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 MARCH 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission File Number 0-23006
DSP GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2683643
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
3120 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-4300
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of April 30, 1999 there were 11,538,081 shares of Common Stock ($.001 par
value per share) outstanding.
INDEX
DSP GROUP, INC.
PAGE NO.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 1999
and December 31, 1998............................................. 3
Condensed consolidated statements of income--Three
months ended March 31, 1999 and 1998................................. 4
Condensed consolidated statements of cash flows--Three
months ended March 31, 1999 and 1998................................. 5
Condensed consolidated statements of Stockholders' Equity --
Three months ended March 31, 1999 and 1998........................... 6
Notes to condensed consolidated financial statements--
March 31, 1999....................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 18
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings...................................................... 19
Item 2. Changes in Securities.................................................. 19
Item 3. Defaults upon Senior Securities........................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.................... 19
Item 5. Other Information...................................................... 19
Item 6. Exhibits and Reports on Form 8-K....................................... 19
SIGNATURES ......................................................................... 20
PART 1. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,090 $ 9,038
Marketable securities 85,233 57,951
Accounts receivable, net 3,486 5,721
Inventories 1,129 2,181
Deferred income taxes 1,374 1,374
Other accounts receivable 2,826 1,608
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TOTAL CURRENT ASSETS 106,138 77,873
Property and equipment, at cost: 14,082 11,330
Less accumulated depreciation and amortization (7,513) (7,094)
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6,569 4,236
Other investments, net of accumulated amortization
2,276 1,834
Capitalized software 1,625 --
Severance pay fund 959 864
Deferred income taxes 848 848
Other assets 135 135
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TOTAL ASSETS
$ 118,550 $ 85,790
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,165 $2,360
Other current liabilities 6,484 6,841
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TOTAL CURRENT LIABILITIES 8,649 9,201
LONG TERM LIABILITIES
Accrued severance pay 1,005 895
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common Stock 12 9
Additional paid-in capital 110,035 75,610
Retained earning 13,150 12,129
Less cost of treasury stock (14,301) (12,053)
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TOTAL STOCKHOLDERS' EQUITY 108,896 75,695
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $118,550 $85,791
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--------- ---------
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
REVENUES:
Product sales $ 6,522 $ 13,401
Licensing, royalties and other 3,940 2,275
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TOTAL REVENUES 10,462 15,676
COST OF REVENUES:
Cost of product sales 3,751 7,727
Cost of licensing, royalties and other 75 66
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TOTAL COST OF REVENUES 3,826 7,793
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GROSS PROFIT 6,636 7,883
OPERATING EXPENSES:
Research and development 3,361 2,028
Sales and marketing 1,916 1,313
General and administrative 1,252 1,092
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TOTAL OPERATING EXPENSES 6,529 4,433
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OPERATING INCOME 107 3,450
OTHER INCOME (EXPENSE):
Interest and other income 1,130 940
Interest expense and other (104) (42)
Equity in income (loss) of equity
method investees, net 442 (66)
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INCOME BEFORE PROVISION FOR INCOME TAXES 1,575 4,282
Provision for income taxes 393 1,071
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NET INCOME $ 1,182 $ 3,211
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NET INCOME PER SHARE:
Basic $ 0.11 $ 0.32
Diluted $ 0.11 $ 0.31
SHARES USED IN PER SHARE COMPUTATIONS:
Basic 10,769 10,080
Diluted 10,953 10,387
See notes to condensed consolidated financial statements.
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 623 $ 404
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INVESTING ACTIVITIES
Purchase of available-for-sale marketable securities (39,331) (25,069)
Sale of available-for-sale marketable securities 12,049 25,711
Purchases of equipment (2,308) (284)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (29,590) 358
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FINANCIAL ACTIVITIES
Sale of Common Stock for cash upon
exercise of options and employee
stock purchase plan 304 569
Purchase of treasury stock (2,710) (2,386)
Issue of Common Stock to investor 34,425 --
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 32,019 (1,817)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 3,052 $ (1,055)
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Non-cash investing and financing information:
Liabilities assumed in connection with asset acquisitions $ 500 --
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-------- --------
Capitalized software acquisition in exchange
for license sale $ 2,000 --
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See notes to condensed consolidated financial statements.
