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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
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
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As of May 10, 1999, there were 39,625,404 shares of Common Stock ($.001 par
value) outstanding.
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INDEX
DSP COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-March 31, 1999
and December 31, 1998........................................... 3
Condensed consolidated statements of operations-quarter
ended March 31, 1999 and 1998 .................................. 4
Condensed consolidated statements of cash flows-quarter
ended March 31, 1999 and 1998................................... 5
Notes to condensed consolidated financial statements-
March 31, 1999.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 8
PART II. OTHER INFORMATION
- -----------------------------
Item 1. Legal Proceedings................................................. 19
Item 2. Changes in Securities and Use of Proceeds......................... 19
Item 3. Defaults upon Senior Securities................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............... 19
Item 5. Other Information ................................................ 19
Item 6. Exhibits and Reports on Form 8-K.................................. 19
SIGNATURE................................................................. 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
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(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 59,540 $ 66,818
Short-term investments 36,714 27,071
Trade accounts receivable 18,942 29,351
Other current assets 5,968 5,717
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Total current assets 121,164 128,957
Property and equipment, net 5,912 5,323
Other assets 4,895 5,063
Goodwill 5,522 5,894
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$ 137,493 $ 145,237
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,339 $ 16,474
Accrued liabilities 15,651 17,110
Deferred income 224 285
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Total current liabilities 24,214 33,869
STOCKHOLDERS' EQUITY
Common stock 38 38
Additional paid-in capital 79,239 78,777
Notes from shareholders (5,099) (5,099)
Retained earnings 39,088 37,624
Accumulated other comprehensive income 13 28
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Total stockholders' equity 113,279 111,368
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$ 137,493 $ 145,237
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
Note 1: The balance sheet at December 31, 1998 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
Months Ended Months Ended
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Product $ 34,138 $ 21,916
Technology development 1,780 1,170
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Total revenues 35,918 23,086
COST OF REVENUES
Product 19,441 10,634
Technology development 885 1,004
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Total cost of revenues 20,326 11,638
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Gross profit 15,592 11,448
OPERATING EXPENSES
Research and development 3,617 2,173
Sales and marketing 1,546 959
General and administrative 2,731 2,219
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7,894 5,351
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Operating income 7,698 6,097
Interest and other income, net 1,204 1,389
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Income before provision for income taxes 8,902 7,486
Provision for income taxes (979) (786)
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Net income $ 7,923 $ 6,700
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Earnings Per Share:
Basic $ 0.21 $ 0.17
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Diluted $ 0.19 $ 0.16
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Shares used in computing earnings per share:
Basic 38,563 39,964
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Diluted 42,176 42,587
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</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>
Three Three
Months Ended Months Ended
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income for the period $ 7,923 $ 6,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,176 617
Compensation expense related to shares
issued in a subsidiary -- 150
Compensation expense related to stock options -- 42
Changes in operating assets and liabilities:
Trade accounts receivable 10,409 504
Other current assets (251) 2,926
Accounts payable (8,135) (6,551)
Accrued liabilities (1,459) 544
Deferred income (61) 616
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Net cash provided by operating activities 9,602 5,548
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INVESTING ACTIVITIES:
Cash purchases of equipment (1,225) (387)
Purchases of short term investments (17,658) (8,856)
Sales of short term investments 8,000 13,463
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Net cash provided by (used in) investing activities (10,883) 4,220
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FINANCING ACTIVITIES:
Repurchase of common stock (9,528) (13,870)
Issuance of common stock for cash 3,531 537
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Net cash used in financing activities (5,997) (13,333)
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Decrease in cash and cash equivalents (7,278) (3,565)
Cash and cash equivalents at beginning of period 66,818 82,322
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Cash and cash equivalents at end of period $ 59,540 $ 78,757
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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DSP COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DSP
Communications, Inc. ("DSPC" or the "Company) have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim period are
not necessarily indicative of the results that may be expected for the full
year. For further information, refer to the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1998.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31 as follows (in thousands except
per share data):
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Numerator for basic and diluted earnings per share -
net income $ 7,923 $ 6,700
-------- --------
-------- --------
Denominator for basic earnings per share -
weighted average shares 38,563 39,964
Effect of dilutive securities - employee stock options 3,613 2,623
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Denominator for diluted earnings per share -
adjusted weighted average shares 42,176 42,587
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-------- --------
Earnings per share:
Basic $ 0.21 $ 0.17
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-------- --------
Diluted $ 0.19 $ 0.16
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</TABLE>
3. SEGMENT INFORMATION
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 and Canada include research,
development and sales. Operations in the United States include marketing and
sales.
