SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-23006
DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2683643
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
3120 Scott Boulevard, Santa Clara, CA 95054
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(Address of principal executive offices, including zip code)
(408) 986-4300
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(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| 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 15,
2000, as reported on the Nasdaq National Market, was approximately
$1,103,666,561. 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 15, 2000, the Registrant had outstanding 26,167,520 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, 1999 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 1999 Annual Report is not deemed filed as part of
this Report.
INDEX
DSP GROUP, INC.
Page No.
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PART I
Item 1. BUSINESS..........................................................3
Item 2. PROPERTIES.......................................................20
Item 3. LEGAL PROCEEDINGS................................................20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................21
Item 6. SELECTED FINANCIAL DATA..........................................21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONAL AND RESULTS OF OPERATIONS............................21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.......21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............22
Item 11. EXECUTIVE COMPENSATION...........................................22
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................22
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K......................................................23
SIGNATURES.......................................................28
This Annual Report on Form 10-K contains certain forward-looking
statements that are based on the beliefs of, and estimates made by and
information currently available to, DSP Group's management. The words "expect,"
"anticipate," "intend," "plan" and similar expressions identify forward-looking
statements. 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.
This Annual Report on Form 10-K includes trademarks and registered
trademarks of 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--the electronic manipulation of digitized speech and
other digital signals. DSP Group's products are used in a wide variety of
telecom applications.
Digital signal processing (DSP) based solutions are more cost effective
and provide a broader range of features than analog based solutions. Many
applications, including digital cellular and wireless communications, broadband
modems, Voice Over the Internet and digital audio/video, all use DSP techniques
intensively.
Our work in the field of DSP has yielded four synergetic product families:
o DSP-based Speech and Telephony Processor - "System on a Chip"
that handles telephony functions and advanced speech
algorithms.
o Cordless Telephony - 900 Megahertz Digital Spread Spectrum
Processor - A chip set that handles digital wireless
communication along with telephony functions and advanced
speech algorithms.
o DSP Cores - Digital Signal Processor Cores - A family of
processors that, when combined with other hardware elements
such as memories and input/output devices, forms a chip that
is most efficiently targeted for specific applications.
o TrueSpeech(R) - A family of proprietary speech compression
algorithms.
DSP-Based Speech and Telephony Processors
DSP Group has developed two lines of speech and telephony processing
chips: integrated digital telephony processors, which are designed for use in
the consumer telephone market, and Voice over IP speech co-processors, which are
designed for use in network telephony and video conferencing products. Both
product lines are based upon our DSP core designs and incorporate our TrueSpeech
speech compression algorithms.
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Integrated Digital Telephony Speech Processors
DSP Group's integrated digital telephony (IDT) speech processors are
currently incorporated in over 90 models of featured phones from more than 40
different companies. These models are being sold in Europe, Japan and the United
States.
Our IDT speech processors are based on our PineDSPCore(R), which is more
fully described below. Our integrated digital telephony speech processors use
our TrueSpeech speech compression technology to provide the highest quality
speech recording and playback. They incorporate the following speech and
telephony technologies in various combinations:
- --------------------------------------------------------------------------------
Technology Description
- --------------------------------------------------------------------------------
Triple Rate Coder(TM) Instructs the telephone answering
system to decide automatically between better voice
quality and longer recording time.
- --------------------------------------------------------------------------------
True Full-Duplex Allows simultaneous two-way (full-duplex),
SpeakerPhone(TM) hands-free operation of the telephone and
suppresses and cancels acoustic and electrical
echoes.
- --------------------------------------------------------------------------------
G.723.1 Provides speech compression for Voice over IP and
video conferencing over standard telephone lines.
- --------------------------------------------------------------------------------
Caller ID and Call Waiting Identifies to the party being called the
Caller ID telephone number of the calling party, whether
or not the party being called is already engaged
in another call.
- --------------------------------------------------------------------------------
Call Progress Tone Detects standard telephony signals during the
Detection progress of a telephone call.
- --------------------------------------------------------------------------------
DTMF Signaling Detects and generates touch tone (DTMF)
signals that comply with telephone industry
frequency standards.
- --------------------------------------------------------------------------------
Speech Prompts Provides the ability to stamp a message
with a time and date and vocal operating
instructions prompts.
- --------------------------------------------------------------------------------
Variable Speed Playback Permits playback of recorded speech at different
(FlexiSpeech(R)) speeds without distorting the natural sound of
the speech.
- --------------------------------------------------------------------------------
Voice Operated Switch Detects human speech and stops recording during
("VOX") (Smart-Vox(R)) periods of silence, thereby conserving available
memory.
- --------------------------------------------------------------------------------
Alpha Least Cost Routing Automatically chooses from a number of telephone
("LCR")/Super LCR service providers in order to select the lowest
available rates.
- --------------------------------------------------------------------------------
Voice Recognition Allows a user to operate a telephone or
answering machine device by giving voice commands.
- --------------------------------------------------------------------------------
The first integrated digital telephony speech processors were introduced
by DSP Group in 1989. Since then, we have shipped approximately 47 million units
of speech processors to original equipment manufacturers (OEMs), of which
approximately 12 million were shipped in 1999. Our IDT speech processor sales
accounted for approximately 62% of our total revenues in 1999.
In 1999, we started the shipment of the D16000 family of fully integrated
speech processors, which combine the components of a mixed signal system on a
single chip. Each speech processor in the D16000 family contains a DSP core,
converters that transform analog signals into digital signals and vice versa,
and
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various signal amplifiers, all embedded on a single chip. In addition to
implementing DSP algorithms, including compression, caller ID and full-duplex
speaker phone, these speech processors also perform tasks that would typically
be handled by a separate central processing unit (CPU) chip. The D16000
processors provide high value to telephony product vendors by eliminating the
need for almost any other electronic components and thus reducing materials and
manufacturing costs.
