Selected Consolidated Financial Data
(US dollars in thousands, except per share
amounts) Year Ended December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Revenues $ 109,513 $ 76,433 $ 63,850 $ 61,959 $ 52,910
Income from continuing operations $ 49,835 $ 54,579 $ 14,415 $ 11,034 $ 5,979
Weighted average number of common shares
outstanding during the period used to compute
basic earnings per share 26,616 23,468 19,536 19,472 19,020
Weighted average number of common shares
outstanding during the period used to compute
diluted earnings per share 28,669 25,442 20,032 20,406 19,162
Net earnings per share - Basic $ 1.87 $ 2.33 $ .74 $ .57 $ .32
Net earnings per share - Diluted $ 1.74 $ 2.15 $ .72 $ .54 $ .31
BALANCE SHEET DATA:
Cash, cash equivalents, marketable securities and
cash deposits $ 223,201 $ 161,371 $ 66,989 $ 65,944 $ 42,934
Working capital $ 220,921 $ 163,747 $ 68,673 $ 66,947 $ 47,851
Total assets $ 282,807 $ 206,179 $ 85,791 $ 85,826 $ 51,778
Total stockholders' equity $ 246,165 $ 183,957 $ 75,695 $ 74,170 $ 54,449
------------------------------------------------------------
(Unaudited, US dollars
in thousands, except
per share amounts)
Fiscal Years by Quarter 2000 1999
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
---------------------------------------------------------------------------------------------------
Revenues $ 31,425 $ 28,988 $ 25,713 $ 23,387 $ 25,973 $ 23,296 $ 16,702 $ 10,462
Gross profit $ 18,167 $ 16,073 $ 13,776 $ 12,589 $ 14,418 $ 12,630 $ 9,543 $ 6,636
Net income $ 8,743 $ 8,428 $ 17,255 $ 15,409 $ 33,918 $ 5,770 $ 13,709 $ 1,182
Net earnings per
share - Basic $ .33 $ .31 $ .65 $ .60 $ 1.35 $ .24 $ .60 $ .06
Net earnings per
share - Diluted $ .31 $ .29 $ .59 $ .54 $ 1.23 $ .22 $ .57 $ .06
--------------------------------------------------------------------------------------------------
The accompanying notes are integral part of the consolidated financial
statements.
DSP Group, Inc. 17
Price Range of Common Stock
DSP Group's common stock trades on the Nasdaq National Market (Nasdaq symbol
"DSPG").
The following table presents for the periods indicated the intraday high and low
sale prices for DSP Group's common stock as reported by the Nasdaq National
Market:
2000 HIGH LOW
- ----------------------------------------------------------------------------
FIRST QUARTER $ 71.19 $ 38.00
SECOND QUARTER $ 74.50 $ 35.00
THIRD QUARTER $ 64.75 $ 36.38
FOURTH QUARTER $ 38.00 $ 18.63
-------------------------------
1999 HIGH LOW
- ----------------------------------------------------------------------------
First Quarter $ 11.32 $ 6.32
Second Quarter $ 18.00 $ 7.35
Third Quarter $ 21.13 $ 17.25
Fourth Quarter $ 48.13 $ 19.00
-------------------------------
As of December 31, 2000, there were approximately 69 holders of record of DSP
Group's Common Stock, which DSP Group believes represents approximately 9,871
beneficial holders. DSP Group has not paid cash dividends on its Common Stock
and presently intends to follow a policy of retaining any earnings for
reinvestment in its business.
The accompanying notes are integral part of the consolidated financial
statements.
DSP Group, Inc. 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
2000 has been a remarkable year for DSP Group in terms of revenue growth
and expansion of its business. In the first quarter of 2000, DSP Group acquired
a software company VoicePump, Inc. ("VoicePump") and entered the Voice Over DSL
(VoDSL) and the Voice Over Internet Protocol (VOIP) markets, making use of its
telephony technologies, DSP Cores architecture and VoicePump's VoDSL and VOIP
gallery of software. Our marketing and sales teams introduced new products for
the telephony line and achieved record high revenues for DSP Group in our
product and licensing markets. DSP Group's liquidity and working capital
continued to improve significantly throughout 2000 and by year end we achieved
new record highs for DSP Group in cash, marketable securities, cash deposits and
working capital. These increases were attained mainly due to additional sales of
a portion of our equity investment in AudioCodes Ltd. as well as to cash
provided from our operations. Our future operating results will be dependent
upon a variety of factors. See "Factors Affecting Operating Results" in this
report and in our Annual Report on Form 10-K for the year ended December
31,2000.
TOTAL REVENUES. Our total revenues were $109.5 million in 2000, $76.4 million in
1999 and $63.9 million in 1998. This represents an increase in total revenues of
43% in 2000 as compared with total revenues in 1999, and a 20% increase in total
revenues in 1999 as compared with those in 1998. The increase in revenues in
2000 compared to 1999 was primarily the result of our successful lines of D16K
and DL16K series products. Our licensing revenues in 2000 were $25.1 million
compared to $19.0 million in 1999, and $14.6 million in 1998. This represents an
increase in licensing revenues of 32% in 2000 as compared with 1999, and an
increase of 30% in our licensing revenues in 1999 as compared with those in
1998.
Export sales, primarily consisting of Integrated Digital Telephony (IDT)
speech processors shipped to manufacturers in Europe and Asia, including Japan,
represented 86% of DSP Group's total revenues in 2000, 97% in 1999 and 95% in
1998. All export sales are denominated in U.S. dollars.
SIGNIFICANT CUSTOMERS. Revenues from one of our distributors, Tomen Electronics,
accounted for 52% of our total revenues in 2000 as compared to 47% in 1999, and
45% in 1998. The loss of this one or more of our other major distributors or
customers could harm our business, financial condition and results of
operations.
GROSS PROFIT. Gross profit as a percentage of total revenues decreased to 55% in
2000, from 57% in 1999. Gross profit as a percentage of total revenues were 54%
in 1998. The decrease in total gross profit in 2000 compared to 1999 was due to
a slightly higher mix of product revenues, which have a lower gross profit than
licensing sales, from total revenues.
Product gross profit as a percentage of product sales continued to slightly
increase to 43% in 2000, from 42% in 1999 and from 41% in 1998. This ongoing
increase was primarily due to the decrease in our costs of manufacturing. Our
manufacturing costs have decreased due primarily to improvements in
manufacturing technology, and to some extent the decreased manufacturing prices
obtained from the foundries. Importantly, this increase in gross profit was
achieved even though we continue to experience competitive, downward pricing
pressure for our IDT products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
significantly to $20.9 million in 2000, from $15.4 million in 1999 and from
$10.2 million in 1998. The significant increase in research and development
expenses in 2000 as compared to those in 1999 primarily resulted from the hiring
of additional engineers associated with the acquisition of VoicePump, as well as
from the increase in external services provided to our research and development
team. Our engineering headcount increased in 2000 compared to 1999 by 45%. The
increase in research and development expenses in 1999 as compared to those in
1998 primarily resulted from the following actions related to our RF cordless
telephone applications: support for our new product line introduction of the
D16K series; the acquisition of products, technology and RF laboratory equipment
as well as an increase in our engineering headcount.
Research and development expenses as a percentage of total revenues were
19% in 2000, 20% in 1999 and 16% in 1998, respectively.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased to
$12.9 million in 2000, from $9.3 million in 1999 and from $5.2 million in 1998.
The increase in expenses in 2000 as compared to those in 1999 was due to an
increase of 17% in our sales and marketing personnel, as well as to an increase
in our sales commissions, due to the increase in our revenues and higher
facility costs for our Japanese subsidiary, Nihon DSP K.K. ("DSP Japan"). The
increase in 1999 compared to 1998 was due primarily to our marketing and sales
efforts of introducing our new line of IDT products, the D16K series, and our
new RF wireless products, as well as an increase in our sales commissions, due
to the increase in our revenues.
Sales and marketing expenses as a percentage of total revenues were 12% in
both 2000 and 1999 and 8% in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
increased to $6.5 million in 2000 from $5.5 million in 1999 and from $4.6
million in 1998. General and administrative expenses increased in 2000 from
1999, mainly due
DSP Group, Inc. 19
to an increase in accounting, tax and legal professional expenses we incurred
with respect to the proposed spin-off of our DSP Cores licensing division.
General and administrative expenses increased in 1999 from 1998, mainly due to
an increase in our rented property and associated facility expenses as a result
of the increase in our total head-count. Additionally, we experienced an
increase in costs in connection with an increase in our general legal and
accounting services. However, we are closely monitoring all expenses and believe
that this contributed to our general and administrative expenses as a percentage
of total revenues decreasing slightly to 6% in 2000, from 7% in both 1999 and
1998.
UNUSUAL ITEMS. In the first quarter of 2000 we recorded two unusual expense
items amounting to approximately $14.2 million. A write-off of $11.9 million was
recorded relating to the acquired in-process research and development in
connection with the acquisition of approximately 73% of the outstanding shares
of VoicePump. An expense of $2.2 million was recorded reflecting the accelerated
amortization of acquired assets and intangibles related to the 1999 acquisition
of 900 MHz RF and baseband technology from Applied Micro Devices, Inc.
INTEREST AND OTHER INCOME. Interest and other income increased significantly to
$13.5 million in 2000 from $6.0 million in 1999 and from $3.8 million in 1998.
The increase in interest income in 2000 as compared with 1999 and 1998, is a
result of higher levels of cash equivalents, marketable securities and cash
deposits in 2000, mainly due to additional sales of a portion of our equity
investment in AudioCodes, Ltd., ("AudioCodes") as well as higher yields of our
financial investments.
EQUITY IN INCOME OF EQUITY METHOD INVESTEES. Equity in income of equity method
investees was $2,644,000 in 2000, $2,475,000 in 1999 and $125,000 in 1998. In
2000 we recorded VoicePump's losses in the results of operations of our
statements of income of approximately $2.2 million and included the minority
interest in those losses in the amount of $627,000.
GAIN ON SALE OF MARKETABLE EQUITY SECURITY. In April 1998, DSP Group sold all of
its Nexus Telecomunications Systems Ltd. ("Nexus") shares in a private
transaction and realized a pre-tax one time gain on marketable equity securities
of approximately $1.1 million, which is included under "Other income (expense)"
in our consolidated statements of income for 1998.
