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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-23006
DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2683643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
3120 SCOTT BOULEVARD, SANTA CLARA, CA 95054
(Address of principal executive offices, including zip code)
(408) 986-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Common Stock on March 1,
1999, as reported on the Nasdaq National Market, was approximately
$107,277,023. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 1, 1999 the Registrant had outstanding 11,633,420 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1998 are incorporated by reference into Part
II of this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's 1998 Annual Report is not deemed
filed as part of this Report.
INDEX
DSP GROUP, INC.
Page No.
--------
PART I
Item 1. BUSINESS...............................................................................3
Item 2. PROPERTIES.............................................................................20
Item 3. LEGAL PROCEEDINGS......................................................................20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................................................21
Item 6. SELECTED FINANCIAL DATA................................................................21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONAL AND RESULTS OF OPERATIONS..................................................21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.............................21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................22
Item 11. EXECUTIVE COMPENSATION.................................................................24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................................................32
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................34
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................................................35
SIGNATURES.............................................................................39
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT ARE BASED ON THE BELIEFS OF, AND ESTIMATES MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO, DSP GROUP'S MANAGEMENT. THESE STATEMENTS
ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW IN "FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
THE TERMS "DSP GROUP," "WE," "OUR" AND "US" AS USED IN THIS ANNUAL
REPORT ON FORM 10-K REFER TO "DSP GROUP, INC." AND ITS SUBSIDIARIES AS A
COMBINED ENTITY, EXCEPT WHERE IT IS MADE CLEAR THAT THE TERM ONLY MEANS THE
PARENT COMPANY. IN ADDITION, THIS ANNUAL REPORT ON FORM 10-K INCLUDES
TRADEMARKS AND REGISTERED TRADEMARKS OF DSP GROUP. PRODUCTS OR SERVICE NAMES
OF OTHER COMPANIES MENTIONED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE
TRADEMARKS OR REGISTERED TRADEMARKS OF THEIR RESPECTIVE OWNERS.
PART I
ITEM 1. BUSINESS.
GENERAL BUSINESS
DSP Group develops and markets products and technologies that perform
digital signal processing--the electronic manipulation of digitized speech
and other digital signals. DSP Group's products are used in a wide variety
of telephony and other communications devices to enhance the functionality of
these devices.
Digital speech technology provides several advantages over analog speech
technology, including higher levels of speech compression and greater ability
to process and manipulate data. In addition, digital speech products that
use programmable digital signal processors can be developed faster than
analog speech products, which require dedicated analog hardware. As a
result, digital speech technology is widely incorporated today in telephone
answering devices ("TADs") and many other types of telephony and
communications products. Digital speech technology also enables a new
generation of products to transmit live speech over data networks and perform
audio and video conferencing over standard telephone lines.
Our work in the field of digital speech and digital signal processing
has yielded three synergistic product families:
- Speech and telephony processors--integrated circuit devices that
-------------------------------
process digitized speech and other digital signals.
- DSP cores--proprietary architectures for central processing units
---------
that, when combined with other circuits such as memory and
input/output circuits, form a complete circuit design for speech and
telephony processors.
- TrueSpeech-Registered Trademark---a family of proprietary speech
-------------------------------
compression algorithms.
In addition, DSP Group entered the cordless telephony business in the first
quarter of 1999 by acquiring two integrated groups of engineers who
specialize in the design of integrated circuits for wireless communication
and by acquiring technology, products and intellectual property related to
certain wireless communications products.
SPEECH AND TELEPHONY PROCESSORS
DSP Group has developed two lines of speech and telephony processing
chips: integrated digital TAD speech processors, which are designed for use
in the consumer telephone market, and Voice over IP speech co-processors,
which are designed for use in network telephony and video conferencing
products.
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Both product lines are based upon our DSP core designs and incorporate our
TrueSpeech speech compression algorithms.
INTEGRATED DIGITAL TAD SPEECH PROCESSORS
DSP Group's integrated digital TAD speech processors are currently
incorporated in over 90 models of digital TADs from more than 40 different
companies. These models include standalone digital TADs and integrated
digital TADs, as well as facsimile machines, standalone speaker phones,
hand-held devices and digital cordless telephones that contain digital TADs.
Our digital TAD speech processors are based on our
PineDSPCore-Registered Trademark-, which is more fully described below. Our
digital TAD speech processors use our TrueSpeech speech compression
technology to provide high quality speech recording and playback. They
incorporate the following speech and telephony technologies in various
combinations:
TECHNOLOGY DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------------
Triple Rate Coder-TM- Instructs the telephone answering system to decide automatically
between better voice quality and longer recording time.
- ----------------------------------------------------------------------------------------------------------------------
G.723.1 Provides speech compression for Voice over IP and video conferencing
over standard telephone lines.
- ----------------------------------------------------------------------------------------------------------------------
Caller ID and Call Waiting Identifies to the party being called the telephone number of the
Caller ID calling party, whether or not the party being called is already
engaged in another call.
- ----------------------------------------------------------------------------------------------------------------------
Call Progress Tone Detection Detects standard telephony signals during the progress of a telephone
call.
- ----------------------------------------------------------------------------------------------------------------------
DTMF Signaling Detects and generates touch tone (DTMF) signals that comply with
telephone industry frequency standards.
- ----------------------------------------------------------------------------------------------------------------------
Full Duplex SpeakerPhone-TM- Allows simultaneous two-way (full-duplex), hands-free operation of the
telephone and suppresses and cancels acoustic and electrical echoes.
- ----------------------------------------------------------------------------------------------------------------------
Speech Prompts Provides the ability to stamp a message with a time and date and vocal
operating instructions prompts.
- ----------------------------------------------------------------------------------------------------------------------
Variable Speed Playback Permits playback of recorded speech at different speeds without
(FlexiSpeech-Registered Trademark-) distorting the natural sound of the speech.
- ----------------------------------------------------------------------------------------------------------------------
Voice Operated Switch ("VOX") Detects human speech and stops recording during periods of silence,
(Smart-Vox-Registered Trademark-) thereby conserving available memory.
- ----------------------------------------------------------------------------------------------------------------------
Alpha Least Cost Routing Automatically chooses from a number of telephone service providers in
("LCR")/Super LCR order to select the lowest available rates.
- ----------------------------------------------------------------------------------------------------------------------
Voice Recognition Allows a user to operate a telephone or answering machine device by
giving voice commands.
- ----------------------------------------------------------------------------------------------------------------------
The first integrated digital TAD speech processors were introduced by
DSP Group in 1989. Since then, we have shipped approximately 33 million
units of speech processors to digital TAD suppliers, of which approximately
10.3 million were shipped in 1998. Digital TAD speech processor sales
accounted for 72% of our total revenues in 1998.
4
In 1998, we introduced the D16000 family of highly integrated speech
processors, which combine the components of a mixed signal system on a single
chip. Each speech processor in the D16000 family contains a DSP core,
converters that transform analog signals into digital signals and vice versa,
and various signal amplifiers, all embedded on a single chip. In addition to
implementing DSP algorithms, including compression, caller ID and speaker
phone, these speech processors also perform tasks that would typically be
handled by a separate microprocessor chip. We believe that the D16000
processors provide high value to telephony product vendors by eliminating the
need for certain other electronic components and thus reducing materials and
manufacturing costs.
We also introduced in 1998 the D6587 speech processor, which
incorporates into one chip three major digital signal processing
technologies: (1) the Triple Rate Coder, (2) voice recognition, and (3) Full
Duplex SpeakerPhone. The D6587 can be used in telephones and hands-free car
kits for mobile phones to provide voice dialing, digital recording and
hands-free conversation.
In 1997, we developed an advanced speech compression technology called
the Triple Rate Coder. Speech processors containing the Triple Rate Coder
can record speech at three different compression rates, allowing for a
tradeoff between recording quality and recording time: the higher the
compression rate is, the higher the recording quality and the shorter the
recording time will be. The three compression rates are as follows:
- Long recording time -- at this rate, 22 to 25 minutes of speech can
be recorded on a four megabit flash memory device.
- High quality recording -- at this rate, approximately 10 minutes of
speech can be recorded on a four megabit flash memory device. Speech
quality is at its highest equaling that of a wired telephone
conversation, overcoming the inferior clarity disadvantage of digital
speech.
- Trade-off between long recording time and high quality recording --
at this rate, approximately 15 minutes of speech can be recorded on a
four megabit flash memory device. Speech quality matches that
provided by G.723.1, the speech compression algorithm contained in
the International Telecommunications Union H.324 standard for video
conferencing over standard telephone lines.
The following table sets forth certain characteristics and features of
the primary digital TAD speech processors that we currently offer:
DSP GROUP'S TAD SPEECH PROCESSORS
D16559 D16529 D16329 D6571 D6587 D6471
------ ------ ------ ----- ----- -----
Process Geometry (microns).............. 0.5 0.5 0.5 0.5 0.5 0.5
Minutes Record, 4 Mbit Memory........... 22-25, 22-25, 15-17 22-25, 22-25, 25-27
10,15 10,15 10,15 10,15
Memory Type............................. Flash Flash Flash Flash Flash Flash
Advanced Features:
Speech Prompts........................ Yes Yes Yes Yes Yes Yes
Variable Speed Playback............... Yes Yes -- Yes Yes Yes
Full Duplex Speakerphone.............. Yes -- -- Yes Yes Yes
Caller ID and Call Waiting Caller ID Yes Yes -- Yes Yes Yes
Voice Recognition -- -- -- -- Yes --
System On Chip-included peripherals:
Microcontroller....................... Yes Yes Yes -- -- --
Line Coder ........................... Yes Yes Yes -- -- --
Speaker Coder......................... Yes -- -- -- -- --
Amplifiers............................ Yes Yes Yes -- -- --
5
The following is a list of TAD manufacturers and resellers whose products
incorporate our TAD speech processors:
TAD MANUFACTURERS AND RESELLERS
TAD MANUFACTURERS TAD RESELLERS
------------------------------------------------------------------------------------
Alcatel Maxon Bell South
Ascom Panasonic Bosch Telecom
CCT Telecom Philips British Telecom
Daewoo Sagem France Telecom
D&B Electronics Samsung GE
Ericsson Sanyo German Telecom
Giant Siemens Loewe-Binatone
HPF Ascom Smoothline Southwestern Bell
I.N.T. Corp. Sony Swiss Telecom
Kinpo Thomson
L.G. Electronics Tiptel
Matra Uniden
VOICE OVER IP SPEECH CO-PROCESSORS
Our Voice over IP speech co-processors were developed for use in
conjunction with other microprocessors to transmit voice over public and
private networks such as the Internet, frame relay networks, cable networks
and other data networks and combined data/voice networks. "Voice over IP"
refers to the transmission of voice signals over networks using the Internet
Protocol (IP), which involves dividing the signals into numerous small data
packets that are individually transmitted over the network and reassembled in
the correct order at their destination. They also can be used to implement
the speech component of video conferencing applications.
