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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-25622
DSP COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0389180
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20300 Stevens Creek Boulevard, Cupertino, California 95014
(Address of principal executive offices, including zip code)
(408) 777-2700
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.001 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of March 6, 1998 was approximately $481,520,613. For purposes of
this calculation only, (i) shares of Common Stock are deemed to have a market
value of $16.0625 per share, the closing sale price of the Common Stock as
reported on the New York Stock Exchange on March 6, 1998, and (ii) each of the
executive officers, directors and persons holding 5% or more of the outstanding
Common Stock is deemed to be an affiliate.
The number of shares of Common Stock outstanding on March 6, 1998 was 39,774,788
shares.
DOCUMENTS INCORPORATED BY REFERENCE: Part III of this Report incorporates
information by reference from the definitive Proxy Statement for the
registrant's annual meeting of stockholders to be held on May 12, 1998.
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DSP COMMUNICATIONS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 14
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 27
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 27
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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PART I
The matters addressed in this report on Form 10-K, with the exception of
the historical information presented, contain forward-looking statements
involving risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the heading "Certain
Factors That May Affect Future Results" in the Management's Discussion and
Analysis section and elsewhere in this report.
ITEM 1. BUSINESS
INTRODUCTION
DSP Communications, Inc., a Delaware corporation ("DSPC" or the "Company"),
applies its expertise in digital signal processing ("DSP") software, algorithms
and VLSI circuit design to develop highly integrated, low power and
cost-effective chip sets for wireless personal communications applications. The
Company believes that it is the largest independent vendor of baseband chip sets
to original equipment manufacturers ("OEMs") in the Japanese digital cellular
telephone market, with customers such as Kenwood Corporation ("Kenwood"),
Kokusai Electric Corporation ("Kokusai"), Kyocera Corporation ("Kyocera"),
Pioneer Corporation ("Pioneer"), Sanyo Electronic Co. Ltd. ("Sanyo") and Sharp
Corporation ("Sharp"). Based on its core DSP technology, the Company has
developed, and is developing, baseband chip sets that support a broad range of
frequency modulation standards, including the Personal Digital Cellular ("PDC")
and IS-136 Time Division Multiple Access ("TDMA") standards. In 1997, the
Company completed the development of baseband chip sets jointly with NEC
Electronics ("NEC"), which support both voice and data capabilities, for use in
the IS-136 TDMA market, and commenced commercial shipments during the second
half of 1997. In addition, the Company has developed baseband chip sets for use
in the IS-95 Code Division Multiple Access ("CDMA") market. In the fourth
quarter of 1997, the Company made shipments of operational samples of its CDMA
chip set, and in the first quarter of 1998 began commercial volume production of
the CDMA chip sets.
The Company's subsidiary, CTP Systems, Ltd. ("CTP Systems"), manufactures
and sells a wireless private branch exchange ("PBX") system for the office
environment and other low-mobility and wireless local loop applications. CTP
Systems has entered into distribution and service agreements with OEMs such as
Harris Corporation, Inc., Tadiran Telecommunications Ltd., Comdial Corporation,
and Executone Information Systems Inc. for its wireless PBX system.
INDUSTRY BACKGROUND
The demand for wireless personal communications services has grown rapidly
over the past several years as cellular, paging and other emerging wireless
personal communications services have become widely available and increasingly
affordable to growing numbers of consumers and businesses. Changes in
telecommunications regulations and allocations of additional radio spectrum
frequencies have further stimulated growth for both wireless voice and data
communications. There has also been a general transition from the use of analog
to digital technologies to improve the reliability and capacity of wireless
networks. In addition, most new cellular networks being built today utilize
digital technology which is capable of transmitting both voice and data
communications. Advancements in cellular and paging technology, as well as
recently introduced services such as personal communications services, are
expected to offer subscribers new means of communicating both voice and data
over existing and future wireless networks.
VOICE COMMUNICATIONS
Wireless voice communications utilize analog or digital transmission
technology which operate with various transmission standards. The Company has
developed products that support a variety of standards, such as PDC, IS-136 and
IS-95, and is also developing next generation products for these existing
standards.
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In Japan, cellular services are predominantly provided over digital
networks based on the PDC standard. The PDC standard is a form of TDMA that
differs from IS-136 in the following respects: (i) IS-136 uses the 800 MHz.
band, while PDC uses both the 800 MHz. and the 1.5 GHz. frequency bands; (ii)
IS-136 requires more bandwidth than PDC (30 kHz compared to 25 kHz); and (iii)
IS-136 is capable of supporting analog communications using AMPS, while PDC is
only capable of supporting digital communications. In order to respond to the
increasing demand for capacity in the Japanese domestic cellular market, several
Japanese carriers have announced that they will launch in 1998 a new digital
system based on CDMA technology. The new cellular system will operate in the
Japanese Total Access Communication System ("JTACS") frequency band, and will
offer higher capacity utilization compared to PDC as well as improved voice
quality and advanced data communication capability. According to the Japanese
Ministry of Posts & Telecommunications, the number of analog and digital
cellular subscribers in Japan increased from 18.2 million in December 1996, to
28.7 million in December 1997, and as of December 1997, approximately 22% of the
total Japanese population subscribed to cellular services.
In North America, cellular networks primarily rely upon analog technology
and use the AMPS standard; however, in 1997, digital standards (mainly TDMA and
CDMA) began to increase in market share. According to the Cellular Telephone
Industry Association, in the United States, the number of cellular subscribers
increased from 38.2 million in June 1996 to 48.7 million in June 1997, and as of
June 1997, approximately 18.5% of the total United States population subscribed
to cellular services. Although analog cellular is the most widely deployed
wireless service available today, it has several limitations, including
inconsistent service quality, limited capacity and, currently, an inability to
transfer data without a modem. Digital technologies offer improved system
flexibility, efficiency and increased capacity by allowing a given channel of
spectrum to carry multiple calls simultaneously. As a result, most new cellular
networks being constructed in North America today utilize digital technology,
primarily using IS-136 TDMA and IS-95 CDMA standards.
New personal communications services ("PCS") in the United States use CDMA
and TDMA technologies for cellular type applications. Unlike cellular that uses
the 800 MHz. frequency, PCS uses the 1.9 GHz. band. The Company believes that
the increasing deployment of PCS networks will also accelerate the transition of
the existing cellular service providers from analog technology to digital
technology. The Company's baseband products for the TDMA and CDMA standards are
designed to support telephones that operate in both the 800 MHz. cellular
frequency and the 1.9 GHz. PCS frequency in the United States, as well as other
frequencies in other countries.
REQUIREMENTS OF WIRELESS SUBSCRIBER EQUIPMENT MANUFACTURERS
The Company believes that growing demand for mobile voice and data
applications will require a transition from analog to digital technology to
increase the capacity, quality, convenience and variety of services. The
increase in the number of subscribers and the growth of services provided over
wireless personal communications networks have led to network congestion and the
need to expand the capacity and capabilities of the networks. The
implementation of digital network technology over analog and digital networks
generally requires the use of DSP technology to maximize their capacity and
capabilities. DSP technology involves converting light, sound and other
naturally occurring analog wave forms into a stream of digital values which may
then be processed, manipulated, exchanged or stored by electronic systems and
later converted back into analog signals. DSP technology provides several
advantages over analog technologies, including (i) greater levels of compression
capability, resulting in greater storage and expanded communications capacity,
(ii) greater ability to process and manipulate digital data, resulting in
enhanced product performance and functionality, and (iii) greater ability to
perform routine electronic functions in software rather than using dedicated
hardware. The ability of DSP to manipulate voice and data communications faster
and more efficiently than analog and non-DSP microprocessor technologies
positions DSP as an important technology for existing and future generations of
wireless personal communications products.
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Manufacturers of subscriber equipment for wireless personal communications
compete in a high-growth, cost-competitive market, in which it is necessary to
offer a compact, cost-effective solution providing a wide range of functions.
To increase performance, minimize the size and decrease the cost of subscriber
equipment, manufacturers require highly integrated chip sets. Greater
integration of functions minimizes the number and size of the integrated
circuits required, thereby lowering the cost of manufacturing and decreasing
power consumption. Lower power consumption permits extended battery life,
giving the mobile user more usage time without the need to recharge the battery
unit. Due to evolving industry standards and the rapid introduction of new
communications services, the success of OEMs in the wireless personal
communications industry also depends on their ability to bring new products to
market quickly to meet new market demands.
DSPC'S SOLUTIONS
DSPC is focused on developing DSP-based software and algorithms and
designing highly integrated, low power baseband chip sets for subscriber
equipment operating on both analog and digital wireless personal communications
networks. Through its wholly-owned subsidiary, CTP Systems, the Company also
develops wireless PBX and other on-premises and low-mobility wireless
communications applications.
The key features of DSPC's solutions include the following:
HIGH INTEGRATION. In 1993, the Company introduced a new chip set solution
for digital cellular telephones in Japan consisting of only two integrated
circuits. Subsequently, the Company developed several further generations of
chip sets that enable lower pin and component counts and higher integration. The
Company continuously works to develop baseband chip sets that it believes will
result in more compact and cost-effective solutions.
LOW POWER CONSUMPTION. The Company's expertise in DSP technology enables
it to design efficient DSP solutions that reduce power consumption. The Company
has developed a high degree of functionality in its software which decreases the
need for dedicated hardware, and thereby reduces the millions of instructions
per second ("MIPS") required for operation. The components of the baseband chip
set are activated intermittently depending on the operating mode of the
subscriber unit at any given time to minimize power consumption.
COST-EFFECTIVE. The Company has reduced the number of integrated circuits
required for a baseband processing subsystem by integrating the DSP functions,
and has also incorporated some traditional hardware functions into its software,
thereby reducing the overall cost of the Company's solution to OEMs. As a
result, the Company's OEM customers are better able to provide competitively
priced products to the wireless personal communications market.
ADAPTABLE TO MULTIPLE STANDARDS. Based on its core DSP technology, the
Company has developed products for use with a variety of modulation standards.
While each product is designed for a specific wireless communications network
and modulation standard, all generally rely on the same fundamental DSP
technology. By maintaining both standards and system flexibility, the Company
seeks to reduce the risks associated with relying on the success of one or a
limited number of existing industry standards. The Company has developed
systems expertise in the PDC, IS-136 TDMA and IS-95 CDMA digital standards and
the AMPS, TACS and JTACS analog standards. The Company believes that its
expertise with multiple transmission standards will also help it develop
products to address the needs of emerging wireless services, such as narrowband
and broadband PCS.
PRODUCTS
The Company designs DSP-based software and integrated circuits for cellular
communications. To date, the Company has used its DSP expertise primarily to
develop baseband chip sets for incorporation into cellular telephones. In
addition, the Company is currently developing new products designed for use in
PCS and other
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emerging wireless personal communications services. Through CTP Systems, the
Company also has developed and sells a wireless PBX system for intra-building
communications.
EXISTING PRODUCTS
PDC CHIP SETS. The Company currently sells chip sets to major Japanese
manufacturers of digital cellular telephones. In 1993, the Company introduced
its first digital chip set, a set of two integrated circuits with a VSELP speech
coder, channel coder and modem that operates on five volts and is based on the
PDC standard. In 1995, the Company commenced volume shipments of its three volt
PDC chip set and initiated shipments of its half-rate PDC chip set. The
half-rate PDC standard enables cellular carriers to increase the capacity of
their existing cellular networks. During 1996 and 1997, the Company introduced
more highly integrated PDC standard chip sets that incorporate higher
functionality, lower power consumption, and smaller size.
TDMA CHIP SETS. In early 1995, the Company began jointly developing with
NEC a chip set for digital cellular telephones using the IS-136 TDMA standard.
At the end of 1996, the Company initiated commercial sales of this chip set and
in the third quarter of 1997 commenced volume shipments. IS-136 supports voice
and limited data communications, such as data cipher mode and short message
alpha-numeric paging service. The Company anticipates that the major potential
markets for the IS-136 standard will be North and South America. The Company
currently has five OEM customers that are in various stages of developing and/or
producing products that use the IS-136 standard.
WIRELESS PBX. The Company's wholly-owned subsidiary, CTP Systems, has
developed a wireless PBX system for intra-building communications. The CTP
Systems solution includes the development of basestations and handsets, and the
joint development of a PBX interface card with several OEMs. CTP Systems'
wireless PBX system, which enables users to make and receive calls while away
from their desks, received in October 1996 approval by the Federal
Communications Commission for operation using the unlicensed 1920 to 1930 MHz.
frequency band. Commercial shipments of the wireless PBX system, which
commenced in the fourth quarter of 1996, have not yet developed into large
volume shipments. CTP Systems is currently engaged in a cost reduction program,
the effects of which should be felt towards the end of 1998.
NEW PRODUCT DEVELOPMENT
CDMA CHIP SETS. The Company has developed systems expertise in the IS-95
CDMA standard and has developed CDMA-based chip sets for use in cellular and PCS
applications. In 1995, the Company signed a license agreement with Qualcomm
Incorporated to license Qualcomm's CDMA technology that permits the Company to
develop baseband chip sets for CDMA products. In the fourth quarter of 1997,
the Company shipped operational samples of the CDMA chip sets, and in the first
quarter of 1998, the Company commenced volume production. The first volume
shipments are expected in the first half of 1998, and significant revenues from
the CDMA chip set are not anticipated until the second half of 1998.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products through a direct sales and marketing
organization, headquartered in Cupertino, California, and facilitates
substantially all of its product delivery through its distributors in Japan and
the United States, which are both non-exclusive distributors. In Japan, the
Company's Japanese subsidiary performs customer liaison services. The Company's
distributors, in Japan - Tomen Electronics Corp. ("TEC"), and in the United
States - Tomen Electronics America Inc. ("TEA"), are not subject to minimum
purchase requirements and can cease marketing the Company's products at any
time. The loss of either of the above distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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The Company sells its PDC chip sets to OEMs such as Kenwood, Kyocera,
Pioneer, Kokusai, Sanyo and Sharp, through TEC, and its TDMA chip sets to other
OEMs, through TEC and TEA. In 1995, 1996 and 1997, product sales to these
distributors accounted for 89%, 91% and 88%, respectively, of the Company's
total revenues. Sales to these distributors are made through specific purchase
orders, which are cancelable without significant penalties. In 1997,
substantially all of the Company's PDC products were sold to seven Japanese
OEMs, and all of the Company's TDMA products were sold to two additional OEMs.
The Company expects that a significant portion of its future product sales will
continue to be concentrated among a limited number of major OEMs. The loss of
either one of the Company's distributors or one or more of its major customers
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's sales to its
OEM customers are dependent on the OEMs' continued success in maintaining or
increasing their market share in the competitive wireless handset market
worldwide. The inability of one or more of these OEM customers to succeed in
these markets could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company sells a majority of its products and provides technology
development services to OEMs located outside of the United States, primarily in
Japan. Revenues from Japan accounted for 94%, 94% and 80% of the Company's
total revenues in 1995, 1996 and 1997, respectively. Due to its international
sales, the Company is subject generally to the risks of conducting business
internationally, including unexpected changes in regulatory requirements,
fluctuations in exchange rates for the United States dollar that could
effectively increase the price of the Company's products in foreign markets,
imposition of tariffs and other barriers and restrictions, and the burden of
complying with a variety of foreign laws. During 1996 and 1997, the Company
hedged its foreign exchange exposure related to anticipatory revenue
transactions by entering into dollar/yen option contracts.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that providing customers with comprehensive product
service and support is critical to maintaining a competitive position in the
wireless personal communications industry. The Company provides technical
support through its application engineering groups located in Japan, Israel and
the United States. The application engineering group offers full service
technical support to customers, product upgrades and training, if necessary.
The Company works closely with its customers to monitor the performance of its
product designs, and to provide application design support and assistance. The
Company believes that close contact with its customers improves their level of
satisfaction and provides the Company with insights into future product
development.
The Company provides several levels of technical support to its customers.
The Company's standard support package is generally offered with all product
sales, and includes provision of evaluation and prototyping systems, full
technical documentation and application design assistance. During an OEM's
production phase, the Company also provides failure analysis and replacement of
defective components. In some cases, the Company also offers more extensive
support arrangements for additional quarterly payments, which includes training,
system level design, implementation and integration support, as well as early
releases of new product versions when they become available. The Company
believes that tailoring the technical support level to its customers' needs is
essential for the success of product introductions and to achieve a high
satisfaction level among its customers.
MANUFACTURING
The Company uses independent foundries to manufacture its baseband chip
sets. The Company to date has ordered products from its foundries primarily
upon receipt of orders from its distributor or OEM customers and does not
maintain any significant inventory of its products. This strategy allows the
Company to avoid the significant capital investment required for wafer
fabrication facilities and inventories, and to focus its resources on algorithm
and software development, product design, quality assurance, marketing and
customer support. The
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Company maintains limited inventory in anticipation of orders from its
distributors or OEM customers. Designs of the Company's baseband chip sets are
verified by both the Company and the customer prior to orders being placed.
Upon receipt of such orders, the manufacturers ship the devices through the
Company's distributors to the Company's customers. The Company has also
developed procedures with its contract manufacturers to conduct comprehensive
quality control and quality assurance throughout the manufacturing and assembly
process. The Company's reliance on independent foundries involves a number of
risks, including the possibility of a shortage of certain key components and
reduced control over delivery schedules, manufacturing capacity, quality and
costs.
To date, the Company has purchased most of its DSP chips for cellular
telephones, for the PDC standard, from Texas Instruments Incorporated ("TI"),
which embeds the Company's software algorithms in TI's standard products. The
Company also buys all of the DSP chips used in CTP Systems' products from TI.
Currently, the Company purchases its application specific integrated circuits
("ASICs") for its PDC chip sets from Atmel ES2, a wholly owned subsidiary of
Atmel Inc., and VLSI Technology, Inc. ("VTI"); its ASICs for CTP Systems'
products from American Microsystems, Inc. ("AMI"); the Radio Frequency ("RF")
chip sets for CTP Systems' products from Rockwell Semiconductor Systems, Inc.;
the DSP chips and ASICs for its IS-136 TDMA chip sets from NEC Electronics Inc.
("NEC"); and, in addition, the Company purchases the DSP chips and ASICs for its
IS-95 CDMA chip sets from other independent foundries. The Company is dependent
on its suppliers to produce a sufficient quantity of DSP chips, ASICs and
components to meet the Company's needs and to deliver them in a timely manner.
Furthermore, the suppliers' manufacturing schedules are entirely independent
from the Company's supply requirements. The Company's reliance on the above
suppliers involves a number of risks, including the possibility of an
insufficient supply of DSP chips and ASICs, noncompetitive pricing and
discontinued production of the components utilized to produce the Company's
products.
CTP Systems currently manufactures its own wireless communications systems
and is therefore subject to various risks associated with the manufacturing
process, including risks resulting from CTP Systems' inexperience in mass
production, risks involved with the ramp-up of production, reliance on
subcontracted assembly facilities, errors in the manufacturing process,
shortages of required components, manufacturing equipment failures, and
disruptions of operations at the manufacturing facility. Prolonged inability of
CTP Systems to deliver products in a timely manner could result in the loss of
customers and materially adversely affect its results of operations. In
addition, certain of the components included in CTP Systems' products are
obtained from a single source or a limited group of suppliers. The partial or
complete loss or delay of the supply of components from certain of these sources
could result in a significant reduction in CTP Systems' revenues and could also
damage certain customer relationships.
Although the Company extensively tests its software and hardware products
prior to their introduction, design errors may be discovered after initial
product sampling, resulting in delays in volume production or recalls of
products sold. Although the Company has not experienced any significant errors
to date, the occurrence of such errors could have a material adverse effect on
the Company's business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
adapt to the rapidly changing wireless personal communications environment and
to continue to meet its customers' needs. Therefore, the continued timely
development and introduction of new products is essential in maintaining its
competitive position. The Company develops most of its products in-house and,
as of December 31, 1997, had a research, development and engineering staff of
106 people, including nine people holding doctorate degrees in areas related to
DSP. The Company is focusing its current development efforts primarily on the
development of enhanced versions of its existing digital cellular chip sets and
new applications involving IS-95 and IS-136. During 1995, 1996 and 1997, the
Company spent approximately $2.5 million, $5.3 million and $6.6 million,
respectively, on research
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and development activities, net of any offsetting grants from the Officer of the
Chief Scientist in Israel's Ministry of Industry and Trade.
COMPETITION
The markets for the Company's products are extremely competitive, and the
Company expects that competition will increase. Many of the Company's
competitors have entrenched market positions, established patents, copyrights,
tradenames, trademarks and intellectual property rights and substantial
technological capabilities. Both in the cellular market and in other wireless
personal communications markets, the Company's existing and potential
competitors include large and emerging domestic and international companies,
many of which have significantly greater financial, technical, manufacturing,
marketing, sales and distribution resources and management expertise than the
Company. The Company believes that its ability to compete successfully in the
wireless personal communications market depends upon a number of factors within
and outside its control, including price, quality, availability, product
performance and features; timing of new product introductions by the Company,
its customers and competitors; and customer service and technical support. The
Company's current OEM customers continuously evaluate whether to develop and
manufacture their own chip sets and could elect to compete with the Company at
any time. Price competition in the markets in which the Company currently
competes and proposes to compete is intense and is likely to increase, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, large manufacturers of wireless
personal communications equipment could also elect to enter into the component
market and compete directly with the Company.
In the Japanese digital cellular market, the Company faces competition from
existing cellular telephone manufacturers that develop in-house solutions, such
as NEC, Panasonic, and Sony Corporation, from other DSP-based baseband chip
suppliers, such as Asahi Kasei, and, in the future, may face competition from
other chip suppliers. The Company believes that its current advantage stems
from its experience in this market, early market presence and established
customer base.
In the TDMA market, the Company competes with existing cellular telephone
manufacturers, such as Ericsson, Lucent, Motorola and Nokia, that develop
in-house solutions.
In the CDMA market, the Company will compete with chip sets offered by
Qualcomm and possibly with other chip set manufacturers.
INTELLECTUAL PROPERTY
Although the Company has twenty-nine patent applications pending or allowed
in the United States, Japan and Israel, the Company relies primarily on its
trade secret program and copyrights to protect its intellectual property. The
Company attempts to protect its trade secrets and other proprietary information
through agreements with its customers, suppliers, employees and consultants, and
through other security measures. Although the Company intends to protect its
rights vigorously, there can be no assurance that these measures will be
successful. In addition, the laws of certain countries in which the Company's
products are or may be developed, manufactured or sold, including Hong Kong,
Japan, Korea and Taiwan, may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the wireless personal communications
industry, its technical expertise and ability to introduce new products on a
timely basis will be more important in maintaining its competitive position than
protection of its intellectual property and that patent, trade secret and
copyright protections are important but must be supported by other factors such
as the expanding knowledge, ability and experience of the Company's personnel,
new product introductions and frequent product
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enhancements. Although the Company continues to implement protective measures
and intends to defend vigorously its intellectual property rights, there can be
no assurance that these measures will be successful.
While the Company has not been involved in any patent or other intellectual
property rights litigation, there can be no assurance that third parties will
not assert claims against the Company with respect to existing and future
products. In the event of litigation to determine the validity of any third
party's claims, such litigation could result in significant expense to the
Company, and divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
Both the semiconductor and the wireless personal communications industries are
subject to frequent litigation regarding patent and other intellectual property
rights. Leading companies and organizations in the wireless personal
communications industry have numerous patents that protect their intellectual
property rights in these areas. In the event of an adverse result of any such
litigation, the Company could be required to expend significant resources to
develop non-infringing technology or to obtain licenses to the technology which
is the subject of the litigation. There can be no assurance that the Company
would be successful in such development or that any such license would be
available on commercially reasonable terms.
BACKLOG
The Company's backlog was approximately $6.8 million at December 31, 1996
and $20.5 million at December 31, 1997. The Company includes in its backlog all
accepted product purchase orders with respect to which a delivery schedule has
been specified for product shipment within one year. As a result of the
relatively short lead time in 1997 between receipt of product orders and
shipment of products due primarily to an increase in the supply of integrated
circuits and increased competition between OEMs in the Japanese wireless handset
market, the Company experienced relatively low backlog levels throughout 1997,
and the Company anticipates that the market for its baseband chip sets will
continue to be characterized by short-term order and shipment schedules. In
addition, product orders in the Company's backlog are subject to changes in
delivery schedules or to cancellation at the option of the purchaser without
significant penalty. Accordingly, the Company believes that backlog as of any
particular date is not necessarily a reliable indicator of sales or revenues for
any future period.
EMPLOYEES
As of December 31, 1997, the Company had 175 full and part-time employees,
including 106 in research and development, 17 in marketing and sales, 25 in
production, and 27 in corporate, administration and production coordination.
The Company believes that its future prospects will depend, in part, on its
ability to continue to attract and retain skilled engineering, marketing and
management personnel, who are in great demand. In particular, there is a
limited supply of highly qualified engineers with DSP experience. None of the
Company's employees are covered by a collective bargaining agreement, and the
Company has never experienced any strike or work stoppage. The Company believes
its relations with its employees to be good.
10
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters are located in an approximately 9,500 square
foot leased facility in Cupertino, California. This facility houses the
Company's management, marketing and sales personnel. The Company subleases
approximately 775 square feet in this facility to another corporation. The
lease for the Cupertino facility terminates in February 2001. The Company's
subsidiary, DSPC Israel Ltd. ("DSPCI"), leases approximately 10,000 square feet
for research and development, application engineering and manufacturing
coordination activities, in a facility in Givat Shmuel, Israel. This lease
terminates in April 2001. DSPCI also leases approximately 10,000 additional
square feet for research and development activities in Givat Shmuel, pursuant to
a lease that terminates in March 1999, with an option to extend the lease until
2002. The Company's subsidiary, CTP Systems, leases approximately 11,000 square
feet for research and development, engineering and manufacturing activities in a
facility in Petah-Tikva, Israel. This lease terminates in October 1999. The
Company's Japanese subsidiary leases approximately 3,200 square feet in Tokyo
for marketing and engineering liaison activities. This lease expires in October
1999.