CAPITAL GAIN. 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 7.0 million shares at a price of $7.00 per share. As a result
we recorded in "Other 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, from the sale of our shares sold in the IPO and $2.5
million from the sale of approximately 494,000 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 6.0 million shares at a price of $20.50
per share. In the follow-on offering, AudioCodes issued and sold 3.0 million
shares and an additional 3.9 million shares were sold by shareholders, of which
approximately 2,138,000 shares were sold by us in two separate transactions. Our
proceeds from these transactions were approximately $42.8 million, and we
recorded in 1999 an additional capital gain in the amount of $47.1 million. This
amount was comprised of $10.8 million, which resulted from the public offering
and $36.3 million from the sale of approximately 2,138,000 AudioCodes' shares.
As of December 31, 1999, we held approximately 5.8 million AudioCodes shares,
which represented about 15% of its outstanding shares. In January 2000, we sold
1,200,000 shares of AudioCodes for approximately $43.8 million and recorded in
the first quarter of 2000 a capital gain in the amount of $40.0 million. In June
2000 we sold an addition 500,000 shares of AudioCodes for approximately $19.2
million and recorded in the second quarter of 2000, an additional capital gain
in the amount of $17.6 million. In the fourth quarter of 2000 we purchased in
the open market 300,000 of AudioCodes shares for approximately $4.9 million.
This transaction created an excess of purchase price over net assets acquired
(approximately $3,745,000 at the date of purchase), which was attributed to
developed technology to be amortized over seven years. As of December 31, 2000,
we own 4.45 million shares of AudioCodes common stock, which represents
approximately 11% of the outstanding capital of AudioCodes. All shares and per
share numbers with respect to AudioCodes have been adjusted to reflect the
2-for-1 stock split effected by AudioCodes in October 2000.
PROVISION FOR INCOME TAXES. The effective tax rate was 18% (excluding tax on
capital gain) for the year ended December 31, 2000, 22% for the year ended
December 31, 1999 and 25% for the year ended December 31, 1998. The tax rates
for both 2000 and 1999 are lower compared to 1999 and 1998, respectively, due
mainly to our utilization of foreign tax holiday benefits.
DSP Group Ltd., DSP Group's subsidiary in Israel, has been granted
"Approved Enterprise" status by the Israeli government according to four
investment plans. The Approved Enterprise status allows for a tax holiday for a
period of two to four years and a reduced corporate tax rate of 10% for an
additional eight or six years, on the respective investment plans' proportionate
share of
DSP Group, Inc. 20
taxable income. The tax benefits under these investment plans are scheduled to
gradually expire starting from 2005 through 2009.
Management has assessed the need for a valuation allowance against deferred
tax assets and has concluded that it is more likely than not that $5.4 million
deferred tax assets will be realized based on current levels of future taxable
income and potentially refundable taxes.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, DSP Group generated $33.0 million of cash and cash equivalents
from its operating activities as compared to $18.3 million during 1999 and $15.1
million in 1998. The significant increase in 2000 of cash and cash equivalents
as compared with that in 1999 occurred even though DSP Group experienced an
decrease in net income in 2000 compared to 1999. The increase was due mainly to
the non-cash effects of the increase of amortization of the in-process research
and development costs in connection with the VoicePump acquisition, reduced
capital gains attributed to the sale of AudioCodes stock and the increases in
accounts payable and accrued expenses. These were off-set by the decrease in
deferred income taxes as well as to the increase in income tax payable. The
increase in 1999 of cash and cash equivalents as compared with that in 1998
occurred primarily because of our significant increase in net income. In
addition, the increase in cash and cash equivalents was attributable primarily
to the non-cash effects of the increase in deferred income tax and the cash used
by the increase in accounts payable. However, the increase was mainly offset by
the increase in capital gain and partially offset by the increase in our
inventories and an increase in accounts receivable.
We invest excess cash in short-term cash deposits and marketable securities
of varying maturity, depending on our projected cash needs for operations,
capital expenditures and other business purposes. In 2000, DSP Group purchased
$155.0 million of investments classified as short-term cash deposits and
marketable securities, $131.4 million in 1999 and $60.0 million in 1998. In
addition, $120.0 million of our investments classified as marketable securities
matured in 2000 compared to $48.7 million in 1999 and $60.6 million in 1998.
During 2000, the average maturity for our investments was less than 12 months
but slightly higher from the previous average of less than 12 months in 1999.
Our capital equipment purchases amounted to $3.4 million in 2000, $5.2
million in 1999 and $2.3 million in 1998 for computer hardware and software used
in engineering development, engineering test and lab equipment, leasehold
improvements, vehicles, and furniture and fixtures. The acquisitions of capital
equipment during 1999 were primarily for new lab equipment associated with the
RF technology, and other computer equipment, testing equipment and software for
our research and development efforts during the year.
On February 2, 1999, DSP Group announced that it had entered into a stock
purchase agreement with Magnum Technologies, Ltd., ("Magnum") an international
investment fund, in which DSP Group issued and sold 2,300,000 new shares
(pre-split 2:1) of DSP Group common stock to Magnum. Based in part on Magnum's
representations, the transaction 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 (pre-split
2:1) 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 agreed to
restrict its sales of the DSP Group shares it purchased for an eighteen-month
period from the date of the transaction under Rule 144(e)(i) of the Securities
Act of 1933, unless it received the prior written approval of DSP Group.
Additionally, DSP Group invited Magnum to appoint two new directors to the Board
of Directors, which currently brings the total number of members of our Board of
Directors to six. In February and August 2000, Magnum exercised its option to
sell our common stock, and sold 2.9 million shares of its holdings. After the
sale, Magnum holds approximately 2.9 million DSP Group shares representing
approximately 11% of our outstanding shares of common stock.
STOCK SPLIT. On January 24, 2000, our Board of Directors declared a stock
dividend whereby each holder of record of our common stock on February 16, 2000
received one additional share of common stock for each share then owned. The
dividend was paid on March 1, 2000.
REPURCHASE PROGRAM. In March 1999, our Board of Directors authorized a new plan
to repurchase up to an additional 2,000,000 shares of our common stock from time
to time on the open market or in privately negotiated transactions, increasing
the total shares authorized to be repurchased to 4,000,000 shares. Accordingly,
during the year 2000 we repurchased 850,000 shares of our common stock at an
average price of $24.13 per share, for an aggregated purchase price of $20.5
million. During 1999 we repurchased 400,000 shares of our common stock at an
average purchase price of $6.78 per share, for an aggregate purchase price of
approximately $2.7 million. In 1998, we repurchased 1,628,000 shares of our
common stock at an average purchase price of $8.77 per share for an aggregate
purchase price of approximately $14.3 million. In 2000, we issued 1,032,000
shares of our common stock to employees who have exercised their stock options
and in 1999 we issued 908,000 shares.
DSP Group, Inc. 21
In September 2000, we invested approximately $485,000 (31.0 million Yen) in
shares of our Japanese distributor's parent company, Tomen Ltd., as part of a
long-term strategic relationship. Tomen's shares are traded on the Japanese
stock exchange, and are recorded in "Other Investments" on our balance sheets,
and accounted for as available for sale marketable equity securities.
In 1997, DSP Group invested $176,000 in convertible debentures of Aptel.
Subsequently, in December 1997, Aptel's shareholders, including DSP Group,
exchanged their shares in Aptel for shares in Nexus. In April 1998, DSP Group
sold all of its 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, which is included under "Other income (expense)" in
our consolidated statements of income for the year ended December 31, 1998.
Cash received upon the exercise of employee stock options and through
purchases pursuant to DSP Group's employee stock purchase plan in 2000 totaled
$15.6 million as compared with $20.4 million in 1999 and $1.2 million in 1998.
At December 31, 2000, DSP Group's principal source of liquidity consisted
of cash and cash equivalent deposits totaling $45.0 million and marketable
securities and short-term cash deposits of $178.2 million. DSP Group's working
capital at December 31, 2000 was $220.9 million.
We believe that our current cash, cash equivalent, cash deposits and
marketable securities will be sufficient to meet our cash requirements through
at least the next 12 months. In addition, as part of our business strategy, we
occasionally evaluate potential acquisitions of businesses, products and
technologies. Accordingly, a portion of our available cash may be used at any
time for the acquisition of complementary products or businesses. Such potential
transactions may require substantial capital resources, which may require us to
seek additional debt or equity financing. There can be no assurance that we will
consummate any such transactions. See "Factors Affecting Future Operating
Results There are Risks Associated with our Acquisition Strategy" for more
detailed information.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is DSP Group's policy not to enter into derivative
financial instruments. DSP Group does not currently have any significant foreign
currency exposure since it does not transact business in foreign currencies. Due
to this, DSP Group did not have significant overall currency exposure at
December 31, 2000.
FOREIGN CURRENCY RATE RISK. As nearly all of DSP Group's sales and expenses are
denominated in U.S. Dollars, DSP Group has experienced only insignificant
foreign exchange gains and losses to date, and does not expect to incur
significant gains and losses in the next 12 months. DSP Group did not engage in
foreign currency hedging activities during 2000 and 1999. See "Factors Effecting
Future Operating Results - Risks of Operating in Israel" in more detailed
information.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the euro, on January 1, 1999. During 2002, all EMU countries are
expected to be operating with the euro as their single currency. Uncertainty
exists as to the effect the euro currency will have on the marketplace.
Additionally, all of the final rules and regulations have not yet been defined
and finalized by the European Commission with regard to the euro currency. We
are assessing the effect the euro formation will have on DSP Group's internal
systems and the sale of DSP Group products. We expect to take appropriate
actions based on the results of such assessment. We believe that the cost
related to this issue will not be material to us and will not have a substantial
effect on our financial condition and results of operations.
RISK FACTORS AFFECTING OPERATING RESULTS
The stockholders' letter and the discussion in this annual report that
concerns DSP Group's future products, expenses, revenue, liquidity and cash
needs as well as DSP Group's plans and strategies contain forward-looking
statements concerning our future operations and financial results. These
forward-looking statements are based on current expectations and we assume no
obligation to update this information. Numerous factors could cause results to
differ from those described in these statements and prospective investors and
stockholders should carefully consider the factors set forth below in evaluating
these forward-looking statements.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly results of operations may vary significantly in the future for a
variety of reasons, including the following:
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, our customers, licensees or
competitors;
o changes in the mix of products sold by us;
o fluctuations in the level of sales by original equipment manufacturers
(OEMs) and other vendors of products incorporating our products; and
o general economic conditions, including the changing economic conditions in
the United States.
