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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 September 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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 77-0389180
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
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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</TABLE>
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 November 7, 1997 there were 40,658,016 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
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-September 30, 1997
and December 31, 1996......................................... 3
Condensed consolidated statements of operations-quarter
ended September 30, 1997 and 1996, and nine months
ended September 30, 1997 and 1996............................. 4
Condensed consolidated statements of cash flows-nine months
ended September 30, 1997 and 1996............................. 5
Notes to condensed consolidated financial statements-
September 30, 1997............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
PART II. OTHER INFORMATION
- -----------------------------
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........................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
SIGNATURE........................................................... 19
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)
SEPTEMBER 30, DECEMBER 31,
1 9 9 7 1 9 9 6
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(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 69,195 $ 77,799
Short term investments 31,352 59,034
Trade accounts receivable 12,501 7,054
Other current assets 5,913 3,373
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Total current assets 118,961 147,260
Property and Equipment, net 4,167 3,565
Goodwill 1,518 1,887
Other Assets 2,387 2,642
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$ 127,033 $ 155,354
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 9,165 $ 3,747
Accrued compensation and benefits 2,924 3,233
Other accrued liabilities 8,438 8,560
Deferred income 71 2,490
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Total current liabilities 20,598 18,030
Other Liabilities 850 480
STOCKHOLDERS' EQUITY
Common stock 40 44
Additional paid-in capital 83,231 127,226
Retained earnings 22,314 9,574
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Total stockholders' equity 105,585 136,844
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$ 127,033 $ 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 NINE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Product $ 19,097 $ 22,998 $ 45,876 $ 58,717
Technology development 1,380 402 3,591 2,336
-------- -------- --------- ---------
Total revenues 20,477 23,400 49,467 61,053
COST OF REVENUES
Product 9,489 11,719 23,509 31,541
Technology development 1,234 487 3,444 2,161
-------- -------- --------- ---------
Total cost of revenues 10,723 12,206 26,953 33,702
-------- -------- --------- ---------
Gross profit 9,754 11,194 22,514 27,351
OPERATING EXPENSES
Research and development 1,559 1,638 4,582 3,664
Sales and marketing 935 857 3,002 2,483
General and administrative 2,023 1,684 5,515 4,768
-------- -------- --------- ---------
4,517 4,179 13,099 10,915
-------- -------- --------- ---------
Operating income 5,237 7,015 9,415 16,436
Other Income 1,096 1,675 4,740 3,139
-------- -------- --------- ---------
Income before provision
for income taxes 6,333 8,690 14,155 19,575
Provision for income taxes 423 1,087 1,400 2,447
-------- -------- --------- ---------
Net income $ 5,910 $ 7,603 $ 12,755 $ 17,128
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income per share $ 0.14 $ 0.16 $ 0.28 $ 0.38
-------- -------- --------- ---------
-------- -------- --------- ---------
Shares used in computing
net income per share 43,617 48,048 44,811 44,798
-------- -------- --------- ---------
-------- -------- --------- ---------
</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)
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1 9 9 7 1 9 9 6
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income for the period $ 12,755 $ 17,128
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,665 1,255
Loss on disposal of equipment 3 2
Changes in operating assets and liabilities:
Trade accounts receivable (5,447) (868)
Other current assets (2,540) (700)
Accounts payable 5,469 2,588
Accrued compensation and benefits (309) 682
Deferred income (2,419) 950
Other accrued liabilities (122) 3,248
Other liabilities 370 310
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Net cash provided by operating activities 9,425 24,595
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INVESTING ACTIVITIES:
Cash purchases of equipment (1,718) (2,270)
Proceeds from sales of equipment 21 8
Sales and maturities of short term investments, net 27,663 --
Purchases of short term investments, net -- (38,606)
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Net cash provided by (used in) investing activities 25,966 (40,868)
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FINANCING ACTIVITIES:
Issuance of common stock for cash 4,224 78,717
Repurchase of common stock (48,219) --
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Net cash provided by (used in) financing activities (43,995) 78,717
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Increase (decrease) in cash and cash equivalents (8,604) 62,444
Cash and cash equivalents
at beginning of period 77,799 10,292
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Cash and cash equivalents at
end of period $ 69,195 $ 72,736
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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DSP COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DSP
Communications, Inc. ("DSPC" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim period are
not necessarily indicative of the results that may be expected for the full
year. For further information, refer to the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 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 an increase in primary earnings per share for the
quarters ended September 30, 1997 and 1996 to $0.15 per share and $0.17 per
share, respectively. The impact is expected to result in an increase in
primary earnings per share for the nine months ended September 30, 1997 and
1996 to $0.30 per share and $0.42 per share, respectively. 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 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 September 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. The Company did not
repurchase any shares of its Common Stock in the third quarter of 1997.
