<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JUNE 30, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-25622
DSP COMMUNICATIONS, INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0389180
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20300 STEVENS CREEK BOULEVARD, CUPERTINO, CALIFORNIA 95014
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 777-2700
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
As of August 4, 1998, there were 40,446,768 shares of Common Stock ($.001 par
value) outstanding.
<PAGE>
INDEX
DSP COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-June 30, 1998
and December 31, 1997.................................................3
Condensed consolidated statements of operations-quarter
ended June 30, 1998 and 1997, and six months
ended June 30, 1998 and 1997..........................................4
Condensed consolidated statements of cash flows-six months
ended June 30, 1998 and 1997..........................................5
Notes to condensed consolidated financial statements-
June 30, 1998.........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................8
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings..................................................19
Item 2. Changes in Securities..............................................19
Item 3. Defaults upon Senior Securities....................................19
Item 4. Submission of Matters to a Vote of Security Holders................20
.
Item 5. Other Information..................................................21
Item 6. Exhibits and Reports on Form 8-K...................................21
SIGNATURES.................................................................22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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(Unaudited) (Note 1)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 78,357 $ 82,322
Short term investments 40,047 34,319
Trade accounts receivable 16,055 11,200
Other current assets 5,052 7,207
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Total current assets 139,511 135,048
Property and equipment, net 4,800 4,151
Other assets 3,281 3,697
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$ 147,592 $ 142,896
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---------- ---------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 8,110 $ 9,372
Accrued liabilities 17,367 17,093
Deferred income 343 528
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Total current liabilities 25,820 26,993
Stockholders' Equity
Common stock 40 40
Additional paid-in capital 75,921 84,890
Retained earnings 45,811 30,973
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Total stockholders' equity 121,772 115,903
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$ 147,592 $ 142,896
---------- ---------
---------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Note 1: The balance sheet at December 31, 1997 has been derived from
audited financial statements at that date, but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
3
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DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars and shares in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Product $ 29,566 $ 8,094 $ 51,482 $ 26,779
Technology development 906 594 2,076 2,211
------- -------- -------- --------
Total revenues 30,472 8,688 53,558 28,990
Cost of Revenues
Product 16,202 3,974 26,836 14,020
Technology development 517 1,204 1,521 2,210
------- -------- -------- --------
Total cost of revenues 16,719 5,178 28,357 16,230
------- -------- -------- --------
Gross profit 13,753 3,510 25,201 12,760
Operating Expenses
Research and development 2,943 1,580 5,116 3,023
Sales and marketing 979 1,138 1,938 2,067
General and administrative 2,307 1,740 4,526 3,492
------- -------- -------- --------
6,229 4,458 11,580 8,582
------- -------- -------- --------
Operating income (loss) 7,524 (948) 13,621 4,178
Other income 1,568 1,769 2,957 3,644
------- -------- -------- --------
Income before provision for
income taxes 9,092 821 16,578 7,822
Provision for income taxes ( 954) ( 102) ( 1,740) ( 977)
------- -------- -------- --------
Net income $ 8,138 $ 719 $ 14,838 $ 6,845
------- -------- -------- --------
------- -------- -------- --------
Earnings per share:
Basic $ 0.20 $ 0.02 $ 0.37 $ 0.16
------- -------- -------- --------
------- -------- -------- --------
Diluted $ 0.19 $ 0.02 $ 0.35 $ 0.15
------- -------- -------- --------
------- -------- -------- --------
Shares used in computing earnings per share:
Basic 40,351 42,203 40,281 43,460
------- -------- -------- --------
------- -------- -------- --------
Diluted 42,629 43,736 42,744 45,263
------- -------- -------- --------
------- -------- -------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997
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<S> <C> <C>
Operating Activities:
Net income for the period $ 14,838 $ 6,845
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,273 1,078
Loss on disposal of equipment -- 3
