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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBERFor the Fiscal Year Ended December 31, 1997
COMMISSION FILE NUMBER1998
Commission File Number 0-23006
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DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2683643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
3120 SCOTT BOULEVARD, SANTA CLARA, CA 95054
(Address of principal executive offices, including zip code)
(408) 986-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes /X/X No
/ /--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Common Stock on March 2, 1998,1,
1999, as reported on the Nasdaq National Market, was approximately
$231,228,988.$107,277,023. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 2, 19981, 1999 the Registrant had outstanding 10,086,09511,633,420 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 19971998 are incorporated by reference into Part
II of this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's 19971998 Annual Report is not deemed
filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 1998 are incorporated by reference into
Part III of this Form 10-K Report.
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INDEX
DSP GROUP, INC.
PAGE
----Page No.
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PART I
Item 1. BUSINESS.................................................................. 3BUSINESS...............................................................................3
Item 2. PROPERTIES................................................................ 19PROPERTIES.............................................................................20
Item 3. LEGAL PROCEEDINGS......................................................... 19PROCEEDINGS......................................................................20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 19HOLDERS....................................20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..... 20MATTERS....................................................................21
Item 6. SELECTED FINANCIAL DATA................................................... 20DATA................................................................21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONAL AND RESULTS OF OPERATIONS............................................................. 20OPERATIONS..................................................21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.............................21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 20DATA............................................21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................................ 20DISCLOSURE.................................................21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 21REGISTRANT.....................................22
Item 11. EXECUTIVE COMPENSATION.................................................... 21COMPENSATION.................................................................24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............ 21MANAGEMENT.........................................................................32
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 21TRANSACTIONS.........................................34
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.......... 22
SIGNATURES................................................................ 278-K............................................................................35
SIGNATURES.............................................................................39
PART I
ITEM 1. BUSINESS.
FOR A DISCUSSION OF VARIOUS RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S
FUTURE OPERATIONS SEE "FACTORS AFFECTING FUTURE OPERATING RESULTS" BEGINNING ON
PAGE 16 BELOW.
THIS ANNUAL REPORT ON FORM 10-K FORCONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT ARE BASED ON THE YEAR ENDED DECEMBER 31,
1997 CONTAINSBELIEFS OF, AND ESTIMATES MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO, DSP GROUP'S MANAGEMENT. THESE STATEMENTS
ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW IN "FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
THE TERMS "DSP GROUP," "WE," "OUR" AND "US" AS USED IN THIS ANNUAL
REPORT ON FORM 10-K REFER TO "DSP GROUP, INC." AND ITS SUBSIDIARIES AS A
COMBINED ENTITY, EXCEPT WHERE IT IS MADE CLEAR THAT THE TERM ONLY MEANS THE
PARENT COMPANY. IN ADDITION, THIS ANNUAL REPORT ON FORM 10-K INCLUDES
TRADEMARKS AND REGISTERED TRADEMARKS OF THE COMPANY.DSP GROUP. PRODUCTS OR SERVICE NAMES
OF OTHER COMPANIES MENTIONED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE
TRADEMARKS OR REGISTERED TRADEMARKS OF THEIR RESPECTIVE OWNERS.
PART I
ITEM 1. BUSINESS.
GENERAL BUSINESS
DSP Group develops and markets products and technologies that perform
digital signal processing integrated circuitsprocessing--the electronic manipulation of digitized speech
and software for useother digital signals. DSP Group's products are used in digital speech products targeted ata wide variety
of telephony and other communications devices to enhance the consumer
telephone and computer telephony markets.functionality of
these devices.
Digital speech technology provides several advantages over analog speech
technology, including higher attainable
levels of speech compression and greater ability
to process and manipulate data, and
faster development ofdata. In addition, digital speech products throughthat
use of a programmable digital signal processor ("DSP") ratherprocessors can be developed faster than
analog speech products, which require dedicated analog hardware. As a
result, digital speech technology is widely incorporated today in the digital telephone
answering devicedevices ("TAD"TADs") market and many other types of telephony and
communications products. Digital speech technology also enables the implementationa new
generation of many new applications in
computer telephony such as voice mail messaging, digital simultaneous voiceproducts to transmit live speech over data networks and data ("DSVD") transmissionperform
audio and video conferencing.
The Company has developedconferencing over standard telephone lines.
Our work in the field of digital speech and digital signal processing
and digital speech
technologies, including proprietary algorithms, software, system designs and
VLSI circuit designs that have enabled the introduction ofhas yielded three synergistic product families:
- Speech and telephony processors--integrated circuit devices that
-------------------------------
process digitized speech and other digital signals.
- DSP cores--proprietary architectures for central processing units
---------
that, when combined with other circuits such as memory and
input/output circuits, form a complete circuit design for speech and
telephony digital signal processingprocessors.
- TrueSpeech-Registered Trademark---a family of proprietary speech
-------------------------------
compression algorithms.
In addition, DSP Group entered the cordless telephony business in the first
quarter of 1999 by acquiring two integrated groups of engineers who
specialize in the design of integrated circuits proprietary architectures for digital signal processors ("DSP core
designs")wireless communication
and proprietary TrueSpeech-Registered Trademark- digital speech
compression algorithms.by acquiring technology, products and intellectual property related to
certain wireless communications products.
SPEECH AND TELEPHONY PROCESSORS
The CompanyDSP Group has developed two serieslines of speech and telephony processing
chips: integrated digital TAD speech processors, which are designed for use
in the consumer telephone market, and computer telephony markets. Both seriesVoice over IP speech co-processors,
which are based on the Company's DSP core designs, incorporate several of its digital
telephony signal processing algorithms and provide TrueSpeech compression
capabilities. In 1989, the Company introduced the first cost effective speech
processordesigned for use in digital TADs and today the Company is the leading
independent supplier of DSPs to digital TAD suppliers. The Company's TAD speech
processors are incorporated in the products of leading digital TAD suppliers
such as Alcatel, British Telecom, L.G. Electronics, Panasonic, Philips, Sagem,
Samsung, Sanyo, Siemens, Sony and Uniden.
DSP Group has also developed a series of speech co-processors for use in
conjunction with microprocessors in personal computers and in many standalone
applications to enhance the microprocessors' speech andnetwork telephony capabilities.
The Company's speech co-processors utilize many of the same technologies used in
its TAD speech processors. These speech co-processors provide a variety of
real-time speech applications for personal computers, standalone videophones,
portable dictation devices and Internet telephony applications, such as voice
mail messaging, DSVD transmission and video conferencing.
DSP CORE DESIGNS
DSP Group has also developed proprietary, low power DSP core designs--the
PineDSPCore-Registered Trademark- and OakDSPCore-Registered Trademark---which
represent low cost solutions for current and emerging digital signal processing
applications. The Company's DSP core designs are incorporated in its own family
of speech and telephony processors and are also licensed to more than
twenty-five entities, including Adaptec, Fujitsu, Kawaski, LSI Logic, NEC,
Samsung, Siemens, Temic and VLSI Technology. These licensees are able to use the
Company's DSP core designs to develop their own DSPs for various products,
including cellular telephones, modems, audio boards and cordless telephones. In
the fourth quarter of 1995, the first shipment of products utilizing the
Company's PineDSPCore-Registered Trademark- technology occurred. Royalties from
two DSP Core licensees have started to become meaningful in 1997.conferencing
products.
3
DSP Group is in the process of developing a new generation of DSP core--the
TeakDSPCore-TM-. In order to enhance versatility, efficiency and ease of use,
the TeakDSPCore is offered in two complementary versions: the TeakLite-TM- and
the Teak-TM-. Each version is designed to provide effective solutions for
different segments of the DSP market. The Company's developers have designed the
TeakLite to improve the performance of the existing
OakDSPCore-Registered Trademark- in three areas: lower power consumption, higher
frequency and greater portability. The TeakLite is now available for licensing.
The Teak will possess the TeakLite features as well as improved DSP
architectural features such as dual arithmetic units, larger addressing space
and support for DSP algorithm. The Teak will be available in the second half of
1998.
TRUESPEECH
The Company has developed TrueSpeech, a family of proprietary speech
compression algorithms which it incorporates in its TAD speech processors and
personal computer speech co-processors and also licenses to various companies in
the computer telephony and personal computer industries. The Company believes
that TrueSpeech offers several advantages over other currently available speech
compression technologies, including a combination of high compression ratios,
high quality speech playback and cost effectiveness. The proliferation of speech
applications in the computer telephony, personal computer and consumer markets
requires standardized digital speech compression technologies. The Company seeks
to establish industry standards for its target markets based on TrueSpeech
algorithms. However, the establishment of industry standards depends upon the
acts of third parties, which are not within the control of the Company. The
development of industry standards utilizing TrueSpeech algorithms would create
an opportunity for the Company to develop and market speech co-processors that
provide complete TrueSpeech solutions and enhance the performance and
functionality of products incorporating these speech co-processors. For example,
in the personal computer market, Microsoft has incorporated a TrueSpeech
algorithm in Windows 95. In addition, in the video conferencing market, the
International Telecommunications Union ("ITU") in February 1995 established
G.723.1, which is predominantly composed of a TrueSpeech algorithm, as the
standard speech compression technology for use in video conferencing over public
telephone lines.
PRODUCT FAMILIES, TECHNOLOGY AND CUSTOMERS
The Company has incorporated its proprietary algorithms and technologies in
threeBoth product families--speech and telephony processors, DSP core designs and
TrueSpeech software--for use in the consumer telephone and computer telephony
markets.
SPEECH AND TELEPHONY PROCESSORS
The Company has developed and introduced two series of DSPs--speech
processors for digital TADs, telephony applications, modems, disk controllers
and other communication applications, which were first introduced in 1989 for
digital TADs, and personal computer speech co-processors, which were first
introduced in late 1994, to maximize the benefits of TrueSpeech compression in
personal computer applications. Both serieslines are based upon the Company's cost
effective, low powerour DSP core designs and incorporate itsour
TrueSpeech speech compression algorithms.
4
The following chart describes some of the Company's other speech and
telephony technologies that may be incorporated in various combinations in its
products.
TECHNOLOGY DESCRIPTION
Triple Rate Coder-TM- Instructs the system to decide automatically between
better voice quality and longer recording time.
G.723.1 Provides thespeech compression algorithm for video
conferencing over POTs lines (H.324 video
conferencing standard)
Caller ID and Call Waiting Caller Identifies the telephone number being used by the
ID calling party, when the line is not engaged and when
the receiving party is already engaged on another
call
Call Progress Tone Detection Detects standard telephony signals during the
progress of the telephone call
DTMF Signaling Detects and generates DTMF signals ("touch tones")
that comply with telephone requirements
Full Duplex Speakerphone Allows simultaneous two-way (full-duplex), hands-free
operation of the telephone and incorporates
acoustical echo cancellation for suppression of room
echoes and electrical echo cancellation for
elimination of electrical echoes
Speech Prompts Provides time-date stamp capabilities and allows the
user to access operating instructions
Variable Speed Playback Permits playback of distortion-free, natural sounding
(FlexiSpeech-Registered Trademark-) speech at variable speeds
Voice Operated Switch ("VOX") Detects human speech and stops recording during
(Smart-Vox-Registered Trademark-) periods of silence, thereby conserving available
memory
Alpha Least Cost Routing Executes telephone calls automatically via a
("LCR")/Super LCR telephone provider with the lowest available rates.
Voice Recognition Allows voice command operation of functions
These technologies enable the Company's speech and telephony processors to
provide a variety of speech capabilities for digital TAD, telephony and computer
telephony products.INTEGRATED DIGITAL TAD SPEECH PROCESSORS.PROCESSORS
DSP Group's integrated digital TAD speech processors are currently
incorporated in over 90 models of digital TADs from more than 40 different
companies. These models include standalone digital TADs and integrated
digital TADs, as well as facsimile machines, with integrated digital TADs, standalone speaker phones,
with integrated digital TADs,
hand-held devices and digital cordless telephones with integratedthat contain digital TADs.
To date, the Company has shipped approximately 22
million speech processors toOur digital TAD suppliers, including approximately 9.0
million TAD speech processors in 1997. TAD speech processor product sales
accounted for 79% of the Company's total revenues in 1997.
The Company'sare based on our
PineDSPCore-Registered Trademark-, which is more fully described below. Our
digital TAD speech processors use our TrueSpeech speech compression
technology to provide high quality speech recording and playback. All ofThey
incorporate the Company'sfollowing speech and telephony technologies in various
combinations:
TECHNOLOGY DESCRIPTION
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Triple Rate Coder-TM- Instructs the telephone answering system to decide automatically
between better voice quality and longer recording time.
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G.723.1 Provides speech compression for Voice over IP and video conferencing
over standard telephone lines.
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Caller ID and Call Waiting Identifies to the party being called the telephone number of the
Caller ID calling party, whether or not the party being called is already
engaged in another call.
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Call Progress Tone Detection Detects standard telephony signals during the progress of a telephone
call.
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DTMF Signaling Detects and generates touch tone (DTMF) signals that comply with
telephone industry frequency standards.
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Full Duplex SpeakerPhone-TM- Allows simultaneous two-way (full-duplex), hands-free operation of the
telephone and suppresses and cancels acoustic and electrical echoes.
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Speech Prompts Provides the ability to stamp a message with a time and date and vocal
operating instructions prompts.
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Variable Speed Playback Permits playback of recorded speech at different speeds without
(FlexiSpeech-Registered Trademark-) distorting the natural sound of the speech.
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Voice Operated Switch ("VOX") Detects human speech and stops recording during periods of silence,
(Smart-Vox-Registered Trademark-) thereby conserving available memory.
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Alpha Least Cost Routing Automatically chooses from a number of telephone service providers in
("LCR")/Super LCR order to select the lowest available rates.
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Voice Recognition Allows a user to operate a telephone or answering machine device by
giving voice commands.
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The first integrated digital TAD speech processors are
basedwere introduced by
DSP Group in 1989. Since then, we have shipped approximately 33 million
units of speech processors to digital TAD suppliers, of which approximately
10.3 million were shipped in 1998. Digital TAD speech processor sales
accounted for 72% of our total revenues in 1998.
4
In 1998, we introduced the D16000 family of highly integrated speech
processors, which combine the components of a mixed signal system on a single
chip. Each speech processor in the Company's PineDSPCore-Registered Trademark-D16000 family contains a DSP core,
converters that transform analog signals into digital signals and incorporate certain
of the Company's technologies,vice versa,
and various signal amplifiers, all embedded on a single chip. In addition to
implementing DSP algorithms, including VOX,compression, caller ID call waiting, DTMF
signaling and call progress tone detection. Some of the Company's TADspeaker
phone, these speech processors feature additional technologies, includingalso perform tasks that would typically be
handled by a separate microprocessor chip. We believe that the D16000
processors provide high value to telephony product vendors by eliminating the
need for certain other electronic components and thus reducing materials and
manufacturing costs.
We also introduced in 1998 the D6587 speech prompt
capabilities, variable speed playbackprocessor, which
incorporates into one chip three major digital signal processing
technologies: (1) the Triple Rate Coder, (2) voice recognition, and full duplex speakerphone.
5
(3) Full
Duplex SpeakerPhone. The D6587 can be used in telephones and hands-free car
kits for mobile phones to provide voice dialing, digital recording and
hands-free conversation.
In 1997, we developed an advanced speech compression technology called
the Triple Rate Coder. Speech processors containing the Triple Rate Coder
can record speech at three different compression rates, allowing for a
tradeoff between recording quality and recording time: the higher the
compression rate is, the higher the recording quality and the shorter the
recording time will be. The three compression rates are as follows:
- Long recording time -- at this rate, 22 to 25 minutes of speech can
be recorded on a four megabit flash memory device.
- High quality recording -- at this rate, approximately 10 minutes of
speech can be recorded on a four megabit flash memory device. Speech
quality is at its highest equaling that of a wired telephone
conversation, overcoming the inferior clarity disadvantage of digital
speech.
- Trade-off between long recording time and high quality recording --
at this rate, approximately 15 minutes of speech can be recorded on a
four megabit flash memory device. Speech quality matches that
provided by G.723.1, the speech compression algorithm contained in
the International Telecommunications Union H.324 standard for video
conferencing over standard telephone lines.
