-----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, Id2CD5doA1C1yqW8Dg/d/NEf3Aew5DAotJdXIcO/DxUbD60AJLonxmkrepH//4Sb TL6j/DRTkMdBwOIh5THbtg== 0001047469-97-004480.txt : 19971115 0001047469-97-004480.hdr.sgml : 19971115 ACCESSION NUMBER: 0001047469-97-004480 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 000-25622 FILM NUMBER: 97717269 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 September 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 incorporation or organization) (I.R.S. Employer Identification Number) 20300 Stevens Creek Boulevard, Cupertino, California 95014 ------------------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (408) 777-2700 --------------
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- As of November 7, 1997 there were 40,658,016 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-September 30, 1997 and December 31, 1996......................................... 3 Condensed consolidated statements of operations-quarter ended September 30, 1997 and 1996, and nine months ended September 30, 1997 and 1996............................. 4 Condensed consolidated statements of cash flows-nine months ended September 30, 1997 and 1996............................. 5 Notes to condensed consolidated financial statements- September 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........................................... 18 Item 6. Exhibits and Reports on Form 8-K............................ 18 SIGNATURE........................................................... 19 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DSP COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (U.S. DOLLARS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, 1 9 9 7 1 9 9 6 ---------- ---------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 69,195 $ 77,799 Short term investments 31,352 59,034 Trade accounts receivable 12,501 7,054 Other current assets 5,913 3,373 ---------- ---------- Total current assets 118,961 147,260 Property and Equipment, net 4,167 3,565 Goodwill 1,518 1,887 Other Assets 2,387 2,642 ---------- ---------- $ 127,033 $ 155,354 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 9,165 $ 3,747 Accrued compensation and benefits 2,924 3,233 Other accrued liabilities 8,438 8,560 Deferred income 71 2,490 ---------- ---------- Total current liabilities 20,598 18,030 Other Liabilities 850 480 STOCKHOLDERS' EQUITY Common stock 40 44 Additional paid-in capital 83,231 127,226 Retained earnings 22,314 9,574 ---------- ---------- Total stockholders' equity 105,585 136,844 ---------- ---------- $ 127,033 $ 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 NINE NINE MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6 ------- ------- ------- ------- REVENUES Product $ 19,097 $ 22,998 $ 45,876 $ 58,717 Technology development 1,380 402 3,591 2,336 -------- -------- --------- --------- Total revenues 20,477 23,400 49,467 61,053 COST OF REVENUES Product 9,489 11,719 23,509 31,541 Technology development 1,234 487 3,444 2,161 -------- -------- --------- --------- Total cost of revenues 10,723 12,206 26,953 33,702 -------- -------- --------- --------- Gross profit 9,754 11,194 22,514 27,351 OPERATING EXPENSES Research and development 1,559 1,638 4,582 3,664 Sales and marketing 935 857 3,002 2,483 General and administrative 2,023 1,684 5,515 4,768 -------- -------- --------- --------- 4,517 4,179 13,099 10,915 -------- -------- --------- --------- Operating income 5,237 7,015 9,415 16,436 Other Income 1,096 1,675 4,740 3,139 -------- -------- --------- --------- Income before provision for income taxes 6,333 8,690 14,155 19,575 Provision for income taxes 423 1,087 1,400 2,447 -------- -------- --------- --------- Net income $ 5,910 $ 7,603 $ 12,755 $ 17,128 -------- -------- --------- --------- -------- -------- --------- --------- Net income per share $ 0.14 $ 0.16 $ 0.28 $ 0.38 -------- -------- --------- --------- -------- -------- --------- --------- Shares used in computing net income per share 43,617 48,048 44,811 44,798 -------- -------- --------- --------- -------- -------- --------- ---------
See Notes to Condensed Consolidated Financial Statements 4 DSP COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (US DOLLARS IN THOUSANDS) (UNAUDITED)
NINE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1 9 9 7 1 9 9 6 ---------- ---------- OPERATING ACTIVITIES: Net income for the period $ 12,755 $ 17,128 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,665 1,255 Loss on disposal of equipment 3 2 Changes in operating assets and liabilities: Trade accounts receivable (5,447) (868) Other current assets (2,540) (700) Accounts payable 5,469 2,588 Accrued compensation and benefits (309) 682 Deferred income (2,419) 950 Other accrued liabilities (122) 3,248 Other liabilities 370 310 --------- --------- Net cash provided by operating activities 9,425 24,595 --------- --------- INVESTING ACTIVITIES: Cash purchases of equipment (1,718) (2,270) Proceeds from sales of equipment 21 8 Sales and maturities of short term investments, net 27,663 -- Purchases of short term investments, net -- (38,606) --------- --------- Net cash provided by (used in) investing activities 25,966 (40,868) --------- --------- FINANCING ACTIVITIES: Issuance of common stock for cash 4,224 78,717 Repurchase of common stock (48,219) -- --------- --------- Net cash provided by (used in) financing activities (43,995) 78,717 --------- --------- Increase (decrease) in cash and cash equivalents (8,604) 62,444 Cash and cash equivalents at beginning of period 77,799 10,292 --------- --------- Cash and cash equivalents at end of period $ 69,195 $ 72,736 --------- --------- --------- ---------