Compensation expense related to shares issued in a subsidiary 150 90
Compensation expense related to stock options 42 --
Changes in operating assets and liabilities:
Trade accounts receivable (4,855) 702
Other current assets 2,155 (1,802)
Accounts payable (1,301) 664
Accrued liabilities 2,243 (1,282)
Deferred income (185) (2,317)
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Net cash provided by operating activities 14,360 3,981
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Investing Activities:
Cash purchases of equipment (1,467) (1,326)
Proceeds from sale of equipment -- 8
Purchases of short term investments (25,563) (22,841)
Sales and maturities of short term investments 19,792 46,840
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Net cash provided by (used in) investing activities (7,238) 22,681
-------- ----------
Financing Activities:
Repurchase of common stock (19,982) (48,219)
Issuance of common stock for cash 8,895 1,849
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Net cash used in financing activities (11,087) (46,370)
-------- ----------
Decrease in cash and cash equivalents (3,965) (19,708)
Cash and cash equivalents at beginning of period 82,322 77,799
-------- ----------
Cash and cash equivalents at end of period $ 78,357 $ 58,091
-------- ----------
-------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
DSP COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DSP
Communications, Inc. ("DSPC" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim period are
not necessarily indicative of the results that may be expected for the full
year. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the three and six months ended June 30 as follows (in thousands
except per share data):
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings per share -
net income $ 8,138 $ 719 $ 14,838 $ 6,845
-------- -------- ------- -------
-------- -------- ------- -------
Denominator for basic earnings per share -
weighted average shares 40,351 42,203 40,281 43,460
Effect of dilutive securities - employee stock options 2,278 1,533 2,463 1,803
-------- -------- ------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares 42,629 43,736 42,744 45,263
-------- -------- ------- -------
-------- -------- ------- -------
Earnings per share:
Basic $ 0.20 $ 0.02 $ 0.37 $ 0.16
-------- -------- ------- -------
-------- -------- ------- -------
Diluted $ 0.19 $ 0.02 $ 0.35 $ 0.15
-------- -------- ------- -------
-------- -------- ------- -------
Potentially dilutive securities excluded from
computations as the effect would be antidilutive 551 2,659 491 1,582
-------- -------- ------- -------
-------- -------- ------- -------
</TABLE>
3. NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income"("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of SFAS 130 had no 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 prior to adoption were
reported separately in stockholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130.
6
<PAGE>
For the three months ended June 30, 1998 and 1997, total comprehensive income
was $8,117,000 and $786,000, respectively. During the first six months of
1998 and 1997, total comprehensive income amounted to $14,795,000 and
$6,800,000, respectively.
As of January 1, 1998, the Company adopted 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 in 1999. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS 131 has no impact on the
Company's consolidated results of operations, financial position or cash
flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity ("SFAS
133"), which is required to be adopted in years beginning after June 15,
1999. SFAS 133 permits early adoption as of the beginning of any fiscal
quarter; however, the Company has yet to determine its date of adoption.
SFAS 133 will require the Company to recognize all derivatives on the balance
sheet at fair value. The Company has not yet determined what the effect of
SFAS 133 will be on the earnings and financial position of the Company.
4. STOCKHOLDERS' EQUITY
In 1997, the Company implemented a repurchase program pursuant to which the
Company, from time to time and at management's discretion, may purchase up to
an aggregate of eight million shares of the Company's common stock, in
open-market and privately negotiated transactions. During 1997, the Company
repurchased 5,869,800 shares of its common stock for an aggregate purchase
price of $52,628,000, and in the first six months of 1998, the Company
repurchased 1,272,800 shares of its common stock for an aggregate purchase
price of $17,863,000. During July 1998, the Company repurchased 100,500
additional shares of its common stock for $1,349,000.
5. LITIGATION
On May 12, 1997, a class action lawsuit was filed against the Company and
several of its officers and directors in the Superior Court of California,
Santa Clara County. 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, 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. The complaint makes
the same allegations as the amended complaint filed in state court, but
charges violations of federal securities laws.
