-----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, AHrWNvxFA70Ceb5BmSSw7vAiKWVMAjjC7JUxvPq27YE6ZwmM+S47XtRHTdARrZ1u qpkQ73ShxJJzpK3e3aPnEQ== 0000912057-97-027535.txt : 19970814 0000912057-97-027535.hdr.sgml : 19970814 ACCESSION NUMBER: 0000912057-97-027535 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSP COMMUNICATIONS INC CENTRAL INDEX KEY: 0000934545 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770389180 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25622 FILM NUMBER: 97658472 BUSINESS ADDRESS: STREET 1: 20300 STEVENS CREEK BLVD STREET 2: 4TH FLOOR CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4087772700 MAIL ADDRESS: STREET 1: 1999 HARRISON STREET STREET 2: SUITE 1300 CITY: OAKLAND STATE: CA ZIP: 94612 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended JUNE 30, 1997 ------------- or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ------------ Commission File Number 0-25622 ------- DSP COMMUNICATIONS , INC. --------------------------- (Exact name of registrant as specified in its charter) Delaware 77-0389180 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 20300 Stevens Creek Boulevard, Cupertino, California 95014 ------------------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (408) 777-2700 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ---- As of August 6, 1997, there were 39,613,727 shares of Common Stock ($.001 per value) outstanding. INDEX DSP COMMUNICATIONS, INC. Page No. -------- PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets-June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed consolidated statements of operations-quarter ended June 30, 1997 and 1996, and six months ended June 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . 4 Condensed consolidated statements of cash flows-six months ended June 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . 5 Notes to condensed consolidated financial statements- June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 8 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 18 Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . 18 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 18 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 19 SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DSP COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31, 1 9 9 7 1 9 9 6 ------- ------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 58,091 $ 77,799 Short term investments 34,990 59,034 Trade accounts receivable 6,352 7,054 Other current assets 5,175 3,373 --------- --------- Total current assets 104,608 147,260 Property and Equipment, net 4,147 3,565 Goodwill 1,641 1,887 Other Assets 2,472 2,642 --------- --------- $ 112,868 $ 155,354 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 4,340 $ 3,747 Accrued compensation and benefits 2,472 3,233 Other accrued liabilities 8,039 8,560 Deferred income 173 2,490 --------- --------- Total current liabilities 15,024 18,030 Other Liabilities 570 480 STOCKHOLDERS' EQUITY Common stock 40 44 Additional paid-in capital 80,815 127,226 Accumulated earnings 16,419 9,574 -------- --------- Total stockholders' equity 97,274 136,844 -------- --------- $ 112,868 $ 155,354 --------- --------- --------- --------- See Notes to Condensed Consolidated Financial Statements Note 1: The balance sheet at December 31, 1996 has been derived from audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 3 DSP COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (U.S. DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
THREE THREE SIX SIX MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6 ------- ------- ------- ------- REVENUES Product $ 8,094 $ 19,595 $ 26,779 $ 35,719 Technology development 594 736 2,211 1,934 -------- --------- -------- -------- Total revenues 8,688 20,331 28,990 37,653 COST OF REVENUES Product 3,974 10,610 14,020 19,822 Technology development 1,204 816 2,210 1,674 -------- --------- -------- -------- Total cost of revenues 5,178 11,426 16,230 21,496 -------- --------- -------- -------- Gross profit 3,510 8,905 12,760 16,157 OPERATING EXPENSES Research and development 1,580 1,019 3,023 2,026 Sales and marketing 1,138 746 2,067 1,626 General and administrative 1,740 1,429 3,492 3,084 -------- -------- -------- -------- 4,458 3,194 8,582 6,736 -------- -------- -------- -------- Operating income (Loss) (948) 5,711 4,178 9,421 Other Income 1,769 1,089 3,644 1,464 -------- -------- -------- --------- Income before provision for income taxes 821 6,800 7,822 10,885 Provision for income taxes 102 850 977 1,360 -------- -------- -------- -------- Net income $ 719 $ 5,950 $ 6,845 $ 9,525 -------- -------- -------- -------- -------- -------- -------- -------- Net income per share $ 0.02 $ 0.13 $ 0.15 $ 0.22 -------- -------- -------- -------- -------- -------- -------- -------- Shares used in computing net income per share 43,736 45,850 45,263 43,172 -------- -------- -------- -------- -------- -------- -------- --------
See Notes to Condensed Consolidated Financial Statements 4 DSP COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (US DOLLARS IN THOUSANDS) (UNAUDITED) SIX SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, 1 9 9 7 1 9 9 6 ------------ ------------ OPERATING ACTIVITIES: Net income for the period $ 6,845 $ 9,525 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,078 794 Loss on disposal of equipment 3 2 Changes in operating assets and liabilities: Trade accounts receivable 702 1,130 Other current assets (1,802) (801) Accounts payable 664 1,620 Accrued compensation and benefits (761) 251 Deferred income (2,317) 843 Other accrued liabilities (431) 1,889 -------- -------- Net cash provided by operating activities 3,981 15,253 -------- -------- INVESTING ACTIVITIES: Cash purchases of equipment (1,326) (1,446) Proceeds from sales of equipment 8 7 Sales and maturities of short term investments, net 23,999 -- Purchases of short term investments, net -- (37,994) --------- ---------- Net cash provided by (used in) investing activities 22,681 (39,433) --------- ---------- FINANCING ACTIVITIES: Issuance of common stock for cash 1,849 77,891 Repurchase of common stock (48,219) -- --------- --------- Net cash provided by financing activities (46,370) 77,891 --------- --------- Increase in cash and cash equivalents (19,708) 53,711 Cash and Cash equivalents at beginning of period 77,799 10,292 --------- --------- Cash and cash equivalents at end of period $ 58,091 $ 64,003 --------- -------- --------- -------- See Notes to Condensed Consolidated Financial Statements 5 DSP COMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of DSP Communications, Inc. ("DSPC" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in no change in primary earnings per share for the quarter ended June 30, 1997 and an increase in primary earnings per share for the quarter ended June 30, 1996, to $0.14 per share. The impact of Statement No. 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. 3. STOCKHOLDERS' EQUITY In April and May 1997, the Company's Board of Directors approved share repurchase programs pursuant to which the Company, from time to time and at management's discretion, was authorized to purchase up to an aggregate of 8 million shares of the Company's Common Stock (equal to aproximately 18% of the approximately 45 million shares that were outstanding immediately prior to the commencement of the repurchase programs) in open-market transactions. As of June 30, 1997, the Company had completed the repurchase of 5,480,500 shares, at purchase prices ranging from $6.875 to $11.8625 per share, for an aggregate purchase price of $48.2 million. On March 6, 1997, the Board of Directors adopted a share option repricing program pursuant to which options to purchase an aggregate of 4,322,500 shares of common stock, held by employees under the Company's stock option plans, were eligible to be repriced, subject to acceptance by the optionees, as follows: options held by employees who were not officers of the Company would be repriced to the fair market value of the common stock on March 6, 1997, which price was $9.875 per share, and options held by officers of the Company would be repriced to $10.875 per share. The offer to participate in the option repricing program was made to the optionees in April 1997, and optionees holding over 92% of the eligible options accepted the offer. 