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 September 30, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-25622
DSP COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0389180
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20300 Stevens Creek Boulevard, Cupertino, California 95014
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 777-2700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
___
As of October 31, 1996, there were 22,188,299 shares of Common Stock ($.001
par value) outstanding.
INDEX
DSP COMMUNICATIONS, INC.
Page No.
PART I. FINANCIAL INFORMATION
_________________________________
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 1996
and December 31, 1995 .....................................3
Condensed consolidated income statements-Quarter
ended September 30, 1996 and 1995, and nine months
ended September 30, 1996 and 1995 ..........................4
Condensed consolidated statements of cash flows - Nine
months ended September 30, 1996 and 1995....................5
Notes to condensed consolidated financial statements-
September 30, 1996 ......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .........................7
PART II. OTHER INFORMATION
__________________________
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 ......................................15
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)
September 30, December 31,
1 9 9 6 1 9 9 5
-------------- -------------
(Unaudited) (Note 1)
Assets
Current Assets
Cash and cash equivalents $ 72,736 $ 10,292
Short term investments 56,068 17,696
Trade accounts receivable 9,706 8,838
Other current assets 2,148 1,448
------------- --------------
Total current assets 140,658 38,274
Property and Equipment, net 3,360 1,823
Goodwill 2,010 2,379
Other Assets 1,388 1,643
------------- --------------
$ 147,416 $ 44,119
------------- --------------
------------- --------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 5,915 $ 3,419
Accrued compensation and benefits 2,393 1,711
Other accrued liabilities 6,771 3,478
Deferred income 1,423 473
------------- --------------
Total current liabilities 16,502 9,081
Other Liabilities 480 170
Stockholders' Equity
Common stock (22,188,468
and 18,105,922 shares issued
and outstanding at September 30, 1996,
and December 31, 1995, respectively) 22 18
Additional paid-in capital 118,228 39,794
Contributed capital 7,232 7,232
Accumulated earnings (deficit) 4,952 (12,176)
------------- ---------------
Total stockholders' equity 130,434 34,868
------------- ---------------
$ 147,416 $ 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 Nine Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------------ ------------ ------------ -------------
Revenues
Product $ 22,998 $ 12,252 $ 58,717 $ 22,962
Technology development 402 583 2,336 2,151
------------ ------------- ------------ -------------
Total revenues 23,400 12,835 61,053 25,113
Cost of Revenues
Product 11,719 6,878 31,541 12,833
Technology development 487 765 2,161 1,757
------------ ------------- ------------ -------------
Total cost of revenues 12,206 7,643 33,702 14,590
Gross profit 11,194 5,192 27,351 10,523
Operating Expenses
Research and development 1,638 692 3,664 1,844
Sales and marketing 857 663 2,483 1,707
General and administrative 1,684 978 4,768 2,246
------------ ------------- ------------ -------------
4,179 2,333 10,915 5,797
------------ ------------- ------------ -------------
Operating income 7,015 2,859 16,436 4,726
Net interest and other income 1,675 374 3,139 752
------------ ------------- ------------ -------------
Income before provision
for income taxes 8,690 3,233 19,575 5,478
Provision for income taxes (1,087) (667) (2,447) (1,115)
------------ ------------- ------------ -------------
Net income $ 7,603 $ 2,566 $ 17,128 $ 4,363
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Net income per share $ 0.32 $ 0.13 $ 0.76 $ 0.25
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Shares used in computing
net income per share 24,024 19,704 22,399 17,127
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
See Notes to Condensed Consolidated Financial Statements
4
DSP Communications Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Nine
Months Ended Months Ended
September 30, September 30,
1 9 9 6 1 9 9 5
------------ -------------
Operating Activities:
Net income $ 17,128 $ 4,363
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,255 285
Loss on disposal of equipment 2 9
Other -- 125
Changes in operating assets and liabilities:
Trade accounts receivable (868) (5,260)
Other current assets (700) (361)
Accounts payable 2,588 2,405
Accrued compensation and benefits 682 100
Deferred income 950 (281)
Other accrued liabilities 3,248 973
Other liabilities 310 947
Other assets -- 53
------------ -------------
Net cash provided by operating activities 24,595 3,358
------------ -------------
Investing Activities:
Cash purchases of equipment, net (2,270) (766)
Proceeds from sales of equipment 8 17
Purchases of short term investments, net (38,606) (17,269)
------------ -------------
Net cash used in investing activities (40,868) (18,018)
------------ -------------
Financing Activities:
Repayments of lease obligations -- (190)
Issuance of common stock for cash 78,717 29,333
------------ -------------
Net cash provided by financing activities 78,717 29,143
------------ -------------
Increase in cash and cash equivalents 62,444 14,483
Cash and Cash equivalents
at beginning of period 10,292 8,146
------------ -------------
Cash and cash equivalents at end of period $ 72,736 $ 22,629
------------ -------------
------------ -------------
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. Subsequent Event -- Merger with Proxim, Inc.