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ADDITIONAL RETAINED OTHER TOTAL
COMMON STOCK PAID-IN EARNINGS TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (ACCUMULATED STOCK AT INCOME EQUITY
THREE MONTHS ENDED EARNINGS COST
MARCH 31, 1999 (DEFICIT)
---------- --------- ----------- -------------- ------------- ---------------- --------------
Balance at December 31, 9,406 $ 9 $ 75,610 $ 12,129 $ (12,053) $ -- $ 75,695
1998
Net income -- -- -- 1,182 -- -- 1,182
Comprehensive income -- -- -- -- -- -- 1,182
Sale of Common Stock, net
of issuance cost 2,300 3 34,425 -- -- -- 34,428
Exercise of Common Stock
options by employees 10 -- -- (54) 172 -- 118
Sale of Common Stock under
employee stock purchase 18 -- -- (107) 290 -- 183
plan
Purchase of treasury stock (200) -- -- -- (2,710) -- (2,710)
---------- --------- ----------- -------------- ------------- ---------------- --------------
Balance at March 31, 1999 11,534 $ 12 $ 110,035 $ 13,150 $ (14,301) $ -- $ 108,896
---------- --------- ----------- -------------- ------------- ---------------- --------------
THREE MONTHS ENDED
MARCH 31, 1998
---------- --------- ----------- -------------- ------------- ---------------- --------------
Balance at December 31, 10,094 $ 10 $ 74,418 $ (1,308) $ -- $ 1,050 $ 74,170
1998
Comprehensive income
Unrealized gain on
marketable security -- -- -- -- -- 36 36
Net income -- -- -- 3,211 -- -- 3,211
Comprehensive income -- -- -- -- -- -- 3,247
Exercise of Common Stock
options by employees 44 -- -- (406) 859 -- 453
Sale of Common Stock under
Employee stock purchase 13 -- -- 116 -- -- 116
plan
Purchase of treasury stock (99) -- -- -- (2,386) -- (2,386)
---------- --------- ----------- -------------- ------------- ---------------- --------------
Balance at March 31, 1998 10,052 $ 10 $ 74,418 $ 1,613 $ (1,527) $ 1,086 $ 75,600
---------- --------- ----------- -------------- ------------- ---------------- --------------
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 1999,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, reference is made to the
consolidated financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 1998.
NOTE B - INVENTORIES
Inventory is valued at the lower of cost or market. Inventories are composed of
the following (in thousands):
MARCH 31, DECEMBER 31,
1999 1998
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Finished goods $1,129 $2,182
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$1,129 $2,182
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NOTE C - NET INCOME PER SHARE
Basic net income per share is computed based on the weighted average number of
shares of common stock outstanding during the period. For the same periods,
diluted net income per share further includes the effect of dilutive stock
options outstanding during the year, all in accordance with the Financial
Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS
128"). The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Page 7
THREE MONTHS ENDED
MARCH 31,
1999 1998
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Numerator:
Net income $ 1,182 $ 3,211
------- -------
------- -------
Denominator:
Weighted average number of shares of Common
Stock outstanding during the period used to
compute basic earnings per share 10,769 10,080
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would
be used to purchase treasury stock) 184 307
Weighted average number of shares of
Common Stock used to compute diluted ------- -------
income per share 10,953 10,387
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------- -------
Basic net income per share $ 0.11 $ 0.32
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------- -------
Diluted net income per share $ 0.11 $ 0.31
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NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
MARCH 31, DECEMBER 31,
--------- ------------
1999 1998
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Obligations of states and
political subdivisions $26,312 $25,290
Corporate obligations 62,829 33,218
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$89,141 $58,508
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------- -------
Amounts included in
marketable securities $85,233 $57,951
Amounts included in
cash and cash equivalents 3,908 557
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$89,141 $58,508
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At March 31, 1999 and at December 31, 1998, the carrying amount of securities
approximated their fair market value and the amount of unrealized gain or loss
was not significant. Gross realized gains or losses for the three months ended
March 31, 1999 and 1998, were not
Page 8
significant. The amortized cost of available-for-sale debt securities at March
31, 1999, by contractual maturities, is shown below (in thousands):
AMORTIZED COST
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Due in one year or less $ 31,122
Due after one year to two years 58,019
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$ 89,141
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NOTE E - INCOME TAXES
The effective tax rate used in computing the provision for income taxes is based
on projected fiscal year income before taxes, including estimated income by tax
jurisdiction. The difference between the effective tax rate and the statutory
rate is due primarily to foreign tax holiday and tax exempt income in Israel.