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 an increase in primary earnings per share for the quarters ended September 30, 1997 and 1996 to $0.15 per share and $0.17 per share, respectively. The impact is expected to result in an increase in primary earnings per share for the nine months ended September 30, 1997 and 1996 to $0.30 per share and $0.42 per share, respectively. 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 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 September 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. The Company did not repurchase any shares of its Common Stock in the third quarter of 1997. 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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 --------------------- --------------------- Revenues: Product 93.3% 98.3% 92.7% 96.2% Technology development 6.7 1.7 7.3 3.8 --------------------- --------------------- Total revenues 100.0 100.0 100.0 100.0 Cost of Revenues: Product 46.3 50.1 47.5 51.7 Technology development 6.0 2.1 7.0 3.5 --------------------- --------------------- Total cost of revenues 52.3 52.2 54.5 55.2 --------------------- --------------------- Gross profit 47.7 47.8 45.5 44.8 Operating Expenses: Research and development 7.6 7.0 9.3 6.0 Sales and marketing 4.6 3.7 6.1 4.1 General and administrative 9.9 7.2 11.1 7.8 --------------------- --------------------- Total operating expenses 22.1 17.9 26.5 17.9 --------------------- --------------------- Operating income 25.6 29.9 19.0 26.9 Other income 5.4 7.2 9.6 5.1 --------------------- --------------------- Income before provision for income taxes 31.0 37.1 28.6 32.0 Provision for income taxes 2.1 4.6 2.8 4.0 --------------------- --------------------- Net income 28.9% 32.5% 25.8% 28.0% --------------------- --------------------- --------------------- ---------------------
8 REVENUES PRODUCT: Product revenues decreased to $19.1 million in the third quarter of 1997 from $23.0 million in the third quarter of 1996 and to $45.9 million in the nine months ended September 30, 1997 from $58.7 million in the first nine months of 1996. Product revenues consist primarily of baseband chip sets for digital cellular telephones. The decline in revenues in the third quarter was primarily due to a product transition and competition in the Japanese PDC market. At the end of the second quarter, the Company began shipments of its new PDC chipsets. During the third quarter the Company also recorded material revenues from its IS-136 Time Division Multiple Access ("TDMA") chipset for the North American market. 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 increased to $1.4 million in the third quarter of 1997 from $402,000 in the third quarter of 1996 and increased to $3.6 million in the nine months ended September 30, 1997 from $2.3 million in the first nine months of 1996. Technology development revenues increased in the third quarter following the achievement of certain technology milestones in the Code Division Multiple Access ("CDMA") project. 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 third quarter of 1997 was $9.8 million (47.7% of revenues) compared to $11.2 million (47.8% of revenues) in the third quarter of 1996. Gross profit in the first nine months of 1997 was $22.5 million (45.5% of revenues), compared to $27.4 million (44.8% of revenues) in the first nine months 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. 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 third 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. Although the Company had previously anticipated higher volume sales of PBX systems toward the end of 1997, due to further delays in market acceptance, the Company currently believes that higher volume sales will not be achieved for the next several quarters. The Company anticipates that the average sales prices of chip sets will 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 were $1.6 million in the third quarter of 1997, the same level as in the third quarter of 1996, and increased to $4.6 million in the first nine months of 1997 from $3.7 million in the first nine months of 1996. The increase in the first nine months of 1997 was a result of increases in research and development activities during this period and growth in the number of engineering personnel. As a percentage of total revenues, research and development expenses increased to 7.6% in the third quarter of 1997, from 7.0% in the third quarter of 1996, mainly because of the reduced revenues, and to 9.3% from 6.0% in the first nine months 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 $935,000 (4.6% of revenues) in the third quarter of 1997 from $857,000 (3.7% of revenues) in the third quarter of 1996 and to $3.0 million (6.1% of revenues) in the first nine months of 1997 from $2.5 million (4.1% of revenues) in the first nine months 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 $2.0 million (9.9% of revenues) in the third quarter of 1997 compared to $1.7 million (7.2% of revenues) in the third quarter of 1996 and $5.5 million (11.1% of revenues) in the first nine months of 1997 compared to $4.8 million (7.8% of revenues) in the first nine months 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 third quarter of 1997 was $1.1 million compared to $1.7 million in the third quarter of 1996 and $4.7 million in the first nine months of 1997 compared to $3.1 million in the first nine months of 1996. Other income in the first nine 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 reduced the interest income generated in the third quarter. PROVISION FOR INCOME TAXES The Company's regular effective tax rate was 12.5% for the first nine months of 1996 and 1997. In the third quarter of 1997, the Company reduced its regular provision of 12.5% by the amount of $370,000. This reduction was effected following the receipt of final tax assessments for the Company's subsidiaries, DSP Telecommunications Ltd. and DSPC Israel Ltd., and a cash refund from the tax authorities to DSP Telecommunications Ltd. for the years 1992 through 1995. For the fourth 10 quarter, the Company intends to provide for income taxes at 12.5% of net income. 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. 