UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-25622
-------
DSP COMMUNICATIONS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0389180
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20300 Stevens Creek Boulevard, Cupertino, California 95014
----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 777-2700
---------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 November 9, 1998, there were 38,255,180 shares of Common Stock ($.001 par
value) outstanding.
INDEX
DSP COMMUNICATIONS, INC.
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-September 30, 1998
and December 31, 1997............................................. 3
Condensed consolidated statements of operations-quarter
ended September 30, 1998 and 1997, and nine months
ended September 30, 1998 and 1997................................. 4
Condensed consolidated statements of cash flows-nine months
ended September 30, 1998 and 1997................................. 5
Notes to condensed consolidated financial statements-
September 30, 1998................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................18
Item 2. Changes in Securities and Use of Proceeds.........................18
Item 3. Defaults upon Senior Securities...................................18
Item 4. Submission of Matters to a Vote of Security Holders...............18
Item 5. Other Information.................................................18
Item 6. Exhibits and Reports on Form 8-K..................................19
SIGNATURES................................................................20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
September 30, December 31,
1998 1997
------------- -----------
(Unaudited) (Note 1)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70,082 $ 82,322
Short term investments 44,241 34,319
Trade accounts receivable 20,397 11,200
Other current assets 6,545 7,207
--------- ---------
Total current assets 141,265 135,048
Property and equipment, net 4,745 4,151
Other assets 3,073 3,697
--------- ---------
$ 149,083 $ 142,896
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,530 $ 9,372
Accrued liabilities 18,998 17,093
Deferred income 1,180 528
--------- ---------
Total current liabilities 31,708 26,993
STOCKHOLDERS' EQUITY
Common stock 38 40
Additional paid-in capital 62,787 84,890
Retained earnings 54,550 30,973
--------- ---------
Total stockholders' equity 117,375 115,903
--------- ---------
$ 149,083 $ 142,896
--------- ---------
--------- ---------
See Notes to Condensed Consolidated Financial Statements
Note 1: The balance sheet at December 31, 1997 has been derived from
audited financial statements at that date, but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
3
DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------- ------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
REVENUES
Product $ 34,040 $ 19,097 $ 85,522 $ 45,876
Technology development 822 1,380 2,898 3,591
---------- ---------- ---------- ----------
Total revenues 34,862 20,477 88,420 49,467
COST OF REVENUES
Product 19,701 9,489 46,537 23,509
Technology development 565 1,234 2,086 3,444
---------- ---------- ---------- ----------
Total cost of revenues 20,266 10,723 48,623 26,953
---------- ---------- ---------- ----------
Gross profit 14,596 9,754 39,797 22,514
OPERATING EXPENSES
Research and
development 3,214 1,559 8,330 4,582
Sales and marketing 1,057 935 2,995 3,002
General and
administrative 2,122 2,023 6,648 5,515
---------- ---------- ---------- ----------
6,393 4,517 17,973 13,099
---------- ---------- ---------- ----------
Operating income 8,203 5,237 21,824 9,415
Other income 1,710 1,096 4,667 4,740
---------- ---------- ---------- ----------
Income before provision for
income taxes 9,913 6,333 26,491 14,155
Provision for income taxes 1,174 423 2,914 1,400
---------- ---------- ---------- ----------
Net income $ 8,739 $ 5,910 $ 23,577 $ 12,755
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share:
Basic $ 0.22 $ 0.15 $ 0.59 $ 0.30
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted $ 0.21 $ 0.14 $ 0.56 $ 0.28
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing
earnings per share:
Basic 40,276 39,727 40,200 42,202
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted 41,787 43,617 42,353 44,811
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See Notes to Condensed Consolidated Financial Statements.
4
DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income for the period $ 23,577 $ 12,755
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,976 1,665
Loss on disposal of equipment -- 3
Compensation expense related to shares issued in a subsidiary 290 370
Compensation expense related to stock options 42 --
Changes in operating assets and liabilities:
Trade accounts receivable (9,197) (5,447)
Other current assets 662 (2,540)
Accounts payable 2,045 5,469
Accrued liabilities 1,615 (431)
Deferred income 652 (2,419)
--------- --------
Net cash provided by operating activities 21,662 9,425
--------- --------
INVESTING ACTIVITIES:
Cash purchases of equipment (1,833) (1,718)
Proceeds from sale of equipment -- 21
Purchases of short term investments (38,188) --
Sales and maturities of short term investments 28,368 27,663
--------- --------
Net cash provided by (used in) investing activities (11,653) 25,966
--------- --------
FINANCING ACTIVITIES:
Repurchase of common stock (31,462) (48,219)
Issuance of common stock for cash 9,213 4,224
--------- --------
Net cash used in financing activities (22,249) (43,995)
--------- --------
Decrease in cash and cash equivalents (12,240) (8,604)
Cash and cash equivalents at beginning of period 82,322 77,799
--------- --------
Cash and cash equivalents at end of period $ 70,082 $ 69,195
--------- --------
--------- --------
See Notes to Condensed Consolidated Financial Statements
5
DSP COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DSP
Communications, Inc. ("DSPC" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the interim period are not necessarily indicative of the
results that may be expected for the full year. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three and nine months ended September 30 as follows (in thousands
except per share data):
Three Months Ended Nine Months Ended
------------------- ------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Numerator for basic and diluted earnings per
share - net income $ 8,739 $ 5,910 $ 23,577 $ 12,755
------- -------- -------- -------
------- -------- -------- -------
Denominator for basic earnings per share -
weighted average shares 40,276 39,727 40,200 42,202
Effect of dilutive securities - employee stock
options 1,511 3,890 2,153 2,609
------- -------- -------- -------
Denominator for diluted earnings per share -
adjusted weighted average shares 41,787 43,617 42,353 44,811
------- -------- -------- -------
------- -------- -------- -------
Earnings per share:
Basic $ 0.22 $ 0.15 $ 0.59 $ 0.30
------- -------- -------- -------
------- -------- -------- -------
Diluted $ 0.21 $ 0.14 $ 0.56 $ 0.28
------- -------- -------- -------
------- -------- -------- -------
Potentially dilutive securities excluded from 917 0 735 0
computations as the effect would be antidilutive ------- -------- -------- -------
------- -------- -------- -------
3. NEW ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income. For the
three months ended September 30, 1998 and 1997, total comprehensive income was
$8,882,000 and $5,936,000, respectively. During the first nine months of 1998
and 1997, total comprehensive income amounted to $23,677,000 and $12,736,000,
respectively.