4. COMPREHENSIVE INCOME
During the first quarter of 1999 and 1998, total comprehensive income
amounted to $7,908,000 and $6,678,000, respectively. Other comprehensive
income represents unrealized gains or losses on the Company's
available-for-sale securities.
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5. NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed For or Obtained For
Internal Use" (the "SOP"). The SOP requires the capitalization of certain
costs incurred in connection with developing or obtaining software for
internal use. The Company previously expensed such costs as incurred. The
adoption of the new SOP does not have a material impact on the Company's
consolidated results of operations, financial position or cash flows.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 1999. Because of the Company's
minimal use of derivatives, the Company does not anticipate that the adoption
of SFAS 133 will have a significant effect on the Company's consolidated
results of operations or financial position.
6. 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
shares of the Company's common stock, in open-market and privately negotiated
transactions. Through 1998, the Company repurchased a total of 10,370,700
shares of its common stock for an aggregate purchase price of $97,000,000.
During the first quarter of 1999 the Company repurchased 644,100 shares of
its common stock for an aggregate purchase price of $9,528,000.
7. 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. 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 made the same allegations as the amended complaint filed in state
court, but charged violations of federal securities laws.
Settlement of the previously disclosed class action lawsuits was approved by
the court on April 9, 1999. Under the terms of the agreement, the claims were
settled for $3,000,000, which was funded by insurance proceeds. The Company
believes that settlement was in the best interests of its investors and
continues to deny all allegations.
8. SUBSEQUENT EVENT
Subsequent to March 31, 1999 and through May 10, 1999, options to purchase
1,295,506 shares of the Company's common stock were exercised.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the condensed
consolidated 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, 1998. 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, without limitation, those set forth under the heading
"Certain Factors That May Affect Future Results" following this Management's
Discussion and Analysis section, and elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain items
from the Company's consolidated statements of operations as a percentage of
total revenues:
<TABLE>
<CAPTION>
Quarter ended
March 31,
1999 1998
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<S> <C> <C>
REVENUES
Product 95.0% 95.0%
Technology development 5.0 5.0
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Total revenues 100.0 100.0
COST OF REVENUES
Product 54.1 46.1
Technology development 2.5 4.3
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Total cost of revenues 56.6 50.4
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Gross profit 43.4 49.6
OPERATING EXPENSES
Research and development 10.1 9.4
Sales and marketing 4.3 4.2
General and administrative 7.6 9.6
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22.0 23.2
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Operating income 21.4 26.4
Interest and other income, net 3.4 6.0
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Income before provision for income taxes 24.8 32.4
Provision for income taxes (2.7) (3.4)
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Net Income 22.1% 29.0%
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</TABLE>
8
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REVENUES
PRODUCT: Product revenues increased to $34.1 million in the first quarter of
1999 from $21.9 million in the first quarter of 1998. Product revenues
consist primarily of baseband chip sets for digital cellular telephones.
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 shipped by the
distributors to the original equipment manufacturer ("OEM") customer.
The increase in product revenues for the three months ended March 31, 1999,
as compared to the same period in 1998, was a result of stronger demand for
the Company's PDC chip sets and volume sales of the Company's CDMA chip sets,
which began in the second quarter of 1998.
TECHNOLOGY DEVELOPMENT: Technology development revenues increased to $1.8
million in the first quarter of 1999 from $1.2 million in the first quarter
of 1998. The Company's technology development revenues fluctuate, and may
continue to fluctuate, depending on the number and size of technology
development agreements and the timing of related milestones and deliverables.
Technology development revenues mainly relate to contracts for development
and enhancement of products for PDC, TDMA and CDMA applications, and revenues
from reference design projects undertaken by the Company's subsidiary, CTP
Systems.
GROSS PROFIT
Gross profit in the first quarter of 1999 was $15.6 million (43.4% of
revenues) compared to $11.4 million (49.6% of revenues) in the first quarter
of 1998.
The gross margins on product revenues in the first quarter of 1999 were
43.1%, as compared to 51.5% in the first quarter of 1998. The gross margins
on product revenues were affected by changes in the customer and product mix
from quarter to quarter, and by price pressures which are impacted by, among
other factors, fluctuations in the dollar/yen rate of exchange.
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, and if the Company is
successful in negotiating such lower prices.