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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Product 93.3% 98.3% 92.7% 96.2%
Technology development 6.7 1.7 7.3 3.8
--------------------- ---------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of Revenues:
Product 46.3 50.1 47.5 51.7
Technology development 6.0 2.1 7.0 3.5
--------------------- ---------------------
Total cost of revenues 52.3 52.2 54.5 55.2
--------------------- ---------------------
Gross profit 47.7 47.8 45.5 44.8
Operating Expenses:
Research and development 7.6 7.0 9.3 6.0
Sales and marketing 4.6 3.7 6.1 4.1
General and administrative 9.9 7.2 11.1 7.8
--------------------- ---------------------
Total operating expenses 22.1 17.9 26.5 17.9
--------------------- ---------------------
Operating income 25.6 29.9 19.0 26.9
Other income 5.4 7.2 9.6 5.1
--------------------- ---------------------
Income before provision for income taxes 31.0 37.1 28.6 32.0
Provision for income taxes 2.1 4.6 2.8 4.0
--------------------- ---------------------
Net income 28.9% 32.5% 25.8% 28.0%
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
8
<PAGE>
REVENUES
PRODUCT: Product revenues decreased to $19.1 million in the third quarter of
1997 from $23.0 million in the third quarter of 1996 and to $45.9 million in
the nine months ended September 30, 1997 from $58.7 million in the first nine
months of 1996. Product revenues consist primarily of baseband chip sets for
digital cellular telephones. The decline in revenues in the third quarter was
primarily due to a product transition and competition in the Japanese PDC
market. At the end of the second quarter, the Company began shipments of its
new PDC chipsets. During the third quarter the Company also recorded
material revenues from its IS-136 Time Division Multiple Access ("TDMA")
chipset for the North American market. 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 increased
to $1.4 million in the third quarter of 1997 from $402,000 in the third
quarter of 1996 and increased to $3.6 million in the nine months ended
September 30, 1997 from $2.3 million in the first nine months of 1996.
Technology development revenues increased in the third quarter following the
achievement of certain technology milestones in the Code Division Multiple
Access ("CDMA") project. 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 third quarter of 1997 was $9.8 million (47.7% of
revenues) compared to $11.2 million (47.8% of revenues) in the third quarter
of 1996. Gross profit in the first nine months of 1997 was $22.5 million
(45.5% of revenues), compared to $27.4 million (44.8% of revenues) in the
first nine months 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. 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 third 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. Although the Company had previously anticipated higher
volume sales of PBX systems toward the end of 1997, due to further delays in
market acceptance, the Company currently believes that higher volume sales
will not be achieved for the next several quarters.
The Company anticipates that the average sales prices of chip sets will
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
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $1.6 million in the third quarter of
1997, the same level as in the third quarter of 1996, and increased to $4.6
million in the first nine months of 1997 from $3.7 million in the first nine
months of 1996. The increase in the first nine months of 1997 was a result
of increases in research and development activities during this period and
growth in the number of engineering personnel. As a percentage of total
revenues, research and development expenses increased to 7.6% in the third
quarter of 1997, from 7.0% in the third quarter of 1996, mainly because of
the reduced revenues, and to 9.3% from 6.0% in the first nine months 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 $935,000 (4.6% of revenues) in the
third quarter of 1997 from $857,000 (3.7% of revenues) in the third quarter
of 1996 and to $3.0 million (6.1% of revenues) in the first nine months of
1997 from $2.5 million (4.1% of revenues) in the first nine months 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 $2.0 million (9.9% of revenues) in
the third quarter of 1997 compared to $1.7 million (7.2% of revenues) in the
third quarter of 1996 and $5.5 million (11.1% of revenues) in the first nine
months of 1997 compared to $4.8 million (7.8% of revenues) in the first nine
months 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 third quarter of 1997 was $1.1 million compared to $1.7 million in the
third quarter of 1996 and $4.7 million in the first nine months of 1997
compared to $3.1 million in the first nine months of 1996.
Other income in the first nine 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
reduced the interest income generated in the third quarter.
PROVISION FOR INCOME TAXES
The Company's regular effective tax rate was 12.5% for the first nine months
of 1996 and 1997. In the third quarter of 1997, the Company reduced its
regular provision of 12.5% by the amount of $370,000. This reduction was
effected following the receipt of final tax assessments for the Company's
subsidiaries, DSP Telecommunications Ltd. and DSPC Israel Ltd., and a cash
refund from the tax authorities to DSP Telecommunications Ltd. for the years
1992 through 1995. For the fourth
10
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quarter, the Company intends to provide for income taxes at 12.5% of net
income. 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.
