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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 March 31, 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 ____________
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 May 6, 1997, there were 43,043,586 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-March 31, 1997
and December 31, 1996 .................................. 3
Condensed consolidated income statements-Quarter
ended March 31, 1997 and 1996........................... 4
Condensed consolidated statements of cash flows-Quarter
ended March 31, 1997 and 1996........................... 5
Notes to condensed consolidated financial statements-
March 31, 1997 ....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................... 7
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings ................................... 15
Item 2. Changes in Securities ................................. 15
Item 3. Defaults upon Senior Securities......................... 15
Item 4. Submission of Matters to a Vote of Security Holders ... 15
Item 5. Other Information ................................... 16
Item 6. Exhibits and Reports on Form 8-K ..................... 16
SIGNATURE .................................................... 17
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1 9 9 7 1 9 9 6
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(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 83,439 $ 77,799
Short term investments 56,503 59,034
Trade accounts receivable 10,632 7,054
Other current assets 3,220 3,373
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Total current assets 153,794 147,260
Property and Equipment, net 3,821 3,565
Goodwill 1,764 1,887
Other Assets 2,557 2,642
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$ 161,936 $ 155,354
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,655 $ 3,747
Accrued compensation and benefits 2,667 3,233
Other accrued liabilities 9,115 8,560
Deferred income 448 2,490
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Total current liabilities 16,885 18,030
Other Liabilities 530 480
STOCKHOLDERS' EQUITY
Common stock 45 44
Additional paid-in capital 128,776 127,226
Accumulated earnings 15,700 9,574
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Total stockholders' equity 144,521 136,844
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$ 161,936 $ 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1 9 9 7 1 9 9 6
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REVENUES
Product $ 18,685 $ 16,124
Technology development 1,617 1,198
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Total revenues 20,302 17,322
COST OF REVENUES
Product 10,046 9,212
Technology development 1,006 858
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Total cost of revenues 11,052 10,070
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Gross profit 9,250 7,252
OPERATING EXPENSES
Research and development 1,443 1,007
Sales and marketing 929 880
General and administrative 1,752 1,655
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4,124 3,542
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Operating income 5,126 3,710
Other Income 1,875 375
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Income before provision
for income taxes 7,001 4,085
Provision for income taxes 875 510
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Net income $ 6,126 $ 3,575
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Net income per share $ 0.13 $ 0.09
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Shares used in computing
net income per share 47,397 40,492
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See Notes to Condensed Consolidated Financial Statements
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DSP COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1 9 9 7 1 9 9 6
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OPERATING ACTIVITIES:
Net income for the period $ 6,126 $ 3,575
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 530 380
Gain from sales of short term investments -- (141)
Compensation expenses related to shares issued
in a subsidiary 50 30
Changes in operating assets and liabilities:
Trade accounts receivable (3,578) 3,618
Other current assets 153 (133)
Accounts payable 986 362
Accrued compensation and benefits (566) (173)
Deferred income (2,042) 758
Other accrued liabilities 555 501
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Net cash provided by operating activities 2,214 8,777
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INVESTING ACTIVITIES:
Cash purchases of equipment (656) (717)
Proceeds from sales of equipment - - 6
Purchases of short term investments (17,010) (6,291)
Sales of short term investments 19,429 5,628
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Net cash provided by (used in)
investing activities 1,763 (1,374)
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FINANCING ACTIVITIES:
Issuance of common stock for cash 1,663 771
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Net cash provided by financing activities 1,663 771
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Increase in cash and cash equivalents 5,640 8,174
Cash and Cash equivalents
at beginning of period 77,799 10,292
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Cash and cash equivalents at
end of period $ 83,439 $ 18,466
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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 an increase in primary earnings per share for the
quarters ended March 31, 1997 and 1996 to $0.14 and $0.10 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. SUBSEQUENT EVENTS
In April 1997, the Company's Board of Directors approved open-market 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
four million shares of the Company's Common Stock (equal to approximately 9%
of the approximately 45 million shares that were outstanding immediately
prior to the commencement of the repurchase programs) in open-market
transactions. As of May 9, 1997, the Company had completed the repurchase of
approximately 3.4 million shares, at purchase prices ranging from $6.875 to
$9.563 per share.