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed in the Company's reports on Form 10-Q for the
quarterly periods ended June 30, 1997 and September 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 were consolidated,
alleged 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 sought damages in an unspecified amount,
interest, attorney's fees and other equitable and injunctive relief. The
plaintiffs requested to have the matter certified as a class action on behalf of
certain past and present shareholders of the Company. The Court sustained the
Company's demurrer with leave to amend. On January 27, 1998, plaintiffs filed
an amended and consolidated complaint. On February 26, 1998, two of the
plaintiffs in the state action filed a similar complaint in the U.S. District
Court for the Northern District of California, captioned ROBERT MISHELOW, ET AL.
V. DSP COMMUNICATIONS, INC., ET AL. The complaint makes the same allegations as
the amended complaint filed in state court, but charges violations of federal
securities laws.
The Company believes that the complaints are without merit and will 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since December 9, 1997, the Common Stock of the Company has been traded on
the New York Stock Exchange under the symbol "DSP." The Company's Common Stock
was traded on the Nasdaq National Market from the Company's initial public
offering on March 7, 1995 until December 8, 1997. The following table presents
for the periods indicated the high and low closing prices for the Common Stock,
as reported by the Nasdaq National Market or the New York Stock Exchange, as
applicable.
<TABLE>
<CAPTION>
Price Range of
Common Stock
----------------------
High Low
----------------------
<S> <C> <C>
Fiscal Year Ended December 31, 1997
First Quarter. . . . . . . . . . . . . . . . . . . $25.38 $ 7.94
Second Quarter . . . . . . . . . . . . . . . . . . $13.13 $ 6.75
Third Quarter. . . . . . . . . . . . . . . . . . . $22.38 $10.31
Fourth Quarter . . . . . . . . . . . . . . . . . . $24.56 $10.94
Fiscal Year Ended December 31, 1996
First Quarter. . . . . . . . . . . . . . . . . . . $13.00 $ 8.02
Second Quarter . . . . . . . . . . . . . . . . . . $25.69 $12.25
Third Quarter. . . . . . . . . . . . . . . . . . . $30.50 $20.75
Fourth Quarter . . . . . . . . . . . . . . . . . . $31.63 $16.75
</TABLE>
On February 25, 1998, the closing price of the Company's Common Stock as
reported on the New York Stock Exchange was $16.687 per share. As of February
25, 1998, there were approximately 127 holders of record of the Common Stock,
which the Company believes represents approximately 8,000 beneficial holders.
DIVIDEND POLICY
To date, the Company has neither declared nor paid any cash dividends on
shares of its Common Stock. The Company presently intends to retain all future
earnings for use in its business and does not anticipate paying cash dividends
on its Common Stock in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
- --------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
(Year ended December 31)
Total revenues $81,501 $ 88,899 $40,867 $15,966 $ 4,098
Gross profit $36,697 $ 41,196 $17,021 $ 6,631 $ 2,135
Operating income (loss) $17,701 $ 20,010 $(2,391) $ 2,655 $(1,142)
Net income (loss)(1)(2) $21,399 $ 21,750 $(2,358) $ 2,233 $(1,026)
Earnings (loss) per share(1)(2)
Basic $ 0.51 $ 0.52 $ (0.08) $ 0.17 $ (0.08)
Diluted $ 0.48 $ 0.48 $ (0.08) $ 0.09 $ (0.08)
Shares used in computing earnings (loss) per share(3)
Basic 41,776 41,865 30,252 13,497 12,605
Diluted 44,922 45,564 30,252 25,624 12,605
Balance Sheet Data
(As of December 31)
Cash, cash equivalents and short-term investments $116,641 $136,833 $ 27,988 $ 8,387 $ 3,636
Working capital $108,055 $129,230 $ 29,193 $ 5,476 $ 3,602
Total assets $142,896 $155,354 $ 44,119 $11,028 $ 6,397
Long-term obligations $ -- $ -- $ -- $ 132 $ 191
Total stockholders' equity $115,903 $136,844 $ 34,868 $ 6,532 $ 4,122
</TABLE>
- ---------------------------
(1) Net loss for 1995 includes a charge of $10,850,000 for acquired in-process
technology primarily in connection with the acquisition of CTP Systems Ltd. and,
to a lesser extent, in connection with a licensing arrangement. Excluding this
charge, pro forma net income for 1995 was $8,492,000 or $0.28 per basic share
and $0.24 per diluted share (based on 30,252,000 shares and 35,752,000 shares,
respectively).
(2) Net income for 1996 includes a charge of $5,000,000 in connection with the
termination of a proposed acquisition of Proxim Inc. Excluding this charge, pro
forma net income for 1996 was $26,125,000 or $0.62 per basic share and $0.57 per
diluted share.
(3) Net income (loss) per share information reflects the common stock
two-for-one split effected in March 1996 and the common stock two-for-one split
effected in December 1996.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the 1997 Consolidated
Financial Statements and notes thereto. The matters addressed in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, with the exception of the historical information presented, contain
forward-looking statements involving risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under the heading "Certain Factors That May Affect Future Results"
following this Management's Discussion and Analysis section, and elsewhere in
this report.
OVERVIEW
DSPC, a Delaware corporation incorporated on November 23, 1994, succeeded
to the business of DSP Telecommunications Ltd., an Israeli corporation ("DSP
Telecom"), pursuant to a reorganization completed upon the closing of the
Company's initial public offering ("IPO") on March 14, 1995, under which DSP
Telecom became a wholly owned subsidiary of DSPC (the "Reorganization"). The
Reorganization was accounted for in a manner similar to a pooling of interests.
The consolidated financial statements present the financial condition of
the Company as of December 31, 1997, the consolidated results of operations and
cash flows of the Company from the Reorganization date, and the combined
financial position, results of operations and cash flow of the Company with DSP
Telecom prior to the Reorganization.
At the end of 1993, the Company began the first volume shipments of its
digital baseband PDC chip sets to Japanese OEMs through its distributor in Japan
and in 1995 introduced and initiated shipments of its half-rate PDC chip set
which enables cellular carriers to increase the capacity of their existing
cellular networks. At the end of 1996, the Company initiated commercial sales of
a third generation chip set for digital cellular telephones using the IS-136
TDMA standard which supports voice and limited data communications, and in the
third quarter of 1997, the Company commenced volume shipments of IS-136 chip
sets. The Company has also developed baseband chip sets for CDMA products using
the IS-95 standard, under a CDMA license agreement with Qualcomm. The Company
shipped operational samples of its CDMA chip sets in the fourth quarter of 1997
and commenced volume production of the chip sets in the first quarter of 1998.
The first volume shipments are expected in the first half of 1998, and
significant revenues from the CDMA chip sets are not expected until the second
half of 1998.
The fourth quarter of 1996 included a charge of $5.0 million, included in
general and administrative expenses, in connection with the termination of a
proposed acquisition of Proxim, Inc.
The fourth quarter of 1995 included a charge of $10.9 million for acquired
in-process technology, primarily in connection with the purchase of CTP Systems.
The Company recorded a net income of $21.4 million on total revenues of
$81.5 million in 1997, compared to a net income of $21.8 million on total
revenues of $88.9 million in 1996 and a net loss of $2.4 million on total
revenues of $40.9 million in 1995. Excluding the charge for the proposed
acquisition in 1996 of $5.0 million and for acquired in-process technology in
1995 of $10.9 million, pro forma net income was $26.1 million for 1996 and $8.5
million for 1995.
The results of operations subsequent to the acquisition of CTP Systems on
October 26, 1995 include the results of CTP Systems. CTP Systems has developed
its wireless PBX product for commercial production, and commercial shipments
commenced in the fourth quarter of 1996. CTP Systems' activities incurred
losses throughout 1996 and 1997 and are expected to continue to incur losses
during 1998.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain
items from the Company's consolidated statements of operations as a percentage
of total revenues for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenues:
Product 94.3% 95.8% 90.9%
Technology development 5.7 4.2 9.1
----- ----- -----
Total revenues 100.0 100.0 100.0
Cost of Revenues:
Product 48.9 49.7 52.6
Technology development 6.1 4.0 5.8
----- ----- -----
Total cost of revenues 55.0 53.7 58.4
----- ----- -----
Gross Profit 45.0 46.3 41.6
Operating Expenses:
Research and development 8.1 6.0 6.2
Sales and marketing 5.0 4.1 5.9
General and administrative 10.2 13.7 8.9
Charge for acquired in-process technology - - 26.5
----- ----- -----
Total operating expenses 23.3 23.8 47.5
----- ----- -----
Operating income (loss) 21.7 22.5 (5.9)
Interest and other income (expense), net 7.8 5.5 2.8
----- ----- -----
Income (loss) before provision for income taxes 29.5 28.0 (3.1)
Provision for income taxes (3.2) (3.5) (2.7)
----- ----- -----
Net income (loss) 26.3% 24.5% (5.8)%
----- ----- -----
----- ----- -----
</TABLE>
REVENUES
PRODUCT: Product revenues consist primarily of baseband chip sets for
digital cellular telephones. Revenues from sales to distributors are recognized
at the time the products are shipped by the distributor to the OEM customer.
Other product revenues are recorded when products are shipped to customers.
Product revenues were $76.8 million in 1997 compared to $85.1 million and $37.1
million in 1996 and 1995, respectively.
The Company's product revenue growth in 1996 was primarily due to a large
increase in demand leading to volume shipments of the Company's Japanese PDC
digital cellular chip sets. The decline in product revenues in 1997 was
primarily due to a product transition in the Japanese PDC handset market that
took place in the second quarter of 1997, during which the Company's product
revenues decreased to $8.1 million as compared to $19.6 million in the second
quarter of 1996 (a decrease of $11.5 million quarter-on-quarter). At the end of
the second quarter of 1997, the Company began shipments of its new PDC chip
sets. The decrease in product revenues in the third quarter of 1997 in
comparison to the third quarter of 1996 was $3.9 million ($19.1 million in third
quarter of 1997 as compared to $23.0 million in the third quarter of 1996).
During the fourth quarter
15
<PAGE>
of 1997, product revenues increased to $30.9 million in comparison to $26.4
million in the fourth quarter of 1996 (an increase of $4.5 million quarter-on-
quarter). Sales prices for the Company's chip sets continued to decline in 1997
as a result of volume discounts and price pressures; however, apart from the
product transition period in the second and third quarters of 1997, increased
sales volume has been sufficient to offset the effect on revenues of decreasing
per unit prices.
TECHNOLOGY DEVELOPMENT: The Company has funded its technology development
in part using revenue from technology development agreements. Following
successful completion of technology development agreements with OEMs, the
Company's strategy is to develop and market products incorporating the developed
technology. Revenues are recognized only when applicable customer milestones,
including deliverables, have been met, but not in excess of the amount that
would be recognized using the percentage of completion method. Technology
development revenues were $4.7 million in 1997, $3.8 million in 1996, and $3.7
million in 1995. The Company's technology development revenues fluctuate, and
may continue to fluctuate, depending on the number and size of technology
development agreements and the timing of related milestones and deliverables.
In 1997, technology development revenues increased following the initiation
and/or completion of contracts for development and support of products for PDC,
TDMA and CDMA applications.
Revenues from Japan, consisting of sales of digital chip sets for cellular
telephones and technology development services, accounted for 80%, 94% and 94%
of total revenues in 1997, 1996 and 1995, respectively. The Company has
introduced its IS-136 TDMA and IS-95 CDMA chip sets, which are expected to
produce significant revenues outside of Japan in 1998. The Company anticipates
that revenues from Japan will continue to account for most of its revenues in
1998, although revenues outside of Japan are expected to continue to increase
through 1999. Virtually all sales are denominated in United States dollars to
reduce the effect of fluctuations in foreign currency exchange rates. In 1996
and 1997, the Company entered into dollar/yen option contracts in order to hedge
against the increase in the value of the U.S. dollar against the yen and
decrease exposure to currency-driven sales price pressures.
COST OF REVENUES
COST OF PRODUCTS SOLD: Cost of products sold consists primarily of
materials, and, to a lesser extent, warranty costs. Cost of products sold was
$39.9 million in 1997, compared to $44.2 million in 1996, and $21.5 million in
1995. The increase in cost of products sold in 1996 was due to increased volume
sales of chip sets, while the decrease in 1997 was a result of a decline in
sales, primarily due to a product transition in the Japanese PDC market that
took place in the second quarter of 1997. The cost of products as a percentage
of product revenues was 51.9%, 51.9%, and 57.9%, for 1997, 1996 and 1995,
respectively. Sales of CTP Systems' wireless PBX systems, resulted in positive
but relatively low margins in 1997. The Company expects that it will continue
to experience relatively low margins on sales of these wireless PBX systems
until higher volume sales are achieved. CTP Systems is currently engaged in a
cost reduction program, the effects of which should be felt towards the end of
1998.
The Company anticipates that the average sales price 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 changes
in the Company's terms of trade, and further cost reductions from suppliers if
the Company's order volumes increase.
In connection with its license agreement for CDMA, DSPC has agreed to pay
royalties on certain sales based on specified rates. The Company expects to
commence payments of these royalties in 1998 upon commencement of sales of its
CDMA products.
16
<PAGE>
COST OF TECHNOLOGY DEVELOPMENT: Cost of technology development is
comprised primarily of engineering salaries, subcontractors' costs and related
costs. The costs of technology development contracts are recorded as incurred.
Cost of technology development increased to $4.9 million in 1997 from $3.6
million in 1996 and $2.4 million in 1995 resulting from increased technology
development activities. The negative gross margin on technology development in
1997 was 5.0% compared to a positive gross margin of 5.9% in 1996 and 36.8% in
1995. The margins on technology development vary depending on the similarity or
diversity of the products and technologies developed, and as contractual
milestones are reached.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities, and materials and subcontracting costs, reduced through 1995 and
1996 by grants from the Chief Scientist. Net research and development expenses
increased to $6.6 million in 1997 from $5.3 million and $2.5 million in 1996 and
1995, respectively. The increases were due to the increased level of activities
in connection with the development of CDMA and TDMA products, and the continued
growth in the number of engineering personnel and in projects under development.
As a percentage of total revenues, research and development expenses were 8.1%
in 1997, 6.0% in 1996 and 6.2% in 1995. The Company expects that its research
and development expenses will continue to increase in the future, in absolute
dollars.
The Company records software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." To date, the Company has
expensed all of its software costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses are mainly comprised of employee related
expenses, trade exhibition expenses, and charges for customer liaison services
in Japan. Sales and marketing expenses increased to $4.1 million (5.0% of
revenues) in 1997 from $3.7 million (4.1% of revenues) in 1996, and $2.4 million
(5.9% of revenues) in 1995. The increase in 1996 reflects primarily the growth
of sales and marketing staff at the Company's headquarters in Cupertino,
California, increased participation at trade exhibitions, and increased
promotion and marketing research activities. The increase in 1997 was a result
of increased promotion and marketing activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in 1997 were $8.4 (10.2% of revenues)
compared to $12.2 million (13.7% of revenues) in 1996 (including a charge of
approximately $5.0 million in connection with the termination of a proposed
acquisition of Proxim, Inc.), and $3.6 million (8.9% of revenues) in 1995.
General and administrative expenses increased in 1997 and 1996 compared to
1995, in absolute dollars, as a result of increased staffing levels in 1996 at
the Company's headquarters in Cupertino, California, and at the facilities of
DSPC Israel Ltd., an Israeli subsidiary of the Company ("DSPCI"), and, in 1997,
increased facility expenses, increased administration expenses and fees
(including a one-time admission fee to the New York Stock Exchange), and
increased legal fees resulting from a class action that was filed against the
Company (see Item 3 above).
17
<PAGE>
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY
The Company recorded a charge of $10.9 million in the fourth quarter of
1995, which consisted of $9.6 million for acquired in-process technology
associated with the acquisition of CTP Systems, and $1.3 million for acquired
in-process technology associated with a licensing arrangement. See Note 9 to
the consolidated financial statements.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, includes interest and investment
income, foreign currency remeasurement gains and losses, and other expenses.
Interest and other income (expense), net, in 1997 was $6.3 million compared to
$4.8 million in 1996, and $1.1 million in 1995.
Interest and other income (expense), net, in 1997, 1996 and 1995 was
generated primarily from interest and realized gains on the Company's cash and
investment balances, including the proceeds from the IPO completed in March
1995, and from the Company's follow-on public offerings completed in June 1995
and April 1996.
PROVISION FOR INCOME TAXES
The tax provisions for 1997, 1996 and 1995 have been favorably impacted by
the benefits of the Israeli "Approved Enterprise" status. The Approved
Enterprise status was granted according to investment plans and will allow the
Company's Israeli subsidiaries a two to four year tax holiday on undistributed
earnings, and a corporate tax rate of 10% to 25% for an additional six to eight
years on each of the investment plans' proportionate share of income. The
benefits under these investment plans are scheduled to expire in 2005.
As of December 31, 1997, the Company had United States federal, state, and
Israel net operating loss carryforwards of approximately $27.8 million, $13.8
million and $5.2 million, respectively. The United States federal and state net
operating loss carryforwards will expire at various dates beginning in years
2001 through 2012. The Israeli loss carryforwards have no expiration date.
The Company's effective tax rate was approximately 11% for 1997 and 13% for
each of 1996 and 1995 (excluding the charge for Israeli acquired in-process
technology of $9.6 million in 1995). The decrease in the Company's effective
tax rate for 1997 was mainly due to a tax refund received by one of the
Company's Israeli subsidiaries as a result of final tax assessments by the
Israeli Income Tax Authorities for the tax years up to and including the 1995
tax year. Over time, the Company's tax rate is expected to increase due to the
elimination of the tax benefits awarded with the Approved Enterprise status, as
well as potential increases due to rules regarding controlled foreign
corporations ("CFC"). Losses incurred by the Company or any of its subsidiaries
in one country generally will not be deductible by entities in other countries
in the calculation of their respective local taxes. Likewise, 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.
Management has assessed the need for a valuation allowance against the
deferred tax assets and concluded that it is more likely than not that $9.5
million will not be realized. The remaining deferred tax asset of approximately
$2.2 million will be realized based on current levels of future taxable income.
Of the total valuation allowance, $8.7 million relates to deferred tax assets
attributable to stock option deductions, the benefit of which will be credited
to equity when realized.
DSP Telecom, DSPCI and CTP Systems (collectively, the "Israeli Companies")
are CFCs for United States income tax purposes. Accordingly, all or a portion
of the earnings of these Israeli Companies are subject to United States taxation
if, among other things, the Israeli Companies lend funds to the Company or
otherwise
18
<PAGE>
invest in certain proscribed assets; or the Israeli Companies engage in various
types of transactions defined in the Subpart F provisions of the United States
Internal Revenue Code. However, if the Israeli Companies' earnings become
subject to United States taxation, DSPC may be eligible to utilize its Israeli
and other foreign income taxes as a credit against its United States income
taxes. The Company believes that its existing plans will minimize the impact of
the CFC rules for the immediate future, subject to any changes in United States
tax laws that may occur. However, over time, the CFC rules may cause the
Company's tax rate to increase.
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
The rate of inflation in Israel in 1997, 1996 and 1995 was 7.0%, 10.6%,
and 8.1%, respectively. While substantially all of the Company's sales and
expenses are denominated in United States dollars, a portion of the Company's
expenses are denominated in Israeli shekels. The Company's primary expense paid
in Israeli currency is Israeli-based employee salaries. As a result, an
increase in the value of Israeli currency in comparison to the United States
dollar could increase the cost of technology development, research and
development expenses and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses independent foundries to fabricate its baseband chip set
products, minimizing its need to invest in manufacturing equipment and to
develop integrated circuit fabrication processes. However, the Company relies
on its independent foundries to achieve acceptable manufacturing yields and to
allocate to the Company a sufficient portion of foundry capacity to meet the
Company's needs. The Company to date has ordered products from its foundries
primarily upon receipt of orders for chip sets from its distributor or OEM
customers and has not maintained any significant inventory of its chip sets.
This strategy allows the Company to avoid utilizing its capital resources for
manufacturing facilities and inventory and allows the Company to focus
substantially all of its resources on the design, development and marketing of
its products. The Company maintains limited inventory in anticipation of orders
from its distributors or OEM customers. CTP Systems manufactures its PBX
systems product and therefore utilizes capital resources for its manufacturing
facility and for payment to external subcontractor assembly facilities. To
date, production of PBX systems has been limited and has not had a material
effect on the Company's liquidity or capital resources.
The Company has financed its operations and investments in capital
equipment primarily through cash provided by operations and sales of equity
securities. The Company received gross proceeds of approximately $9.4 million
through private sales of equity securities prior to the IPO in March 1995,
approximately $18.9 million from the IPO, $10.5 million from the follow-on
offering in June 1995, and $75.6 million from the second follow-on offering in
April 1996.
As of December 31, 1997, the Company had $116.6 million of cash, cash
equivalents and short-term investments.
19
<PAGE>
In 1997, the Company repurchased 5,869,800 shares of its Common Stock in
its share repurchase program, using an aggregate of approximately $52.6 million.
In addition, in January and February 1998, the Company repurchased an additional
753,900 shares for approximately $10.6 million. The Company may, from time to
time, repurchase additional shares of its Common Stock under its share
repurchase program.
The Company's operating activities provided cash of $21.3 million in 1997,
$32.9 million in 1996 and $4.0 million in 1995. Net cash provided from
operations in 1997 was comprised primarily of net income, an increase in
current liabilities, less an increase in trade accounts receivable and current
assets. Trade accounts receivable increased to $11.2 million at December 31,
1997, due to the timing of shipments and payments. Accounts receivable have to
date been primarily from TEC, the Company's distributor in Japan, which
accounted for 85% of the Company's accounts receivable at December 31, 1997.
The Company's write-offs of accounts receivable have not been material to date.
The Company's investing activities, other than purchases of and proceeds
from sales and maturities of short-term investments, have consisted of
expenditures for fixed assets, which totaled $2.1 million in 1997.
In obtaining approval of the Reorganization from Israeli tax authorities,
which was completed immediately before the closing of the IPO, the Company
agreed to invest in activities in Israel in an amount of not less than $9.0
million out of the proceeds of the IPO within three years after the IPO.
Through December 31, 1997, $5.0 million has been transferred to Israel. The
Company is in the process of applying for an extension of the above three year
period and expects to receive approval. If approval of the extension is not
received, the Company will comply with the original investment requirement.
As of December 31, 1997, the Company also had issued bank guarantees and
letters of credit totaling $2.5 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 complementary
businesses, projects or technologies which may require additional financing or
require the use of a significant portion of its existing cash, although the
Company has no present understandings, commitments or agreements, nor is it
engaged in any discussions or negotiations with respect to any such transaction.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. In 1997, the Company initiated a project
to modify or replace portions of its systems so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company has determined that it has no exposure to contingencies related to the
Year 2000 issue for the products it has sold. The Company expects this project
to be substantially complete in 1999 and does not expect to incur material costs
on this project. In addition, the Company has initiated formal communications
with all of its significant suppliers and large customers to determine the
extent to which the Company may be vulnerable to those third parties' failure to
remediate their own Year 2000 issues. Despite these efforts, there can be no
assurance that the Company will not encounter unforeseen problems in its own
computer systems, or that the systems of other companies on which the Company's
operations rely will be upgraded or replaced in a timely manner. Such
unforeseen problems in the Company's systems, or failures to address this issue
by other companies could have an adverse effect on the Company's operations.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-K contains forward looking statements concerning the
Company's existing and future products, markets, expenses, revenues,
liquidity, performance 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 TWO DISTRIBUTORS; COMPETITION IN
THE OEM MARKET. Substantially all of the Company's sales of PDC baseband chip
sets for digital cellular telephones are to TEC, the Company's distributor in
Japan, and all of the Company's sales of TDMA chip sets are to TEC and to TEA,
the Company's distributor in the United States. These distributors' sales of
the Company's products are concentrated in a small number of OEM customers. In
1997, seven OEM customers accounted for substantially all of the sales of the
Company's PDC baseband chip sets, while two other OEM customers accounted for
all sales of the Company's TDMA chip sets. The loss of TEC or TEA as a
distributor or the loss of or significant reduction in the distributors' sales
to any of these OEMs could 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 wireless handset market is intense and is increasing. The
Company's performance depends significantly on the ability of its OEM customers
to establish, or 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.
RELIANCE ON A SINGLE PRODUCT; NEED FOR NEW PRODUCT INTRODUCTIONS. Since
December 1993, the Company has relied upon sales from a single product, its PDC
baseband chip set for digital cellular telephones for use in Japan, to generate
substantially all of its product sales. In the second half of 1997, the Company
commenced volume shipments of its TDMA chip set for digital telephones for use
outside of Japan. 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, introducing and marketing 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' wireless 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
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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.
In addition, the Company's quarterly operating results have in the past and may
continue to vary significantly as a result of 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; changes in general economic conditions, particularly in Japan and the
Far East; 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; and sales of wireless subscriber equipment by OEMs.
DEPENDENCE ON JAPANESE MARKET AND ECONOMY; FLUCTUATION OF EXCHANGE RATE.
Sales of the Company's products may be affected materially 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 condition and
results of operations. 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 Japan. 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. 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, changes in the Company's terms of trade, 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 well 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 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, currently for the North American market.
