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 June 30, 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 0-25622 ------- DSP COMMUNICATIONS , INC. ------------------------- (Exact name of registrant as specified in its charter) Delaware 77-0389180 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 20300 Stevens Creek Boulevard, Cupertino, California 95014 ---------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (408) 777-2700 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 5, 1999, there were 41,031,847 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-June 30, 1999 and December 31, 1998........................................................................................3 Condensed consolidated statements of operations-quarter ended June 30, 1999 and 1998, and six months ended June 30, 1999 and 1998.............................................................................4 Condensed consolidated statements of cash flows-six months ended June 30, 1999 and 1998.............................................................................5 Notes to condensed consolidated financial statements- June 30, 1999............................................................................................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..............................................20 PART II. OTHER INFORMATION - ----------------------------- Item 1. Legal Proceedings........................................................................................21 Item 2. Changes in Securities and Use of Proceeds................................................................21 Item 3. Defaults upon Senior Securities..........................................................................21 Item 4. Submission of Matters to a Vote of Security Holders......................................................21 Item 5. Other Information........................................................................................22 Item 6. Exhibits and Reports on Form 8-K.........................................................................22 SIGNATURES.......................................................................................................23 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DSP COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31, 1999 1998 ---------- ------------ (Unaudited) (Note 1) ASSETS CURRENT ASSETS Cash and cash equivalents $ 39,875 $ 66,818 Short term investments 87,003 27,071 Trade accounts receivable 20,085 29,351 Other current assets 6,469 5,717 --------- ---------- Total current assets 153,432 128,957 Property and equipment, net 6,012 5,323 Other assets 4,705 5,063 Goodwill 5,149 5,894 --------- ---------- $ 169,298 $ 145,237 --------- ---------- --------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 12,964 $ 16,474 Accrued liabilities 19,254 17,110 Deferred income 127 285 --------- ---------- Total current liabilities 32,345 33,869 STOCKHOLDERS' EQUITY Common stock 40 38 Additional paid-in capital 87,024 78,777 Notes from shareholders (5,099) (5,099) Retained earnings 55,096 37,624 Accumulated other comprehensive income (108) 28 --------- ---------- Total stockholders' equity 136,953 111,368 --------- ---------- $ 169,298 $ 145,237 --------- ---------- --------- ---------- See Notes to Condensed Consolidated Financial Statements Note 1: The balance sheet at December 31, 1998 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 SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Product $ 39,600 $ 29,566 $ 73,738 $ 51,482 Technology development 2,274 906 4,054 2,076 -------- -------- -------- -------- Total revenues 41,874 30,472 77,792 53,558 COST OF REVENUES Product 23,124 16,202 42,565 26,836 Technology development 1,326 517 2,211 1,521 -------- -------- -------- -------- Total cost of revenues 24,450 16,719 44,776 28,357 -------- -------- -------- -------- Gross profit 17,424 13,753 33,016 25,201 OPERATING EXPENSES Research and development 3,769 2,943 7,386 5,116 Sales and marketing 1,554 979 3,100 1,938 General and administrative 2,906 2,307 5,637 4,526 -------- -------- -------- -------- 8,229 6,229 16,123 11,580 -------- -------- -------- -------- Operating income 9,195 7,524 16,893 13,621 Interest and other income, net 1,534 1,568 2,738 2,957 -------- -------- -------- -------- Income before provision for income taxes 10,729 9,092 19,631 16,578 Provision for income taxes (1,180) (954) (2,159) (1,740) -------- -------- -------- -------- Net income $ 9,549 $ 8,138 $ 17,472 $ 14,838 -------- -------- -------- -------- -------- -------- -------- -------- Earnings per share: Basic $ 0.24 $ 0.20 $ 0.44 $ 0.37 -------- -------- -------- -------- -------- -------- -------- -------- Diluted $ 0.22 $ 0.19 $ 0.40 $ 0.35 -------- -------- -------- -------- -------- -------- -------- -------- Shares used in computing earnings per share: Basic 39,563 40,351 39,506 40,281 -------- -------- -------- -------- -------- -------- -------- -------- Diluted 43,905 42,629 43,770 42,744 -------- -------- -------- -------- -------- -------- -------- -------- See Notes to Condensed Consolidated Financial Statements. 4 DSP COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (US DOLLARS IN THOUSANDS) (UNAUDITED) SIX SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net income for the period $ 17,472 $ 14,838 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,207 1,273 Compensation expense related to shares issued in a subsidiar -- 150 Compensation expense related to stock options -- 42 Changes in operating assets and liabilities: Trade accounts receivable 9,266 (4,855) Other current assets (752) 2,155 Other assets 1,187 -- Accounts payable (3,510) (1,301) Accrued liabilities 2,144 2,243 Deferred income (158) (185) -------- -------- Net cash provided by operating activities 26,856 14,350 -------- -------- INVESTING ACTIVITIES: Cash purchases of equipment (1,980) (1,467) Purchases of short-term investments (92,488) (25,563) Sales and maturities of short-term investments 32,556 19,792 -------- -------- Net cash used in investing activities (61,912) (7,238) -------- -------- FINANCING ACTIVITIES: Repurchase of common stock (9,527) (19,982) Issuance of common stock for cash 17,640 8,895 -------- -------- Net cash provided by (used in) financing activities 8,113 (11,087) -------- -------- Decrease in cash and cash equivalents (26,943) (3,965) Cash and cash equivalents at beginning of period 66,818 82,322 -------- -------- Cash and cash equivalents at end of period $ 39,875 $ 78,357 -------- -------- -------- -------- 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, 1998. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30 as follows (in thousands except per share data): THREE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ---- ---- ---- ---- Numerator for basic and diluted earnings per share - net income $ 9,549 $ 8,138 $ 17,472 $ 14,838 ------- ------- -------- -------- ------- ------- -------- -------- Denominator for basic earnings per share - weighted average shares 39,563 40,351 39,506 40,281 Effect of dilutive securities - employee stock options 4,342 2,278 4,264 2,463 ------- ------- -------- -------- Denominator for diluted earnings per share - adjusted weighted average shares 43,905 42,629 43,770 42,744 ------- ------- -------- -------- ------- ------- -------- -------- Earnings per share: Basic $ 0.24 $ 0.20 $ 0.44 $ 0.37 ------- ------- -------- -------- ------- ------- -------- -------- Diluted $ 0.22 $ 0.19 $ 0.40 $ 0.35 ------- ------- -------- -------- ------- ------- -------- -------- Potentially dilutive securities excluded from computations as the effect would be antidilutive 6,484 551 7,569 491 ------- ------- -------- -------- ------- ------- -------- -------- 3. SEGMENT INFORMATION DSPC and its subsidiaries operate in one industry segment, principally the development and marketing of integrated circuits for the wireless communications market. Operations in Israel and Canada include research, development and sales. Operations in the United States include marketing and sales. 4. COMPREHENSIVE INCOME During the second quarter of 1999 and 1998, total comprehensive income was $9,428,000 and $8,117,000, respectively. For the first six months of 1999 and 1998, total comprehensive income amounted to $17,336,000 and $14,795,000, respectively. Other comprehensive income represents unrealized gains or losses on the Company's available-for-sale securities. 6 5. NEW ACCOUNTING STANDARDS Effective January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed For or Obtained For Internal Use" (the "SOP"). The SOP requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The adoption of the new SOP does not have a material impact on the Company's consolidated results of operations, financial position or cash flows. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133." This Statement defers for one year the effective date of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The rule now will apply to fiscal years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, the Company does not anticipate that the adoption of SFAS 133 will have a significant effect on the Company's consolidated results of operations or financial position. 6. STOCKHOLDERS' EQUITY During the first six months of 1999 the Company repurchased 644,100 shares of its common stock for $9,527,000. In addition, during the first six months of 1999, options to purchase 2,731,000 shares of the Company's common stock were exercised for total proceeds of $17,777,000. 7. ISRAELI GOVERNMENT RESEARCH GRANTS The Company is participating in programs sponsored by the Israeli Government for the support of research and development activities. The Company has obtained approval for grants from the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade (the "Chief Scientist") totaling approximately $2,100,000, of which, in the second quarter of 1999, $540,000 has been accrued (included in other current assets). 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 Chief Scientist. The grant is repayable to the Chief Scientist, at the rate of 4% of the sales of products developed out of the projects funded, up to an amount equal to 100% of the grant received. 8. 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 and injunctive relief. 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 made the same allegations as the amended complaint filed in state court, but charged violations of federal securities laws. Settlement of the previously disclosed class action lawsuits was approved by the court on April 9, 1999. Under the terms of the agreement, the claims were settled for $3,000,000, which was funded by insurance proceeds. The Company believes that settlement was in the best interests of its investors and continues to deny all allegations. 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, 1998. 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, without limitation, 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 SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Product 94.6 % 97.0 % 94.8 % 96.1 % Technology development 5.4 3.0 5.2 3.9 ----- ----- ----- ------ Total revenues 100.0 100.0 100.0 100.0 COST OF REVENUES Product 55.2 53.2 54.7 50.1 Technology development 3.2 1.7 2.9 2.8 ----- ----- ----- ----- Total cost of revenues 58.4 54.9 57.6 52.9 ----- ----- ----- ----- Gross profit 41.6 45.1 42.4 47.1 OPERATING EXPENSES Research and development, net 9.0 9.7 9.5 9.6 Sales and marketing 3.7 3.2 4.0 3.6 General and administrative 6.9 7.5 7.2 8.5 ----- ----- ----- ----- 19.6 20.4 20.7 21.7 ----- ----- ----- ----- Operating income 22.0 24.7 21.7 25.4 Interest and other income, net 3.7 5.1 3.5 5.6 ----- ----- ----- ----- Income before provision for income taxes 25.7 29.8 25.2 31.0 Provision for income taxes (2.8) (3.1) (2.8) (3.3) ----- ----- ----- ----- Net income 22.9 % 26.7 % 22.4 % 27.7 % ----- ----- ----- ----- ----- ----- ----- ----- 8 REVENUES PRODUCT: Product revenues increased to $39.6 million in the second quarter of 1999 from $29.6 million in the second quarter of 1998 and to $73.7 million in the six months ended June 30, 1999 from $51.5 million in the first six months of 1998. Product revenues consist primarily of baseband chip sets for digital cellular telephones. Revenues from sales to distributors are recognized at the time the products are shipped by the distributor to the original equipment manufacturer ("OEM") customer. The increase in product revenues for the three months and six months ended June 30, 1999 as compared to the same periods in 1998, was a result of stronger demand for the Company's PDC chip sets and volume sales of the Company's CDMA chip sets, which began in the second quarter of 1998. TECHNOLOGY DEVELOPMENT: Technology development revenues increased to $2.3 million in the second quarter of 1999 from $906,000 in the second quarter of 1998 and to $4.1 million in the six months ended June 30, 1999 from $2.1 million in the first six months of 1998. 