On October 28, 1996, the Company entered into a merger agreement pursuant to
which the Company will acquire Proxim, Inc., a designer and manufacturer of
high performance wireless local area data networking products. The
acquisition is intended to be accounted for as a pooling of interests and is
expected to close by the end of January 1997. The merger is subject to
various conditions, including obtaining stockholder approval and requisite
regulatory approval. Under the terms of the merger agreement, Proxim
stockholders will receive 0.70 of a share of the Comapany's Common Stock for
each share of Proxim Common Stock upon closing of the merger, subject to
certain adjustments under certain conditions. At September 30, 1996, Proxim
had approximately 9.7 million shares of Common Stock outstanding.
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, second and third quarters and are expected to continue to incur
losses in the fourth quarter 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 Nine months ended
September 30, September 30,
---------------------- ------------------------
1996 1995 1996 1995
---------------------- ------------------------
Revenues:
Product 98.3% 95.5% 96.2% 91.4%
Technology development 1.7 4.5 3.8 8.6
------- ------- ------- -------
100.0 100.0 100.0 100.0
Cost of revenues:
Product 50.1 53.6 51.6 51.1
Technology development 2.1 6.0 3.5 7.0
------- ------- ------- -------
52.2 59.6 55.1 58.1
------- ------- ------- -------
Gross profit 47.8 40.4 44.9 41.9
Operating expenses:
Research and development 7.0 5.4 6.0 7.3
Sales and marketing 3.7 5.2 4.0 6.8
General and administrative 7.2 7.6 7.8 8.9
------- ------- ------- -------
17.9 18.2 17.8 23.0
------- ------- ------- -------
Operating income 29.9 22.2 27.1 18.9
Net interest and other income 7.2 2.9 5.0 3.0
------- ------- ------- -------
Income before provision for income taxes 37.1 25.1 32.1 21.9
Provision for income taxes (4.6) (5.2) (4.0) (4.4)
------- ------- ------- -------
Net income 32.5% 19.9% 28.1% 17.5%
------ ------- ------- -------
------ ------- ------- -------
7
Revenues
Total revenues increased 82% to $23.4 million in the third quarter of 1996 from
$12.8 million in the third quarter of 1995, and 143% to $61.1 million in the
nine months ended September 30, 1996 from $25.1 million in the comparable
period in 1995.
Product revenues increased 87.7% to $23.0 million in the third quarter of 1996
from $12.3 million in the third quarter of 1995, and 155.7% to $58.7 in the
nine months ended September 30, 1996 from $23.0 million in the first nine
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 nine months of 1996 the Company commenced volume
shipments sales of its new half rate chip set.
Technology development revenues were $402,000 in the third quarter of 1996 as
compared to $583,000 in the third quarter of 1995, and $2,336,000 in the nine
months ended September 30, 1996 compared to $2,151,000 in the nine months ended
September 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 third quarter of 1996 was $11.2 million (48% of revenues)
compared to $5.2 million (40% of revenues) in the third quarter of 1995.
Gross profit in the first nine months of 1996 was $27.4 (45% of revenues),
compared to $10.5 million (42% of revenues) in the first nine months of 1995.
The gross profit on product revenues increased to 49% in the third quarter of
1996 from 44% in the third quarter of 1995. The gross profit on product
revenues increased to 46% in the first nine months of 1996 from 44 % in the
first nine months of 1995. Gross margins on product revenues increased in the
third quarter of 1996 as the Company completed its obligations to pay
royalties to the Chief Scientist of the Israel Ministry of Trade and Industry.
Sales of CTP Systems' Wireless PBX systems to Beta sites were made in small
quantities and resulted in negative margins. 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 during 1997. Margins were also positively effected by a change in
the composition of products and customers. 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 third 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 fourth quarter.