The following table sets forth certain characteristics and features of
the primary digital TAD speech processors that we currently offered by the Company:offer:
DSP GROUP'S TAD SPEECH PROCESSORS
D6305 D6365 D6455 D6386D16559 D16529 D16329 D6571 D6587 D6471
D6301
--------- --------- --------- --------- --------- --------------- ------ ------ ----- ----- -----
Process Geometry (microns)......................................... 0.5 0.6 0.8 0.80.5 0.5 0.5 0.5 0.5
Minutes Record, 4 Mbit Memory........................Memory........... 22-25, 22-25, 15-17 15-1722-25, 22-25, 25-27
15-17 25-27 1510,15 10,15 10,15 10,15
Memory Type.......................................... ARAM ARAM ARAM ARAMType............................. Flash Flash Flash Flash Flash Flash
Advanced Features:
Speech Prompts.....................................Prompts........................ Yes Yes Yes Yes Yes Yes
Variable Speed Playback............................ --Playback............... Yes Yes -- Yes Yes Yes
Full Duplex Speakerphone...........................Speakerphone.............. Yes -- -- Yes Yes Yes Yes --
Caller ID and Call Waiting Caller ID...............ID Yes Yes -- Yes Yes Yes
Voice Recognition -- -- -- -- Yes Yes
Voice Recognition.................................. --
-- -- Yes -- --
Other Required Components:
Microcontroller.................................... Yes Yes Yes Yes Yes Yes
Codec.............................................. Yes Yes Yes Yes Yes Yes
EPROM.............................................. YesSystem On Chip-included peripherals:
Microcontroller....................... Yes Yes Yes -- -- Battery............................................--
Line Coder ........................... Yes Yes Yes -- -- --
Speaker Coder......................... Yes -- -- -- -- --
Amplifiers............................ Yes Yes Yes -- -- --
DSP Group's D6301 and D6471 interface directly with a new flash memory chip
introduced by Samsung and facilitate lower overall system costs for digital
TADs. The new Samsung flash memory chip is designed for speech recording and is
less expensive than other currently available flash memories. The D6301 and
D6471 eliminate the need for audio-grade random access memories ("ARAMs"), which
from time to time have constrained the growth of the digital TAD market due to
supply shortages. By allowing substitution of a flash memory for an ARAM, the
D6301 and D6471 also eliminate the need for battery circuitry to maintain the
data in the ARAM during power failures and an EPROM to store pre-recorded voice
prompts and time-date stamps.
In 1997, the Company developed an advanced compression technology called
Triple Rate Coder-TM-. The new technology provides for tradeoffs between quality
and recording time. The Triple Rate Coder-TM- provides three compression rates
as follows:
- Long recording time--22 to 25 minutes recording time (on a four megabit
flash memory).
- Quality recording--the technology provides approximately 10 recording
minutes (on a four megabit flash memory). The speech quality equals that
of a line telephone conversation. This technology overcomes one of the
disadvantages of digital speech, i.e., the inferior clarity of digitized
speech.
- Tradeoff between long recording time and high quality recording is enabled
through another compression rate. The technology allows approximately 15
recording minutes with a quality that matches G.723.1 standard (Part of
H.324, video conferencing standard).
ADVANCED VOICE-ACTIVATED DIGITAL TAD. In 1997, the Company announced that
it had attained the capability of voice recognition, a technology that the
Company believes may become well sought after for speech and telephony
processors. The Company believes that this new voice recognition capability,
combined with the Company's TrueSpeech-Registered Trademark- low bit rate voice
compression and full duplex SpeakerPhone-Registered Trademark-, provides the
Company with an advantage over competitors in the field. Also contained in the
voice recognition processor are: caller ID, caller ID on call waiting, and other
key telephony algorithms. This voice recognition processor provides for hands
free operation of an answering machine either locally or from a remote location.
65
VOICE ACTIVATED CAR KIT. The Company has expanded its products line to
include a hands free digital speech processor, which the Company believes will
be highly in demand in the cellular telephone and automotive markets. The
product line provides a unique combination of functions such as voice
recognition, echo suppression, noise reduction, and True
Speech-Registered Trademark- voice compression. The combination of voice
recognition and full duplex speaker phone, enables free hand operation of a car
phone for example, thus contributing to the driver's safety. The voice
recognition processor with its unique integration of full duplex Speaker
Phone-Registered Trademark- makes it possible for the Company to enter the
market of car phones and hand held devices.
The following is a list of TAD manufacturers and resellers whose products
incorporate the Company'sour TAD speech processors:
TAD MANUFACTURERS AND RESELLERS
TAD MANUFACTURERS TAD RESELLERS
- -------------------------------------------- ---------------------------------------------------------------------------------------------------------
Alcatel Maxon Bell South
Ascom National TelecomPanasonic Bosch Telecom
CCT Telecom PanasonicPhilips British Telecom
Daewoo PhilipsSagem France Telecom
D&B Electronics SagemSamsung GE
Giant SamsungEricsson Sanyo German Telecom
Hagenuk SanyoGiant Siemens Loewe-Binatone
Hanchang Siemens Radio Shack
Hanwha TelecomHPF Ascom Smoothline Southwestern Bell
HPF AscomI.N.T. Corp. Sony Swiss Telecom
HyundaiKinpo Thomson
I.N.T. Corp. Tiptel
Kinpo Uniden
L.G. Electronics YupiteruTiptel
Matra Uniden
PERSONAL COMPUTERVOICE OVER IP SPEECH CO-PROCESSORS. The Company has developed its
personal computerCO-PROCESSORS
Our Voice over IP speech co-processors as complementary application-specific
DSPswere developed for use in
conjunction with other microprocessors to enhance the performancetransmit voice over public and
functionality of personal computer, computer
telephony and consumer products using TrueSpeech. While the current generation
of microprocessors contained in personal computers can compress and record
speech in real-time, the microprocessors are not specifically designed to run
digital speech processing algorithms and, therefore, require a substantial
amount of the personal computer's computing power to do so. As a result, the use
of speech co-processors that incorporate TrueSpeech in personal computers
provides a more efficient utilization of the personal computer's computing
power. The Company believes personal computer users will demand real-time speech
compression capability and manufacturers will begin to provide real-time speech
compression by including application-specific DSPs on personal computer productsprivate networks such as modems, audio boards, PCMCIA cardsthe Internet, frame relay networks, cable networks
and personal computer based
videophoneother data networks and combined data/voice networks. "Voice over IP"
refers to the transmission of voice signals over networks using the Internet
Protocol (IP), which involves dividing the signals into numerous small data
packets that are individually transmitted over the network and reassembled in
the correct order at their destination. They also can be used to implement
the speech component of video conferencing products.
To date, the Company has announced and begun shipments of three speech
co-processors--the CT8005, CT8015 and CT8020--for use in personal computers,
voice-over-data modems, video telephones and video conferencing equipment.applications.
These speech co-processors are based on the Company's DSP core designs,
incorporate TrueSpeech and manytake advantage of its other proprietary algorithms and
technologies, and are fully controlled by the personal computer's host
processor. All of the Company's speech co-processors contain the TrueSpeech
algorithm incorporated in Windows 95. The CT8005 provides telephone and
speech recording and playback functions in personal computers and in digital
voice recorders, while the CT8015 is designed asG.723.1, a low-cost solution for use
in voice-over-data modems, in wireless voice and in Internet telephony
products. The CT8020 is designed for use in video telephones and video
conferencing equipment and also implements all the specifications of the
G.723.1 speech
compression standard for video telephony. The CT8020 alsoalgorithm that has been incorporated into various international
communications standards, which is being utilized in many Internet-based telephone applications.
7
more fully discussed below, to provide
cost-effective, high quality speech compression. The following table sets
forth theother features of the personal computerVoice over IP speech co-processors that we
currently offered by the Company:
DSP GROUP'S PERSONAL COMPUTERoffer:
6
DSP GROUP'S VOICE OVER IP SPEECH CO-PROCESSORS
CT8005 CT8015CT8016 CT8020 --------------- ---------------CT8021
-------------- -------------- ---------------
DSP Core Design...............................Design............................. PineDSPCore PineDSPCoreOakDSPCore OakDSPCore
Process Geometry (microns).................... 0.8 0.8.................. 0.5 0.6 0.5
TrueSpeech AlgorithmAlgorithm........................ 8.5, 6.3, 5.3, 8.5, 6.3, 5.3, 8.5, 6.3, 5.3,
Data Rate, Kilobits Per 8.5, 6.3, 5.3,
Second...................................... 8.5 8.5Second.............. 4.8 & 4.1 4.8 & 4.1 4.8 & 4.1
ITU-T Standard Speech Coders................ G.729A+B G.723.1 G.723.1, G.722,
G.728, G.729A+B
Features:
Voice Mail Messaging........................ Yes -- Yes
Telephone Answering......................... Yes -- Yes
Full Duplex Speakerphone....................Speakerphone................... Yes Yes Yes
Variable Speed Message Playback.............Playback............ Yes -- --Yes
Full Duplex DSVD............................DSVD........................... Yes Yes Yes
Video Conferencing......................... -- Yes Yes
Video Conferencing.......................... -- --Internet Telephony......................... Yes
Internet Telephony.......................... Yes (HDX) Yes Yes
FUTURE SPEECH AND TELEPHONY PROCESSORS. The Company isPROCESSORS
We are currently developing itsour next generation of integrated digital
TAD speech processors based onand Voice over IP speech co-processors to include a
number of enhancements and improvements.
First, we intend to design and manufacture our future digital TAD speech
processors using a 0.35 micron CMOS technology, to reduce
its manufacturing costsso that the conductive paths
on the circuits inside these chips will be 0.35 microns wide. By reducing
these line widths we can place more transistors in the same amount of space
and as a result provide more power at the same cost. We expect that this
design will increase itsour competitiveness in the price sensitiveprice-sensitive TAD business.
Second, we intend to add new features to our next generation of digital
TAD speech processors and Voice over IP speech co-processors. For example,
we intend to enhance our integrated digital TAD speech processors with
additional capabilities, including improved speech quality, full duplex
speakerphone, advanced voice recognition and text to speech algorithms and
our integrated 900 MHz spread spectrum processor. In addition, we intend to
use the Company intendsTeakLite-TM-DSP core, which is more powerful than our PineDSPCore and
OakDSPCore-Registered Trademark-, to provide additional processing power for
these new features.
Finally, we intend to continue to enhance its
existing speech and telephony processors through the addition of advanced
capabilities and to develop new speech and telephony
processors for emerging communications applications. For example, the Company intendsWe also intend to enhance its TAD speech
processors through the addition of capabilities such as improved speech quality,
full duplex speakerphone, advanced voice recognition algorithm, integrated micro
processor, and integrated analog functions.
The Company believes that emerging applicationsuse
our high performance, dual MAC DSP TeakLite core for its personal computer
speech co-processors may include other personal computer products such as laptop
computers, personal digital assistants ("PDAs"), personal communications systems
and other mobile computing devices. In addition,Voice over IP gateway
applications.
DSP CORES
DSP Group believeshas developed proprietary, DSP core designs that itsprovide
low-power, cost-effective solutions for current and emerging digital signal
processing applications. Our DSP cores are incorporated in our own family of
speech and telephony processors and also are licensed to more than 30
entities, including Adaptec, Fujitsu, Kawasaki, LSI Logic, NEC, Oki, Samsung
Semi conductor, Inc., Seiko Epson, Siemens, Sony, Temic and VLSI Technology.
We currently offer four DSP cores--PineDSPCore, OakDSPCore,
TeakDSPCore-TM-and PalmDSPCore.-TM- Together, they cover a wide range of
applications, from low end applications, including digital speech expertise will also be applicableTADs, hard disk
controllers, low speed modems and Voice over IP applications, to emerginghigh
7
performance applications such as digital speech applications for consumer electronics. For example,
one manufacturer has introducedsubscriber line (DSL), third
generation cellular communications, high speed modems, multimedia and
is shipping a personal digital voice
recorder with one hour of recording time based on a DSP Group TAD speech
processor. This recorder utilizes the Company's variable speed playback
algorithm and provides the capability of editing a stored speech file. The
recorder also provides memory storage in a detachable module with a PCMCIA
connector, allowing transfer of the recorded speech file to a computer with a
PCMCIA interface for storage, playback or transmittal over a modem. The Company
intends to develop additional speech co-processors for the personal digital
voice recorder market, and intends to pursue the use of its technologies for
other speech applications in the computer telephony, personal consumer and
consumer electronics market.
DSP CORE DESIGNS
The Company's DSP core designs--PineDSPCore-Registered Trademark- and
OakDSPCore-Registered Trademark---are low power, low voltage and low cost
digitalInternet gateways.
Digital signal processing integrated circuit architectures with associated
advanced software development tools. The Company's DSP cores and associated
instruction sets are designed for general purpose applications including
speech processing, speakerphone, telephony algorithms and cellular, which
enables efficient processing for digital speech applications. The DSP core
designs operate at both 3 volts and 5 volts and incorporate power management
features for low power consumption. As digital signal processingchips and software migrate intoare being used more and
more in high volume communication and computing products, the Company
believes there will be a significant demand for low cost, low power DSP
platforms. The efficient processing, flexible design and scaleable memories
of the Company's DSP core designs allow the development of smaller and lower
costproducts. We believe that
our cores can provide cost-effective DSP solutions and shorten time to market for new products and product
enhancements.
8
chips used in these
applications, because our cores are:
- Flexible. The Company's DSP core designs are small, highly efficient, 16-bit, general
purpose DSPs with adjacent modular RAM"soft core" designs, so they are
--------
foundry independent and ROM and general I/O blocks for
flexible layout and design. Universalcan be implemented on any of the various
manufacturing processes used by different semiconductor fabrication
facilities. The cores can also be produced by manufacturers in
different geometries. Furthermore, universal design rules are used
in the DSP core designs to allow easy implementation across multiple
semiconductor process technologies.
- Efficient to design. The designs of our cores are highly efficient,
-------------------
with variable data size of 16/20/24 bits, general purpose DSPs with
adjacent modular RAM and ROM and general I/O blocks to provide for a
flexible layout and design.
- Power efficient. Our cores operate at different voltages, ranging
---------------
from 5 volts down to 1.1 volts. The lower the voltage, the lower the
power requirements.
- Inexpensive to manufacture. The DSP cores, initially implementedwhich in the past could
--------------------------
only be used on processors designed for a 1.0 micron CMOS technology, were converted into 0.8process,
can now be implemented on 0.25 and 0.18 micron CMOS technology and then were further
redesigned for 0.6 micron CMOS technology to reduce cost and increase
performance. The Company is currently in the process of converting the DSP cores
into 0.35 micron CMOS technology. These successive costprocesses. We believe
these size reductions in manufacturing are aimed at reducingcan reduce the product cost,
andwhile increasing product performance.
The PineDSPCore-Registered Trademark-,efficient processing, flexible design and scaleable memories of our
DSP core designs allow for the development of smaller and lower cost DSP
solutions and shorten the time to market for new products and product
enhancements.
With each new core, we have added features and enhanced performance.
Our first introducedcore, the PineDSPCore, was released in 1992 and was developed by the Company's VLSI designers and its software developers to
efficiently processfor
use in our digital TAD speech and telephony algorithms. Duringprocessor products. In 1994, the Company
announced its OakDSPCore-Registered Trademark-,we introduced our
OakDSPCore, an enhanced version of the PineDSPCore-Registered Trademark-PineDSPCore that, among other things,
achieves a higher processing speed through improved architecture and includes
an advanced, more efficient instruction set. The OakDSPCore is specifically suitedespecially
well-suited for use in personal communication products and higher level
processing applications, such as digital cellular telephones, high bit rate
modems, DSVD modems and video telephone conferencing applications. The OakDSPCore-Registered Trademark- offers
significantly improved processing features compared toapplications and DSVD modems, which send
compressed voice and data signals at the PineDSPCore-Registered Trademark-, includingsame time over a higher processing speed of 80
MIPS and an advanced, more efficient instruction set.regular telephone
line. Algorithms implemented onthat use the PineDSPCore-Registered Trademark-PineDSPCore instruction set maycan also be run on
the OakDSPCore-Registered Trademark-. The Company recently has started developingOakDSPCore.
In 1998, we introduced the TeakDSPCore, the next generation DSP core--the TeakDSPCore-TM-. This core willcore.
