DSP Group Inc.
Annual Report 2015

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April 2016 Dear Stockholders: 2015 was a banner year for DSP Group, highlighted by the return to full year revenue growth. This accomplishment was driven by a 35% increase in revenues from new product initiatives and our successful entry into the mobile market, which was a milestone event for DSP Group and the HDClear product line. We successfully transitioned the company back to growth by diligently executing on our higher margin, new product initiatives. This included record revenue contributions from new products, major design wins for mobile, record revenues in VoIP and strategic design wins with ULE. The new DSP Group is a combination of two businesses; the first is a highly profitable, mature cordless telephone business, although declining, continues to generate significant cash flows. More importantly, the second is a growth business that generated revenues of $40 million in 2015, growing at 35% year-over-year. This portfolio consists of new products with strong competitive positions and addresses growing market opportunities. Moreover, the growth business supports a better margin profile and its growth rate is expected to accelerate in 2016.* The proven success of our new product initiatives is propelling us rapidly towards a major inflection point where the high growth, high margin segments will become the dominant part of our business and the basis for sustaining our long-term value. Given the solid execution by our team and the successful market adoption of our new initiatives in VoIP, Mobile, HGW and ULE, we are confident in our ability to sustain long term revenue growth.* 2015 new product highlights: 1. Office/VoIP segment – Posted solid revenue growth of 56% year-over-year to $22.2 million, lifted by strong demand for our VoIP SoCs. We expect recent Tier 1 design wins to materialize into mass commercialization and contribute to continued growth in this segment.* 2. Mobile segment – Successfully accomplished our strategic goal of a major design win with a tier 1 mobile OEM for HDClear. We are optimistic about the outlook for our Mobile segment and expect HDClear to provide meaningful revenue contributions in 2016.* 3. Home/IoT segment – Grew customer base and ecosystem vendors for our ULE technology. During 2015, eight new OEMs and three leading service providers have launched products based on our ULE technology, driven by key attributes that DECT and ULE bring to the IoT market, including better home coverage and longer range, an interference-free band and support for voice and video on a single link. We ended 2015 with revenues of slightly more than $144 million, achieving our objective of full year revenue growth.  Gross Margin: 160 bps improvement in non-GAAP gross margins to 41.7% vs. 40.1% in 2014; **  Operating Profit: Non-GAAP operating profit of $7.5 million, 5% of revenues; **  Net Income: Non-GAAP net income of $8.0 million, representing 6% of revenues;** and  Cash Flow from Operations: Generation of $12.2 million in cash flow from operations Turning to our balance sheet, we ended 2015 with approximately $122 million in cash and cash equivalents. Reflecting our continued belief in the company’s long-term growth prospects, we repurchased 1.3 million shares of our common stock for approximately $13.2 million. Our plans for 2016 are focused on executing our business strategy relating to new product offerings and accelerating adoption and revenue growth.* The continued growth in VoIP products, expectations for meaningful revenue contributions from HDClear and anticipated broader adoption of DECT/ULE, position us well for continued revenue growth.* Finally, we would like to thank our customers, business partners, stockholders and our team for their continued, outstanding support, cooperation and loyalty. We believe that with your support, our focus, the loyalty of our customers and the dedication of our staff, we are well positioned to meet market challenges in 2016, reap the benefits of our investments and achieve profitable revenue growth. Patrick Tanguy Chairman of the Board Ofer Elyakim Chief Executive Officer *Forward-Looking Information This letter contains forward-looking statements (which are denoted by an asterisk) that involve risks and uncertainties, as well as assumptions that if they materialize or prove incorrect, could cause DSP Group’s results to differ materially from those expressed or implied by such forward-looking statements. Please review the “Risk Factors” section of DSP Group’s 2015 Form 10-K that accompanies this letter for a description of the risks, uncertainties and assumptions associated with DSP Group’s business and financial results. DSP Group assumes no obligation to update any forward-looking statements or information. **Non-GAAP Financial Information This letter contains references to non-GAAP financial measures (which are denoted by a double asterisk). See DSP Group’s current report on Form 8-K and attached Exhibit 99.1, filed with the Securities and Exchange Commission on February 2, 2016, for a reconciliation of the company’s GAAP and non-GAAP gross margin, operating income and net income results for the twelve-month periods ended December 31, 2014 and 2015. This page intentionally left blank 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, 2015 Commission File Number 001-35256 DSP GROUP, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation and organization) 94-2683643 (I.R.S. Employer Identification No.) 161 S. San Antonio Road, Suite 10, Los Altos, CA 94022 (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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ 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 ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company) Accelerated filer ☒ Smaller reporting company ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of June 30, 2015, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on June 30, 2015 as reported on the NASDAQ Global Select Market, was approximately $151,631,477. 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 4, 2016, the Registrant had outstanding 21,731,537 shares of Common Stock. Documents incorporated by reference: Portions of the Registrant’s proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of December 31, 2015 are incorporated herein by reference into Item 5 of Part II and Items 10, 11, 12, 13 and 14 of Part III of this annual report. This page intentionally left blank INDEX DSP GROUP, INC. PART I Item 1. BUSINESS. ............................................................................................................................................ Item 1A. RISK FACTORS. ................................................................................................................................... Item 1B. UNRESOLVED STAFF COMMENTS. ................................................................................................ Item 2. PROPERTIES. ........................................................................................................................................ LEGAL PROCEEDINGS. ...................................................................................................................... Item 3. Item 4. MINE SAFETY DISCLOSURES. ......................................................................................................... PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ................................................................... SELECTED FINANCIAL DATA .......................................................................................................... Item 6. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. .............................................................................................................. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................... FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ...................................................... Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND Item 9. FINANCIAL DISCLOSURE. ................................................................................................................ Item 9A. CONTROLS AND PROCEDURES. ...................................................................................................... Item 9B. OTHER INFORMATION. ..................................................................................................................... PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ............................... Item 11. EXECUTIVE COMPENSATION. ......................................................................................................... Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. ........................................................................................... Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. ................................................................................................................................. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ....................................................................... PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. ............................................................. SIGNATURES .......................................................................................................................................................... Page No. 1 9 21 21 21 21 22 24 25 38 40 89 89 89 90 90 90 90 90 91 96 i This report and certain information incorporated herein by reference contain forward-looking statements, which are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this report, other than statements that are purely historical in nature, are forward- looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include statements regarding: ● Our belief that sales of our DECT products will continue to represent a substantial percentage of our revenues for 2016; ● Our belief that our past research and development investments in new technologies are beginning to materialize; ● Our belief that the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed-line telephony is declining and will continue to decline, which will reduce our revenues derived from, and unit sales of, cordless telephony products; ● Our belief that SparkPA is well positioned to support the new Wave 2 and Wave 3 802.11ac access point requirements; ● Our belief that the market will remain price sensitive for 2016 for our traditional cordless telephony products and expect that price erosion and the decrease in the average selling prices of such products to continue; ● Our anticipation that revenues from our new products, primarily VoIP and HDClear products, will continue to increase in 2016 and expect such revenues to represent a higher percentage of 2016 total sales; ● Our anticipation that annual revenues generated from our new products to increase significantly in 2016 as compared to 2015; ● Our belief that our gross margin on an annual basis will continue to increase in the foreseeable future as our product mix shifts in favor of new products which generally have higher gross margins; ● Our belief that research and development expenses will increase slightly in 2016 in comparison to 2015; ● Our belief that commercial shipments of products incorporating our new products will continue during 2016; and ● Our belief that our available cash and cash equivalents at December 31, 2015 should be sufficient to finance our operations for the foreseeable future. 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. DSP Group, Inc. is referred to in this Annual Report as “DSP Group,” “we,” “us” “our” or “company.” ii Item 1. BUSINESS. Introduction PART I DSP Group®, Inc. (NASDAQ: DSPG) is a leading global provider of wireless chipset solutions for converged communications. Delivering semiconductor system solutions with software and hardware reference designs, DSP Group enables OEMs, ODMs, consumer electronics (CE) manufacturers and service providers to cost-effectively develop new revenue-generating products with fast time to market. At the forefront of semiconductor innovation and operational excellence for over two decades, DSP Group provides a broad portfolio of wireless chipsets integrating DECT/CAT-iq, ULE, Wi-Fi, PSTN, HDClear™, video and VoIP technologies. DSP Group enables converged voice, audio, video and data connectivity across diverse mobile, consumer and enterprise products – from mobile and wearable devices, connected multimedia screens and home automation & security to cordless phones, VoIP systems and home gateways. Leveraging industry-leading experience and expertise, DSP Group partners with leading CE manufacturers and service providers to reshape the future of converged communications at home, office and on the go. We were incorporated in California in 1987 and reincorporated in Delaware in 1994. We completed our initial public offering in February 1994. Industry Environment and Our Business Our focus on the design of highly-integrated, mixed-signal devices that combine signal processing, complex RF (radio frequency), analog and digital functions enables us to address the complex challenges of integrating various technologies, platforms and processes posed by emerging trends in the industry. Our integrated circuit (IC) products are customizable, achieve high functionality and performance at reduced power consumption, especially for Internet of Things (IoT) and home automation devices, mobile and wearable products, cordless telephony and IP telephony that require very low power consumption, and can be manufactured in high volumes using cost-effective process technologies. Our systems architecture provides an open design environment for ODMs to design and market their own end products with maximum differentiation. Our expertise and investment in software development, including Board Support Package (BSP) and drivers layer, telephony, communication stack and application layers in Real-time Operating System (RTOS) and Full Featured Operating System (FFOS) frameworks, enable our customers fast time to market with cost- and performance-optimized solutions. In response to the growing trend towards wireless residential and business connectivity, we developed and are offering leading wireless voice and data transmission solutions for various applications, including mobile handsets. Since 1999, we have developed and acquired various technologies, including Direct Sequence Spread Spectrum (DSSS), Frequency Hopping Spread Spectrum (FHSS), Orthogonal Frequency Digital Modulation (OFDM), Digital Narrow Band, Complementary Metal Oxide Semiconductor (CMOS), Gallium Arsenide (GaAs) technology, and Silicon Germanium (SiGe) RF chips for 900MHz, 2.4GHz and 5.8GHz Industry Scientific and Medical (ISM) bands, European DECT (1.9GHz), DECT 6.0 (1.8GHz), Korean DECT (1.7GHz), Bluetooth (2.4GHz), Wi-Fi (802.11, 2.4GHz/5GHz), BiCMOS (Bipolar CMOS) and deep sub-micron CMOS technologies. Moreover, we have expanded our DECT solutions beyond cordless telephony to address the burgeoning IoT market via an ultra low energy flavor of DECT called DECT ULE or ULE, ULE offers numerous technological benefits due to its licensed and interference-free, frequency bands, longer range, RF robustness, propagation through multiple walls, voice and visual support, while using very low power consumption. During the past few years, we expanded into chips and phones for office and business applications, and have quickly become a market leader in this growing segment. Today, DSP Group offers comprehensive systems-on-a-chip (SoC) and solution for VoIP, home, SoHo and office IP phones. VoIP is a technology that enables users to make HD voice calls via a broadband Internet connection rather than an analog phone line. Through successful penetration into tier 1 accounts we have achieved over 50% CAGR in 2014 and 2015. Furthermore, with mobile devices playing an increasingly significant role in peoples’ lives, in February 2013, we unveiled our revolutionary HDClear solution, a comprehensive noise suppression and voice quality enhancement product for mobile devices. There is a clear emerging market trend of mobile units incorporating technology to eliminate background noise, HDClear leverages this trend by incorporating proprietary noise cancellation algorithms, thereby dramatically improving user experience and delivering unparalleled voice quality and better voice call intelligibility. This technology will -1- enable people to use their cell phones for conversations in virtually any environment, whether in a car, on a train or in any noisy surroundings. HDClear will also facilitate the use of speech recognition and voice commands by eliminating background noise. It also enables always-on voice activation at very low power consumption. Our HDClear product family was developed through the acquisition of BoneTone Communications Ltd. (“BoneTone”) and the addition of their innovative intelligent noise cancellation algorithms to our low power SoC. In 2015, we secured our first design win for HDClear with a tier one customer and started mass production shipments during the fourth quarter of 2015. During January 2016, we announced our second design-win, which has already contributed to our revenues for the first quarter of 2016. Committed to advancing technology across the CE and telecommunications markets, DSP Group is actively involved in prominent industry associations, including the DECT Forum, the European Telecommunications Standards Institute and the Wi-Fi Alliance, DSP Group also participates in the 3GPP and MIPI alliance. DSP Group is also deeply involved in all stages of defining DECT CAT-iq as well as ULE standards and ULE Alliance and is building full eco-systems to support these solutions. We are an active member of the Home Gateway Initiative (HGI), and support the specification activities of CableLabs, which is contributing to the evolution and implementation of CAT-iq in various markets and applications. Such involvement enables us to define standards and keep abreast of the latest innovations and requirements. We also maintain close relationships with many world-leading telecommunication service providers, thereby providing us with insight into future plans across the industry. With our in-house innovations and acquired intellectual property, we are now able to bring additional value to our existing market verticals and address new market verticals, including markets for IoT, office phones, mobile and wearable devices and headsets, thus expanding our market opportunities. Target Markets and DSP Group Products In response to market trends, we are concentrating our development efforts on new products and opportunities to leverage our strong technology base and customer relationships to address evolving market opportunities and take advantage of the current market trends in our domain. In addition to our main product line that is targeted for cordless phones, new products include three main groups of products: (i) home segment products consisting of ULE ICs targeting the growing markets of IoT, smart home devices and home gateways; (ii) office segment products consisting of VoIP SoC products for Enterprise, SMB and SoHo; and (iii) mobile segment products consisting of products targeted for mobile and wearable device markets that incorporate our HDClear technology, as well as other third party advanced voice processing, always on and sensor hub functionality. Home Segment - Products Targeted for Cordless Telephony, Home Gateways and Home Automation (IoT) Market Our DECT and 2.4 GHz technologies are targeted at three broad categories of products: (a) digital cordless telephony, (b) gateways, both home gateways and fixed mobile convergence and (c) smart home & IoT applications. As a market leader in DECT and next-generation CAT-iq cordless technology, we offer a wide range of cost- effective, highly integrated SoC solutions. Delivering high-quality audio with notably low power consumption, our field- proven chipset solutions are ideal for highly integrated digital cordless telephony, DECT-enabled gateways and home automation and security. Our chipsets provide a total integrated digital solution and include all required digital baseband, analog interface and RF functionality. Our Home chipset solutions enable worldwide coverage, supporting all RF bands and cordless protocols, such as: 1.7GHz -1.9GHz DECT – used in Europe, U.S. (DECT6.0), Korea, Japan and Latin America; and 2.4GHz – used in Japan, China, India and the U.S.; the dominant protocols for this RF band is our proprietary EDCT (Enhanced Digital Cordless Technology) and WDCT (Wireless Digital Cordless Technology) protocols. This chipset portfolio combines wireless communications technology with a range of telephony features, audio and voice-processing algorithms to provide the industry a low cost and small footprint solution. Enhanced with our hardware and software packages, these chipsets are highly versatile and enable the development of an array of cordless telephony solutions, DECT home gateways and smart-home applications and devices at a lower effort and faster time to market than alternative silicon offerings. This portfolio supports cordless phones, cordless headsets, remote controls, home gateways, fixed-mobile convergence solutions and home security and automation devices. -2- Our home chipset solutions are available in three chipset families: ● The DCE family is a highly integrated, low-power ROM-based chipset solution, delivering enhanced audio and extended range for entry-level applications. The chipset is used to develop fully integrated cordless telephone systems, digital voice recorders (DVRs), digital baby monitors, and other low-to-mid-range audio applications. Including the industry’s most advanced digital cordless solutions, the DCE family maintains multi-line, multi- handset and digital answering machine capabilities, while supporting various RF protocols such as DECT (1.7GHz-1.9GHz), FHSS DECT 2.4GHz, EDCT 2.4GHz and 5.8GHz. Integration of the TeakLite™ RISC DSP core into the DE56, DCE58 and DCE59 baseband chip enables software implementation of a variety of voice coders, and provides a flexible platform for developing a wide range of solutions. With its DSP-based architecture, the chipset enables cost-effective incorporation of the most advanced audio and telephony features. ● The DCX family is a low-power, Flash and ROM-based chipset solution targeting mid-to-high-range cordless applications. Built on an open platform with powerful ARM9™ core processing capabilities, the cost-effective DCX family delivers unsurpassed telephony coverage and HD voice features. Combining state-of-the-art RF and ARM9 baseband functions in a single package with a rich set of telephony features and advanced audio- processing capabilities, the DCX provides the best cost-performance solution for mid-to-high-range DECT/DECT6.0/CAT-iq and WDCT cordless applications, home gateway applications, fixed mobile convergence applications and ULE gateways and devices. Supporting all RF bands and comprised of Flash- based chips and a full set of ROM-based products with various memory configurations, the DCX chipset family offers a total integrated solution that includes a digital baseband controller, analog interface, RF transceiver and power amplifier. The DHX family is a low-power chipset solution for home automation and security. Equipped with audio capabilities and a powerful ARM926™ processor, it implements hibernation features to deliver advanced ULE. Miniature size DHX91 module DHAN-S shortens a customer’s time to market and ensures superior performance of DHX91 RF. The ULE base utilizes existing and proven cordless SoCs, functioning as a standalone ULE over the top box (DVF99) and embedded module for home gateways (DCX81). We achieved significant milestones in 2014 and 2015 by incorporating DHX91, a ULE SoC; in end customer products for home automation and security applications. Our customers’ end products integrating DHX91 went through various field trials and officially launched in the market in 2014. In 2015, Panasonic Communications Ltd. (“Panasonic”) and several other leading CE brands launched an ULE home monitoring system that utilizes DECT/ULE for sensors, actuators, voice and video cameras. Moreover, during 2015, two leading service providers in Europe launched services based on our DECT and ULE solutions. In January 2016, we unveiled a new CMOS power amplifier, or PA, product category that leverages DSP Group’s decade long CMOS RF design expertise. SparkPA is a 5GHz Wi-Fi PA with the highest RF transmit power and best linearity in CMOS technology. SparkPA achieves more than 100mW of output power at -35db EVM and more than 50 mW at -40db EVM with excellent stability over temperature. When incorporated into access points, SparkPA has been proven to dramatically improve device performance. Moreover, this technology is scalable and designed to cover several higher volume segments of Wi-Fi PAs. By leveraging its superior linearity performance, SparkPA is well positioned to also support the new Wave 2 and Wave 3 802.11ac access point requirements, MU-MIMO at 4×4 and 8×8 topologies, as well as future 1024 QAM. Office Segment - Products Targeted for the Office Market As a leading silicon vendor for enterprise voice, we offer a comprehensive portfolio of solutions for VoIP terminals. Our DVF SoCs family is a comprehensive solution for developing affordable, scalable and green VoIP home and office products. DVF facilitates rapid introduction of embedded features into residential devices such as cordless IP and instant messaging (IM) phones. DVF enables development of low-power enterprise IP, analog terminal adapters (ATAs) and home VoIP phones that offer superb acoustic echo cancellation, high-quality HD voice, multi-line capabilities, and an enhanced user interface (UI). Built on an open platform with multi-ARM processors running on Linux OS, DVF includes IPfonePro™, an extensive SDK for IP phones and ATAs. DVF99, the latest member of the DVF family, provides outstanding cost/performance value for mid-range to high- end IP phones. Designed specifically to meet Tier 1 requirements, DVF99 fully complements existing solutions, including DVFD818 VoIP processors for low- and mid-range applications, and the XpandR® media processor for video IP devices. -3- Since 2008, we have been selling products for the VoIP market while developing a new platform based on ARM9 and REAL DSP core, and the VegaFireBird and VegaOne SoC products, to the advanced IAD (Integrated Access Device) market. During 2010, we launched a new VoIP chipset based on the VegaFireBird SoC and our RF products combining ARM9 and VoIP processing baseband functions in a single package with a rich set of telephony features targeting Corded IP phones for home and office, Analog Terminal Adaptors and Cordless IP Phones. These products support multi line and multi HD voice channels, superior audio processing capabilities including acoustic echo cancellation and superior full duplex speakerphone technologies. In 2012, we taped-out a new VoIP SoC DVF99xx, which commercially launched in January 2013. Built with two ARM926EJ-S™ cores, this new VoIP SoC provides combined processing speed of 1.1 GHz, and is designed to support IP phone processing needs - from basic single-line IP phones to high-end multi-line gigabit Ethernet IP phones with large color display and advanced GUI. The DVF99 also integrates multiple hardware accelerators, including a hardware security engine which enables a new class of secure IP phones, an LCD controller, a 2D graphics engine, a high-speed USB 2.0 port, DDR3/DDR2 memory and minimal power consumption. This product was designed to meet the needs of the enterprise IP telephony market. In 2013, we started commercial shipments of DVF99xx with two leading customers and continued to secure additional design wins with leading customers. In 2014, we continued our design win momentum with DVF99xx SoC with confirmed wins from two additional tier-one VoIP OEMs. Prior design wins include products that went into production in 2014, which contributed to our VoIP revenue growth. Revenues from our VoIP segment continued its strong growth trajectory in 2015. A major tier 1 customer successfully launched and manufactured in volume a series of IP phone models powered by our DVF9919 SoC. A number of additional customers announced and launched new products based on our DVF99xx, both corded IP phones and wireless IP DECT phones and terminals. Moreover, we continued to develop high volume products with our tier one and tier two customers. We also successfully introduced solutions for voice conferencing systems and expect to introduce more designs in 2016. Products Targeted for Mobile Phones and Wearable Devices As a result of the acquisition of BoneTone, we enhanced our product portfolio with technology of intelligent voice enhancement and noise elimination. This technology supports two solutions: HDClear and HDMobileSurround™ which are offered as part of the HDClear product line. HDClear-based solutions offer mobile voice quality and intelligibility, while completely removing background noise. Delivering clearer voice calls made from noisy environments, HDClear also maximizes accuracy of Automatic Speech Recognition (ASR) applications in noisy environments by leveraging robust and powerful noise cancellation algorithms. HDClear more effectively isolates voice from ambient noise, thereby drastically lowering Word Error Rate (WER) and dramatically improves the user experience for speech-enabled applications like virtual assistants, voice search, speakerphone conference calls and speech-to-text on mobile and wearable devices, tablets and other consumer devices. In 2012, we taped-out a new DBMD2, which we believe is one of the most efficient voice enhancement processors in the market. It is measured just 2.5 x 2.5mm. Offered with a 36-pin FCCSP and 0.4mm ball pitch, DBMD2 embeds a programmable 32-bit DSP, incorporates advanced connectivity options, including four TDM/I2S ports and SLIMbus, and equipped with a comprehensive software framework that enables rapid development and fast time-to-market, thereby overcoming the challenges of portable design, real estate and power consumption. DBMD2’s low power enables an always-on voice feature for mobile devices. Always-on is a low power decisive natural voice interface for mobile and wearable devices. An average user accesses his/her device tens or hundreds of times per day by physically pressing a screen or a button. A truly always-on technology enables the user to skip this step by using natural voice to access the device even while the device is in standby mode. DBMD2 enables mobile OEMs to offload voice and audio tasks from mobile device CPUs, in addition to running HDClear to enhance ASR accuracy. OEMs can leverage DBMD2’s open and flexible architecture to differentiate their products to run their own voice/audio enhancement software for pre- and post-processing. -4- The DBMD2 supports a rich set of voice processing features to significantly enhance voice call quality, intelligibility and speech recognition accuracy, including: • Noise suppression for the far-end listener • Noise reduction and speech conditioning for the near-end listener • Acoustic Echo Cancellation (AEC) • • Flexispeech – variable speech playback for the hearing impaired Flexible Listening Experience (FLE) – automatic adjustment of incoming voice when the near-end listener is in a noisy environment • Sensor hub and sensor fusion functionality In 2014, we further enhanced our HDClear noise reduction capability and added two microphone hands free AEC support. We also fully integrated DBMD2 with always-on latest android 5.0 lollipop. In 2015, we started commercial shipments of DBMD2 for a wearable device with a leading OEM. In 2015, we also taped-out a new DBMD4, a chip targeted for ultra-low-power, always-on voice and audio applications. DBMD4 incorporates a suite of voice enhancement algorithms, including noise suppression that significantly improves user experience and accuracy of speech-driven applications, particularly in high noise environments. Offered with a 25-WLCSP and 0.35mm ball pitch, DBMD4 embeds a TeakLite-III DSP core, incorporates advanced connectivity options, including I2S, UART, SPI, I2C ports and SLIMbus, and is equipped with a comprehensive software framework that enables rapid development and fast time- to-market, thereby overcoming the challenges of portable design, real estate and power consumption. During January 2016, we announced our second design-win incorporating our DBMD4 chip, which has already contributed to our revenues for the first quarter of 2016. Customers We are a flexible customer-centric company that proactively partners with our broad base of CE manufacturer customers and service providers. As a reliable long-term industry supplier, We maintain a proven track record of operational excellence and successful delivery. With over 10 offices across Asia, Europe and North America, we deliver outstanding local service and support worldwide. We sell our products primarily through distributors and directly to OEMs and ODMs who incorporate our products into consumer products for the worldwide residential wireless communications market and enterprise products for the worldwide office communications market. In 2014, we continued expanding our customer base, and in some cases, increased our share of business with existing customers. Our blue-chip customer base features leading international CE manufacturers, including the world’s top consumer brands, which have deployed our chipset solutions at prominent tier-one telecom operators across the globe, and include: Aprotech, ADB, AEG, Alcatel, Atcom, AT&T, Arris, Atlink, Arcadyan, Askey, Audioline, Avaya, Ayecom, Baycom, Belgacom, Binatone, British Telecom, Brother, CCT Tech, Cetis, China Telecom, CIG, Cisco, Comcast, Crow, Cybertan, Grandstream, Deutsche Telekom, Doro, DNI, Eclogic, Escene, Everspring, France Telecom, Freebox, Gibson (formerly Philips), Gaoxinqi, Gemtek, Global China Technologies, Grandstream, Hagenuk, Huawei, Innomedia, Intelbras, Invoxia, JXE, Kaonmedia, Kocom, Korea Telecom, KPN, LG