These speech co-processors take advantage of G.723.1, a speech
compression algorithm that has been incorporated into various international
communications standards, which is more fully discussed below, to provide
cost-effective, high quality speech compression. The following table sets
forth other features of the Voice over IP speech co-processors that we
currently offer:
6
DSP GROUP'S VOICE OVER IP SPEECH CO-PROCESSORS
CT8016 CT8020 CT8021
-------------- -------------- ---------------
DSP Core Design............................. PineDSPCore OakDSPCore OakDSPCore
Process Geometry (microns).................. 0.5 0.6 0.5
TrueSpeech Algorithm........................ 8.5, 6.3, 5.3, 8.5, 6.3, 5.3, 8.5, 6.3, 5.3,
Data Rate, Kilobits Per Second.............. 4.8 & 4.1 4.8 & 4.1 4.8 & 4.1
ITU-T Standard Speech Coders................ G.729A+B G.723.1 G.723.1, G.722,
G.728, G.729A+B
Features:
Full Duplex Speakerphone................... Yes Yes Yes
Variable Speed Message Playback............ Yes -- Yes
Full Duplex DSVD........................... Yes Yes Yes
Video Conferencing......................... -- Yes Yes
Internet Telephony......................... Yes Yes Yes
FUTURE SPEECH AND TELEPHONY PROCESSORS
We are currently developing our next generation of integrated digital
TAD speech processors and Voice over IP speech co-processors to include a
number of enhancements and improvements.
First, we intend to design and manufacture our future digital TAD speech
processors using a 0.35 micron CMOS technology, so that the conductive paths
on the circuits inside these chips will be 0.35 microns wide. By reducing
these line widths we can place more transistors in the same amount of space
and as a result provide more power at the same cost. We expect that this
design will increase our competitiveness in the price-sensitive TAD business.
Second, we intend to add new features to our next generation of digital
TAD speech processors and Voice over IP speech co-processors. For example,
we intend to enhance our integrated digital TAD speech processors with
additional capabilities, including improved speech quality, full duplex
speakerphone, advanced voice recognition and text to speech algorithms and
our integrated 900 MHz spread spectrum processor. In addition, we intend to
use the TeakLite-TM-DSP core, which is more powerful than our PineDSPCore and
OakDSPCore-Registered Trademark-, to provide additional processing power for
these new features.
Finally, we intend to continue to develop new speech and telephony
processors for emerging communications applications. We also intend to use
our high performance, dual MAC DSP TeakLite core for Voice over IP gateway
applications.
DSP CORES
DSP Group has developed proprietary, DSP core designs that provide
low-power, cost-effective solutions for current and emerging digital signal
processing applications. Our DSP cores are incorporated in our own family of
speech and telephony processors and also are licensed to more than 30
entities, including Adaptec, Fujitsu, Kawasaki, LSI Logic, NEC, Oki, Samsung
Semi conductor, Inc., Seiko Epson, Siemens, Sony, Temic and VLSI Technology.
We currently offer four DSP cores--PineDSPCore, OakDSPCore,
TeakDSPCore-TM-and PalmDSPCore.-TM- Together, they cover a wide range of
applications, from low end applications, including digital TADs, hard disk
controllers, low speed modems and Voice over IP applications, to high
7
performance applications such as digital subscriber line (DSL), third
generation cellular communications, high speed modems, multimedia and
Internet gateways.
Digital signal processing chips and software are being used more and
more in high volume communication and computing products. We believe that
our cores can provide cost-effective DSP solutions for chips used in these
applications, because our cores are:
- Flexible. The DSP core designs are "soft core" designs, so they are
--------
foundry independent and can be implemented on any of the various
manufacturing processes used by different semiconductor fabrication
facilities. The cores can also be produced by manufacturers in
different geometries. Furthermore, universal design rules are used
in the DSP core designs to allow easy implementation across multiple
semiconductor process technologies.
- Efficient to design. The designs of our cores are highly efficient,
-------------------
with variable data size of 16/20/24 bits, general purpose DSPs with
adjacent modular RAM and ROM and general I/O blocks to provide for a
flexible layout and design.
- Power efficient. Our cores operate at different voltages, ranging
---------------
from 5 volts down to 1.1 volts. The lower the voltage, the lower the
power requirements.
- Inexpensive to manufacture. The DSP cores, which in the past could
--------------------------
only be used on processors designed for a 1.0 micron CMOS process,
can now be implemented on 0.25 and 0.18 micron processes. We believe
these size reductions in manufacturing can reduce the product cost,
while increasing product performance.
The efficient processing, flexible design and scaleable memories of our
DSP core designs allow for the development of smaller and lower cost DSP
solutions and shorten the time to market for new products and product
enhancements.
With each new core, we have added features and enhanced performance.
Our first core, the PineDSPCore, was released in 1992 and was developed for
use in our digital TAD speech processor products. In 1994, we introduced our
OakDSPCore, an enhanced version of the PineDSPCore that, among other things,
achieves a higher processing speed through improved architecture and includes
an advanced, more efficient instruction set. The OakDSPCore is especially
well-suited for use in personal communication products and higher level
processing applications, such as digital cellular telephones, high bit rate
modems, video telephone conferencing applications and DSVD modems, which send
compressed voice and data signals at the same time over a regular telephone
line. Algorithms that use the PineDSPCore instruction set can also be run on
the OakDSPCore.
In 1998, we introduced the TeakDSPCore, the next generation DSP core.
The TeakDSPCore is a family of two low power, cost effective cores: the
TeakLite and the Teak. These cores contain two arithmetic units functioning
in parallel, which improve the performance of a notable portion of the
application that requires DSP technology. The TeakDSPCore is aimed at
emerging applications in the digital cellular communications, including
products implementing the Global System for Mobile communications (GSM),
half-rate GSM, Time Division Multiple Access (TDMA) and Code Division
Multiple Access (CDMA) standards. We also have targeted this core for use in
advanced wired line modems, including those using the V.90 standard, products
implementing emerging digital audio standards and formats such as AC3 and
MPEG2, and Voice over IP and telecommunications products.
In 1998, we also introduced our new high performance PalmDSPCore, a
family of three cores designed to cover a wide range of high performance
applications, including third generation cellular communications,
asynchronous digital subscriber lines (ADSL), high performance multimedia
applications, cable modems, pooled modems and Internet gateways.
8
The following table shows a comparison of our DSP core designs:
DSP GROUP'S DSP CORE DESIGNS
PineDSPCore OakDSPCore TeakDSPCore PalmDSPCore
----------- ---------- ---------- -----------
Word Length ......................... 16 bit 16bit 16bit 16/20/24 bit
Process Geometry (microns)........... 0.5 0.35 0.25 0.2
Performance ......................... 40 MIPS 65MIPS 140-180 MIPS 450 MIPS
Voltage ............................. 5.0 V 3.3V 2.5V 2.5V
Advanced Instruction Set............. -- Yes Yes Yes
In addition to incorporating our DSP core designs in our speech and
telephony processors, we also license them to third parties, together with
advanced software tools, so that these licensees can incorporate our DSP core
designs into their semiconductor chip products. These licenses are generally
granted in exchange for an upfront license fee payment. This fee is
generally recognized by us upon shipment of the deliverables for the core,
provided that no significant vendor or post-contract support obligations
remain outstanding and that collection of the resulting receivable is deemed
probable. The licensees also pay a monthly support fee, which is typically
paid for a period of one or two years, and ongoing per-unit royalties based
on the number of units of products containing the core that are shipped by
the licensee. The timing and amount of royalties that DSP receives from its
core licensees depend on the timing of each licensee's product development
and the degree of market acceptance of each licensee's products, neither of
which are within our control. In 1998, royalties paid by four PineDSPCore and
OakDSPCore licensees for shipment of products utilizing these cores increased
from the previous year.
The following is a partial list of companies who have licensed our DSP
core designs and representative applications for which they use our DSP core
designs:
DSP CORE DESIGN LICENSES
LICENSEES REPRESENTATIVE APPLICATIONS
- -------------------- -----------------------------------------
Adaptec Disk Drives
Atmel ASIC, Communications
DSP Communications Digital Cellular Telephones
Fujitsu ASIC, ADSL, Communications
Harris Semiconductor Communications and Multimedia
Hyundai ASIC, Audio, Communications
Kawasaki ASIC, Communications
Kenwood Audio Products
LSI Logic ASIC, Communications, DAB
Mitel ASIC, Communications
National Semiconductors Communications
NEC ASIC, Communications
Oki Communications
ROHM ASIC, Communications
Samsung ASIC, Communications and Multimedia
Seiko-Epson ASIC, Communications
Siemens Communications
Sony Communications
9
TDK Semiconductor Modems
TEMIC DAB, Communications
TSMC ASIC Library
VLSI Technology ASIC, Communications
Xemics Low Voltage applications
Xicor Programmable DSP
In order to assist existing licensees of the PineDSPCore and OakDSPCore,
and to enhance the attractiveness of these cores to potential licensees, we
have entered into agreements with leading developers of semiconductor design
and simulation software, including Cadence, Mentor Graphics and Synopsys.
These companies have adapted certain of their software applications to
support our PineDSPCore and OakDSPCore, enabling such software to be used to
design and simulate semiconductor products containing these cores. In
addition, a number of independent software vendors, including VoCal
Technologies, Prairiecomm, and Ensigma, have developed digital signal
processing algorithms that operate on our PineDSPCore and OakDSPCore for a
variety of communications and multimedia applications. We believe that these
developments make our DSP core designs more attractive to potential
licensees. In addition, we believe that these software tools help to
establish our PineDSPCore and the OakDSPCore as industry standards.
In 1998, XEMICS, a Swiss company and a leading manufacturer of low
voltage medical devices such as hearing aids and pace makers, announced that
it would license and implement TeakLite on a very low voltage library
instruction set. Together with Xemics, we offer a design kit for low voltage
applications (1.2V), by which potential licensees will license the TeakLite
technology from DSP Group and the low voltage library from Xemics.
TRUESPEECH PRODUCTS
TrueSpeech is a family of high-quality, cost-effective speech
compression technologies based on complex mathematical algorithms that are
derived from the way airflow from the lungs is shaped by the throat, mouth
and tongue during speech. This shaping of bursts of air is what the ear
interprets as speech. TrueSpeech converts this speech into digital data and
then selectively eliminates and enhances certain sound data to replicate
human speech.
Originally developed for consumer telephone applications, we also have
enhanced TrueSpeech for use in the computer telephony, personal computer and
Voice over IP markets. We incorporate our TrueSpeech technology in our
speech and telephony processors and also license TrueSpeech to computer
telephony, personal computer and Voice over IP companies for inclusion in
their products.
Our TrueSpeech technology has become one of the leading digital speech
compression solutions in several markets. In the personal computer market,
Microsoft has incorporated a TrueSpeech algorithm in Windows 95, Windows 98
and NT. In the audio and video telephone conferencing markets, TrueSpeech
algorithms are used extensively, having been adopted by various international
standards-setting organizations. In February 1995, the International
Telecommunications Union established its G.723.1 standard for low bit rate
speech compression, which incorporates the TrueSpeech 6.3 and 5.3 algorithms.
In March 1997, the International Multimedia Teleconferencing Consortium, a
nonprofit industry group, recommended the G.723.1 standard as a default low
bit rate audio compression technology for all voice transmissions over the
Internet and for conferencing products conforming the International
Telecommunication Union's H.323 standard for packet-based multimedia
communications systems. G.723.1 is also part of the International
Telecommunication Union's H.324 standard for video conferencing over standard
telephone lines. Since its adoption and endorsement by the International
Telecommunications Union and the International Multimedia Teleconferencing
Consortium, the G.723.1 standard has gained considerable momentum in the
video and audio conferencing industry.