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, may be repriced, subject to acceptance by the optionees, as follows:
options held by employees who are 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 as of May 9,
1997, optionees holding over 80% of the eligible options have notified the
Company of their acceptance of the offer.
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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 :
Quarter ended
March 31,
1997 1996
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Revenues:
Product 92.0% 93.1%
Technology development 8.0 6.9
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Total revenues 100.0 100.0
Cost of Revenues :
Product 49.5 53.2
Technology development 5.0 4.9
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Total cost of revenues 54.5 58.1
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Gross profit 45.5 41.9
Operating Expenses:
Research and development 7.1 5.8
Sales and marketing 4.6 5.1
General and administrative 8.6 9.6
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Total operating expenses 20.3 20.5
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Operating income 25.2 21.4
Other income 9.2 2.2
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Income before provision for income taxes 34.4 23.6
Provision for income taxes (4.3) (2.9)
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Net income 30.1% 20.7%
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REVENUES
PRODUCT: Product revenues increased to $18.7 million in the first quarter of
1997 from $16.1 million in the first quarter of 1996. Product revenues
consist primarily of baseband chip sets for digital cellular telephones.
Revenues from sales to distributors are recognized at the time the products
are shipped by the distributor to the 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 $1.6 million in the first quarter of 1997 from $1.2 million in the first
quarter of 1996. 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.
Technology development revenues increased following the initiation and/or
completion of contracts for development and support of products for PDC, TDMA
and CDMA applications.
GROSS PROFIT
Gross profit in the first quarter of 1997 was $9.3 million (45.5% of
revenues) compared to $7.3 million (41.9% of revenues) in the first quarter
of 1996.
The effect of a decrease in sales prices of the Company's chip sets has been
offset by cost reductions received from the Company's suppliers due to
increased order volumes and by the fact that in the second quarter of 1996
the Company completed its obligations to pay royalties to the Chief Scientist
of the Israeli Ministry of Trade and Industry on grants relating to products
currently being marketed by the Company. Sales of wireless private branch
exchange ("PBX") systems of the Company's subsidiary, CTP Systems, Ltd. ("CTP
Systems"), to Beta sites were made in small quantities in 1996 and resulted
in negative margins. In the first quarter of 1997, the Company commenced
commercial sales of PBX systems in low volumes. Such sales resulted in
positive but relatively low margins. The Company expects that it will
continue to experience relatively low margins on low volume initial sales of
these wireless PBX systems until higher volume sales are achieved. Higher
volume sales are anticipated during the second half of 1997.
The Company anticipates that the average sales prices of chip sets may
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.
The Company entered 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.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $1.4 million in the first
quarter of 1997 from $1.0 million in the first quarter of 1996. The increases
were a result of increases in research and development activities during
those periods, and due to the growth in the number of engineering personnel.
As percentage of total revenues, research and development expenses increased
to 7.1% in the first quarter of 1997, from 5.8% in the first quarter of 1996.
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.
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SALES AND MARKETING EXPENSES
Sales and Marketing expenses increased to $0.93 million (4.6% of revenues) in
the first quarter of 1997 from $0.88 million (5.1% of revenues) in the first
quarter of 1996. The increase reflects primarily the growth of sales and
marketing staff at the Company's headquarters in Cupertino, California, and
its Tokyo offices, increased participation at trade exhibitions, and
increased promotion and marketing research activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses were $1.8 million (8.6% of revenues) in
the first quarter of 1997 compared to $1.7 million (9.6% of revenues) in the
first quarter of 1996.
General and Administrative expenses increased, in absolute dollars, as a
result of increased staffing levels at the Cupertino, California headquarters
and at the facilities of DSPC Israel Ltd. ("DSPCI"), an Israeli subsidiary of
the Company, increased facility expenses, and increased administration
expenses and fees.
OTHER INCOME
Other income includes net interest income, investment income, and foreign
currency remeasurement gains and losses and other expenses. Other income in
the first quarter of 1997 was $1.9 million compared to $0.4 million in the
first quarter of 1996.