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 $9.4 million in the first
nine months of 1997 and $24.6 million in the first nine months of 1996. Net
cash provided from operations in the first nine months of 1997 was comprised
primarily of net income, an increase in current liabilities, and an increase
in trade accounts receivable. Trade accounts receivable increased to $12.5
million at September 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 $1.7 million, and the repurchase of common stock
which totaled $48.2 million, in the first nine 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
11
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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 September 30, 1997, the Company had $100.5 million of cash, cash
equivalents and short-term investments. As of September 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
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 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 management expectations, and the Company assumes no obligation to
update this information. Numerous factors could cause actual results and
events to differ significantly from the results anticipated by management and
described in these forward looking statements, including but not limited to
the following risk factors.
RELIANCE ON A SMALL NUMBER OF OEMS AND ON A SINGLE JAPANESE DISTRIBUTOR;
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. Until recently, 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. During the second half of 1996
and the first half of 1997, 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 declined, due primarily to increased competition among
OEMs in the Japanese wireless handset market and to an increase in the supply
12
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of integrated circuits. This reduced lead time resulted in decreased backlog
levels and decreased the time period for which the Company is able to
estimate future product demand. Although the Company's visibility has
increased somewhat during the third quarter of 1997, 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.
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. 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, the TDMA-based
chip set and the CDMA-based 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. In addition, sales of the Company's
products are affected in part by the condition of the Japanese economy, which
has recently experienced a slowing of growth. A significant negative change
in the condition of the Japanese economy could have a material adverse effect
on the Company's business, financial
13
<PAGE>
condition and results of operations. 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 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.
Changes in the political or economic conditions, trade policy or regulation
of telecommunications in Japan could 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.
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.
UNCERTAINTIES RELATED TO TDMA-BASED PRODUCT. In the third quarter of
1997, the Company began commercial shipments of a newly-developed baseband
chip set for IS-136 TDMA-based products in the North American market.
However, the IS-136 TDMA standard has only recently been introduced, and
IS-136 TDMA-based digital cellular networks have not at this time been widely
deployed. The success of the Company in marketing its IS-136 TDMA-based chip
set will be dependent on, among other things, the success of the IS-136 TDMA
standard and growth of the IS-136 TDMA market. There can be no assurance
that the IS-136 TDMA standard will be widely adopted or that the IS-136
TDMA-based chip set will be successful in the marketplace. Sales of the
Company's IS-136 TDMA-based products will also be dependent on the success of
the Company's OEM customers in completing their development of IS-136
TDMA-based handsets in a timely manner and in successfully competing in the
IS-136 TDMA handset market. In addition, the Company uses independent
foundries to manufacture the product, and there can be no assurance that this
chip set will continue to 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 manufacture in a timely manner the IS-136
TDMA-based chip set and to market the product successfully, or if the
14
<PAGE>
Company's OEMs are unable successfully to develop and market their IS-136
TDMA-based products, the Company's business and results of operations could
be materially and adversely affected.
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 has delivered operational engineering
samples, 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.
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.
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."
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
15
<PAGE>
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.
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 September 30, 1997,
150 of the Company's 170 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.
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
16
<PAGE>
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 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)
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Form 10-Q for the quarterly period
ended June 30, 1997, 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
None.
ITEM 5. OTHER INFORMATION
On November 5, 1997, Nathan Hod, the Company's President and Chief
Executive Officer, was appointed as Chairman of the Board of Directors, and
Davidi Gilo resigned as Chairman of the Board and as a director of the
Company. Mr. Gilo will remain employed with the Company as an advisor to Mr.
Hod. In addition, Gerald Dogon, the Company's Executive Vice President and
Chief Financial Officer, was appointed by the Board as a director to fill the
vacancy resulting from Mr. Gilo's resignation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 11, 1997
DSP COMMUNICATIONS, INC.
By: /s/ Gerald Dogon
- ------------------------------------------------------------------
Gerald Dogon, Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in the Quarterly Report on Form 10-Q of DSP Communications,
Inc. for the nine months ended September 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 69,195
<SECURITIES> 31,352
<RECEIVABLES> 12,633
<ALLOWANCES> 132
<INVENTORY> 0
<CURRENT-ASSETS> 118,961
<PP&E> 7,510
<DEPRECIATION> 3,343
<TOTAL-ASSETS> 127,033
<CURRENT-LIABILITIES> 20,598
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 105,545
<TOTAL-LIABILITY-AND-EQUITY> 105,585
<SALES> 45,876
<TOTAL-REVENUES> 49,467
<CGS> 23,509
<TOTAL-COSTS> 26,953
<OTHER-EXPENSES> 4,582
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,155
<INCOME-TAX> 1,400
<INCOME-CONTINUING> 12,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,755
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