Research and Development Expenses
Research and development expenses increased to $1,638,000 (7% of revenues) in
the third quarter of 1996 from $692,000 (5% of revenues) in the third quarter
of 1995 and to $3,664,000 (6% of revenues) in the nine months ended
September 30, 1996, compared to $1,844,000 (7% of revenues) in the nine months
ended September 30, 1995. The increase reflects an increased level of
activities in the CDMA project, growth in the number of 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 $857,000 (4% of revenues) in the third
quarter of 1996 from $663,000 (5% of revenues) in the third quarter of 1995, and
to $2,483,000 (4% of revenues) in the nine months ended September 30, 1996
compared to $1,707,000 (7% of revenues) in the nine months ended
September 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 third quarter of 1996 were $1,684,000
(7% of revenues) compared to $978,000 (8% of revenues) in the third quarter of
1995, and $4,768,000 (8% of revenues) in the nine months ended September 30,
1996, compared to $2,246,000 (9% of revenues) in the nine months ended
September 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 $1,675,000 in the third quarter of 1996
compared to $374,000 in the third quarter of 1995, and was $3,139,000 in the
nine months ended September 30, 1996, compared to $752,000 in the nine
months ended September 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 nine month period ended September 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 third 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 $24.6 million in the nine months
ended September 30, 1996 and $3.4 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, set off by an increase
in trade accounts receivable.
The Company's investing activities, other than purchases of and proceeds from
short-term investments, have consisted of expenditures for fixed assets, which
totaled $2,270,000 in the first nine months of 1996 and $766,000 in the first
nine 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 September 30, 1996, the Company had $128.8 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
$76,536,000.
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
10
significant portion of its future product sales will continue to be concentrated
in a limited number of OEMS. 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
11
arrangements far in advance of delivery dates, the Company often must commit to
price reductions for its 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 nine 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 significant errors or the need for any material 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 may have an obligation to make certain contingent earn-out
payments in March 1998 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. 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.
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 September 30, 1996, 120 of the Company's 138 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.
13
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 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 amortization of goodwill and other intangibles
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. For example, the Company entered into an agreement
to acquire Proxim, Inc. ("Proxim") on October 28, 1996, the closing of which is
subject to certain conditions. The successful integration of Proxim with the
Company will require, among other things, integration and/or co-ordination of
the Company's and Proxim's marketing and research and development departments.
There can be no assurance that the combination of the Company and Proxim will be
accomplished efficiently or successfully, and the inability of the Company's
management to successfully integrate the Company and Proxim could have a
material adverse effect on the business, results of operations and financial
condition of the combined company.
14
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
None.
Item 5. OTHER INFORMATION
On September 20, 1996, the Board of Directors approved amendments to the
Company's Certificate of Incorporation (i) effecting a two-for-one stock
split of the Company's Common Stock, and (ii) increasing the number of shares
of Common Stock that the Company is authorized to issue from 70,000,000 to
110,000,000 shares. These amendments were approved by the stockholders at a
meeting held on November 12, 1996. The Board has established November 13,
1996 as record date for the 2-for-1 stock split and it is anticipated that the
new share price reflecting the stock split will be reported on the Nasdaq
National Market commencing on, or about, December 3, 1996.
On October 28, 1996, the Company, Proxim and Data Merger Corporation, a
wholly-owned subsidiary of the Company ("Sub"), entered into an Agreement and
Plan of Merger (the "Merger Agreement") providing for the merger of Proxim
with and into Sub. Under the terms of the Merger Agreement, Proxim
stockholders will receive 0.70 shares of the Company's common stock for each
share of Proxim common stock, subject to certain adjustments. The merger is
intended to qualify as a tax-free reorganization and pooling of interests for
accounting and financial reporting purposes, and is subject to certain
conditions, including the approval of the respective stockholders of the
Company and Proxim, and requisite regulatory approval. On October 31, 1996,
the Company filed a current report on Form 8-K with the Securities and
Exchange Commission relating to this transaction.
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.42 1996 Stock Option Plan
10.43 Employment Agreement, dated as of June 15, 1996, between DSP
Telecom, Inc. and Michael Lubin
11 Statement Re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended September 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.
Date: November 12, 1996
DSP COMMUNICATIONS, INC.
By: /s/Gerald Dogon
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Gerald Dogon, Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
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