-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MRWfAAvsS4HVDMzl5PxlImEvXaM2sciRaonzNLGY7B6RF8w5YYdNP1LFudg558gD UQ7zJPZ0tzvW7/j3ORnnjQ== 0000912057-00-014966.txt : 20000331 0000912057-00-014966.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014966 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSP GROUP INC /DE/ CENTRAL INDEX KEY: 0000915778 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 942683643 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23006 FILM NUMBER: 586974 BUSINESS ADDRESS: STREET 1: 3120 SCOTT BLVD CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089864300 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 Commission File Number 0-23006 DSP GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 94-2683643 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation and organization) 3120 Scott Boulevard, Santa Clara, CA 95054 ------------------------------------------- (Address of principal executive offices, including zip code) (408) 986-4300 -------------- (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 per share (Title of class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on March 15, 2000, as reported on the Nasdaq National Market, was approximately $1,103,666,561. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 15, 2000, the Registrant had outstanding 26,167,520 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1999 are incorporated by reference into Part II of this Form 10-K Report. With the exception of those portions which are incorporated by reference, the Registrant's 1999 Annual Report is not deemed filed as part of this Report. INDEX DSP GROUP, INC. Page No. -------- PART I Item 1. BUSINESS..........................................................3 Item 2. PROPERTIES.......................................................20 Item 3. LEGAL PROCEEDINGS................................................20 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............20 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................................21 Item 6. SELECTED FINANCIAL DATA..........................................21 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAL AND RESULTS OF OPERATIONS............................21 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.......21 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................21 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................21 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............22 Item 11. EXECUTIVE COMPENSATION...........................................22 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................22 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................22 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................................23 SIGNATURES.......................................................28 This Annual Report on Form 10-K contains certain forward-looking statements that are based on the beliefs of, and estimates made by and information currently available to, DSP Group's management. The words "expect," "anticipate," "intend," "plan" and similar expressions identify forward-looking statements. These statements are subject to risks and uncertainties. Actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in "Factors that May Affect Future Operating Results" and elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K includes trademarks and registered trademarks of DSP Group. Products or service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners. PART I Item 1. BUSINESS. General Business DSP Group develops and markets products and technologies that perform digital signal processing--the electronic manipulation of digitized speech and other digital signals. DSP Group's products are used in a wide variety of telecom applications. Digital signal processing (DSP) based solutions are more cost effective and provide a broader range of features than analog based solutions. Many applications, including digital cellular and wireless communications, broadband modems, Voice Over the Internet and digital audio/video, all use DSP techniques intensively. Our work in the field of DSP has yielded four synergetic product families: o DSP-based Speech and Telephony Processor - "System on a Chip" that handles telephony functions and advanced speech algorithms. o Cordless Telephony - 900 Megahertz Digital Spread Spectrum Processor - A chip set that handles digital wireless communication along with telephony functions and advanced speech algorithms. o DSP Cores - Digital Signal Processor Cores - A family of processors that, when combined with other hardware elements such as memories and input/output devices, forms a chip that is most efficiently targeted for specific applications. o TrueSpeech(R) - A family of proprietary speech compression algorithms. DSP-Based Speech and Telephony Processors DSP Group has developed two lines of speech and telephony processing chips: integrated digital telephony processors, which are designed for use in the consumer telephone market, and Voice over IP speech co-processors, which are designed for use in network telephony and video conferencing products. Both product lines are based upon our DSP core designs and incorporate our TrueSpeech speech compression algorithms. 3 Integrated Digital Telephony Speech Processors DSP Group's integrated digital telephony (IDT) speech processors are currently incorporated in over 90 models of featured phones from more than 40 different companies. These models are being sold in Europe, Japan and the United States. Our IDT speech processors are based on our PineDSPCore(R), which is more fully described below. Our integrated digital telephony speech processors use our TrueSpeech speech compression technology to provide the highest quality speech recording and playback. They incorporate the following speech and telephony technologies in various combinations: - -------------------------------------------------------------------------------- Technology Description - -------------------------------------------------------------------------------- Triple Rate Coder(TM) Instructs the telephone answering system to decide automatically between better voice quality and longer recording time. - -------------------------------------------------------------------------------- True Full-Duplex Allows simultaneous two-way (full-duplex), SpeakerPhone(TM) hands-free operation of the telephone and suppresses and cancels acoustic and electrical echoes. - -------------------------------------------------------------------------------- G.723.1 Provides speech compression for Voice over IP and video conferencing over standard telephone lines. - -------------------------------------------------------------------------------- Caller ID and Call Waiting Identifies to the party being called the Caller ID telephone number of the calling party, whether or not the party being called is already engaged in another call. - -------------------------------------------------------------------------------- Call Progress Tone Detects standard telephony signals during the Detection progress of a telephone call. - -------------------------------------------------------------------------------- DTMF Signaling Detects and generates touch tone (DTMF) signals that comply with telephone industry frequency standards. - -------------------------------------------------------------------------------- Speech Prompts Provides the ability to stamp a message with a time and date and vocal operating instructions prompts. - -------------------------------------------------------------------------------- Variable Speed Playback Permits playback of recorded speech at different (FlexiSpeech(R)) speeds without distorting the natural sound of the speech. - -------------------------------------------------------------------------------- Voice Operated Switch Detects human speech and stops recording during ("VOX") (Smart-Vox(R)) periods of silence, thereby conserving available memory. - -------------------------------------------------------------------------------- Alpha Least Cost Routing Automatically chooses from a number of telephone ("LCR")/Super LCR service providers in order to select the lowest available rates. - -------------------------------------------------------------------------------- Voice Recognition Allows a user to operate a telephone or answering machine device by giving voice commands. - -------------------------------------------------------------------------------- The first integrated digital telephony speech processors were introduced by DSP Group in 1989. Since then, we have shipped approximately 47 million units of speech processors to original equipment manufacturers (OEMs), of which approximately 12 million were shipped in 1999. Our IDT speech processor sales accounted for approximately 62% of our total revenues in 1999. In 1999, we started the shipment of the D16000 family of fully integrated speech processors, which combine the components of a mixed signal system on a single chip. Each speech processor in the D16000 family contains a DSP core, converters that transform analog signals into digital signals and vice versa, and 4 various signal amplifiers, all embedded on a single chip. In addition to implementing DSP algorithms, including compression, caller ID and full-duplex speaker phone, these speech processors also perform tasks that would typically be handled by a separate central processing unit (CPU) chip. The D16000 processors provide high value to telephony product vendors by eliminating the need for almost any other electronic components and thus reducing materials and manufacturing costs. The following table presents the main features of the primary IDT speech processors that we currently offer: DSP Group's IDT Speech Processors D16559 D16529 D6571 D6587 ------ ------ ----- ----- Process Geometry (microns) ................ 0.5 0.5 0.5 0.5 Minutes Record, 4 Mbit Memory .............. 22-25, 22-25, 22-25, 22-25, 10,15 10,15 10,15 10,15 Memory Type ................................ Flash Flash Flash Flash Advanced Features: Speech Prompts ........................... Yes Yes Yes Yes Variable Speed Playback .................. Yes Yes Yes Yes Full Duplex Speakerphone ................. Yes -- Yes Yes Caller ID and Call Waiting Caller ID...... Yes Yes Yes Yes Voice Recognition ........................ Yes System On Chip-included peripherals: Microcontroller .......................... Yes Yes -- -- Line Coder ............................... Yes Yes -- -- Speaker Coder ............................ Yes -- -- -- Amplifiers ............................... Yes Yes -- -- The following is a list of IDT manufacturers and resellers whose products incorporate our IDT speech processors: IDT Manufacturers and Resellers IDT Manufacturers IDT Resellers ------------------------------------ -------------------------- Alcatel Panasonic Bell South Ascom Philips Bosch Telecom CCT Telecom Sagem British Telecom Daewoo Samsung France Telecom D&B Electronics Sanyo GE Ericsson Siemens/Infinion German Telecom Giant Smoothline Loewe-Binatone HPF Ascom Sony Southwestern Bell I.N.T. Corp. Taifeng Swiss Telecom Kinpo Thomson L.G. Electronics Tiptel Matra Uniden Maxon Voice over IP Speech Co-Processors Our Voice over IP speech co-processors were developed for use in conjunction with other microprocessors to transmit voice over packet-based public and private networks, including the Internet, 5 local area networks (LANs), frame relay networks, cable networks and other data networks and combined data/voice networks. "Voice over IP" refers to the transmission of voice signals over networks using the Internet Protocol (IP), which involves dividing the signals into numerous small data packets that are individually transmitted over the network and reassembled in the correct order at their destination. They also can be used to implement the speech component of video conferencing applications. These speech co-processors take advantage of G.723.1, a speech compression algorithm that has been incorporated into various international communications standards, which is more fully discussed below, to provide cost-effective, high quality speech compression. The following table sets forth other features of the Voice over IP speech co-processors that we currently offer: DSP Group's Voice over IP Speech Co-Processors
CT8016 CT8021 CT8022 -------------- --------------- -------------- DSP Core.................................... PineDSPCore OakDSPCore OakDSPCore Process Geometry (microns).................. 0.5 0.5 0.5 TrueSpeech Algorithm........................ 8.5, 6.3, 5.3, 8.5, 6.3, 5.3, 8.5, 6.3, 5.3, Data Rate, Kilobits Per Second.............. 4.8 & 4.1 4.8 & 4.1 4.8 & 4.1 ITU-T Standard Speech Coders................ G.729A+B G.723.1, G.722, G.723.1, G.728, G.729A+B G.729A+B Features: Full Duplex Speakerphone................... Yes Yes Yes Variable Speed Message Playback............ Yes Yes -- Full Duplex DSVD........................... Yes Yes Yes Video Conferencing......................... -- Yes Yes Internet Telephony......................... Yes Yes Yes
Future Speech and Telephony Processors We are currently developing our next generation of IDT speech processors and Voice over IP speech co-processors to include a number of enhancements and improvements. First, we intend to design and manufacture our future IDT speech processors using a 0.25 micron CMOS technology, so that the conductive paths on the circuits inside these chips will be 0.25 microns wide. By reducing these line widths we can place more transistors in the same amount of space and as a result provide more power at the same cost. We expect that this design will increase our competitiveness in the price-sensitive IDT business. Second, we intend to add new features to our next generation of IDT speech processors and Voice over IP speech co-processors. For example, we intend to enhance our IDT speech processors with additional capabilities, including improved speech quality, full duplex speakerphone, advanced voice recognition and text to speech algorithms and our integrated 900 MHz spread spectrum base band processor. In addition, we intend to use the TeakLiteTM DSP core, which is more powerful than our PineDSPCore and OakDSPCore(R), to provide additional processing power for these new features. Cordless Telephony In the beginning of 1999, DSP Group acquired two integrated groups of engineers, one located in Israel and the other in the United States. These twenty-five engineers specialize in the design of integrated 6 circuits for wireless communications. In addition, we acquired technology and products, including associated intellectual property, related to 900 Megahertz narrow-band cordless telephones (the transmissions between the handset and base unit of these telephones are at or near a frequency of 900 Megahertz) and 900 Megahertz spread spectrum cordless telephones (the transmissions between the handset and base unit of these telephones are "spread" in a pseudrandom pattern over a range of frequencies). During 1999, we also finalized the design and began to sell a cordless telephony solution consisting of two chips - a base band chip and an RF chip - that allow telephone vendors to build 900 Megahertz cordless telephones with limited technical understanding, shortening the time it takes for the product to reach the market. In the second half of 1999, we started development of the DSPG Elite(TM) device with an RF and power amplifier that we believe will provide a high performance, cost effective solution for 900 Megahertz spread spectrum technology. DSP Cores DSP Group has developed proprietary, DSP core architecture and designs that provide low-power, high performance, cost-effective solutions for current and emerging digital signal processing applications. Our DSP cores are incorporated in our own family of speech, cordless and telephony processors and also are licensed to more than 50 entities, including Adaptec, DSP Communications (a subsidiary of Intel), Fujitsu, Kawasaki, LSI Logic, NEC, Oki, Seiko Epson, Siemens/Infinion, Sony, Temic and VLSI, a subsidiary of Philips. We currently offer four families of DSP SmartCores(TM), --PineDSPCore(R), OakDSPCore(R), TeakDSPCore(R) and PalmDSPCore(R). Together, they cover a wide range of applications, from low end applications, including digital answering machines, hard disk controllers, low speed modems and Voice over IP applications, to high performance applications such as digital subscriber line (DSL), third generation (3G) cellular communications, broadband modems, multimedia and Voice over IP gateways. Digital signal processing chips and software are being used more and more in high volume communication and computing products. We believe that our cores can provide cost-effective DSP solutions for chips used in these applications, because our cores are: o Flexible and Portable. The DSP cores are designed as "soft cores," so the cores are foundry independent and can be implemented in any of the various manufacturing processes used by different semiconductor fabrication facilities. The cores also can be produced by manufacturers in different geometries. Furthermore, universal design rules are used in the DSP core designs to allow easy implementation across multiple semiconductor process technologies. o Efficient to design. The designs are highly efficient, with variable data size of 16/20/24 bits, general purpose DSPs with adjacent modular RAM and ROM and general I/O blocks to provide for a flexible layout and design. o Power efficient. During the design of the cores, special mechanisms were inserted throughout the different phases of design, from architecture definition to the implementation, to reduce the power consumption of the core. In addition, our cores operate at different voltages, ranging from 5 volts down to 1.1 volts. The lower the voltage and the lower the power requirements, then the less it consumes battery life. o Inexpensive to manufacture. The DSP cores, which in the past could only be used on processors designed for a 1.0 micron CMOS process, can now be implemented on 0.25 and 7 0.18 micron processes. We believe these size reductions in manufacturing can reduce the product cost, while increasing product performance. o Open Architecture - Our DSP cores technology is widely adopted by semiconductors, ASIC vendors and OEMs. The efficient processing, increasing performance, flexible design and scaleable memories of our DSP core designs allow for the development of powerful, smaller and lower cost DSP solutions, which shorten time to market for new products and product enhancements. With each new core, we have added features and enhanced performance. Our first core, the PineDSPCore, was released in 1992 and was developed for use in our IDT speech processor products. It also gained success in other DSP applications as well as hard disk driver applications. In 1994, we introduced our OakDSPCore, an enhanced version of the PineDSPCore that, among other things, achieves a higher processing speed through improved architecture and includes an advanced, more efficient instruction set. The OakDSPCore is especially well-suited for use in personal communication products and higher level processing applications, including digital cellular telephones, high bit rate modems, video telephone conferencing applications and DSVD modems, which send compressed voice and data signals at the same time over a regular telephone line. Algorithms that use the PineDSPCore instruction set also can be run on the OakDSPCore. OakDSPCore became the standard de-facto licensable DSP core on the market. In 1999, we introduced the TeakDSPCore - a family of two low power, cost effective cores: the TeakLite(TM) and the Teak(R). These cores were designed in a new methodology to achieve a higher frequency. Teak contains two arithmetic units functioning in parallel (Dual MAC), which improve the performance of a notable portion of the application that requires DSP technology. The TeakDSPCore is aimed at emerging applications in the digital cellular communications, including products implementing the Global System for Mobile communications (GSM), half-rate GSM, Time Division Multiple Access (TDMA) and Code Division Multiple Access (CDMA) standards. We also have targeted this core for use in advanced wired line modems, including those using the V.90 standard, products implementing emerging digital audio standards and formats such as AC3 and MPEG2, and Voice over IP and telecommunications products. In 1999, we also introduced the first silicon of our high performance PalmDSPCore. The PalmDSPCore is a family of three cores, each core version meets a different market segment. The wide range of high performance applications, including third generation cellular communications, digital subscriber lines (DSL), VoIP gateways and consumer multimedia. The following table shows a comparison of our DSP core designs: DSP Group's DSP Core Designs
PineDSPCore OakDSP Core TeakLite Teak PalmDSPCore ----------- ----------- ---------- -------- ------------ Data Word Length .............. 16 bit 16 bit 16 bit 16 bit 16/20/24 bit Process Geometry (microns)..... 0.5 0.35 0.25 0.25 0.2 Performance ................... Single MAC Single MAC Single MAC Dual MAC Dual MAC & Instruction Level Parallelism Voltage ....................... 5.0V 3.3V 2.5V 2.5V 2.5V Advanced Instruction Set....... Average Advanced Advanced Parallel Parallel Capability Capability
8 In addition to incorporating our DSP core designs in our speech and telephony processors, we also license them to third parties, together with advanced software tools, so that these licensees can incorporate our DSP core designs into their semiconductor chip products. These licenses are generally granted in exchange for an upfront license fee payment. This fee is generally recognized by us upon shipment of the deliverables for the core, provided that no significant vendor or post-contract support obligations remain outstanding and that collection of the resulting receivable is deemed probable. The licensees also pay a monthly support fee, which is typically paid for a period of one or two years, and ongoing per-unit royalties based on the number of units of products containing the core that are shipped by the licensee. The timing and amount of royalties that DSP receives from its core licensees depend on the timing of each licensee's product development and the degree of market acceptance of each licensee's products, neither of which are within our control. In 1999, royalties paid by four PineDSPCore and OakDSPCore licensees for shipment of products utilizing these cores increased from the previous year. We also know that one of the important issues to a potential licensee is the quality of our customer support. With good customer support the licensee achieves faster time to market for their products. To provide this high quality support, we have geographically located our support network all over the world, as well as offering online technical support. In addition, special training classes are given to each of our licensees, by our expert R&D personnel. We believe that it is a great benefit for our licensees that DSP Group is the developer of both the DSP cores and the supporting development tools. This dual function is the reason that we are able to provide our customers with advanced and optimized development tools: assemblers, linkers, simulators, emulators and optimized C/C++ compilers. New releases of the development tools occur periodically and include updates and new features. The following is a partial list of companies who have licensed our DSP core designs and representative applications for which they use our DSP core designs: DSP Core Design Licenses Licensees Representative Applications - ----------------------------- -------------------------------------- Adaptec Disk Drives Atmel ASIC, Communications DSP Communications (a subsidiary of Intel) Digital Cellular Telephones Fujitsu ASIC, ADSL, Communications Hyundai ASIC, Audio, Communications Kawasaki ASIC, Communications Kenwood Audio Products LSI Logic ASIC, Communications, DAB Mitel ASIC, Communications National Semiconductors Communications NEC ASIC, Communications Oki Communications ROHM ASIC, Communications Samsung ASIC, Communications and Multimedia Seiko-Epson ASIC, Communications Siemens/Infinion Communications Sony Multimedia TDK Semiconductor Modems 9 Licensees Representative Applications - ----------------------------- -------------------------------------- TEMIC DAB, Communications TSMC ASIC Library VLSI Technology (a subsidiary of Philips) ASIC, Communications Xemics Low Voltage applications In order to assist existing licensees of our DSP core designs, and to enhance the attractiveness of these cores to potential licensees, we have entered into agreements with leading developers of semiconductor design and simulation software, including Cadence, Mentor Graphics and Synopsys. These companies have adapted certain of their software applications to support our cores, enabling such software to be used to design and simulate semiconductor products containing these cores. In addition, a number of independent software vendors, among them Ensigma, Espico, Prairiecomm, Vocal Technologies and VoicePump, have developed digital signal processing algorithms that operate on our PineDSPCore and OakDSPCore for a variety of communications and multimedia applications. In 1999, these companies expanded their software product lines and began to implement software on our most recently announced cores: TeakDSPCore and PalmDSPCore. We believe that these developments and the large software installed-base, make our DSP cores more attractive to potential licensees. In addition, we believe that these technology providers help to establish our cores as industry standards. In 1999, the number of our core licensees increased as a result of several contracts signed for our newest products, TeakLite, Teak and PalmDSPCore. Prior to 1999, most of our licensees licensed our cores for the cellular market. In 1999, the PalmDSPCore was selected by leading companies as the platform for the xDSL (full-rate and G.Lite) market. TrueSpeech Products TrueSpeech is a family of high-quality, cost-effective speech compression technologies based on complex mathematical algorithms that are derived from the way airflow from the lungs is shaped by the throat, mouth and tongue during speech. This shaping of bursts of air is what the ear interprets as speech. TrueSpeech converts this speech into digital data and then selectively eliminates and enhances certain sound data to replicate human speech. Originally developed for consumer telephone applications, we also have enhanced TrueSpeech for use in the computer telephony and Voice over IP markets. We incorporated our TrueSpeech technology in our speech and telephony processors and also license TrueSpeech to computer telephony, personal computer and Voice over IP companies for inclusion in their products. Our TrueSpeech technology has become one of the leading digital speech compression solutions in several markets. In the personal computer market, Microsoft has incorporated a TrueSpeech algorithm in Windows 95, Windows 98 and NT. In February 1995, the International Telecommunications Union established its G.723.1 standard for low bit rate speech compression, which incorporates the TrueSpeech 6.3 and 5.3 algorithms. In March 1997, the International Multimedia Teleconferencing Consortium, a nonprofit industry group, recommended the G.723.1 standard as a default low bit rate audio compression technology for all voice transmissions over the Internet and for conferencing products conforming the International Telecommunication Union's H.323 standard for packet-based multimedia communications systems. G.723.1 is also part of the International Telecommunication Union's H.324 standard for video conferencing over standard telephone lines. Since its adoption and endorsement by the International Telecommunications Union and the International Multimedia Teleconferencing Consortium, the G.723.1 standard has gained considerable momentum in the video and audio conferencing industry. 10 We believe that the principal advantages of TrueSpeech, as compared with other currently available digital speech compression technologies, are as follows: o Industry Acceptance and Field proof. As described above, a TrueSpeech algorithm, the G.723, was adopted as a standard by the International Telecommunications Union and was recommended as the a default speech algortihm for Voice over IP by the International Multimedia Teleconferencing Consortium. This enabled a broad usage of the algorithm especially in Voice over IP and video conferencing applications. o High Quality Speech. Another advantage of TrueSpeech is that it reproduces high quality speech playback with minimum distortion by selectively eliminating nonessential and background sound data without significant loss of speech quality. TrueSpeech has received high scores for speech quality from a number of independent evaluators. For example, TrueSpeech scored the highest on the ITU's intricately structured test used to numerically rate the quality of the five competing speech compression algorithms submitted for adoption as the G.723.1 standard for video telephones. In independently conducted tests performed by Dynastat, Inc., a company specializing in the performance evaluation of voice communication systems, TrueSpeech 6.3 received a Mean Opinion Score of 3.98, while regular telephone quality is based upon a Mean Opinion Score of 4.0. o Cost Effectiveness. TrueSpeech's ability to achieve high speech compression with lower computational complexity provides it with a competitive cost advantage. As an example, competing speech compression algorithms evaluated by the ITU use 20% to 50% more computing power for the same compression and transmission rates, and more memory for storage and operation. Consequently, competing speech compression algorithms require larger, more expensive DSPs and result in higher cost solutions. Our TrueSpeech licensees include, among others, 8x8, Analog Devices, Cirrus Logic, Creative Labs, Dialogic, IBM, Intel, Microsoft, Philips, Siemens/Infinion, Smith Micro, Texas Instruments, Unisys, US Robotics, Winbond and White Pine Software. In addition, we have ported our TrueSpeech algorithms to certain DSP platforms offered by Analog Devices, Motorola and Texas Instruments, three leading merchant vendors of programmable DSP chips. Sales, Marketing and Distribution We market and distribute our products through our direct sales and marketing organization, as well as through a network of distributors and independent manufacturers' representatives. A marketing and sales team located in our headquarters in Santa Clara, California and in Israel pursues business with our customers in North America and closely monitors new markets, trends and customer needs to shape our strategic decisions. In Japan, we operate from a marketing and support office in Tokyo and through Tomen Electronics, a local distributor. In the rest of Asia, we operate through sales representatives in China, Hong Kong, South Korea and Taiwan. To handle sales and distribution in Europe, we operate a marketing and support office located in France and have sales representatives in Denmark, Germany, Israel, Spain, Sweden and the United Kingdom. Our sales representatives and distributors are not subject to minimum purchase requirements and can cease marketing our products at any time. The loss of one or more representatives or their failure to renew agreements with us upon expiration could harm our business, financial condition and results of operations. Sales to Tomen Electronics comprised 47% of our total revenues in 1999, 45% in 1998 and 33% in 1997. Export sales accounted for 97% of our total revenues in 1999, 95% in 1998 and 92% in 1997. Due to our export sales, we are subject to the risks of conducting business internationally, including 11 unexpected changes in regulatory requirements, fluctuations in exchange rates that could increase the price of our products in foreign markets, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, other barriers and restrictions and the burden of complying with a variety of foreign laws. All of our export sales are denominated in United States dollars. See Note 3 of the Notes to Consolidated Financial Statements of our Annual Report to Stockholders for the year ended December 31, 1999, for a summary of our operations within various geographic areas. Manufacturing and Design Methodology Since our products are based on our proprietary DSP core designs, which are not dependent upon a particular foundry's library cells, these products can be manufactured at a number of independent foundries. Accordingly, all of our manufacturing occurs at independent foundries. We contract fabrication services for speech and telephony processors from Taiwan Semiconductor Manufacturing Company, Sony and UMC. Under non-exclusive agreements, these independent foundries normally provide us with either finished, packaged and tested speech processors at variable prices depending on the volume of units purchased or at sorted good wafers level. We customarily pay for fully-tested products meeting predetermined specifications. To ensure the integrity of quality assurance procedures, we develop detailed testing procedures and specifications for each product and require each foundry to use these procedures and specifications before shipping us finished products. We intend to continue to use independent foundries to manufacture digital speech processors, cordless devices and other products for the consumer telephone and computer telephony markets. To obtain an adequate supply of wafers, we are considering various alternative production sites. Our reliance on independent foundries involves a number of risks, including the foundries' achievement of acceptable manufacturing yields and allocation of capacity to us. In addition to our speech processors, our IDT speech processors require an external component, including analog random access memory circuits (ARAMs) and flash memory that are supplied by third party manufacturers. Temporary fluctuations in the pricing and availability of these components could negatively impact sales of our IDT speech processors, which could in turn harm our business, financial condition and results of operations. Competition The markets in which we operate are extremely competitive and we expect that competition will increase. In each of our business activities, we face current and potential competition from competitors that have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. Our future prospects will depend greatly on our ability to successfully develop and introduce new products that are responsive to market needs. We cannot assure you that we will be able to successfully develop or market any of these products. The principal competitive factors in the IDT speech processors market include price, speech quality, compression ratio, value-added features including variable speed message playback and speakerphone, the level of mixed signal integration, customer support and the timing of product introductions by us and our competitors. We believe that we are competitive with respect to each of these factors. Our principal competitors in the IDT market include Lucent Microelectronics, Macronix, Philips, Sanyo, Siemens/Infinion and Toshiba. The principal competitive factors in the cordless telephony market include price, system integration level, range, customer support and the timing of product introductions by us and our competitors. We believe that we are competitive with respect to most of these factors. Our principal competitors in the Cordless market include Conexant, Level 1, Philips and Siemens/Infinion. 