-----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, PmfLY0m0DPMpHT9XLp/WzdmhDsPZdnG9LE8vmzgAGSW2TZMNp18y0U8kbZdmoDqu IX7m2qN2YMXNbpN+eOiDww== 0001047469-98-041156.txt : 19981118 0001047469-98-041156.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041156 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSP GROUP INC /DE/ CENTRAL INDEX KEY: 0000915778 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942683643 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23006 FILM NUMBER: 98751343 BUSINESS ADDRESS: STREET 1: 3120 SCOTT BLVD CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089864300 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1998 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission File Number 0-23006 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 number) incorporation or organization) 3120 Scott Boulevard, Santa Clara, California 95054 --------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (408) 986-4300 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of October 31, 1998 there were 9,385,875 shares of Common Stock ($.001 par value per share) outstanding. INDEX DSP GROUP, INC.
Page No. -------- PART I. FINANCIAL INFORMATION - ------------------------------- Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets-September 30, 1998 and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed consolidated statements of income-Three and nine months ended September 30, 1998 and 1997 . . . . . . . . . . . . . . 4 Condensed consolidated statements of cash flows-Nine months ended September 30, 1998 and 1997 . . . . . . . . . . . . . . 5 Condensed consolidated statements of Stockholders' Equity - Three and nine months ended September 30, 1998 and 1997. . . . . . . 6 Notes to condensed consolidated financial statements- September 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . .12 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . .19 PART II. OTHER INFORMATION - ---------------------------- Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . .20 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . .21 Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . .21 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . .21 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . .21 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .21 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
PART 1. FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS DSP GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS (Unaudited) (Note) CURRENT ASSETS: Cash and cash equivalents $ 6,355 $ 7,325 Marketable securities 56,234 58,619 Accounts receivable, net 8,410 3,594 Inventories 2,226 4,116 Deferred income taxes 2,850 2,850 Prepaid expenses and other 1,878 1,441 ----------- ----------- TOTAL CURRENT ASSETS 77,953 77,945 Property and equipment, at cost: 10,811 9,010 Less accumulated depreciation and amortization (6,696) (5,522) ----------- ------------ 4,115 3,488 Other investments, net of accumulated amortization 1,586 2,935 Other assets 280 150 Deferred income taxes 650 650 ----------- ---------- TOTAL ASSETS $84,584 $85,168 ----------- ---------- ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $3,242 $3,319 Other current liabilities 9,860 7,679 ---------- --------- TOTAL CURRENT LIABILITIES 13,102 10,998 Commitments and contingencies STOCKHOLDERS' EQUITY: Common Stock 9 10 Additional paid-in capital 73,614 74,418 Unrealized gain on marketable equity security -- 1,050 Retained earning (deficit) 9,639 (1,308) Treasury stock at cost (11,780) -- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 71,482 74,170 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $84,584 $85,168 ----------- ---------- ----------- ----------
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements. 3 DSP GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ------------------------- 1998 1997 1998 1997 ----------- ---------- ---------- ---------- REVENUES: Product sales $13,504 $13,547 $ 39,950 $37,626 Licensing, royalties and other 3,804 3,011 9,783 7,752 --------- --------- --------- ---------- TOTAL REVENUES 17,308 16,558 49,733 45,378 COST OF REVENUES: Cost of product sales 8,110 8,232 23,698 23,306 Cost of licensing, royalties and other 157 276 355 1,122 -------- -------- --------- -------- TOTAL COST OF REVENUES 8,267 8,508 24,053 24,428 -------- -------- --------- -------- GROSS PROFIT 9,041 8,050 25,680 20,950 OPERATING EXPENSES: Research and development 2,806 2,084 7,334 6,043 Sales and marketing 1,243 1,220 3,834 3,551 General and administrative 1,248 1,168 3,529 3,372 -------- -------- -------- ------- TOTAL OPERATING EXPENSES 5,297 4,472 14,697 12,966 -------- -------- -------- ------- OPERATING INCOME 3,744 3,578 10,983 7,984 OTHER INCOME (EXPENSE): Interest and other income 926 753 2,784 2,006 Interest expense and other (26) (55) (132) (176) Gain on sale of marketable equity security -- -- 1,086 -- Equity in loss of equity method investees, net (8) (42) (123) (559) -------- ------- -------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES 4,636 4,234 14,598 9,255 Provision for income taxes 1,161 886 3,651 1,666 -------- -------- ------- -------- NET INCOME $3,475 $3,348 $10,947 $ 7,589 -------- -------- ------- -------- -------- -------- ------- -------- NET INCOME PER SHARE: Basic $ 0.36 $ 0.34 $ 1.11 $0.79 Diluted $ 0.35 $ 0.32 $ 1.08 $0.76 SHARES USED IN PER SHARE COMPUTATIONS: Basic 9,716 9,773 9,892 9,641 Diluted 9,936 10,530 10,161 10,018
See notes to condensed consolidated financial statements. 4 DSP GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1998 1997 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 9,782 $ 15,848 INVESTING ACTIVITIES Purchase of available-for-sale marketable securities (45,222) (48,139) Sale of available-for-sale marketable securities 47,607 32,619 Purchases of equipment (1,814) (1,899) Sale of equipment -- 166 Proceeds from sale of Nexus 1,262 -- --------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,833 (17,253) --------- -------- FINANCIAL ACTIVITIES Sale of Common Stock for cash upon exercise of options and employee stock purchase plan 1,042 4,144 Purchase of treasury stock (13,627) -- --------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (12,585) 4,144 --------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (970) $ 2,739 --------- -------- --------- --------
See notes to condensed consolidated financial statements. 5 DSP GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands)
RETAINED EARNINGS ADDITIONAL (ACCUMULATED TREASURY OTHER TOTAL THREE MONTHS ENDED COMMON STOCK PAID-IN EARNINGS STOCK COMPREHENSIVE STOCKHOLDERS' SEPTEMBER 30, 1998 SHARE AMOUNT CAPITAL DEFICIT) AT COST INCOME EQUITY ------------------------------------------------------------------------------- Balance at June 30, 1998 9,785 $ 10 $73,968 $ 6,164 $ (6,904) $ -- $73,238 Net income -- -- -- 3,475 -- -- 3,475 Comprehensive income -- -- -- -- -- -- 76,713 Exercise of Common Stock options by employees 15 -- (167) -- 298 -- 131 Sale of Common Stock under employee stock purchase plan 19 -- (187) -- 399 -- 212 Purchase of Treasury stock (385) (1) -- -- (5,573) -- (5,574) ------------------------------------------------------------------------------- Balance at September 30, 1998 9,434 $ 9 $73,614 $9,639 $(11,780) $ -- $71,482 ------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------------- Balance at June 30, 1997 9,641 $ 10 $67,613 $ (8,101) $ -- $ -- $59,522 Net income -- -- -- 3,348 -- -- 3,348 Exercise of Common Stock options by employees 274 -- 3,312 -- -- -- 3,312 Sale of Common Stock under employee stock purchase plan -- -- -- -- -- -- -- ------------------------------------------------------------------------------- Balance at September 30, 1997 9,915 $ 10 $70,925 $ (4,753) $ -- $ -- $66,182 ------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1998 ------------------------------------------------------------------------------- Balance at December 31, 1997 10,094 $ 10 $74,418 $ (1,308) $ -- $1,050 $74,170 Net income -- -- -- 10,947 -- -- 10,947 Other comprehensive income, Decrease in unrealized gain on marketable equity securities, net of reclassification adjustment (a) -- -- -- -- -- (1,050) (1,050) Comprehensive income -- -- -- -- -- -- 84,067 Exercise of Common Stock options by employees 72 -- (733) -- 1,448 -- 715 Sale of Common Stock under employee stock purchase plan 32 -- (71) -- 399 -- 328 Purchase of Treasury stock (764) (1) -- -- (13,627) -- (13,628) ------------------------------------------------------------------------------- Balance at September 30, 1998 9,434 $ 9 $73,614 $ 9,639 $(11,780) $ -- $71,482 ------------------------------------------------------------------------------- (a) Disclosure of reclassification amount: Unrealized holding gains arising during period $ 36 Less: reclassification for gains included in income (1,086) ------- Net decrease in unrealized gain on marketable security $(1,050) ------- NINE MONTHS ENDED SEPTEMBER 30, 1997 ------------------------------------------------------------------------------- Balance at December 31, 1996 9,540 $ 10 $66,781 $ (12,342) $ -- $ -- $54,449 Net income -- -- -- 7,589 -- -- 7,589 Exercise of Common Stock options by employees 352 -- 3,972 -- -- -- 3,972 Sale of Common Stock under Employee stock purchase plan 23 -- 172 -- -- -- 172 ------------------------------------------------------------------------------- Balance at September 30, 1997 9,915 $ 10 $70,925 $ (4,753) $ -- $ -- $66,182 -------------------------------------------------------------------------------
6 DSP GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 (UNAUDITED) NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE B - INVENTORIES Inventory is valued at the lower of cost (first-in, first-out method) or market. The components of inventory consist of the following (in thousands):
September 30, December 31, 1998 1997 ------------- ------------ Work-in-process $ 19 $ 16 Finished goods 2,207 4,100 --------- --------- $ 2,226 $ 4,116 --------- --------- --------- ---------
7 DSP GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C - NET INCOME PER SHARE Basic net income per share is based on the weighted average number of shares of Common Stock outstanding during the period. For the same periods, diluted net income per share further includes the effect of dilutive stock options outstanding during the period. The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):