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. Technology development revenues mainly relate to contracts for development and enhancement of products for PDC, TDMA and CDMA applications, and revenues from reference design projects undertaken by the Company's subsidiary, CTP Systems. GROSS PROFIT Gross profit in the second quarter of 1999 was $17.4 million (41.6% of revenues) compared to $13.8 million (45.1% of revenues) in the second quarter of 1998. Gross profit in the first half of 1999 was $33.0 million (42.4% of revenues), as compared to $25.2 million (47.1% of revenues) in the first half of 1998. The gross margins on product revenues in the second quarter of 1999 were 41.6%, as compared to 45.2% in the second quarter of 1998. Gross margins on product revenues in the first half of 1999 were 42.3%, as compared to 47.9% in the first half of 1998. The gross margins on product revenues were affected by changes in the customer and product mix from quarter to quarter, and by price pressures which are impacted by, among other factors, fluctuations in the dollar/yen rate of exchange. 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, and if the Company is successful in negotiating such lower prices. The gross margins on technology development revenues vary from quarter to quarter depending on the number and size of technology development agreements and the timing of related milestones. In connection with its license agreement for CDMA, the Company has agreed to pay royalties based on specified rates. The Company initiated payment of these royalties in 1998 upon commencement of sales of its CDMA products. Royalty expenses in the first six months of 1999 amounted to $947,000. 9 RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased to $3.8 million in the second quarter of 1999 from $2.9 million in the second quarter of 1998 and to $7.4 million in the first half of 1999 from $5.1 million in the first half of 1998. The increases were a result of increases in the number of engineering personnel involved in research and development activities, including the addition of engineering and software personnel hired by the Company's subsidiary in Canada, Isotel Corp. ("Isotel"), as a result of the acquisition on December 31, 1998 of substantially all of the assets of Isotel Research Ltd., an OEM software company, and the amortization of developed technology purchased within the framework of the Isotel acquisition (the "Isotel acquisition"). As a percentage of total revenues, research and development expenses decreased to 9.0% in the second quarter of 1999, from 9.7% in the second quarter of 1998, mainly as a result of the increase in revenues, and to 9.5% in the first half of 1999 from 9.6% in the first half of 1998. The Company expects that its research and development expenses will increase in the future. The Company is participating in programs sponsored by the Israeli Government for the support of research and development activities. The Company has obtained approval for grants from the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade (the "Chief Scientist") totaling approximately $2,100,000, of which, in the second quarter of 1999, $540,000 has been accrued (included in other current assets). 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 Chief Scientist. The grant is repayable to the Chief Scientist, at the rate of 4% of the sales of products developed out of the projects funded, up to an amount equal to 100% of the grant received. SALES AND MARKETING EXPENSES Sales and marketing expenses increased to $1.6 million (3.7% of revenues) in the second quarter of 1999 from $1.0 million (3.2% of revenues) in the second quarter of 1998 and to $3.1 million (4.0% of revenues) in the first half of 1999 from $1.9 million (3.6% of revenues) in the first half of 1998. The increase was a result of increased sales and marketing staff at the Company's headquarters in Cupertino, California, the addition of Isotel's sales and marketing staff, and increased promotion and marketing activities. The Company expects that its sales and marketing expenses will increase, in absolute dollars. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased to $2.9 million (6.9% of revenues) in the second quarter of 1999 as compared to $2.3 million (7.5% of revenues) in the second quarter of 1998 and $5.6 million (7.2% of revenues) in the first half of 1999 as compared to $4.5 million (8.5% of revenues) in the first half of 1998. The increase in absolute dollars was a result of increased staffing levels at the facility of DSPC Technologies Ltd., an Israeli subsidiary of the Company, the addition of Isotel's administrative staff, increased facility expenses resulting from additional space that was leased by the Company's subsidiary in Israel, increased administration expenses and fees, and amortization of goodwill related to the Isotel acquisition. INTEREST AND OTHER INCOME, NET Interest and other income, net, includes interest and investment income, foreign currency remeasurement gains and losses and other miscellaneous expenses. Interest and other income decreased marginally to $1.5 million in the second quarter of 1999 from $1.6 million in the second quarter of 1998 and to $2.7 million in the first half of 1999 from $3.0 million in the first half of 1998. 10 Interest and other income, net, in the first six months of 1999 and 1998 was generated primarily from interest and realized gains on the Company's cash and short-term investment balances, which were at an average level of approximately $110 million and $118 million, during the first six months of 1999 and 1998, respectively. Interest and 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) and the Isotel acquisition; changes in the rate of exchange between the Japanese yen and the United States dollar and between the new Israeli shekel and the United States dollar; and fluctuations in the available interest rates applicable to the Company's deposits and short-term investments. PROVISION FOR INCOME TAXES The tax provisions have been favorably impacted by the benefits of the Israeli "Approved Enterprise" status. The Approved Enterprise status was granted according to investment plans and will allow the Company's Israeli subsidiaries a two to four year tax holiday on undistributed earnings, and a corporate tax rate of 10% to 25% for an additional six to eight years on each of the investment