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to a distributor accounted for 8% and 51% of total revenues for
the three months ended March 31, 1999 and 1998, respectively. Revenues from a
licensee accounted for 18% of total revenues for the three months ended March
31, 1999. The loss of one or more major distributors or customers could have a
material adverse effect on our business, financial condition and results of
operations.
NOTE G - OTHER INVESTMENTS
Other investments are comprised of: AudioCodes, Ltd.: AudioCodes, Ltd.
("AudioCodes") is an Israeli corporation primarily engaged in design,
research, development, manufacturing and marketing of hardware and software
products that enable simultaneous transmission of voice and data over
networks such as the Internet, ATM and Frame Relay. In July 1997, AudioCodes
completed a private placement of additional equity securities without our
participation and, as a result, our equity ownership interest in AudioCodes
was diluted from approximately 35% to approximately 29%. We also have an
option to purchase approximately 3.5% of the outstanding stock of AudioCodes
for approximately $1.0 million, subject to certain conditions. The condensed
consolidated statements of income for the three months ended March 31, 1999
and 1998, include a $442,000 equity gain and $66,000 equity loss,
respectively, in our investment in AudioCodes.
NOTE H- REPURCHASE OF COMPANY'S COMMON STOCK
In March 1999, our Board of Directors authorized a new plan to repurchase up to
1,000,000 shares of our Common Stock from time to time on the open-market or in
privately negotiated transactions, increasing the total shares authorized to be
repurchased to 2,000,000 shares. In the three months ended March 31, 1999, we
repurchased 200,000 shares of our Common Stock at an average purchase price of
$13.55 per share. The accumulated number of shares of Common Stock we
repurchased as of March 31, 1999 is 1,014,000 shares.
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NOTE I - DEFERRED REVENUE
During the first quarter of 1998, we successfully finalized testing on a certain
TAD chip shipped to a customer in the third and fourth quarters of fiscal 1997.
Accordingly, in the first quarter ended March 31, 1998, we recorded
approximately $2,180,000 of revenue and approximately $1,208,000 of related
inventory cost, which had been previously deferred at December 31, 1997.
NOTE J - ACQUISITIONS
In the first quarter of 1999, we entered the wireless communication product
market, which we believe to be synergistic with our existing markets. We
acquired two integrated groups of engineers specializing in the design of
integrated circuits for wireless communication. In addition, we acquired
technology and products, including associated intellectual property, related to
base band and RF for 900 Megahertz digital spread spectrum.
NOTE K- CONTINGENCIES
We are involved in certain claims arising in the normal course of business,
including claims that it may be infringing patent rights owned by third parties.
We are unable to foresee the extent to which these matters will be pursued by
the claimants or to predict with certainty the eventual outcome. However, we
believe that the ultimate resolution of these matters will not have a material
adverse effect on our financial position, results of operations or cash flow.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in the
United States District Court for the Northern District of California against us.