12 The principal competitive factors in the DSP core designs market for high volume, low cost applications include such features as small size, low power, flexible I/O blocks and associated development tools. Our DSP core designs compete with companies such as LSI Logic and Siemens/Infinion, which license DSP platforms, and Analog Devices, Lucent Microelectronics, Motorola, and Texas Instruments, which sell their own complete general purpose DSP solutions. Several digital speech compression technologies exist and are currently being developed that may be promoted by competitors as industry standards for the computer telephony and personal computer markets. Our TrueSpeech algorithms compete with ADPCM, and the speech compression technologies used in GSM and VSELP protocols, each of which is available in the public domain. There are many versions of these algorithms that have been developed by different parties, including AT&T, which has been actively involved in the development of GSM protocols, and Motorola, which developed the original VSELP protocols. Although TrueSpeech has achieved a degree of acceptance in the computer telephony personal computer and VoIP markets, ADPCM and the speech compression technologies for GSM and VSELP protocols are widely used in the development and implementation of new products in the telephony industry. In addition, other advanced speech compression algorithms have been introduced by competitors that offer compression ratios comparable or higher than the TrueSpeech algorithms. Large companies, such as AT&T, Creative Labs, Motorola and Rockwell, have speech processing technologies that can be applied to speech compression for use in the same markets for which our products are targeted. Price competition in the markets in which we currently compete and propose to compete is intense and may increase, which could harm our business, financial condition and results of operations. We have experienced and expect to continue to experience increased competitive pricing pressures for our IDT processors. During 1999, we were able to completely offset this decrease on an annual basis through manufacturing cost reductions and a higher level of integration by combining functions of the telephone, which used to be part of separate chips, into the our DSP Group chip. However, we cannot assure you that we will be able to further reduce product costs, or be able to compete successfully as to price or any other of the key competitive factors. Research and Development We believe that continued timely development and introduction of new products is essential to maintain our competitive position. We currently conduct most of our product development effort in-house and at December 31, 1999 had a staff of 93 research and development personnel of which 81 were located in Israel. We also employ independent contractors to assist with certain product development and testing activities. We spent approximately $15.4 million in 1999, compared with $10.2 million in 1998, on research and development activities. Relationships With Affiliated Companies We have a $18.4 million equity investment in, and have entered into license and development arrangements with, AudioCodes Ltd., an Israeli corporation primarily engaged in design, development, manufacturing and marketing of hardware and software products that enable simultaneous transmission of voice and data over networks including Internet, ATM and Frame Relay. AudioCodes was formed in April 1993 by two of our former employees. Pursuant to an agreement between DSP Group and AudioCodes, AudioCodes has granted DSP Group a license to use some of Audiocodes' technology subject to the payment of royalties. In addition, we signed a development agreement to develop a new software based on Audiocodes' voice compression technology. We have established this relationship to complement our in-house product development efforts. In May 1999, we exercised our option to purchase approximately 3.5% of the outstanding stock of AudioCodes for approximately $1.1 million. In the same month, AudioCodes completed its initial public offering (IPO) and is now listed on the Nasdaq SmallCap Market under the symbol AUDC. In its IPO, AudioCodes issued 3.5 million shares at a price of $14.00 per share. As a result, we recorded in "Other 13 income (expense)" in our consolidated statements of income for 1999 a one-time capital gain in the amount of $11.8 million. This amount was comprised of $9.4 million, which was from the sale of our shares sold in the IPO and $2.5 million from the sale of approximately 248,000 of our AudioCodes shares to the underwriters to cover their over-allotment option. The gross proceeds from our sale were approximately $3.2 million. In October 1999, AudioCodes successfully concluded a follow-on public offering of 3.0 million shares at a price of $41.00 per share. In the follow-on, AudioCodes issued and sold 1.5 million shares and an additional 1.95 million shares were sold by shareholders, of which approximately 1,069,000 were sold by us in two separate transactions. Our proceeds from these transactions were approximately $42.8 million, and we recorded an additional capital gain in the amount of $47.1 million. This amount was comprised of $10.8 million, which resulted in the public offering, and $36.3 million from the sale of approximately 1,069,000 AudioCodes shares. As of December 31, 1999, we held approximately 2.9 million of AudioCodes shares which represented about 15% of its outstanding shares. In January 2000, we sold an additional 600,000 shares of AudioCodes for approximately $43.8 million, recording in the first quarter of 2000 an additional capital gain in the amount of $40.0 million. After this sale, we hold approximately 2.3 million AudioCodes shares, which represent approximately 12% of its outstanding shares. In July 1996, we invested $2.0 million of cash for approximately 40% of the equity interest in Aptel Ltd., an Israeli company. In connection with the investment, we incurred a one-time write-off of acquired in-process technology of $1.5 million. In October 1997, we invested approximately $176,000 in convertible debentures issued by Aptel. In December 1997, we converted our debentures and Aptel's shareholders, including us, exchanged their shares in Aptel for shares in Nexus Telecommunications Systems Ltd., an Israeli company registered and traded on the Nasdaq SmallCap Market. In April 1998, we sold all of our Nexus shares in a private transaction for approximately $1.3 million and realized a pre-tax one time gain on marketable equity securities of approximately $1.1 million. This one time gain was included under "Other income (expenses)" in our consolidated statements of income for the year ended December 31, 1998. Licenses, Patents and Trademarks We have been granted twelve United States patents, one Canadian patent and one Israeli patent, and have twenty-seven patents pending in the United States, two patents pending in Japan, one patent pending in Taiwan, thirteen patents pending in Israel and one patent pending in Europe. We actively pursue foreign patent protection in other countries of interest to us. Our policy is to apply for patents or for other appropriate statutory protection when we develop valuable new or improved technology. The status of patents involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, or that our patents, and any patents that may be issued in the future, will afford adequate protection against competitors with similar technology; nor can we provide assurance that patents issued to us will not be infringed or designed around by others. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold, including Hong Kong, Japan and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States. We attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees and consultants, and through other security measures. Although we intend to protect our rights vigorously, we cannot provide assurance that these measures will be successful. The semiconductor and software industries are subject to frequent litigation regarding patent and other intellectual property rights. While we have not been involved in any material patent or other intellectual property rights litigation to date, we cannot provide assurance that third parties will not assert claims against us with respect to existing or future products or that we will not need to assert claims against 14 third parties to protect our proprietary technology. 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 equipment manufacturers license this technology from AT&T. If litigation becomes necessary to determine the validity of any third party claims or to protect our proprietary technology, it could result in significant expense to us and could divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor. In the event of an adverse result in any litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. We cannot provide assurance that we would be successful in developing non-infringing technology or that any licenses would be available on commercially reasonable terms. We have been issued registered trademarks for the use of the PineDSPCore, OakDSPCore, TeakDSPCore, Teak, PalmDSPCore, OCEM and TrueSpeech trademarks. In addition, we applied for trademarks for Full Duplex SpeakerPhone, TeakLite, Triple Rate Coder, PalmAssyst, Assyst, SpeechOnChip, DSPeech, SpeeChip and SmartCores. While our ability to compete may be affected by our ability to protect our intellectual property, we believe that, because of the rapid pace of technological change in the industry, our technical expertise and ability to innovate on a timely basis will be more important in maintaining our competitive position than protection of our intellectual property. We believe that, because of the rapid pace of technological change in the consumer telephone, computer telephony and personal computer industries, patents and trade secret protection are important but must be supported by other factors, including the expanding knowledge, ability and experience of our personnel, new product introductions and frequent product enhancements. Although we continue to implement protective measures and intend to defend our intellectual property rights, we cannot provide assurance that these measures will be successful. Backlog At December 31, 1999, our backlog was approximately $28.8 million compared with approximately $8.7 million at December 31, 1998. We include in our backlog all accepted product purchase orders with respect to which a delivery schedule has been specified for product shipment within one year and fees specified in executed licensing contracts. Our business in IDT speech processors is characterized by short-term order and shipment schedules. Product orders in our current backlog are subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. Accordingly, although useful for scheduling production, backlog as of any particular date may not be a reliable measure of our sales for any future period. Employees At December 31, 1999, we had 161 employees, including 93 in research and development, 32 in marketing and sales and 36 in corporate and administration and manufacturing coordination. Competition for personnel in the semiconductor, software and personal computer industries in general is intense. We believe that our future prospects will depend, in part, on our ability to continue to attract and retain highly-skilled technical, marketing and management personnel, who are in great demand. In particular, there is a limited supply of highly-qualified engineers with digital signal processing experience. None of our employees is represented by a collective bargaining agreement, nor have we ever experienced any work stoppage. We believe that our employee relations are good. 15 Factors that may affect future operating results Our quarterly operating results may fluctuate significantly We experience, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter. Our quarterly results fluctuate due to a number of factors: o fluctuations in volume and timing of product orders; o timing of recognition of license fees; o level of per unit royalties; o changes in demand for our products due to seasonal customer buying patterns and other factors; o timing of new product introductions by us or our customers, licensees or competitors; o changes in the mix of products sold by us; o fluctuations in the level of sales by OEMs and other vendors of products incorporating our products; and o general economic conditions, including the changing economic conditions in Asia. Each of the above factors is difficult to forecast and thus could have a material adverse effect on our business, financial condition and results of operations. Through 2000, 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 totally dependent upon the success of our third party licensees in introducing products utilizing our technology and the success of those third party 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 IDT 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 IDT market which is highly competitive Sales of IDT products comprise a substantial portion of our product sales. Any adverse change in the IDT market or in our ability to compete and maintain our position in that market would have a material adverse effect on our business, financial condition and results of operations. The IDT market and the markets for our products in general are extremely competitive and we expect that competition 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 IDT 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. 16 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 IDT 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. For example, foundries in Taiwan produce a significant portion of our wafer supply. As a result, earthquakes, aftershocks or other natural disasters in Asia, could preclude us from obtaining an adequate supply of wafers to fill customer orders and could harm our business, financial condition and results of operations. We may need to increase our research and development efforts to remain competitive The DSP Cores market is experiencing extensive efforts by some of our competitors to use new technologies to manipulate the chip design programming to increase the parallel processing of the chip. One such technology used is Very Long Instruction Word (VLIW), which some of our competitors possess elements of, but which we do not possess at the present time. If such technology continues to improve the programming processing of these chips, then we may need to further our research and development to obtain such technology to remain competitive in the market. 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. For example, we have noticed a trend of decreasing sales for the product models based on the 900 Megahertz digital spread spectrum RF and base band technology we acquired in 1999. We are in the process of developing new RF and base band models, but there is no assurance that we will be successful or that our developments will be accepted by the market. Additionally, future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing. The occurrence of any of these events could harm our business, financial condition or results of operations. We depend on international operations, particularly in Israel We are dependent on sales to customers outside the United States. We expect that international sales will continue to account for a significant portion of our net product and license sales for the foreseeable future. As a result, the occurrence of any negative international, political, economic or geographic events could result in significant revenue shortfalls. The shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include: o unexpected changes in regulatory requirements; o fluctuations in the exchange rate for the U.S. dollar; 17 o imposition of tariffs and other barriers and restrictions; o burdens of complying with a variety of foreign laws; o political and economic instability; and o 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 December 31, 1999, 121 of our 161 employees were located in Israel, including 81 of our 93 research and development personnel. In addition, although DSP Group is incorporated in Delaware, a majority of our directors and executive officers are residents of 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 1.3% in 1999 and 8.6% in 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, sales and marketing 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 harm our business, financial condition and results of operations. We depend on third parties and their suppliers to obtain required complementary components Some of the raw materials, components and subassemblies included in the products manufactured by our third party 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 harm our business and results of operations due to the delay or discontinuance of orders for our products by customers until the other 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 continuing 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. 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. 18 If it appears necessary or desirable, we may try to obtain licenses under those patents or intellectual property rights that we are allegedly infringing. Although holders of these types 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. Our stock price may be volatile Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results and general conditions in 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. We have made forward-looking statements in this Annual Report on Form 10-K The information contained in this Annual Report on Form 10-K and in the other documents referenced herein contains forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements can be identified by the use of forward-looking terminology, including "believes," "expects," "may," "will," "should" or "anticipates," or the negative of these terms or other variations or comparable terminology, or by discussions of strategy that involve risks and certainties. Numerous factors, including economic and competitive conditions, timing and volume of incoming orders, shipment volumes, product margins, and foreign exchange rates, could cause actual results to differ materially from those described in these statements. These forward-looking statements are based on current expectations and we assume no obligation to update this information. 19 Item 2. PROPERTIES. DSP Group's operations in the United States are located in an approximately 15,700 square foot leased facility in Santa Clara, California. This facility houses our marketing and support, North American sales, operations, manufacturing coordination and administrative personnel. This facility is leased through June 2001. DSP Group's operations in Israel are located in approxiamately 29,800 square feet of leased facilities, with the primary leased facility located in Herzelia Pituach, Israel. These facilities are leased through November 2003. Item 3. LEGAL PROCEEDINGS. From time to time, we may become involved in litigation relating to claims arising from our ordinary course of business. We believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 20 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information contained in the section labeled "Price Range of Common Stock" appearing on page 16 of DSP Group's Annual Report to Stockholders for the year ended December 31, 1999 is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA. The information contained in the section labeled "Selected Consolidated Financial Data" appearing on page 15 of DSP Group's Annual Report to Stockholders for the year ended December 31, 1999 is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information contained in the section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on pages 17 through 23 of DSP Group's Annual Report to Stockholders for the year ended December 31, 1999 is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE. The information contained in the section labeled "Quantitative and Qualitative Disclosures About Market Risk" appearing on page 20 of DSP Group's Annual Report to Stockholders for the year ended December 31, 1999 is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements and related notes and independent auditors report appearing on pages 24 through 45 of DSP Group's Annual Report to Stockholders for the year ended December 31, 1999 are incorporated herein by reference. The information contained in the section labeled "Quarterly Data" appearing on page 15 of DSP Group's Annual Report to Stockholders for the year ended December 31, 1999 is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 21 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The section labeled "Directors, Executive Officers and Key Personnel" of DSP Group's definitive Proxy Statement to be filed shortly hereafter for the annual meeting of stockholders to be held on May 16, 2000 is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION. The section labeled "Executive Compensation and Other Information" of DSP Group's definitive Proxy Statement to be filed shortly hereafter for the annual meeting of stockholders to be held on May 16, 2000 is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The section labeled "Security Ownership of Certain Beneficial Owners and Management" of DSP Group's definitive Proxy Statement to be filed shortly hereafter for the annual meeting of stockholders to be held on May 16, 2000 is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The section labeled "Certain Relationships and Related Transactions" of DSP Group's definitive Proxy Statement to be filed shortly hereafter for the annual meeting of stockholders to be held on May 16, 2000 is incorporated herein by reference. 22 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents have been filed as a part of this Annual Report on Form 10-K. 1. Index to Financial Statements. The following consolidated financial statements and related notes and auditor's report are included in DSP Group's Annual Report to Stockholders for the year ended December 31, 1999 and are incorporated into this Form 10-K by reference. Description: Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Report of Kost Forer & Gabbay, a member of Ernst & Young International, Independent Auditors 2. Index to Financial Statement Schedules. The following financial statement schedules and related auditor's report are filed as part of this Annual Report on Form 10-K: Page in this Annual Report Description on Form 10-K - ----------- ------------ Schedule II: Valuation and Qualifying Accounts (included at page 33) Consent of Kost Forer & Gabbay, a member of Ernst & Young Exhibit 23.1 International, Independent Auditors (included at page 32) All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or the related notes incorporated into this Form 10-K by reference to DSP Group's Annual Report to Stockholders for the year ended December 31, 1999. 23 3. List of Exhibits: Exhibit Number Description ------- ---------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1B to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and incorporated herein by reference). 3.2 Amended and Restated Bylaws, as of November 11, 1999. 3.3 Certificate of Determination of Preference of Series A Preferred Stock of the Registrant, filed with the Secretary of State of the State of Delaware on June 6, 1997 (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on June 6, 1997). 3.4 Specimen Rights Certificate (filed as Exhibit 1.1 to the Registrant's Current Report on Form 8-K filed on June 6, 1997). 3.5 Amended and Restated Rights Agreement, dated as of November 9, 1998, between the Registrant and Norwest Bank Minnesota, N.A., as Rights Agent (filed as Exhibit 3.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference). 3.6 Amendment No. 1, dated May 19, 1999, to the Amended and Restated Rights Agreement, dated as of November 9, 1998, between the Registrant and Norwest Bank Minnesota, N.A., as Rights Agent. 4.1 Registration Rights Agreement, dated as of February 2, 1999, by and between the Registrant and Magnum Technology Limited (filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference). 10.1 1991 Employee and Consultant Stock Plan and forms of option agreements thereunder (filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and incorporated herein by reference). 10.2 Israeli Stock Option Plan and form of option agreement thereunder (filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and incorporated herein by reference). 10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and incorporated herein by reference). 10.4 1993 Employee Stock Purchase Plan and form of subscription agreement thereunder (filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and incorporated herein by reference). 10.5 Technology Assignment and License Agreement, dated January 7, 1994, by and between the Registrant and DSP Telecommunications, Ltd. (filed as Exhibit 10.24 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and incorporated herein by reference). 24 Exhibit Number Description ------- ---------------------------------------------------------------- 10.6 ACL Technology License Agreement, dated June 24, 1994, by and between the Registrant and AudioCodes, Ltd. (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, and incorporated herein by reference). 10.7 Investment Agreement, dated June 16, 1994, by and between the Registrant and AudioCodes Ltd. (see Exhibit 10.30 for Appendix B to Investment Agreement) (filed as Exhibit 10.39 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference). 10.8 Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994, and incorporated herein by reference). 10.9 Employment Agreement, dated April 22, 1996, by and between the Registrant and Eli Ayalon (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and incorporated herein by reference). 10.10 Assignment and Assumption Agreement, dated October 9, 1996, by and between the Registrant and Dialogic Corporation, relating to the Registrant's facility located at 3120 Scott Boulevard in Santa Clara, California (filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference). 10.11 Sublease, dated October 18, 1996, as amended on December 4, 1996, by and between Dialogic Corporation and the Registrant, relating to the Registrant's facility located at 3120 Scott Boulevard in Santa Clara, California (filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference). 10.12 Lease, dated November 28, 1996, by and between DSP Semiconductors Ltd. and Gav-Yam Lands Company Ltd., relating to the property located on Shenkar Street, Herzlia Pituach, Israel (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference). 10.13 Amendment to Employment Agreement with Eliyahu Ayalon, dated as of November 3, 1997 (filed as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference). 10.14 Amendment to 1993 Directors Stock Option Plan, as adopted November 3, 1997 (filed as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference). 10.15 Separation and Consulting Agreement between the Registrant and Martin M. Skowron, dated May 31, 1998 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and incorporated herein by reference). 25 Exhibit Number Description ------- ---------------------------------------------------------------- 10.16 Consulting Agreement between the Registrant and Millard Phelps, dated as of June 29, 1998 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and incorporated herein by reference). 10.17 Lease, dated September 13, 1998, between DSP Group, Ltd. and Bayside Land Corporation Ltd., relating to the property located on Shenkar Street, Herzlia Pituach, Israel (filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference). 10.18 1998 Non-Officer Employee Stock Option Plan (filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference). 10.19 Stock Purchase Agreement, dated as of February 2, 1999, by and between the Registrant and Magnum Technology Limited (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference). 10.20 1991 Employee and Consultant Stock Plan, as amended and restated July 19, 1999 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference). 10.21 1993 Director Stock Option Plan, as amended and restated July 19, 1999 (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference). 10.22 Second Amendment to Sublease, dated February 11, 1999, by and between Dialogic Corporation and the Registrant, relating to the Registrant's facility located at 3120 Scott Boulevard in Santa Clara, California. 10.23 Employment Agreement, dated May 1, 1999, by and between the Registrant and Moshe Zelnik. 10.24 Employment Agreement, dated May 1, 1999, by and between the Registrant and Boaz Edan. 10.25 Appendix Agreement, dated May 5, 1999, by and between DSP Group, Ltd. and Bayside Land Corporation Ltd., relating to the property located on Shenkar Street, Herzlia Pituach, Israel. 10.26 Amendment to Employment Agreement with Eliyahu Ayalon, effective as of November 11, 1999. 10.27 Amendment to Employment Agreement with Igal Kohavi, effective as of November 11, 1999. 10.28 Separation Agreement between the Registrant and Igal Kohavi, dated January 24, 2000. 11.1 Statements regarding computation of per share earnings (included at page 30). 13.1 Portions of the Annual Report to Stockholders for the year ended December 31, 1999. 21.1 Subsidiaries of DSP Group (included at page 31). 23.1 Consent of Ernst & Young LLP, Independent Auditors (included at page 32). 26 Exhibit Number Description ------- ---------------------------------------------------------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K in Fourth Quarter. The Company did not file any reports on Form 8-K during the three months ended December 31, 1999. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DSP GROUP, INC. By: /s/ Eliyahu Ayalon ----------------------------------------- Eliyahu Ayalon Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 30, 2000 Power of Attorney KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eliyahu Ayalon and Moshe Zelnik or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - ---------------------------- -------------------------------- --------------- /s/ Eliyahu Ayalon Chairman of the Board March 30, 2000 - ---------------------------- and Chief Executive Officer Eliyahu Ayalon (Principal Executive Officer) /s/ Moshe Zelnik Vice President of Finance, Chief March 30, 2000 - ---------------------------- Financial Officer and Secretary Moshe Zelnik (Principal Financial Officer and Principal Accounting Officer) /s/ Zvi Limon Director March 30, 2000 - ---------------------------- Zvi Limon /s/ Yair Shamir Director March 30, 2000 - ---------------------------- Yair Shamir /s/ Saul Shani Director March 30, 2000 - ---------------------------- Saul Shani 28 /s/ Louis Silver Director March 30, 2000 - ---------------------------- Louis Silver /s/ Patrick Tanguy Director March 30, 2000 - ---------------------------- Patrick Tanguy 29 Exhibit 11.1 DSP GROUP, INC. STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share data)
Year Ended December 31, --------------------------- 1999 1998 1997 ------- ------- ------- Numerator: Net income ...................................... $54,579 $14,415 $11,034 ======= ======= ======= Denominator: Weighted average number of common shares outstanding during the period used to compute basic earnings per share ...................... 11,734 9,768 9,736 ======= ======= ======= Incremental shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) .............. 987 248 467 ------- ------- ------- Weighted average number of shares of common stock used to compute diluted earnings per share ......................................... 12,721 10,016 10,203 ======= ======= ======= Basic net income per share ............................ $ 4.65 $ 1.48 $ 1.13 ======= ======= ======= Diluted net income per share .......................... $ 4.29 $ 1.44 $ 1.08 ======= ======= =======
30 Exhibit 21.1 LIST OF SUBSIDIARIES Name of Subsidiary Jurisdiction of Incorporation - ------------------------------------ -------------------------------- 1. DSP Group Europe SARL France 2. DSP Group Ltd. Israel 3. Nihon DSP K.K. Japan 4. RF Integrated Systems, Inc. Delaware, U.S. 5. Voicecom Ltd. Israel 31 Exhibit 23.1 CONSENT OF KOST FORER & GABBAY, A MEMBER OF ERNST & YOUNG INTERNATIONAL, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of DSP Group, Inc. of our report dated January 23, 2000 (except for Note 9, as to which the date is March 1, 2000), included in the 1999 Annual Report to Stockholders of DSP Group, Inc. Our audits also included the consolidated financial statement schedule of DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-83456, 33-87390, 333-53129, and 333-69289) pertaining to the 1991 Employee and Consultant Stock Plan, the 1991 DSP Group, Inc. Israeli Stock Option Plan, the 1993 Director Stock Option Plan, the 1993 Employee Stock Purchase Plan and the 1998 Non-Officer Employee Stock Option Plan, of our report dated January 23, 2000 (except for Note 9, as to which the date is March 1, 2000), with respect to the consolidated financial statements and schedule incorporated herein by reference or included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Kost Forer & Gabbay, a member of Ernst & Young International Tel Aviv, Israel March 30, 2000 32 Schedule II DSP GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Charged to Balance at (deducted Beginning from) of Costs and Balance at Period Expenses End of Description Deduction Period - ---------------------------------- ---------- ---------- --------- ---------- Year ended December 31, 1997: Allowance for doubtful accounts 71 60 61(1) 70 Sales returns reserve 377 345 600(2) 122 Year ended December 31, 1998: Allowance for doubtful accounts 70 10 80 Sales returns reserve 122 -- -- 122 Year ended December 31, 1999: Allowance for doubtful accounts 80 60 -- 140 Sales returns reserve 122 400 -- 522
- ---------- (1) write-offs of uncollectible amounts (2) sales returns applied against revenue 33 EX-3.2 2 EXHIBIT 3.2 ================================================================================ BYLAWS OF DSP GROUP, INC. (a Delaware corporation) Amended and restated as of November 11, 1999 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I CORPORATE OFFICES..................................................1 1.1 REGISTERED OFFICE........................................1 1.2 OTHER OFFICES............................................1 ARTICLE II MEETINGS OF STOCKHOLDERS..........................................1 2.1 PLACE OF MEETINGS........................................1 2.2 ANNUAL MEETING...........................................1 2.3 SPECIAL MEETING..........................................3 2.4 NOTICE OF STOCKHOLDERS' MEETINGS.........................3 2.5 MANNER OF GIVING NOTICE, AFFIDAVIT OF NOTICE.............3 2.6 QUORUM...................................................4 2.7 ADJOURNED MEETING; NOTICE................................4 2.8 VOTING...................................................4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE, CONSENT........5 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING..5 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.................................................6 2.12 PROXIES..................................................6 2.13 INSPECTORS OF ELECTION...................................7 ARTICLE III DIRECTORS........................................................7 3.1 POWERS...................................................7 3.2 NUMBER AND TERM OF OFFICE................................7 3.3 CLASSES OF DIRECTORS.....................................8 3.4 RESIGNATION AND VACANCIES................................8 3.5 REMOVAL..................................................9 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................9 3.7 FIRST MEETINGS..........................................10 3.8 REGULAR MEETINGS........................................10 3.9 SPECIAL MEETINGS; NOTICE................................10 3.10 QUORUM..................................................10 3.11 WAIVER OF NOTICE........................................11 3.12 ADJOURNMENT.............................................11 i 3.13 NOTICE OF ADJOURNMENT...................................11 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.......11 3.15 FEES AND COMPENSATION OF DIRECTORS......................11 3.16 APPROVAL OF LOANS TO OFFICERS...........................12 ARTICLE IV COMMITTEES.......................................................12 4.1 COMMITTEES OF DIRECTORS.................................12 4.2 MEETINGS AND ACTION OF COMMITTEES.......................12 ARTICLE V OFFICERS..........................................................13 5.1 OFFICERS................................................13 5.2 ELECTION OF OFFICERS....................................13 5.3 SUBORDINATE OFFICERS....................................13 5.4 REMOVAL AND RESIGNATION OF OFFICERS.....................13 5.5 VACANCIES IN OFFICES....................................14 5.6 CHAIRMAN OF THE BOARD...................................14 5.7 CHIEF EXECUTIVE OFFICER.................................14 5.8 VICE PRESIDENTS.........................................14 5.9 SECRETARY...............................................14 5.10 CHIEF FINANCIAL OFFICER.................................15 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS .....................................................................15 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...............15 6.2 INDEMNIFICATION OF OTHERS...............................16 6.3 INSURANCE...............................................16 ARTICLE VII RECORDS AND REPORTS.............................................16 7.1 MAINTENANCE AND INSPECTION OF RECORDS...................16 7.2 INSPECTION BY DIRECTORS.................................17 7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................17 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..........17 ARTICLE VIII GENERAL MATTERS................................................17 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING...17 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS...............18 ii 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.......18 8.4 STOCK CERTIFICATES; PARTLY PAID SHARES..................18 8.5 SPECIAL DESIGNATION ON CERTIFICATES.....................19 8.6 LOST CERTIFICATES.......................................19 8.7 CONSTRUCTION; DEFINITIONS...............................19 ARTICLE IX AMENDMENTS.......................................................19 ARTICLE X DISSOLUTION.......................................................20 ARTICLE XI CUSTODIAN........................................................20 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.............20 11.2 DUTIES OF CUSTODIAN.....................................21 iii BYLAWS OF DSP GROUP, INC. (a Delaware corporation) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be fixed in the Certificate of Incorporation of the corporation. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING (a) The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not 1 less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders: provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or reelection as a Director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for elections of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 2.2. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that 2 information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrants, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or in the absence of the chairman of the board by the chief executive officer. No other person or persons are permitted to call a special meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, chief executive officer, or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time requested by the person or persons who called the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS Except as set forth in Section 2.3, all notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.5 MANNER OF GIVING NOTICE, AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is 3 given, notice shall be deemed to have been given if sent to that stockholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a stockholder at the address of that stockholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the stockholder on written demand of the stockholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of stockholders. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE Any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of stockholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than thirty (30) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of 4 Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the Certificate of Incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the stockholders. Any stockholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the stockholder fails to specify the number of shares which the stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which the stockholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the stockholders, unless the vote of a greater number or a vote by classes is required by law or by the Certificate of Incorporation. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE, CONSENT The transactions of any meeting of stockholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of stockholders. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the Certificate of Incorporation, any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in 5 writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date: (a) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining stockholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 6 2.13 INSPECTORS OF ELECTION Before any meeting of stockholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more stockholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fads to appear or fads or refuses to act, then the chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies, (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all stockholders. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the Certificate of Incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER AND TERM OF OFFICE The authorized number of directors shall be not less than five (5) nor more than nine (9). The exact number of directors shall be seven (7) until changed, within the limits specified above, 7 by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the stockholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the Certificate of Incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote or by resolution of a majority of the board of directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. 3.3 CLASSES OF DIRECTORS Following the closing of the corporation's initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock of the corporation (the "Initial Public Offering"), the Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I Directors shall expire and Class I Directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II Directors shall expire and Class II Directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III Directors shall expire and Class III Directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, Directors shall be elected for a full term of three years to succeed the Directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each Director shall serve until his successor is duly elected and qualified or until his earlier death, resignation or removal. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the stockholders or by court order may be 8 filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. Unless otherwise provided in the Certificate of Incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 REMOVAL Subject to any limitations imposed by law, and unless otherwise provided in the Certificate of Incorporation, the Board of Directors, or any individual Director, may be removed from office at any time by the affirmative vote of the holders of at least a majority of the then outstanding shares of the capital stock of the corporation entitled to vote at an election of Directors. 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the 9 absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.7 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.8 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.9 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, or in the absence of the chairman of the board by the chief executive officer or any three directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least seven (7) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least seventy-two (72) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.10 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act 10 or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the Certificate of Incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.11 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.12 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.13 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.8 of these bylaws, to the directors who were not present at the time of the adjournment. 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.15 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 11 3.16 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, but no such committee shall have the power or authority to (i) amend the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section 3.13 (action without meeting), with such changes in the context of 12 those bylaws as are necessary to the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a chairman of the board, a chief executive officer, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a president, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 13 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall serve as the corporation's general manager, and shall have general supervision, direction and control of the corporation's business and its officers, and, if present, preside at meetings of the stockholders and the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no chief executive officer, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. The chairman of the board shall report to the board of directors. 5.7 CHIEF EXECUTIVE OFFICER Subject to such powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer shall, subject to the control of the chairman of the board, or the board of directors if there is no chairman of the board, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and the board of directors, in the absence or nonexistence of a chairman of the board. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. 14 The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 15 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each 16 stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall he specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action (other than action by stockholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of 17 any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer, the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon 18 partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.5 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.6 LOST CERTIFICATES Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.7 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote, provided, however, that the corporation may, in its Certificate of Incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. 19 ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs 20 of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division, or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. 21 EX-3.6 3 EXHIBIT 3.6 AMENDMENT NO. 1 TO RIGHTS AGREEMENT THIS AMENDMENT NO. 1 (this "Amendment"), dated as of May 19, 1999, is between DSP Group, Inc., a Delaware corporation (the "Corporation"), and Norwest Bank Minnesota, N.A. (the "Rights Agent"). RECITALS A. The Corporation and the Rights Agent have previously executed and delivered that certain Rights Agreement, dated as of June 5, 1997, amended and restated as of November 9, 1998 (the "Agreement"). B. The Corporation and the Rights Agent wish to enter into this Amendment and thereby amend the Agreement, in accordance with the terms and provisions set forth herein. The parties hereto agree as follows: AGREEMENT ARTICLE I DEFINITIONS Section 1.1 Definitions. Capitalized terms used herein have the meanings set forth in the Agreement, unless otherwise defined in this Amendment. ARTICLE II AMENDMENT TO RIGHTS AGREEMENT Section 2.1 Amendment. Section 1(a) of the Rights Agreement shall be amended to read in its entirety as follows: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates or Associates of such Person, shall be the Beneficial Owner of 15% or more of the shares of Company Common Stock then outstanding. Notwithstanding the foregoing: (i) an "Acquiring Person" shall not include (A) the Company, (B) any Subsidiary of the Company, (C) any employee benefit plan maintained by the Company or any of its Subsidiaries, (D) any trustee or fiduciary with respect to such employee benefit plan acting in such capacity or a trustee or fiduciary holding shares of Company Common Stock for the purpose of funding any such plan or employee benefits, (E) any Person who has reported or is required to report Beneficial Ownership of Company Common Stock on Schedule 13G under the Exchange Act (or any comparable or successor report), but only so long as (x) such Person is eligible to report such ownership on Schedule 13(G) under the Exchange Act (or any comparable or successor report), (y) such Person has not reported and is not required to report such ownership on Schedule 13(D) under the Exchange Act (or any 1 comparable or successor report) and such Person does not hold shares of Company Common Stock on behalf of any other Person who is required to report Beneficial Ownership of such shares of Company Common Stock on such Schedule 13(D), and (z) such Person does not beneficially own 20% or more of the shares of Company Common Stock then outstanding, (F) any Person if (1) the Board of Directors of the Company determines in good faith that such Person who would otherwise be an "Acquiring Person" became such inadvertently (including, without limitation, because (x) such Person was unaware that it beneficially owned a percentage of Company Common Stock that would otherwise cause such Person to be an "Acquiring Person" or (y) such Person was aware of the extent of its Beneficial Ownership of Company Common Stock but had no actual knowledge of the consequences of such Beneficial Ownership under this Agreement) and without any intention of changing or influencing control of the Company, (2) as promptly as practicable such Person divested or divests itself of Beneficial Ownership of a sufficient number of shares of Company Common Stock so that such Person would no longer beneficially own 15% or more of the then outstanding shares of Company Common Stock, and (3) such Person does not become the Beneficial Owner of any additional shares of Company Common Stock after such Person becomes aware that such Person would be an Acquiring Person (but for the operation of this clause (i)(F)), unless upon becoming the Beneficial Owner of such additional shares such Person is the Beneficial Owner of less than 15% of the then outstanding shares of Company Common Stock, (G) any Person who becomes the Beneficial Owner of 15% or more of the then outstanding shares of Company Common Stock as a result of the acquisition of shares of Company Common Stock directly from the Company in one or more transactions approved by the Board of Directors, (H) Magnum Technology Limited, an international investment fund ("Magnum"), and its subsidiaries with respect to (1) the shares of Company Common Stock issued in the transaction contemplated by the Stock Purchase Agreement by and between the Company and Magnum, dated as of February 2, 1999 (the "Magnum Agreement"), and (2) any additional shares of Company Common Stock purchased by Magnum and its subsidiaries for so long as Magnum and its subsidiaries own no more than 35% of the outstanding shares of Company Common Stock; provided, that (w) any subsidiary of Magnum holding shares of Company Common Stock shall be subject to all obligations which would be applicable to Magnum if such shares were held by Magnum, (x) all or substantially all of the capital stock of Magnum shall not have been transferred to a single person (including, without limitation, an entity or individual) or a group as defined under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, (y) a direct or indirect change in control of Magnum and of any subsidiary holding shares of Company Common Stock shall not have occurred and (z) the shares of the Company shall not constitute all or substantially all of Magnum's assets, and (ii) no Person shall be deemed an "Acquiring Person" as a result of the acquisition of shares of Company Common Stock by the Company which, by reducing the number of shares of Company Common Stock outstanding, increases the proportional number of shares beneficially owned by such Person; provided, however, that if (A) a Person would become an Acquiring Person (but for the operation of this subclause (ii)) as a result of the acquisition of shares of Company Common Stock by the Company and (B) after such share acquisition by the Company, such Person becomes the Beneficial Owner of any additional shares of Company Common Stock, then such Person shall be 2 deemed an Acquiring Person unless upon becoming the Beneficial Owner of such additional shares such Person is the Beneficial Owner of less than 15% of the then outstanding shares of Company Common Stock. Each Person identified in subclauses (A), (B), (C) and (D) of this Section (1)(a) is individually an "Exempt Person" and collectively "Exempt Persons." ARTICLE III MISCELLANEOUS Section 3.1 Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed entirely in such State. Section 3.2 Counterparts. This Amendment may be executed (including by facsimile) in one or more counterparts, and by different parties hereto in separate counterparts, each of which when executed shall be deemed an original, but all of which taken together shall constitute one and the same instrument. Section 3.3 Headings. The headings contained in this Amendment and for descriptive purposes only and shall not affect in any way the meaning or interpretation of this Amendment. Section 3.4 Construction. The terms of this Amendment shall prevail over any conflicting provision of the Agreement, but both instruments shall otherwise be construed and interpreted as a single integrated agreement. All references in the Agreement to such "Agreement" shall be construed as referring to the Agreement as it has been amended hereby. The Agreement remains in full force and effect, in accordance with its terms and as amended hereby, and there are no other amendments, understandings or agreements except as set forth herein. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first written above. By: /s/ IGAL KOHAVI By: /s/ ELIYAHU AYALON -------------------------- ------------------------- Name: Igal Kohavi Name: Eliyahu Ayalon Title: Chairman of the Board Title: President and Chief Executive Officer Attest: NORWEST BANK MINNESOTA, N.A. By: /s/ KARRI L. VAN DELL By: /s/ JOHN BAKER -------------------------- ------------------------- Name: Karri L. Van Dell Name: John Baker ------------------------ ----------------------- Title: AVP Title: Account Manager ----------------------- ---------------------- 3 EX-10.22 4 EXHIBIT 10.22 SECOND AMENDMENT TO SUBLEASE This Amendment dated February 11, 1999, for reference purposes only, is made and entered into by Dialogic Corporation ("Sublessor") and DSP Group, Inc. ("Sublessee"). RECITALS: A. The parties have previously entered into a sublease ("Sublease") dated October 18, 1996 and a First Amendment to Sublease dated December 4, 1996. NOW THEREFORE, the parties agree as follows: 1. To amend the "Termination Date" as defined in paragraph 7 of Sublease to be June 30, 2001. 2. To increase the monthly rent as defined in paragraph 9 of Sublease to be thirty-three thousand six hundred thirty-seven dollars ($33,637.00) beginning January 1, 2000. 3. To delete paragraph 8 of Sublease in its entirety and substitute the following: The Sublease shall automatically renew for one month periods beginning July 1, 2001; provided, however, in no event shall the term of Sublease extend past April 30, 2004. This month to month extension period can be terminated by either party by providing at least five (5) months prior written notice to the other party at any time after February 1, 2001 (i.e., if written notice is delivered on February 1, 2000, such termination shall be effective July 1, 2001). 4. Except as specifically amended modified by this Second Amendment to Sublease, all other terms and provisions of the First Amendment to Sublease and Sublease shall remain unmodified and in full force and effect. Sublessor: DIALOGIC CORPORATION Sublessee: DSP GROUP, INC. By:/s/ THOMAS ARIDAO By: /s/ MICHAEL COHEN ------------------------------ ---------------------------- Title: Chief Financial Officer Title: Director, Administration -------------------------- ------------------------- Date: 3/15/99 Date: 3/12/99 --------------------------- -------------------------- EX-10.23 5 EXHIBIT 10.23 OFFICER'S CERTIFICATE MARCH 30, 2000 ------------------------ The undersigned, Eli Ayalon, hereby certifies as follows: (a) I am the duly elected, qualified, acting and incumbent Chairman of the Board and Chief Executive Officer of DSP Group, Inc. (the "Company"). (b) Attached hereto is an English translation of an Employment Agreement, dated as of May 1, 1999, by and between Moshe Zelnik and DSP Group Ltd., a wholly owned subsidiary of the Company. (c) To my knowledge, such translation is a fair and accurate translation as required under Rule 306 of Regulation S-T promulgated by the Securities and Exchange Commission. IN WITNESS WHEREOF, the undersigned has duly executed this Certificate on behalf of the Company as of the date first written above. DSP GROUP, INC. /s/ ELI AYALON ---------------------------------------- Eli Ayalon, Chairman of the Board and Chief Executive Officer To: Moshe Zelnik ------------------------ Identity Certificate No._________________________ Address:_________________________________________ _________________________________________________ Re: YOUR EMPLOYMENT WITH DSP GROUP. We are pleased to offer you to join DSP Group Co. Ltd. (Hereinafter: "The Company") in accordance with the following terms of employment: 1. DEFINITION OF THE POSITION. A. Your position in the Company will be VICE PRESIDENT OF FINANCE, CHIEF FINANCIAL OFFICER AND SECRETARY. B. You will be directly subordinate to __________________________. 2. TERMS OF EMPLOYMENT A. SALARY. 1. In consideration for your work for the Company, the Company will pay you the amount of NIS - (US$105,000) - Gross, annually. (Hereinafter: "The Salary"). 2. Tax will be deducted at source from the Salary as required by law in accordance with the Income Tax Regulations, as well as Health Tax And National Insurance. The Salary will be linked to the cost of living index without any maximum rate, to which health dues will be attached as required by law. B. SENIOR EMPLOYEES INSURANCE PLAN 1. The Company will pay 20.833% of the Salary as detailed in section 1.A.2 above to a pension fund or a provident fund, at its discretion, up to the maximum stipulated in the law, in accordance with the following details: A) 8.33% of the Salary on account of severance pay - at the Company's expense; B) 5% of the Salary on account of recompense payments - at the Company's expense. C) 5% of the Salary on account of recompense payments - at your expense. D) 2.5% of the Salary on account of insurance for loss of work ability - as is customary in the Company and at the Company's expense. 2. The payments made by the Company for the senior employees insurance plan, as stipulated in sub section A above, are instead of any other obligation for the payment of severance pay / payments made to a pension fund etc. 3. Your consent to section B exempts the Company from the need to approach the Minister of Labor in order to receive his permission in accordance with section 14 of the Severance Compensation Pay Law, although if such a need is created, for referral for the receiving of the necessary permit, your signature upon this agreement will constitute authorization for the Company also to make a referral in your name. 4. If the Company is obliged in the future, by virtue of the law and/or an extension order which applies to the whole economy, to make payments of monies for an arrangement or comprehensive pension fund or otherwise, the payments will be made to the new applicable fund or arrangement, instead of the arrangement as in this agreement, and you will not be able to withdraw monies on account of the deposits to the previous arrangement, unless subject to the regulations of the appropriate fund and/or plan. C. STUDY FUND During the period of your employment, the Company will make payments to a study fund, the payments will be at the rate of 7.5% of the Salary up to the maximum rate, as set down by law, at the Company's expense and 2.5% of the maximum rate up to the maximum rate set down by law, at the expense of the employee. 