The parties have reached an agreement in principle to settle the lawsuits in
their entirety for $3,000,000, which will be funded by insurance proceeds.
The agreement is subject to negotiation and execution of a Stipulation of
Settlement and approval by the court. The Company continues to deny all
allegations in the lawsuit.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the consolidated
condensed interim financial statements and the notes thereto in Part I, Item 1
of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The matters addressed
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations, with the exception of the historical information presented,
contain forward-looking statements involving risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under the heading "Certain Factors That May Affect Future Results"
following this Management's Discussion and Analysis section, and elsewhere in
this report.
Results of Operations
The following table sets forth the percentage relationships of certain items
from the Company's consolidated statements of operations as a percentage of
total revenues :
<TABLE>
<CAPTION>
THREE THREE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Product 97.0 % 93.2 % 96.1 % 92.4 %
Technology development 3.0 6.8 3.9 7.6
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of Revenues
Product 53.2 45.7 50.1 48.4
Technology development 1.7 13.9 2.8 7.6
------ ------ ------ ------
Total cost of revenues 54.9 59.6 52.9 56.0
------ ------ ------ ------
Gross profit 45.1 40.4 47.1 44.0
Operating Expenses
Research and development 9.7 18.2 9.6 10.4
Sales and marketing 3.2 13.1 3.6 7.1
General and administrative 7.5 20.0 8.5 12.0
------ ------ ------ ------
20.4 51.3 21.7 29.5
------ ------ ------ ------
Operating income (loss) 24.7 (10.9) 25.4 14.5
Other income 5.1 20.4 5.6 12.5
------ ------ ------ ------
Income before provision for
income taxes 29.8 9.5 31.0 27.0
Provision for income taxes (3.1) (1.2) (3.3) (3.4)
------ ------ ------ ------
Net income 26.7 % 8.3 % 27.7 % 23.6 %
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
8
<PAGE>
REVENUES
PRODUCT: Product revenues increased to $29.6 million in the second quarter
of 1998 from $8.1 million in the second quarter of 1997 and to $51.5 million
in the six months ended June 30, 1998 from $26.8 million in the first six
months of 1997. Product revenues have been primarily from sales of baseband
chip sets for digital cellular telephones. The increase in product revenues
for the three months and six months ended June 30, 1998 as compared to the
same periods in 1997, was a result of stronger demand for the Company's PDC
chip sets in Japan, volume sales of its TDMA chip sets and the commencement
of sales of its CDMA chip sets. Revenues from sales to distributors are
recognized at the time the products are shipped by the distributor to the
original equipment manufacturer ("OEM") customer. Other product revenues are
recorded when products are shipped to customers.
TECHNOLOGY DEVELOPMENT AND OTHER: Technology development revenues increased
to $906,000 in the second quarter of 1998 from $594,000 in the second quarter
of 1997 and decreased to $2.1 million in the six months ended June 30, 1998
from $2.2 million in the first six months of 1997. 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. The Company's subsidiary, CTP Systems,
Ltd. ("CTP" Systems), has commenced certain reference design projects which
have begun to contribute to the technology development revenues.
GROSS PROFIT
Gross profit in the second quarter of 1998 was $13.8 million (45.1% of
revenues) compared to $3.5 million (40.4% of revenues) in the second quarter
of 1997. Gross profit in the first half of 1998 was $25.2 million (47.1% of
revenues), compared to $12.8 million (44.0% of revenues) in the first half of
1997.
The gross margins on product revenues are affected by changes in the customer
and product mix from quarter to quarter and by price pressures (or
alleviation thereof) which are impacted by, among other factors, fluctuations
in the dollar/yen rate of exchange. For the three months and six months
ended June 30, 1998 as compared to the same periods in 1997, The effect of
the continued decrease in sales prices of the Company's chip sets has
partially been offset by cost reductions received from the Company's
suppliers due to increased order volumes and by cost reductions resulting
from the weakening of the yen which reduced in dollar terms the cost of
components quoted in, or linked to, yen based prices (See also discussion in
Foreign Currency Transactions section below).