The following table presents the main features of the primary IDT speech
processors that we currently offer:
DSP Group's IDT Speech Processors
D16559 D16529 D6571 D6587
------ ------ ----- -----
Process Geometry (microns) ................ 0.5 0.5 0.5 0.5
Minutes Record, 4 Mbit Memory .............. 22-25, 22-25, 22-25, 22-25,
10,15 10,15 10,15 10,15
Memory Type ................................ Flash Flash Flash Flash
Advanced Features:
Speech Prompts ........................... Yes Yes Yes Yes
Variable Speed Playback .................. Yes Yes Yes Yes
Full Duplex Speakerphone ................. Yes -- Yes Yes
Caller ID and Call Waiting Caller ID...... Yes Yes Yes Yes
Voice Recognition ........................ Yes
System On Chip-included peripherals:
Microcontroller .......................... Yes Yes -- --
Line Coder ............................... Yes Yes -- --
Speaker Coder ............................ Yes -- -- --
Amplifiers ............................... Yes Yes -- --
The following is a list of IDT manufacturers and resellers whose products
incorporate our IDT speech processors:
IDT Manufacturers and Resellers
IDT Manufacturers IDT Resellers
------------------------------------ --------------------------
Alcatel Panasonic Bell South
Ascom Philips Bosch Telecom
CCT Telecom Sagem British Telecom
Daewoo Samsung France Telecom
D&B Electronics Sanyo GE
Ericsson Siemens/Infinion German Telecom
Giant Smoothline Loewe-Binatone
HPF Ascom Sony Southwestern Bell
I.N.T. Corp. Taifeng Swiss Telecom
Kinpo Thomson
L.G. Electronics Tiptel
Matra Uniden
Maxon
Voice over IP Speech Co-Processors
Our Voice over IP speech co-processors were developed for use in
conjunction with other microprocessors to transmit voice over packet-based
public and private networks, including the Internet,
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local area networks (LANs), frame relay networks, cable networks and other 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 applications.
These speech co-processors take advantage of G.723.1, a speech compression
algorithm that has been incorporated into various international communications
standards, which is more fully discussed below, to provide cost-effective, high
quality speech compression. The following table sets forth other features of the
Voice over IP speech co-processors that we currently offer:
DSP Group's Voice over IP Speech Co-Processors
CT8016 CT8021 CT8022
-------------- --------------- --------------
DSP Core.................................... PineDSPCore OakDSPCore OakDSPCore
Process Geometry (microns).................. 0.5 0.5 0.5
TrueSpeech Algorithm........................ 8.5, 6.3, 5.3, 8.5, 6.3, 5.3, 8.5, 6.3, 5.3,
Data Rate, Kilobits Per Second.............. 4.8 & 4.1 4.8 & 4.1 4.8 & 4.1
ITU-T Standard Speech Coders................ G.729A+B G.723.1, G.722, G.723.1,
G.728, G.729A+B G.729A+B
Features:
Full Duplex Speakerphone................... Yes Yes Yes
Variable Speed Message Playback............ Yes Yes --
Full Duplex DSVD........................... Yes Yes Yes
Video Conferencing......................... -- Yes Yes
Internet Telephony......................... Yes Yes Yes
Future Speech and Telephony Processors
We are currently developing our next generation of IDT speech processors
and Voice over IP speech co-processors to include a number of enhancements and
improvements.
First, we intend to design and manufacture our future IDT speech
processors using a 0.25 micron CMOS technology, so that the conductive paths on
the circuits inside these chips will be 0.25 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 our competitiveness in the price-sensitive IDT business.
Second, we intend to add new features to our next generation of IDT speech
processors and Voice over IP speech co-processors. For example, we intend to
enhance our IDT 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 base
band processor. In addition, we intend to use the TeakLiteTM DSP core, which is
more powerful than our PineDSPCore and OakDSPCore(R), to provide additional
processing power for these new features.
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
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circuits for wireless communications. 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 these 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 these telephones are "spread" in a pseudrandom pattern
over a range of frequencies).
During 1999, we also finalized the design and began to sell a cordless
telephony solution consisting of two chips - a base band chip and an RF chip -
that 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. In the second half of 1999, we started development of the DSPG
Elite(TM) device with an RF and power amplifier that we believe will provide a
high performance, cost effective solution for 900 Megahertz spread spectrum
technology.
DSP Cores
DSP Group has developed proprietary, DSP core architecture and designs
that provide low-power, high performance, cost-effective solutions for current
and emerging digital signal processing applications. Our DSP cores are
incorporated in our own family of speech, cordless and telephony processors and
also are licensed to more than 50 entities, including Adaptec, DSP
Communications (a subsidiary of Intel), Fujitsu, Kawasaki, LSI Logic, NEC, Oki,
Seiko Epson, Siemens/Infinion, Sony, Temic and VLSI, a subsidiary of Philips.
We currently offer four families of DSP SmartCores(TM), --PineDSPCore(R),
OakDSPCore(R), TeakDSPCore(R) and PalmDSPCore(R). Together, they cover a wide
range of applications, from low end applications, including digital answering
machines, hard disk controllers, low speed modems and Voice over IP
applications, to high performance applications such as digital subscriber line
(DSL), third generation (3G) cellular communications, broadband modems,
multimedia and Voice over IP gateways.
Digital signal processing chips and software are being used more and more
in high volume communication and computing products. We believe that our cores
can provide cost-effective DSP solutions for chips used in these applications,
because our cores are:
o Flexible and Portable. The DSP cores are designed as "soft cores,"
so the cores are foundry independent and can be implemented in any
of the various manufacturing processes used by different
semiconductor fabrication facilities. The cores also can 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.
o Efficient to design. The designs 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.
o Power efficient. During the design of the cores, special mechanisms
were inserted throughout the different phases of design, from
architecture definition to the implementation, to reduce the power
consumption of the core. In addition, our cores operate at different
voltages, ranging from 5 volts down to 1.1 volts. The lower the
voltage and the lower the power requirements, then the less it
consumes battery life.
o Inexpensive to manufacture. The DSP cores, which in the past could
only be used on processors designed for a 1.0 micron CMOS process,
can now be implemented on 0.25 and
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0.18 micron processes. We believe these size reductions in
manufacturing can reduce the product cost, while increasing product
performance.
o Open Architecture - Our DSP cores technology is widely adopted by
semiconductors, ASIC vendors and OEMs.