10
We believe that the principal advantages of TrueSpeech, as compared with
other currently available digital speech compression technologies, are as
follows:
- High Compression Ratio. The three versions of TrueSpeech currently
----------------------
offered by DSP Group compress digital speech at ratios ranging from
15:1 to 26:1. These compression ratios are between seven and twelve
times greater than the compression provided by Pulse Code Modulation
("PCM"), which is used in current generation telephone speech
transmissions, and four to six times greater than the compression
provided by Adaptive Differential PCM ("ADPCM"), which is currently
used in personal computer audio cards. As a result, a standard 1.4
megabyte floppy diskette can hold approximately 37 minutes of speech
using the most advanced version of TrueSpeech commercially available,
compared to approximately three minutes using PCM and six minutes
using ADPCM. Our competitors have introduced other advanced speech
algorithms that offer compression ratios comparable to the most
advanced TrueSpeech algorithms, and several had submitted these
algorithms to the ITU standards committee for evaluation for video
telephones. However, the ITU testing showed that TrueSpeech provides
superior quality playback and requires lower computational complexity
than these competing algorithms.
- High Quality Speech. Another advantage of TrueSpeech is that it
-------------------
reproduces high quality speech playback with minimum distortion by
selectively eliminating nonessential and background sound data without
significant loss of speech quality. TrueSpeech has received high
scores for speech quality from a number of independent evaluators.
For example, TrueSpeech scored the highest on the ITU's intricately
structured test used to numerically rate the quality of the five
competing speech compression algorithms submitted for adoption as the
G.723.1 standard for video telephones. In independently conducted
tests performed by Dynastat, Inc., a company specializing in the
performance evaluation of voice communication systems, TrueSpeech 6.3
received a Mean Opinion Score of 3.98, while regular telephone quality
is based upon a Mean Opinion Score of 4.0.
- Cost Effectiveness. TrueSpeech's ability to achieve high speech
------------------
compression with lower computational complexity provides it with a
competitive cost advantage. As an example, competing speech
compression algorithms evaluated by the ITU use 20% to 50% more
computing power for the same compression and transmission rates, and
more memory for storage and operation. Consequently, competing speech
compression algorithms require larger, more expensive DSPs and result
in higher cost solutions.
Our TrueSpeech licensees include, among others, 8x8, Analog Devices,
Cirrus Logic, Creative Labs, Dialogic, IBM, Intel, Microsoft, Philips,
Siemens, Smith Micro, Texas Instruments, Unisys, US Robotics, Winbond and
White Pine Software. In addition, we have ported our TrueSpeech algorithms to
certain DSP platforms offered by Analog Devices, Motorola and Texas
Instruments, three leading merchant vendors of programmable DSP chips. To
date, our royalties from TrueSpeech licenses contribute modestly to our
overall revenues.
CORDLESS TELEPHONY
In the beginning of 1999, DSP Group acquired two integrated groups of
engineers, one located in Israel and the other in the United States. These
twenty-five engineers specialize in the design of integrated circuits for
wireless communication. In addition, we acquired technology and products,
including associated intellectual property, related to 900 Megahertz
narrow-band cordless telephones (the transmissions between the handset and
base unit of such telephones are at or near a frequency of 900 megahertz) and
900 Megahertz spread spectrum cordless telephones (the transmissions between
the handset and base unit of such telephones are "spread" in a pseudrandom
pattern over a range of frequencies).
11
We intend to sell a cordless telephony solution consisting of two chips
- --a baseband chip and an RF chip -- that will allow telephone vendors to
build 900 megahertz cordless telephones with limited technical understanding,
shortening the time it takes for the product to reach the market. We believe
our recent acquisitions also will assist us in developing 2.4 gigahertz
cordless telephones. In addition, we believe that the cordless telephony
business will be synergistic with our existing digital signal processing
business.
SALES, MARKETING AND DISTRIBUTION
We market and distribute our products through our direct sales and
marketing organization, consisting of 27 employees, as well as through a
network of distributors and independent manufacturers' representatives. A
marketing and sales team located in our headquarters in Santa Clara,
California and in Israel pursues business with our customers in North America
and closely monitors new markets, trends and customer needs to shape our
strategic decisions. In Japan, we operate from a marketing and support
office in Tokyo and through Tomen Electronics, a local distributor. In the
rest of Asia, we operate through sales representatives in Hong Kong,
Singapore, South Korea and Taiwan. To handle sales and distribution in
Europe, we operate a marketing and support office located in France and have
sales representatives in Denmark, Israel, Germany, Spain, Sweden and the
United Kingdom. Our sales representatives and distributors are not subject
to minimum purchase requirements and can cease marketing our products at any
time. The loss of one or more representatives or their failure to renew
agreements with us upon expiration could have an adverse effect on our
business, financial condition and results of operations.
In 1998, 1997 and 1996 sales to Tomen Electronics comprised 45%, 33% and
17%, respectively, of total revenues. In 1996, sales to Samsung comprised
11% of total revenues.
Export sales accounted for 95%, 92% and 91% of our total revenues in
1998, 1997 and 1996, respectively. Due to our export sales, we are subject
to the risks of conducting business internationally, including unexpected
changes in regulatory requirements, fluctuations in exchange rates that could
increase the price of our products in foreign markets, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs,
other barriers and restrictions and the burden of complying with a variety of
foreign laws. All of our export sales are denominated in United States
dollars. See Note 3 of the Notes to Consolidated Financial Statements of our
Annual Report to Stockholders for the year ended December 31, 1998, for a
summary of our operations within various geographic areas.
MANUFACTURING AND DESIGN METHODOLOGY
Since our products are based on our proprietary DSP core designs, which
are not dependent upon a particular foundry's library cells, these products
can be manufactured at a number of independent foundries. Accordingly, all
of our manufacturing occurs at independent foundries. We contract
fabrication services for speech and telephony processors from Taiwan
Semiconductor Manufacturing Company, Tower Semiconductor and Samsung. Under
non-exclusive agreements, these independent foundries normally provide us
with finished, packaged and tested speech processors at variable prices
depending on the volume of units purchased. We customarily pay for
fully-tested products meeting predetermined specifications. To ensure the
integrity of quality assurance procedures, we develop detailed testing
procedures and specifications for each product and require each foundry to
use these procedures and specifications before shipping us finished products.
We intend to continue to use independent foundries to manufacture
digital speech processors and other products for the consumer telephone and
computer telephony markets. To obtain an adequate supply of wafers, we are
considering various alternative production sites. Our reliance on
independent foundries involves a number of risks, including the foundries'
achievement of acceptable manufacturing yields and allocation of capacity to
us.
12
In addition to our speech processors, digital TADs include various other
components such as analog random access memory circuits (ARAMs), coders and
flash memories that are supplied by third party manufacturers. Temporary
fluctuations in the pricing and availability of these components could have a
material adverse effect on sales of our speech processors for digital TADs
and other computer telephony products, which could in turn have a material
adverse effect on our business, financial condition and results of
operations.
COMPETITION
The markets in which we operate are extremely competitive and we expect
that competition will increase. In each of our business activities, we face
current and potential competition from competitors that have significantly
greater financial, technical, manufacturing, marketing, sales and
distribution resources and management expertise than we do. Our future
prospects will depend greatly on our ability to successfully develop and
introduce new products that are responsive to market needs. We cannot assure
that we will be able to successfully develop or market any of these products.
The principal competitive factors in the digital TAD speech processor
market include price, speech quality, compression ratio, value-added features
such as variable speed message playback and speakerphone, customer support
and the timing of product introductions by us and our competitors. We
believe that we are competitive with respect to each of these factors.
Currently, the key competitive challenge for digital TADs is the relative
lower cost of analog tape-based machines. We believe that the continuing
decline in prices of digital speech processors and silicon memory devices
will close the cost gap between the analog and digital technology solution.
Our principal competitors in the TAD speech processor market include ISD,
Lucent Microelectronics, Macronix, Toshiba, Siemens and Zilog.
The principal competitive factors in the DSP core designs market for
high volume, low cost applications include such features as small size, low
power, flexible I/O blocks and associated development tools. Our DSP core
designs compete with companies such as Analog Devices, Atmel, Clarkspur
Designs, SGS Thompson and Siemens, which license DSP platforms, and Analog
Devices, Lucent Microelectronics, Motorola, and Texas Instruments, which sell
their own complete general purpose DSP solutions.
Several digital speech compression technologies exist and are currently
being developed that may be promoted by competitors as industry standards for
the computer telephony and personal computer markets. Our TrueSpeech
algorithms compete with ADPCM, and the speech compression technologies used
in GSM and VSELP protocols, each of which is available in the public domain.
There are many versions of these algorithms that have been developed by
different parties, including AT&T, which has been actively involved in the
development of GSM protocols, and Motorola, which developed the original
VSELP protocols. Although TrueSpeech has achieved a degree of acceptance in
the computer telephony and personal computer markets, ADPCM and the speech
compression technologies for GSM and VSELP protocols are widely used in the
development and implementation of new products in the telephony industry. In
addition, other advanced speech compression algorithms have been introduced
by competitors that offer compression ratios comparable to the TrueSpeech
algorithms, including a competing algorithm sponsored by the University of
Sherbrooke that the ITU standards committee has adopted as the speech
compression standard for DSVD modems. Large companies, such as AT&T,
Creative Labs, Motorola and Rockwell, have speech processing technologies
that can be applied to speech compression for use in the same markets for
which our products are targeted.
Price competition in the markets in which we currently compete and
propose to compete is intense and may increase, which could have a material
adverse effect on our business, financial condition and results of
operations. We have experienced and expect to continue to experience
increased competitive pricing pressures for our digital TAD speech
processors. During 1998, we were able to completely offset this decrease on
an annual basis through manufacturing cost reductions. However, we cannot
assure that we will be able to further reduce product costs, or be able to
compete successfully as to price or any other of the key competitive factors.
13
RESEARCH AND DEVELOPMENT
We believe that continued timely development and introduction of new
products is essential to maintain our competitive position. We currently
conduct most of our product development effort in-house and at December 31,
1998 had a staff of 66 research and development personnel located in Israel.
We also employ independent contractors to assist with certain product
development and testing activities. We spent approximately $10.2 million in
1998, $8.4 million in 1997 and $8.5 million in 1996 on research and
development activities.
RELATIONSHIPS WITH AFFILIATED COMPANIES
We have a $1.8 million equity investment in, and have entered into
technology arrangements with, AudioCodes Ltd. ("AudioCodes"), an Israeli
corporation primarily engaged in design, development, manufacturing and
marketing of hardware and software products that enable simultaneous
transmission of voice and data over networks such as Internet, ATM and Frame
Relay. We currently own 29% of the capital stock of AudioCodes, a company
formed in April 1993 by two of our former employees. Pursuant to an
agreement between DSP Group and AudioCodes, DSP Group and AudioCodes have
joint ownership of any speech compression technology developed by AudioCodes.
We have established this relationship to complement our in-house product
development efforts.
In July 1996, we invested $2.0 million of cash for approximately 40% of
the equity interest in Aptel Ltd. ("Aptel"), an Israeli company. In
connection with the investment, we incurred a one-time write-off of acquired
in-process technology of $1.5 million. In October 1997, we invested
approximately $176,000 in convertible debentures issued by Aptel. In
December 1997, we converted our debentures and Aptel's shareholders,
including DSP Group, exchanged their shares in Aptel for common shares in
Nexus Telecommunications Systems Ltd. ("Nexus"), an Israeli company
registered and traded on the Nasdaq SmallCap Market. In April 1998, we sold
all of our Nexus shares in a private transaction and realized a pre-tax one
time gain on marketable equity securities of approximately $1.1 million.
This one time gain is included under "Other income (expenses)" in our
consolidated statements of income for the year ended December 31, 1998.
LICENSES, PATENTS AND TRADEMARKS
We have been granted seven United States patents, one Canadian patent
and one Israeli patent, and have seven patents pending in the United States,
two patents pending in Japan, two patents pending in Israel and one patent
pending in Europe. We actively pursue foreign patent protection in other
countries of interest to us. Our policy is to apply for patents or for other
appropriate statutory protection when we develop valuable new or improved
technology. The status of patents involves complex legal and factual
questions, and the breadth of claims allowed is uncertain. Accordingly, we
cannot assure that any patent application filed by us will result in a patent
being issued, or that our patents, and any patents that may be issued in the
future, will afford adequate protection against competitors with similar
technology; nor can we provide assurance that patents issued to us will not
be infringed or designed around by others. In addition, the laws of certain
countries in which our products are or may be developed, manufactured or
sold, including Hong Kong, Japan and Taiwan, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States.
We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, suppliers, employees and
consultants, and through other security measures. Although we intend to
protect our rights vigorously, we cannot provide assurance that these
measures will be successful.
The semiconductor and software industries are subject to frequent
litigation regarding patent and other intellectual property rights. While we
have not been involved in any material patent or other intellectual property
rights litigation to date, we cannot provide assurance that third parties
will not assert claims against us with respect to existing or future products
or that we will not need to assert claims against
14
third parties to protect our proprietary technology. For example, AT&T has
asserted that G.723.1, which is primarily composed of a TrueSpeech algorithm,
includes certain elements covered by patents held by AT&T and has requested
that video conferencing equipment manufacturers license this technology from
AT&T. If litigation becomes necessary to determine the validity of any third
party claims or to protect our proprietary technology, it could result in
significant expense to us and could divert the efforts of our technical and
management personnel, whether or not the litigation is determined in our
favor. In the event of an adverse result in any litigation, we could be
required to expend significant resources to develop non-infringing technology
or to obtain licenses to the technology that is the subject of the
litigation. We cannot provide assurance that we would be successful in
developing non-infringing technology or that any licenses would be available
on commercially reasonable terms.
We have been issued registered trademarks for the use of the
PineDSPCore, OakDSPCore, TeakDSPCore, OCEM-Registered Trademark- and
TrueSpeech trademarks. In addition, we applied for trademarks for Full Duplex
SpeakerPhone, TeakLite, Triple Rate Coder, and PalmDSPCore.
While our ability to compete may be affected by our ability to protect
our intellectual property, we believe that, because of the rapid pace of
technological change in the industry, our technical expertise and ability to
innovate on a timely basis will be more important in maintaining our
competitive position than protection of our intellectual property. We
believe that, because of the rapid pace of technological change in the
consumer telephone, computer telephony and personal computer industries,
patents and trade secret protection are important but must be supported by
other factors such as the expanding knowledge, ability and experience of our
personnel, new product introductions and frequent product enhancements.
Although we continue to implement protective measures and intend to defend
our intellectual property rights, we cannot provide assurance that these
measures will be successful.
BACKLOG
At December 31, 1998, our backlog was approximately $8.7 million
compared with approximately $16.8 million at December 31, 1997. We include
in our backlog all accepted product purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year and
fees specified in executed licensing contracts. Our business in digital TAD
speech processors is characterized by short-term order and shipment
schedules. Product orders in our current backlog are subject to changes in
delivery schedules or to cancellation at the option of the purchaser without
significant penalty. Accordingly, although useful for scheduling production,
backlog as of any particular date may not be a reliable measure of our sales
for any future period.
EMPLOYEES
At December 31, 1998, we had 120 employees, including 66 in research and
development, 27 in marketing and sales and 27 in corporate and administration
and manufacturing coordination. Competition for personnel in the
semiconductor, software and personal computer industries in general is
intense. We believe that our future prospects will depend, in part, on our
ability to continue to attract and retain highly-skilled technical, marketing
and management personnel, who are in great demand. In particular, there is a
limited supply of highly-qualified engineers with digital signal processing
experience. None of our employees is represented by a collective bargaining
agreement, nor have we ever experienced any work stoppage. We believe that
our employee relations are good.
15
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
We experience, and will continue to experience, significant fluctuations
in sales and operating results from quarter to quarter. Our quarterly results
fluctuate due to a number of factors:
- fluctuations in volume and timing of product orders;
- timing of recognition of license fees;
- level of per unit royalties;
- changes in demand for our products due to seasonal customer buying
patterns and other factors;
- timing of new product introductions by us or our customers, licensees
or competitors;
- changes in the mix of products sold by us;
- fluctuations in the level of sales by OEMs and other vendors of
products incorporating our products; and
- general economic conditions, including the changing economic
conditions in Asia.
Each of the above factors is difficult to forecast and thus could have a
material adverse effect on our business, financial condition and results of
operations.
Through 1999, we expect that revenues from our DSP core designs and
TrueSpeech algorithms will be derived primarily from license fees rather than
per unit royalties. The uncertain timing of these license fees has caused,
and may continue to cause, quarterly fluctuations in our operating results.
Our per unit royalties from licenses are totally dependent upon the success
of our third party licensees in introducing products utilizing our technology
and the success of those third party products in the marketplace. Per unit
royalties from TrueSpeech licensees have not been significant to date.
In addition, in the fourth quarter of 1998 and in the first quarter of
1999, we experienced a sharp decrease in product revenues as a result of the
phasing out of an old line of digital TAD products, while shipments from a
new product line are expected to begin in the second quarter of 1999.
OUR AVERAGE SELLING PRICES CONTINUE TO DECLINE
We have experienced a decrease in the average selling prices of our
digital TAD speech processors, but have to date been able to offset this
decrease on an annual basis through manufacturing cost reductions and the
introduction of new products with higher performance. However, we cannot
guarantee that our on-going efforts will be successful or that they will keep
pace with the anticipated, continuing decline in average selling prices.
WE DEPEND ON THE DIGITAL TAD MARKET WHICH IS HIGHLY COMPETITIVE
Sales of digital TAD products comprise a substantial portion of our
product sales. Any adverse change in the digital TAD market or in our
ability to compete and maintain our position in that market would have a
material adverse effect on our business, financial condition and results of
operations. The digital TAD market and the markets for our products in
general are extremely competitive and we expect that competition will only
increase. Our existing and potential competitors in each of our markets
include large and emerging domestic and foreign companies, many of which have
significantly greater financial, technical, manufacturing, marketing, sale
and distribution resources and management expertise than we do. It is
possible that we may one day be unable to respond to increased price
competition for TAD speech processors or other products through the
introduction of new products or reductions of manufacturing costs. This
inability would have a material adverse effect on our business, financial
condition and results of operations. Likewise, any significant delays by us
in developing, manufacturing or shipping new or
16
enhanced products would also have a material adverse effect on our business,
financial condition and results of operations.
WE DEPEND ON REVENUES FROM A CURRENTLY UNSTABLE ASIAN MARKET
In 1997, we generated approximately $19.9 million, or 39% of our total
product sales, from sales to customers located in South Korea, Taiwan,
Singapore and Hong Kong. However, in 1998, due to economic problems in some
of these countries, most notably South Korea and Singapore, our product sales
in this region decreased to $10.9 million, or 22% of our total product sales.
The decline in sales from Southeast Asia countries resulted in a decrease in
our backlog, but was partially offset by increased orders from Japan. If
this negative economic trend in the Asian markets continues, it may result in
a further decrease of our backlog in 1999. We cannot provide assurance that
continued negative economic development in Asia will not have a material
adverse effect on our future operating performance.
WE DEPEND ON INDEPENDENT FOUNDRIES TO MANUFACTURE OUR INTEGRATED CIRCUIT
PRODUCTS
All of our integrated circuit products are manufactured by independent
foundries. While these foundries have been able to adequately meet the
demands of our increasing business, we are and will continue to be dependent
upon these foundries to achieve acceptable manufacturing yields, quality
levels and costs, and to allocate to us a sufficient portion of foundry
capacity to meet our needs in a timely manner. To meet our increased wafer
requirements, we have added additional independent foundries to manufacture
our digital TAD speech processors. Our revenues could be materially and
adversely affected should any of these foundries fail to meet our request for
products due to a shortage of production capacity, process difficulties, low
yield rates or financial instability.
WE DEPEND ON INTERNATIONAL OPERATIONS, PARTICULARLY IN ISRAEL
We are subject to the risks of doing business internationally,
including:
- unexpected changes in regulatory requirements;
- fluctuations in the exchange rate for the U.S. dollar;
- imposition of tariffs and other barriers and restrictions;
- burdens of complying with a variety of foreign laws;
- political and economic instability; and
- changes in diplomatic and trade relationships.
In particular, our principal research and development facilities are
located in the State of Israel and, as a result, at December 31, 1998, 97 of
our 120 employees were located in Israel, including all 66 of our research
and development personnel. In addition, although DSP Group is incorporated
in Delaware, a majority of our directors and executive officers are residents
of Israel. Therefore, we are directly affected by the political, economic
and military conditions to which Israel is subject.
Moreover, many of our expenses in Israel are paid in Israeli currency
which subjects us to the risks of foreign currency fluctuations and to
economic pressures resulting from Israel's generally high rate of inflation.
The rate of inflation in Israel was 8.6% in 1998 and 7.0% in 1997. While
substantially all of our sales and expenses are denominated in United States
dollars, a portion of our expenses are denominated in Israeli shekels. Our
primary expenses paid in Israeli currency are employee salaries and lease
payments on our Israeli facilities. As a result, an increase in the value of
Israeli currency in comparison to the United States dollar could increase the
cost of technology development, research and development expenses, sales and
marketing expenses and general and administrative expenses. We cannot
provide assurance that currency fluctuations, changes in the rate of
inflation in Israel or any of the other factors mentioned above will not have
a material adverse effect on our business, financial condition and results of
operations.
17
WE DEPEND ON THIRD PARTIES AND THEIR SUPPLIERS TO OBTAIN REQUIRED
COMPLEMENTARY COMPONENTS
Some of the raw materials, components and subassemblies included in the
products manufactured by our third party customers, which also incorporate
our products, are obtained from a limited group of suppliers. Supply
disruptions, shortages or termination of any of these sources could have an
adverse effect on our business and results of operations due to the delay or
discontinuance of orders for our products by customers until the other
necessary components are available.
WE DEPEND UPON THE ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH
Our prospects are partially dependent upon the establishment of industry
standards for digital speech compression based on TrueSpeech algorithms in
the computer telephony and Voice over IP markets. The continuing development
of industry standards utilizing TrueSpeech algorithms would create an
opportunity for us to develop and market speech co-processors that provide
TrueSpeech solutions and enhance the performance and functionality of
products incorporating these co-processors.
In February 1995, the ITU established G.723.1, which is predominately
composed of a TrueSpeech algorithm, as the standard speech compression
technology for use in video conferencing over public telephone lines. In
March 1997, the International Multimedia Teleconferencing Consortium, a
nonprofit industry group, recommended the use of G.723.1 as the default audio
coder for all voice transmissions over the Internet or for IP applications
for H.323 conferencing products.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
DSP Group has pursued, and will continue to pursue, growth opportunities
through internal development and acquisition of complementary businesses,
products and technologies. We are unable to predict whether or when any
prospective acquisition will be completed. The process of integrating an
acquired business may be prolonged due to unforeseen difficulties and may
require a disproportionate amount of our resources and management's
attention. We cannot provide assurance that we will be able to successfully
identify suitable acquisition candidates, complete acquisitions, integrate
acquired businesses into our operations or expand into new markets. Once
integrated, acquisitions may not achieve comparable levels of revenues,
profitability or productivity as the existing business of DSP Group or
otherwise perform as expected. The occurrence of any of these events could
harm our business, financial condition or results of operations.