The TeakDSPCore is a family of two low power, cost effective cores: the
TeakLite and the Teak. These cores contain two arithmetic units which will both functionfunctioning
in parallel. This willparallel, which improve the performance of a notable portion of the
application.application that requires DSP technology. The CompanyTeakDSPCore is targetingaimed at
emerging applications in the digital cellular communications, including
products implementing the Global System for Mobile communications (GSM),
half-rate GSM, Time Division Multiple Access (TDMA) and Code Division
Multiple Access (CDMA) standards. We also have targeted this DSP core to the new cellular application standards (e.g., half rate GSM and
wide band CDMA) and for use in
advanced wirewired line modems, (e.g.including those using the V.90 standard, products
implementing emerging digital audio standards and formats such as AC3 and
MPEG2, and Voice over IP and telecommunications products.
In 1998, we also introduced our new high performance PalmDSPCore, a
family of three cores designed to cover a wide range of high performance
applications, including third generation cellular communications,
asynchronous digital subscriber lines (ADSL), 56kbit/ second) as well
as forhigh performance multimedia
applications, (e.g., AC3, MPEG2).cable modems, pooled modems and Internet gateways.
8
The following table shows a comparison of the Company'sour DSP core designs:
DSP GROUP'S DSP CORE DESIGNS
PINEDSPCORE OAKDSPCORE
------------ ------------PineDSPCore OakDSPCore TeakDSPCore PalmDSPCore
----------- ---------- ---------- -----------
Word Length......................................................Length ......................... 16 bit 1616bit 16bit 16/20/24 bit
Process Geometry (microns).................................................. 0.5 0.35 Performance......................................................0.25 0.2
Performance ......................... 40 MIPS 6565MIPS 140-180 MIPS Voltage..........................................................450 MIPS
Voltage ............................. 5.0 V 3.3V 2.5V 2.5V
Advanced Instruction Set.........................................Set............. -- Yes Yes Yes
The Company incorporates itsIn addition to incorporating our DSP core designs in itsour speech and
telephony processors, andwe also licenseslicense them to original equipment manufacturers ("OEMs").
The Company's licensing program, introduced in 1992, enables OEMs tothird parties, together with
advanced software tools, so that these licensees can incorporate the Company'sour DSP core
designs in the OEMs'into their semiconductor chip products. Licensing revenuesThese licenses are generally
granted in exchange for an upfront license fee payment. This fee is
generally recognized onby us upon shipment byof the Companydeliverables for the core,
provided that no significant vendor or post contractpost-contract support obligations
remain outstanding and that collection of the resulting receivable is deemed
probable. In addition, most
licenses require the licensee toThe licensees also pay the Companya monthly support fee, which is typically
paid for a period of one or two years, and ongoing per-unit royalties based
on the unit shipmentsnumber of units of products containing the licensee's products and a monthly support
fee.core that are shipped by
the licensee. The timing and amount of royalties that DSP receives from licensing of the DSPits
core designs
willlicensees depend on the timing of each licensee's product development
and the degree of market acceptance of sucheach licensee's product, bothproducts, neither of
which are not within our control. In 1998, royalties paid by four PineDSPCore and
OakDSPCore licensees for shipment of products utilizing these cores increased
from the Company's control. Royalties from two DSP Core licensees have started to
become meaningful in 1997.
9
previous year.
The following is a partial list of companies who have licensed the Company'sour DSP
core designs and representative applications for which they are able to use theour DSP core
designs:
DSP CORE DESIGN LICENSES
LICENSEES REPRESENTATIVE APPLICATIONS
- ------------------------------------------ ---------------------------------------------------------------------- -----------------------------------------
Adaptec...................................Adaptec Disk Drives
Asahi Kasei Microsystems.................. Cordless Telephones
Atmel.....................................Atmel ASIC, Communications
DSP Communications Inc................... Digital Cellular Telephones
Fujitsu...................................Fujitsu ASIC, ADSL, Communications
GEC Plessey...............................Harris Semiconductor Communications Harris Semiconductor...................... Video Conferencing
Hyundai...................................and Multimedia
Hyundai ASIC, Audio, Communications
Integrated Circuit Systems................ Multimedia Boards
Kawasaki..................................Kawasaki ASIC, Communications
Kenwood...................................Kenwood Audio Products
LSI Logic.................................Logic ASIC, Communications, DBA
NEC....................................... Communications and Consumer Products
ROHM......................................DAB
Mitel ASIC, Communications
Samsung...................................National Semiconductors Communications
NEC ASIC, Communications
Oki Communications
ROHM ASIC, Communications
Samsung ASIC, Communications and Multimedia
Siemens................................... Digital Cellular Telephones,Seiko-Epson ASIC, Communications
Siemens Communications
Sony Communications
9
TDK Semiconductor.........................Semiconductor Modems
TEMIC (Daimler-Benz)...................... DBA,DAB, Communications
TSMC......................................TSMC ASIC Library
VLSI Technology...........................Technology ASIC, Communications
Xicor.....................................Xemics Low Voltage applications
Xicor Programmable DSP
The Alta GroupIn order to assist existing licensees of the PineDSPCore and OakDSPCore,
and to enhance the attractiveness of these cores to potential licensees, we
have entered into agreements with leading developers of semiconductor design
and simulation software, including Cadence, Mentor Graphics and SynopsysSynopsys.
These companies have announced the
developmentadapted certain of electronictheir software applications to
support our PineDSPCore and OakDSPCore, enabling such software to be used to
design automation ("EDA") tools, system level design
kits and software co-design and co-simulationsimulate semiconductor products for systems designers
that use the PineDSPCore-Registered Trademark- and
OakDSPCore-Registered Trademark-.containing these cores. In
addition, a number of independent software vendors, including VoCal
Technologies, Prairiecomm, and Ensigma, have announced the
development ofdeveloped digital signal
processing algorithms that operate on the
PineDSPCore-Registered Trademark-our PineDSPCore and OakDSPCore-Registered Trademark-OakDSPCore for a
variety of communications and multimedia applications. The Company believesWe believe that these
developments make itsour DSP core designs more attractive to potential
OEM
licensees. In addition, the Company believeswe believe that these software tools assist in
the creation of the PineDSPCore-Registered Trademark-help to
establish our PineDSPCore and the OakDSPCore-Registered Trademark-OakDSPCore as industry standards, muchstandards.
In 1998, XEMICS, a Swiss company and a leading manufacturer of low
voltage medical devices such as most ASIC
vendors worldwide are in facthearing aids and pace makers, announced that
it would license and implement TeakLite on a very low voltage library
instruction set. Together with Xemics, we offer a design kit for low voltage
applications (1.2V), by which potential licensees will license the TeakLite
technology from DSP Group licensees.
RISC CORE
The Company has entered into an agreement with National Semiconductors
Corporation ("NSC") to becomeand the worldwide exclusive distributor for general
licensing and support of the CompactRISC core technology. The Company decided to
enter the RISC market because it believes that customers use RISC cores along
with DSP cores in their applications to implement control functions efficiently.
The Company established this relationship with NSC to shorten the time to market
for the Company's products and to make use of already proven and established
technology.
Currently, Advanced RISC Machines ("ARM") controls the RISC market. The
Company estimates that the CompactRISC technology is better suited for the
embedded market than ARM's products because CompactRISC is a true 16-bit
machine, whereas the ARM core is a 32-bit machine with a wrapper. As such, the
CompactRISC consumes less power and is less expensive in die size and memory
consumption. However, ARM's brand name is prevailing and there is no assurance
that the CompactRISC technology will be able to compete effectively in the
market.
10
The following table sets forth the key features of the CompactRISC core
design:
CR16B
-------------
Word Length.......................................................... 16 bit
Process Geometry (microns)........................................... 0.35
Performance.......................................................... 50 MIPS
Voltage.............................................................. 3.0 to 5.0 V
low voltage library from Xemics.
TRUESPEECH PRODUCTS
TrueSpeech is a family of high-quality, cost effectivecost-effective speech
compression technologytechnologies based on complex mathematical algorithms that are
derived from the way airflow from the lungs is shaped by the throat, mouth
and tongue during speech. This shaping of bursts of air is what the ear
interprets as speech. TrueSpeech converts this speech into digital data and
then selectively eliminates and enhances certain sound data to replicate
human speech.
Originally developed for consumer telephone applications, such as the Company's TAD speech processors,
the Company has sincewe also have
enhanced TrueSpeech for use in the computer telephony, and
personal computer and
Voice over IP markets. The Company seeksWe incorporate our TrueSpeech technology in our
speech and telephony processors and also license TrueSpeech to establish industry standardscomputer
telephony, personal computer and Voice over IP companies for inclusion in
their products.
Our TrueSpeech technology has become one of the leading digital speech
compression technology based on its TrueSpeech algorithms for emerging speech
applicationssolutions in the consumer telephone and computer telephonyseveral markets. However,
the establishment of industry standards depends upon the acts of third parties,
which are not within the control of the Company. The development of industry
standards utilizing TrueSpeech algorithms would create an opportunity for the
Company to develop and market speech co-processors that would serve as
complementary application-specific DSPs to enhance the performance and
functionality of personal computers using TrueSpeech. In the personal computer market,
Microsoft has incorporated a TrueSpeech algorithm in Windows 95.95, Windows 98
and NT. In the audio and video telephone market, the ITU inconferencing markets, TrueSpeech
algorithms are used extensively, having been adopted by various international
standards-setting organizations. In February 1995, the International
Telecommunications Union established G.723.1, which is
predominantly composed of a TrueSpeech algorithm, as the standard speech
compression technology for video conferencing over public telephone lines. In
addition to the Company's TrueSpeech algorithm, G.723.1 incorporates elements of
algorithms developed by France Telecom and the University of Sherbrooke. In
addition, although the ITU committee has approved theits G.723.1 standard for analog telephone line, there is no assurance thatlow bit rate
speech compression, which incorporates the video conference market in
analog line will be widely accepted, mainly due to quality of the current
implementationsTrueSpeech 6.3 and price issues. Furthermore, in5.3 algorithms.
In March 1997, the International Multimedia Teleconferencing Consortium, ("IMTC"), a
nonprofit industry group, recommended the use of G.723.1 standard as thea default low
bit rate audio codercompression technology for all voice transmissions over the
Internet orand for Internet Protocol ("IP") applicationsconferencing products conforming the International
Telecommunication Union's H.323 standard for H.323packet-based multimedia
communications systems. G.723.1 is also part of the International
Telecommunication Union's H.324 standard for video conferencing products. The IMTC membership approved this recommendationover standard
telephone lines. Since its adoption and endorsement by the International
Telecommunications Union and the International Multimedia Teleconferencing
Consortium, the G.723.1 standard has gained considerable momentum in 1997.
The Company believesthe
video and audio conferencing industry.
10
We believe that the principal advantages of TrueSpeech, as compared with
other currently available digital speech compression technologies, are as
follows:
HIGH COMPRESSION RATIO.- High Compression Ratio. The three versions of TrueSpeech currently
----------------------
offered for license by DSP Group compress digital speech at ratios ranging from
15:1 to 26:1. These compression ratios are between seven and twelve
times greater than the compression provided by Pulse Code Modulation
("PCM"), which is used in current generation telephone speech
transmissions, and four to six times greater than the compression
usingprovided by Adaptive Differential PCM ("ADPCM"), which is currently
used in personal computer audio cards. As a result, a standard 1.4
megabyte floppy diskette can hold approximately 37 minutes of speech
using the most advanced version of TrueSpeech commercially available,
compared to approximately three minutes using PCM and six minutes
using ADPCM. CompetitorsOur competitors have introduced other advanced speech compression
algorithms that offer compression ratios comparable to the most
advanced TrueSpeech algorithms, including competingand several had submitted these
algorithms that were submitted by several
companies to the ITU standards committee evaluating speech compression
algorithmsfor evaluation for video
telephones. TheHowever, the ITU testing showed that TrueSpeech provides
superior quality playback and requires lower computational complexity
than these competing algorithms.
11
HIGH QUALITY SPEECH.- High Quality Speech. Another advantage of TrueSpeech is that it
-------------------
reproduces high quality speech playback with minimum distortion by
selectively eliminating nonessential and background sound data without
significant loss of speech quality. TrueSpeech has received high
scores for speech quality from a number of independent evaluators.
For example, TrueSpeech scored the highest on the ITU's intricately
structured test used to numerically rate the quality of the five
competing speech compression algorithms submitted for adoption as the
G.723.1 standard for video telephones. COST EFFECTIVENESS.In independently conducted
tests performed by Dynastat, Inc., a company specializing in the
performance evaluation of voice communication systems, TrueSpeech 6.3
received a Mean Opinion Score of 3.98, while regular telephone quality
is based upon a Mean Opinion Score of 4.0.
- Cost Effectiveness. TrueSpeech's ability to achieve high speech
------------------
compression with lower computational complexity provides it with a
competitive cost advantage. As an example, competing speech
compression algorithms evaluated by the ITU use 20% to 50% more
computing power for the same compression and transmission rates, and
more RAM and ROMmemory for storage and operation. Consequently, competing speech
compression algorithms require larger, more expensive DSPs and result
in higher cost solutions.
The Company incorporates its TrueSpeech technology in its speech and
telephony processors and also licenses TrueSpeech to computer telephony and
personal computer companies for inclusion in their products. The Company'sOur TrueSpeech licensees include, among others, 8x8, Analog Devices,
Cirrus Logic, Creative Labs, Dialogic, IBM, Integrated Circuit Systems, Intel, LSI Logic, Lucent, Microsoft, Netspeak, Philips,
Phylon, Prodigy, Siemens, Sierra Semiconductor, Silicon
Systems, Smith Micro, Texas Instruments, ("TI"), Unisys, US Robotics, VDOnetWinbond and
VLSI Technology.White Pine Software. In addition, the Company haswe have ported itsour TrueSpeech algorithms to
certain DSP platforms offered by Analog Devices, Lucent, Motorola and TI,
fourTexas
Instruments, three leading merchant vendors of programmable DSPs.DSP chips. To
date, the Company'sour royalties from TrueSpeech licenses have not been significant.contribute modestly to our
overall revenues.
CORDLESS TELEPHONY
In the beginning of 1999, DSP Group acquired two integrated groups of
engineers, one located in Israel and the other in the United States. These
twenty-five engineers specialize in the design of integrated circuits for
wireless communication. In addition, we acquired technology and products,
including associated intellectual property, related to 900 Megahertz
narrow-band cordless telephones (the transmissions between the handset and
base unit of such telephones are at or near a frequency of 900 megahertz) and
900 Megahertz spread spectrum cordless telephones (the transmissions between
the handset and base unit of such telephones are "spread" in a pseudrandom
pattern over a range of frequencies).
11
We intend to sell a cordless telephony solution consisting of two chips
- --a baseband chip and an RF chip -- that will allow telephone vendors to
build 900 megahertz cordless telephones with limited technical understanding,
shortening the time it takes for the product to reach the market. We believe
our recent acquisitions also will assist us in developing 2.4 gigahertz
cordless telephones. In addition, we believe that the cordless telephony
business will be synergistic with our existing digital signal processing
business.
SALES, MARKETING AND DISTRIBUTION
The Company marketsWe market and distributes itsdistribute our products through aour direct sales and
marketing organization, consisting of 2227 employees, as well as through a
network of distributors and independent manufacturers' representatives. A
marketing and sales team located in the Company'sour headquarters in Santa Clara,
California and in Israel pursues business with the Company'sour customers in North America
and closely monitormonitors new markets, trends and customer needs to shape the Company'sour
strategic decisions. In Japan, the Company operateswe operate from a marketing and support
office in Tokyo and through Tomen Electronics, a local distributor. In the
rest of Asia, the Company operateswe operate through DSP Solutions Ltd., a distributor and
sales representativerepresentatives in Hong Kong, and through manufacturers' representatives in
Singapore, South Korea and Taiwan. To handle sales and distribution in
Europe, the Company operateswe operate a marketing and support office located in France and has
manufacturers'have
sales representatives in Denmark, Israel, Germany, Spain, Sweden and Sweden. The
Company'sthe
United Kingdom. Our sales representatives and distributors are not subject
to minimum purchase requirements and can cease marketing the Company'sour products at any
time. The loss of one or more representatives or thetheir failure of such parties to renew
agreements with the
Companyus upon expiration could have an adverse effect on the Company'sour
business, financial condition and results of operations.
In 1998, 1997 1996 and 19951996 sales to Tomen Electronics comprised 33%45%, 17%33% and
25%17%, respectively, of total revenues respectively.revenues. In 1996, sales to Samsung comprised
11% of total revenues.