However, the IS-136 TDMA standard has only recently been introduced, and 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
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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 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 CDMA-BASED PRODUCT. The Company has developed a
baseband chip set for IS-95 CDMA products pursuant to a license agreement with
Qualcomm for CDMA technology. In the fourth quarter of 1997, the Company
delivered operational engineering samples of the CDMA chip set, and in the first
quarter of 1998 commenced volume production of the CDMA chip set. Although the
Company extensively tested the CDMA chip set prior to its introduction, design
adjustments may yet be required which could result in delays in further or
expanded volume production or recalls of the chip sets already produced.
Although the Company has not to date experienced any significant errors or the
need for any material adjustments with respect to the CDMA chip set, the
occurrence of such errors or adjustments could have a material adverse effect on
the Company's business, financial condition or results of operations. Sales of
the Company's CDMA-based products will 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, there has to date 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. In addition, the
Company uses 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 manufacture in a timely manner
and at competitive cost, 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.
RELIANCE ON 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"). The Company also
purchases its IS-95 CDMA chip sets from other independent foundries.
Accordingly, the Company is and will remain dependent on independent foundries,
including TI, NEC, AMI, Atmel ES2, VTI and others, 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.
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 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
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product demand. Although the Company's visibility increased somewhat during the
second half 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.
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 AND COMMERCIAL RISKS ASSOCIATED WITH CTP SYSTEMS. In October
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. Although CTP Systems began commercial shipments of
wireless PBX equipment to OEM customers in the fourth quarter of 1996, and is
currently shipping to four OEM customers, it still has not reached commercially
viable levels of shipments. Sales of wireless PBX systems worldwide in 1997
were lower than forecasts. Wireless PBX sales are currently to vertical and
limited applications. It is still not clear when and if the Wireless PBX market
will experience significant growth and how successful the Company's OEMs will be
in this market. CTP Systems is currently engaged in further development to
facilitate a cost reduction program that may require the Company to incur
additional engineering expenses to correct any problems or redesign the product.
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 and subcontracted
assembly 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
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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 December 31, 1997, 155 of the Company's 175 employees
were located in Israel, including most of the Company's senior management and
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 1996 and
1997 was 10.6% and 7.0%, 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 and development 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 and development, 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, general and administrative, and
marketing and sales expenses coupled with the Company's reliance on OEMs to
successfully market and develop products that incorporate the Company's
proprietary technologies could have an adverse effect on the Company's
performance in the next several quarters. The Company's failure to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
FUTURE ACQUISITIONS. The Company's strategy includes obtaining additional
technologies and may 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,
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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
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 technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could have a material adverse effect on the market
price of the Company's Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers required by Item
10 is incorporated by reference from the information under the captions
"Election of Directors," "Directors and Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's definitive proxy
statement for its annual meeting of stockholders to be held on May 12, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
information under the caption "Executive Compensation and Other Information" in
the Company's definitive proxy statement for its annual meeting of stockholders
to be held on May 12, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive proxy statement for its annual
meeting of stockholders to be held on May 12, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Company's definitive proxy statement for its annual meeting of
stockholders to be held on May 12, 1998.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The financial statements filed as a part of this report are identified
in the Index to Consolidated Financial Statements on page F-1.
(a)2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this
Report:
PAGE
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . .S-1
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(a)3. EXHIBITS
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission. The Company shall
furnish copies of exhibits for a reasonable fee (covering the expense of
furnishing copies) upon request.
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(Filed as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1, File No. 33-87506, as declared effective on March 7, 1995,
and incorporated herein by reference).
3.1A Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated March 5, 1996 (Filed as Exhibit 3.1A to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995, as filed on March 30, 1996, and incorporated herein by
reference).
3.1B Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated November 13, 1996 (Filed as Exhibit 3.1B to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996, as filed on March 24, 1997, and incorporated herein by
reference).
3.2 Bylaws of the Company (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, File No. 33-87506, as declared
effective on March 7, 1995, and incorporated herein by reference).
3.3 Written Consent dated January 26, 1995, amending the Bylaws of the
Company (Filed as Exhibit 3.7 to the Registrant's Registration
Statement on Form S-1, File No. 33-87506, as declared effective on
March 7, 1995, and incorporated herein by reference).
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EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.1 Form of Indemnification Agreement for directors and executive officers
(Filed as Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, File No. 33-87506, as declared effective on March 7, 1995,
and incorporated herein by reference).
10.2* 1995 Director Stock Option Plan, as amended.
10.3* 1995 Employee and Consultant Stock Plan (Filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506, as
declared effective on March 7, 1995, and incorporated herein by
reference).
10.4* 1992 Israeli Key Employee Share Incentive Plan (Filed as Exhibit 10.4
to the Registrant's Registration Statement on Form S-1, File No.
33-87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.5* 1995 Employee Stock Purchase Plan (Filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506, as
declared effective on March 7, 1995, and incorporated herein by
reference).
10.6 Non-Exclusive Distribution Agreement dated as of January 1, 1994,
between DSP Telecom and Tomen Electronics Corp. (Filed as Exhibit 10.1
to the Registrant's Current Report on Form 8-K, as filed on February
26, 1998, and incorporated herein by reference).
10.7 Technology Assignment and License Agreement dated as of January 7,
1994 between DSP Group and DSP Telecom (Filed as Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506, as
declared effective on March 7, 1995, and incorporated herein by
reference).
10.8 License Agreement dated as of March 25, 1994 between DSP Telecom and
DSP Semiconductors USA, Inc. (Filed as Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506, as
declared effective on March 7, 1995, and incorporated herein by
reference).
10.9 Lease Agreement dated February 21, 1991 for a portion of the Company's
facilities located in Givat Shmuel, Israel, together with
documentation transferring the Lease from DSP Semiconductors Ltd. to
DSP Telecom (in Hebrew) (Filed as Exhibit 10.27 to the Registrant's
Registration Statement on Form S-1, File No. 33-87506, as declared
effective on March 7, 1995, and incorporated herein by reference).
10.10 Lease Agreement dated February 21, 1991 for a portion of the Company's
facilities located in Givat Shmuel, Israel, together with
documentation transferring the Lease from DSP Semiconductors Ltd. to
DSP Telecom (in English) (Filed as Exhibit 10.28 to the Registrant's
Registration Statement on Form S-1, File No. 33-87506, as declared
effective on March 7, 1995, and incorporated herein by reference).
10.11 Development and License Agreement dated May 1, 1993 between Texas
Instruments Incorporated and DSP Telecom (Filed as Exhibit 10.2 to the
Registrant's Current Report on Form 8-K, as filed on February 26,
1998, and incorporated herein by reference).
29
<PAGE>
EXHIBIT
NUMBER EXHIBIT TITLE
10.12 Lease Agreement dated December 15, 1994 for the Company's headquarters
located in Cupertino, California (Filed as Exhibit 10.30 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506, as
declared effective on March 7, 1995, and incorporated herein by
reference).
10.13 Development and License Agreement dated as of March 31, 1993 between
NEC Electronics Inc. and DSP Telecom, Inc. (Filed as Exhibit 10.33 to
the Registrant's Registration Statement on Form S-1, File No.
33-87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.14* 1994 Employee and Consultant Stock Plan (Filed as Exhibit 10.34 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506, as
declared effective on March 7, 1995, and incorporated herein by
reference).
10.15 Addendum No. 1 to Lease Agreement between Multiline Service
International Limited and DSP Semiconductors Ltd. and DSPC Israel Ltd.
dated December 3, 1995, together with Guarantee by DSP Communications
Inc. (in English & Hebrew) (Filed as Exhibit 10.36 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, as
filed on March 30, 1996, and incorporated herein by reference).
10.16 Addendum No. 2 to Lease Agreement between Multiline Service
International Limited and DSPC Israel Ltd., dated December 3, 1995 (in
English and Hebrew) (Filed as Exhibit 10.37 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995, as filed on
March 30, 1996, and incorporated herein by reference).
10.17 Lease Agreement for CTP Systems' facility located in Petah-Tikva,
Israel (in Hebrew) (Filed as Exhibit 10.38 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995, as filed on
March 30, 1996, and incorporated herein by reference).
10.18 1996 Nonstatutory Employee and Consultant Stock Option Plan (Filed as
Exhibit 10.41 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, as filed on August 12, 1996, and
incorporated herein by reference).
10.19* 1996 Stock Option Plan (Filed as Exhibit 10.42 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, as filed on November 14, 1996, and incorporated herein by
reference).
10.20* Employment Agreement, dated as of June 15, 1996, between DSP Telecom,
Inc. and Michael Lubin (Filed as Exhibit 10.43 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, as filed on November 14, 1996, and incorporated herein by
reference).
30
<PAGE>
EXHIBIT
NUMBER EXHIBIT TITLE
10.21* Amended and Restated Employment Agreement, dated as of November 1,
1996, between DSP Telecom, Inc. and Davidi Gilo (Filed as Exhibit
10.25 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996, as filed on March 24, 1997, and incorporated
herein by reference).
10.22* Employment Agreement, dated as of September 16, 1996 between DSP
Telecom, Inc. and Stephen Pezzola (Filed as Exhibit 10.26 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, as filed on August 13, 1997, and incorporated herein by
reference).
10.23* Amendment to Employment Agreement, dated as of November 5, 1997,
between DSP Telecom, Inc. and Davidi Gilo.
10.24* Employment Agreement, dated as of January 1, 1998, between DSPC Israel
Ltd. and Nathan Hod.
10.25* Employment Agreement, dated as of January 1, 1998, between DSPC Israel
Ltd. and Gerald Dogon.
10.26* Amended and Restated Employment Agreement, dated as of January 1,
1998, between DSP Communications, Inc., DSP Telecom, Inc. and Stephen
Pezzola.
10.27 Rental Contract dated January 8, 1996 for a portion of the Company's
facilities in Givat Shmuel, Israel (in English).
10.28 Rental Contract dated December 24, 1997 for a portion of the Company's
facilities in Givat Shmuel, Israel (in English).
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule (1997)
27.2 Restated Financial Data Schedule (1996)
27.3 Restated Financial Data Schedule (1995)
- ------------------------
* Indicates management contract or compensation plan or arrangement in which
directors and/or executive officers of the Registrant are eligible to
participate.
(b) REPORTS ON FORM 8-K
None.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DSP COMMUNICATIONS, INC.
By: /s/ Nathan Hod
-------------------------------------------------
Nathan Hod, Chief Executive Officer and President
Date: March 16, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Nathan Hod Chairman of the Board of March 16, 1998
- ----------------------- Directors, President and ----------------------
Nathan Hod Chief Executive Officer
(Principal Executive
Officer)
/s/ Gerald Dogon Executive Vice President, March 16, 1998
- ----------------------- Chief Financial Officer ----------------------
Gerald Dogon and Director (Principal
Financial and Accounting
Officer)
Director
- ----------------------- ----------------------
Neill Brownstein
/s/ Lewis Broad Director March 16, 1998
- ----------------------- ----------------------
Lewis Broad
/s/ Andrew Schonzeit Director March 16, 1998
- ----------------------- ----------------------
Andrew Schonzeit
/s/ Shigeru Iwamoto Director March 16, 1998
- ----------------------- ----------------------
Shigeru Iwamoto
/s/ Avraham Fischer Director March 16, 1998
- ----------------------- ----------------------
Avraham Fischer
<PAGE>
DSP COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . F-3
Consolidated Statements of Operations --
Years ended December 31, 1997, 1996, and 1995. . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1997, 1996, and 1995. . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows --
Years ended December 31, 1997, 1996, and 1995. . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . F-7
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
DSP Communications, Inc.
We have audited the accompanying consolidated balance sheets of DSP
Communications, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DSP
Communications, Inc. at December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Palo Alto, California
January 13, 1998
except for Note 13, as to which the date is
February 9, 1998
F-2
<PAGE>
DSP Communications, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 82,322 $ 77,799
Short-term investments 34,319 59,034
Trade accounts receivable (net of allowance for
doubtful accounts of $0 and $132 in 1997 and
1996, respectively) 11,200 7,054
Other current assets 7,207 3,373
------------------------
Total current assets 135,048 147,260
Property and equipment, net 4,151 3,565
Other assets 3,697 4,529
------------------------
$ 142,896 $ 155,354
------------------------
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,372 $ 3,747
Accrued liabilities 17,093 11,793
Deferred income 528 2,490
------------------------
Total current liabilities 26,993 18,030
Other liabilities - 480
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized; no shares
issued and outstanding - -
Common stock, par value $0.001, 110,000,000
shares authorized; 40,427,710 shares
issued and outstanding at December 31,
1997 (44,497,177 shares in 1996) 40 44
Additional paid-in capital 84,890 127,226
Retained earnings 30,973 9,574
------------------------
Total stockholders' equity 115,903 136,844
------------------------
$ 142,896 $ 155,354
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
DSP Communications, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Revenues:
Product $76,817 $85,128 $37,127
Technology development 4,684 3,771 3,740
------------------------------------------
Total revenues 81,501 88,899 40,867
------------------------------------------
Cost of revenues:
Product 39,885 44,153 21,483
Technology development 4,919 3,550 2,363
------------------------------------------
Total cost of revenues 44,804 47,703 23,846
------------------------------------------
Gross profit 36,697 41,196 17,021
Operating expenses:
Research and development 6,562 5,311 2,524
Sales and marketing 4,078 3,685 2,407
General and administrative 8,356 12,190 3,631
Charge for acquired in-process technology -- -- 10,850
------------------------------------------
Total operating expenses 18,996 21,186 19,412
------------------------------------------
Operating income (loss) 17,701 20,010 (2,391)
Interest and other income (expense), net 6,332 4,848 1,148
------------------------------------------
Income (loss) before provision for income taxes 24,033 24,858 (1,243)
Provision for income taxes (2,634) (3,108) (1,115)
------------------------------------------
Net income (loss) $21,399 $21,750 $(2,358)
------------------------------------------
------------------------------------------
Earnings (loss) per share:
Basic $0.51 $0.52 $(0.08)
------------------------------------------
------------------------------------------
Diluted $0.48 $0.48 $(0.08)
------------------------------------------
------------------------------------------
Shares used in computing earnings (loss) per share:
Basic 41,776 41,865 30,252
------------------------------------------
------------------------------------------
Diluted 44,922 45,564 30,252
------------------------------------------
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
DSP Communications, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Ordinary Shares Additional Retained Total
-------------------------------------------- Paid-In Earnings Stockholders'
Shares Amount Shares Amount Capital Deficit) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 400 $ -- 5,721,360 $ 1,386 $ 14,964 $ (9,818) $6,532
Conversion of ordinary shares into common
stock 22,885,440 23 (5,721,360) (1,386) 1,363 --
Issuance of common stock for warrants
exercised 505,432 -- -- -- 187 -- 187
Issuance of common stock pursuant to options
exercised 1,073,940 1 -- -- 922 -- 923
Issuance of common stock in public offerings,
net 11,746,632 12 -- -- 29,241 -- 29,253
Change in net unrealized gain on securities
available for sale -- -- -- -- 331 -- 331
Net loss -- -- -- -- -- (2,358) (2,358)
---------------------------------------------------------------------------------
Balance at December 31, 1995 36,211,844 36 -- -- 47,008 (12,176) 34,868
Issuance of common stock under stock option
and stock purchase plans (2,076,882
shares and 11,187 shares, respectively) 2,088,069 2 -- -- 3,273 -- 3,275
Issuance of common stock in public offering,
net 6,197,264 6 -- -- 75,616 -- 75,622
Tax benefit related to stock option plans -- -- -- -- 1,617 -- 1,617
Change in net unrealized gain on securities
available for sale -- -- -- -- (288) -- (288)
Net income -- -- -- -- -- 21,750 21,750
---------------------------------------------------------------------------------
Balance at December 31, 1996 44,497,177 44 -- -- 127,226 9,574 136,844
Issuance of common stock under stock option
and stock purchase plans (1,789,039 shares
and 11,294 shares, respectively) 1,800,333 2 -- -- 9,995 -- 9,997
Repurchase of common stock (5,869,800) (6) -- -- (52,622) -- (52,628)
Compensation expense related to stock options -- -- -- -- 332 -- 332
Change in net unrealized gain on securities
available for sale -- -- -- -- (41) -- (41)
Net income -- -- -- -- -- 21,399 21,399
---------------------------------------------------------------------------------
Balance at December 31, 1997 40,427,710 $ 40 -- $ -- $84,890 $30,973 $115,903
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
DSP Communications, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 21,399 $ 21,750 $ (2,358)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 1,433 946 418
Amortization 832 832 139
Compensation expense related to shares
issued in a Subsidiary 370 310 170
Compensation expense related to stock options 332 - -
Charge for acquired in-process technology - - 9,600
Other - (1) (360)
Changes in operating assets and liabilities,
net of effects of acquisition:
Trade accounts receivable (4,146) 1,784 (7,257)
Other current assets (3,713) (1,647) (169)
Accounts payable 5,686 333 2,007
Accrued liabilities 1,057 6,604 2,431
Deferred income (1,962) 2,017 (621)
----------------------------
Net cash provided by operating activities 21,288 32,928 4,000
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of CTP, net of cash acquired - - (13,886)
Cash purchases of equipment (2,097) (2,702) (1,203)
Proceeds from sales of equipment 17 10 34
Purchases of short-term investments (42,149) (97,340) (68,685)
Sales and maturities of short-term investments 66,823 55,714 51,934
Other assets - - (750)
----------------------------
Net cash provided by (used in) investing
activities 22,594 (44,318) (32,556)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of lease obligations - - (190)
Issuance of common stock for cash 9,997 78,897 30,892
Repurchase of common stock (49,356) - -
----------------------------
Net cash provided by (used in) financing
activities (39,359) 78,897 30,702
----------------------------
Increase in cash and cash equivalents 4,523 67,507 2,146
Cash and cash equivalents at beginning of year 77,799 10,292 8,146
----------------------------
Cash and cash equivalents at end of year $ 82,322 $ 77,799 $ 10,292
----------------------------
----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
DSP Communications, Inc.
Consolidated Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ - $ - $ 127
----------------------------
----------------------------
Income taxes paid $ 624 $ 730 $ 445
----------------------------
----------------------------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
INFORMATION
Equipment cost payable $ 64 $ 125 $ 130
----------------------------
----------------------------
Loan provided to CTP before acquisition $ - $ - $ 750
----------------------------
----------------------------
Amounts payable for repurchase of common stock $ 3,272 $ - $ -
----------------------------
----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
DSP Communications, Inc. ("DSPC" or the "Company"), a Delaware corporation
incorporated on November 23, 1994, succeeded to the business of DSP
Telecommunications Ltd., an Israeli company ("DSP Telecom"), pursuant to a
reorganization completed upon the closing of the Company's initial public
offering ("IPO") on March 14, 1995, under which DSP Telecom became a wholly
owned subsidiary of DSPC (the "Reorganization"). The Reorganization was
accounted for in a manner similar to a pooling of interests.
The consolidated financial statements include the accounts of DSPC, its
subsidiaries DSP Telecom Inc., a California corporation, DSP Communications
(Japan) Inc., a Japanese corporation, DSPC Israel Ltd. ("DSPCI"), an Israeli
company; DSP Telecom; and effective October 31, 1995, CTP Systems Ltd., an
Israeli company ("CTP") (see Note 9). DSPC wholly owns all of its subsidiaries
except for less than a 1% minority interest in DSPCI represented by nonvoting
preferred stock of DSPCI held by certain employees and advisors. Intercompany
accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS AND RELATED CONCENTRATIONS
The Company applies its expertise in the development, design and marketing of
DSP (digital signal processing) software, algorithms and VLSI circuit design to
develop highly integrated, low power and cost-effective chip sets for wireless
personal communications applications. Following the CTP Acquisition, DSPC also
provides wireless PBX solutions for the office environment.
The major portion of DSPC's product revenues to date have been generated from
the sale of a single product, its baseband chip set for digital cellular
telephones, for use mainly in Japan. In the second half of 1997, the Company
commenced volume shipments of chip sets for use outside of Japan.
Substantially all of the Company's product revenues are from sales to its two
distributors who in turn sell to OEM manufacturers in Japan and other areas.
The Company's distributors are not subject to minimum purchase requirements and
can cease marketing the Company's products at any time. The loss of either of
the Company's distributors could have a material adverse effect on the Company's
business, financial condition and results of operations. Substantially all of
these distributors' sales were made to a small number of customers in 1997, 1996
and 1995. Because the worldwide cellular subscriber equipment industry is
dominated by a small number of large corporations, DSPC expects that a
significant portion of its future product revenues will continue to be
concentrated in a limited number of customers. The loss of one or more of these
customers would have a material adverse effect on the Company's results of
operations.
The Company uses independent foundries to manufacture its baseband chip sets.
The Company's reliance on independent foundries involves a number of risks,
including the possibility of a shortage of certain key components and reduced
control over delivery schedules, manufacturing capacity, quality and costs.
F-7
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NATURE OF OPERATIONS AND RELATED CONCENTRATIONS (CONTINUED)
DSPC's integrated circuits are fabricated by independent third party suppliers.
The Company's reliance on these suppliers involves a number of risks, including
the possibility of an insufficient supply of DSP chips, noncompetitive pricing
and discontinued production of the DSP chip currently utilized to produce the
Company's products. During and at the end of 1997, the Company had four major
suppliers for the integrated circuits. The reliance on a small number of
suppliers may subject the Company from time to time to quality, allocation and
pricing constraints.
REVENUE RECOGNITION
PRODUCT - Product revenue relates to sales of baseband chip sets for cellular
telephones and to wireless PBX systems. Revenue from product sales to
customers, other than sales to distributors, are recorded when products are
shipped. Sales to distributors, under agreements allowing price protection and
right of return on products unsold by the distributors, are not recognized until
the products are sold by the distributors to OEM manufacturers. DSPC accrues
estimated sales returns/exchanges for end-user sales and warranty costs upon
recognition of sales. DSPC has not experienced significant warranty claims to
date.
TECHNOLOGY DEVELOPMENT - DSPC performs best-efforts research and product
development work under technology development agreements. Due to technology
risk factors, the costs of these agreements are expensed as incurred and
revenues are recognized when applicable customer milestones are met, including
deliverables, and in any case, not in excess of the amount that would be
recognized using the percentage-of-completion method. Costs incurred under
technology development agreements are included in the cost of technology
development. Revenues under support agreements are recorded pro rata over the
terms of the agreements.
Deferred income consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
----------------------------------
<S> <C> <C>
Product revenues $ 528 $2,390
Technology development revenues -- 100
----------------------------------
$ 528 $2,490
----------------------------------
----------------------------------
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and through 1996 were
reduced by related participation from programs sponsored by the Israeli
government.
F-8
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and are included in other assets.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives
of the assets (generally from 3 to 5 years) or the life of the lease,
whichever is shorter.
FOREIGN CURRENCY TRANSACTION
Substantially all of DSPC's sales are made in United States dollars. In
addition, a substantial portion of DSPC's costs are incurred in dollars.
Since the dollar is the primary currency in the economic environment in which
DSPC operates, the dollar is its functional currency, and accordingly,
monetary accounts maintained in currencies other than the dollar (principally
cash and liabilities) are remeasured using the foreign exchange rate at the
balance sheet date. Operational accounts and nonmonetary balance sheet
accounts are measured and recorded at the rate in effect at the date of the
transaction. The effects of foreign currency remeasurement, which have been
immaterial to date, are reported in current operations.
The Company utilizes financial instruments to reduce financial market risks.
These instruments are used to hedge anticipatory transactions. The foreign
exchange forward contract position as of December 31, 1997 is to hedge
$3,600,000 in foreign currency exposure. These contracts mature in the first
quarter of 1998. The Company does not use derivative financial instruments
for trading purposes. Material gains and losses on currency options that are
designated and effective as hedges of anticipated transactions are deferred
and recognized in income in the same period that the underlying transactions
are settled.
F-9
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
In 1997 the Financial Accounting Standards Board ("FASB") issued Statement No.
128, EARNINGS PER SHARE, according to which the calculation of primary and fully
diluted earnings per share, was replaced with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31 as follows (in thousands except per share
data):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share -
net income (loss) $ 21,399 $ 21,750 $ (2,358)
----------- ----------- -----------
----------- ----------- -----------
Denominator for basic earnings per share -
weighted average shares 41,776 41,865 30,252
Effect of dilutive securities - employee stock options 3,146 3,699 --
----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares 44,922 45,564 30,252
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per share:
Basic $ 0.51 $ 0.52 $ (0.08)
----------- ----------- -----------
----------- ----------- -----------
Diluted $ 0.48 $ 0.48 $ (0.08)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
For additional disclosures regarding the employee stock options, see Note 8.
During 1997 and 1996, options to purchase 860,753 shares and 137,205 shares,
respectively, of common stock were outstanding but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive. Options to purchase 5.5 million shares of
common stock were outstanding during 1995 but were not included in the
computation of diluted earnings per share as the effect would be antidilutive.
The earnings (loss) per share amounts reflect the common stock splits through
December 31, 1997 and are computed using the weighted average number of common
and ordinary shares outstanding and the effect of dilutive securities.
F-10
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject DSPC to credit risk consist principally of
cash equivalents and short term investments and trade receivables. The Company
invests cash equivalents and short-term investments through high-quality
financial institutions. The majority of DSPC's product sales are to a single
distributor who in turn sells to manufacturers of consumer electronics products.
No collateral is required from the distributor or end customers. As of December
31, 1997, approximately $9,500,000 or 85% of trade accounts receivable is due
from this distributor. Write-off of accounts receivable through December 31,
1997 have been insignificant.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
DSPC considers all highly liquid investments with a maturity of three months or
less, when purchased, to be cash equivalents. As of December 31, 1997, pursuant
to Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, all debt securities are
designated as available-for-sale. Available-for-sale securities are carried at
fair value, which is determined based upon the quoted market prices of the
securities, with unrealized gains and losses reported in stockholders' equity.
