UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-25622
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DSP COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0389180
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
20300 Stevens Creek Boulevard, Cupertino, California 95014
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 777-2700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of August 7, 1996, there were 21,999,063 shares of Common Stock ($.001 par
value) outstanding.
INDEX
DSP COMMUNICATIONS, INC.
PAGE NO.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - June 30, 1996
and December 31, 1995............................................3
Condensed consolidated income statements-Quarter
ended June 30, 1996 and 1995, and six months
ended June 30, 1996 and 1995.....................................4
Condensed consolidated statements of cash flows - Six months
ended June 30, 1996 and 1995.....................................5
Notes to condensed consolidated financial statements -
June 30, 1996....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................7
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings................................................15
Item 2. Changes in Securities............................................15
Item 3. Defaults upon Senior Securities..................................15
Item 4. Submission of Matters to a Vote of Security Holders..............15
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
SIGNATURE.................................................................17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1 9 9 6 1 9 9 5
------- -------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 64,003 $ 10,292
Short term investments 55,578 17,696
Trade accounts receivable 7,708 8,838
Other current assets 2,249 1,448
--------- ---------
Total current assets 129,538 38,274
Property and Equipment, net 3,000 1,823
Goodwill 2,133 2,379
Other Assets 1,473 1,643
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$ 136,144 $ 44,119
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,157 $ 3,419
Accrued compensation and benefits 1,962 1,711
Other accrued liabilities 5,616 3,478
Deferred income 1,316 473
--------- ---------
Total current liabilities 14,051 9,081
Other Liabilities 230 170
STOCKHOLDERS' EQUITY
Common stock (21,915,275
and 18,105,922 shares issued
and outstanding at June 30, 1996,
and Dec. 31, 1995, respectively) 21 18
Additional paid-in capital 117,261 39,794
Contributed capital 7,232 7,232
Accumulated deficit (2,651) (12,176)
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Total stockholders' equity 121,863 34,868
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$ 136,144 $ 44,119
--------- ---------
--------- ---------
See Notes to Condensed Consolidated Financial Statements
Note 1: The balance sheet at December 31, 1995 has been derived from audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
DSP COMMUNICATIONS INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(U.S. DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE THREE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------------ ------------ ------------ ------------
REVENUES
Product $ 19,595 $ 7,234 $ 35,719 $ 10,711
Technology development 736 788 1,934 1,567
-------- -------- -------- --------
Total revenues 20,331 8,022 37,653 12,278
COST OF REVENUES
Product 10,610 4,178 19,822 5,956
Technology development 816 580 1,674 991
-------- -------- -------- --------
Total cost of revenues 11,426 4,758 21,496 6,947
Gross profit 8,905 3,264 16,157 5,331
OPERATING EXPENSES
Research and development 1,019 640 2,026 1,152
Sales and marketing 746 571 1,626 1,045
General and administrative 1,429 723 3,084 1,268
-------- -------- -------- --------
3,194 1,934 6,736 3,465
-------- -------- -------- --------
Operating income 5,711 1,330 9,421 1,866
Net interest and other income 1,089 194 1,464 379
-------- -------- -------- --------
Income before provision
for income taxes 6,800 1,524 10,885 2,245
Provision for income taxes 850 301 1,360 448
-------- -------- -------- --------
Net income $ 5,950 $ 1,223 $ 9,525 $ 1,797
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ 0.26 $ 0.07 $ 0.44 $ 0.11
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing
net income per share 22,925 17,892 21,586 15,840
-------- -------- -------- --------
-------- -------- -------- --------
See Notes to Condensed Consolidated Financial Statements
4
DSP COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1 9 9 6 1 9 9 5
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OPERATING ACTIVITIES:
Net income $ 9,525 $ 1,797
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 794 183
Loss on disposal of equipment 2 2
Other -- (83)
Changes in operating assets and liabilities:
Trade accounts receivable 1,130 (1,741)
Accounts receivable for affiliated companies -- 68
Other current assets (801) (507)
Accounts payable 1,620 1,912
Accrued compensation and benefits 251 105
Deferred income 843 (720)
Other accrued liabilities 1,889 1,262
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Net cash provided by (used in) operating activities 15,253 2,278
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INVESTING ACTIVITIES:
Cash purchases of equipment (1,446) (547)
Proceeds from sales of equipment 7 10
Purchases of short term investments, net (37,994) (19,014)
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Net cash used in investing activities (39,433) (19,551)
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FINANCING ACTIVITIES:
Repayments of lease obligations -- (28)
Issuance of common stock for cash 77,891 30,152
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Net cash provided by financing activities 77,891 30,124
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Increase in cash and cash equivalents 53,711 12,851
Cash and Cash equivalents
at beginning of period 10,292 8,146
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Cash and cash equivalents at
end of period $ 64,003 $ 20,997
--------- ---------
--------- ---------
See Notes to Condensed Consolidated Financial Statements.