DSP Group, Inc. 22
Each of the above factors is difficult to forecast and thus could harm our
business, financial condition and results of operations. Through 2001, 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 dependent upon the success of our OEM licensees in introducing
products utilizing our technology and the success of those OEM 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 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
digital IDT market or in our ability to compete and maintain our position in
that market would harm 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 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. Likewise, any significant delays by us in developing, manufacturing or
shipping new or enhanced products also would have a material adverse effect on
our business.
The 900 Mhz Digital Spread Spectrum RF and Base Band technology acquired in 1999
from Advances Micro Devices gave us a "cheap entry ticket" to this market. This
technology is not state of the art and we have noticed a trend of decreasing
sales for the product models which are based on this technology. We may not
succeed in our development of new RF and Base Band models and those which are
going to be developed may not be accepted by the market.
Despite the recent success of development and sales of our DSP Cores, the market
needs extensive R&D efforts in new technologies not currently owned by the
company, and we may not succeed in developing such technologies in due time,
which could affect our competitive position.
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 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 VeryLong 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 in order to
remain competitive in the markets in which we compete.
WE DEPEND ON INTERNATIONAL OPERATIONS. 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. These shortfalls could cause our business 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 United States dollar;
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.
DSP Group, Inc. 23
RISKS OF OPERATING IN ISRAEL. Our principal research and development facilities
are located in the State of Israel and, as a result, at December 31, 2000, 164
of our 217 employees were located in Israel, including 113 out of 135 of our
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. Although substantially all of our sales currently are being
made to customers outside Israel, we are nonetheless directly influenced by the
political, economic and military conditions affecting Israel. Any major
hostilities involving Israel, or the interruption or curtailment of trade
between Israel and its present trading partners, could significantly harm our
business, operating results and financial condition.
Israel's economy has been subject to numerous destabilizing factors, including a
period of rampant inflation in the early to mid-1980's, low foreign exchange
reserves, fluctuations in world commodity prices, military conflicts and civil
unrest. In addition, Israel and companies doing business with Israel have been
the subject of an economic boycott by the Arab countries since Israel's
establishment. Although they have not done so to date, these restrictive laws
and policies may have an adverse impact on our operating results, financial
condition or expansion of our business.
Since the establishment of the State of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries.
Although Israel has entered into various agreements with certain Arab countries
and the Palestinian Authority, and various declarations have been signed in
connection with efforts to resolve some of the economic and political problems
in the Middle East, we cannot predict whether or in what manner these problems
will be resolved. Our results of operations may be negatively affected by the
obligation of key personnel to perform military service. In addition, certain of
our officers and employees are currently obligated to perform annual reserve
duty in the Israel Defense Forces and are subject to being called for active
military duty at any time. Although we have operated effectively under these
requirements since our inception, we cannot predict the effect of these
obligations on the Company in the future. Our operations could be disrupted by
the absence, for a significant period, of one or more of our officers or key
employees due to military service.
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 general rate of inflation. 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 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
have a material adverse effect on our business, financial condition and results
of operations.
ANY FUTURE PROFITABILITY MAY BE DIMINISHED IF TAX BENEFITS FROM THE STATE OF
ISRAEL ARE REDUCED OR WITHHELD. The Company receives certain tax benefits in
Israel, particularly as a result of the "Approved Enterprise" status of the
Company's facilities and programs. To be eligible for tax benefits, the Company
must meet certain conditions, relating principally to adherence to the
investment program filed with the Investment Center of the Israeli Ministry of
Industry and Trade and to periodic reporting obligations. The Company believes
that it will be able to meet such conditions. Should the Company fail to meet
such conditions in the future, however, it would be subject to corporate tax in
Israel at the standard rate of 36%, and could be required to refund tax benefits
already received. There can be no assurance that such grants and tax benefits
will be continued in the future at their current levels or otherwise. The
termination or reduction of certain programs and tax benefits (particularly
benefits available to the Company as a result of the Approved Enterprise status
of the Company's facilities and programs) or a requirement to refund tax
benefits already received may have a material adverse effect on the Company's
operating results and financial condition.
PROPOSED ISRAELI TAX REFORM. On May 4, 2000, a committee chaired by the Director
General of the Israeli Ministry of Finance, Avi Ben-Bassat, issued a report
recommending a sweeping reform in the Israeli system of taxation. The proposed
reform would significantly alter the taxation of individuals, and would also
affect corporate taxation. In particular, the proposed reform would reduce, but
not eliminate, the tax benefits available to approved enterprises such as ours.
The proposed reform would also impose a capital gains tax on individuals on the
sale of shares, unless the selling shareholder is entitled to benefits under a
tax treaty. The Israeli cabinet has approved the recommendations in principle,
but implementation of the reform requires legislation by Israel's Knesset. The
Company cannot be certain whether the proposed reform will be adopted, when it
will be adopted or what form any reform will ultimately take. The elimination of
our approved status could have negative tax consequences discussed above and
could have a material adverse effect on our business.
WE DEPEND ON OEMS AND THEIR SUPPLIERS TO OBTAIN REQUIRED COMPLEMENTARY
COMPONENTS. Some of the raw materials, components and subassemblies included in
the products
DSP Group, Inc. 24
manufactured by our OEM 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 have an adverse effect on our business
and results of opera-tions due to the delay or discontinuance of orders for our
products by customers until those necessary components are available.
WE DEPEND UPON THE ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH
TECHNOLOGY. 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 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. If TrueSpeech algorithms are not adopted as the standard speech
compression technology for different applications, the sales of our TrueSpeech
products may not achieve anticipated levels.
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. Future acquisitions
may require substantial capital resources, which may require us to seek
additional debt or equity financing.
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. If
it appears necessary or desirable, we may try to obtain licenses for 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 you 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 harm 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, changes in the general conditions of 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.
YEAR 2000 ISSUE. The "Year 2000 issue" refers to the use by many computer
hardware and software systems of only two digits to represent the calendar year.
As a result, these systems and programs may not process dates beyond 1999, which
may cause errors in information or systems failures. The Company believes it has
taken all reasonable and prudent steps to protect its assets and operations from
the impact of the Year 2000 Issue. To date there have been no known adverse
effects on any of the Company's operations or offices. While the change in date
has occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the Company have been fully resolved. The Company believes
that exposure to business disruption remains, but does not expect it would have
a material impact on the Company's results of operations, liquidity and
financial condition.
DSP Group, Inc. 25
Report of Independent Auditors
TO THE STOCKHOLDERS OF DSP GROUP, INC.
We have audited the accompanying consolidated balance sheets of DSP Group, Inc.
(the "Company") and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DSP Group, Inc.
and its subsidiaries as of December 31, 2000 and 1999, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ KOST FORER & GABBAY
KOST FORER & GABBAY
A member of Ernst & Young International
Tel Aviv, Israel
January 22, 2001,
Except for Note 9, as to which the date is February 14, 2001
DSP Group, Inc. 26
Consolidated Statements of Income
(US dollars in thousands, except per share amounts) Years Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Product sales $ 84,384 $ 57,397 $ 49,252
Licensing, royalties and other 25,129 19,036 14,598
------------------------------------------
TOTAL REVENUES 109,513 76,433 63,850
COSTS OF REVENUES:
Product sales 47,861 33,051 29,002
Licensing, royalties and other 1,047 155 426
------------------------------------------
TOTAL COST OF REVENUES 48,908 33,206 29,428
------------------------------------------
GROSS PROFIT 60,605 43,227 34,422
OPERATING EXPENSES:
Research and development, net 20,912 15,404 10,181
Sales and marketing 12,909 9,309 5,222
General and administrative 6,515 5,511 4,632
Impairment of tangible and intangible assets 2,285 - -
In-process research and development write-off 11,869 - -
------------------------------------------
TOTAL OPERATING EXPENSES 54,490 30,224 20,035
------------------------------------------
OPERATING INCOME 6,115 13,003 14,387
FINANCIAL AND OTHER INCOME (EXPENSE):
Interest and other income 13,507 6,048 3,810
Interest and other expenses (186) (232) (189)
Gain on sale of available-for-sale marketable securities - - 1,086
Equity in income of affiliate 2,644 2,475 125
Minority interest in losses of subsidiary 627 - -
Loss from issuance of subsidiary's stock (100) - -
Capital gains from realization of investments 57,593 58,931 -
------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 80,200 80,225 19,219
Provision for income taxes (30,365) (25,646) (4,804)
------------------------------------------
NET INCOME 49,835 54,579 $ 14,415
------------------------------------------
NET EARNINGS PER SHARE:
Basic $ 1.87 $ 2.33 $ 0.74
Diluted $ 1.74 $ 2.15 $ 0.72
------------------------------------------
The accompanying notes are integral part of the consolidated financial
statements.
DSP Group, Inc. 27
Consolidated Balance Sheets
(US dollars in thousands) December 31, 2000 1999
- -------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,035 $ 20,778
Marketable securities and short term deposits 178,166 140,593
Trade receivable, less allowance for returns of $123 in 2000 and $123
in 1999 and doubtful accounts of $200 in 2000 and $140 in 1999 16,932 10,435
Deferred income taxes 4,554 1,707
Other accounts receivable and prepaid expenses 1,445 1,362
Inventories 2,815 3,283
-----------------------------
TOTAL CURRENT ASSETS 248,947 178,158
Property and equipment, net 6,451 6,948
-----------------------------
LONG TERM ASSETS:
Other investments 21,000 18,433
Other assets, net of accumulated amortization 4,259 1,250
Severance pay fund 2,150 1,390
-----------------------------
Total Long term assets 27,409 21,073
-----------------------------
TOTAL ASSETS $ 282,807 $ 206,179
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payable $ 8,092 $ 6,079
Accrued compensation and benefits 5,276 4,207
Income taxes payable 6,414 1,054
Accrued royalties 2,472 803
Accrued expenses and other accounts payable 5,772 2,268
-----------------------------
TOTAL CURRENT LIABILITIES 28,026 14,411
LONG TERM LIABILITIES:
Accrued severance pay 2,147 1,431
Deferred income taxes 5,559 6,380
Minority interest 910 -
-----------------------------
COMMITMENTS AND CONTINGENCIES 8,616 7,811
-----------------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value:
Authorized shares-- 5,000 as of December 31, 2000 and 1999
Issued and outstanding shares-- none as of December 31, 2000 and 1999 - -
Common stock, $0.001 par value:
Authorized shares -- 50,000 as of December 31, 2000 and 1999
Issued and outstanding shares -- 26,248 as of December 31, 2000
and 25,342 as of December 31, 1999 (see note 4) 27 12
Additional paid-in capital 151,787 119,163
Retained earnings 114,291 64,782
Less cost of treasury stock (19,940) -
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 246,165 183,957
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 282,807 $ 206,179
-----------------------------
The accompanying notes are integral part of the consolidated financial
statements.