The action alleges breach of contract, breach of implied covenant of good faith
and fair dealing and requests an accounting by us in connection with our
termination of the Sales Representative Agreement between BEKA and us. In April
1999, we mutually resolved the case with BEKA, without a material adverse effect
on our financial position, results of operations or cash flow. The case was
formally dismissed on May 5, 1999.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Our total revenues decreased to $10.5 million in the first
quarter of 1999 from $15.7 million in the first quarter of 1998. The decrease in
the first quarter of 1999 compared to the same period in 1998 was due to our
decreased revenues from product sales which was primarily caused by our phasing
out of our D64xx line of products and our phasing in of our new line of D16xxx
products. Our licensing and royalty revenues increased to $3.9 million in the
first quarter of 1999 compared to $2.3 million in the same period of 1998
primarily due to a new licensee which licensed the DSP TEAK Core.
Export sales, primarily consisting of TAD speech processors shipped to customers
in Europe and Asia, including Japan, as well as license fees on DSP core
designs, represented 70% of our total revenues for the three months ended March
31, 1999 and 94% of our total revenues for the three months ended March 31,
1998. All export sales are denominated in U.S. dollars.
Revenues from one of our licensees accounted for 18% of total revenues for the
first quarter of 1999. Revenues from a distributor, Tomen Electronics, accounted
for 8% of our total revenues for the three months ended March 31, 1999 and 51%
of our total revenues for the three months ended March 31, 1998.
GROSS PROFIT. Gross profit as a percentage of total revenues increased to 63% in
the first quarter of 1999 from 50% in the first quarter of 1998. The increase in
gross profit in the first quarter of 1999, was primarily due to the change in
the mix of our licensing revenues and product sale revenues, which resulted in
higher licensing revenues, which have a higher gross profit than product sales.
Product gross profit as a percentage of product sales was 42% in both first
quarters of 1999 and 1998. The Company managed to off-set the continued decline
in average selling prices with a decrease in manufacturing costs.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
increased to $3.4 million in the first quarter of 1999 from $2.0 million in the
first quarter of 1998. The increase was primarily due to our newly acquired
wireless communication technologies and products, including partial amortization
of research and development costs that have not yet reached technological
feasibility. The expense increase was also attributed to an increase in research
and development personnel as compared to the same period in 1998, and to higher
levels of depreciation, due to our acquisition of new research and development
computers and lab equipment.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased to $1.9
million from $1.3 million in the first quarter of 1999 as compared to the same
quarter in 1998. Salaries and fringe benefits increased in the first quarter of
1999 compared to the first quarter of 1998, primarily due to an increase in
sales and marketing personnel, partially associated with our new wireless
communication activities. Our sales and marketing expenses as a percentage of
total revenues were 18% in the three months ended March 31, 1999 and 8% in the
three months ended March 31, 1998. The increase was attributed to our lower
revenues in the first three months ended March 31, 1999, as compared with the
same period in 1998.
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GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
were approximately $1.3 million in the three months ended March 31, 1999 and
$1.1 million in the three months ended March 31, 1998. The increase was mainly
due to higher levels of legal expenses, rent and utilities expenses. These
expenses as a percentage of total revenues increased to approximately 12% in
first three months of 1999, compared to 7% in the first three months of 1998.
OTHER INCOME (EXPENSE). Interest and other income and interest expense other,
net was $1.0 million for the three months ended March 31, 1999, compared to
$898,000 for the three months ended March 31, 1998. The increase was primarily
the result of higher levels of cash equivalents and marketable securities in
1999 as compared with 1998, which were off-set by lower yields.
EQUITY IN INCOME (LOSS) OF EQUITY METHOD INVESTEES, NET. Equity in income (loss)
of equity method investees, net was a $442,000 gain for the three months ended
March 31, 1999 as compared to a $66,000 loss in the comparable period ended
March 31, 1998.
PROVISION FOR INCOME TAXES. In 1999 and 1998, we benefited for federal and state
tax purposes from foreign tax holiday and tax exempt income in Israel.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the three months ended March 31, 1999, we generated
$623,000 of cash and cash equivalents from our operating activities as compared
to $404,000 during the three months ended March 31, 1998. This increase, even
though we experienced a decrease in net income during the three months ended
March 31, 1999, was attributable primarily to the non-cash effects of a decrease
of accounts receivable and a decrease in inventory. These decreases were offset
by our purchase of capitalized software in the first three months of 1999 and by
our recognizing deferred revenue, in the first three months of 1998.