The gross margins on technology development revenues vary from quarter to
quarter depending on the number and size of technology development agreements
and the timing of related milestones.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $3.6 million in the first
quarter of 1999 from $2.2 million in the first quarter of 1998. The increase
was a result of increases in the number of engineering personnel involved in
research and development activities, including the addition of engineering
and software personnel hired by the Company's subsidiary in Canada - Isotel
Corp. ("Isotel"), as a result of the acquisition on December 31, 1998 of
substantially all of the assets of Isotel Research Ltd., an OEM software
company, and the amortization of developed technology purchased within the
framework of the Isotel acquisition. As a percentage of total revenues,
research and development expenses increased to 10.1% in the first quarter of
1999, from 9.4% in the first quarter of 1998. The Company expects that its
research and development expenses will increase in the future, in absolute
dollars.
9
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SALES AND MARKETING EXPENSES
Sales and Marketing expenses increased to $1.5 million (4.3% of revenues) in
the first quarter of 1999 from $1.0 million (4.2% of revenues) in the first
quarter of 1998. The increase was a result of increased sales and marketing
staff at the Company's headquarters in Cupertino, California, the addition of
Isotel's sales and marketing staff, and increased promotion and marketing
activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses were $2.7 million (7.6% of revenues) in
the first quarter of 1999, compared to $2.2 million (9.6% of revenues) in the
first quarter of 1998. The increase in absolute dollars was a result of
increased staffing levels at the facility of D.S.P.C. Technologies Ltd., an
Israeli subsidiary of the Company, the addition of Isotel's administrative
staff, increased facility expenses resulting from additional space that was
leased by the Company's subsidiary in Israel, increased administration
expenses and fees, and amortization of goodwill related to the acquisition.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, includes interest and investment income,
foreign currency remeasurement gains and losses and other miscellaneous
expenses. Interest and other income was $1.2 million in the first quarter of
1999, as compared to $1.4 million in the first quarter of 1998.
Interest and other income, net, in the first quarter of 1999 and 1998 was
generated primarily from interest and realized gains on the Company's cash
and short-term investment balances, which were at an average level of
approximately $95 million and $113 million, during the first quarter of 1999
and 1998, respectively.
Interest and 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 the
Isotel acquisition), changes in the rate of exchange between the Japanese yen
and the United States dollar and between the new Israeli shekel and the
United States dollar, and fluctuations in the available interest rates
applicable to the Company's deposits and short-term investments.
PROVISION FOR INCOME TAXES
The tax provisions 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 current investment plans are scheduled to expire between the years 2005
and 2008.
As of December 31, 1998, the Company had United States federal, state, and
Israeli net operating loss carryforwards of approximately $34.0 million,
$16.2 million and $5.3 million, respectively. The United States federal and
state net operating loss carryforwards will expire at various dates beginning
in years 2001 through 2013. These loss carryforwards primarily relate to
stock option deductions, the benefit of which will be credited to paid in
capital when realized. The Israeli loss carryforwards have no expiration
date, but can only be used to offset certain Israeli subsidiary earnings.
The Company's effective tax rate for the first quarter of 1999 was 11%, as
compared to 10.5% for the first quarter of 1998. 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.
The Company believes that, based upon a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability
of the deferred tax asset such that a partial valuation allowance has been
10
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provided. The deferred tax asset recorded of $2.2 million is realizable based
upon current levels of future taxable income on a jurisdictional basis. The
Company will continue to assess, on a quarterly basis, the realizability of
the deferred tax assets based on actual and forecasted operating results of
each legal entity. The unbenefited U.S. deferred tax assets primarily relate
to stock option deductions, the benefit of which will be credited to paid in
capital when realized.
D.S.P.C. Technologies Ltd., DSP Telecom, DSPC Israel Ltd. 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 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 ISSUES AND IMPACT OF RATE OF INFLATION
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 items are remeasured and recorded at the rate in effect at the date of
transaction. The effects of foreign currency remeasurement, which have not
been material to date, are reported in current operations.
While most of the Company's revenues and costs are denominated in United
States dollars, a material portion of the sales prices for certain products
sold by the Company, and prices for certain components purchased by the
Company, 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.
A portion of the Company's expenses is denominated in Israeli shekels. The
Company's primary expense paid in Israeli currency is Israeli-based employee
salaries. In addition, the Company also has certain Israeli shekel-based
liabilities and assets. As a result, fluctuations in the value of Israeli
currency in comparison to the United States dollar and inflationary pressures
on the Israeli shekel could affect the cost of technology development,
research and development expenses and general and administrative expenses,
and could have a material adverse effect on the Company's results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had $96.3 million of cash, cash equivalents
and short-term investments, compared to $108.4 million as of March 31, 1998.