DSP Group, Inc. 28
Consolidated Statements of Stockholders' Equity
RETAINED
ADDITIONAL TREASURY EARNINGS OTHER TOTAL
(US dollars in thousands) COMMON STOCK PAID-IN STOCK (ACCUMULATED- COMPREHENSIVE STOCKHOLDERS
Three Years Ended December 31, 2000 SHARES AMOUNT CAPITAL AT COST DEFICIT) INCOME EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1998 10,094 $ 10 $ 74,418 $ - $ (1,308) $ 1,050 $ 74,170
Net income - - - - 14,415 - 14,415
Comprehensive income Unrealized
gains on Marketable securities - - - - - (1,050) (1,050)
-------------
Total comprehensive income - - - - - - 13,365
Purchase of Treasury Stock (814) (1) - (14,273) - - (14,274)
Exercise of Common Stock options
by employees 94 - - 1,821 (908) - 913
Sale of Common Stock under
employee stock purchase plan 32 - - 399 (70) - 329
Income tax benefit from stock
options exercised - - 1,192 - - - 1,192
-------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 9,406 $ 9 $ 75,610 $(12,053) $ 12,129 $ - $ 75,695
Net income - - - - 54,579 - 54,579
-------------
Total comprehensive income - - - - - - 54,579
Purchase of Treasury Stock (200) (*) - (2,710) - - (2,710)
Issue of Common Stock to investor 2,300 2 34,367 - - - 34,369
Exercise of Common Stock options
by employees 256 - 5,640 - - - 5,640
Issue of Treasury Stock upon
exercise of stock options 879 1 1,948 14,272 (1,813) - 14,408
Issue of Treasury Stock upon
purchase of ESPP shares 30 (*) 7 491 (113) - 385
Income tax benefit from stock
options exercised - - 1591 - - - 1,591
-------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 12,671 $ 12 $119,163 $ - $ 64,782 $ - $183,957
Net income - - - - 49,835 - 49,835
-------------
Total comprehensive income - - - - - - 49,835
Purchase of Treasury Stock (850) (1) - (20,512) - - (20,513)
Exercise of Common Stock options
in exchange of acquisition
of VoicePump 261 1 14,897 - - - 14,898
Exercise of Common Stock options
by employees 1,032 1 14,660 - - - 14,661
Issue of Stock upon purchase
of ESPP shares 41 (*) 651 - - - 651
Issue of Treasury Stock upon
exercise of stock options 24 1 - 572 (326) - 247
Income tax benefit from stock
options exercised - - 2,429 - - - 2,429
Stock split effected as a
stock dividend (100%) 13,069 13 (13) - - - -
-------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 26,248 $ 27 $151,787 $(19,940) $114,291 $ - $246,165
-------------------------------------------------------------------------------------------
(*) Represents an amount of less than $1.
The accompanying notes are integral part of the consolidated financial
statements.
DSP Group, Inc. 29
Consolidated Statements of Cash Flows
(US dollars in thousands) Years Ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 49,835 $ 54,579 $ 14,415
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,758 2,455 1,572
In - process Research and Development write-off 11,869 - -
Increase (decrease) in deferred revenue (90) 54 (2,324)
Increase (decrease) in deferred income taxes, net (1,337) 8,487 2,470
Gains on sale of available for sale marketable securities - - (1,086)
Capital gains from realization of investments (34,193) (43,328) -
Acquired assets and workforce - (2,000) -
Impairment of tangible, intangible assets and amortization of goodwill 2,764 885 -
Accrued interest on held to maturity marketable securities (2,617) - -
Equity in income of affiliate (2,644) (2,475) (125)
Minority interest in losses of subsidiary (627) - -
Increase in trade receivable (6,301) (4,714) (2,127)
Decrease (increase) in inventories 468 (1,101) 1,934
Decrease (increase) in other accounts reccivable and prepaid expenses (3) 246 (167)
Decrease (increase) in other assets (230) - 15
Increase (decrease) in trade payable 2,009 3,719 (959)
Increase in accrued compensation and benefits 802 1,652 384
Increase (decrease) in accrued severance pay, net (44) 10 31
Increase (decrease) in income taxes payable 5,360 (855) 218
Increase in accrued royalties 1,669 156 476
Increase in accrued expenses and other accounts payable 3,575 484 408
---------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 33,023 $ 18,254 $ 15,135
---------------------------------------------------
The accompanying notes are integral part of the consolidated financial
statements.
DSP Group, Inc. 30
Consolidated Statements of Cash Flows (continued)
(US dollars in thousands) Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of marketable securities and cash deposits $ (154,992) $ (131,357) $ (59,980)
Sale and maturity of marketable securities and cash deposits 120,038 48,715 60,648
Purchases of property and equipment (3,403) (5,167) (2,320)
Proceeds from sale of property and equipment 57 - -
Proceed from realization of investment in an investee 39,623 30,445 1,262
Investment in investees (5,353) (1,241) -
Cash acquired in acquisition of consolidated subsidiary 106 - -
-------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,924) (58,605) (390)
-------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock for cash upon exercise
of options, warrants, and employee stock purchase plan 15,559 20,432 1,240
Issuance of Common Stock to investor - 34,369 -
Issuance of shares to minority shareholders in consolidated subsidiary 112 - -
Purchase of treasury stock (20,513) (2,710) (14,273)
-------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,842) 52,091 (13,033)
-------------------------------------------------
Increase in cash and cash equivalents 24,257 11,740 1,713
Cash and cash equivalents at beginning of year 20,778 9,038 7,325
-------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 45,035 $ 20,778 $ 9,038
-------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 26,035 $ 17,300 $ 1,530
CASH ACQUIRED IN ACQUISITION OF CONSOLIDATED SUBSIDIARY
Estimated fair value of assets acquired and liabilities assumed
of the subsidiary at the date of acquisition:
Working capital (excluding cash and cash equivalents) $ (127)
Property and equipment (17)
Minority interest in subsidiaries at date of acquisition 91
In-process Research and Development and goodwill arising on acquisition (14,739)
Issuance of DSP shares 14,898
-------------------------------------------------
$ 106
-------------------------------------------------
The accompanying notes are integral part of the consolidated financial
statements.
DSP Group, Inc. 31
Notes to Consolidated Financial Statements
1. GENERAL
DSP Group, Inc. (the "Company") is involved in the development and
marketing of digital signal processing cores used in a wide range of
applications for industries such as wireless communications, broadband
communications, VoIP, multimedia, advanced telecommunications systems and
personal computing. By combining its DSP core technology with its advanced
speech processing algorithms, DSP Group also delivers a wide range of enabling
application-specific Integrated Circuits (ICs), such as ICs for fully featured
Integrated Digital Telephony (IDT) products and applications, including 900 MHz
and 2.4 GHz wireless technologies and for IP telephony applications. The Company
has five wholly owned subsidiaries: DSP Group Ltd. ("DSP Group Israel"), an
Israeli corporation primarily engaged in research, development, marketing,
sales, technical support and certain general and administrative functions; RF
Integrated Systems Inc. ("RF US"), a USA corporation primarily engaged in
research and development of RF technology for wireless products; Nihon DSP K.K.
("DSP Japan"), a Japanese corporation primarily engaged in marketing and
technical support activities; DSP Group Europe SARL, a French corporation
primarily engaged in marketing and technical support activities; and Voicecom
Ltd. ("Voicecom"), an Israeli corporation primarily engaged in research and
development for 900 MHz and 2.4 GHz wireless telephony products. The Company
also has a partial holding of approximately 71% in VoicePump Inc. ("VoicePump")
a USA corporation primarily engaged in the design, research, development and
marketing of software applications for the Voice Over DSL (VODSL) and Voice Over
Internet Protocol (VoIP). See note 2 - acquisition of VoicePump Inc.
Revenues derived from the Company's largest reseller Tomen Electronics
represented 52%, 47% and 45% of the Company's revenues for 2000, 1999 and 1998,
respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
General Accepted Accounting Principles in the United States, ("GAAP").
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
REVENUE RECOGNITION
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), as amended in June 2000, which summarizes the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company adopted SAB 101 during the fourth quarter of 2000. The
adoption did not have a significant effect on our consolidated results of
operations or financial postition.
PRODUCT SALES
Product sales of integrated digital telephony ("IDT") processors for
communications applications, telephony and other products are recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectability is probable. The
Company has no ongoing commitments after shipment other than for warranty and
sales returns/exchanges by distributors. The Company's provision for returns is
provided in accordance with FAS 48. "Revenue Recognition when Right-Off Return
Exists" The Company accrues estimated sales returns/exchanges upon recognition
of sales. The Company has not experienced significant warranty claims to date,
and accordingly, the Company provides for the costs of warranty when specific
problems are identified.
LICENSING AND ROYALTY REVENUES
The Company accounts for software license in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition". SOP 97-2, generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair value of the elements.
The Company has adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions," for all multiple element
transactions entered into after January 1, 2000. SOP 98-9 requires that revenue
be recognized under the "residual method" when vendor specific objective
evidence (VSOE) of fair value exists for all undelivered elements and VSOE does
not exist for all of the delivered elements.
Revenues are recognized when: (1) collection is probable; (2) delivery has
accrued; (3) the license fee is otherwise fixed and determinable; and (4)
persuasive evidence of an arrangement exists.If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer
provided that all other revenue recognition criteria have been met. Maintenance
and support revenue included in multiple element arrangements is deferred and
recognized on a straight-line basis over the term of the maintenance and
support agreement. Costs related to insignificant obligations, primarily
telephone support, are accrued upon shipment and are included
DSP Group, Inc. 32
in cost of revenues. VSOE of fair value of the undelivered elements
(maintenance, support and services) is determined based on the price charged for
the undelivered element where sold separately.
Certain royalty agreements provide for per unit royalties to be paid to the
Company based on shipments by customers of units containing the Company's
products. Revenue under such agreements is recognized at the time of shipment by
the customers as they are reported to the Company by them. Non refundable
payment on account of future royalties from similar agreements, are recognized
upon payments, provided no future obligation exists.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosures about the fair value of financial instruments. The carrying
values of cash and cash equivalents, short term deposits, trade receivables and
trade payables approximate fair values due to the short-term maturities of these
instruments. The fair value for marketable securities is based on quoted market
prices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company
and its subsidiaries. Intercompany transactions and balances, including profits
from intercompany sales not yet realized outside the group, have been eliminated
in consolidation.