6 4. LITIGATION On May 12, 1997, a class action lawsuit was filed against the Company and several of its officers and directors in the Superior Court of California, Santa Clara County, bearing the caption BERT PERL, ET AL. V. DSP COMMUNICATIONS, INC., DAVIDI GILO, LEWIS S. BROAD, GERALD DOGON, NATHAN HOD, ARNON KOHAVI AND JOSEPH PERL. A second, identical lawsuit, captioned GERSHON SONTAG, ET AL. V. DSP COMMUNICATIONS, INC., ET AL. was filed on May 22, 1997. The complaints, which have been consolidated, allege that the Company and certain of its officers and directors violated California securities laws in connection with certain statements allegedly made during the first quarter of 1997, and seek damages in an unspecified amount, interest, attorney's fees and other costs, and other equitable and injunctive relief. The plaintiffs have requested to have the matter certified as a class action on behalf of certain past and present shareholders of the Company. The Company has demurred to the complaints, and such demurrer is presently pending before the court. The Company believes that the complaints are without merit and intends to defend these actions vigorously. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation at this time. Any unfavorable outcome of litigation could have an adverse impact on the Company's business, financial condition and results of operations. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following information should be read in conjunction with the consolidated condensed interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The matters addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented, contain forward-looking statements involving risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Certain Factors That May Affect Future Results" following this Management's Discussion and Analysis section, and elsewhere in this report. RESULTS OF OPERATIONS The following table sets forth the percentage relationships of certain items from the Company's consolidated statements of operations as a percentage of total revenues :
Quarter ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 --------------------- --------------------- Revenues: Product 93.2% 96.4% 92.4% 94.9% Technology development 6.8 3.6 7.6 5.1 --------------------- --------------------- Total revenues 100.0 100.0 100.0 100.0 Cost of Revenues: Product 45.7 52.2 48.4 52.6 Technology development 13.9 4.0 7.6 4.4 -------------------- --------------------- Total cost of revenues 59.6 56.2 56.0 57.0 -------------------- --------------------- Gross profit 40.4 43.8 44.0 43.0 Operating Expenses: Research and development 18.2 5.0 10.4 5.4 Sales and marketing 13.1 3.7 7.1 4.3 General and administrative 20.0 7.0 12.0 8.2 -------------------- -------------------- Total operating expenses 51.3 15.7 29.5 17.9 -------------------- -------------------- Operating income (loss) (10.9) 28.1 14.5 25.1 Other income 20.4 5.4 12.5 3.8 -------------------- -------------------- Income before provision for income taxes 9.5 33.5 27.0 28.9 Provision for income taxes (1.2) (4.2) (3.4) (3.6) -------------------- -------------------- Net income 8.3% 29.3% 23.6% 25.3% -------------------- -------------------- -------------------- --------------------
8 REVENUES PRODUCT: Product revenues decreased to $8.1 million in the second quarter of 1997 from $19.6 million in the second quarter of 1996 and to $26.8 million in the six months ended June 30, 1997 from $35.7 million in the first six months of 1996. Product revenues consist primarily of baseband chip sets for digital cellular telephones. The decline in revenues in the second quarter was primarily due to a product transition in the Japanese PDC market. At the end of the second quarter, the Company began shipments of its new PDC chipsets. Revenues from sales to distributors are recognized at the time the products are shipped by the distributor to the original equipment manufacturer ("OEM") customer. Other product revenues are recorded when products are shipped to customers. TECHNOLOGY DEVELOPMENT AND OTHER: Technology development revenues decreased to $594,000 in the second quarter of 1997 from $736,000 in the second quarter of 1996 and increased to $2.2 million in the six months ended June 30, 1997 from $1.9 million in the first six months of 1996. Technology development revenues were affected in the second quarter by delays in achieving technology milestones in the Code Division Multiple Access ("CDMA") project. It is expected that these milestones will be achieved in the third quarter. The Company's technology development revenues fluctuate, and may continue to fluctuate, depending on the number and size of technology development agreements and the timing of related milestones and deliverables. GROSS PROFIT Gross profit in the second quarter of 1997 was $3.5 million (40.4% of revenues) compared to $8.9 million (43.8% of revenues) in the first quarter of 1996. Gross profit in the second quarter was negatively affected by the loss on technology development activities and the effect of these revenues being a greater relative portion of the total revenues than previously experienced. Gross profit in the first half of 1997 was $12.8 million (44.0% of revenues), compared to $16.2 million (43.0% of revenues) in the first half of 1996. The gross margins on product revenues (primarily from sales of chipsets for the Japanese PDC market) are affected by the changes in the customer mix from quarter to quarter as well as the overall general price reduction. Sales of wireless private branch exchange ("PBX") systems of the Company's subsidiary, CTP Systems, Ltd. ("CTP Systems"), resulted in positive but relatively low margins in the second quarter of 1997. The Company expects that it will continue to experience relatively low margins on low volume sales of these wireless PBX systems until higher volume sales are achieved. Higher volume sales are anticipated towards the end of 1997. The Company anticipates that the average sales prices of chip sets may continue to decrease as a result of volume discounts and price pressures, which would increase the cost of products sold as a percentage of product revenues; however, any such price decreases may be offset to a certain extent by further cost reductions from suppliers if the Company's order volumes increase. The costs incurred on technology development varies from quarter to quarter depending on the similarity or diversity of the products and technologies developed, and as contractual milestones are achieved. From time to time, the Company enters into dollar/yen option transactions in order to hedge against the increase in value of the US dollar against the yen and to decrease exposure to currency-driven sales price pressure. 9 RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased to $1.6 million in the second quarter of 1997 from $1.0 million in the second quarter of 1996 and to $3.0 million in the first half of 1997 from $2.0 million in the first half of 1996. The increases were a result of increases in research and development activities during those periods and growth in the number of engineering personnel. As percentage of total revenues, research and development expenses increased to 18.2% in the second quarter of 1997, from 5.0% in the second quarter of 1996, mainly because of the reduced revenues, and to 10.4% from 5.4% in the first half of 1997 and 1996, respectively. The Company expects that its research and development expenses will increase in the future, in absolute dollars. The Company records software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." To date, the Company has expensed all of its software costs. SALES AND MARKETING EXPENSES Sales and marketing expenses increased to $1.1 million (13.1% of revenues) in the second quarter of 1997 from $746,000 (3.7% of revenues) in the second quarter of 1996 and to $2.1 million (7.1% of revenues) in the first half of 1997 from $1.6 million (4.3% of revenues) in the first half of 1996. The increase reflects primarily increased promotion and marketing research activities, and increased expenses at the company's Tokyo offices. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $1.7 million (20.0% of revenues) in the first quarter of 1997 compared to $1.4 million (7.0% of revenues) in the first quarter of 1996 and $3.5 million (12.0% of revenues) in the first half of 1997 compared to $3.1 million (8.2% of revenues) in the first half of 1996. General and administrative expenses increased, in absolute dollars, as a result of increases in facility expenses, legal and audit fees, insurance and communications expenses. OTHER INCOME Other income includes net interest income, investment income, and foreign currency remeasurement gains and losses and other expenses. Other income in the second quarter of 1997 was $1.8 million compared to $1.1 million in the second quarter of 1996 and $3.6 million in the first half of 1997 compared to $1.5 million in the first half of 1996. Other income in the first six months of 1997 was generated primarily from interest and realized gains on the Company's cash and investment balances. During the second quarter the Company repurchased 5,480,500 shares of its common stock for $48.2 million, and the resulting reduction in cash balances will affect the interest income generated in the third quarter. PROVISION FOR INCOME TAXES The Company's effective tax rate was 12.5% for the first half of 1996 and 1997. The effective tax rate is substantially below the federal statutory rate primarily due to the tax benefits achieved by the status of certain of the Company's Israeli subsidiaries as "Approved Enterprises" granted by the State of Israel, which provides for a tax holiday or a reduced corporate tax rate of 10% on the Company's undistributed Israeli earnings. 10 The Company believes its effective income tax rate will increase in the future due to the utilization of its Israeli net operating loss carryforwards, the elimination over time of the tax benefits awarded with Approved Enterprise status, and potential increases in U.S. tax due to the rules regarding controlled foreign corporations ("CFC"). Losses incurred by the Company or any of its subsidiaries in one country generally will not be deductible by entities in other countries in the calculation of their respective local taxes. In addition, losses generated by one Israeli entity will not offset income generated by another Israeli entity. Therefore, losses incurred by one Israeli entity or a combined loss of the U.S. entities will increase the Company's effective tax rate. FOREIGN CURRENCY TRANSACTIONS Substantially all of the Company's sales and a substantial portion of its costs are denominated in United States dollars. Since the dollar is the primary currency in the economic environment in which the Company operates, the dollar is its functional currency, and, accordingly, monetary accounts maintained in currencies other than the dollar (principally cash, and liabilities) are remeasured using the foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are remeasured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations, and have been immaterial to date. IMPACT 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 expense paid in Israeli currency is Israeli-based employee salaries. 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. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities provided cash of $4.0 million in the first six months of 1997 and $15.3 million in the first half of 1996. Net cash provided from operations in the first six months of 1997 was comprised primarily of net income, a decrease in current liabilities, and a decrease in trade accounts receivable. Trade accounts receivable decreased to $6.4 million at June 30, 1997 due to the timing of shipments and payments. The Company's investing and financing activities, other than purchases of and proceeds from, short-term investments, have consisted of expenditures for fixed assets which totaled $1.3 million, and the repurchase of common stock which totaled $48.2 million, in the first six months of 1997. In obtaining approval of the Company's Reorganization from Israeli tax authorities, which was completed immediately before the closing of the Company's initial public offering ("IPO") in March 1995, the Company agreed to invest in activities in Israel in an amount of not less than $9.0 million out of the proceeds of the IPO within three years after the IPO. In October 1995, the Company completed the acquisition of CTP Systems, for $13.6 million in cash. In 1995, the Company transferred $4.5 million out of the IPO proceeds to Israel in order to finance a part of the CTP Systems acquisition, and in 1996 a further $500,000 to increase the capital of DSPC Israel, Ltd. ("DSPCI"), an Israeli subsidiary of the Company. As of June 30, 1997, the Company had $93.1 million of cash, cash equivalents and short-term investments. As of June 30, 1997, the Company had repurchased 5,480,500 shares of its Common Stock in its share repurchase program, using an aggregate of approximately $48.2 million. The 11 Company may from time to time repurchase additional shares of its Common Stock under its share repurchase program. The Company believes that its existing cash, cash equivalents and short-term investment balances, will be sufficient to meet its cash requirements for at least the next twelve months. While operating activities may provide cash in certain periods, to the extent the Company may experience growth in the future, the Company anticipates that its operating and investing activities may use cash and consequently, such growth may require the Company to obtain additional sources of financing. The Company may also from time to time consider the acquisition of complimentary businesses, projects or technologies which may require additional financing or require the use of a significant portion of its existing cash. CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This Form 10-Q contains forward looking statements concerning the Company's future products, expenses, revenue, liquidity and cash needs as well as the Company's plans and strategies. These forward looking statements are based on current expectations, and the Company assumes no obligation to update this information. Numerous factors could cause actual results to differ significantly from the results described in these forward looking statements, including but not limited to the following risk factors. RELIANCE ON A SINGLE JAPANESE DISTRIBUTOR AND A SMALL NUMBER OF OEMS; COMPETITION IN JAPANESE OEM MARKET. Substantially all of the Company's sales of baseband chip sets for digital cellular telephones are to Tomen Electronics Corp. ("Tomen"), the Company's distributor in Japan. Tomen's sales of the Company's products are concentrated in a small number of Japanese OEM customers. Prior to 1997, five OEM customers accounted for substantially all of Tomen's sales of the Company's baseband chip sets. The loss of Tomen as a distributor or the loss of or significant reduction in Tomen's sales to any of these Japanese OEMs would have a material adverse effect on the Company's business, financial condition and results of operations. Because the world-wide cellular subscriber equipment industry is dominated by a small number of large corporations, the Company expects that a significant portion of its future product sales will continue to be concentrated in a limited number of OEMs. In addition, the Company believes that the manufacture of subscriber equipment for emerging telecommunications services, such as personal communications services ("PCS"), will also be concentrated in a limited number of OEMs. As a result, the Company's performance is likely to depend on relatively large orders from a limited number of distributors and OEMs. The Company's performance will also depend in part on gaining additional OEM customers, both within existing markets and in new markets. The competition between OEMs in the Japanese wireless handset market is intense and is increasing. The Company's performance depends significantly on the ability of its OEM customers to maintain and increase their market share in this market. The loss of any existing OEM customer, a significant reduction in the level of sales to any existing customers, or the failure of the Company to gain additional OEM customers could have a material adverse effect on the Company's business, financial