Additionally, future acquisitions may require substantial capital resources,
which may require us to seek additional debt or equity financing.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; RISKS OF INFRINGEMENT OF
RIGHTS OF OTHERS
As is typical in the semiconductor industry, we have been and may from
time to time be notified of claims that we may be infringing patents or
intellectual property rights owned by third parties. For example, AT&T has
asserted that G.723.1, which is primarily composed of a TrueSpeech algorithm,
includes certain elements covered by patents held by AT&T, and has requested
that video conferencing manufacturers license the technology from AT&T.
Other organizations including Lucent Microelectronics, NTT and VoiceCraft
have raised public claims that they also have patents related to the G.723.1
technology.
If it appears necessary or desirable, we may try to obtain licenses
under those patents or intellectual property rights that we are allegedly
infringing. Although holders of these types of intellectual property rights
commonly offer these licenses, we cannot assure that licenses will be offered
or that terms of any offered licenses will be acceptable to us. Our failure
to obtain a license for key intellectual property rights from a third party
for technology used by us could cause us to incur substantial liabilities and
to suspend the manufacturing of products utilizing the technology. We
believe that the ultimate resolution of these matters will not have a
material adverse effect on our financial position, results of operations, or
cash flows.
18
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY YEAR 2000 READINESS ISSUES
During the next year, many software programs may not recognize calendar
dates beginning in the Year 2000. This problem could force computers or
machines that utilize date dependent software to either shut down or provide
incorrect information. To address this problem, we have examined our
computer and information systems and have contacted our primary processing
vendors, suppliers and other third parties.
Although we believe that our products are Year 2000 compliant,
undetected errors or defects may remain. Disruptions to our business or
unexpected costs may arise because of undetected errors or defects in the
technology used in our products. If we, or any of our key suppliers or
customers, fail to mitigate internal and external Year 2000 risks, we may
temporarily be unable to process transactions, manufacture products, send
invoices or engage in similar normal business activities or we may experience
a decline in sales, which could have a material adverse effect on our
business, financial condition and results of operations. See the section
labeled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report to Stockholders for more
information.
OUR STOCK PRICE MAY BE VOLATILE
Announcements of developments related to our business, announcements by
competitors, quarterly fluctuations in our financial results and general
conditions in the highly dynamic industry in which we compete or the national
economies in which we do business, and other factors could cause the price of
our common stock to fluctuate, perhaps substantially. In addition, in recent
years the stock market has experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies.
These factors and fluctuations could have a material adverse effect on the
market price of our common stock.
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K
The information contained in this Annual Report on Form 10-K and in the
other documents referenced herein contains forward-looking statements that
involve a number of risks and uncertainties. Forward-looking statements can
be identified by the use of forward-looking terminology, including
"believes," "expects," "may," "will," "should" or "anticipates," or the
negative of these terms or other variations or comparable terminology, or by
discussions of strategy that involve risks and certainties. Numerous
factors, including economic and competitive conditions, timing and volume of
incoming orders, shipment volumes, product margins, and foreign exchange
rates, could cause actual results to differ materially from those described
in these statements. These forward-looking statements are based on current
expectations and we assume no obligation to update this information.
19
ITEM 2. PROPERTIES.
DSP Group's operations in the United States are located in an approximately
15,700 square foot leased facility in Santa Clara, California. This
facility houses our marketing and support, North American sales,
operations, manufacturing coordination and administrative personnel. This
facility is leased through December 1999. In August 1997, our subsidiary,
DSP Group, Ltd. moved to a facility in Herzlia Pituach, Israel with
approximately 27,000 square feet pursuant to a lease ending in May 2002.
In September 1998, DSP Group, Ltd. leased an additional 9,400 square feet
at its current facility in Herzlia Pituch, Israel, through November 2003.
In August 1997, DSP Group, Ltd. signed an additional lease agreement for
office space in Omer, located in the south of Israel, for 840 square feet
through September 1999.
ITEM 3. LEGAL PROCEEDINGS.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in
the United States District Court for the Northern District of California
against DSP Group. The action alleges breach of contract, breach of
implied covenant of good faith and fair dealing and requests an accounting
by us in connection with our termination of the Sales Representative
Agreement between BEKA and us. The complaint seeks an unspecified amount
of damages. The parties completed non-binding mediation in May 1998, but
were unable to settle the case. Discovery in the case has been completed.
Trial has been set for May 11, 1999. DSP Group believes the lawsuit to be
without merit and intends to defend itself vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information contained in the section labeled "Price Range of Common
Stock" in DSP Group's Annual Report to Stockholders for the year ended
December 31, 1998 is incorporated herein by reference.
The information contained in the section labeled "Subsequent Events--Sale
of Common Stock" in DSP Group's Annual Report to Stockholders for the year
ended December 31, 1998 is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information contained in the section labeled "Selected Consolidated
Financial Data" in DSP Group's Annual Report to Stockholders for the year
ended December 31, 1998 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information contained in the section labeled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in DSP
Group's Annual Report to Stockholders for the year ended December 31, 1998
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.
The information contained in the section labeled "Quantitative and
Qualitative Disclosures About Market Risk" in DSP Group's Annual Report to
Stockholders for the year ended December 31, 1998 is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and related notes and independent
auditors report in DSP Group's Annual Report to Stockholders for the year
ended December 31, 1998 are incorporated herein by reference.
The information contained in the section labeled "Quarterly Data" in DSP
Group's Annual Report to Stockholders for the year ended December 31, 1998
is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to the
directors and executive officers of DSP Group:
NAME AGE POSITION
Igal Kohavi 59 Chairman of the Board
Eliyahu Ayalon 56 President, Chief Executive Officer and Director
Avi Basher 42 Vice President of Finance,
Chief Financial Officer and Secretary
David Tolub 48 Vice President-- Sales
Gideon Wertheizer 42 Vice President-- Marketing
Samuel L. Kaplan (1)(2) 62 Director
Zvi Limon (2) 40 Director
Millard Phelps (1)(2) 70 Director
Yair Shamir (1)(2) 53 Director
Saul Shani (1) 44 Director
- --------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
IGAL KOHAVI has been Chairman of the Board of DSP Group since September
1995. Dr. Kohavi has served since 1995 as Chairman of the Venture Funds of
Dovrat-Sherm & Co. Ltd., an Israeli investment bank at which he formerly served
as President from October 1994 to January 1996. Between March 1993 and October
1994, he served as Managing Director of Clal Electronic Industries Ltd.
Dr. Kohavi also serves as a director of Mercury Interactive Corporation (Nasdaq:
MERQ) ("Mercury Interactive"), a provider of client/server and web testing
tools.
ELIYAHU AYALON joined DSP Group in April 1996 as President, Chief Executive
Officer and Director. From May 1992 to April 1996, Mr. Ayalon served as
President and Chief Executive Officer of Mennen Medical Ltd., a developer and
manufacturer of medical instruments and apparatus.
AVI BASHER joined DSP Group in October 1996 as Vice President of Finance
and Chief Financial Officer. In January 1997, he was elected to serve as
Secretary of DSP Group as well. Prior to joining DSP Group, Mr. Basher served
from December 1992 to October 1996 as Chief Financial Officer of InterPharm
Laboratories, Ltd., a healthcare biotechnology company.
DAVID TOLUB joined DSP Group in May 1998 as Vice President, Sales. Prior
to joining DSP Group, Mr. Tolub served from September 1993 to May 1998 as Vice
President, Marketing of NICE Systems, a provider of Computer Telephony
Integrated (CTI) recording and quality measurement solutions.
GIDEON WERTHEIZER joined DSP Group in September 1990 as Project Manager of
DSP Group's VLSI Design Center and became Vice President of the VLSI Design
Center in August 1995. In November 1997, Mr. Wertheizer was appointed Vice
President, Marketing of DSP Group.
22
SAMUEL L. KAPLAN has been a Director of DSP Group since May 1993.
Mr. Kaplan has been a partner in the law firm of Kaplan, Strangis and Kaplan,
P.A. of Minneapolis, Minnesota, since October 1978. Mr. Kaplan also serves as a
trustee of USP Real Estate Investment Trust, a real estate investment trust.
ZVI LIMON has been a Director of DSP Group since February 1999. Mr. Limon
has served as Chairman of Limon Holdings Ltd., a consulting and investment
advisory firm since 1993. He presently serves as a director of Eltek Ltd.
(Nasdaq: ELTKF), a developer and manufacturer of PC boards.
MILLARD PHELPS has been a Director of DSP Group since July 1995.
Mr. Phelps has been most recently associated with Hambrecht & Quist, an
investment banking firm, where he served from 1984 to August 1997 as Advisory
Director in the corporate finance area, advising on public and private financing
matters. Mr. Phelps has worked in the semiconductor industry for more than 20
years at several manufacturing companies, including Texas Instruments
Incorporated, Fairchild Corporation, Intersil Inc. and Synertek Inc. He
currently serves as a director of Trident Microsystems, Inc., a designer,
developer and marketer of integrated circuit graphics and multimedia products.
YAIR SHAMIR has been a Director of DSP Group since October 1996 and has
served as President and Chief Executive Officer of VCON Telecommunications,
Ltd., a developer and marketer of video conferencing systems, since February
1997. From July 1995 to February 1997, Mr. Shamir served as the Executive Vice
President of The Challenge Fund-Etgar L.P., a venture capital firm. From
January 1994 to July 1995, he served as Chief Executive Officer for Elite
Industries, Ltd., a food products company. Mr. Shamir currently serves as a
director of Mercury Interactive, Orckit Communications, Limited, a developer and
manufacturer of local loop communications systems and VCon Telecommunications,
Ltd.
SAUL SHANI has been a Director of DSP Group since February 1999. Mr. Shani
has served since 1996 as Managing Director of Limon Holdings, Ltd., a consulting
and investment advisory firm. He also has served as Chairman and Director of
Global Village Telecom N.V., a private company engaged in providing satellite
based telephony services, since 1998. From 1990 to 1996, Mr. Shani served as
co-founder, CEO, Chairman, and Director of Sapiens International Corporation
NV (Nasdaq: SPNSF), a provider of enterprise-wide solutions for software
applications.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act"),
requires DSP Group's directors, executive officers and persons who own more than
10% of DSP Group's common stock (collectively, "Reporting Persons") to file
reports of ownership and changes in ownership of DSP Group's common stock with
the Securities and Exchange Commission and The Nasdaq Stock Market, Inc. Copies
of these reports are also required to be delivered to DSP Group.
Except as set forth below, we believe, based solely on our review of the
copies of such reports received or written representations from certain
Reporting Persons, that during the fiscal year ended December 31, 1998, all
Reporting Persons complied with all applicable filing requirements, except for
the following: Mr. Phelps inadvertently failed to report a sale of DSP
Group's common stock on his Form 4 for the period of the sale; such sale was
subsequently reported on a later Form 4.