INVESTING ACTIVITIES. We invest excess cash in marketable securities of varying
maturity, depending on our projected cash needs for operations, capital
expenditures and other business purposes. In the first three months of 1999, we
purchased $39.3 million and sold $12.0 million of investments classified as
marketable securities. Our capital equipment purchases in the first three months
of 1999 totaled $2.3 million, primarily for new equipment associated with the
acquisition of wireless communicating technologies, including computers and
testing equipment.
FINANCING ACTIVITIES. During the three months ended March 31, 1999, we received
$304,000 upon the exercise of employee stock options and through purchases
pursuant to the employee stock purchase plan. In the first three months of 1999,
we repurchased 200,000 shares of our Common Stock at an average purchase price
of $13.55 per share, for an aggregate purchase price of approximately $2.7
million.
On February 2, 1999, we announced that we had entered into a stock purchase
agreement with Magnum Technologies, Ltd., an international investment fund
("Magnum"), in which we issued and sold 2,300,000 new shares of our Common Stock
to Magnum, which represented approximately 20% of our outstanding Common Stock
at the time of the transaction, for $15 per share, or an aggregate of $34.5
million in total gross proceeds to DSP Group. As part of the agreement, Magnum
Page 12
may acquire additional shares of our Common Stock in the open market, but may
not bring its total holdings to more than 35% of our outstanding shares of
Common Stock.
At March 31, 1999, our principal source of liquidity consisted of cash and cash
equivalents totaling $12.1 million and marketable securities with an aggregate
value of $85.2 million. Our working capital at March 31, 1999 was $97.5 million.
We believe that our current cash, cash equivalent and marketable securities will
be sufficient to meet our cash requirements through at least the next twelve
months. In March 1999, we announced a new stock repurchase program pursuant to
which up to an additional 1,000,000 shares of our Common Stock may be acquired
in the open market or in privately negotiated transactions. Accordingly, we will
use part of our available cash for this purpose.
Additionally, as part of our business strategy, we occasionally evaluate
potential acquisitions of businesses, products and technologies. Accordingly, a
portion of our available cash may be used for the acquisition of complementary
products or businesses. Such potential transactions may require substantial
capital resources, which may require us to seek additional debt or equity
financing. There can be no assurance that we will consummate any such
transactions. See "Factors Affecting Future Operating Results--There are Risks
Associated with our Acquisition Strategy" for more detailed information.
YEAR 2000 READINESS
We are aware of the issues associated with the programming code in existing
computer systems as the Year 2000 approaches. The "Year 2000" problem is
concerned with whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Year 2000 problem is pervasive and complex as the computer operation
of virtually every company will be affected in some way.
Beginning in 1997, during 1998 and going forward in 1999, we have been and will
continue to utilize both internal and external resources to identify, correct or
reprogram and test our systems for Year 2000 readiness. We anticipate that all
reprogramming efforts, including testing, will be completed by July 31, 1999.
Our efforts include the evaluation of both information technology ("IT") and
non-IT systems. Non-IT systems include systems or hardware containing embedded
technology such as microcontrollers. To date the costs we have incurred with
respect to this project are not material and we do not believe that future costs
for the completion of this project will be material. However, if systems
material to our operations have not been made Year 2000 ready by the completion
of the project, the Year 2000 issue could have a material adverse effect on our
financial statements. We have not developed a contingency plan to operate in the
event that a non compliant critical system is not remedied by January 1, 2000
and do not intend to do so.
Throughout 1998 and into 1999, we have been and continue to take steps to ensure
that our products and services will continue to operate on and after January 1,
2000. We believe that our products being shipped today are Year 2000 ready. In
addition, to date, confirmations have been received from our primary processing
vendors that plans are being developed to address the processing of transactions
in the Year 2000. We also have been communicating with suppliers and other third
parties that we do business with to coordinate Year 2000
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readiness. The responses received to date indicate that such third parties are
taking steps to address this concern.