2 D. CAR 1. The Company shall make a Company car available to you, (Hereinafter: "The Car") commencing from the start of your employment. 2. All the expenses for the Car shall be paid by the Company, except for the payment for the value of the use of the Car, which shall be paid by you, and which shall be deducted by the Company from your monthly Salary. E. ANNUAL VACATION LEAVE. 1. During the period of your employment, you will be entitled to annual vacation leave of 23 days. The date of your leaving for vacation shall be coordinated with your superior. 2. The accumulation of vacation days for the period of more than the total of the vacation days available to you for two contract years will not be allowed. 3. The Company will be entitled to order you to leave for annual vacation and to spend up to half of your available annual vacation days at the date at which the Company's employees will leave on an organized and collective vacation leave. F. ILLNESS 1. You are entitled to 30 days annual sick leave, with the possibility of accumulating 3 (three) years (i.e. up to ninety days). 2. The payment of the sick leave will be made from the first day against presentation of a doctor's certificate. 3. Accumulative sick leave days are not redeemable. F. MILITARY RESERVE DUTY SERVICE (MILLUIM) 1. Every time you go on active military service you are obliged to inform the Company upon the receiving of the call up order. 3 2. Wages for the period of the reserve military duty will be fully paid, as stipulated in this agreement, subject to the providing of the relevant confirmations concerning the active military duty. H. YOUR CANDIDACY FOR THE OPTIONS PROGRAM FOR COMPANY EMPLOYEES. 1. The Company management shall make a recommendation to the board of directors of DSPG Inc., granting you an option to purchase 40,000 DSPG shares, subject to the terms of the share/options program for DSPG employees. In order to eliminate any doubt, it is clarified that, in any event, the confirmation of the granting of the options is subject to the confirmation of the board of directors of the Company as transpires from the Company's procedures. I. ANNUAL BONUS. The Company is accustomed to granting bonuses to some of the employees, and at the time of the deliberations on the granting of bonuses, the Company shall decide, at its discretion, also with respect of your candidature for the granting of a bonus. 3. THE PERIOD OF THE CONTRACT AND THE TERMINATION THEREOF. A. This agreement is valid from the date of the signing thereof. The contract is for a period of time which has not been specified in advance. The commencement of your employment with the Company is hereby set as commencing from _________________. B. Each party shall be entitled to bring this contract to an end by prior written notice to the other party of ninety (90) days. The Company has reserved the right not to make use of the period of prior notice and/or to immediately terminate your employment. In such a case, you shall be paid prior notice at the rate of your Salary for the stipulated period, on the basis of your last known Salary. 4 C. In the following instances the Company shall be entitled to cease your employment without any prior notice: 1. The perpetrating of a criminal offence connected to the work and/or an offence which bears an element of disgrace. 2. The breach of the duty of trust with the Company and/or the performance of an act which has a conflict of interests. 3. The breach of your undertakings of the preserving of secrecy and non competitiveness as detailed below in this agreement and the appendices thereto. 4. The causing of malicious damage to the Company or the causing of damage to the Company as a result of gross negligence. 4. THE TRANSFERENCE OF PAYMENTS AND RETIREMENT COMPENSATION. In the event of you being dismissed, except for dismissal for one of the causes as stated below, the Company will transfer to you the full payments which have accumulated in your favor in the senior employees insurance plan policy and/or the endowment and/or fund (Hereinafter: "The Payments"). As follows is the list of causes which will cancel the transference of the Payments into your name: A. The Company has dismissed you for reasons which entitle it to dismiss you in accordance with the law without severance pay. B. The breach of your duty of trust and/or the duty of non competitiveness and/or the breach of the duty of secrecy, in accordance with this agreement, without derogating from the generality of that stipulated - the breach of the agreement of secrecy and non competitiveness attached as APPENDIX A to this agreement and which constitutes an integral part thereof. C. The perpetration of a criminal offence connected with the work and/or an offence which bears an element of disgrace. 5 D. You ended your work with the Company without providing sufficient prior notice as detailed in section 3B above. E. You have concluded your employment with the Company without passing over your position as detailed in section 7 below. It is hereby clarified that, your transference from the work set up of the Company to that of new company which will be set up, if at all, within the framework of the group and your employment in such a company, will not be considered as the termination of your employment, your dismissal and/or your resigning from the Company, for the transference of the various Payments, including, but without derogating from the above said, severance pay. 5. WORK HOURS. A. The accepted working hours in the Company are 44 hours a week and the accepted working days are Sundays through to Thursday. B. As your position is regarded as one of those positions which require a special amount of personal trust, as defined in the Working Hours and Rest Law - 1951, the provisions of this law will not apply to you. From time to time, you will be required, in accordance with the needs of your position, to work beyond the accepted working hours and on Fridays. In these cases, you will not be paid extra for your overtime. 6. THE DUTY OF TRUST AND REFRAINING FROM A CONFLICT OF INTERESTS. A. You are obligated to fulfil your position diligently and in a trustworthy manner, to make use of all your talents, your knowledge and experience for the benefit of the Company and for the progress of the Company and this at the highest and most efficient level as shall be determined by the Company. Furthermore, you are obligated to act in accordance with the Company's instructions with everything concerning the manner of the performance of the work, 6 work procedures, discipline and behavior as shall be valid from time to time. B. Commencing from the start of your employment on a full time basis for the Company, as stipulated in section 3A above, i.e., commencing from (Date):________________ you shall not be employed in any other employment and/or any other job as a salaried worker and/or as an adviser and/or as being directly or indirectly self- employed, unless having received the prior written consent of the Company. C. For the full duration of the period of the agreement, you will not receive any payment or other benefit from any third party, directly or indirectly involved with your work. It is made clear to you, that the breach of this provision is a fundamental breach of this agreement, and that furthermore, the amount or benefit which is received by you as stipulated, shall belong to the Company, which shall be entitled to deduct this amount, from any monies owing to you by the Company. D. You shall not carry out any act which may harm the trust of the Company and/or which is likely to place you in a situation of a conflict of interests with the aims of the Company. You are obliged to inform the Company immediately and without delay of any issue or matter in which you have a personal interest and/or any other action which is likely to place you in a situation as detailed above. E. The commencement of your employment in accordance with this agreement is made conditional on your signing on the agreement of secrecy and non competitiveness which is attached to this agreement as Appendix A and which constitutes an integral part thereof. F. You are obliged to inform the managing director of the Company of any business opportunity which has any connection to the information as defined in Appendix A. You are obliged not to make 7 any such opportunity exclusive to yourself, whether directly or indirectly, unless the prior written approval of the managing director of the Company has been given to you. 7. THE PASSING OVER OF THE POSITION. If your employment has terminated or been terminated and/or the validity of this agreement has expired for any reason whatsoever, you are obliged to pass over your position, and without derogating from the generality of that stipulated - all the matters under your care and/or any information whatsoever available to you and connected in any form whatsoever to your work for the Company, in an orderly and full fashion including the disclosure of any important detail with regard to the business of the Company, as well as forwarding, in a full and orderly fashion, all the documents, information, equipment, etc. to the Company, which may have reached you and/or be prepared by you with regard to your employment with the Company, up until the cessation of your employment with the Company. 8. DECLARATION OF SECRECY AND NON COMPETITIVENESS. You are obligated to the safeguarding of secrecy and non competitiveness, both during the course of your employment with the Company and thereafter, as detailed in your undertaking to safeguard secrecy and non competitiveness attached to this agreement as APPENDIX A and which constitutes an integral part thereof. 9. PATENTS, INVENTIONS AND COMMERCIAL SECRETS. A. Copyrights for any invention and/or patent and/or commercial secret and/or professional secret and/or any innovation, which you may intend and/or which any of the employees of the Company who are sub-ordinate to you may invent during the period of your employment with the Company are the exclusive property of the Company. 8 The Company shall be entitled to protect any invention and/or patent and/or commercial secret as stipulated, by means of registration, or by any other means, in Israel or anywhere else. It is hereby clarified that you will not be entitled to register any invention and/or patent or commercial secret or to take any measures with respect thereof, excepting for the actions which will be required for the above mentioned making use thereof or registration in the name of the Company or by the Company. B. You are obligated to immediately inform the Company in writing of any invention and/or patent and/or commercial secret which you may invent and/or which is invented by the Company's employees who are subject to you. C. That stipulated in this section completes and compliments that stipulated in Appendix A. With your signing upon this personal agreement and your formal joining of the work staff of the Company we wish you continued satisfaction and enjoyment of your work. Here's hoping for years of co-operation and personal benefit as well as benefit for the Company, its employees and stockholders. Yours Respectfully, /s/ LEAH SADEH Leah Sadeh Corporate Vice President Human Resources DSP Group Ltd. 9 I have carefully read this letter and I express my consent with the contents thereof. I am aware that the terms of wages which have been offered to me above and those which shall be pertinent for long as I am employed by you are personal and that this letter constitutes a special personal contract of employment, which lays down the relations between me and the Company, and that therefore I confirm that I am aware that no provisions of any to the agreements will apply to me, and including collective agreements, between the Company and its employees so long as this agreement is valid and I undertake to safeguard the secrecy thereof. /s/ MOSHE ZELNIK 5/1/99 - ------------------------------ -------------- SIGNATURE DATE - ------------------------------ I.D. MOSHE ZELNIK - ------------------------------ NAME 10 APPENDIX A TO THE AGREEMENT OF MY EMPLOYMENT WITH DSP GROUP CO. LTD. To: DSP Group Co. Ltd. 5 Shenkar St. HERZLIA -ON - SEA Dear Sir/Madam, Re: UNDERTAKING TO SAFEGUARD SECRECY AND NON-COMPETITIVENESS. WHEREAS: I seek to be employed by DSP Group Co. Ltd. (a private registered company No. 51-135472-2 (Hereinafter: "The Company"); AND WHEREAS: The Company, in the matter of the duty of secrecy and non-competitiveness in this appendix, also includes the American holding company of DSP Group Co. Ltd. - DSP Group, Inc. and also the subsidiary company of DSP Voice Com. Group Ltd. and the subsidiary company of DSP Group Inc. - RF Sub Inc.; AND WHEREAS: During the course of my employment for the Company information is likely to reach me, in accordance with the following definition: Any information which has and/or shall reach me and/or come to my attention, whether directly and/or indirectly, during the course of my work or as a result of my work for the Company, including document (reports, notes and papers, applications and cheques), drafts, processes, commercial secrets - including information concerning the Company's customers, suppliers and business partners and/or the manufacture or marketing set-up of the Company or connected to the ties of the Company and/or companies connected to it, or which control or are controlled or 11 affiliated with the Company by virtue of and acting with any third party whatsoever, including customers, suppliers, banking institutions, governmental bodies, private entities, public and quasi public entities of any kind and sort as well as any financial, business and commercial information, financial reports and balance sheets before the publication thereof and any internal information whatsoever which may influence the value of the Company's shares - formulae, data, plans, patents, inventions, discoveries, innovations, improvements, research, and any methods whatsoever, developments and scientific and technical, economic, commercial or other developments, applications for patent, prototypes, models, pictures, descriptions, sketches, drawings, photostats or blueprints, notebooks, samples and documents of schedule, lists, documentation, source and destination codes, films, recordings and other means of storage, letters, notes, booklets for note taking, reports and flow charts, as well as information connected with the business of the Company in the present and/or business which the Company is about to engage in (as they shall be developed by the Company and as described by the Company in the development plan booklet and its business plans and in the other explanatory material on behalf of the Company), and any other thing, and all, whether in writing or verbally, and provided that it is not in the public domain or that it has not become in the public domain as a result of the breach of my undertakings in accordance with this letter or in accordance with law. (Hereinafter: "The Information"). AND WHEREAS: The Information, as defined above, also includes Information of commercial, technical and non-technical, value, written and non-written, data, systems of note taking, samples, documents of 12 specifications, source and destination codes, processes, algorithms, computer tapes, recordings and other means of storage which are to be viewed as intellectual property or secret material of the Company or of any one of its predecessors or of the companies connected to it, whether fully or partially, and including especially without restriction, computer hardware, programs and computer software and implementations, matters of prices and marketing information as well as inventions which are not restricted in accordance with the definition of invention as has been determined in the patent laws which are implemented in Israel or in the U.S.A., and any improvement or adjustment of that information in question, which has been developed, sold, or which in respect of which a license has been given to the Company during the course of the conducting of the business of the Company, from time to time, as well as any product in question, whether planned, developed or attained by or for the Company, directly or indirectly, and provided that it is not information and/or a product which is available freely and which constitutes public domain information or which can be purchased freely by an independent third party. AND WHEREAS: As a condition of my employment with the Company and the receiving of information by me, inter alia, is my undertaking to safeguard the secrecy and of non-competitiveness; THEREFORE, I DECLARE AND UNDERTAKE AS FOLLOWS: CHAPTER A - SECRECY 1. To keep secret the Information which reaches me or which shall reach me, or which shall come to my attention, directly or indirectly, during the course of my employment for the Company and/or my involvement with the Company, 13 absolutely secret, and this without any limitation in time, even after the conclusion of my employment with the Company. 2. Not to disclose and/or to transfer and/or to sell, whether for remuneration or not and/or to cause the discovery of Information, whether directly or indirectly, as well as to take all measures to safeguard the secrecy of the information and the prevention of the delivery thereof or of its reaching any third party, person, entity or corporation whatsoever, excepting for my superiors in the Company or in accordance with their instructions for the Purpose of the performance of my duties as an employee of the Company. 3. Not to make any use of the Information, whether fully or partially, for my needs or for the needs of to others, whether directly or indirectly, which are not for the purpose of to performance of the jobs imposed upon me as an employee of the Company in accordance with the instruction of my superiors in the Company. Not to make any copies of the information in any manner whatsoever unless in accordance with the Company's instructions or someone who is authorized to do so on behalf of the Company. 4. I hereby undertake not to accept any materials whatsoever relating to the Information or the products, or any equipment from the Company without receiving the express prior written consent of: (1) the president of the Company or the managing director, or (2) a person authorized in writing to do so by the president of the Company or the managing director. 5. Without prejudicing the above said, I am aware that I do not have any intellectual property right and that I shall not have any intellectual property right in the Information as defined by this agreement. 5A. I hereby declare to disclose to the Company and/or to those replacing it and/or to the assignees of the Company, regarding the inventions which shall be made by me during the period of my employment with the 14 Company and/or as a result of my employment with the Company and connected to my employment with the Company and/or the information, and I hereby assign any interest that I have or which I may have in those inventions in favor of the Company and/or those in place of the Company and/or its assignees, and all this without further remuneration and provided that I will not be required to bear any costs whatsoever involved with such assignment as mentioned above. In the event of my making an invention, which is registered as a patent, during the course of my employment with the Company or as result of my employment with the Company, the Company will register my name in the patent documents as the inventor, provided that it is convinced, beyond all doubt, that the invention was indeed made by me and that such registration shall not prejudice its intellectual property rights and/or other rights of the Company and/or those in its stead and/or it assignees, for the invention and/or patent as detailed above. 5B. I hereby undertake, that for so long as I am required to do so, including after the termination of my employment for any reason whatsoever, that I will sign on any document, which, in accordance with the Company's discretion is required for the lodging of an application or copyright in accordance with the laws of Israel, the U.S.A. and/or any other foreign country in order to protect the interests of the Company in the above mentioned invention. 5C. I hereby declare that apart from that as detailed in section 5C.1 below, I do not have any interest in any application or application for a patent whatsoever and not even for material which is subject to copyright, patents and applications for patents which presently belong to me. 5C.1 Existing patent and/or applications for patents pending and/or activities in research at the stage of lodging for registration of patent are as follows: 15 1.______________________________________________________________ 2.______________________________________________________________ 3.______________________________________________________________ 4.______________________________________________________________ 6. I am aware that the forwarding of Information and/or any part thereof to any third person whatsoever is likely to cause serious damages to the Company and I hereby undertake that I shall not undertake any action of transference and/or sale of the Information and/or of the products developed by the Company and/or existing products and/or which have been developed whether by myself or in co-operation with others, including customers of the Company or whether in co-operation with any third party whatsoever, whether with customers of the Company or with others. 7. I declare that I am aware, that due to the nature of the Company's business, it takes upon itself and/or is likely to take upon itself undertakings with third parties obliging the safeguarding of secrecy which will also be applicable to its employees, and that the non-fulfillment of the above undertakings shall, inter alia, be cause for the breach of the contract between the Company and the third party. I therefore undertake to fulfil all these undertakings as has been determined between the Company and the aforesaid third party. 8. I hereby undertake not to harm, whether directly or indirectly, the reputation of the Company and/or its status amongst its customers in effect an its potential customers. 9. To keep secret any information relating to aspects of money, fiscal aspects and economic aspects of the Company's activities, including ties with banking institutions, customs and excise authorities, undertakings of the Company and rights toward third parties. Likewise, I will keep secret 16 any information which may reach me and connected with entities such as the center for investments, the Scientist-in-Chief, accountants and legal advisors of the Company, etc. 10. In order to eliminate any doubt, it is hereby emphasized that my undertakings in accordance with sections 1 - 9 above shall remain valid both during the period of my employment with the Company and after the termination thereof for whatever reason whatsoever, and shall also bind my legal representatives, and this without any limitation in time. 11. I agree that any document which I have prepared and/or any Information which I have attained for the purpose of my work with the Company and/or my work during the period of my employment with the Company is the property of the Company, which shall be forwarded to the Company immediately upon the termination of my employment as detailed below. Likewise, I hereby undertake to return to the Company any Information, whether written or in any other form whatsoever, which is in my possession or which shall be in my possession at any time, and this immediately upon the termination of my employment for any reason whatsoever or immediately upon the demand of the Company at any time. CHAPTER B - NON COMPETITIVENESS 12. Furthermore, and without prejudicing my undertakings in this document and/or my undertakings imposed upon me in accordance with the law or according to custom, I hereby undertake not to compete with the Company in any form or manner whatsoever, by any means of undertaking whatsoever, whether directly or indirectly, by myself or together with others, and/or to provide advise of any sort whatsoever to a competing business and/or to be employed for pay or without pay by a competing business and/or to be active, whether directly or indirectly in the management and/or activating and/or planning of a competing business. 17 13. I hereby undertake that upon the conclusion of my employment with the Company for any reason whatsoever, I will not work, whether for wages or not and/or for the purpose of advising and/or to be directly or indirectly active in the execution of work and/or service for a customer of the Company and/or someone who was a customer of the Company at the time of my employment with the Company. 14. In order to eliminate any doubt I hereby clarify that my undertakings in accordance with sections 12 - 13 above, shall remain valid during the period of my employment with the Company and after the termination thereof for whatever reason whatsoever for the periods as detailed below: 14A. For a period of one year after the conclusion of my employment, in the event of my having worked for the Company for a period of more than 6 months; 14B For a period of two years after the conclusion of my employment, in the event of my having worked for the Company for a period exceeding two years. 15. I undertake that upon the conclusion of my employment with the Company, for whatever reason, I shall not lobby and/or attempt to lobby and/or attain, whether directly and/or indirectly and/or for another and/or for any undertaking whatsoever with any customer of the Company and/or someone who was a customer of the Company at the time of my employment with the Company. CHAPTER C - MISCELLANEOUS BREACHES 16. In the event of my breaching my undertakings in accordance with this writ of undertaking, I will be obliged to compensate the Company for all the damages and expenses caused to the Company as a result of the breach, and this without derogating from any of the remedies available to the 18 Company against me in accordance with any law as a result of the breach of my above undertakings. 17. I am aware that the Company has various intellectual property rights, and the above said shall not prejudice these rights in any manner whatsoever. 18. The rights of the Company in accordance with this document are personally negotiable. 19. My undertakings in accordance with this writ, constitute an integral part of the terms of my employment between me and the Company. My above undertakings shall not prejudice the undertakings applicable to me in any way and as an employee of the Company in accordance with the agreement of employment between me and the Company and/or in accordance with any law, including collective agreements and/or any custom. 20. My undertakings in accordance with this document cannot be changed and shall not be brought to an end, fully or partially, unless by virtue of a document written and signed by an authorized representative on behalf of the Company. 21. If, for any reason whatsoever, a term of this document is held to be invalid or unenforceable, the validity and enforceability of the other provisions of this document shall not be prejudiced. 5/1/99 /s/ MOSHE ZELNIK - ------------------------ --------------------------------- DATE EMPLOYEE'S SIGNATURE 19 EX-10.24 6 EXHIBIT 10.24 OFFICER'S CERTIFICATE MARCH 30, 2000 ------------------------- The undersigned, Moshe Zelnik, hereby certifies as follows: (a) I am the duly elected, qualified, acting and incumbent Vice President of Finance, Chief Financial Officer and Secretary of DSP Group, Inc., (the "Company"). (b) Attached hereto is an English translation of an Employment Agreement, dated as of May 1, 1999, by and between Boaz Edan and DSP Group, Ltd., a wholly owned subsidiary of the Company. (c) To my knowledge, such translation is a fair and accurate translation as required under Rule 306 of Regulation S-T promulgated by the Securities and Exchange Commission. IN WITNESS WHEREOF, the undersigned has duly executed this Certificate on behalf of the Company as of the date first written above. DSP GROUP, INC. /s/ MOSHE ZELNIK ------------------------------------- Moshe Zelnik, Vice President of Finance, Chief Financial Officer and Secretary To: BOAZ EDAN - ----------------------------- Identity Certificate No.______________________________ Address:______________________________________________ ______________________________________________________ Re: YOUR EMPLOYMENT WITH DSP GROUP. We are pleased to offer you to join DSP Group Co. Ltd. (Hereinafter: "The Company") in accordance with the following terms of employment: 1. DEFINITION OF THE POSITION. A. Your position in the Company will be VICE PRESIDENT OPERATIONS. B. You will be directly subordinate to ____________________________. 2. TERMS OF EMPLOYMENT A. SALARY. 1. In consideration for your work for the Company, the Company will pay you the amount of NIS - (US$105,000) - Gross, annually. (Hereinafter: "The Salary"). 2. Tax will be deducted at source from the Salary as required by law in accordance with the Income Tax Regulations, as well as Health Tax And National Insurance. The Salary will be linked to the cost of living index without any maximum rate, to which health dues will be attached as required by law. B. SENIOR EMPLOYEES INSURANCE PLAN 1. The Company will pay 20.833% of the Salary as detailed in section 1.A.2 above to a pension fund or a provident fund, at its discretion, up to the maximum stipulated in the law, in accordance with the following details: A) 8.33% of the Salary on account of severance pay - at the Company's expense; B) 5% of the Salary on account of recompense payments - at the Company's expense. C) 5% of the Salary on account of recompense payments - at your expense. D) 2.5% of the Salary on account of insurance for loss of work ability - as is customary in the Company and at the Company's expense. 2. The payments made by the Company for the senior employees insurance plan, as stipulated in sub section A above, are instead of any other obligation for the payment of severance pay / payments made to a pension fund etc. 3. Your consent to section B exempts the Company from the need to approach the Minister of Labor in order to receive his permission in accordance with section 14 of the Severance Compensation Pay Law, although if such a need is created, for referral for the receiving of the necessary permit, your signature upon this agreement will constitute authorization for the Company also to make a referral in your name. 4. If the Company is obliged in the future, by virtue of the law and/or an extension order which applies to the whole economy, to make payments of monies for an arrangement or comprehensive pension fund or otherwise, the payments will be made to the new applicable fund or arrangement, instead of the arrangement as in this agreement, and you will not be able to withdraw monies on account of the deposits to the previous arrangement, unless subject to the regulations of the appropriate fund and/or plan. C. STUDY FUND During the period of your employment, the Company will make payments to a study fund, the payments will be at the rate of 7.5% of the Salary up to the maximum rate, as set down by law, at the Company's expense and 2.5% of the maximum rate up to the maximum rate set down by law, at the expense of the employee. 2 D. CAR 1. The Company shall make a Company car available to you, (Hereinafter: "The Car") commencing from the start of your employment. 2. All the expenses for the Car shall be paid by the Company, except for the payment for the value of the use of the Car, which shall be paid by you, and which shall be deducted by the Company from your monthly Salary. E. ANNUAL VACATION LEAVE. 1. During the period of your employment, you will be entitled to annual vacation leave of 23 days. The date of your leaving for vacation shall be coordinated with your superior. 2. The accumulation of vacation days for the period of more than the total of the vacation days available to you for two contract years will not be allowed. 