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
distributors 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 wireless PBX systems product
primarily through external subcontractor assembly facilities. To date,
production of wireless 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. In the first quarter of 1999,
the Company repurchased 644,100 shares of its common stock in its share
repurchase program, using an aggregate of approximately $9.5 million. A total
of 11 million shares have been
11
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repurchased through March 31, 1999, with a total aggregate purchase price of
approximately $106.5 million. Cash used to repurchase common stock was
partially offset by $3.5 million received upon exercises of stock options.
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 $9.6 million in the first
quarter of 1999, as compared to $5.5 million in the first quarter of 1998.
Net cash provided from operations in the first quarter of 1999 was comprised
primarily of net income and a decrease in trade accounts receivable, less a
decrease in current liabilities.
The Company's investing activities in the first quarter of 1999, other than
purchases of and proceeds from sales and maturities of short-term
investments, have consisted of expenditures for fixed assets, which totaled
$1.2 million.
The Company, which was incorporated in November 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 in March 1995 under which DSP Telecom became a wholly
owned subsidiary of the Company (the "Reorganization"). 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 an amount of not less than $9.0 million out of the
proceeds of the IPO within three years after the IPO. In 1998, the Company
received approval from the Israeli Tax Authorities for a two year extension
of this requirement until March 2000. Through March 31, 1999, $7.8 million
has been transferred to Israel.
As of March 31, 1999, the Company also had issued bank guarantees and letters
of credit totaling $2.5 million.
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.
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.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products experience
problems handling dates beyond the year 1999 and will need to be modified
before the year 2000 in order to remain functional. As a result, before the
year 2000, computer systems and/or software products and applications used by
many companies may need to be upgraded to comply with such year 2000
requirements.
The Company is currently expending resources to review its internal systems,
products and the readiness of third parties with whom it has business
relationships and has assigned a dedicated task force to develop and
implement a year 2000 plan (the "Plan") which is designed to cover all of the
Company's activities. The Plan, which has executive sponsorship, is reviewed
regularly by senior management and includes the evaluation of both
information technology ("IT") and non-IT systems, and consists of five steps.
Step one involved increasing awareness by educating and involving all
appropriate levels of management regarding the need to address year 2000
issues. Step two consisted of identifying all of the Company's systems,
products and relationships that may be impacted by year 2000. Step three
involved determining the current state of year 2000 readiness for those areas
identified in step two and prioritizing areas that need to be fixed. Step
four consisted of developing a plan for those areas, including the Company's
internal computers and operating systems, identified as needing correction.
Step five consists of the implementation and execution of the Company's Plan
and completing the steps identified to attain year 2000 readiness. The
Company is currently executing step five. Based on the Company's assessment
to date, it has determined that it is unlikely that it has any exposure to
contingencies related to the year 2000 issue for the products that it has
sold, that all of the Company's products
12
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that are currently being sold are year 2000 compliant and that the Company
expects to complete implementation by the middle of 1999.
The majority of the costs associated with this effort are not incremental to
the Company, but represent a reallocation of existing resources. The Company
believes that modifications deemed necessary will be made on a timely basis
and does not believe that the cost of such modifications will have a material
effect on the Company's operating results. To date, the Company's costs
related to the year 2000 issues have amounted to approximately $50,000 and
the Company does not expect the aggregate amount spent on the year 2000 issue
to exceed $90,000. In addition, the Company is in the process of evaluating
the need for contingency plans with respect to year 2000 requirements. The
necessity of any contingency plan must be evaluated on a case-by-case basis
and may vary considerably in nature depending on the year 2000 issue it may
address.
The Company's expectations as to the extent and timeliness of modifications
required in order to achieve year 2000 compliance is a forward-looking
statement subject to risks and uncertainties. Actual results may vary
materially as a result of a number of factors, including, among others, those
described above in this section. There can be no assurance however, that
unexpected delays or problems, including the failure to ensure year 2000
compliance by systems or products supplied to the Company by third parties,
will not have an adverse effect on the Company, its financial performance and
results of operations. In addition, the Company cannot predict the effect of
the year 2000 issues on its customers or the resulting effect on the Company.
As a result, if such customers do not take preventative and/or corrective
actions in a timely manner, the year 2000 issue could have an adverse effect
on their operations and accordingly have a material adverse effect on the
Company's business, financial condition and results of operations.
Furthermore, the Company's current understanding of expected costs is subject
to change as the project progresses and does not include the cost of internal
software and hardware replaced in the normal course of business whose
installation otherwise may be accelerated to provide solutions to year 2000
compliance issues.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward looking statements concerning our existing
and future products, markets, expenses, revenues, liquidity, performance and
cash needs as well as our plans and strategies. These forward looking
statements involve risks and uncertainties and are based on current
management expectations, and we are not obligated to update this information.