The efficient processing, increasing performance, flexible design and
scaleable memories of our DSP core designs allow for the development of
powerful, smaller and lower cost DSP solutions, which shorten time to market for
new products and product enhancements.
With each new core, we have added features and enhanced performance. Our
first core, the PineDSPCore, was released in 1992 and was developed for use in
our IDT speech processor products. It also gained success in other DSP
applications as well as hard disk driver applications. In 1994, we introduced
our OakDSPCore, an enhanced version of the PineDSPCore that, among other things,
achieves a higher processing speed through improved architecture and includes an
advanced, more efficient instruction set. The OakDSPCore is especially
well-suited for use in personal communication products and higher level
processing applications, including digital cellular telephones, high bit rate
modems, video telephone conferencing applications and DSVD modems, which send
compressed voice and data signals at the same time over a regular telephone
line. Algorithms that use the PineDSPCore instruction set also can be run on the
OakDSPCore. OakDSPCore became the standard de-facto licensable DSP core on the
market.
In 1999, we introduced the TeakDSPCore - a family of two low power, cost
effective cores: the TeakLite(TM) and the Teak(R). These cores were designed in
a new methodology to achieve a higher frequency. Teak contains two arithmetic
units functioning in parallel (Dual MAC), which improve the performance of a
notable portion of the application that requires DSP technology. The TeakDSPCore
is aimed 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 core for use in
advanced wired line modems, 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 1999, we also introduced the first silicon of our high performance
PalmDSPCore. The PalmDSPCore is a family of three cores, each core version meets
a different market segment. The wide range of high performance applications,
including third generation cellular communications, digital subscriber lines
(DSL), VoIP gateways and consumer multimedia.
The following table shows a comparison of our DSP core designs:
DSP Group's DSP Core Designs
PineDSPCore OakDSP Core TeakLite Teak PalmDSPCore
----------- ----------- ---------- -------- ------------
Data Word Length .............. 16 bit 16 bit 16 bit 16 bit 16/20/24 bit
Process Geometry (microns)..... 0.5 0.35 0.25 0.25 0.2
Performance ................... Single MAC Single MAC Single MAC Dual MAC Dual MAC &
Instruction
Level
Parallelism
Voltage ....................... 5.0V 3.3V 2.5V 2.5V 2.5V
Advanced Instruction Set....... Average Advanced Advanced Parallel Parallel
Capability Capability
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In addition to incorporating our DSP core designs in our speech and
telephony processors, we also license them to third parties, together with
advanced software tools, so that these licensees can incorporate our DSP core
designs into their semiconductor chip products. These licenses are generally
granted in exchange for an upfront license fee payment. This fee is generally
recognized by us upon shipment of the deliverables for the core, provided that
no significant vendor or post-contract support obligations remain outstanding
and that collection of the resulting receivable is deemed probable. The
licensees also pay a monthly support fee, which is typically paid for a period
of one or two years, and ongoing per-unit royalties based on the number of units
of products containing the core that are shipped by the licensee. The timing and
amount of royalties that DSP receives from its core licensees depend on the
timing of each licensee's product development and the degree of market
acceptance of each licensee's products, neither of which are within our control.
In 1999, royalties paid by four PineDSPCore and OakDSPCore licensees for
shipment of products utilizing these cores increased from the previous year.
We also know that one of the important issues to a potential licensee is
the quality of our customer support. With good customer support the licensee
achieves faster time to market for their products. To provide this high quality
support, we have geographically located our support network all over the world,
as well as offering online technical support. In addition, special training
classes are given to each of our licensees, by our expert R&D personnel.
We believe that it is a great benefit for our licensees that DSP Group is
the developer of both the DSP cores and the supporting development tools. This
dual function is the reason that we are able to provide our customers with
advanced and optimized development tools: assemblers, linkers, simulators,
emulators and optimized C/C++ compilers. New releases of the development tools
occur periodically and include updates and new features.
The following is a partial list of companies who have licensed our DSP
core designs and representative applications for which they use our DSP core
designs:
DSP Core Design Licenses
Licensees Representative Applications
- ----------------------------- --------------------------------------
Adaptec Disk Drives
Atmel ASIC, Communications
DSP Communications
(a subsidiary of Intel) Digital Cellular Telephones
Fujitsu ASIC, ADSL, Communications
Hyundai ASIC, Audio, Communications
Kawasaki ASIC, Communications
Kenwood Audio Products
LSI Logic ASIC, Communications, DAB
Mitel ASIC, Communications
National Semiconductors Communications
NEC ASIC, Communications
Oki Communications
ROHM ASIC, Communications
Samsung ASIC, Communications and Multimedia
Seiko-Epson ASIC, Communications
Siemens/Infinion Communications
Sony Multimedia
TDK Semiconductor Modems
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Licensees Representative Applications
- ----------------------------- --------------------------------------
TEMIC DAB, Communications
TSMC ASIC Library
VLSI Technology
(a subsidiary of Philips) ASIC, Communications
Xemics Low Voltage applications
In order to assist existing licensees of our DSP core designs, 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 Synopsys. These
companies have adapted certain of their software applications to support our
cores, enabling such software to be used to design and simulate semiconductor
products containing these cores. In addition, a number of independent software
vendors, among them Ensigma, Espico, Prairiecomm, Vocal Technologies and
VoicePump, have developed digital signal processing algorithms that operate on
our PineDSPCore and OakDSPCore for a variety of communications and multimedia
applications. In 1999, these companies expanded their software product lines and
began to implement software on our most recently announced cores: TeakDSPCore
and PalmDSPCore. We believe that these developments and the large software
installed-base, make our DSP cores more attractive to potential licensees. In
addition, we believe that these technology providers help to establish our cores
as industry standards.
In 1999, the number of our core licensees increased as a result of several
contracts signed for our newest products, TeakLite, Teak and PalmDSPCore. Prior
to 1999, most of our licensees licensed our cores for the cellular market. In
1999, the PalmDSPCore was selected by leading companies as the platform for the
xDSL (full-rate and G.Lite) market.