Three months ended Nine months ended September 30, September 30, ------------------------ -------------------------- 1998 1997 1998 1997 ---------- ---------- ----------- ---------- Numerator: Net income $ 3,475 $ 3,348 $10,947 $ 7,589 -------- -------- ------- -------- -------- -------- ------- -------- Denominator: Weighted average number of shares of Common Stock outstanding during the period used to compute basic earnings per share 9,716 9,773 9,892 9,641 Incremental shares attributable to exercise of outstanding options (assuming proceeds would be used to purchase treasury stock) 220 577 269 377 -------- -------- ------- -------- Weighted average number of shares of Common Stock used to compute diluted earnings per share 9,936 10,350 10,161 10,018 -------- -------- ------- -------- -------- -------- ------- -------- Basic net income per share $0.36 $0.34 $1.11 $0.79 -------- -------- ------- -------- -------- -------- ------- -------- Diluted net income per share $0.35 $0.32 $1.08 $0.76 -------- -------- ------- -------- -------- -------- ------- --------
8 DSP GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D - INVESTMENTS The following is a summary of the cost of available-for-sale securities (in thousands):
September 30, December 31, 1998 1997 ------------- ------------ Corporate obligations $ 37,239 $53,270 Government and other agency's obligations 19,075 6,002 ---------- ---------- $56,314 $59,272 ---------- ---------- ---------- ---------- Amounts included in marketable securities $56,234 $58,619 Amounts included in cash and cash equivalents 80 653 ---------- ---------- $56,314 $59,272 ---------- ---------- ---------- ----------
At September 30, 1998 and at December 31, 1997, the carrying amount of securities approximated their fair market value and the amount of unrealized gain or loss was not significant. Gross realized gains or losses for the three months ended September 30, 1998 and 1997, were not significant. The amortized cost of available-for-sale debt securities at September 30, 1998, by contractual maturities, is shown below (in thousands):
Amortized cost -------------- Due in one year or less $ 4,108 Due after one year to two years 52,206 -------- $ 56,314 -------- --------
NOTE E - INCOME TAXES The effective tax rate used in computing the provision for income taxes is based on projected fiscal year income before taxes, including estimated income by tax jurisdiction. The difference between the effective tax rate and the statutory rate is due primarily to foreign tax holiday and tax exempt income in Israel. 9 DSP GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE F - SIGNIFICANT CUSTOMERS Product sales to a distributor accounted for 47% and 39% of total revenues for the three months ended September 30, 1998 and 1997, respectively, and 47% and 32% of total revenues for the nine months ended September 30, 1998 and 1997, respectively. The loss of one or more major distributors or customers could have a material adverse effect on the Company's business, financial condition and results of operations. NOTE G - OTHER INVESTMENTS Other investments are comprised of: AudioCodes, Ltd.: AudioCodes, Ltd. ("AudioCodes") is an Israeli corporation primarily engaged in research, development, production and marketing of voice communication products. 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 approximately 35% to approximately 29%. The Company also has an option to purchase up to an additional 5% of the outstanding stock of AudioCodes. The condensed consolidated statements of income for the three months ended September 30, 1998 and 1997, include a $8,000 and $42,000 equity loss, respectively, in the Company's investment in AudioCodes. Aptel Ltd. and Nexus Telecommunications Systems Ltd.: In July 1996, the Company invested $2.0 million of cash for approximately 40% of the equity interests in Aptel Ltd. ("Aptel"), an Israeli company. In connection with the investment, the Company incurred a one-time write-off of acquired in-process technology of $1.5 million. In October 1997, the Company invested approximately $176,000 in convertible debentures issued by Aptel. In December 1997, the Company converted its debentures into equity and Aptel's shareholders (including the Company) exchanged their shares in Aptel for common shares of Nexus Telecommunications Systems Ltd. ("Nexus"), an Israeli company registered and traded on the Nasdaq SmallCap Market. In April 1998, the Company 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 the Company's condensed consolidated statements of income for the nine months ended September 30, 1998 and 1997. NOTE H- REPURCHASE OF COMPANY'S COMMON STOCK On January 27, 1998, the Company announced that its Board of Directors had authorized management to repurchase up to 1,000,000 shares of the Company's Common Stock from time to time on the open-market or in privately negotiated transactions. In the three quarters of fiscal 1998, the Company repurchased 764,000 shares of its Common Stock at an average purchase price of $17.84 per share. In the three months ended September 30, 1998, the Company repurchased 385,000 shares at an average purchase price of $14.48 per share. 