Export sales accounted for 92%95%, 92% and 91% of our total revenues in
1998, 1997 and 81% of total revenue in 1997, 1996,
and 1995, respectively. Due to itsour export sales, the Company iswe are subject
to the risks of conducting business internationally, including unexpected
changes in regulatory requirements, fluctuations in exchange rates that could
increase the price of the Company'sour products in foreign markets, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs,
other barriers and restrictions and the burden of complying with a variety of
foreign laws. All of the Company'sour export sales are denominated in United States
dollars. See Note 3 of the Notes to Consolidated Financial Statements of the
Company'sour
Annual Report to Stockholders for the year ended December 31, 1997,1998, for a
summary of the Company'sour operations within various geographic areas.
12
MANUFACTURING AND DESIGN METHODOLOGY
Since the Company'sour products are based on itsour proprietary DSP core designs, which
are not dependent upon a particular foundry's library cells, these products
can be manufactured at a number of independent foundries. Accordingly, all
of the Company'sour manufacturing occurs at independent foundries. The Company
contractsWe contract
fabrication services for speech and telephony processors from Taiwan
Semiconductor Manufacturing Company, ("TSMC"), Tower Semiconductor ("Tower") and Samsung Semiconductor, Inc. ("Samsung").Samsung. Under
non-exclusive agreements, these independent foundries normally provide the Companyus
with finished, packaged and tested speech processors at variable prices
depending on the volume of units purchased. The CompanyWe customarily payspay for
fully-tested products meeting predetermined specifications. To ensure the
integrity of quality assurance procedures, the Company developswe develop detailed testtesting
procedures and specifications for each product and requiresrequire each foundry to
use suchthese procedures and specifications before shipping us finished products.
The Company plansWe intend to continue to use independent foundries to manufacture
digital speech processors and other products for the consumer telephone and
computer telephony markets. To obtain an adequate supply of wafers, the Company
iswe are
considering various alternative production sites. The Company'sOur reliance on
independent foundries involves a number of risks, such asincluding the foundries'
achievement of acceptable manufacturing yields and allocation of capacity to
the
Company.us.
12
In addition to the Company'sour speech processors, digital TADs include various other
components such as ARAMs, codecsanalog random access memory circuits (ARAMs), coders and
flash memories that are supplied by third party manufacturers. Temporary
fluctuations in the pricing and availability of these components could have a
material adverse effect on sales of the Company'sour speech processors for digital TADs
and other computer telephony products, which could in turn have a material
adverse effect on the Company'sour business, financial condition and results of
operations.
COMPETITION
The markets in which the Company operateswe operate are extremely competitive and the
Company expectswe expect
that competition will increase. In each of the Company'sour business activities, it faceswe face
current and potential competition from competitors that have significantly
greater financial, technical, manufacturing, marketing, sales and
distribution resources and management expertise than the Company. The
Company'swe do. Our future
prospects will be highly dependent upon the successful
developmentdepend greatly on our ability to successfully develop and
introduction ofintroduce new products that are responsive to market needs. There can be no assuranceWe cannot assure
that the Companywe will be able to successfully develop or market any suchof these products.
The principal competitive factors in the digital TAD speech processor
market include price, speech quality, compression ratio, value-added features
such as variable speed message playback and speakerphone, customer support
and the timing of product introductions by the Companyus and itsour competitors. The Company
believesWe
believe that it iswe are competitive with respect to each of these factors.
Currently, the key competitive challenge for digital TADs is the relative
lower cost of analog tape-based machines. The Company believesWe believe that the continuing
decline in prices of digital speech processors and silicon memory devices
will close the cost gap between the analog and digital technology solution.
The Company'sOur principal competitors in the TAD speech processor market include ISD,
Lucent Microelectronics, Macronix, TI, Toshiba, Siemens and Zilog.
The principal competitive factors in the DSP core designs market for
high volume, low cost applications include such features as small size, low
power, flexible I/O blocks and associated development tools. The Company'sOur DSP core
designs compete with companies such as Analog Devices, Atmel, Clarkspur
Designs, SGS Thompson and Tensleep,Siemens, which license DSP platforms, and Analog
Devices, Lucent Microelectronics, Motorola, and TI,Texas Instruments, which sell
their own complete general purpose DSP solutions (general purpose DSPs).solutions.
Several digital speech compression technologies exist and are currently
being developed that may be promoted by competitors as industry standards for
the computer telephony and personal computer markets. The Company'sOur TrueSpeech
algorithms compete with ADPCM, and the speech compression technologies used
in GSM and VSELP protocols, each of which is available in the public domain.
There are many versions of these algorithms that have been developed by
different parties, including AT&T, (whichwhich has been actively involved in the
development of GSM)GSM protocols, and Motorola, (whichwhich developed the original
VSELP).VSELP protocols. Although TrueSpeech has achieved a degree of acceptance in
the computer telephony and personal computer markets, ADPCM and the speech
compression technologies for GSM and VSELP protocols are widely used in the
13
development and implementation of new products in the telephony industry. In
addition, other advanced speech compression algorithms have been introduced
by competitors whichthat offer compression ratios comparable to the TrueSpeech
algorithms, including a competing algorithm sponsored by the University of
Sherbrooke that the ITU standards committee has adopted as the speech
compression standard for DSVD modems. Large companies, such as AT&T,
Creative Labs, Motorola and Rockwell, have speech processing technologies
that can be applied to speech compression for use in the same markets for
which the Company'sour products are targeted.
Price competition in the markets in which the Companywe currently competescompete and
proposespropose to compete is intense and may increase, which could have a material
adverse effect on the Company'sour business, financial condition and results of
operations. The Company hasWe have experienced and expectsexpect to continue to experience
increased competitive pricing pressures for itsour digital TAD speech
processors. During 1997, the Company was1998, we were able to completely offset this decrease on
an annual basis through manufacturing cost reductions. There can be no assuranceHowever, we cannot
assure that the
Companywe will be able to further reduce product costs, or be able to
compete successfully as to price or any other of the key competitive factors.
13
RESEARCH AND DEVELOPMENT
The Company believesWe believe that continued timely development and introduction of new
products areis essential to maintaining itsmaintain our competitive position. The CompanyWe currently
conductsconduct most of itsour product development effort in-house and at December 31,
19971998 had a staff of 5666 research and development personnel located in Israel.
The CompanyWe also employsemploy independent contractors to assist with certain product
development and testing activities. During the years 1997, 1996
and 1995, the CompanyWe spent approximately $10.2 million in
1998, $8.4 million in 1997 and $8.5 million and $8.4
million, respectively,in 1996 on research and
development activities.
RELATIONSHIPS WITH AFFILIATED COMPANIES
The Company hasWe have a $1.7$1.8 million equity investment in, and hashave entered into
technology arrangements with, AudioCodes Ltd. ("AudioCodes"), an Israeli
corporation primarily engaged in DSP-related contract engineering in connection
with speechdesign, development, manufacturing and
speech algorithm technologies. The Companymarketing of hardware and software products that enable simultaneous
transmission of voice and data over networks such as Internet, ATM and Frame
Relay. We currently ownsown 29% of the capital stock of AudioCodes, a company
formed in April 1993 by two of our former employees of DSP Group.employees. Pursuant to an
agreement between the CompanyDSP Group and AudioCodes, the CompanyDSP Group and AudioCodes have
joint ownership of any speech compression technology developed by AudioCodes.
The Company hasWe have established this relationship to complement itsour in-house product
development efforts.
In July 1996, the Companywe invested $2.0 million of cash for approximately 40% of
the equity interestsinterest in Aptel Ltd. ("Aptel"), an emerging company in
its product development stage located in Israel. Aptel has expertise in
spread spectrum direct sequence modulation technology, which is applicable toIsraeli company. In
connection with the development of products for two-way paging systems and telemetry
applications. In 1996, the Companyinvestment, we incurred a one-time write-off of acquired
in-process technology of $1.5 million. In October 1997, the Companywe invested
approximately $176,000 in convertible debentures issued by Aptel. In
December 1997, the Companywe converted itsour debentures and Aptel's shareholders,
(including the Company)including DSP Group, exchanged their shares in Aptel for common shares in
Nexus Telecommunications Systems Ltd. ("Nexus"), an Israeli company
registered and traded on the Nasdaq SmallCap Market. TheIn April 1998, we sold
all of our Nexus shares received in a private transaction and realized a pre-tax one
time gain on marketable equity securities of approximately $1.1 million.
This one time gain is included under "Other income (expenses)" in our
consolidated statements of income for the transaction are restricted from being traded until December 1998 and are
presented in the Company's balance sheet at $1,226,000, which is the market
value of such shares onyear ended December 31, 1997.1998.
LICENSES, PATENTS AND TRADEMARKS
The Company hasWe have been granted seven United States patents, one Canadian patent
and hasone Israeli patent, and have seven patents pending in the United States,
two patents pending in Japan, two patents pending in Israel and one patent
pending in the United States. The CompanyEurope. We actively pursuespursue foreign patent protection in other
countries of interest to the Company. Theus. Our policy
of the Company is to apply for patents or for other
appropriate statutory protection when it developswe develop valuable new or improved
technology. The status of patents involves complex legal and factual
questions, and the breadth of claims allowed is 14
uncertain. Accordingly, there can be no assurancewe
cannot assure that any patent application filed by the Companyus will result in patentsa patent
being issued, or that itsour patents, and any patents that may be issued in the
future, will afford adequate protection against competitors with similar
technology; nor can there be anywe provide assurance that patents issued to the Companyus will not
be infringed or designed around by others. In addition, the laws of certain
countries in which the Company'sour products are or may be developed, manufactured or
sold, including Hong Kong, Japan and Taiwan, may not protect the Company'sour products and
intellectual property rights to the same extent as the laws of the United
States.
The Company attemptsWe attempt to protect itsour trade secrets and other proprietary
information through agreements with itsour customers, suppliers, employees and
consultants, and through other security measures. Although the Company
intendswe intend to
protect itsour rights vigorously, there can be nowe cannot provide assurance that these
measures will be successful.
The semiconductor and software industries are subject to frequent
litigation regarding patent and other intellectual property rights. While the Company haswe
have not been involved in any material patent or other intellectual property
rights litigation to date, there can be nowe cannot provide assurance that third parties
will not assert claims against the Companyus with respect to existing or future products
or that the Companywe will not need to assert claims against
14
third parties to protect itsour proprietary technology. For example, AT&T has
asserted that G.723.1, which is primarily composed of a TrueSpeech algorithm,
includes certain elements covered by patents held by AT&T and has requested
that video conferencing equipment manufacturers license this technology from
AT&T. In the event ofIf litigation becomes necessary to determine the validity of any third
party claims or to protect itsour proprietary technology, such litigationit could result in
significant expense to the Companyus and could divert the efforts of the Company'sour technical and
management personnel, whether or not suchthe litigation is determined in favor of the Company.our
favor. In the event of an adverse result in any such litigation, the Companywe could be
required to expend significant resources to develop non-infringing technology
or to obtain licenses to the technology that is the subject of the
litigation. There can be noWe cannot provide assurance that the Companywe would be successful in
such
developmentdeveloping non-infringing technology or that any such licenses would be available
on commercially reasonable terms.
The Company hasWe have been issued registered trademarks for the use of the
PineDSPCore-Registered Trademark-, OakDSPCore-RegisteredPineDSPCore, OakDSPCore, TeakDSPCore, OCEM-Registered Trademark- and
TrueSpeech trademarks. In addition, the Companywe applied for trademarks for TeakDSPCoreFull Duplex
SpeakerPhone, TeakLite, Triple Rate Coder, and PalmDSPCore.
While the Company'sour ability to compete may be affected by itsour ability to protect
itsour intellectual property, the Company believeswe believe that, because of the rapid pace of
technological change in the industry, itsour technical expertise and ability to
innovate on a timely basis will be more important in maintaining itsour
competitive position than protection of itsour intellectual property. The Company
believesWe
believe that, because of the rapid pace of technological change in the
consumer telephone, computer telephony and personal computer industries,
patents and trade secret protection are important but must be supported by
other factors such as the expanding knowledge, ability and experience of the Company'sour
personnel, new product introductions and frequent product enhancements.
Although the Company continueswe continue to implement protective measures and intendsintend to defend
itsour intellectual property rights, there can be nowe cannot provide assurance that these
measures will be successful.
BACKLOG
At December 31, 1997, the Company's1998, our backlog was approximately $16.8$8.7 million
compared with approximately $15.1$16.8 million at December 31, 1996. The Company
includes1997. We include
in itsour backlog all accepted product purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year and
fees specified in executed licensing contracts. The Company'sOur business in digital TAD
speech processors is characterized by short-term order and shipment
schedules. Product orders in the Company'sour current backlog are subject to changes in
delivery schedules or to cancellation at the option of the purchaser without
significant penalty. Accordingly, although useful for scheduling production,
backlog as of any particular date may not be a reliable measure of our sales
for any future period.
15
EMPLOYEES
As ofAt December 31, 1997, the Company1998, we had 105120 employees, including 5666 in research and
development, 2227 in marketing and sales and 27 in corporate and administration
and manufacturing coordination. Competition for personnel in the
semiconductor, software and personal computer industries in general is
intense. The Company believesWe believe that itsour future prospects will depend, in part, on itsour
ability to continue to attract and retain highly skilledhighly-skilled technical, marketing
and management personnel, who are in great demand. In particular, there is a
limited supply of highly qualifiedhighly-qualified engineers with digital signal processing
experience. None of the Company'sour employees is represented by a collective bargaining
agreement, nor has the Companyhave we ever experienced any work stoppage. The Company believesWe believe that
itsour employee relations are good.
15
FACTORS AFFECTINGTHAT MAY AFFECT FUTURE OPERATING RESULTS
THIS FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY
FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING THE
FOLLOWING RISK FACTORS.
POTENTIAL FLUCTUATIONS INOUR QUARTERLY OPERATING RESULTS. The Company's
revenues are derived predominately from productRESULTS MAY FLUCTUATE SIGNIFICANTLY
We experience, and will continue to experience, significant fluctuations
in sales and accordingly vary
significantly depending on theoperating results from quarter to quarter. Our quarterly results
fluctuate due to a number of factors:
- fluctuations in volume and timing of product orders. The
Company's quarterly operating results also depend on theorders;
- timing of recognition of license fees and thefees;
- level of per unit royalties.royalties;
- changes in demand for our products due to seasonal customer buying
patterns and other factors;
- timing of new product introductions by us or our customers, licensees
or competitors;
- changes in the mix of products sold by us;
- fluctuations in the level of sales by OEMs and other vendors of
products incorporating our products; and
- general economic conditions, including the changing economic
conditions in Asia.
Each of the above factors is difficult to forecast and thus could have a
material adverse effect on our business, financial condition and results of
operations.
Through 1998, the Company
expects1999, we expect that revenues from itsour DSP core designs and
TrueSpeech algorithms will be derived primarily from license fees rather than
per unit royalties. The uncertain timing of these license fees has caused,
and may continue to cause, quarterly fluctuations in the Company'sour operating results.
The Company'sOur per unit royalties from licenses are totally dependent upon the success
of its OEMour third party licensees in introducing products utilizing the Company'sour technology
and the success of those OEMthird party products in the marketplace. Per unit
royalties from TrueSpeech licensees have not been significant to date.
Royalties from two DSP
Core licensees have started to become meaningfulIn addition, in 1997.
The Company's quarterly operating results may also fluctuate significantly
as demand for TADs varies during the year due to seasonal customer buying
patterns,fourth quarter of 1998 and in the first quarter of
1999, we experienced a sharp decrease in product revenues as a result of other factors such as the
timingphasing out of an old line of digital TAD products, while shipments from a
new product introductions by the Company or its customers, licensees or competitors; market
acceptance of new products and technologies; the mix of products sold;
fluctuationsline are expected to begin in the levelsecond quarter of sales by OEMs and other vendors of products
incorporating the Company's products; and changes in general economic
conditions.
DECLINING1999.
OUR AVERAGE SELLING PRICES AND GROSS MARGINS; DEPENDENCE ON DIGITAL
TAD MARKET. The Company hasCONTINUE TO DECLINE
We have experienced a decrease in the average selling prices of itsour
digital TAD speech processors, but hashave to date been able to offset this
decrease on an annual basis through manufacturing cost reductions and the
introduction of new products with higher performance. The Company experienced a
significant decline in the gross margin on TADs in the second and third quarters
of 1996 due to competitive market pricing pressures and delays in ongoing cost
reduction efforts. Although significant cost reductions were achieved in the
fourth quarter of 1996 and throughout 1997, there is noHowever, we cannot
guarantee that suchour on-going efforts will be successful or that they will keep
pace with the anticipated, continuing decline in average selling prices.