6
As of January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued in 1999. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 has no impact on the Company's consolidated
results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activity" ("SFAS 133"), which
is required to be adopted in years beginning after June 15, 1999. SFAS 133
permits early adoption as of the beginning of any fiscal quarter; however, the
Company has yet to determine its date of adoption. SFAS 133 will require the
Company to recognize all derivatives on the balance sheet at fair value. The
Company has not yet determined what the effect of SFAS 133 will be on the
earnings and financial position of the Company.
4. STOCKHOLDERS' EQUITY
In 1997, the Company implemented a repurchase program pursuant to which the
Company, from time to time and at management's discretion, may purchase shares
of the Company's common stock in open-market and privately negotiated
transactions. The number of shares in the repurchase plan, which was originally
8 million, has been increased through October 1998 to a total of 16 million
shares. During 1997, the Company repurchased 5,869,800 shares of its common
stock for an aggregate purchase price of $52,628,000, and in the first nine
months of 1998, the Company repurchased 2,632,200 shares of its common stock for
an aggregate purchase price of $31,462,000. During October 1998, the Company
repurchased 1,669,500 additional shares of its common stock for $10,790,000.
5. LITIGATION
On May 12, 1997, a class action lawsuit was filed against the Company and
several of its officers and directors in the Superior Court of California, Santa
Clara County. A second, identical lawsuit, was filed on May 22, 1997. The
complaints, which were consolidated, alleged that the Company and certain of its
officers and directors violated California securities laws in connection with
certain statements allegedly made during the first quarter of 1997, and sought
damages in an unspecified amount, interest, attorney's fees and other costs and
other equitable injunctive relief. The plaintiffs requested to have the matter
certified as a class action on behalf of certain past and present shareholders
of the Company. The court sustained the Company's demurrer with leave to amend.
On January 27, 1998, plaintiffs filed an amended and consolidated complaint. On
February 26, 1998, two of the plaintiffs in the state action filed a similar
complaint in the U.S. District Court for the Northern District of California.
The complaint makes the same allegations as the amended complaint filed in state
court, but charges violations of federal securities laws.
The parties have reached an agreement in principle to settle the lawsuits in
their entirety for $3,000,000, which will be funded by insurance proceeds. The
agreement is subject to negotiation and execution of a Stipulation of Settlement
and approval by the court. The Company continues to deny all allegations in the
lawsuit.
6. SUBSEQUENT EVENTS
In October 1998, options to purchase approximately 2.4 million shares of common
stock were repriced to $6.125 or to $6.6875 per share. Options previously
exchanged in April 1997 were not subject to the repricing. Also during October
1998, the Company granted options to purchase approximately 2.6 million shares
of common stock to employees and executives.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the condensed
consolidated interim financial statements and the notes thereto in Part I, Item
1 of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The matters addressed
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations, with the exception of the historical information presented,
contain forward-looking statements involving risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under the heading "Certain Factors That May Affect Future Results"
following this Management's Discussion and Analysis section, and elsewhere in
this report.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain items
from the Company's consolidated statements of operations as a percentage of
total revenues:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
% % % %
REVENUES
Product 97.6 93.3 96.7 92.7
Technology development 2.4 6.7 3.3 7.3
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
COST OF REVENUES
Product 56.5 46.3 52.6 47.5
Technology development 1.6 6.0 2.4 7.0
----- ----- ----- -----
Total cost of revenues 58.1 52.3 55.0 54.5
----- ----- ----- -----
GROSS PROFIT 41.9 47.7 45.0 45.5
OPERATING EXPENSES
Research and development 9.2 7.6 9.4 9.3
Sales and marketing 3.0 4.6 3.4 6.1
General and administrative 6.1 9.9 7.5 11.1
----- ----- ----- -----
18.3 22.1 20.3 26.5
----- ----- ----- -----
Operating income 23.6 25.6 24.7 19.0
Other income 4.9 5.4 5.3 9.6
----- ----- ----- -----
Income before provision
for income taxes 28.5 31.0 30.0 28.6
Provision for income taxes (3.4) (2.1) (3.3) (2.8)
----- ----- ----- -----
Net income 25.1 28.9 26.7 25.8
----- ----- ----- -----
----- ----- ----- -----
8
REVENUES
PRODUCT: Product revenues increased to $34.0 million in the third quarter of
1998, from $19.1 million in the third quarter of 1997, and to $85.5 million in
the nine months ended September 30, 1998, from $45.9 million in the first nine
months of 1997. Product revenues have been primarily from sales of baseband chip
sets for digital cellular telephones. The increase in product revenues for the
three months and nine months ended September 30, 1998 as compared to the same
periods in 1997, was a result of stronger demand for the Company's PDC and TDMA
chip sets and the commencement of volume sales of its CDMA chip sets in the
second quarter of 1998. Revenues from sales to distributors are recognized at
the time the products are shipped by the distributor to the original equipment
manufacturer ("OEM") customer. Other product revenues are recorded when products
are shipped to customers.