TrueSpeech Products
TrueSpeech is a family of high-quality, cost-effective speech compression
technologies 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, we also have
enhanced TrueSpeech for use in the computer telephony and Voice over IP markets.
We incorporated our TrueSpeech technology in our speech and telephony processors
and also license TrueSpeech to computer 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 solutions in several markets. In the personal computer market,
Microsoft has incorporated a TrueSpeech algorithm in Windows 95, Windows 98 and
NT. In February 1995, the International Telecommunications Union established its
G.723.1 standard for low bit rate speech compression, which incorporates the
TrueSpeech 6.3 and 5.3 algorithms. In March 1997, the International Multimedia
Teleconferencing Consortium, a nonprofit industry group, recommended the G.723.1
standard as a default low bit rate audio compression technology for all voice
transmissions over the Internet and for conferencing products conforming the
International Telecommunication Union's H.323 standard for packet-based
multimedia communications systems. G.723.1 is also part of the International
Telecommunication Union's H.324 standard for video conferencing over 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 the video
and audio conferencing industry.
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We believe that the principal advantages of TrueSpeech, as compared with
other currently available digital speech compression technologies, are as
follows:
o Industry Acceptance and Field proof. As described above, a
TrueSpeech algorithm, the G.723, was adopted as a standard by the
International Telecommunications Union and was recommended as the a
default speech algortihm for Voice over IP by the International
Multimedia Teleconferencing Consortium. This enabled a broad usage
of the algorithm especially in Voice over IP and video conferencing
applications.
o 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. 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.
o 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 memory for storage and operation. Consequently, competing
speech compression algorithms require larger, more expensive DSPs
and result in higher cost solutions.
Our TrueSpeech licensees include, among others, 8x8, Analog Devices,
Cirrus Logic, Creative Labs, Dialogic, IBM, Intel, Microsoft, Philips,
Siemens/Infinion, Smith Micro, Texas Instruments, Unisys, US Robotics, Winbond
and White Pine Software. In addition, we have ported our TrueSpeech algorithms
to certain DSP platforms offered by Analog Devices, Motorola and Texas
Instruments, three leading merchant vendors of programmable DSP chips.
Sales, Marketing and Distribution
We market and distribute our products through our direct sales and
marketing organization, as well as through a network of distributors and
independent manufacturers' representatives. A marketing and sales team located
in our headquarters in Santa Clara, California and in Israel pursues business
with our customers in North America and closely monitors new markets, trends and
customer needs to shape our strategic decisions. In Japan, we operate from a
marketing and support office in Tokyo and through Tomen Electronics, a local
distributor. In the rest of Asia, we operate through sales representatives in
China, Hong Kong, South Korea and Taiwan. To handle sales and distribution in
Europe, we operate a marketing and support office located in France and have
sales representatives in Denmark, Germany, Israel, Spain, Sweden and the United
Kingdom. Our sales representatives and distributors are not subject to minimum
purchase requirements and can cease marketing our products at any time. The loss
of one or more representatives or their failure to renew agreements with us upon
expiration could harm our business, financial condition and results of
operations.
Sales to Tomen Electronics comprised 47% of our total revenues in 1999,
45% in 1998 and 33% in 1997.
Export sales accounted for 97% of our total revenues in 1999, 95% in 1998
and 92% in 1997. Due to our export sales, we are subject to the risks of
conducting business internationally, including
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unexpected changes in regulatory requirements, fluctuations in exchange rates
that could increase the price of our 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 our export sales are denominated in United
States dollars. See Note 3 of the Notes to Consolidated Financial Statements of
our Annual Report to Stockholders for the year ended December 31, 1999, for a
summary of our operations within various geographic areas.
Manufacturing and Design Methodology
Since our products are based on our 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 our
manufacturing occurs at independent foundries. We contract fabrication services
for speech and telephony processors from Taiwan Semiconductor Manufacturing
Company, Sony and UMC. Under non-exclusive agreements, these independent
foundries normally provide us with either finished, packaged and tested speech
processors at variable prices depending on the volume of units purchased or at
sorted good wafers level. We customarily pay for fully-tested products meeting
predetermined specifications. To ensure the integrity of quality assurance
procedures, we develop detailed testing procedures and specifications for each
product and require each foundry to use these procedures and specifications
before shipping us finished products.
We intend to continue to use independent foundries to manufacture digital
speech processors, cordless devices and other products for the consumer
telephone and computer telephony markets. To obtain an adequate supply of
wafers, we are considering various alternative production sites. Our reliance on
independent foundries involves a number of risks, including the foundries'
achievement of acceptable manufacturing yields and allocation of capacity to us.
In addition to our speech processors, our IDT speech processors require an
external component, including analog random access memory circuits (ARAMs) and
flash memory that are supplied by third party manufacturers. Temporary
fluctuations in the pricing and availability of these components could
negatively impact sales of our IDT speech processors, which could in turn harm
our business, financial condition and results of operations.
Competition
The markets in which we operate are extremely competitive and we expect
that competition will increase. In each of our business activities, we face
current and potential competition from competitors that have significantly
greater financial, technical, manufacturing, marketing, sales and distribution
resources and management expertise than we do. Our future prospects will depend
greatly on our ability to successfully develop and introduce new products that
are responsive to market needs. We cannot assure you that we will be able to
successfully develop or market any of these products.
The principal competitive factors in the IDT speech processors market
include price, speech quality, compression ratio, value-added features including
variable speed message playback and speakerphone, the level of mixed signal
integration, customer support and the timing of product introductions by us and
our competitors. We believe that we are competitive with respect to each of
these factors. Our principal competitors in the IDT market include Lucent
Microelectronics, Macronix, Philips, Sanyo, Siemens/Infinion and Toshiba.
The principal competitive factors in the cordless telephony market include
price, system integration level, range, customer support and the timing of
product introductions by us and our competitors. We believe that we are
competitive with respect to most of these factors. Our principal competitors in
the Cordless market include Conexant, Level 1, Philips and Siemens/Infinion.