Electronics, Matsushita, Mitac, Mitrastar, Motorola, Moimstone, NEC, Netgear, NTT, OnReal, Ooma, Panasonic, Pioneer, Plantronics, Sagemcom, Samsung, Sanyo, SAXA, Sercomm, SGW, Skymotion, Sharp, Siemens (Gigaset), SK Telecom, Sony, Spracht, Sumitomo, Swissvoice, Swisscom, TCL, Tecom, Telecom Italia, Telefonica, Telstra, Technicolor, Telefield (RCA), Topcom, TP-Link, T&W, Uniden, Unihan, Urmet, Uwin, Turkcell, Turkish Telecom, Verizon, VTech, Vodafone, WNC, WONDALINK, Xingtel, Yamaha, Yealink and Yeastar. International Sales and Operations Export sales accounted for 97% of our total revenues for 2015, 2014 and 2013. Although most of our sales to foreign entities are denominated in United States dollars, we are subject to risks of conducting business internationally. See Note 17 of the attached Notes to Consolidated Financial Statements for the year ended December 31, 2015, for a summary of the geographic breakdown of our revenues and location of our long-lived assets. -5- Moreover, a portion of our expenses in Israel is paid in the Israeli currency (New Israeli Shekel (NIS)). Our primary expenses paid in NIS 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 U.S. dollar could increase the cost of our technology development, research and development expenses and general and administrative expenses. From time to time, we use derivative instruments to minimize the effects of currency fluctuations, but our hedging positions may be partial, may not exist at all in the future or may not succeed in minimizing our foreign currency fluctuation risks. In addition, a portion of our expenses in Europe is paid in Euro. Our primary expenses paid in Euro are employee salaries and lease and operational payments on our European facilities. As a result, an increase in the value of the Euro in comparison to the U.S. dollar also could increase the cost of our technology development, research and development expenses and general and administrative expenses. Sales, Marketing and Distribution We market and distribute our products through our direct sales and marketing offices, as well as through a network of distributors. Our sales and marketing team, working out of our sales offices in Hong Kong, China; Nierenberg, Germany; Los Altos, California; Tokyo, Japan; Herzliya Pituach, Israel, Edinburgh, Scotland; and Shenzhen, China; pursues business with our customers in North and South America, Europe and Asia. In territories where we do not have sales offices, we operate solely through a network of distributors and representatives. Revenues derived from sales through our Japanese distributor, Tomen Electronics, Ltd. (“Tomen Electronics”), represented 16% of our total revenues for 2015, 20% for 2014 and 19% for 2013. Revenues derived from sales through our distributor, Ascend Technology Inc. (“Ascend Technology”) represented 15% of our total revenues for 2015, 10% for 2014 and 9% for 2013. We also derive a significant amount of revenues from a limited number of customers. Sales to VTech Holding Ltd. (“VTech”) represented 31% of our total revenues for 2015, 35% for 2014 and 36% for 2013. Sales to Shenzhen Guo Wei Electronics Ltd. (“Guo Wei”) represented 12% of our total revenues for 2015, 8% for 2014 and 8% for 2013. Sales to Panasonic through Tomen represented 13%, 15% and 14% of our total revenues for 2015, 2014 and 2013, respectively. Furthermore, as our products are generally incorporated into consumer products sold by our OEM customers, our revenues may be affected by seasonal buying patterns of consumer products sold by our OEM customers. Manufacturing and Design Methodology We are ISO9001:2008 certified. This certification is applicable for the design, development, testing and supply of our system-on-chip solutions. We also have well established methodologies and working procedures that are also regularly audited. We contract product wafer fabrication services mostly from TSMC. A majority of our integrated circuit products at this time are manufactured by TSMC. We intend to continue to use independent foundries to manufacture our products. Our reliance on independent foundries involves a number of risks, including the foundries’ ability to achieve acceptable manufacturing yields at competitive costs and their allocation of sufficient capacity to us to meet our needs. While we currently believe we have adequate capacity to support our current sales levels, we may encounter capacity issues in the future. In the event of a worldwide shortage in foundry capacity, we may not be able to obtain a sufficient allocation of foundry capacity to meet our product needs. Shortage or lack of capacity at the foundries we use to manufacture our products may lead to increased operating costs and lower gross margins. In addition, such a shortage could lengthen our products’ manufacturing cycle and cause a delay in the shipment of our products to our customers. Unforeseen difficulties with our independent foundries could harm our business, financial condition and results of operations. We use independent subcontractors located in Asia, to assemble and test certain of our products. We develop detailed testing procedures and specifications for each product and require each subcontractor to use these procedures and specifications before shipping us the finished products. We test and/or assemble our products at Amkor, ASE, Giga Solutions, KYEC and SPIL. Furthermore, our digital cordless products require an external component in the finished product, which is supplied by a third party, to provide flash memory. -6- Competition The principal competitive factors in the cordless telephony market include price, performance, system integration level, range, voice quality, customer support and the timing of product introductions by us and our competitors. We believe that we are competitive with respect to most of these factors. Our principal competitors in the cordless market include Lantiq (acquired by Intel) and Dialog Semiconductors. Similar principal competitive factors affect the VoIP market. We also believe that we are competitive with respect to most of these factors. Our principal competitors in the VoIP market include Broadcom (Broadcom signed an agreement to be acquired by Avago Technologies), Dialog Semiconductors, Lantiq, Texas Instruments and new Taiwanese IC vendors. Similar principal competitive factors affect the Home Automation (DECT ULE) market. We also believe that we are competitive with respect to most of these factors. Our principal competitors are developers of different wireless home automation technologies, including Analog, Z-wave and Zigbee. Among those, the major competitors for digital home connectivity are Atmel (Atmel signed an agreement to be acquired by Microchip Technology), Freescale, NXP, Texas Instruments, Sigma Design and Silicon Lab. Similar principal competitive factors affect the mobile audio noise reduction market. An additional competitive factor relating to this market is that we are a newcomer to this market and this market already has a number of dominant, well-established companies with significant existing market shares. Nonetheless, we believe that we are competitive in this market with HDClear’s outstanding performance. Competitors in this market include Audience (acquired by Knowles Corporation), Cirrus Logic and developers of noise cancellation software running on mobile phones such as NXP and ForteMedia. In future periods, due to various new developments in the residential telephony, enterprise telephony, home automation and mobile markets, we intend to enter into new markets with competitors that have more established presence, and significantly greater financial, technical, manufacturing, marketing, sales and distribution resources than we do. Furthermore, there is a growing threat from alternative technologies accelerating the decline of the fixed-line telephony market. This competition comes from mobile telephony, including emerging dual-mode mobile Wi-Fi phones, and other innovative applications, such as Skype and iChat. Given that we derive a significant amount of revenues from chipsets incorporated into fixed-line telephony products, if we are unable to develop new technologies in the face of the decline of this market, our business could be materially adversely affected. Research and Development We believe that timely development and introduction of new products are essential to maintain our competitive position. We currently conduct most of our product development at our facilities. At December 31, 2015, we had a staff of 196 research and development personnel, of which 137 were located in Israel. We also employ independent contractors to assist with certain product development and testing activities. We spent $35.5 million in 2015, $33.5 million in 2014 and $35.0 million in 2013 on research and development activities. Due to various new developments in the home residential market, including the rapid deployment of new communication access methods and the rise of alternative technologies in lieu of fixed-line telephony, we are expanding our current product lines and develop products and services targeted at wider markets, including office enterprise market and the intensively competitive mobile device market. We will need to continue to invest in research and development, and our research and development expenses may increase in the future, including the addition of new research and development personnel, to keep pace with new and rapidly changing trends in our industry. Licenses, Patents and Trademarks As of December 31, 2015, we have been granted a total of 152 patents and 75 patents are pending. We actively pursue foreign patent protection in 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 any patent 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 China, Hong Kong, Japan, Korea and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States. -7- 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 assure that these measures will be successful. While no material claims involving patent or other intellectual property rights have been brought against us to date, we cannot provide assurance that third parties will not assert claims against us or our customers with respect to existing or future products, or that we will not need to assert claims against third parties to protect our proprietary technology. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter- claim may be ineffective. We have received claims that our products infringe upon the proprietary rights of such patent holding companies. In addition, third parties have asserted and may in the future assert intellectual property infringement claims against our customers, which we have agreed in certain circumstances to indemnify and defend against such claims. 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 claim has any merit and notwithstanding that 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. 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 our industry, our technical expertise and ability to innovate on a timely basis and in a cost-effective manner will be more important in maintaining our competitive position than the protection of our intellectual property. In addition, we believe that due to rapid technological changes in residential telephony, computer telephony and personal computer markets, patents and trade secret protection are important but must be supported by other factors, including expanding the 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 vigorously, we cannot assure that these measures will be successful. Backlog At December 31, 2015, our backlog was approximately $17.2 million, compared to approximately $34.1 million and $25.1 million at December 31, 2014 and 2013, respectively. 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. Our business is characterized by short-term order and shipment schedules. Product orders in our current backlog are subject to change, sometimes on short notice, due to changes in delivery schedules or cancellation by a purchaser. 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, 2015, we had 314 employees, including 196 in research and development, 57 in marketing and sales and 61 in corporate, administration and manufacturing coordination. Competition for personnel in the semiconductor industry 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 demand. In particular, there is a limited supply of RF chip designers and highly-qualified engineers with digital signal processing experience. We believe that our relations with our employees are good. Web Site Access to Company’s Reports Our Internet Web Site address is www.dspg.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our Web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. We will also provide the reports in electronic or paper form free of charge upon request. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. -8- Item 1A. RISK FACTORS. The following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Before you decide to buy, hold, or sell our common stock, you should carefully consider the risks described below, in addition to the other information contained elsewhere in this report. The following risk factors are not the only risk factors facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. Our business, financial condition, and results of operation could be seriously harmed if any of the events underlying any of these risks or uncertainties actually occurs. In that event, the market price for our common stock could decline, and you may lose all or part of your investment. We generate a significant amount of our total revenues from the sale of digital cordless telephony products and our business and operating results may be materially adversely affected if we do not continue to succeed in this highly competitive market or if sales within the overall cordless digital market continue to decrease. Sales of our digital cordless telephony products comprised 72% of our total revenues for 2015, 79% for 2014 and 85% for 2013. Any adverse change in the digital cordless market or in our ability to compete and maintain our competitive position in that market would harm our business, financial condition and results of operations. The digital cordless telephony market is undergoing a challenging period. With the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed-line telephony is declining and will continue to decline, which reduces our revenues derived from, and unit sales of, cordless telephony products. Moreover, macro-economic trends in the consumer electronics industry may adversely impact our future revenues. Furthermore, the decline in fixed line telephony together with the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity will decrease sales of products using fixed-line telephony. Our business also may be affected by the outcome of the competition between cellular phone operators and fixed- line operators for the provision of residential communication. A significant majority of our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony, and the continued decline in fixed-line telephony would reduce our revenues derived from, and unit sales of, our digital cordless telephony products. In addition, the digital cordless telephony market is competitive and is facing pricing pressures, and we expect that competition and pricing pressures will continue. It is possible that we may one day be unable to respond to increased pricing competition for digital cordless telephony processors or other products through the introduction of new products or reduction of manufacturing costs. This inability to compete would have a material adverse effect on our business, financial condition and results of operations. Likewise, any significant delays by us in developing, manufacturing or shipping new or enhanced products in this market also would have a material adverse effect on our business, financial condition and results of operations. We rely significantly on revenue derived from a limited number of customers. We expect that a limited number of customers, varying in identity from period-to-period, will account for a substantial portion of our revenues in any period. Our four largest customers – VTech Holding Ltd. (“VTech”), Panasonic Communications Ltd. (“Panasonic”) through Tomen Electronics, Ltd. (“Tomen Electronics”), CCT Telecom Holdings Ltd. (“CCT”) and Shenzhen Guo Wei Electronics Ltd. (“Guo Wei”) accounted for approximately 61%, 66% and 66% of our total revenues for each of 2015, 2014 and 2013, respectively. Sales to VTech represented 31% of our total revenues for 2015, 35% for 2014 and 36% for 2013. Sales to Panasonic through Tomen Electronics represented 13% of our total revenues for 2015, 15% for 2014, and 14% for 2013. Sales to Guo Wei represented 12% of our total revenues for 2015, 8% for 2014 and 8% for 2013. Typically, our sales are made on a purchase order basis, and most of our customers have not entered into a long-term agreement requiring it to purchase our products. Moreover, we do not typically require our customers to purchase a minimum quantity of our products, and our customers can generally reschedule the delivery date of their orders on short notice without significant penalties. A significant amount of our revenues will continue to be derived from a limited number of large customers. Furthermore, the primary customers for our products are original equipment manufacturers (OEMs) and original design manufacturers (ODMs) in the cordless digital market. This industry is highly cyclical and has been subject to significant economic downturns at various times, particularly in recent periods. These downturns are characterized by production overcapacity and reduced revenues, which at times may affect the financial stability of our customers. Therefore, the loss of one of our major customers, or reduced demand for products from, or the reduction in purchasing capability of, one of our major customers, could have a material adverse effect on our business, financial condition and results of operations. -9- Our future success is dependent on market acceptance of our HDClear product family targeted for the mobile device market and on market acceptance of our VoIP products, which are intensively competitive markets with dominant and established players. Our ability to increase our revenues and offset declining revenues from our cordless product family are substantially dependent on our ability to gain market share for our HDClear and VoIP product families. Moreover, we are targeting a new market with our HDClear product family, a market with dominant and established players selling to OEM customers with whom they have established relationships. We will need to win over such customers, with whom we do not have established relationships, to gain market share. If we are unable to generate significant revenues from our HDClear product family and gain significant and sustainable market share in the mobile device market, our operating results would be adversely affected. Furthermore, our future growth is also dependent on the market acceptance of our VoIP products, a market where we also compete with existing and potential competitors, many of whom have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. The market for mobile device components is highly competitive and we expect competition to intensify in the future. The market for mobile device components is highly competitive and characterized by the presence of large companies with significantly greater resources than we have. Our HDClear product family relates only to the voice and audio subsystem of a mobile device and there are only a limited number of OEMs targeted for this market. Our main competitors include Audience (acquired by Knowles Corporation) and Cirrus Logic. We also face competition from other companies and could face competition from new market entrants. We also compete against solutions internally developed by OEMs, as well as combined third-party software and hardware systems. If we are unable to compete effectively, we may not succeed in achieving additional design wins and may have to lower our pricing to gain design wins, both of which would adversely impact our operating results. Because our products are components of end products, if OEMs do not incorporate our products into their end products or if the end products of our OEM customers do not achieve market acceptance, we may not be able to generate adequate sales of our products. Our products are not sold directly to the end-user; rather, they are components of end products. As a result, we rely upon OEMs to incorporate our products into their end products at the design stage. Once an OEM designs a competitor’s product into its end product, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. As a result, we may incur significant expenditures on the development of a new product without any assurance that an OEM will select our product for design into its own product and without this “design win” it becomes significantly difficult to sell our products. This is especially the case for our HDClear product family. Moreover, even after an OEM agrees to design our products into its end products, the design cycle is long and may be delayed due to factors beyond our control which may result in the end product incorporating our products not to reach the market until long after the initial “design win” with the OEM. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in. These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, and our ability to ship products according to our customers’ schedule. Moreover, the continued uncertainty about the sustainability of the global economic recovery and outlook may further prolong an OEM customer’s decision-making process and design cycle. Furthermore, we rely on the end products of our OEM customers that incorporate our products to achieve market acceptance. Many of our OEM customers face intense competition in their markets. If end products that incorporate our products are not accepted in the marketplace, we may not achieve adequate sales volume of our products, which would have a negative effect on our results of operations. We rely on a few distributors for a significant portion of our total revenues and the failure of those distributors to perform as expected would materially reduce our future sales and revenues. In addition to direct sales, we use a network of distributors to sell our products. Particularly, revenues derived from sales through our Japanese distributor, Tomen Electronics, accounted for 16% of our total revenues for 2015, 20% for 2014 and 19% for 2013. Revenues derived from sales through another distributor, Ascend Technology Inc. (“Ascend Technology”), accounted for 15% of our total revenues for 2015, 10% for 2014 and 9% for 2013. Our future performance will depend, in part, on those distributors to continue to successfully market and sell our products. Furthermore, Tomen Electronics sells our products to a limited number of customers. One customer, Panasonic, has continually accounted for a majority of the sales through Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately 13% of our total revenues for 2015, 15% for 2014 and 14% for 2013. -10- The loss of Tomen Electronics and/or Ascend Technology as our distributors and our inability to obtain satisfactory replacements in a timely manner would materially harm our sales and results of operations. Additionally, the loss of Panasonic and Tomen Electronics’ inability to thereafter effectively market our products would also materially harm our sales. Because our quarterly operating results may fluctuate significantly, the price of our common stock may decline. ● ● ● ● ● ● ● ● ● ● ● ● Our quarterly results of operations may vary significantly in the future for a variety of reasons, many of which are outside our control, including the following: fluctuations in volume and timing of product orders; timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory; changes in demand for our products due to seasonal consumer buying patterns and other factors; timing of new product introductions by us and by our customers or competitors; changes in the mix of products sold by us or our competitors; fluctuations in the level of sales by our OEM customers and other vendors of end products incorporating our products; timing and size of expenses, including expenses to develop new products and product improvements, and expenses resulting from restructuring activities; entry into new markets, including China, Korea and South America; our ability to scale our operations in response to changes in demand for our existing products and services or demand for new products requested by our customers; mergers and acquisitions by us, our competitors and our existing and potential customers; and general economic conditions, including current economic conditions in the United States and worldwide, and the adverse effects on the semiconductor and consumer electronics industries. Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations. Also, we sell our products to OEM customers that operate in consumer markets. As a result, our revenues are affected by seasonal buying patterns of consumer products sold by our OEM customers that incorporate our products and the market acceptance of such products supplied by our OEM customers. Our revenues, gross margins and profitability may be materially adversely affected by the continued decline in average selling prices of our products and other factors, including increases in assembly and testing expenses, and raw material and commodity costs. We have experienced and will continue to experience a decrease in the average selling prices of our products. Decreasing average selling prices could result in decreased revenues even if the volume of products sold increases. Decreasing average selling prices may also require us to sell our products at much lower gross margin than in the past and reduce profitability. Although we have to date been able to partially offset on an annual basis the declining average selling prices of our products through general operational efficiencies and manufacturing cost reductions by achieving a higher level of product integration and improving our yield percentages, there is no guarantee that our ongoing efforts will be successful or that they will keep pace with the anticipated, continued decline in average selling prices of our products. Moreover, we believe there are significant pressures in the supply chain as a result principally of the uncertainty relating to the sustainability of the global economic recovery, which has negatively affected the consumer electronics industry. The pressures in the supply chain make it very difficult for us to increase or even maintain our product pricing, which further adversely affects our gross margins. -11- In addition to the continued decline in the average selling prices of our products, our gross profit may decrease in the future due to other factors, including the roll-out of new products in any given period and the penetration of new markets which may require us to sell products at a lower margin, our failure to introduce new engineering processes and mix of products sold. Our gross margins also are affected by the product mix. For example, mature products have lower average gross margins than other products. Therefore, increased sales of certain products would lower our gross margins. Furthermore, increases in the price of silicon wafers, testing costs and commodities such as gold and oil, which may result in increased production costs, mainly assembly and packaging costs, may result in a decrease in our gross margins. Moreover, our suppliers may pass the increase in raw materials and commodity costs onto us which would further reduce the gross margin of our products. In addition, as we are a fabless company, global market trends such as “over-capacity” problems so that there is a shortage of capacity to fulfill our fabrication needs also may increase our raw material costs and thus decrease our gross margin. There are several emerging market trends that may challenge our ability to continue to grow our business. New technological developments in the home connectivity market may adversely affect our operating results. For example, the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, as well as the lack of growth in products using fixed-line telephony would reduce our total revenues derived from, and unit sales of, cordless fixed-line telephony products. Our ability to maintain our growth will depend on the expansion of our product lines to capitalize on the emerging access methods and on our success in developing and selling a portfolio of “system-on-a-chip” solutions targeted at wider markets, including the intensively competitive mobile devices market. We cannot assure you that we will succeed in expanding our product lines or portfolio of “system-on-a-chip” solutions, or that they would receive market acceptance. Furthermore, there is a growing threat from alternative technologies accelerating the decline of the fixed-line telephony market. This competition comes from mobile telephony, including emerging dual-mode mobile Wi Fi phones and other innovative applications, such as Skype and iChat. Given that we derive a significant amount of revenues from chipsets incorporated into fixed-line telephony products, if we are unable to develop new technologies in the face of the decline of this market, our business could be materially adversely affected. Our future business growth depends on the growth in demand for mobile devices with improved sound quality and always- on capability. Our HDClear product family is designed to enhance the sound quality and eliminate background voices for mobile device users and to enable always-on capabilities in mobile and other wearable devices. OEMs and ODMs may decide that the costs of improving sound quality outweigh the benefits or that always-on voice technology is not a required feature, both of which could limit demand for our HDClear product family. Moreover, users may also be satisfied with existing sound quality or blame poor quality on their phone carriers. The market that we are targeting is evolving rapidly and is technologically challenging. New mobile devices with different components or software may be introduced that provide the same functionality as HDClear product family. Our future business growth will depend on the growth of this market and our ability to adapt to technological changes, user preferences and OEM demands. Our business could be materially adversely affected if we fail to do so. Because we have significant international operations, we may be subject to political, economic and other conditions relating to our international operations that could increase our operating expenses and disrupt our business. Although the majority of end users of the consumer products that incorporate our products are located in the U.S., we are dependent on sales to OEM customers, located outside of the U.S., that manufacture these consumer products. Also, we depend on a network of distributors to sell our products that also are primarily located outside of the U.S. Export sales, primarily consisting of digital cordless telephony products shipped to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented 97% of our total revenues for 2015, 2014 and 2013. Furthermore, we have material operations in Germany, Hong Kong and India and employ a number of individuals within those foreign operations. As a result, the occurrence of any negative international political, economic or geographic events, as well as our failure to mitigate the challenges in managing an organization operating in various countries, could result in significant revenue shortfalls and disrupt our workforce within our foreign operations. These shortfalls and disruptions could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include: ● unexpected changes in foreign government regulatory requirements; -12- ● fluctuations in the exchange rate for the United States dollar; ● import and export license requirements; ● imposition of tariffs and other barriers and restrictions; ● burdens of complying with a variety of foreign laws, treaties and technical standards; ● uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property; ● difficulty in collecting accounts receivable and longer payment cycles for international customers than existing customers; ● difficulty in staffing and managing foreign operations and maintaining the morale and productivity of employees within foreign operations; ● multiple and possibly overlapping tax structures and potentially adverse tax consequences; ● political and economic instability; and ● changes in diplomatic and trade relationships. One or more of these factors may have a material adverse effect on our future operations and consequently, on our business, financial conditions and operating results. In order to sustain the future growth of our business, we must penetrate new markets and our new products must achieve widespread market acceptance. In order to increase our sales volume and expand our business, we must penetrate new markets and introduce new products, especially our HDClear product family. We are exploring opportunities to expand sales of our products in China, Japan, Korea and South America. However, there are no assurances that we will gain significant market share in those competitive markets. In addition, due to the cyclical nature of manufacturing capacity issues, the increasing cost of silicon integrated circuits, the continued decline of average selling prices of chipsets and other industry-wide factors, many North American, European and Japanese OEMs are moving their manufacturing sites to Asia. This trend may cause the mix of our OEM customers to change in the future, thereby further necessitating our need to penetrate new markets. Furthermore, to sustain the future growth of our business, we need to introduce new products as sales of our older products taper off. Moreover, the penetration of new competitive markets and introduction of new products could require us to reduce the sale prices of our products or increase the cost per product and thus reducing our total gross profit in future periods. Our revenue growth is dependent on the successful deployment of our new VoIP and HDClear products. Our