TECHNOLOGY DEVELOPMENT AND OTHER: Technology development revenues decreased to
$822,000 in the third quarter of 1998 from $1,380,000 in the third quarter of
1997 and to $2.9 million in the nine months ended September 30, 1998 from $3.6
million in the first nine months of 1997. The Company's technology development
revenues fluctuate, and may continue to fluctuate, depending on the number and
size of technology development agreements and the timing of related milestones
and deliverables. The Company's subsidiary, CTP Systems, Ltd. ("CTP Systems"),
is engaged in certain reference design projects which contribute to the
technology development revenues.
GROSS PROFIT
Gross profit in the third quarter of 1998 was $14.6 million (41.9% of revenues),
compared to $9.8 million (47.7% of revenues) in the third quarter of 1997. Gross
profit in the first nine months of 1998 was $39.8 million (45.0% of revenues),
compared to $22.5 million (45.5% of revenues) in the first nine months of 1997.
The gross margins on product revenues are affected by changes in the customer
and product mix from quarter to quarter and by price pressures (or alleviation
thereof) which are impacted by, among other factors, fluctuations in the
dollar/yen rate of exchange. For the three months and nine months ended
September 30, 1998 as compared to the same periods in 1997, the effect of the
continued decrease in sales prices of the Company's chip sets has partially been
offset by cost reductions received from the Company's suppliers due to increased
order volumes and by cost reductions resulting from a weaker yen which reduced
in dollar terms the cost of components quoted in, or linked to, yen based prices
(See also discussion in Foreign Currency Issues and Impact of Inflation section
below).
Sales of wireless private branch exchange ("PBX") systems of CTP Systems,
resulted in relatively low margins. The Company expects that it will continue to
experience relatively low margins on sales of these wireless PBX systems unless
and until higher quantity sales can be achieved. CTP Systems is currently
engaged in a cost reduction program, the initial effects of which are
anticipated to be felt towards the end of 1998 and further cost reductions will
be implemented during 1999.
The Company anticipates that the average sales prices of chip sets may continue
to decrease as a result of volume discounts and price pressures, which would
increase the cost of products sold as a percentage of product revenues; however,
any such price decreases may be offset to a certain extent by changes in the
Company's terms of trade, and further cost reductions from suppliers if the
Company's order volumes increase.
The costs incurred on technology development vary from quarter to quarter
depending on the similarity or diversity of the products and technologies
developed, and as contractual milestones are achieved.
During the third quarter of 1998, the Company entered into dollar/yen option
transactions in an attempt to hedge partially against the increase in value of
the US dollar against the yen and to somewhat decrease the net exposure to
currency-driven sales price pressure. The Company additionally has some of its
vendor purchases quoted in, or linked to, yen based prices.
9
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $3.2 million in the third quarter
of 1998 from $1.6 million in the third quarter of 1997 and to $8.3 million in
the first nine months of 1998 from $4.6 million in the first nine months of
1997. The increases were a result of growth in research and development
activities during those periods, a decrease in the allocation of engineering
costs to technology development due to a decrease in technology development
activity, and growth in the number of engineering personnel. As a percentage of
total revenues, research and development expenses increased to 9.2% in the third
quarter of 1998, from 7.6% in the third quarter of 1997, and to 9.4% in the
first nine months of 1998 from 9.3% in the first nine months of 1997. The
Company expects that its research and development expenses will increase in the
future, in absolute dollars.
The Company records software development costs in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." To date, the Company has
expensed all of its software costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $1.1 million (3.0% of revenues) in the third
quarter of 1998, $0.9 million (4.6% of revenues) in the third quarter of 1997
and were $3.0 million (3.4% of revenues) in the first nine months of 1998 and
$3.0 million (6.1% of revenues) in the first nine months of 1997. These expenses
are mainly comprised of the sales and marketing staff at the Company's
headquarters in Cupertino, California, its offices in Israel and Tokyo,
participation at trade exhibitions, and other promotional and marketing research
activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2.1 million (6.1% of revenues) in the
third quarter of 1998 compared to $2.0 million (9.9% of revenues) in the third
quarter of 1997 and $6.6 million (7.5% of revenues) in the first nine months of
1998 compared to $5.5 million (11.1% of revenues) in the first nine months of
1997. General and administrative expenses increased, in absolute dollars, as a
result of increased staffing levels at the facilities of DSPC Israel Ltd.
("DSPCI"), an Israeli subsidiary of the Company, increased facility expenses
resulting from additional space that was leased by DSPCI, and increased
administration expenses and fees.
OTHER INCOME
Other income includes net interest income, investment income, and foreign
currency remeasurement gains and losses and other expenses. Other income
increased to $1.7 million in the third quarter of 1998 from $1.1 million in the
third quarter of 1997. In the first nine months of both 1998 and 1997, other
income was $4.7 million. Other income in the first nine months of 1998 and 1997
was generated primarily from interest and realized gains on the Company's cash
and investment balances, which were at an average level of approximately $114
million and $118 million, during the first nine months of 1998 and 1997,
respectively.
Other income fluctuates as a result of changes in the level of the Company's
cash and investment balances, which was primarily caused by the repurchase of
shares (see below - Liquidity and Capital Resources), changes in the rate of
exchange between the Japanese yen and the United States dollar and between the
Israeli shekel and the United States dollar, and fluctuations in the available
interest rates applicable to the Company's deposits and investments.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 11.0% for the first nine months of 1998
compared to 12.5% for the first nine months of 1997. In the third quarter of
1997, the Company reduced its regular provision of 12.5% by the amount of
$370,000, following the receipt of final tax assessments for two of the
Company's Israeli subsidiaries for the years 1992 through 1995. The effective
tax rate is substantially below the federal statutory rate primarily due to the
tax benefits achieved by the status of certain of the Company's Israeli
subsidiaries as "Approved Enterprises" granted by the State of Israel, which
provides for a tax holiday or a reduced corporate tax rate of 10% on the
Company's
10
undistributed Israeli earnings. The decrease in the Company's effective tax rate
is mainly due to the increase in the Company's revenues, which is allocated to
an investment program within the "Approved Enterprises" that benefits from a tax
holiday. Over time, the Company's tax rate is expected to increase as the tax
benefits awarded with Approved Enterprise status become eliminated, as well as
potential increases due to rules regarding controlled foreign corporations
("CFC"). Losses incurred by the Company or any of its subsidiaries in one
country generally will not be deductible by entities in other countries in the
calculation of their respective local taxes. In addition, losses generated by
one Israeli entity will not offset income generated by another Israeli entity.
