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 0-23006
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DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2683643
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3120 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-4300
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1996, there were 9,540,000 shares of Common Stock ($.001 par
value per share) outstanding.
INDEX
DSP GROUP, INC.
PAGE NO.
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PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 30, 1996
and December 31, 1995.............................................. 3
Condensed consolidated statements of income--Three 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......................................... 11
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings.................................................. 19
Item 2. Changes in Securities.............................................. 19
Item 3. Defaults upon Senior Securities.................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................ 20
Item 5. Other Information.................................................. 20
Item 6. Exhibits and Reports on Form 8-K................................... 20
SIGNATURES.................................................................. 21
EXHIBIT INDEX............................................................... 22
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
September 30, December 31,
1996 1995
------------ ------------
ASSETS (Unaudited) (Note)
CURRENT ASSETS
Cash and cash equivalents $24,152 $14,679
Marketable securities 9,361 19,149
Accounts receivable, net 5,051 8,129
Inventories 5,389 3,000
Deferred income taxes 784 784
Prepaid expenses and other 836 876
----------- -----------
Total current assets 45,573 46,617
PROPERTY AND EQUIPMENT 7,389 6,688
Accumulated depreciation and amortization (3,637) (2,591)
------------ -----------
3,752 4,097
EQUITY INVESTMENT, net 2,586 2,244
OTHER ASSETS, net 505 507
DEFERRED TAXES 1,389 1,389
----------- ----------
TOTAL ASSETS $53,805 $54,854
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,127 $2,437
Other current liabilities 3,752 4,876
----------- ---------
Total current liabilities 4,879 7,313
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, par value $0.001 per share:
Authorized- 5,000 shares; None issued
and outstanding -- --
Common Stock, par value $0.001 per share:
Authorized - 20,000 shares;
Issued and
outstanding- 9,540 shares at September 30 and
9,439 shares at December 31 9 9
Additional paid-in capital 66,782 66,287
Stockholders' notes receivable (122) (434)
Accumulated deficit (17,743) (18,321)
------------ -----------
48,926 47,541
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $53,805 $54,854
----------- -----------
----------- -----------
Note: The balance sheet at December 31, 1995 has been derived from the audited
inancial statements at that date.
See notes to condensed consolidated financial statements.
3
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Product sales $11,403 $10,850 $29,136 $30,262
Royalties, licensing and other 2,208 2,218 8,693 7,152
-------- -------- -------- --------
Total revenues 13,611 13,068 37,829 37,414
Cost of revenues:
Cost of product sales 8,378 6,324 21,511 17,277
Cost of royalties, licensing and other 218 137 596 620
-------- -------- -------- --------
Total cost of revenues 8,596 6.461 22,107 17,897
-------- -------- -------- --------
Gross profit 5,015 6,607 15,722 19,517
Operating expenses:
Research and development 1,802 2,260 6,584 6,208
Sales and marketing 941 1,196 3,316 3,790
General and administrative 1,125 1,065 4,370 4,361
Acquired in-process technology 1,529 - 1,529 -
Unusual items - - - 913
-------- -------- -------- --------
Total operating expenses 5,397 4,521 15,799 15,272
-------- -------- -------- --------
Operating income (loss) (382) 2,086 (77) 4,245
Other income (expense):
Interest and other income 331 358 1,131 1,047
Other expenses (116) (102) (325) (306)
Equity in income (loss) of investees (125) 71 (83) 71
Gain on sale of stock in affiliate - - - 1,893
-------- -------- -------- --------
Income (loss) before income taxes (292) 2,413 646 6,950
Provision (benefit) for income taxes (29) (77) 68 309
-------- -------- -------- --------
Net income (loss) $ (263) $2,490 $ 578 $6,641
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $(.03) $.26 $.06 $.69
-------- -------- -------- --------
-------- -------- -------- --------
Number of shares used in
per share computation 9,534 9,729 9,567 9,656
-------- -------- -------- --------
-------- -------- -------- --------
See notes to condensed consolidated financial statements.
4
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended September 30,
1996 1995
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES $ 1,888 $ 1,070
INVESTING ACTIVITIES:
Purchase of available-for-sale marketable securities (9,145) (24,005)
Sale of available-for-sale marketable securities 18,933 14,105
Purchases of equipment (700) (2,553)
Equity investment in Aptel (2,158) -
Sale of equipment - 62
Sale of Nogatech, Inc. - 1,259
Sale of stock in affiliated company - 1,893
Capitalized software development costs (152) (261)
--------- ---------
6,778 (9,500)
--------- ---------
FINANCING ACTIVITIES:
Line of credit borrowings - 5
Repayment of stockholders' notes receivable 312 706
Sale of common stock for cash upon
exercise of options and warrants 495 1,882
--------- ---------
807 2,593
--------- ---------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 9,473 $ (5,837)
--------- ---------
--------- ---------
See notes to condensed consolidated financial statements.
5
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements 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 footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996. For further information, reference is made to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
NOTE B - INVENTORIES
Inventory is valued at the lower of cost (first-in, first-out method) or
market. The components of inventory consist of the following (in thousands):
September 30, December 31,
1996 1995
--------------- ---------------
Raw materials $ - $ 2
Work-in-process 17 28
Finished goods 5,372 2,970
-------- --------
$5,389 $3,000
-------- --------
-------- --------
NOTE C - NET INCOME PER SHARE
Net income (loss) per share is computed using the weighted average number of
shares of Common Stock and, if applicable, dilutive common equivalent shares
from stock options and warrants (using the treasury stock method). Dual
presentation of primary and fully diluted net income (loss) per share is not
shown on the face of the income statement because the differences are not
significant.
6
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
September 30, December 31,
1996 1995
------------ -----------
Corporate obligations $23,167 $ -
Obligations of states and
political subdivisions 5,695 14,753
Tax-free auction rate preferred
and municipal mutual fund 3,600 4,400
Other - 636
---------- ----------
$32,462 $19,789
---------- ----------
---------- ----------
Amounts included in
marketable securities $ 9,361 $19,149
Amounts included in
cash and cash equivalents 23,101 640
---------- ----------
$32,462 $19,789
---------- ----------
---------- ----------
At September 30, 1996, the cost of securities approximated their fair market
value and the amount of unrealized gain was not significant. Gross realized
gains or losses for the three months and nine months ended September 30, 1996
and 1995 were not significant. The contractual maturities of debt securities
are all less than one year.
NOTE E - INCOME TAXES
The effective tax rate used in computing the provision (benefit) for income
taxes is based on projected fiscal year income before taxes, including
estimated income by tax jurisdiction. The difference between the effective
tax rate and the statutory rate is due primarily to the utilization of tax
loss carryforwards and tax exempt interest income.
7
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - SIGNIFICANT CUSTOMERS
Revenues from two distributors accounted for 25% and 11% of revenues for the
three months ended September 30, 1996, respectively, and 14% and 11% of
revenues for the nine months ended September 30, 1996, respectively. Sales
to these distributors accounted for 27% and 3% for the three months ended
September 30, 1996, respectively, and 23% and 7% of revenues for the three
and nine months ended September 30, 1995, respectively. The loss of one or
more major distributors could have an adverse effect on the Company's
business, financial condition and results of operations.
NOTE G - OTHER INVESTMENT
The Company sold its remaining 131,000 shares of the common stock of DSP
Communications, Inc. ("DSPC"), the successor of a former subsidiary, DSP
Telecommunications Ltd., in April 1995 upon the exercise of underwriters'
overallotment options. As the Company's basis in the investment had no book
value, the sale resulted in a pre-tax gain of approximately $1.2 million.
The Company had sold 73,000 shares in DSPC's March 1995 initial public
offering, resulting in a pre-tax gain of approximately $666,000 in the first
quarter of 1995. DSPC is a Delaware corporation primarily engaged in the
development and marketing of integrated circuits based on digital signal
processing ("DSP") technology for the wireless communications market. In
addition, the Company recorded $8,000 of revenues in the nine months ended
September 30, 1996, for engineering services performed for DSPC and $299,000
and $734,000 in the three and nine months ended September 30, 1995,
respectively, for such engineering services.
8
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H - EQUITY INVESTMENT
In July 1996, the Company invested $2 million of cash for approximately 40%
of the equity interests in Aptel Ltd. ("Aptel"), which is located in Netanya,
Israel. Aptel is an emerging company in its product development stage. Aptel
has expertise in spread spectrum direct sequence modulation technology, which
is applicable to the development of products for two-way paging systems and
telemetry applications. Expenses related to the acquisition were $158,000.
The acquisition was accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16. The total cost of the acquisition was
allocated to the estimated fair value of the assets acquired, and as a result
the Company incurred a one-time write-off of acquired in-process technology
of $1.5 million based on an independent estimate of value.
The Company has a two-year option to purchase additional stock from Aptel at
the same valuation to enable the Company to increase its ownership interest
to 51% in Aptel, and an additional option to acquire the then remaining
outstanding stock of Aptel from its shareholders payable at the seller's
option in either cash or stock of the Company. Igal Kohavi, Chairman of the
Company, is Chairman of Dovrat Shrem & Associates Direct Investment Funds
which held, together with other associated parties under its leadership, an
approximate 70% equity interest in Aptel prior to the Company's investment,
and is a director of Aptel.
NOTE I - SALE OF NOGATECH AND UNUSUAL ITEMS
During the second quarter of 1995, the Company decided to divest its 89%
equity interest in its Nogatech, Inc. ("Nogatech") subsidiary. The Company
incurred a $500,000 charge for the write-down of Nogatech's intangible assets
in accordance with Statement of Financial Accounting Standards No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of". Pursuant to a Stock Purchase Agreement, the Company on
August 11, 1995 sold its equity interest in Nogatech to two purchasers for
$1.5 million in cash. Nogatech's revenues for periods from July 1, 1995, to
August 11, 1995, and January 1, 1995, to August 11, 1995, were $143,000 and
$500,000, respectively, and Nogatech's operating loss for these periods,
exclusive of the $500,000 write-down, were $52,000 and $767,000,
respectively.
The Company also incurred $413,000 of severance expenses in the second
quarter of 1995 as a result of the resignation of the former Chairman of the
Board.
9
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - CONTINGENCIES
The Company has been and may from time to time be notified of claims that it
may be infringing patents or intellectual property rights owned by third
parties. The Company is unable to state 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.
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996 and the Court on
August 14, 1996 held a hearing on the Company's motion to dismiss the
complaint. The Company believes the lawsuit to be without merit and intends
to defend itself vigorously.
NOTE K - BORROWINGS
In June 1996, the Company obtained a revolving line of credit with a domestic
bank that provides for borrowings of up to $2.0 million, including letters of
credit. The line of credit expires in June 1997. The line of credit is
unsecured, and the Company is subject to certain financial covenants. In
June 1996, the bank issued a $290,000 standby letter of credit used as a
security deposit for the sublease of the building the Company leases as its
main headquarters.
NOTE L - SUBSEQUENT EVENT
In October 1996, the Company entered into a settlement agreement with
Rockwell International ("Rockwell"). Under the agreement, Rockwell licensed
three versions of TrueSpeech (8.5, 6.3 and G.723) and the Company dismissed
all litigation against Rockwell. The Company will realize in the fourth
quarter of 1996 gross profit, net of direct expenses, of approximately
$700,000 attributable to the licensing of TrueSpeech G.723 and 6.3, and other
income, net of direct expenses for legal and other costs, of
approximately $3.7 million attributable to the licensing of TrueSpeech 8.5.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased to $13.6 million in the third
quarter of 1996 from $13.1 million in the third quarter of 1995 due primarily
to increased shipments of the Company's TAD speech processors, especially
those utilizing flash memory. In the first nine months of 1996, total
revenues increased to $37.8 million from $37.4 million in the comparable
period of 1995. This increase was due primarily to the increased licensing of
the Company's DSP core design products. Product sales for the first nine
months of 1996 decreased to $29.1 million from $30.3 million in the first
nine months of 1995 due primarily to lower average selling prices and
decreased sales in the first quarter of 1996 of the Company's TAD speech
processors resulting from a softness in the TAD market following weak
economic conditions during the 1995 Christmas period.
Export sales, primarily consisting of TAD speech processors shipped to
manufacturers in Europe and Asia as well as license fees on DSP core design
products, represented 94% and 92% of total revenues for the Company in the
three and nine months ended September 30, 1996, respectively, and 82% and 74%
of total revenues in the three and nine months ended September 30, 1995,
respectively. All export sales are denominated in U.S. dollars.
Revenues from Tomen Electronics (a distributor) and DSP Solutions (a
distributor), accounted for 25% and 11% of total revenues in the three months
ended September 30, 1996, respectively, and 14% and 11% of total revenues in
the nine months ended September 30, 1996, respectively. Tomen Electronics
and DSP Solutions (formerly RTI Industries) accounted for 27% and 3% of total
revenues in the three months ended September 30, 1995, respectively, and 23%
and 7% of total revenues in the nine months ended September 30, 1995,
respectively.
GROSS PROFIT. Gross profit as a percentage of total revenues declined to 37%
in the third quarter of 1996 from 51% in the third quarter of 1995, and
declined to 42% in the first nine months of 1996 from 52% in the first nine
months of 1995. The decreases were due primarily to decreases in product
gross margins. The decrease in product gross margins in the nine months
ended September 30, 1996, was partially offset by the increases in licensing
revenues, which have a higher gross margin than product sales. Product gross
profit as a percentage of product sales decreased to 27% in the third quarter
of 1996 from 42% in the third quarter of 1995, and decreased to 26% in the
first nine months of 1996 from 43% in the first nine months of 1995. The
decreases in product margin were due primarily to decreases in sales prices
of the Company's TAD products due to downward competitive market pricing
pressures.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $1.8 million in the third quarter of 1996 from $2.3 million in
the third quarter of 1995
11
due primarily to a decrease in the cost of materials associated with the
Company's development of new speech processors for TAD products and personal
computer telephony applications and reductions in engineering personnel.
In the first nine months of 1996, research and development expenses increased
to $6.6 from $6.2 million in the same period in 1995. The increase was
primarily due to the increased cost of such materials incurred in the first
six months of 1996, and increased facilities expenses offsetting reductions
in engineering personnel. As a result, research and development expenses as a
percentage of total revenues were 13% and 17% in the three and nine months
ended September 30, 1996, respectively, compared to 17% in both the three and
nine months ended September 30, 1995.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased to
$941,000 in the third quarter of 1996 from $1.2 million in the third quarter
of 1995. In the first nine months of 1996, sales and marketing expenses
decreased to $3.3 million from $3.8 million in the comparable period of 1995.
These decreases were due primarily to reductions in sales and marketing
personnel. Sales and marketing expenses as a percentage of total revenues
decreased to 7% and 9% in the three and nine months ended September 30, 1996,
respectively, compared to 9% and 10% in the three and nine months ended
September 30, 1995, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1.1 million in both the third quarter of 1996 and 1995. General and
administrative expenses were $4.4 million in both the first nine months of
1996 and 1995 as reductions in legal expenses in 1996 compared to 1995 were
offset by the addition of two new officers and severance expenses to former
officers. General and administrative expenses as a percentage of total
revenues were 8% in both the three months ended September 30, 1996, and 1995,
and 12% in both the nine months ended September 30, 1996, and 1995.
ACQUIRED IN-PROCESS TECHNOLOGY. In August 1996, the Company expensed $1.5
million of in-process technology in connection with the purchase of an
approximately 40% equity interest in Aptel Ltd. See Note H of Notes to
Condensed Consolidated Financial Statements.
UNUSUAL ITEMS. In the second quarter of 1995, the Company decided to sell its
equity interest in its Nogatech subsidiary. Accordingly, the Company
incurred a charge of $500,000 to write down Nogatech to its estimated net
realizable value less disposal costs. In addition, in April 1995, the former
Chairman of the Board resigned to pursue personal business interests and the
Company incurred $413,000 of severance expense as a result of this
resignation.
OTHER INCOME (EXPENSE). Interest and other income was $1.1 million in the
nine months ended September 30, 1996, compared to $1.0 million in the nine
months ended September 30, 1995. The amount of the investments and yield
have been approximately equivalent between the periods.
12
EQUITY IN INCOME (LOSS) OF INVESTEES. The consolidated statement of
operations includes the Company's $127,000 loss on an equity basis in Aptel's
results of operations for the period from August 7, 1996, the date of
closing, to September 30, 1996. This amount is net of $4,000 and $46,000 of
income on an equity basis in AudioCodes for the three and nine months ended
September 30, 1996, respectively.
GAIN ON SALE OF STOCK IN AFFILIATE. The Company sold its remaining equity
interest in DSP Communications ("DSPC") in the second quarter of 1995 upon
the exercise of the underwriters' overallotment option. DSPC is the successor
of a former subsidiary of the Company, DSP Telecommunications Ltd. The
equity interest, which had no book value, was sold for $1.2 million of cash.
In addition, in March 1995, DSPC completed its initial public offering and
the Company sold a portion of its equity interest in DSPC, which had no book
value, for $666,000 in cash.
PROVISION (BENEFIT) FOR INCOME TAXES. In 1996 and 1995 the Company benefited
from the utilization of its net operating loss carryforwards and tax exempt
interest income, as well as the recognition of certain other deferred tax
assets in 1995.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the nine months ended September 30, 1996, net
cash provided by operations was $1.9 million, primarily composed of (i)
$578,000 of net income, (ii) $1.4 million of depreciation and amortization,
(iii) a $2.4 million decrease in accounts receivable, and (iv) the $1.5
million charge for acquired research and development. These were offset by a
$2.4 million increase in inventories and a $1.3 million decrease in accounts
payable.
INVESTING ACTIVITIES. The Company purchased $9.1 million and sold $18.9
million of investments classified as marketable securities in the first nine
months of 1996. Capital equipment additions in the first nine months of 1996
totaled $700,000, primarily for computer hardware and software used in
research and development, engineering test equipment, and furniture and
fixtures. In the first nine months of 1996, the Company capitalized $152,000
of software development costs.
In the third quarter of 1996, the Company invested $2 million in cash for
approximately 40% of the equity interest in Aptel Ltd. ("Aptel"), and
incurred $158,000 in acquisition expenses. See Note H of Notes to Condensed
Consolidated Financial Statements.
FINANCING ACTIVITIES. During the first nine months of 1996, the Company
received $495,000 upon the exercise of employee stock options, and $312,000
upon the repayment of stockholders' notes receivable.
At September 30, 1996, the Company's principal source of liquidity consisted
of cash and cash equivalents totaling $24.1 million, marketable securities of
$9.4 million and
13
amounts available under a domestic bank line of credit of $1.7 million. The
Company's working capital at September 30, 1996 was $40.7 million.
The Company believes that its current cash and its available line of credit
will be sufficient to meet its cash requirements through at least the next
twelve months. The Company occasionally investigates means to acquire
greater control over wafer production, whether by joint venture, prepayments,
equity investments in or loans to wafer suppliers. There can be no assurance
that the Company will consummate any such transactions. As part of its
business strategy, the Company occasionally evaluates potential acquisitions
of businesses, products and technologies. Accordingly, a portion of its
available cash may be used for the acquisition of complementary products or
businesses. Such potential transactions may require substantial capital
resources, which may require the Company to seek additional debt or equity
financing. There can be no assurance that the Company will consummate any
such transactions.
14
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.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
revenues are derived predominately from product sales and accordingly vary
significantly depending on the volume and timing of product orders. The
Company's quarterly operating results also depend on the timing of the
recognition of license fees and the level of per unit royalties. Through
1997, the Company expects that revenues from its DSP core designs and
TrueSpeech will be derived primarily from license fees rather than per unit
royalties. The uncertain timing of such license fees has caused, and may
continue to cause, quarterly fluctuations in the Company's operating results.
The Company's per unit royalties from licenses are totally dependent upon the
success of the original equipment manufacturer ("OEM") utilizing the
Company's technology and the success of those OEM products in the
marketplace. In the fourth quarter of 1995, the first shipment of products
utilizing the Company's PineDSPCore-TM- technology occurred; however,
royalties from such shipments as well as TrueSpeech products have not been
significant to date.
The Company's quarterly operating results may also vary significantly as
demand for TADs varies during the year due to seasonal customer buying
patterns, and as a result of other factors such as the timing of new product
introductions by the Company or its customers, licensees or competitors;
market acceptance of new products and technologies; the mix of products sold;
fluctuations in the level of sales by OEMs and other vendors of products
incorporating the Company's products; the ability to generate new products;
and changes in general economic conditions. Sales of TAD products comprise a
substantial portion of the Company's product sales. Any adverse change in
the digital TAD market or the Company's ability to compete and maintain its
position in that market would have a material adverse effect on the Company's
business, financial condition and results of operations.
DECLINING AVERAGE SELLING PRICES AND GROSS MARGINS; DEPENDENCE ON DIGITAL TAD
MARKET. The Company has experienced a significant decline in the gross
margin of its TAD speech processors due to competitive market pricing
pressures, delays in its ongoing cost-reduction efforts, and an adjustment in
the second quarter of 1996 for excess and slow moving inventory. There is no
guarantee that these cost-reduction efforts will improve margins. The
Company's existing and potential competitors in each of its markets include
large and emerging domestic and foreign companies, many of which have
significantly greater financial, technical, manufacturing, marketing, sale
and distribution resources and management expertise than the Company. Any
inability of the Company to respond to increased price competition for its
TAD speech processors and its
15
other products through the continuing and frequent introduction of new products
or reductions of manufacturing costs would have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON INDEPENDENT FOUNDRIES. 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 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 a sufficient portion of foundry capacity to meet the Company's
needs in a timely manner. To meet its increased wafer requirements, the
Company has contracted with additional independent foundries to manufacture
its TAD speech processors. The Company believes that it now has sufficient
foundry capacity through 1997. Revenues could be materially and adversely
affected should any of these foundries fail to meet the Company's demand for
products due to a shortage of production capacity, process difficulties or
low yield rates.
RELIANCE ON OEMS TO OBTAIN REQUIRED COMPLEMENTARY COMPONENTS. 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. For example, the Company's customers for TAD speech processors
have experienced in the past difficulties obtaining sufficient timely
supplies of audio-grade random access memories ("ARAMs"), which are included
in current digital TADs. Such supply disruptions, shortages or termination
could have an adverse effect on the Company's business and results of
operations, due to the customers' possible delay or discontinuance of orders
for the Company's products until such components are available.
ACQUISITION STRATEGY. The Company has pursued, and will continue to pursue,
growth opportunities through internal development and acquisition of
complementary businesses, products and technologies. The Company is unable
to predict whether or when any prospective acquisition will be completed. In
July 1996, the Company entered into an agreement regarding the acquisition of
approximately 40% of the equity of Aptel, a developer of spread spectrum
direct modulation technology. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations --
Acquired In-Process Technology." The process of integrating an acquired
business such as Aptel may be prolonged due to unforeseen difficulties and
may require a disproportionate amount of resources and management's
attention. There can be no assurance that the Company will be able to
successfully identify suitable acquisition candidates, complete acquisitions,
integrate acquired businesses into its operations, or expand into new
markets. Once integrated, acquisitions may not achieve comparable levels of
revenues, profitability or productivity as the existing business of the
Company or otherwise perform as expected. The occurrence of any of these
events could have a material adverse effect on the Company's business,
financial condition or results of operations. Future acquisitions may
require substantial capital resources, which may require the Company to seek
additional debt or equity financing.
16
INTELLECTUAL PROPERTY. As is typical in the semiconductor and software
industries, the Company has been and may from time to time be notified of
claims that it may be infringing patents or intellectual property rights
owned by third parties. For example, AT&T has asserted that G.723, which is
primarily composed of a TrueSpeech algorithm, includes certain elements
covered by patents held by AT&T and has requested that video conferencing
equipment manufacturers license such technology from AT&T. If it appears
necessary or desirable, the Company may seek licenses under such patents or
intellectual property rights that it is allegedly infringing. Although
holders of such intellectual property rights commonly offer such licenses, no
assurances can be given that licenses will be offered or that the terms of
any offered licenses will be acceptable to the Company. The failure to
obtain a license for key intellectual property rights from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products utilizing the
technology. Any litigation relating to patent infringement or other
intellectual property matters could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. The
Company's prospects are partially dependent upon the establishment of
industry standards for digital speech compression based on TrueSpeech
algorithms in the computer, personal computer and other markets. The
establishment of industry standards incorporating TrueSpeech algorithms would
create an opportunity for the Company to develop and market speech co-
processors that provide TrueSpeech solutions and enhance the performance and
functionality of products incorporating these co-processors. The failure to
establish industry standards based on TrueSpeech algorithms or to develop and
market competitive speech co-processors, or the failure of significant
markets to develop for the Company's speech co-processors would have a
material adverse effect on the Company's business, financial condition and
results of operations.
ONGOING LITIGATION. In November 1995, after the Company's stock price
declined, several lawsuits were filed in the United States District Court for
the Northern District of California accusing the Company, its former Chief
Executive Officer, and its former Chief Financial Officer of issuing
materially false and misleading statements in violation of the federal
securities laws. These lawsuits were consolidated into a single amended
complaint in February 1996. In the amended complaint, plaintiffs sought
unspecified damages on behalf of all persons who purchased shares of the
Company's Common Stock during the period from June 6, 1995, to November 10,
1995. On June 11, 1996, the Court granted the Company's motion to dismiss
the lawsuit, with leave to amend. The plaintiffs filed an amended complaint
on July 11, 1996, and on August 14, 1996, the Court held a hearing on the
Company's motion to dismiss the complaint. The Company believes the lawsuit
to be without merit and intends to defend itself vigorously. The Company
believes the ultimate resolution of this matter will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
17
However, the Company anticipates that in the near term it may
incur significant legal expenses to defend itself.
The variety and uncertainty of the factors affecting the Company's operating
results, and the fact that the Company participates in a highly dynamic
industry, may result in significant volatility in the Company's Common Stock
price.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 22, 1996, the lawsuit between the Company and Rockwell
International Corporation was settled and Rockwell purchased a license for
three versions of the Company's TrueSpeech speech technology. The litigation
had been pending since February 1995 in Superior Court of Santa Clara County,
California. The Company had alleged unfair competition, violations of state
law and an attempt by Rockwell to unfairly influence the DSVD Consortium, a
group of companies formed to select a speech compression technology that
enables modems to transmit computer data and digital voice simultaneously, in
the selection of speech compression technology. A preliminary injunction was
issued by the Court in March 1995 enjoining Rockwell from granting royalty-
free licenses of its speech compression product during the pendency of the
action or until further order of the Court. Rockwell had appealed from the
issuance of the preliminary injunction and such appeal remained pending.
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995, through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996, and the Court on
August 14, 1996 held a hearing on the Company's motion to dismiss the
complaint. The Company believes the lawsuit to be without merit and intends
to defend itself vigorously.
On April 12, 1996, Elk Industries, Inc. ("Elk") commenced an action in the
United States District Court for the Southern District of Florida against the
Company. The action alleges patent infringement by the Company in connection
with the Company's making, selling and using an audio storage and
distribution system allegedly covered under a patent held by Elk. The
complaint seeks unspecified damages and injunctive relief. The Company
believes the lawsuit to be without merit and intends to defend itself
vigorously.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Severance Agreement, dated October 25, 1996, between
John P. Goldsberry III and the Company.
11.1 Statement re: Computation of Per Share Earnings
27.1 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.
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SIGNATURES
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.
DSP GROUP, INC.
(Registrant)
By /s/ Avi Basher
-------------------------
Avi Basher, Vice President of Finance and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Date November 14, 1996
-----------------
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EXHIBIT INDEX
10.1 Severance Agreement, dated October 25, 1996, between John P.
Goldsberry III and the Company.
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
22