Sales of wireless private branch exchange ("PBX") systems of CTP Systems,
resulted in relatively low margins. The Company expects that it will
continue to experience relatively low margins on sales of these wireless PBX
systems until higher volume sales can be achieved. CTP Systems is currently
engaged in a cost reduction program, the effects of which are anticipated to
be felt towards the end of 1998.
The Company anticipates that the average sales prices of chip sets may
continue to decrease as a result of volume discounts and price pressures,
which would increase the cost of products sold as a percentage of product
revenues; however, any such price decreases may be offset to a certain extent
by changes in the Company's terms of trade, and further cost reductions from
suppliers if the Company's order volumes increase.
The costs incurred on technology development vary from quarter to quarter
depending on the similarity or diversity of the products and technologies
developed, and as contractual milestones are achieved.
The Company entered into dollar/yen option transactions in order to hedge
partially against the increase in value of the US dollar against the yen and
to somewhat decrease exposure to currency-driven sales price pressure.
9
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $2.9 million in the second
quarter of 1998 from $1.6 million in the second quarter of 1997 and to $5.1
million in the first half of 1998 from $3.0 million in the first half of
1997. The increases were a result of growth in research and development
activities during those periods and growth in the number of engineering
personnel. As a percentage of total revenues, research and development
expenses decreased to 9.7% in the second quarter of 1998, from 18.2% in the
second quarter of 1997, mainly as a result of the increase in revenues, and
to 9.6% in the first half of 1998 from 10.4% in the first half of 1997. The
Company expects that its research and development expenses will increase in
the future, in absolute dollars.
The Company records software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." To date, the
Company has expensed all of its software costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses decreased marginally to $1.0 million (3.2% of
revenues) in the second quarter of 1998 from $1.1 million (13.1% of revenues)
in the second quarter of 1997 and to $1.9 million (3.6% of revenues) in the
first half of 1998 from $2.1 million (7.1% of revenues) in the first half of
1997. These expenses are mainly comprised of the sales and marketing staff at
the Company's headquarters in Cupertino, California, its offices in Israel
and Tokyo, participation at trade exhibitions, and other promotional and
marketing research activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2.3 million (7.5% of revenues) in
the second quarter of 1998 compared to $1.7 million (20.0% of revenues) in
the second quarter of 1997 and $4.5 million (8.5% of revenues) in the first
half of 1998 compared to $3.5 million (12.0% of revenues) in the first half
of 1997.
General and administrative expenses increased, in absolute dollars, as a
result of increased staffing levels at the facilities of DSPC Israel Ltd.
("DSPCI"), an Israeli subsidiary of the Company, increased facility expenses
resulting from additional space that was leased by DSPCI, and increased
administration expenses and fees.
OTHER INCOME
Other income includes net interest income, investment income, and foreign
currency remeasurement gains and losses and other expenses. Other income
decreased to $1.6 million in the second quarter of 1998 from $1.8 million in
the second quarter of 1997 and to $3.0 million in the first half of 1998
from$3.6 million in the first half of 1997. Other income fluctuates as a
result of changes in the level of the Company's cash and investment balances,
which was primarily caused by the repurchase of shares (see below - Liquidity
and Capital Resources), and fluctuations in the available interest rates
applicable to the Company's deposits and investments.
Other income in the first six months of 1998 and 1997 was generated primarily
from interest and realized gains on the Company's cash and investment
balances, which were at an average level of approximately $118 million and
$117 million, during the first six months of 1998 and 1997, respectively.