Many factors could cause actual results and events to differ significantly
from the results anticipated by us and described in these forward looking
statements, including but not limited to the following risk factors.
WE RELY ON A LIMITED NUMBER OF CHIP SET PRODUCTS USED IN DIGITAL WIRELESS
TELEPHONES; WE MUST MAINTAIN AND INCREASE SALES OF EACH OF OUR PRODUCTS AND
DEVELOP NEXT-GENERATIONS OF OUR PRODUCTS AND THIRD GENERATION PRODUCTS TO BE
SUCCESSFUL
Unlike companies that sell a large number of products, substantially all of
our sales are from only three chip set products used in cellular telephones.
Because we sell so few products, a decrease or slowdown in sales of any
single product could have a material adverse effect on our results and
financial condition. Our success will also depend on our ability to develop
and market successive generations of these products. To succeed in the
future, we may also need to develop and market new products. If we are not
successful in developing, manufacturing and marketing next-generation
products or any new products, our business and results of operations could be
materially and adversely affected.
Third generation digital wireless standards are currently being
proposed and developed worldwide to address the growing needs for
high-capacity voice communications and high-speed data, video and multimedia
applications. The Company is developing chipsets for use in Wideband CDMA and
other third generation standards. If we do not succeed in timely developing
and marketing third generation products that meet the new standards, our
business would be materially adversely affected.
13
<PAGE>
IF OUR CELLULAR TELEPHONE MANUFACTURER CUSTOMERS DO NOT SUCCEED, WE WILL NOT
SUCCEED
Sales of our PDC, TDMA and CDMA chip sets will depend on the success of our
cellular telephone manufacturer customers in developing, introducing and
marketing competitive handsets using these chip sets, and in successfully
competing in their intensely competitive wireless personal communications
markets. In addition, our subsidiary, CTP Systems, will depend on the success
of its manufacturer customers in the market for intra-office wireless
communications systems, known as private branch exchange, or PBX, systems,
for sales of CTP Systems' wireless PBX systems. We will not be successful if
our customers are not successful.
WE COULD BE ADVERSELY AFFECTED BY ANY DECREASE IN THE GROWTH OF THE WORLDWIDE
DIGITAL CELLULAR MARKETS IN WHICH WE SELL OUR PRODUCTS
Our increasing sales of chip set products have resulted to date largely from
the rapid growth of the global digital wireless telephone markets in which we
sell our chip set products. A slowdown in the growth of any of these markets
could have a material adverse effect on our business.
WE SELL TO A SMALL NUMBER OF CUSTOMERS; THE LOSS OF EITHER OF OUR
DISTRIBUTORS OR ANY OF OUR CUSTOMERS COULD HAVE ADVERSE CONSEQUENCES
We sell substantially all of our baseband chip sets for digital cellular
telephones to Tomen Electronics Corp., our distributor in Japan, and to Tomen
Electronics America Inc., our distributor in the United States. These
distributors sell our products to a small number of cellular telephone
manufacturer customers. In the first quarter of 1999, seven cellular
telephone manufacturer customers accounted for substantially all of the sales
of our personal digital cellular, or PDC, baseband chip sets, while two
cellular telephone manufacturers accounted for all sales of our code division
multiple access, or CDMA, chip sets, and two customers accounted for all
sales of our time division multiple access, or TDMA, chip sets. The loss of
either of our distributors or the loss of or significant reduction in the
distributors' sales to any of these cellular telephone manufacturers could
have a material adverse effect on our business, financial condition and
results of operations.
WE COMPETE IN DIGITAL WIRELESS TELEPHONE CHIP SET MARKETS AGAINST COMPANIES
WITH GREATER RESOURCES
The digital wireless telephone chip set market is intensely competitive. Many
of our competitors have entrenched market positions, established patents,
copyrights, tradenames, trademarks and other intellectual property rights and
substantial technological capabilities. Our current and potential competitors
in the digital cellular market include:
- - other manufacturers and suppliers of digital signal processing-based chip
sets,
- - cellular telephone manufacturers that develop chip set solutions internally,
and
- - smaller companies offering design solutions.
Many of these competitors have significantly greater financial, technical,
manufacturing, marketing, sales and distribution resources and management
expertise than we do. We believe that we will rely on our ability to compete
successfully based on price, quality, availability, performance and features
of our products, timing of our new product introductions, and customer
service and technical support. Other factors outside our control will also
affect our ability to compete, such as pricing by our competitors, and the
timing and quality of their new product introductions. We may not have the
financial resources, technical expertise, intellectual property, or
marketing, sales, distribution and customer service and technical support
capabilities to compete successfully.