Based upon the steps being taken to address this issue and the progress to date,
we believe that Year 2000 readiness expenses will not harm our earnings.
However, we cannot assure you that Year 2000 problems will not occur with
respect to our computer systems. Furthermore, the Year 2000 problem may impact
other entities with which we transact business, and we cannot predict the effect
of the Year 2000 problem on these entities or the resulting effect on us. As a
result, if preventative and/or corrective actions mainly by those with which we
do business with are not made in a timely manner, the Year 2000 issue could
result in a failure of some of our manufacturing operations, which would harm
our business, financial condition and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative financial
instruments. We do not currently have any significant foreign currency exposure
since we do not transact business in foreign currencies. Due to this, we did not
have significant overall currency exposure at April 1, 1999.
FOREIGN CURRENCY RATE RISK. As nearly all of our sales and expenses are
denominated in U.S. Dollars, we have experienced only insignificant foreign
exchange gains and losses to date, and do not expect to incur significant gains
and losses in 1999. We did not engage in foreign currency hedging activities
during the three months ended March 31, 1999.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the euro, on January 1, 1999. During 2002, all EMU countries are
expected to be operating with the euro as their single currency. Uncertainty
exists as to the effect the euro currency will have on the marketplace.
Additionally, all of the final rules and regulations have not yet been defined
and finalized by the European Commission with regard to the euro currency. We
are assessing the effect the euro formation will have on DSP Group's internal
systems and the sale of DSP Group products. We expect to take appropriate
actions based on the results of such assessment. We believe that the cost
related to this issue will not be material to us and will not have a substantial
effect on our financial condition and results of operations.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING OUR FUTURE
PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS OUR PLANS AND
STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS
AND WE ASSUME NO OBLIGATION TO UPDATE THIS INFORMATION. NUMEROUS FACTORS COULD
CAUSE OUR ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN
THESE FORWARD-LOOKING STATEMENTS, INCLUDING THE FOLLOWING RISK FACTORS.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our quarterly
results of operations may vary significantly in the future for a variety of
reasons, including the following:
- fluctuations in volume and timing of product orders;
- timing of recognition of license fees;
- level of per unit royalties;
- changes in demand for our products due to seasonal customer
buying patterns and other factors;
- timing of new product introductions by us or our customers,
licensees or competitors;
- changes in the mix of products sold by us;
- fluctuations in the level of sales by original equipment
manufacturers (OEMs) and other vendors of products incorporating
our products; and
- general economic conditions, including the changing economic
conditions in Asia.
Each of the above factors is difficult to forecast and thus could harm
our business, financial condition and results of operations. Through 1999, we
expect that revenues from our DSP core designs and TrueSpeech algorithms 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 our operating results. Our per unit royalties from
licenses are dependent upon the success of our OEM licensees in introducing
products utilizing our technology and the success of those OEM products in the
marketplace. Per unit royalties from TrueSpeech licensees have not been
significant to date.
OUR AVERAGE SELLING PRICES CONTINUE TO DECLINE. We have experienced a decrease
in the average selling prices of our TAD speech processors, but have 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.
However, we cannot guarantee that our on-going efforts will be successful or
that they will keep pace with the anticipated, continuing decline in average
selling prices.
WE DEPEND ON THE DIGITAL TAD MARKET WHICH IS HIGHLY COMPETITIVE. Sales of TAD
products comprise a substantial portion of our product sales. Any adverse change
in the digital TAD market or in our ability to compete and maintain our position
in that market would harm our business, financial condition and results of
operations. The digital TAD market and the markets for our products in general
are extremely competitive and we expect that competition
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will only increase. Our existing and potential competitors in each of our
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 we do. It is possible
that we may one day be unable to respond to increased price competition for TAD
speech processors or other products through the introduction of new products or
reductions of manufacturing costs. This inability would have a material adverse
effect on our business, financial condition and results of operations. Likewise,
any significant delays by us in developing, manufacturing or shipping new or
enhanced products would also have a material adverse effect on our business,
financial condition and results of operations.