5
DSP COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DSP
Communications, Inc. ("DSPC" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the interim period are not necessarily indicative of the
results that may be expected for the full year. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
2. FOLLOW-ON OFFERING
On April 24, 1996, the Company closed a follow-on offering of 4,000,000 shares
of common stock at $26 per share, of which 901,368 shares were sold by a selling
shareholder, resulting in net proceeds to the Company of approximately $76
million.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the consolidated
condensed interim financial statements and the notes thereto in Part I, Item 1
of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report for the year ended December 31, 1995.
The results of operations for 1996 include the results of CTP Systems Ltd. ("CTP
Systems"). CTP Systems is presently developing its wireless PBX product for
commercial production, and commercial quantities are expected to be first
shipped in the fourth quarter of 1996. CTP Systems' activities incurred losses
in the first and second quarters and are expected to continue to incur losses in
the following quarters of 1996.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items from
the Company's condensed consolidated statements of income as a percentage of
total revenues.
Quarter ended Six months ended
June 30, June 30,
1996 1995 1996 1995
---------------- ----------------
Revenues:
Product 96.4 90.2% 94.9 87.2%
Technology development 3.6 9.8 5.1 12.8
---------------- ----------------
100.0 100.0 100.0 100.0
Cost of revenues:
Product 52.2 52.1 52.6 48.5
Technology development 4.0 7.2 4.4 8.1
---------------- ----------------
56.2 59.3 57.0 56.6
---------------- ----------------
Gross profit 43.8 40.7 43.0 43.4
Operating expenses:
Research and development 5.0 8.0 5.4 9.4
Sales and marketing 3.7 7.1 4.3 8.5
General and administrative 7.0 9.0 8.2 10.3
---------------- ----------------
15.7 24.1 17.9 28.2
---------------- ----------------
Operating income 28.1 16.6 25.1 15.2
Net interest and other income 5.3 2.4 3.8 3.1
---------------- ----------------
Income before provision
for income taxes 33.4 19.0 28.9 18.3
Provision for income taxes (4.2) (3.8) (3.6) (3.6)
---------------- ----------------
Net income 29.2% 15.2% 25.3% 14.7%
---------------- ----------------
---------------- ----------------
7
REVENUES
Total revenues increased 153% to $20.3 million in the second quarter of 1996
from $8.0 million in the second quarter of 1995, and 207% to $37.7 million in
the six months ended June 30, 1996 from $12.3 million in the comparable period
in 1995.
Product revenues increased 171% to $19.6 million in the second quarter of 1996
from $7.2 million in the second quarter of 1995, and 233% to $35.7 in the six
months ended June 30, 1996 from $10.7 million in the first six months of 1995.
The demand for the Company's baseband chip sets for the Japanese PDC digital
cellular telephone market has increased significantly. In addition, during the
first six months of 1996 the Company commenced volume shipments sales of its new
half rate chip set.