DECLINING SALES PRICES OF CHIP SETS COULD ADVERSELY IMPACT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Prices of wireless personal communications equipment have declined, and we
expect this decline to continue. As a result, prices for our chip set
products have declined and will likely continue to decline. In addition,
pricing competition among handset manufacturers and component suppliers has
increased. If we are unable to offset these price decreases with either
increases in unit volume, changes in our terms of trade, or reductions in per
unit costs,
14
<PAGE>
our gross profit would be adversely affected. Since cellular telephone
manufacturers often negotiate supply arrangements well in advance of delivery
dates, we must often commit to price reductions for our products before we
are aware of how, or if, adequate cost reductions can be obtained. If we are
unable to lower costs in response to these price reduction commitments, our
business, financial condition and results of operations could be materially
and adversely affected. In addition, our inability to respond to increased
price competition would have a material adverse effect on our business,
financial condition and results of operations.
THE FAILURE OF THIRD PARTIES ON WHICH WE RELY TO MANUFACTURE OUR INTEGRATED
CIRCUIT PRODUCTS COULD ADVERSELY AFFECT FUTURE OPERATIONS
All of our integrated circuit products and certain of the components included
in CTP Systems' products are currently made by independent third parties, and
we intend to continue using independent foundries in the future. Accordingly,
we are and will remain dependent on independent foundries to achieve
acceptable manufacturing yields, to allocate to us a sufficient amount of
foundry capacity to meet our needs and to offer us competitive pricing. Since
we are a comparatively small customer of our chip set suppliers, some of
these suppliers have in the past, when market shortages of integrated
circuits have occurred, failed to allocate to us sufficient capacity to
manufacture our chip sets upon receiving our orders. These failures have
caused delays in shipments. We anticipate that if shortages of integrated
circuits occur in the future, our suppliers may again be unable or unwilling
to allocate sufficient capacity to us and may cause delays in shipments of
our products to customers. Any failure by our independent foundries to
allocate sufficient capacity to us, or any other material quality or pricing
problems with our independent foundries could have a material adverse effect
on our business, financial condition and results of operations.
RISKS RELATED TO NEW MARKETS FOR OUR TDMA, CDMA AND WIRELESS PBX PRODUCTS
Our success in marketing our TDMA-based and CDMA-based chip sets will depend
on, among other things, the success of the relatively new TDMA and CDMA
standards and growth of these markets worldwide. These standards may not be
widely adopted, and our TDMA or CDMA chip sets or successive generations of
these products may not be successful in the marketplace. In addition,
increased sales of CTP Systems' wireless PBX systems will depend on, among
other things, growth in the market for PBX systems and other low-mobility
wireless communications applications. This market has to date not grown as
fast as previously anticipated, and may not become large enough to support
significant sales of CTP Systems' products.
OUR SUCCESS DEPENDS IN LARGE PART ON OUR SUCCESS IN THE JAPANESE MARKET
Our future performance will depend, in large part, upon our ability to
continue to compete successfully in the Japanese market. A number of factors
could adversely impact our ability to do so, including any deterioration of
existing trade relations between Japan, Israel and the United States, the
imposition of tariffs in the wireless personal communications industry, or
any adverse changes in Japanese political conditions, trade policy or
telecommunications regulations. To remain competitive in Japan, we must also
continue to develop products that meet the technical requirements of our
Japanese customers and maintain satisfactory relationships with our Japanese
customers and distributors. Our inability to compete in Japan for any reason
could have a material adverse effect on our business, financial condition and
results of operations.
DECLINE IN JAPANESE AND OTHER ECONOMIES COULD HAVE ADVERSE CONSEQUENCES
Since we sell a large percentage of our products in Japan, the current
difficulties in the Japanese economy may materially affect our revenues. If
the Japanese economy remains weak or declines further, our business,
financial condition and results of operations could be materially and
adversely affected.
An increasing amount of our sales are made to cellular telephone
manufacturers for sale outside of Japan. The economies of other global
regions in which we or our customers do business, such as North and South
America and South Korea, may also be negatively affected by the current
economic difficulties in Japan and Asia and other causes. Deterioration of
economic conditions in these regions could have a material negative impact on
our business, financial condition and results of operations.