condition and results of operations. REDUCED VISIBILITY; DECREASED BACKLOG. Over the past year, the period of time between the receipt of orders for the Company's products and the date requested by OEM customers for shipment of products has been reduced, due primarily to increased competition among OEMs in the Japanese wireless handset market and to an increase in the supply of integrated circuits. This reduced lead time has resulted in decreased backlog levels and has decreased the time period for which the Company is able to estimate future product demand. The Company anticipates that the market for its baseband chip sets will continue to be characterized by short-term order and shipment schedules. Accordingly, since the Company's revenue expectations and planned operating expenses are in large part based on these estimates rather than on firm customer orders, the Company's quarterly 12 operating results could be materially adversely affected if orders and revenues do not meet expectations. RELIANCE ON A SINGLE PRODUCT; NEED FOR NEW PRODUCT INTRODUCTIONS. Since December 1993, the Company has relied upon sales from a single product, its baseband chip set for digital cellular telephones for use in Japan, to generate substantially all of its product sales. The Company believes that its success will depend in part on its ability to develop successfully additional products for digital cellular telephones, PCS and wireless PBX applications, and the Company is in the process of developing and introducing new products; however, there can be no assurance that it will be successful in doing so, or that completion of development of products will not be delayed. The success of new products will also depend on, among other things, the ability of the Company to market the products successfully, the growth of the relevant markets for the products, and the success of the Company's OEM customers in completing in a timely manner their development of handsets or other OEM products utilizing the Company's products and in successfully competing in the applicable markets. In addition, the Company will likely use independent foundries to manufacture any such products (with the exception of CTP Systems' PBX products, which are currently manufactured by CTP Systems), and there can be no assurance that the products will be able to be manufactured in a timely manner, in commercial quantities, at reasonable cost, and with acceptable yields and quality standards, particularly with new products, such as the new PDC chip set, that incorporate new manufacturing technology. If the Company is unable, for technological or other reasons, to develop, introduce and manufacture in a timely manner new products and to market them successfully, or if the Company's OEMs are unable successfully to develop and market their products, the Company's business and results of operations could be materially and adversely affected. In addition, the Company anticipates that for the foreseeable future new product introductions may cause significant fluctuations in quarterly operating results. EXPECTED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND POTENTIAL QUARTERLY LOSSES. The Company's quarterly operating results depend on the volume and timing of product orders received and delivered during the quarter and the timing of new product introductions by the Company and its customers. The Company's quarterly operating results may also vary significantly depending on other factors, including the introduction of new products by the Company's competitors; market acceptance of new products; the greater number of manufacturing days in the second and third quarters; adoption of new technologies and standards; relative prices of the Company's products; competition; the cost and availability of components; the mix of products sold; the quality and availability of chip sets manufactured for the Company by third parties; changes in the Company's distribution arrangements; sales of wireless subscriber equipment by OEMs and changes in general economic conditions. DEPENDENCE ON JAPANESE MARKET. The future performance of the Company will be dependent, in large part, upon its ability to continue to compete successfully in the Japanese market. The Company's ability to continue to compete in this market will be dependent upon several factors, including no deterioration of existing trade relations between Japan, Israel and the United States or imposition of tariffs in the wireless personal communications industry, no adverse changes in the Japanese telecommunications regulatory environment, the Company's ability to develop products that meet the technical requirements of its Japanese customers, and the Company's ability to maintain satisfactory relationships with its Japanese customers and its distributor. All of the Company's sales to its Japanese customers are denominated in United States dollars and, therefore, fluctuations in the exchange rate for the United States dollar could materially increase the price of the Company's products to these customers and require the Company to reduce prices of its products to remain competitive. Moreover, the expected emergence of Personal HandyPhone Services, a microcellular technology potentially competitive with today's existing Japanese analog and digital cellular networks, could reduce sales in Japan of digital cellular telephones incorporating the Company's baseband chip sets. There can be no assurance that changes in the political or economic conditions, trade policy or regulation of telecommunications in Japan will not have a material adverse effect on the Company's business, financial condition and results of operations. 13 RELIANCE ON TEXAS INSTRUMENTS AND OTHER THIRD PARTY MANUFACTURERS. All of the Company's integrated circuits are currently fabricated by independent third parties, and the Company intends to continue using independent foundries in the future. To date, the Company has purchased most of the DSP chips for its PDC baseband chip sets for cellular telephones from Texas Instruments Incorporated ("TI"). The Company also buys all of the DSP chips used in the products of CTP Systems from TI. The Company purchases standard DSP chips from TI, and TI embeds the Company's proprietary software algorithms in TI's chips. In addition, the Company currently purchases its DSP chips and its application specific integrated circuits ("ASICs") for its IS-136 D-AMPS chip sets from NEC Corporation ("NEC"); its ASICs for its PDC chip sets from Atmel ES2 and VLSI Technology, Inc. ("VTI"); its ASICs for analog baseband chip sets from TI; and its ASICs for CTP Systems' products from American Microsystems, Inc. ("AMI"). Accordingly, the Company is and will remain dependent on independent foundries, including TI, NEC, AMI, Atmel ES2 and VTI, to achieve acceptable manufacturing yields, to allocate to the Company a sufficient portion of foundry capacity to meet the Company's needs and to offer competitive pricing to the Company. Although the Company has not experienced material quality, allocation or pricing problems to date, if such problems were to arise in the future, they would have a material adverse effect on the Company's business, financial condition and results of operations. DECLINING SALES PRICES. Manufacturers of wireless personal communications equipment are experiencing, and are likely to continue to experience, intense price pressure, which has resulted and is expected to continue to result in downward pricing pressure on the Company's products. As a result, the Company has experienced, and expects to continue to experience, declining sales prices for its products. In addition, pricing competition among handset manufacturers and component suppliers has increased. There can be no assurance that either increases in unit volume or reductions in per unit costs will offset declines in per unit sales prices, in which case the Company's gross profit would be adversely affected. Since cellular telephone manufacturers frequently negotiate supply arrangements far in advance of delivery dates, the Company often must commit to price reductions for its products before it is aware of how, or if, such cost reductions can be obtained. As a result, such current or future price reduction commitments could have, and any inability of the Company to respond to increased price competition would have, a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTIES RELATED TO DEVELOPMENT, PRODUCTION AND MARKETING OF CDMA-BASED PRODUCT. The Company is currently developing a baseband chip set for CDMA products pursuant to a license agreement with Qualcomm for CDMA technology. Although the Company expects to complete successfully the development of this chip set and to deliver the product, there can be no assurance that the development work will be successfully completed, or that completion of development will not be delayed. To date, there has been only limited deployment of CDMA-based digital cellular networks, and the success of the Company in marketing its CDMA-based chip set will be dependent on, among other things, the success of the CDMA standard and growth of the CDMA subscriber population. There can be no assurance that the CDMA standard will be widely adopted or that the CDMA-based chip set will be successful in the marketplace. Sales of the Company's CDMA-based products will also be dependent on the success of the Company's OEM customers in completing their development of CDMA-based handsets in a timely manner and in successfully competing in the CDMA-based handset market. In addition, the Company intends to use independent foundries to manufacture the product, and there can be no assurance that this chip set will be able to be manufactured in a timely manner, in commercial quantities and at reasonable cost. If the Company is unable, for technological or other reasons, to develop, introduce and manufacture in a timely manner the CDMA-based chip set and to market the product successfully, or if the Company's OEMs are unable successfully to develop and market their products, the Company's business and results of operations could be materially and adversely affected. RISK OF INCREASED INCOME TAXES. DSPCI and CTP Systems, two Israeli subsidiaries of the Company, operate as "Approved Enterprises" under Israel's Law for the Encouragement of Capital Investments, 1959, as amended. An Approved Enterprise is eligible for significant income tax rate reductions for several years following the first year in which it has income subject to taxation in Israel (after consideration of tax losses carried forward). There can be no assurance that this favorable tax treatment will continue, and any change in such tax treatment could have a material adverse effect on 14 the Company's net income and results of operations. As of this date, the Company is not aware of any circumstances that might cause it to lose its favorable tax treatment. If Israel's tax incentives or rates applicable to DSPCI or CTP Systems are rescinded or changed, their income taxes could increase and their results of operations and cash flow would be adversely affected. In addition, the Company's income tax rate would increase if all or a portion of the earnings of DSP Telecom, DSPCI or CTP Systems were to become subject to United States federal and state income tax as a result of actual or deemed dividends or through operation of United States tax rules applicable to "controlled foreign corporations." MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE. The markets for the Company's products are extremely competitive, and the Company expects that competition will increase. Many of the Company's competitors have entrenched market positions, established patents, copyrights, tradenames, trademarks and intellectual property rights and substantial technological capabilities. The Company's current competitors in the digital cellular market include other suppliers of DSP-based chip sets and existing cellular telephone manufacturers that develop chip set solutions internally. Both in the cellular market and in other wireless personal communications markets, the Company's existing and potential competitors include large and emerging domestic and international companies, many of which have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than the Company. The Company believes that its ability to compete successfully in the wireless personal communications market will depend upon a number of factors both within and outside of its control, including price, quality, availability, product performance and features; timing of new product introductions by the Company, its customers and competitors; and customer service and technical support. There can be no assurance that the Company will have the financial resources, technical expertise, or marketing, sales, distribution and customer service and technical support capabilities to compete successfully. RELIANCE ON INTERNATIONAL OPERATIONS; RISKS OF OPERATIONS IN ISRAEL. The Company is subject to the risks of doing business internationally, including unexpected changes in regulatory requirements; fluctuations in the exchange rate for the United States dollar; imposition of tariffs and other barriers and restrictions; and the burdens of complying with a variety of foreign laws. The Company is also subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with its international operations. In particular, the Company's principal research and development facilities are located in the State of Israel and, as a result, as of June 30, 1997, 148 of the Company's 168 employees were located in Israel, including all of the Company's research and development personnel. Therefore, the Company is directly affected by the political, economic and military conditions to which that country is subject. In addition, many of the Company's expenses in Israel are paid in Israeli currency, thereby also subjecting the Company to foreign currency fluctuations and to economic pressures resulting from Israel's generally high rate of inflation. The rate of inflation in Israel for 1995 and 1996 was 8.1% and 10.6%, respectively. 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 expense paid in Israeli currency is Israeli-based employee salaries. 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. 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. In the past, the Company has obtained royalty-bearing grants from the Office of the Chief Scientist in Israel's Ministry of Industry and Trade (the "Chief Scientist") and the Israel-United States Binational Industrial Research and Development Foundation to fund research and development. The terms of the grants from the Chief Scientist prohibit the transfer of technology developed pursuant to the terms of these grants to any person, without the prior written consent of the State of Israel. The Company does not expect to apply for such grants for the development of new products in the future. 15 OPERATIONAL RISKS ASSOCIATED WITH CTP SYSTEMS. On October 26, 1995, the Company acquired for $14.1 million CTP Systems, a developer and manufacturer of wireless PBX systems and other low-mobility wireless communications applications. CTP Systems began commercial shipments of wireless PBX equipment to two OEM customers in the fourth quarter of 1996, and the PBX system is currently in Beta testing with other OEMs, which may identify quality or operational problems in the product that require the Company to incur additional engineering expenses to correct any problems or redesign the product, and also may result in a delay in making the product commercially available. Although CTP Systems has commenced manufacturing its PBX product, it has not yet manufactured commercial quantities on a continuous basis. The Company believes that CTP Systems' existing manufacturing facilities will enable it to produce commercial quantities of its PBX equipment. No assurance can be given, however, that manufacturing or control problems will not arise as CTP Systems increases production of its product, or as additional facilities are required in the future. CTP Systems is subject to various risks associated with the manufacturing process, including errors in the manufacturing process, shortages of required components, manufacturing equipment failures and disruptions of operations at the manufacturing facility. Prolonged inability of CTP Systems to deliver products in a timely manner could result in the loss of customers and a material adverse effect on its results of operations. In addition, CTP Systems may