Realized gains and losses and declines in value judged to be
other-than-temporary on available for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
INTANGIBLE ASSETS
Intangible assets consist of acquired developed technology and goodwill
resulting from the CTP acquisition (see Note 9) which are being amortized over
the estimated useful lives of five years. Acquired developed technology and
goodwill, with a cost of $4,161,000 and accumulated amortization of $1,803,000
and $971,000 at December 31, 1997 and 1996, respectively, are included in other
assets. Management assesses the realizability of the goodwill and the acquired
technology at each balance sheet date.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations
in accounting for its employee stock options because, as discussed in note 8,
the alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized.
F-11
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME
("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. Adoption is required in 1998 and will
not have an impact on the Company's net income or stockholders' equity. SFAS
130 requires unrealized gains or losses on the Company's available-for-sale
securities, which currently are reported in stockholders' equity, to be included
in other comprehensive income and the disclosure of total comprehensive income.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION ("SFAS 131") SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 is required in 1998 and will have no impact on the
Company's consolidated results of operations, financial position or cash flows.
F-12
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities at December 31,
1997: (in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bank time deposit $ 3,062 $ - $ - $ 3,062
Commercial paper 4,172 - - 4,172
Closed-end mutual fund shares 11,776 - - 11,776
U.S. corporate obligations 22,222 1 (7) 22,216
U.S. municipal obligations 11,108 8 - 11,116
U.S. government obligations 3,034 - - 3,034
-------------------------------------------------------------
$ 55,374 $ 9 $ (7) $ 55,376
-------------------------------------------------------------
-------------------------------------------------------------
Reported as:
Cash equivalents $ 21,057 $ - $ - $ 21,057
Short-term investments 34,317 9 (7) 34,319
-------------------------------------------------------------
$ 55,374 $ 9 $ (7) $ 55,376
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
The following is a summary of available-for-sale securities at December 31, 1996
(in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bank time deposit $ 13,904 $ - $ - $ 13,904
Commercial paper 6,039 - - 6,039
Closed-end mutual fund shares 20,577 - - 20,577
U.S. corporate obligations 30,658 29 (2) 30,685
U.S. municipal obligations 19,430 11 (3) 19,438
U.S. government obligations 7,233 8 - 7,241
-------------------------------------------------------------
$ 97,841 $ 48 $ (5) $ 97,884
-------------------------------------------------------------
-------------------------------------------------------------
Reported as:
Cash equivalents $ 38,850 $ - $ - $ 38,850
Short-term investments 58,991 48 (5) 59,034
-------------------------------------------------------------
$ 97,841 $ 48 $ (5) $ 97,884
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
F-13
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
During the years ended December 31, 1997 and 1996, the change in net unrealized
gains were decreases of $41,000 and of $288,000, respectively. Proceeds from
the sale of available-for-sale securities were $58,778,000, $106,822,000 and
$13,019,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Realized gains and losses on the sale of available-for-sale securities for the
year ended December 31, 1997 and 1996 were immaterial. Realized gains on the
sale of available-for-sale securities during 1995 were $369,000. There were no
realized losses on the sale of available-for-sale securities during 1995.
The contractual maturity of available-for-sale securities as of December 31,
1997 is as follows: 1998 - $43,830,000; 1999 - $11,546,000.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in
thousands)
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Computer and laboratory equipment $ 5,928 $ 4,047
Furniture, fixtures and other 679 752
Leasehold improvements 1,263 1,100
-------------------------------
7,870 5,899
Accumulated depreciation (3,719) (2,334)
-------------------------------
$ 4,151 $ 3,565
-------------------------------
-------------------------------
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Income tax authorities $ 5,961 $ 3,570
Compensation and benefits 3,361 3,533
Repurchase of common stock 3,272 -
Warranty reserve 2,894 3,069
Other 1,605 1,621
-------------------------------
$ 17,093 $ 11,793
-------------------------------
-------------------------------
</TABLE>
F-14
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEASES
The Company leases facilities in Cupertino, California, in Israel and in Japan
under noncancelable operating leases expiring on different dates between March
1999 and February 2001.
Future minimum payments under noncancelable operating leases with initial terms
of one year or more consist of the following at December 31, 1997
(in thousands):
<TABLE>
<S> <C>
1998 $ 1,276
1999 1,034
2000 645
2001 153
--------------
$ 3,108
--------------
--------------
</TABLE>
The gross rental payments under all operating leases were $1,142,000,
$865,000 and $497,000 in 1997, 1996 and 1995, respectively. Rental expense,
net of reimbursements from sublessees, was $962,000, $784,000 and $412,000 in
1997, 1996, and 1995, respectively.
6. COMMITMENTS AND CONTINGENCIES
ISRAELI GOVERNMENT RESEARCH GRANTS
The Company has participated in programs sponsored by the Israeli Government for
the support of research and development activities. Through December 31, 1996,
the Company obtained grants from the Office of the Chief Scientist in the
Israeli Ministry of Industry and Trade (the "Chief Scientist") aggregating
approximately $3,000,000 for participation in a number of research and
development projects. The terms of the grants from the Chief Scientist prohibit
the transfer of technology developed pursuant to the terms of these grants to
any person, without the prior written consent of the Chief Scientist. The
Company was obligated to pay royalties to the Chief Scientist, amounting to 3%
of the sales of the products developed out of such projects up to an amount
equal to 150% of the grant received. For the years ended December 31, 1996 and
1995, the Company charged cost of revenues for approximately $724,000 and
$1,142,000, respectively, for royalties on products that were commercially
developed out of projects funded by research grants from the Chief Scientist.
As of December 31, 1996, the Company decided not to apply for further grants
from the Chief Scientist and repaid all amounts owed pursuant to the grants
relating to products being currently marketed by the Company.
F-15
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER ROYALTY COMMITMENTS
In connection with certain license agreements, DSPC agreed to pay royalties on
certain sales based on specified rates. The Company has not commenced payments
of these royalties as of December 31, 1997.
CTP participated with one of its customers in a program sponsored by the BIRD
Foundation, which was terminated prior to the acquisition by DSPC. In
connection with the program, CTP agreed to pay to the BIRD Foundation royalties
on its wireless PBX product sales at specified rates of 2.5% to 5%, up to an
aggregate total of approximately $800,000 as adjusted for changes in the
consumer price index. Through December 31, 1997, the Company has paid or
accrued royalties to the BIRD Foundation in the aggregate amount of $80,000.
SEVERANCE LIABILITY
The Company's liability for severance pay and pension, pursuant to Israeli law
is fully provided for through insurance contracts and by accrual. As of
December 31, 1997, virtually all of the liability is funded. The amounts
maintained with insurance companies and part of pension and severance pay funds,
are not under the control of the Company and, therefore, are not included in the
financial statements. Pension and severance expenses for the years ended
December 31, 1997, 1996 and 1995 amounted to approximately $917,000, $802,000
and $493,000, respectively.
INVESTMENT COMMITMENT
In obtaining approval of the Reorganization from Israeli tax authorities, the
Company agreed to invest in activities in Israel no less than $9,000,000 out of
the proceeds of the initial public offering within three years after
consummation of the offering. Through December 31, 1997, $5,000,000 has been
transferred to Israel. The Company is in the process of applying for an
extension of the above three year period.
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 Country. A second, identical lawsuit was filed on May 22, 1997. The
complaints, which were consolidated, alleged 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 sought
damages in an unspecified amount, interest, attorney's fees and other costs, and
other equitable and injunctive relief. The plaintiffs requested to have the
matter certified as a class action on behalf of certain past and present
shareholders of the Company. The Court sustained the Company's demurrer with
leave to amend. On January 27, 1997, plaintiffs filed an amended and
consolidated complaint.
The Company believes that the complaint is without merit and is defending
this action vigorously. However, due to the inherent uncertainties of
litigation, the Company can not accurately predict the ultimate outcome at
this time. Any unfavorable outcome could have adverse impact on the
Company's business, financial condition and results of operations.
F-16
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CREDIT ARRANGEMENTS
As of December 31, 1997, the Company had issued bank guarantees and a letter of
credit totaling $2,482,000. The term of the letter of credit is through
November 27, 1998.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The board of directors has the authority, without any further vote or action by
the stockholders, to provide for the issuance of up to 5,000,000 shares of
preferred stock from time to time in one or more series with such designations,
rights, preferences and limitations as the board of directors may determine,
including the consideration received therefore, the number of shares comprising
each series, dividend rates, redemption provisions, liquidation preferences,
redemption fund provisions, conversion rights and voting rights, all without the
approval of the holders of common stock.
COMMON STOCK
During April 1997, the board of directors authorized management to implement a
repurchase program pursuant to which the Company, from time to time and at
management's discretion, may purchase up to an aggregate of 4,000,000 shares of
the Company's common stock, in open-market and privately negotiated
transactions. During May 1997, the board of directors increased the number of
shares of common stock authorized to be repurchased under DSPC's repurchase plan
to 8,000,000 shares. Repurchased shares of common stock will be retired. As of
December 31, 1997, the Company has repurchased 5,869,800 shares of its common
stock, with an aggregate purchase price of $52,628,000, pursuant to the
repurchase plan.
SHARE OPTION PLANS
1995 EMPLOYEE AND CONSULTANT STOCK PLAN
DSPC's 1995 Employee and Consultant Stock Plan (the "1995 Plan") provides for
(i) the grant to employees of incentive stock options, (ii) the grant to
employees and consultants of DSPC of nonstatutory stock options and (iii) the
grant of stock options which comply with the applicable requirements of Israeli
law to the extent granted to persons who may be subject to income tax in Israel.
A total of 4,800,000 shares of common stock have been reserved for issuance
under the 1995 Plan.
Options granted under the 1995 Plan have an exercise price no less than the fair
market value of the common stock on the date of grant. The period within which
the option may be exercised is determined at the time of grant. In no event may
the term of an incentive stock option be longer than ten years.
F-17
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY (CONTINUED)
1996 STOCK OPTION PLAN
DSPC's 1996 Stock Option Plan (the "1996 Plan") provides for (i) the grant to
employees of incentive stock options, (ii) the grant to employees, consultants
and nonemployee directors of DSPC of nonstatutory stock options, and (iii) the
grant of stock options which comply with the applicable requirements of Israeli
law to the extent granted to persons who may be subject to income tax in Israel.
A total of 3,000,000 shares of common stock have been reserved for issuance
under the 1996 Plan.
Options granted under the 1996 Plan have an exercise price no less than the fair
market value of the common stock on the date of grant. The period within which
the option may be exercised is determined at the time of grant. In no event may
the term of an incentive stock option be longer than ten years.
1996 DIRECTOR STOCK OPTION PLAN
Each nonemployee director of the Company is entitled to participate in the
Company's 1995 Director Stock Option Plan (the "Director Option Plan"). The
board of directors and the stockholders have authorized a total of 600,000
shares of common stock for issuance under the Director Option Plan. The
Director Option Plan provides for the grant of nonstatutory options to
nonemployee directors of the Company.
The Director Option Plan provides that each eligible director shall be granted
an option to purchase 32,000 shares of common stock on the later of March 14,
1995 or the date on which the optionee first becomes a director of the Company.
Thereafter, beginning on January 1, 1996, each nonemployee director shall be
granted an option to purchase 8,000 additional shares of common stock on January
1 of each year if, on such date, he or she shall have served on the Company's
board of directors for at least six months.
Options granted under the Director Option Plan have an exercise price equal to
the fair market value of the common stock on the date of grant and have a term
of ten years, unless terminated sooner upon termination of the optionee's status
as a director or otherwise pursuant to the Director Option Plan.
OPTION EXCHANGE PROGRAM
In March 1997, the Company adopted an Option Exchange Program whereby employee
options which were previously granted at exercise prices greater than $9.88 and
$10.88 per share for non-executives and executives, respectively, were
exchanged. The exercise price of the new options for non-executives and
executives are: $9.88 and $10.88 per share, respectively. Notwithstanding the
original vesting schedule, the new options generally vest over a three year
period and have a term of five years. A total of 4.0 million options with a
weighted-average exercise price of $21.55 were exchanged and are reflected in
the following table as cancellations and grants.
F-18
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY (CONTINUED)
SHARE OPTION PLANS
A summary of the Company's stock option activity under all option plans and
related information for the years ended December 31 is as follows (in thousands
except per share information):
<TABLE>
<CAPTION>
Weighted
Shares Shares Average Weighted
Available Under Exercise Average Options
For Grant Option Price Fair Value Exercisable
--------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994 1,287 3,531 $ 0.99
Authorized 5,200 - $ -
Granted (3,238) 3,238 $ 3.98 $ 1.75
Exercised - (1,068) $ 0.87
Canceled and forfeited 167 (167) $ 2.40
--------- -------
Year ended December 31, 1995 3,416 5,534 $ 2.71 1,360
Authorized 3,000 - $ -
Granted (4,307) 4,307 $19.92 $ 8.33
Exercised - (2,077) $ 1.57
Canceled and forfeited 374 (374) $ 3.94
--------- -------
Year ended December 31, 1996 2,483 7,390 $13.00 995
Granted (6,233) 6,233 $11.63 $ 4.85
Exercised - (1,789) $ 5.50
Canceled and forfeited 5,214 (5,214) $19.60
--------- -------
Year ended December 31, 1997 1,464 6,620 $ 8.49 953
--------- -------
--------- -------
</TABLE>
F-19
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY (CONTINUED)
SHARE OPTION PLANS (CONTINUED)
The options outstanding at December 31, 1997 have been segregated into ranges
for additional disclosure as follows (in thousands except per share
information):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted- Options
Options Average Weighted- Currently Weighted-
Range of Outstanding at Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise at December 31, Exercise
Prices 1997 Life (in years) Price 1997 Price
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.06-$ 3.25 1,055 2.33 $ 2.32 464 $ 1.83
$ 3.88-$ 5.00 816 2.44 $ 4.26 380 $ 4.33
$ 5.69-$ 9.69 628 3.58 $ 7.42 64 $ 6.71
$ 9.88-$ 9.88 1,995 4.24 $ 9.88 - $ -
$10.25-$10.88 1,518 4.26 $ 10.52 8 $ 10.25
$10.91-$19.38 608 5.27 $ 16.12 37 $ 16.39
---------------------------------------------------------------------
$ 0.06-$19.38 6,620 3.80 $ 8.49 953 $ 3.79
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
OPTIONS GRANTED ABOVE FAIR VALUE
Substantially all options have been granted at fair market value. In 1997 and
1996, options to purchase 2,078,000 and 420,000 shares, respectively, were
granted with an exercise price in excess of the fair market value on the date of
grant. The weighted-average exercise prices and the weighted-average fair
values of these options were $10.88 and $4.79, respectively, in 1997 and $26.00
and $9.08, respectively, in 1996. In 1995, all options were granted at fair
market value. During 1997, the Company recorded compensation cost of $332,000
for stock-based compensation awards granted to consultants.
1995 EMPLOYEE STOCK PURCHASE PLAN
DSPC has reserved 2,000,000 shares of common stock for issuance under the 1995
Employee Stock Purchase Plan (the "1995 Purchase Plan"). Under the 1995
Purchase Plan, eligible employees are permitted to purchase shares of common
stock at the end of each six month purchase period during a two year offering
period (the "Offering Period"), through payroll deductions not exceeding 10% of
an employee's compensation. The price per share is equal to 85% of the fair
market value of the common stock on the first day of the Offering Period or on
the last day of the applicable purchase period, whichever is lower. As of
December 31, 1997, approximately 22,500 shares of common stock had been issued
under this plan.
F-20
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free rates of 5.6% to
6.7%, 5.0% to 7.0%; and 5.0% to 7.0%; no dividend yield; volatility factors of
the expected market price of the Company's common stock of .75, .65 and .65; and
a weighted-average expected life of the option of approximately 2.5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
PRO FORMA DISCLOSURES (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for per share information):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 5,469 $ 15,194 $ (3,452)
Pro forma earnings per share
Basic $ 0.13 $ 0.36 $ (0.11)
Diluted $ 0.13 $ 0.34 $ (0.11)
Shares used in the calculation
of pro forma earnings per share:
Basic 41,776 41,865 30,252
Diluted 42,971 44,464 30,252
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully realized until 1998.
F-21
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
As of December 31, 1997, approximately 10,062,000 shares of common stock are
reserved for future issuance under the Company's stock option and stock
purchase plans.
9. MERGER AND ACQUISITION ACTIVITY
On October 26, 1995, the Company acquired all of the outstanding shares of
CTP, which develops wireless PBX and other low mobility wireless
applications, for $13,600,000 in cash. The transaction was accounted for as a
purchase. The purchase price of $14,130,000, which consisted of the
$13,600,000 cash payment and approximately $500,000 of transaction costs, was
allocated based on an independent appraisal as follows (in thousands):
<TABLE>
<S> <C>
Net tangible assets $ 369
Acquired developed technology 1,700
Acquired in-process technology 9,600
Goodwill 2,461
-------------
Total purchase price $14,130
-------------
-------------
</TABLE>
The purchase price allocation resulted in a $9,600,000 charge to acquired
in-process technology in the fourth quarter of 1995. The acquired in-process
technology represents the appraised value of technology in the development
stage that had not yet reached technological feasibility and does not have
alternative future uses. The total charge for acquired-in-process technology
of $10,850,000 in the fourth quarter of 1995 also included $1,250,000 of
acquired-in-process technology in connection with a license arrangement. The
results of CTP are consolidated from October 31, 1995. The results of
operations of CTP from October 26, 1995 to October 31, 1995 were not material
to DSPC.
In connection with the acquisition, prior shareholders of CTP were entitled
to receive a contingent earn-out payment on March 31, 1998. Due to CTP's
operating results for the year ended December 31, 1997, the Company will not
be required to make this contingent earn-out payment.
In the fourth quarter of 1996, the Company incurred a charge of approximately
$5,000,000 in connection with the termination of a proposed acquisition of
Proxim, Inc.
F-22
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 283 $ 630 $ -
State - 170 -
Foreign 2,472 2,770 1,115
----------------------------------------------
2,755 3,570 1,115
Deferred:
Federal - (183) -
Foreign (121) (279) -
----------------------------------------------
(121) (462) -
----------------------------------------------
Provision for income taxes $ 2,634 $ 3,108 $ 1,115
----------------------------------------------
----------------------------------------------
</TABLE>
The tax benefits resulting from the exercise of nonqualified stock options
and the disqualifying dispositions of shares acquired under the Company's
incentive stock option plans were $1,617,000 in 1996. Such benefit was
credited to additional paid-in capital.
Pretax income (loss) from foreign operations was $23,424,000 in 1997,
$24,655,000 in 1996, and $(164,000) in 1995.
A reconciliation between the Company's effective tax rate and the United
States ("U.S.") federal statutory rate of 35% for the years ended December 31
is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Tax (benefit) at U.S. statutory rate $8,412 $ 8,700 $ (435)
State taxes, net of federal benefit - 110 -
Valuation of temporary differences - (163) 399
Foreign earnings taxes at less than
U.S. rate (6,342) (7,656) (2,209)
Charge for acquired Israeli in-process
technology - - 3,360
Unbenefited foreign losses 1,006 1,518 -
Other (442) 599 -
----------------------------------------------
Provision for income taxes $2,634 $ 3,108 $ 1,115
----------------------------------------------
----------------------------------------------
</TABLE>
F-23
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as
follows at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $10,824 $ 6,178
Accruals and reserves not currently deductible 585 535
Foreign tax credits - 484
Capitalized research and development 321 409
Other 8 97
---------------------------
Total deferred tax assets 11,738 7,703
Valuation allowance (9,538) (5,624)
---------------------------
Total deferred tax assets $ 2,200 $ 2,079
---------------------------
---------------------------
</TABLE>
Of the valuation allowance as of December 31, 1997, $8,729,000 is related to
the benefits of stock options, which will be credited to paid-in capital when
realized. The valuation allowance increased by $4,322,000 in 1996.
As of December 31, 1997, the Company has U.S. federal, state and Israel net
operating loss carryforwards of approximately $27,800,000, $13,800,000 and
$5,200,000, respectively. The federal and state net operating loss
carryforwards will expire beginning in years 2001 through 2012 if not
utilized. The Israeli loss carryforwards have no expiration date. Utilization
of the net operating loss carryforwards may be subject to an annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions.
Net undistributed earnings of the foreign subsidiaries amounted to
approximately $42,000,000 at December 31, 1997. These earnings are considered
to be indefinitely reinvested, and accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject
to U.S. income taxes (subject to an adjustment for foreign tax credits) and
additional Israeli corporate income and withholding taxes in the amount of
approximately $17,000,000.
The Approved Enterprise status was granted according to several investment
plans and will allow the Israeli subsidiaries a two to four year tax holiday
on undistributed earnings and a corporate tax rate of 10% to 25% for an
additional six to eight years on each of the investment plan's proportionate
share of income. The benefits under these investment plans are scheduled to
fully expire in 2005.
The per share (diluted) benefit of the Israeli tax holiday was $0.14, $0.17
and $0.07 per diluted share for 1997, 1996 and 1995, respectively.
F-24
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS
In prior years, DSP Telecom entered into technology licensing, engineering, and
marketing, and marketing arrangements and had transactions with DSP Group, Inc.
a Delaware corporation, and its subsidiaries ("DSP Group"). DSP Group was DSP
Telecom's former parent and is primarily engaged in the development of DSP-based
software for digital speech products. One of DSPC's former directors is DSP
Group's chairman of the board.
Pursuant to these arrangements and transactions, through 1996, the Company
performed certain contract engineering, research and development, sales and
marketing, and general and administrative services for, and received certain
research and development, sales and marketing, and general and administrative
services from DSP Group, amounting to approximately none and $64,000,
respectively, in 1996 and $183,000 and $1,135,000, respectively, in 1995.
Currently, the Company has a license agreement with DSP Group, which gives DSPC
rights to develop five integrated circuits using DSP Group's current generation
digital signal processor technology.
Until 1996, DSPC performed certain technology development services for a former,
significant stockholder in the amounts of $112,500 in 1996 and $710,000 in 1995.
DSPC also sold chipsets to the same former, significant stockholder. Product
revenues from such transactions amounted to $6,260,000 and $8,379,000 in 1996
and 1995, respectively. Management believes that the transactions with the
former stockholder were at arms-length.
In the normal course of business, DSPC provided certain officers and employees
loans, which amounted to an aggregate of $336,000 and $319,000 at December 31,
1997, and 1996, respectively.
F-25
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INDUSTRY SEGMENT REPORTING
DSPC and its subsidiaries operate in one industry segment, principally the
development and marketing of integrated circuits for the wireless communications
market. Operations in Israel include research, development and sales.
Operations in the U.S. include marketing and sales.
The following is a summary of operations within geographic areas for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States $ 13,992 $ 2,711 $ 1,066
Israel 1,456 1,917 525
Japan 65,553 83,771 38,517
Others 500 500 759
-------------------------------------------
$ 81,501 $ 88,899 $40,867
-------------------------------------------
-------------------------------------------
Income (loss) before provision for
income taxes:
United States $ 609 $203 $(1,079)
Israel 23,424 24,655 (164)
-------------------------------------------
$ 24,033 $ 24,858 $(1,243)
-------------------------------------------
-------------------------------------------
Identifiable assets:
United States $ 66,810 $105,587 $31,637
Israel 81,473 51,107 20,365
Eliminations (5,387) (1,340) (7,883)
-------------------------------------------
$142,896 $155,354 $44,119
-------------------------------------------
-------------------------------------------
</TABLE>
In 1997, 1996 and 1995 sales of chip sets through its distributors (two in 1997
and one in 1996 and 1995) accounted for 88%, 91% and 89% of total revenues,
respectively.
13. OTHER SUBSEQUENT EVENTS
On January 15, 1998, the board of directors authorized an increase of 2,000,000
shares under the 1996 Stock Option Plan, subject to shareholder approval.
Subsequent to December 31, 1997 and through February 9, 1998, the Company
repurchased approximately 753,900 additional shares of its common stock, with an
aggregate purchase price of $10,598,000, pursuant to the repurchase plan
described in Note 8.
14. EVENTS SUBSEQUENT TO THE REPORT OF INDEPENDENT AUDITORS (UNAUDITED)
With respect to Note 6, on February 26, 1998, two of the plaintiffs in the
state action filed a similar complaint in the U.S. District Court for the
Northern District of California. The complaint makes the same allegations as
the amended complaint filed in state court but charges violations of federal
securities laws.
F-26
<PAGE>
DSP COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
---------- -------- ----------------------- -------- --------
Additions
-----------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts Deductions Balance at
Descriptions Period Expenses Describe Describe End of Period
- ------------ ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Years Ended:
December 31, 1995. . . . . . . . . . . . . . $ 50,000 $ 89,000 $ -- $ -- $ 139,000
December 31, 1996. . . . . . . . . . . . . . $ 139,000 $ -- $ -- $ (7,000)(1) $ 132,000
December 31, 1997. . . . . . . . . . . . . . $ 132,000 $ -- $ -- $(132,000)(1) $ --
Warranty Reserve:
Years Ended:
December 31, 1995. . . . . . . . . . . . . . $ 425,000 $ 382,000 $ -- $ -- $ 807,000
December 31, 1996. . . . . . . . . . . . . . $ 807,000 $2,262,000 $ -- $ -- $3,069,000
December 31, 1997. . . . . . . . . . . . . . $3,069,00 $ 575,000 $ -- $(750,000)(2) $2,894,000
</TABLE>
(1) Estimated Allowance reduced as a result of a lower outstanding accounts
receivable balance.