10
<PAGE>
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 10.5% for the first half of 1998
compared to12.5% for the first half of 1997. The effective tax rate is
substantially below the federal statutory rate primarily due to the tax
benefits achieved by the status of certain of the Company's Israeli
subsidiaries as "Approved Enterprises" granted by the State of Israel, which
provides for a tax holiday or a reduced corporate tax rate of 10% on the
Company's undistributed Israeli earnings. The decrease in the Company's
effective tax rate is mainly due to the increase in the Company's revenues,
which is allocated to an investment program within the "Approved Enterprises"
that benefits from a tax holiday. Over time, the Company's tax rate is
expected to increase as the tax benefits awarded with Approved Enterprise
status become eliminated, 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. In addition, losses generated by one Israeli entity
will not offset income generated by another Israeli entity. Therefore,
losses incurred by one Israeli entity or a combined loss of the U.S. entities
will increase the Company's effective tax rate.
FOREIGN CURRENCY TRANSACTIONS
The United States dollar is the Company's functional currency as it is the
primary currency in the economic environment in which the Company operates.
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.
While virtually all of the Company's sales and a substantial portion of its
costs are denominated in United States dollars, a limited portion of sales
prices for certain products sold by the Company, and an increasing portion of
the prices of components purchased by the Company for the manufacture of its
products, are quoted in, or linked to, yen based prices. Therefore,
fluctuations in the exchange rate of the yen in relation to the United States
dollar could have a material adverse effect on the Company's results of
operations and financial condition.
IMPACT OF INFLATION
While the United States dollar is the Company's functional currency, 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, and could have a material adverse affect on the Company's results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $14.4 million in the
first six months of 1998 compared to $4.0 million in the first six months of
1997. Net cash provided from operations in the first six months of 1998 was
comprised primarily of net income and an increase in other current
liabilities, less an increase in accounts receivable and other current
assets. Trade accounts receivable were $16.1 million at June 30, 1998 due to
the timing of shipments and payments.
The Company's investing and financing activities for the first six months of
1998, other than purchases of and proceeds from, short-term investments, have
consisted of expenditures for fixed assets which totaled $1.5
11
<PAGE>
million, and the repurchase of common stock for cash which totaled $20.0
million, in the first six months of 1998.
In the first six months of 1998, the Company repurchased 1,272,800 shares of
its common stock in its repurchase program, bringing the total number of
shares repurchased through June 30, 1998, in this repurchase program, to
7,142,600 shares with a total aggregate purchase price of approximately $70.5
million. The Company may from time to time repurchase additional shares of
its Common Stock under its share repurchase program.
In obtaining approval from Israeli tax authorities of the Company's
reorganization, which was completed immediately before the closing of the
Company's initial public offering ("IPO") in March 1995, the Company agreed
to invest in activities in Israel an amount of not less than $9.0 million out
of the proceeds of the IPO within three years after the IPO. In the first
quarter of 1998, the Company received approval from the Israeli tax
authorities for a two year extension of this requirement. Through June 30,
1998, $6.5 million has been transferred to Israel.
As of June 30, 1998, the Company had $118.4 million of cash, cash equivalents
and short-term investments The Company believes that its existing cash, cash
equivalents and short-term investment balances, will be sufficient to meet
its cash requirements for at least the next twelve months.
While operating activities may provide cash in certain periods, to the extent
the Company may experience growth in the future, the Company anticipates that
its operating and investing activities may use cash and consequently, such
growth may require the Company to obtain additional sources of financing.
The Company may also from time to time consider the acquisition of
complimentary businesses, projects or technologies which may require
additional financing or require the use of a significant portion of its
existing cash, 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 for internal use were written
using two digits rather than four to define the applicable year. As a
result, those 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 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. The Company has determined that it
has no exposure to contingencies related to the year 2000 issue for the
products that it has sold. 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 Companies
operations or business 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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<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Form 10-Q contains forward looking statements concerning the
Company's future products, expenses, revenue, liquidity and cash needs as
well as the Company's plans and strategies. These forward looking statements
are based on current expectations, and the Company assumes no obligation to
update this information. Numerous factors could cause actual results to
differ significantly from the results described in these forward looking
statements, including, among others, the following risk factors.