Other income in the first quarter of 1997 was generated primarily from
interest and realized gains on the Company's cash and investment balances,
including the proceeds from the initial public offering ("IPO") completed in
March 1995, and from the follow-on offerings completed in June 1995, and
April 1996.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 12.5% for the first quarters 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.
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.
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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 $2.2 million in the
first quarter of 1997 and $8.8 million in the first quarter of 1996. Net
cash provided from operations in the first quarter of 1997 was comprised
primarily of net income, an increase in current liabilities, and a increase
in trade accounts receivable. Trade accounts receivable increased to
$10.6 million at March 31, 1997 due to the timing of shipments and payments.
The Company's investing activities, other than purchases of and proceeds
from, short-term investments, have consisted of expenditures for fixed assets
which totaled $0.66 million in the first quarter of 1997.
In obtaining approval of the Company's Reorganization from Israeli tax
authorities, which was completed immediately before the closing of the 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, 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
acquisition, and in 1996 a further $0.5 million to increase the capital of
DSPC Israel, Ltd.
As of March 31, 1997, the Company had $139.9 million of cash, cash
equivalents and short-term investments. As of May 9, 1997 the Company had
repurchased approximately 3.4 million shares of its Common Stock in its share
repurchase program at prices ranging from $6.875 to $9.563 per share, using
an aggregate of approximately $26 million. 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 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
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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 operating results could be
materially adversely affected if orders and revenues do not meet expectations.
EXPECTED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND POTENTIAL
QUARTERLY LOSSES. The Company's quarterly operating results depend on the
volume and timing of product orders received and delivered during the quarter
and the timing of new product introductions by the Company and its customers.
The Company anticipates that for the foreseeable future new product
introductions may cause significant fluctuations in quarterly operating
results. The Company's quarterly operating results may also vary
significantly depending on other factors, including the introduction of new
products by the Company's competitors; market acceptance of new products; the
greater number of manufacturing days in the second and third quarters;
adoption of new technologies and standards; relative prices of the Company's
products; competition; the cost and availability of components; the mix of
products sold; the quality and availability of chip sets manufactured for the
Company by third parties; changes in the Company's distribution arrangements;
sales of wireless subscriber equipment by OEMs and changes in general
economic conditions.
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
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materially increase the price of the Company's products to these customers
and require the Company to reduce prices of its products to remain
competitive. Moreover, the expected emergence of Personal HandyPhone
Services, a microcellular technology potentially competitive with today's
existing Japanese analog and digital cellular networks, could reduce sales in
Japan of digital cellular telephones incorporating the Company's baseband
chip sets. There can be no assurance that changes in the political or
economic conditions, trade policy or regulation of telecommunications in
Japan will not have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON TEXAS INSTRUMENTS AND OTHER THIRD PARTY MANUFACTURERS. All
of the Company's integrated circuits are currently fabricated by independent
third parties, and the Company intends to continue using independent
foundries in the future. To date, the Company has purchased most of the DSP
chips for its baseband chip sets for cellular telephones from Texas
Instruments Incorporated ("TI"). The Company also buys all of the DSP chips
used in the products of CTP Systems from TI. The Company purchases standard
DSP chips from TI, and TI embeds the Company's proprietary software
algorithms in TI's chips. In addition, the Company currently purchases its
application specific integrated circuits ("ASICs") for its PDC chip sets from
Atmel ES2 and VTI; all of its ASICs for analog baseband chip sets from TI and
its ASICs for CTP Systems' products from AMI. Accordingly, the Company is
and will remain dependent on independent foundries, including TI, AMI, Atmel
ES2 and VTI, to achieve acceptable manufacturing yields, to allocate to the
Company a sufficient portion of foundry capacity to meet the Company's needs
and to offer competitive pricing to the Company. Although the Company has
not experienced material quality, allocation or pricing problems to date, if
such problems were to arise in the future, they would have a material adverse
effect on the Company's business, financial condition and results of
operations.