(2) Adjustment of warranty reserve balance due to product maturity.
S-1
<PAGE>
EXHIBIT 10.2
DSP COMMUNICATIONS, INC.
1995 DIRECTOR STOCK OPTION PLAN
(AS RESTATED ON JANUARY 1, 1997)
1. PURPOSES OF THE PLAN. The purposes of this Director Stock Option Plan
are to attract and retain the best available personnel for service as Directors
of the Company, to provide additional incentive to the Outside Directors of the
Company to serve as Directors, and to encourage their continued service on the
Board.
All options granted hereunder shall be "nonstatutory stock options."
2. DEFINITIONS. As used herein, the following definitions shall apply:
a. "BOARD" shall mean the Board of Directors of the Company.
b. "CODE" shall mean the Internal Revenue Code of 1986, as amended.
c. "COMMON STOCK" shall mean the Common Stock of the Company.
d. "COMPANY" shall mean DSP COMMUNICATIONS, INC., a Delaware
corporation.
e. "CONTINUOUS STATUS AS A DIRECTOR" shall mean the absence of any
interruption or termination of service as a Director.
f. "DIRECTOR" shall mean a member of the Board.
g. "EFFECTIVE DATE" shall have the meaning as set forth in Section 6
below.
h. "EMPLOYEE" shall mean any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
i. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
j. "FIRST OPTION" shall have the meaning as set forth in Section
4.b.ii. below.
k. "OPTION" shall mean a stock option granted pursuant to the Plan.
l. "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
m. "OPTIONEE" shall mean an Outside Director who receives an Option.
n. "OUTSIDE DIRECTOR" shall mean a Director who is not an Employee.
o. "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
p. "PLAN" shall mean this 1995 Director Stock Option Plan.
<PAGE>
q. "SHARE" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
r. "SUBSEQUENT OPTION" shall have the meaning as set forth in
Section 4.b.iii. below.
s. "SUBSIDIARY" shall mean a "Subsidiary Corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 600,000 Shares (the "Pool") of Common Stock. The Shares may
be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan. If Shares which were acquired upon exercise of an
Option are subsequently repurchased by the Company, such Shares shall not in any
event be returned to the Plan and shall not become available for future grant
under the Plan.
4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
a. ADMINISTRATOR. Except as otherwise required herein, the Plan
shall be administered by the Board.
b. PROCEDURE FOR GRANTS. All grants of Options hereunder shall be
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
ii) Each person who is an Outside Director on the Effective
Date of this Plan and each Outside Director who subsequently becomes a member of
the Board of Directors shall be automatically granted an Option to purchase
32,000 Shares (the "First Option") on the date on which the later of the
following events occurs: (A) the Effective Date of this Plan, as determined in
accordance with Section 6 hereof; or (B) the date on which such person first
becomes an Outside Director, whether through election by the stockholders of the
Company or appointment by the Board of Directors to fill a vacancy.
iii) Additionally, beginning on January 1, 1996, each Outside
Director shall be automatically granted an Option to purchase 8,000 Shares (a
"Subsequent Option"), on January 1 of each year, if on such date, he or she
shall have served on the Board for at least six (6) months.
iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares subject
to outstanding Options, plus the number of Shares previously purchased upon
exercise of Options to exceed the Pool, then each such automatic grant shall be
for that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Outside Directors on the
automatic grant date. Any further grants shall then be deferred until such
time, if any, as additional Shares become available for
2
<PAGE>
grant under the Plan through action of the stockholders to increase the number
of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.
v) Notwithstanding the provisions of subsections ii) and iii)
hereof, any grant of an Option made before the Company has obtained stockholder
approval of the Plan in accordance with Section 17 hereof shall have their
exercisability conditioned upon obtaining such stockholder approval of the Plan
in accordance with Section 17 hereof.
vi) The terms of a First Option granted hereunder shall be as
follows:
a) The First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof.
b) The exercise price per Share shall be 100% of the
fair market value (as defined in Section 8.b. hereunder) per Share on the date
of grant of the First Option.
c) The First Option shall vest and become exercisable as
to 25% of the Shares subject to the First Option on the first anniversary of the
date of grant of the First Option, and shall vest and become exercisable as to
6.25% of the Shares subject to the First Option at the end of each three-month
period thereafter, subject to the provisions set forth in Section 9, below.
vii) The terms of a Subsequent Option granted hereunder shall
be as follows:
a) The Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Section 9 hereof.
b) The exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of the Subsequent Option.
c) The Subsequent Option shall become exercisable as to
100% of the Shares subject to the Subsequent Option on the first anniversary of
the date of grant of the Subsequent Option.
c. POWERS OF THE BOARD. Subject to the provisions and restrictions
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8.b. of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per share of Options to be granted, which exercise price
shall be determined in accordance with Section 8.a. of the Plan; (iii) to
interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan; (v) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
d. EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
5. ELIGIBILITY. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4.b. hereof. An Outside
3
<PAGE>
Director who has been granted an Option may, if he or she is otherwise eligible,
be granted an additional Option or Options in accordance with such provisions.
The Plan shall not confer upon an Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the
date on which the Company's registration statement on Form S-1 (or any successor
form thereof) is declared effective by the Securities and Exchange Commission
(the "Effective Date"). It shall continue in effect for a term of ten (10)
years, unless sooner terminated under Section 13 of the Plan, subject to the
limitations set forth in this Plan.
7. TERM OF OPTION. The term of each Option shall be ten (10) years from
the date of grant thereof.
8. EXERCISE PRICE AND CONSIDERATION.
a. EXERCISE PRICE. The per Share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
b. FAIR MARKET VALUE. The fair market value per Share shall be the
mean of the bid and asked prices of the Common Stock in the over-the-counter
market on the date of grant, as reported in THE WALL STREET JOURNAL (or, if not
so reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System) or, in the event that the Common
Stock is traded on the NASDAQ National Market System or listed on a stock
exchange, the fair market value per Share shall be the closing price on such
system or exchange on the date of grant of the Option, as reported in THE WALL
STREET JOURNAL; provided, however, that if such market or exchange is closed on
the date of the grant of the Option then the fair market value per Share shall
be based on the most recent date on which such trading occurred immediately
prior to the date of the grant of the Option; provided, further, that for
purposes of the First Options granted on the Effective Date, the fair market
value per share shall be the initial public offering price as set forth in the
final prospectus filed with the Securities and Exchange Commission pursuant to
Rule 424 under the Securities Act of 1933, as amended.
c. FORM OF CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares having a fair market value on the date of surrender equal to
the aggregate exercise price of the Shares as to which said Option shall be
exercised (which, if acquired from the Company, shall have been held for at
least six months), any combination of such methods of payment or any other
consideration or method of payment as shall be permitted under applicable
corporate law.
9. EXERCISE OF OPTION.
a. PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4.b hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 17 hereof has been
obtained.
4
<PAGE>
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company, together with such other documentation
as the Company and the broker, if applicable, shall require to effect an
exercise of the Option, in accordance with the terms of the Option by the person
entitled to exercise the Option and full payment for the Shares with respect to
which the Option is exercised has been received by the Company. Full payment
may consist of any consideration and method of payment allowable under Section
8.c of the Plan. Until the issuance (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the Company)
of the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. A share certificate
for the number of Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
b. TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director
ceases to serve as a Director, he or she may, but only within three (3) months
after the date he or she ceases to be a Director of the Company, exercise his or
her Option to the extent that he or she was entitled to exercise it at the date
of such termination. Notwithstanding the foregoing, in no event may the Option
be exercised after its term set forth in Section 7 has expired. To the extent
that such Outside Director was not entitled to exercise an Option at the date of
such termination, or does not exercise such Option (which he or she was entitled
to exercise) within the time specified herein, the Option shall terminate.
c. DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 9.b above, in the event a Director is unable to continue his or her
service as a Director with the Company as a result of his or her total and
permanent disability (as defined in Section 22.e.3 of the Internal Revenue
Code), he or she may, but only within six (6) months from the date of such
termination, exercise his or her Option to the extent he or she was entitled to
exercise it at the date of such termination. Notwithstanding the foregoing, in
no event may the Option be exercised after its term set forth in Section 7 has
expired. To the extent that he or she was not entitled to exercise the Option
at the date of termination, or if he or she does not exercise such Option (which
he or she was entitled to exercise) within the time specified herein, the Option
shall terminate.
d. DEATH OF OPTIONEE. In the event of the death of an Optionee:
i) during the term of the Option who is, at the time of his or
her death, a Director of the Company and who shall have been in Continuous
Status as a Director since the date of grant of the Option, the Option may be
exercised, at any time within twelve (12) months following the date of death, by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that would have accrued had the Optionee continued living and remained
in Continuous Status as Director for six (6) months after the date of death.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired.
5
<PAGE>
ii) within three (3) months after the termination of Continuous
Status as a Director, the Option may be exercised, at any time within twelve
(12) months following the date of death, by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent of the right to exercise that had accrued at the date of
termination. Notwithstanding the foregoing, in no event may the option be
exercised after its term set forth in Section 7 has expired.
10. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a
beneficiary by an Optionee does not constitute a transfer. An Option may be
exercised during the lifetime of an Optionee only by the Optionee or a
transferee permitted by this Section.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
a. CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each outstanding
Option and the number of Shares which have been authorized for issuance under
the Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
b. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Board and give each Optionee the right to exercise his or
her Option as to all or any part of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable.
c. MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
shall be substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation does not
agree to assume the Option or to substitute an equivalent option, the Board
shall, in lieu of such assumption or substitution, provide for the Optionee to
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be exercisable. If the Board makes an
Option fully exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
For the purposes of this paragraph, the Option shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase, for each Share of Optioned Stock subject to the Option immediately
prior to the merger or sale of assets, the
6
<PAGE>
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holder of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets by holders of Common Stock for each Share held
on the effective date of the transaction (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a majority
of the outstanding Shares); provided, however, that if such consideration
received in the merger or sale of assets was not solely common stock of the
successor corporation or its Parent, the Board may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option, for each Share of Optioned Stock subject to the Option,
to be solely common stock of the successor corporation or its Parent equal in
Fair Market Value to the per share consideration received by holders of Common
Stock in the merger or sale of assets.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4.b hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
a. AMENDMENT AND TERMINATION. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
Notwithstanding the foregoing, the provisions set forth in Section 4 of this
Plan (and any other Sections of this Plan that affect the formula award terms
required to be specified in this Plan by Rule 16b-3) shall not be amended more
than once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder.
b. EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act
of 1933, as amended (the "Securities Act"), the Exchange Act, the rules and
regulations promulgated under the Securities Act and the Exchange Act, state
securities laws, and the requirements of any stock exchange upon which the
Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
7
<PAGE>
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. STOCKHOLDER APPROVAL.
a. Continuance of the Plan shall be subject to approval by the
stockholders of the Company at the first meeting of stockholders. If such
stockholder approval is obtained at a duly held stockholders' meeting, it may be
obtained by the affirmative vote of the holders of a majority of the outstanding
shares of the Company present or represented and entitled to vote thereon. If
such stockholder approval is obtained by written consent, it may be obtained by
the written consent of the holders of a majority of the outstanding shares of
the Company.
b. Any required approval of the stockholders of the Company shall be
solicited substantially in accordance with Section 14.a of the Exchange Act and
the rules and regulations promulgated thereunder.
8
<PAGE>
EXHIBIT 10.23
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Agreement"), is entered into
effective as of the 5th day of November, 1997, by and between DSP TELECOM, INC.,
a California corporation (the "Corporation"), and DAVIDI GILO ("Gilo").
RECITALS
A. On August 1, 1994, Gilo and the Corporation entered into an Employment
Agreement (the "Employment Agreement"), as amended and restated as of December
15, 1995, and as further amended and restated as of November 6, 1996 (as so
amended and restated, the "Employment Agreement"), for the provision by Gilo of
certain services to the Corporation.
B. Effective November 5, 1997 (the "Effective Date"), Gilo resigned from
his position as Chairman of the Board and as a Director of the Corporation's
parent corporation, DSP Communications, Inc. ("DSPC"), which resignation was
accepted by the Board of DSPC.
C. Notwithstanding Gilo's resignation as an officer and director of DSPC,
Gilo and the Corporation desire that Gilo continue to provide services during a
transition period to the Corporation as an employee following his resignation,
in a non-policy making role.
B. The Corporation and Gilo desire to amend the Employment Agreement
according to the terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements and covenants
contained in this Agreement, the parties hereby agree as follows:
1. DUTIES OF GILO. Notwithstanding anything in the Employment Agreement
to the contrary, Gilo shall no longer provide services to the Corporation in the
capacity of Chairman of the Board, or as a Director of, DSPC; Gilo shall instead
act as an advisor to Nathan Hod, DSPC's Chairman of the Board, and shall report
to Nathan Hod, in a non-policy making role, spending at least a majority of his
weekly working hours on DSPC matters.
2. TERM OF AGREEMENT. Section 2 of the Employment Agreement is hereby
amended and restated to read in full as follows:
"2. TERM. This Agreement shall terminate on April 6, 1998, unless
(a) extended as set forth herein, or (b) terminated sooner under the
terms of this Agreement. Thereafter, this Agreement may be renewed by
Gilo and the Board of Directors of this Corporation on such terms as
the parties may agree to in writing. As used herein, the term
"employment term" refers to the entire period of employment of Gilo
hereunder, including any extensions."
<PAGE>
3. BONUS. Gilo shall be entitled to the annual bonus for 1997 as
provided in, and subject to, Section 3.c. of the Employment Agreement; provided,
however, that after December 31, 1997, Gilo shall be entitled only to bonuses
as are determined in the sole discretion of the Board.
4. SEVERANCE PAY. Section 7.d. of the Employment Agreement is hereby
amended and restated to read in full as follows:
"d. SEVERANCE PAY. If this Agreement is terminated without cause
pursuant to Section 7.a. (above), the Corporation shall pay Gilo a
severance/consulting fee equal to the full amount of the compensation
that he could have expected under this Agreement, as and when payable
under this Agreement, without deduction except for tax withholding
amounts, through the end of the term (including the severance payment
provided below in the event the parties elect not to extend this
Agreement), during which Gilo shall remain as a consultant to the
Corporation. The Corporation shall pay Gilo a severance fee equal to
his monthly salary at his then-current rate of fixed salary
compensation, multiplied by the number six (6), if this Agreement is
terminated pursuant to Section 7.b.(i) (above). The Corporation shall
pay Gilo a severance fee equal to his monthly salary at his
then-current rate of fixed salary compensation, multiplied by the
number eighteen (18), if Gilo voluntarily elects to terminate his
employment, unless the Corporation successfully claims that a
termination in accordance with Section 7.b.(ii) and (iii) is in order,
or if Gilo or the Corporation elects not to renew this Agreement.
There shall be no severance in the event that this Agreement is
terminated in accordance with Section 7.b.(ii) and (iii).
If this Agreement is terminated for any reason other than for
cause pursuant to Section 7.b. (above), the Corporation shall upon the
termination date of this Agreement (i) pay Gilo for all accrued, but
unused vacation days as of the termination date, (ii) allow Gilo to
use the voice mail box maintained for him at DSPC as of the
termination date for a period of six (6) months after the termination
date, (iii) forward mail and other messages to Gilo for a period of
six (6) months after the termination date, and (iv) give to Gilo all
of the office equipment, computers, cellular telephones and furniture
("Equipment") that Gilo was using as of the date of this Agreement, at
DSPC and at his home in Woodside, California, which Equipment is set
forth on Schedule 1(e), attached hereto and incorporated by reference
herein."
5. OTHER TERMS OF EMPLOYMENT AGREEMENT. Except as amended hereby, the
terms and conditions of the Employment Agreement shall remain in full force and
effect.
6. CONFLICT. The parties acknowledge that Pezzola & Reinke, A
Professional Corporation ("P&R") is counsel to each of them. The parties have
been made aware of the conflict and advised to seek independent counsel. Gilo
acknowledges that P&R advised the Corporation and not Gilo. Gilo hereby
acknowledges the conflict and waives it as to P&R's participation in this
Agreement. The Corporation acknowledges the conflict and waives it as to P&R's
participation in this Agreement.
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<PAGE>
The parties also acknowledge that Stephen P. Pezzola is counsel to each of
them. The parties have been made aware of the conflict and advised to seek
independent counsel. The Corporation and Gilo acknowledge the conflict and
waive it as to Stephen Pezzola's participation in this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DSP TELECOM, INC.,
a California corporation
20300 Stevens Creek Blvd., Ste. 465
Cupertino, CA 95014
By:/s/ Nathan Hod /s/ Davidi Gilo
------------------------- ---------------------------------
Nathan Hod, DAVIDI GILO
Chief Executive Officer 100 Why Worry Lane
Woodside, California 94062
3
<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
OF NATHAN HOD
WITH
DSPC ISRAEL LTD.
THIS EMPLOYMENT AGREEMENT (this "Agreement") made and entered into
effective as of this 1st day of January, 1998, by and between DSPC ISRAEL LTD.,
an Israeli company (the "Corporation"), and NATHAN HOD (hereinafter "Hod").
RECITALS
A. On May 1, 1994, Hod and DSP Telecom, Inc., a California corporation
and an affiliate of the Corporation ("DSPT"), entered into an Employment
Agreement, as amended effective as of November 1, 1995 (as so amended, the
"Employment Agreement"), for the provision by Hod of certain services to DSPT.
B. On November 5, 1997, Hod was appointed as Chairman of the Board of the
parent corporation of DSPT and the Corporation, DSP Communications, Inc.
("DSPC"). In addition, Hod has relocated his residence from California to
Israel on or about January 1, 1998 and has become an employee of the Corporation
effective as of the date hereof.
C. In connection with Hod's appointment as Chairman of DSPC and his
relocation to Israel, DSPT and Hod wish to terminate the Employment Agreement,
and the Corporation and Hod desire to enter into this Agreement according to the
terms and conditions set forth below.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. EMPLOYMENT DUTIES.
a. GENERAL. The Corporation hereby agrees to employ Hod, and Hod
hereby agrees to accept employment with the Corporation, on the terms and
conditions hereinafter set forth.
b. CORPORATION'S DUTIES. The Corporation shall allow Hod to, and
Hod shall, perform responsibilities normally incident to his position as
Chairman of the Board and Chief Executive Officer of both the Corporation and
DSPC, commensurate with his background, education, experience and professional
standing. The Corporation shall provide Hod with a private office, stenographic
help, office equipment, supplies, customary services and cooperation suitable
for the performance of his duties. These duties shall be performed primarily in
Israel.
c. HOD'S DUTIES. Unless otherwise agreed to by the parties, Hod
shall serve as the Chairman of the Board and Chief Executive Officer of both the
Corporation and DSPC. Hod shall devote his full productive time, attention,
energy, and skill to the business of the Corporation and DSPC during the
employment term set forth below, and shall not become engaged to render similar
services on behalf of any other entity while employed hereunder, without the
prior written consent of the Corporation's Board of Directors, except that he is
allowed to serve as the Chairman of the Board of Nogatech, Inc. Hod shall
report directly to DSPC's Board of Directors. Hod shall inform the Board of
Directors of any positions that he
<PAGE>
takes in any corporation other than DSPC. Hod, however, shall be allowed to
perform services for the Corporation's other affiliates, including, without
limitation, DSP Telecommunications, Ltd, CTP Systems, Ltd, DSP Telecom, Inc.,
DSPC Japan, Inc., and CTP Systems, Inc. Notwithstanding Hod's executive offices
or titles in DSPC or any of DSPC's subsidiaries or other affiliates, Hod shall
have the authority to conclude contracts in the name of any such company only to
the extent that such authority does not cause (i) any Israeli company to have a
permanent establishment in the United States for purposes of any tax treaty
between the United States and Israel or (ii) any United States company to have a
permanent establishment in Israel for purposes of any tax treaty between the
United States and Israel.
d. Hod acknowledges that his employment with the Corporation will
require frequent travel spanning extended periods outside Israel. Furthermore,
Hod agrees to extensive world-wide travel under his employment with the
Corporation.
e. Hod understands and acknowledges that as his position is a senior
managerial position in substance, as defined in the Work and Rest Hours Law,
1951, and requires a high level of trust, the provisions of said law shall not
apply to Hod and Hod agrees that he may be required to work beyond the regular
working hours of the Corporation, for no additional compensation other than as
specified in this Agreement.
2. TERM. This Agreement shall terminate December 31, 2000, unless
(a) extended as set forth herein, or (b) terminated sooner under the terms of
this Agreement. Thereafter, this Agreement may be renewed by Hod and the Board
of Directors of this Corporation on such terms as the parties may agree to in
writing. Absent written notice to the contrary, thirty (30) days prior to the
end of the employment term, this Agreement will be renewed for consecutive one
(1) year extensions. As used herein, the term "employment term" refers to the
entire period of employment of Hod hereunder, including any agreed-to extension.
3. COMPENSATION. Hod shall be compensated as follows:
a. FIXED SALARY. Hod shall receive a fixed annual gross salary of
Two Hundred Fifty Thousand U.S. Dollars (US$250,000) (the "Gross Salary"),
payable on a monthly basis in the equivalent amount of New Israeli Shekels
according to the representative rate of the U.S. Dollar on the date of payment.
The Corporation agrees to review the fixed salary following the end of each
twelve (12) month period during the employment term based upon Hod's services
and the Corporation's and DSPC's financial results during the calendar year, and
to make such increases as may be determined appropriate in the discretion of the
Corporation's Board of Directors.
b. BONUS COMPENSATION. During the employment term, Hod shall
participate in each bonus plan adopted by the Corporation's Board of Directors.
Commencing in 1996, Hod shall be entitled to receive an annual bonus equal to
(i) twenty-five percent (25%) of his base salary should DSPC meet eighty percent
(80%) of its plan as presented to the Board in January of each year, during the
term of Hod's employment ("Yearly Plan"); (ii) fifty percent (50%) of his base
salary should DSPC meet its Yearly Plan; and (iii) one hundred percent (100%) of
his base salary should DSPC meet one hundred twenty percent (120%) of its Yearly
Plan, with the bonus prorated if the Yearly Plan is met between eighty percent
(80%) and one hundred percent (100%); or between one hundred percent (100%) and
one hundred twenty percent (120%). The meeting of the Yearly Plan for purposes
of this Section shall be based upon the actual revenues and earnings per share
of DSPC for each applicable year (each weighted fifty percent (50%)) compared to
the revenues and earnings per share projected in the Yearly Plan (with each item
weighted fifty percent (50%)) and no item shall be counted
2
<PAGE>
if it is not at least eighty percent (80%) met. The bonus shall be payable in
New Israeli Shekels according to the representative rate of the U.S. Dollar on
the date of payment.
c. VACATION. Hod shall accrue paid vacation at the rate of thirty
(30) days for each twelve (12) months of employment. Hod shall be compensated
at his usual rate of compensation during any such vacation. Hod shall not
accumulate unused vacation days for more than twenty-four (24) months of
employment. Hod shall be entitled to paid national and Jewish holidays as is
the law or custom in Israel.
d. BENEFITS.
i. During the term of Hod's employment, Hod shall be entitled
to Manager's Insurance (Bituach Menehalim) in an amount equal to 15.83% of the
Gross Salary, which shall be paid monthly to said Manager's Insurance Plan
directly by the Corporation. The insurance shall be allocated as follows: (i)
8.33% in respect of severance compensation, (ii) 5% in respect of pension and
(iii) 2.5% of the Gross Salary in respect of disability. An additional 5% of
the Gross Salary shall be deducted by the Corporation from the monthly payment
of Hod's salary as Hod's contribution to said Manager's Insurance.
ii. The Manager's Insurance policy provided for Hod's benefit
shall be registered in the Corporation's name. The contributions to the
Manager's Insurance Policy shall be paid by the Corporation in lieu of any other
legal obligation to make payments on account of severance or pension in respect
of Hod's employment during the Employment Term. Should the provisions made for
severance pay not cover the amount owed by the Corporation to Hod by law, then
the Corporation shall pay Hod the difference, all in accordance with Israeli
law. Hod's agreement to the last two sentences shall exempt the Corporation
from the requirement to apply to the Minister of Labor and Welfare for an
approval under Section 14 of the Severance Pay Law; however, should such
application be deemed necessary, Hod's signature hereupon shall be deemed his
consent to the Corporation's application in Hod's name in such matter.
iii. The sums accumulated in the Manager's Insurance policy
shall be transferred to Hod upon termination of his employment hereunder, unless
Hod has committed an act in breach of Hod's fiduciary duty towards the
Corporation, DSPC or any of its affiliates.
iv. The Corporation shall provide and pay Hod Recreation Funds
(Dme'y Havra'ah), at the rate required by law and regulations.
v. The Corporation shall contribute to a Continuing Education
Fund chosen by it for the benefit of Hod in an amount equal to 7.5% of his Gross
Salary per month, subject to Hod's contribution of an additional 2.5% of his
Gross Salary per month.
vi. The Corporation and DSPC shall provide Hod with Director and
Officer Insurance, if reasonably available to the Corporation and DSPC, and all
of its officers and directors. Hod shall in no event receive less Director and
Officer insurance coverage than that available to any other employee. The
Corporation shall, at a minimum, keep in full force and effect its
indemnification agreement previously entered into with Hod.