12
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. Our DSP core designs
compete with companies such as LSI Logic and Siemens/Infinion, which license DSP
platforms, and Analog Devices, Lucent Microelectronics, Motorola, and Texas
Instruments, which sell their own complete general purpose DSP 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. Our 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, which has been actively involved in the development of GSM
protocols, and Motorola, which developed the original VSELP protocols. Although
TrueSpeech has achieved a degree of acceptance in the computer telephony
personal computer and VoIP markets, ADPCM and the speech compression
technologies for GSM and VSELP protocols are widely used in the development and
implementation of new products in the telephony industry. In addition, other
advanced speech compression algorithms have been introduced by competitors that
offer compression ratios comparable or higher than the TrueSpeech algorithms.
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 our products are targeted.
Price competition in the markets in which we currently compete and propose
to compete is intense and may increase, which could harm our business, financial
condition and results of operations. We have experienced and expect to continue
to experience increased competitive pricing pressures for our IDT processors.
During 1999, we were able to completely offset this decrease on an annual basis
through manufacturing cost reductions and a higher level of integration by
combining functions of the telephone, which used to be part of separate chips,
into the our DSP Group chip. However, we cannot assure you that we 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.
Research and Development
We believe that continued timely development and introduction of new
products is essential to maintain our competitive position. We currently conduct
most of our product development effort in-house and at December 31, 1999 had a
staff of 93 research and development personnel of which 81 were located in
Israel. We also employ independent contractors to assist with certain product
development and testing activities. We spent approximately $15.4 million in
1999, compared with $10.2 million in 1998, on research and development
activities.
Relationships With Affiliated Companies
We have a $18.4 million equity investment in, and have entered into
license and development arrangements with, AudioCodes Ltd., an Israeli
corporation primarily engaged in design, development, manufacturing and
marketing of hardware and software products that enable simultaneous
transmission of voice and data over networks including Internet, ATM and Frame
Relay. AudioCodes was formed in April 1993 by two of our former employees.
Pursuant to an agreement between DSP Group and AudioCodes, AudioCodes has
granted DSP Group a license to use some of Audiocodes' technology subject to the
payment of royalties. In addition, we signed a development agreement to develop
a new software based on Audiocodes' voice compression technology. We have
established this relationship to complement our in-house product development
efforts.
In May 1999, we exercised our option to purchase approximately 3.5% of the
outstanding stock of AudioCodes for approximately $1.1 million. In the same
month, AudioCodes completed its initial public offering (IPO) and is now listed
on the Nasdaq SmallCap Market under the symbol AUDC. In its IPO, AudioCodes
issued 3.5 million shares at a price of $14.00 per share. As a result, we
recorded in "Other
13
income (expense)" in our consolidated statements of income for 1999 a one-time
capital gain in the amount of $11.8 million. This amount was comprised of $9.4
million, which was from the sale of our shares sold in the IPO and $2.5 million
from the sale of approximately 248,000 of our AudioCodes shares to the
underwriters to cover their over-allotment option. The gross proceeds from our
sale were approximately $3.2 million.
In October 1999, AudioCodes successfully concluded a follow-on public
offering of 3.0 million shares at a price of $41.00 per share. In the follow-on,
AudioCodes issued and sold 1.5 million shares and an additional 1.95 million
shares were sold by shareholders, of which approximately 1,069,000 were sold by
us in two separate transactions. Our proceeds from these transactions were
approximately $42.8 million, and we recorded an additional capital gain in the
amount of $47.1 million. This amount was comprised of $10.8 million, which
resulted in the public offering, and $36.3 million from the sale of
approximately 1,069,000 AudioCodes shares.
As of December 31, 1999, we held approximately 2.9 million of AudioCodes
shares which represented about 15% of its outstanding shares. In January 2000,
we sold an additional 600,000 shares of AudioCodes for approximately $43.8
million, recording in the first quarter of 2000 an additional capital gain in
the amount of $40.0 million. After this sale, we hold approximately 2.3 million
AudioCodes shares, which represent approximately 12% of its outstanding shares.
In July 1996, we invested $2.0 million of cash for approximately 40% of
the equity interest in Aptel Ltd., an Israeli company. In connection with the
investment, we incurred a one-time write-off of acquired in-process technology
of $1.5 million. In October 1997, we invested approximately $176,000 in
convertible debentures issued by Aptel. In December 1997, we converted our
debentures and Aptel's shareholders, including us, exchanged their shares in
Aptel for shares in Nexus Telecommunications Systems Ltd., an Israeli company
registered and traded on the Nasdaq SmallCap Market. In April 1998, we sold all
of our Nexus shares in a private transaction for approximately $1.3 million and
realized a pre-tax one time gain on marketable equity securities of
approximately $1.1 million. This one time gain was included under "Other income
(expenses)" in our consolidated statements of income for the year ended December
31, 1998.
Licenses, Patents and Trademarks
We have been granted twelve United States patents, one Canadian patent and
one Israeli patent, and have twenty-seven patents pending in the United States,
two patents pending in Japan, one patent pending in Taiwan, thirteen patents
pending in Israel and one patent pending in Europe. We actively pursue foreign
patent protection in other countries of interest to us. Our policy is to apply
for patents or for other appropriate statutory protection when we develop
valuable new or improved technology. The status of patents involves complex
legal and factual questions, and the breadth of claims allowed is uncertain.
Accordingly, we cannot assure you that any patent application filed by us will
result in a patent being issued, or that our patents, and any patents that may
be issued in the future, will afford adequate protection against competitors
with similar technology; nor can we provide assurance that patents issued to us
will not be infringed or designed around by others. In addition, the laws of
certain countries in which our products are or may be developed, manufactured or
sold, including Hong Kong, Japan and Taiwan, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States.