plans' proportionate share of income. The benefits under these current investment plans are scheduled to expire between the years 2005 and 2008. As of December 31, 1998, the Company had United States federal, state, and Israeli net operating loss carryforwards of approximately $34.0 million, $16.2 million and $5.3 million, respectively. The United States federal and state net operating loss carryforwards will expire at various dates beginning in years 2001 through 2013. These loss carryforwards primarily relate to stock option deductions, the benefit of which will be credited to paid in capital when realized. The Israeli loss carryforwards have no expiration date, but can only be used to offset certain Israeli subsidiary earnings. The Company's effective tax rate was 11% for the first half of 1999 compared to10.5% for the first half of 1998. Over time, the Company's tax rate is expected to increase due to elimination of the tax benefits awarded with Approved Enterprise status, 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. Likewise, losses incurred by one Israeli entity or a combined loss of the U.S. entities will increase the Company's effective tax rate. The Company believes that, based upon a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax asset such that a partial valuation allowance has been provided. The deferred tax asset recorded of $2.2 million is realizable based upon current levels of future taxable income on a jurisdictional basis. The Company will continue to assess, on a quarterly basis, the realizability of the deferred tax assets based on actual and forecasted operating results of each legal entity. The unbenefited U.S. deferred tax assets primarily relate to stock option deductions, the benefit of which will be credited to paid in capital when realized. DSPC Technologies Ltd., DSP Telecom Ltd., DSPC Israel Ltd. and CTP Systems Ltd. (collectively, the "Israeli Companies") are CFCs for United States income tax purposes. Accordingly, all or a portion of the earnings of these Israeli Companies are subject to United States taxation if, among other things, the Israeli Companies lend funds to the Company or otherwise invest in certain proscribed assets; or the Israeli Companies engage in various types of transactions defined in the Subpart F provisions of the United States Internal Revenue Code. However, if the Israeli Companies' earnings become subject to United States taxation, DSPC may be eligible to utilize its Israeli and other foreign income taxes as a credit against its United States income taxes. The Company believes that its existing plans will minimize the impact of the CFC rules for the immediate future, subject to any changes in United States tax laws that may occur. However, over time, the CFC rules may cause the Company's tax rate to increase. 11 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 items are remeasured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement, which have not been material to date, are reported in current operations. While most 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 a material portion of the purchase prices for certain components purchased by the Company, 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 is 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 and general and administrative expenses, and could have a material adverse effect on the Company's results of operations. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, the Company had $126.9 million of cash, cash equivalents and short-term investments, compared to $118.4 million as of June 30, 1998. The Company uses independent foundries to fabricate its baseband chip set products, minimizing its need to invest in manufacturing equipment and to develop integrated circuit fabrication processes. However, the Company relies on its independent foundries to achieve acceptable manufacturing yields and to allocate to the Company a sufficient portion of foundry capacity to meet the Company's needs. The Company to date has ordered products from its foundries primarily upon receipt of orders for chip sets from its distributors or OEM customers and has not maintained any significant inventory of its chip sets. This strategy allows the Company to avoid utilizing its capital resources for manufacturing facilities and inventory and allows the Company to focus substantially all of its resources on the design, development and marketing of its products. The Company maintains limited inventory in anticipation of orders from its distributors or OEM customers. CTP Systems manufactures its wireless PBX systems product primarily through external subcontractor assembly facilities. To date, production of wireless PBX systems has been limited and has not had a material effect on the Company's liquidity or capital resources. The Company has financed its operations and investments in capital equipment primarily through cash provided by operations. During the first six months of 1999, the Company repurchased 644,100 shares of its common stock in its share repurchase program, using an aggregate of approximately $9.5 million. A total of approximately 11 million shares have been repurchased through June 30, 1999, with a total aggregate purchase price of approximately $106.5 million. The Company may from time to time repurchase additional shares of its Common Stock under its share repurchase program. During the first six months of 1999, options to purchase 2,731,000 shares of the Company's common stock were exercised for total proceeds of $17,777,000 The Company's operating activities provided cash of $26.9 million in the first six months of 1999, as compared to $11.1 million in the first six months of 1998. Net cash provided from operations in the first six months of 1999 12 was comprised primarily of net income and a decrease in trade accounts receivable, less a decrease in current liabilities. The Company's investing activities in the first six months of 1999, other than purchases of and proceeds from sales and maturities of short-term investments, have consisted of expenditures for fixed assets, which totaled $2.0 million. As of June 30, 1999, the Company also had issued bank guarantees and letters of credit totaling $2.7 million. 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 complementary 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 with respect to any such transaction. 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. 