4. EXPENSES. The Corporation shall reimburse Hod for his normal and
reasonable expenses incurred for travel, entertainment and similar items in
promoting and carrying out the business of the Corporation in accordance with
the Corporation's general policy as adopted
3
<PAGE>
by the Corporation's management from time to time. As a condition of
reimbursement, Hod agrees to provide the Corporation with copies of all
available invoices and receipts, and otherwise account to the Corporation in
sufficient detail to allow the Corporation to claim an income tax deduction for
such paid item, if such item is deductible. Reimbursements shall be made on a
monthly, or more frequent, basis. The Corporation shall also reimburse Hod for
all professional membership dues incurred, if any; all technical books purchased
by Hod; and all other expenses incurred by Hod at the Corporation's or DSPC's
request.
5. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. Hod agrees that during
the employment term he is in a position of special trust and confidence and has
access to confidential and proprietary information about the Corporation's
business and plans. Hod agrees that he will not directly or indirectly, either
as an employee, employer, consultant, agent, principal, partner, stockholder,
corporate officer, director, or in any similar individual or representative
capacity, engage or participate in any business that is in competition, in any
manner whatsoever, with the Corporation. Notwithstanding anything in the
foregoing to the contrary, Hod shall be allowed to invest as a shareholder in
publicly traded companies, or through a venture capital firm or an investment
pool.
For purposes of this Section 5, the term "Corporation" shall also mean DSPC
or any of its subsidiaries.
6. TRADE SECRETS.
a. SPECIAL TECHNIQUES. It is hereby agreed that the Corporation has
developed or acquired certain products, technology, unique or special methods,
manufacturing and assembly processes and techniques, trade secrets, special
written marketing plans and special customer arrangements, and other proprietary
rights and confidential information and shall during the employment term
continue to develop, compile and acquire said items (all hereinafter
collectively referred to as the "Corporation's Property"). It is expected that
Hod will gain knowledge of and utilize the Corporation's Property during the
course and scope of his employment with the Corporation, and will be in a
position of trust with respect to the Corporation's Property.
b. CORPORATION'S PROPERTY. It is hereby stipulated and agreed that
the Corporation's Property shall remain the Corporation's sole property. In the
event that Hod's employment is terminated, for whatever reason, Hod agrees not
to copy, make known, disclose or use, any of the Corporation's Property without
the Corporation's prior written consent. In such event, Hod further agrees not
to endeavor or attempt in any way to interfere with or induce a breach of any
prior proprietary contractual relationship that the Corporation may have with
any employee, customer, contractor, supplier, representative, or distributor for
nine (9) months after any termination of this Agreement. Hod agrees upon
termination of employment to deliver to the Corporation all confidential papers,
documents, records, lists and notes (whether prepared by Hod or others)
comprising or containing the Corporation's Property. Hod recognizes that
violation of covenants and agreements contained in this Section 6 may result in
irreparable injury to the Corporation which would not be fully compensable by
way of money damages.
c. COVENANT NOT TO COMPETE. For a period of one (1) year from the
date of any termination of Hod's employment with the Corporation, Hod shall not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, Director, or in any other
individual or representative capacity, engage or
4
<PAGE>
participate in any activities which are the same as, or competitive with, the
activities in which the Corporation is presently engaged.
d. CORPORATION DEFINED. For purposes of this Section 6, the term
"Corporation" shall also mean DSPC and any of its subsidiaries.
7. TERMINATION.
a. GENERAL. The Corporation may terminate this Agreement without
cause, by written notice. Hod may voluntarily terminate his employment
hereunder upon ninety (90) days' advance written notice to the Corporation.
b. TERMINATION FOR CAUSE. The Corporation may immediately terminate
Hod's employment at any time for cause. Termination for cause shall be
effective from the receipt of written notice thereof to Hod specifying the
grounds for termination and all relevant facts. Cause shall be deemed to
include: (i) material neglect of his duties or a significant violation of any
of the provisions of this Agreement, which continues after written notice and a
reasonable opportunity (not to exceed thirty (30) days) in which to cure;
(ii) fraud, embezzlement, defalcation or conviction of any felonious offense; or
(iii) intentionally imparting confidential information relating to the
Corporation, DSPC or any of DSPC's subsidiaries, or their business to
competitors or to other third parties other than in the course of carrying out
his duties hereunder. The Corporation's exercise of its rights to terminate
with cause shall be without prejudice to any other remedy it may be entitled at
law, in equity, or under this Agreement.
c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall
automatically terminate upon Hod's death. In addition, if any disability or
incapacity of Hod to perform his duties as the result of any injury, sickness,
or physical, mental or emotional condition continues for a period of thirty (30)
business days (excluding any accrued vacation) out of any one hundred twenty
(120) calendar day period, the Corporation may terminate Hod's employment upon
written notice. Payment of salary to Hod during any sick leave shall only be to
the extent that Hod has accrued sick leave or vacation days. Hod shall accrue
sick leave at the same rate generally available to the Corporation's employees.
d. SEVERANCE PAY. If this Agreement is terminated by the
Corporation without cause pursuant to Section 7.a (above), the Corporation
shall pay Hod a severance fee equal to his monthly salary at his then current
rate of fixed salary compensation, multiplied by the number of full months left
until December 31, 2000, during which time Hod shall remain as an employee of
the Corporation in a non-policy making role, devoting substantive productive
time, and his options in DSPC shall continue to vest for the period of
continuous employment. The above severance fee shall be payable in accordance
with the Corporation's normal payroll practices. The Corporation shall pay Hod
a severance fee equal to his monthly salary at his then-current rate of fixed
salary compensation, multiplied by the number six (6) if this Agreement is
terminated pursuant to Section 7.b (i) (above) or if Hod or the Corporation
elects not to renew this Agreement. The Corporation shall pay Hod a severance
fee equal to his monthly salary at his then-current rate of fixed salary
compensation, multiplied by the lesser of the number eighteen (18) or the number
of months left in the original term of this Agreement as set forth herein plus
eight (8), if Hod voluntarily elects to terminate his employment, unless the
Corporation successfully claims that a termination in accordance with Sections
7.b(ii) or (iii) is in order. There shall be no severance in the event that
this Agreement is terminated in accordance with Section 7.b (ii) or (iii).
5
<PAGE>
8. CORPORATE OPPORTUNITIES.
a. DUTY TO NOTIFY. In the event that Hod, during the employment
term, shall become aware of any material and significant business opportunity
related to the business of the Corporation, DSPC or any of DSPC's subsidiaries,
Hod shall promptly notify the Corporation's Directors of such opportunity. Hod
shall not appropriate for himself or for any other person other than the
Corporation, or any affiliate of the Corporation, any such opportunity unless,
as to any particular opportunity, the Board of Directors of the Corporation
fails to take appropriate action within thirty (30) days. Hod's duty to notify
the Corporation and to refrain from appropriating all such opportunities for
thirty (30) days shall neither be limited by, nor shall such duty limit, the
application of the general law of California relating to the fiduciary duties of
an agent or employee.
b. FAILURE TO NOTIFY. In the event that Hod fails to notify the
Corporation of, or so appropriates, any such opportunity without the express
written consent of the Corporation's Board of Directors, Hod shall be deemed to
have violated the provisions of this Section notwithstanding the following:
i. The capacity in which Hod shall have acquired such
opportunity; or
ii. The probable success in the Corporation's hands of such
opportunity.
9. MISCELLANEOUS.
a. ENTIRE AGREEMENT; NO DEROGATION OF RIGHTS. This Agreement
constitutes the entire agreement and understanding between the parties with
respect to the subject matters herein, and supersedes and replaces any prior
agreements and understandings, whether oral or written between them with respect
to such matters (excluding any stock option agreements with DSPC). The
provisions of this Agreement may be waived, altered, amended or repealed in
whole or in part only upon the written consent of both parties to this
Agreement. Hod hereby agrees that the Amended and Restated Employment Agreement
dated effective as of November 1, 1995, between Hod and DSPT, is terminated and
is of no further force or effect effective as of January 1, 1998, subject to any
salary, bonus or vacation amounts for 1997 that may have been accrued but unpaid
by DSPT under the Employment Agreement. Hod agrees that the terms in this
Agreement represent an improvement of the terms of his Employment Agreement with
DSPT and waives any claim against DSPT or the Corporation and their affiliates
of a derogation of his rights by virtue of his signing this Agreement.
b. NO IMPLIED WAIVERS. The failure of either party at any time to
require performance by the other party of any provision hereof shall not affect
in any way the right to require such performance at any time thereafter, nor
shall the waiver by either party of a breach of any provision hereof be taken or
held to be a waiver of any subsequent breach of the same provision or any other
provision.
c. PERSONAL SERVICES. It is understood that the services to be
performed by Hod hereunder are personal in nature and the obligations to perform
such services and the conditions and covenants of this Agreement cannot be
assigned by Hod. Subject to the foregoing, and except as otherwise provided
herein, this Agreement shall inure to the benefit of and bind the successors and
assigns of the Corporation.
6
<PAGE>
d. SEVERABILITY. If for any reason any provision of this Agreement
shall be determined to be invalid or inoperative, the validity and effect of the
other provisions hereof shall not be affected thereby, provided that no such
severability shall be effective if it causes a material detriment to any party.
e. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Israel applicable to
contracts between Israeli residents entered into and to be performed entirely
within the State of Israel.
f. NOTICES. All notices, requests, demands, instructions or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given upon delivery, if
delivered personally, or if given by prepaid telegram, or mailed first-class,
postage prepaid, registered or certified mail, return receipt requested, shall
be deemed to have been given seventy-two (72) hours after such delivery, if
addressed to the other party at the addresses as set forth on the signature page
below. Either party hereto may change the address to which such communications
are to be directed by giving written notice to the other party hereto of such
change in the manner above provided.
g. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE CORPORATION.
This Agreement shall not be terminated by any dissolution of the Corporation
resulting from either merger or consolidation in which the Corporation is not
the consolidated or surviving corporation or a transfer of all or substantially
all of the assets of the Corporation. In such event, the rights, benefits and
obligations herein shall automatically be assigned to the surviving or resulting
corporation or to the transferee of the assets.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the date first written above.
DSPC ISRAEL LTD.,
an Israeli company
11 Ben Gurion Street
Givat Shmuel 51905, ISRAEL
By:/s/ Gerald Dogon /s/ Nathan Hod
------------------------------- ---------------------------------
NATHAN HOD
Name: GERALD DOGON
----------------------------- ---------------------------------
Title: EVP and CFO (Address)
-----------------------------
---------------------------------
The undersigned, DSP Telecom, Inc., a California corporation, hereby agrees that
the Amended and Restated Employment Agreement dated effective as of November 1,
1995, between DSP Telecom, Inc. and Nathan Hod, is hereby terminated and is of
no further force and effect as of January 1, 1998, subject to any salary, bonus
or vacation amounts for 1997 that may have been accrued but unpaid by DSP
Telecom, Inc. under the Employment Agreement.
Dated: January 1, 1998
---------------------------
DSP TELECOM, INC.,
a California corporation
20300 Stevens Creek Blvd, 4th Floor
Cupertino, California 95014
By:/s/ Stephen P. Pezzola
------------------------------
STEPHEN P. PEZZOLA
General Counsel and Secretary
8
<PAGE>
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
OF GERALD DOGON
WITH
DSPC ISRAEL LTD.
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
effective as of this 1st day of January, 1998, by and between DSPC ISRAEL LTD.,
an Israeli company (hereinafter the "Corporation"), and GERALD DOGON
(hereinafter "Dogon").
RECITALS
A. Dogon is employed by the Corporation as its Chief Financial Officer.
B. In connection with Dogon's employment with the Corporation, the
Corporation and Dogon desire to enter into this Employment Agreement according
to the terms and conditions set forth below.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. EMPLOYMENT DUTIES.
a. GENERAL. The Corporation hereby agrees to employ Dogon, and
Dogon hereby agrees to accept employment with the Corporation, on the terms and
conditions hereinafter set forth.
b. CORPORATION'S DUTIES. The Corporation shall allow Dogon to, and
Dogon shall, perform responsibilities normally incident to his position as Chief
Financial Officer of both the Corporation and the Corporation's parent
corporation, DSP Communications, Inc., a Delaware corporation ("DSPC"), and as
Executive Vice President of DSPC, commensurate with his background, education,
experience and professional standing. The Corporation shall provide Dogon with
a private office, stenographic help, office equipment, supplies, customary
services and cooperation suitable for the performance of his duties. These
duties shall be performed primarily in Israel.
c. DOGON'S DUTIES. Unless otherwise agreed to by the parties, Dogon
shall serve as the Chief Financial Officer of both the Corporation and DSPC and
also as the Executive Vice President of DSPC. Dogon shall devote his full
productive time, attention, energy, and skill to the business of the Corporation
and DSPC during the employment term set forth below, and shall not become
engaged to render similar services on behalf of any other entity while employed
hereunder, without the prior written consent of the Corporation's Board of
Directors or its Chairman. Dogon shall report directly to DSPC's Board of
Directors and the Chairman of the Board. Dogon shall inform the Board of
Directors of any positions that he takes in any corporation other than the
Corporation or DSPC. Dogon, however, shall be allowed to perform services for
the Corporation's affiliates, including, without limitation, DSP
Telecommunications, Ltd, CTP Systems, Ltd, DSP Telecom, Inc., DSPC Japan, Inc.,
and CTP Systems, Inc. Notwithstanding Dogon's executive offices or titles in
DSPC or any of DSPC's subsidiaries or other affiliates, Dogon shall have the
authority to conclude contracts in the name of such company only to the extent
that such authority does not cause (i) any Israeli company to have a permanent
establishment in the United States for purposes of any tax
1
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treaty between the United States and Israel or (ii) any United States company to
have a permanent establishment in Israel for purposes of any tax treaty between
the United States and Israel.
d. Dogon acknowledges that his employment with the Corporation will
require frequent travel spanning extended periods outside Israel. Furthermore,
Dogon agrees to extensive world-wide travel under his employment with the
Corporation.
e. Dogon understands and acknowledges that as his position is a
senior managerial position in substance, as defined in the Work and Rest Hours
Law, 1951, and requires a high level of trust, the provisions of said law shall
not apply to Dogon and Dogon agrees that he may be required to work beyond the
regular working hours of the Corporation, for no additional compensation other
than as specified in this Agreement.
2. TERM. This Agreement shall terminate on December 31, 2000, unless
(a) extended as set forth herein, or (b) terminated sooner under the terms of
this Agreement. Thereafter, this Agreement may be renewed by Dogon and the
Board of Directors of this Corporation on such terms as the parties may agree to
in writing. Absent written notice to the contrary, thirty (30) days prior to
the end of the employment term, this Agreement will be renewed for consecutive
one (1) year extensions. As used herein, the term "employment term" refers to
the entire period of employment of Dogon hereunder, including any agreed-to
extension.
3. COMPENSATION. Dogon shall be compensated as follows:
a. FIXED SALARY. Dogon shall receive a fixed annual gross salary of
One Hundred Sixty-Five Thousand One Hundred Thirty-Five Dollars (US$165,135)(the
"Gross Salary"), which amount includes an annual vehicle allowance, payable on a
monthly basis in the equivalent amount of New Israeli Shekels according to the
representative rate of the U.S. dollar on the date of payment. The Corporation
agrees to review the fixed salary following the end of each twelve (12) month
period during the employment term based upon Dogon's services and the
Corporation's and DSPC's financial results during the calendar year, and to make
such increases as may be determined appropriate in the discretion of the
Corporation's Board of Directors.
b. BONUS COMPENSATION. During the employment term, Dogon shall
participate in each bonus plan adopted by the Corporation's Board of Directors.
Commencing in 1997, Dogon shall be entitled to receive an annual bonus equal to
(i) twenty-five percent (25%) of his base salary should DSPC meet eighty percent
(80%) of its plan as presented to the Board in January of each year, during the
term of Dogon's employment ("Yearly Plan"); (ii) fifty percent (50%) of his base
salary should DSPC meet its Yearly Plan; and (iii) one hundred percent (100%) of
his base salary should DSPC meet one hundred twenty percent (120%) of its Yearly
Plan, with the bonus prorated if the Yearly Plan is met between eighty percent
(80%) and one hundred percent (100%); or between one hundred percent (100%) and
one hundred twenty percent (120%). The meeting of the Yearly Plan for purposes
of this Section shall be based upon the actual revenues and earnings per share
of DSPC for each applicable year (each weighted fifty percent (50%)) compared to
the revenues and earnings per share projected in the Yearly Plan (with each item
weighted fifty percent (50%)) and no item shall be counted if it is not at least
eighty percent (80%) met. The bonus shall be payable in New Israeli Shekels
according to the representative rate of the US dollar on the date of payment.
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c. VACATION. Dogon shall accrue paid vacation at the rate of
twenty-five (25) days for each twelve (12) months of employment. Dogon shall be
compensated at his usual rate of compensation during any such vacation. Dogon
shall not accumulate unused vacation days for more than twenty four (24) months
of employment. Dogon shall be entitled to paid national and Jewish holidays as
is the law or custom in Israel.
d. BENEFITS.
i. During the term of Dogon's employment, Dogon shall be
entitled to Manager's Insurance (Bituach Menehalim) in an amount equal to 15.83%
of the Gross Salary, which shall be paid monthly to said Manager's Insurance
Plan directly by the Corporation. The insurance shall be allocated as follows:
(i) 8.33% in respect of severance compensation, (ii) 5% in respect of pension
and (iii) 2.5% of the Gross Salary in respect of disability. An additional 5%
of the Gross Salary shall be deducted by the Corporation from the monthly
payment of Dogon's salary as Dogon's contribution to said Manager's Insurance.
ii. The Manager's Insurance policy provided for Dogon's benefit
shall be registered in the Corporation's name. The contributions to the
Manager's Insurance Policy shall be paid by the Corporation in lieu of any other
legal obligation to make payments on account of severance or pension in respect
of Dogon's employment during the Employment Term. Should the provisions made for
severance pay not cover the amount owed by the Corporation to Dogon by law, then
the Corporation shall pay Dogon the difference, all in accordance with Israeli
law. Dogon's agreement to the last two sentences shall exempt the Corporation
from the requirement to apply to the Minister of Labor and Welfare for an
approval under Section 14 of the Severance Pay Law; however, should such
application be deemed necessary, Dogon's signature hereupon shall be deemed his
consent to the Corporation's application in Dogon's name in such matter.
iii. The sums accumulated in the Manager's Insurance policy shall
be transferred to Dogon upon termination of his employment hereunder, unless
Dogon has committed an act in breach of Dogon's fiduciary duty towards the
Corporation, DSPC or any of its affiliates.
iv. The Corporation shall provide and pay Dogon Recreation Funds
(Dme'y Havra'ah) at the rate required by law and regulations.
v. The Corporation shall contribute to a Continuing Education
Fund chosen by it for the benefit of Dogon in an amount equal to 7.5% of his
Gross Salary per month, subject to Dogon's contribution of an additional 2.5% of
his Gross Salary per month.
vi. The Corporation and DSPC shall provide Dogon with Director
and Officer Insurance, if reasonably available to the Corporation and DSPC, and
all of its officers and directors. Dogon shall in no event receive less
Director and Officer insurance coverage than that available to any other
employee. The Corporation shall, at a minimum, keep in full force and effect
its indemnification agreement previously entered into with Dogon.
4. EXPENSES. The Corporation shall reimburse Dogon for his normal and
reasonable expenses incurred for travel, entertainment and similar items in
promoting and carrying out the business of the Corporation in accordance with
the Corporation's general policy as adopted by the Corporation's management from
time to time. As a condition of reimbursement, Dogon agrees to provide the
Corporation with copies of all available invoices and receipts, and otherwise
account to the Corporation in sufficient detail to allow the Corporation to
claim an income tax deduction for such paid item, if such item is deductible.
Reimbursements shall be
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made on a monthly, or more frequent, basis. The Corporation shall also
reimburse Dogon for all professional membership dues incurred, if any; all
technical books purchased by Dogon; and all other expenses, incurred by Dogon at
the Corporation's or DSPC's request.
5. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. Dogon agrees that during
the employment term he is in a position of special trust and confidence and has
access to confidential and proprietary information about the Corporation's
business and plans. Dogon agrees that he will not directly or indirectly,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any similar individual or
representative capacity, engage or participate in any business that is in
competition, in any manner whatsoever, with the Corporation. Notwithstanding
anything in the foregoing to the contrary, Dogon shall be allowed to invest as a
shareholder in publicly traded companies, or through a venture capital firm or
an investment pool.
For purposes of this Section 5, the term "Corporation" shall also mean DSPC
or any of its subsidiaries.
6. TRADE SECRETS.
a. SPECIAL TECHNIQUES. It is hereby agreed that the Corporation has
developed or acquired certain products, technology, unique or special methods,
manufacturing and assembly processes and techniques, trade secrets, special
written marketing plans and special customer arrangements, and other proprietary
rights and confidential information and shall during the employment term
continue to develop, compile and acquire said items (all hereinafter
collectively referred to as the "Corporation's Property"). It is expected that
Dogon will gain knowledge of and utilize the Corporation's Property during the
course and scope of his employment with the Corporation, and will be in a
position of trust with respect to the Corporation's Property.
b. CORPORATION'S PROPERTY. It is hereby stipulated and agreed that
the Corporation's Property shall remain the Corporation's sole property. In the
event that Dogon's employment is terminated, for whatever reason, Dogon agrees
not to copy, make known, disclose or use, any of the Corporation's Property
without the Corporation's prior written consent. In such event, Dogon further
agrees not to endeavor or attempt in any way to interfere with or induce a
breach of any prior proprietary contractual relationship that the Corporation
may have with any employee, customer, contractor, supplier, representative, or
distributor for nine (9) months after any termination of this Agreement. Dogon
agrees upon termination of employment to deliver to the Corporation all
confidential papers, documents, records, lists and notes (whether prepared by
Dogon or others) comprising or containing the Corporation's Property. Dogon
recognizes that violation of covenants and agreements contained in this
Section 6 may result in irreparable injury to the Corporation which would not be
fully compensable by way of money damages.
c. COVENANT NOT TO COMPETE. For a period of one (1) year from the
date of any termination of Dogon's employment with the Corporation Dogon shall
not, directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, Director, or in any other
individual or representative capacity, engage or participate in any activities,
which are the same as, or competitive with, the activities in which the
Corporation is presently engaged.
d. CORPORATION DEFINED. For purposes of this Section 6, the term
"Corporation" shall also mean DSPC and any of its subsidiaries.
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7. TERMINATION.
a. GENERAL. The Corporation may terminate this Agreement without
cause, by written notice. Dogon may voluntarily terminate his employment
hereunder upon ninety (90) days' advance written notice to the Corporation.
b. TERMINATION FOR CAUSE. The Corporation may immediately terminate
Dogon's employment at any time for cause. Termination for cause shall be
effective from the receipt of written notice thereof to Dogon specifying the
grounds for termination and all relevant facts. Cause shall be deemed to
include: (i) material neglect of his duties or a significant violation of any
of the provisions of this Agreement, which continues after written notice and a
reasonable opportunity (not to exceed thirty (30) days) in which to cure; (ii)
fraud, embezzlement, defalcation or conviction of any felonious offense; or
(iii) intentionally imparting confidential information relating to the
Corporation, DSPC or any of DSPC's subsidiaries, or their business to
competitors or to other third parties other than in the course of carrying out
his duties hereunder. The Corporation's exercise of its rights to terminate
with cause shall be without prejudice to any other remedy it may be entitled at
law, in equity, or under this Agreement.
c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall
automatically terminate upon Dogon's death. In addition, if any disability or
incapacity of Dogon to perform his duties as the result of any injury, sickness,
or physical, mental or emotional condition continues for a period of thirty (30)
business days (excluding any accrued vacation) out of any one hundred twenty
(120) calendar day period, the Corporation may terminate Dogon's employment upon
written notice. Payment of salary to Dogon during any sick leave shall only be
to the extent that Dogon has accrued sick leave or vacation days. Dogon shall
accrue sick leave at the same rate generally available to the Corporation's
employees.
d. SEVERANCE PAY. If this Agreement is terminated by the
Corporation without cause pursuant to Section 7.a (above), the Corporation
shall pay Dogon a severance fee equal to his monthly salary at his then current
rate of fixed salary compensation, multiplied by the number of full months left
until December 31, 2000, during which time Dogon shall remain as an employee of
the Corporation in a non-policy making role, devoting substantive productive
time, and his options in DSPC shall continue to vest for the period of
continuous employment. The above severance fee shall be payable in accordance
with the Corporation's normal payroll practices. The Corporation shall pay
Dogon a severance fee equal to his monthly salary at his then-current rate of
fixed salary compensation, multiplied by the number six (6) if this Agreement is
terminated pursuant to Section 7.b (i) (above) or if Dogon or the Corporation
elects not to renew this Agreement. The Corporation shall pay Dogon a severance
fee equal to his monthly salary at his then-current rate of fixed salary
compensation, multiplied by the lesser of the number twelve (12) or the number
of months left in the original term of this Agreement as set forth herein plus
six (6), if Dogon voluntarily elects to terminate his employment, unless the
Corporation successfully claims that a termination in accordance with Sections
7.b (ii) or (iii) is in order. There shall be no severance in the event that
this Agreement is terminated in accordance with Section 7.b (ii) or (iii).
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8. CORPORATE OPPORTUNITIES.
a. DUTY TO NOTIFY. In the event that Dogon, during the employment
term, shall become aware of any material and significant business opportunity
related to the business of the Corporation, DSPC or any of DSPC's subsidiaries,
Dogon shall promptly notify the Corporation's Directors of such opportunity.