RELIANCE ON A LIMITED NUMBER OF PRODUCTS; NEED FOR NEW PRODUCT
INTRODUCTIONS. Until the second half of 1997, the Company relied solely 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 use outside of Japan, and in the first half of 1998
commenced volume shipments of its CDMA chip set. The Company believes that
its success will depend in part both on continued sales of its PDC, TDMA and
CDMA chip sets and on its ability to successfully develop 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 upon, 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, 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 new PDC
product generations, and further generations of TDMA and CDMA products, that
may 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 to successfully develop and market their products,
the Company's business and results of operations could be materially and
adversely affected.
MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE. The markets
for the Company's products are extremely competitive, and the Company expects
that competition will increase. Many of the Company's competitors have
entrenched market positions, established patents, copyrights, tradenames,
trademarks and intellectual property rights and substantial technological
capabilities. The Company's current competitors in the digital cellular
market include other suppliers of DSP-based chip sets, such as existing
cellular telephone manufacturers that develop chip set solutions internally
and smaller companies offering design solutions. 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, intellectual property, or marketing, sales, distribution and
customer service and technical support capabilities to compete successfully.
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 first quarter of 1998, the Company
commenced volume production of the CDMA chip set and in the second quarter
commenced volume shipments of the CDMA chip set. Although the Company
extensively tested the CDMA
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<PAGE>
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, or successive generations of CDMA
based products, 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.
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 and South
American markets. 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, or successive generations of TDMA-based products,
will be successful in the marketplace. Sales of the Company's IS-136
TDMA-based products will also be dependent on the success of the Company's
OEM customers in completing their development of IS-136 TDMA-based handsets
in a timely manner and in successfully competing in the IS-136 TDMA handset
market. In addition, the Company uses independent foundries to manufacture
the product, and there can be no assurance that this chip set will continue
to be able to be manufactured in a timely manner, in commercial quantities
and at reasonable cost. If the Company is unable, for technological or other
reasons, to manufacture in a timely manner the IS-136 TDMA-based chip set and
to market the product successfully, or if the 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.
DEPENDENCE ON JAPANESE MARKET AND ECONOMY; FLUCTUATION OF EXCHANGE RATE.
A substantial portion of the Company's revenues are derived from sales of its
products in Japan and may be materially affected by the current difficulties
in the Japanese economy. A continued weakness in the Japanese economy or a
further decline of economic conditions in Japan 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. While virtually all of the Company's sales to its Japanese customers
are denominated in United States dollars, a limited portion of sales prices
for certain products sold by the Company are quoted in dollars linked to yen
based prices. Therefore, fluctuations in the exchange rate for the United
States dollar could materially affect the price of the Company's products in
Japan and require the Company to reduce prices of its products. In addition,
an increasing portion of the components purchased by the Company for the
manufacture of its products are quoted in, or linked to, yen based prices
and, therefore, strengthening of the
14
<PAGE>
exchange rate of the yen in relation to the United States dollar could
materially increase the cost of these materials and thereby have a material
adverse effect on the Company's results of operations and financial
conditions. 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.
RELIANCE ON A SMALL NUMBER OF OEMS AND ON TWO DISTRIBUTORS; COMPETITION
IN THE OEM MARKET. Substantially all of the Company's sales of baseband chip
sets for digital cellular telephones are to Tomen Electronics Corp. (TEC),
the Company's distributor in Japan, and to Tomen Electronics America Inc.
(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. During the first half of 1998, seven OEM customers accounted for
substantially all of the sales of the Company's PDC baseband chip sets, while
two OEM customers accounted for all sales of the Company's TDMA chip sets and
two OEM customers accounted for all sales of the Company's CDMA 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.
EXPECTED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND POTENTIAL
QUARTERLY LOSSES. The Company's quarterly operating results depend on the
volume and timing of product orders received and delivered during the quarter
and the timing of new product introductions by the Company and its customers.