be required to develop, adapt or acquire additional production technology, facilities and technical personnel in the event the PBX system equipment is modified or redesigned. Since CTP Systems has limited manufacturing experience, there can be no assurance that prices for CTP Systems' products will cover the manufacturing costs for its product. In addition, certain of the components included in CTP Systems' products are obtained from a single source or a limited group of suppliers. The partial or complete loss or delay of the supply of components from certain of these sources could result in a significant reduction in CTP Systems' revenues and could also damage certain customer relationships. MANAGEMENT OF GROWTH. The growth in the Company's business has placed, and is expected to continue to place, a significant strain on the Company's management and operations. To manage its growth, the Company must continue to implement and improve its operational, financial and management information systems and expand, train and manage its employees. The anticipated increase in product development and marketing and sales expenses coupled with the Company's reliance on OEMs to successfully market and develop products that incorporate the Company's proprietary technologies could have an adverse effect on the Company's performance in the next several quarters. The Company's failure to manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. FUTURE ACQUISITIONS. The Company's strategy includes obtaining additional technologies and will involve, in part, acquisitions of products, technologies or businesses from third parties. Identifying and negotiating these acquisitions may divert substantial management resources. An acquisition could absorb substantial cash resources, could require the Company to incur or assume debt obligations, or could involve the issuance of additional Common or Preferred Stock. The issuance of additional equity securities would dilute and could represent an interest senior to the rights of then outstanding Common Stock of the Company. An acquisition which is accounted for as a purchase, like the acquisition of CTP Systems, could involve significant one-time, non-cash write-offs, or could involve the amortization of goodwill and other intangibles over a number of years, which would adversely affect earnings in those years. Acquisitions outside the digital communications area may be viewed by outside market analysts as a diversion of the Company's focus on digital communications. For these and other reasons, the market for the Company's stock may react negatively to the announcement of any acquisition. An acquisition will continue to require attention from the Company's management to integrate the acquired entity into the Company's operations, may require the Company to develop expertise in fields outside its current area of focus, and may result in departures of management of the acquired entity. An acquired entity may have unknown liabilities, and its business may not achieve the results anticipated at the time of the acquisition. 16 VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has recently experienced substantial fluctuation, and the Company believes that factors such as announcements of developments related to the Company's business, announcements by competitors, quarterly fluctuations in the Company's financial results and general conditions in the wireless personal communications industry in which the Company competes or the national economies in which the Company does business, fluctuation in levels of consumer spending for cellular telephones in Japan, and other factors could cause the price of the Company's Common Stock to continue to fluctuate in the future, perhaps substantially. In addition, in recent years the stock market in general, and the market for shares of small capitalization technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. Such fluctuations could have a material adverse effect on the market price of the Company's Common Stock. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK) 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 12, 1997, a class action lawsuit was filed against the Company and several of its officers and directors in the Superior Court of California, Santa Clara County, bearing the caption BERT PERL, ET AL. V. DSP COMMUNICATIONS, INC., DAVIDI GILO, LEWIS S. BROAD, GERALD DOGON, NATHAN HOD, ARNON KOHAVI AND JOSEPH PERL. A second, identical lawsuit, captioned GERSHON SONTAG, ET AL. V. DSP COMMUNICATIONS, INC., ET AL. was filed on May 22, 1997. The complaints, which have been consolidated, allege that the Company and certain of its officers and directors violated California securities laws in connection with certain statements allegedly made during the first quarter of 1997, and seek damages in an unspecified amount, interest, attorney's fees and other costs, and other equitable and injunctive relief. The plaintiffs have requested to have the matter certified as a class action on behalf of certain past and present shareholders of the Company. The Company has demurred to the complaints, and such demurrer is presently pending before the court. The Company believes that the complaints are without merit and intends to defend these actions vigorously. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation at this time. Any unfavorable outcome of litigation could have an adverse impact on the Company's business, financial condition and results of operations. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of stockholders was held on May 15, 1997. At the annual meeting, the following matters were voted upon: 1. The election of two (2) Class II directors to serve for a three year term until the 2000 Annual Meeting of Stockholders. The results of the voting were as follows: a. LEWIS BROAD: Number of shares voted FOR 39,980,113 Number of shares voted AGAINST 127,593 b. AVRAHAM FISCHER: Number of shares voted FOR 39,832,033 Number of shares voted AGAINST 275,673 2. Ratification of the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending December 31, 1997. The results of the voting were as follows: Number of Shares Voted FOR 40,032,643 Number of Shares Voted AGAINST 37,202 Number of Shares ABSTAINING 37,861 Number of Broker Non-Votes -- 18 ITEM 5. OTHER INFORMATION In April and May 1997, the Company's Board of Directors approved share repurchase programs pursuant to which the Company, from time to time and at management's discretion, was authorized to purchase up to an aggregate of 8 million shares of the Company's Common Stock (equal to approximately 18% of the approximately 45 million shares that were outstanding immediately prior to the commencement of the repurchase programs) in open-market transactions. As of June 30, 1997, the Company had completed the repurchase of 5,480,500 shares, at purchase prices ranging from $6.875 to $11.8625 per share, for an aggregate purchase price of $48.2 million. On March 6, 1997, the Board of Directors adopted a share option repricing program pursuant to which options to purchase an aggregate of 4,322,500 shares of common stock, held by employees under the Company's stock option plans, were eligible to be repriced, subject to acceptance by the optionees, as follows: options held by employees who were not officers of the Company would be repriced to the fair market value of the common stock on March 6, 1997, which price was $9.875 per share, and options held by officers of the Company would be repriced to $10.875 per share. The offer to participate in the repricing program was made by the Company to optionees in April 1997, and optionees holding over 92% of the eligible options accepted the offer. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.26 Employment Agreement, dated as of September 16, 1996, between DSP Telecom, Inc. and Stephen Pezzola 27 Financial Data Schedule (b) Reports on Form 8-K None. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 8, 1997 DSP COMMUNICATIONS, INC. BY: /s/ Gerald Dogon - ------------------------------------------------------------------ Gerald Dogon, Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 20