WE DEPEND ON THE DIGITAL TAD MARKET WHICH IS HIGHLY COMPETITIVE
Sales of digital TAD products comprise a substantial portion of our
product sales. Any adverse change in the digital TAD market or in our
ability to compete and maintain our position in that market would have a
material adverse effect on our business, financial condition and results of
operations. The digital TAD market and the markets for the
Company'sour products in
general are extremely competitive and the Company expectswe expect that competition will only
increase. The Company'sOur existing and potential competitors in each of itsour markets
include large and emerging domestic and foreign companies, many of which have
significantly greater financial, technical, manufacturing, marketing, sale
and distribution resources and management expertise than the
Company. Any inability of the Companywe do. It is
possible that we may one day be unable to respond to increased price
competition for its TAD speech processors or its other products through the continuing and
frequent
introduction of new products or reductions of manufacturing costs, orcosts. This
inability would have a material adverse effect on our business, financial
condition and results of operations. Likewise, any significant delays by the Companyus
in developing, manufacturing or shipping new or
16
enhanced products would also have a material adverse effect on the Company'sour business,
financial condition and results of operations.
Sales of TAD products
comprise a substantial portion of the Company's product sales. Any adverse
change in the digital TAD market or the Company's ability to compete and
maintain its position in that market would have a material adverse effect on the
Company's business, financial condition and results of operations.
16
WE DEPEND ON REVENUES FROM ASIA.A CURRENTLY UNSTABLE ASIAN MARKET
In 1997, the Companywe generated approximately $19.9 million, or 39% of itsour total
product sales, from sales to customers located in South Korea, Taiwan,
Singapore and Hong Kong. WhileHowever, in 1998, due to economic activityproblems in some
of these countries, most notably South Korea has been adversely affected by recent
developments in local currency and banking markets, the Company believes that
the effect of these developments on the Company's business is somewhat mitigated
by the financial condition of many of the Company's customers in these markets,
such as Daewoo, L.G. Electronics and Maxon. Many of these customers are leaders
in their respective industries and conduct their business on a multinational
basis. In addition, management estimates that approximately 70% of the Company'sSingapore, our product sales
generated from the Asianin this region in 1997 were used in end-products
subsequently exporteddecreased to non-Asian markets such as the United States and Europe,
which represent an important source$10.9 million, or 22% of foreign currency for these customers.our total product sales.
The
Company does not believe that economic conditions in Asia had a material effect
on its 1997 revenue. The Company continues to believe that the geographic
diversity of its customers and the diverse end-markets for its customers'
products will continue to benefit the Company. However, in the first quarter of
1998, the Company has been experiencing a decline in the flows of orderssales from Southeast Asia specifically South Korea mainly due to the general economic
atmospherecountries resulted in that region.a decrease in
our backlog, but was partially offset by increased orders from Japan. If
this negative economic trend in the Asian markets continues, it may result in
a further decrease of the Company'sour backlog at the end of the first quarter of 1998. There can be
noin 1999. We cannot provide assurance that
continued negative developmentseconomic development in the Asian regionAsia will not have ana material
adverse effect on the Company'sour future operating performance.
RELIANCEWE DEPEND ON INDEPENDENT FOUNDRIES.FOUNDRIES TO MANUFACTURE OUR INTEGRATED CIRCUIT
PRODUCTS
All of the Company'sour integrated circuit products are manufactured by independent
foundries. While these foundries have been able to adequately meet the
demands of the Company'sour increasing business, the Company iswe are and will continue to be dependent
upon these foundries to achieve acceptable manufacturing yields, and quality
levels and costs, and to allocate to the
Companyus a sufficient portion of foundry
capacity to meet the Company'sour needs in a timely manner. To meet itsour increased wafer
requirements, the Company haswe have added additional independent foundries to manufacture
itsour digital TAD speech processors. RevenuesOur revenues could be materially and
adversely affected should any of these foundries fail to meet the Company'sour request for
products due to a shortage of production capacity, process difficulties, or low
yield rates.
RELIANCErates or financial instability.
WE DEPEND ON INTERNATIONAL OPERATIONS; RISK OF OPERATIONS, PARTICULARLY IN ISRAEL. The
Company isISRAEL
We are subject to the risks of doing business internationally,
includingincluding:
- unexpected changes in regulatory requirements;
- fluctuations in the exchange rate for the United StatesU.S. 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 aslaws;
- political and economic instabilityinstability; and
- changes in diplomatic and trade relationships, in connection with its international operations.relationships.
In particular, the Company'sour principal research and development facilities are
located in the State of Israel and, as a result, at December 31, 1997, 761998, 97 of
the Company's 105our 120 employees were located in Israel, including all 5666 of our research
and development personnel. In addition, although the CompanyDSP Group is incorporated
in Delaware, thea majority of the Company'sour directors and executive officers are non-residentsresidents
of the United States.Israel. Therefore, the Company iswe are directly affected by the political, economic
and military conditions to which that
countryIsrael is subject.
In addition,Moreover, many of the Company'sour expenses in Israel are paid in Israeli currency
thereby also subjectingwhich subjects us to the Company torisks of foreign currency fluctuations and to
economic pressures resulting from Israel's generally high rate of inflation.
The rate of inflation in Israel for 1996was 8.6% in 1998 and 1997 was 10.6% and 7.0%, respectively. in 1997. While
substantially all of the
Company'sour sales and expenses are denominated in United States
dollars, a portion of the Company'sour expenses are denominated in Israeli shekels. The
Company'sOur
primary expenses paid in Israeli currency are employee salaries and lease
payments on theour Israeli facility.facilities. 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, sales and
marketing expenses and general and administrative expenses. There can be noWe cannot
provide assurance that currency fluctuations, changes in the rate of
inflation in Israel or any of the other aforementioned factors mentioned above will not have
a material adverse effect on the
Company'sour business, financial condition and results of
operations.
RELIANCE17
WE DEPEND ON OEMSTHIRD PARTIES AND THEIR SUPPLIERS TO OBTAIN REQUIRED
COMPLEMENTARY COMPONENTS. CertainCOMPONENTS
Some of the raw materials, components and subassemblies included in the
products manufactured by the Company's OEMour third party customers, which also incorporate
the
Company'sour products, are obtained from a limited group of suppliers. Disruptions,Supply
disruptions, shortages or termination of certainany of these sources of supply could occur.
Supply disruptions, shortages or termination could have an
adverse effect on the
Company'sour business and results of operations due to its customersthe delay or
discontinuance of orders for our products by customers until the Company's products until suchother
necessary components are available.
DEPENDENCEWE DEPEND UPON THE ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. The
Company'sTRUESPEECH
Our prospects are partially dependent upon the establishment of industry
standards for digital speech compression based on TrueSpeech algorithms in
17
the computer telephony and personal computerVoice over IP markets. The continuing development
of industry standards utilizing TrueSpeech algorithms would create an
opportunity for the Companyus to develop and market speech co-processors that provide
TrueSpeech solutions and enhance the performance and functionality of
products incorporating these co-processors.
In February 1995, the ITU established G.723.1, which is predominately
composed of a TrueSpeech algorithm, as the standard speech compression
technology for use in video conferencing over public telephone lines. In
March 1997, the International Multimedia Teleconferencing Consortium, a
nonprofit industry group, recommended the use of G.723.1 as the default audio
coder for all voice transmissions over the Internet or for IP applications
for H.323 conferencing products.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
DSP Group has pursued, and will continue to pursue, growth opportunities
through internal development and acquisition of complementary businesses,
products and technologies. We are unable to predict whether or when any
prospective acquisition will be completed. The process of integrating an
acquired business may be prolonged due to unforeseen difficulties and may
require a disproportionate amount of our resources and management's
attention. We cannot provide assurance that we will be able to successfully
identify suitable acquisition candidates, complete acquisitions, integrate
acquired businesses into our operations or expand into new markets. Once
integrated, acquisitions may not achieve comparable levels of revenues,
profitability or productivity as the existing business of DSP Group or
otherwise perform as expected. The occurrence of any of these events could
harm our business, financial condition or results of operations.
Additionally, future acquisitions may require substantial capital resources,
which may require us to seek additional debt or equity financing.
PROTECTION OF OUR INTELLECTUAL PROPERTY.PROPERTY IS LIMITED; RISKS OF INFRINGEMENT OF
RIGHTS OF OTHERS
As is typical in the semiconductor and software
industries, the Company hasindustry, we have been and may from
time to time be notified of claims that itwe may be infringing patents or
intellectual property rights owned by third parties. For example, AT&T Lucent Microelectronics, NTT and VoiceCraft have
recentlyhas
asserted that G.723.1, which is primarily composed of a TrueSpeech algorithm,
includes certain elements covered by patents held by these entitiesAT&T, and havehas requested
that video conferencing equipment manufacturers license suchthe technology from them.AT&T.
Other organizations including Lucent Microelectronics, NTT and VoiceCraft
have raised public claims that they also have patents related to the G.723.1
technology.
If it appears necessary or desirable, the Companywe may seektry to obtain licenses
under suchthose patents or intellectual property rights that it iswe are allegedly
infringing. Although holders of suchthese types of intellectual property rights
commonly offer suchthese licenses, no assurances can be givenwe cannot assure that licenses will be offered
or that
the terms of any offered licenses will be acceptable to the Company. Theus. Our failure
to obtain a license for key intellectual property rights from a third party
for technology used by the Companyus could cause the Companyus to incur substantial liabilities and
to suspend the manufacturemanufacturing of products utilizing the technology. The Company believesWe
believe that the ultimate resolution of these matters will not have a
material adverse effect on our financial position, results of operations, or
cash flows.
18
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY YEAR 2000 READINESS ISSUES
During the Company'snext year, many software programs may not recognize calendar
dates beginning in the Year 2000. This problem could force computers or
machines that utilize date dependent software to either shut down or provide
incorrect information. To address this problem, we have examined our
computer and information systems and have contacted our primary processing
vendors, suppliers and other third parties.
Although we believe that our products are Year 2000 compliant,
undetected errors or defects may remain. Disruptions to our business or
unexpected costs may arise because of undetected errors or defects in the
technology used in our products. If we, or any of our key suppliers or
customers, fail to mitigate internal and external Year 2000 risks, we may
temporarily be unable to process transactions, manufacture products, send
invoices or engage in similar normal business activities or we may experience
a decline in sales, which could have a material adverse effect on our
business, financial position orcondition and results of operations. YEAR 2000 COMPLIANCE. The Company is awareSee the section
labeled "Management's Discussion and Analysis of the issues associated with
the programming codeFinancial Condition and
Results of Operations" in existing computer systems as the year 2000 approaches.
The "Year 2000" problem is concerned whether computer systems will properly
recognize date sensitive information when the year changesour Annual Report to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a systemStockholders for more
information.
OUR STOCK PRICE MAY BE VOLATILE
Announcements of developments related to fail. The year 2000 problem is pervasiveour business, announcements by
competitors, quarterly fluctuations in our financial results and complex as
virtually every company's computer operation will be affected in some way. The
Company is utilizing both internal and external resources to identify, correct
or reprogram, and test the systems for Year 2000 compliance. It is anticipated
that all reprogramming efforts will be completed by December 31, 1998, allowing
adequate time for testing. To date, confirmations have been received from the
Company's primary processing vendors that plans are being developed to address
processing of transactionsgeneral
conditions in the year 2000. Management believes that Year 2000
compliance expenses will nothighly dynamic industry in which we compete or the national
economies in which we do business, and other factors could cause the price of
our common stock to fluctuate, perhaps substantially. In addition, in recent
years the stock market has experienced extreme price fluctuations, which have
anoften been unrelated to the operating performance of affected companies.
These factors and fluctuations could have a material adverse effect on the
Company's earnings.
However, theremarket price of our common stock.
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K
The information contained in this Annual Report on Form 10-K and in the
other documents referenced herein contains forward-looking statements that
involve a number of risks and uncertainties. Forward-looking statements can
be no assuranceidentified by the use of forward-looking terminology, including
"believes," "expects," "may," "will," "should" or "anticipates," or the
negative of these terms or other variations or comparable terminology, or by
discussions of strategy that Year 2000 problems will not occur with
respectinvolve risks and certainties. Numerous
factors, including economic and competitive conditions, timing and volume of
incoming orders, shipment volumes, product margins, and foreign exchange
rates, could cause actual results to the Company's computer systems. The Year 2000 problem may impact
other entities with which the Company transacts business, and the Company cannot
predict the effect of the Year 2000 problem on such entities.
ONGOING LITIGATION. In November 1995, after the Company's stock price
declined, several lawsuits were fileddiffer materially from those described
in the United States District Court for
the Northern District of California accusing the Company, its former Chief
Executive Officer, and its former Chief Financial Officer of issuing materially
false and misleadingthese statements. These forward-looking statements in violation of the federal securities laws.
These lawsuits were consolidated into a single amended complaint in February
1996. In the amended complaint, plaintiffs sought unspecified damages on behalf
of all persons who purchased shares of the Company's Common Stock during the
period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court
granted the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the
Court issued an order dismissing with prejudice all claimsare based on statements
issued by the Company. The Court allowed plaintiffscurrent
expectations and we assume no obligation to proceed with their claims
regarding statements the Company allegedly made to securities analysts, and also
permitted plaintiffs to amend their complaint as to their claim that the Company
is responsible for the statements contained in analysts' reports. Plaintiffs
chose not to amend their complaint after the March 7, 1997 order. On November 5,
1997, the parties reached an agreement in principle to settleupdate this litigation.
The proposed settlement requires that the Company fund approximately $50,000 of
the settlement amount to fulfill the retention amounts under the Company's
insurance policy. The proposed settlement is subject to the execution of a
stipulation of settlement and court approval.
POSSIBLE VOLATILITY OF STOCK PRICE. The variety and uncertainty of the
factors affecting the Company's operating results, and the fact that the Company
participates in a highly dynamic industry, may result in significant volatility
in the Company's Common Stock price.
18information.
19
ITEM 2. PROPERTIES.
The Company'sDSP Group's operations in the United States are located in an approximately
15,700 square foot leased facility in Santa Clara, California. This
facility houses the Company'sour marketing and support, North American sales,
operations, manufacturing coordination and administrative personnel. This
facility is leased through December 1999. In August 1997, the Company'sour subsidiary,
DSP Semiconductors (Israel),Group, Ltd. moved to a facility in Herzlia Pituach, Israel with
approximately 27,000 square feet pursuant to a lease ending in May 2002.
In September 1998, DSP Group, Ltd. leased an additional 9,400 square feet
at its current facility in Herzlia Pituch, Israel, through November 2003.
In August 1997, DSP Semiconductors (Israel),Group, Ltd. signed an additional lease agreement for
office space in Omer, (locatedlocated in the south of Israel),Israel, for 840 square feet
through September 1999.
ITEM 3. LEGAL PROCEEDINGS.
In November 1995, after the Company's stock price declined, several
lawsuits were filed in the United States District Court for the Northern
District of California accusing the Company, its former Chief Executive
Officer, and its former Chief Financial Officer of issuing materially false
and misleading statements in violation of the federal securities laws. These
lawsuits were consolidated into a single amended complaint in February 1996.
In the amended complaint, plaintiffs sought unspecified damages on behalf of
all persons who purchased shares of the Company's Common Stock during the
period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court
granted the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the
Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts, and also permitted plaintiffs to amend their complaint
as to their claim that the Company was responsible for the statements
contained in analysts' reports. Plaintiffs chose not amend their complaint
after the March 7, 1997 order. On November 5, 1997, the parties reached an
agreement in principle to settle this litigation. The proposed settlement
requires that the Company fund approximately $50,000 of the settlement amount
to fulfill the retention amounts under the Company's insurance policy. The
proposed settlement is subject to the execution of a stipulation of
settlement and court approval.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in
the United States District Court for the Northern District of California
against the Company.DSP Group. The action alleges breach of contract, breach of
implied covenant of good faith and fair dealing and requests an accounting
by the Companyus in connection with the Company'sour termination of the Sales Representative
Agreement between BEKA and the Company.us. The complaint seeks an unspecified amount
of damages. The Company filed an answerparties completed non-binding mediation in May 1998, but
were unable to settle the complaint on April 14, 1997, denying
all causes of action. The Companycase. Discovery in the case has been completed.