The Company anticipates that for the foreseeable future new product
introductions may cause significant fluctuations in quarterly operating
results. 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, the Far East and North and South America; adoption of
new technologies and standards; relative prices of the Company's products;
15
<PAGE>
competition of the Company and its OEMs; 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.
SHORT VISIBILITY; LOW BACKLOG LEVELS. 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 product demand. Although the Company's visibility increased
somewhat during the second half of 1997 and during the first half of 1998,
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 estimates rather than on firm customer
orders, the Company's quarterly operating results could be materially
adversely affected if orders and revenues do not meet expectations.
RELIANCE ON 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 digital ASICs for 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.
RISKS ASSOCIATED WITH CTP SYSTEMS. In October 1995, the Company
acquired 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 to date have been 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 are capable of producing commercial
quantities of its PBX equipment. No assurance can be given, however, that
manufacturing or control problems will not arise as CTP Systems increases
production of its product, or as additional facilities are required in the
future. CTP Systems is subject to various risks associated with the
manufacturing process, including errors in the manufacturing process,
shortages of required components, manufacturing equipment failures and
disruptions of operations at the manufacturing facility. Prolonged inability
of CTP Systems to deliver products in a timely manner could
16
<PAGE>
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.
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 Telecommunications Ltd., 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."
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 June 30, 1998, 168 of the
Company's 189 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 the Company's functional currency is the
United States dollar, 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
17
<PAGE>
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. The Company's
failure to manage growth effectively and efficiently 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, 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 and
regional economies in which the Company does business, fluctuations in levels
of consumer spending for cellular telephones in Japan and North and South
America, 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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's reports on Form 10-K for the
fiscal year ended December 31, 1997 and on Form 10-Q for the quarterly
periods ended June 30, 1997, September 30, 1997 and March 31, 1998, 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 costs
and other equitable 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 parties have reached an agreement in principle to settle the
lawsuits in their entirety for $3,000,000, which will be funded by insurance
proceeds. The agreement is subject to negotiation and execution of a
Stipulation of Settlement and approval by the court. The Company continues
to deny all allegations in the lawsuit.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 12, 1998.
At the annual meeting, the following matters were voted upon and approved by
the stockholders:
1. The election of three (3) Class III directors to serve for a three-year
term until the 2001 Annual Meeting of Stockholders. The results of the
voting were as follows:
a. Neill H. Brownstein
Number of shares voted FOR 35,737,471
Number of shares WITHHOLDING AUTHORITY 697,127
b. Nathan Hod
Number of shares voted FOR 35,738,773
Number of shares WITHHOLDING AUTHORITY 695,825
c. Shigeru Iwamoto
Number of shares voted FOR 35,753,293
Number of shares WITHHOLDING AUTHORITY 681,305
2. Proposal to amend the Company's 1996 Stock Option Plan to increase the
number of shares of Common Stock authorized for issuance thereunder by
2,000,000 shares, from 3,000,000 to 5,000,000 shares. The results of the
voting were as follows:
Number of shares voted FOR 14,306,008
Number of shares voted AGAINST 11,034,453
Number of shares ABSTAINING 52,210
Number of Broker Non-Votes 11,041,927
3. Ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31, 1998. The
results of the voting were as follows:
Number of shares voted FOR 36,338,628
Number of shares voted AGAINST 56,455
Number of shares ABSTAINING 39,515
Number of Broker Non-Votes -0-
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<PAGE>
ITEM 5. OTHER INFORMATION
In 1997, the Company implemented a share repurchase program pursuant to
which the Company, from time to time and at management's discretion, was
authorized to purchase up to an aggregate of eight million shares of the
Company's Common Stock. In the first six months of 1998, the Company
repurchased 1,272,800 shares for approximately $17.9 million, bringing the
total number of shares repurchased in this repurchase program to 7,142,600
shares, with an aggregate purchase price of approximately $70.5 million.