Therefore, losses incurred by one Israeli entity or a combined loss of the U.S.
entities will increase the Company's effective tax rate.
FOREIGN CURRENCY ISSUES AND IMPACT OF RATE OF INFLATION
The United States dollar is the Company's functional currency as it is the
primary currency in the economic environment in which the Company operates.
Accordingly, monetary accounts maintained in currencies other than the dollar
(principally cash and liabilities) are remeasured using the foreign exchange
rate at the balance sheet date. Operational accounts and nonmonetary balance
sheet accounts are remeasured and recorded at the rate in effect at the date of
the transaction. The effects of foreign currency remeasurement are reported in
current operations, and have been immaterial to date.
While a substantial portion of the Company's revenues and costs are denominated
in United States dollars, a material portion of the sales prices for certain
products sold by the Company, and prices of certain components purchased by the
Company for the manufacture of its products, are quoted in, or linked to, yen
based prices. Therefore, fluctuations in the exchange rate of the yen in
relation to the United States dollar could have a material adverse effect on the
Company's results of operations and financial condition.
A portion of the Company's expenses are denominated in Israeli shekels. The
Company's primary expense paid in Israeli currency is Israeli-based employee
salaries. In addition, the Company also has certain Israeli shekel-based
liabilities and assets. As a result, fluctuations in the value of Israeli
currency in comparison to the United States dollar and inflationary pressures on
the Israeli shekel could affect the cost of technology development, research and
development expenses, general and administrative expenses and the Company's
effective income tax rate and could have a material adverse affect on the
Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $21.7 million in the first
nine months of 1998 compared to $9.4 million in the first nine months of 1997.
Net cash provided from operations in the first nine months of 1998 was comprised
primarily of net income and an increase in current liabilities, less an increase
in accounts receivable. Trade accounts receivable were $20.4 million at
September 30, 1998 due to the timing of shipments and payment terms.
The Company's investing and financing activities for the first nine months of
1998, other than purchases of and proceeds from, short-term investments, have
consisted of expenditures for fixed assets which totaled 1.8 million, and the
repurchase of common stock for cash which totaled $31.5 million, in the first
nine months of 1998.
In the first nine months of 1998, the Company repurchased 2,632,200 shares of
its common stock in its repurchase program, bringing the total number of shares
repurchased through September 30, 1998, in this repurchase program, to 8,502,000
shares with a total aggregate purchase price of approximately $84.1 million.
During October 1998, the Company repurchased an additional 1,669,500 shares of
its common stock for an aggregate purchase price of approximately $10.8 million.
The Company may from time to time repurchase additional shares of its Common
Stock under its share repurchase program.
In obtaining approval from Israeli tax authorities of the Company's
reorganization, which was completed immediately before the closing of the
Company's initial public offering ("IPO") in March 1995, the Company agreed to
invest in activities in Israel an amount of not less than $9.0 million out of
the proceeds of the IPO within three years after the IPO. In the first quarter
of 1998, the Company received approval from the Israeli tax authorities for a
two year extension of this requirement. Through September 30, 1998, $6.5 million
has been transferred to Israel.
11
As of September 30, 1998, the Company had $114.3 million of cash, cash
equivalents and short-term investments. The Company believes that its existing
cash, cash equivalents and short-term investment balances, will be sufficient to
meet its cash requirements for at least the next twelve months.
While operating activities may provide cash in certain periods, to the extent
the Company may experience growth in the future, the Company anticipates that
its operating and investing activities may use cash and consequently, such
growth may require the Company to obtain additional sources of financing. The
Company may also from time to time consider the acquisition of complimentary
businesses, projects or technologies which may require additional financing or
require the use of a significant portion of its existing cash, although the
Company has no present understandings, commitments or agreements, nor is it
engaged in any discussions or negotiations with respect to any such transaction.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products experience
problems handling dates beyond the year 1999 and will need to be modified before
the year 2000 in order to remain functional. As a result, before the year 2000,
computer systems and/or software products and applications used by many
companies may need to be upgraded to comply with such year 2000 requirements.
The Company is currently expending resources to review its internal systems,
products and the readiness of third parties with whom the Company has business
relationships and has assigned a dedicated task force to develop and implement a
Year 2000 plan (the "Plan") which is designed to cover all of the Company's
activities. The Plan, which has executive sponsorship, is reviewed regularly by
senior management and includes the evaluation of both information technology
("IT") and non-IT systems. The Plan consists of five steps.
Step one involves increasing awareness by educating and involving all
appropriate levels of management regarding the need to address Year 2000 issues.
Step two consists of identifying all of the Company's systems, products and
relationships that may be impacted by Year 2000. Step three involves determining
our current state of Year 2000 readiness for those areas identified in step two
and prioritizing areas that need to be fixed. Step four will consist of
developing a plan for those areas identified as needing correction. Step five
will be the implementation and execution of the Company's Plan and completing
the steps identified to attain Year 2000 readiness. The Company has completed
step one and is currently completing step two. Based on the Company's assessment
to date, it has determined that it is unlikely that the Company has any exposure
to contingencies related to the Year 2000 issue for the products that it has
sold, that all of the Company's products that are currently being sold are Year
2000 compliant, and that the Company expects to complete implementation of the
Plan, including completing any necessary modifications or replacements of its
internal IT and non-IT systems, by the middle of 1999.