WE DEPEND ON REVENUES FROM A CURRENTLY UNSTABLE ASIAN MARKET. In 1997, we
generated approximately $19.9 million, or 39% of our total product sales, from
sales to customers located in South Korea, Taiwan, Singapore and Hong Kong.
However, in 1998, due to economic problems in some of these countries, most
notably South Korea and Singapore, our product sales in this region decreased to
$10.9 million, or 22% of our total product sales. The decline in sales from
Southeast Asia countries resulted in a decrease in our backlog, but was
partially offset by increased orders from Japan. If this negative economic trend
in the Asian markets continues, it may result in a further decrease of our
backlog in 1999. We cannot provide assurance that continued negative economic
development in Asia will not have a material adverse effect on our future
operating performance.
WE DEPEND ON INDEPENDENT FOUNDRIES TO MANUFACTURE OUR INTEGRATED CIRCUIT
PRODUCTS. All of our integrated circuit products are manufactured by independent
foundries. While these foundries have been able to adequately meet the demands
of our increasing business, we are and will continue to be dependent upon these
foundries to achieve acceptable manufacturing yields, quality levels and costs,
and to allocate to us a sufficient portion of foundry capacity to meet our needs
in a timely manner. To meet our increased wafer requirements, we have added
additional independent foundries to manufacture our TAD speech processors. Our
revenues could be harmed should any of these foundries fail to meet our request
for products due to a shortage of production capacity, process difficulties, low
yield rates or financial instability.
WE DEPEND ON INTERNATIONAL OPERATIONS, PARTICULARLY IN ISRAEL. We are subject to
the risks of doing business internationally, including:
- unexpected changes in regulatory requirements;
- fluctuations in the exchange rate for the U.S. dollar;
- imposition of tariffs and other barriers and restrictions;
- burdens of complying with a variety of foreign laws;
- political and economic instability; and
- changes in diplomatic and trade relationships.
In particular, our principal research and development facilities are located in
the State of Israel and, as a result, at March 31, 1999, 106 of our 138
employees were located in Israel, including all 85 of our research and
development personnel. In addition, although DSP Group is incorporated in
Delaware, a majority of our directors and executive officers are residents of
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Israel. Therefore, we are directly affected by the political, economic and
military conditions to which Israel is subject.
Moreover, many of our expenses in Israel are paid in Israeli currency which
subjects us to the risks of foreign currency fluctuations and to economic
pressures resulting from Israel's generally high rate of inflation. The rate of
inflation in Israel was (1.5%) for the three months ended March 31, 1999 and
0.1% for the three months ended March 31, 1998. While substantially all of our
sales and expenses are denominated in United States dollars, a portion of our
expenses are denominated in Israeli shekels. Our primary expenses paid in
Israeli currency are employee salaries and lease payments on our Israeli
facilities. 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. We cannot provide assurance that currency fluctuations, changes in the
rate of inflation in Israel or any of the other factors mentioned above will not
have a material adverse effect on our business, financial condition and results
of operations.
WE DEPEND ON OEMS AND THEIR SUPPLIERS TO OBTAIN REQUIRED COMPLEMENTARY
COMPONENTS. Some of the raw materials, components and subassemblies included in
the products manufactured by our OEM customers, which also incorporate our
products, are obtained from a limited group of suppliers. Supply disruptions,
shortages or termination of any of these sources could have an adverse effect on
our business and results of operations due to the delay or discontinuance of
orders for our products by customers until those necessary components are
available.
WE DEPEND UPON THE ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. Our
prospects are partially dependent upon the establishment of industry standards
for digital speech compression based on TrueSpeech algorithms in the computer
telephony and Voice over IP markets. The development of industry standards
utilizing TrueSpeech algorithms would create an opportunity for us 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.723.1, which is predominately composed
of a TrueSpeech algorithm, as the standard speech compression technology for use
in video conferencing over public telephone lines. In March 1997, the
International Multimedia Teleconferencing Consortium, a nonprofit industry
group, recommended the use of G.723.1 as the default audio coder for all voice
transmissions over the Internet or for IP applications for H.323 conferencing
products.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY. DSP Group has pursued,
and will continue to pursue, growth opportunities through internal development
and acquisition of complementary businesses, products and technologies. We are
unable to predict whether or when any prospective acquisition will be completed.