Dogon shall not appropriate for himself or for any other person other than the
Corporation, or any affiliate of the Corporation, any such opportunity unless,
as to any particular opportunity, the Board of Directors of the Corporation
fails to take appropriate action within thirty (30) days. Dogon's duty to
notify the Corporation and to refrain from appropriating all such opportunities
for thirty (30) days shall neither be limited by, nor shall such duty limit, the
application of the general law of Israel relating to the fiduciary duties of an
agent or employee.
b. FAILURE TO NOTIFY. In the event that Dogon fails to notify the
Corporation of, or so appropriates, any such opportunity without the express
written consent of the Corporation's Board of Directors, Dogon shall be deemed
to have violated the provisions of this Section notwithstanding the following:
i. The capacity in which Dogon shall have acquired such
opportunity; or
ii. The probable success in the Corporation's hands of such
opportunity.
9. MISCELLANEOUS.
a. ENTIRE AGREEMENT; NO DEROGATION OF RIGHTS. This Agreement
constitutes the entire agreement and understanding between the parties with
respect to the subject matters herein, and supersedes and replaces any prior
agreements and understandings, whether oral or written between them with respect
to such matters including but not without limitation to the employment agreement
between the parties dated June 5, 1994 (but excluding the car loan agreement
dated June 5, 1994 and any stock option agreements with DSPC). Dogon agrees that
the terms in this Agreement represent an improvement of the terms of his
employment with the Corporation and waives any claim against the Corporation and
its affiliates of a derogation of his rights by virtue of his signing this
Agreement. The provisions of this Agreement may be waived, altered, amended or
repealed in whole or in part only upon the written consent of both parties to
this Agreement.
b. NO IMPLIED WAIVERS. The failure of either party at any time to
require performance by the other party of any provision hereof shall not affect
in any way the right to require such performance at any time thereafter, nor
shall the waiver by either party of a breach of any provision hereof be taken or
held to be a waiver of any subsequent breach of the same provision or any other
provision.
c. PERSONAL SERVICES. It is understood that the services to be
performed by Dogon hereunder are personal in nature and the obligations to
perform such services and the conditions and covenants of this Agreement cannot
be assigned by Dogon. Subject to the foregoing, and except as otherwise
provided herein, this Agreement shall inure to the benefit of and bind the
successors and assigns of the Corporation.
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d. SEVERABILITY. If for any reason any provision of this Agreement
shall be determined to be invalid or inoperative, the validity and effect of the
other provisions hereof shall not be affected thereby, provided that no such
severability shall be effective if it causes a material detriment to any party.
e. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Israel applicable to
contracts between Israeli residents entered into and to be performed entirely
within the State of Israel.
f. NOTICES. All notices, requests, demands, instructions or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given upon delivery, if
delivered personally, or if given by prepaid telegram, or mailed first-class,
postage prepaid, registered or certified mail, return receipt requested, shall
be deemed to have been given seventy-two (72) hours after such delivery, if
addressed to the other party at the addresses as set forth on the signature page
below. Either party hereto may change the address to which such communications
are to be directed by giving written notice to the other party hereto of such
change in the manner above provided.
g. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE CORPORATION.
This Agreement shall not be terminated by any dissolution of the Corporation
resulting from either merger or consolidation in which the Corporation is not
the consolidated or surviving corporation or a transfer of all or substantially
all of the assets of the Corporation. In such event, the rights, benefits and
obligations herein shall automatically be assigned to the surviving or resulting
corporation or to the transferee of the assets.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement as
of the date first written above.
DSPC ISRAEL LTD.,
an Israeli company
11 Ben Gurion Street
Givat Shmuel 51905, ISRAEL
By: /s/ Nathan Hod /s/ Gerald Dogon
---------------------------------- ----------------------------------
NATHAN HOD GERALD DOGON
Chief Executive Officer 78 Hakidma
Herzlia Pituach, 46743, Israel
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EXHIBIT 10.26
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
OF STEPHEN P. PEZZOLA
WITH
DSP COMMUNICATIONS, INC. AND DSP TELECOM, INC.
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), made and
entered into effective as of the 1st day of January, 1998, by and between DSP
COMMUNICATIONS, INC., a Delaware corporation (hereinafter "DSPC"), DSP TELECOM,
INC., a California corporation (hereinafter the "Corporation"), and STEPHEN P.
PEZZOLA (hereinafter "Pezzola").
RECITALS
A. Effective September 16, 1996, Pezzola, DSPC and the Corporation
entered into an Employment Agreement (the "Employment Agreement") pursuant to
which Pezzola was employed as DSPC's General Counsel, and as an employee of the
Corporation. DSPC is the parent corporation of the Corporation.
B. DSPC, the Corporation, and Pezzola desire to amend certain terms of
the Employment Agreement entered into on September 16, 1996, as set forth in
this Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. EMPLOYMENT DUTIES.
a. GENERAL. The Corporation hereby agrees to employ Pezzola, and
Pezzola hereby agrees to accept employment with the Corporation, on the terms
and conditions hereinafter set forth.
b. CORPORATION'S DUTIES. The Corporation shall allow Pezzola to,
and Pezzola shall, perform responsibilities normally incident to his position as
General Counsel of DSPC, commensurate with his background, education, experience
and professional standing. The Corporation shall provide Pezzola with a private
office, stenographic help, office equipment, supplies, customary services and
cooperation suitable for the performance of his duties.
c. PEZZOLA'S DUTIES. Unless otherwise agreed to by the parties,
Pezzola shall serve as General Counsel of DSPC, and to the extent requested by
the Chairman of the Board of Directors of DSPC, as General Counsel for any and
all subsidiaries of DSPC. For purposes of acting as an attorney for DSPC (or
any of its subsidiaries), Pezzola shall owe his duties of loyalty and
confidentiality directly to DSPC (or any of its subsidiaries). Pezzola shall
devote such time in executing his duties as General Counsel as is deemed needed
by the Chairman
<PAGE>
of the Board of Directors of DSPC. Pezzola shall not be required to devote his
full time efforts to the Corporation or DSPC. It is intended that Pezzola will
work part time, approximately thirteen (13) hours per week, and that he will
serve as General Counsel of other entities and as an owner in an investment
entity. Pezzola shall report directly to the Chairman of the DSPC Board of
Directors. Mr. Pezzola shall inform the Chairman of the DSPC Board of Directors
of any other positions that he takes with any other entity, beyond the positions
that he currently holds. Pezzola's duties shall be performed primarily in the
San Francisco Bay Area, and more particularly, in either Cupertino or Oakland,
California, at the option of Pezzola.
2. TERM. This Agreement shall terminate December 31, 1998, unless
(a) extended as set forth herein, or (b) terminated sooner under the terms of
this Agreement. Thereafter, this Agreement may be renewed by Pezzola and the
Chairman of Board of Directors of DSPC on such terms as the parties may agree to
in writing. Absent written notice to the contrary, thirty (30) days prior to
the end of the employment term, this Agreement will be renewed for consecutive
one (1) year extensions. As used herein, the term "employment term" refers to
the entire period of employment of Pezzola hereunder, including any extensions.
3. COMPENSATION. Pezzola shall be compensated as follows:
a. FIXED SALARY. Pezzola shall receive a fixed annual salary of One
Hundred Fifteen Thousand Dollars ($115,000). The Corporation agrees to review
the fixed salary following the end of each calendar year during the employment
term based upon Pezzola's services and the financial results of DSPC during the
calendar year, and to make such increases as may be determined appropriate in
the discretion of DSPC's Compensation Committee of the Board of Directors
("Compensation Committee").
b. PAYMENT. Pezzola's fixed salary shall be payable on a
semi-monthly basis.
c. BONUS COMPENSATION. During the employment term, Pezzola shall
participate in each bonus plan adopted by DSPC, and shall receive such other
bonus pay as may be determined reasonable in the discretion of the Compensation
Committee.
d. VACATION. Pezzola shall accrue paid vacation at the rate of
twenty (20) days for each twelve (12) months of employment. Pezzola shall be
compensated at his usual rate of compensation during any such vacation. Pezzola
shall be entitled to ten (10) paid holidays during each twelve (12) months of
employment. Pezzola shall receive sick leave or disability leave in accordance
with the terms of the Corporation's standard sick leave or disability leave
policy.
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e. BENEFITS. Pezzola waives any entitlement he may have as a
Corporation employee to any benefits relating to group health, disability, life
insurance, retirement and other related benefits as in effect from time to time.
Such waiver shall be ineffective, however, for a Corporation employee benefit
plan in the event that such waiver would adversely impact the beneficial federal
income tax status of such plan. The Corporation shall provide Pezzola with
Director and Officer Insurance.
4. EXPENSES. The Corporation shall reimburse Pezzola for his normal and
reasonable expenses incurred for travel, entertainment and similar items in
promoting and carrying out the business of the Corporation in accordance with
the Corporation's general policy as adopted by the Corporation's management from
time to time. The Corporation shall pay Pezzola's cellular telephone expenses
up to an amount equal to Three Hundred Dollars ($300) per month, unless Pezzola
provides documentation to DSPC that Pezzola's cellular telephone use during a
particular month was directly related to the business of DSPC, in which case
DSPC shall pay all of the cellular telephone expenses attributable to the
business of DSPC during such month. As a condition of payment or reimbursement,
Pezzola agrees to provide the Corporation with copies of all available invoices
and receipts, and otherwise account to the Corporation in sufficient detail to
allow the Corporation to claim an income tax deduction for such paid item, if
such item is deductible. Reimbursements shall be made on a monthly, or more
frequent, basis. The Corporation shall reimburse Pezzola for fifty percent
(50%) of all professional membership dues incurred, if any; fifty percent (50%)
of all technical books purchased by Pezzola; and one hundred (100%) of all legal
education and seminar expenses. The Corporation shall also reimburse Pezzola
for fifty percent (50%) of any California Bar Association dues or fees necessary
to maintain his certification as an attorney in California. It is noted that
Zen Research, Inc. is currently providing an office adjacent to the
Corporation's principal place of business to Pezzola at no expense to DSPC or
the Corporation.
5. INDEMNIFICATION. The parties agree to enter into an Indemnification
Agreement, effective September 16, 1996, under which DSPC will indemnify Pezzola
for actions he may take on behalf of the Corporation or DSPC.
6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. Pezzola agrees that
during the employment term he is in a position of special trust and confidence
and has access to confidential and proprietary information about the
Corporation's business and plans. Pezzola agrees that he will not directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder, corporate officer, director, or in any similar individual
or representative capacity, engage or participate in any business that is in
competition, in any
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manner whatsoever, with the Corporation. Notwithstanding anything in the
foregoing to the contrary, Pezzola shall be allowed to invest as a shareholder
in publicly traded companies, or through a venture capital firm or an investment
pool.
7. TRADE SECRETS.
a. SPECIAL TECHNIQUES. It is hereby agreed that the Corporation has
developed or acquired certain products, technology, unique or special methods,
manufacturing and assembly processes and techniques, trade secrets, special
written marketing plans and special customer arrangements, and other proprietary
rights and confidential information and shall during the employment term
continue to develop, compile and acquire said items (all hereinafter
collectively referred to as the "Corporation's Property"). It is expected that
Pezzola will gain knowledge of and utilize the Corporation's Property during the
course and scope of his employment with the Corporation, and will be in a
position of trust with respect to the Corporation's Property.
b. CORPORATION'S PROPERTY. It is hereby stipulated and agreed that
the Corporation's Property shall remain the Corporation's sole property. In the
event that Pezzola's employment is terminated, for whatever reason, Pezzola
agrees not to copy, make known, disclose or use, any of the Corporation's
Property without the Corporation's prior written consent. In such event,
Pezzola further agrees not to endeavor or attempt in any way to interfere with
or induce a breach of any prior proprietary contractual relationship that the
Corporation may have with any employee, customer, contractor, supplier,
representative, or distributor for nine (9) months after any termination of this
Agreement. Pezzola agrees upon termination of employment to deliver to the
Corporation all confidential papers, documents, records, lists and notes
(whether prepared by Pezzola or others) comprising or containing the
Corporation's Property. Pezzola recognizes that violation of covenants and
agreements contained in this Section 7 may result in irreparable injury to the
Corporation which would not be fully compensable by way of money damages.
8. TERMINATION.
a. GENERAL. The Corporation may terminate this Agreement without
cause, by written notice. Pezzola may voluntarily terminate his employment
hereunder upon sixty (60) days' advance written notice to the Corporation.
b. TERMINATION FOR CAUSE. The Corporation may immediately terminate
Pezzola's employment at any time for cause. Termination for cause shall be
effective from the receipt of written notice thereof to Pezzola specifying the
grounds for termination and all relevant facts. Cause shall be deemed to
include: (i) material neglect of his duties or a
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significant violation of any of the provisions of this Agreement, which
continues after written notice and a reasonable opportunity (not to exceed
thirty (30) days) in which to cure; (ii) fraud, embezzlement, defalcation or
conviction of any felonious offense; or (iii) intentionally imparting
confidential information relating to the Corporation or DSPC or their business
to competitors or to other third parties other than in the course of carrying
out his duties hereunder. The Corporation's exercise of its rights to terminate
with cause shall be without prejudice to any other remedy it may be entitled at
law, in equity, or under this Agreement.
c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall
automatically terminate upon Pezzola's death. In addition, if any disability or
incapacity of Pezzola to perform his duties as the result of any injury,
sickness, or physical, mental or emotional condition continues for a period of
thirty (30) business days (excluding any accrued vacation) out of any one
hundred twenty (120) calendar day period, the Corporation may terminate
Pezzola's employment upon written notice. Payment of salary to Pezzola during
any sick leave shall only be to the extent that Pezzola has accrued sick leave
or vacation days. Pezzola shall accrue sick leave at the same rate generally
available to the Corporation's employees.
d. SEVERANCE PAY. If this Agreement is terminated by the
Corporation without cause pursuant to Section 8.a. (above), the Corporation
shall pay Pezzola a severance fee equal to the full amount of the compensation
that he could have expected under this Agreement, as and when payable under this
Agreement, without deduction except for tax withholding amounts, through the end
of the term, during which Pezzola shall remain as an employee of the Corporation
in a non-policy making role. The Corporation shall pay Pezzola a severance fee
equal to his monthly salary at his then-current rate of fixed salary
compensation, multiplied by the number three (3) if this Agreement is terminated
with cause pursuant to Section 8.b (i) (above) or if Pezzola or the Corporation
elects not to renew this Agreement. The Corporation shall pay Pezzola a
severance fee equal to his monthly salary at his then-current rate of fixed
salary compensation, multiplied by the number three (3), if Pezzola voluntarily
elects to terminate his employment, unless the Corporation successfully claims
that a termination in accordance with Sections 8.b(ii) or (iii) is in order.
There shall be no severance in the event that this Agreement is terminated in
accordance with Section 8.b (ii) or (iii).
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9. CORPORATE OPPORTUNITIES.
a. DUTY TO NOTIFY. In the event that Pezzola, during the employment
term, shall become aware of any material and significant business opportunity
directly related to any of the Corporation's significant businesses, Pezzola
shall promptly notify DSPC's Chairman of the Board of such opportunity. Pezzola
shall not appropriate for himself or for any other person other than the
Corporation, or any affiliate of the Corporation, any such opportunity unless,
as to any particular opportunity, the Board of Directors of the Corporation
fails to take appropriate action within thirty (30) days. Pezzola's duty to
notify DSPC and the Corporation and to refrain from appropriating all such
opportunities for thirty (30) days shall neither be limited by, nor shall such
duty limit, the application of the general law of California relating to the
fiduciary duties of an agent or employee.
b. FAILURE TO NOTIFY. In the event that Pezzola fails to notify the
Corporation of, or so appropriates, any such opportunity without the express
written consent of the Chairman of the Board of Directors of DSPC, Pezzola shall
be deemed to have violated the provisions of this Section notwithstanding the
following:
i. The capacity in which Pezzola shall have acquired such
opportunity; or
ii. The probable success in the Corporation's hands of such
opportunity.
c. CORPORATION DEFINED. For purposes of Sections 6, 7 and 9 hereof,
the term "Corporation" shall also include DSPC and all of DSPC's subsidiaries.
10. MISCELLANEOUS.
a. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding between the parties with respect to the subject
matters herein, and supersedes and replaces any prior agreements and
understandings, whether oral or written between them with respect to such
matters. The provisions of this Agreement may be waived, altered, amended or
repealed in whole or in part only upon the written consent of both parties to
this Agreement.
b. NO IMPLIED WAIVERS. The failure of either party at any time to
require performance by the other party of any provision hereof shall not affect
in any way the right to require such performance at any time thereafter, nor
shall the waiver by either party of a breach of any provision hereof be taken or
held to be a waiver of any subsequent breach of the same provision or any other
provision.
6
<PAGE>
c. PERSONAL SERVICES. It is understood that the services to be
performed by Pezzola hereunder are personal in nature and the obligations to
perform such services and the conditions and covenants of this Agreement cannot
be assigned by Pezzola. Subject to the foregoing, and except as otherwise
provided herein, this Agreement shall inure to the benefit of and bind the
successors and assigns of the Corporation.
d. SEVERABILITY. If for any reason any provision of this Agreement
shall be determined to be invalid or inoperative, the validity and effect of the
other provisions hereof shall not be affected thereby, provided that no such
severability shall be effective if it causes a material detriment to any party.
e. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, applicable to
contracts between California residents entered into and to be performed entirely
within the State of California.
f. NOTICES. All notices, requests, demands, instructions or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given upon delivery, if
delivered personally, or if given by prepaid telegram, or mailed first-class,
postage prepaid, registered or certified mail, return receipt requested, shall
be deemed to have been given seventy-two (72) hours after such delivery, if
addressed to the other party at the addresses as set forth on the signature page
below. Either party hereto may change the address to which such communications
are to be directed by giving written notice to the other party hereto of such
change in the manner above provided.
g. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE CORPORATION.
This Agreement shall not be terminated by any dissolution of the Corporation
resulting from either merger or consolidation in which the Corporation is not
the consolidated or surviving corporation or a transfer of all or substantially
all of the assets of the Corporation. In such event, the rights, benefits and
obligations herein shall automatically be assigned to the surviving or resulting
corporation or to the transferee of the assets.
7
<PAGE>
h. CONFLICT POTENTIAL AND DUTY TO NOTIFY. Pezzola agrees to notify
the Chairman of the Board of Directors of DSPC of: (1) any investments in any
company or other entity of his own personal funds which is in excess of
$200,000; (2) any investment which results in Pezzola owning over five percent
(5%) of an entity; or (3) any other employment or consulting arrangement to
which Pezzola is a party. If the Chairman of the Board of Directors of DSPC
deems such investment or arrangement to be a conflict, he and Pezzola shall
attempt to resolve the conflict. If such conflict cannot be so resolved, then
the Chairman of the Board of Directors of DSPC shall discuss the matter with the
entire Board, and bring the matter to the Corporation's outside counsel.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DSP TELECOM, INC. DSP COMMUNICATIONS, INC.
a California corporation a Delaware corporation
20300 Stevens Creek Blvd., Ste. 465 20300 Stevens Creek Blvd., Ste. 465
Cupertino, CA 95014 Cupertino, CA 95014
By: /S/ CINDY BYRNE By: /S/ CINDY BYRNE
------------------------------- -----------------------------
Cindy Byrne, Finance Manager Cindy Byrne, Finance Manager
/S/ STEPHEN P. PEZZOLA
- ------------------------------------
STEPHEN P. PEZZOLA
40 Yorkshire Drive
Oakland, CA 94618
8
<PAGE>
EXHIBIT 10.27
TRANSLATION FROM THE HEBREW ORIGINAL
RENTAL CONTRACT
Prepared and signed in Tel-Aviv on 8th day of January, 1996
Between
Yehudit Pomerantz, ID# 5057196
Ofer Pomerantz, ID# 5338270
Irit Pomerantz, ID# 5724172
Jointly and severally
30 Kaplansky Street, Givatayim
(hereinafter: "the Landlord")
Parties of the first part
And Between
DSPC Israel Ltd.
11 Ben Gurion Street, Givat Shmuel
(hereinafter: "the Tenant")
Party of the second part
Whereas: The Landlord is the owner of the building as detailed below;
Whereas: The Landlord is interested in renting to the Tenant and the Tenant
is interested in renting from the Landlord the property as detailed below in
accordance with the contractual terms set forth below;
Therefore it was agreed to and declared between the parties as follows:
1. Preamble
The Preamble to this contract and its attachments represent an integral part of
the contract.
2. Definitions
<PAGE>
2.1 "The Building" -- a three-story building, penthouse and basement that is
located at 18 Ben Gurion Street, Givat Shmuel, and which is known as plot number
952 of parcel number 6189.
2.2 "The Rental Property" -- an area of approximately 485 square meters
(gross) in the Building and which represents the entire first floor according to
the blueprint presented as Attachment A to the contract, including the
proportionate common areas of the Building's ground floor.
3. Rental Period
3.1 The Landlord rents to the Tenant and the Tenant rents from the Landlord
the rental property for a period of 36 months commencing on April 1, 1996 and
terminating on March 31, 1999, (hereinafter: "the Rental Period".)
3.2 The rental period will be extended for a period of 36 months commencing
on April 1, 1999, and will terminate on March 31, 2002 (hereinafter: "the
Extended Rental Period") unless the Landlord receives from the Tenant a written
notification of his intent not to exercise the renewal option six months prior
to the expiration of the rental period.
4. Intended Use
The intended use of the rental property is to be utilized by the Tenant, as
offices that serve the Tenant in his various activities only in the high-
technology industry (hereinafter: "intended use"), and the Tenant consents not
to use the rental property or part thereof for any other use whatsoever.
The above paragraph constitutes a material portion of the contract and any
breach will be considered a breach of the contract.
5. Declarations and Obligations of the Tenant
The Tenant declares as follows:
5.1 The Tenant declares that it is familiar with and is informed regarding
the building, and the rental property, and the areas that relate to it and has
found them suitable for its intended purpose and relinquishes any claim that
they are unfit for use to the Tenant.
5.2 The Tenant declares that it is familiar with and is informed regarding
the area and vicinity of the rental property, checked the blueprints and
investigated the plans that outline permissible use in the rental property
according to the building plan and according to the permits issued by the Givat
Shmuel Regional Council.
6. Rental Payment
6.1 The Tenant will pay to the Landlord monthly rental payments for the
entire duration of the rental contract amounts equal to $7,275, in New Israeli
Shekels.
<PAGE>
The rental payment will be converted to NIS upon signing of this contract
according to the representative conversion rate of the US dollar as published by
the Bank of Israel, that is known at that time and, from that time, the payment
will be linked to the Consumer Price Index as stated below.
6.2 In the event that the Tenant will exercise the option, the rental
payments will be increased for the extended rental period (at the beginning of
the extended rental period) at a rate of 7%, above the rental payments due as
stipulated according to this contract at the end of the rental period (rental
payments in addition to all of the linkage differences up until the said date)
(hereinafter: "Extended Rental Period Payments".)
6.3 The rental payments for the extended rental period will be linked to the
Consumer Price Index in accordance with the stipulations of this contract.
6.4 At the date of signing this contract, rental payment will be paid for a
single month only.
On April 1, 1996, payment will be made for two month's rent.
Beginning on July 1, 1996, and for the remainder of the rental period and for
the extended rental period, should it be exercised, rental payments will be made
for each 3-month period in advance, on the 1st of each month in which a payment
is to be made.
6.5 Rental payments will be linked to the Consumer Price Index according to
the terms as follows:
6.5.1 "Consumer Price Index" - The index known as the Consumer Price Index as
published by the Central Agency for Statistics and Financial Investigation and
every index like it unless this index is replaced by a different authorized
governing body whether it be comprised of the same components or not.
"The Base Index" - The index for the month of November 1995, published
on December 15, 1995.
"The New Index" - For each and every rental payment--the latest
published index published immediately prior to the date designated for a
specific payment or prior to actual payment, whichever is higher.
6.5.2 Calculation Method
If on the actual payment date of each rental payment, the new index is higher
than the base index, then the rental payment will increase proportionately to
the increase in the change between the base index and the new index. If, on the
actual rental payment date of each rental payment the new index will be
different than or lower than the base index, then the rental payment will remain
the same with no change.
<PAGE>
6.6 Value Added Tax will be added to each and every rental payment and will
be paid in full according to the Value Added Tax rate in effect at the time of
payment. The Landlord will issue a tax invoice as required by law.
7. Decrement of the Rental Period
The Tenant does not have the right to alter the conclusion of this
contract prior to the end of the rental period as described in Paragraph 3.1,
above, and/or prior to the end of the extended rental period, should it be
exercised. Any lapse in the use of the rental property and/or abandonment of
the rental property prior to the date referenced below does not release the
Tenant from its obligations according to this contract including, and without
detracting from the generality of the above, the Tenant's obligation to pay
rental payments to the Landlord.
8. Taxes and Payments
8.1 Governmental property taxes and other obligatory payments that,
according to the law, are the responsibility of the property owner, as
distinguished from the occupant, will be paid by the Landlord.
8.2 All other taxes, levies, fees, and payments, without exception, that
relate to the rental period and the extended rental period, should it be
exercised, will be paid by the Tenant, including:
8.2.1 All taxes, fees, and levies imposed by the Regional Council that apply
to the rental property and its use therein and the business being conducted
therein by the Tenant.
8.2.2 Invoices for water, electricity, and telephone that relate to the
Tenant.
8.2.3 All payments that relate to maintenance of the rental property without
exception.
8.2.4 28% of the total general building maintenance including expenses related
to elevator maintenance, elevator insurance, maintenance of the electrical
system, garden, and sewage.
The payments will be made immediately upon the Landlord's first demand to which
a detailed invoice will be attached.
8.2.5 In addition to everything stated above, the Tenant will pay to the
Landlord a co-operative maintenance and upkeep payment in the amount of $1.00,
plus Value Added Tax, for each square meter of the rental property, which will
be converted to NIS and linked to the Consumer Price Index and paid together
with the regular rental payment.