The costs to the Company of implementing the Plan to date have not been
material, and the Company does not believe that the costs of completing the Plan
will be material. The Company is currently evaluating modification or
replacement of certain of its internal IT systems in connection with the
Company's growth, and the majority of the costs associated with the Plan for the
Year 2000 are expected to represent resources used in this related expansion
effort. The Company believes that modifications deemed necessary will be made on
a timely basis and does not believe that the cost of such modifications will
have a material effect on the Company's operating results. In addition, the
Company is in the process of evaluating the need for contingency plans with
respect to year 2000 requirements. The necessity of any contingency plan must be
evaluated on a case-by-case basis and may vary considerably in nature depending
on the year 2000 issue it may address.
The Company's statements above regarding its expectations as to the extent and
timeliness of modifications or replacements required in order to achieve Year
2000 compliance are forward-looking statements subject to risks and
uncertainties. Actual results may vary materially as a result of a number of
factors, including, among others, those described above in this section. There
can be no assurance however, that unexpected delays or problems, including the
failure to ensure Year 2000 compliance of systems or products supplied to the
Company by third parties, will not have an adverse effect on the Company, its
financial performance and results of operations. In addition, the Company cannot
predict the effect of the Year 2000 issues on its customers or the resulting
effect on the Company. As a result, if such customers do not take preventative
and/or corrective actions in a timely manner, the Year 2000 issue could have an
adverse effect on their operations and accordingly have a material adverse
effect
12
on the Company's business, financial condition and results of operations.
Furthermore, the Company's current understanding of expected costs is subject to
change as the project progresses and does not include the cost of internal
software and hardware replaced in the normal course of business whose
installation otherwise may be accelerated to provide solutions to Year 2000
compliance issues.
CERTAIN FACTORS THAT MAY AFFECT 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, among others, the following risk factors.
RELIANCE ON A LIMITED NUMBER OF PRODUCTS; NEED FOR NEW PRODUCT
INTRODUCTIONS. Substantially all of the Company's sales are from three products:
its PDC baseband chip set for digital cellular telephones for use in Japan, its
TDMA chip set for use outside of Japan, and its CDMA chip set for use in the US,
Japan, Korea and other parts of the world. The Company believes that its success
will depend both on continued sales of its PDC, TDMA and CDMA chip sets and on
its ability to successfully develop, introduce and market successive generations
of its products. Although the Company continuously works to develop future
generations of its products, there can be no assurance that it will be
successful in doing so, or that completion of development of products will not
be delayed. The Company's future success may also be dependent on commencing new
product development and successful introduction of new products. The success of
new product generations and new products, will also depend upon, among other
things, the ability of the Company to market the products successfully, the
growth of the relevant markets for the products, and the success of the
Company's OEM customers in completing in a timely manner their development of
handsets or other OEM products utilizing the Company's products and in
successfully competing in the applicable markets. In addition, the Company will
likely use independent foundries to manufacture any such products, and there can
be no assurance that the products will be able to be manufactured in a timely
manner, in commercial quantities, at reasonable cost, and with acceptable yields
and quality standards, particularly with new products, such as further
generations of PDC, TDMA and CDMA products, that may incorporate new
manufacturing technology. If the Company is unable, for technological or other
reasons, to develop, introduce and manufacture in a timely manner new product
generations and new products and to market them successfully, or if the
Company's OEMs are unable to successfully develop and market their products, the
Company's business and results of operations could be materially and adversely
affected.
MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE. The markets
for the Company's products are extremely competitive, and the Company expects
that competition will increase. Many of the Company's competitors have
entrenched market positions, established patents, copyrights, tradenames,
trademarks and intellectual property rights and substantial technological
capabilities. The Company's current competitors in the digital cellular market
include other suppliers of DSP-based chip sets, such as existing cellular
telephone manufacturers that develop chip set solutions internally and smaller
companies offering design solutions. The Company also expects new competitors to
enter the chip set manufacturing market as the wireless communications markets
expand. Both in the cellular market and in other wireless personal
communications markets, the Company's existing and potential competitors include
large and emerging domestic and international companies, many of which have
significantly greater financial, technical, manufacturing, marketing, sales and
distribution resources and management expertise than the Company. The Company
believes that its ability to compete successfully in the wireless personal
communications market will depend upon a number of factors both within and
outside of its control, including price, quality, availability, product
performance and features; timing of new product introductions by the Company,
its customers and competitors; and customer service and technical support. There
can be no assurance that the Company will have the financial resources,
technical expertise, intellectual property, or marketing, sales, distribution
and customer service and technical support capabilities to compete successfully.
DECLINING SALES PRICES. Manufacturers of wireless personal
communications equipment are experiencing, and are likely to continue to
experience, intense price pressure, which has resulted and is expected to
continue to result in downward pricing pressure on the Company's products. As a
result, the Company has experienced, and expects to continue to experience,
declining sales prices for its products. In addition, pricing competition among
handset manufacturers and component suppliers has increased. There can be no
assurance that either increases in
13
unit volume, changes in the Company's terms of trade, or reductions in per
unit costs will offset declines in per unit sales prices, in which case the
Company's gross profit would be adversely affected. Since cellular telephone
manufacturers frequently negotiate supply arrangements well in advance of
delivery dates, the Company often must commit to price reductions for its
products before it is aware of how, or if, such cost reductions can be
obtained. As a result, such current or future price reduction commitments
could have, and any inability of the Company to respond to increased price
competition would have, a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON A SMALL NUMBER OF OEMS AND ON TWO DISTRIBUTORS; COMPETITION
IN THE OEM MARKET. Substantially all of the Company's sales of baseband chip
sets for digital cellular telephones are to Tomen Electronics Corp. (TEC), the
Company's distributor in Japan, and to Tomen Electronics America Inc. (TEA), the
Company's distributor in the United States. These distributors' sales of the
Company's products are concentrated in a small number of OEM customers. During
the first half of 1998, seven OEM customers accounted for substantially all of
the sales of the Company's PDC baseband chip sets, while two OEM customers
accounted for all sales of the Company's TDMA chip sets and two OEM customers
accounted for all sales of the Company's CDMA chip sets. The loss of TEC or TEA
as a distributor or the loss of or significant reduction in the distributors'
sales to any of these OEMs could have a material adverse effect on the Company's
business, financial condition and results of operations.
Because the world-wide cellular subscriber equipment industry is
dominated by a small number of large corporations, the Company expects that a
significant portion of its future product sales will continue to be concentrated
in a limited number of OEMs. In addition, the Company believes that the
manufacture of subscriber equipment for emerging telecommunications services,
such as personal communications services ("PCS"), will also be concentrated in a
limited number of OEMs. As a result, the Company's performance is likely to
continue to depend on relatively large orders from a limited number of
distributors and OEMs. The Company's performance will also depend in part on
gaining additional OEM customers, both within existing markets and in new
markets. Sales of the Company's PDC, TDMA and CDMA chip sets will depend on the
success of the Company's OEM customers in continuing to develop and introduce
competitive handsets using these chip sets, and in successfully competing in
these intensely competitive wireless personal communications markets. In
addition, sales of CTP Systems' PBX systems will depend on the success of CTP
Systems' OEM customers in the wireless PBX market. The loss of any existing OEM
customer, a significant reduction in the level of sales to any existing
customers, or the failure of the Company to gain additional OEM customers could
have a material adverse effect on the Company's business, financial condition
and results of operations.
UNCERTAINTIES RELATED TO CERTAIN NEW MARKETS FOR THE COMPANY'S
PRODUCTS. The success of the Company in marketing its TDMA-based and CDMA-based
chip sets will be dependent on, among other things, the success of the
relatively new TDMA and CDMA standards and growth of these markets worldwide.
There can be no assurance that these standards will be widely adopted or that
the TDMA or CDMA chip sets or successive generations of these products, will be
successful in the marketplace. In addition, increased sales of CTP Systems'
wireless PBX systems will be dependent on, among other things, growth in the
market for PBX systems and other low-mobility wireless communications
applications. This market has to date not experienced the rate of growth
previously anticipated, and there can be no assurance that the PBX market will
become large enough to support significant sales of CTP Systems' products.
DEPENDENCE ON JAPANESE AND GLOBAL MARKETS AND ECONOMIES; FLUCTUATION OF
EXCHANGE RATES. A substantial portion of the Company's revenues are derived from
sales of its products in Japan and may be materially affected by the current
difficulties in the Japanese economy. A continued weakness in the Japanese
economy or a further decline of economic conditions in Japan could have a
material adverse effect on the Company's business, financial condition and
results of operations. The future performance of the Company will be dependent,
in large part, upon its ability to continue to compete successfully in the
Japanese market. The Company's ability to continue to compete in this market
will be dependent upon several factors, including no deterioration of existing
trade relations between Japan, Israel and the United States or imposition of
tariffs in the wireless personal communications industry, no adverse changes in
the Japanese telecommunications regulatory environment, the Company's ability to
develop products that meet the technical requirements of its Japanese customers,
and the Company's ability to maintain satisfactory relationships with its
Japanese customers and its distributor in Japan. While virtually all of the
Company's sales to its Japanese customers are denominated in United States
dollars, a
14
material portion of the sales prices for certain products sold to
these customers by the Company are quoted in dollars linked to yen based prices.
Therefore, fluctuations in the exchange rate for the United States dollar in
relation to the yen could materially affect the price of the Company's products
in Japan and could have a material adverse effect on the Company's sales and
results of operations. In addition, an increasing portion of the components
purchased by the Company for the manufacture of its products are quoted in, or
linked to, yen based prices and, therefore, strengthening of the exchange rate
of the yen in relation to the United States dollar could materially increase the
cost of these materials and thereby have a material adverse effect on the
Company's results of operations and financial conditions. Changes in the
political or economic conditions, trade policy or regulation of
telecommunications in Japan could have a material adverse effect on the
Company's business, financial condition and results of operations.
An increasing amount of the Company's sales are made outside of Japan.
The economies of other global regions in which the Company or its OEM customers
do business, such as North and South America, may also be negatively affected by
the current economic difficulties in Japan and Asia and other causes.
Deterioration of economic conditions in these regions could have a material
negative impact on the Company's business, financial condition and results of
operations.
EXPECTED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND POTENTIAL
QUARTERLY LOSSES. The Company's quarterly operating results depend on the volume
and timing of product orders received and delivered during the quarter and the
timing of new product introductions by the Company and its customers. The
Company anticipates that for the foreseeable future new product introductions
may cause significant fluctuations in quarterly operating results. In addition,
the Company's quarterly operating results have in the past and may continue to
vary significantly as a result of other factors, including the introduction of
new products by the Company's competitors; market acceptance of new products;
the greater number of manufacturing days in the second and third quarters;
changes in general economic conditions, particularly in Japan, the Far East and
North and South America; adoption of new technologies and standards; relative
prices of the Company's products; competition of the Company and its OEMs; the
cost and availability of components; the mix of products sold; the quality and
availability of chip sets manufactured for the Company by third parties; changes
in the Company's distribution arrangements; and sales of wireless subscriber
equipment by OEMs.
SHORT VISIBILITY. The market for the Company's baseband chip sets is
characterized by short-term order and shipment schedules. Accordingly, since the
Company's revenue expectations and planned operating expenses are in large part
based on estimates rather than on firm customer orders, the Company's quarterly
operating results could be materially adversely affected if orders and revenues
do not meet expectations.
RELIANCE ON THIRD PARTY MANUFACTURERS. All of the Company's integrated
circuit products and certain of the components included in CTP Systems' products
are currently fabricated by independent third parties, and the Company intends
to continue using independent foundries in the future. Accordingly, the Company
is and will remain dependent on independent foundries to achieve acceptable
manufacturing yields, to allocate to the Company a sufficient portion of foundry
capacity to meet the Company's needs and to offer competitive pricing to the
Company. Although the Company has not experienced material quality, allocation
or pricing problems to date, if such problems were to arise in the future, they
would have a material adverse effect on the Company's business, financial
condition and results of operations.