ASSET IMPAIRMENT
The Company accounts for asset impairment in accordance with the provisions
of FASB Statement No. 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", which requires impairment losses to be
recorded on long-lived assets used in operations, certain identifiable
intangibles, and the goodwill related to those assets, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. In this case, an
impairment loss is recognized to the extent that the carrying amount exceeds the
fair value of the assets. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. Such assets are reported
at the lower of their carrying amount of fair value, less costs to sell the
assets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives, at the following annual rates:
%
- -------------------------------------------------------------------------------
Computers and peripheral equipment 20-33
Office furniture and equipment 7-10
Motor vehicles 15
Leasehold improvements (over the terms of the lease)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
detremined for all kind of inventories using the average cost method. The
Company periodically evaluates the quantities on hand relative to current and
historical selling prices and historical and projected sales volume. Based on
these evaluations, provisions are made in each period to write inventory down to
its net realizable value. Inventories are composed of the following:
(US dollars in thousands) December 31, 2000 1999
- -----------------------------------------------------------------------------
Work-in-process $ 34 $ 169
Finished goods 2,781 3,114
-------------------------
$ 2,815 $ 3,283
-------------------------
DSP Group, Inc. 33
OTHER INVESTMENTS
Other investments are comprised of:
(US dollars in thousands) December 31, 2000 1999
- -------------------------------------------------------------------------
Equity method investments:
Investment in AudioCodes Ltd. $ 20,417 $ 18,335
Available for sale investments:
Tomen Electronics Ltd. 485 -
Cost method investments:
Other investments 98 98
--------------------------
$ 21,000 $ 18,433
--------------------------
AUDIOCODES, LTD.
AudioCodes, Ltd. ("AudioCodes") is an Israeli corporation primarily engaged
in design, research, development, manufacturing and marketing hardware and
software products that enable simultaneous transmission of voice and data over
networks including Internet, ATM and Frame Relay. The Company acquired an
approximate 35% ownership in AudioCodes in two separate transactions in 1993 and
1994. In July 1997, AudioCodes completed a private placement of additional
equity securities without the participation of the Company and, as a result, the
Company's equity ownership interest in AudioCodes was diluted from 35% to
approximately 29%. The Company also had an option under certain conditions to
purchase up to an additional 5% of the outstanding stock of AudioCodes.
The Company accounts for its ownership in AudioCodes using the equity
method. The Company's original investment in AudioCodes included the excess of
purchase price over net assets acquired (approximately $1,907,000 at the date of
purchase), which was attributed to developed technology to be amortized over
seven years. The private placement by AudioCodes in July 1997 was at a price per
share greater than the Company's then current investment in AudioCodes. As a
result, even though the Company's ownership interest decreased from 35% to 29%,
the Company's proportionate share of the net assets of AudioCodes increased from
$816,000 to $1,481,000 at the date of the private placement. This increase in
the Company's proportionate share of the net assets of AudioCodes reduced the
remaining unamortized excess of purchase price over net assets acquired from
$1,080,000 to $415,000 as of the date of the private placement.
In May 1999, the Company exercised its option to purchase approximately
3.5% of the outstanding stock of AudioCodes for approximately $1.2 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 7.0 million shares at a price of $7.00 per share. As a result,
the Company recorded in "Financial and Other income (expense)" in its
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 sold in
the IPO and $2.5 million from the sale of approximately 496,000 AudioCodes
shares to the underwriters, to cover their over-allotment option. The gross
proceeds to the Company from this sale were approximately $3.2 million. In
October 1999, AudioCodes successfully concluded a follow-on public offering of
6.0 million shares at a price of $20.50 per share. In the follow-on, AudioCodes
issued and sold 3.0 million shares and an additional 3.9 million shares were
sold by shareholders, of which approximately 2,138,000 shares were sold by the
Company in two separate transactions. The gross proceeds to the Company from
these transactions were approximately $42.8 million, and were recorded as
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 2,138,000 AudioCodes shares. As of
December 31, 1999, the Company amortized all the remaining portion of the excess
of purchase price over net assets.
In January 2000, the Company sold an additional 1,200,000 shares of
AudioCodes for approximately $43.8 million and recorded in the first quarter of
2000, an additional capital gain in the amount of $40.0 million. In May 2000 the
Company sold an additional 500,000 shares of AudioCodes for approximately $19.2
million and recorded in the second quarter of 2000, an additional capital gain
in the amount of $17.6 million. In December 2000 DSP Group purchased in the open
market 300,000 of AudioCodes shares for approximately $4.9 million. This
transaction created an excess of purchase price over net assets acquired
(approximately $3,745,000 at the date of purchase), which was attributed to
developed technology to be amortized over seven years. As of December 31, 2000,
the Company holds 4.45 million of AudioCodes shares, which represents
approximately 11% of the outstanding shares of
DSP Group, Inc. 34
AudioCodes. The Company's equity in the net income of AudioCodes was $2,644,000
in 2000, $2,475,000 in 1999, and $125,000 in 1998. All shares and per share
numbers with respect to AudioCodes have been adjusted to reflect the 2 for 1
Stock Split effected by AudioCodes in October 2000. As of December 31, 2000, the
fair market value of the Company's investment in AudioCodes was approximately
$60.4 million.
APTEL LTD. AND NEXUS TELECOMMUNICATIONS SYSTEMS LTD.
In July 1996, the Company invested in Aptel Ltd. ("Aptel"), which is
located in Israel. The Company accounted for its investment in Aptel using the
equity method. The Company's equity in the net losses of Aptel, including
amortization of related intangibles, was $408,000 in 1997. As of June 30, 1997,
the Company had fully written-off its investment in Aptel.
In December 1997, Aptel's shareholders, including the Company exchanged
their shares in Aptel for ordinary shares of Nexus Telecommunications Systems
Ltd. ("Nexus"). Nexus is an Israeli company whose shares are registered and
traded on the Nasdaq SmallCap Market under the symbol NXUSF. In October 1997,
the Company invested $176,000 in a convertible debenture in Aptel which was
converted into ordinary shares of Aptel prior to the closing of the Nexus
transaction. The Company received approximately 297,000 ordinary shares of Nexus
in the exchange transaction amounting to approximately 3% ownership interest in
Nexus. The Company's basis in the Nexus stock received is $176,000. At December
31, 1997, the Company's investment in Nexus was presented in the Company's
consolidated balance sheet at the market value of $1,226,000, with the
unrealized gain of $1,050,000 recorded as other comprehensive income, as a
separate component of stockholder's equity. In April 1998, the Company sold all
of its Nexus shares in a private transaction for approximately $1.3 million and
realized a pre-tax gain on marketable equity securities of approximately $1.1
million, which is included under "Financial and Other income (expense)" in the
Company's consolidated statements of income for 1998.
ACQUISITION OF VOICEPUMP INC.
VoicePump, Inc. ("VoicePump") is an US corporation primarily engaged in the
design, research, development and marketing of software applications for Voice
Over DSL (VoDSL) and Voice Over Internet Protocol (VoIP). In March 2000, the
Company acquired (1) approximately 1,960,250 shares of Common Stock of VoicePump
from certain shareholders in exchange for approximately 261,000 shares of its
Common Stock and a nominal amount of cash (to pay for fractional shares) and (2)
approximately 1,027,397 shares of VoicePump common stock directly from VoicePump
together with warrants to purchase up to 1,027,397 shares of VoicePump Common
Stock at an exercise price of $4.866 per share within two years (of the issuance
of the warrant) and up to 1,027,397 additional shares at an exercise price of
$4.866 per share within three years (of the issuance of the warrant) for
$5,000,000. The shares acquired from VoicePump and its shareholders (not
including the shares issuable upon exercise of the warrants) represent
approximately 73% of the outstanding shares of VoicePump. In the second quarter
of 2000 the investment in VoicePump was diluted due to exercise of warrants by a
VoicePump shareholder to approximately 71% of the outstanding shares of
VoicePump. Due this transaction, the Company recorded in the second quarter of
2000 a loss of $100,000 which was attributed to minority gain in VoicePump's
stock issue. The Company's original investment in VoicePump included the excess
of purchase price over net assets acquired (approximately $16,070,000 at the
date of purchase), which was attributed to in-process research and development
and to goodwill. The operation expenses include unusual items in the amount of
$11,869,000 related to the acquired in-process research and development which
was written off in the first quarter of 2000. The write-off was due to
unestablished technological feasibility and to no alternative future use. Other
intangible assets acquired had an estimated fair value of $4,201,000 and were
recorded as goodwill. As of December 31, 2000 the balance of this goodwill to be
amortized in seven years was approximately $3,854,000. Pro forma information in
accordance with APB-16 has not been provided, since the revenues of 2000 and
1999 were not material in relation to total consolidated revenues and net income
(loss). The consolidated statements of income for the year ended December 31,
2000 (commencing from the Acquisition date) include losses in the investment in
VoicePump of approximately $2.2 million and include the minority interest in
those losses in the amount of $627,000. See note 9.
TOMEN LTD.
In September 2000, the Company invested approximately $485,000 (31.0
million Yen) in shares of its Japanese distributor's parent company, Tomen Ltd.,
as part of a long-term strategic relationship. Tomen's shares are traded on the
Japanese stock exchange, and are recorded in "Other Investments" on our balance
sheets. The Company accounts for investments in debt and equity securities
(other than those accounted for under the equity method of accounting) in
accordance with FASB Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Securities available for sale are carried at fair
value, with the unrealized gains and losses, net of income taxes, reported as a
separate component of shareholders' equity, accumulated other comprehensive
income (loss). Realized gains and losses on sales of investments, as determined
on a specific identification basis, are included in the consolidated statement
of income. At December 31, 2000 the carrying amount of securities
DSP Group, Inc. 35
approximated the fair value and the amount of unrealized gain or loss was not
significant.
ACQUIRED ASSETS AND WORKFORCE
In the beginning of 1999, the Company 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 communications. In addition, the company acquired technology and
products, including associated intellectual property, related to 900 megahertz
narrow-band cordless telephones and 900 megahertz spread spectrum cordless
telephones.
In connection with the above, the Company capitalized approximately $2.0
million of acquired assets and work force. As of December 31, 1999, the net
balance of these capitalized assets and workforce was approximately $1.1
million. The Company accounts for asset impairment in accordance with the
provisions of FASB Statement No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", accordingly, in the first
quarter of 2000 the Company recorded two unusual expense items, of which the
outstanding balance of the capitalized assets were amortized. Management
believes that the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount.