23
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table sets forth all compensation earned by DSP Group's Chief
Executive Officer and each of the four other most highly compensated executive
officers of DSP Group (including one former executive officer) (collectively,
the "Named Executive Officers") for the years ended December 31, 1998, 1997 and
1996.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
SECURITIES
SALARY (1) BONUS (2) UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR $ $ (#)
- --------------------------- ---- ---------------- ------------------------------------
Eliyahu Ayalon 1998 $294,952 $240,000 150,000
Chief Executive Officer, President and 1997 283,747 212,500 150,000
Director 1996 157,493(3) 72,000 160,000
Igal Kohavi 1998 294,630 240,000 150,000
Chairman of the Board 1997 280,620 212,500 150,000
1996 250,000 72,000 140,000
Avi Basher 1998 174,082 45,000 10,000
Vice President of Finance, Chief Financial 1997 163,299 45,000 30,000
Officer and Secretary 1996 31,822(4) -- 50,000
David Tolub (5) 1998 110,859(6) -- 50,000
Vice President -- Sales 1997 -- -- --
1996 -- -- --
Gideon Wertheizer (7) 1998 172,122 50,000 20,000
Vice President -- Marketing 1997 146,362 45,000 15,000
1996 -- -- --
Amir Karni (8) 1998 125,644 10,000 10,000
Former Vice President, Research and Development 1997 61,317(9) -- 22,000
1996 -- -- --
- --------------------------
(1) The salaries of officers located in Israel include social benefit payments
and car allowances.
(2) DSP Group's executive officers are eligible for annual cash bonuses. Such
bonuses are generally based upon achievement of corporate performance
objectives determined by DSP Group's Compensation Committee. Bonuses are
awarded by the Compensation Committee based upon individual, as well as
corporate, performance. DSP Group pays bonuses in the year following that
in which the bonuses were earned.
(3) Represents Mr. Ayalon's salary from his appointment as Chief Executive
Officer, President and Director of DSP Group in April 1996.
(4) Represents Mr. Basher's salary from his appointment as Vice President of
Finance, and Chief Financial Officer of DSP Group in October 1996.
(5) Mr. Tolub was appointed an executive officer of DSP Group in May 1998.
(6) Includes $12,357 of commissions earned by Mr. Tolub in 1998.
(7) Mr. Wertheizer was appointed an executive officer of DSP Group in November
1997.
(8) Mr. Karni resigned as Vice President, Research and Development in
November 1998.
(9) Represents Mr. Karni's salary from his appointment as Vice President of
Research and Development of DSP Group in July 1997.
24
OPTION GRANTS
The following table sets forth certain information with respect to stock
options granted during 1998 to each of the Named Executive Officers. In
accordance with the rules of the Securities and Exchange Commission, also shown
below is the potential realizable value over the term of the option (the period
from the grant date to the expiration date) based on assumed rates of stock
appreciation of 5% and 10%, compounded annually. These amounts are based on
certain assumed rates of appreciation and do not represent DSP Group's estimate
of future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of the DSP Group's common stock.
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS (1)
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO TERM
GRANTED EMPLOYEES EXERCISE EXPIRATION
NAME (#) IN 1998 PRICE DATE 5% 10%
- ------------------------- --------------- ---------- ------------- ---------- -------------- -----------
Eliyahu Ayalon 150,000 18.94% $18.563 07/02/05 $1,133,551 $2,641,655
Igal Kohavi 150,000 18.94% 18.563 07/02/05 1,133,551 2,641,655
Avi Basher 10,000 1.26% 18.875 08/03/05 76,840 179,070
David Tolub 50,000 6.31% 19.50 05/27/05 396,923 924,999
Gideon Wertheizer 20,000 2.53% 18.875 08/03/05 153,680 358,141
Amir Karni 10,000 1.26% 18.875 08/03/05 76,840 179,070
------------------------------
(1) All options were granted pursuant to the 1991 Employee and Consultant Stock
Plan.
25
Option Exercises and Option Values
The following table sets forth information concerning option exercises
during 1998 and the aggregate value of unexercised options as of December 31,
1998 held by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN 1998
AND OPTION VALUES AT DECEMBER 31, 1998
NUMBER OF SECURITIES VALUE OF UNEXERCISED
AGGREGATE OPTION UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
EXERCISES IN 1998 OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
------------------ --------------------------
SHARES
ACQUIRED VALUE
ON EXERCISE REALIZED
NAME (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- ------------- --------- ------------ ------------- ----------- -------------
Eliyahu Ayalon -- -- 85,000 257,500 $423,594 $735,781
Igal Kohavi -- -- 177,500 252,500 719,219 686,406
Avi Basher 12,500 $146,945 11,250 53,750 115,313 543,438
David Tolub -- -- -- 50,000 -- 68,750
Gideon Wertheizer 5,586 57,959 8,437 36,645 21,563 94,160
Amir Karni -- -- 6,874 25,126 20,193 64,432
- --------------------------
(1) Calculated on the basis of the closing price of DSP Group's common stock as
reported on the Nasdaq National Market on December 31, 1998 of $20.875 per
share, minus the exercise price.
(2) Calculated on the basis of the broker's reported sale price of DSP Group's
common stock subject to the option, minus the exercise price.
26
EMPLOYMENT AGREEMENTS
The following Named Executive Officers have written employment agreements
with DSP Group: Messrs. Ayalon, Basher and Kohavi.
In April 1996, Mr. Ayalon entered into an employment agreement with DSP
Semiconductors, Ltd., DSP Group's wholly owned subsidiary in Israel ("DSP
Semiconductors"), pursuant to which Mr. Ayalon is to serve as the President and
Chief Executive Officer of DSP Group. The term of the agreement is indefinite.
The agreement originally provided for a fixed monthly salary of NIS 47,000
(approximately U.S. $15,000), which shall be adjusted monthly to the Consumer
Price Index of Israel. In June 1997, the Board of Directors increased
Mr. Ayalon's monthly salary to NIS 69,295 (approximately U.S. $20,500).
Mr. Ayalon also is entitled to an annual bonus, the amount of which is
determined at the sole discretion of the Board of Directors. The agreement may
be terminated by DSP Group or Mr. Ayalon, without cause (as defined in the
agreement), upon six months advance written notice. Mr. Ayalon's employment
agreement was amended in November 1997 to provide for the following:
(i) Mr. Ayalon's base compensation shall be fixed at the commencement of each
year, but shall not be subject to reduction during the term of the agreement;
(ii) if Mr. Ayalon terminates the agreement without good reason or if DSP Group
terminates the agreement for cause, then no further payments shall be made to
Mr. Ayalon pursuant to the agreement and he shall be subject to a one-year
prohibition against competition in addition to the customary prohibitions
against disclosure of trade secrets; (iii) upon a change of control of DSP Group
or if the agreement is terminated by Mr. Ayalon for good reason or by DSP Group
without cause, then all rights of Mr. Ayalon under the agreement would continue
for two years and all options held by Mr. Ayalon would accelerate and
immediately vest and be exercisable in whole or in part at any time during the
remaining two-year term of the agreement; and (iv) in the event of death or
permanent disability of Mr. Ayalon, all options shall accelerate and immediately
vest.
In February 1997, Mr. Basher entered into an employment agreement with DSP
Semiconductors pursuant to which Mr. Basher is to serve as the Vice President of
Finance and Chief Financial Officer of DSP Group. The term of the agreement is
indefinite. The agreement provides for a fixed monthly salary of NIS 31,970
(approximately U.S. $10,000), which shall be adjusted monthly to the Consumer
Price Index of Israel. Mr. Basher also is entitled to an annual bonus, the
amount of which is determined at the sole discretion of the Board of Directors.
The agreement may be terminated by DSP Semiconductors or Mr. Basher, without
cause (as defined in the agreement), upon three months advance written notice.
In June 1997, Mr. Kohavi entered into an employment agreement with DSP
Semiconductors pursuant to which Mr. Kohavi is to serve as the Chairman of
the Board of Directors of DSP Group. The term of the agreement is
indefinite. The agreement provided for a fixed monthly salary of NIS 69,295
(approximately U.S. $20,500), which shall be adjusted monthly to the Consumer
Price Index of Israel. Mr. Kohavi also shall be entitled to an annual bonus,
the amount of which is determined at the sole discretion of the Board of
Directors. The agreement may be terminated by DSP Group or Mr. Kohavi,
without cause (as defined in the agreement), upon six months advance written
notice. Mr. Kohavi's employment agreement was amended in November 1997 to
provide for the following: (i) Mr. Kohavi's base compensation shall be fixed
at the commencement of each year, but shall not be subject to reduction
during the term of the agreement; (ii) if Mr. Kohavi terminates the agreement
without good reason or if DSP Group terminates the agreement for cause, then
no further payments shall be made to Mr. Kohavi pursuant to the agreement and
he shall be subject to a one year prohibition against competition in addition
to the customary prohibitions against disclosure of trade secrets; (iii) upon
a change of control of DSP Group or if the agreement is terminated by Mr.
Kohavi for good reason or by DSP Group without cause, then all rights of Mr.
Kohavi under the agreement would continue for two years and all options held
by Mr. Kohavi would accelerate and immediately vest and be exercisable in
whole or in part at any time during the remaining two-year term of the
agreement; and (iv) in the event of death or permanent disability of Mr.
Kohavi, all options shall accelerate and immediately vest.
27
COMPENSATION OF DIRECTORS
Directors who are employees of DSP Group do not receive any additional
compensation for their services as directors. Directors who are not employees
of DSP Group receive an annual retainer of $20,000, payable in quarterly
installments of $5,000 each. The retainer contemplates attendance at four Board
of Director meetings per year. Additional Board of Directors meetings of a
face-to-face nature are compensated at the rate of $500 per meeting. In
addition, committee meetings of a face-to-face nature or on a telephonic basis
are compensated at the rate of $500 per meeting. All directors are reimbursed
for expenses incurred in connection with attending Board and committee meetings.
Each outside director of DSP Group is also entitled to participate in the
1993 Director Option Plan (the "Director Option Plan"). The Director Option
Plan provides for the grant of non-statutory options to non-employee directors
of DSP Group. The Director Option Plan is designed to work automatically;
however, to the extent administration is necessary, it will be provided by the
Board of Directors. The Director Option Plan provides that each eligible
director is granted an option to purchase 15,000 shares of DSP Group common
stock under the Director Option Plan on the date on which he or she first
becomes a director of DSP Group. In addition, on the same date, each new
director is granted an option to purchase 10,000 shares of common stock under
the 1991 Employee and Consultant Stock Plan (the "1991 Stock Plan").
Thereafter, each outside director is granted an option to purchase 5,000
additional shares of common stock (a "Subsequent Option") on January 1 of each
year if, on such date, he or she shall have served on DSP Group's Board of
Directors for at least six months. In addition, an option to purchase
5,000 shares of common stock (a "Committee Option") is granted on January 1 of
each year to each outside director for each committee of the Board of Directors
on which he or she shall have served as a chairperson for at least six months.
On January 2, 1998, each of Messrs. Kaplan, Phelps and Shamir were granted
Subsequent Options to purchase up to 5,000 shares of DSP Group common stock, at
an exercise price of $19.25 per share, under the Director Option Plan.
On January 2, 1998, Mr. Kaplan was granted a Committee Option to purchase
up to 5,000 shares of DSP Group common stock, at an exercise price of $19.25 per
share, under the Director Option Plan.
On July 2, 1998 each of Messrs. Ayalon and Kohavi were granted options to
purchase up to 150,000 shares of DSP Group common stock, at an exercise price of
$18.5625, under the 1991 Stock Plan.
On January 4, 1999, each of Messrs. Kaplan, Phelps and Shamir were granted
Subsequent Options to purchase up to 5,000 shares of DSP Group common stock, at
an exercise price of $20.375 per share, under the Director Option Plan.
On January 4, 1999, each of Messrs. Kaplan and Phelps were granted
Committee Options to purchase up to 5,000 shares of DSP Group common stock, at
an exercise price of $20.375 per share, under the Director Option Plan.