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has
experienced substantial fluctuation, and the Company believes that factors such
as announcements of developments related to the Company's business,
announcements by customers or competitors, quarterly fluctuations in the
Company's financial results and general conditions in the wireless personal
communications industry in which the Company competes or the national and
regional economies in which the Company does business, fluctuations in levels of
consumer spending for cellular telephones in Japan and North and South America,
and other factors could cause the price of the Company's Common Stock to
continue to fluctuate in the future, perhaps substantially. In addition, in
recent years the stock market in general, and the market for shares of
technology stocks in particular, have experienced extreme price fluctuations,
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could have a material adverse effect on the market
price of the Company's Common Stock.
15
RISK OF INCREASED INCOME TAXES. DSPCI and CTP Systems, two Israeli
subsidiaries of the Company, operate as "Approved Enterprises" under Israel's
Law for the Encouragement of Capital Investments, 1959, as amended. An Approved
Enterprise is eligible for significant income tax rate reductions for several
years following the first year in which it has income subject to taxation in
Israel (after consideration of tax losses carried forward). There can be no
assurance that this favorable tax treatment will continue, and any change in
such tax treatment could have a material adverse effect on the Company's net
income and results of operations. As of this date, the Company is not aware of
any circumstances that might cause it to lose its favorable tax treatment. If
Israel's tax incentives or rates applicable to DSPCI or CTP Systems are
rescinded or changed, their income taxes could increase and their results of
operations and cash flow would be adversely affected. In addition, the Company's
income tax rate would increase if all or a portion of the earnings of DSP
Telecommunications Ltd., DSPCI or CTP Systems were to become subject to United
States federal and state income tax as a result of actual or deemed dividends or
through operation of United States tax rules applicable to "controlled foreign
corporations."
The effective income tax rate of DSPCI and CTP Systems is sensitive to
the relationship between the rate of inflation in Israel and to the change in
the rate of exchange between the US dollar and the New Israeli Shekel ("NIS").
As a result, fluctuations in this rate of exchange in relation to the rate of
inflation in Israel could increase the Company's effective income tax rate and
as a result have a material adverse effect on the Company's net income and
results of operations.
FUTURE ACQUISITIONS. The Company's strategy includes obtaining
additional technologies and may involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating these
acquisitions may divert substantial management resources. An acquisition could
absorb substantial cash resources, could require the Company to incur or assume
debt obligations, or could involve the issuance of additional Common or
Preferred Stock. The issuance of additional equity securities would dilute and
could represent an interest senior to the rights of then outstanding Common
Stock of the Company. An acquisition which is accounted for as a purchase, like
the acquisition of CTP Systems, could involve significant one-time, non-cash
write-offs, or could involve the amortization of goodwill and other intangibles
over a number of years, which would adversely affect earnings in those years.
Acquisitions outside the digital communications area may be viewed by outside
market analysts as a diversion of the Company's focus on digital communications.
For these and other reasons, the market for the Company's stock may react
negatively to the announcement of any acquisition. An acquisition will continue
to require attention from the Company's management to integrate the acquired
entity into the Company's operations, may require the Company to develop
expertise in fields outside its current area of focus, and may result in
departures of management of the acquired entity. An acquired entity may have
unknown liabilities, and its business may not achieve the results anticipated at
the time of the acquisition.
RELIANCE ON INTERNATIONAL OPERATIONS; RISKS OF OPERATIONS IN ISRAEL.
The Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in the exchange rate
for the United States dollar; imposition of tariffs and other barriers and
restrictions; and the burdens of complying with a variety of foreign laws. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations. In particular, the Company's
principal research and development facilities are located in the State of Israel
and, as a result, as September 30, 1998, 176 of the Company's 190 employees were
located in Israel, including a substantial portion of the Company's senior
management and all of the Company's research and development personnel.
Therefore, the Company is directly affected by the political, economic and
military conditions to which that country is subject. In addition, many of the
Company's expenses in Israel are paid in Israeli currency, thereby also
subjecting the Company to foreign currency fluctuations and to economic
pressures resulting from Israel's generally high rate of inflation. The rate of
inflation in Israel for 1996, 1997 and the first nine months of 1998 was 10.6%,
7.0% and 4.0%, respectively. While the Company's functional currency is the
United States dollar, a portion of the Company's expenses are denominated in
Israeli shekels. The Company's primary expense paid in Israeli currency is
Israeli-based employee salaries. In addition, the Company also has certain
Israeli shekel-based liabilities and assets. As a result, fluctuations in the
value of Israeli currency in comparison to the United States dollar and
inflationary pressures on the Israeli shekel could increase the cost of
technology development, research and development expenses, general and
administrative expenses and the Company's effective income tax rate. 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.
16
In the past, the Company has obtained royalty-bearing grants from the
Office of the Chief Scientist in Israel's Ministry of Industry and Trade (the
"Chief Scientist") and the Israel-United States Binational Industrial Research
and Development Foundation to fund research and development. The terms of the
grants from the Chief Scientist prohibit the transfer of technology developed
pursuant to the terms of these grants to any person, without the prior written
consent of the State of Israel.