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 $9.4 million in the first nine months of 1997 and $24.6 million in the first nine months of 1996. Net cash provided from operations in the first nine months of 1997 was comprised primarily of net income, an increase in current liabilities, and an increase in trade accounts receivable. Trade accounts receivable increased to $12.5 million at September 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 $1.7 million, and the repurchase of common stock which totaled $48.2 million, in the first nine 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 11 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 September 30, 1997, the Company had $100.5 million of cash, cash equivalents and short-term investments. As of September 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 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 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 management expectations, and the Company assumes no obligation to update this information. Numerous factors could cause actual results and events to differ significantly from the results anticipated by management and described in these forward looking statements, including but not limited to the following risk factors. RELIANCE ON A SMALL NUMBER OF OEMS AND ON A SINGLE JAPANESE DISTRIBUTOR; 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. Until recently, 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. During the second half of 1996 and the first half of 1997, 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 declined, due primarily to increased competition among OEMs in the Japanese wireless handset market and to an increase in the supply 12 of integrated circuits. This reduced lead time resulted in decreased backlog levels and decreased the time period for which the Company is able to estimate future product demand. Although the Company's visibility has increased somewhat during the third quarter of 1997, 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 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. 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, the TDMA-based chip set and the CDMA-based 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. In addition, sales of the Company's products are affected in part by the condition of the Japanese economy, which has recently experienced a slowing of growth. A significant negative change in the condition of the Japanese economy could have a material adverse effect on the Company's business, financial 13 condition and results of operations. 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 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. Changes in the political or economic conditions, trade policy or regulation of telecommunications in Japan could 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. 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. UNCERTAINTIES RELATED TO TDMA-BASED PRODUCT. In the third quarter of 1997, the Company began commercial shipments of a newly-developed baseband chip set for IS-136 TDMA-based products in the North American market. However, the IS-136 TDMA standard has only recently been introduced, and IS-136 TDMA-based digital cellular networks have not at this time been widely deployed. The success of the Company in marketing its IS-136 TDMA-based chip set will be dependent on, among other things, the success of the IS-136 TDMA standard and growth of the IS-136 TDMA market. There can be no assurance that the IS-136 TDMA standard will be widely adopted or that the IS-136 TDMA-based chip set will be successful in the marketplace. Sales of the Company's IS-136 TDMA-based products will also be dependent on the success of the Company's OEM customers in completing their development of IS-136 TDMA-based handsets in a timely manner and in successfully competing in the IS-136 TDMA handset market. In addition, the Company uses independent foundries to manufacture the product, and there can be no assurance that this chip set will continue to 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 manufacture in a timely manner the IS-136 TDMA-based chip set and to market the product successfully, or if the 14 Company's OEMs are unable successfully to develop and market their IS-136 TDMA-based products, the Company's business and results of operations could be materially and adversely affected. 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 has delivered operational engineering samples, 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. 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. 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 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." 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 15 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. 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 September 30, 1997, 150 of the Company's 170 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. 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 16 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. 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 As previously disclosed in the Company's Form 10-Q for the quarterly period ended June 30, 1997, 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 None. ITEM 5. OTHER INFORMATION On November 5, 1997, Nathan Hod, the Company's President and Chief Executive Officer, was appointed as Chairman of the Board of Directors, and Davidi Gilo resigned as Chairman of the Board and as a director of the Company. Mr. Gilo will remain employed with the Company as an advisor to Mr. Hod. In addition, Gerald Dogon, the Company's Executive Vice President and Chief Financial Officer, was appointed by the Board as a director to fill the vacancy resulting from Mr. Gilo's resignation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None. 18 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: November 11, 1997 DSP COMMUNICATIONS, INC. By: /s/ Gerald Dogon - ------------------------------------------------------------------ Gerald Dogon, Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 19
EX-27 2 EXHIBIT 27
5 This schedule contains summary financial information extracted from the financial statements in the Quarterly Report on Form 10-Q of DSP Communications, Inc. for the nine months ended September 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 69,195 31,352 12,633 132 0 118,961 7,510 3,343 127,033 20,598 0 0 0 40 105,545 105,585 45,876 49,467 23,509 26,953 4,582 0 0 14,155 1,400 12,755 0 0 0 12,755 0.28 0.28
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