On February 5, 1999, the date on which they were appointed as directors of
DSP Group, each of Messrs. Limon and Shani were granted an option to purchase up
to 15,000 shares of DSP Group common stock, at an exercise price of $13.625 per
share under the Director Option Plan. On the same date, each of Messrs. Limon
and Shani also were granted an option to purchase up to 10,000 shares of DSP
Group common stock, at an exercise price of $13.625 per share, under the 1991
Stock Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of DSP Group currently consists of Messrs.
Kaplan, Phelps, Shamir and Shani; Mr. Kaplan serves as its Chairman. No member
of this committee is a present or former
28
officer or employee of DSP Group or any of its subsidiaries. Other than Mr.
Kohavi, no executive officer of DSP Group served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of DSP Group's Board of Directors or Compensation
Committee. Mr. Kohavi serves as the Chairman of the Board of VCON
Telecommunications, Ltd., a public company listed on the Nouveau Marcheand
located in Israel, for which Mr. Shamir serves as President and CEO.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF DSP GROUP'S
PREVIOUS FILINGS UNDER THE SECURITIES ACT OF 1933 OR THE EXCHANGE ACT THAT MIGHT
INCORPORATE FUTURE FILINGS, INCLUDING THIS ANNUAL REPORT ON FORM 10-K, IN WHOLE
OR IN PART, THE FOLLOWING REPORT AND THE STOCK PERFORMANCE GRAPH THAT FOLLOWS
SHALL NOT BE DEEMED TO BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.
COMPENSATION POLICY. DSP Group's compensation policy, as established by
the Compensation Committee, states that the executive officers' total annual
cash compensation should vary with the performance of DSP Group and that
long-term incentives awarded to such officers should be aligned with the
interest of DSP Group's stockholders. DSP Group has designed its executive
compensation program to attract and retain executive officers who will
contribute to DSP Group's long-term success, to reward executive officers who
contribute to DSP Group's financial performance and to link executive officer
compensation and stockholder interests through the grant of stock options under
the 1991 Employee and Consultant Stock Plan (the "1991 Stock Plan").
Compensation of DSP Group's executive officers consists of three principal
components: salary, bonus and long-term incentive compensation consisting of
stock option grants.
SALARY. The base salaries of DSP Group's executive officers are reviewed
annually and are set by the Compensation Committee. When setting base salary
levels, in a manner consistent with the Compensation Committee's policy outlined
above, the Committee considers competitive market conditions for executive
compensation, DSP Group's performance and the performance of the individual
executive officer.
BONUS. For the fiscal year ended December 31, 1998, the Compensation
Committee evaluated the performance of, and set the bonuses payable to, the
Chief Executive Officer and the other executive officers of the Company. The
performance factors utilized by the Compensation Committee in determining
whether bonuses should be awarded to the Company's executive officers included
the following: (1) increased sales of DSP Group's products and increased
profitability of DSP Group during fiscal 1998; (2) the officer's overall
individual performance in his position and his relative contribution to DSP
Group's performance during the year; and (3) the desire of the Board of
Directors to retain the executive officer in the face of considerable
competition for executive talent within the industry. The Board of Directors or
the Compensation Committee in the future may modify the foregoing criteria or
select other performance factors with respect to bonuses paid to executive
officers for any given fiscal year.
LONG-TERM INCENTIVE COMPENSATION. DSP Group believes that stock option
grants (1) align executive officer interests with stockholder interests by
creating a direct link between compensation and stockholder return, (2) give
executive officers a significant, long-term interest in DSP Group's success, and
(3) help retain key executive officers in a competitive market for executive
talent.
The 1991 Stock Plan authorizes the Board, or a committee thereof, to
grant stock options to employees and consultants of DSP Group, including the
executive officers. Stock option grants are made from time to time to
executive officers whose contributions have or will have a significant impact
on DSP Group's long-term performance. DSP Group's determination of whether
stock option grants are appropriate is based upon individual performance
measures established for each individual on an annual
29
basis. Options are not necessarily granted to each executive officer during
each year. Generally, options granted to executive officers vest as to 25%
of the grant on the first anniversary of the date of grant with the remaining
options vesting quarterly over the next three years and expire five years
from the date of grant. Details on stock options granted to certain
executive officers in 1998 are provided in the table entitled "Option Grants
in 1998."
COMPENSATION OF CHIEF EXECUTIVE OFFICER. The Board of Directors considered
the following factors in evaluating the performance of, and setting the bonus
compensation for, Mr. Ayalon, DSP Group's Chief Executive Officer and President
since April 1996: the increase in the net income of DSP Group from the prior
year, DSP Group's stock price and the time and effort that Mr. Ayalon
individually applied in connection with the execution of his duties. The
Compensation Committee believes that the salary, bonus and long-term incentive
compensation paid to Mr. Ayalon for the fiscal year ended December 31, 1998 were
appropriate based on the above criteria.
COMPENSATION POLICY REGARDING DEDUCTIBILITY. Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally disallows a tax deduction
to publicly held companies for compensation exceeding $1 million paid to
certain of the corporation's executive officers. The limitation applies only
to compensation which is not considered to be performance-based. The
non-performance based compensation to be paid to DSP Group's executive
officers in 1998 did not exceed the $1 million limit per officer. The 1991
Stock Plan is structured so that any compensation deemed paid to an executive
officer in connection with the exercise of option grants made under such plan
will qualify as performance-based compensation which will not be subject to
the $1 million limitation. The Compensation Committee currently intends to
limit the dollar amount of all other compensation payable to DSP Group's
executive officers to no more than $1 million. The Compensation Committee is
aware of the limitations imposed by Section 162(m), and the exemptions
available therefrom, and will address the issue of deductibility when and if
circumstances warrant, and may use such exemptions in addition to the
exemption contemplated under the 1991 Stock Plan.
Submitted by the Compensation Committee:
Samuel L. Kaplan
Millard Phelps
Yair Shamir
Saul Shani
30
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on DSP
Group's common stock with the cumulative total return on the Standard & Poor's
500 Index and Standard & Poor's Technology Sector Index. The period shown
commences on February 11, 1994, the date that DSP Group's common stock was
registered under Section 12 of the Exchange Act, and ends on December 31, 1998,
the end of DSP Group's last fiscal year. The graph assumes an investment of
$100 on February 11, 1994, and the reinvestment of any dividends.
The comparisons in the graph below are based upon historical data and are
not indicative of, nor intended to forecast, future performance of DSP Group's
common stock.
TOTAL RETURN TO STOCKHOLDERS
FEBRUARY 11, 1994 TO DECEMBER 31, 1998
Research Data Group Peer Group Total Return Worksheet
Dsp Group (DSPG)
CUMULATIVE TOTAL RETURN
-----------------------------------------------------------------------
2/11/94 3/94 6/94 9/94 12/94 3/95 6/95 9/95 12/95 3/96
DSP GROUP, INC. $100 $116 $### $158 $139 $163 $179 $127 $ 82 $ 89
S&P 500 100 93 93 98 98 108 118 127 135 142
S&P TECHNOLOGY SECTOR 100 99 95 104 111 125 154 163 160 169
CUMULATIVE TOTAL RETURN
--------------------------------------------------------------------------
6/96 9/96 12/96 3/97 6/97 9/97 12/97 3/98 6/98 9/98 12/98
DSP GROUP, INC. $ 66 $ 59 $ 61 $ 66 $107 $280 $143 $137 $141 $105 $149
S&P 500 148 153 166 170 200 215 221 252 260 234 284
S&P TECHNOLOGY SECTOR 183 201 227 229 279 326 286 346 375 369 495
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information known to DSP Group with
respect to the beneficial ownership of DSP Group's common stock as of March 1,
1999, by (1) each stockholder known to DSP Group to own beneficially more than
5% of the DSP Group's common stock; (2) each of DSP Group's directors; (3) the
Named Executive Officers (including one former executive officer) determined for
the fiscal year ended December 31, 1998; and (4) all directors and executive
officers of DSP Group as a group.
NAME OF SHARES APPROXIMATE PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (2)
- ---------------- ---------------------- ----------------------
Magnum Technology, Ltd.
c/o Rothschild Corporate Fiduciary Services, Ltd.
P.O. Box 472
St. Peter's House, Le Bordage
St. Peter Port, Guernsey
Channel Islands GY1 6AX (3)............... 2,896,500 24.90%
Loomis, Sayles & Company, L.P.
One Financial Center
Boston, Massachusetts 02111 (4)........... 450,800 3.88%
Mellon Bank Corporation
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258 (5)......... 537,300 4.62%
Samuel L. Kaplan (6)...................... 78,188 *
Zvi Limon ................................ * *
Millard Phelps (7)........................ 13,167 *
Yair Shamir (8)........................... 11,667 *
Saul Shani ............................... * *
Eliyahu Ayalon (9)........................ 104,133 *
Avi Basher (10)........................... 20,242 *
Igal Kohavi (11).......................... 219,960 1.86%
David Tolub .............................. 357 *
Gideon Wertheizer (12).................... 12,997 *
Amir Karni ............................... * *
All directors and executive officers
as a group (11 persons) (13).............. 460,711 3.86%
- ------------------------------------
* Less than 1%
32
(1) To DSP Group's knowledge, except as set forth in the footnotes to this
table, and subject to applicable community property laws, each person named
in this table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of DSP Group's common
stock, subject to options currently exercisable or exercisable on or before
April 30, 1999, are deemed outstanding for computing the percentage of the
person holding such options, but are not deemed outstanding for computing
the percentage of any other person. Percentages are based on 11,633,420
shares of DSP Group's common stock outstanding as of March 1, 1999.
(3) Magnum Technology, Ltd. ("Magnum") filed Amendment No. 1 to a Schedule 13D,
dated February 19, 1999, with the Securities and Exchange Commission on
behalf of itself. Magnum reported sole voting and dispositive power over
2,896,500 shares.
(4) Loomis, Sayles & Company, L.P. ("Loomis") filed a Schedule 13G, dated
February 10, 1999, with the Securities and Exchange Commission on behalf of
itself. Loomis reported sole voting power over 375,400 shares and shared
dispositive power over 450,800 over shares.
(5) Mellon Bank Corporation ("Mellon Bank") filed a Schedule 13G, dated
February 5, 1999, with the Securities and Exchange Commission on behalf of
itself. Mellon Bank reported sole voting power over 492,900 shares, sole
dispositive power over 497,100 shares and shared dispositive power over
40,200 shares.
(6) Includes 22,520 shares held of record by the Kaplan, Strangis and Kaplan,
P.A. Profit Sharing Trust FBO Samuel L. Kaplan. Also includes 34,668
shares of DSP Group's common stock, subject to options which are currently
exercisable or will become exercisable on or before April 30, 1999.
(7) Includes 13,167 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(8) Includes 11,667 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(9) Includes 100,000 shares of DSP Group's common stock subject to options
which are currently exercisable or will become exercisable on or before
April 30, 1999.
(10) Includes 19,375 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(11) Includes 217,500 shares of DSP Group's common stock subject to options
which are currently exercisable or will become exercisable on or before
April 30, 1999.
(12) Includes 12,244 shares of DSP Group's common stock subject to options which
are currently exercisable or will become exercisable on or before April 30,
1999.
(13) See footnotes (6) through (12). Includes 408,621 shares of DSP Group's
common stock subject to options which are currently exercisable or will
become exercisable on or before April 30, 1999.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
OTHER TRANSACTIONS
DSP Group entered into a consulting agreement, date as of June 29, 1998,
with Mr. Phelps, an outside director of DSP Group. Pursuant to the terms of the
agreement, from May 1998 through December 1998, Mr. Phelps was to provide advice
to DSP Group's Chairman of the Board regarding identifying potential merger and
acquisition candidates. The agreement provided that Mr. Phelps be paid $4,000
per month for his services.
On February 2, 1999, DSP Group entered into a stock purchase agreement
with Magnum Technologies, Ltd., an international investment fund ("Magnum"), in
which DSP Group issued and sold 2,300,000 new shares of DSP Group common stock
to Magnum. Based in part on Magnum's representations, the transaction was
exempt from the registration requirements of the Securities Act of 1933
according to Section 4(2) of the Securities Act. These shares, representing
19.6% of DSP Group's outstanding common stock at the time of the transaction,
were issued for a price of $15 per share, or an aggregate of $34.5 million in
total net proceeds to DSP Group. As part of the agreement, Magnum may acquire
additional shares of DSP Group in the open market, but may not bring its total
holdings to more than 35% of DSP Group's outstanding shares of common stock.
Furthermore, Magnum has agreed not to sell any of the DSP Group shares of common
stock it purchased without the prior written consent of DSP Group for a period
of one year following the date of this transaction, and also to restrict its
sales of the shares for an additional six-month period under Rule 144(e)(i) of
the Securities Act of 1933. Additionally, DSP Group has invited Magnum to
appoint two new directors to the Board of Directors, bringing the total number
of members of the Board of Directors to seven.
DSP Group has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require DSP Group to
indemnify such individuals to the fullest extent permitted by Delaware law.
All future transactions between DSP Group and its officers, directors,
principal stockholders and affiliates will be approved by a majority of the
Board of Directors, including a majority of the disinterested, non-employee
directors on the Board of Directors, and will be on terms no less favorable to
DSP Group than could be obtained from unaffiliated third parties.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual
Report on Form 10-K.
1. Index to Financial Statements.
The following consolidated financial statements and related notes and
auditor's report are included in DSP Group's Annual Report to
Stockholders for the year ended December 31, 1998 and are incorporated
into this Form 10-K by reference.
DESCRIPTION
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
2. Index to Financial Statement Schedules.
The following financial statement schedules and related auditor's report
are filed as part of this Annual Report on Form 10-K:
Page in this
Annual Report
Description on Form 10-K
----------- ------------
Schedule II: Valuation and Qualifying Accounts (included at page 43)
Consent of Ernst & Young LLP, Independent Auditors Exhibit 23.1
(included at page 42)
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
the related notes incorporated into this Form 10-K by reference to DSP
Group's Annual Report to Stockholders for the year ended December 31, 1998.
35
3. List of Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1B to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994
and incorporated herein by reference).
3.2 Bylaws (filed as Exhibit 3.2B to the Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and incorporated herein by reference).
3.3 Amendment to Registrant's Bylaws, dated March 30, 1995 (filed as Exhibit 3.2.c to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, and incorporated herein by reference).
3.4 Certificate of Determination of Preference of Series A Preferred Stock of the Registrant, filed
with the Secretary of State of the State of Delaware on June 6, 1997 (filed as Exhibit 3.1 to
the Registrant's Current Report on Form 8-K filed on June 6, 1997).
3.5 Amendment to Registrant's Bylaws, dated November 3, 1997 (filed as Exhibit 3.7 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated
herein by reference.)
3.6 Specimen Rights Certificate (filed as Exhibit 1.1 to the Registrant's Current Report on Form 8-K
filed on June 6, 1997).
3.7 Amended and Restated Rights Agreement, dated as of November 9, 1998, between the Registrant and
Norwest Bank Minnesota, N.A., as Rights Agent.
10.1 1991 Employee and Consultant Stock Plan and forms of option agreements thereunder (filed as
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein by reference).
10.2 Israeli Stock Option Plan and form of option agreement thereunder (filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on
February 11, 1994 and incorporated herein by reference).
10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 to the Registrant's Registration
Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.4 1993 Employee Stock Purchase Plan and form of subscription agreement thereunder (filed as
Exhibit 10.5 to the Registrant's Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein by reference).
10.5 Technology Assignment and License Agreement, dated January 7, 1994, by and between the
Registrant and DSP Telecommunications, Ltd. (filed as Exhibit 10.24 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994
and incorporated herein by reference).
36
10.6 ACL Technology License Agreement, dated June 24, 1994, by and between the Registrant and
AudioCodes, Ltd. (filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994, and incorporated herein by reference).
10.7 Investment Agreement, dated June 16, 1994, by and between the Registrant and AudioCodes Ltd.
(see Exhibit 10.30 for Appendix B to Investment Agreement) (filed as Exhibit 10.39 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated
herein by reference).
10.8 Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 to
the Registrant's Registration Statement on Form S-1, file no. 33-73482, as declared effective on
February 11, 1994, and incorporated herein by reference).
10.9 Employment Agreement, dated April 22, 1996, by and between the Registrant and Eli Ayalon (filed
as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and incorporated herein by reference).
10.10 Assignment and Assumption Agreement, dated October 9, 1996, by and between the Registrant and
Dialogic Corporation, relating to the Registrant's facility located at 3120 Scott Boulevard in
Santa Clara, California (filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated herein by reference).
10.11 Sublease, dated October 18, 1996, as amended on December 4, 1996, by and between Dialogic
Corporation and the Registrant, relating to the Registrant's facility located at 3120 Scott
Boulevard in Santa Clara, California (filed as Exhibit 10.25 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference).
10.12 Employment Agreement, dated February 24, 1997, by and between the Registrant and Avi Basher
(filed as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
10.13 Lease, dated November 28, 1996, by and between DSP Semiconductors Ltd. and Gav-Yam Lands Company
Ltd., relating to the property located on Shenkar Street, Herzlia Pituach, Israel (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference).
10.14 Agreement, dated August 18, 1997, by and between DSP Semiconductors Ltd. and Aptel Ltd. (filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference).
10.15 Employment Agreement with Igal Kohavi, dated as of June 1, 1997 (filed as Exhibit 10.24 to the
Registrant's Annual Report on Form 10K for the year ended December 31, 1997, and incorporated
herein by reference).
10.16 CompactRISC Technology License Agreement, dated as of September 29, 1997, by and between DSP
Semiconductors Ltd. and National Semiconductor Corporation (filed as Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated
herein by reference).
37
10.17 Amendment to Employment Agreement with Eliyahu Ayalon, dated as of November 3, 1997 (filed as
Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference).
10.18 Amendment to Employment Agreement with Igal Kohavi, dated as of November 3, 1997 (filed as
Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by reference).
10.19 Amendment to 1993 Directors Stock Option Plan, as adopted November 3, 1997 (filed as Exhibit
10.28 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by reference).
10.20 Separation and Consulting Agreement between the Registrant and Martin M. Skowron, dated May 31,
1998 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, and incorporated herein by reference).
10.21 Consulting Agreement between the Registrant and Millard Phelps, dated as of June 29, 1998 (filed
as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, and incorporated herein by reference).
10.22 Lease, dated September 13, 1998, between DSP Group, Ltd. and Bayside Land Corporation Ltd.,
relating to the property located on Shenkar Street, Herzlia Pituach, Israel.
10.23 1998 Non-Officer Employee Stock Option Plan.
11.1 Statements regarding computation of per share earnings (included at page 40).
13.1 Portions of the Annual Report to Stockholders for the year ended December 31, 1998.
21.1 Subsidiaries of DSP Group (included at page 41).
23.1 Consent of Ernst & Young LLP, Independent Auditors (included at page 42).
27.1 Financial Data Schedule
(b) Reports on Form 8-K in Fourth Quarter.
The Company did not file any reports on Form 8-K during the three
months ended December 31, 1998.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DSP GROUP, INC.
By: /s/ Eliyahu Ayalon
------------------------------------
Eliyahu Ayalon
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------------- --------------------------------------------------- --------------------
/s/ Igal Kohavi Chairman of the Board March 31, 1999
- --------------------------------------
Igal Kohavi
/s/ Eliyahu Ayalon President, Chief Executive Officer and March 31, 1999
- -------------------------------------- Director (Principal Executive Officer)
Eliyahu Ayalon
/s/ Avi Basher Vice President of Finance, Chief March 31, 1999
- -------------------------------------- Financial Officer and Secretary
Avi Basher (Principal Financial Officer and Principal
Accounting Officer)
/s/ Samuel L. Kaplan Director March 31, 1999
- --------------------------------------
Samuel L. Kaplan
/s/ Zvi Limon Director March 31, 1999
- --------------------------------------
Zvi Limon
/s/ Millard Phelps Director March 31, 1999
- --------------------------------------
Millard Phelps
/s/ Yair Shamir Director March 31, 1999
- --------------------------------------
Yair Shamir
/s/ Saul Shani Director March 31, 1999
- --------------------------------------
Saul Shani
39
Exhibit 11.1
DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------------------------------------
Numerator:
Net income......................................... $14,415 $11,034 $5,979
------- ------- ------
------- ------- ------
Denominator:
Weighted average number of common shares outstanding during
the period used to compute basic earnings per
share ........................................... 9,768 9,736 9,510
------- ------- ------
------- ------- ------
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would be used
to purchase treasury stock)...................... 248 467 71
------- ------- ------
Weighted average number of shares of common stock used
to compute diluted earnings per
share............................................ 10,016 10,203 9,581
------- ------- ------
------- ------- ------
Basic net income per share.............................. $1.48 $1.13 $0.63
------- ------- ------
------- ------- ------
Diluted net income per share............................ $1.44 $1.08 $0.62
------- ------- ------
------- ------- ------
40
Exhibit 21.1
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
1. Nihon DSP K.K. Japan
2. DSP Group Ltd. Israel
3. DSP Group Europe SARL France
4. Voicecom Ltd. Israel
5. RF Integrated Systems, Inc. Delaware, U.S.
41
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc. of our report dated January 25, 1999 (except for
Note 9, as to which the date is February 18, 1999), included in the 1998
Annual Report to Stockholders of DSP Group, Inc.
Our audits also included the consolidated financial statement schedule
of DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the consolidated financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-83456, 33-87390, 333-53129 and 333-69289)
pertaining to the 1991 Employee and Consultant Stock Plan, the 1991 DSP
Group, Inc. Israeli Stock Option Plan, the 1993 Director Stock Option Plan,
the 1993 Employee Stock Purchase Plan and the 1998 Non-Officer Employee Stock
Option Plan, of our report dated January 25, 1999 (except for Note 9, as to
which the date is February 18, 1999), with respect to the consolidated
financial statements and schedule incorporated herein by reference or
included in this Annual Report (Form 10-K) for the year ended December 31,
1998.
/s/ Ernst & Young LLP
Palo Alto, California
March 30, 1999
42
SCHEDULE II
DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
BALANCE AT
BEGINNING CHARGED TO
OF COSTS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES DEDUCTION END OF PERIOD
- ------------------------------------------------------ ---------- ------------ --------- -------------
Year ended December 31, 1996:
Allowance for doubtful accounts 162 60 151(1) 71
Sales returns reserve 281 245 149(2) 377
Year ended December 31, 1997:
Allowance for doubtful accounts 71 60 61(1) 70
Sales returns reserve 377 345 600(2) 122
Year ended December 31, 1998:
Allowance for doubtful accounts 70 10 - 80
Sales returns reserve 122 - - 122
(1) Write-offs of uncollectible amounts
(2) Sales returns applied against revenue
43