Trial has been set for May 11, 1999. DSP Group believes the lawsuit to be
without merit and intends to defend itself vigorously.
In February 1997, a lawsuit between the Company and Elk Industries, Inc.
("Elk") was settled. The litigation had been pending since April 1996 in the
United States District Court for the Southern District of Florida. Elk had
alleged patent infringement by the Company in connection with the Company's
making, selling and using an audio storage and distribution system allegedly
covered under a patent held by Elk.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
1920
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information contained in the section labeled "Price Range of Common
Stock" appearing on page 18 of
the Registrant'sin DSP Group's Annual Report to Stockholders for the year ended
December 31, 19971998 is incorporated herein by reference.
The information contained in the section labeled "Subsequent Events--Sale
of Common Stock" in DSP Group's Annual Report to Stockholders for the year
ended December 31, 1998 is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information contained in the section labeled "Selected Consolidated
Financial Data" appearing on page
17 of the Registrant'sin DSP Group's Annual Report to Stockholders for the year
ended December 31, 19971998 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information contained in the section labeled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing on pages 19 through 24 of the
Registrant'sin DSP
Group's Annual Report to Stockholders for the year ended December 31, 19971998
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.
The information contained in the section labeled "Quantitative and
Qualitative Disclosures About Market Risk" in DSP Group's Annual Report to
Stockholders for the year ended December 31, 1998 is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and related notes and independent
auditors report appearing on pages 25 through 46 of the Registrant'sin DSP Group's Annual Report to Stockholders for the year
ended December 31, 19971998 are incorporated herein by reference.
The information contained in the section labeled "Quarterly Data" appearing on page 17 of the
Registrant'sin DSP
Group's Annual Report to Stockholders for the yearsyear ended December 31, 1996
and 19971998
is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
2021
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section labeled "Directors, Executive Officersfollowing table sets forth certain information with respect to the
directors and Key Personnel"executive officers of DSP Group:
NAME AGE POSITION
Igal Kohavi 59 Chairman of the Board
Eliyahu Ayalon 56 President, Chief Executive Officer and Director
Avi Basher 42 Vice President of Finance,
Chief Financial Officer and Secretary
David Tolub 48 Vice President-- Sales
Gideon Wertheizer 42 Vice President-- Marketing
Samuel L. Kaplan (1)(2) 62 Director
Zvi Limon (2) 40 Director
Millard Phelps (1)(2) 70 Director
Yair Shamir (1)(2) 53 Director
Saul Shani (1) 44 Director
- --------------------------
(1) Member of the Registrant's definitive Proxy StatementCompensation Committee
(2) Member of the Audit Committee
IGAL KOHAVI has been Chairman of the Board of DSP Group since September
1995. Dr. Kohavi has served since 1995 as Chairman of the Venture Funds of
Dovrat-Sherm & Co. Ltd., an Israeli investment bank at which he formerly served
as President from October 1994 to January 1996. Between March 1993 and October
1994, he served as Managing Director of Clal Electronic Industries Ltd.
Dr. Kohavi also serves as a director of Mercury Interactive Corporation (Nasdaq:
MERQ) ("Mercury Interactive"), a provider of client/server and web testing
tools.
ELIYAHU AYALON joined DSP Group in April 1996 as President, Chief Executive
Officer and Director. From May 1992 to April 1996, Mr. Ayalon served as
President and Chief Executive Officer of Mennen Medical Ltd., a developer and
manufacturer of medical instruments and apparatus.
AVI BASHER joined DSP Group in October 1996 as Vice President of Finance
and Chief Financial Officer. In January 1997, he was elected to serve as
Secretary of DSP Group as well. Prior to joining DSP Group, Mr. Basher served
from December 1992 to October 1996 as Chief Financial Officer of InterPharm
Laboratories, Ltd., a healthcare biotechnology company.
DAVID TOLUB joined DSP Group in May 1998 as Vice President, Sales. Prior
to joining DSP Group, Mr. Tolub served from September 1993 to May 1998 as Vice
President, Marketing of NICE Systems, a provider of Computer Telephony
Integrated (CTI) recording and quality measurement solutions.
GIDEON WERTHEIZER joined DSP Group in September 1990 as Project Manager of
DSP Group's VLSI Design Center and became Vice President of the VLSI Design
Center in August 1995. In November 1997, Mr. Wertheizer was appointed Vice
President, Marketing of DSP Group.
22
SAMUEL L. KAPLAN has been a Director of DSP Group since May 1993.
Mr. Kaplan has been a partner in the law firm of Kaplan, Strangis and Kaplan,
P.A. of Minneapolis, Minnesota, since October 1978. Mr. Kaplan also serves as a
trustee of USP Real Estate Investment Trust, a real estate investment trust.
ZVI LIMON has been a Director of DSP Group since February 1999. Mr. Limon
has served as Chairman of Limon Holdings Ltd., a consulting and investment
advisory firm since 1993. He presently serves as a director of Eltek Ltd.
(Nasdaq: ELTKF), a developer and manufacturer of PC boards.
MILLARD PHELPS has been a Director of DSP Group since July 1995.
Mr. Phelps has been most recently associated with Hambrecht & Quist, an
investment banking firm, where he served from 1984 to August 1997 as Advisory
Director in the corporate finance area, advising on public and private financing
matters. Mr. Phelps has worked in the semiconductor industry for more than 20
years at several manufacturing companies, including Texas Instruments
Incorporated, Fairchild Corporation, Intersil Inc. and Synertek Inc. He
currently serves as a director of Trident Microsystems, Inc., a designer,
developer and marketer of integrated circuit graphics and multimedia products.
YAIR SHAMIR has been a Director of DSP Group since October 1996 and has
served as President and Chief Executive Officer of VCON Telecommunications,
Ltd., a developer and marketer of video conferencing systems, since February
1997. From July 1995 to February 1997, Mr. Shamir served as the Executive Vice
President of The Challenge Fund-Etgar L.P., a venture capital firm. From
January 1994 to July 1995, he served as Chief Executive Officer for Elite
Industries, Ltd., a food products company. Mr. Shamir currently serves as a
director of Mercury Interactive, Orckit Communications, Limited, a developer and
manufacturer of local loop communications systems and VCon Telecommunications,
Ltd.
SAUL SHANI has been a Director of DSP Group since February 1999. Mr. Shani
has served since 1996 as Managing Director of Limon Holdings, Ltd., a consulting
and investment advisory firm. He also has served as Chairman and Director of
Global Village Telecom N.V., a private company engaged in providing satellite
based telephony services, since 1998. From 1990 to 1996, Mr. Shani served as
co-founder, CEO, Chairman, and Director of Sapiens International Corporation
NV (Nasdaq: SPNSF), a provider of enterprise-wide solutions for software
applications.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
requires DSP Group's directors, executive officers and persons who own more than
10% of DSP Group's common stock (collectively, "Reporting Persons") to file
reports of ownership and changes in ownership of DSP Group's common stock with
the Securities and Exchange Commission and The Nasdaq Stock Market, Inc. Copies
of these reports are also required to be filed shortly hereafterdelivered to DSP Group.
Except as set forth below, we believe, based solely on our review of the
copies of such reports received or written representations from certain
Reporting Persons, that during the fiscal year ended December 31, 1998, all
Reporting Persons complied with all applicable filing requirements, except for
the annual meetingfollowing: Mr. Phelps inadvertently failed to report a sale of stockholders to be heldDSP
Group's common stock on May 19, 1998 is incorporated herein
by reference.his Form 4 for the period of the sale; such sale was
subsequently reported on a later Form 4.
23
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The section labeled "Executive Compensationfollowing table sets forth all compensation earned by DSP Group's Chief
Executive Officer and Other Information"each of the Registrant's definitive Proxy Statementfour other most highly compensated executive
officers of DSP Group (including one former executive officer) (collectively,
the "Named Executive Officers") for the years ended December 31, 1998, 1997 and
1996.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
SECURITIES
SALARY (1) BONUS (2) UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR $ $ (#)
- --------------------------- ---- ---------------- ------------------------------------
Eliyahu Ayalon 1998 $294,952 $240,000 150,000
Chief Executive Officer, President and 1997 283,747 212,500 150,000
Director 1996 157,493(3) 72,000 160,000
Igal Kohavi 1998 294,630 240,000 150,000
Chairman of the Board 1997 280,620 212,500 150,000
1996 250,000 72,000 140,000
Avi Basher 1998 174,082 45,000 10,000
Vice President of Finance, Chief Financial 1997 163,299 45,000 30,000
Officer and Secretary 1996 31,822(4) -- 50,000
David Tolub (5) 1998 110,859(6) -- 50,000
Vice President -- Sales 1997 -- -- --
1996 -- -- --
Gideon Wertheizer (7) 1998 172,122 50,000 20,000
Vice President -- Marketing 1997 146,362 45,000 15,000
1996 -- -- --
Amir Karni (8) 1998 125,644 10,000 10,000
Former Vice President, Research and Development 1997 61,317(9) -- 22,000
1996 -- -- --
- --------------------------
(1) The salaries of officers located in Israel include social benefit payments
and car allowances.
(2) DSP Group's executive officers are eligible for annual cash bonuses. Such
bonuses are generally based upon achievement of corporate performance
objectives determined by DSP Group's Compensation Committee. Bonuses are
awarded by the Compensation Committee based upon individual, as well as
corporate, performance. DSP Group pays bonuses in the year following that
in which the bonuses were earned.
(3) Represents Mr. Ayalon's salary from his appointment as Chief Executive
Officer, President and Director of DSP Group in April 1996.
(4) Represents Mr. Basher's salary from his appointment as Vice President of
Finance, and Chief Financial Officer of DSP Group in October 1996.
(5) Mr. Tolub was appointed an executive officer of DSP Group in May 1998.
(6) Includes $12,357 of commissions earned by Mr. Tolub in 1998.
(7) Mr. Wertheizer was appointed an executive officer of DSP Group in November
1997.
(8) Mr. Karni resigned as Vice President, Research and Development in
November 1998.
(9) Represents Mr. Karni's salary from his appointment as Vice President of
Research and Development of DSP Group in July 1997.
24
OPTION GRANTS
The following table sets forth certain information with respect to stock
options granted during 1998 to each of the Named Executive Officers. In
accordance with the rules of the Securities and Exchange Commission, also shown
below is the potential realizable value over the term of the option (the period
from the grant date to the expiration date) based on assumed rates of stock
appreciation of 5% and 10%, compounded annually. These amounts are based on
certain assumed rates of appreciation and do not represent DSP Group's estimate
of future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of the DSP Group's common stock.
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS (1)
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO TERM
GRANTED EMPLOYEES EXERCISE EXPIRATION
NAME (#) IN 1998 PRICE DATE 5% 10%
- ------------------------- --------------- ---------- ------------- ---------- -------------- -----------
Eliyahu Ayalon 150,000 18.94% $18.563 07/02/05 $1,133,551 $2,641,655
Igal Kohavi 150,000 18.94% 18.563 07/02/05 1,133,551 2,641,655
Avi Basher 10,000 1.26% 18.875 08/03/05 76,840 179,070
David Tolub 50,000 6.31% 19.50 05/27/05 396,923 924,999
Gideon Wertheizer 20,000 2.53% 18.875 08/03/05 153,680 358,141
Amir Karni 10,000 1.26% 18.875 08/03/05 76,840 179,070
------------------------------
(1) All options were granted pursuant to the 1991 Employee and Consultant Stock
Plan.
25
Option Exercises and Option Values
The following table sets forth information concerning option exercises
during 1998 and the aggregate value of unexercised options as of December 31,
1998 held by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 1998
AND OPTION VALUES AT DECEMBER 31, 1998
NUMBER OF SECURITIES VALUE OF UNEXERCISED
AGGREGATE OPTION UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
EXERCISES IN 1998 OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
------------------ --------------------------
SHARES
ACQUIRED VALUE
ON EXERCISE REALIZED
NAME (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- ------------- --------- ------------ ------------- ----------- -------------
Eliyahu Ayalon -- -- 85,000 257,500 $423,594 $735,781
Igal Kohavi -- -- 177,500 252,500 719,219 686,406
Avi Basher 12,500 $146,945 11,250 53,750 115,313 543,438
David Tolub -- -- -- 50,000 -- 68,750
Gideon Wertheizer 5,586 57,959 8,437 36,645 21,563 94,160
Amir Karni -- -- 6,874 25,126 20,193 64,432
- --------------------------
(1) Calculated on the basis of the closing price of DSP Group's common stock as
reported on the Nasdaq National Market on December 31, 1998 of $20.875 per
share, minus the exercise price.
(2) Calculated on the basis of the broker's reported sale price of DSP Group's
common stock subject to the option, minus the exercise price.
26
EMPLOYMENT AGREEMENTS
The following Named Executive Officers have written employment agreements
with DSP Group: Messrs. Ayalon, Basher and Kohavi.
In April 1996, Mr. Ayalon entered into an employment agreement with DSP
Semiconductors, Ltd., DSP Group's wholly owned subsidiary in Israel ("DSP
Semiconductors"), pursuant to which Mr. Ayalon is to serve as the President and
Chief Executive Officer of DSP Group. The term of the agreement is indefinite.
The agreement originally provided for a fixed monthly salary of NIS 47,000
(approximately U.S. $15,000), which shall be adjusted monthly to the Consumer
Price Index of Israel. In June 1997, the Board of Directors increased
Mr. Ayalon's monthly salary to NIS 69,295 (approximately U.S. $20,500).
Mr. Ayalon also is entitled to an annual bonus, the amount of which is
determined at the sole discretion of the Board of Directors. The agreement may
be terminated by DSP Group or Mr. Ayalon, without cause (as defined in the
agreement), upon six months advance written notice. Mr. Ayalon's employment
agreement was amended in November 1997 to provide for the following:
(i) Mr. Ayalon's base compensation shall be fixed at the commencement of each
year, but shall not be subject to reduction during the term of the agreement;
(ii) if Mr. Ayalon terminates the agreement without good reason or if DSP Group
terminates the agreement for cause, then no further payments shall be made to
Mr. Ayalon pursuant to the agreement and he shall be subject to a one-year
prohibition against competition in addition to the customary prohibitions
against disclosure of trade secrets; (iii) upon a change of control of DSP Group
or if the agreement is terminated by Mr. Ayalon for good reason or by DSP Group
without cause, then all rights of Mr. Ayalon under the agreement would continue
for two years and all options held by Mr. Ayalon would accelerate and
immediately vest and be exercisable in whole or in part at any time during the
remaining two-year term of the agreement; and (iv) in the event of death or
permanent disability of Mr. Ayalon, all options shall accelerate and immediately
vest.
In February 1997, Mr. Basher entered into an employment agreement with DSP
Semiconductors pursuant to which Mr. Basher is to serve as the Vice President of
Finance and Chief Financial Officer of DSP Group. The term of the agreement is
indefinite. The agreement provides for a fixed monthly salary of NIS 31,970
(approximately U.S. $10,000), which shall be adjusted monthly to the Consumer
Price Index of Israel. Mr. Basher also is entitled to an annual bonus, the
amount of which is determined at the sole discretion of the Board of Directors.
The agreement may be terminated by DSP Semiconductors or Mr. Basher, without
cause (as defined in the agreement), upon three months advance written notice.
In June 1997, Mr. Kohavi entered into an employment agreement with DSP
Semiconductors pursuant to which Mr. Kohavi is to serve as the Chairman of
the Board of Directors of DSP Group. The term of the agreement is
indefinite. The agreement provided for a fixed monthly salary of NIS 69,295
(approximately U.S. $20,500), which shall be adjusted monthly to the Consumer
Price Index of Israel. Mr. Kohavi also shall be entitled to an annual bonus,
the amount of which is determined at the sole discretion of the Board of
Directors. The agreement may be terminated by DSP Group or Mr. Kohavi,
without cause (as defined in the agreement), upon six months advance written
notice. Mr. Kohavi's employment agreement was amended in November 1997 to
provide for the following: (i) Mr. Kohavi's base compensation shall be fixed
at the commencement of each year, but shall not be subject to reduction
during the term of the agreement; (ii) if Mr. Kohavi terminates the agreement
without good reason or if DSP Group terminates the agreement for cause, then
no further payments shall be made to Mr. Kohavi pursuant to the agreement and
he shall be subject to a one year prohibition against competition in addition
to the customary prohibitions against disclosure of trade secrets; (iii) upon
a change of control of DSP Group or if the agreement is terminated by Mr.