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 implementing its 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, and consists of five steps. Step one involved increasing awareness by educating and involving all appropriate levels of management regarding the need to address year 2000 issues. Step two consisted of identifying all of the Company's systems, products and relationships that may be impacted by year 2000. Step three involved determining the current state of year 2000 readiness for those areas identified in step two and prioritizing areas that need to be fixed. Step four consisted of developing a plan for those areas, including the Company's internal computers and operating systems, identified as needing correction. Step five consists of the implementation and execution of the Company's Plan and completing the steps identified to attain year 2000 readiness. The Company is in the final stages of completing step five. Based on the Company's assessment to date, it has determined that it is unlikely that it has any exposure related to the year 2000 issue with respect to the Company's systems and products. The majority of the costs associated with this effort are not incremental to the Company, but represent a reallocation of existing resources. 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. To date, the Company's costs related to the year 2000 issues have amounted to approximately $60,000 and the Company does not expect the aggregate amount spent on the year 2000 issue to exceed $90,000. 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 expectations as to the extent and timeliness of modifications required in order to achieve year 2000 compliance is a forward-looking statement 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 13 can be no assurance however, that unexpected delays or problems, including the failure to ensure year 2000 compliance by 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 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. 14 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS This Form 10-Q contains forward looking statements concerning our existing and future products, markets, expenses, revenues, liquidity, performance and cash needs as well as our plans and strategies. These forward looking statements involve risks and uncertainties and are based on current management expectations, and we are not obligated to update this information. Many factors could cause actual results and events to differ significantly from the results anticipated by us and described in these forward looking statements, including but not limited to the following risk factors. WE RELY ON A LIMITED NUMBER OF CHIP SET PRODUCTS USED IN DIGITAL WIRELESS TELEPHONES; WE MUST MAINTAIN AND INCREASE SALES OF EACH OF OUR PRODUCTS AND DEVELOP NEXT-GENERATIONS OF OUR PRODUCTS AND THIRD GENERATION PRODUCTS TO BE SUCCESSFUL Unlike companies that sell a large number of products, substantially all of our sales are from only three chip set products used in cellular telephones. Because we sell so few products, a decrease or slowdown in sales of any single product could have a material adverse effect on our results and financial condition. Our success will also depend on our ability to develop and market successive generations of these products. To succeed in the future, we may also need to develop and market new products. If we are not successful in developing, manufacturing and marketing next-generation products or any new products, our business and results of operations could be materially and adversely affected. Third generation digital wireless standards are currently being proposed and developed worldwide to address the growing needs for high-capacity voice communications and high-speed data, video and multimedia applications. The Company is developing chipsets for use in Wideband CDMA and other third generation standards. If we do not succeed in timely developing and marketing third generation products that meet the new standards, our business would be materially adversely affected. IF OUR CELLULAR TELEPHONE MANUFACTURER CUSTOMERS DO NOT SUCCEED, WE WILL NOT SUCCEED Sales of our PDC, TDMA and CDMA chip sets will depend on the success of our cellular telephone manufacturer customers in developing, introducing and marketing competitive handsets using these chip sets, and in successfully competing in their intensely competitive wireless personal communications markets. In addition, our subsidiary, CTP Systems, will depend on the success of its manufacturer customers in the market for intra-office wireless communications systems, known as private branch exchange, or PBX, systems, for sales of CTP Systems' wireless PBX systems. We will not be successful if our customers are not successful. THE FAILURE OF THIRD PARTIES ON WHICH WE RELY TO MANUFACTURE OUR INTEGRATED CIRCUIT PRODUCTS COULD ADVERSELY AFFECT FUTURE OPERATIONS All of our integrated circuit products and certain of the components included in CTP Systems' products are currently made by independent third parties, and we intend to continue using independent foundries in the future. Accordingly, we are and will remain dependent on independent foundries to achieve acceptable manufacturing yields, to allocate to us a sufficient amount of foundry capacity to meet our needs and to offer us competitive pricing. Since we are a comparatively small customer of our chip set suppliers, some of these suppliers have in the past, when market shortages of integrated circuits have occurred, failed to allocate to us sufficient capacity to manufacture our chip sets upon receiving our orders. These failures have caused delays in shipments. We anticipate that if shortages of integrated circuits occur in the future, our suppliers may again be unable or unwilling to allocate sufficient capacity to us and may cause delays in shipments of our products to customers. Any failure by our independent foundries to allocate sufficient capacity to us, or any other material quality or pricing problems with our independent foundries could have a material adverse effect on our business, financial condition and results of operations. 