15
<PAGE>
FLUCTUATION OF EXCHANGE RATES BETWEEN US DOLLAR AND JAPANESE YEN COULD HAVE
ADVERSE EFFECTS
While virtually all of our sales to our Japanese customers are denominated in
United States dollars, a material portion of the sales prices for certain
products we sell to these customers are quoted in dollars linked to Japanese
yen-based prices. Fluctuations in the exchange rate for the United States
dollar in relation to the yen could materially affect the price of our
products in Japan and could have a material adverse effect on our sales and
results of operations. In addition, an increasing number of the components
used in our products are quoted in or linked to yen based prices, and an
increase in the value of yen relative to the United States dollar could
materially increase the cost of these materials. This increase could have a
material adverse effect on our results of operations and financial condition.
SHORT VISIBILITY FOR FUTURE PRODUCT ORDERS COULD ADVERSELY AFFECT QUARTERLY
OPERATING RESULTS
The market for our chip sets is characterized by short-term order and
shipment schedules. Accordingly, since our revenue expectations and planned
operating expenses are in large part based on estimates rather than on firm
customer orders, our quarterly operating results could be materially
adversely affected if orders and revenues do not meet expectations.
RISKS OF INTERNATIONAL OPERATIONS, PARTICULARLY IN ISRAEL
We market and sell our products internationally and have offices and
operations in Israel, Japan and Canada in addition to our offices in the
United States. We are therefore subject to the many risks of doing business
internationally and in maintaining international operations, including:
- - unexpected changes in regulatory requirements,
- - fluctuations in the exchange rate for the United States dollar,
- - the impact of recessions in economies outside the United States,
- - the imposition of tariffs and other barriers and restrictions,
- - the burdens of complying with a variety of foreign laws,
- - global political and economic instability, and
- - changes in diplomatic and trade relationships.
Our principal research and development facilities are located in Israel, and
over 80% of our employees are located in Israel, including a substantial
portion of our senior management and research and development personnel.
Israel's political, economic and military conditions therefore directly
affect us. In addition, we pay many of our expenses in Israel with Israeli
currency, and we are subject to foreign currency fluctuations and to economic
pressures resulting from Israel's generally high rate of inflation. While our
functional currency is the United States dollar, a portion of our expenses,
including Israeli based employee salaries, are denominated in Israeli
shekels. In addition, we also have certain Israeli shekel-based liabilities
and assets. As a result, fluctuations in the value of Israeli currency in
comparison to the United States dollar and inflationary pressures on the
Israeli shekel could increase the cost of technology development, research
and development expenses and general and administrative expenses. Currency
fluctuations, changes in the rate of inflation in Israel or any of the other
factors noted above may have a material adverse effect on our business,
financial condition and results of operations.
RISK OF INCREASED INCOME TAXES IN ISRAEL AND THE UNITED STATES
DSPC Israel Ltd. and CTP Systems, two of our Israeli subsidiaries, operate as
"Approved Enterprises" under Israel's Law for the Encouragement of Capital
Investments, 1959. 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. This favorable tax treatment may not continue, and any
change in this tax treatment could have a material adverse effect on our net
income and results of operations. We are not currently aware of any
circumstances that might cause us to lose our favorable tax treatment. If
Israel's tax incentives or rates applicable to DSPC Israel 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, our income
tax rate would increase if any of the earnings of our Israeli subsidiaries
were to become
16
<PAGE>
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."
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE
The price of our common stock has been particularly volatile and will likely
continue to fluctuate in the future. Certain of the factors which may cause
the price of our common stock and our quarterly operating results to
fluctuate include:
- - the timing of our new product introductions and of new product introductions
by our cellular telephone manufacturer customers,
- - the timing of product introduction by our competitors and our customers'
competitors,
- - changes in general economic conditions, particularly in Japan, South Korea,
other countries in the Far East and North and South America,
- - the timing of adoption of new cellular technologies and standards,
- - the mix of products sold,
- - the quality and availability of chip sets manufactured for us by third
parties,
- - acquisitions of other businesses,
- - the timing of sales of wireless subscriber equipment by our customers, and
- - fluctuations in the exchange rates of the currencies in which we do business.
It is possible that in some future quarter, our operating results may be
below public market analyst and investor expectations. If that occurs, the
price of our stock may fall. In addition, in recent years the stock market in
general, and the market for shares of technology stocks such as ours 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 our
common stock.
RISK OF SECURITIES LITIGATION
In the past, we have been the object of securities class action litigation in
connection with the volatility of the market price of our common stock. If we
were the object of additional securities class action litigation in the
future, it could result in substantial costs and a diversion of management's
attention and resources.