FOREIGN CURRENCY TRANSLATIONS
A majority of the revenues of the Company and its subsidiaries is generated
in U.S. dollars ("dollar"). In addition, a substantial portion of the Company's
and its subsidiaries costs is incurred in dollars. Company's management believes
that the dollar is the primary currency of the economic environment in which the
Company and its subsidiaries operate. Thus, the functional and reporting
currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into U.S. dollars in accordance with Statement No. 52 of
the Financial Accounting standard Board ("FASB") - "Foreign Currency
Translations". All transactions gains and losses of the remeasurement of
monetary balance sheet items are reflected in the statements of operations as
financial income or expenses as appropriate.
NET EARNINGS PER SHARE
Basic net earnings per share is computed based on the weighted average
number of shares of common stock outstanding during the period. For the same
periods, diluted net earnings per share further includes the effect of dilutive
stock options outstanding during the year, all in accordance with the Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128").
The following table sets forth the computation of basic and diluted net earning
per share:
(US dollars in thousands except per share amounts) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Numerator:
Net Income $ 49,835 $ 54,579 $ 14,415
Denominator:
Weighted average number of shares of
common stock outstanding during the period
used to compute basic earning per share 26,616 23,468 19,536
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would
be used to purchase treasury stock) 2,053 1,974 496
--------------------------------------------
Weighted average number of shares of common stock
used to compute diluted earnings per share 28,669 25,442 20,032
--------------------------------------------
Basic net earnings per share $ 1.87 $ 2.33 $ 0.74
--------------------------------------------
Diluted net earnings per share $ 1.74 $ 2.15 $ 0.72
--------------------------------------------
DSP Group, Inc. 36
Weighted average number of options outstanding to purchase approximately
432,000, 182,000 and 1,314,000 shares of common stock for the years ended
December 31, 2000, 1999 and 1998, respectively, were not included in the
computation of diluted net earning per share, because option exercise prices
were greater than the average market price of the common shares and therefore,
the effect would have been antidilutive.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk", requires disclosures of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash and cash
equivalents, marketable securities, other cash deposits, short-term deposits and
trade receivables.
The Company's cash and cash equivalents are invested in short-term deposits
with major U.S. and Israeli banks. Cash deposits in the United States may be in
access of insured limits and are not insured in other jurisdictions. Management
believes that the financial institutions holding the Company's investments are
financially sound, and accordingly, minimal credit risk exists with respect to
these investments. The majority of the Company's sales of products are to
distributors who in turn sell to manufacturers of consumer electronics products.
The Company's licensing revenues are primarily from customers that have licensed
rights to use the Company's DSP Core microprocessor architectures and speech
compression technology. No collateral is required from the Company's licensing
customers; however, some of the customers pay using letters of credit.
Write-offs for bad debts have not been significant to date.
CONCENTRATION OF OTHER RISKS
All of the Company's integrated circuit products are manufactured by
independent foundries. While these foundries have been able to adequately meet
the demands of the Company's increasing business, the Company is and will
continue to be dependent upon these foundries to achieve acceptable
manufacturing yields, quality levels and costs, and to allocate to the Company
sufficient portion of foundry capacity to meet the Company's needs in a timely
manner. To meet the Company's increased wafer requirements, the Company has
added additional independent foundries to manufacture its processors. Revenues
could be materially and adversely affected should any of these foundries fail to
meet the Company's 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.
Additionally, certain of the raw materials, components, and subassemblies
included in the products manufactured by the Company's OEM customers, which also
incorporate the Company's products, are obtained from a limited group of
suppliers. Disruptions, shortages, or termination of certain of these sources of
supply could occur.
CASH EQUIVALENTS
The Company considers all highly liquid investments which are readily
convertible to cash with an original maturity of three months or less when
purchased to be cash equivalents.
MARKETABLE SECURITIES AND SHORT TERM DEPOSITS
At December 31, 2000, all marketable securities have been designated as
held to maturity under Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
The amortized cost of held to maturity securities is adjusted for the
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest and other income. Realized gains and losses
and declines in value judged to be other-than-temporary on held to maturity
securities are included in interest and other income. The cost of securities
sold is based on the specific identification method. Interest on securities
classified as held to maturity are included in financial and other income. Cash
deposits originally purchased with a maturity of over three months and less than
one year are considered as short-term investments and are presented at cost as
short-term deposits.
DSP Group, Inc. 37
The following is a summary of held-to-maturity securities and cash deposits at
December 31, 2000 and 1999:
(US dollars in thousands) AMORTIZED COST 2000 1999
- -------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 52,253 $ 96,312
Corporate obligations 110,916 30,440
Cash deposits 58,270 21,961
-------------------------
$ 221,439 $ 148,713
-------------------------
Amounts included in marketable securities and short-term deposits $ 178,166 $ 140,593
Amounts included in cash and cash equivalents 43,273 8,120
-------------------------
$ 221,439 $ 148,713
-------------------------
At December 31, 2000 and 1999 the carrying amounts of securities approximated
fair value.
Gross realized gains or losses for 2000, 1999, and 1998 were not significant.
The amortized cost of held-to-maturity debt and securities at December 31, 2000,
by contractual maturities, are shown below:
(US dollars in thousands) AMORTIZED COST
- ----------------------------------------------------------------------
Due in one year or less $ 94,256
Due after one year to three years 83,910
---------------
$ 178,166
---------------
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION CONSIST OF THE FOLLOWING:
(US dollars in thousands) 2000 1999
- -----------------------------------------------------------------------
Goodwill $ 3,854 $ -
Intangible assets - 1,115
Deposit and other 405 135
-------------------------
$ 4,259 $ 1,250
-------------------------
SEVERANCE PAY
The Company's subsidiaries, DSP Group Israel and Voicecom, have liability
for severance pay pursuant to Israeli law, based on the most recent monthly
salary of the employees multiplied by the number of years of employment as of
the balance sheet date for all employees. The Company's liability is fully
provided by monthly deposits with severance pay funds and insurance policies.
The deposited funds include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli severance pay law or labor agreements. The value
of these policies is recorded as an asset in the Company's balance sheet.
Severance expenses for the years ended December 31, 2000, 1999 and 1998,
were approximately $890,000, $593,000 and $367,000, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25, ("APB-25"),
"Accounting for Stock Issued to Employees" and interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" ("FIN-44") in
accounting for its employee stock options. Under APB-25, when the exercise price
of the employee's options equals or is higher than the market price of the
underlying Company stock on the date of grant, no compensation expense is
recognized. The pro-forma information with respect to the fair value of the
options is provided in accordance with the provisions of statement No. 123
"Accounting for stock Based Compensation" (see Note 4).
DSP Group, Inc. 38
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended,
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new statement will have a significant effect on earnings or
the financial position of the Company.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
This statement prescribes the use of the liability method, whereby deferred tax
asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary,
to reduce deferred tax assets to their estimated realizable value.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to the statement of operations
as incurred.
3. PROPERTY AND EQUIPMENT
Composition of assets, grouped by major classifications, is as follows:
(US dollars in thousands) December 31, 2000 1999
- -------------------------------------------------------------------------
Computers and peripheral equipment $ 15,229 $ 12,216
Office furniture and equipment 1,076 985
Motor vehicles 1,145 1,163
Leasehold improvements 2,076 1,866
-------------------------
19,526 16,230
Less accumulated depreciation 13,075 9,282
-------------------------
Depreciated cost $ 6,451 $ 6,948
-------------------------
4. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or
action by the stockholders, to provide for the issuance of up to 5,000,000
shares of Preferred Stock in one or more series with such designations, rights,
preferences, and limitations as the Board of Directors may determine, including
the consideration received, the number of shares comprising each series,
dividend rates, redemption provisions, liquidation preferences, sinking fund
provisions, conversion rights, and voting rights.
DIVIDEND POLICY
At December 31, 2000, the Company had retained earnings of approximately
$114.3 million. The Company has never paid dividends on its Common Stock and
presently intends to follow a policy of retaining any earnings for reinvestment
in its business.
STOCK SPLIT EFFECTED AS A STOCK DIVIDEND
On January 24, 2000, the Company's Board of Directors declared a stock
split to be effected as a stock dividend whereby each holder of record of Common
Stock on February 16, 2000 received one additional share of common stock for
each share then owned. The stock split effected as stock dividend was paid on
March 1, 2000.
All shares and stock option information in the consolidated financial
statements have been retroactively restated for all periods to reflect the stock
split effected as a stock dividend.
STOCK ISSUANCE TO INVESTOR
On February 2, 1999, the Company announced that it had entered into a stock
purchase agreement with Magnum Technologies, Ltd., an international investment
fund, in which the Company issued and sold 4,600,000 new shares of the Company's
common stock to Magnum. Based in part on Magnum's representations, the
transaction was exempt from the registration requirements of the Securities Act
of 1933 according to Section 4(2) of the Securities Act. These shares,
representing
DSP Group, Inc. 39
19.6% of the Company's outstanding common stock at the time of the transaction,
were issued for a price of $7.5 per share, or an aggregate of $34.4 million in
total net proceeds to the Company. As part of the agreement, Magnum may acquire
additional shares of the Company in the open market, but may not bring its total
holdings to more than 35% of the Company's outstanding shares of common stock.
Furthermore, Magnum agreed to restrict its sales of the Company's shares it
purchased for an 18 month period from the date of the transaction under Rule
144(e)(i) of the Securities Act of 1933, unless it received the prior written
approval of the Company. Additionally, the Company invited Magnum to appoint two
new directors to the Board of Directors, which currently brings the total number
of members of the Board of Directors to six. In February and August 2000, Magnum
exercised its option and sold 2.9 million shares of the Company's common stock.
After the sale, Magnum holds approximately 2.9 million shares representing
approximately 11% of the Company's outstanding shares of common stock.
SHARE REPURCHASE PROGRAM
In March 1999, the Company's Board of Directors authorized a new plan to
repurchase up to an additional 2,000,000 shares of the Company's common stock
from time to time on the open market or in privately negotiated transactions,
increasing the total shares authorized to be repurchased to 4,000,000 shares.