We attempt to protect our trade secrets and other proprietary information
through agreements with our customers, suppliers, employees and consultants, and
through other security measures. Although we intend to protect our rights
vigorously, we 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 we
have not been involved in any material patent or other intellectual property
rights litigation to date, we cannot provide assurance that third parties will
not assert claims against us with respect to existing or future products or that
we will not need to assert claims against
14
third parties to protect our 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. If
litigation becomes necessary to determine the validity of any third party claims
or to protect our proprietary technology, it could result in significant expense
to us and could divert the efforts of our technical and management personnel,
whether or not the litigation is determined in our favor. In the event of an
adverse result in any litigation, we 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. We cannot provide assurance
that we would be successful in developing non-infringing technology or that any
licenses would be available on commercially reasonable terms.
We have been issued registered trademarks for the use of the PineDSPCore,
OakDSPCore, TeakDSPCore, Teak, PalmDSPCore, OCEM and TrueSpeech trademarks. In
addition, we applied for trademarks for Full Duplex SpeakerPhone, TeakLite,
Triple Rate Coder, PalmAssyst, Assyst, SpeechOnChip, DSPeech, SpeeChip and
SmartCores.
While our ability to compete may be affected by our ability to protect our
intellectual property, we believe that, because of the rapid pace of
technological change in the industry, our technical expertise and ability to
innovate on a timely basis will be more important in maintaining our competitive
position than protection of our intellectual property. We 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, including the expanding
knowledge, ability and experience of our personnel, new product introductions
and frequent product enhancements. Although we continue to implement protective
measures and intend to defend our intellectual property rights, we cannot
provide assurance that these measures will be successful.
Backlog
At December 31, 1999, our backlog was approximately $28.8 million compared
with approximately $8.7 million at December 31, 1998. We include in our 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. Our business in IDT speech processors is
characterized by short-term order and shipment schedules. Product orders in our
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.
Employees
At December 31, 1999, we had 161 employees, including 93 in research and
development, 32 in marketing and sales and 36 in corporate and administration
and manufacturing coordination. Competition for personnel in the semiconductor,
software and personal computer industries in general is intense. We believe that
our future prospects will depend, in part, on our ability to continue to attract
and retain highly-skilled technical, marketing and management personnel, who are
in great demand. In particular, there is a limited supply of highly-qualified
engineers with digital signal processing experience. None of our employees is
represented by a collective bargaining agreement, nor have we ever experienced
any work stoppage. We believe that our employee relations are good.
15
Factors that may affect future operating results
Our quarterly operating results may fluctuate significantly
We experience, and will continue to experience, significant fluctuations
in sales and operating results from quarter to quarter. Our quarterly results
fluctuate due to a number of factors:
o fluctuations in volume and timing of product orders;
o timing of recognition of license fees;
o level of per unit royalties;
o changes in demand for our products due to seasonal customer buying
patterns and other factors;
o timing of new product introductions by us or our customers,
licensees or competitors;
o changes in the mix of products sold by us;
o fluctuations in the level of sales by OEMs and other vendors of
products incorporating our products; and
o 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 2000, we expect that revenues from our 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 our operating results. Our per
unit royalties from licenses are totally dependent upon the success of our third
party licensees in introducing products utilizing our technology and the success
of those third party products in the marketplace. Per unit royalties from
TrueSpeech licensees have not been significant to date.
Our average selling prices continue to decline
We have experienced a decrease in the average selling prices of our IDT
speech processors, but have 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. However, we cannot guarantee that our 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 IDT market which is highly competitive
Sales of IDT products comprise a substantial portion of our product sales.
Any adverse change in the IDT 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 IDT market and the
markets for our products in general are extremely competitive and we expect that
competition will only increase. Our existing and potential competitors in each
of our 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 we do.
It is possible that we may one day be unable to respond to increased price
competition for IDT speech processors or other products through the introduction
of new products or reductions of manufacturing costs. This inability would have
a material adverse effect on our business, financial condition and results of
operations. Likewise, any significant delays by us in developing, manufacturing
or shipping new or enhanced products would also have a material adverse effect
on our business, financial condition and results of operations.
16
We depend on independent foundries to manufacture our integrated circuit
products
All of our integrated circuit products are manufactured by independent
foundries. While these foundries have been able to adequately meet the demands
of our increasing business, we are and will continue to be dependent upon these
foundries to achieve acceptable manufacturing yields, quality levels and costs,
and to allocate to us a sufficient portion of foundry capacity to meet our needs
in a timely manner. To meet our increased wafer requirements, we have added
additional independent foundries to manufacture our IDT speech processors. Our
revenues could be harmed should any of these foundries fail to meet our request
for products due to a shortage of production capacity, process difficulties, low
yield rates or financial instability. For example, foundries in Taiwan produce a
significant portion of our wafer supply. As a result, earthquakes, aftershocks
or other natural disasters in Asia, could preclude us from obtaining an adequate
supply of wafers to fill customer orders and could harm our business, financial
condition and results of operations.
We may need to increase our research and development efforts to remain
competitive
The DSP Cores market is experiencing extensive efforts by some of our
competitors to use new technologies to manipulate the chip design programming to
increase the parallel processing of the chip. One such technology used is Very
Long Instruction Word (VLIW), which some of our competitors possess elements of,
but which we do not possess at the present time. If such technology continues to
improve the programming processing of these chips, then we may need to further
our research and development to obtain such technology to remain competitive in
the market.
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. For example, we have noticed a trend of
decreasing sales for the product models based on the 900 Megahertz digital
spread spectrum RF and base band technology we acquired in 1999. We are in the
process of developing new RF and base band models, but there is no assurance
that we will be successful or that our developments will be accepted by the
market. Additionally, future acquisitions may require substantial capital
resources, which may require us to seek additional debt or equity financing. The
occurrence of any of these events could harm our business, financial condition
or results of operations.
We depend on international operations, particularly in Israel
We are dependent on sales to customers outside the United States. We
expect that international sales will continue to account for a significant
portion of our net product and license sales for the foreseeable future. As a
result, the occurrence of any negative international, political, economic or
geographic events could result in significant revenue shortfalls. The shortfalls
could cause our business, financial condition and results of operations to be
harmed. Some of the risks of doing business internationally include:
o unexpected changes in regulatory requirements;
o fluctuations in the exchange rate for the U.S. dollar;
17
o imposition of tariffs and other barriers and restrictions;
o burdens of complying with a variety of foreign laws;
o political and economic instability; and
o changes in diplomatic and trade relationships.