10 DSP GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE I- 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 flow. In November 1995, after the Company's stock price declined, several lawsuits were filed in the United States District Court for the Northern District of California accusing the Company, its former Chief Executive Officer, and its former Chief Financial Officer of issuing materially false and misleading statements in violation of the federal securities laws. These lawsuits were consolidated into a single amended complaint in February 1996. In the amended complaint, plaintiffs sought unspecified damages on behalf of all persons who purchased shares of the Company's Common Stock during the period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted the Company's motion to dismiss the lawsuit, with leave to amend. The plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the Court issued an order dismissing with prejudice all claims based on statements issued by the Company. The Court permitted plaintiffs to proceed with their claims regarding statements the Company allegedly made to securities analysts. The Court also permitted plaintiffs to amend their complaint as to their claim that the Company is responsible for the statements contained in analysts' reports, but the plaintiffs chose not to amend their complaint. On November 5, 1997, the parties reached an agreement in principle to settle the litigation. The Court approved the settlement on September 4, 1998. There were no objections, and only one shareholder (who purports to have purchased shares during the class period) opted out. The settlement is being funded by insurance proceeds except for $50,000 funded by the Company in order to fulfill the retention amounts under the Company's insurance policy. The Company continues to deny all allegations in the law suit. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS TOTAL REVENUES. Total revenues increased to $17.3 million in the third quarter of 1998 from $16.6 million in the third quarter of 1997. Total revenues also increased to $49.7 million in the first three quarters of 1998 from $45.4 million in the first three quarters of 1997. The increase in the third quarter of 1998 compared to the same period in 1997 was due to increased revenues from licensing to new licensees. The increased revenues in the first three quarters of 1998, compared to the same period in 1997, was primarily due to increased revenues from the Company's TAD speech processors, especially those utilizing flash memory and sold in Japan, as well as increased revenues from licensing to new licensees. Export sales, primarily consisting of TAD speech processors shipped to customers in Europe and Asia, as well as license fees on DSP core designs, represented 96% and 95% of total revenues for the three and nine months ended September 30, 1998, respectively, and 90% and 91% of total revenues for the three and nine months ended September 30, 1997, respectively. All export sales are denominated in U.S. dollars. Revenues from Tomen Electronics (a distributor), accounted for 47% of total revenues for both the three and nine months ended September 30, 1998, and 39% and 32% for the three and nine months ended September 30, 1997, respectively. GROSS PROFIT. Gross profit as a percentage of total revenues increased to 52% in the third quarter of 1998 from 49% in the third quarter of 1997. The increase in gross profit was primarily due to an increase in licensing revenues, which have a higher gross profit than product sales. Product gross profit as a percentage of product sales slightly increased to 40% in the third quarter of 1998 compared to 39% in the third quarter of 1997, primarily due to lower costs of manufactured products. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $2.8 million in the third quarter of 1998 from $2.1 million in the third quarter of 1997. In the first nine months of 1998, research and development expenses increased to $7.3 million from $6.0 million in the same period of 1997. The increases were primarily due to an increase in external services, additional Mask tapeouts for new and enhanced products, and an increase in research and development personnel as compared to the same periods in 1997. SALES AND MARKETING EXPENSES. Sales and marketing expenses remained at the same level of $1.2 million for both of the third quarters of 1998 and 1997, respectively. In the first three quarters of 1998, sales and marketing expenses increased to $3.8 million from $3.5 million in the comparable period of 1997. Salaries and fringe benefits increased in 1998 compared to 1997, primarily due to an increase in 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 were 7% and 8% in both of the three and nine months ended September 30, 1998 and 1997, respectively. 12 GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were approximately $1.2 million in both the three months ended September 30, 1998 and 1997, respectively. In the first nine months of 1998 general and administrative expenses increased slightly to $3.5 million compared to $3.4 million in the comparable period of 1997. These expenses as a percentage of total revenues remained at a constant level of approximately 7% in both the first three and nine months of 1998 and 1997, respectively. OTHER INCOME (EXPENSE), NET. Interest and other income (expense), net was $2.6 million for the nine months ended September 30, 1998, compared to $1.8 million for the nine months ended September 30, 1997. The increase was primarily the result of higher levels of cash equivalents and marketable securities in 1998 as compared with 1997, as well as higher yield of financial investments. EQUITY IN LOSS OF EQUITY METHOD INVESTEES, NET. Equity in loss of equity method investees was an $8,000 and a $123,000 loss for the three and nine months ended September 30, 1998 as compared to a $42,000 and a $559,000 loss in the comparable periods ended September 30, 1997. The condensed consolidated statements of income for the nine months ended September 30, 1997 include a $407,000 equity loss for the Company's proportionate share of the results of operations of Aptel, and a loss of $152,000 for the Company's equity basis in AudioCodes. In December 1997, Aptel's shareholders, including the Company, exchanged their shares in Aptel for common shares of Nexus. The Company's investment in Nexus was accounted for using the cost method. As a result, the Company's results of operations in 1998 do not include any equity earnings (losses) pertaining to Aptel or Nexus. GAIN ON SALE OF MARKETABLE EQUITY SECURITY. In April 1998, the Company 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 the Company's condensed consolidated statements of income for the nine months ended September 30, 1998. See also Note G - Other Investments. PROVISION FOR INCOME TAXES. In 1998 and 1997, the Company benefited for federal and state tax purposes from foreign tax holiday and tax exempt income in Israel. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. During the nine months ended September 30, 1998, the Company generated $9.8 million of cash and cash equivalents from its operating activities as compared to $15.8 million during the nine months ended September 30, 1997. This decrease, even though the Company experienced an increase in net income during the nine months ended September 30, 1998, was attributable primarily to the non-cash effects of recognizing deferred revenue, gain on sale of marketable equity securities, and the cash provided by the increase in accounts receivable, which was offset by the decrease in inventories and in accounts payables in the first three quarters of 1998. INVESTING ACTIVITIES. The Company invests excess cash in marketable securities of varying maturity, depending on its projected cash needs for operations, capital expenditures and other business purposes. In the first nine months of 1998, the Company purchased $45.2 million and 13 sold $47.6 million of investments classified as marketable securities. Capital equipment additions in the first nine months of 1998 totaled $1.8 million, primarily for computer equipment, product testing equipment and software. FINANCING ACTIVITIES. During the three and nine months ended September 30, 1998, the Company received $342,000 and $1,042,000, respectively upon the exercise of employee stock options and through purchases pursuant to the employee stock purchase plan. In the first three quarters of fiscal 1998, the Company repurchased 764,000 shares of its Common Stock at an average purchase price of $17.84 per share, for an aggregate purchase price of approximately $13.6 million. In the three months ended September 30, 1998, the Company repurchased 385,000 shares at an average purchase price of $14.48 per share. At September 30, 1998, the Company's principal source of liquidity consisted of cash and cash equivalents totaling $6.4 million and marketable securities with an aggregate value of $56.2 million. The Company's working capital at September 30, 1998 was $64.9 million. The Company believes that its current cash, cash equivalent and marketable securities will be sufficient to meet its cash requirements through at least the next twelve months. In January 1998, the Company announced a stock repurchase program pursuant to which up to 1,000,000 shares of its Common Stock may be acquired in the open market or in privately negotiated transactions. Accordingly, the Company will use part of its available cash for this purpose. As part of its business strategy, the Company occasionally evaluates potential acquisitions of businesses, products and technologies. Accordingly, a portion of its available cash may be used for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require the Company to seek additional debt or equity financing. There can be no assurance that the Company will consummate any such transactions. See "Factors Affecting Future Operating Results -- Acquisition Strategy." 14 FACTORS AFFECTING FUTURE OPERATING RESULTS THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING THE FOLLOWING RISK FACTORS. POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's revenues are derived predominantly from product sales and accordingly vary significantly depending on the volume and timing of product orders. In addition, the Company's quarterly operating results depend on the timing of the recognition of license fees and the level of per unit royalties. Through 1998, the Company expects that revenues from its DSP core designs and TrueSpeech will be derived primarily from license fees rather than by per unit royalties. The uncertain timing of such license fees has caused, and may continue to cause, quarterly fluctuations in the Company's operating results. The Company's per unit royalties from licensees are completely dependent upon the success of its original equipment manufacturer ("OEM") licensees in introducing products utilizing the Company's technology and the success of those OEM products in the marketplace The Company's quarterly operating results may also fluctuate significantly as demand for TADs varies during the year due to seasonal customer buying patterns, and as a result of other factors, such as the mix of products sold; fluctuations in the level of sales by OEMs and other vendors of products incorporating the Company's products; the timing of new product introductions by the Company or its customers, licensees or competitors; changes in general economic conditions, including the changing economics conditions in Southeast Asia and other factors, including those documented elsewhere in this quarterly report. RECENT DEVELOPMENTS - REVENUES FROM ASIA. In 1997, the Company generated approximately 39% of its total product sales, from sales to customers located in South Korea, Taiwan, Singapore and Hong Kong. In the first nine months of 1998, due to negative economic developments in some of these countries, most notably South Korea, product sales significantly decreased. In the first three quarters of 1998, the Company has experienced a decline in the flow of orders from Southeast Asia, primarily South Korea and Singapore, mainly due to the general economic uncertainty in that region, which was primarily offset by increased orders from Japan, resulting in a decrease in the Company's backlog. If this trend in the Asian economic market continues, it may result in a further decrease of the Company's backlog at the end of 1998. There can be no assurance that continued negative developments in Asia will not have a material adverse effect on the Company's future operating performance. PRICE COMPETITION. The Company has experienced and is experiencing a continued decrease in the average selling prices of its TAD speech processors. During 1997 and 1998, the Company was able to offset this decrease on an annual basis through manufacturing cost reductions. However, any inability of the Company to respond to increased price competition for these 15 and other products through the continuing and frequent introduction of new products or continued reductions of manufacturing costs would have a material adverse effect on the Company's business, financial condition and results of operations. The markets for the Company's products are extremely competitive and the Company expects that competition will increase. The Company's existing and potential competitors in each of its markets include large and emerging domestic and foreign companies, many of which have significantly greater financial, technical, manufacturing, marketing, selling and distribution resources and management expertise than the Company. Sales of TAD products comprise a substantial part of the Company's product sales. Any adverse change in the digital TAD market or the Company's ability to compete and maintain its position in that market would have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON INTERNATIONAL OPERATIONS; RISK OF OPERATIONS IN ISRAEL. The Company is subject to the risks of doing business internationally, including unexpected changes in regulatory requirements; fluctuations in the exchange rate for the United States dollar; imposition of tariffs and other barriers and restrictions; and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with its international operations. In particular, the Company's principal research and development facilities are located in the State of Israel and, as a result, on September 30, 1998, 87 of the Company's 114 employees were located in Israel, including 100% of the Company's research and development personnel. In addition, although the Company is incorporated in Delaware, a majority of the Company's directors and executive officers are non-residents of the United States. Therefore, the Company is directly affected by the political, economic and military conditions to which Israel is subject. In addition, many of the Company's expenses in Israel are paid in Israeli currency, thereby also subjecting the Company to the risks of foreign currency fluctuations and to economic pressures resulting from Israel's generally high rate of inflation. While substantially all of the Company's sales and expenses are denominated in United States dollars, a portion of the Company's expenses are denominated in Israeli shekels. The Company's primary expenses paid in Israeli currency are employee salaries and lease payments on the Israeli 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. The rate of inflation in Israel for the first nine months of 1998 and 1997, respectively, was 4.0% and 6.4%. There can be no assurance that currency fluctuations, changes in the rate of inflation in Israel or any of the other aforementioned factors will not have a material adverse effect on the Company's business, financial condition and results of operations. ACQUISITION STRATEGY. The Company has pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies. The Company is 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 resources and management's attention. There can be no assurance that the Company will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into its operations, or expand into new markets. Once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as 16 the existing business of the Company or otherwise perform as expected. The occurrence of any of these events could have a material adverse effect on the Company's business, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require the Company to seek additional debt or equity financing. DEPENDENCE ON INDEPENDENT FOUNDRIES. All of the Company's integrated circuit products are manufactured by independent foundries. While these foundries have been able to adequately meet the demands of the Company's increasing business, the Company is and will continue to be dependent upon these foundries to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to the Company a sufficient portion of foundry capacity to meet the Company's needs in a timely manner. The Company believes that it now has sufficient foundry capacity through 1998. Revenues could be materially and adversely affected, however, should any of these foundries fail to meet the Company's request for products due to a shortage of production capacity, process difficulties or low yield rates. RELIANCE ON OEMS TO OBTAIN REQUIRED COMPLEMENTARY COMPONENTS. Certain of the raw materials, components and subassemblies included in the products manufactured by the Company's OEM customers, which also incorporate the Company's products, are obtained from a limited group of suppliers. Supply disruptions, shortages or termination of certain of these sources could have an adverse effect on the Company's business and results of operations due to the delay or discontinuance of orders for the Company's products by customers until such components are available. INTELLECTUAL PROPERTY. As is typical in the semiconductor industry, the Company has been and may from time to time be notified of claims that it may be infringing patents or intellectual property rights owned by third parties. For example, AT&T has 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 such technology from AT&T. Other organizations including Lucent Microelectronics, NTT and VoiceCraft recently have raised public claims that they also have patents related to the G.723.1 technology. If it appears necessary or desirable, the Company may seek licenses under such patents or intellectual property rights that it is allegedly infringing. Although holders of such intellectual property rights commonly offer such licenses, no assurances can be given that licenses will be offered or that terms of any offered licenses will be acceptable to the Company. The failure to obtain a license for key intellectual property rights from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products utilizing the technology. The Company believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. YEAR 2000 COMPLIANCE. The Company is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. The "Year 2000" problem is concerned with whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Year 2000 problem is pervasive 17 and complex as the computer operation of virtually every company will be affected in some way. During 1997 and going forward in 1998, the Company is utilizing both internal and external resources to identify, correct or reprogram, and test the Company's systems for Year 2000 readiness. The Company anticipates that all reprogramming efforts will be completed by December 31, 1998 to allow the Company adequate time for testing. The Company's efforts include the evaluation of both information technology ("IT") and non-IT systems. Non-IT systems include systems or hardware containing embedded technology such as microcontrollers. To date the costs incurred by the Company with respect to this project are not material nor does the Company believe that future costs for the completion of this project will be material. However, if systems material to the Company's operations have not been made Year 2000 ready by the completion of the project, the Year 2000 issue could have a material adverse effect on the Company's financial statements. The Company has not yet developed a contingency plan to operate in the event that any noncompliant critical systems are not remedied by January 1, 2000, but the Company intends to develop such a plan in the near future. The Company currently is taking steps to ensure that its products and services will continue to operate on and after January 1, 2000. The Company believes that its products being shipped today are Year 2000 ready. In addition, to date, confirmations have been received from the Company's primary processing vendors that plans are being developed to address the processing of transactions in the Year 2000. The Company also has been communicating with suppliers and other third parties that it does business with to coordinate Year 2000 readiness. The responses received by the Company to date indicate that such third parties are taking steps to address this concern. Based upon the steps being taken to address this issue and the progress to date, the Company's management believes that Year 2000 readiness expenses will not have a material adverse effect on the Company's earnings. However, there can be no assurance that Year 2000 problems will not occur with respect to the Company's computer systems. Furthermore, the Year 2000 problem may impact other entities with which the Company transacts business, and the Company cannot predict the effect of the Year 2000 problem on such entities or the resulting effect on the Company. As a result, if preventative and/or corrective actions by the Company or those which the Company does business with are not made in a timely manner, the Year 2000 issue could result in a failure of some of the Company's manufacturing operations, which would have a material adverse effect on the Company's business, financial condition and results of operations. EURO CONVERSION. Beginning in January 1999, a new currency called the "euro" is scheduled to be introduced in certain Economic and Monetary Union ("EMU") countries. 