EX-10.26 2 EXHIBIT 10-26 EMPLOYMENT AGREEMENT EXHIBIT 10.26 OF STEPHEN P. PEZZOLA WITH DSP COMMUNICATIONS, INC. AND DSP TELECOM, INC. THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into effective as of the 16th day of September, 1996, by and between DSP COMMUNICATIONS, INC., a Delaware corporation (hereinafter "DSPC"), DSP TELECOM, INC., a California corporation (hereinafter the "Corporation"), and STEPHEN P. PEZZOLA (hereinafter "Pezzola"). RECITALS A. Effective September 16, 1996, Pezzola was employed by DSPC as its General Counsel, and to serve as an employee of the Corporation. DSPC is the parent corporation of the Corporation. B. DSPC, the Corporation, and Pezzola desire to document the terms of their employment agreement entered into on September 16, 1996 as set forth in this Agreement. AGREEMENT NOW, THEREFORE, the parties hereto hereby agree as follows: 1. EMPLOYMENT DUTIES. a. GENERAL. The Corporation hereby agrees to employ Pezzola, and Pezzola hereby agrees to accept employment with the Corporation, on the terms and conditions hereinafter set forth. b. CORPORATION'S DUTIES. The Corporation shall allow Pezzola to, and Pezzola shall, perform responsibilities normally incident to his position as General Counsel of DSPC, commensurate with his background, education, experience and professional standing. The Corporation shall provide Pezzola with a private office, stenographic help, office equipment, supplies, customary services and cooperation suitable for the performance of his duties. c. PEZZOLA'S DUTIES. Unless otherwise agreed to by the parties, Pezzola shall serve as General Counsel of DSPC, and to the extent requested by the Board of Directors, as General Counsel for any and all subsidiaries of DSPC. For purposes of acting as an attorney for DSPC (or any of its subsidiaries), Pezzola shall owe his duties of loyalty and confidentiality directly to DSPC (or any of its subsidiaries). Pezzola shall devote such time in executing his duties as General Counsel as is deemed needed by DSPC's Chairman of the Board of Directors. Pezzola shall not be required to devote his full time efforts to the Corporation or DSPC. It is intended that Pezzola will work part time, approximately thirteen (13) hours per week, and that he will serve as General Counsel of other entities and as an owner in an investment entity. Pezzola shall report directly to the Chairman of the Compensation Committee and to the Board of Directors of DSPC. Mr. Pezzola shall inform the Chairman of the DSPC Compensation Committee of any other positions that he takes with any other entity, beyond the positions that he currently holds. Pezzola's duties shall be performed primarily in the San Francisco Bay Area, and more particularly, in either Cupertino or Oakland, California, at the option of Pezzola. 2. TERM. This Agreement shall terminate December 31, 1998, unless (a) extended as set forth herein, or (b) terminated sooner under the terms of this Agreement. Thereafter, this Agreement may be renewed by Pezzola and the Board of Directors of DSPC on such terms as the parties may agree to in writing. Absent written notice to the contrary, thirty (30) days prior to the end of the employment term, this Agreement will be renewed for consecutive one (1) year extensions. As used herein, the term "employment term" refers to the entire period of employment of Pezzola hereunder, including any extensions. 3. COMPENSATION. Pezzola shall be compensated as follows: a. FIXED SALARY. Effective September 16, 1996, Pezzola shall receive a fixed annual salary of Ninety Thousand Dollars ($90,000). Beginning on January 1, 1997, and continuing thereafter, Pezzola shall receive a fixed salary of Ninety-five Thousand Dollars ($95,000). The Corporation agrees to review the fixed salary following the end of each calendar year during the employment term based upon Pezzola's services and the financial results of DSPC during the calendar year, and to make such increases as may be determined appropriate in the discretion of DSPC's Compensation Committee of the Board of Directors ("Compensation Committee"). b. PAYMENT. Pezzola's fixed salary shall be payable on a semi-monthly basis. c. BONUS COMPENSATION. During the employment term, Pezzola shall participate in each bonus plan adopted by DSPC, and shall receive such other bonus pay as may be determined reasonable in the discretion of the Compensation Committee. d. VACATION. Pezzola shall accrue paid vacation at the rate of twenty-five (25) days for each twelve (12) months of employment. Pezzola shall be compensated at his usual rate of compensation during any such vacation. Pezzola shall be entitled to ten (10) paid holidays during each twelve (12) months of employment. Pezzola shall receive sick leave or disability leave in accordance with the terms of the Corporation's standard sick leave or disability leave policy. e. BENEFITS. Pezzola waives any entitlement he may have as a Corporation employee to any benefits relating to group health, disability, life insurance, retirement and -2- other related benefits as in effect from time to time. Such waiver shall be ineffective, however, for a Corporation employee benefit plan in the event that such waiver would adversely impact the beneficial federal income tax status of such plan. The Corporation shall provide Pezzola with Director and Officer Insurance. 4. EXPENSES. The Corporation shall reimburse Pezzola for his normal and reasonable expenses incurred for travel, entertainment and similar items in promoting and carrying out the business of the Corporation in accordance with the Corporation's general policy as adopted by the Corporation's management from time to time. The Corporation shall pay Pezzola's cellular telephone expenses up to an amount equal to Three Hundred Dollars ($300) per month, unless Pezzola provides documentation to DSPC that Pezzola's cellular telephone use during a particular month was directly related to the business of DSPC, in which case DSPC shall pay all of the cellular telephone expenses attributable to the business of DSPC during such month. As a condition of payment or reimbursement, Pezzola agrees to provide the Corporation with copies of all available invoices and receipts, and otherwise account to the Corporation in sufficient detail to allow the Corporation to claim an income tax deduction for such paid item, if such item is deductible. Reimbursements shall be made on a monthly, or more frequent, basis. The Corporation shall reimburse Pezzola for fifty percent (50%) of all professional membership dues incurred, if any; fifty percent (50%) of all technical books purchased by Pezzola; and one hundred (100%) of all legal education and seminar expenses. The Corporation shall also reimburse Pezzola for fifty percent (50%) of any California Bar Association dues or fees necessary to maintain his certification as an attorney in California. It is noted that Zen Research, Inc. is currently providing an office adjacent to the Corporation's principal place of business to Pezzola at no expense to DSPC or the Corporation. 5. INDEMNIFICATION. The parties agree to enter into an Indemnification Agreement, effective September 16, 1996, under which DSPC will indemnify Pezzola for actions he may take on behalf of the Corporation or DSPC. 6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. Pezzola agrees that during the employment term he is in a position of special trust and confidence and has access to confidential and proprietary information about the Corporation's business and plans. Pezzola agrees that he will not directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any similar individual or representative capacity, engage or participate in any business that is in competition, in any manner whatsoever, with the Corporation. Notwithstanding anything in the foregoing to the -3- contrary, Pezzola shall be allowed to invest as a shareholder in publicly traded companies, or through a venture capital firm or an investment pool. 7. TERMINATION. a. TERMINATION BY PEZZOLA. Pezzola may voluntarily terminate his employment hereunder upon sixty (60) days' advance written notice to the Corporation. b. TERMINATION FOR CAUSE. The Corporation may immediately terminate Pezzola's employment at any time for cause. Termination for cause shall be effective from the receipt of written notice thereof to Pezzola specifying the grounds for termination and