Kohavi for good reason or by DSP Group without cause, then all rights of Mr.
Kohavi under the agreement would continue for two years and all options held
by Mr. Kohavi would accelerate and immediately vest and be exercisable in
whole or in part at any time during the remaining two-year term of the
agreement; and (iv) in the event of death or permanent disability of Mr.
Kohavi, all options shall accelerate and immediately vest.
27
COMPENSATION OF DIRECTORS
Directors who are employees of DSP Group do not receive any additional
compensation for their services as directors. Directors who are not employees
of DSP Group receive an annual retainer of $20,000, payable in quarterly
installments of $5,000 each. The retainer contemplates attendance at four Board
of Director meetings per year. Additional Board of Directors meetings of a
face-to-face nature are compensated at the rate of $500 per meeting. In
addition, committee meetings of a face-to-face nature or on a telephonic basis
are compensated at the rate of $500 per meeting. All directors are reimbursed
for expenses incurred in connection with attending Board and committee meetings.
Each outside director of DSP Group is also entitled to participate in the
1993 Director Option Plan (the "Director Option Plan"). The Director Option
Plan provides for the grant of non-statutory options to non-employee directors
of DSP Group. The Director Option Plan is designed to work automatically;
however, to the extent administration is necessary, it will be provided by the
Board of Directors. The Director Option Plan provides that each eligible
director is granted an option to purchase 15,000 shares of DSP Group common
stock under the Director Option Plan on the date on which he or she first
becomes a director of DSP Group. In addition, on the same date, each new
director is granted an option to purchase 10,000 shares of common stock under
the 1991 Employee and Consultant Stock Plan (the "1991 Stock Plan").
Thereafter, each outside director is granted an option to purchase 5,000
additional shares of common stock (a "Subsequent Option") on January 1 of each
year if, on such date, he or she shall have served on DSP Group's Board of
Directors for at least six months. In addition, an option to purchase
5,000 shares of common stock (a "Committee Option") is granted on January 1 of
each year to each outside director for each committee of the Board of Directors
on which he or she shall have served as a chairperson for at least six months.
On January 2, 1998, each of Messrs. Kaplan, Phelps and Shamir were granted
Subsequent Options to purchase up to 5,000 shares of DSP Group common stock, at
an exercise price of $19.25 per share, under the Director Option Plan.
On January 2, 1998, Mr. Kaplan was granted a Committee Option to purchase
up to 5,000 shares of DSP Group common stock, at an exercise price of $19.25 per
share, under the Director Option Plan.
On July 2, 1998 each of Messrs. Ayalon and Kohavi were granted options to
purchase up to 150,000 shares of DSP Group common stock, at an exercise price of
$18.5625, under the 1991 Stock Plan.
On January 4, 1999, each of Messrs. Kaplan, Phelps and Shamir were granted
Subsequent Options to purchase up to 5,000 shares of DSP Group common stock, at
an exercise price of $20.375 per share, under the Director Option Plan.
On January 4, 1999, each of Messrs. Kaplan and Phelps were granted
Committee Options to purchase up to 5,000 shares of DSP Group common stock, at
an exercise price of $20.375 per share, under the Director Option Plan.
On February 5, 1999, the date on which they were appointed as directors of
DSP Group, each of Messrs. Limon and Shani were granted an option to purchase up
to 15,000 shares of DSP Group common stock, at an exercise price of $13.625 per
share under the Director Option Plan. On the same date, each of Messrs. Limon
and Shani also were granted an option to purchase up to 10,000 shares of DSP
Group common stock, at an exercise price of $13.625 per share, under the 1991
Stock Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of DSP Group currently consists of Messrs.
Kaplan, Phelps, Shamir and Shani; Mr. Kaplan serves as its Chairman. No member
of this committee is a present or former
28
officer or employee of DSP Group or any of its subsidiaries. Other than Mr.
Kohavi, no executive officer of DSP Group served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of DSP Group's Board of Directors or Compensation
Committee. Mr. Kohavi serves as the Chairman of the Board of VCON
Telecommunications, Ltd., a public company listed on the Nouveau Marcheand
located in Israel, for which Mr. Shamir serves as President and CEO.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF DSP GROUP'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE EXCHANGE ACT THAT MIGHT
INCORPORATE FUTURE FILINGS, INCLUDING THIS ANNUAL REPORT ON FORM 10-K, IN WHOLE
OR IN PART, THE FOLLOWING REPORT AND THE STOCK PERFORMANCE GRAPH THAT FOLLOWS
SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.
COMPENSATION POLICY. DSP Group's compensation policy, as established by
the Compensation Committee, states that the executive officers' total annual
cash compensation should vary with the performance of DSP Group and that
long-term incentives awarded to such officers should be aligned with the
interest of DSP Group's stockholders. DSP Group has designed its executive
compensation program to attract and retain executive officers who will
contribute to DSP Group's long-term success, to reward executive officers who
contribute to DSP Group's financial performance and to link executive officer
compensation and stockholder interests through the grant of stock options under
the 1991 Employee and Consultant Stock Plan (the "1991 Stock Plan").
Compensation of DSP Group's executive officers consists of three principal
components: salary, bonus and long-term incentive compensation consisting of
stock option grants.
SALARY. The base salaries of DSP Group's executive officers are reviewed
annually and are set by the Compensation Committee. When setting base salary
levels, in a manner consistent with the Compensation Committee's policy outlined
above, the Committee considers competitive market conditions for executive
compensation, DSP Group's performance and the performance of the individual
executive officer.
BONUS. For the fiscal year ended December 31, 1998, the Compensation
Committee evaluated the performance of, and set the bonuses payable to, the
Chief Executive Officer and the other executive officers of the Company. The
performance factors utilized by the Compensation Committee in determining
whether bonuses should be awarded to the Company's executive officers included
the following: (1) increased sales of DSP Group's products and increased
profitability of DSP Group during fiscal 1998; (2) the officer's overall
individual performance in his position and his relative contribution to DSP
Group's performance during the year; and (3) the desire of the Board of
Directors to retain the executive officer in the face of considerable
competition for executive talent within the industry. The Board of Directors or
the Compensation Committee in the future may modify the foregoing criteria or
select other performance factors with respect to bonuses paid to executive
officers for any given fiscal year.
LONG-TERM INCENTIVE COMPENSATION. DSP Group believes that stock option
grants (1) align executive officer interests with stockholder interests by
creating a direct link between compensation and stockholder return, (2) give
executive officers a significant, long-term interest in DSP Group's success, and
(3) help retain key executive officers in a competitive market for executive
talent.
The 1991 Stock Plan authorizes the Board, or a committee thereof, to
grant stock options to employees and consultants of DSP Group, including the
executive officers. Stock option grants are made from time to time to
executive officers whose contributions have or will have a significant impact
on DSP Group's long-term performance. DSP Group's determination of whether
stock option grants are appropriate is based upon individual performance
measures established for each individual on an annual
29
basis. Options are not necessarily granted to each executive officer during
each year. Generally, options granted to executive officers vest as to 25%
of the grant on the first anniversary of the date of grant with the remaining
options vesting quarterly over the next three years and expire five years
from the date of grant. Details on stock options granted to certain
executive officers in 1998 are provided in the table entitled "Option Grants
in 1998."
COMPENSATION OF CHIEF EXECUTIVE OFFICER. The Board of Directors considered
the following factors in evaluating the performance of, and setting the bonus
compensation for, Mr. Ayalon, DSP Group's Chief Executive Officer and President
since April 1996: the increase in the net income of DSP Group from the prior
year, DSP Group's stock price and the time and effort that Mr. Ayalon
individually applied in connection with the execution of his duties. The
Compensation Committee believes that the salary, bonus and long-term incentive
compensation paid to Mr. Ayalon for the fiscal year ended December 31, 1998 were
appropriate based on the above criteria.
COMPENSATION POLICY REGARDING DEDUCTIBILITY. Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally disallows a tax deduction
to publicly held companies for compensation exceeding $1 million paid to
certain of the corporation's executive officers. The limitation applies only
to compensation which is not considered to be filed shortly hereafter for the
annual meeting of stockholdersperformance-based. The
non-performance based compensation to be heldpaid to DSP Group's executive
officers in 1998 did not exceed the $1 million limit per officer. The 1991
Stock Plan is structured so that any compensation deemed paid to an executive
officer in connection with the exercise of option grants made under such plan
will qualify as performance-based compensation which will not be subject to
the $1 million limitation. The Compensation Committee currently intends to
limit the dollar amount of all other compensation payable to DSP Group's
executive officers to no more than $1 million. The Compensation Committee is
aware of the limitations imposed by Section 162(m), and the exemptions
available therefrom, and will address the issue of deductibility when and if
circumstances warrant, and may use such exemptions in addition to the
exemption contemplated under the 1991 Stock Plan.
Submitted by the Compensation Committee:
Samuel L. Kaplan
Millard Phelps
Yair Shamir
Saul Shani
30
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on May 19,DSP
Group's common stock with the cumulative total return on the Standard & Poor's
500 Index and Standard & Poor's Technology Sector Index. The period shown
commences on February 11, 1994, the date that DSP Group's common stock was
registered under Section 12 of the Exchange Act, and ends on December 31, 1998,
is incorporated herein
by reference.the end of DSP Group's last fiscal year. The graph assumes an investment of
$100 on February 11, 1994, and the reinvestment of any dividends.
The comparisons in the graph below are based upon historical data and are
not indicative of, nor intended to forecast, future performance of DSP Group's
common stock.
TOTAL RETURN TO STOCKHOLDERS
FEBRUARY 11, 1994 TO DECEMBER 31, 1998
Research Data Group Peer Group Total Return Worksheet
Dsp Group (DSPG)
CUMULATIVE TOTAL RETURN
-----------------------------------------------------------------------
2/11/94 3/94 6/94 9/94 12/94 3/95 6/95 9/95 12/95 3/96
DSP GROUP, INC. $100 $116 $### $158 $139 $163 $179 $127 $ 82 $ 89
S&P 500 100 93 93 98 98 108 118 127 135 142
S&P TECHNOLOGY SECTOR 100 99 95 104 111 125 154 163 160 169
CUMULATIVE TOTAL RETURN
--------------------------------------------------------------------------
6/96 9/96 12/96 3/97 6/97 9/97 12/97 3/98 6/98 9/98 12/98
DSP GROUP, INC. $ 66 $ 59 $ 61 $ 66 $107 $280 $143 $137 $141 $105 $149
S&P 500 148 153 166 170 200 215 221 252 260 234 284
S&P TECHNOLOGY SECTOR 183 201 227 229 279 326 286 346 375 369 495
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section labeled "Security Ownershipfollowing table sets forth certain information known to DSP Group with
respect to the beneficial ownership of Certain Beneficial Owners and
Management"DSP Group's common stock as of March 1,
1999, by (1) each stockholder known to DSP Group to own beneficially more than
5% of the Registrant's definitive Proxy Statement to be filed shortly
hereafterDSP Group's common stock; (2) each of DSP Group's directors; (3) the
Named Executive Officers (including one former executive officer) determined for
the annual meetingfiscal year ended December 31, 1998; and (4) all directors and executive
officers of stockholdersDSP Group as a group.
NAME OF SHARES APPROXIMATE PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (2)
- ---------------- ---------------------- ----------------------
Magnum Technology, Ltd.
c/o Rothschild Corporate Fiduciary Services, Ltd.
P.O. Box 472
St. Peter's House, Le Bordage
St. Peter Port, Guernsey
Channel Islands GY1 6AX (3)............... 2,896,500 24.90%
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts 02111 (4)........... 450,800 3.88%
Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258 (5)......... 537,300 4.62%
Samuel L. Kaplan (6)...................... 78,188 *
Zvi Limon ................................ * *
Millard Phelps (7)........................ 13,167 *
Yair Shamir (8)........................... 11,667 *
Saul Shani ............................... * *
Eliyahu Ayalon (9)........................ 104,133 *
Avi Basher (10)........................... 20,242 *
Igal Kohavi (11).......................... 219,960 1.86%
David Tolub .............................. 357 *
Gideon Wertheizer (12).................... 12,997 *
Amir Karni ............................... * *
All directors and executive officers
as a group (11 persons) (13).............. 460,711 3.86%
- ------------------------------------
* Less than 1%
32
(1) To DSP Group's knowledge, except as set forth in the footnotes to bethis
table, and subject to applicable community property laws, each person named
in this table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of DSP Group's common
stock, subject to options currently exercisable or exercisable on or before
April 30, 1999, are deemed outstanding for computing the percentage of the
person holding such options, but are not deemed outstanding for computing
the percentage of any other person. Percentages are based on 11,633,420
shares of DSP Group's common stock outstanding as of March 1, 1999.
(3) Magnum Technology, Ltd. ("Magnum") filed Amendment No. 1 to a Schedule 13D,
dated February 19, 1999, with the Securities and Exchange Commission on
behalf of itself. Magnum reported sole voting and dispositive power over
2,896,500 shares.
(4) Loomis, Sayles & Company, L.P. ("Loomis") filed a Schedule 13G, dated
February 10, 1999, with the Securities and Exchange Commission on behalf of
itself. Loomis reported sole voting power over 375,400 shares and shared
dispositive power over 450,800 over shares.
(5) Mellon Bank Corporation ("Mellon Bank") filed a Schedule 13G, dated
February 5, 1999, with the Securities and Exchange Commission on behalf of
itself. Mellon Bank reported sole voting power over 492,900 shares, sole
dispositive power over 497,100 shares and shared dispositive power over
40,200 shares.
(6) Includes 22,520 shares held of record by the Kaplan, Strangis and Kaplan,
P.A. Profit Sharing Trust FBO Samuel L. Kaplan. Also includes 34,668
shares of DSP Group's common stock, subject to options which are currently
exercisable or will become exercisable on May 19, 1998 is
incorporated herein by reference.or before April 30, 1999.
(7) Includes 13,167 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(8) Includes 11,667 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(9) Includes 100,000 shares of DSP Group's common stock subject to options
which are currently exercisable or will become exercisable on or before
April 30, 1999.
(10) Includes 19,375 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(11) Includes 217,500 shares of DSP Group's common stock subject to options
which are currently exercisable or will become exercisable on or before
April 30, 1999.
(12) Includes 12,244 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(13) See footnotes (6) through (12). Includes 408,621 shares of DSP Group's
common stock subject to options which are currently exercisable or will
become exercisable on or before April 30, 1999.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section labeled "Certain Relationships and Related Transactions"OTHER TRANSACTIONS
DSP Group entered into a consulting agreement, date as of June 29, 1998,
with Mr. Phelps, an outside director of DSP Group. Pursuant to the terms of the
Registrant's definitive Proxy Statementagreement, from May 1998 through December 1998, Mr. Phelps was to provide advice
to DSP Group's Chairman of the Board regarding identifying potential merger and
acquisition candidates. The agreement provided that Mr. Phelps be filed shortly hereafterpaid $4,000
per month for his services.
On February 2, 1999, DSP Group entered into a stock purchase agreement
with Magnum Technologies, Ltd., an international investment fund ("Magnum"), in
which DSP Group issued and sold 2,300,000 new shares of DSP Group common stock
to Magnum. Based in part on Magnum's representations, the annual meetingtransaction was
exempt from the registration requirements of the Securities Act of 1933
according to Section 4(2) of the Securities Act. These shares, representing
19.6% of DSP Group's outstanding common stock at the time of the transaction,
were issued for a price of $15 per share, or an aggregate of $34.5 million in
total net proceeds to DSP Group. As part of the agreement, Magnum may acquire
additional shares of DSP Group in the open market, but may not bring its total
holdings to more than 35% of DSP Group's outstanding shares of common stock.
Furthermore, Magnum has agreed not to sell any of the DSP Group shares of common
stock it purchased without the prior written consent of DSP Group for a period
of one year following the date of this transaction, and also to restrict its
sales of the shares for an additional six-month period under Rule 144(e)(i) of
the Securities Act of 1933. Additionally, DSP Group has invited Magnum to
appoint two new directors to the Board of Directors, bringing the total number
of members of the Board of Directors to seven.
DSP Group has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require DSP Group to
indemnify such individuals to the fullest extent permitted by Delaware law.