In particular, our principal research and development facilities are
located in the State of Israel and, as a result, at December 31, 1999, 121 of
our 161 employees were located in Israel, including 81 of our 93 research and
development personnel. In addition, although DSP Group is incorporated in
Delaware, a majority of our directors and executive officers are residents of
Israel. Therefore, we are directly affected by the political, economic and
military conditions to which Israel is subject.
Moreover, many of our expenses in Israel are paid in Israeli currency
which subjects us to the risks of foreign currency fluctuations and to economic
pressures resulting from Israel's generally high rate of inflation. The rate of
inflation in Israel was 1.3% in 1999 and 8.6% in 1998. While substantially all
of our sales and expenses are denominated in United States dollars, a portion of
our expenses are denominated in Israeli shekels. Our primary expenses paid in
Israeli currency are employee salaries and lease payments on our Israeli
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. We cannot provide assurance that currency
fluctuations, changes in the rate of inflation in Israel or any of the other
factors mentioned above will not harm our business, financial condition and
results of operations.
We depend on third parties and their suppliers to obtain required complementary
components
Some of the raw materials, components and subassemblies included in the
products manufactured by our third party customers, which also incorporate our
products, are obtained from a limited group of suppliers. Supply disruptions,
shortages or termination of any of these sources could harm our business and
results of operations due to the delay or discontinuance of orders for our
products by customers until the other necessary components are available.
We depend upon the adoption of industry standards based on TrueSpeech
Our prospects are partially dependent upon the establishment of industry
standards for digital speech compression based on TrueSpeech algorithms in the
computer telephony and Voice over IP markets. The continuing development of
industry standards utilizing TrueSpeech algorithms would create an opportunity
for us 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.
Protection of our intellectual property is limited; risks of infringement of
rights of others
As is typical in the semiconductor industry, we have been and may from
time to time be notified of claims that we may be infringing patents or
intellectual property rights owned by third parties. 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 manufacturers license the technology from 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.
18
If it appears necessary or desirable, we may try to obtain licenses under
those patents or intellectual property rights that we are allegedly infringing.
Although holders of these types of intellectual property rights commonly offer
these licenses, we cannot assure that licenses will be offered or that terms of
any offered licenses will be acceptable to us. Our failure to obtain a license
for key intellectual property rights from a third party for technology used by
us could cause us to incur substantial liabilities and to suspend the
manufacturing of products utilizing the technology. We 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.
Our stock price may be volatile
Announcements of developments related to our business, announcements by
competitors, quarterly fluctuations in our financial results and general
conditions in the highly 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
often been unrelated to the operating performance of affected companies. These
factors and fluctuations could have a material adverse effect on the market
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
identified 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 involve 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 differ materially from those described in these statements.
These forward-looking statements are based on current expectations and we assume
no obligation to update this information.
19
Item 2. PROPERTIES.
DSP 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 our marketing and support, North American
sales, operations, manufacturing coordination and administrative
personnel. This facility is leased through June 2001. DSP Group's
operations in Israel are located in approxiamately 29,800 square feet of
leased facilities, with the primary leased facility located in Herzelia
Pituach, Israel. These facilities are leased through November 2003.
Item 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate
disposition of which would have a material adverse effect on us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
20
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 16 of DSP Group's Annual Report to Stockholders
for the year ended December 31, 1999 is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA.
The information contained in the section labeled "Selected Consolidated
Financial Data" appearing on page 15 of DSP Group's Annual Report to
Stockholders for the year ended December 31, 1999 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 17 through 23 of DSP Group's Annual Report to Stockholders for
the year ended December 31, 1999 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" appearing on page 20 of DSP
Group's Annual Report to Stockholders for the year ended December 31, 1999
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 24 through 45 of DSP Group's Annual
Report to Stockholders for the year ended December 31, 1999 are
incorporated herein by reference.
The information contained in the section labeled "Quarterly Data"
appearing on page 15 of DSP Group's Annual Report to Stockholders for the
year ended December 31, 1999 is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section labeled "Directors, Executive Officers and Key Personnel" of
DSP Group's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 16, 2000 is incorporated herein
by reference.
Item 11. EXECUTIVE COMPENSATION.
The section labeled "Executive Compensation and Other Information" of DSP
Group's definitive Proxy Statement to be filed shortly hereafter for the annual
meeting of stockholders to be held on May 16, 2000 is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section labeled "Security Ownership of Certain Beneficial Owners and
Management" of DSP Group's definitive Proxy Statement to be filed shortly
hereafter for the annual meeting of stockholders to be held on May 16, 2000 is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section labeled "Certain Relationships and Related Transactions" of
DSP Group's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 16, 2000 is incorporated herein
by reference.
22
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.
The following consolidated financial statements and related notes
and auditor's report are included in DSP Group's Annual Report to
Stockholders for the year ended December 31, 1999 and are
incorporated into this Form 10-K by reference.
Description:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Kost Forer & Gabbay, a member of Ernst & Young
International, Independent Auditors
2. Index to Financial Statement Schedules.
The following financial statement schedules and related auditor's
report are filed as part of this Annual Report on Form 10-K:
Page in this
Annual Report
Description on Form 10-K
- ----------- ------------
Schedule II: Valuation and Qualifying Accounts (included at page 33)
Consent of Kost Forer & Gabbay, a member of Ernst & Young Exhibit 23.1
International, Independent Auditors (included at page 32)
All other schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or the related
notes incorporated into this Form 10-K by reference to DSP Group's Annual Report
to Stockholders for the year ended December 31, 1999.
23
3. 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 Amended and Restated Bylaws, as of November 11, 1999.
3.3 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).
3.4 Specimen Rights Certificate (filed as Exhibit 1.1 to the
Registrant's Current Report on Form 8-K filed on June 6, 1997).
3.5 Amended and Restated Rights Agreement, dated as of November 9,
1998, between the Registrant and Norwest Bank Minnesota, N.A.,
as Rights Agent (filed as Exhibit 3.6 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference).