Technology development revenues were $736,000 in the second quarter of 1996 as
compared to $788,000 in the second quarter of 1995, and $1,934,00 in the six
months ended June 30, 1996 compared to $1,567,000 in the six months ended June
30, 1995. The Company's technology development revenues fluctuate depending on
the number and size of technology development agreements and timing of related
milestones and deliverables.
GROSS PROFIT
Gross profit in the second quarter of 1996 was $8.9 million (43.8% of revenues)
compared to $3.3 million (40.7% of revenues) in the second quarter of 1995.
Gross profit in the first half of 1996 was $16.2 (42.9% of revenues), compared
to $5.3 million (43.4% of revenues) in the first half of 1995. The gross profit
on product revenues increased to 45.9% in the second quarter of 1996 from 42.2%
in the second quarter of 1995. The gross profit on product revenues increased to
44.5% in the first half of 1996 from 44.4% in the first half of 1995. Gross
margins on product revenues increased in the second quarter of 1996 as the
Company completed its obligations to pay royalties to the Chief Scientist of
the Israel Ministry of Trade and Industry, and therefore was not required to
provide for this 3% royalty for all sales recorded during the quarter. Sales of
CTP Systems' Wireless PBX systems to Beta sites were effected in small
quantities. These sales were effected at negative margins, and the Company
expects that it will continue to experience negative margins on low volume
initial systems sales until higher volume sales are achieved. Higher volume
sales are anticipated at the end of 1996. Margins were also positively effected
by a change in the composition of products and customers which yielded a higher
margin. The Company anticipates that the cost of products sold as a percentage
of product revenues may increase in subsequent quarters as the sales price of
chip sets decreases as a result of volume discounts and price pressures. The
costs incurred on technology development varies from quarter to quarter
depending on the similarity or diversity of the products and technologies
developed, and as contractual milestones are achieved. The achievement of
certain contractual milestones was delayed from the second quarter, and as a
result, the related revenues were not recognized and a gross loss resulted on
technology development. The Company believes that these milestones will be
achieved in the third quarter.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $1,019,000 (5.0% of revenues) in
the second quarter of 1996 from $640,000 (8.0% of revenues) in the second
quarter of 1995, (net of grants from the Chief Scientist of the Israeli Ministry
of Trade and Industry) and to $2,026,000 (5.4% of revenues) in the six months
ended June 30, 1996, compared to $1,152,000 (9.4% of revenues) in the six months
ended June 30, 1995. The increase reflects the growth in engineering personnel
and in projects under development, and the inclusion of CTP Systems' R&D
activities.
8
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased to $746,000 (3.7% of revenues) in the
second quarter of 1996 from $571,000 (7.1% of revenues) in the second quarter of
1995, and to $1,626,000 (4.3% of revenues) in the six months ended June 30, 1996
compared to $1,045,000 (8.5% of revenues) in the six months ended June 30, 1995.
The increase reflects the growth in the marketing and sales staff at the
Company's Cupertino, California, offices, increased participation at trade
exhibitions, increased promotion and market research expenses, and increased
expenses at the Company's Tokyo offices.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in the second quarter of 1996 were
$1,429,000 (7.0% of revenues) compared to $723,000 (9% of revenues) in the
second quarter of 1995, and $3,084,000 (8.2% of revenues) in the six months
ended June 30, 1996, compared to $1,268,000 (10.3% of revenues) in the six
months ended June 30, 1995. General and administrative expenses increased
primarily as a result of increased staffing levels at the Company's Cupertino
offices and at the facilities of the Company's Israeli subsidiaries, increased
facility expenses, increased administration expenses and fees, and the
inclusion of CTP Systems' administration expenses and related amortization of
the goodwill recorded with the acquisition of CTP Systems.
OTHER INCOME
Net interest and other income was $1,089,000 in the second quarter of 1996
compared to $194,000 in the second quarter of 1995, and was $1,464,000 in the
six months ended June 30, 1996, compared to $379,000 in the six months ended
June 30, 1995. The 1996 amount was generated primarily from interest on the
Company's cash and investment balances, including the proceeds from the
Company's follow-on public offerings completed in June 1995 and in April 1996.