All future transactions between DSP Group and its officers, directors,
principal stockholders and affiliates will be approved by a majority of the
Board of Directors, including a majority of the disinterested, non-employee
directors on the Board of Directors, and will be on terms no less favorable to
DSP Group than could be held on May 19, 1998 is incorporated herein
by reference.
21obtained from unaffiliated third parties.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual
Report on Form 10-K.
1. INDEX TO FINANCIAL STATEMENTS.Index to Financial Statements.
The following consolidated financial statements and related notes and
auditor's report are included in the Registrant'sDSP Group's Annual Report to
Stockholders for the year ended December 31, 19971998 and are incorporated
hereininto this Form 10-K by reference pursuantreference.
DESCRIPTION
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Item 8.
PAGE IN 1997
ANNUAL REPORT
DESCRIPTION TO STOCKHOLDERS
- -------------------------------------------------------------------------------------------------- ---------------
Consolidated Balance Sheets as of December 31, 1997 and 1996...................................... 26-27
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............ 25
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and
1995............................................................................................. 28-29
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........ 30-31
Notes to Consolidated Financial Statements........................................................ 32-46
Report of Ernst & Young LLP, Independent Auditors................................................. 47
Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
2. INDEX TO FINANCIAL STATEMENT SCHEDULES.Index to Financial Statement Schedules.
The following financial statement schedules and related auditor(1)sauditor's report
are filed as part of this Annual Report on Form 10-K:
PAGE IN THIS
ANNUAL REPORT
DESCRIPTION ON FORMPage in this
Annual Report
Description on Form 10-K
- --------------------------------------------------------------------------------------- ------------------------------------ ------------
Schedule II: Valuation and Qualifying Accounts.........................................Accounts (included at page 32)43)
Consent of Ernst & Young LLP, Independent Auditors.....................................Auditors Exhibit 23.1
(included at page 30)
Consent of Almagor & Co., Independent Auditors......................................... Exhibit 23.2
(included at page 31)42)
All other schedules are omitted because they are not applicable or not
required or because the
required information is included in the Consolidated
Financial Statementsconsolidated financial statements or
the Notes thereto.
22related notes incorporated into this Form 10-K by reference to DSP
Group's Annual Report to Stockholders for the year ended December 31, 1998.
35
3. LIST OF EXHIBITS:List of Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1B to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994
and incorporated herein by reference).
3.2 Bylaws (filed as Exhibit 3.2B to the Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and incorporated herein by reference).
3.3 Amendment to Registrant's Bylaws, dated March 30, 1995 (filed as Exhibit 3.2.c to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference).
3.4 Certificate of Determination of Preference of Series A Preferred Stock of the Registrant, filed
with the Secretary of State of the State of Delaware on June 6, 1997 (filed as Exhibit 3.1 to
the Registrant's Current Report on Form 8-K filed on June 6, 1997).
3.5 Rights Agreement,Amendment to Registrant's Bylaws, dated as of June 5,November 3, 1997 between the Registrant and
Norwest Bank Minnesota, N.A., as Rights Agent (filed as Exhibit 2.13.7 to the
Registrant's CurrentAnnual Report on Form 8-K filed on June 6, 1997).10-K for the year ended December 31, 1997, and incorporated
herein by reference.)
3.6 Specimen Rights Certificate (filed as Exhibit 1.1 to the Registrant's Current Report on Form 8-K
filed on June 6, 1997).
3.7 Amendment to Registrant's Bylaws,Amended and Restated Rights Agreement, dated as of November 3, 1997.9, 1998, between the Registrant and
Norwest Bank Minnesota, N.A., as Rights Agent.
10.1 1991 Employee and Consultant Stock Plan and forms of option agreements thereunder (filed as
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein by reference).
10.2 Israeli Stock Option Plan and form of option agreement thereunder (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on
February 11, 1994 and incorporated herein by reference).
10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 to the Registrant's Registration
Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.4 1993 Employee Stock Purchase Plan and form of subscription agreement thereunder (filed as
Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein by reference).
10.5 Registration Rights Agreement, dated August 30, 1993, by and among the
Registrant and certain shareholders of the Registrant (filed as Exhibit
10.9 to the Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and incorporated
herein by reference).
23
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
10.6 Technology Assignment and License Agreement, dated January 7, 1994, by and between the
Registrant and DSP Telecommunications, Ltd. (filed as Exhibit 10.24 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994
and incorporated herein by reference).
10.736
10.6 ACL Technology License Agreement, dated June 24, 1994, by and between the Registrant and
AudioCodes, Ltd. (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference).
10.810.7 Investment Agreement, dated June 16, 1994, by and between the Registrant and AudioCodes Ltd.
(see Exhibit 10.30 for Appendix B to Investment Agreement) (filed as Exhibit 10.39 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated
herein by reference).
10.910.8 Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on
February 11, 1994, and incorporated herein by reference).
10.10 Severance and Consulting Agreement, dated as of May 6, 1996, by and
between the Registrant and Eli Porat (filed as Exhibit 10.36 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996, and incorporated herein by reference).
10.11 Severance Agreement, dated June 8, 1996, by and between the Registrant and
Karin Pitcock (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference).
10.12 Share Purchase and Shareholders Agreement, dated July 4, 1996, by and
among Aptel Ltd., the shareholders named therein, and DSP Semiconductors
Ltd. (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, and incorporated herein by
reference).
10.1310.9 Employment Agreement, dated April 22, 1996, by and between the Registrant and Eli Ayalon (filed
as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and incorporated herein by reference).
10.14 Severance10.10 Assignment and ConsultingAssumption Agreement, dated as of October 25,9, 1996, by and between the Registrant and
John GoldsberryDialogic Corporation, relating to the Registrant's facility located at 3120 Scott Boulevard in
Santa Clara, California (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, and incorporated herein by reference).
10.15 Employment Severance and Consulting Agreement, dated as of December 2,
1996, by and between the Registrant and Mike Hoberg (filed as Exhibit
10.2310.24 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated herein by reference).
10.16 Assignment and Assumption Agreement, dated October 9, 1996, by and between
the Registrant and Dialogic Corporation, relating to the Registrant's
facility located at 3120 Scott Boulevard in Santa Clara, California
(filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by
reference).
24
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
10.1710.11 Sublease, dated October 18, 1996, as amended on December 4, 1996, by and between Dialogic
Corporation and the Registrant, relating to the Registrant's facility located at 3120 Scott
Boulevard in Santa Clara, California (filed as Exhibit 10.25 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference).
10.1810.12 Employment Agreement, dated February 24, 1997, by and between the Registrant and Avi Basher
(filed as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
10.19 Employment Agreement, dated June 1, 1996, by and between the Registrant
and Moshe Shahaf (filed as Exhibit 10.27 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).
10.20 Rescission Agreement, dated as of August 15, 1996, by and between the
Registrant and Igal Kohavi (filed as Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).
10.21 Service Agreement, dated as of August 15, 1996, by and between DSP
Semiconductors, Ltd. and Niko Consulting and Management (1995) Ltd.
(filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by
reference).
10.2210.13 Lease, dated November 28, 1996, by and between DSP Semiconductors Ltd. and Gav-Yam Lands Company
Ltd., relating to the property located on Shenkar Street, Herzlia Pituach, Israel (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference).
10.2310.14 Agreement, dated August 18, 1997, by and between DSP Semiconductors Ltd. and Aptel LtdLtd. (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference).
10.2410.15 Employment Agreement with Igal Kohavi, dated as of June 1, 1997.
10.251997 (filed as Exhibit 10.24 to the
Registrant's Annual Report on Form 10K for the year ended December 31, 1997, and incorporated
herein by reference).
10.16 CompactRISC Technology License Agreement, dated as of September 29, 1997, by and between DSP
Semiconductors Ltd. and National Semiconductor Corporation.
10.26Corporation (filed as Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated
herein by reference).
37
10.17 Amendment to Employment Agreement with Eliyahu Ayalon, dated as of November 3, 1997.
10.271997 (filed as
Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference).
10.18 Amendment to Employment Agreement with Igal Kohavi, dated as of November 3, 1997.
10.281997 (filed as
Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by reference).
10.19 Amendment to 1993 Directors Stock Option Plan, as adopted November 3, 1997.
111997 (filed as Exhibit
10.28 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by reference).
10.20 Separation and Consulting Agreement between the Registrant and Martin M. Skowron, dated May 31,
1998 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, and incorporated herein by reference).
10.21 Consulting Agreement between the Registrant and Millard Phelps, dated as of June 29, 1998 (filed
as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, and incorporated herein by reference).
10.22 Lease, dated September 13, 1998, between DSP Group, Ltd. and Bayside Land Corporation Ltd.,
relating to the property located on Shenkar Street, Herzlia Pituach, Israel.
10.23 1998 Non-Officer Employee Stock Option Plan.
11.1 Statements regarding computation of per share earnings (included at page 28)40).
1313.1 Portions of the Annual Report to Stockholders for the year ended December 31, 1997.
211998.
21.1 Subsidiaries of the RegistrantDSP Group (included at page 29)41).
23.1 Consent of Ernst & Young LLP, Independent Auditors (included at page 30).
25
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
23.2 Consent of Almagor & Co., Independent Auditors (included at page 31)42).
27.1 Financial Data Schedule for the fiscal year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the quarter ended September 30, 1997.
27.3 Restated Financial Data Schedule for the quarter ended June 30, 1997.
27.4 Restated Financial Data Schedule for the quarter ended March 31, 1997.
27.5 Restated Financial Data Schedule for the fiscal year ended December 31, 1996.
27.6 Restated Financial Data Schedule for the quarter ended September 30, 1996.
27.7 Restated Financial Data Schedule for the quarter ended June 30, 1996.
27.8 Restated Financial Data Schedule for the quarter ended March 31, 1996.
27.9 Restated Financial Data Schedule for the fiscal year ended December 31, 1995.
99.1 Auditor's Report of Almagor & Co., Certified Public Accountants (Israel)
(b) Reports on Form 8-K in Fourth Quarter.
The Company filed a Current Reportdid not file any reports on Form 8-K dated June 5, 1997, relating
toduring the adoption of the Stockholder's Rights Agreement, pursuant to which one
preferred share purchase right was distributed for each outstanding share of
Common Stock of the Company.
26three
months ended December 31, 1998.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DSP GROUP, INC.
By: /s/ ELIYAHU AYALON
---------------------------------------
Eliyahu Ayalon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1998
DSP GROUP, INC.
By: /s/ Eliyahu Ayalon
------------------------------------
Eliyahu Ayalon
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- --------------------------------------------------------- --------------------------------------------------- --------------------
/s/ IGAL KOHAVI
- ------------------------------Igal Kohavi Chairman of the Board March 31, 19981999
- --------------------------------------
Igal Kohavi
/s/ Eliyahu Ayalon President, Chief Executive /s/ ELIYAHU AYALON Officer and DirectorMarch 31, 1999
- -------------------------------------------------------------------- Director (Principal Executive March 31, 1998Officer)
Eliyahu Ayalon
Officer)/s/ Avi Basher Vice President of Finance, Chief Financial Officer
/s/ AVI BASHER and Secretary (PrincipalMarch 31, 1999
- -------------------------------------------------------------------- Financial Officer and March 31, 1998Secretary
Avi Basher (Principal Financial Officer and Principal
Accounting Officer)
/s/ SAMUELSamuel L. KAPLAN
- ------------------------------Kaplan Director March 31, 19981999
- --------------------------------------
Samuel L. Kaplan
/s/ MILLARD PHELPS
- ------------------------------Zvi Limon Director March 31, 19981999
- --------------------------------------
Zvi Limon
/s/ Millard Phelps Director March 31, 1999
- --------------------------------------
Millard Phelps
/s/ YAIR SHAMIR
- ------------------------------Yair Shamir Director March 31, 19981999
- --------------------------------------
Yair Shamir
/s/ Saul Shani Director March 31, 1999
- --------------------------------------
Saul Shani
2739
EXHIBIT 11Exhibit 11.1
DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997 1996
1995
-------- -------- ------------------------------------------------
Numerator:
Net income . . . . . . . . . . . . .income......................................... $14,415 $11,034 $5,979
$7,211
-------- ------- ------- --------------
------- ------- ------
Denominator:
Weighted average number of common shares outstanding during
the period used to compute basic earnings per
share . . . . . ............................................ 9,768 9,736 9,510
9,352------- ------- ------
------- ------- ------
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would be used
to purchase treasury stock) . ....................... 248 467 71
306
-------- ------- ------- ------
Weighted average number of shares of common stock used
to compute diluted earnings per
share . . . .share............................................ 10,016 10,203 9,581
9,658
-------- ------- ------- --------------
------- ------- Net------
Basic net income per share -- basic . . . . . .share.............................. $1.48 $1.13 $0.63
$0.77
-------- ------- ------- --------------
------- ------- Net------
Diluted net income per share -- diluted . . . . .share............................ $1.44 $1.08 $0.62
$0.75
-------- ------- ------- --------------
------- ------- -------------
2840
EXHIBIT 21Exhibit 21.1
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
--------------------------- -----------------------------
1. Nihon DSP K.K. Japan
2. DSP SemiconductorsName of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
1. Nihon DSP K.K. Japan
2. DSP Group Ltd. Israel
3. DSP Group Europe SARL France
294. Voicecom Ltd. Israel
5. RF Integrated Systems, Inc. Delaware, U.S.
41
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc. of our report dated January 23, 199825, 1999 (except for
Note 9, as to which the date is January 27, 1998)February 18, 1999), included in the 19971998
Annual Report to Stockholders of DSP Group, Inc.
Our audits also included the consolidated financial statement schedule
of DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the consolidated financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-83456, 33-87390, 333-53129 and 33-87390)333-69289)
pertaining to the 1991 Employee and Consultant Stock Plan, the 1991 DSP
Group, Inc. Israeli Stock Option Plan, the 1993 Director Stock Option Plan,
and the 1993 Employee Stock Purchase Plan and the 1998 Non-Officer Employee Stock
Option Plan, of our report dated January 23, 199825, 1999 (except for Note 9, as to
which the date is January 27, 1998)February 18, 1999), with respect to the consolidated
financial statements and schedulesschedule incorporated herein by reference or
included in this Annual Report (Form 10-K) for the year ended December 31,
1997.1998.
/s/ ERNSTErnst & YOUNGYoung LLP
San Jose,Palo Alto, California
March 27, 1998
30,
EXHIBIT 23.2
CONSENT OF ALMAGOR & CO. CPA (ISR), INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc., of our report dated January 22, 1998 on the financial
statements of DSP Semiconductors, Ltd. as of December 31, 1997 and for the year
then ended, not included in the 1997 Annual Report to Stockholders of DSP Group,
Inc.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 33-83456 and 33-87390) pertaining to the 1991 Employee and
Consultant Stock Plan, the 1991 DSP Group, Inc. and Israeli Stock Option Plan,
the 1993 Directors Stock Option Plan, and the 1993 Employee Stock Purchase Plan
of our report dated January 22, 1998 on the financial statements of DSP
Semiconductors Ltd. as of December 31, 1997 and for the year ended, not included
in the 1997m Annual Report and Stockholders of DSP Group, Inc.
/s/ ALMAGOR & CO.
Certified Public Accountants (Israel)
Tel Aviv, Israel
March 27, 1998
311999
42
SCHEDULE II
DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
CHARGED TODSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
BALANCE AT
(DEDUCTED FROM)
BEGINNING CHARGED TO
OF COSTS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES DEDUCTION END OF PERIOD
- ---------------------------------------------------------- --------------- --------------- ----------- --------------------------------------------------------------------- ---------- ------------ --------- -------------
Year ended December 31, 1995:
Allowance for doubtful accounts......................... $ 150 $ 15 $ 3 $ 162
Sales returns reserve................................... 254 296 269 281
Year ended December 31, 1996:
Allowance for doubtful accounts.........................accounts 162 60 151151(1) 71
Sales returns reserve...................................reserve 281 245 149149(2) 377
Year ended December 31, 1997:
Allowance for doubtful accounts.........................accounts 71 60 6161(1) 70
Sales returns reserve...................................reserve 377 345 600600(2) 122
Year ended December 31, 1998:
Allowance for doubtful accounts 70 10 - 80
Sales returns reserve 122 - - 122
32(1) Write-offs of uncollectible amounts
(2) Sales returns applied against revenue
43