RELIANCE ON A SINGLE PRODUCT. Since December 1993, the Company has
relied upon sales from a single product, its baseband chip set for digital
cellular telephones for use in Japan, to generate substantially all of its
product sales. The Company is in the process of developing additional
products for digital cellular telephones, PCS and wireless PBX applications;
however, there can be no assurance that it will be successful in doing so.
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
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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
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 March 31, 1997, 138 of
the Company's 157 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
13
<PAGE>
substantially all of the Company's sales and expenses are denominated in
United States dollars, a portion of the Company's expenses are denominated in
Israeli shekels. The Company's primary expense paid in Israeli currency is
Israeli-based employee salaries. As a result, an increase in the value of
Israeli currency in comparison to the United States dollar could increase the
cost of technology development, research and development expenses and general
and administrative expenses. There can be no assurance that currency
fluctuations, changes in the rate of inflation in Israel or any of the other
aforementioned factors will not have a material adverse effect on the
Company's business, financial condition and results of operations.
In the past, the Company has obtained royalty-bearing grants from the
Office of the Chief Scientist in Israel's Ministry of Industry and Trade (the
"Chief Scientist") and the Israel-United States Binational Industrial
Research and Development Foundation to fund research and development. The
terms of the grants from the Chief Scientist prohibit the transfer of
technology developed pursuant to the terms of these grants to any person,
without the prior written consent of the State of Israel. The Company does
not expect to apply for such grants for the development of new products in
the future.
OPERATIONAL RISKS ASSOCIATED WITH CTP SYSTEMS. On October 26, 1995,
the Company acquired for $14.1 million CTP Systems, a developer and
manufacturer of wireless private branch exchanges ("PBXs") and other
low-mobility wireless communications applications. CTP Systems began
commercial shipments of wireless PBX equipment to two OEM customers in the
fourth quarter of 1996, and the PBX system is currently in Beta testing with
other OEMs, which may identify quality or operational problems in the product
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.
14
<PAGE>
FUTURE ACQUISITIONS. The Company's strategy includes obtaining
additional technologies and will involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating
these acquisitions may divert substantial management resources. An
acquisition could absorb substantial cash resources, could require the
Company to incur or assume debt obligations, or could involve the issuance of
additional Common or Preferred Stock. The issuance of additional equity
securities would dilute and could represent an interest senior to the rights
of then outstanding Common Stock of the Company. An acquisition which is
accounted for as a purchase, like the acquisition of CTP Systems, could
involve significant one-time, non-cash write-offs, or could involve the
amortization of goodwill 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
ITEM 5. OTHER INFORMATION
In April 1997, the Company's Board of Directors approved open-market 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
four million shares of the Company's Common Stock (equal to approximately 9%
of the approximately 45 million shares that were outstanding immediately
prior to the commencement of the repurchase programs) in open-market
transactions. As of May 9, 1997, the Company had completed the repurchase of
approximately 3.4 million shares, at purchase prices ranging from $6.875 to
$9.563 per share.
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, may be repriced, subject to acceptance by the optionees, as follows:
options held by employees who are 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 as of May 9,
1997, optionees holding over 80% of the eligible options have notified the
Company of their acceptance of the offer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1997
DSP COMMUNICATIONS, INC.
By: /s/Gerald Dogon
- ------------------------------------------------------------------
Gerald Dogon, Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP COMMUNICATIONS,
INC. FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 83,439
<SECURITIES> 56,503
<RECEIVABLES> 10,764
<ALLOWANCES> 132
<INVENTORY> 0
<CURRENT-ASSETS> 153,794
<PP&E> 6,477
<DEPRECIATION> 2,656
<TOTAL-ASSETS> 161,936
<CURRENT-LIABILITIES> 16,885
<BONDS> 0
0
0
<COMMON> 45
<OTHER-SE> 144,476
<TOTAL-LIABILITY-AND-EQUITY> 144,521
<SALES> 18,685
<TOTAL-REVENUES> 20,302
<CGS> 16,124
<TOTAL-COSTS> 17,322
<OTHER-EXPENSES> 1,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,001
<INCOME-TAX> 875
<INCOME-CONTINUING> 6,126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,126
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
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