During July 1998, the Company repurchased 100,500 additional shares of its
common stock for $1,349,000. The Company may, from time to time, repurchase
additional shares of its Common Stock under the repurchase program.
On July 14, 1998, Joseph Perl, formerly the Company's Chief Technical
Officer, was appointed as President and Chief Executive Officer of the
Company, replacing Nathan Hod in such capacities. Dr. Perl was also
appointed to serve on the Board of Directors. Mr. Hod will remain on the
Board of Directors and will continue to serve as Chairman of the Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.4 Resolution adopted by the Board of Directors at a meeting of the
Board held on July 14, 1998, amending the Bylaws of the Company.
27.1 Financial Data Schedule - Six Months Ended June 30, 1998
27.2 Restated Financial Data Schedule - Six months Ended June 30, 1997
</TABLE>
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 1998
DSP COMMUNICATIONS, INC.
BY: /S/GERALD DOGON
- -----------------------------------------------------------------------
Gerald Dogon, Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
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<PAGE>
EXHIBIT 3.4
RESOLUTION ADOPTED BY THE BOARD OF DIRECTORS AT A MEETING OF THE BOARD HELD ON
JULY 14, 1998, AMENDING THE BYLAWS OF THE COMPANY
BE IT RESOLVED: That the Board of Directors hereby amends
Section 3.2 of this Corporation's 1994 Bylaws, to read in its
entirety, as follows:
"3.2. NUMBER AND TERM OF OFFICE. The authorized
number of Directors shall be not less than six (6) nor more
than nine (9). The exact number of Directors shall be eight
(8) until changed within the limits specified above, by a
Bylaw amending this Section 3.2, duly adopted by the Board
of Directors or by the stockholders. The indefinite number
of Directors may be changed, or a definite number may be
fixed without provision for an indefinite number, by a duly
adopted amendment to the Certificate of Incorporation, or by
an amendment to this Bylaw adopted by the vote or written
consent of holders of a majority of the outstanding shares
entitled to vote or by resolution of a majority of the Board
of Directors.
No reduction of the authorized number of Directors
shall have the effect of removing any Director before that
Director's term of office expires. If, for any cause, the
Directors shall not have been elected at an annual meeting,
they may be elected as soon thereafter as convenient at a
special meeting of the stockholders called for that purpose
in the manner provided by these Bylaws."
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP COMMUNICATIONS,
INC. FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 78,357
<SECURITIES> 40,047
<RECEIVABLES> 16,155
<ALLOWANCES> 100
<INVENTORY> 1,196
<CURRENT-ASSETS> 139,511
<PP&E> 9,378
<DEPRECIATION> 4,578
<TOTAL-ASSETS> 147,592
<CURRENT-LIABILITIES> 25,820
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 121,732
<TOTAL-LIABILITY-AND-EQUITY> 147,592
<SALES> 51,842
<TOTAL-REVENUES> 53,558
<CGS> 26,836
<TOTAL-COSTS> 28,357
<OTHER-EXPENSES> 5,116
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,578
<INCOME-TAX> 1,740
<INCOME-CONTINUING> 14,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,838
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.35
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP COMMUNICATIONS,
INC. FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 58,091
<SECURITIES> 34,990
<RECEIVABLES> 6,352
<ALLOWANCES> 132
<INVENTORY> 1,896
<CURRENT-ASSETS> 104,608
<PP&E> 7,110
<DEPRECIATION> 2,963
<TOTAL-ASSETS> 112,868
<CURRENT-LIABILITIES> 15,024
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 97,234
<TOTAL-LIABILITY-AND-EQUITY> 112,868
<SALES> 26,779
<TOTAL-REVENUES> 28,990
<CGS> 14,020
<TOTAL-COSTS> 16,230
<OTHER-EXPENSES> 3,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,822
<INCOME-TAX> 977
<INCOME-CONTINUING> 6,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,845
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