15 WE SELL TO A SMALL NUMBER OF CUSTOMERS; THE LOSS OF EITHER OF OUR DISTRIBUTORS OR ANY OF OUR CUSTOMERS COULD HAVE ADVERSE CONSEQUENCES We sell substantially all of our baseband chip sets for digital cellular telephones to Tomen Electronics Corp., our distributor in Japan, and to Tomen Electronics America Inc., our distributor in the United States. These distributors sell our products to a small number of cellular telephone manufacturer customers. In the first six months of 1999, seven cellular telephone manufacturer customers accounted for substantially all of the sales of our personal digital cellular, or PDC, baseband chip sets, while two cellular telephone manufacturers accounted for all sales of our code division multiple access, or CDMA, chip sets, and two customers accounted for all sales of our time division multiple access, or TDMA, chip sets. The loss of either of our distributors or the loss of or significant reduction in the distributors' sales to any of these cellular telephone manufacturers could have a material adverse effect on our business, financial condition and results of operations. DECLINING SALES PRICES OF CHIP SETS COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS Prices of wireless personal communications equipment have declined, and we expect this decline to continue. As a result, prices for our chip set products have declined and will likely continue to decline. In addition, pricing competition among handset manufacturers and component suppliers has increased. If we are unable to offset these price decreases with either increases in unit volume, changes in our terms of trade, or reductions in per unit costs, our gross profit would be adversely affected. Since cellular telephone manufacturers often negotiate supply arrangements well in advance of delivery dates, we must often commit to price reductions for our products before we are aware of how, or if, adequate cost reductions can be obtained. If we are unable to lower costs in response to these price reduction commitments, our business, financial condition and results of operations could be materially and adversely affected. In addition, our inability to respond to increased price competition would have a material adverse effect on our business, financial condition and results of operations. WE COULD BE ADVERSELY AFFECTED BY ANY DECREASE IN THE GROWTH OF THE WORLDWIDE DIGITAL CELLULAR MARKETS IN WHICH WE SELL OUR PRODUCTS Our increasing sales of chip set products have resulted to date largely from the rapid growth of the global digital wireless telephone markets in which we sell our chip set products. A slowdown in the growth of any of these markets could have a material adverse effect on our business. RISKS RELATED TO NEW MARKETS FOR OUR TDMA, CDMA AND WIRELESS PBX PRODUCTS Our success in marketing our TDMA-based and CDMA-based chip sets will depend on, among other things, the success of the relatively new TDMA and CDMA standards and growth of these markets worldwide. These standards may not be widely adopted, and our TDMA or CDMA chip sets or successive generations of these products may not be successful in the marketplace. In addition, increased sales of CTP Systems' wireless PBX systems will depend on, among other things, growth in the market for PBX systems and other low-mobility wireless communications applications. This market has to date not grown as fast as previously anticipated, and may not become large enough to support significant sales of CTP Systems' products. 16 WE COMPETE IN DIGITAL WIRELESS TELEPHONE CHIP SET MARKETS AGAINST COMPANIES WITH GREATER RESOURCES The digital wireless telephone chip set market is intensely competitive. Many of our competitors have entrenched market positions, established patents, copyrights, tradenames, trademarks and other intellectual property rights and substantial technological capabilities. Our current and potential competitors in the digital cellular market include: - - other manufacturers and suppliers of digital signal processing-based chip sets, - - cellular telephone manufacturers that develop chip set solutions internally, and - - smaller companies offering design solutions. Many of these competitors have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. We believe that we will rely on our ability to compete successfully based on price, quality, availability, performance and features of our products, timing of our new product introductions, and customer service and technical support. Other factors outside our control will also affect our ability to compete, such as pricing by our competitors, and the timing and quality of their new product introductions. We may not have the financial resources, technical expertise, intellectual property, or marketing, sales, distribution and customer service and technical support capabilities to compete successfully. WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS BY THIRD PARTIES Both the semiconductor and the wireless personal communications industries are subject to frequent litigation regarding patent and other intellectual property rights. Leading companies and organizations in the wireless personal communications industry have numerous patents that protect their intellectual property rights in these areas. Third parties may assert claims against us, our distributors or our customers with respect to our existing and future products. In the event of litigation to determine the validity of any third party's claims, we could be required to expend significant resources and divert the efforts of our technical and management personnel, whether or not such litigation is determined in our favor. In the event of an adverse result of any such litigation, among other requirements, we could be required to develop non-infringing technology; to obtain licenses to the technology that is the subject of the litigation; or to indemnify our customers from their damages under certain contracts. We may not be successful in developing non-infringing technology or in obtaining a license to use the technology on commercially reasonable terms. OUR SUCCESS DEPENDS IN LARGE PART ON OUR SUCCESS IN THE JAPANESE MARKET Our future performance will depend, in large part, upon our ability to continue to compete successfully in the Japanese market. A number of factors could adversely impact our ability to do so, including any deterioration of existing trade relations between Japan, Israel and the United States, the imposition of tariffs in the wireless personal communications industry, or any adverse changes in Japanese political conditions, trade policy or telecommunications regulations. To remain competitive in Japan, we must also continue to develop products that meet the technical requirements of our Japanese customers and maintain satisfactory relationships with our Japanese