inability to penetrate such markets and increase our market share in those markets or lack of customer acceptance of those products may harm our business and potential growth. Because the markets in which we compete are subject to rapid changes, our products may become obsolete or unmarketable. The markets for our products and services are characterized by rapidly changing technology, short product life cycles, evolving industry standards, changes in customer needs, demand for higher levels of integration, growing competition and new product introductions. This is especially the case for the mobile device market. Our future growth is dependent not only on the continued success of our existing products but also successful introduction of new products. Our ability to adapt to changing technology and anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards. If our product development and improvements take longer than planned, the availability of our products would be delayed. Any such delay may render our products obsolete or unmarketable, which would have a negative impact on our ability to sell our products and our results of operations. ● Because of changing customer requirements and emerging industry standards, we may not be able to achieve broad market acceptance of our products. Our success is dependent, in part, on our ability to: -13- ● ● ● ● ● successfully develop, introduce and market new and enhanced products at competitive prices and in a timely manner in order to meet changing customer needs; convince leading OEMs to select our new and enhanced products for design into their own new products; respond effectively to new technological changes or new product announcements by others; effectively use and offer leading technologies; and maintain close working relationships with our key customers. There are no assurances that we will be successful in these pursuits, that the demand for our products will continue or that our products will achieve market acceptance. Our failure to develop and introduce new products that are compatible with industry standards and that satisfy customer requirements, and the failure of our products to achieve broad market acceptance, could have a negative impact on our ability to sell our products and our results of operations. Because we depend on independent foundries and other third party suppliers to manufacture and test all of our integrated circuit products, we are subject to additional risks that may materially disrupt our business. All of our integrated circuit products are manufactured and tested by independent foundries and other third party suppliers. While these foundries and other third party suppliers have been able to adequately meet the demands of our increasing business, we are and will continue to be dependent upon these foundries and third party suppliers to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to us a sufficient portion of their foundry, assembly and test capacity to meet our needs in a timely manner. While we currently believe we have adequate capacity to support our current sales levels pursuant to our arrangement with our foundries and other third party suppliers, we may encounter capacity shortage issues in the future. In the event of a worldwide shortage in foundry, assembly and/or test capacity, we may not be able to obtain a sufficient allocation of such capacity to meet our product needs or we may incur additional costs to ensure specified quantities of products and services. Over-capacity at the current foundries and other third party suppliers we use, or future foundries or other third party suppliers we may use, to manufacture and test our integrated circuit products may lead to increased operating costs and lower gross margins. In addition, such a shortage could lengthen our products’ manufacturing and testing cycle and cause a delay in the shipment of our products to our customers. This could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could be materially reduced. Our business could also be harmed if our current foundries or other third party suppliers terminate their relationship with us and we are unable to obtain satisfactory replacements to fulfill customer orders on a timely basis and in a cost-effective manner. Moreover, we do not have long term capacity guarantee agreements with our foundries and with other third party suppliers. In addition, as TSMC produces a significant portion of our integrated circuit products and ASE tests and assembles a significant portion of them, earthquakes, aftershocks or other natural disasters in Asia, or adverse changes in the political situation in Taiwan, could preclude us from obtaining an adequate supply of wafers to fill customer orders. Such events could harm our reputation, business, financial condition, and results of operations. Our operating results are affected by general economic conditions and the highly cyclical nature of the semiconductor industry. Notwithstanding improvements in business conditions since the global downturn in 2008 and 2009, recovery is slow and general worldwide economic conditions remain uncertain which continues to make it difficult for our customers, the end- product customers, our vendors and us to accurately forecast and plan future business activities and make reliable projections. Moreover, we operate within the semiconductor industry which experiences significant fluctuations in sales and profitability. Downturns in the semiconductor industry are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity. These factors could cause substantial fluctuations in our revenues and in our results of operations. If global economic and market conditions remain uncertain or deteriorate, we could experience a material adverse impact on our business and results of operations. -14- Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary yields or product reliability that our business requires. The manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a foundry could adversely affect the foundry’s ability to achieve acceptable manufacturing yields and product reliability. If the foundries we currently use do not achieve the necessary yields or product reliability, our ability to fulfill our customers’ needs could suffer. This could ultimately lead to a loss of sales of our products and have a negative effect on our gross margins and results of operations. Furthermore, there are other significant risks associated with relying on these third-party foundries, including: ● risks due to the fact that we have reduced control over production cost, delivery schedules and product quality; ● less recourse if problems occur as the warranties on wafers or products supplied to us are limited; and ● increased exposure to potential misappropriation of our intellectual property. As we depend on independent subcontractors, located in Asia, to assemble and test our semiconductor products, we are subject to additional risks that may materially disrupt our business. Independent subcontractors, located in Asia, assemble and test our semiconductor products. Because we rely on independent subcontractors to perform these services, we cannot directly control our product delivery schedules or quality levels. We are dependent on these subcontractors to allocate to us a sufficient portion of their capacity to meet our needs in a timely manner. Our future success also depends on the financial viability of our independent subcontractors. If the capital structures of our independent subcontractors weaken, we may experience product shortages, production delays, quality assurance problems, increased manufacturing costs, and/or supply chain disruption. All of this could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could be materially harmed. Moreover, the economic, market, social, and political situations in countries where some of our independent subcontractors are located are unpredictable, can be volatile, and can have a significant impact on our business because we may not be able to obtain product in a timely manner. Market and political conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and other factors, including natural or man-made disasters, adverse changes in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areas where our independent subcontractors are located also could have a severe negative impact on our operating capabilities. We are subject to order and shipment uncertainties and if we are unable to accurately predict customer demand, our business may be harmed. We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally change or defer purchase orders on short notice without incurring a significant penalty. Given current market conditions, we have less ability to accurately predict what or how many products our customers will need in the future. In addition, we have little visibility into and no control of the demand by our customer’s customers – generally consumer electronics retailers. Furthermore, based on discussions with our customers, we understand that our customers also have less visibility into their product demands. A decrease in the consumer electronics retailers’ demand or a build-up of their inventory, both of which are out of the control of our customers and us, may cause a cancellation, change or deferral of purchase orders on short notice by our customers. Anticipating demand is difficult because our customers and their customers face volatile pricing and unpredictable demand for their own products, and are increasingly focused on cash preservation and tighter inventory management. Based on these trends, our customers are reluctant to place orders with normal lead times, and we are seeing a shift to shorter lead-times and rush orders. However, we place orders with our suppliers based on forecasts of our customers’ demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. If we overestimate our customers’ demand or our customers overestimate their demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect to, if at all. As a result, we could hold excess or obsolete inventory, which would reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate our customers’ demand or our customers underestimate their demand and insufficient manufacturing capacity is available, we could forego revenue opportunities and potentially lose market share and damage our customer relationships. -15- Furthermore, we maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third party warehouse based upon the customer’s projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products. Since we own inventory that is physically located in a third party’s warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete product and negatively impact our cash flow. We are dependent on a small number of OEM customers, and our business could be harmed by the loss of any of these customers or reductions in their purchasing volumes. We sell our products to a limited number of OEM customers directly or through a network of distributors. Moreover, many North American, European and Japanese OEMs are moving their manufacturing sites to Southeast Asia, as a result of the cyclical nature of manufacturing capacity issues and cost of silicon integrated circuits, the continued decline of average selling prices of chipsets and other industry-wide factors. In addition, OEMs located in Southeast Asia are growing and gaining competitive strength. As a result, the mix of our OEM customers may change in the future. However, we may not succeed in attracting new customers as these potential customers may have pre-existing relationships with our current or potential competitors. This trend also may promote the consolidation of OEMs located in North America, Europe and Japan with OEMs located in Southeast Asia, which may reduce the number of our potential customers and reduce the volume of chipsets the combined OEM customer may purchase from us. However, as is common in our industry, we typically do not enter into long term contracts with our customers in which they commit to purchase products from us. The loss of any of our OEM customers may have a material adverse effect on our results of operations. To attract new customers, we may be faced with intense price competition, which may affect our revenues and gross margins. The possible emerging trend of our OEM customers outsourcing their production may cause our revenue to decline. We believe there may be an emerging trend of our OEM customers outsourcing their production to third parties. We have invested substantial resources to build relationships with our OEM customers. However the outsourcing companies whom our OEM customers may choose to outsource production may not have prior business relationship with us or may instead have prior or ongoing relationships with our competitors. The emergence of this trend may require us to expend substantial additional resources to build relationships with these outsourcing companies, which would increase our operating expenses. Even if we do expend such resources, there are no assurances that these outsourcing companies will choose to incorporate our chipsets rather than chipsets of our competitors. Our inability to retain an OEM customer once such customer chooses to outsource production would have a material adverse effect on our future revenue. Third party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and seriously harm our operating results and disrupt our business. As is typical in the semiconductor industry, we and our customers 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. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter- claim may be ineffective. We have received claims that our products infringe upon the proprietary rights of such patent holding companies. In addition, third parties have asserted and may in the future assert intellectual property infringement claims against our customers, which we have agreed in certain circumstances to indemnify and defend against such claims. If litigation becomes necessary to determine the validity of any third party claims, it could result in significant expense to us and could divert the efforts of our technical and management personnel, whether or not the claim has merit and notwithstanding that the litigation is determined in our favor. If it appears necessary or desirable, we may try to obtain licenses for those patents or intellectual property rights that we are allegedly infringing. Although holders of these types of intellectual property rights commonly offer these licenses, we cannot assure you that licenses will be offered or that the 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, suspend the manufacturing of products utilizing the technology or damage the relationship with our customers. Alternatively, we could be required to expend significant resources to develop non-infringing technology. We cannot assure you that we would be successful in developing non-infringing technology. The occurrence of any of these events could harm our business, financial condition or results of operations. -16- Because we have significant operations in Israel, we may be subject to political, economic and other conditions affecting Israel that could increase our operating expenses and disrupt our business. Our principal research and development facilities are located in the State of Israel and, as a result, at December 31, 2015, 201 of our 314 employees were located in Israel, including 137 out of 196 of our research and development personnel. In addition, although we are incorporated in Delaware, a majority of our directors and executive officers are residents of Israel. Although substantially all of our sales currently are being made to customers outside of Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm our business, operating results and financial condition. Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since Israel’s establishment. Although they have not done so to date, these restrictive laws and policies may have an adverse impact on our operating results, financial condition or expansion of our business. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, hostilities between Israel and some of its Arab neighbors have recently escalated and intensified. We cannot predict whether or in what manner these conflicts will be resolved. Our results of operations may be negatively affected by the obligation of key personnel to perform military service. In addition, certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service. The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced in the future, which would increase our taxes. Our facilities in Israel have been granted Approved Enterprise and Beneficiary Enterprise status under the Law for the Encouragement of Capital Investments, 1959, commonly referred to as the “Investment Law,” as amended. The Investment Law provides that capital investments in a production facility (or other eligible assets) designated as an Approved Enterprise or Beneficiary Enterprise receive certain tax benefits in Israel. Our investment programs that generate taxable income are currently subject to an average tax rate of up to approximately 10% based on a variety of factors, including percentage of foreign ownership and approvals for the erosion of the tax basis of our investment programs. To be eligible for tax benefits, we must meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Economy and periodic reporting obligations. Although we believe we have met such conditions in the past, should we fail to meet such conditions in the future, we would be subject to corporate tax in Israel at the standard corporate tax rate (26.5% for 2015) and could be required to refund tax benefits (including with interest and adjustments for inflation based on the Israeli consumer price index) already received. Our average tax rate for our investment programs also may change in the future due to circumstances outside of our control, including changes to legislation. For example, in July 2013, the Investment Law was amended whereby the reduction of corporate tax rate for preferred enterprises was eliminated such that such enterprises, which are subject to the new law, would be subject to a 16% tax rate. Therefore, we cannot provide any assurances that our average tax rate for our investment programs will continue in the future at their current levels, if at all. The termination or reduction of certain programs and tax benefits or a requirement to refund tax benefits (including with interest and adjustments for inflation based on the Israeli consumer price index) already received may have a material adverse effect on our business, operating results and financial condition. We may engage in future acquisitions that could dilute our stockholders’ equity and harm our business, results of operations and financial condition. We have 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 other 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 assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired -17- businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing. ● ● ● ● ● ● ● ● ● Future acquisitions by us could result in the following, any of which could seriously harm our results of operations or the price of our stock: issuance of equity securities that would dilute our current stockholders’ percentages of ownership; large one-time write-offs; the incurrence of debt and contingent liabilities; difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies; diversion of management’s attention from other business concerns; contractual disputes; risks of entering geographic and business markets in which we have no or only limited prior experience; and potential loss of key employees of acquired organizations. We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position. Our success and ability to compete is in part dependent upon our internally-developed technology and other proprietary rights, which we protect through a combination of copyright, trademark and trade secret laws, as well as through confidentiality agreements and licensing arrangements with our customers, suppliers, employees and consultants. In addition, we have filed a number of patents in the United States and in other foreign countries with respect to new or improved technology that we have developed. However, the status of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, or that the patents issued to us will not be infringed by others. Also, our competitors and potential competitors may develop products with similar technology or functionality as our products, or they may attempt to copy or reverse engineer aspects of our product line or to obtain and use information that we regard as proprietary. Moreover, the laws of certain countries in which our products are or may be developed, manufactured or sold, including Hong Kong, Japan, Korea and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Policing the unauthorized use of our products is difficult and may result in significant expense to us and could divert the efforts of our technical and management personnel. Even if we spend significant resources and efforts to protect our intellectual property, we cannot assure you that we will be able to prevent misappropriation of our technology. Use by others of our proprietary rights could materially harm our business and expensive litigation may be necessary in the future to enforce our intellectual property rights. Because our products are complex, the detection of errors in our products may be delayed, and if we deliver products with material defects, our credibility will be harmed, the sales and market acceptance of our products may decrease and product liability claims may be made against us. Our products are complex and may contain errors, defects and bugs when introduced. If we deliver products with material errors, defects or bugs, our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the nature of our products may also delay the detection of any such error or defect. If our products contain material errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects, errors or failures in our products could lead to product liability claims or lawsuits against us or against our customers. We generally provide our customers with a standard warranty for our products, generally lasting one year from the date of purchase. Although we attempt to limit our liability for product defects to product replacements, we -18- may not be successful, and customers may sue us or claim liability for the defective products. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and results of operations. We are exposed to the credit risk of our customers and to credit exposures in weakened markets, which could result in material losses. Most of our sales are on an open credit basis. Because of current conditions in the global economy, our exposure to credit risks relating to sales on an open credit basis has increased. We expect demand for enhanced open credit terms, for example, longer payment terms, to continue and believe that such arrangements are a competitive factor in obtaining business. Although we monitor and attempt to mitigate credit risks, including through insurance coverage from time to time, there can be no assurance that our efforts will be effective. Moreover, even if we attempt to mitigate credit risks through insurance coverage, such coverage may not be sufficient to cover all of our losses and we would be subject to a deductible under any insurance coverage. As a result, our future credit risk exposure may increase. Although any losses to date relating to credit exposure of our customers have not been material, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. Moreover, the loss of a customer due to its financial default also could harm our future business and potential growth. Our executive officers and key personnel are critical to our business, and because there is significant competition for personnel in our industry, we may not be able to attract and retain such qualified personnel. Our success depends to a significant degree upon the continued contributions of our executive management team, and our technical, marketing, sales customer support and product development personnel. The loss of significant numbers of such personnel could significantly harm our business, financial condition and results of operations. We do not have any life insurance or other insurance covering the loss of any of our key employees. Because our products are specialized and complex, our success depends upon our ability to attract, train and retain qualified personnel, including qualified technical, marketing and sales personnel. However, the competition for personnel is intense and we may have difficulty attracting and retaining such personnel. We may have exposure to additional tax liabilities as a result of our foreign operations. We are subject to income taxes in the United States and various foreign jurisdictions. In addition to our significant operations in Israel, we have operations in Germany, the United Kingdom, Hong Kong and India. Significant judgment is required in determining our worldwide provision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities and as an example, we are now under audit for one of our subsidiaries, the outcome of which could have material adverse impact on our financial condition. Our intercompany transfer pricing may be reviewed by the U.S. Internal Revenue Service and by foreign tax jurisdictions. Although we believe that our tax estimates are reasonable, due to the complexity of our corporate structure, the multiple intercompany transactions and the various tax regimes, we cannot assure you that a tax audit or tax dispute to which we may be subject will result in a favorable outcome for us. If taxing authorities do not accept our tax positions and impose higher tax rates on our foreign operations, our overall tax expenses could increase. We are exposed to fluctuations in currency exchange rates. A significant portion of our business is conducted outside the United States. Export sales to manufacturers in Europe and Asia, including Japan and Asia Pacific, represented 97% of our total revenues for 2015, 2014 and 2013. Although most of our revenue and expenses are transacted in U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business in local currencies. Moreover, part of our expenses in Israel are paid in Israeli currency, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the New Israeli Shekel (NIS) and to economic pressures resulting from Israel’s general rate of inflation. Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our European operations are paid in the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primary expenses paid in the Euro are employee salaries, lease and operational payments on our European facilities. As a result, an increase in the value of the NIS and Euro in comparison to the U.S. dollar could increase the cost of our technology development, research and development expenses and general and administrative expenses, all of which could harm our operating profit. From time to time, we use derivative instruments in order to minimize the effects of currency fluctuations, but our hedging positions may be partial, may not exist at all in the future or may not succeed in minimizing our foreign currency fluctuation risks. Our financial results may be harmed if the trend relating to the devaluation of the U.S. dollars continues for an extended period. -19- Because the markets in which we compete are highly competitive, and many of our competitors have greater resources than we do, we cannot be certain that our products will be accepted in the marketplace or capture market share. The markets in which we operate are extremely competitive and characterized by rapid technological change, evolving standards, short product life cycles and price erosion. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market. Given the highly competitive environment in which we operate, we cannot be sure that any competitive advantages enjoyed by our current products would be sufficient to establish and sustain our new products in the market. Any increase in price or competition could result in the erosion of our market share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results of operations. 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. These competitors may also have pre-existing relationships with our customers or potential customers. Further, in the event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to do so. Our principal competitors in the cordless market include Lantiq and Dialog Semiconductors. Our principal competitors in the VoIP market include Broadcom, Dialog Semiconductors, Infineon, Texas Instruments and new Taiwanese IC vendors. As discussed above, various new developments in the home residential market may require us to enter into new markets with competitors that have more established presence, and significantly greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we do. The expenditure of greater resources to expand our current product lines and develop a portfolio of “system-on-a-chip” solutions that integrate video, voice, data and communication technologies in a wider multimedia market may increase our operating expenses and reduce our gross profit. We cannot assure you that we will succeed in developing and introducing new products that are responsive to market demands. An unfavorable government review of our federal income tax returns or changes in our effective tax rates could adversely affect our operating results. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the periodic examination of our income tax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, as an example, we are now under audit for one of our subsidiaries. The outcome from this examination may have an adverse effect on our operating results and financial condition. Our business operations would be disrupted if the information technology systems we rely on fail to function properly. We rely on complex information technology systems to manage our business which operates in many geographical locations. For example, to achieve short delivery lead times and superior levels of customer service while maintaining low levels of inventory, we constantly adjust our production schedules with manufacturers and subcontractors. We develop and adjust these schedules based on end customer demand as communicated by our customers and distributors and based on our inventory levels, manufacturing cycle times, component lead times, and projected production yields. We combine and distribute all of this information electronically over a complex global communications network. Our ability to estimate demand and to adjust our production schedules is highly dependent on this network. Any delay in the implementation of, or disruption in the transition to, new or enhanced processes, systems or controls, could adversely affect our ability to manage customer orders and manufacturing schedules, as well as generate accurate financial and management information in a timely manner. These systems are also susceptible to power and telecommunication disruptions and other system failures. Failure of our IT systems or difficulties in managing them could result in business disruption. Our business could be significantly disrupted and we could be subject to third party claims associated with such disruptions. We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses. A growing trend in our industry is the integration of greater semiconductor content into a single chip to achieve higher levels of functionality. In order to remain competitive, we must achieve higher levels of design integration and deliver new integrated products on a timely basis. This will require us to expend greater research and development resources, and may require us to modify the manufacturing processes for some of our products, to achieve greater integration. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to -20- reduce our costs. Although this migration to smaller geometry process technologies has helped us to offset the declining average selling prices of our products, this effort may not continue to be successful. Also, because we are a fabless semiconductor company, we depend on our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition. In case our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected. The anti-takeover provisions in our certificate of incorporation and bylaws could prevent or discourage a third party from acquiring us. Our certificate of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if the acquisition would be beneficial to our stockholders. Our board of directors also has the authority to fix the rights and preferences of shares of our preferred stock and to issue such shares without a stockholder vote. Our bylaws also place limitations on the authority to call a special meeting of stockholders. Our stockholders may take action only at a meeting of stockholders and not by written consent. We have advance notice procedures for stockholders desiring to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. In addition, these factors may also adversely affect the market price of our common stock, and the voting and other rights of the holders of our common stock. Our stock price may be volatile so you may not be able to resell your shares of our common stock at or above the price you paid for them. Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results, changes in the general conditions of the highly dynamic industry in which we compete or the national economies in which we do business, and other factors could cause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years, the stock market has experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could have a material adverse effect on the market price of our common stock. Item 1B. UNRESOLVED STAFF COMMENTS. None. Item 2. PROPERTIES. Our principal offices in the United States are located in Los Altos, California, where we lease approximately 700 square feet under a lease that expires in January 2018. Our operations in Israel are located in leased facilities, with the primary leased facility of approximately 45,359 square feet located in Herzliya Pituach, Israel. These facilities are leased through November 2018. Our subsidiary in Tokyo, Japan has a lease that terminates in October 2016. Our subsidiary in Nuremberg, Germany has a lease that terminates in December 2016. Our subsidiary in Scotland has 2 lease agreements for its facilities, one with automatic renewals on a month-to-month basis and another that terminates in November 2019. Our subsidiary in India has a lease that terminates in August 2020. Our subsidiary in Shenzhen, China has a lease that terminates in September 2016. Our subsidiary in Hong Kong entered into a lease agreement that is effective until November 2016. We believe that our existing facilities are adequate to meet our needs for the immediate future. Item 3. LEGAL PROCEEDINGS. From time to time, we may become involved in litigation relating to claims arising from our ordinary course of business activities. Also, 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. We currently believe that there are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse effect on us. Item 4. MINE SAFETY DISCLOSURES. Not applicable. -21- PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock, par value $0.001, trades on the NASDAQ Global Select Market (NASDAQ symbol “DSPG”). The following table presents for the periods indicated the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market: Year Ended December 31, 2014 First Quarter ..................................................................................................... Second Quarter ................................................................................................. Third Quarter .................................................................................................... Fourth Quarter .................................................................................................. Year Ended December 31, 2015 First Quarter ..................................................................................................... Second Quarter ................................................................................................. Third Quarter .................................................................................................... Fourth Quarter .................................................................................................. High Low 10.32 9.21 9.48 11.48 High Low 12.08 12.17 10.45 10.65 8.31 7.90 8.30 8.83 9.77 10.14 8.02 8.65 As of March 4, 2016, there were 21,731,537 shares of common stock outstanding. As of March 4, 2016, the company had approximately 27 holders of record and we believe greater than 740 beneficial holders. We have never paid cash dividends on our common stock and presently intend to continue a policy of retaining any earnings for reinvestment in our business. Equity Compensation Plan Information Information relating to our equity compensation plans will be presented under the caption “Equity Compensation Plan Information” of our definitive proxy statement pursuant to Regulation 14A in connection with the annual meeting of stockholders to be held on June 6, 2016. The definitive proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report. Such information is incorporated herein by reference. Issuer Purchases of Equity Securities In November 2013, our board of directors authorized the company’s entry into a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of up to 2,700,000 shares of our common stock. This authorization was in addition to the approximately 308,000 shares that were available for repurchase under the board’s prior authorizations. Furthermore, in August 2015, our board of directors authorized an additional $10 million dollar buyback program, of which 0.5 million shares are available for repurchase under a Rule 10b5-1 plan. At December 31, 2015, 905,040 shares of our common stock remained available for repurchase under our board authorized share repurchase program. The repurchase program is being affected from time to time, depending on market conditions and other factors, through open market purchases and privately negotiated transactions. Information relating to our equity compensation plans will be presented under the caption “Equity Compensation Plan Information” of our definitive proxy statement pursuant to Regulation 14A in connection with the annual meeting of stockholders to be held on June 6, 2016. The definitive proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report. Such information is incorporated herein by reference. -22- Stock Performance Graph Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this proxy statement or future filings made by the Company under those statutes, the Stock Performance Graph shall not be deemed filed with the United States Securities and Exchange Commission and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes. The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Standard & Poor’s 500 Index and Standard & Poor’s Information Technology Index. The period shown commences on December 31, 2010 and ends on December 31, 2015, the end of our last fiscal year. The graph assumes an investment of $100 on December 31, 2010, and the reinvestment of any dividends. Comparisons in the graph above are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock. -23- Item 6. SELECTED FINANCIAL DATA. The selected historical consolidated financial data presented below is derived from our consolidated financial statements. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, our consolidated financial statements for the year ended December 31, 2015, and the discussion of our business, operations and financial results in the section captioned, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Year Ended December 31, 2015 2014 2013 (U.S. dollars in thousands) 2012 2011 Statements of Operations Data: Revenues .............................................................. $ Cost of revenues ............................................... Gross profit .......................................................... Operating expenses Research and development, net ........................ General, administrative, sales and marketing .. Amortization of intangible assets ..................... Write-off of expired option related to investment in other company ........................ Restructuring cost (income) .............................. Total operating expenses .................................. Operating income (loss) ....................................... Financial and other income Financial income, net .......................................... Other income from remeasurement of investment in a business Combination ................................ Income (loss) before taxes ................................... Income tax benefit (expense) .............................. Net income (loss) ............................................. Weighted average number of Common Stock outstanding during the period used to compute basic net earnings (loss) per share .................... Weighted average number of Common Stock outstanding during the period used to compute diluted net earnings (loss) per share ................. Basic net income (loss) per share ......................... $ Diluted net income (loss) per share ...................... $ Balance Sheet Data (end of year): Cash, cash equivalents, marketable securities and bank deposits, including restricted deposits...... $ Working capital .................................................... $ Total assets ........................................................... $ Total stockholders’ equity .................................... $ 144,271 $ 143,036 $ 85,992 57,044 84,411 59,860 151,063 $ 91,237 59,826 162,790 $ 101,660 61,130 193,861 123,734 70,127 35,483 21,979 1,284 400 - 59,146 714 33,468 22,446 1,573 - - 57,487 (443) 35,000 23,085 1,672 - - 59,757 69 42,539 24,875 2,310 53,244 29,417 7,972 - 2,008 71,732 (10,602) - (170) 90,463 (20,336) 1,175 1,204 2,457 2,388 1,885 - 1,889 (327) 1,562 $ - 761 2,841 3,602 $ - 2,526 150 2,676 $ - (8,214) 172 (8,042) $ 1,343 (17,108) 866 (16,242) 21,924 21,968 22,249 21,950 23,247 23,340 0.07 $ 0.07 $ 22,954 0.16 $ 0.16 $ 22,906 0.12 $ 0.12 $ 21,950 (0.37) $ (0.37) $ 23,247 (0.70) (0.70) 121,656 $ 124,944 $ 38,817 $ 38,352 $ 183,962 $ 191,179 $ 143,318 $ 146,623 $ 127,712 $ 42,301 $ 192,265 $ 147,411 $ 120,339 $ 49,102 $ 185,182 $ 142,227 $ 117,909 60,010 197,625 148,624 -24- Year Ended December 31, Fiscal Years by Quarter Quarterly Data: 4th 3rd 2015 2nd 1st 4th 3rd 2014 2nd 1st (Unaudited, U.S. dollars in thousands, except per share amount) Revenues ............................ $ 33,770 $ 35,219 $ 37,247 $ 38,035 $ 37,159 $ 36,715 $ 36,276 $ 32,886 Gross profit ........................ $ 14,517 $ 14,573 $ 15,235 $ 15,535 $ 14,721 $ 14,528 $ 14,781 $ 13,014 Net income (loss) ............... $ (988) 730 $ Net income (loss) per share 1,088 $ 2,729 $ (108) $ 773 $ 773 $ 167 $ — Basic ......................... $ 0.00 $ 0.01 $ 0.03 $ 0.03 $ 0.13 $ 0.04 $ 0.05 $ (0.04) Net income (loss) per share — Diluted ...................... $ 0.00 $ 0.01 $ 0.03 $ 0.03 $ 0.12 $ 0.03 $ 0.05 $ (0.04) Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto. Business Overview DSP Group is a leading global provider of wireless chipset solutions for converged communications, delivering system solutions that combine semiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating DECT, Wi-Fi, PSTN and VoIP technologies with state-of-the-art application processors. We also enable converged voice, audio and data connectivity across diverse consumer products – from cordless and VoIP phones to home gateways and connected multimedia screens. A majority of our revenues is derived from products targeted for digital cordless telephony. Such revenues currently represent approximately 72% of our total revenues for 2015. Our revenues were $144.3 million for 2015, an increase of 1% in comparison to 2014. The increase for 2015 was primarily as a result of increased sales of our VoIP, home gateway and home automation products, as well as the commencement of sales of our HDClear products, partially offset by a decrease in sales of our cordless telephony products. Revenues from our new products accounted for 28% of our total revenues for 2015, as compared to 21% of our total revenues for 2014. Sales of our home gateway products represented 10% of our total revenues in 2015, as compared to 8% of our total revenues in 2014. Sales of our VoIP products represented 15% of our total revenues for 2015, as compared to 10% of our total revenues in 2014. Revenues derived from the sale of cordless telephony products represented 72% of our total revenues for 2015, as compared to 79% of our total revenues for 2014. We expect that revenues from new products, primarily VoIP and HDClear products, will continue to increase in 2016 and expect such revenues to represent a higher percentage of 2016 total sales. Our gross margin increased to 41.5% of our total revenues for 2015 from 39.9% for 2014, primary due to (i) an increase in total revenues, (ii) an improvement in production yield and direct contribution of certain of our products, and (iii) a change in the mix of products sold and mix of customers. We anticipated that our gross margin on an annual basis will continue to increase in the foreseeable future as our product mix shifts in favor of new products which generally have higher gross margins. Our operating income was $0.7 million for 2015, as compared to an operating loss of $0.4 million for 2014. The change from operating loss to operating income was mainly as a result of increases in total revenues and gross margin during 2015, as compared to 2014, offset to some extent by an increase in operating expenses, mainly in research and development expenses, during 2015, as compared to 2014. Our operating expenses increased by 3% to $59.1 million for 2015, as compared to $57.5 million for 2014, mainly as a result of the above mentioned increase in research and development expenses. We expect our research and development expenses to increase slightly in 2016 in comparison to 2015. Notwithstanding our return to revenue growth in 2015 and our success in increasing our gross margin, we expect that our financial condition will continue to be challenged by the steady decline of the cordless telephony market. The cordless telephony market is undergoing a challenging period. With the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed- line telephony will continue to decline, which will continue to reduce our revenues derived from, and unit sales of, cordless telephony products. Furthermore, our business also may be significantly affected by the outcome of the competition between -25- cellular phone operators and fixed-line operators for the provision of residential communication. A significant majority of our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony. If we are unable to develop new technologies to address alternative connectivity methods, our business could be materially adversely affected. Therefore, in order to increase our revenues and offset the declining revenues generated from our cordless products, we need to introduce new products and penetrate new markets. We intend to leverage our strong technology base and customer relationships to maximize growth and revenue opportunities for these new products. We see evidence that our past research and development investments in new technologies are beginning to materialize. We have achieved a number of design wins for our new products and begun mass shipments of a number of new products. Moreover, 2015 marked the achievement of a significant milestone for the company with initial mass production shipments of HDClear products to a tier one mobile customer. Aggregate revenues derived from our new products were 28%, 21% and 15% of our total revenues for 2015, 2014 and 2013, respectively. Based on a strong pipeline of design wins, our current mix of new products and anticipated commercialization schedules of customers incorporating our new products, we anticipate annual revenues generated from our new products to increase significantly in 2016 as compared to 2015. However, we can provide no assurances about our success in introducing new products and penetrating new markets, as well as our predictions regarding market trends. Furthermore, although our new products targeted for mobile devices, home control & automation and enterprise VoIP solutions are gradually being introduced into the market, market adoption of such products is at early stages and may require us to increase our research and development spending to capitalize on opportunities in those markets. Moreover, although we have achieved a number of design wins with top-tier OEMs for new products, revenue generated from the commercialization of new products is a measured process as there is generally a long lead time from a design win to commercialization. From initial product design win to volume production, many factors could impact the timing and/or amount of sales actually realized from the design win. In addition to general price sensitivity and price erosion in the markets we operate, the introduction of new products may accelerate price erosion of older products. As a result, we expect the market to remain price sensitive for our traditional cordless telephony products and expect that price erosion and the decrease in the average selling prices of such products to continue. Furthermore, various other factors, including increases in the cost of raw materials and commodities and our suppliers passing such increases onto us, increases in silicon wafer costs and increases in production, assembly and testing costs, and shortage of capacity to fulfill our fabrication, assembly and testing needs, all may decrease our gross profit and harm our ability to grow our revenues in future periods. As of December 31, 2015, our principal source of liquidity consisted of cash and cash equivalents of $13.7 million and marketable securities and short term deposits of $107.8 million, totaling $121.5 million. Critical Accounting policies Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the financial statements, we are required to make assumptions and estimates about future events, and apply judgment that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosure. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumption and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the notes to our consolidated financial statements for the year ended December 31, 2015. -26- Management believes that the following accounting policies require management’s most difficult, subjective and complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with our independent auditors and audit committee. Description Tax Contingencies: Like most companies, domestic and foreign tax authorities periodically audit our income tax returns. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and income among the allocation of various tax jurisdictions. In evaluating the exposure associated with our various tax filing positions, including state, foreign and local taxes, we record probable exposures. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved. reserves for We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. Tax Valuation Allowance: We have a valuation allowance for some of our deferred tax assets based on the determination that it is more likely than not that some of these assets will not be realized. Judgments & Uncertainties The estimate of our tax contingency reserve contains uncertainty because management must use judgment to estimate the exposure associated with our various tax filing positions. According to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740, “Income Taxes,” the first step is to evaluate the tax position for recognition the weight of if by determining available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. appeals or related Effect if Actual Results Differ from Assumptions Although management believes that its estimates and judgments about tax contingencies are reasonable, actual results could differ, and we may be exposed to gains or losses that could be material. To the extent we prevail in matters for which reserve has been established, or are required to pay amounts in excess of the reserve, our effective tax rate for a given financial statement period could be materially tax affected. An settlement would require use of our cash and result in an increase in our effective tax rate for the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate for the year of resolution. unfavorable Our management inherently must make estimates to determine the ultimate realization of these assets. The estimate of our tax valuation allowance contains uncertainty because management must use judgment to estimate the expected results for tax purposes. and judgments Although management believes that its about estimates expected results for tax purposes are reasonable, actual results could differ, and we may be required to record an additional valuation allowance for our deferred tax assets. -27- Judgments & Uncertainties Effect if Actual Results Differ from Assumptions require us We determine fair value using widely accepted techniques, valuation including discounted cash flow and market multiple analyses. These types of analyses to make assumptions and estimates regarding the industry economic factors and profitability business of strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. future If management’s estimates or related assumptions change in the future, we may be required to record impairment charges for our investment in other company. As of December 31, 2015, we did not exercise the purchase option by the expiration date, and as a result we recorded a write-off of $0.4 million associated with this investment. Description Valuation of Investment in Other Company : The investment in other company on our consolidated balance sheet is as a result of our investment in a private for company approximately 14% of the equity of the company on a fully diluted basis and an option we had to acquire the remaining equity of this private company by a specified date. in Asia return in not investment may This investment in other company is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of be such We may obtain an recoverable. appraisal independent valuation firm to determine the amount of impairment, if any. In addition to the use of an independent valuation firm, we perform internal valuation analyses and consider other publicly available market information. from an Valuation of Long-Lived Assets, Intangible Assets and Goodwill : Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired in business combination. The goodwill on our consolidated balance sheet is a result of our acquisition of BoneTone. intangible asset The included on our consolidated balance sheet is technology acquired in the BoneTone acquisition. identifiable require us We determine fair value using widely accepted techniques, valuation including discounted cash flow and market multiple analyses. These types of analyses to make assumptions and estimates regarding the industry economic factors and profitability business of strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations. future If management’s estimates or related assumptions change in the future, we may be required to record impairment charges for our intangible assets. We perform our annual impairment analysis of goodwill and indefinite- lived (such as technology) in the fourth quarter of each fiscal year, or more often if there intangible assets -28- Judgments & Uncertainties Effect if Actual Results Differ from Assumptions events changes Description are indicators of impairment. We review intangible assets with finite useful life for potential impairment in or when circumstances indicate the carrying value of those intangible assets may be impaired. We may obtain an independent appraisal the valuation firm amount of impairment, if any. In addition to the use of an independent valuation firm, we perform internal valuation analyses and consider other publicly available market information. to determine from an Contingencies and Other Accrued Expenses: We are from time to time involved in legal proceedings and other claims. We are required the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. to assess A determination of the amount of reserve required, if any, for any contingencies and accruals is made after careful analysis of each individual issue. The required reserve may change due to future developments, such as a change in the settlement strategy in dealing with any contingencies, which may result in higher net losses. If actual results are not consistent with management’s and judgments, we may be exposed to gains or losses that could be material. assumptions value through Inventory Write-Off: We value our inventory at the lower of the cost of the inventory or fair the market establishment of write-off and inventory loss reserve. We have not made any changes in the accounting methodology used to establish our markdown or inventory loss reserves during the past four fiscal years. Our write-off represents the excess of the carrying value, typically cost, over the amount we expect to realize from the ultimate sale or other disposal of inventory based upon our assumptions regarding forecasted consumer demand, the promotional environment, inventory aging and technological obsolescence. If management’s estimates regarding consumer demand are inaccurate or changes in technology affect demand for in an unforeseen certain products manner, we may be exposed to losses or gains in excess of our established write- off that could be material. Equity-Based Compensation Expense: Equity-based compensation expense is measured on the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of equity- based awards on the grant date requires the exercise of judgment, including the amount of equity-based awards that are expected to be forfeited. We consider many factors when estimating expected forfeitures, including types of awards, employee historical experience. Actual results, and future in estimates, may differ changes substantially from our current estimates. class, and Although management believes that their estimates and judgments about equity-based compensation expense are reasonable, actual results could differ. -29- Description Judgments & Uncertainties Effect if Actual Results Differ from Assumptions We estimate the fair value of equity- based awards using a binomial option pricing model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including expected stock price volatility and the expected term of the equity-based award. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. Expected volatility is calculated based upon actual historical stock price movements. The expected term of the equity-based award granted is based upon and represents the period of time that the to be award granted outstanding. Our expected dividend rate is zero since we do not currently pay cash dividends and do not anticipate doing so in the foreseeable future. is expected experience historical determines Marketable Securities: Management the appropriate classification for our in debt and equity investments securities at the time of purchase and re-evaluates such determination at each balance sheet date. Although management believes actual that their considerations and judgments about fair value and whether a loss associated with a marketable security is other-than-temporary, results could differ. Given current market conditions uncertainty, and management’s judgments could prove to be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their obligations and thereby cause other- than-temporary losses. The marketable securities are periodically reviewed for impairment. If it is concluded that any of these investments are impaired, management determines whether such impairment is that “other-than-temporary.” Factors are considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period, and our intent to sell, or whether it is more likely than not that the we will be required investment before recovery of its cost basis. If any impairment is considered “other-than-temporary,” the investment is written down to its fair value and a corresponding charge is recorded in financial income, net. to sell, Results of Operations: Total Revenues. Our total revenues were $144.3 million for 2015, $143.0 million for 2014 and $151.1 million for 2013. The increase for 2015 was primarily as a result of increased sales of our VoIP, home gateway and home automation products, as well as commencement of sales of our HDClear products, partially offset by a decrease in sales of our cordless telephony products. The decrease of 5.3% in revenues for 2014 as compared to 2013 was primarily as a result of decreased sales of our 2.4GHz and DECT cordless telephony products, offset to some extent by increased sales of VoIP, home gateway and home automation products. -30- Sales of our cordless telephony products were $104.1 million, $113.2 million and $128.8 million for the years ended 2015, 2014 and 2013, respectively, representing approximately 72%, 79% and 85% of our total revenues for 2015, 2014 and 2013, respectively. The above mentioned decrease in 2015 compared to 2014 was mainly attributable to decreased demand from our customers, mainly for the U.S. and Japanese domestic end markets. The above mentioned decrease in 2014 compared to 2013 was mainly attributable to decreased demand from our customers, mainly for the U.S. and European end markets. Sales of our home gateway products were $13.8 million, $12.0 million and $9.4 million for the years ended 2015, 2014 and 2013, respectively, representing approximately 10%, 8% and 6% of our total revenues for 2015, 2014 and 2013, respectively. The increase of 15% in absolute dollars of our home gateway product sales in 2015 as compared to 2014 and the increase of 28% in absolute dollars of our home gateway product sales in 2014 as compared to 2013 were both mainly attributable to the increased acceptance and adoption of HD voice as DECT solution is the preferred medium for transmitting HD voice wirelessly at home. Sales of our VoIP products were $22.2 million, $14.3 million and $8.9 million for 2015, 2014 and 2013, respectively, representing 15%, 10% and 6% of our total revenues for 2015, 2014 and 2013, respectively. The increase of 56% in absolute dollars of our VoIP sales in 2015 as compared to 2014 and the increase of 61% in absolute dollars of our VoIP sales in 2014 as compared to 2013 were both mainly attributable to a growth in market demand for our VoIP products that resulted from the growth of our market share within this domain. The following table shows the breakdown of revenues for all product lines for the periods indicated by geographic location based on the geographic location of our customers (in thousands): Year Ended December 31, 2014 2015 2013 United States ....................................................................................... $ Hong Kong .......................................................................................... Japan.................................................................................................... Europe ................................................................................................. China ................................................................................................... Taiwan ................................................................................................. Other.................................................................................................... Total revenues ..................................................................................... $ 3,944 $ 72,608 26,114 8,464 10,359 16,902 5,880 144,271 $ 4,702 $ 79,622 31,261 6,787 6,568 9,077 5,019 143,036 $ 4,342 86,090 34,377 7,370 6,999 7,093 4,792 151,063 Sales to our customers in Hong Kong decreased for 2015 as compared to 2014, representing a decrease of 9% in absolute dollars. The decrease in our sales to Hong Kong for the comparable periods resulted mainly from the decrease in sales to VTech Holding Ltd. (“VTech”) of 12% when comparing 2015 to 2014 and a decrease in sales to CCT Telecom Holdings Ltd. (“CCT”) of 34% when comparing 2015 to 2014. This decrease was partially offset by an increase of 52% in sales to Shenzhen Guo Wei Electronics Ltd. (“Guo Wei”). The decrease in our sales to Japan for the comparable periods resulted mainly from a decrease in sales to the Japanese domestic market, representing a 39% decrease in absolute dollars for 2015 as compared to 2014 and a decrease in sales through our distributor, Tomen Electronics, Ltd. (“Tomen Electronics”), to Panasonic Communications Ltd (“Panasonic”) of 12% when comparing 2015 to 2014. Sales to our customers in Taiwan increased for 2015 as compared to 2014, representing an increase of 86% in absolute dollars. The increase in our sales to Taiwan for the comparable periods resulted mainly from an increase in sales through our distributor, Ascend Technology Inc. (“Ascend Technology”). Sales to our customers in Hong Kong decreased for 2014 as compared to the same period of 2013, representing a decrease of 8% in absolute dollars. The decrease in our sales to Hong Kong for the comparable periods resulted mainly from a decrease in sales to VTech of 6% during the comparable periods. Sales to our customers in Japan decreased for 2014 as compared to the same period of 2013, representing a decrease of 9% in absolute dollars. The decrease in our sales to Japan for the comparable periods resulted mainly from a decrease in sales to Uniden American Corporation, representing a 52% decrease in absolute dollars for 2014, as compared to 2013. As our products are generally incorporated into consumer electronics products sold by our OEM customers, our revenues are affected by seasonal buying patterns of consumer electronics products sold by our OEM customers that incorporate our products. -31- Significant Customers. The Japanese and Hong Kong markets and the OEMs that operate in those markets are among the largest suppliers of residential wireless products with significant market share in the U.S. market. The loss of any of our significant customers or distributors could have a material adverse effect on our business, financial condition and results of operations. VTech is a significant OEM customer based in Hong Kong. Sales to VTech represented 31%, 35% and 36% of our total revenues for 2015, 2014 and 2013, respectively. Sales to Guo Wei represented 12%, 8% and 8% of our total revenues for 2015, 2014 and 2013, respectively. Revenues derived from sales through our distributor, Japan-based Tomen Electronics accounted for 16% of our total revenues for 2015, as compared to 20% for 2014 and 19% for 2013. Tomen Electronics sells our products to a limited number of customers. One customer, Panasonic, has continually accounted for a majority of sales through Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately 13%, 15% and 14% of our total revenues for 2015, 2014 and 2013, respectively. Revenues derived from sales through our distributor, Ascend Technology, accounted for 15% of our total revenues for 2015, as compared to 10% for 2014 and 9% for 2013. Ascend Technology sells our products to a limited number of customers; however none of those customers accounted for more than 10% of our total revenues for 2015, 2014 or 2013. Significant Products. Revenues from our digital cordless telephony products represented 72%, 79% and 85% of our total revenues for 2015, 2014 and 2013, respectively. We believe that sales of digital cordless telephony products will continue to represent a substantial percentage of our revenues for 2016. We believe that the rapid deployment of new communication access methods, as well as the lack of growth in fixed-line telephony, will reduce our total revenues derived from, and unit sales of, cordless telephony products, for the short and long term. Revenues from our home gateway products represented 10%, 8% and 6% of our total revenues for 2015, 2014 and 2013, respectively. Revenues from our VoIP products represented 15%, 10% and 6% of our total revenues for 2015, 2014 and 2013, respectively. Gross Profit. Gross profit as a percentage of revenues was 41.5% for 2015, 39.9% for 2014 and 39.6% for 2013. The increase in our gross profit for 2015 as compared to 2014 was primary due to (i) an increase in total revenues, (ii) an improvement in production yield and direct contribution of certain of our products, and (iii) a change in the mix of products sold and mix of customers. The increase in our gross profit for 2014 as compared to 2013 was primarily due to (i) an improvement in production yield and direct contribution of certain of our products as a result of lower cost structure for production of such products, and (ii) a change in the mix of products sold and customers, offset to some extent by a decrease in total revenues. As gross profit reflects the sale of chips and chipsets that have different margins, changes in the mix of products sold and customers have impacted and will continue to impact our gross profit in future periods. Our gross profit may decrease in the future due to a variety of factors, including the continued decline in the average selling prices of our products, changes in the mix of products sold and customers, our failure to achieve cost reductions, roll-out of new products in any given period, our success in introducing new engineering processes to reduce manufacturing costs, increases in the cost of raw materials such as gold, oil and silicon wafers, and increases in production, assembly and testing costs. Moreover, our suppliers may pass the increase in the cost of raw materials and commodities onto us which would further reduce the gross margins of our products. There are no guarantees that our ongoing efforts in cost reduction and yield improvements will keep pace with the anticipated continuing decline in average selling prices of our products. Cost of goods sold consists primarily of costs of wafer manufacturing and fabrication, assembly and testing of integrated circuit devices and related overhead costs, and compensation and associated expenses related to manufacturing and testing support, inventory obsolesce and logistics personnel. Operating Expenses. Our operating expenses were $59.1 million for 2015, $57.5 million for 2014 and $59.8 million for 2013. The increase in operating expenses for 2015 as compared to 2014 was primarily attributable to (i) an increase in research and development expenses in the amount of $2.0 million, and (ii) an increase in sales and marketing expenses in the amount of $0.2 million. These increases were offset to some extent by a decrease in general and administrative expenses in the amount of $0.6 million in 2015 as compared to 2014. -32- The decrease in operating expenses for 2014 as compared to 2013 was primarily attributable to (i) a decrease in research and development expenses in the amount of $1.5 million, and (ii) a decrease in general and administrative expenses in the amount of $1.3 million. These decreases were offset to some extent by an increase in sales and marketing expenses in the amount of $0.6 million in 2014 as compared to 2013. Our operating income was $0.7 million for 2015, as compared to an operating loss of $0.4 million for 2014 and an operating income of $0.1 million for 2013. The change from operating loss in 2014 to operating income in 2015 was mainly as a result of increases in total revenues and gross margin during 2015, as compared to 2014, offset to some extent by an increase in operating expenses, mainly in research and development expenses, during 2015, as compared to 2014. The decrease in operating income in 2014 as compared to 2013 was mainly as a result of a decrease in total revenues during 2014 as compared to 2013, offset to some extent by a decrease in research and development, and general and administrative expenses, and an improvement in gross margins. Research and Development Expenses. Our research and development expenses, net, were $35.5 million for 2015, $33.5 million for 2014 and $35.0 million for 2013. The increase for 2015 in research and development expenses, net, as compared to 2014, was mainly due to (i) an increase in projects-related expenses (mainly IP and tapeouts) in the amount of $3.0 million, and (ii) a decrease in funding received from the Israeli Office of the Chief Scientist (“OCS”) in the amount of $0.3 million for 2015. The increase in research and development expenses, net, for 2015, as compared to the comparable period of 2014, was partially offset by a decrease in labor and employees related expenses in the amount of $1.2 million for 2015 as compared to 2014, mainly as a result of an increase in the exchange rate between the USD and the NIS, which decreased the payroll expenses of our Israeli employees and a decrease in overall compensation payments to employees. The OCS funding was recognized as a deduction of our research and development expenses, net. As a result of receipt of OCS funding, royalties may be payable to the OCS in the future based on a percentage of revenues derived from sales of products whose development was facilitated by the OCS funding. The obligation to pay these royalties is contingent on actual sales of these products. The decrease for 2014 in research and development expenses, net, as compared to 2013, was mainly due to (i) a decrease in projects-related expenses (mainly tapeouts) in the amount of $1.4 million, (ii) a decrease in depreciation expenses in the amount of $0.5 million, and (iii) funding received from the OCS in the amount of $3.0 million for 2014, following the receipt of an approval from the OCS during the first quarter of 2014 for 2014 research and development programs and some residual funding that was approved for 2013 programs. During 2013, such funding recognized in research and development expenses amounted to $2.1 million. The above mentioned OCS funding was recognized as a deduction of our research and development expenses, net. The decrease in research and development expenses, net, for 2014, as compared to the comparable period of 2013, was offset to some extent by (i) an increase in equity-based compensation expenses for 2014 in the amount of $0.5 million, and (ii) an increase in labor and employees related expenses in the amount of $1.1 million for 2014 as compared to 2013, mainly as a result of the devaluation of the U.S. dollar against the NIS, which increased our Israeli employees labor expenses. Our research and development expenses, net, as a percentage of our total revenues were 25% for 2015 and 23% for both 2014 and 2013. The increase in research and development expenses, net, as a percentage of total revenues for 2015 as compared to 2014 was mainly due to an increase in research and development expenses, net, for the comparable periods. Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to tapeout and mask work, subcontracting, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment and software tools used in research and development, and facilities expenses associated with and allocated to research and development activities. Sales and Marketing Expenses. Our sales and marketing expenses were $12.1 million for 2015, $11.9 million for 2014 and $11.3 million for 2013. The increase in sales and marketing expenses between 2015 and 2014 was mainly due to an increase in consulting services. The increase in sales and marketing expenses between 2014 and 2013 was mainly attributed to an increase in labor and employee-related expenses, mainly due to an increase in, sales commissions and the devaluation of the U.S. dollar against the NIS, which increased our Israeli employees labor expenses. Our sales and marketing expenses as a percentage of our total revenues were 8%, 8% and 7% for 2015, 2014 and 2013, respectively. The increase in sales and marketing expenses as a percentage of total revenues for 2014 as compared to 2013 was mainly due to a decrease in absolute dollars of the total revenues and an increase in sales and marketing expenses for 2014 as compared to 2013. -33- Sales and marketing expenses consist mainly of sales commissions, payroll expenses to direct sales and marketing employees, travel, trade show expenses, and facilities expenses associated with and allocated to sales and marketing activities. General and Administrative Expenses. Our general and administrative expenses were $9.9 million, $10.5 million and $11.8 million for 2015, 2014 and 2013, respectively. The decrease in general and administrative expenses for 2015 as compared to 2014 was mainly due to a decrease in payroll and overhead expenses as a result of (i) an increase in the exchange rate of the USD and the NIS, which decreased our Israeli operational overhead and employee labor expenses, and (ii) a decrease in other payroll benefit expenses. The decrease in general and administrative expenses for 2014 as compared to 2013 was mainly attributed to proxy contest related expenses (mainly legal and stockholder related expenses) we incurred during the second quarter of 2013 in the amount of $1.4 million as compared to no such expenses in 2014. General and administrative expenses as a percentage of our total revenues were 7%, 7% and 8% for 2015, 2014 and 2013, respectively. The decrease in general and administrative expenses in 2014 as a percentage of total revenues as compared to 2013 was due to a decrease in absolute dollars of general and administrative expenses, offset to some extent by a decrease in total revenues for 2014 as compared to 2013. Our general and administrative expenses consist mainly of payroll expenses for management and administrative employees, accounting and legal fees, expenses related to investor relations as well as facilities expenses associated with general and administrative activities. Amortization of Intangible Assets. During 2015, 2014 and 2013, we recorded an expense of $1.3 million, $1.6 million and $1.7 million, respectively, relating to the amortization of intangible assets associated with the acquisition of the CIPT Business from NXP B.V. in 2007 and the acquisition of BoneTone in 2011. The sequential decrease is consistent with, and is based on, the original amortization schedule determined following the impairment of goodwill and other intangible assets that took place in 2008 in relation to the acquisition of the CIPT Business, offset to some extent by an increase from 2013 in the amortization of intangible assets associated with the acquisition of BoneTone. Write-off of expired option related to investment in other company, . In November 2013, we made an investment of $2.2 million in a private company in Asia in return for approximately 14% of the equity of the company on a fully diluted basis. We also had the option to acquire the remaining equity of this private company until December 31, 2014. The terms and conditions of the investment were modified in November 2014, including an extension of the option to acquire the remaining equity of the company to December 31, 2015. We did not exercise the purchase option by the expiration date, and as a result we recorded a write-off of $400,000 associated with the investment. Financial income, net. Financial income, net, was $1.2 million for 2015, $1.2 million for 2014 and $2.5 million for 2013. The decrease in financial income, net, for 2014 as compared to 2013 was mainly due to (i) fewer gains realized from sales of certain of our marketable securities in the amount of $0.9 million, and (ii) a lower yield on marketable securities. Our total cash, cash equivalents, marketable securities and short term deposits, including restricted deposits, were $121.7 million as of December 31, 2015, as compared to $124.9 million as of December 31, 2014. Provision for Income Taxes. Taxes on income were $0.3 million for 2015, as compared to an income tax benefit of $2.8 million for 2014 and an income tax benefit of $0.2 million for 2013. The taxes on income for 2015 were mainly attributed to current tax expenses that were recorded in the amount of $0.7 million, offset to some extent by an income from amortization of deferred tax liability related to intangible assets acquired in connection with the BoneTone acquisition in the amount of $0.4 million. The income tax benefit for 2014 was mainly attributed to (i) income from elimination of valuation allowance of deferred tax assets and tax advances in the amount of $2.1 million due to our current estimation of future taxable income, (ii) income from reversal of income tax contingency reserves that were determined to be no longer needed due to finalization of tax assessment of one of our subsidiaries in the amount of $0.9 million, and (iii) income from amortization of deferred tax liability related to intangible assets acquired in connection with the BoneTone acquisition in the amount of $0.3 million. The above mentioned tax benefits were offset to some extent by current tax expenses that were recorded in the amount of $0.4 million. The income tax benefit for 2013 was mainly attributed to (i) an amortization of deferred tax liability, net related to the intangible assets acquired in connection with BoneTone acquisition in the amount of $0.4 million, and (ii) a reversal of an income tax contingency reserve that was determined to be no longer needed due to the expiration of the applicable statute of limitations in the amount of $0.3 million. The above mentioned tax benefits were offset to some extent by current tax expenses that were recorded in the amount of $0.5 million. -34- DSP Group Ltd., our Israeli subsidiary, is eligible for various tax incentives under the Israeli Investment Laws. For more information about these incentives and plans, please refer to Note 15 to our consolidated financial statements for the year ended December 31, 2015. Description of Segments. We operate under three reportable segments. Our segment information has been prepared in accordance with ASC 280, “Segment Reporting.” Operating segments are defined as components of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the company’s chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer, who evaluates the Company’s performance and allocates resources based on segment revenues and operating income. Our operating segments are as follows: Home, Office and Mobile. The classification of our business segments is based on a number of factors that our management uses to evaluate, view and run the company’s business operations, which include, but are not limited to, customer base, homogeneity of products and technology. A description of the types of products provided by each business segment is as follows: Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits targeted for cordless phones sold in retail or supplied by telecommunication service providers, home gateway devices supplied by telecommunication service providers which integrate the DECT/CAT-iq functionality, integrated circuits addressing home automation applications, as well as fixed-mobile convergence solutions. In this segment, (i) revenues from cordless telephony products exceeded 10% of our total consolidated revenues and amounted to 72%, 79% and 85% of our total revenues for 2015, 2014 and 2013, respectively, and (ii) revenues from home gateway products exceeded 10% of our total consolidated revenues for 2015 and amounted to 10%, 8% and 6% of our total revenues for 2015, 2014 and 2013, respectively. Office - Comprehensive solution for Voice-over-IP (VoIP) office products, including office solutions that offer businesses of all sizes low-cost VoIP terminals with converged voice and data applications. VoIP products in the Office segment represented 15%, 10% and 6% of our total revenue for 2015, 2014 and 2013, respectively. No revenues derived from other products in the office segment exceeded 10% of our total consolidated revenues for the years 2015, 2014 and 2013. Mobile - Products for the mobile market that provides voice enhancement, always-on and far-end noise elimination targeted for mobile phone and mobile headsets and wearable devices that incorporate our noise suppression and voice quality enhancement HDClear technology. No revenues derived from products in the mobile segment exceeded 10% of our total consolidated revenues for the years 2015, 2014 and 2013. Segment data: We derive the results of our business segments directly from our internal management reporting system and by using certain allocation methods. The accounting policies we use to derive business segment results are substantially the same as those we use for consolidation of our financial statements. Management measures the performance of each business segment based on several metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. We do not allocate to our business segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include primarily amortization of purchased intangible assets, equity-based compensation expenses, proxy contest related expenses incurred during the second quarter of 2013 and certain corporate governance costs. -35- We do not allocate any assets to segments and, therefore, no amount of assets is reported to management and disclosed in the financial information for segments. Selected operating results information for each business segment was as follows for the years ended December 31, 2015, 2014 and 2013: Year ended December 31 Home ............... $ Office ............... $ Mobile .............. $ Totalb .............. $ 2015 121,714 $ 22,216 $ 341 $ 144,271 $ Revenues 2014 128,690 $ 14,276 $ 70 $ 143,036 $ 2013 142,144 $ 8,849 $ 70 $ 151,063 $ Income (loss) from operations 2014 2013 2015 24,815 $ (4,861) $ (10,308) $ 9,646 $ 23,438 $ (2,805) $ (11,983) $ 8,650 $ 25,367 (4,656) (11,040) 9,671 Sales to our customers in the home segment decreased for 2015 as compared to 2014, representing a decrease of 5% in absolute dollars, and decreased for 2014 as compared to 2013, representing a decrease of 9% in absolute dollars. The decrease in our home segment sales for the comparable periods was mainly attributable to the decline in market demands, and the decrease in the average selling prices, of cordless phones over the comparative periods, offset to some extent by an increase in sales of home gateways and home automation products. Sales to our customers in the office segment increased for 2015 as compared to 2014, representing an increase of 56% in absolute dollars. Sales to our customers in the office segment increased for 2014 as compared to 2013, representing an increase of 61% in absolute dollars. The increase in our office segment sales for both comparable periods was mainly due to an increase in our market share of VoIP products. Sales to our customers in the mobile segment increased for 2015 as compared to 2014, representing an increase of 387% in absolute dollars. The increase in our mobile segment sales for the comparable periods was mainly due to achievement of a significant milestone for the company with initial mass production shipments of HDClear products to a tier one mobile customer. The reconciliation of segment operating results information to our consolidated financial information is included in Note 17 to our consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Operating Activities. We generated $12.2, $10.4 and $13.3 million of cash and cash equivalents from our operating activities during 2015, 2014 and 2013, respectively. The increase in net cash generated by operating activities for 2015, as compared to 2014, was mainly as a result of a decrease in inventories in the amount of $4.2 million during 2015, as compared to an increase in inventories in the amount of $3.3 million during 2014. The above mentioned increase was offset to some extent by (i) a decrease of $2.2 million in accounts payable during 2015, as compared to an increase in the amount of $1.1 million during 2014, and (ii) an increase of $1.0 million in prepaid expenses and other current assets during 2015 as compared to a decrease of $0.7 million during 2014. The decrease in net cash generated by operating activities for 2014, as compared to 2013, was mainly as a result of (i) an increase in inventories in the amount of $3.3 million during 2014, as compared to a decrease in inventories in the amount of $0.6 million during 2013, and (ii) an increase in accrued compensation and benefits for 2014 in the amount of $1.3 million, as compared to an increase in accrued compensation and benefits in the amount of $4.0 million for 2013. Investing Activities. We invest excess cash in marketable securities of varying maturities, depending on our projected cash needs for operations, capital expenditures and other business purposes. During 2015, we purchased $41.0 million of investments in marketable securities and deposits, as compared to $73.1 million during 2014 and $70.7 million during 2013. During the same periods, $20.1 million, $23.3 million and $18.3 million, respectively, of investments in marketable securities matured and were called by the issuer. During the same periods, $13.3 million, $46.5 million and $43.0 million, respectively, of investments in marketable securities were sold. Additionally, during 2015, 2014 and 2013, $2.6 million, $2.6 million and $2.8 million, respectively, of short term deposits matured. As of December 31, 2015, the amortized cost of our marketable securities and deposits was approximately $108.3 million and their stated market value was approximately $107.8 million, representing an unrealized loss of approximately $0.5 million. -36- During November 2013, we made an investment of $2.2 million in a private company in Asia in return for approximately 14% of the equity of the company on a fully diluted basis. We also had the option to acquire the remaining equity of this private company under agreed terms until December 31, 2014. The terms and conditions of the investment were modified in November 2014, including an extension of the option to acquire the remaining equity until December 31, 2015. We did not exercise the purchase option by the expiration date. Our capital equipment purchases for 2015, consisting primarily of research and development software tools, computers and other peripheral equipment, engineering test and lab equipment, leasehold improvements, furniture and fixtures, totaled $2.3 million, as compared to $1.3 million for 2014, and $1.1 million for 2013. Financing Activities. During 2015, we repurchased 1.3 million shares of our common stock at an average purchase price of $10.24 per share for an aggregate amount of $13.2 million. In addition, during 2015, we received $1.2 million upon the exercise of employee stock options. During 2014, we repurchased 1.4 million shares of our common stock at an average purchase price of $8.83 per share for an aggregate amount of $12.48 million. In addition, during 2014, we received $1.8 million upon the exercise of employee stock options. In November 2013, our board of directors authorized the company’s entry into a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of up to 2,700,000 shares of our common stock. This authorization was in addition to the approximately 308,000 shares that were available for repurchase under the board’s prior authorizations. Furthermore, in August 2015, our board authorized an additional $10 million dollar buyback program, of which 0.5 million shares are available for repurchase under a Rule 10b5-1 plan. At December 31, 2015, approximately 0.9 million shares of our common stock are available for repurchase under our board authorized share repurchase program. As of December 31, 2015, we had cash and cash equivalents totaling approximately $13.7 million and marketable securities and time deposits of approximately $107.8 million. Out of total cash, cash equivalents and marketable securities of $121.5 million, $107.8 million was held by foreign entities. Our intent is to permanently reinvest earnings of our foreign operations and our current operating plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations. However, if these funds were needed for our operations in the United States, we would be required to accrue and pay U.S. taxes as well as taxes in other countries to repatriate these funds. The determination of the amount of additional taxes related to the repatriation of these earnings is not practicable, as it may vary based on various factors such as the location of the cash and the effect of regulation in the various jurisdictions from which the cash would be repatriated. Our working capital at December 31, 2015 was approximately $38.4 million, as compared to $38.8 million as of December 31, 2014. The decrease in working capital was mainly due to a decrease in inventories in the amount of $4.2 million, offset to some extent by a decrease in current liabilities. We believe that our current cash, cash equivalents, cash deposits and market securities will be sufficient to meet our cash requirements for both the short and long term. In addition, as part of our business strategy, we may evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot assure you that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See the section of the risk factors entitled “We may engage in future acquisitions that could dilute our stockholders’ equity and harm our business, results of operations and financial condition.” for more detailed information. -37- Contractual Obligations The following table aggregates our material expected obligations and commitments as of December 31, 2015 (in thousands): Payment Due By Period Total Less Than 1 Year 2-3 Years 4-5 Years More Than 5 Years Contractual Obligations Operating Lease Commitments (1) ................... $ Net Pension Liability (2) .................................. 6,278 $ 1,360 2,684 $ 55 3,449 $ 29 Development tools lease and other (3) ............. Total Contractual Obligations .......................... $ 2,637 10,275 $ 1,515 4,254 $ 1,122 4,600 $ 145 17 - 162 $ - 1,259 - 1,259 (1) Represents mainly operating lease payments for facilities and vehicles under non-cancelable lease agreements. See Note 14 to notes to our consolidated financial statements for the year ended December 31, 2015. (2) Includes estimates of gross contributions and future payments required to meet the requirements of several defined benefit plans. The amounts presented in the table are not discounted and do not take into consideration staff turnover assumptions. (3) Represents lease payments for development tools and other non-cancelable lease agreements. At December 31, 2015, we had a liability for unrecognized tax benefits and an accrual for the payment of related interests totaling $1.7 million. Due to uncertainties related to those tax matters, we currently are unable to make a reasonably reliable estimate of when cash settlement with a taxing authority will occur. We believe a change in the amount of unrecognized tax benefit is reasonably possible in the next 12 months due to the examination of the tax returns of one of our subsidiaries. We currently cannot provide an estimate of the range of change in the amount of the unrecognized tax benefits due to the ongoing status of the examination. Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risk. It is our policy not to enter into interest rate derivative financial instruments, except for hedging of foreign currency exposures discussed below. We do not currently have any significant interest rate risk since we do not have any financial obligations. The majority of our cash and cash equivalents are invested in high grade certificates of deposits with major U.S., European and Israeli banks. Generally, cash and cash equivalents and short term deposits may be redeemed and therefore minimal credit risk exists with respect to them. Nonetheless, cash deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits in the U.S. or similar limits in foreign jurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash balances and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our funds fails or is subject to other adverse conditions in the financial or credit markets. To date we have experienced no loss of principal or lack of access to our cash; however, we can provide no assurances that access to our cash will not be affected if the financial institutions that we hold our cash fail or the financial and credit markets continue to worsen. We hold an investment portfolio of marketable securities consisting principally of debentures of U.S. and European corporations, and state and political subdivisions of the U.S. government. We intend, and have the ability, to hold investments in marketable securities with a decline in fair value until an anticipated recovery of any temporary declines in their market value. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term. However, we can provide no assurances that we will recover present declines in the market value of our investments. -38- Interest rate fluctuations relating to our cash and cash equivalents and within our investment portfolio have not had, and we do not currently anticipate such fluctuations will have, a material effect on our financial position on an annual or quarterly basis. Foreign Currency Exchange Rate Risk. A significant part of our sales and expenses are denominated in U.S. dollars. Part of our expenses in Israel is paid in NIS, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the NIS. Our primary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our European operations are paid in the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primary expenses paid in Euro are employee salaries, lease and operational payments on our European facilities. To partially protect the company against an increase in value of forecasted foreign currency cash flows resulting from salary and lease payments denominated in NIS during 2015, we instituted a foreign currency cash flow hedging program. The option and forward contracts used are designated as cash flow hedges, as defined by FASB ASC No. 815,” Derivatives and Hedging,” and are all effective as hedges of these expenses. For more information about our hedging activity, see Note 2 to our notes to our consolidated financial statement for the year ended December 31, 2015. An increase in the value of the NIS and the Euro in comparison to the U.S. dollar could increase the cost of our research and development expenses and general and administrative expenses, all of which could harm our operating profit. Although we currently are using a hedging program to minimize the effects of currency fluctuations relating to the NIS, our hedging position is partial, may not exist at all in the future and may not succeed in minimizing our foreign currency fluctuation risks. -39- Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015 IN U.S. DOLLARS INDEX Page Reports of Independent Registered Public Accounting Firm ................................................................................. 41 Consolidated Balance Sheets ..................................................................................................................................... 44 Consolidated Statements of Operations ................................................................................................................... 46 Consolidated Statements of Comprehensive Income (Loss) ................................................................................... 47 Statements of Changes in Stockholders’ Equity ...................................................................................................... 48 Consolidated Statements of Cash Flows ................................................................................................................... 50 Notes to Consolidated Financial Statements ............................................................................................................ 52 - - - - - - - - - - -40- Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 6706703, Israel Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of DSP GROUP, INC. We have audited the accompanying consolidated balance sheets of DSP Group, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DSP Group, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DSP Group, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 5, 2016 expressed an unqualified opinion thereon. Tel-Aviv, Israel March 15, 2016 /s/ Kost Forer Gabbay & Kasierer KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global -41- Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 6706703, Israel Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of DSP GROUP INC. We have audited DSP Group, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). DSP Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. -42- Kost Forer Gabbay & Kasierer 3 Aminadav St. Tel-Aviv 6706703, Israel Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, DSP Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of DSP Group, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015 of DSP Group, Inc. and our report dated March 5, 2016 expressed an unqualified opinion thereon. Tel-Aviv, Israel March 15, 2016 /s/ Kost Forer Gabbay & Kasierer KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global -43- CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands ASSETS CURRENT ASSETS: DSP GROUP, INC. December 31, 2015 2014 Cash and cash equivalents ........................................................................................... $ Restricted deposits ...................................................................................................... Marketable securities and short-term deposits (Note 3) .............................................. Trade receivables, net .................................................................................................. Other accounts receivable and prepaid expenses (Note 4)........................................... Inventories (Note 5) ..................................................................................................... 13,704 $ 168 18,070 19,211 3,319 11,453 20,544 623 11,508 20,298 1,902 15,635 Total current assets ....................................................................................................... 65,925 70,510 PROPERTY AND EQUIPMENT, NET (Note 6) ........................................................... 3,764 2,843 LONG-TERM ASSETS: Long-term marketable securities (Note 3) ................................................................... Long-term prepaid expenses and lease deposits .......................................................... Deferred income taxes (Note 15) ................................................................................. Severance pay fund ...................................................................................................... Investment in other company (Note 9) ........................................................................ Intangible assets, net (Note 7) ..................................................................................... Goodwill ..................................................................................................................... 89,714 743 1,311 11,578 1,800 3,851 5,276 92,269 1,162 924 10,860 2,200 5,135 5,276 114,273 117,826 Total assets ..................................................................................................................... $ 183,962 $ 191,179 The accompanying notes are an integral part of the consolidated financial statements. -44- CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands, except share and per share data DSP GROUP, INC. December 31, 2015 2014 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Trade payables ............................................................................................................. $ Accrued compensation and benefits ............................................................................ Income tax accruals and payables ................................................................................ Accrued expenses and other accounts payable (Note 10) ............................................ 13,103 $ 7,788 1,864 4,818 15,282 9,408 1,151 5,852 Total current liabilities ................................................................................................. 27,573 31,693 LONG-TERM LIABILITIES: Deferred income taxes (Note 15) ................................................................................. Accrued severance pay ................................................................................................ Accrued pensions (Note 11) ........................................................................................ 476 11,703 892 845 10,929 1,089 Total long-term liabilities ............................................................................................. 13,071 12,863 COMMITMENTS AND CONTINGENCIES (Note 14) STOCKHOLDERS’ EQUITY (Note 13): Capital stock: Common stock, $0.001 par value - Authorized: 50,000,000 shares at December 31, 2015 and 2014; Issued and outstanding: 21,572,616 and 21,843,950 shares at December 31, 2015 and 2014, respectively ............................................................................................. Additional paid-in capital ............................................................................................ Treasury stock at cost .................................................................................................. Accumulated other comprehensive loss ...................................................................... Accumulated deficit ..................................................................................................... 22 361,023 (125,697) (1,267) (90,763) 22 355,906 (122,387 ) (1,566 ) (85,352 ) Total stockholders’ equity ............................................................................................ 143,318 146,623 Total liabilities and stockholders’ equity .................................................................... $ 183,962 $ 191,179 The accompanying notes are an integral part of the consolidated financial statements. -45- CONSOLIDATED STATEMENTS OF OPERATIONS U.S. dollars and shares in thousands, except per share data DSP GROUP, INC. Year ended December 31, 2014 2013 2015 Revenues ........................................................................................... $ Costs of revenues (1) ......................................................................... 144,271 $ 84,411 143,036 $ 85,992 151,063 91,237 Gross profit ....................................................................................... 59,860 57,044 59,826 Operating expenses: Research and development, net (2) ................................................ Sales and marketing (3) ................................................................. General and administrative (4) ...................................................... Amortization of intangible assets .................................................. Write-off of expired option related to investment in other 35,483 12,103 9,876 1,284 33,468 11,905 10,541 1,573 35,000 11,273 11,812 1,672 company ................................................................................... 400 - - Total operating expenses ................................................................ 59,146 57,487 59,757 Operating income (loss) .................................................................... Financial income, net (Note 12) ....................................................... Income before income tax benefit ..................................................... Income tax benefit (expense) ............................................................ 714 1,175 1,889 (327) (443) 1,204 761 2,841 Net income ....................................................................................... $ 1,562 $ 3,602 $ Net earnings per share: Basic .............................................................................................. $ Diluted ........................................................................................... $ 0.07 $ 0.07 $ 0.16 $ 0.16 $ 69 2,457 2,526 150 2,676 0.12 0.12 Weighted average number of shares used in per share computations of: Basic net earnings per share .......................................................... Diluted net earnings per share ....................................................... 21,924 23,340 21,968 22,954 22,249 22,906 (1) (2) (3) (4) Includes equity-based compensation expense in the amount of $300, $300 and $253 for the years ended December 31, 2015, 2014 and 2013, respectively. Includes equity-based compensation expense in the amount of $2,201, $2,381 and $1,873 for the years ended December 31, 2015, 2014 and 2013, respectively. Includes equity-based compensation expense in the amount of $641, $621 and $478 for the years ended December 31, 2015, 2014 and 2013, respectively. Includes equity-based compensation expense in the amount of $1,950, $2,057 and $1,555 for the years ended December 31, 2015, 2014 and 2013, respectively. The accompanying notes are an integral part of the consolidated financial statements. -46- DSP GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) U.S. dollars in thousands Net income: ........................................................................................ $ Other comprehensive income (loss): Available-for-sale securities: Changes in unrealized gains/losses .......................................... Reclassification adjustments for losses (gains) included in net income (loss) ................................................................. Net change ............................................................................... Cash flow hedges: Changes in unrealized gains/losses .......................................... Reclassification adjustments for (gains) losses included in net income (loss) ................................................................. Net change ............................................................................... Change in unrealized components of defined benefit plans: Gains (losses) arising during the period .................................. Amortization of actuarial loss and prior service benefit .......... Net change ............................................................................... Foreign currency translation adjustments, net ............................. Other comprehensive income (loss) ................................................... Comprehensive income ..................................................................... $ Year Ended December 31, 2014 2015 2013 1,562 $ 3,602 $ 2,676 (230) 24 (206) 157 (304 ) (61 ) 96 (1,009 ) (1,313 ) (38) (1,180 ) 621 583 63 20 83 (161) 299 1,861 $ 562 (618 ) (209 ) 11 (198 ) (25 ) (745 ) 2,857 $ 372 (856 ) (484 ) (11 ) 11 - (12 ) (1,809 ) 867 -47- STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY U.S. dollars and shares in thousands DSP GROUP, INC. Number of shares of common stock Common stock amount 22 Additional paid-in capital Treasury stock at cost Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders’ equity $ 346,335 $ (125,724) $ 988 $ (79,394) $ 142,227 Balance at December 31, 2012 .. 21,674 $ Issuance of treasury stock upon purchase of common stock under employee stock purchase plan ........................ Issuance of treasury stock upon exercise of stock options, stock appreciation rights and restricted stock units by employees and directors ........ Purchase of treasury stock ......... Equity-based compensation expenses .............................. Net income ............................ Change in Accumulated other comprehensive income ............................... 374 *) - - 3,668 - (2,004) 1,664 692 (390) - - - 1 (1) - - - - - 6,796 (3,489) 4,159 - - - - - - - - - (4,813) - - 2,676 1,984 (3,490) 4,159 2,676 (1,809) - (1,809) Balance at December 31, 2013 .. 22,350 $ 22 $ 350,494 $ (118,749) $ (821) $ (83,535) $ 147,411 *) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. -48- DSP GROUP, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY U.S. dollars and shares in thousands Number of shares of common stock Common stock amount Additional paid-in capital Treasury stock at cost Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders’ equity Cont. Balance at December 31, 2013 .. 22,350 $ 22 $ 350,494 $ (118,749) $ (821) $ (83,535) $ 147,411 Issuance of treasury stock upon purchase of common stock under employee stock purchase plan ........................ Issuance of treasury stock upon exercise of stock options, stock appreciation rights and restricted stock units by employees and directors ........ Purchase of treasury stock ......... Equity-based compensation expenses .............................. Net income ............................ Change in Accumulated other comprehensive income ............................... 310 *) - - 3,031 - (1,309) 1,722 598 (1,414) - - - 1 (1) - - - 53 - 5,814 (12,483) 5,359 - - - - - - - (4,110) - - 3,602 1,758 (12,484) 5,359 3,602 - - (745) - (745) Balance at December 31, 2014 .. 21,844 $ 22 $ 355,906 $ (122,387) $ (1,566) $ (85,352) $ 146,623 Issuance of treasury stock upon purchase of common stock under employee stock purchase plan ........................ Issuance of treasury stock upon exercise of stock options, stock appreciation rights and restricted stock units by employees and directors ........ Purchase of treasury stock ......... Equity-based compensation expenses .............................. Net income ............................ Change in Accumulated other comprehensive income ............................... 233 *) - - 2,269 - (500) 1,769 791 (1,295) 1 (1) - - - 25 - 7,689 (13,268) 5,092 - - - - - - - - - (6,473) - - 1,562 1,242 (13,269) 5,092 1,562 299 - 299 Balance at December 31, 2015 .. 21,573 $ 22 $ 361,023 $ (125,697) $ (1,267) $ (90,763) $ 143,318 *) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. -49- CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands Cash flows from operating activities: Net income ....................................................................................... $ Adjustments required to reconcile net income to net cash provided by operating activities: Depreciation ................................................................................. Equity-based compensation expenses related to employees’ stock options, SARs and RSUs ........................................................... Capital loss from sale and disposal of property and equipment ..... Realized losses (gains) from sale of marketable securities ........... Amortization of intangible assets ................................................. Write-off of expired option related to investment in other company .................................................................................... Accrued interest and amortization of premium on marketable securities and short-term deposits .............................................. Change in operating assets and liabilities: Deferred income tax assets and liabilities, net ............................... Trade receivables, net .................................................................... Other accounts receivable and prepaid expenses ........................... Inventories ..................................................................................... Long-term prepaid expenses and lease deposits ............................ Trade payables ............................................................................... Accrued compensation and benefits .............................................. Income tax accruals and payables .................................................. Accrued expenses and other accounts payable .............................. Accrued severance pay, net ........................................................... Accrued pensions ........................................................................... DSP GROUP, INC. Year ended December 31, 2014 2013 2015 1,562 $ 3,602 $ 2,676 1,356 1,290 1,994 5,092 4 24 1,284 400 847 (756) 945 (987) 4,131 (31) (2,180) 184 800 (499) 55 (7) 5,359 - (61) 1,573 - 1,214 (1,170) 704 719 (3,333) (1,052) 1,142 1,323 (730) (289) 58 30 4,159 - (1,009) 1,672 - 747 (377) (767) 536 587 153 121 3,952 54 (989) (228) (31) Net cash provided by operating activities ......................................... 12,224 10,379 13,250 Cash flows from investing activities: Purchase of marketable securities .................................................. Purchase of short-term deposits ..................................................... Proceeds from maturity of marketable securities ........................... Proceeds from sales of marketable securities ................................ Proceeds from redemption of short-term deposits ......................... Purchases of property and equipment ............................................ Investment in other company ......................................................... Decrease (Increase) in restricted deposits ...................................... (35,475) (5,563) 20,127 13,238 2,589 (2,297) - 455 (70,517) (2,561) 23,250 46,491 2,561 (1,315) - (556) (67,850) (2,849) 18,325 42,949 2,849 (1,118) (2,200) - Net cash used in investing activities .................................................. (6,926) (2,647) (9,894) The accompanying notes are an integral part of the consolidated financial statements. -50- CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands Cash flows from financing activities: DSP GROUP, INC. Year ended December 31, 2014 2013 2015 Issuance of common stock and treasury stock upon exercise of stock options and SARs ............................................................. Purchase of treasury stock ............................................................. 1,242 (13,206) 1,758 (12,484) 1,984 (3,490) Net cash used in financing activities ................................................. (11,964) (10,726) (1,506) Increase (decrease) in cash and cash equivalents .............................. Cash and cash equivalents at the beginning of the year .................... Cash (erosion) due to exchange rate differences ............................... (6,666) 20,544 (174) (2,994) 23,578 (40) 1,850 21,684 44 Cash and cash equivalents at the end of the year .............................. $ 13,704 $ 20,544 $ 23,578 Supplemental disclosures of cash flows activities: Cash paid during the year for: Taxes on income ............................................................................... $ 134 $ 131 $ 149 The accompanying notes are an integral part of the consolidated financial statements. -51- U.S. dollars in thousands, except share and per share data. NOTE 1:- GENERAL DSP Group, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”), are a fabless semiconductor company offering advanced chipset solutions for a variety of applications. The Company is a worldwide leader in the short-range wireless communication market, enabling home networking convergence for voice, audio, video and data. The Company sells its products primarily through distributors and directly to OEMs and original design manufacturers (ODMs) who incorporate the Company’s products into consumer and enterprise products. The Company’s future performance will depend, in part, on the continued success of its distributors in marketing and selling its products. The loss of the Company’s distributors and the Company’s inability to obtain satisfactory replacements in a timely manner may harm the Company’s sales and results of operations. In addition, the Company expects that a limited number of customers, varying in identity from period-to-period, will account for a substantial portion of its revenues in any period. The loss of, or reduced demand for products from, any of the Company’s major customers could have a material adverse effect on the Company’s business, financial condition and results of operations. Sales to Hong Kong-based VTech Holdings Ltd. (“VTech”) represented 31%, 35% and 36% of the Company’s total revenues for 2015, 2014 and 2013, respectively. Sales to Hong Kong-based Guo Wei Electronics Ltd. (“Guo Wei”) represented 12%, 8% and 8% of the Company’s total revenues for 2015, 2014 and 2013, respectively. Revenues derived from sales through one distributor, Tomen Electronics Corporation (“Tomen Electronics”), accounted for 16%, 20% and 19% of the Company’s total revenues for 2015, 2014 and 2013, respectively. Tomen Electronics sells the Company’s products to a limited number of customers. One customer, Panasonic Communications Co., Ltd. (“Panasonic”), has continually accounted for a majority of the sales of Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately 13%, 15% and 14% of the Company’s total revenues for 2015, 2014 and 2013, respectively. Revenues derived from sales through another distributor, Ascend Technology Inc. (“Ascend Technology”) accounted for 15%, 10% and 9% of the Company’s total revenues for 2015, 2014 and 2013, respectively. Ascend Technology sells the Company’s products to a limited number of customers; however none of those customers accounted for more than 10% of the Company’s total revenues for 2015, 2014 and 2013. The Japanese and Hong Kong markets and the OEMs that operate in those markets are among the largest suppliers in the world with significant market share in the U.S. market for residential wireless products. The majority of the revenues derived from the above mentioned customers are included in the Home segment. All of the Company’s integrated circuit products are manufactured and tested by independent foundries and test houses. While these foundries and test houses have been able to adequately meet the demands of the Company’s business, the Company is and will continue to be dependent upon these foundries and test houses to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to the Company a sufficient portion of foundry and test capacity to meet the Company’s needs in a timely manner. Revenues could be materially and adversely affected should any of these foundries and test houses fail to meet the Company’s request for product manufacturing due to a shortage of production capacity, process difficulties, low yield rates or financial instability. Additionally, certain of the raw materials, components, and subassemblies included in the products manufactured by the Company’s original equipment manufacturer (OEM) customers, which incorporate the Company’s products, are obtained from a limited group of suppliers. Disruptions, shortages, or termination of certain of these sources of supply could occur and could negatively affect the Company’s financial condition and results of operations. -52- U.S. dollars in thousands, except share and per share data. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are prepared according to United States generally accepted accounting principles (“U.S. GAAP”). a. Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. b. Financial statements in U.S. dollars: Most of the Company’s revenues are generated in U.S. dollars (“dollar”). In addition, a substantial portion of the Company’s costs are incurred in dollars. The Company’s management believes that the dollar is the currency of the primary economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar. Monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with ASC No. 830-30, “Translation of Financial Statements.” All transaction gains and losses resulting from the remeasurement of monetary balance sheet items are reflected in the consolidated statements of operations as financial income or expenses as appropriate. The financial statements of the Company’s subsidiary – DSP Group Technologies GmbH whose functional currency is in Euro, has been translated into dollars. All amounts on the balance sheets have been translated into the dollar using the exchange rates in effect on the relevant balance sheet dates. All amounts in the consolidated statements of operations have been translated into the dollar using the average exchange rate for the relevant periods. The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss) in changes in stockholders’ equity. Accumulated other comprehensive loss related to foreign currency translation adjustments, net amounted to $379 and $218 as of December 31, 2015 and 2014, respectively. c. Principles of consolidation: The consolidated financial statements include the accounts of the Company. Intercompany transactions and balances have been eliminated in consolidation. d. Cash equivalents: Cash equivalents are short-term highly liquid investments, which are readily convertible to cash with original maturity of three months or less from the date of acquisition. e. Restricted deposits: Restricted deposits include deposits which are used as security for derivative instruments and for one of the Company’s lease agreements. f. Short-term deposits: Bank deposits with original maturities of more than three months and less than one year are presented at cost, including accrued interest. -53- U.S. dollars in thousands, except share and per share data. g. Marketable securities: The Company accounts for investments in debt securities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 320-10, “Investments in Debt and Equity Securities.” Management determines the appropriate classification of the Company’s investments in debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. The Company classified all of its investments in marketable securities as available for sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, reported in other comprehensive income (loss) using the specific identification method. Unrealized losses determined to be other-than-temporary are recorded as a financial expense. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in financial income, net. Interest and dividends on securities are included in financial income, net. The marketable securities are periodically reviewed for impairment. If management concludes that any of these investments are impaired, management determines whether such impairment is other-than- temporary. Factors considered in making such a determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period, and the Company’s intent to sell, or whether it is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For debt securities, only the decline attributable to deteriorating credit of an-other-than-temporary impairment is recorded in the consolidated statement of operations, unless the Company intends, or more likely than not it will be forced, to sell the security. During the years ended December 31, 2015, 2014 and 2013, the Company did not record an-other-than- temporary impairment loss (see Note 3). h. Fair value of financial instruments: Cash and cash equivalents, restricted deposits, short-term deposits, trade receivables, trade payables and accrued liabilities approximate fair value due to short term maturities of these instruments. Marketable securities and derivative instruments are carried at fair value. See Note 3 for more information. Fair value is an exit price, representing the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market- based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in valuation methodologies to measure fair value: Level 1- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2- Include other inputs that are directly or indirectly observable in the marketplace. Level 3- Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. i. Inventories: Inventories are stated at the lower of cost or market value. Inventory reserves are provided to cover risks arising from slow-moving items or technological obsolescence. The Company and its subsidiaries periodically evaluate the quantities on hand relative to historical, current and projected sales volume. Based on this evaluation, an impairment charge is recorded when required to write-down inventory to its market value. -54- U.S. dollars in thousands, except share and per share data. Cost is determined as follows: Work in progress and finished products- on the basis of raw materials and manufacturing costs on an average basis. The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors, including the following: historical usage rates and forecasted sales according to outstanding backlogs. Purchasing requirements and alternative usage are explored within these processes to mitigate inventory exposure. When recorded, the reserves are intended to reduce the carrying value of inventory to its net realizable value. Inventory of $11,453, $15,635 and $12,334 as of December 31, 2015, 2014 and 2013, respectively, is stated net of inventory reserves of $670, $505 and $591 in each year, respectively. If actual demand for the Company’s products deteriorates, or market conditions are less favorable than those projected, additional inventory reserves may be required. j. Property and equipment, net: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, at the following annual rates: Computers and equipment ........................................ Office furniture and equipment ................................. Leasehold improvements .......................................... % 20 - 33 6 - 15 The shorter of term of the lease or the useful life of the asset Property and equipment of the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of such assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During the years ended December 31, 2015, 2014 and 2013, no impairment losses were identified for property and equipment. The Company accounts for costs of computer software developed or obtained for internal use in accordance with FASB ASC No. 350-40, “The Internal Use Software.” FASB ASC 350-40 requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. During 2015, 2014 and 2013, the Company capitalized $1,086, $128 and $34, respectively, of internal use software cost. Such costs are amortized using the straight-line method over their estimated useful life of three years. k. Goodwill and other intangible assets: The goodwill and certain other purchased intangible assets have been recorded as a result of the BoneTone Acquisition and the CIPT Acquisition. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such a case, the second phase is then performed, and the Company measures impairment by comparing the carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss is recognized in an amount equal to the excess. ASC 350 allows an entity to first assess qualitative -55- U.S. dollars in thousands, except share and per share data. factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test. The Company performs an annual impairment test on December 31 of each fiscal year, or more frequently if impairment indicators are present. The Company’s reporting units are consistent with the reportable segments identified in Note 17. Fair value is determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the methodologies include estimates of future cash-flows, future short- term and long-term growth rates, weighted average cost of capital and market multiples for the reporting unit. For the fiscal year ended December 31, 2015, 2014 and 2013, the Company performed a quantitative assessment on its goodwill and no impairment losses were identified. Intangible assets that are not considered to have an indefinite useful life are amortized using the straight- line basis over their estimated useful lives, which range from 3 to 7.3 years. The carrying amount of these assets is reviewed whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured as the difference between the carrying amount of the assets and the fair value of the impaired asset. During 2015, 2014 and 2013, no impairment losses were identified. l. Severance pay: DSP Group Ltd., the Company’s Israeli subsidiary (“DSP Israel”), has a liability for severance pay pursuant to Israeli law, based on the most recent monthly salary of its employees multiplied by the number of years of employment as of the balance sheet date for such employees. DSP Israel’s liability is fully provided for by monthly accrual and deposits with severance pay funds and insurance policies. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. Severance expenses for the years ended December 31, 2015, 2014 and 2013, were $1,498, $1,568 and $1,494, respectively. m. Revenue recognition: The Company generates its revenues from sales of products. The Company sells its products through a direct sales force and through a network of distributors. Product sales are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, collectability is reasonably assured, and no significant obligations remain. -56- U.S. dollars in thousands, except share and per share data. Persuasive evidence of an arrangement exists - The Company’s sales arrangements with customers are pursuant to written documentation, either a written contract or purchase order. The actual documentation used is dependent on the business practice with each customer. Therefore, the Company determines that persuasive evidence of an arrangement exists with respect to a customer when it has a written contract, or a written purchase order from the customer. Delivery has occurred - Each written documentation relating to a sale arrangement that is agreed upon with the customer specifically sets forth when risk and title are being transferred (based on the agreed International Commercial terms, or “INCOTERMS”). Therefore, the Company determines that risk and title are transferred to the customer when the terms of the written documentation based on the applicable INCOTERMS are satisfied and thus delivery of its products has occurred. Separately, the Company has consignment inventory which is held for specific customers at the customers’ premises. It recognizes revenue on the consigned inventory when the customer consumes the products from the warehouse, as that is when per the consignment inventory agreements, risk and title passes to the customer and the products are deemed delivered to the customer. Price is fixed or determinable - Pursuant to the customer agreements, the Company does not provide any price protection, stock rotation, right of return and/or other discount programs and thus the fee is considered fixed and determinable upon execution of the written documentation with the customers. Additionally, payments that are due within the normal course of the Company’s credit terms, which are currently no more than four months from the contract date, are deemed to be fixed and determinable based on the Company’s successful collection history for such arrangements. Collectability of the related receivable is reasonably assured - The Company determines whether collectability is reasonably assured on a customer-by-customer basis pursuant to its credit review policy. The Company typically sells to customers with whom it has a long-term business relationship and a history of successful collection. A significant number of the Company’s customers are also large original equipment manufacturers with substantial financial resources. For a new customer, or when an existing customer substantially expands its commitments, the Company evaluates the customer’s financial position, the number of years the customer has been in business, the history of collection with the customer and the customer’s ability to pay and typically assigns a credit limit based on that review. The Company increases the credit limit only after it has established a successful collection history with the customer. If the Company determines at any time that collectability is not reasonably assured under a particular arrangement based upon its credit review process, the customer’s payment history or information that comes to light about a customer’s financial position, it recognizes revenue under that arrangement as customer payments are actually received. With respect to product sales through the Company’s distributors, such product revenues are deferred until the distributors resell the Company’s products to the end-customers (“sell through”) and recognized based upon receipt of reports from the distributors, provided all other revenue recognition criteria as discussed above are met. The Company views its distributor arrangements as that of consignment because, although the actual sales are conducted through the distributors and legally title for the products passes to the distributors upon delivery to the distributors, in substance inventory is simply being transferred to another location for sale to the end-user customers as the Company’s primary business relationships and responsibilities are directly with the end-user customers. Because the Company views its arrangements with its distributors as that of consignment relationships, delivery of goods is not deemed to have occurred solely upon delivery to the distributors. Therefore, the Company recognizes revenues from distributors under the “sell-through” method. As a result, revenue is deferred at the time of shipment to the distributors and is recognized only when the distributors sell the products to the end-user customers. -57- U.S. dollars in thousands, except share and per share data. n. Warranty: The Company warrants its products against errors, defects and bugs for generally one year. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty costs and liability were immaterial for the years ended December 31, 2015, 2014 and 2013. o. Research and development costs, net: Research and development costs, net of grants received, are charged to the consolidated statement of operations as incurred. p. Government grants: Government grants received by the Company’s Israeli subsidiary relating to categories of operating expenditures are credited to the consolidated statements of income during the period in which the expenditure to which they relate is charged. Royalty and non-royalty-bearing grants from the Israeli Office of the Chief Scientist (“OCS”) for funding certain approved research and development projects are recognized at the time when the Company’s Israeli subsidiary is entitled to such grants, on the basis of the related costs incurred, and are included as a deduction from research and development expenses, net. The Company recorded royalty bearing grants in the amount of $2,738, $3,002 and $2,116 for the year ended December 31, 2015 and 2014 and 2013, respectively. The Company’s Israeli subsidiary is obligated to pay royalties amounting to 5% of the sales of certain products the development of which received grants from the OCS in previous years. The obligation to pay these royalties is contingent on actual sales of such products. Grants received from the OCS may become repayable if certain criteria under the grants are not met. The Israeli Research and Development Law provides that know-how developed under an approved research and development program may not be transferred to third parties without the approval of the OCS. Such approval is not required for the sale or export of any products resulting from such research or development. The OCS, under special circumstances, may approve the transfer of OCS-funded know-how outside Israel, in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid in consideration for such OCS-funded know-how or in consideration for the sale of the grant recipient itself, as the case may be, which portion will not exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest, in the event that the recipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel after the transfer); (b) the grant recipient receives know-how from a third party in exchange for its OCS-funded know-how; (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperation in research and development activities; or (d) if such transfer of know-how arises in connection with a liquidation by reason of insolvency or receivership of the grant recipient. q. Equity-based compensation: At December 31, 2015, the Company had two equity incentive plans from which the Company may grant future equity awards and three expired equity incentive plans from which no future equity awards may be granted but had outstanding equity awards granted prior to expiration. The Company also had one employee stock purchase plan. See full description in Note 13. The Company accounts for equity-based compensation in accordance with FASB ASC No. 718, “Stock Compensation” (“FASB ASC No. 718”). FASB ASC No. 718 requires companies to estimate the fair value of equity-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. -58- U.S. dollars in thousands, except share and per share data. The Company recognizes compensation expenses for the value of its awards granted based on the accelerated attribution method, rather than a straight-line method over the requisite service period of each of the awards, net of estimated forfeitures. FASB ASC No. 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. The Company selected the lattice option pricing model as the most appropriate fair value method for its equity-based awards and values options and stock appreciation rights (SARs) based on the market value of the underlying shares on the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected term of the equity-based award. Expected volatility is calculated based upon actual historical stock price movements. The expected term of the equity-based award granted is based upon historical experience and represents the period of time that the award granted is expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. The Company granted stock appreciation rights (SARs) until 2012. Starting in 2013, a majority of the Company’s equity awards were in the form of restricted stock unit (“RSU”) grants. r. Basic and diluted income (loss) per share: Basic net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during the year. Diluted net income (loss) per share further includes the dilutive effect of stock options, SARs and RSUs outstanding during the year, all in accordance with FASB ASC No. 260, “Earnings Per Share.” The total weighted average number of shares related to the outstanding stock options, SARs and RSUs excluded from the calculation of diluted net income per share due to their anti-dilutive effect was 403,632, 1,811,687and 2,730,867 for the years ended December 31, 2015, 2014 and 2013, respectively. s. Income taxes: The Company accounts for income taxes in accordance with FASB ASC No. 740, “Income Taxes.” This topic prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. Deferred tax liabilities and assets are classified as non-current based on the adopting of Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes.” Prior to the adoption of ASU 2015-17, U.S. GAAP required an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. ASU 2015-17 was issued to simplify the presentation of deferred income taxes. Deferred tax liabilities and assets are now classified as noncurrent in a classified statement of financial position for all period presented. The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two- step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining whether the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company reevaluates its income tax positions periodically to consider factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in recognition of a tax benefit or an additional charge to the tax provision. -59- U.S. dollars in thousands, except share and per share data. The Company includes interest related to tax issues as part of income tax expense in its consolidated financial statements. The Company records any applicable penalties related to tax issues within the income tax provision. t. Concentrations of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted deposits, short-term deposits, trade receivables and marketable securities. The majority of cash and cash equivalents and short-term deposits of the Company are invested in dollar deposits with major U.S., European and Israeli banks. Deposits in U.S. banks may be in excess of insured limits and are not insured in other jurisdictions. Generally, cash and cash equivalents and these deposits may be withdrawn upon demand and therefore bear low risk. The Company’s marketable securities consist of investment-grade corporate bonds and U.S. government-sponsored enterprise (“GSE”) securities. As of December 31, 2015, the amortized cost of the Company’s marketable securities was $102,717, and their stated market value was $102,216, representing an unrealized loss of $501. A significant portion of the products of the Company is sold to original equipment manufacturers of consumer electronics products. The customers of the Company are located primarily in Japan, Hong Kong, Taiwan, China, Korea, Europe and the United States. The Company performs ongoing credit evaluations of their customers. A specific allowance for doubtful accounts is determined, based on management’s estimates and historical experience. Under certain circumstances, the Company may require a letter of credit. The Company covers most of its trade receivables through credit insurance. As of December 31, 2015 and 2014, no allowance for doubtful accounts was provided. The Company has no off-balance-sheet concentration of credit risk, except for certain derivative instruments as mentioned below. u. Derivative instruments: The Company accounts for derivatives and hedging based on FASB ASC No. 815,”Derivatives and Hedging”. ASC No. 815 requires companies to recognize all of their derivative instruments as either assets or liabilities on the balance sheet at fair value. For derivative instruments that are designated and qualify as a cash flows hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change. To protect against the increase in value of forecasted foreign currency cash flows resulting from salary and rent payments in New Israeli Shekel (“NIS”) during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll and rent of its Israeli facilities denominated in NIS for a period of one to 12 months with put and call options and forward contracts. These forward contracts and put and call options are designated as cash flow hedges and are all effective as hedges of these expenses. -60- U.S. dollars in thousands, except share and per share data. The fair value of the outstanding derivative instruments at December 31, 2015 and 2014 is summarized below: Derivative assets (liabilities) Balance sheet location Fair value of derivative instruments As of December 31, 2014 2015 Foreign exchange forward contracts and put and call options ................................. Accrued expenses and other accounts payable ......................... $ (36) $ (618) Total $ (36) $ (618) The effect of derivative instruments in cash flow hedging transactions on income and other comprehensive income (“OCI”) for the years ended December 31, 2015, 2014 and 2013 is summarized below: Gains (losses) on derivatives recognized in OCI Year ended December 31, 2014 2013 2015 Foreign exchange forward contracts and put and call options ............................................ $ (38) $ (1,180 ) $ 372 Location Foreign exchange forward contracts and put and call options .................................. Operating expenses $ Gains (losses) on derivatives reclassified from OCI to income Year ended December 31, 2014 2013 2015 (621) $ (562) $ 856 As of December 31, 2015, the Company had outstanding option contracts and forward contracts in the amount of $12,850 and $1,800, respectively. As of December 31, 2014, the Company had outstanding option contracts in the amount of $16,575. v. Comprehensive income: The Company accounts for comprehensive income in accordance with FASB ASC No. 220, “Comprehensive Income.” Comprehensive income generally represents all changes in stockholders’ equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive income relate to gains and losses on hedging derivative instruments, unrealized gains and losses on available-for-sale securities, unrealized gains and losses from pension and unrealized gain and losses from foreign currency translation adjustments. -61- U.S. dollars in thousands, except share and per share data. The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for 2015: Unrealized gains (losses) on available- for-sale marketable securities Unrealized gains (losses) on Cash Flow Hedges Unrealized gains (losses) on components of defined benefit plans (295) $ (618) $ (435) $ Unrealized gains (losses) on foreign currency translation (218) $ Total (1,566 ) (230) (38) 63 (161) (366 ) 24 621 20 - 665 (206) 583 83 (161) 299 January 1, 2015 ............... $ Other comprehensive income (loss) before reclassifications ............ Amounts reclassified from accumulated other comprehensive income (loss) ............................. Net current period other comprehensive income (loss) ............................. December 31, 2015 ......... $ (501) $ (35) $ (352) $ (379) $ (1,267 ) The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for 2015: Details about Accumulated Other Comprehensive Income (Loss) Components Losses on available-for-sale marketable securities ... $ Losses on cash flow hedges ...................................... Losses on components of defined benefit plans........ Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (In millions) Affected Line Item in the Statement of Income (Loss) 24 Financial income, net - Provision for income taxes 24 Total, net of income taxes 487 Research and development 48 Sales and marketing 86 General and administrative 621 Total, before income taxes - Provision for income taxes 621 Total, net of income taxes 12 Research and development 8 Sales and marketing 20 Total, before income taxes - Provision for income taxes 20 Total, net of income taxes Total reclassifications for the period ........................ 665 Total, net of income taxes -62- U.S. dollars in thousands, except share and per share data. w. Treasury stock at cost The Company repurchases its common stock from time to time on the open market or in other transactions and holds such shares as treasury stock. The Company presents the cost to repurchase treasury stock as a reduction of stockholders’ equity. From time to time, the Company reissues treasury stock under its employee stock purchase plan and equity incentive plans, upon purchases or exercises of equity awards under the plans. When treasury stock is reissued, the Company accounts for the re-issuance in accordance with ASC No. 505-30, “Treasury Stock” and charges the excess of the purchase cost over the re-issuance price (loss) to retained earnings. The purchase cost is calculated based on the specific identification method. In case the purchase cost is lower than the re-issuance price, the Company credits the difference to additional paid- in capital. x. Investment in other company: Investment in other company is stated at cost. The Company followed ASC 323, “Investments - Equity and Joint Ventures,” to determine whether it should apply the equity method of accounting to a certain investment in preferred shares, and determined that the preferred shares were not in substance common stock. The Company’s investment in other company is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such investment may not be recoverable, in accordance with ASC 325-20. As of December 31, 2014, no impairment loss was indicated. As of December 31, 2015, an impairment in the amount of $400 was recognized in the Company’s consolidated financial statements as a result of the expiration of a purchase option related to such investment. (See also Note 9). y. Recently Issued Accounting Guidance: In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 modifies revenue recognition guidance for U.S. GAAP. Previous revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, International Accounting Standards Board ("IASB") provided limited guidance on revenue recognition. Accordingly, the FASB and IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards ("IFRS"). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year. As a result, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. An entity shall adopt the amendments in ASU 2014-09 by either (i) retrospectively -63- U.S. dollars in thousands, except share and per share data. adjusting each prior reporting period presented or (ii) retrospectively adjusting for the cumulative effect of initially applying ASU 2014-09 at the date of initial adoption. The Company has not determined (i) the extent to which it expects ASU 2014-09 will impact its reported revenues or (ii) the manner in which it will adopt ASU 2014-09. In September 2015, the FASB issued ASU 2015-16, "Business Combinations." ASU 2015-16 modifies how changes to provisional amounts determined during the measurement period of a business combination are recognized. Under existing accounting literature, changes to provisional amounts determined during the measurement period of a business combination, resulting from facts and circumstances that existed on the acquisition date, are recognized by retrospectively adjusting the provisional amounts on the acquisition date. However, under ASU 2015- 16, an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. NOTE 3: MARKETABLE SECURITIES AND TIME DEPOSITS The following is a summary of marketable securities and time deposits at December 31, 2015 and 2014 (see also Note 8): Amortized cost 2015 2014 Unrealized gains (losses), net Fair value 2015 2014 2015 2014 Short term deposit $ U.S. GSE securities ............ Corporate obligations ......... 5,568 $ 2,599 $ - $ - $ 5,568 $ 2,599 23,645 21,085 (114) (34) 23,531 21,051 79,072 80,389 (387) (262) 78,685 80,127 $ 108,285 $ 104,073 $ (501) $ (296) $ 107,784 $ 103,777 The amortized costs of marketable debt securities at December 31, 2015, by contractual maturities or anticipated dates of sale, are shown below: Amortized Unrealized gains (losses) cost Gains Losses Fair value Due in one year or less ............................... $ Due after one year to five years ................ 12,500 $ 90,217 $ 102,717 $ 8 $ 25 33 $ (7) $ (527) 12,501 89,715 (534) $ 102,216 The amortized cost of marketable debt securities at December 31, 2014, by contractual maturities or anticipated dates of sale, are shown below: Amortized Unrealized gains (losses) cost Gains Losses Fair value Due in one year or less ............................... $ Due after one year to six years .................. 8,910 $ 92,564 4 $ 110 (5) $ (405) 8,909 92,269 $ 101,474 $ 114 $ (410) $ 101,178 The actual maturity dates may differ from the contractual maturities because debtors may have the right to call or prepay obligations without penalties. -64- U.S. dollars in thousands, except share and per share data. The total fair value of marketable securities with outstanding unrealized losses as of December 31, 2015 amounted to $84,095, while the unrealized losses for these marketable securities amounted to $534. Of the $534 unrealized losses outstanding as of December 31, 2015, a portion of which in the amount of $70 was related to marketable securities that were in a loss position for more than 12 months and the remaining portion of $464 was related to marketable securities that were in a loss position for less than 12 months. The total fair value of marketable securities with outstanding unrealized losses as of December 31, 2014 amounted to $68,945, while the unrealized losses for these marketable securities amounted to $410. Of the $410 unrealized losses outstanding as of December 31, 2014, a portion of which in the amount of $113 was related to marketable securities that were in a loss position for more than 12 months and the remaining portion of $297 was related to marketable securities that were in a loss position for less than 12 months. Management believes that as of December 31, 2015, the unrealized losses in the Company’s investments in all types of marketable securities were temporary and no impairment loss was realized in the Company’s consolidated statements of operations. The unrealized losses related to the Company’s marketable securities were primarily due to changes in interest rates. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2015. Proceeds from maturity of available-for-sale marketable securities during 2015, 2014 and 2013 were $20,127, $23,250 and $18,325, respectively. Proceeds from sales of available-for-sale marketable securities during 2015, 2014 and 2013 were $13,238, $46,491 and $42,949, respectively. Realized gains from the sale of available-for sale marketable securities for 2015, 2014 and 2013 were $3, $73 and $1,013, respectively. Realized losses from the sale of available-for sale marketable securities for 2015, 2014 and 2013 were $27, $12 and $4, respectively. The Company determines realized gains or losses on the sale of available-for-sale marketable securities based on a specific identification method. NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES Prepaid expenses ..................................................................................... $ Tax and governmental receivables ........................................................... Deposits ................................................................................................... Others ....................................................................................................... December 31, 2015 2014 2,054 $ 956 260 49 1,010 649 208 35 $ 3,319 $ 1,902 NOTE 5:- INVENTORIES Inventories are composed of the following: Work-in-progress ...................................................................................... $ Finished products ...................................................................................... 6,384 $ 5,069 6,795 8,840 $ 11,453 $ 15,635 December 31, 2015 2014 -65- U.S. dollars in thousands, except share and per share data. Inventory write-downs amounted to $361 for the year ended December 31, 2015. For the years ended December 31, 2014 and 2013, the Company recorded $6 and $261, respectively, of income due to the utilization of inventory that was previously written off. NOTE 6:- PROPERTY AND EQUIPMENT, NET Composition of assets, grouped by major classifications, is as follows: Cost: Computers and equipment ............................................................................ $ Office furniture and equipment ..................................................................... Leasehold improvements .............................................................................. Less - accumulated depreciation ....................................................................... December 31, 2015 2014 19,735 $ 1,469 4,728 25,932 22,168 Depreciated cost ............................................................................................... $ 3,764 $ 17,793 1,446 4,559 23,798 20,955 2,843 During 2014, the Company disposed fully depreciated equipment, which ceased to be used, in the amount of $24,247. No capital loss was recorded due to this disposal of equipment in the consolidated statement of operations. Depreciation expenses, which also include amortization expenses of assets recorded under capital leases, amounted to $1,356, $1,290 and $1,994 for the years ended December 31, 2015, 2014 and 2013, respectively. NOTE 7:- INTANGIBLE ASSETS, NET The following table shows the Company’s intangible assets for the periods presented: Useful life (years) December 31, 2015 2014 Cost: Current technology ................................................ Customer relations ................................................. Technology (completion of the development of in-process R&D) ................................................. Non-competition agreement ................................... 4.2 - 5.3 7.3 $ 6 3 77,080 $ 23,477 7,702 519 77,080 23,477 7,702 519 108,778 108,778 Accumulated amortization: Current technology ................................................ Customer relations ................................................. Technology (completion of the development of in-process R&D) ................................................. Non-competition agreement ................................... Impairment: (Note 7b) Current technology ................................................ Customer relations ................................................. 48,263 13,407 3,851 519 66,040 28,817 10,070 38,887 Amortized cost ............................................................ $ 3,851 $ 48,263 13,407 2,567 519 64,756 28,817 10,070 38,887 5,135 a. Amortization expenses amounted to $1,284, $1,573 and $1,672 for the years ended December 31, 2015, 2014 and 2013, respectively. -66- U.S. dollars in thousands, except share and per share data. b. Estimated amortization expenses for the years ending: Year ending December 31, 2016 ................................................................................................................................. $ 2017 ................................................................................................................................. 2018 ................................................................................................................................. $ 1,284 1,284 1,283 3,851 NOTE 8:- FAIR VALUE MEASUREMENTS In accordance with ASC 820, the Company measures its cash equivalents, marketable securities and foreign currency derivative contracts at fair value. Cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 value hierarchies. This is because cash equivalents, and marketable securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments. The following table provides information by value level for financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2015 (see also Note 3): Description Assets Balance as of December 31, 2015 Fair value measurements Level 1 Level 2 Level 3 Cash equivalents Money market mutual funds .................... $ Short-term marketable securities and time deposits U.S. GSE securities .................................. Corporate debt securities .......................... $ Long-term marketable securities U.S. GSE securities .................................. $ Corporate debt securities .......................... $ 1,089 $ 1,089 - 12,501 23,531 66,184 - - $ - $ - $ - $ 12,501 23,531 66,184 (36) - - - - - - Derivative liabilities ................................. $ (36) -67- U.S. dollars in thousands, except share and per share data. The following table provides information by value level for financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2014: Description Assets Balance as of December 31, 2014 Fair value measurements Level 1 Level 2 Level 3 Cash equivalents Money market mutual funds .................... $ 2,746 $ 2,746 Short-term marketable securities and time deposits U.S. GSE securities .................................. $ Corporate debt securities .......................... $ 1,499 7,410 Long-term marketable securities U.S. GSE securities .................................. $ Corporate debt securities .......................... $ Derivative liabilities ................................. $ 19,552 72,717 (618) - $ - $ - $ - $ - $ 1,499 7,410 19,552 72,717 (618) - - - - - In addition to the assets and liabilities described above, the Company’s financial instruments also include cash and cash equivalents, restricted deposits, short term deposits, trade receivables, other accounts receivable, trade payables, accrued expenses and other payables. The fair value of these financial instruments was not materially different from their carrying value at December 31, 2015 and 2014 due to the short-term maturity of these instruments. NOTE 9:- INVESTMENT IN OTHER COMPANY On October 24, 2013, the Company made an investment of $2,200 in a private company in Asia. The investment was in return for approximately 14% of the equity of the company, on a fully diluted basis. The Company also signed an agreement pursuant to which it had the option to purchase all of the remaining outstanding securities of the private company by no later than December 31, 2014. The terms and conditions of the investment were modified on November 2014, including an extension of the option to purchase the remaining outstanding securities until December 31, 2015. The investment is accounted under the cost-method in accordance with ASC 325-20. The Company did not exercise the purchase option by December 31, 2015 and as a result, recorded a write-off in the amount of $400. NOTE 10:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE December 31, 2015 2014 Accrued expenses ..................................................................................... $ Derivative instruments ............................................................................. Legal, accounting and investors relation accrual ..................................... Royalties and commission ........................................................................ Governmental payables ............................................................................ Others ....................................................................................................... 2,729 $ 36 615 488 212 738 $ 4,818 $ 3,279 618 543 538 104 770 5,852 -68- U.S. dollars in thousands, except share and per share data. NOTE 11:- ACCRUED PENSION LIABILITIES As of December 31, 2015 and 2014, the defined benefits plans that the Company assumed in connection with the CIPT Acquisition that are accounted for in the Company’s consolidated financial statements are the pension plans in Germany and India. Consistent with the requirements of local law, the Company deposits funds for certain plans with insurance companies, third-party trustees, or into government-managed accounts, and/or accrues for the unfunded portion of the obligation. The Company’s pension obligation in Germany relating to the unvested pension claims (i.e. future obligation that will result from future service period) of the employees were outsourced in November 2010 to an external insurance company (“Nuremberger Versicherung”). From and after the outsourcing date, the Company is required to pay premiums to the external insurance company and in return the pension benefits earned by the German employees are covered by the Company’s arrangement with the external insurance company. The Company legally is released from its obligations to the German employees once the premiums are paid, and it is no longer subject to any of the risks and rewards associated with the benefit obligations covered and the plan assets transferred to the external insurance company. Since the outsourcing arrangement meets the requirements of a nonparticipating annuity contract, the Company treats the costs of the outsourcing arrangement as the costs of the benefits being earned in accordance with ASC Paragraph 715-30-25-7 of ASC 715 “Compensation—Retirement Benefits.” The following tables provide a reconciliation of the changes in the pension plans’ benefit obligation and fair value of assets for the years ended December 31, 2015 and 2014, and the statement of funded status as of December 31, 2015 and 2014: December 31, 2015 2014 Accumulated benefit obligation ........................................................... $ 937 $ 1,194 Change in benefit obligation Benefit obligation at beginning of year ................................................ $ Service cost .......................................................................................... Interest cost .......................................................................................... Benefits paid from the plan .................................................................. Actuarial loss ........................................................................................ Exchange rates and others .................................................................... 1,205 $ 5 17 (96) (62) (123) Benefit obligation at end of year .......................................................... $ 946 $ Change in plan assets Fair value of plan assets at beginning of year ...................................... Actual return on plan assets ................................................................. Benefits paid from the plan .................................................................. Exchange rates ..................................................................................... Fair value of plan assets at end of year ................................................ $ 116 5 (56) (11) 54 $ 1,239 5 29 (152) 218 (134) 1,205 258 6 (127) (21) 116 -69- U.S. dollars in thousands, except share and per share data. The assumptions used in the measurement of the Company’s pension expense and benefit obligations as of December 31, 2015, 2014 and 2013 are as follows: Year ended December 31, 2014 2013 2015 Weighted-average assumptions Discount rate ......................................................... Expected return on plan assets .............................. Rate of compensation increase .............................. 2.5% 4.28% 2.5% 2.1% 2.86% 2.5% 3.5% 2.88% 2.5% The amounts reported for net periodic pension costs and the respective benefit obligation amounts are dependent upon the actuarial assumptions used. The Company reviews historical trends, future expectations, current market conditions, and external data to determine the assumptions. The discount rate is determined considering the yield of government bonds. The rate of compensation increase is determined by the Company, based on its long-term plans for such increases. The following table provides the components of net periodic benefit cost for the years ended December 31, 2015, 2014 and 2013: Components of net periodic benefit cost Service cost ........................................................... $ Interest cost ........................................................... Expected return on plan assets .............................. Amortization of net loss ....................................... Net periodic benefit cost ....................................... $ 2015 December 31, 2014 2013 5 $ 17 (5) 20 37 $ 5 $ 29 (6) 11 39 $ December 31, 2015 2014 Net amounts recognized in the consolidated balance sheets as of December 31, 2015 and 2014 consist of: Current liabilities .................................................................................. $ Noncurrent liabilities ............................................................................ Net amounts recognized in the consolidated balance sheets ................ $ Net amounts recognized in accumulated other comprehensive income as of December 31, 2015 and 2014 consist of: Net actuarial loss ................................................................................. $ Net amounts recognized in accumulated other comprehensive loss..... $ - $ 892 892 $ (351) $ (351) $ 5 35 (6) 11 45 - 1,089 1,089 (435) (435) The estimated amount that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2016 is as follows: 2016 Net actuarial loss and other ............................................................................................... $ 14 -70- U.S. dollars in thousands, except share and per share data. Benefit payments are expected to be paid as follows: Year ending December 31, 2016 .................................................................................................................................... $ 2017 .................................................................................................................................... $ 2018 .................................................................................................................................... $ 2019 .................................................................................................................................... $ 2020 .................................................................................................................................... $ 2021-2025 .......................................................................................................................... $ The plan asset allocations at December 31 of the relevant years are as follows: Bonds .................................................................................................... Real estate ............................................................................................. Cash ....................................................................................................... Shares .................................................................................................... Other .................................................................................................... December 31, 2015 2014 - - - - 100% 100% 55 21 8 8 9 104 - - - - 100% 100% The fair value of the Company’s pension plan assets at December 31, 2015 by asset category, classified by the three levels of inputs described in Note 2, are as follows: Fair value measurements at December 31, 2015 using: Total fair value at December 31, 2015 Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Cash .............................................................. $ Equity securities ........................................... Real estate .................................................... Corporate bonds ........................................... Others ........................................................... Total assets measured at fair value ............... $ - $ - - - 54 54 $ - $ - - - - - $ - $ - - - 54 54 $ - - - - - - Valuation techniques - For Level 2 inputs, the Company utilizes quoted market prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Regarding the policy for amortizing actuarial gains or losses for pension and post-employment plans, the Company has chosen the “corridor” option. This option consists of recognizing in the consolidated statements of operations, the part of unrecognized actuarial gains or losses exceeding 10% of the greater of the PBO or the market value of the plan assets. If amortization is required, the minimum amortization amount is that excess divided by the average remaining service period of the active employees expected to receive benefits under the plan. Actuarial profits were recognized in other comprehensive income (loss) in the amount of $63 for the year ended December 31, 2015. Actuarial losses were recognized in other comprehensive income (loss) in the amount of $209 and $11 for the years ended December 31, 2014 and 2013, respectively. -71- U.S. dollars in thousands, except share and per share data. NOTE 12:- FINANCIAL INCOME, NET The components of financial income, net were as follows: Year ended December 31, 2014 2015 2013 19 $ 27 $ - Foreign exchange gains ........................................... $ Interest income from marketable securities and deposits, net of amortization of premium on marketable securities ........................................... Realized gains on marketable securities .................. Other ....................................................................... 1,391 3 - 1,391 73 - Financial income ..................................................... 1,413 1,491 Realized losses on marketable securities ................. Foreign exchange losses .......................................... Interest expenses ..................................................... Other ....................................................................... Financial expense .................................................... 27 58 12 141 238 12 113 24 138 287 1,656 1,013 13 2,682 4 86 29 106 225 Financial income, net .............................................. $ 1,175 $ 1,204 $ 2,457 NOTE 13:- STOCKHOLDERS’ EQUITY a. Preferred stock: The Company’s Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of up to 5,000,000 shares of preferred stock in one or more series with such designations, rights, preferences, and limitations as the Board of Directors may determine, including the consideration received, the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights and voting rights. No shares of preferred stock are currently outstanding. b. Common stock: Currently, 50,000,000 shares of common stock are authorized. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the Company’s stockholders. Subject to the rights of holders of preferred stock, if any, in the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of the Company’s assets. The Company’s Board of Directors may declare a dividend out of funds legally available therefore and, subject to the rights of holders of preferred stock, if any, the holders of common stock are entitled to receive ratably any such dividends. Holders of common stock have no preemptive rights or other subscription rights to convert their shares into any other securities. There are no redemption or sinking fund provisions applicable to common stock. c. Dividend policy: At December 31, 2015, the Company had an accumulated deficit of $90,763. The Company has never paid cash dividends on the common stock and presently intends to follow a policy of retaining earnings for reinvestment in its business. -72- U.S. dollars in thousands, except share and per share data. d. Share repurchase program: In November 2013, the Company entered into a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of up to 2,700,000 shares of its common stock. This amount is in addition to the approximately 308,000 shares that were available for repurchase under the board’s prior authorizations. Furthermore, in August 2015, the Company’s board of directors authorized an additional $10 million dollar share repurchase plan, of which 0.5 million shares are available for repurchase under a Rule 10b5-1 plan. In 2015, 2014 and 2013, the Company repurchased approximately 1,295,000, 1,414,000 and 390,000 shares, respectively, of common stock at an average purchase price of $10.24, $8.83 and $8.95 per share, respectively, for an aggregate purchase price of $13,267, $12,484 and $3,490, respectively. As of December 31, 2015, 905,040 shares of the Company’s common stock remained authorized for repurchase under the Company’s board-authorized share repurchase program. In 2015, 2014 and 2013, the Company issued 1,024,000, 908,000 and 1,066,000 shares, respectively, of common stock, out of treasury stock, to employees who exercised their equity awards under the Company’s equity incentive plans or purchased shares from the Company’s 1993 Employee Stock Purchase Plan (“ESPP”). e. Stock purchase plan and equity incentive plans: The Company has various equity incentive plans under which employees, officers, non-employee directors of the Company and its subsidiaries and others, including consultants, may be granted rights to purchase the Company’s common stock. The plans authorize the administrator, except for the grant of RSUs, to grant equity incentive awards at an exercise price of not less than 100% of the fair market value of the common stock on the date the award is granted. It is the Company’s policy to grant stock options and SARs at an exercise price that equals the fair market value Equity awards granted under all stock incentive plans that are cancelled or forfeited before expiration become available for future grant. Until the end of 2012, the Company granted to employees and executive officers of the Company primarily share appreciation rights (“SARs”), capped with a ceiling, under the various equity incentive plans. The SAR unit confers the holder the right to stock appreciation over a preset price of the Company’s common stock during a specified period of time. When the unit is exercised, the appreciation amount is paid through the issuance of shares of the Company’s common stock. The ceiling limits the maximum income for each SAR unit and the maximum number of shares to be issued. SARs are considered an equity instrument as it is a net share settled award capped with a ceiling. Starting in 2013, the Company granted to employees and executive officers of the Company primarily restricted stock units (“RSUs”) under the various equity incentive plans. An RSU award is an agreement to issue shares of our common stock at the time the award is vested. RSUs granted to employees and executive officers generally vest over a four year period from the grant date with 25% of the RSUs granted vesting on the first anniversary of the grant date and 6.25% vesting each quarter thereafter. A summary of the various plans is as follows: 1993 Director Stock Option Plan (Directors Plan) Upon the closing of the Company’s initial public offering, the Company adopted the Directors Plan. Under the Directors Plan, which expired in January 2014, the Company was authorized to issue nonqualified stock options to the Company’s outside non-employee directors to purchase up to 1,980,875 shares of common stock at an exercise price equal to the fair market value of the common stock on the date of grant. The Directors Plan, as amended, provided that each person who became an outside, non-employee director of the Board of Directors was automatically granted an option to purchase 30,000 shares of common stock (the “First Option”). Thereafter, each outside director was automatically granted an option to purchase 15,000 shares of common stock (a “Subsequent Option”) on January 1 of each year if, on such date, he had served on the Board of Directors for at least six months. In addition, an option to purchase an additional 15,000 shares of common stock (a “Committee Option”) was granted on January 1 of each year to each outside director for each committee of the Board on which had served as a chairperson for at least six months. -73- U.S. dollars in thousands, except share and per share data. Options granted under the Directors Plan generally had a term of 10 years. One-third of the shares were exercisable after the first year and thereafter one-third at the end of each twelve-month period. The Directors Plan expired in January 2014 and therefore no further awards may be granted thereunder. As of December 31, 2015, 2,464,933 shares of common stock had been granted under the plan and stock options to acquire 495,000 shares remained outstanding in the plan prior to its expiration. 1998 Non-Officer Employee Stock Option Plan (1998 Plan) In 1998, the Company adopted the 1998 Plan. Under the 1998 Plan, employees may be granted non-qualified stock options for the purchase of common stock. The 1998 Plan currently provides for the purchase of up to 5,062,881 shares of common stock. As of December 31, 2015, 35,473 shares of common stock remained available for grant under the 1998 Plan. The exercise price of options under the 1998 Plan shall not be less than the fair market value of common stock for nonqualified stock options, as determined by the Company’s Board of Directors or a committee appointed by the Company’s Board of Directors. Options under the 1998 Plan are generally exercisable over a 48-month period beginning 12 months after issuance, or as determined by the Company’s Board of Directors or a committee appointed by the Company’s Board of Directors. Options under the 1998 Plan expire up to seven years after the date of grant. 2001 Stock Incentive Plan (2001 Plan) In 2001, the Company adopted the 2001 Plan. The 2001 Plan expired in 2011 and no further grants of awards may be made thereunder. As of December 31, 2015, 2,194,847 shares of common stock were granted under the plan, stock options to acquire 10,000 shares remained outstanding in the plan prior to its expiration. The 2001 Plan authorized the administrator to grant incentive stock options at an exercise price of not less than 100% of the fair market value of the common stock on the date the option is granted. Equity awards under the 2001 Plan were generally exercisable over a 48-month period beginning 12 months after issuance or as determined by the Company’s Board of Directors or a committee appointed by the Company’s Board of Directors. Equity awards under the 2001 plan expired up to seven years after the date of grant. 2003 Israeli Share Incentive Plan (2003 Plan) In 2003, the Company adopted the 2003 Plan, which complied with the Israeli tax reforms. The 2003 Plan terminated in 2012 upon approval of the Company’s 2012 Equity Incentive Plan (the “2012 Plan”). As of December 31, 2015, 10,700,543 shares of common stock had been granted under the plan and stock option and SARs to acquire 922,595 shares of common stock remained outstanding under the plan. As the 2003 Plan expired in May 2012, no further awards may be granted thereunder. Equity awards under the 2003 Plan were generally exercisable over a 48-month period beginning 12 months after issuance, or as determined by the Company’s Board of Directors or a committee appointed by the Company’s Board of Directors. Equity awards under the 2003 Plan expired up to seven years after the date of grant. 2012 Equity Incentive Plan (2012 Plan) In 2012, the Company adopted the 2012 Plan, which also complies with the Israeli tax reforms. Under the 2012 Plan, employees, directors and consultants may be granted incentive or non-qualified stock options, SARs, RSUs and other awards under the plan. The exercise price of the equity awards under the 2012 Plan shall not be less than the fair market value of common stock at the time of grant, unless otherwise determined by the Company’s Board of Directors or a committee appointed by the Company’s Board of Directors. The 2012 Plan currently provides for the purchase of up to 2,450,000 shares of common stock. As of December 31, 2015, 1,027,577 shares of common stock remained available for grant under the 2012 Plan. -74- U.S. dollars in thousands, except share and per share data. Stock options, SARs and RSUs awarded under the 2012 Plan to employees and executive officers are generally exercisable over a 48-month period beginning 12 months after issuance, or as determined by the Company’s Board of Directors or a committee appointed by the Company’s Board of Directors Equity awards under the 2012 Plan expire up to seven years after the date of grant. A director subplan was established under the 2012 Plan to provide for the grant of equity awards to the Company’s non-employee directors. The director subplan is designed to work automatically; however, to the extent administration is necessary, it would be provided by the Company’s board of directors. Starting in 2014, non-employee directors are granted automatically under the director subplan, on January 1 of each year, 8,000 stock options and 4,000 restricted stock units, all of which would fully vest at the end of one year from the grant date. If a director is appointed for a term commencing during a calendar year, the director would be granted stock options and restricted stock units on the date of appointment and the number of stock options and restricted stock units granted would be based upon the number of days remaining in the in the calendar year following the date such person was nominated as a director. Solely with respect to calendar year 2014, in addition to the grants of 8,000 stock options and 4,000 restricted stock units on January 1, 2014 to all then elected board members, each committee chair also received an automatic grant of stock options of 15,000 shares. 1993 Employee Stock Purchase Plan (ESPP) Upon the closing of the Company’s initial public offering, the Company adopted the ESPP. The Company has reserved an aggregate of 4,800,000 shares of common stock for issuance under the ESPP. The ESPP provides that substantially all employees of the Company may purchase Company common stock at 85% of its fair market value on specified dates via payroll deductions. There were approximately 233,000, 310,000 and 374,000 shares of common stock issued at a weighted average purchase price of $7.59, $5.55 and $4.44 per share under the ESPP in 2015, 2014 and 2013, respectively. As of December 31, 2015, 1,170,000 shares of common stock were reserved under the ESPP. Stock Reserved for Future Issuance The following table summarizes the number of shares available for future issuance at December 31, 2015 (after giving effect to the above increases in the equity incentive plans): ESPP ................................................................................................................................... Equity awards ...................................................................................................................... Undesignated preferred stock .............................................................................................. 1,170,000 1,063,000 5,000,000 7,233,000 -75- U.S. dollars in thousands, except share and per share data. The following is a summary of activities relating to the Company’s stock options, SARs and RSUs granted among the Company’s various plans: 2015 Weighted average exercise price Amount of options/ SARs/RSUs in thousands Year ended December 31, 2014 Weighted average exercise price Amount of options/ Aggregate intrinsic value (4) SARs/RSUs in thousands 2013 Amount of options/ SARs/RSUs in thousands Aggregate intrinsic value (4) Weighted average exercise price Aggregate intrinsic value (4) Options outstanding at beginning of year ....... 4,644 $ 6.52 $ - 6,537 $ 8.68 $ - 9,622 $ 10.72 $ - Changes during the year: Options granted ............ RSUs granted ................ Exercised (4) ................. Forfeited and cancelled Options/SARs/RSUs outstanding at end of year (1,2,4)................. Options/SARs/RSUs exercisable at end of year (1,3,4)................. 179 $ 405 $ (1,403) $ (85) $ 11.2 $ - $ 5.68 $ 12.21 $ - - 7,302 - 232 $ 337 $ (1,715) $ (747) $ 9.15 $ - $ 7.92 $ 20.11 $ - - 3,537 - 524 $ 552 $ (2,105) $ (2,056) $ 6.42 $ - $ 6.49 $ 17.56 $ - - 3,795 - 3,740 $ 6.22 $ 13,364 4,644 $ 6.52 $ 21,409 6,537 $ 8.68 $ 16,673 2,552 $ 7.47 $ 6,031 3,106 $ 7.73 $ 10,941 4,623 $ 10.30 $ 7,230 (1) SAR grants made prior to January 1, 2009 are convertible for a maximum number of shares of the Company’s common stock equal to 50% of the SAR units subject to the grant. SAR grants made on or after January 1, 2009 and before January 1, 2010 are convertible for a maximum number of shares of the Company’s common stock equal to 75% of the SAR units subject to the grant. SAR grants made on or after January 1, 2010 are convertible for a maximum number of shares of the Company’s common stock equal to 66.67% of the SAR units subject to the grant. SAR grants made on or after January 1, 2012 are convertible for a maximum number of shares of the Company’s common stock equal to 50% of the SAR units subject to the grant. (2) Due to the ceiling imposed on the SAR grants, the outstanding amount above can be exercised for a maximum of 3,154,626 shares of the Company’s common stock as of December 31, 2015. (3) Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of 1,992,668 shares of the Company’s common stock as of December 31, 2015. (4) Calculation of aggregate intrinsic value for options, RSUs and SARs outstanding and exercisable is based on the share price of the Company’s common stock as of December 31, 2015, 2014 and 2013 which was $9.44, $10.87 and $9.71 per share, respectively. The intrinsic value for options, RSUs and SARs exercised during those years represents the difference between the fair market value of the Company’s common stock on the date of exercise and the exercise price of each option, RSU or SAR, as applicable. -76- U.S. dollars in thousands, except share and per share data. The stock options and SARs outstanding as of December 31, 2015, have been separated into ranges of exercise price as follows: Range of exercise price $ Outstanding thousands Remaining contractual life (years) (1) Weighted average exercise price $ Remaining contractual life (years) Weighted average exercise price $ Exercisable thousands 0 (RSUs) 5.21 - 7.26 7.49 - 9.71 10.87 - 15.79 21.07 - 25.06 706 1,797 958 219 60 - 2.68 3.87 6.21 0.50 - 6.48 8.04 11.54 23.38 - 1,625 827 40 60 - 2.51 3.45 1.96 0.50 - 6.51 7.93 13.10 23.38 3,740 3.27 6.22 2,552 2.76 7.47 (1) Calculation of weighted average remaining contractual term does not include the RSUs that were granted, which have an indefinite contractual term. As of December 31, 2015, the outstanding number of SARs was 1,541,977 and based on the share price of the Company’s common stock as of December 31, 2015 ($9.44 per share), 1,541,977 of those SARs were in the money as of December 31, 2015. The weighted average estimated fair value of employee RSUs granted during 2015, 2014 and 2013 was $10.43, $7.94 and $6.17 per share, respectively, (using the weighted average pre vest cancellation rate of 3.49%, 3.79% and 3.84% during 2015, 2014 and 2013, respectively, on an annual basis). The weighted-average estimated fair value of employee stock options granted during the years ended December 31, 2015, 2014 and 2013 was $3.80, $3.47 and $4.90 per stock option, respectively, using the binomial model with the following weighted-average assumptions (annualized percentages): Year ended December 31, 2014 2015 2013 Volatility ...................................................... Risk-free interest rate ................................... Dividend yield ............................................. Pre-vest cancellation rate *) ......................... Post-vest cancellation rate **) ..................... Suboptimal exercise factor ***) .................. Expected life (years) .................................... 49.04 % 1.96 % 0 % 3.95 % 3.86 % 1.46 4.43 43.14% 1.85% 0% 4.17% 4.09% 1.61 3.27 46.24% 1.39% 0% 3.48% 2.52% 1.81 4.66 *) The pre-vest cancellation rate was calculated on an annual basis and is presented here on an annual basis. **) The post-vest cancellation rate was calculated on a monthly basis and is presented here on an annual basis. ***) The ratio of the stock price to strike price at the time of exercise of the option. The computation of volatility uses a combination of historical volatility and implied volatility derived from the Company’s exchange traded options with similar characteristics. The risk-free interest rate assumption is based on U.S. treasury bill interest rates appropriate for the term of the Company’s employee equity-based awards. -77- U.S. dollars in thousands, except share and per share data. The dividend yield assumption is based on the Company’s historical and expectation of future dividend payouts and may be subject to substantial change in the future. The expected term of employee equity-based awards represents the weighted-average period the awards are expected to remain outstanding and is a derived output of the binomial model. The expected life of employee equity-based awards is impacted by all of the underlying assumptions used in the Company’s model. The binomial model assumes that employees’ exercise behavior is a function of the award’s remaining contractual life and the extent to which the award is in-the-money (i.e., the average stock price during the period is above the strike price of the award). The binomial model estimates the probability of exercise as a function of these two variables based on the history of exercises and cancellations on past award grants made by the Company. As equity-based compensation expense recognized in the consolidated statement of operations is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. The forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre and post-vesting forfeitures were estimated based on historical experience. The fair value for rights to purchase shares of common stock under the Company’s ESPP was estimated on each enrollment date using the same assumptions set forth above for the years ended 2015, 2014 and 2013 except the expected life and the volatility. The expected life was assumed to be between six to 24 months based on the contractual life of the plan, and the expected volatility was assumed to be in a range of 22.83%-34.53% in 2015, 29.06%-37.17% in 2014 and 36.37%-44.19% in 2013. The Company’s aggregate equity compensation expenses for the years ended December 31, 2015, 2014 and 2013 totaled $5,092, $5,359 and $4,159, respectively. The Company recognized no tax benefit in its consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013 for the Company’s equity-based compensation arrangements. A summary of the status of the Company’s non-vested stock options, SARs and RSUs as of December 31, 2015, and changes during the year ended December 31, 2015, is presented below: Non-vested Units (In thousands) Weighted Average grant date fair value Non-vested at January 1, 2015 ........................................... 1,538 Granted .............................................................................. Vested ................................................................................ Forfeited ............................................................................ 584 (910) (24) Non-vested at December 31, 2015 ..................................... 1,188 5.01 8.38 6.00 4.68 6.90 As of December 31, 2015, equity-based compensation arrangements to purchase a maximum of approximately 2,902,000 shares of common stock were vested and expected to vest (the calculation takes into consideration the average forfeiture rate). As of December 31, 2015, there was a total unrecognized compensation expense of $3,061 related to non-vested equity-based compensation arrangements granted under the Company’s various equity incentive plans. That expense is expected to be recognized during the period from 2016 through 2019. -78- U.S. dollars in thousands, except share and per share data. NOTE 14:- COMMITMENTS AND CONTINGENCIES Commitments a. The Company and its subsidiaries lease certain equipment and facilities under non-cancelable operating leases. The Company has significant leased facilities in Herzliya Pituach, Israel. The lease agreement for the Israeli facilities is effective until November 2018. The Company leases its facilities in the U.S. under a contract which terminates in 2018. The Company’s subsidiaries in Scotland, Japan, Germany, China and Hong-Kong have lease agreements for their facilities that terminate in 2019, 2016, 2016, 2016 and 2016, respectively. The Company’s subsidiary in India has a lease agreement which terminates in 2020. The Company has operating lease agreements for its motor vehicles which terminate in 2016 through 2018. At December 31, 2015, the Company is required to make the following minimum lease payments under non- cancelable operating leases for motor vehicles and facilities: Year ended December 31, 2016 ................................................................................................................................. $ 2017 ................................................................................................................................. 2018 ................................................................................................................................. 2019 and thereafter .......................................................................................................... $ 2,684 1,835 1,614 145 6,278 Facilities rental expenses amounted to $2,252, $2,298 and $2,389 for the years ended December 31, 2015, 2014 and 2013, respectively. b. The Company participated in programs (most of which are royalty bearing grants) sponsored by the Israeli government for the support of research and development activities. Through December 31, 2015, the Company had obtained grants from the Israeli Office of the Chief Scientist (the “OCS”) for certain of the Company’s research and development projects. The Company is obligated to pay royalties to the OCS, amounting to 5% of the sales of the products and other related revenues (based on the dollar) generated from such projects, up to 100% of the grants received. The royalty payment obligations also bear interest at the LIBOR rate. The obligation to pay these royalties is contingent on actual sales of the applicable products and in the absence of such sales, no payment is required. As of December 31, 2015, the aggregate contingent liability to the OCS amounted to $7,880. The Israeli Research and Development Law provides that know-how developed under an approved research and development program may not be transferred to third parties without the approval of the OCS. Such approval is not required for the sale or export of any products resulting from such research or development. The OCS, under special circumstances, may approve the transfer of OCS-funded know- how outside Israel, in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid in consideration for such OCS-funded know-how or in consideration for the sale of the grant recipient itself, as the case may be, which portion will not exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest, in the event that the recipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel after the transfer); (b) the grant recipient receives know-how from a third party in exchange for its OCS- funded know-how; (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperation in research and development activities; or (d) if such transfer of know-how arises in connection with a liquidation by reason of insolvency or receivership of the grant recipient. Litigation a. The Company is involved in certain claims arising in the normal course of business. However, the Company believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position, results of operations, or cash flows. -79- U.S. dollars in thousands, except share and per share data. b. From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of business activities. Also, as is typical in the semiconductor industry, the Company has been and, from time to time may be, notified of claims that it may be infringing on patents or intellectual property rights owned by third parties. NOTE 15:- TAXES ON INCOME a. The provision for income taxes is as follows: Domestic taxes Federal taxes: Current ................................................................... $ State taxes: Current ................................................................... Year ended December 31, 2014 2013 2015 - $ 2 - $ (271) 2 (9) Foreign taxes: Current (1) .............................................................. Deferred (2) ............................................................ 1,081 (756) (1,672) (1,170) Domestic taxes ...................................................... 325 (2,842) Tax expenses (income) tax benefit ......................... $ 327 $ (2,840) $ 507 (377) 130 (150) (1) Includes for 2014 (i) income in the amount of $858 due to reversal of income tax contingency reserves that were determined to be no longer needed due to finalization of a tax assessment of one of the Company’s subsidiaries and (ii) income in the amount of $1,234 due to removal of valuation allowance of tax advances. (2) Includes for 2014 income tax benefit in the amount of $827 due to elimination of valuation allowance of deferred tax assets. There were no tax benefits associated with the exercise of non-qualified stock options in 2015, 2014 and 2013. b. Income (loss) before taxes is comprised as follows: Year ended December 31, 2014 2015 2013 Domestic ................................................................ $ Foreign ................................................................... (909) $ 2,798 (3,497) $ 4,258 (3,525) 6,051 $ 1,889 $ 761 $ 2,526 c. A reconciliation between the Company’s effective tax rate assuming all income is taxed at statutory tax rate applicable to the income of the Company and the U.S. statutory rate is as follows: -80- U.S. dollars in thousands, except share and per share data. Year ended December 31, 2014 2013 2015 Income (loss) before taxes on income ....................... $ 1,889 $ 761 $ 266 $ 2 2,526 884 2 661 $ 2 Theoretical tax at U.S. statutory tax rate (35%) ......... $ State taxes, net of federal benefit ............................... Foreign income taxed at rates other than the U.S. rate (including deferred taxes that were not provided, valuation allowance and current adjustment and interest on uncertain tax position liability) ............. Nondeductible equity-based compensation expenses Current adjustment and interest on uncertain tax position liability in U.S. ......................................... Valuation allowance in U.S. ....................................... Other ......................................................................... (2,209) 1,782 (5,974) 1,876 (3,015) 1,456 - 91 - - 989 1 $ 327 $ (2,840) $ (283) 804 2 (150) d. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. December 31, 2015 2014 Deferred tax assets (short-term): Reserves and accruals ........................................................................... $ Carryforward tax losses ......................................................................... $ Total deferred tax assets (short-term) ..................................................... Valuation allowance ............................................................................... Total ....................................................................................................... - $ - $ - - - 149 626 775 - 775 Deferred tax assets (long-term): Reserves and accruals ............................................................................ Equity-based compensation .................................................................... Intangible assets .................................................................................... Carryforward tax losses ......................................................................... Other ...................................................................................................... 1,823 462 805 (1) 5,798 - 1,669 2,761 1,198 27,621 15 Total deferred tax assets (long-term) ...................................................... