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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-23006
DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2683643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
3120 SCOTT BOULEVARD, SANTA CLARA, CA 95054
(Address of principal executive offices, including zip code)
(408) 986-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 3, 1997, as
reported on the Nasdaq National Market, was approximately $94,771,750. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 3, 1997 the Registrant had outstanding 9,560,528 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996 are incorporated by reference into Part II of
this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's 1996 Annual Report is not deemed
filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1997 are incorporated by reference into
Part III of this Form 10-K Report.
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INDEX
DSP GROUP, INC.
PAGE NO.
--------
PART I
Item 1. BUSINESS.................................................... 3
Item 2. PROPERTIES.................................................. 18
Item 3. LEGAL PROCEEDINGS........................................... 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 19
STOCKHOLDER MATTERS.........................................
Item 6. SELECTED FINANCIAL DATA..................................... 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 20
CONDITIONAL AND RESULTS OF OPERATIONS.......................
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 20
AND FINANCIAL DISCLOSURE....................................
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 20
Item 11. EXECUTIVE COMPENSATION...................................... 20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 20
MANAGEMENT..................................................
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 20
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 21
8-K.........................................................
25
SIGNATURES..................................................
PART I
ITEM 1. BUSINESS.
FOR A DISCUSSION OF VARIOUS RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S
FUTURE OPERATIONS SEE "FACTORS AFFECTING FUTURE OPERATING RESULTS" BEGINNING ON
PAGE 14 BELOW. THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996 CONTAINS TRADEMARKS OF THE COMPANY.
DSP Group develops and markets digital signal processing integrated circuits
and software for use in digital speech products targeted at the consumer
telephone and computer telephony markets. Digital speech technology provides
several advantages over analog speech technology, including higher attainable
levels of compression, greater ability to process and manipulate data, and
faster development of products through use of a programmable digital signal
processor ("DSP") rather than dedicated analog hardware. As a result, digital
speech technology is incorporated today in the digital telephone answering
device ("TAD") market and enables the implementation of many new applications in
computer telephony such as voice mail messaging, digital simultaneous voice and
data ("DSVD") transmission and video conferencing.
The Company has developed digital signal processing and digital speech
technologies, including proprietary algorithms, software, system designs and
VLSI circuit designs that have enabled the introduction of three synergistic
product families: speech and telephony digital signal processing integrated
circuits, proprietary architectures for digital signal processors ("DSP core
designs") and proprietary TrueSpeech-Registered Trademark- digital speech
compression algorithms.
SPEECH AND TELEPHONY PROCESSORS
The Company has developed two series of speech and telephony processors for
use in the consumer telephone and computer telephony markets. Both series are
based on the Company's DSP core designs, incorporate several of its digital
telephony signal processing algorithms and provide TrueSpeech compression
capabilities. In 1989, the Company introduced the first cost effective speech
processor for use in digital TADs and today the Company is the leading
independent supplier of DSPs to digital TAD suppliers. The Company's TAD speech
processors are incorporated in the products of leading digital TAD suppliers
such as Alcatel, AT&T, British Telecom, L.G. Electronics, Panasonic, Philips,
Sagem, Samsung, Sanyo, Siemens, Sony and Uniden.
DSP Group has also developed a series of speech co-processors for use in
conjunction with microprocessors in personal computers and in many standalone
applications to enhance the microprocessors' speech and telephony capabilities.
The Company's speech co-processors utilize many of the same technologies used in
its TAD speech processors. These speech co-processors provide a variety of
real-time speech applications for personal computers, standalone videophones,
portable dictation devices and Internet telephony applications, such as voice
mail messaging, DSVD transmission and video conferencing.
DSP CORE DESIGNS
DSP Group has also developed proprietary, low power DSP core designs--the
PineDSPCore and OakDSPCore--which represent low cost solutions for current and
emerging digital signal processing applications. The Company's DSP core designs
are incorporated in its own family of speech and telephony processors and are
also licensed to more than twenty entities, including LSI Logic, NEC, Samsung,
Siemens, TEMIC and VLSI Technology. These licensees may use the Company's DSP
core designs to develop their own DSPs for various products, including cellular
telephones, modems, audio boards and cordless telephones. In the fourth quarter
of 1995, the first shipment of products utilizing the Company's PineDSPCore
technology occurred; however, royalties from these shipments have not been
significant to date.
3
TRUESPEECH
The Company has developed TrueSpeech, a family of proprietary speech
compression algorithms which it incorporates in its TAD speech processors and
personal computer speech co-processors and also licenses to various companies in
the computer telephony and personal computer industries. The Company believes
that TrueSpeech offers several advantages over other currently available speech
compression technologies, including a combination of high compression ratios,
high quality speech playback and cost effectiveness. The proliferation of speech
applications in the computer telephony and personal computer market requires
standardized digital speech compression technologies. The Company seeks to
establish industry standards for its target markets based on TrueSpeech
algorithms. However, the establishment of industry standards depends upon the
acts of third parties, which are not within the control of the Company. The
development of industry standards utilizing TrueSpeech algorithms would create
an opportunity for the Company to develop and market speech co-processors that
provide complete TrueSpeech solutions and enhance the performance and
functionality of products incorporating these speech co-processors. For example,
in the personal computer market, Microsoft has incorporated a TrueSpeech
algorithm in Windows 95. In addition, in the video conferencing market, the
International Telecommunications Union ("ITU") in February 1995 established
G.723, which is predominantly composed of a TrueSpeech algorithm, as the
standard speech compression technology for use in video conferencing over public
telephone lines.
PRODUCT FAMILIES, TECHNOLOGY AND CUSTOMERS
The Company has incorporated its proprietary algorithms and technologies in
three product families--speech and telephony processors, DSP core designs and
TrueSpeech software--for use in the consumer telephone and computer telephony
markets.
SPEECH AND TELEPHONY PROCESSORS
The Company has developed and introduced two series of DSPs speech
processors for digital TADs, telephony applications, modems, disk controllers
and other communication applications, which were first introduced in 1989 for
digital TADs, and personal computer speech co-processors, which were first
introduced in late 1994, to maximize the benefits of TrueSpeech compression in
personal computer applications. Both series are based upon the Company's cost
effective, low power DSP core designs and incorporate its TrueSpeech algorithms.
The Company is currently developing a third generation DSP core design for use
with applications that require faster processing speeds. The following chart
describes some
4
of the Company's other speech and telephony technologies that may be
incorporated in various combinations in its products.
TECHNOLOGY DESCRIPTION
Caller ID and Call Waiting Identifies the telephone number being used by the calling party, when the line
Caller ID is not engaged and when the receiving party is already engaged on another call
Call Progress Tone Detection Detects standard telephony signals during the progress of the telephone call
DTMF Signaling Detects and generates DTMF signals ("touch tones") that comply with telephone
requirements
Full Duplex Speakerphone Allows simultaneous two-way (full-duplex), hands-free operation of the telephone
and incorporates acoustical echo cancellation for suppression of room echoes and
electrical echo cancellation for elimination of electrical echoes
Speech Prompts Provides time-date stamp capabilities and allows the user to access operating
instructions
Variable Speed Playback Permits playback of distortion-free, natural sounding speech at variable speeds
(FlexiSpeech-Registered Trademark-)
Voice Operated Switch ("VOX") Detects human speech and stops recording during periods of silence, thereby
(Smart-Vox-Registered Trademark-) conserving available memory
Voice Recognition Allows voice command operation of functions
These technologies enable the Company's speech and telephony processors to
provide a variety of speech capabilities for digital TAD, telephony and computer
telephony products.
TAD SPEECH PROCESSORS. DSP Group's TAD speech processors are currently
incorporated in over 80 models of digital TADs from approximately 50 different
companies. These models include standalone digital TADs, integrated digital
TADs, facsimile machines with integrated digital TADs, standalone speaker phones
with integrated digital TADs, hand-held devices and digital cordless telephones
with integrated digital TADs. To date, the Company has shipped approximately 13
million speech processors to digital TAD suppliers, including approximately 5.8
million TAD speech processors in 1996. TAD speech processor product sales
accounted for 73% of the Company's total revenues in 1996.
The Company's TAD speech processors use TrueSpeech to provide high quality
speech recording and playback. All of the Company's TAD speech processors are
based on the Company's PineDSPCore and incorporate certain of the Company's
technologies, including VOX, caller ID, DTMF signaling and call progress tone
detection. Some of the Company's TAD speech processors feature additional
technologies, including speech prompt capabilities, variable speed playback and
full duplex speakerphone. The following
5
table sets forth certain characteristics of the primary TAD speech processors
currently offered by the Company:
DSP GROUP'S TAD SPEECH PROCESSORS
D6305 D6375 D6455 D6371 D6471 D6301
----- ----- ----- ----- ----- -----
Process Geometry (microns).................................. 0.8 0.8 0.8 0.6 0.6 0.6
Minutes Record, 4 Mbit Memory............................... 15-17 15-17 25-27 15-17 25-27 15
Memory Type................................................. ARAM ARAM ARAM Flash Flash Flash
Advanced Features:
Speech Prompts............................................ Yes Yes Yes Yes Yes Yes
Variable Speed Playback................................... -- Yes -- -- Yes Yes
Full Duplex Speakerphone.................................. -- Yes Yes -- Yes --
Caller ID and Call Waiting Caller ID...................... -- -- -- Yes Yes Yes
Other Required Components:(1)
Microcontroller........................................... Yes Yes Yes Yes Yes Yes
Codec..................................................... Yes Yes Yes Yes Yes Yes
EPROM..................................................... Yes Yes Yes -- -- --
Battery................................................... Yes Yes Yes -- -- --
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(1) In addition to the Company's speech processors, digital TADs require other
electrical and electronic components as indicated. The approximate digital
subsystem costs include the estimated total cost of the Company's TAD speech
processors and the other associated electrical and electronic components
required for a digital TAD.
DSP Group's D6301 and D6471, its newest TAD speech processors, interface
directly with a new flash memory chip introduced by Samsung and facilitate lower
overall system costs for digital TADs. The new Samsung flash memory chip is
designed for speech recording and is less expensive than other currently
available flash memories. The D6301 and D6471 eliminate the need for audio-grade
random access memories ("ARAMs"), which from time to time have constrained the
growth of the digital TAD market due to supply shortages. By allowing
substitution of a flash memory for an ARAM, the D6301 and D6471 also eliminate
the need for battery circuitry to maintain the data in the ARAM during power
failures and an EPROM to store pre-recorded voice prompts and time-date stamps.
6
The following is a list of TAD manufacturers and resellers whose products
incorporate the Company's TAD speech processors:
TAD MANUFACTURERS AND RESELLERS
TAD MANUFACTURERS TAD RESELLERS
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Alcatel Maxon Amstrad
Ascom NEC Bell South
Daewoo Norris Bosch
D&B Electronics Panasonic British Telecom
CCT Telecom Philips Cresta
GE/Thomson Sagem France Telecom
Hanchang Samsung GE
Hanwha Telecom Sanyo German Telecom
HPF Ascom Sharp Loewe-Binatone
Hyundai Siemens Northwestern Bell
I.N.T. Corp. Smoothline Peacock
Interisa Sony Phonemate
Kinpo Uniden Radio Shack
L.G. Electronics Vtech Southwestern Bell
Matra Yupiteru Swiss Telecom
Telyco
PERSONAL COMPUTER SPEECH CO-PROCESSORS. The Company has developed its
personal computer speech co-processors as complementary application-specific
DSPs to enhance the performance and functionality of personal computer products
using TrueSpeech. While the current generation of microprocessors contained in
personal computers can compress and record speech in real-time, the
microprocessors are not specifically designed to run digital speech processing
algorithms and, therefore, require a substantial amount of the personal
computer's computing power to do so. As a result, the use of speech
co-processors that incorporate TrueSpeech in personal computers provides a more
efficient utilization of the personal computer's computing power. After becoming
familiar with new speech applications, the Company believes many personal
computer users will demand real-time speech compression capability and
manufacturers will begin to provide real-time speech compression by including
application-specific DSPs on personal computer products such as modems, audio
boards, PCMCIA cards and personal computer based videophone and video
conferencing products.
To date, the Company has announced three speech co-processors--the CT8005,
CT8015 and CT8020--for use in personal computers, DSVD modems, video telephones
and video conferencing equipment. These speech co-processors are based on the
Company's DSP core designs, incorporate TrueSpeech and many of its other
proprietary algorithms and technologies, and are fully controlled by the
personal computer's host processor. All of the Company's speech co-processors
contain the TrueSpeech algorithm incorporated in Windows 95. The CT8005 provides
telephone and speech recording and playback functions in personal computers,
while the CT8015 is designed as a low-cost solution for use in DSVD modems and
in Internet telephony products. The CT8020 is designed for use in video
telephones and video conferencing equipment and also implements all the
specifications of the G.723 speech compression standard for video telephony. The
CT8020 may also be utilized in many Internet-based telephone applications as
well.
7
The Company has begun shipments of the CT8005 and the CT8015, and expects to
begin volume production of the CT8020 in 1997. The following table sets forth
the features of the personal computer speech co-processors currently offered by
the Company:
DSP GROUP'S PERSONAL COMPUTER SPEECH CO-PROCESSORS
CT8005 CT8015 CT8020
----------- ----------- ----------
First Sample Date............................................................... Q2 95 Q2 95 Q1 96
DSP Core Design................................................................. PineDSPCore PineDSPCore OakDSPCore
Process Geometry (microns)...................................................... 0.8 0.8 0.6
TrueSpeech Algorithm Data Rate,
Kilobits Per Second........................................................... 8.5 8.5 8.5, 6.3,
5.3,
4.8 & 4.1
Features:
Voice Mail Messaging.......................................................... Yes -- Yes
Telephone Answering........................................................... Yes -- Yes
Full Duplex Speakerphone...................................................... Yes Yes Yes
Variable Speed Message Playback............................................... Yes -- Yes
Full Duplex DSVD.............................................................. -- Yes Yes
Video Conferencing............................................................ -- -- Yes
Internet Telephony............................................................ Yes (HDX) Yes Yes
FUTURE SPEECH AND TELEPHONY PROCESSORS. The Company is developing its next
generation of TAD speech processors based on 0.5 micron technology to reduce its
manufacturing costs and increase its competitiveness in the price sensitive TAD
business. In addition, the Company intends to continue to enhance its existing
speech and telephony processors through the addition of advanced capabilities
and to develop new speech and telephony processors for emerging applications.
For example, the Company intends to enhance its TAD speech processors through
the addition of capabilities such as superior quality full duplex speakerphone,
caller ID, call waiting caller ID, integrated facsimile functions and reliable
speech recognition technology that can be used to operate digital TADs with
spoken commands.
The Company believes that emerging applications for its personal computer
speech co-processors may include other personal computer products such as laptop
computers, personal digital assistants ("PDAs"), personal communications systems
and other mobile computing devices. In addition, DSP Group believes that its
digital signal processing and digital speech expertise will also be applicable
to emerging digital speech applications for consumer electronics. For example,
one manufacturer has introduced and is shipping a personal digital voice
recorder with one hour of recording time based on a DSP Group TAD speech
processor. This recorder utilizes the Company's variable speed playback
algorithm and provides the capability of editing a stored speech file. The
recorder also provides memory storage in a detachable module with a PCMCIA
connector, allowing transfer of the recorded speech file to a computer with a
PCMCIA interface for storage, playback or transmittal over a modem. The Company
intends to develop additional speech co-processors for the personal digital
voice recorder market, and intends to pursue the use of its technologies for
other speech applications in the computer telephony, personal consumer and
consumer electronics market.
DSP CORE DESIGNS
The Company's DSP core designs--PineDSPCore and OakDSPCore--are low power,
low voltage and low cost digital signal processing integrated circuit
architectures with associated advanced software development tools. The Company's
DSP cores and associated instruction sets are designed for general purpose
applications including speech processing, speakerphone, telephony algorithms and
cellular, which enables efficient processing for digital speech applications.
The DSP core designs operate at both 3 volts
8
and 5 volts and incorporate power management features for low power consumption.
As digital signal processing and software migrate into high volume communication
and computing products, the Company believes there will be a significant demand
for low cost, low power DSP platforms. The efficient processing, flexible design
and scaleable memories of the Company's DSP core designs allow the development
of smaller and lower cost DSP solutions and shorten time to market for new
products and product enhancements.
The Company's DSP core designs are small, highly efficient, 16-bit, general
purpose DSPs with adjacent modular RAM and ROM and general I/O blocks for
flexible layout and design. Universal design rules are used in the DSP core
designs to allow easy implementation across multiple semiconductor process
technologies. The DSP cores, initially implemented in 1.0 micron CMOS
technology, were converted into 0.8 micron CMOS technology and then were further
redesigned for 0.6 micron CMOS technology to reduce cost and increase
performance.
The PineDSPCore, first introduced in 1992, was developed by the Company's
VLSI designers and its software developers to efficiently process speech and
telephony algorithms. During 1994, the Company announced its OakDSPCore, an
enhanced version of the PineDSPCore that achieves a higher processing speed
through improved architecture and is specifically suited for use in personal
communication products and higher level processing applications, such as digital
cellular telephones, high bit rate modems, DSVD modems and video telephone
conferencing applications. The OakDSPCore offers significantly improved
processing features compared to the PineDSPCore, including a higher processing
speed of 40 MIPS and an advanced, more efficient instruction set. Algorithms
implemented on the PineDSPCore instruction set may also be run on the
OakDSPCore. The following table shows a comparison of the Company's DSP core
designs:
DSP GROUP'S DSP CORE DESIGNS
PINEDSPCORE OAKDSPCORE
------------ ----------
Word Length..................................................................... 16 bit 16 bit
Process Geometry (microns)...................................................... 0.8 0.6
Performance..................................................................... 25 MIPS 40 MIPS
Voltage......................................................................... 3.0 to 5.0 V 3.3V
Advanced Instruction Set........................................................ -- Yes
The Company incorporates its DSP core designs in its speech and telephony
processors and also licenses them to original equipment manufacturers ("OEMs").
The Company's licensing program, introduced in 1992, enables OEMs to incorporate
the Company's DSP core designs in the OEMs products. Licensing revenues are
generally recognized on shipment by the Company provided that no significant
vendor or post contract support obligations remain outstanding and that
collection of the resulting receivable is deemed probable. In addition, most
licenses require the licensee to pay the Company ongoing per-unit royalties
based on the unit shipments of the licensee's products and a monthly support
fee. The timing and amount of royalties from licensing of the DSP core designs
will depend on the timing of each licensee's product development and the degree
of market acceptance of such licensee's product, both of which are not within
the Company's control. To date, royalty revenues from the licensing of DSP core
designs have not been significant. The following is a partial list of companies
who have licensed the
9
Company' s DSP core designs and representative applications for which they have
the right to use the DSP core designs:
DSP CORE DESIGN LICENSES
LICENSEES REPRESENTATIVE APPLICATIONS
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Adaptec......................................................................... Disk Drive
Asahi Kasei Microsystems........................................................ Cordless Telephone
Atmel........................................................................... Communications
DSP Communications, Inc......................................................... Digital Cellular Telephone
GEC Plessey..................................................................... Communications
Harris Semiconductor............................................................ Video Conferencing
Hyundai......................................................................... Communications
Integrated Circuit Systems...................................................... Multimedia Boards
Kenwood......................................................................... Audio
NEC............................................................................. Communications & Consumer Products
LSI Logic....................................................................... ASIC Library
Samsung......................................................................... Communications & Multimedia
Siemens......................................................................... Digital Cellular Telephone
Silicon Systems................................................................. Modem
TEMIC (Daimler-Benz)............................................................ Communications
VLSI Technology................................................................. Communications & PCs
Xicor........................................................................... Programmable DSP
The Alta Group of Cadence, Mentor Graphics and Synopsys have announced the
development of electronic design automation ("EDA") tools, system level design
kits and software co-design and co-simulation products for systems designers
that use the PineDSPCore and OakDSPCore. In addition, a number of independent
software vendors, including QSound and VoCal Technologies, have announced the
development of digital signal processing algorithms that operate on the
PineDSPCore and OakDSPCore for a variety of communications and multimedia
applications. The Company believes that these developments make its DSP core
designs more attractive to potential OEM licensees.
TRUESPEECH PRODUCTS
TrueSpeech is a high-quality, cost effective speech compression technology
based on complex mathematical algorithms that are derived from the way airflow
from the lungs is shaped by the throat, mouth and tongue during speech. This
shaping of bursts of air is what the ear interprets as speech. TrueSpeech
converts this speech into digital data and then selectively eliminates and
enhances certain sound data to replicate human speech. Originally developed for
consumer telephone applications, such as the Company's TAD speech processors,
the Company has since enhanced TrueSpeech for use in the computer telephony and
personal computer markets.
The Company seeks to establish industry standards for digital speech
compression technology based on its TrueSpeech algorithms for emerging speech
applications in the consumer telephone and computer telephony markets. However,
the establishment of industry standards depends upon the acts of third parties,
which are not within the control of the Company. The development of industry
standards utilizing TrueSpeech algorithms would create an opportunity for the
Company to develop and market speech co-processors that would serve as
complementary application-specific DSPs to enhance the performance and
functionality of personal computers using TrueSpeech. In the personal computer
market, Microsoft has incorporated a TrueSpeech algorithm in Windows 95. In the
video telephone market, the ITU in February 1995 established G.723, which is
predominantly composed of a TrueSpeech algorithm, as the standard speech
compression technology for video conferencing over public telephone lines. In
addition to
10
the Company's TrueSpeech algorithm, G.723 incorporates elements of algorithms
developed by France Telecom and the University of Sherbrooke. The Company
believes that the ITU's selection positions other TrueSpeech algorithms as
strong candidates for adoption as formal industry standards for other
applications. In addition, although the ITU committee has approved the G.723
standard for analog telephone line, there is no assurance that the video
conference market in analog line will be widely accepted, mainly due to quality
and price issues. Furthermore, in March 1997, the International Multimedia
Teleconferencing Consortium ("IMTC"), a nonprofit industry group, recommended
the use of G.723 as the default audio coder for all voice transmissions over the
Internet or for Internet Protocol ("IP") applications for H.323 conferencing
products. The IMTC will forward its recommendation to its membership for
approval in May 1997.
The Company believes that the principal advantages of TrueSpeech compared
with other currently available digital speech compression technologies are as
follows:
HIGH COMPRESSION RATIO. The three versions of TrueSpeech currently
offered for license by DSP Group compress digital speech at ratios ranging
from 15:1 to 26:1. These compression ratios are between seven and twelve
times greater than the compression provided by Pulse Code Modulation ("PCM")
used in current generation telephone speech transmissions and four to six
times greater than compression using Adaptive Differential PCM ("ADPCM")
currently used in personal computer audio cards. As a result, a standard 1.4
megabyte floppy diskette can hold approximately 37 minutes of speech using
the most advanced version of TrueSpeech commercially available, compared to
approximately three minutes using PCM and six minutes using ADPCM.
Competitors have introduced other advanced speech compression algorithms
that offer compression ratios comparable to the most advanced TrueSpeech
algorithms, including competing algorithms that were submitted by several
companies to the ITU standards committee evaluating speech compression
algorithms for video telephones. The ITU testing showed that TrueSpeech
provides superior quality playback and requires lower computational
complexity than these competing algorithms.
HIGH QUALITY SPEECH. Another advantage of TrueSpeech is that it
reproduces high quality speech playback with minimum distortion by
selectively eliminating nonessential and background sound data without
significant loss of speech quality. TrueSpeech has received high scores for
speech quality from a number of independent evaluators. For example,
TrueSpeech scored the highest on the ITU's intricately structured test used
to numerically rate the quality of the five competing speech compression
algorithms submitted for adoption as the G.723 standard for video
telephones.
COST EFFECTIVENESS. TrueSpeech's ability to achieve high speech
compression with lower computational complexity provides it with a
competitive cost advantage. As an example, competing speech compression
algorithms evaluated by the ITU use 20% to 50% more computing power for the
same compression and transmission rates, and more RAM and ROM for storage
and operation. Consequently, competing speech compression algorithms require
larger, more expensive DSPs and result in higher cost solutions.
The Company incorporates its TrueSpeech technology in its speech and
telephony processors and also licenses TrueSpeech to computer telephony and
personal computer companies for inclusion in their products. The Company's
TrueSpeech licensees include Atmel, Cirrus Logic, Creative Labs, Dialogic, IBM,
Integrated Circuit Systems, Intel, LSI Logic, Lucent, Microsoft, Multi-Tech,
Netspeak, Philips, Phylon, Prodigy, Siemens, Sierra Semiconductor, Silicon
Systems, Smith Micro, Texas Instruments ("TI"), Unisys, US Robotics, VDOnet and
VLSI Technology. In addition, the Company has ported its TrueSpeech algorithms
to certain DSP platforms offered by Analog Devices, Lucent, Motorola and TI,
four leading merchant vendors of programmable DSPs. To date, the Company's
royalties from TrueSpeech licenses have not been significant.
11
SALES, MARKETING AND DISTRIBUTION
The Company markets and distributes its products through a direct sales and
marketing organization, consisting of 16 employees, as well as through a network
of distributors and independent manufacturers' representatives. A marketing and
sales team located in the Company's headquarters in Santa Clara, California
pursues business with the Company's customers in North America. In Japan, the
Company operates from a marketing and support office in Tokyo, and through Tomen
Electronics, a local distributor. In the rest of Asia, the Company operates
through RTI, a distributor in Hong Kong, and through manufacturers'
representatives in Hong Kong, Malaysia, Singapore, South Korea and Thailand. To
handle sales and distribution in Europe, the Company operates a marketing and
support office located in France and has manufacturers' representatives located
in Denmark, Germany, Spain and the United Kingdom. The Company's distributors
are not subject to minimum purchase requirements and can cease marketing the
Company's products at any time. The loss of one or more representatives or the
failure of such parties to renew agreements with the Company upon expiration
could have an adverse effect on the Company's business, financial condition and
results of operations.
In 1996, sales to Tomen Electronics and Samsung comprised 17% and 11% of
total revenues, respectively. In 1995, sales to Tomen Electronics comprised 25%
of total revenues. In 1994, sales to Tomen Electronics, RTI Industries and TI
accounted for 22%, 16% and 10% of total revenues.
Export sales accounted for 91%, 81% and 80% of total revenue in 1996, 1995
and 1994, respectively. Due to its export sales, the Company is subject to the
risks of conducting business internationally, including unexpected changes in
regulatory requirements, fluctuations in exchange rates that could increase the
price of the Company's products in foreign markets, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, other
barriers and restrictions, and the burden of complying with a variety of foreign
laws. All of the Company's export sales are denominated in United States
dollars. See Note 4 of Notes to Consolidated Financial Statements appearing on
pages 41 and 42 of the Company's Annual Report to Stockholders for the year
ended December 31, 1996, for a summary of the Company's operations within
various geographic areas.
MANUFACTURING AND DESIGN METHODOLOGY
Since the Company's products are based on its proprietary DSP core designs,
which are not dependent upon a particular foundry's library cells, these
products can be manufactured at a number of independent foundries. All of the
Company's manufacturing occurs at independent foundries. The Company contracts
fabrication services for speech and telephony processors from Taiwan
Semiconductor Manufacturing Company ("TSMC"), Tower Semiconductor ("Tower") and
Samsung Semiconductor, Inc. ("Samsung"), to provide such service. Under
non-exclusive agreements, these independent foundries normally provide the
Company with finished, packaged and tested speech processors at variable prices
depending on the volume of units purchased. The Company customarily pays for
fully-tested products meeting predetermined specifications. To ensure the
integrity of quality assurance procedures, the Company develops detailed test
procedures and specifications for each product and requires each foundry to use
such procedures and specifications before shipping finished products.
TI produces and distributes an early generation of the Company's TAD speech
processors, based on a TI DSP platform, to certain European OEM customers, for
which TI pays a royalty to the Company. TI's production of these TAD speech
processors has declined from 27% of the Company's total production of TAD speech
processors in 1994 to 6% for 1995, and to 0.3% in 1996. The decline is due
primarily to these customers converting to newer generations of TAD speech
processors, including those sold directly by the Company.
The Company plans to continue to use independent foundries to manufacture
digital speech processors and other products for the consumer telephone and
computer telephony markets. To obtain an adequate supply of wafers, however, the
Company plans to consider various transactions, including the use
12
of contracts that commit the Company to purchase specified quantities of wafers,
equity investments in or loans to independent foundries in exchange for
guaranteed production, and the formation of joint ventures to own foundries. Any
such investment or transaction would require substantial capital investments,
which may require the Company to seek additional equity or debt financing. The
Company's reliance on independent foundries involves a number of risks such as
the foundries achievement of acceptable manufacturing yields and allocation of
capacity to the Company.
In addition to the Company's speech processors, digital TADs include various
other components such as ARAMs, codecs and flash memories that are supplied by
third party manufacturers. Temporary fluctuations in the pricing and
availability of these components could have a material adverse effect on sales
of the Company's speech processors for digital TADs and other computer telephony
products, which could in turn have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The markets in which the Company operates are extremely competitive and the
Company expects that competition will increase. In each of the Company's
business activities it faces current and potential competition from competitors
that have significantly greater financial, technical, manufacturing, marketing,
sales and distribution resources and management expertise than the Company. The
Company's future prospects will be highly dependent upon the successful
development and introduction of new products that are responsive to market
needs. There can be no assurance that the Company will be able to successfully
develop or market any such products.
The principal competitive factors in the digital TAD speech processor market
include price, speech quality, compression ratio, value-added features such as
variable speed message playback and speakerphone, customer support and the
timing of product introductions by the Company and its competitors. The Company
believes that it is competitive with respect to each of these factors.
Currently, the key competitive challenge for digital TADs is the relative lower
cost of analog tape-based machines. The Company believes that the continuing
decline in prices of digital speech processors and silicon memory devices will
close the cost gap between the analog and digital solution. The Company's
principal competitors in the TAD speech processor market include AT&T, Lucent
Microelectronics, Macronix, National Semiconductor, TI, Toshiba and Zilog.
The principal competitive factors in the DSP core designs market for high
volume, low cost applications include such features as small size, low power,
flexible I/O blocks and associated development tools. The Company's DSP core
designs compete with companies such as Analog Devices, Clarkspur Designs, TCSI
and Tensleep, which license DSP platforms, and Analog Devices, AT&T, Motorola
and TI, which sell their own complete DSP solutions.
Several digital speech compression technologies exist and are currently
being developed that may be promoted by competitors as industry standards for
the computer telephony and personal computer markets. The Company's TrueSpeech
algorithms compete with ADPCM, and the speech compression technologies used in
GSM and VSELP, each of which is available in the public domain. There are many
versions of these algorithms that have been developed by different parties,
including AT&T (which has been actively involved in the development of GSM) and
Motorola (which developed the original VSELP). Although TrueSpeech has achieved
a degree of acceptance in the computer telephony and personal computer markets,
ADPCM and the speech compression technologies for GSM and VSELP are widely used
in the development and implementation of new products in the telephony industry.
In addition, other advanced speech compression algorithms have been introduced
by competitors which offer compression ratios comparable to the TrueSpeech
algorithms, including a competing algorithm sponsored by the University of
Sherbrooke that the ITU standards committee has adopted as the speech
compression standard for DSVD modems. Large companies, such as AT&T, Creative
Labs, Motorola and Rockwell,
13
have speech processing technologies that can be applied to speech compression
for use in the markets for which the Company's products are targeted.
Price competition in the markets in which the Company currently competes and
proposes to compete is intense and may increase, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has experienced and expects to continue to experience
increased competitive pricing pressures for its TAD speech processors. The
Company earned higher gross margins in the fourth quarter of 1996 due primarily
to lower product cost. There can be no assurance that the Company will be able
to further reduce product costs or be able to compete successfully as to price
or any other of the key competitive factors.
RESEARCH AND DEVELOPMENT
The Company believes that continued timely development and introduction of
new products are essential to maintaining its competitive position. The Company
currently conducts most of its product development effort in-house and at
December 31, 1996 had a staff of 51 research and development personnel, 43 of
which are located in Israel. The Company also employs independent contractors to
assist with certain product development and testing activities. During the years
1996, 1995 and 1994, the Company spent approximately $8.5 million, $8.4 million
and $4.4 million, respectively, on research and development activities.
RELATIONSHIPS WITH AFFILIATED COMPANIES
The Company has a $2.0 million equity investment in, and has entered into
technology arrangements with, AudioCodes Ltd. ("AudioCodes"), an Israeli
corporation primarily engaged in DSP-related contract engineering in connection
with speech and speech algorithm technologies. The Company owns 35% of the
capital stock of AudioCodes, a company formed in April 1993 by two former
employees of DSP Group. Pursuant to an agreement between the Company and
AudioCodes, the Company and AudioCodes have joint ownership of any speech
compression technology developed by AudioCodes. The Company has established this
relationship to complement its in-house product development efforts.
In July 1996, the Company invested $2.0 million of cash for approximately
40% of the equity interests in Aptel Ltd. ("Aptel"), an emerging company in its
product development stage located in Israel. 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 total cost of the
acquisition was allocated to the estimated fair value of the assets acquired. 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. As of
December 31, 1996, the Company's equity in Aptel had a book value of $0.4
million. 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 in Aptel to 51%, and an additional option to acquire the then remaining
outstanding stock of Aptel from its current shareholders payable at the seller's
option in either cash or stock of the Company.
LICENSES, PATENTS AND TRADEMARKS
The Company has been granted six United States patents and has five patents
pending in the United States. The Company actively pursues foreign patent
protection in other countries of interest to the Company. The policy of the
Company is to apply for patents or for other appropriate statutory protection
when it develops valuable new or improved technology. The status of patents
involves complex legal and factual questions and the breadth of claims allowed
is uncertain. Accordingly, there can be no assurance that any patent application
filed by the Company will result in patents being issued, or that its patents,
and any patents that may be issued in the future, will afford protection against
competitors with similar technology; nor can there be any assurance that patents
issued to the Company will not be infringed or designed around by others. In
addition, the laws of certain countries in which the Company's products are
14
or may be developed, manufactured or sold, including Hong Kong, Japan and
Taiwan, may not protect the Company's products and intellectual property rights
to the same extent as the laws of the United States.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with its customers, suppliers, employees and
consultants, and through other security measures. Although the Company intends
to protect its rights vigorously, there can be no assurance that these measures
will be successful.
The semiconductor and software industries are subject to frequent litigation
regarding patent and other intellectual property rights. While the Company has
not been involved in any material patent or other intellectual property rights
litigation to date, there can be no assurance that third parties will not assert
claims against the Company with respect to existing or future products or that
the Company will not need to assert claims against third parties to protect its
proprietary technology. 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 this technology from AT&T. In the event of litigation to
determine the validity of any third party claims or to protect its proprietary
technology, such litigation could result in significant expense to the Company
and could divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology that is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available on commercially
reasonable terms.
The Company has been issued registered trademarks for the use of the
PineDSPCore, OakDSPCore and TrueSpeech trademarks.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the industry, its technical expertise and
ability to innovate on a timely basis will be more important in maintaining its
competitive position than protection of its intellectual property. The Company
believes that, because of the rapid pace of technological change in the consumer
telephone, computer telephony and personal computer industries, patents and
trade secret protection are important but must be supported by other factors
such as the expanding knowledge, ability and experience of the Company's
personnel, new product introductions and frequent product enhancements. Although
the Company continues to implement protective measures and intends to defend its
intellectual property rights, there can be no assurance that these measures will
be successful.
BACKLOG
At December 31, 1996, the Company's backlog was approximately $15.1 million
compared with approximately $14.7 million at December 31, 1995. The Company
includes in its backlog all accepted product purchase orders with respect to
which a delivery schedule has been specified for product shipment within one
year and fees specified in executed licensing contracts. The Company's business
in TAD speech processors is characterized by short-term order and shipment
schedules. Product orders in the Company's current backlog are subject to
changes in delivery schedules or to cancellation at the option of the purchaser
without significant penalty. Accordingly, although useful for scheduling
production, backlog as of any particular date may not be a reliable measure of
sales for any future period.
EMPLOYEES
As of December 31, 1996, the Company had 91 employees, including 51 in
research and development, 16 in marketing and sales, and 24 in corporate and
administration and manufacturing coordination. Competition for personnel in the
semiconductor, software and personal computer industries in general is
15
intense. The Company believes that its future prospects will depend, in part, on
its ability to continue to attract and retain highly skilled technical,
marketing and management personnel, who are in great demand. In particular,
there is a limited supply of highly qualified engineers with digital signal
processing experience. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company ever experienced any work
stoppage. The Company believes that its employee relations are good.
FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-K 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 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 these 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 its OEM
licensees in introducing products utilizing the Company's technology and the
success of those OEM products in the marketplace. Royalties from the Company's
DSP core designs and TrueSpeech have not been significant to date.
The Company's quarterly operating results may also fluctuate 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; and changes in general economic
conditions.
DECLINING AVERAGE SELLING PRICES AND GROSS MARGINS; DEPENDENCE ON DIGITAL
TAD MARKET. The Company has experienced a decrease in the average selling
prices of its TAD speech processors, but has to date been able to offset this
decrease on an annual basis through manufacturing cost reductions and the
introduction of new products with higher performance. The Company experienced a
significant decline in the gross margin on TADs in the second and third quarters
of 1996 due to competitive market pricing pressures and delays in ongoing cost
reduction efforts. Although significant cost reductions were achieved in the
fourth quarter of 1996, there is no guarantee that such on-going efforts will be
successful or that they will keep pace with the anticipated, continuing decline
in average selling prices. The markets for the Company's products are extremely
competitive, and the Company expects that competition will increase. 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 or its other products through the continuing and frequent
introduction of new products or reductions of manufacturing costs, or any
significant delays by the Company in developing, manufacturing or shipping new
or enhanced products would have a material adverse effect on the Company's
business, financial condition and results of operations. 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.
16
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 increasing business,
the Company is and will continue to be dependent upon these foundries to achieve
acceptable manufacturing yields and quality levels, 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 added
additional independent foundries to manufacture its TAD speech processors.
Revenues could be materially and adversely affected should any of these
foundries fail to meet the Company's request for products due to a shortage of
production capacity, process difficulties or low yield rates.
RELIANCE ON INTERNATIONAL OPERATIONS; RISK 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 December 31, 1996, 59 of the Company's 91 employees were
located in Israel, including 84% of the Company's research and development
personnel. In addition, although the Company is incorporated in Delaware,
approximately half of the Company's directors and executive officers are
non-residents of the United States. 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 1995 and 1996 was 8.1%
and 10.6%, 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 expenses paid
in Israeli currency are employee salaries and lease payments on the Israeli
facility. 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.
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 in the past
experienced difficulties obtaining sufficient timely supplies of ARAMs which are
included in certain digital TADs. These shortages are due to the increasing
demand for ARAMs for TAD products, and fluctuations in ARAM production as ARAMs
are a by-product in the fabrication of dynamic random access memories ("DRAMs")
with ARAM yields varying inversely with the DRAM yield. Although such shortages
were alleviated during most of 1996, there is no guarantee that such favorable
circumstances will continue. In addition, there is a trend in the industry
toward the production of 16 Mbit DRAMs, rather than 4 Mbit DRAMs, which may
increase the cost of TAD systems because such systems mainly use 4 Mbit ARAMs.
Supply disruptions, shortages or termination could have an adverse effect on the
Company's business and results of operations due to its customers delay or
discontinuance of orders for the Company's products until such components are
available.
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 telephony and personal computer markets. The development of
17
industry standards utilizing 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. In February 1995, the ITU established G.723,
which is predominately composed of a TrueSpeech algorithm, as the standard
speech compression technology for use in video conferencing over public
telephone lines. However, the ITU failed to select TrueSpeech as the speech
compression technology for DSVD applications and discussed adopting a proposed
audio standard based on an existing standard (G.729) sponsored by the University
of Sherbrooke. The Company intends to license the compression standard selected
by the ITU for inclusion in the Company's DSVD co-processors. The failure to
establish industry standards based on TrueSpeech algorithms or to develop and
market competitive speech co-processors would have a material adverse effect on
the Company's business, financial condition and results of operations.
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 recently 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. The Company believes that the ultimate
resolution of these matters will not have a material adverse effect on the
Company's business, financial position or 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 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. On March 7, 1997, the
Court issued an order dismissing with prejudice all claims based on statements
issued by the Company. The Court is permitting plaintiffs to proceed with their
claims regarding statements the Company allegedly made to securities analysts,
and is also permitting plaintiffs to amend their complaint as to their claim
that the Company is responsible for the statements contained in analysts
reports. 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. However, the Company anticipates
that in the near term it may incur significant legal expense to defend itself.
POSSIBLE VOLATILITY OF STOCK PRICE. 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.
ITEM 2. PROPERTIES.
The Company's operations in the United States are located in an
approximately 14,300 square foot leased facility in Santa Clara, California.
This facility houses the Company's marketing and support, North American sales,
operations, manufacturing coordination and administrative personnel. This
facility is
18
leased through December 1999. The Company's subsidiary, DSP Semiconductors
(Israel), Ltd. leases a facility in Givat Shmuel, Israel with approximately
22,000 square feet under a lease ending in May 2000.
ITEM 3. LEGAL PROCEEDINGS.
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. On March 7, 1997, the Court issued an order
dismissing with prejudice all claims based on statements issued by the Company.
The Court is permitting plaintiffs to proceed with their claims regarding
statements the Company allegedly made to securities analysts, and is also
permitting plaintiffs to amend their complaint as to their claim that the
Company is responsible for the statements contained in analysts reports. The
Company believes the lawsuit to be without merit and intends to defend itself
vigorously.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in
the United States District Court for the Northern District of California against
the Company. The action alleges breach of contract, breach of implied covenant
of good faith and fair dealing and requests an accounting by the Company in
connection with the Company's termination of the Sales Representative Agreement
between BEKA and the Company. The complaint seeks an unspecified amount of
damages. The Company believes the lawsuit to be without merit and intends to
defend itself vigorously.
On October 22, 1996, a 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 had remained pending.
In February 1997, a lawsuit between the Company and Elk Industries, Inc.
("Elk") was settled. The litigation had been pending since April 1996 in the
United States District Court for the Southern District of Florida. Elk had
alleged 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The section labeled "Price Range of Common Stock" appearing on page 18 of
the Registrant's Annual Report to Stockholders for the year ended December 31,
1996 is incorporated herein by reference.
19
ITEM 6. SELECTED FINANCIAL DATA.
The section labeled "Selected Consolidated Financial Data" appearing on page
17 of the Registrant's Annual Report to Stockholders for the year ended December
31, 1996 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 19 through 25 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1996
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and related notes and independent
auditors report appearing on pages 26 through 47 of the Registrant's Annual
Report to Stockholders for the year ended December 31, 1996 are incorporated
herein by reference.
The section labeled "Quarterly Data" appearing on page 17 of the
Registrant's Annual Report to Stockholders for the years ended December 31, 1995
and 1996 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section labeled "Directors, Executive Officers and Key Personnel" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 20, 1997 is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section labeled "Executive Compensation and Other Information" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 20, 1997 is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section labeled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's definitive Proxy Statement to be filed shortly
hereafter for the annual meeting of stockholders to be held on May 20, 1997 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section labeled "Certain Relationships and Related Transactions" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 20, 1997 is incorporated herein
by reference.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual Report
on Form 10-K.
1. Index to Financial Statements.
The following financial statements and related notes and auditor's report
are included in the Registrant's Annual Report to Stockholders for the year
ended December 31, 1996 and are incorporated herein by reference pursuant to
Item 8.
PAGE IN 1996
ANNUAL REPORT
DESCRIPTION TO STOCKHOLDERS
- ------------------------------------------------------------ ---------------
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... 28-29
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.......................... 27
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1995 and 1994...... 30-31
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................... 32-33
Notes to Consolidated Financial Statements.................. 34-47
Report of Ernst & Young LLP, Independent Auditors........... 26
2. Index to Financial Statement Schedules.
The following financial statement schedules and related auditor's report are
filed as part of this Annual Report on Form 10-K:
PAGE IN THIS
ANNUAL REPORT
DESCRIPTION ON FORM 10-K
- ------------------------------------------------------------ ---------------
Schedule II: Valuation and Qualifying Accounts.............. (included at
page 29)
Consent of Ernst & Young LLP, Independent Auditors.......... Exhibit 23
(included at
page 28)
All other schedules are omitted because they are not applicable or not
required or because the required information is included in the Consolidated
Financial Statements or the Notes thereto.
3. List of Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1B to the Registrant's Registration Statement on
Form S-1, file no. 33-73482, as declared effective on
February 11, 1994 and incorporated herein by reference).
3.2 Bylaws (filed as Exhibit 3.2B to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated
herein by reference).
3.3 Amended Bylaws (filed as Exhibit 3.2.c to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, and incorporated herein by reference).
21
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
10.1 1991 Employee and Consultant Stock Plan and forms of option
agreements thereunder (filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.2 Israeli Stock Option Plan and form of option agreement
thereunder (filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated
herein by reference).
10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 to
the Registrant's Registration Statement on Form S-1, file
no. 33-73482, as declared effective on February 11, 1994
and incorporated herein by reference).
10.4 1993 Employee Stock Purchase Plan and form of subscription
agreement thereunder (filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.5 Registration Rights Agreement, dated August 30, 1993, by and
among the Registrant and certain shareholders of the
Registrant (filed as Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated
herein by reference).
10.6 Technology Assignment and License Agreement, dated January
7, 1994, by and between the Registrant and DSP
Telecommunications, Ltd. (filed as Exhibit 10.24 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.7 ACL Technology License Agreement, dated June 24, 1994, by
and between the Registrant and AudioCodes, Ltd. (filed as
Exhibit 10.12 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, and incorporated
herein by reference).
10.8 Investment Agreement, dated June 16, 1994, by and between
the Registrant and AudioCodes Ltd. (see Exhibit 10.30 for
Appendix B to Investment Agreement) (filed as Exhibit 10.39
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, and incorporated herein by
reference).
10.9 Form of Indemnification Agreement for directors and
executive officers (filed as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994, and
incorporated herein by reference).
10.10 Technology Retransfer Agreement, dated as of June 29, 1995,
by and among the Registrant, Nogatech, Inc. and Nogatech
Ltd. (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995,
and incorporated herein by reference).
10.11 Stock Purchase Agreement, dated as of June 30, 1995, by and
among the Registrant, Kenwood Corporation, Tomen
Electronics Corp. and Nogatech, Inc. (filed as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by
reference).
10.12 Promissory Note, dated August 11, 1995, made in favor of the
Registrant by Nogatech, Inc. (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein by reference).
10.13 Davidi Gilo Severance Agreement, dated April 7, 1995 (filed
as Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, and incorpo-
rated herein by reference).
22
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
10.14 Amendment No. 1 to the Stock Option Agreement, effective
April 7, 1995, by and between the Registrant and Davidi
Gilo (filed as Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995,
and incorporated herein by reference).
10.15 Promissory Note, dated July 3, 1995, made in favor of the
Registrant by Davidi Gilo (filed as Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein by reference).
10.16 Employment Termination and Consulting Agreement and Mutual
Release, dated October 1, 1995, by and between Registrant
and F. Judson Mitchell (filed as Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference).
10.17 Employment Agreement, dated November 1, 1995, by and between
Registrant and Igal Kohavi (filed as Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference).
10.18 Severance and Consulting Agreement, dated as of May 6, 1996,
by and between the Registrant and Eli Porat (filed as
Exhibit 10.36 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, and incorporated
herein by reference).
10.19 Severance Agreement, dated June 8, 1996, by and between the
Registrant and Karin Pitcock (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and incorporated herein by reference).
10.20 Share Purchase and Shareholders Agreement, dated July 4,
1996, by and among Aptel Ltd., the shareholders named
therein, and DSP Semiconductors Ltd. (filed as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by
reference).
10.21 Employment Agreement, dated April 22, 1996, by and between
the Registrant and Eli Ayalon (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and incorporated herein by reference).
10.22 Severance and Consulting Agreement, dated as of October 25,
1996, by and between the Registrant and John Goldsberry
(filed as Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference).
10.23 Employment Severance and Consulting Agreement, dated as of
December 2, 1996, by and between the Registrant and Mike
Hoberg.
10.24 Assignment and Assumption Agreement, dated October 9, 1996,
by and between the Registrant and Dialogic Corporation,
relating to the Registrant's facility located at 3120 Scott
Boulevard in Santa Clara, California.
10.25 Sublease, dated October 18, 1996, as amended on December 4,
1996, by and between Dialogic Corporation and the
Registrant, relating to the Registrant's facility located
at 3120 Scott Boulevard in Santa Clara, California.
10.26 Employment Agreement, dated February 24, 1997, by and
between the Registrant and Avi Basher.
10.27 Employment Agreement, dated June 1, 1996, by and between the
Registrant and Moshe Shahaf.
10.28 Rescission Agreement, dated as of August 15, 1996, by and
between the Registrant and Igal Kohavi.
23
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
10.29 Service Agreement, dated as of August 15, 1996, by and
between DSP Semiconductors, Ltd. and Niko Consulting and
Management (1995) Ltd.
11 Statements regarding computation of per share earnings
(included at page 26).
13 Portions of the Annual Report to Stockholders for the year
ended December 31, 1996.
21 Subsidiaries of the Registrant (included at page 27).
23 Consent of Ernst & Young LLP, Independent Auditors (included
at page 28).
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 22, 1996,
relating to the settlement of the Rockwell litigation.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DSP GROUP, INC.
By: /s/ ELIYAHU AYALON
-----------------------------------------
Eliyahu Ayalon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ ------------------------------ ----------------
/s/ IGAL KOHAVI
- ------------------------------ Chairman of the Board March 31, 1997
Igal Kohavi
President, Chief Executive
/s/ ELIYAHU AYALON Officer and Director
- ------------------------------ (Principal Executive March 31, 1997
Eliyahu Ayalon Officer)
Vice President of Finance,
Chief Financial Officer and
/s/ AVI BASHER Secretary (Principal
- ------------------------------ Financial Officer and March 31, 1997
Avi Basher Principal Accounting
Officer)
/s/ NATHANIEL DE ROTHSCHILD
- ------------------------------ Director March 31, 1997
Nathaniel de Rothschild
/s/ SAMUEL L. KAPLAN
- ------------------------------ Director March 31, 1997
Samuel L. Kaplan
/s/ MILLARD PHELPS
- ------------------------------ Director March 31, 1997
Millard Phelps
/s/ YAIR SHAMIR
- ------------------------------ Director March 31, 1997
Yair Shamir
25
EXHIBIT 11
DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER
31,
----------------------
1996 1995 1994
------ ------ ------
Net Income.................................................. $5,979 $7,211 $4,032
------ ------ ------
------ ------ ------
PRIMARY:
Computation of weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding................ 9,510 9,352 8,111
Common equivalent shares attributable to Convertible
Preferred Stock......................................... -- -- 394
Common equivalent shares from stock options and
warrants................................................ 71 306 630
------ ------ ------
Shares used in per share computation........................ 9,581 9,658 9,135
------ ------ ------
------ ------ ------
Net income per share........................................ $ 0.62 $ 0.75 $ 0.44
------ ------ ------
------ ------ ------
FULLY DILUTED:
Computation of weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding................ 9,510 9,352 8,111
Common equivalent shares attributable to Convertible
Preferred Stock......................................... -- -- 394
Common equivalent shares from stock options and
warrants................................................ 71 312 700
------ ------ ------
Shares used in per share computation........................ 9,581 9,664 9,205
------ ------ ------
------ ------ ------
Net income per share........................................ $ 0.62 $ 0.75 $ 0.44
------ ------ ------
------ ------ ------
26
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------------- -----------------------------
1. Nihon DSP K.K. Japan
2. DSP Semiconductors
Ltd. Israel
3. DSP Group Europe SARL France
27
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc. of our report dated January 26, 1997 (except for
Stockholders' Litigation under Note 5, as to which the date is March 7, 1997),
included in the 1996 Annual Report to Stockholders of DSP Group, Inc.
Our audits also included the consolidated financial statement schedule of
DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-83456 and 33-87390) pertaining to the 1991 Employee
and Consultant Stock Plan, the 1991 DSP Group, Inc. Israeli Stock Option Plan,
the 1993 Director Stock Option Plan, and the 1993 Employee Stock Purchase Plan
of our report dated January 26, 1997 (except for Stockholders' Litigation under
Note 5, as to which the date is March 7, 1997), with respect to the consolidated
financial statements and schedules incorporated herein by reference or included
in this Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
San Jose, California
March 27, 1997
28
SCHEDULE II
DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTION END OF PERIOD
- ------------------------------------------------------------ ------------ ---------- --------- -------------
Year ended December 31, 1994:
Allowance for doubtful accounts........................... $ 50 $100 $-- $150
Sales returns reserve..................................... 50 204 -- 254
Year ended December 31, 1995:
Allowance for doubtful accounts........................... 150 15 3 162
Sales returns reserve..................................... 254 296 269 281
Year ended December 31, 1996:
Allowance for doubtful accounts........................... 162 60 151 71
Sales returns reserve..................................... 281 245 149 377
29