WE MAY BE UNABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS
Although we have made efforts to protect our intellectual property rights,
other unauthorized parties may be able to copy portions of our products or
reverse engineer or obtain or use technology or other information that we
regard as proprietary. In addition, the laws of the countries in which our
products are or may be developed, manufactured or sold, including Hong Kong,
Japan, South Korea and Taiwan, may not protect our products and intellectual
property rights to the same extent as the laws of the United States.
WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS BY THIRD PARTIES
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. Third parties may assert claims against us,
our distributors or our customers with respect to our existing and future
products. In the event of litigation to determine the validity of any third
party's claims, we could be required to expend significant resources and
divert the efforts of our technical and management personnel, whether or not
such litigation is determined in our favor. In the event of an adverse result
of any such litigation, among other requirements, we could be required to
develop non-infringing technology; to obtain licenses to the technology that
is the subject of the litigation; or to indemnify our customers from their
damages under certain contracts. We may not be successful in developing
non-infringing technology or in obtaining a license to use the technology on
commercially reasonable terms.
17
<PAGE>
MANAGEMENT OF GROWTH
The growth and development in our business has placed, and is expected to
continue to place, a significant strain on our management and operations. To
manage our growth and development, we must continue to implement and improve
our operational, financial and management information systems and expand,
train and manage our employees. The anticipated increase in product
development, general and administrative, and marketing and sales expenses
coupled with our reliance on wireless telephone equipment manufacturers to
successfully market and develop products that use our products could have an
adverse effect on our performance. Our failure to manage growth effectively
and efficiently could have a material adverse effect on our business,
financial condition and results of operations.
OUR ACQUISITION OF ISOTEL OR OTHER COMPANIES MAY NOT BE SUCCESSFUL
In December 1998, we purchased the assets of Isotel Research, Ltd., a
Canadian software developer. As with any new acquisition, our management will
need to devote attention to the integration of our new Isotel subsidiary with
the rest of our company, and Isotel will likely divert management resources
from other areas of our operations. Our strategy in acquiring Isotel in order
to include software components together with our other products may not be
successful. In addition, we need continually to develop expertise in digital
wireless software development and marketing, which has been a field outside
our current area of focus. Although our purchase agreement with Isotel
provides incentives for Isotel's management to remain with our company for
the next year or more, they may leave after a limited period of time. Any of
these factors could have a material adverse affect on our business and
results of operations.
Our strategy continues to include obtaining additional technologies and may
involve acquisitions of products, technologies or businesses from third
parties. Identifying and negotiating these acquisitions may divert
substantial management resources. An acquisition could use substantial cash,
could require us to incur or assume debt obligations, or could involve the
issuance of additional common or preferred stock. The issuance of additional
stock would dilute existing stockholders and could represent an interest
senior to the rights of our then outstanding common stock. An acquisition
that is accounted for as a purchase 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. Public market analysts may view acquisitions outside the digital
communications area as a diversion of our focus on digital communications.
For these and other reasons, the market for our stock may react negatively to
the announcement of any acquisition. As with Isotel and other acquisitions,
future acquisitions will require attention from our management to integrate
the acquired entity into our operations and may require us to develop
expertise in fields outside our current area of focus. Management of the
acquired entity may leave after the purchase. An acquired entity may have
unknown liabilities, and its business may not achieve the results anticipated
at the time of the acquisition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks, including market risk associated
with interest rate movements and currency rate movements on non - U.S. dollar
denominated assets and liabilities, as well as collectibility of accounts
receivable. The Company regularly assesses these risks and has established
policies and business practices to protect against the adverse effects of
these and other potential exposures. As a result, the Company does not
anticipate material losses in these areas.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Settlement of the previously disclosed class action lawsuits was
approved by the court on April 9, 1999. Under the terms of the agreement, the
claims were settled for $3,000,000, which was funded by insurance proceeds.
The Company believes that settlement was in the best interests of its
investors and continues to deny all allegations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In 1997, the Company's Board of Directors approved 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. The board has since
increased the number of shares that may be repurchased under this program to
16 million shares. In the first quarter of 1999, the Company repurchased
644,100 shares for approximately $9.5 million, bringing the total number of
shares repurchased in this repurchase program to 11,014,800 shares, with an
aggregate purchase price of approximately $106.5 million. The Company may,
from time to time, repurchase additional shares of its common stock under the
repurchase program.
Subsequent to March 31, 1999 and through May 10, 1999, options to
purchase 1,295,506 shares of the Company's common stock were exercised.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 1999
DSP COMMUNICATIONS, INC.
By: /s/ David Aber
-------------------------------
David Aber, Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
20
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THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP COMMUNICATIONS, INC. FOR
THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
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