customers and distributors. Our inability to compete in Japan for any reason could have a material adverse effect on our business, financial condition and results of operations. DECLINE IN JAPANESE AND OTHER ECONOMIES COULD HAVE ADVERSE CONSEQUENCES Since we sell a large percentage of our products in Japan, the current difficulties in the Japanese economy may materially affect our revenues. If the Japanese economy remains weak or declines further, our business, financial condition and results of operations could be materially and adversely affected. An increasing amount of our sales are made to cellular telephone manufacturers for sale outside of Japan. The economies of other global regions in which we or our customers do business, such as North and South America 17 and South Korea, 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 our business, financial condition and results of operations. FLUCTUATION OF EXCHANGE RATES BETWEEN US DOLLAR AND JAPANESE YEN COULD HAVE ADVERSE EFFECTS While virtually all of our sales to our Japanese customers are denominated in United States dollars, a material portion of the sales prices for certain products we sell to these customers are quoted in dollars linked to Japanese yen-based prices. Fluctuations in the exchange rate for the United States dollar in relation to the yen could materially affect the price of our products in Japan and could have a material adverse effect on our sales and results of operations. In addition, an increasing number of the components used in our products are quoted in or linked to yen based prices, and an increase in the value of yen relative to the United States dollar could materially increase the cost of these materials. This increase could have a material adverse effect on our results of operations and financial condition. SHORT VISIBILITY FOR FUTURE PRODUCT ORDERS COULD ADVERSELY AFFECT QUARTERLY OPERATING RESULTS The market for our chip sets is characterized by short-term order and shipment schedules. Accordingly, since our revenue expectations and planned operating expenses are in large part based on estimates rather than on firm customer orders, our quarterly operating results could be materially adversely affected if orders and revenues do not meet expectations. RISKS OF INTERNATIONAL OPERATIONS, PARTICULARLY IN ISRAEL We market and sell our products internationally and have offices and operations in Israel, Japan and Canada in addition to our offices in the United States. We are therefore subject to the many risks of doing business internationally and in maintaining international operations, including: - - unexpected changes in regulatory requirements, - - fluctuations in the exchange rate for the United States dollar, - - the impact of recessions in economies outside the United States, - - the imposition of tariffs and other barriers and restrictions, - - the burdens of complying with a variety of foreign laws, - - global political and economic instability, and - - changes in diplomatic and trade relationships. Our principal research and development facilities are located in Israel, and over 80% of our employees are located in Israel, including a substantial portion of our senior management and research and development personnel. Israel's political, economic and military conditions therefore directly affect us. In addition, we pay many of our expenses in Israel with Israeli currency, and we are subject to foreign currency fluctuations and to economic pressures resulting from Israel's generally high rate of inflation. While our functional currency is the United States dollar, a portion of our expenses, including Israeli based employee salaries, are denominated in Israeli shekels. In addition, we also have 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 and general and administrative expenses. Currency fluctuations, changes in the rate of inflation in Israel or any of the other factors noted above may have a material adverse effect on our business, financial condition and results of operations. RISK OF INCREASED INCOME TAXES IN ISRAEL AND THE UNITED STATES DSPC Technologies Ltd. and CTP Systems, two of our Israeli subsidiaries, operate as "Approved Enterprises" under Israel's Law for the Encouragement of Capital Investments, 1959. An Approved Enterprise is eligible for 18 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. This favorable tax treatment may not continue, and any change in this tax treatment could have a material adverse effect on our net income and results of operations. We are not currently aware of any circumstances that might cause us to lose our favorable tax treatment. If Israel's tax incentives or rates applicable to DSPC Technologies 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, our income tax rate would increase if any of the earnings of our Israeli subsidiaries 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." OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE The price of our common stock has been particularly volatile and will likely continue to fluctuate in the future. Certain of the factors which may cause the price of our common stock and our quarterly operating results to fluctuate include: - - the timing of our new product introductions and of new product introductions by our cellular telephone manufacturer customers, - - the timing of product introduction by our competitors and our customers' competitors, - - changes in general economic conditions, particularly in Japan, South Korea, other countries in the Far East and North and South America, - - the timing of adoption of new cellular technologies and standards, - - the mix of products sold, - - the quality and availability of chip sets manufactured for us by third parties, - - acquisitions of other businesses, - - the timing of sales of wireless subscriber equipment by our customers, and - - fluctuations in the exchange rates of the currencies in which we do business. It is possible that in some future quarter, our operating results may be below public market analyst and investor expectations. If that occurs, the price of our stock may fall. In addition, in recent years the stock market in general, and the market for shares of technology stocks such as ours 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 our common stock. RISK OF SECURITIES LITIGATION In the past, we have been the object of securities class action litigation in connection with the volatility of the market price of our common stock. If we