3. The Company will be entitled to order you to leave for annual vacation and to spend up to half of your available annual vacation days at the date at which the Company's employees will leave on an organized and collective vacation leave. F. ILLNESS 1. You are entitled to 30 days annual sick leave, with the possibility of accumulating 3 (three) years (i.e. up to ninety days). 2. The payment of the sick leave will be made from the first day against presentation of a doctor's certificate. 3. Accumulative sick leave days are not redeemable. F. MILITARY RESERVE DUTY SERVICE (MILLUIM) 1. Every time you go on active military service you are obliged to inform the Company upon the receiving of the call up order. 3 2. Wages for the period of the reserve military duty will be fully paid, as stipulated in this agreement, subject to the providing of the relevant confirmations concerning the active military duty. H. YOUR CANDIDACY FOR THE OPTIONS PROGRAM FOR COMPANY EMPLOYEES. 1. The Company management shall make a recommendation to the board of directors of DSPG Inc., granting you an option to purchase 35,000 DSPG shares, subject to the terms of the share/options program for DSPG employees. In order to eliminate any doubt, it is clarified that, in any event, the confirmation of the granting of the options is subject to the confirmation of the board of directors of the Company as transpires from the Company's procedures. I. ANNUAL BONUS. The Company is accustomed to granting bonuses to some of the employees, and at the time of the deliberations on the granting of bonuses, the Company shall decide, at its discretion, also with respect of your candidature for the granting of a bonus. 3. THE PERIOD OF THE CONTRACT AND THE TERMINATION THEREOF. A. This agreement is valid from the date of the signing thereof. The contract is for a period of time which has not been specified in advance. The commencement of your employment with the Company is hereby set as commencing from ___________________. B. Each party shall be entitled to bring this contract to an end by prior written notice to the other party of ninety (90) days. The Company has reserved the right not to make use of the period of prior notice and/or to immediately terminate your employment. In such a case, you shall be paid prior notice at the rate of your Salary for the stipulated period, on the basis of your last known Salary. 4 C. In the following instances the Company shall be entitled to cease your employment without any prior notice: 1. The perpetrating of a criminal offence connected to the work and/or an offence which bears an element of disgrace. 2. The breach of the duty of trust with the Company and/or the performance of an act which has a conflict of interests. 3. The breach of your undertakings of the preserving of secrecy and non competitiveness as detailed below in this agreement and the appendices thereto. 4. The causing of malicious damage to the Company or the causing of damage to the Company as a result of gross negligence. 4. THE TRANSFERENCE OF PAYMENTS AND RETIREMENT COMPENSATION. In the event of you being dismissed, except for dismissal for one of the causes as stated below, the Company will transfer to you the full payments which have accumulated in your favor in the senior employees insurance plan policy and/or the endowment and/or fund (Hereinafter: "The Payments"). As follows is the list of causes which will cancel the transference of the Payments into your name: A. The Company has dismissed you for reasons which entitle it to dismiss you in accordance with the law without severance pay. B. The breach of your duty of trust and/or the duty of non competitiveness and/or the breach of the duty of secrecy, in accordance with this agreement, without derogating from the generality of that stipulated - the breach of the agreement of secrecy and non competitiveness attached as APPENDIX A to this agreement and which constitutes an integral part thereof. C. The perpetration of a criminal offence connected with the work and/or an offence which bears an element of disgrace. 5 D. You ended your work with the Company without providing sufficient prior notice as detailed in section 3B above. E. You have concluded your employment with the Company without passing over your position as detailed in section 7 below. It is hereby clarified that, your transference from the work set up of the Company to that of new company which will be set up, if at all, within the framework of the group and your employment in such a company, will not be considered as the termination of your employment, your dismissal and/or your resigning from the Company, for the transference of the various Payments, including, but without derogating from the above said, severance pay. 5. WORK HOURS. A. The accepted working hours in the Company are 44 hours a week and the accepted working days are Sundays through to Thursday. B. As your position is regarded as one of those positions which require a special amount of personal trust, as defined in the Working Hours and Rest Law - 1951, the provisions of this law will not apply to you. From time to time, you will be required, in accordance with the needs of your position, to work beyond the accepted working hours and on Fridays. In these cases, you will not be paid extra for your overtime. 6. THE DUTY OF TRUST AND REFRAINING FROM A CONFLICT OF INTERESTS. A. You are obligated to fulfil your position diligently and in a trustworthy manner, to make use of all your talents, your knowledge and experience for the benefit of the Company and for the progress of the Company and this at the highest and most efficient level as shall be determined by the Company. Furthermore, you are obligated to act in accordance with the Company's instructions with everything concerning the manner of the performance of the work, 6 work procedures, discipline and behavior as shall be valid from time to time. B. Commencing from the start of your employment on a full time basis for the Company, as stipulated in section 3A above, i.e., commencing from (Date):________________ you shall not be employed in any other employment and/or any other job as a salaried worker and/or as an adviser and/or as being directly or indirectly self- employed, unless having received the prior written consent of the Company. C. For the full duration of the period of the agreement, you will not receive any payment or other benefit from any third party, directly or indirectly involved with your work. It is made clear to you, that the breach of this provision is a fundamental breach of this agreement, and that furthermore, the amount or benefit which is received by you as stipulated, shall belong to the Company, which shall be entitled to deduct this amount, from any monies owing to you by the Company. D. You shall not carry out any act which may harm the trust of the Company and/or which is likely to place you in a situation of a conflict of interests with the aims of the Company. You are obliged to inform the Company immediately and without delay of any issue or matter in which you have a personal interest and/or any other action which is likely to place you in a situation as detailed above. E. The commencement of your employment in accordance with this agreement is made conditional on your signing on the agreement of secrecy and non competitiveness which is attached to this agreement as Appendix A and which constitutes an integral part thereof. F. You are obliged to inform the managing director of the Company of any business opportunity which has any connection to the information as defined in Appendix A. You are obliged not to make 7 any such opportunity exclusive to yourself, whether directly or indirectly, unless the prior written approval of the managing director of the Company has been given to you. 7. THE PASSING OVER OF THE POSITION. If your employment has terminated or been terminated and/or the validity of this agreement has expired for any reason whatsoever, you are obliged to pass over your position, and without derogating from the generality of that stipulated - all the matters under your care and/or any information whatsoever available to you and connected in any form whatsoever to your work for the Company, in an orderly and full fashion including the disclosure of any important detail with regard to the business of the Company, as well as forwarding, in a full and orderly fashion, all the documents, information, equipment, etc. to the Company, which may have reached you and/or be prepared by you with regard to your employment with the Company, up until the cessation of your employment with the Company. 8. DECLARATION OF SECRECY AND NON COMPETITIVENESS. You are obligated to the safeguarding of secrecy and non competitiveness, both during the course of your employment with the company and thereafter, as detailed in your undertaking to safeguard secrecy and non competitiveness attached to this agreement as APPENDIX A and which constitutes an integral part thereof. 9. PATENTS, INVENTIONS AND COMMERCIAL SECRETS. A. Copyrights for any invention and/or patent and/or commercial secret and/or professional secret and/or any innovation, which you may intend and/or which any of the employees of the Company who are sub-ordinate to you may invent during the period of your employment with the Company are the exclusive property of the Company. 8 The Company shall be entitled to protect any invention and/or patent and/or commercial secret as stipulated, by means of registration, or by any other means, in Israel or anywhere else. It is hereby clarified that you will not be entitled to register any invention and/or patent or commercial secret or to take any measures with respect thereof, excepting for the actions which will be required for the above mentioned making use thereof or registration in the name of the Company or by the Company. B. You are obligated to immediately inform the Company in writing of any invention and/or patent and/or commercial secret which you may invent and/or which is invented by the Company's employees who are subject to you. C. That stipulated in this section completes and compliments that stipulated in Appendix A. With your signing upon this personal agreement and your formal joining of the work staff of the Company we wish you continued satisfaction and enjoyment of your work. Here's hoping for years of co-operation and personal benefit as well as benefit for the Company, its employees and stockholders. Yours Respectfully, /s/ LEAH SADEH Leah Sadeh Corporate Vice President Human Resources DSP Group Ltd. 9 I have carefully read this letter and I express my consent with the contents thereof. I am aware that the terms of wages which have been offered to me above and those which shall be pertinent for long as I am employed by you are personal and that this letter constitutes a special personal contract of employment, which lays down the relations between me and the Company, and that therefore I confirm that I am aware that no provisions of any to the agreements will apply to me, and including collective agreements, between the Company and its employees so long as this agreement is valid and I undertake to safeguard the secrecy thereof. /s/ BOAZ EDAN 5/1/99 - ------------------------- --------------------- SIGNATURE DATE - ------------------------- I.D. Boaz Edan - ------------------------- NAME 10 APPENDIX A TO THE AGREEMENT OF MY EMPLOYMENT WITH DSP GROUP CO. LTD. To: DSP Group Co. Ltd. 5 Shenkar St. HERZLIA -ON - SEA Dear Sir/Madam, Re: UNDERTAKING TO SAFEGUARD SECRECY AND NON-COMPETITIVENESS. WHEREAS: I seek to be employed by DSP Group Co. Ltd. (a private registered company No. 51-135472-2 (Hereinafter: "The Company"); AND WHEREAS: The Company, in the matter of the duty of secrecy and non-competitiveness in this appendix, also includes the American holding company of DSP Group Co. Ltd. - DSP Group, Inc. and also the subsidiary company of DSP Voice Com. Group Ltd. and the subsidiary company of DSP Group Inc. - RF Sub Inc.; AND WHEREAS: During the course of my employment for the Company information is likely to reach me, in accordance with the following definition: Any information which has and/or shall reach me and/or come to my attention, whether directly and/or indirectly, during the course of my work or as a result of my work for the Company, including document (reports, notes and papers, applications and cheques), drafts, processes, commercial secrets - including information concerning the Company's customers, suppliers and business partners and/or the manufacture or marketing set-up of the Company or connected to the ties of the Company and/or companies connected to it, or which control or are controlled or 11 affiliated with the Company by virtue of and acting with any third party whatsoever, including customers, suppliers, banking institutions, governmental bodies, private entities, public and quasi public entities of any kind and sort as well as any financial, business and commercial information, financial reports and balance sheets before the publication thereof and any internal information whatsoever which may influence the value of the Company's shares formulae, data, plans, patents, inventions, discoveries, innovations, improvements, research, and any methods whatsoever, developments and scientific and technical, economic, commercial or other developments, applications for patent, prototypes, models, pictures, descriptions, sketches, drawings, photostats or blueprints, notebooks, samples and documents of schedule, lists, documentation, source and destination codes, films, recordings and other means of storage, letters, notes, booklets for note taking, reports and flow charts, as well as information connected with the business of the Company in the present and/or business which the Company is about to engage in (as they shall be developed by the Company and as described by the Company in the development plan booklet and its business plans and in the other explanatory material on behalf of the Company), and any other thing, and all, whether in writing or verbally, and provided that it is not in the public domain or that it has not become in the public domain as a result of the breach of my undertakings in accordance with this letter or in accordance with law. (Hereinafter: "The Information"). AND WHEREAS: The Information, as defined above, also includes Information of commercial, technical and non-technical, value, written and non-written, data, systems of note taking, samples, documents of 12 specifications, source and destination codes, processes, algorithms, computer tapes, recordings and other means of storage which are to be viewed as intellectual property or secret material of the Company or of any one of its predecessors or of the companies connected to it, whether fully or partially, and including especially without restriction, computer hardware, programs and computer software and implementations, matters of prices and marketing information as well as inventions which are not restricted in accordance with the definition of invention as has been determined in the patent laws which are implemented in Israel or in the U.S.A., and any improvement or adjustment of that information in question, which has been developed, sold, or which in respect of which a license has been given to the Company during the course of the conducting of the business of the Company, from time to time, as well as any product in question, whether planned, developed or attained by or for the Company, directly or indirectly, and provided that it is not information and/or a product which is available freely and which constitutes public domain information or which can be purchased freely by an independent third party. AND WHEREAS: As a condition of my employment with the Company and the receiving of information by me, inter alia, is my undertaking to safeguard the secrecy and of non-competitiveness; THEREFORE, I DECLARE AND UNDERTAKE AS FOLLOWS: CHAPTER A - SECRECY 1. To keep secret the Information which reaches me or which shall reach me, or which shall come to my attention, directly or indirectly, during the course of my employment for the Company and/or my involvement with the Company, 13 absolutely secret, and this without any limitation in time, even after the conclusion of my employment with the Company. 2. Not to disclose and/or to transfer and/or to sell, whether for remuneration or not and/or to cause the discovery of Information, whether directly or indirectly, as well as to take all measures to safeguard the secrecy of the information and the prevention of the delivery thereof or of its reaching any third party, person, entity or corporation whatsoever, excepting for my superiors in the Company or in accordance with their instructions for the Purpose of the performance of my duties as an employee of the Company. 3. Not to make any use of the Information, whether fully or partially, for my needs or for the needs of to others, whether directly or indirectly, which are not for the purpose of to performance of the jobs imposed upon me as an employee of the Company in accordance with the instruction of my superiors in the Company. Not to make any copies of the information in any manner whatsoever unless in accordance with the Company's instructions or someone who is authorized to do so on behalf of the Company. 4. I hereby undertake not to accept any materials whatsoever relating to the Information or the products, or any equipment from the Company without receiving the express prior written consent of: (1) the president of the Company or the managing director, or (2) a person authorized in writing to do so by the president of the Company or the managing director. 5. Without prejudicing the above said, I am aware that I do not have any intellectual property right and that I shall not have any intellectual property right in the Information as defined by this agreement. 5A. I hereby declare to disclose to the Company and/or to those replacing it and/or to the assignees of the Company, regarding the inventions which shall be made by me during the period of my employment with the 14 Company and/or as a result of my employment with the Company and connected to my employment with the Company and/or the information, and I hereby assign any interest that I have or which I may have in those inventions in favor of the Company and/or those in place of the Company and/or its assignees, and all this without further remuneration and provided that I will not be required to bear any costs whatsoever involved with such assignment as mentioned above. In the event of my making an invention, which is registered as a patent, during the course of my employment with the Company or as result of my employment with the Company, the Company will register my name in the patent documents as the inventor, provided that it is convinced, beyond all doubt, that the invention was indeed made by me and that such registration shall not prejudice its intellectual property rights and/or other rights of the Company and/or those in its stead and/or it assignees, for the invention and/or patent as detailed above. 5B. I hereby undertake, that for so long as I am required to do so, including after the termination of my employment for any reason whatsoever, that I will sign on any document, which, in accordance with the Company's discretion is required for the lodging of an application or copyright in accordance with the laws of Israel, the U.S.A. and/or any other foreign country in order to protect the interests of the Company in the above mentioned invention. 5C. I hereby declare that apart from that as detailed in section 5C.1 below, I do not have any interest in any application or application for a patent whatsoever and not even for material which is subject to copyright, patents and applications for patents which presently belong to me. 5C.1 Existing patent and/or applications for patents pending and/or activities in research at the stage of lodging for registration of patent are as follows: 15 1.______________________________________________________________ 2.______________________________________________________________ 3.______________________________________________________________ 4.______________________________________________________________ 6. I am aware that the forwarding of Information and/or any part thereof to any third person whatsoever is likely to cause serious damages to the Company and I hereby undertake that I shall not undertake any action of transference and/or sale of the Information and/or of the products developed by the Company and/or existing products and/or which have been developed whether by myself or in co-operation with others, including customers of the Company or whether in co-operation with any third party whatsoever, whether with customers of the Company or with others. 7. I declare that I am aware, that due to the nature of the Company's business, it takes upon itself and/or is likely to take upon itself undertakings with third parties obliging the safeguarding of secrecy which will also be applicable to its employees, and that the non-fulfillment of the above undertakings shall, inter alia, be cause for the breach of the contract between the Company and the third party. I therefore undertake to fulfil all these undertakings as has been determined between the Company and the aforesaid third party. 8. I hereby undertake not to harm, whether directly or indirectly, the reputation of the Company and/or its status amongst its customers in effect an its potential customers. 9. To keep secret any information relating to aspects of money, fiscal aspects and economic aspects of the Company's activities, including ties with banking institutions, customs and excise authorities, undertakings of the Company and rights toward third parties. Likewise, I will keep secret 16 any information which may reach me and connected with entities such as the center for investments, the Scientist-in-Chief, accountants and legal advisors of the Company, etc. 10. In order to eliminate any doubt, it is hereby emphasized that my undertakings in accordance with sections 1 - 9 above shall remain valid both during the period of my employment with the Company and after the termination thereof for whatever reason whatsoever, and shall also bind my legal representatives, and this without any limitation in time. 11. I agree that any document which I have prepared and/or any Information which I have attained for the purpose of my work with the Company and/or my work during the period of my employment with the Company is the property of the Company, which shall be forwarded to the Company immediately upon the termination of my employment as detailed below. Likewise, I hereby undertake to return to the Company any Information, whether written or in any other form whatsoever, which is in my possession or which shall be in my possession at any time, and this immediately upon the termination of my employment for any reason whatsoever or immediately upon the demand of the Company at any time. CHAPTER B - NON COMPETITIVENESS 12. Furthermore, and without prejudicing my undertakings in this document and/or my undertakings imposed upon me in accordance with the law or according to custom, I hereby undertake not to compete with the Company in any form or manner whatsoever, by any means of undertaking whatsoever, whether directly or indirectly, by myself or together with others, and/or to provide advise of any sort whatsoever to a competing business and/or to be employed for pay or without pay by a competing business and/or to be active, whether directly or indirectly in the management and/or activating and/or planning of a competing business. 17 13. I hereby undertake that upon the conclusion of my employment with the Company for any reason whatsoever, I will not work, whether for wages or not and/or for the purpose of advising and/or to be directly or indirectly active in the execution of work and/or service for a customer of the Company and/or someone who was a customer of the Company at the time of my employment with the Company. 14. In order to eliminate any doubt I hereby clarify that my undertakings in accordance with sections 12 - 13 above, shall remain valid during the period of my employment with the Company and after the termination thereof for whatever reason whatsoever for the periods as detailed below: 14A. For a period of one year after the conclusion of my employment, in the event of my having worked for the Company for a period of more than 6 months; 14B For a period of two years after the conclusion of my employment, in the event of my having worked for the Company for a period exceeding two years. 15. I undertake that upon the conclusion of my employment with the Company, for whatever reason, I shall not lobby and/or attempt to lobby and/or attain, whether directly and/or indirectly and/or for another and/or for any undertaking whatsoever with any customer of the Company and/or someone who was a customer of the Company at the time of my employment with the Company. CHAPTER C - MISCELLANEOUS BREACHES 16. In the event of my breaching my undertakings in accordance with this writ of undertaking, I will be obliged to compensate the Company for all the damages and expenses caused to the Company as a result of the breach, and this without derogating from any of the remedies available to the 18 Company against me in accordance with any law as a result of the breach of my above undertakings. 17. I am aware that the Company has various intellectual property rights, and the above said shall not prejudice these rights in any manner whatsoever. 18. The rights of the Company in accordance with this document are personally negotiable. 19. My undertakings in accordance with this writ, constitute an integral part of the terms of my employment between me and the Company. My above undertakings shall not prejudice the undertakings applicable to me in any way and as an employee of the Company in accordance with the agreement of employment between me and the Company and/or in accordance with any law, including collective agreements and/or any custom. 20. My undertakings in accordance with this document cannot be changed and shall not be brought to an end, fully or partially, unless by virtue of a document written and signed by an authorized representative on behalf of the Company. 21. If, for any reason whatsoever, a term of this document is held to be invalid or unenforceable, the validity and enforceability of the other provisions of this document shall not be prejudiced. 5/1/99 /s/ BOAZ EDAN - ------------------------- -------------------------------- DATE EMPLOYEE'S SIGNATURE 19 EX-10.25 7 EXHIBIT 10.25 OFFICER'S CERTIFICATE MARCH 30, 2000 ------------------------- The undersigned, Moshe Zelnik, hereby certifies as follows: (a) I am the duly elected, qualified, acting and incumbent Vice President of Finance, Chief Financial Officer and Secretary of DSP Group, Inc., (the "Company"). (b) Attached hereto is an English translation of an Appendix Agreement to a Lease Contract, dated as of May 5, 1999, by and between Bayside Land Corporation Ltd. and DSP Group, Ltd., a wholly owned subsidiary of the Company. (c) To my knowledge, such translation is a fair and accurate translation as required under Rule 306 of Regulation S-T promulgated by the Securities and Exchange Commission. IN WITNESS WHEREOF, the undersigned has duly executed this Certificate on behalf of the Company as of the date first written above. DSP GROUP, INC. /s/ MOSHE ZELNIK ------------------------------------- Moshe Zelnik, Vice President of Finance, Chief Financial Officer and Secretary APPENDIX AGREEMENT DRAWN UP AND SIGNED IN HAIFA ON MAY 5TH 1999 BETWEEN BAYSIDE LAND CORPORATION LTD. of 24 Ha'prasim St. Haifa (hereinafter: "The Lessor") AND DSP GROUP LTD. Company No. 51-135472-2 of 5 Shenkar St. Herzelia Pituach (hereinafter: "The Lessee") WHEREAS A Lease Contract was drawn up and signed between the parties on November 28th 1996, in accordance with which the Lessor leased to the Lessee an area of 1,688 sq. meters on the 1st floor of Building No. 1 at the Bayside (Gav - Yam) Center, according to its definition in the Lease Contract (hereinafter: "The First Contract"); AND WHEREAS A Lease Contract was drawn up and signed between the parties on September 13th 1998, in accordance with which the Lessor leased to the Lessee an additional area of 590 sq. meters on the 1st floor of Building No. 2 at the Bayside Center (hereinafter: "The Building"), according to its definition in the Lease Contract (hereinafter: "The Second Contract"); AND WHEREAS The Lessee requested from the Lessor to lease an additional part of the Building, in an inclusive area of 355 sq. meters, in addition to the other leased, located in its possession, as per the First Contract and the Second Contract (hereinafter: "The Additional Area"); AND WHEREAS The Lessor declares that it agrees to lease to the Lessee a part of the Building, in accordance with that stated in this Contract; THEREFORE, IT HAS BEEN AGREED AND STIPULATED BETWEEN THE PARTIES, AS FOLLOWS: 1. The preamble to this Agreement shall constitute an integral part thereof. 2. According to the agreements, reached by the parties, the Sections of the Second Contract shall be amended and adjusted as follows: 3. In the fourth "Whereas" of the Agreement, the area of approx. 590 sq. meters shall be changed to an area of 945 sq. meters. 4. Appendix B of the Second Contract (plans of the leased) shall be replaced with the plan, attached to this Appendix Agreement, which also include the Additional Area. 5. The definition of the "leased" in Section 3.1 of the Second Contract shall be amended and its definition shall read as follows: "The leased: a part of the Building in an area of approx. 945 sq. meters, located on the 1st floor of the Building, including the equipment and the attachments installed therein, all as marked in yellow in Appendix B. In order to remove any doubt, the area of the leased, as specified above, also include a relative part of the entrance lobby, shared by all the office floors in the Building and also floor's public areas." 6. a. Notwithstanding that stated in Section 4.2 of the Second Contract, the leased period with respect to the Additional Area shall commence on September 1st 1999 and it shall end upon the date of completion of the lease period, as stated in Section 4.1.1 of the Second Contract, i.e. on November 31st 2003. b. All the other provisions in Section 4 of the Second Contract, in reference to the delivery day and/or the delivery date shall apply to the Additional Area, in a manner which is adjusted to the date, stated in Section 6.a above, which would also be viewed as the delivery date or the delivery day of the Additional Area. c. Notwithstanding that stated above, it is agreed between the parties that the actual delivery of the Additional Area to the Lessee shall be carried out in accordance with Section 5 of the Second Contract, after the completion of four months from the date of the filing by the Lessee of agreed upon architectural plans, with respect to the Additional Area, to the Lessor. d. In order to remove any doubt, it is hereby agreed that the agreed upon architectural plans, stated in Section 6.c above, must receive the approval of the safety consultant of the project. 7. As from September 1st 1999, in Section 8 of the Second Contract, the heading of which is "The Lease Moneys", the amounts in the following Sections shall be amended as follows: In Section 8.1.1, the lease moneys of the offices, in the amount of NIS 31,388 ($8,260), shall be replaced with the amount of NIS 50,274 ($13,230). 8. The guarantee of DSP Group Inc., the parent company of the Lessee, shall also apply to the charges emerging from the provisions of this Appendix Agreement and the provisions of the Second Contract, which would also apply to the Additional Area. 9. In order to remove any doubt, it is hereby agreed and declared that the Lessee shall pay with respect to the Additional Area all the payments and charges imposed on it in accordance with the Second Contract, as from the delivery day and not later than September 1st 1999, even if the leased is not actually delivered to the Lessee by that day. 10. Notwithstanding that stated in Sections 8 and 9 above, it is hereby agreed that the Lessee shall pay to the Lessor the balance between the lease moneys, according to Section 8 of the Second Contract, and the lease moneys, according to Section 7 above, over a three month period, i.e. an amount of NIS 56,658 ($14,910) upon the date of signature of this Appendix Agreement. It is hereby clarified and agreed that the aforementioned amount shall be paid together with the addition of linkage differences in comparison with the basic index, as stated in Section 8 of the Second Contract. 11. The amount of the bank guarantee, as stated in Section 17.1 of the Second Contract shall be adjusted to the amount of the basic lease moneys, as it was amended by means of Section 7 of this Appendix Agreement, that being for the three months and together with the addition of VAT. 12. The technical specification of the Second Contract shall be amended accordingly and as required by the Additional Area. 13. In Appendices G and H and in the second "Whereas", instead of "590 sq. meters" it shall read "945 sq. meters". IN WITNESS THEREOF, THE PARTIES HAVE SIGNED: (signature) (signature) [Stamp of DSP] [Stamp of Bayside Land Corporation Ltd.] - ------------------------ ---------------------------------------- The Lessor The Lessee EX-10.26 8 EXHIBIT 10.26 [DSP Group, Inc. letterhead] NOVEMBER 17, 1999 Amendment to Employment Agreement Between DSP Group, Inc., DSP Group, Ltd. and Eli Ayalon. Effective date November 11, 1999. In the event Mr. Ayalon will desire to terminate the Employment Agreement without Good Reason, he will have to notify the company one year in advance and then all his rights under the Employment Agreement would continue for the notice period plus two years. All options held by Mr. Ayalon will accelerate and immediately vest after 6 months following the notice date and be exercisable in whole or in part at any time from vesting of the options for a period of two years. /s/ IGAL KOHAVI /s/ ELI AYALON - -------------------- -------------------- DSP Group, Inc. Eli Ayalon /s/ ELI AYALON - -------------------- DSP Group, Inc. /s/ SHAUL SHANI ------------------------- Shaul Shani - Chairman of Compensation Committee EX-10.27 9 EXHIBIT 10.27 [DSP Group, Inc. letterhead] NOVEMBER 17, 1999 Amendment to Employment Agreement Between DSP Group, Inc., DSP Group, Ltd. and Igal Kohavi. Effective date November 11, 1999. In the event Mr. Kohavi will desire to terminate the Employment Agreement without Good Reason, he will have to notify the company one year in advance and then all his rights under the Employment Agreement would continue for the notice period plus two years. All options held by Mr. Kohavi will accelerate and immediately vest after 6 months following the notice date and be exercisable in whole or in part at any time from vesting of the options for a period of two years. /s/ IGAL KOHAVI /s/ IGAL KOHAVI - -------------------- -------------------- DSP Group, Inc. Igal Kohavi /s/ ELI AYALON - -------------------- DSP Group, Inc. /s/ SHAUL SHANI ------------------------- Shaul Shani - Chairman of Compensation Committee EX-10.28 10 EXHIBIT 10.28 SEPARATION AGREEMENT This Agreement, dated as of January 24, 2000, is between DSP Group, Ltd. ("Employer") and Igal Kohavi ("Employee"). RECITALS Employee is currently employed as the Chairman of the Board of Employer and of its parent corporation, DSP Group, Inc. (collectively, the "Company"). Employee desires to terminate his employment with the Company for "Good Reason" within the meaning of his employment agreement, effective on January 24, 2000 ("Effective Date"). This Agreement implements the terms of and supersedes the June 1, 1997 Employment Agreement, the November 3, 1997 Amendment to Employment Agreement, and the November 17, 1999 Amendment to Employment Agreement. ACCORDINGLY, the parties agree as follows: 1. Resignation of Duties. As of the Effective Date, Employee resigns as an officer and director of Employer and from all other positions he holds with Employer, its parent corporation, and its subsidiaries. As of the Effective Date, Employee shall cease all work on behalf of the Company. 2. Consideration. Employer agrees to provide Employee with the following benefits. Except as specifically provided herein, all compensation and benefits will cease as of the Effective Date. (a) Salary, Vacation Pay and Manager's Insurance. Employer shall pay Employee the salary and accrued paid vacation up to the Effective Date. The sums accumulated in the Manager's Insurance policy (bituach menehalim) shall be transferred to the Employee on the Effective Date. (b) Bonus. Employer shall pay Employee a lump-sum bonus of $200,000, payable on the Effective Date. (c) Stock Options. As provided in the November 3, 1998 Amendment to the Employment Agreement in the case of termination by Employee for Good Reason, all stock options granted to Employee by DSP Group, Inc. as of the Effective Date will vest in full on January 24, 2000 and may be exercised in whole or in part until January 23, 2002. (d) Indemnification Agreement. The Indemnification Agreement dated September 21, 1995 between DSP Group, Inc. and Igal Kohavi shall continue in full force and shall not be affected by this Agreement. 1 3. Other Obligations of Employee. (a) Waiver. Employee waives any right to two years of additional compensation and any right to acquire shares in any subsidiary of the Company. (b) Interference with Business. For a period of one (1) year after the Effective Date, Employee agrees not to engage in any business activity that directly or indirectly interferes with the Company's business activities. Such prohibited activities include, but are not limited to, the following: making disparaging or defamatory statements about the Company or the Company's officers or employees; inducing or attempting to induce the Company's employees to resign from the Company; and creating or assisting in any business that will directly or indirectly compete with the Company. (c) Return of Property. On the Effective Date, Employee shall return to the Company all property of the Company, including, without limitation, all equipment, tangible proprietary information, documents, books, records, reports, contracts, lists, computer disks (or other computer-generated files or data), or copies thereof, created on any medium, prepared or obtained by Employee in the course of or incident to his employment with the Company. 4. Potential Joint Venture Between Employee and the Company. A committee ("Committee") of three directors of the parent corporation of Employer, Eliyahu Ayalon, Zvi Limon and Saul Shani (collectively the "Committee Members"), will be formed to evaluate the proposal that the Company invest $7.5 million as a limited partner in a venture capital fund to be formed with Employee as a general partner. Employee and Employer acknowledge that, while the Committee Members have indicated that they are favorably disposed toward such an investment, the Company has no obligation to make any such investment unless the Committee formally approves the proposal. 5. Mutual Release. Employee and Employer and their respective representatives (collectively, the "Releasors") waive all claims of any kind, known and unknown, which either party may now have or have ever had against the other party, its affiliated, related, parent and subsidiary corporations, and its and their present and former directors, officers, and employees (collectively, the "Released Parties"). This release includes all claims arising from Employee's employment with Employer and the termination of this employment, including employment discrimination claims under the California Fair Employment and Housing Act, Title VII, the Age Discrimination in Employment Act and any other state or federal law. Because this release specifically covers known and unknown claims, each party waives its rights under section 1542 of the California Civil Code, which states: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement to the debtor." Employer and Employee agree not to initiate or cause to be initiated any lawsuit, administrative claim, investigation, or proceeding of any kind concerning the claims released by this 2 paragraph, or to voluntarily participate in one except as required by law. Instead, the parties agree that any and all disputes arising out of the terms of this agreement, their interpretation, and any of the matters herein being released, shall be resolved by the binding arbitration to be held in Santa Clara County, California, in accordance with the American Arbitration Association's California Employment Dispute Resolution Rules. 6. Notices. Any notice or other communication under this Agreement must be in writing and shall be effective upon delivery by hand or three (3) business days after deposit in the mail, postage prepaid, certified or registered, and addressed to Employer or to Employee at the corresponding address below. Employee shall be obligated to notify Employer in writing of any change in his address. Notice of change of address shall be effective only when done in accordance with this Section. Employer's Notice Address: DSP Group Ltd. 5 Shenkar Street 46120 Herzelia ISRAEL ATTN: Eli Ayalon, President Employee's Notice Address: Igal Kohavi -------------------------- -------------------------- -------------------------- 7. Integration. The parties understand and agree that the preceding Sections recite the sole consideration for this Agreement; that no representation or promise has been made by Employee, Employer, or any other Released Party on any subject whatsoever, except as expressly set forth in this Agreement; and that all agreements and understandings between the parties on any subject whatsoever are embodied and expressed in this Agreement. This Agreement shall supersede all prior or contemporaneous agreements and understandings among Employee, Employer, and any other Released Party, whether written or oral, express or implied, with respect to any subject whatsoever, including without limitation, any employment-related agreement or benefit plan, except to the extent that the provisions of any such agreement or plan have been expressly referred to in this Agreement as having continued effect. 8. Amendments; Waivers. This Agreement may not be amended except by an instrument in writing, signed by each of the parties. No failure to exercise and no delay in exercising any right, remedy, or power under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power under this Agreement preclude any other or further exercise thereof, or the exercise of any other right, remedy, or power provided herein or by law or in equity. 3 9. Assignment; Successors and Assigns. Employee agrees that he will not assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement. Any such purported assignment, transfer, or delegation shall be null and void. Employee represents that he has not previously assigned or transferred any claims or rights released by him pursuant to this Agreement. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, successors, attorneys, and permitted assigns. This Agreement shall also inure to the benefit of any Released Party. This Agreement shall not benefit any other person or entity except as specifically enumerated in this Agreement. 10. Severability. If any provision of this Agreement, or its application to any person, place, or circumstance, is held by an arbitrator or a court of competent jurisdiction to be invalid, unenforceable, or void, such provision shall be enforced to the greatest extent permitted by law, and the remainder of this Agreement and such provision as applied to other persons, places, and circumstances shall remain in full force and effect. 11. Attorneys' Fees. In any legal action, arbitration, or other proceeding brought to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs. 12. Governing Law. Except as expressly stated otherwise, this Agreement shall be governed by and construed in accordance with the law of the State of California. 13. Interpretation. This Agreement shall be construed as a whole, according to its fair meaning, and not in favor of or against any party. By way of example and not in limitation, this Agreement shall not be construed in favor of the party receiving a benefit nor against the party responsible for any particular language in this Agreement. Captions are used for reference purposes only and should be ignored in the interpretation of the Agreement. 14. Representation by Counsel. The parties acknowledge that (i) they have had the opportunity to consult counsel in regard to this Agreement; (ii) they have read and understand the Agreement and they are fully aware of its legal effect; and (iii) they are entering into this Agreement freely and voluntarily, and based on each party's own judgment and not on any representations or promises made by the other party, other than those contained in this Agreement. 4 The parties have duly executed this Agreement as of the date first written above. Igal Kohavi /s/ IGAL KOHAVI - -------------------------------- DSP Group, Ltd. /s/ ELI AYALON /s/ MOSHE ZELNIK - -------------------------------- ------------------------------------ By: Eli Ayalon By: Moshe Zelnik ---------------------------- -------------------------------- Its: President & CEO Its: VP Finance & CFO --------------------------- ------------------------------- 5 EX-13.1 11 EXHIBIT 13.1
Selected Consolidated Financial Data YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995 --------------- -------------- --------------- --------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENTS OF OPERATIONS DATA: Revenues $ 76,433 $ 63,850 $ 61,959 $ 52,910 $ 50,347 Income from continuing operations $ 54,579 $ 14,415 $ 11,034 $ 5,979 $ 7,211 Weighted average number of common shares outstanding during the period used to compute basic earnings per share 11,734 9,768 9,736 9,510 9,352 Weighted average number of common shares outstanding during the period used to compute diluted earnings per share 12,721 10,016 10,203 9,581 9,658 Net earnings per share - Basic $ 4.65 $ 1.48 $ 1.13 $ .63 $ .77 Net earnings per share - Diluted $ 4.29 $ 1.44 $ 1.08 $ .62 $ .75 BALANCE SHEET DATA: Cash, cash equivalents and marketable securities $161,371 $ 66,989 $ 65,944 $ 42,934 $ 33,828 Working capital $163,747 $ 68,673 $ 66,947 $ 47,851 $ 39,304 Total assets $206,179 $ 85,791 $ 85,826 $ 51,778 $ 55,350 Total stockholders' equity $183,957 $ 75,695 $ 74,170 $ 54,449 $ 47,541
FISCAL YEARS BY QUARTER ---------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------------ --------------------------------------- (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST Revenues $25,973 $23,296 $16,702 $10,462 $14,117 $17,308 $16,749 $15,676 Gross profit $14,418 $12,630 $ 9,543 $ 6,636 $ 8,742 $ 9,041 $ 8,756 $ 7,883 Net income $33,918 $ 5,770 $13,709 $ 1,182 $ 3,468 $ 3,475 $ 4,261 $ 3,211 Net earnings per share - Basic $ 2.70 $ .48 $ 1.19 $ .11 $ .37 $ .36 $ .43 $ .32 Net earnings per share - Diluted $ 2.46 $ .44 $ 1.13 $ .11 $ .36 $ .35 $ .42 $ .31
The accompanying notes are an integral part of the consolidated financial statements. 15 Price Range of Common Stock DSP Group's common stock trades on the Nasdaq National Market (Nasdaq symbol "DSPG"). The following table presents for the periods indicated the intraday high and low sale prices for DSP Group's common stock as reported by the Nasdaq National Market:
HIGH LOW ---------------------- -------------------- 1999 First Quarter $22.63 $12.63 Second Quarter $36.00 $14.69 Third Quarter $42.25 $34.50 Fourth Quarter $96.25 $38.00 1998 First Quarter $26.88 $16.75 Second Quarter $25.00 $16.88 Third Quarter $24.75 $13.13 Fourth Quarter $20.88 $9.63
As of December 31, 1999, there were approximately 61 holders of record of DSP Group's Common Stock, which DSP Group believes represents approximately 5,578 beneficial holders. DSP Group has not paid cash dividends on its Common Stock and presently intends to follow a policy of retaining any earnings for reinvestment in its business. The accompanying notes are an integral part of the consolidated financial statements. 16 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS 1999 has been a challenging year for DSP Group in all aspects. Our research and development team successfully completed an ambitious project of renewing our entire line of products. Our marketing and sales teams introduced the new products and achieved record high revenue for DSP Group in our product and licensing markets. 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. Moreover, our results of operations for 1999 show improved total and product gross margins. DSP Group's liquidity and working capital continued to improve significantly throughout 1999 and by year end we achieved new record highs for DSP Group in cash and marketable securities and working capital. These increases were attained mainly due to the sale of a portion of our equity investment in AudioCodes Ltd. as well as to cash provided from our operating activities and cash received by the issuance and sale of DSP Group common stock to an investor. Our future operating results will be dependent upon a variety of factors. See "Factors Affecting Operating Results" in this report and in our Annual Report on Form 10-K for the year ended December 31, 1999. TOTAL REVENUES Our total revenues were $76.4 million in 1999, $63.9 million in 1998 and $62.0 million in 1997. This represents an increase in total revenues of 20% in 1999 as compared with total revenues in 1998, and a 3% increase in total revenues in 1998 as compared with those in 1997. The increase in revenues in 1999 compared to 1998 was the result of the introduction of our new line of D16K series products. Our licensing revenues in 1999 were $19.0 million compared to $14.6 million in 1998, and $10.7 million in 1997. This represents an increase in licensing revenues of 30% in 1999 as compared with 1998, and an increase of 36% in our licensing revenues in 1998 as compared with those in 1997. Export sales, primarily consisting of Integrated Digital Telephony (IDT) speech processors shipped to manufacturers in Europe and Asia, including Japan, represented 97% of DSP Group's total revenues in 1999, 95% in 1998 and 92% in 1997. All export sales are denominated in U.S. dollars. SIGNIFICANT CUSTOMERS Revenues from one of our distributors, Tomen Electronics, accounted for 47% of our total revenues in 1999 as compared to 45% in 1998, and 33% in 1997. The loss of one or more of our major distributors or customers could harm our business, financial condition and results of operations. GROSS PROFIT Gross profit as a percentage of total revenues increased to 57% in 1999, from 54% in 1998 and from 48% in 1997. The increase in gross profit in both 1999 and in 1998 compared to 1998 and 1997 was primarily due to the increase in our licensing revenues, which have a higher gross profit than product sales. Product gross profit as a percentage of product sales slightly increased to 42% in 1999, from 41% in 1998 and from 39% in 1997. This ongoing increase was primarily due to the decrease in our costs of manufacturing. Our manufacturing costs have decreased due to improvements in manufacturing technology and the decreased manufacturing prices obtained from the foundries. Importantly, this increase in gross profit was achieved even though we continue to experience competitive, downward pricing pressure for our IDT products. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased significantly to $15.4 million in 1999, from $10.2 million in 1998 and from $8.4 million in 1997. The significant increase in research and development expenses in 1999 as compared to those in 1998 primarily resulted from the following actions related to our RF cordless telephone applications: support for our new product line introduction of the D16K series; the acquisition of products, technology and RF laboratory equipment; and an increase in our engineering headcount by approximately 20%. The increase in research and development expenses in 1998 as compared to those in 1997 was attributable mainly to an increase in the external services provided to our research and development team, additional mask tapeouts for our new enhanced line of products, and an increase in our research and development personnel. Research and development expenses as a percentage of total revenues increased to 20% in 1999 from 16% in 1998 and from 14% in 1997. SALES AND MARKETING EXPENSES Our sales and marketing expenses increased to $9.3 million in 1999, from $5.2 million in 1998 and from $4.9 million in 1997. The significant increase in 1999 compared to 1998 was due to 17 our marketing and sales efforts of introducing our new line of IDT products, the D16K series, and our new RF wireless products, as well as an increase in our sales commissions, due to the increase in our revenues. The increase in expenses in 1998 as compared to those in 1997 was due to an increase in our sales and marketing personnel, which was partially offset by lower sales commissions and lower consulting costs. Sales and marketing expenses as a percentage of total revenues increased in 1999 to 12% from 8% in both 1998 and 1997. GENERAL AND ADMINISTRATIVE EXPENSES Our general and administrative expenses increased to $5.5 million in 1999 from $4.6 million in 1998 and from $4.5 million in 1997. General and administrative expenses increased in 1999 from 1998, mainly due to an increase in our rented property and associated facility expenses as a result of the increase in our total headcount. Additionally, we experienced an increase in costs in connection with an increase in our general legal and accounting services. However, we are closely monitoring all expenses and believe that this contributed to our general and administrative expenses as a percentage of total revenues remaining at 7% in the years 1999, 1998 and 1997. INTEREST AND OTHER INCOME Interest and other income increased significantly to $6.0 million in 1999 from $3.8 million in 1998 and from $2.9 million in 1997. The increase in interest income in 1999 as compared with 1998 and 1997, is a result of higher levels of cash equivalents and marketable securities in 1999, mainly due to the issuance and sale of shares of our common stock to an investor in February 1999, the sale of a portion of our equity investment in AudioCodes Ltd., as well as higher yields of financial investments. Equity in income (loss) of equity method investees was $2,475,000 in 1999, $125,000 in 1998 and ($706,000) in 1997. In 1997 equity in losses of Aptel Ltd. were included in our results of operations. In December 1997, Aptel's shareholders, including DSP Group, exchanged their shares in Aptel for shares of common stock of Nexus Telecommunications Systems Ltd., an Israeli company whose shares are registered and traded on the Nasdaq SmallCap Market. DSP Group's results of operations in 1998 do not include any equity gains (losses) pertaining to Aptel or Nexus. The equity loss in 1997 was due to our higher equity share in both Aptel and AudioCodes Ltd., an Israeli corporation. See Note 1 of the Notes to Consolidated Financial Statements for more information. Equity in income (loss) of equity method investees also included amortization of the excess of the purchase price over the net assets acquired for an equity investment in AudioCodes, Ltd. made in the second quarter of 1994. As of May 1999, we amortized all of the remaining excess over purchase price over the net assets acquired. GAIN ON SALE OF MARKETABLE EQUITY SECURITY In April 1998, DSP Group sold all of its Nexus shares in a private transaction and realized a pre-tax one time gain on marketable equity securities of approximately $1.1 million, which is included under "Other income (expense)" in our consolidated statements of income for 1998. CAPITAL GAIN In May 1999, we exercised our option to purchase approximately 3.5% of the outstanding stock of AudioCodes for approximately $1.1 million. In the same month, AudioCodes Ltd. completed its initial public offering (IPO) and is now listed on the Nasdaq SmallCap Market under the symbol AUDC. In its IPO, AudioCodes issued 3.5 million shares at a price of $14.00 per share. As a result we recorded in "Other income (expense)" in our consolidated statements of income for 1999 a one-time capital gain in the amount of $11.8 million. This amount was comprised of $9.4 million, from the sale of our shares sold in the IPO and $2.5 million from the sale of approximately 247,000 of our AudioCodes shares to the underwriters to cover their over-allotment option. The gross proceeds from our sale were approximately $3.2 million. In October 1999, AudioCodes successfully concluded a follow-on public offering of 3.0 million shares at a price of $41.00 per share. In the follow-on, AudioCodes issued and sold 1.5 million shares and an additional 1.95 million shares were sold by shareholders, of which approximately 1,069,000 shares were sold by us in two separate transactions. Our proceeds from these transactions were approximately $42.8 million, and we recorded an additional capital gain in the amount of $47.1 million. This amount was comprised of $10.8 million, which resulted from the public offering and $36.3 million from the sale of approximately 1,069,000 AudioCodes shares. As of December 31, 1999, we held approximately 2.9 million AudioCodes shares, which represented about 15% of its outstanding shares. In January 2000, we sold an additional 600,000 shares of AudioCodes for approximately $43.8 million, recording in the first quarter of 2000, an additional capital gain in the amount of $40.0 million. After this sale, we hold approximately 2.3 million AudioCodes shares, which represent approximately 12% of its outstanding shares. PROVISION FOR INCOME TAXES The effective tax rate was 22% (excluding tax on capital gain) for the year ended December 31, 1999, 25% for the year ended December 31, 1998 and 20% for the year ended December 31, 1997. The tax rate for 1999 is lower compared to 1998 due mainly to our utilization of foreign tax holiday benefits. The tax rate 18 for 1998 is higher than 1997 due to previously unbenefited operating losses and tax credit carry-forwards utilized in 1997, which were no longer available in 1998, offset by increased foreign tax holiday benefits in 1998. DSP Group Ltd., DSP Group's subsidiary in Israel, has been granted "Approved Enterprise" status by the Israeli government according to four investment plans. The Approved Enterprise status allows for a tax holiday for a period of two to four years and a reduced corporate tax rate of 10% for an additional eight or six years, on the respective investment plans' proportionate share of taxable income. The tax benefits under these investment plans are scheduled to gradually expire starting from 2002 through 2009. Management has assessed the need for a valuation allowance against deferred tax assets and has concluded that it is more likely than not that $2.2 million deferred tax assets will be realized based on current levels of future taxable income and potentially refundable taxes. LIQUIDITY AND CAPITAL RESOURCES During 1999, DSP Group generated $18.3 million of cash and cash equivalents from its operating activities as compared to $15.1 million during 1998 and $18.6 million in 1997. The increase in 1999 of cash and cash equivalents as compared with that in 1998 occurred primarily because of our significant increase in net income. The increase in cash and cash equivalents was attributable primarily to the non-cash effects of the increase in deferred income tax and the cash used by the increase in accounts payable. However, the increase was mainly offset by the increase in capital gain and partially offset by the increase in our inventories and an increase in accounts receivable. The decrease in cash and cash equivalents in 1998 compared to 1997 was attributable primarily to the non-cash effects of recognizing deferred revenue and the cash used by the increase in accounts receivables and decrease in accounts payables, which in turn was partially offset by the decrease in our inventories and in our deferred income tax. We invest excess cash in short-term cash deposits and marketable securities of varying maturity, depending on our projected cash needs for operations, capital expenditures and other business purposes. In 1999, DSP Group purchased $131.4 million of investments classified as short-term cash deposits and marketable securities, $60.0 million in 1998 and $77.1 million in 1997. In addition, DSP Group sold $48.7 million of investments classified as marketable securities in 1999, $60.6 million in 1998 and $49.3 million in 1997. During 1999, the average maturity for our investments was less than 12 months from the previous average of approximately 18 months in 1998. Our capital equipment purchases amounted to $5.2 million in 1999, $2.3 million in 1998 and $2.2 million in 1997 for computer hardware and software used in engineering development, engineering test and lab equipment, leasehold improvements, vehicles, and furniture and fixtures. The acquisitions of capital equipment during 1999 were primarily for new lab equipment associated with the RF technology, and other computer equipment, testing equipment and software for our research and development efforts during the year. On February 2, 1999, DSP Group announced that it had entered into a stock purchase agreement with Magnum Technologies, Ltd., an international investment fund, in which DSP Group issued and sold 2,300,000 new shares of DSP Group common stock to Magnum. Based in part on Magnum's representations, the transaction was exempt from the registration requirements of the Securities Act of 1933 according to Section 4(2) of the Securities Act. These shares, representing 19.6% of DSP Group's outstanding common stock at the time of the transaction, were issued for a price of $15 per share, or an aggregate of $34.5 million in total net proceeds to DSP Group. As part of the agreement, Magnum may acquire additional shares of DSP Group in the open market, but may not bring its total holdings to more than 35% of DSP Group's outstanding shares of common stock. Furthermore, Magnum agreed to restrict its sales of the DSP Group shares it purchased for an eighteen-month period from the date of the transaction under Rule 144(e)(i) of the Securities Act of 1933, unless it received the prior written approval of DSP Group. Additionally, DSP Group invited Magnum to appoint two new directors to the Board of Directors, which currently brings the total number of members of the Board of Directors to six. In February 2000, Magnum exercised their option to sell our common stock, and sold 929,000 shares of its holdings. After the sale, Magnum holds approximately 2.0 million DSP Group shares representing approximately 15.5% of our outstanding shares of common stock. In March 1999, our Board of Directors authorized a new plan to repurchase up to an additional 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. Accordingly, in 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. In 1998, we repurchased 814,000 shares of our common stock at an average purchase price of $17.53 per share for an aggregate purchase price of approximately $14.3 million. In 1999, we issued 908,000 shares of our common stock to employees who have exercised their stock options and in 1998 we issued 106,000 shares. In 1997, DSP Group invested $176,000 in convertible debentures of Aptel. Subsequently, in December 1997, Aptel's shareholders, including DSP Group, exchanged their shares in Aptel for shares in Nexus. In April 1998, DSP Group sold all of its 19 Nexus shares in a private transaction for approximately $1.3 million and realized a pre-tax one time gain on marketable equity securities of approximately $1.1 million, which is included under "Other income (expense)" in our consolidated statements of income for the 1998. Cash received upon the exercise of employee stock options and through purchases pursuant to DSP Group's employee stock purchase plan in 1999 totaled $20.4 million as compared with $1.2 million in 1998 and $6.6 million in 1997. In addition, repayment of stockholders' notes receivable provided cash of $434,000 in 1996. At December 31, 1999, DSP Group's principal source of liquidity consisted of cash and cash equivalent deposits totaling $20.8 million and marketable securities and short-term cash deposits of $140.6 million. DSP Group's working capital at December 31, 1998 was $163.7 million, an increase from the working capital of $68.7 million at December 31, 1998. We believe that our current cash, cash equivalent, cash deposits and marketable securities will be sufficient to meet our cash requirements through at least the next 12 months. As part of DSP Group's 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. These potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. However, we cannot provide assurance that we will consummate any of these transactions. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. It is DSP Group's policy not to enter into derivative financial instruments. DSP Group does not currently have any significant foreign currency exposure since it does not transact business in foreign currencies. Due to this, DSP Group did not have significant overall currency exposure at December 31, 1999. FOREIGN CURRENCY RATE RISK As nearly all of DSP Group's sales and expenses are denominated in U.S. Dollars, DSP Group has experienced only insignificant foreign exchange gains and losses to date, and does not expect to incur significant gains and losses in the next 12 months. DSP Group did not engage in foreign currency hedging activities during 1999 and 1998. 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. YEAR 2000 COMPLIANCE DSP Group was aware of the issues associated with the programming code in existing computer systems as the Year 2000 approached. The "Year 2000" problem is concerned with whether computer systems will properly recognize date sensitive information when the year changed 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 could have been affected in some way. Beginning in 1997, and continuing in 1998 and 1999, DSP Group utilized both internal and external resources to identify, correct or reprogram and test DSP Group's systems for Year 2000 readiness. All reprogramming efforts, including testing, was completed by December 31, 1999. Our efforts included the evaluation of both information technology ("IT") and non-IT systems. Non-IT systems include systems or hardware containing embedded technology such as microcontrollers. The costs incurred by DSP Group with respect to this project were not material. Throughout 1998 and 1999, we took steps to ensure that our products and services would continue to operate on and after January 1, 2000. We believe that DSP Group's products being shipped today were Year 2000 ready and we have not received any notification to the contrary from customers. In addition, we received confirmations from DSP Group's primary processing vendors that plans had been developed to address the processing of transactions in the Year 2000. We also communicated with suppliers and other third parties that DSP Group does business with to coordinate Year 2000 readiness. We have not experienced any supply problems because of the year 2000 noncompliance problems with any of our vendors or suppliers. Based upon the steps we have taken to address this issue and the progress to date, we believe that Year 2000 readiness expenses will not have a material adverse effect on DSP Group's earnings. As a result of the year 2000 changeover, we know of no trend or event that could harm our business, financial condition and results of operations. However, we will continue to monitor our vendors manufacturing processors and the transactional based software for potential embedded year 2000 problems. 20 SUBSEQUENT EVENTS SALE OF COMMON STOCK In February 2000, Magnum exercised its option to sell our common stock and sold 929,000 shares of its holdings. After the sale, Magnum holds approximately 2.0 million DSP Group shares representing approximately 15.5% of our outstanding shares of common stock. In January 2000, we sold an additional 600,000 shares of AudioCodes for approximately $43.8 million, recorded in the first quarter of 2000, for an additional capital gain in the amount of $40.0 million. After this sale we hold approximately 2.3 million AudioCodes shares, which represent approximately 12% of its outstanding shares. STOCK SPLIT On January 24, 2000, our Board of Directors declared a two-for-one stock split of our common stock that was effected in the form of a 100% stock dividend. The dividend was paid on March 1, 2000 to stockholders of record on February 16, 2000. RISK FACTORS AFFECTING OPERATING RESULTS The stockholders' letter and the discussion in this annual report that concerns DSP Group's future products, expenses, revenue, liquidity and cash needs as well as DSP Group's plans and strategies contain forward-looking statements concerning our future operations and financial results. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause results to differ from those described in these statements, and prospective investors and stockholders should carefully consider the factors set forth below in evaluating these forward-looking statements. 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 2000, 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 IDT 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 IDT MARKET WHICH IS HIGHLY COMPETITIVE Sales of IDT products comprise a substantial portion of our product sales. Any adverse change in the digital IDT 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 IDT market and the markets for our products in general are extremely competitive and we expect that competition 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 IDT 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 also would have a material adverse effect on our business, financial condition and results of operations. The 900 Mhz Digital Spread Spectrum RF and Base Band technology acquired in 1999 from AMD gave us a "cheap entry ticket" to this market. This technology is not state of the art and the company has noticed a trend of decreasing sales for the product models which are based on this technology. The company may not succeed in its development of new RF and Base Band models and those which are going to be developed 21 may not be accepted by the market. Despite the recent success of development and sales of our DSP Cores, the market needs extensive R&D efforts in new technologies not currently owned by the company, and we may not succeed in developing such technologies in due time, which could effect our competitive position. 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 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. For example, foundries in Taiwan produce a significant portion of our wafer supply. As a result, earthquakes, aftershocks or other natural disasters in Asia, could preclude us from obtaining an adequate supply of wafers to fill customer orders and could harm our business, financial condition, and results of operations. WE DEPEND ON INTERNATIONAL OPERATIONS, PARTICULARLY IN ISRAEL We are dependent on sales to customers outside the United States. We expect that international sales will continue to account for a significant portion of our net product and license sales for the foreseeable future. As a result, the occurrence of any negative international political, economic or geographic events could result in significant revenue shortfalls. These shortfalls could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include: - - 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 December 31, 1999, 121 of our 161 employees were located in Israel, including 81 out of 93 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 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 rate of inflation. The rate of inflation in Israel was 1.3% in 1999 and 8.6% in 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 22 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 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 types of intellectual property rights commonly offer these licenses, we cannot assure you 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 harm our financial position, results of operations, or cash flows. 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. 23 Report of Independent Auditors To The Stockholders of DSP Group, Inc. We have audited the accompanying consolidated balance sheets of DSP Group, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DSP Group, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. /s/ KOST FORER & GABBY KOST FORER & GABBAY A member of Ernst & Young International Tel Aviv, Israel January 23, 2000, Except for Note 9, as to which the date is March 1, 2000 24
Consolidated Statements of Income YEARS ENDED DECEMBER 31, 1999 1998 1997 ------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES: Product sales $57,397 $49,252 $51,238 Licensing, royalties and other 19,036 14,598 10,721 ------------------------------------------------------ TOTAL REVENUES 76,433 63,850 61,959 COSTS OF REVENUES: Product sales 33,051 29,002 31,143 Licensing, royalties and other 155 426 1,169 ------------------------------------------------------ TOTAL COST OF REVENUES 33,206 29,428 32,312 ------------------------------------------------------ GROSS PROFIT 43,227 34,422 29,647 OPERATING EXPENSES: Research and development 15,404 10,181 8,420 Sales and marketing 9,309 5,222 4,934 General and administrative 5,511 4,632 4,505 ------------------------------------------------------ TOTAL OPERATING EXPENSES 30,224 20,035 17,859 ------------------------------------------------------ OPERATING INCOME 13,003 14,387 11,788 Other income (expense): Interest and other income 6,048 3,810 2,936 Interest expense and other (232) (189) (226) Gain on sale of available-for-sale marketable securities - 1,086 - Equity in income (loss) of affiliates 2,475 125 (706) Capital gains from realization of investments 58,931 - - ------------------------------------------------------ INCOME BEFORE PROVISION FOR INCOME TAXES 80,225 19,219 13,792 Provision for income taxes (25,646) (4,804) (2,758) ------------------------------------------------------ NET INCOME 54,579 $14,415 $11,034 ====================================================== NET EARNINGS PER SHARE: Basic $ 4.65 $ 1.48 $ 1.13 Diluted $ 4.29 $ 1.44 $ 1.08
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 25
Consolidated Balance Sheets DECEMBER 31, 1999 1998 ------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS CURRENT ASSETS: Cash and cash equivalents $20,778 $9,038 Marketable securities and cash deposits 140,593 57,951 Trade receivable, less allowance for returns and doubtful accounts of $663 in 1999 and $304 in 1998 10,435 5,721 Deferred income taxes 1,707 1,374 Other accounts receivable and prepaid expenses 1,362 1,608 Inventories 3,283 2,182 ------------------------------------- TOTAL CURRENT ASSETS 178,158 77,874 Property and equipment, net 6,948 4,236 ------------------------------------- Other investments, net of accumulated amortization 18,433 1,834 Other assets, net of accumulated amortization 1,250 135 Severance pay fund 1,390 864 Deferred income taxes -- 848 ------------------------------------- TOTAL ASSETS $206,179 $85,791 =====================================
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 26
DECEMBER 31, 1999 1998 ---------------------------------- (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade payable $6,079 $2,360 Accrued compensation and benefits 4,207 2,555 Income taxes payable 1,054 1,909 Accrued royalties 803 647 Deferred revenue 90 36 Accrued expenses and other accounts payable 2,178 1,694 ---------------------------------- TOTAL CURRENT LIABILITIES 14,411 9,201 LONG TERM LIABILITIES: Accrued severance pay 1,431 895 Deferred income taxes 6,380 - COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value: Authorized shares -- 5,000 Issued and outstanding shares -- none - - Common stock, $0.001 par value: Authorized shares -- 50,000 Issued and outstanding shares -- 12,671 in 1999 and 9,406 in 1998 12 9 Additional paid-in capital 119,163 75,610 Retained earnings 64,782 12,129 Less cost of treasury stock -- (12,053) ------------------------------------- TOTAL STOCKHOLDERS' EQUITY 183,957 75,695 ------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 206,179 $ 85,791 =====================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 27
Statements of Stockholders' Equity THREE YEARS ENDED COMMON STOCK ADDITIONAL TREASURY STOCK RETAINED ACCUMULATED TOTAL DECEMBER 31, 1999 SHARES AMOUNT PAID-IN AT COST EARNINGS OTHER STOCKHOLDERS' CAPITAL (ACCUMULATED COMPREHENSIVE EQUITY DEFICIT) INCOME ( IN ----------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1997 9,540 10 66,781 -- (12,342) -- 54,449 Net income -- -- -- -- 11,034 -- 11,034 Other comprehensive income unrealized gain on marketable security -- -- -- -- -- 1,050 1,050 ----------------------------------------------------------------------------------------------- Total comprehensive income -- -- -- -- -- -- 12,084 Exercise of Common Stock options by employees 526 -- 6,382 -- -- -- 6,382 Sale of Common Stock under employee stock purchase plan 28 -- 218 -- -- -- 218 Income tax benefit from stock options exercised -- -- 1,037 -- -- -- 1,037 -------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 10,094 10 74,418 -- (1,308) -- 74,170 Net income -- -- -- -- 14,415 -- 14,415 Other comprehensive income unrealized gain on marketable security -- -- -- -- -- (1,050) (1,050) Total comprehensive income -- -- -- -- -- -- 13,365 Purchase of Treasury Stock (814) (1) -- (14,273) -- -- (14,274) Exercise of Common Stock options by employees 94 -- -- 1,821 (908) -- 913 Sale of Common Stock under employee stock purchase plan 32 -- -- 399 (70) -- 329 Income tax benefit from stock options exercised -- -- 1,192 -- -- -- 1,192 -------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 9,406 $ 9 $ 75,610 $ (12,053) $ 12,129 $-- $ 75,695
28
STATEMENTS OF STOCKHOLDERS' EQUITY Net income -- -- -- -- 54,579 54,579 Total comprehensive income -- -- -- -- 54,579 Purchase of Treasury Stock (200) -- -- (2,710) -- -- (2,710) Issue of Common Stock to -- -- 34,369 investor 2,300 2 34,367 -- Exercise of Common Stock -- 5,640 options by employees 256 -- 5,640 -- -- Issue of Treasury Stock upon (1,813) 14,408 exercise of stock options 879 1 1,948 14,272 Issue of Treasury Stock upon (113) 385 purchase of ESPP shares 30 -- 7 491 -- Income tax benefit from stock options exercised -- -- 1,591 -- -- -- 1,591 ----------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 12,671 $ 12 $ 119,163 $-- $ 64,782 $-- $ 183,957
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 29
Consolidated Statements of Cash Flows YEARS ENDED DECEMBER 31, 1999 1998 1997 -------------------------------------------------- OPERATING ACTIVITIES (IN THOUSANDS) Net income $54,579 $14,415 $11,034 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,455 1,572 1,797 Amortization of software development costs - - 322 Increase (decrease) in deferred revenue 54 (2,324) 2,360 Increase (decrease) in deferred income tax, net 8487 2,470 (1,459) Gain on sale of marketable equity security - (1,086) - Capital gain from realization of investments (43,328) - - Acquired assets and workforce (2,000) - - Amortization of acquired assets 885 - - Equity in (income) loss of affiliates (2,475) (125) 706 Changes in operating assets and liabilities: Decrease (increase) in trade receivable (4,714) (2,127) 1,267 Decrease (increase) in inventories (1,101) 1,934 (1,159) Decrease (increase) in other current assets 246 (167) (84) Decrease (increase) in other assets - 15 (84) Increase (decrease) in accounts payable 3,719 (959) 1,891 Increase in accrued compensation and benefits 1,652 384 432 Increase in severance pay - net 10 31 - Increase (decrease) in income taxes payable (855) 218 783 Increase (decrease) in accrued royalties 156 476 (5) Increase (decrease) in accrued expenses and other 484 408 779 accounts payable -------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $18,254 $15,135 $18,580
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 30
Consolidated Statements of Cash Flows YEARS ENDED DECEMBER 31, 1999 1998 1997 -------------------------------------------------- (IN THOUSANDS) INVESTING ACTIVITIES Purchase of marketable securities and cash deposits $(131,357) $(59,980) $(77,135) Sale and maturity of marketable securities and cash deposits 48,715 60,648 49,278 Purchases of property and equipment (5,167) (2,320) (2,160) Proceeds from sale of equipment - - 166 Realization of investment in an investee 30,445 1,262 - Investment in an investee (1,241) - (176) -------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (58,605) (390) (30,027) -------------------------------------------------- FINANCING ACTIVITIES Issuance of Common Stock for cash upon exercise of options, warrants, and employee stock purchase plan 20,432 1,240 6,600 Issuance of Common Stock to investor 34,369 - - Purchase of treasury stock (2,710) (14,273) - -------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 52,091 (13,033) 6,600 -------------------------------------------------- Increase (decrease) in cash and cash equivalents 11,740 1,713 (4,847) Cash and cash equivalents at beginning of year 9,038 7,325 12,172 -------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $20,778 $9,038 $7,325 ================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Income taxes $17,300 $1,530 $3,148
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1: GENERAL DSP Group, Inc. (the "Company") is involved in the development and marketing of digital signal processing cores used in a wide range of applications for industries such as wireless communications, telephony and personal computing. By combining its DSP core technology with its advanced speech processing algorithms, DSP Group also delivers a wide range of enabling application-specific Integrated Circuits (ICs), such as ICs for fully featured Integrated Digital Telephony (IDT), for 900 MHz Spread Spectrum wireless telephony products and for IP telephony applications. The Company has five wholly owned subsidiaries: DSP Group Ltd. ("DSP Group Israel"), an Israeli corporation primarily engaged in research, development, marketing, sales, technical support and certain general and administrative functions; RF Integrated Systems Inc. ("RF US"), a USA corporation primarily engaged in research and development of RF technology for wireless products; Nihon DSP K.K. ("DSP Japan"), a Japanese corporation primarily engaged in marketing and technical support activities; DSP Group Europe SARL, a French corporation primarily engaged in marketing and technical support activities; and Voicecom Ltd. ("Voicecom"), an Israeli corporation primarily engaged in research and development for 900 MHz Spread Spectrum wireless telephony products. Revenues derived from the Company's largest reseller Tomen Electronics represented 47%, 45% and 33% of the Company's revenues for 1999, 1998 and 1997, respectively. 2: SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. REVENUE RECOGNITION PRODUCT SALES Product sales of integrated digital telephony ("IDT") processors for communications applications, telephony and other products are recognized upon shipment. The Company has no ongoing commitments after shipment other than for warranty and sales returns/exchanges by distributors. The Company accrues estimated sales returns/exchanges upon recognition of sales. The Company has not experienced significant warranty claims to date, and accordingly, the Company provides for the costs of warranty when specific problems are identified. LICENSING AND ROYALTY REVENUES Revenues from software license agreements are recognized upon delivery of the software in accordance with Statement of Position 97-2 (SOP 97-2) "Software Revenue Recognition", (as amended by SOP 98-4), when: (1) collection is probable; (2) all license payments are due within one year; (3) the license fee is otherwise fixed and determinable; (4) vendor specific evidence exists to allocate the total fee to the undelivered elements of the arrangements; and (5) persuasive evidence of an arrangement exists. Revenues from maintenance contracts are recognized ratably over the term of the agreement. Costs related to insignificant obligations, primarily telephone support, are accrued upon shipment and are included in cost of revenues. Certain royalty agreements provide for per unit royalties to be paid to the Company based on shipments by customers of units containing the Company's products. Revenue under such agreements is recognized at the time of shipment by the customer as they report to the Company. In December 1998, the AICPA issued Statement of Position 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, With respect to Certain Transactions". SOP 98-9 amends SOP 98-4 to extend the deferral to the application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosure About Fair Value of Financial Instruments", requires disclosures about the fair value of financial instruments. The carrying values of cash and cash equivalents, marketable securities, trade receivables and trade payables approximate fair values due to the short-term maturities of these instruments. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances, including profits from intercompany sales not yet realized outside the group, have been eliminated in consolidation. 32 PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives, at the following annual rates:
% - ------------------------------------------------------------------------------- Computers and peripheral equipment 33 - ------------------------------------------------------------------------------- Office furniture and equipment 7-10 - ------------------------------------------------------------------------------- Motor vehicles 15 - ------------------------------------------------------------------------------- Leasehold improvements (over the terms of the lease) - -------------------------------------------------------------------------------
INVENTORIES Inventories are stated at the lower of cost or market value. Cost is determined using the average cost method. The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume. Based on these evaluations, provisions are made in each period to write inventory down to its net realizable value. Inventories are composed of the following
(IN THOUSANDS) DECEMBER 31, 1999 1998 --------------------- Work-in-process $ 169 $ -- Finished goods 3,114 2,182 --------------------- $3,283 $2,182 =====================
OTHER INVESTMENTS Other investments are comprised of (in thousands):
DECEMBER 31, 1999 1998 --------------------- Equity method investments: Investment in AudioCodes Ltd., net of accumulated amortization of $1,142 in 1999 and $891 in 1998 $ 18,335 $ 1,834 Cost method investments: Other investments 98 -- --------------------- $ 18,433 $ 1,834 =====================
AUDIOCODES, LTD. AudioCodes, Ltd. ("AudioCodes") is an Israeli corporation primarily engaged in design, research, development, manufacturing and marketing hardware and software products that enable simultaneous transmission of voice and data over networks including Internet, ATM and Frame Relay. The Company acquired an approximate 35% ownership in AudioCodes in two separate transactions in 1993 and 1994. In July 1997, AudioCodes completed a private placement of additional equity securities without the participation of the Company and, as a result, the Company's equity ownership interest in AudioCodes was diluted from 35% to approximately 29%. The Company also has an option under certain conditions to purchase up to an additional 5% of the outstanding stock of AudioCodes. The Company accounts for its ownership in AudioCodes using the equity method. The Company's original investment in AudioCodes included the excess of purchase price over net assets acquired (approximately $1,907,000 at the date of purchase), which was attributed to developed technology to be amortized over seven years. The private placement by AudioCodes in July 1997 was at a price per share greater than the Company's then current investment in AudioCodes. As a result, even though the Company's ownership interest decreased from 35% to 29%, the Company's proportionate share of the net assets of AudioCodes increased from $816,000 to $1,481,000 at the date of the private placement. This increase in the Company's proportionate share of the net assets of AudioCodes reduced the remaining unamortized excess of purchase price 33 over net assets acquired from $1,080,000 to $415,000 as of the date of the private placement. In May 1999, the Company exercised its option to purchase approximately 3.5% of the outstanding stock of AudioCodes for approximately $1.1 million. In the same month AudioCodes completed its initial public offering (IPO) and is now listed on the Nasdaq SmallCap Market under the symbol AUDC. In its IPO, AudioCodes issued 3.5 million shares at a price of $14.00 per share. As a result, the Company recorded in "Other income (expense)" in its consolidated statements of income for 1999 a one-time capital gain in the amount of $11.8 million. This amount was comprised of $9.4 million, which was sold in the IPO and $2.5 million from the sale of approximately 248,000 AudioCodes shares to the underwriters, to cover their over-allotment option. The gross proceeds to the Company from this sale were approximately $3.2 million. In October 1999, AudioCodes successfully concluded a follow-on public offering of 3.0 million shares at a price of $41.00 per share. In the follow-on, AudioCodes issued and sold 1.5 million shares and an additional 1.95 million shares were sold by shareholders, of which approximately 1,069,000 shares were sold by the Company in two separate transactions. The gross proceeds to the Company from these transactions were approximately $42.8 million, and were recorded as additional capital gain in the amount of $47.1 million. This amount was comprised of $10.8 million, which resulted in the public offering and $36.3 million from the sale of approximately 1,069,000 AudioCodes shares. As of December 31, 1999, the Company held approximately 2.9 million of AudioCodes shares which represents about 15% of the outstanding shares of AudioCodes. In January 2000, the Company sold an additional 600,000 shares of AudioCodes for approximately $43.8 million and recorded in the first quarter of 2000, an additional capital gain in the amount of $40.0 million. After this sale, the Company holds approximately 2.3 million of AudioCodes shares, which represents approximately 12% of the outstanding shares of AudioCodes. The Company's equity in the net income (loss) of AudioCodes was $2,475,000 in 1999, $230,000 in 1998, and ($103,000) in 1997. As of December 31, 1999, the Company amortized all the remaining portion of the excess of purchase price over net assets. APTEL LTD. AND NEXUS TELECOMMUNICATIONS SYSTEMS LTD. In July 1996, the Company invested in Aptel Ltd. ("Aptel"), which is located in Israel. The Company accounted for its investment in Aptel using the equity method. The Company's equity in the net losses of Aptel, including amortization of related intangibles, was $408,000 in 1997. As of June 30, 1997, the Company had fully written-off its investment in Aptel. In December 1997, Aptel's shareholders, including the Company exchanged their shares in Aptel for ordinary shares of Nexus Telecommunications Systems Ltd. ("Nexus"). Nexus is an Israeli company whose shares are registered and traded on the Nasdaq SmallCap Market under the symbol NXUSF. In October 1997, the Company invested $176,000 in a convertible debenture in Aptel which was converted into ordinary shares of Aptel prior to the closing of the Nexus transaction. The Company received approximately 297,000 ordinary shares of Nexus in the exchange transaction amounting to approximately 3% ownership interest in Nexus. The Company's basis in the Nexus stock received is $176,000 and the Company accounted for the investment using the cost method. At December 31, 1997, the Company's investment in Nexus was presented in the Company's consolidated balance sheet at the market value of $1,226,000, with the unrealized gain of $1,050,000 recorded as other comprehensive income, as a separate component of stockholder's equity. In April 1998, the Company sold all of its Nexus shares in a private transaction for approximately $1.3 million and realized a pre-tax gain on marketable equity securities of approximately $1.1 million, which is included under "Other income (expense)" in the Company's consolidated statements of income for 1998. CAPITALIZED ASSETS AND WORKFORCE In the beginning of 1999, the Company acquired two integrated groups of engineers, one located in Israel and the other in the United States. These twenty-five engineers specialize in the design of integrated circuits for wireless communications. In addition, the Company acquired technology and products, including associated intellectual property, related to 900 Megahertz narrow-band cordless telephones and 900 Megahertz spread spectrum cordless telephones. In connection with the above, the Company capitalized approximately $2.0 million of acquired assets and work force. This amount is amortized over approximately 3 years. As of December 31, 1999, the net balance of these capitalized assets and workforce was approximately $1.1 million. FOREIGN CURRENCY TRANSLATIONS The financial statements of certain subsidiaries and other entities reported using the equity method of accounting, whose functional currency is not the U.S. dollar, have been remeasured into U.S. dollars, in accordance with FASB Statement No. 52, "Foreign Currency Translation". Accordingly, monetary accounts are remeasured using the foreign exchange rate at the balance sheet date. Operations accounts and nonmonetary balance sheet accounts are remeasured at the rate in effect at the date of transaction. The effects of foreign currency remeasurement are reported in current operations and have not been significant to date. 34 NET EARNINGS PER SHARE Basic net earnings 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 earnings per share further includes the effect of dilutive stock options outstanding during the year, all in accordance with the Financial Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128"). The following table sets forth the computation of basic and diluted net earning per share (in thousands except per share amounts):
1999 1998 1997 ---------- --------- --------- Numerator: Net Income $ 54,579 $ 14,415 $ 11,034 ---------- ---------- Denominator: Weighted average number of shares of common stock outstanding during the period used to compute basic earning per share....................................... 11,734 9,768 9,736 Incremental shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock)................................ 987 248 467 ---------- Weighted average number of shares of common stock used to compute diluted earnings per share................... 12,721 10,016 10,203 ========== Basic net earnings per share............................ $4.65 $1.48 $1.13 ========== Diluted net earnings per share.......................... $4.29 $1.44 $1.08 ==========