PROVISIONS FOR INCOME TAX
The tax provision for the quarter and six month period ended June 30, 1996,
reflects Israeli taxes on the portion of the undistributed income which is not
subject to "Approved Enterprise" status and U.S. taxes on U.S. earnings which
are not offset by net operating loss carry forwards. The effective tax rate for
the second quarter of 1996 is approximately 12.5% and may increase in the future
depending on, among other factors, the elimination over time of the tax
benefits awarded with Approved Enterprise status and the possible application of
U.S. tax rules regarding the taxation of controlled foreign corporations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided $15.3 million in the six months
ended June 30, 1996 and $2.3 million in the comparable period in 1995. Net cash
provided from operations in 1996 was composed primarily of net income for the
period, and an increase in current liabilities and a decrease in trade accounts
receivable.
The Company's investing activities, other than purchases of and proceeds from
short-term investments, have consisted primarily of expenditures for fixed
assets, which totaled $1,466,000 in the first six months of 1996 and $547,000 in
the first six months of 1995.
9
In obtaining approval of the Company's reorganization from Israeli tax
authorities, which was completed immediately before the closing of the Company's
initial public offering in March 1995 ("IPO"), the Company agreed to invest in
activities in Israel not less than $9.0 million out of the proceeds of the IPO
within three years after the IPO.
In October 1995, the Company completed the acquisition of CTP Systems, for $14.1
million. Prior shareholders of CTP Systems who are continuing as employees of
CTP Systems and, under certain circumstances, prior shareholders who have no
continuing role in CTP Systems, may be entitled to receive a contingent earn-out
payment on March 31, 1998. The amount of the contingent earn-out payment will be
determined by a formula based upon the profits and revenues, as defined, of CTP
Systems for fiscal years 1996 and 1997 on a combined basis, and the relationship
between such profits and revenues. The Company has the ability to extinguish the
contingent earn-out obligation by paying an additional $6.0 million by December
1996. Based on the operating results of CTP Systems to date, the Company does
not expect that the prior shareholders of CTP Systems will be entitled to
receive such an earn-out payment. The Company does not currently plan to
extinguish the obligation by making the $6.0 million payment in 1996.
As of June 30, 1996, the Company had $119.6 million of cash, cash equivalents
and short-term investments. The Company believes that existing cash, cash
equivalents and short-term investments balances, will be sufficient to meet its
cash requirements for at least the next twelve months. While operating
activities may provide cash in certain periods, to the extent the Company may
experience growth in the future, the Company anticipates that its operating and
investing activities may use cash and consequently, such growth may require the
Company to obtain additional sources of financing. The Company may also from
time to time consider the acquisition of additional complimentary businesses,
projects or technologies which may require additional financing or require the
use of a significant portion of its existing cash.
On April 24, 1996, the Company closed a follow-on public offering of 4,000,000
shares of Common Stock at $26 per share, of which 901,368 shares were sold by a
selling shareholder. Aggregate net proceeds to the Company from the offering,
exclusive of the Company's expenses associated with the offering, were
$76,536,210.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward looking statements concerning the Company's
future products, expenses, revenue, liquidity and cash needs as well as the
Company's plans and strategies. These forward looking statements are based on
current expectations, and the Company assumes no obligation to update this
information. Numerous factors could cause actual results to differ
significantly from the results described in these forward looking statements,
including the following risk factors.
RELIANCE ON A SINGLE JAPANESE DISTRIBUTOR AND A SMALL NUMBER OF OEMS.
Substantially all of the Company's sales of baseband chip sets for digital
cellular telephones are to Tomen Electronics Corp. ("Tomen"), the Company's
distributor in Japan. Tomen's sales of the Company's products are
concentrated in a small number of Japanese original equipment manufacturer
("OEM") customers. Although Tomen has recently commenced shipments of the
Company's products to additional Japanese OEMs, prior to 1996, Kenwood
Corporation, Kyocera Corporation and Sanyo Electronic Co., Ltd. accounted for
all of Tomen's sales of the Company's baseband chip sets. The loss of Tomen
as a distributor or the loss of or significant reduction in Tomen's sales to
any of these Japanese OEMs would have a material adverse effect on the
Company's business, financial condition and results of operations. Because
the world-wide cellular subscriber equipment industry is dominated by a small
number of large corporations, the Company expects that a significant portion
of its future product sales will continue to be concentrated in a limited
number of OEMS.
10
As a result, the Company's performance is likely to depend on relatively
large orders from a limited number of distributors and OEMS. The Company's
performance will also depend significantly on gaining additional OEM
customers, both within existing markets and in new markets. In addition, the
Company believes that the manufacture of subscriber equipment for emerging
telecommunications services, such as personal communications services
("PCS"), will also be concentrated in a limited number of OEMS. The loss of
any existing OEM customer, a significant reduction in the level of sales to
any existing customers, or the failure of the Company to gain additional OEM
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON TEXAS INSTRUMENTS AND OTHER THIRD PARTY MANUFACTURERS. All of the
Company's integrated circuits are currently fabricated by independent third
parties and the Company intends to continue using independent foundries in the
future. To date, the Company has purchased all of the DSP chips for its
baseband chip sets for cellular telephones from Texas Instruments Incorporated
("TI"). The Company also buys all of the DSP chips used in the products of CTP
Systems from TI. The Company purchases standard DSP chips from TI, and TI
embeds the Company's proprietary software algorithms in TI's chips. In
addition, the Company currently purchases its application specific integrated
circuits ("ASICs") for its PDC chip sets from VLSI Technology, Inc. ("VTI") and
Atmel ES2, a wholly-owned subsidiary of Atmel, Inc. ("Atmel ES2"); all of its
ASICs for analog baseband chip sets from TI and its ASICs for CTP Systems'
products from American Microsystems, Inc. ("AMI") and Pacific Communication
Services, Inc. ("PCSI"), a subsidiary of Cirrus Logic, Inc. Accordingly, the
Company is and will remain dependent on independent foundries, including TI,
PCSI, AMI, VTI and Atmel ES2, to achieve acceptable manufacturing yields, to
allocate to the Company a sufficient portion of foundry capacity to meet the
Company's needs and to offer competitive pricing to the Company. Although the
Company has not experienced material quality, allocation or pricing problems to
date, if such problems were to arise in the future, they would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON JAPANESE MARKET. The future performance of the Company will be
dependent, in large part, upon its ability to continue to compete successfully
in the Japanese market. The Company's ability to continue to compete in this
market will be dependent upon several factors, including no deterioration of
existing trade relations between Japan, Israel and the United States or
imposition of tariffs in the wireless personal communications industry, no
adverse changes in the Japanese telecommunications regulatory environment, the
Company's ability to develop products that meet the technical requirements of
its Japanese customers and the Company's ability to maintain satisfactory
relationships with its Japanese customers and its distributor. All of the
Company's sales to its Japanese customers are denominated in United States
dollars and, therefore, fluctuations in the exchange rate for the United States
dollar could materially increase the price of the Company's products to these
customers and require the Company to reduce prices of its products to remain
competitive. Moreover, the expected emergence of Personal HandyPhone Services,
a microcellular technology potentially competitive with today's existing
Japanese analog and digital cellular networks, could reduce sales in Japan of
digital cellular telephones incorporating the Company's baseband chip sets.
There can be no assurance that changes in the political or economic conditions,
trade policy or regulation of telecommunications in Japan will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
DECLINING SALES PRICES. Manufacturers of wireless personal communications
equipment are experiencing, and are likely to continue to experience, intense
price pressure, which has resulted and is expected to continue to result in
downward pricing pressure on the Company's products. As a result, the Company
has experienced, and expects to continue to experience, declining sales prices
for its products. In addition, pricing competition among component suppliers
has increased. There can be no assurance that either increases in unit volume
or reductions in per unit costs will offset declines in per unit sales prices,
in which case the Company's gross profit would be adversely affected. Since
cellular telephone manufacturers frequently negotiate supply arrangements far in
advance of delivery dates, the Company often must commit to price reductions for
its
11
products before it is aware of how, or if, such cost reductions can be
obtained. As a result, such current or future price reduction commitments
could have, and any inability of the Company to respond to increased price
competition would have, a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON A SINGLE PRODUCT; INTRODUCTION OF HALF RATE CHIP SET. Since
December 1993, the Company has relied upon sales from a single product, its
baseband chip set for digital cellular telephones for use in Japan, to generate
substantially all of its product sales. The Company is in the process of
developing additional products for digital cellular telephones, PCS and wireless
PBX applications; however, there can be no assurance that it will be successful
in doing so.
During the first six months of 1996, the Company commenced volume shipments of
its new half rate chip set. Although the Company extensively tested the half
rate chip set prior to its introduction, design adjustments may yet be required
which could result in delays in further volume production or recalls of half
rate chip sets already sold. Although the Company has not to date experienced
any errors or the need for any such adjustments with respect to the half rate
chip set, the occurrence of such errors or adjustments could have a material
adverse effect on the Company's business, financial condition or results of
operations.
EXPECTED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND POTENTIAL QUARTERLY
LOSSES. The Company's quarterly operating results depend on the volume and
timing of product orders received and delivered during the quarter and the
timing of new product introductions by the Company and its customers. The
Company anticipates that for the foreseeable future new product introductions
may cause significant fluctuations in quarterly operating results. The
Company's quarterly operating results may also vary significantly depending on
other factors, including the introduction of new products by the Company's
competitors; market acceptance of new products; the greater number of
manufacturing days in the second and third quarters; adoption of new
technologies and standards; relative prices of the Company's products;
competition; the cost and availability of components; the mix of products sold;
the quality and availability of chip sets manufactured for the Company by third
parties; changes in the Company's distribution arrangements; sales of wireless
subscriber equipment by OEMs and changes in general economic conditions. In
addition, the Company has an obligation to make certain contingent earn-out
payments on March 1988 in connection with its acquisition of CTP Systems;
however, the Company has the right to extinguish this contingent earn-out
obligation by paying $6 million by December 1996. If the Company elects to make
this payment, it will result in the recognition of a substantial one-time charge
against earnings and a material adverse effect on the Company's operating
results in the quarter in which it is paid. In the event the Company does not
elect to make this payment, the Company could be required to pay a substantially
greater amount in March 1998 if CTP Systems exceeds its original projections of
revenues and profits.
RISK OF INCREASED INCOME TAXES. DSPC Israel Ltd. ("DSPCI") and CTP Systems, two
Israeli subsidiaries of the Company, operate as "Approved Enterprises" under
Israel's Law for the Encouragement of Capital Investments, 1959, as amended. An
Approved Enterprise is eligible for significant income tax rate reductions for
several years following the first year in which it has income subject to
taxation in Israel (after consideration of tax losses carried forward). There
can be no assurance that this favorable tax treatment will continue, and any
change in such tax treatment could have a material adverse effect on the
Company's net income and results of operations. As of this date, the Company is
not aware of any circumstances that might cause it to lose its favorable tax
treatment. If Israel's tax incentives or rates applicable to DSPCI or CTP
Systems are rescinded or changed, their income taxes could increase and their
results of operations and cash flow would be adversely affected. In addition,
the Company's income tax rate would increase if all or a portion of the earnings
of DSP Telecom, DSPCI or CTP Systems were to become subject to United States
federal and state income tax as a result of actual or deemed dividends or
through operation of United States tax rules applicable to "controlled foreign
corporations.
12
MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE. The markets for the
Company's products are extremely competitive and the Company expects that
competition will increase. Many of the Company's competitors have entrenched
market positions, established patents, copyrights, tradenames, trademarks and
intellectual property rights and substantial technological capabilities. The
Company's current competitors in the digital cellular market include other
suppliers of DSP-based chip sets and existing cellular telephone manufacturers
that develop chip set solutions internally. Both in the cellular market and in
other wireless personal communications markets, the Company's existing and
potential competitors include large and emerging domestic and international
companies, many of which have significantly greater financial, technical,
manufacturing, marketing, sales and distribution resources and management
expertise than the Company. The Company believes that its ability to compete
successfully in the wireless personal communications market will depend upon a
number of factors both within and outside of its control, including price,
quality, availability, product performance and features; timing of new product
introductions by the Company, its customers and competitors; and customer
service and technical support. There can be no assurance that the Company will
have the financial resources, technical expertise, or marketing, sales,
distribution and customer service and technical support capabilities to compete
successfully.
RELIANCE ON INTENTIONAL OPERATIONS; RISKS OF OPERATIONS IN ISRAEL. The Company
is subject to the risks of doing business internationally, including unexpected
changes in regulatory requirements; fluctuations in the exchange rate for the
United States dollar; imposition of tariffs and other barriers and restrictions;
and the burdens of complying with a variety of foreign laws. The Company is
also subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, in connection
with its international operations. In particular, the Company's principal
research and development facilities are located in the State of Israel and, as a
result, at June 30, 1996, 109 of the Company's 121 employees were located in
Israel, including all of the Company's research and development personnel.
Therefore, the Company is directly affected by the political, economic and
military conditions to which that country is subject. In addition, many of the
Company's expenses in Israel are paid in Israeli currency, thereby also
subjecting the Company to foreign currency fluctuations and to economic
pressures resulting from Israel's generally high rate of inflation. The rate of
inflation in Israel for 1994 and 1995 was 14.7% and 8.1%, respectively. While
substantially all of the Company's sales and expenses are denominated in United
States dollars, a portion of the Company's expenses are denominated in Israeli
shekels. The Company's primary expense paid in Israeli currency is employee
salaries. As a result, an increase in the value of Israeli currency in
comparison to the United States dollar could increase the cost of technology
development, research and development expenses and general and administrative
expenses. There can be no assurance that currency fluctuations, changes in the
rate of inflation in Israel or any of the other aforementioned factors will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
In the past, the Company has obtained royalty-bearing grants from the Office of
the Chief Scientist in Israel's Ministry of Industry and Trade (the "Chief
Scientist") and the Israel-United States Binational Industrial Research and
Development Foundation to fund research and development. The terms of the
grants from the Chief Scientist prohibit the transfer of technology developed
pursuant to the terms of these grants to any person, without the prior written
consent of the State of Israel. The Company does not expect to apply for such
grants for the development of new products in the future but will continue to
apply for grants for existing products.
OPERATIONAL RISKS ASSOCIATED WITH CTP SYSTEMS. On October 26, 1995, the Company
acquired for $14.1 million CTP Systems, a developer and manufacturer of wireless
private branch exchanges ("PBXs") and other low-mobility wireless communications
applications. CTP Systems' wireless PBX equipment is currently in Beta testing,
which may identify quality or operational problems in the product that require
the Company to incur additional engineering expenses to correct any problems or
redesign the product, and also may result in a delay in making the product
commercially available. CTP Systems intends to manufacture its own products and
will, therefore, be subject to various risks associated with the manufacturing
process, including errors in
13
the manufacturing process, shortages of required components, manufacturing
equipment failures and disruptions of operations at the manufacturing
facility. Prolonged inability of CTP Systems to deliver products in a timely
manner could result in the loss of customers and a material adverse effect on
its results of operations. In addition, certain of the components included
in CTP Systems' products are obtained from a single source or a limited group
of suppliers. The partial or complete loss or delay of the supply of
components from certain of these sources could result in a significant
reduction in CTP Systems' revenues and could also damage certain customer
relationships.
MANAGEMENT OF GROWTH. The growth in the Company's business has placed, and is
expected to continue TO place, a significant strain on the Company's management
and operations. To manage its growth, the Company must continue to implement
and improve its operational, financial and management information systems and
expand, train and manage its employees. The anticipated increase in product
development and marketing and sales expenses coupled with the Company's reliance
on OEMs to successfully market and develop products that incorporate the
Company's proprietary technologies could have an adverse effect on the Company's
performance in the next several quarters. The Company's failure to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
FUTURE ACQUISITIONS. The Company's strategy includes obtaining additional
technologies and will involve, in part, acquisitions of products, technologies
or businesses from third parties. Identifying and negotiating these
acquisitions may divert substantial management resources. An acquisition could
absorb substantial cash resources, could require the Company to incur or assume
debt obligations, or could involve the issuance of additional Common or
Preferred Stock. The issuance of additional equity securities would dilute and
could represent an interest senior to the rights of then outstanding Common
Stock of the Company. An acquisition which is accounted for as a purchase, like
the acquisition of CTP Systems, could involve significant one-time non-cash
write-offs, or could involve the amortisation of goodwill over a number of
years, which would adversely affect earnings in those years. Acquisitions
outside the digital communications area may be viewed by outside market analysts
as a diversion of the Company's focus on digital communications. For these and
other reasons, the market for the Company's stock may react negatively to the
announcement of any acquisition. An acquisition will continue to require
attention from the Company's management to integrate the acquired entity into
the Company's operations, may require the Company to develop expertise in fields
outside its current area of focus and may result in departures of management of
the acquired entity. An acquired entity may have unknown liabilities, and its
business may not achieve the results anticipated at the time of the acquisition.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on June 4, 1996. At the
annual meeting, the following matters were voted upon:
1. The election of two (2) Class I directors to serve for a three year term
until the 1999 Annual Meeting of Stockholders. The results of the voting were
as follows:
a. DAVIDI GILO:
Number of shares voted FOR 15,449,694
Number of shares voted AGAINST 144,955
b. ANDREW SCHONZEIT:
Number of shares voted FOR 15,449,694
Number of shares voted AGAINST 144,955
2. Proposal to amend and restate the DSP Communications, Inc. 1995 Director
Stock Option Plan to (a) increase the number of shares of common stock reserved
for issuance thereunder from 200,000 shares to 300,000 shares, and (b) change
the vesting schedule of future grants of Subsequent Options under the Plan so
that future Subsequent Options may be exercisable as to 100% of the shares
subject to such options on the first anniversary of the date of the grant rather
than the fourth anniversary. The results of the voting were as follows:
Number of Shares Voted FOR 11,141,406
Number of Shares Voted AGAINST 4,241,883
Number of Shares ABSTAINING 70,440
Number of Broker Non-Votes 140,920
15
3. Ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31, 1996. The
results of the voting were as follows:
Number of Shares Voted FOR 15,506,557
Number of Shares Voted AGAINST 2,825
Number of Shares ABSTAINING 70,761
Number of Broker Non-Votes 14,506
ITEM 5. OTHER INFORMATION
On April 24, 1996, the Company effected a follow-on public offering of shares of
its Common Stock. Aggregate net proceeds to the Company, exclusive of the
Company's expenses associated with the offering, were $76,536,210. A complete
description of the terms of the public offering are set forth in the Company's
Registration Statement on Form S-3 (File No. 333-3134), which was declared
effective on April 18, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.39 Amended and Restated Employment Agreement dated December 19,
1995, between DSP Telecom, Inc. and Davidi Gilo
10.40 Amended and Restated Employment Agreement dated November 1, 1995,
between DSP Telecom, Inc. and Nathan Hod
10.41 1996 Nonstatutory Employee and Consultant Stock Option Plan
11 Statement re: Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K: not applicable. The Company did not file any
reports on Form 8-K during the three months ended June 30, 1996.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 7, 1996
DSP COMMUNICATIONS, INC.
By: /s/Gerald Dogon
- ---------------------------------------------------------------
Gerald Dogon, Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
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