were the object of additional securities class action litigation in the future, it could result in substantial costs and a diversion of management's attention and resources. WE MAY BE UNABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS Although we have made efforts to protect our intellectual property rights, other unauthorized parties may be able to copy portions of our products or reverse engineer or obtain or use technology or other information that we regard as proprietary. In addition, the laws of the countries in which our products are or may be developed, manufactured or sold, including Hong Kong, Japan, South Korea and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States. MANAGEMENT OF GROWTH The growth and development in our business has placed, and is expected to continue to place, a significant strain on our management and operations. To manage our growth and development, we must continue to implement and 19 improve our operational, financial and management information systems and expand, train and manage our employees. The anticipated increase in product development, general and administrative, and marketing and sales expenses coupled with our reliance on wireless telephone equipment manufacturers to successfully market and develop products that use our products could have an adverse effect on our performance. Our failure to manage growth effectively and efficiently could have a material adverse effect on our business, financial condition and results of operations. OUR ACQUISITION OF ISOTEL OR OTHER COMPANIES MAY NOT BE SUCCESSFUL In December 1998, we purchased the assets of Isotel Research, Ltd., a Canadian software developer. As with any new acquisition, our management will need to devote attention to the integration of our new Isotel subsidiary with the rest of our company, and Isotel will likely divert management resources from other areas of our operations. Our strategy in acquiring Isotel in order to include software components together with our other products may not be successful. In addition, we need continually to develop expertise in digital wireless software development and marketing, which has been a field outside our current area of focus. Although our purchase agreement with Isotel provides incentives for Isotel's management to remain with our company for the next year or more, they may leave after a limited period of time. Any of these factors could have a material adverse affect on our business and results of operations. Our strategy continues to include obtaining additional technologies and may involve acquisitions of products, technologies or businesses from third parties. Identifying and negotiating these acquisitions may divert substantial management resources. An acquisition could use substantial cash, could require us to incur or assume debt obligations, or could involve the issuance of additional common or preferred stock. The issuance of additional stock would dilute existing stockholders and could represent an interest senior to the rights of our then outstanding common stock. An acquisition that is accounted for as a purchase 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. Public market analysts may view acquisitions outside the digital communications area as a diversion of our focus on digital communications. For these and other reasons, the market for our stock may react negatively to the announcement of any acquisition. As with Isotel and other acquisitions, future acquisitions will require attention from our management to integrate the acquired entity into our operations and may require us to develop expertise in fields outside our current area of focus. Management of the acquired entity may leave after the purchase. An acquired entity may have unknown liabilities, and its business may not achieve the results anticipated at the time of the acquisition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks, including market risk associated with interest rate movements and currency rate movements on non - U.S. dollar denominated assets and liabilities, as well as collectibility of accounts receivable. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the Company does not anticipate material losses in these areas. 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As previously disclosed in the Company's quarterly report on Form 10-Q for the period ended March 31, 1999, settlement of the previously disclosed class action lawsuits was approved by the court on April 9, 1999. Under the terms of the agreement, the claims were settled for $3,000,000, which was funded by insurance proceeds. The Company believes that settlement was in the best interests of its investors and continues to deny all allegations. 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 The Company's annual meeting of stockholders was held on May 11, 1999. At the annual meeting, the following matters were voted upon and approved by the stockholders: 1. The election of two (2) Class I directors to serve for a three-year term until the 2002 Annual Meeting of Stockholders. The results of the voting were as follows: a. Avraham Fischer Number of shares voted FOR 35,989,064 Number of shares WITHHOLDING AUTHORITY 388,923 b. Andrew Schonzeit Number of shares voted FOR 36,090,934 Number of shares WITHHOLDING AUTHORITY 287,053 2. Ratification of the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 1999. The results of the voting were as follows: Number of shares voted FOR 36,333,116 Number of shares voted AGAINST 15,048 Number of shares ABSTAINING 29,823 Number of Broker Non-Votes -0- 21 ITEM 5. OTHER INFORMATION On June 1, 1999, David Gilo, the Company's Chairman of the Board, was appointed as Chief Executive Officer of the Company, replacing Joseph Perl in that capacity. Dr. Perl resigned as Chief Executive Officer, President and as a Director of the Company, and he will continue to serve as an employee of the Company, acting as an advisor to Mr. Gilo. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.32 Amendment to Employment Agreement, dated as of June 1, 1999, and between DSP Telecom, Inc. and Joseph Perl. 10.33 Employment Agreement, dated as of July 15, 1999, between DSP Telecom, Inc., and Shmuel Arditi. 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 22 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: August 10, 1999 DSP COMMUNICATIONS, INC. By: /s/ David Aber -------------------- David Aber, Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 23