Options outstanding to purchase approximately 91,000, 657,000 and 210,000 shares of common stock for the years ended December 31, 1999, 1998 and 1997, respectively, were not included in the computation of diluted net earning per share, because option exercise prices were greater than the average market price of the common shares and therefore, the effect would be antidilutive. CONCENTRATION OF CREDIT RISK SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk", requires disclosures of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, marketable security and cash deposits, short-term bank deposits and trade receivables. The Company's cash and cash equivalents are invested in short-term deposits with major U.S. and Israeli banks. Management believes that the financial institutions holding the Company's investments are financially sound, and accordingly, minimal credit risk exists with respect to these investments. The majority of the Company's sales of products are to distributors who in turn sell to manufacturers of consumer electronics products. The Company's licensing revenues are primarily from customers that have licensed rights to use the Company's DSP Core microprocessor architectures and speech compression technology. No collateral is required from the Company's customers; however, some of the customers pay using letters of credit. Write-offs for bad debts have not been significant to date. CONCENTRATION OF OTHER RISKS All of the Company's integrated circuit products are manufactured by independent foundries. While these foundries have been able to adequately meet the demands of the Company's increasing business, the Company is and will continue to be dependent upon these foundries to achieve acceptable 35 manufacturing yields, quality levels and costs, and to allocate to the Company sufficient portion of foundry capacity to meet the Company's needs in a timely manner. To meet the Company's increased wafer requirements, the Company has added additional independent foundries to manufacture its processors. Revenues could be materially and adversely affected should any of these foundries fail to meet the Company's request for products due to a shortage of production capacity, process difficulties, low yield rates or financial instability. For example, foundries in Taiwan produce a significant portion of our wafer supply. As a result, earthquakes, aftershocks or other natural disasters in Asia, could preclude us from obtaining an adequate supply of wafers to fill customer orders and could harm our business, financial condition, and results of operations. Additionally, certain of the raw materials, components, and subassemblies included in the products manufactured by the Company's OEM customers, which also incorporate the Company's products, are obtained from a limited group of suppliers. Disruptions, shortages, or termination of certain of these sources of supply could occur. CASH EQUIVALENTS The Company considers all highly liquid investments which are readily convertible to cash with an original maturity of three months or less when purchased to be cash equivalents. MARKETABLE SECURITIES AND CASH DEPOSITS At December 31, 1999, all marketable securities have been designated as held to maturity under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The amortized cost of held to maturity securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest and other income. Realized gains and losses and declines in value judged to be other-than-temporary on held to maturity securities are included in interest and other income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as held to maturity are included in interest and other income. Cash deposits originally purchased with a maturity of over three months are considered as short-term investments and are presented as part of the marketable securities. The following is a summary of held to maturity securities and cash deposits at December 31, 1999 and 1998:
(in thousands) AMORTIZED COST 1999 1998 ------------------------------- Obligations of states and political subdivisions $96,312 $25,290 Corporate obligations 30,440 33,218 Cash deposits 21,961 -- ------------------------------- $148,713 $58,508 =============================== Amounts included in marketable securities and cash deposits $140,593 $57,951 Amounts included in cash and cash equivalents 8,120 557 ------------------------------- $148,713 $58,508 ===============================
At December 31, 1999 and 1998, the carrying amount of securities approximated the fair value and the amount of unrealized gain or loss was not significant. Gross realized gains or losses for 1999, 1998, and 1997 were not significant. The amortized cost of held to maturity debt and securities at December 31, 1999, by contractual maturities, are shown below (IN THOUSANDS):
AMORTIZED COST ------------- Due in one year or less $100,656 Due after one year to two years 39,937 ------------- $140,593 =============
36 SEVERANCE PAY The Company's subsidiaries, DSP Group Israel and Voicecom, have liability for severance pay pursuant to Israeli law, based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date for all employees. The Company's liability is fully provided by monthly deposits with severance pay funds and insurance policies. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of these policies is recorded as an asset in the Company's balance sheet. Severance expenses for the years ended December 31, 1999, 1998 and 1997, were approximately $593,000, $367,000 and $135,000, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has chosen to continue accounting for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, ("APB-25"), "Accounting for Stock Issued to Employees". Under APB-25, when the exercise price of the employee's options equals or is higher than the market price of the underlying Company stock on the date of grant, no compensation expense is recognized. The pro-forma information with respect to the fair value of the options is provided in accordance with the provisions of statement No. 123 (see Note 4). In accounting for warrants granted to those other than employees, the provisions of Statement of Financial Accounting Standards Board No. 123, "Accounting for Stock-Based Compensation", were applied. The fair value of these warrants was estimated at the grant date using the Black-Scholes option pricing model (see Note 4). NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (the "FASB") issued No. 133, "Accounting for Derivative instruments and Hedging Activities" ("SFAS No. 133"). This statement established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The FASB has issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". The Statement defers the effective date of SFAS No. 133 for one year. The rule will apply to all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect the impact of this new statement on the Company's consolidated balance sheets or results of operations to be material. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". This statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. 3. PROPERTY AND EQUIPMENT Composition of assets, grouped by major classifications, is as follows:
(IN THOUSANDS) DECEMBER 31, ------------------------------ 1999 1998 -------------- -------------- Computers and peripheral equipment $ 12,216 $ 8,209 Office furniture and equipment 985 808 Motor vehicles 1,163 933 Leasehold improvements 1,866 1,380 -------------- -------------- 16,230 11,330 Less accumulated depreciation 9,282 7,094 -------------- -------------- $ 6,948 $ 4,236 ============== ==============
37 4. STOCKHOLDERS' EQUITY PREFERRED STOCK The Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of up to 5,000,000 shares of Preferred Stock in one or more series with such designations, rights, preferences, and limitations as the Board of Directors may determine, including the consideration received, the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights, and voting rights. DIVIDEND POLICY At December 31, 1999, the Company had retained earnings of approximately $64.8 million. The Company has never paid dividends on its Common Stock and presently intends to follow a policy of retaining any earnings for reinvestment in its business. STOCK ISSUE TO INVESTOR On February 2, 1999, the Company announced that it had entered into a stock purchase agreement with Magnum Technologies, Ltd., an international investment fund, in which the Company issued and sold 2,300,000 new shares of the Company's common stock to Magnum. Based in part on Magnum's representations, the transaction was exempt from the registration requirements of the Securities Act of 1933 according to Section 4(2) of the Securities Act. These shares, representing 19.6% of the Company's outstanding common stock at the time of the transaction, were issued for a price of $15 per share, or an aggregate of $34.4 million in total net proceeds to the Company. As part of the agreement, Magnum may acquire additional shares of the Company in the open market, but may not bring its total holdings to more than 35% of the Company's outstanding shares of common stock. Furthermore, Magnum agreed to restrict its sales of the Company's shares it purchased for an eighteen-month period from the date of the transaction under Rule 144(e)(i) of the Securities Act of 1933, unless it received the prior written approval of the Company. Additionally, the Company invited Magnum to appoint two new directors to the Board of Directors, which currently brings the total number of members of the Board of Directors to six. In February 2000, Magnum exercised its option and sold 929,000 shares of the Company's Common Stock. After the sale, Magnum holds approximately 2.0 million shares representing approximately 15.5% of the Company's outstanding shares of common stock. SHARE REPURCHASE PROGRAM In March 1999, the Company's Board of Directors authorized a new plan to repurchase up to an additional 1,000,000 shares of the Company's 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. Accordingly, in 1999 and 1998, the Company repurchased 200,000 and 814,000 shares, respectively, of its common stock at an average purchase price of $13.55 and $17.53 per share, respectively, for an aggregate purchase price of approximately $2.7 million and $14.3 million, respectively. In 1999 and 1998, the Company issued 908,000 and 106,000 shares, respectively, of the Company's common stock to employees who have exercised their stock options. Such repurchases of common shares are accounted for as treasury stock, and result in a reduction of stockholders' equity. When treasury shares are reissued, the Company charges the excess of the repurchase cost over issuance price using the weighted average method to retain earnings. STOCK PURCHASE PLAN AND STOCK OPTION PLANS The Company has various stock plans under which employees, consultants, officers, and directors may be granted options to purchase the Company's Common Stock. A summary of the various plans is as follows: 1991 EMPLOYEE AND CONSULTANT STOCK PLAN In 1991, the Company adopted the 1991 Employee and Consultant Stock Plan (the "1991 Plan"). Under the 1991 Plan, employees and consultants may be granted incentive or non-qualified stock options or stock purchase rights for the purchase of the Company's Common Stock. The 1991 Plan expires in 2001 and currently provides for the purchase of up to 4,300,000 shares of the Company's Common Stock. The exercise price of options under the 1991 Plan shall not be less than the fair market value of the Common Stock for incentive stock options and not less than 85% of the fair market value of the common stock for nonqualified stock options at the date of grant, as determined by the Board of Directors. Options under the 1991 Plan are generally exercisable over a 48-month period beginning twelve months after issuance or as determined by the Board of Directors. Options under the 1991 Plan expire up to seven years after the date of grant. 1993 DIRECTOR STOCK OPTION PLAN Upon the closing of the Company's initial public offering, the Company adopted the 1993 Director Stock Option Plan (the "Directors' Plan"). Under the Directors' Plan the Company is authorized to issue nonqualified stock options to purchase up to 275,000 shares of the Company's Common Stock at an exercise price equal to the 38 fair market value of the Common Stock on the date of grant. The Directors' Plan, following certain amendments in 1996 approved by the Company's stockholders, provides that each person who is an outside director on the effective date of the Directors' Plan and each outside director who subsequently becomes a member of the Board of Directors shall automatically be granted an option to purchase 15,000 shares (the First Option). Additionally, each outside director shall automatically be granted an option to purchase 5,000 shares (a Subsequent Option) on January 1 of each year if, on such date, he/she shall have served on the Board of Directors for at least six months. Options granted under the Directors' Plan generally have a term of ten years. The First Option is 25% exercisable after the first year (one-third after the first year for options granted after May 1996) and in quarterly installments over the ensuing three years (one-third at the end of each twelve-month period for options granted after May 1996). Each Subsequent Option becomes exercisable in full on the fourth anniversary from the date of grant (one-third at the end of each twelve-month period from the date of grant for options granted after May 1996). 1993 ISRAELI PLAN In 1993, the Company adopted the 1993 DSP Group, Inc. Israeli Stock Option Plan (the "1993 Israeli Plan") under which the Company is authorized to issue nonqualified stock options to purchase up to 167,000 shares of the Company's Common Stock at an exercise price equivalent to fair market value. Options are immediately exercisable and expire five years from the date of grant. All options and shares are held in a trust until the later of 24 months from the date of grant or the shares are vested based on a vesting schedule determined by a committee appointed by the Board of Directors. 1998 NON-OFFICER EMPLOYEE STOCK OPTION PLAN In 1998, the Company adopted the 1998 Non-Officer Employee Stock Option Plan (the "1998 Plan"). Under the 1998 Plan, employees may be granted non-qualified stock options for the purchase of the Company's Common Stock. Officers and directors of the Company are excluded from participating under the 1998 Plan. The 1998 Plan expires in 2008 and currently provides for the purchase of up to 1,550,000 shares of the Company's Common Stock. The exercise price of options under the 1998 Plan shall not be less than the fair market value of the Common Stock for nonqualified stock options, as determined by the Board of Directors. Options under the 1998 Plan are generally exercisable over a 48-month period beginning twelve months after issuance or as determined by the Board of Directors. Options under the 1998 Plan expire up to seven years after the date of grant. A summary of activity under the 1991 Plan, the 1993 Israeli Plan, the Directors' Plan, and the 1998 Plan is as follows:
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING ---------------------------------------- SHARES SHARES WEIGHTED AVAILABLE UNDER AVERAGE FOR GRANT OPTION EXERCISE PRICE --------------------------------------------------------- BALANCE AT JANUARY 1, 1997 621 1,475 $10.94 Granted (797) 797 $21.67 Exercised - (526) $12.12 Canceled 429 (429) $11.18 ----------------------------------- BALANCE AT DECEMBER 31, 1997 253 1,317 $16.87 ----------------------------------- Authorized 1,950 - $ - Granted (812) 812 $ 18.54 Exercised - (94) $ 9.95 Canceled 136 (136) $ 13.59 ----------------------------------- BALANCE AT DECEMBER 31, 1998 1,527 1,899 $18.17 ----------------------------------- Authorized 1,200 - $ - Granted (1,800) 1,800 $28.66 Exercised - (1,136) $17.67 Canceled 158 (158) $19.86 ----------------------------------- BALANCE AT DECEMBER 31, 1999 1,085 2,405 $26.14 -----------------------------------
39 A summary of the average fair exercise price and the number of options exercisable for the years 1999, 1998 and 1997, is as follows:
- ---------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------- Number of options excisable as of December 31, (options in thousands) 39 469 375 - ---------------------------------------------------------------------------- Weighted average exercise price of options granted during the year $ 28.71 $ 18.54 $ 21.67 - ----------------------------------------------------------------------------
A summary of the Company's stock option activity and related information as of December 31, 1999, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- -------------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE EXERCISE OPTIONS CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE - -------------------------------------------------------------------------------------------------------------- $ 7.63 - $14.63 406,950 5.34 Years 12.50 10,815 9.72 $15.13 -$18.48 456,253 6.28 Years 18.27 2,066 15.35 $18.56 -$18.81 153,125 5.50 Years 18.57 0 0 $18.88 -$18.88 585,462 6.07 Years 18.88 6,878 18.88 $19.25 -$38.00 466,716 5.98 Years 29.71 19,693 22.33 $38.75- $66.88 337,000 7.21 Years 64.43 0 0 ---------------------------------------------------------------------------------------- 2,405,506 6.09 Years $26.14 39,452 $17.90 ========================================================================================
Weighted average fair value of options whose exercise price is equal or less than the market price of the shares at date of grant are as follows: - -------------------------------------------------------------------------------------------------------------- Weighted average fair value of options grants 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Exercise price equals to fair value at date of grants $10.61 $9.65 $9.90 -----------------------------------------
1993 EMPLOYEE STOCK PURCHASE PLAN Upon the closing of the Company's initial public offering, the Company adopted the 1993 Employee Stock Purchase Plan (the "1993 Purchase Plan"). The Company has reserved an aggregate amount of 350,000 shares of Common Stock for issuance under the 1993 Purchase Plan. The 1993 Purchase Plan provides that substantially all employees may purchase stock at 85% of its fair market value on specified dates via payroll deductions. There were approximately 30,000, 32,000 and 28,000 shares issued under the Purchase Plan in 1999, 1998 and 1997, respectively. COMMON STOCK RESERVED FOR FUTURE ISSUANCE Shares of Common Stock of the Company reserved for future issuance at December 31, 1999, are as follows (in thousands): Employee Stock Purchase Plan 220 Stock Options 3,490 Undesignated Preferred Stock 5,000 ----------- 8,710 ===========
40 STOCK BASED COMPENSATION Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"), which requires the use of option valuation models that were not developed for use in valuing employee stock options. For example, the Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The fair value of the Company's employee stock options was estimated at the date of grant using a Black-Scholes multiple option pricing model with the following weighted average assumptions; risk-free interest rates of 5.5%, 5.02% and 6.15% for 1999, 1998 and 1997, respectively; a dividend yield of 0.0% for each of those years; a volatility factor of the expected market price of the Company's Common Stock of 0.76, for 1999, 0.77 for 1998 and 0.70 for 1997; and a weighted-average expected life of the option of 2.9 years for 1999, 3.0 years for 1998 and 3.1 years for 1997. The weighed average net fair value of options granted in 1999, 1998 and 1997 was $10.61, $9.65 and $9.90 per share, respectively. The Company does not recognize compensation cost related to employee stock purchase rights under the Employee Stock Purchase Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation cost is estimated for the fair value of the employees' stock purchase rights using the Black-Scholes model with the following assumptions for those rights granted in 1999, 1998 and 1997; dividend yield of 0.0%; an expected life ranging up to 0.5 years; expected volatility factor of 0.70 in 1999, 0.71 in 1998 and 0.75 in 1997; and a risk free interest rate of 6.33% in 1999, 4.84% in 1998, 5.49% in 1997. The weighted average fair value of those purchase rights granted in January 1999, July 1999, January 1998, July 1998, January 1997 and July 1997 were $6.33, $17.05, $10.70, $9.57, $2.45 and $8.21, respectively. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 ----------------------------------------------- Net income as reported $ 54,579 $ 14,415 $ 11,034 Pro forma net income $ 47,513 $ 10,428 $ 8,485 Pro forma basic earnings per share $ 4.05 $ 1.07 $ 0.87 Pro forma diluted earnings per share $ 4.05 $ 1.07 $ 0.85
41 5. INDUSTRY SEGMENT REPORTING The Company operates in one business segment approach, principally the development of affordable, high performance, cost effective DSP-based software, integrated circuits, and circuit boards. Operations outside the United States include research, development, sales, marketing and certain general and administrative functions. The Company's Israeli subsidiary performs research, development, sales, marketing, technical support, and certain general and administrative functions. The Company's Japanese and French subsidiaries perform marketing and technical support activities. The following is a summary of operations within geographic areas:
(IN THOUSANDS) 1999 1998 1997 ---------------------------------------------- Sales to unaffiliated customers: United States $ 9,649 $31,436 $57,364 Israel 66,784 32,414 4,595 ---------------------------------------------- $76,433 $63,850 $61,959 ============================================== Revenues: United States $ 7,098 $ 3,821 4,688 Export: Japan 43,758 35,711 23,402 Europe 6,226 10,591 10,357 Asia 15,392 12,616 21,644 Israel 3,959 1,111 1,868 ---------------------------------------------- $76,433 $63,850 $ 61,959 ============================================== Long-lived assets: United States $21,694 $2,085 $2,252 Israel 4,742 4,783 4,751 Other 61 66 77 ---------------------------------------------- $26,497 $6,934 $7,080 ==============================================
6. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company leases certain equipment and facilities under noncancelable operating leases. The Company has significant leased facilities in Herzelia Pituach, Israel and in Santa Clara, California. In 1996, the Company negotiated the assignment of certain of its Santa Clara facility use obligations to another company (the "Assignee"). The Company received payments from the Assignee in the Santa Clara facility, of $322,000 in both 1999 and 1998 and will receive $322,000 in 2000. In addition, commencing January 1, 1997, the Company began subleasing a new space in the same building from the Assignee under a separate sublease agreement that expires in December 1999. In August 1997, the Company entered into a new lease for its Israel facilities in Herzelia Pituach. The lease agreement is effective until November 2003. In December 1999, May 1999 and September 1998, the Company entered into three new leases for additional office space at its Israel facilities in Herzelia Pituach. The lease agreements for the additional spaces are effective until November 2003. At December 31, 1999, the Company is required to make the following minimum lease payments:
(IN THOUSANDS) Year Amount ---- ----------- 2000 $1,214 2001 846 2002 622 2003 570 ------ $3,252 ======
42 Total rental expense for all leases was approximately $736,000 (net of sublease income of $322,000), $545,000 (net of sublease income of $365,000), $778,000 (net of sublease income of $469,000), for the years ended December 31, 1999, 1998, and 1997, respectively. CONTINGENCIES The Company is involved in certain claims arising in the normal course of business, including claims that it may be infringing patent rights owned by third parties. The Company is unable to foresee the extent to which these matters will be pursued by the claimants or to predict with certainty the eventual outcome. However, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, results of operations, or cash flows. 7. INCOME TAXES The provision for income taxes is as follows (IN THOUSANDS):
1999 1998 1997 ------------------------------------------- Federal taxes: Current $ 1,080 $ 2,751 $ 3,166 Deferred 6,168 1,181 (1,301) ------------------------------------------ 7,248 3,932 1,865 State taxes: Current 1,140 216 337 Deferred 209 97 (158) ------------------------------------------ 1,349 313 179 Foreign taxes: Current 16,684 559 714 Deferred 365 -- -- ------------------------------------------ 17,049 559 714 ========================================== ========================================== Provision for income taxes $ 25,646 $ 4,804 $ 2,758 ==========================================
The tax benefits associated with the exercise of stock options reduced taxes currently payable by $1,591,000 in 1999, $1,192,000 in 1998, and $1,037,000 in 1997. Such benefits were credited to paid in capital when realized. Pretax income from foreign operations was $14,965,000, $7,330,000 and $3,495,000 in 1999, 1998 and 1997, respectively. Unremitted foreign earnings that are considered to be permanently invested outside of the U.S., and on which no deferred taxes have been provided, amount to approximately $9,600,000 at December 31, 1999. If such amounts were remitted, the Company would be subject to U.S. income taxes (subject to an adjustment for foreign tax credits) and additional Israeli corporate income and withholding taxes of approximately $2,300,000. 43 A reconciliation between the Company's effective tax rate and the U.S. statutory rate (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1999 1998 1997 -------------------------------------------- Tax at U.S. statutory rate $ 27,276 $ 6,534 $ 4,827 State taxes, net of federal benefit 890 207 116 Operating losses utilized - - (1,160) Tax exempt interest income - - (26) Foreign income taxed at rates other than U.S. rate (3,934) (1,806) (813) Different rate from sale of affiliate 1,179 - - Tax credits utilized - (264) (480) Nondeductible losses and expenses of investees - - 247 Other individually immaterial items 235 133 47 -------------------------------------------- $ 25,646 $ 4,804 $ 2,758 ============================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1999 and 1998 are as follows:
(IN THOUSANDS) 1999 1998 -------------------------- Deferred tax assets (liability): Tax credit carryforwards $ 545 $ 108 Net operating loss carryforwards - 385 Capitalized research and development (229) 222 Reserves and accruals 1,349 690 Other 452 817 Investment in affiliate (6,790) - -------------------------- Total deferred tax assets (liability) $(4,673) $ 2,222 Income tax payable (1,054) (1,909) -------------------------- Net deferred tax assets (liability) $(5,727) $ 313 ==========================
Management believes that the deferred tax assets will be realized based on current levels of future taxable income and potentially refundable taxes. The valuation allowance decreased by $1,250,000 in 1998. DSP Group Israel's production facilities have been granted "Approved Enterprise" status under Israeli law in connection with four separate investment plans. According to the provisions of such Israeli law, DSP Group Israel has chosen to enjoy "Alternative plans benefits," which is a waiver of grants in return for tax exemption. Accordingly, DSP Group Israel's income from an "Approved Enterprise" is tax-exempt for a period of two or four years and is subject to a reduced corporate tax rate of 10% for an additional period of eight or six years, respectively. The tax benefits under these investment plans are scheduled to gradually expire starting from 2001 through 2009. DSP Group Israel's first and second plans, which were completed and commenced operation in 1992 and 1996, respectively, are tax exempt for two and four years, respectively, and are entitled to a reduced corporate tax rate of 10% for an additional period of six years. The third and fourth plans were approved in 1996 and 1998, respectively. They entitle DSP Group Israel to a corporate tax exemption for a period of two years for each plan and to a reduced corporate tax rate of 10% for an additional period of eight years. The period of tax benefits, as detailed above, is subject to limitations of the earlier of 12 years from commencement of production, or 14 years from receipt of approval. The tax exempt income attributable to an "Approved Enterprise" can be distributed to stockholders without subjecting DSP Group Israel to taxes only upon the complete liquidation of DSP Group Israel. The Company has determined 44 that such tax exempt income will not be distributed as dividends. Accordingly, no deferred income taxes have been provided on income attributable to DSP Group Israel's "Approved Enterprise." Through December 31, 1999, DSP Group Israel has met all the conditions required under these approvals. Should DSP Group Israel fail to meet such conditions in the future, however, it could be subject to corporate tax in Israel at the standard rate of 36% and could be required to refund tax benefits already received. Income from sources other than the "Approved Enterprise" during the benefit period will be subject to tax at the standard rate of corporate tax in Israel of 36%. By virtue of such Israeli law, DSP Group Israel is entitled to claim accelerated rates of depreciation on equipment used by an "Approved Enterprise" during the first five tax years from the beginning of such use. 8. RELATED PARTY TRANSACTIONS In 1993, the Company entered into a development and licensing agreement with AudioCodes (see Note 2 Other Investments). Under the agreement, AudioCodes is to perform certain research and development services for the Company. Upon development of the technology, the Company is to pay AudioCodes a service fee and additional royalty fees of 15% to 50% of the net revenue and 3% to 10% of the gross margin realized from the sale of the technology incorporated in the Company's products. In 1999, 1998 and 1997 the Company recorded the following:
----------------------------------- (IN THOUSANDS) 1999 1998 1997 RELATED PARTY TRANSACTIONS ----------------------------------- REVENUES: - ------------------------------------ Product sales $861 $944 $1,542 Licensing $ 92 $ 82 $206 COST OF REVENUES: - ------------------------------------ Cost of products $324 $384 $291 Cost of licensing $ 63 $160 $268 OPERATING EXPENSES: - ------------------------------------ Research and development $358 $345 $340 LIABILITIES AS OF DECEMBER 31, $109 $121 $107
9. SUBSEQUENT EVENTS In February 2000, Magnum exercised its option and sold 929,000 shares of the Company's Common Stock. After the sale, Magnum holds approximately 2.0 million shares representing approximately 15.5% of the Company's outstanding shares of Common Stock. On January 24, 2000, our Board of Directors declared a two-for-one stock split of our Common Stock that was effected in the form of a 100% stock dividend. The dividend was paid on March 1, 2000 to stockholders of record on February 16, 2000. 45 CORPORATE DIRECTORY OFFICERS AND KEY EMPLOYEES ELI AYALON Chairman of the Board & Chief Executive Officer BOAZ EDAN Vice President, Products Division Manager RAFI FRIED Vice President, Research & Development ROSS HAYDEN Vice President, Sales LEAH SADE Vice President, Human Resources GIDEON WERTHEIZER Executive Vice President MOSHE ZELNIK Secretary, Vice President, Finance & Chief Financial Officer DIRECTORS ELI AYALON Chairman of the Board & CEO DSP Group ZVI LIMON Chairman Limon Holdings Ltd. YAIR SHAMIR President VCON Telecommunications Ltd. SHAUL SHANI Managing Director Limon Holdings Ltd. PATRICK TANGUY CEO, Technal S.A. LOUIS SILVER Counsel Discount Bank & Trust Co. INDEPENDENT AUDITORS Kost, Forer & Gabai A Member of Ernst & Young international Tel Aviv, Israel GENERAL LEGAL COUNSEL Morrison & Foerster LLP San Francisco, California REGISTRAR AND TRANSFER AGENT Northwest Bank Minnesota, St. Paul, Minnesota CORPORATE HEADQUARTERS DSP Group, Inc. 3120 Scott Boulevard Santa Clara, CA 95054 Tel. 408-986-4300 Fax. 408-986-4323 http://www.dspg.com DSP Group Ltd. 5 Shenkar Street Herzeliya, 46120, Israel Tel. 972-9-9529696 Fax. 972-9-9541234 SALES, MARKETING AND SUPPORT OFFICES U.S.A.: DSP Group, Inc. 3120 Scott Boulevard Santa Clara, CA 95054 Tel. 408-986-4300 Fax. 408-986-4323 http://www.dspg.com ISRAEL: DSP Group Ltd. 5 Shenkar Street Herzeliya, 46120, Israel Tel. 972-9-9529696 Fax. 972-9-9541234 http://www.dspg.com EUROPE: DSP Group Europe, SARL 18 rue de l'Effort Mutuel 91300, Massy, France Tel. 33-607-686754 Fax. 33-1-6010-5187 JAPAN: Nihon DSP K.K. Yasuda Kasai Bldg. 2-3-1, Higashi-Gotanda Shinagawa-Ku Tokyo, 141, Japan Tel. 81-3-3449-7863 Fax. 81-3-3449-8006 KOREA: DSP Technology Seoul, Korea Tel. 82-2-554-7494 Fax. 82-2-554-7495 CHINA: Beijing Link Televideo Technology Co., Ltd. Unit 2104, Landmark Tower 2, 8 North Donganhaun Road, Chaoyang District, Beijing 100004, PR China Tel. (8610) 6590 6372 Fax. (8610) 6590 6367 HONG KONG: DSP Solutions Ltd. Kowloon, Hong Kong Tel. 852-2795-7421 Fax. 852-2305-0640 TAIWAN: DSP Applications Taipei, Taiwan, R.O.C. Tel. 886-2-698-4320 Fax. 886-2-698-4133 SEC Form 10-K A copy of the company's Annual Report to the Securities and Exchange Commission on Form 10-K is available without charge by writing to: DSP Group, Inc. Attn: Investor Relations 3120 Scott Boulevard Santa Clara, CA 95054, USA QUARTERLY EARNINGS RELEASE Quarterly earnings releases will be made available to stockholders upon request. Please note that quarterly reports to stockholders will no longer be published. ANNUAL MEETING The Annual Meeting of stockholders will be held on May 16, 2000 at 9:00 a.m. local time at DSP Group, Inc. Corporate Headquarters in the U.S. EX-27 12 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP GROUP FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 20,778 140,593 11,098 663 3,283 178,158 16,230 9,282 206,179 14,411 0 0 0 12 183,945 206,179 57,397 76,433 33,051 33,206 15,404 0 232 80,225 25,646 54,579 0 0 0 54,579 4.65 4.29
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