Accordingly, in 2000, 1999 and 1998, the Company repurchased 850,000, 400,000
and 1,628,000 shares, respectively, of its common stock at an average purchase
price of $24.13, $6.78 and $8.77 per share, respectively, for an aggregate
purchase price of approximately $20.5 million, $2.7 million and $14.3 million,
respectively. In 2000 and 1999, the Company issued 65,000 and 1,818,000 shares,
respectively, of the Company's common stock to employees who have exercised
their stock options.
Such repurchases of common shares are accounted for as treasury stock, and
result in a reduction of stockholders' equity. When treasury shares are
reissued, the Company charges the excess of the repurchase cost over issuance
price using the weighted average method to retain earnings. In case the
repurchasing cost is lower than the issuance price, the Company charges the
difference to additional paid in capital.
STOCK PURCHASE PLAN AND STOCK OPTION PLANS
The Company has various stock plans under which employees, consultants,
officers, and directors may be granted options to purchase the Company's common
stock. A summary of the various plans is as follows:
1991 EMPLOYEE AND CONSULTANT STOCK PLAN. In 1991, the Company adopted the
1991 Employee and Consultant Stock Plan (the "1991 Plan"). Under the 1991 Plan,
employees and consultants may be granted incentive or non-qualified stock
options or stock purchase rights for the purchase of the Company's common stock.
The 1991 Plan expires in 2001 and currently provides for the purchase of up to
8,600,000 shares of the Company's common stock.
The exercise price of options under the 1991 Plan shall not be less than
the fair market value of the common stock for incentive stock options and not
less than 85% of the fair market value of the common stock for nonqualified
stock options at the date of grant, as determined by the Board of Directors. The
Company's policy is to grant option at fair value.
Options under the 1991 Plan are generally exercisable over a 48-month
period beginning 12 months after issuance or as determined by the Board of
Directors. Options under the 1991 Plan expire up to seven years after the date
of grant.
1993 DIRECTOR STOCK OPTION PLAN. Upon the closing of the Company's initial
public offering, the Company adopted the 1993 Director Stock Option Plan (the
"Directors' Plan"). Under the Directors' Plan the Company is authorized to issue
nonqualified stock options to purchase up to 550,000 shares of the Company's
common stock at an exercise price equal to the fair market value of the common
stock on the date of grant. The Directors' Plan, following certain amendments in
1996 approved by the Company's stockholders, provides that each person who is an
outside director on the effective date of the Directors' Plan and each outside
director who subsequently becomes a member of the Board of Directors shall
automatically be granted an option to purchase 30,000 shares (the First Option).
Additionally, each outside director shall automatically be granted an option to
purchase 10,000 shares (a Subsequent Option) on January 1 of each year if, on
such date, he/she shall have served on the Board of Directors for at least six
months.
Options granted under the Directors' Plan generally have a term of ten
years. The First Option is 25% exercisable after the first year (one-third after
the first year for options granted after May 1996) and in quarterly installments
over the ensuing three years (one-third at the end of each twelve-month period
for options granted after May 1996). Each Subsequent Option becomes exercisable
in full on the fourth anniversary from the date of grant (one-third at the end
of each twelve-month period from the date of grant for options granted after May
1996).
1993 ISRAELI PLAN. In 1993, the Company adopted the 1993 DSP Group, Inc.
Israeli Stock Option Plan (the "1993 Israeli Plan") under which the Company is
authorized to issue nonqualified stock options to purchase up to 334,000 shares
of the Company's common stock at an exercise price equivalent to fair market
value. Options are immediately exercisable and expire five years from the date
of grant. All options and shares are held
DSP Group, Inc. 40
in a trust until the later of 24 months from the date of grant or the shares are
vested based on a vesting schedule determined by a committee appointed by the
Board of Directors.
1998 NON-OFFICER EMPLOYEE STOCK OPTION PLAN. In 1998, the Company adopted
the 1998 Non-Officer Employee Stock Option Plan (the "1998 Plan"). Under the
1998 Plan, employees may be granted non-qualified stock options for the purchase
of the Company's common stock. Officers and directors of the Company are
excluded from participating under the 1998 Plan. The 1998 Plan expires in 2008
and currently provides for the purchase of up to 3,600,000 shares of the
Company's common stock.
The exercise price of options under the 1998 Plan shall not be less than
the fair market value of the common stock for nonqualified stock options, as
determined by the Board of Directors.
Options under the 1998 Plan are generally exercisable over a 48-month
period beginning 12 months after issuance or as determined by the Board of
Directors. Options under the 1998 Plan expire up to seven years after the date
of grant.
A summary of activity under the 1991 Plan, the 1993 Israeli Plan, the
Directors' Plan, and the 1998 Plan is as follows:
OPTIONS OUTSTANDING
-----------------------------
SHARES SHARES WEIGHTED
AVAILABLE UNDER AVERAGE
(Shares in thousands) FOR GRANT OPTION EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1998 506 2,634 $ 8.44
Authorized 3,900 - $ -
Granted (1,624) 1,624 $ 9.27
Exercised - (188) $ 4.98
Canceled 272 (272) $ 6.80
-------------------------------------------
BALANCE AT DECEMBER 31, 1998 3,054 3,798 $ 9.09
-------------------------------------------
Authorized 2,400 - $ -
Granted (3,600) 3,600 $ 14.33
Exercised - (2,272) $ 8.84
Canceled 316 (316) $ 9.93
-------------------------------------------
BALANCE AT DECEMBER 31, 1999 2,170 4,810 $ 13.07
-------------------------------------------
Authorized 500 - $ -
Granted (2,262) 2,262 $ 32.71
Exercised - (1,438) $ 10.37
Canceled 348 (348) $ 11.03
-------------------------------------------
BALANCE AT DECEMBER 31, 2000 756 5,286 $ 22.34
-------------------------------------------
A summary of the average fair exercise price and the number of options
exercisable for the years 2000, 1999 and 1998, is as follows:
2000 1999 1998
----------------------------------------
Number of options exercisable as of December 31, (options in thousands) 847 78 938
----------------------------------------
Weighted average exercise price of exercisable options $ 15.43 $ 14.36 $ 9.27
----------------------------------------
DSP Group, Inc. 41
A summary of the Company's stock option activity and related information as of
December 31, 2000, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------
AVERAGE WEIGHTED - WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OUTSTANDING LIFE YEARS PRICE OPTIONS PRICE
--------------------------------------------------------------------------------------------
$ 3.81 - $ 9.41 868,047 4.66 7.86 138,714 6.17
$ 9.44 - $ 9.44 919,748 5.06 9.44 242,001 9.44
$ 9.63 - $ 21.44 735,697 5.13 16.18 268,846 14.44
$ 22.00 - $ 22.00 993,000 6.82 22.00 37,500 22.00
$ 22.53 - $ 39.00 773,600 6.31 33.95 160,002 32.64
$ 40.22 - $ 54.06 996,817 6.43 42.73 0 0
--------------------------------------------------------------------------------------------
5,286,909 5.78 $ 22.34 847,063 $ 15.43
--------------------------------------------------------------------------------------------
Weighted average grant date fair value of options granted during the year whose
exercise price is equal to the market price of the shares at date of grant are
as follows:
2000 1999 1998
--------------------------------------
Exercise price equals fair value at date of grants $ 29.82 $ 10.61 $ 9.65
--------------------------------------
1993 EMPLOYEE STOCK PURCHASE PLAN
Upon the closing of the Company's initial public offering, the Company
adopted the 1993 Employee Stock Purchase Plan (the "1993 Purchase Plan"). The
Company has reserved an aggregate amount of 700,000 shares of Common Stock for
issuance under the 1993 Purchase Plan. The 1993 Purchase Plan provides that
substantially all employees may purchase stock at 85% of its fair market value
on specified dates via payroll deductions. There were approximately 55,000,
60,000 and 64,000 shares issued under the Purchase Plan in 2000, 1999 and 1998,
respectively.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Shares of Common Stock of the Company reserved for future issuance at
December 31, 2000, are as follows:
(US dollars in thousands)
- --------------------------------------------------------------------------------
Employee Stock Purchase Plan 384
Stock Options 6,042
Undesignated Preferred Stock 5,000
-------------
11,426
-------------
STOCK BASED COMPENSATION
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123"), which requires the use of option
valuation models that were not developed for use in valuing employee stock
options. For example, the Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair value of the Company's employee stock options was estimated at the
date of grant using a Black-Scholes multiple option pricing model with the
following weighted average assumptions; risk-free interest rates of 4.88 %, 5.5%
and 5.02% for 2000, 1999 and 1998, respectively; a dividend yield of 0.0%
DSP Group, Inc. 42
for each of those years; a volatility factor of the expected market price of the
Company's Common Stock of 0.81, for 2000, 0.76 for 1999 and 0.77 for 1998; and a
weighted-average expected life of the option of 2.9 years for 2000, 2.9 years
for 1999 and 3.0 years for 1998.
The Company does not recognize compensation cost related to employee stock
purchase rights under the Employee Stock Purchase Plan. To comply with the pro
forma reporting requirements of SFAS 123, compensation cost is estimated for the
fair value of the employees' stock purchase rights using the Black-Scholes model
with the following assumptions for those rights granted in 2000, 1999 and 1998;
dividend yield of 0.0%; an expected life ranging up to 0.5 years; expected
volatility factor of 1.0 in 2000, 0.70 in 1999 and 0.71 in 1998; and a risk free
interest rate of 4.87% in 2000, 6.33% in 1999 4.84% in 1998. The weighted
average fair value of those purchase rights granted in January 2000, July 2000,
January 1999, July 1999, January 1998 and July 1998 were $36.16, $42.84, $6.33,
$17.05, $10.70 and $9.57, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(US dollars in thousands, except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Net income as reported $ 49,835 $ 54,579 $ 14,415
Pro forma net income $ 32,284 $ 47,513 $ 10,428
Pro forma basic earnings per share $ 1.21 $ 2.03 $ .54
Pro forma diluted earnings per share $ 1.20 $ 2.03 $ .54
----------------------------------------
5.INDUSTRY SEGMENT REPORTING
The Company has two reportable segments, principally the development and
licensing of affordable, high performance, cost effective DSP-based software and
the sales of integrated circuits and circuit boards. The information evaluated
by the Company's decision makers in deciding how to allocate resources to these
segments are total revenues, gross margin and segments assets as presented in
the statement of operations and balance sheet.
The accounting policies of the segments are in accordance with the
requirements of FAS 131 "Disclosure About Segments of an Enterprise and Related
Information".