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. The Company is assessing the effect the euro formation will have on its internal systems and the sale of its products. The Company expects to take appropriate actions based on the results of such assessment. The Company has not yet determined the cost related to addressing this issue and there can be no 18 assurance that this issue and its related costs will not have a material adverse effect on the Company's business, financial condition and results of operations. ONGOING LITIGATION. In November 1995, after the Company's stock price declined, several lawsuits were filed in the United States District Court for the Northern District of California accusing the Company, its former Chief Executive Officer, and its former Chief Financial Officer of issuing materially false and misleading statements in violation of the federal securities laws. These lawsuits were consolidated into a single amended complaint in February 1996. In the amended complaint, plaintiffs sought unspecified damages on behalf of all persons who purchased shares of the Company's Common Stock during the period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted the Company's motion to dismiss the lawsuit, with leave to amend. The plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the Court issued an order dismissing with prejudice all claims based on statements issued by the Company. The Court allowed plaintiffs to proceed with their claims regarding statements the Company allegedly made to securities analysts. The Court also permitted plaintiffs to amend their complaint as to their claim that the Company is responsible for the statements contained in analysts' reports, but the plaintiffs chose not to amend their complaint. On November 5, 1997, the parties reached an agreement in principle to settle the litigation. The Court approved the settlement on September 14, 1998. There were no objections, and only one shareholder (who purports to have purchased shares during the class period) opted out. The proposed settlement requires that the Company fund approximately $50,000 of the settlement amount to fulfill the retention amounts under the Company's insurance policy. The Company continues to deny all allegations in the law suit. POSSIBLE VOLATILITY OF STOCK PRICE. The variety and uncertainty of the factors affecting the Company's operating results, and the fact that the Company participates in a highly dynamic industry, may result in significant volatility in the Company's Common Stock price. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In November 1995, after the Company's stock price declined, several lawsuits were filed in the United States District Court for the Northern District of California accusing the Company, its former Chief Executive Officer, and its former Chief Financial Officer of issuing materially false and misleading statements in violation of the federal securities laws. These lawsuits were consolidated into a single amended complaint in February 1996. In the amended complaint, plaintiffs sought unspecified damages on behalf of all persons who purchased shares of the Company's Common Stock during the period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted the Company's motion to dismiss the lawsuit, with leave to amend. The plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the Court issued an order dismissing with prejudice all claims based on statements issued by the Company. The Court permitted plaintiffs to proceed with their claims regarding statements the Company allegedly made to securities analysts. The Court also permitted plaintiffs to amend their complaint as to their claim that the Company is responsible for the statements contained in analysts' reports, but the plaintiffs chose not to amend this complaint. On November 5, 1997, the parties reached an agreement in principle to settle the litigation. The Court approved the settlement on September 4, 1998. There were no objections, and only one shareholder (who purports to have purchased shares during the class period) opted out. The settlement is being funded by insurance proceeds except for $50,000 funded by the Company in order to fulfill the retention amounts under the Company's insurance policy. The Company continues to deny all allegations in the law suit. On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in the United States District Court for the Northern District of California against the Company. The action alleges breach of contract, breach of implied covenant of good faith and fair dealing and requests an accounting by the Company in connection with the Company's termination of the Sales Representative Agreement between BEKA and the Company. The complaint seeks an unspecified amount of damages. The parties completed nonbinding mediation in May 1998, but were unable to settle the case. Discovery in the case is ongoing. Trial has been set for May 11, 1999. The Company believes the lawsuit to be without merit and intends to defend itself vigorously. 20 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K The Company filed a report on Form 8-K/A, Amendment No. 1, on August 27, 1998, relating to the change in accountants of DSP Semiconductors Ltd., a wholly owned subsidiary of the Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DSP GROUP, INC. (Registrant) By /s/ AVI BASHER ------------------------------------------------------------- Avi Basher, Vice President of Finance, Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) Date: Nov. 16, 1998 21 EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC. FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 6,355 56,234 9,002 592 2,226 77,953 10,811 6,696 84,584 13,102 0 0 0 9 71,473 84,584 39,950 49,733 23,698 24,053 7,334 0 132 14,598 3,651 0 0 0 0 10,947 1.11 1.08
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