9. Permits
9.1 The Tenant is obligated to obtain the required permits to operate a
commercial enterprise in accordance with the intended use of the rental property
from the appropriate
<PAGE>
governing bodies. The Tenant agrees to perform its commercial activities in
accordance with the said permits, without deviation, as required by Law and any
governing body.
9.2 The Landlord is in no manner responsible for the receipt of the proper
commercial permits relating to the rental property, and the Tenant alone will
act to this end and is responsible for obtaining the said permits.
10. Alterations and Renovation
10.1 The Tenant agrees not to perform any alterations or corrections that
include additions or building of any sort, in any definition of the term, in the
rental property (hereinafter comprehensively termed: "renovation") without prior
written consent from the Landlord.
10.2 In the event that the Tenant desires to perform any renovation, it must
present a detailed plan of renovation. Upon the plan's approval by the Landlord
and renovation performed by the Tenant, the Landlord has the right, upon the
completion of this contract, to demand that the Tenant demolish the renovation
and, in this case, the Tenant must demolish the renovation and perform any
required corrective maintenance to return the rental property to its condition
prior to the renovation, all this to be completed within 14 days of the
Landlord's demand, or to leave the renovation in the ownership of the Landlord
and the Tenant agrees that the renovation will be the sole property of the
Landlord without any compensation for it.
11. Furnishings
The Tenant may furnish the rental property provided that the installation of the
furnishings do not damage the rental property.
12. Use of the Rental Property
12.1 The Tenant agrees to use the rental property in a careful and reasonable
manner, to preserve a state of cleanliness of the property and its surrounding
area, to prevent destruction and damage in the rental property including all of
the appliances that serve the Tenant whether they serve only the Tenant or
together with other Tenants, excluding only damage or depreciation that result
from normal or reasonable use.
12.2 The Tenant is required to immediately repair any damage and/or
destruction to the rental property or its appliances as stated in Paragraph
12.1, above, (excluding only damage or depreciation that results from normal and
reasonable use) and to immediately replace, with an equal replacement, any
accessory installed in the rental property that was lost or destroyed.
12.3 In the event that the Tenant did not perform the repairs required of it
as stated, or if it did not replace any part which it is so required to replace
as stated, the Landlord may, but is not obligated to, perform the repairs at the
expense of the Tenant, and, in any case, the Tenant is obligated to repay the
Landlord, in full, for any damage, destruction, or loss
<PAGE>
as stated excluding only damage or destruction that results from normal or
reasonable use.
12.4 The Landlord is not compelled to perform any repairs during the term of
the rental period or the extended rental period, should it be exercised, except
for repairs as a result of faulty building. Repair of plumbing, sewage, and
electricity that is internal to the walls and water damage or water penetration
from the external walls, that result from reasonable use by the Tenant of the
said appliances, only, will be repaired by the Landlord within 30 days of the
Tenant's demand. After this period, the Tenant may perform the repairs at the
Landlord's expense.
13. Responsibility for Damage
13.1 The Tenant assumes responsibility towards the Landlord and to any third-
party whatsoever for any damage, of any type, that may result to any person or
property, including, and without detracting from the generality of the above,
visitors to the rental property, the Tenant's employees, and to any other person
that finds himself within the boundaries of the rental property, that results
from the condition of the rental property and/or the installed equipment therein
and/or, the Tenant's actions and/or, from the provision of services within the
rental property, and/or, within its immediate surroundings and/or the property
of and/or the jurisdiction of the Tenant.
13.2 Without detracting from the instructions stated in Paragraph 13.1,
above, the Tenant agrees to take all steps necessary to cancel any demand and/or
claim against the Landlord for any damage as described in Paragraph 13.1, above,
and to indemnify the Landlord for any monies that the Landlord may be required
to pay as a result of said demand and/or, claim, as mentioned above, within 15
days from the initial demand for payment from the Landlord provided that the
Landlord notified the Tenant of any demand and/or claim, as above mentioned,
within 15 days that he became aware of the demand and/or claim, as above
mentioned, and permitted the Tenant to defend itself accordingly.
14. Insurance
14.1 Without diminishing the Tenant's obligations and responsibility
according to this contract, the Tenant agrees to maintain, at it own expense,
for the entire duration of the rental period and the extended rental period,
should it be exercised, the following forms of insurance:
14.1.1 Comprehensive insurance covering the rental property (including loss of
rental income) that will be underwritten through participation in the Landlord's
comprehensive insurance policy and taken out by the Landlord, for the proportion
of the rental property in the building.
14.1.2 Third party insurance (including itself and its employees) for any
bodily injury or property damage resulting from any source through the rental
property.
<PAGE>
14.1.3 The Tenant's property insurance will include cancellation of the
subrogation clause towards the Landlord.
14.2 The following clarifications apply the following types of insurance:
14.2.1 The insurance company will be any reasonable insurance company that the
Landlord will agree to.
14.2.2 The Tenant will present to the Landlord copies of the insurance policies
above mentioned.
14.2.3 The third party insurance policy will include a paragraph stating that
the terms of the policy may not be downgraded and that the policy may not be
cancelled, except with the written approval of the Landlord.
15. Signs and Advertisements
The Tenant agrees not to hang, install, or graphically depict symbols or
advertising messages, of any type, on any part of the building that the Tenant
occupies without prior approval of the Landlord, and similarly, not to use any
portion of the building except for the rental property except for use as access
to the rental property without detracting from the statements above, in the
event that any type of the Tenant's property is found outside of the rental
property, the Landlord has the right to remove them from any place that they may
be found, at the Tenant's expense, and the Landlord has no responsibility
regarding the property whatsoever.
16. Visitation
The rights of the Landlord or his appointee:
16.1 To enter the rental property at any reasonable time in order to verify
that the terms and conditions of the contract are being upheld upon prior
notification of the Tenant and accompanied with a representative of the Tenant.
16.2 To enter the rental property, at any reasonable time and with prior
arrangement, to perform in the rental property, building maintenance required
for the building or any part thereof.
16.3 During the last three months of the rental period and/or the extended
rental period, should it be exercised, to enter the rental property during
generally accepted working hours together with visitors, whose number shall not
be greater than 4, with 24 hour advance notice to the Tenant.
The Tenant agrees not to deny the Landlord access to the rental property, as
stated, to perform the said maintenance.
17. Non Transference of Rights
17.1 The Tenant agrees not to transfer the rental of the rental property, or
any part thereof, to another, not to give, not to transfer, and not to rent the
property, or any part
<PAGE>
thereof to another, not to allow use by another, in the rental property, or any
part thereof, not to include another in the rental property's possession, and/or
use, and/or enjoyment of the rental property, or any part thereof, and/or in the
commercial enterprise being conducted in the rental property and not to assign
any rights in the rental property, or any part thereof, whatsoever, to another.
All these whether compensation received or without compensation.
17.2 The restrictions stated in Paragraph 17.1, above, do not apply to use of
the rental property by the Tenant's parent company, DSP Communications Inc.,
(owners of controlling interest in the Tenant) and/or a different company
controlled by the Tenant, and/or the Tenant's parent company on providing that
the Tenant is solely responsible for fulfilling its obligations according to
this rental contract.
17.3 The transfer of shares and/or the issue of shares by the Tenant are
deemed as assignment of rights for the purposes of this contract, except for
transfers that do not alter controlling interest of the Tenant.
17.4 Notwithstanding the above paragraphs, the Tenant may sub-let portions of
the rental property (that shall not constitute more than 50% of the rental
property), and shall not be more than 2 sub-tenants at any given time, and this
only under the provision that prior written approval is granted by the Landlord.
The Landlord shall not withhold the granting of said approvals, unless
substantiated by reasonable cause.
17.5 In any event, the Tenant shall be responsible for the performance of the
terms and conditions set forth in this contract for the areas that are sub-let.
18. Vacation
18.1 The Tenant agrees that no later than March 31, 1999, or on the date that
the rental contract expires, or upon expiration of the extended rental period,
should it be exercised, or on the date that this contract reaches its end
(hereinafter: "Vacation Date"), the Tenant will vacate the rental property and
return it to the Landlord. The Tenant agrees that on the vacation date and upon
returning the rental property to the Landlord, the rental property will be free
and clear of any person or Tenant's belongings, orderly, and in good condition,
except for normal and reasonable use, in the same condition that the property
was received, according to Paragraph 12, above.
18.2 In the event that the Tenant did not fulfill its obligations as detailed
in Paragraph 18.1, above, then, and without detracting from the Landlord's
rights to exercise its rights in any manner it sees fit, the Tenant will be
obligated to pay to the Landlord up to and until such time that the Tenant did
not fulfill its obligations above mentioned, a usage fee to be paid in NIS equal
to $500 US for each day as fixed compensation and agreed to in advance. It is
explicitly declared and agreed to between the parties that the amount of the
compensation is set in advance after proper and cautious consideration of the
damage
<PAGE>
imposed on the Landlord in the event that the Tenant does not vacate the rental
property on the appropriate date as stated and that any claim by the Tenant that
the amount is a penalty will not be given consideration, and the Tenant will be
prevented from making such a claim.
19. Securities
19.1 In order to insure that the Tenant will fulfill all of its obligations
according to this contract (including vacation of the rental property) and to
reduce the burden of collecting the sums due to the Landlord from the Tenant
according to this contract, including the amounts described in Paragraph 8, the
Tenant will furnish to the Landlord upon signing of this contract:
19.1.1 A bank guarantee in the amount of NIS 100,000, linked to the Consumer
Price Index as detailed in Paragraph 6, above, for the entire duration of the
rental period including the extended rental period, should it be exercised,
valid for 30 days after expiration of the rental period and/or the extended
rental period, should it be exercised.
19.1.2 Three (3) promissory notes in the amount of NIS 50,000 each, linked to
the Consumer Price Index as detailed in this contract, signed by the Tenant as
the issuer of the promissory notes, that will be deposited with Yoav Schnitzer,
Attorney, in escrow (hereinafter: "Trust administrator") and will be transferred
to the Landlord by the trust administrator upon demand of the Landlord, only
after the trust administrator notifies the Tenant of his intent 15 days in
advance, wherein the reason for transfer of the promissory notes to the Landlord
is stated.
19.2 In any event that monies are due to the Landlord by the Tenant according
to this contract, including rental payments, the Landlord is permitted to use
the bank guarantee and/or the promissory notes in an amount equal to the debt
outstanding due to the Landlord by the Tenant, should there be any, and to this
end, the Landlord has the right to utilize the bank guarantee and to use any
alternative means to collect the promissory notes provided that the Landlord
provide a written letter of intent to the Tenant 7 days in advance.
19.3 It is declared and agreed to between the parties that utilization of the
bank guarantee and/or the collection of the promissory notes by the Landlord do
not diminish the rights of the Landlord in collection from the Tenant of any
damages it sustained as a result of the Tenant's breach of any of its
obligations as set forth in this contract and/or, to restrict the Landlord in
exercising its said rights and/or, to limit its compensation and/or, damages
that are due to the Landlord as a result of the Tenant's breach of any of its
obligations as set forth in this contract.
19.4 In any event that the Landlord utilizes the securities, and/or any of
them and/or the securities have expired, and/or any of them, the Tenant agrees
to present to the Landlord new securities of comparable value and composition to
the bank guarantee or
<PAGE>
promissory notes that were used or expired within 7 days of the date of
notification by the Landlord that the securities were realized or expired.
20. Major Terms and Conditions - Breaches, and Agreed Upon Compensation
20.1 The parties declare that all of the terms and conditions detailed in
Paragraphs 3, 4, 5, 6, 7, 8, 9, 10, 12, 13, 14, 17, 18, 19, and 20 and their
sub-paragraphs in this contract constitute major terms and conditions and their
breach will be considered a fundamental breach of this contract.
Any breach and/or non-fulfillment of any condition or obligation as described in
the above referenced paragraphs by the Tenant will entitle the Landlord to
notify the Tenant that the rental, according to this contract, has been breached
and is terminated and the Tenant must vacate the rental property, according to
Paragraph 18, above, within 15 days of said notification, and this does not
limit the rights of the Landlord to receive all of the rental payments and the
other amounts it was entitled to had the contract been in force, and this does
not diminish its right to seek other support or remedies, including compensation
for any damage that the Landlord incurs as a result of the breach or non-
fulfillment as described above.
20.2 Without detracting from the rights of the Landlord afforded him through
this contract, the Landlord maintains the right to claim interest from the
Tenant in any case of delay in the payment of the rental payment or other
payments the Tenant is obligated to the Landlord according to this contract, the
rate of interest will be the maximum interest rate charged by Bank Leumi Ltd.
for accounts over their limit.
21. Independence from the Tenants' Protection Law
The Tenant declares that it has not and will not provide key-money for the
rental property and/or in consideration of the rental property and that on the
date of the inception of the Tenant's Protection Law (Various Articles) - 1968,
the rental property was not occupied by any occupant with rights relative to the
rental property and that the Tenants' Protection Law (Comprehensive Version) -
1972 will not apply to it, and/or its dependents, and/or as it relates to the
Law.
22. Transfer of the Rights of the Landlord
The Landlord may transfer his rights in the rental property to others according
to this contract without any consent on behalf of the Tenant provided that the
rights of the Tenant are in no way affected.
23. Stamps
The stamp expense will be born equally between the parties.
24. Other Instructions
24.1 Any compromise by any of the parties to this contract will not be deemed
as renouncement of its rights or agreement on his part to any compromise and/or
<PAGE>
modification of the terms of this contract unless the renouncement or agreement
is performed explicitly, in writing.
24.2 Any modification and/or addition to this contract shall not take effect
unless performed in writing and signed by the relevant parties.
24.3 All payments incumbent upon the Tenant according to this contract,
including the rental payment, will have Value Added Tax added, as prescribed by
the rate according to the Law, that will be paid by the Tenant together with the
said payment.
25. Correspondence
The addresses of the parties are:
Landlord: 30 Kaplansky Street, Givatayim
Tenant: __________________________
All correspondence that will be sent to any of the parties to the address that
appears next to its name will be considered as though delivered to its
destination 72 hours after sent via registered mail and/or 24 hours after
delivered by means of courier.
Agreed to between the parties as signed
/s/ Joseph M. Perl, Ph.D /s/Yehudit Pomerantz /s/ Ofer Pomerantz
- ------------------------ -------------------- -------------------
DSPC Israel Ltd. Yehudit Pomerantz Ofer Pomerantz
/s/ Irit Pomerantz
- ------------------
Irit Pomerantz
<PAGE>
EXHIBIT 10.28
TRANSLATION FROM THE HEBREW ORIGINAL
CONTRACT
Prepared and signed in Tel-Aviv on 24th day of December, 1997
Between
Yehudit Pomerantz, ID# 5057196
Ofer Pomerantz, ID# 5338270
Irit Pomerantz, ID# 5724172
Jointly and severally
30 Kaplansky Street, Givatayim
(hereinafter: "the Landlord")
Parties of the first part
And Between
Asher Fuchtonger Ltd.
23 Ha'Yitzirah Street, Kiryat Aryeh
(hereinafter: "Fuchtonger")
Party of the second part
And Between
DSPC Israel Ltd.
11 Ben Gurion Street, Givat Shmuel
(hereinafter: "the Tenant")
Party of the third part
Whereas: On January 14, 1996 a contract was signed between the Landlord and
Fuchtonger, according to which Fuchtonger rented from the Landlord, an area of
approximately 520 square meters that represent the second floor of the building
as defined in the rental contract (hereinafter: "the Second Floor"), including
the proportionate common areas of the building, and on March 11, 1996, a
contract was signed between the Landlord and Fuchtonger, according to which
Fuchtonger rented from the Landlord, an area of approximately 153 square meters
that represent the top floor of the building as defined in the rental contract
(hereinafter: "the Penthouse"), including the proportionate common areas of the
building (hereinafter jointly referred to as:
<PAGE>
"Fuchtonger Rental Contract") (the second floor and the penthouse hereinafter
referred to: "Additional Areas");
Whereas: The expiration date of the Fuchtonger rental contract was March
31, 1999, and Fuchtonger is interested in reducing the rental term as set forth
in the Fuchtonger rental contract and to vacate the additional areas on the
dates stated below;
Whereas: The Landlord agrees to the vacation of the rental property by
Fuchtonger as stipulated below;
Whereas: On January 8, 1996, a rental contract was signed between the
Landlord and the Tenant (hereinafter: "DSPC Rental Contract") according to which
the Tenant rented from the Landlord an area of approximately 485 square meters,
gross, that comprise the first floor of the building as defined in the contract
including the proportionate common areas of the ground floor of the building
(hereinafter: "the First Floor");
Whereas: The Tenant is interested in renting the additional areas and the
Landlord is interested in renting to the Tenant the additional areas commencing
on the actual vacation date by Fuchtonger, all according to the terms and
conditions as set forth in this contract;
Therefore it was agreed to and declared between the parties as follows:
1. Preamble
The Preamble to this contract and its attachments represent an integral part of
the contract.
2. Vacation of the Additional Areas by Fuchtonger
2.1 Fuchtonger will vacate the additional areas up until January 15, 1998,
(hereinafter: Vacation Date").
2.2 Commencing on January 15, 1998, the rental of the additional areas will
begin.
2.3 Fuchtonger agrees to vacate the rental property on the vacation date and
to fulfill all of its obligations as stipulated in the Fuchtonger rental
contract, including the return of the additional areas clear of any belonging or
person, as received, orderly and in good and reasonable condition as it was
received at the beginning of the rental period.
2.4 On the vacation date, representatives of the Landlord and the Tenant
will conduct a survey of the additional areas and a transfer protocol
(hereinafter: "Protocol") wherein required repair items will be itemized, should
any be so required (hereinafter: "Repairs"). It is stated that repairs are
defined as repair of normal wear and tear that resulted during the rental
period of the additional areas to Fuchtonger and they do not include other
renovation and/or internal modifications of any sort that were performed in the
additional
<PAGE>
areas, as at the signing of this contract. The repairs will be performed within
30 days from the date of the preparation of this protocol by the Landlord.
3. Application of the Terms and Conditions of the DSPC Rental Contract to
the Additional Areas
The DSPC rental contract, in its entirety, without exception, will apply also to
the additional areas and the Tenant agrees to fulfill all of the terms and
conditions stipulated in the DSPC rental contract and that they shall also apply
to the additional areas, including as stated in sub-Paragraphs 6.2 and 8.2.5 of
the DSPC rental contract, except for changes specified in this contract.
4. Rental Payments
4.1 The Tenant will pay to the Landlord rental payments for the additional
areas, for the entire duration of the rental contract the amount of NIS 37,983
per month.
The rental payment will be linked to the Consumer Price Index according to the
DSPC rental Contract whereby the base index is the index published on December
15, 1997 for the month of November, 1997.
5. Payments
5.1 Fuchtonger agrees to make all payments and to repay all expenses,
without exception, for which it is obligated as stipulated in the Fuchtonger
rental contract up to and until the vacation date.
5.2 In addition to the statements in sub-Paragraph 8.2.4 of the rental
contract, the Tenant will participate, from the vacation date, in the general
building maintenance (hereinafter: "General Expenses"), at the rates specified
below:
5.2.1 As they relate to the second floor--30% of the general expenses.
5.2.2 As they relate to the penthouse--8% of the general expenses.
6. Alternate Tenant and Sub-Let of the Penthouse
6.1 The Tenant may sub-let the penthouse provided that prior written
approval is granted by the Landlord. The Landlord shall not withhold the
granting of said approvals, unless substantiated by reasonable cause.
6.2 In any event, the Tenant shall be responsible for the performance of the
terms and conditions set forth in this contract also as they relate to the
penthouse in the event that the penthouse be sub-let.
6.3 With prior written approval by the Landlord, the Tenant has the right,
at the end of six months rental, to present an alternate tenant who will replace
it provided that the alternate tenant will assume all of the obligations of the
Tenant according to this contract and that he will sign a rental contract with
the Landlord. Should a rental contract be
<PAGE>
signed, as stated, between the Landlord and an alternate tenant, the Tenant will
not be obligated to the Landlord for the fulfillment of this contract for the
entire rental period to be agreed upon between the Landlord and the alternate
tenant.
7. Return of Securities
The Landlord agrees that immediately, upon proof without a doubt that
Fuchtonger fulfilled all of its obligations, as stipulated in the Fuchtonger
rental contract, including rental payments until the vacation date, the Landlord
will return all of the securities provided to it by the Tenant according to the
Fuchtonger rental contract.
8. Vacation
In addition to the fixed compensation specified in Paragraph 18.2 in the
DSPC rental contract, in the event that DSPC will not fulfill its obligations as
specified in Paragraph 18.1 of the DSPC rental contract, an amount of $520 US ,
in NIS, will be added for each day.
9. Securities
9.1 In addition to the instructions, according to Paragraph 19 of the DSPC
rental contract, and to insure that the Tenant will fulfill all of its
obligations as they relate to the second floor (including vacation of the second
floor) and to reduce the burden of collecting the sums due to the Landlord from
the Tenant according to this contract, including the amounts described in
Paragraph 4, above, the Tenant will furnish to the Landlord upon signing of this
contract:
9.1.1 A bank guarantee in the amount of NIS 80,000, linked to the Consumer
Price Index, as detailed in the DSPC rental contract (base index for the month
of October, 1997), for the entire duration of the rental period including the
extended rental period, should it be exercised, valid for 30 days after
expiration of the rental period and/or the extended rental period, should it be
exercised.
9.1.2 Three (3) promissory notes in the amount of NIS 90,000 each, linked to
the Consumer Price Index as detailed in the DSPC rental contract (base index for
the month of October, 1997), signed by the Tenant as the issuer of the
promissory notes, that will be deposited with Yoav Schnitzer, Attorney, in
escrow (hereinafter: "Trust administrator") and will be transferred to the
Landlord by the trust administrator upon demand of the Landlord, only after the
trust administrator notifies the Tenant of his intent 15 days in advance,
wherein the reason for transfer of the promissory notes to the Landlord is
stated.
9.2 The remainder of the instructions specified in Paragraph 19 of the DSPC
rental
<PAGE>
contract remain in effect, and without change, shall apply to the securities
above mentioned.
Agreed to between the parties as signed
/s/ Joseph M. Perl, Ph.D /s/Yehudit Pomerantz /s/Ofer Pomerantz
- ------------------------ -------------------- -----------------
DSPC Israel Ltd. Yehudit Pomerantz Ofer Pomerantz
/s/ Irit Pomerantz /s/ Asher Fuchtonger Ltd.
- ------------------ -------------------------
Irit Pomerantz Asher Fuchtonger Ltd.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
DSP Telecom, Inc. California
CTP Systems, Inc. California
DSP Telecommunications, Ltd. Israel
DSPC Israel Ltd. Israel
CTP Systems Ltd. Israel
DSP Communications (Japan), Inc. Japan
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-19883) pertaining to the 1996 Stock Option Plan, the Registration
Statement (Form S-8 No. 333-11841) pertaining to the 1996 Nonstatutory Employee
and Consultant Option Plan and the Registration Statement (Form S-8 No. 033-
95886) pertaining to the 1995 Employee Stock Purchase Plan, the 1995 Employee
and Consultant Stock Plan and the 1995 Director Stock Option Plan of DSP
Communications, Inc., of our report dated January 13, 1998, with respect to the
consolidated financial statements of DSP Communications, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1997.
Our audits also included the financial statement schedule of DSP Communications,
Inc. listed in item 14(a)2 of this Annual Report. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP COMMUNICATIONS,
INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 82,322
<SECURITIES> 34,319
<RECEIVABLES> 11,200
<ALLOWANCES> 0
<INVENTORY> 4,424
<CURRENT-ASSETS> 135,048
<PP&E> 7,870
<DEPRECIATION> 3,719
<TOTAL-ASSETS> 142,896
<CURRENT-LIABILITIES> 26,993
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 115,863
<TOTAL-LIABILITY-AND-EQUITY> 142,896
<SALES> 76,817
<TOTAL-REVENUES> 81,501
<CGS> 39,885
<TOTAL-COSTS> 44,804
<OTHER-EXPENSES> 6,562
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,033
<INCOME-TAX> 2,634
<INCOME-CONTINUING> 21,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,399
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.48
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP COMMUNICATIONS,
INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 77,799
<SECURITIES> 59,034
<RECEIVABLES> 7,054
<ALLOWANCES> 132
<INVENTORY> 1,681
<CURRENT-ASSETS> 147,260
<PP&E> 5,899
<DEPRECIATION> 2,334
<TOTAL-ASSETS> 155,354
<CURRENT-LIABILITIES> 18,030
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 136,800
<TOTAL-LIABILITY-AND-EQUITY> 155,354
<SALES> 85,128
<TOTAL-REVENUES> 88,899
<CGS> 44,153
<TOTAL-COSTS> 47,703
<OTHER-EXPENSES> 5,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,858
<INCOME-TAX> 3,108
<INCOME-CONTINUING> 21,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,750
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.48
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP COMMUNICATIONS,
INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 10,292
<SECURITIES> 17,696
<RECEIVABLES> 8,838
<ALLOWANCES> 139
<INVENTORY> 272
<CURRENT-ASSETS> 38,274
<PP&E> 3,226
<DEPRECIATION> 1,403
<TOTAL-ASSETS> 44,119
<CURRENT-LIABILITIES> 9,081
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 34,850
<TOTAL-LIABILITY-AND-EQUITY> 44,119
<SALES> 37,127
<TOTAL-REVENUES> 40,867
<CGS> 21,483
<TOTAL-COSTS> 23,846
<OTHER-EXPENSES> 2,524
<LOSS-PROVISION> 89
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,243)
<INCOME-TAX> 1,115
<INCOME-CONTINUING> (2,358)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,358)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