Segment revenues, gross margins and assets for the year ended December 31, 2000:
DSP CORE IC'S AND
(US dollars in thousands) TECHNOLOGY OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 22,910 $ 86,603 * $ 109,513
Gross margin 22,500 38,105 60,605
Segment assets 2,431 27,171 29,602
----------------------------------------
(*) Including $1,945 of Truespeech licensing and royalties revenues.
Segment revenues, gross margins and assets for the year ended December 31,
1999:
DSP CORE IC'S AND
(US dollars in thousands) TECHNOLOGY OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 18,201 $ 58,232 * $ 76,433
Gross margin 17,993 25,234 43,227
Segment assets 1,902 24,595 26,497
(*) Including $702 of Truespeech licensing and royalties revenues.
DSP Group, Inc. 43
Segment revenues, gross margins and assets for the year ended December 31, 1998:
DSP CORE IC'S AND
(US dollars in thousands) TECHNOLOGY OTHER TOTAL
- ----------------------------------------------------------------------------------------------------------------------
Revenues $ 13,244 $ 50,606 * $ 63,850
Gross margin 12,963 21,459 34,422
Segment assets 1,088 5,846 6,934
---------------------------------------
(*) Including $1,264 of Truespeech licensing and royalties revenues.
The following is a summary of operations within geographic areas based on
customer locations:
(US dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
REVENUE DISTRIBUTION:
United States $ 16,114 $ 7,098 $ 3,821
Japan 61,239 43,758 35,711
Europe 7,645 6,226 10,591
Asia 21,546 15,392 12,616
Israel 2,969 3,959 1,111
---------------------------------------
$ 109,513 $ 76,433 $ 63,850
=======================================
LONG-LIVED ASSETS:
United States $ 21,493 $ 21,694 $ 2,085
Israel 7,972 4,742 4,783
Other 137 61 66
---------------------------------------
$ 29,602 $ 26,497 $ 6,934
=======================================
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment and facilities under noncancelable
operating leases. The Company has significant leased facilities in Herzelia
Pituach, Israel and in Santa Clara, California. In 1996, the Company negotiated
the assignment of certain of its Santa Clara facility use obligations to another
company (the "Assignee"). The Company received payments from the Assignee in the
Santa Clara facility, of $322,000 in both 2000 and 1999. In August 1997, the
Company entered into a new lease for its Israel facilities in Herzelia Pituach.
The lease agreement is effective until November 2003. In December 1999, May 1999
and September 1998, the Company entered into three new leases for additional
office space at its Israel facilities in Herzelia Pituach. The lease agreements
for the additional spaces are effective until November 2003. VoicePump leases
office facilities in Palo Alto, California. The lease is effective from March
2000 until February 2006. Voicepump also leased office facilities for its
research and development personnel in Schaumburg, Illinois, the lease is
effective until November 2003. In November 2000, DSP Japan entered into a new
facility in Tokyo, Japan. This new lease is effective until October 2004. The
Company has car operating lease agreements which terminate in 2003.
DSP Group, Inc. 44
At December 31, 2000, the Company is required to make the following minimum
lease payments:
(US dollars in thousands) YEAR AMOUNT
- -------------------------------------------------------------------------------
2001 1,724
2002 1,528
2003 1,370
2004 417
2005 211
2006 35
------------------------------
$ 5,285
------------------------------
Total rental expense for all leases was approximately $964,000 (net of
sublease income of $322,000), $736,000 (net of sublease income of $322,000),
$545,000 (net of sublease income of $365,000), for the years ended December 31,
2000, 1999, and 1998, respectively.
CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business, including claims that it may be infringing patent rights owned by
third parties. The Company is unable to foresee the extent to which these
matters will be pursued by the claimants or to predict with certainty the
eventual outcome. However, the Company believes that the ultimate resolution of
these matters will not have a material adverse effect on its financial position,
results of operations, or cash flows.
7. INCOME TAXES
The provision for income taxes is as follows:
(US dollars in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
FEDERAL TAXES:
Current $ 7,405 $ 1,080 $ 2,751
Deferred (3,286) 6,168 1,181
---------------------------------------
4,119 7,248 3,932
STATE TAXES:
Current 1,798 1,140 216
Deferred (41) 209 97
---------------------------------------
1,757 1,349 313
FOREIGN TAXES:
Current 24,554 16,684 559
Deferred (65) 365 -
---------------------------------------
24,489 17,049 559
---------------------------------------
$ 30,365 $ 25,646 $ 4,804
---------------------------------------
PROVISION FOR INCOME TAXES
The tax benefits associated with the exercise of stock options reduced taxes
currently payable by $2,429,000 in 2000, $1,591,000 in 1999, and $1,192,000 in
1998. Such benefits were credited to paid in capital.
Pretax income from foreign operations was $21,239,000, $14,965,000 and
$7,330,000 in 2000, 1999 and 1998, respectively. Unremitted foreign earnings
that are considered to be permanently invested outside of the U.S., and on which
no deferred taxes have been provided, amount to approximately $30.0 million at
December 31, 2000. If such amounts were remitted, the Company would be subject
to U.S. income taxes (subject to an adjustment for foreign tax credits) and
additional Israeli corporate income and withholding taxes of approximately $6.0
million.
DSP Group, Inc. 45
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate:
(US dollars in thousands) Years Ended December 31, 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Tax at U.S. statutory rate $ 28,070 $ 27,276 $ 6,534
State taxes, net of federal benefit 1,142 890 207
In process R&D and goodwill amortization 4,344 - -
Foreign income taxed at rates other than U.S. rate (3,864) (3,934) (1,806)
Different rate from sale of affiliate - 1,179 -
Tax credits utilized (66) - (264)
Other individually immaterial items 739 235 133
---------------------------------------
$ 30,365 $ 25,646 $ 4,804
---------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2000 and
1999 are as follows:
(US dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS (LIABILITIES):
Tax credit carryforwards $ 4,237 $ 545
Deferred revenue 805 -
Reserves and accruals 1,387 1,349
Valuation allowance (1,875) -
Investment in affiliate $ (5,559) $ (6,790)
Other - 223
------------------------------
TOTAL DEFERRED TAXES $ (1,005) $ (4,673)
------------------------------
As of December 31, 2000, the Company had foreign tax credit carryovers of
approximately $4.2 million. These foreign tax credit carryovers are available to
offset US federal income taxes, subject to certain limitation calculations, and
will expire in years 2004 and 2005 if not used. In addition, utilization of the
foreign tax credit carryovers may also be subject to an annual limitation based
on the change in ownership rules under the Tax Reform Act of 1986.
Management believes that the deferred net tax assets will be realized based
on current levels of future taxable income and potentially refundable taxes.
Management provided valuation allowance for certain foreign tax credits that may
be subject to limitations on their utilization.
The valuation allowance increased by $1,875,000 in 2000, and decreased by
$1,250,000 in 1999.
DSP Group Israel's production facilities have been granted "Approved
Enterprise" status under Israeli law in connection with four separate investment
plans.
According to the provisions of such Israeli law, DSP Group Israel has
chosen to enjoy "Alternative plan benefits," which is a waiver of grants in
return for tax exemption. Accordingly, DSP Group Israel's income from an
"Approved Enterprise" is tax-exempt for a period of two or four years and is
subject to a reduced corporate tax rate of 10% - 25% (based on percentage of
foreign ownership) for an additional period of eight or six years, respectively.
The tax benefits under these investment plans are scheduled to gradually expire
starting from 2005 through 2009.
DSP Group Israel's first and second plans, which were completed and
commenced operation in 1994 and 1996, respectively, are tax exempt for two and
four years from the first year it has taxable income, respectively, and are
entitled to a reduced corporate tax rate of 10% - 25% (based on percentage of
foreign ownership) for an additional period of eight and six years,
respectively.
The third plan which was completed and commenced operation in 1998 is tax
exempt for two years, from the first year
DSP Group, Inc. 46
it has taxable income and is entitled to a reduced corporate tax rate of 10% -
25% (based on percentage of foreign ownership) for an additional period of eight
years from the first year it has taxable income.
The fourth plan was approved 1998. It entitled DSP Group Israel to a
corporate tax exemption for a period of two years and to a reduced corporate tax
rate of 10% - 25% (based on percentage of foreign ownership)for an additional
period of eight years.
The period of tax benefits, as detailed above, is subject to limitations of
the earlier of 12 years from commencement of production, or 14 years from
receipt of approval.
The tax exempt income attributable to an "Approved Enterprise" can be
distributed to stockholders without subjecting DSP Group Israel to taxes only
upon the complete liquidation of DSP Group Israel. The Company has determined
that such tax exempt income will not be distributed as dividends. Accordingly,
no deferred income taxes have been provided on income attributable to DSP Group
Israel's "Approved Enterprise."
Through December 31, 2000, DSP Group Israel has met all the conditions
required under these approvals.
Should DSP Group Israel fail to meet such conditions in the future,
however, it could be subject to corporate tax in Israel at the standard rate of
36% and could be required to refund tax benefits already received.
Income from sources other than the "Approved Enterprise" during the benefit
period will be subject to tax at the standard rate of corporate tax in Israel of
36%.
By virtue of such Israeli law, DSP Group Israel is entitled to claim
accelerated rates of depreciation on equipment used by an "Approved Enterprise"
during the first five tax years from the beginning of such use.
8. RELATED PARTY TRANSACTIONS
In 1993, the Company entered into a development and licensing agreement
with AudioCodes (see Note 2 Other Investments). Under the agreement, AudioCodes
is to perform certain research and development services for the Company. Upon
development of the technology, the Company is to pay AudioCodes a service fee
and additional royalty fees of 15% to 50% of the net revenue and 3% to 10% of
the gross margin realized from the sale of the technology incorporated in the
Company's products. In 2000, 1999 and 1998 the Company recorded the following:
(US dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
RELATED PARTY TRANSACTIONS
REVENUES:
Product sales $ 1,216 $ 861 $ 944
Licensing $ 65 $ 92 $ 82
COST OF REVENUES:
Cost of products $ 521 $ 324 $ 384
Cost of licensing $ 461 $ 63 $ 160
OPERATING EXPENSES:
Research and development $ 80 $ 358 $ 345
LIABILITIES AS OF DECEMBER 31, $ 100 $ 109 $ 121
-------------------------------------
9. SUBSEQUENT EVENTS
VOICEPUMP ACQUISITION
In February 2001, the Company exercised its option and acquired the remaining
VoicePump common stock. The Company acquired approximately 1,210,750 shares of
common stock of VoicePump in exchange for approximately 161,433 shares of its
common stock and a nominal amount of cash (to pay for fractional shares).
DSP Group, Inc. 47