3.6 Amendment No. 1, dated May 19, 1999, to the Amended and Restated
Rights Agreement, dated as of November 9, 1998, between the
Registrant and Norwest Bank Minnesota, N.A., as Rights Agent.
4.1 Registration Rights Agreement, dated as of February 2, 1999, by
and between the Registrant and Magnum Technology Limited (filed
as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, and incorporated herein by
reference).
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 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).
24
Exhibit
Number Description
------- ----------------------------------------------------------------
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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 Amendment to Employment Agreement with Eliyahu Ayalon, dated as
of November 3, 1997 (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).
10.14 Amendment to 1993 Directors Stock Option Plan, as adopted
November 3, 1997 (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).
10.15 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).
25
Exhibit
Number Description
------- ----------------------------------------------------------------
10.16 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).
10.17 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 (filed as Exhibit
10.22 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by
reference).
10.18 1998 Non-Officer Employee Stock Option Plan (filed as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by
reference).
10.19 Stock Purchase Agreement, dated as of February 2, 1999, by and
between the Registrant and Magnum Technology Limited (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, and incorporated herein by
reference).
10.20 1991 Employee and Consultant Stock Plan, as amended and restated
July 19, 1999 (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999, and incorporated herein by reference).
10.21 1993 Director Stock Option Plan, as amended and restated July
19, 1999 (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999,
and incorporated herein by reference).
10.22 Second Amendment to Sublease, dated February 11, 1999, by and
between Dialogic Corporation and the Registrant, relating to the
Registrant's facility located at 3120 Scott Boulevard in Santa
Clara, California.
10.23 Employment Agreement, dated May 1, 1999, by and between the
Registrant and Moshe Zelnik.
10.24 Employment Agreement, dated May 1, 1999, by and between the
Registrant and Boaz Edan.
10.25 Appendix Agreement, dated May 5, 1999, by and between DSP Group,
Ltd. and Bayside Land Corporation Ltd., relating to the property
located on Shenkar Street, Herzlia Pituach, Israel.
10.26 Amendment to Employment Agreement with Eliyahu Ayalon, effective
as of November 11, 1999.
10.27 Amendment to Employment Agreement with Igal Kohavi, effective as
of November 11, 1999.
10.28 Separation Agreement between the Registrant and Igal Kohavi,
dated January 24, 2000.
11.1 Statements regarding computation of per share earnings (included
at page 30).
13.1 Portions of the Annual Report to Stockholders for the year ended
December 31, 1999.
21.1 Subsidiaries of DSP Group (included at page 31).
23.1 Consent of Ernst & Young LLP, Independent Auditors (included at
page 32).
26
Exhibit
Number Description
------- ----------------------------------------------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K in Fourth Quarter.
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1999.
27
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
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: March 30, 2000
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Eliyahu Ayalon and Moshe Zelnik or either of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
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/ Eliyahu Ayalon Chairman of the Board March 30, 2000
- ---------------------------- and Chief Executive Officer
Eliyahu Ayalon (Principal Executive Officer)
/s/ Moshe Zelnik Vice President of Finance, Chief March 30, 2000
- ---------------------------- Financial Officer and Secretary
Moshe Zelnik (Principal Financial Officer
and Principal Accounting
Officer)
/s/ Zvi Limon Director March 30, 2000
- ----------------------------
Zvi Limon
/s/ Yair Shamir Director March 30, 2000
- ----------------------------
Yair Shamir
/s/ Saul Shani Director March 30, 2000
- ----------------------------
Saul Shani
28
/s/ Louis Silver Director March 30, 2000
- ----------------------------
Louis Silver
/s/ Patrick Tanguy Director March 30, 2000
- ----------------------------
Patrick Tanguy
29
Exhibit 11.1
DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
Year Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
Numerator:
Net income ...................................... $54,579 $14,415 $11,034
======= ======= =======
Denominator:
Weighted average number of common shares
outstanding during the period used to compute
basic earnings per share ...................... 11,734 9,768 9,736
======= ======= =======
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would be
used to purchase treasury stock) .............. 987 248 467
------- ------- -------
Weighted average number of shares of common
stock used to compute diluted earnings per
share ......................................... 12,721 10,016 10,203
======= ======= =======
Basic net income per share ............................ $ 4.65 $ 1.48 $ 1.13
======= ======= =======
Diluted net income per share .......................... $ 4.29 $ 1.44 $ 1.08
======= ======= =======
30
Exhibit 21.1
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
- ------------------------------------ --------------------------------
1. DSP Group Europe SARL France
2. DSP Group Ltd. Israel
3. Nihon DSP K.K. Japan
4. RF Integrated Systems, Inc. Delaware, U.S.
5. Voicecom Ltd. Israel
31
Exhibit 23.1
CONSENT OF KOST FORER & GABBAY,
A MEMBER OF ERNST & YOUNG INTERNATIONAL, 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, 2000 (except for Note
9, as to which the date is March 1, 2000), included in the 1999 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 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, the 1993
Employee Stock Purchase Plan and the 1998 Non-Officer Employee Stock Option
Plan, of our report dated January 23, 2000 (except for Note 9, as to which the
date is March 1, 2000), with respect to the consolidated financial statements
and schedule incorporated herein by reference or included in this Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ Kost Forer & Gabbay,
a member of Ernst & Young
International
Tel Aviv, Israel
March 30, 2000
32
Schedule II
DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged to
Balance at (deducted
Beginning from)
of Costs and Balance at
Period Expenses End of
Description Deduction Period
- ---------------------------------- ---------- ---------- --------- ----------
Year ended December 31, 1997:
Allowance for doubtful accounts 71 60 61(1) 70
Sales returns reserve 377 345 600(2) 122
Year ended December 31, 1998:
Allowance for doubtful accounts 70 10 80
Sales returns reserve 122 -- -- 122
Year ended December 31, 1999:
Allowance for doubtful accounts 80 60 -- 140
Sales returns reserve 122 400 -- 522
- ----------
(1) write-offs of uncollectible amounts
(2) sales returns applied against revenue
33