The process of integrating an acquired business may be prolonged due to
unforeseen difficulties and may require a disproportionate amount of our
resources and management's attention. We cannot provide assurance that we will
be able to successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired businesses into our operations, or expand into
new markets. Once integrated, acquisitions may not achieve comparable levels of
revenues, profitability or productivity as the existing business of DSP Group or
otherwise perform as expected. The occurrence of any of these events could harm
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our business, financial condition or results of operations. Future acquisitions
may require substantial capital resources, which may require us to seek
additional debt or equity financing.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; RISKS OF INFRINGEMENT OF
RIGHTS OF OTHERS. As is typical in the semiconductor industry, we have been and
may from time to time be notified of claims that we may be infringing patents or
intellectual property rights owned by third parties. For example, AT&T has
asserted that G.723.1, which is primarily composed of a TrueSpeech algorithm,
includes certain elements covered by patents held by AT&T and has requested that
video conferencing manufacturers license the technology from AT&T. Other
organizations including Lucent Microelectronics, NTT and VoiceCraft have raised
public claims that they also have patents related to the G.723.1 technology.
If it appears necessary or desirable, we may try to obtain licenses for those
patents or intellectual property rights that we are allegedly infringing.
Although holders of these type of intellectual property rights commonly offer
these licenses, we cannot assure that licenses will be offered or that terms of
any offered licenses will be acceptable to us. Our failure to obtain a license
for key intellectual property rights from a third party for technology used by
us could cause us to incur substantial liabilities and to suspend the
manufacturing of products utilizing the technology. We believe that the ultimate
resolution of these matters will not have a material adverse effect on our
financial position, results of operations, or cash flows.
WE MAY HAVE YEAR 2000 READINESS ISSUES. We may discover Year 2000 readiness
problems in our information technology ("IT") and non-IT systems that will
require substantial revision. If we cannot fix or replace these systems before
January 1, 2000 our operating costs could be increased and we could experience
business interruptions which could harm our business.
Furthermore, the Year 2000 problem may impact other entities with which we
transact business, including suppliers, primary processing vendors and
customers, and we cannot predict the effect of the Year 2000 problem on these
entities or the resulting effect on us. As a result, if preventative and/or
corrective actions mainly by those with which we do business are not made in a
timely manner, the Year 2000 issue could harm our business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness" for more
detailed information.
OUR STOCK PRICE MAY BE VOLATILE. Announcements of developments related to our
business, announcements by competitors, quarterly fluctuations in our financial
results, changes in the general conditions of the highly dynamic industry in
which we compete or the national economies in which we do business and other
factors could cause the price of our common stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market has experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. These factors and fluctuations could have a
material adverse effect on the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quantitative and Qualitative Disclosures About Market Risk."
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in the
United States District Court for the Northern District of California against DSP
Group. The action alleges breach of contract, breach of implied covenant of good
faith and fair dealing and requests an accounting by us in connection with our
termination of the Sales Representative Agreement between BEKA and us. In April
1999, we mutually resolved the case with BEKA. The case was formally dismissed
on May 5, 1999.
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amendment to the Company's Bylaws, effective as of
February 5, 1999
4.1 Registration Rights Agreement, dated as of February
2, 1999, by and between the Company and Magnum
Technology Limited
10.1 Stock Purchase Agreement, dated as of February 2,
1999, by and between the Company and Magnum
Technology Limited
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP GROUP, INC.
(Registrant)
By /s/ AVI BASHER
-----------------------------------------------------------
Avi Basher, Vice President of Finance, Chief Financial Officer
and Secretary (Principal Financial Officer and Principal Accounting Officer)
Date: May 13, 1999
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