MANAGEMENT OF GROWTH. The growth and development in the Company's
business has placed, and is expected to continue to place, a significant strain
on the Company's management and operations. To manage its growth and
development, the Company must continue to implement and improve its operational,
financial and management information systems and expand, train and manage its
employees. The anticipated increase in product development, general and
administrative, and marketing and sales expenses coupled with the Company's
reliance on OEMs to successfully market and develop products that incorporate
the Company's proprietary technologies could have an adverse effect on the
Company's performance. The Company's failure to manage growth effectively and
efficiently could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's reports on Form 10-K for the
fiscal year ended December 31, 1997 and on Form 10-Q for the quarterly periods
ended June 30, 1997, September 30, 1997, March 31, 1998 and June 30, 1998, on
May 12, 1997, a class action lawsuit was filed against the Company and several
of its officers and directors in the Superior Court of California, Santa Clara
County, bearing the caption BERT PERL, ET AL. V. DSP COMMUNICATIONS, INC.,
DAVIDI GILO, LEWIS S. BROAD, GERALD DOGON, NATHAN HOD, ARNON KOHAVI AND JOSEPH
PERL. A second identical lawsuit, captioned GERSHON SONTAG, ET AL. V. DSP
COMMUNICATIONS, INC., ET AL. was filed on May 22, 1997. The complaints, which
were consolidated, alleged that the Company and certain of its officers and
directors violated California securities laws in connection with certain
statements allegedly made during the first quarter of 1997, and sought damages
in an unspecified amount, interest, attorney's fees and other costs and other
equitable injunctive relief. The plaintiffs requested to have the matter
certified as a class action on behalf of certain past and present shareholders
of the Company. The court sustained the Company's demurrer with leave to amend.
On January 27, 1998, plaintiffs filed an amended and consolidated complaint. On
February 26, 1998, two of the plaintiffs in the state action filed a similar
complaint in the U.S. District Court for the Northern District of California,
captioned ROBERT MISHELOW, ET AL. V. DSP COMMUNICATIONS, INC., ET AL. The
complaint makes the same allegations as the amended complaint filed in state
court, but charges violations of federal securities laws.
The parties have reached an agreement in principle to settle the
lawsuits in their entirety for $3,000,000, which will be funded by insurance
proceeds. The agreement is subject to negotiation and execution of a Stipulation
of Settlement and approval by the court. The Company continues to deny all
allegations in the lawsuit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 12, 1998, Nathan Hod resigned as Chairman of the Board and
as a director of the Company and Davidi Gilo, the Company's founder and former
Chairman, was appointed as Chairman of the Board of Directors of the Company.
Mr. Hod will remain employed with the Company as an advisor to Mr. Gilo until
December 31, 1998.
In addition, on October 12, 1998, Gerald Dogon resigned as the
Company's Executive Vice President and Chief Financial Officer. Mr.
Dogon will remain as a director of the Company. David Aber, formerly Vice
President of Finance of the Company, was appointed as the Company's Chief
Financial Officer.
In connection with Mr. Gilo's appointment as Chairman of the Board, the
Company sold 350,000 shares of the Company's common stock to Mr. Gilo on October
12, 1998. The purchase price was $2,340,625, or $6.6875 per share, which was the
closing share price of the common stock as reported on the New York Stock
Exchange on October 12, 1998. The purchase price was paid by delivery by Mr.
Gilo to the Company of a promissory note in the principal amount of $2,340,625.
The note bears interest at the rate of 6.5% per annum. Principal and interest
under the note are payable on December 31, 2001. The note is secured by a deed
of trust on certain real property owned by Mr. Gilo. The sale of the shares to
Mr. Gilo was deemed to be exempt from registration under the Securities Act of
1933 in reliance on Section 4(2) thereof.
18
In October 1998, the Company increased its share repurchase program,
originally adopted in April 1997, by six million shares, to a total of 16
million shares. Pursuant to the repurchase program, the Company is authorized to
purchase, from time to time and at management's discretion, up to the authorized
16 million shares of the Company's common stock in the open market or in
privately negotiated transactions. In the third quarter of 1998, the Company
repurchased 1,359,400 shares for approximately $13.6 million. In addition, in
October 1998, the Company repurchased 1,669,500 shares, bringing the total
number of shares repurchased in this repurchase program to 4,301,700 shares in
1998 and to 10,171,500 shares since its inception, with an aggregate purchase
price of approximately $94.9 million. The Company may, from time to time,
repurchase additional shares of its common stock under the repurchase program.
On October 7, 1998, the Board of Directors adopted a 1998 Non-Qualified
Stock Option Plan, pursuant to which 5,000,000 shares of common stock are
reserved for issuance upon exercise of options that may be granted to employees
and consultants of the Company.
On October 7, 1998, the Board of Directors adopted a share option
repricing program pursuant to which options to purchase an aggregate of
1,579,476 shares of common stock, held by non-officer employees of the Company
under the Company's stock option plans, were repriced to have an exercise price
equal to the closing market price of the common stock on October 7, 1998, which
price was $6.125 per share. In addition, on October 12, 1998, the Board of
Directors adopted a share option repricing program pursuant to which options to
purchase an aggregate of 810,000 shares of common stock, held by certain
officers of the Company under the Company's stock option plans, were repriced to
have an exercise price equal to the closing market price of the common stock on
October 12, 1998, which price was $6.6875 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.29 Employment Agreement, dated as of July 22, 1998, by and
between DSP Telecom, Inc. and Joseph Perl.
10.30 Promissory Note, dated June 22, 1998, issued by Dr. and Mrs.
Joseph Perl to the Company.
10.31 Amendment to Employment and Option Agreements, dated as of
October 12, 1998, by and between DSPC Israel Ltd., the
Company, and Nathan Hod.
10.32 Stock Purchase Agreement, dated as of October 12, 1998, by and
between the Company and Davidi Gilo.
10.33 Promissory Note, dated October 12, 1998, issued by Davidi Gilo
to the Company.
10.34 1998 Non-Qualified Stock Option Plan of the Company.
27.1 Financial Data Schedule - Nine Months Ended September 30, 1998
27.2 Financial Data Schedule - Nine Months Ended September 30, 1997
(b) Reports on Form 8-K
None.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1998
DSP COMMUNICATIONS, INC.
By: /s/ David Aber
------------------------------
David Aber, Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
20