all relevant facts. Cause shall be deemed to include: (i) material neglect of his duties or a significant violation of any of the provisions of this Agreement, which continues after written notice and a reasonable opportunity (not to exceed thirty (30) days) in which to cure; (ii) fraud, embezzlement, defalcation or conviction of any felonious offense; or (iii) intentionally imparting confidential information relating to the Corporation or DSPC or their business to competitors or to other third parties other than in the course of carrying out his duties hereunder. The Corporation's exercise of its rights to terminate with cause shall be without prejudice to any other remedy it may be entitled at law, in equity, or under this Agreement. c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall automatically terminate upon Pezzola's death. In addition, if any disability or incapacity of Pezzola to perform his duties as the result of any injury, sickness, or physical, mental or emotional condition continues for a period of thirty (30) business days (excluding any accrued vacation) out of any one hundred twenty (120) calendar day period, the Corporation may terminate Pezzola's employment upon written notice. Payment of salary to Pezzola during any sick leave shall only be to the extent that Pezzola has accrued sick leave or vacation days. Pezzola shall accrue sick leave at the same rate generally available to the Corporation's employees. d. SEVERANCE PAY. If this Agreement is terminated without cause pursuant to Section 7.a. (above), the Corporation shall pay Pezzola a severance/consulting fee equal to the full amount of the compensation that he could have expected under this Agreement, as and when payable under this Agreement, without deduction except for tax withholding amounts, through the end of the term, during which Pezzola shall remain as a consultant to the Corporation. If this Agreement is terminated with cause pursuant to Section 7.b. (above), the Corporation shall not be obligated to pay Pezzola any severance/consulting fee. If this Agreement is not renewed on or after December 31, 1998, then the Corporation shall pay Pezzola a severance/consulting fee equal to his then-current monthly rate of fixed salary compensation, multiplied by the number three (3). -4- 8. CORPORATE OPPORTUNITIES. a. DUTY TO NOTIFY. In the event that Pezzola, during the employment term, shall become aware of any material and significant business opportunity directly related to any of the Corporation's significant businesses, Pezzola shall promptly notify the Corporation's Directors of such opportunity. Pezzola shall not appropriate for himself or for any other person other than the Corporation, or any affiliate of the Corporation, any such opportunity unless, as to any particular opportunity, the Board of Directors of the Corporation fails to take appropriate action within thirty (30) days. Pezzola's duty to notify the Corporation and to refrain from appropriating all such opportunities for thirty (30) days shall neither be limited by, nor shall such duty limit, the application of the general law of California relating to the fiduciary duties of an agent or employee. b. FAILURE TO NOTIFY. In the event that Pezzola fails to notify the Corporation of, or so appropriates, any such opportunity without the express written consent of the Board of Directors, Pezzola shall be deemed to have violated the provisions of this Section notwithstanding the following: i. The capacity in which Pezzola shall have acquired such opportunity; or ii. The probable success in the Corporation's hands of such opportunity. c. CORPORATION DEFINED. For purposes of Sections 6 and 8 hereof, the term "Corporation" shall also include DSPC and all of DSPC's subsidiaries. 9. MISCELLANEOUS. a. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matters herein, and supersedes and replaces any prior agreements and understandings, whether oral or written between them with respect to such matters. The provisions of this Agreement may be waived, altered, amended or repealed in whole or in part only upon the written consent of both parties to this Agreement. b. NO IMPLIED WAIVERS. The failure of either party at any time to require performance by the other party of any provision hereof shall not affect in any way the right to require such performance at any time thereafter, nor shall the waiver by either party of a breach of any provision hereof be taken or held to be a waiver of any subsequent breach of the same provision or any other provision. -5- c. PERSONAL SERVICES. It is understood that the services to be performed by Pezzola hereunder are personal in nature and the obligations to perform such services and the conditions and covenants of this Agreement cannot be assigned by Pezzola. Subject to the foregoing, and except as otherwise provided herein, this Agreement shall inure to the benefit of and bind the successors and assigns of the Corporation. d. SEVERABILITY. If for any reason any provision of this Agreement shall be determined to be invalid or inoperative, the validity and effect of the other provisions hereof shall not be affected thereby, provided that no such severability shall be effective if it causes a material detriment to any party. e. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, applicable to contracts between California residents entered into and to be performed entirely within the State of California. f. NOTICES. All notices, requests, demands, instructions or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given upon delivery, if delivered personally, or if given by prepaid telegram, or mailed first-class, postage prepaid, registered or certified mail, return receipt requested, shall be deemed to have been given seventy-two (72) hours after such delivery, if addressed to the other party at the addresses as set forth on the signature page below. Either party hereto may change the address to which such communications are to be directed by giving written notice to the other party hereto of such change in the manner above provided. g. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE CORPORATION. This Agreement shall not be terminated by any dissolution of the Corporation resulting from either merger or consolidation in which the Corporation is not the consolidated or surviving corporation or a transfer of all or substantially all of the assets of the Corporation. In such event, the rights, benefits and obligations herein shall automatically be assigned to the surviving or resulting corporation or to the transferee of the assets. h. CONFLICT POTENTIAL AND DUTY TO NOTIFY. Pezzola agrees to notify the Chairman of the Compensation Committee of: (1) any investments in any company or other entity of his own personal funds which is in excess of $200,000; (2) any investment which results in Pezzola owning over five percent (5%) of an entity; or (3) any other employment or consulting arrangement to which Pezzola is a party. If the Chairman of the Compensation Committee deems such investment or arrangement to be a conflict, he and Pezzola shall attempt to resolve the conflict. If such conflict cannot be so resolved, then the Chairman of -6- the Compensation Committee shall discuss the matter with the entire Board, and bring the matter to the Corporation's outside counsel. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. DSP TELECOM, INC. DSP COMMUNICATIONS, INC. a California corporation a California corporation 20300 Stevens Creek Blvd., Ste. 465 20300 Stevens Creek Blvd., Ste. 465 Cupertino, CA 95014 Cupertino, CA 95014 By: /s/ Nathan Hod By: /s/ Lewis Broad --------------------------------- -------------------------------- Nathan Hod, Chairman of the Board Lewis Broad, Chairman of the Compensation Committee /s/ Stephen P. Pezzola - ---------------------------- STEPHEN P. PEZZOLA 40 Yorkshire Drive Oakland, CA 94618 -7- EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTE FROM THE FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP COMMUNICATIONS, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 58,091 34,990 6,484 132 0 104,608 7,132 2,985 112,868 15,024 0 0 0 40 97,234 97,274 26,779 28,990 14,020 16,230 3,023 0 0 7,822 977 6,845 0 0 0 6,845 0.15 0.15
-----END PRIVACY-ENHANCED MESSAGE-----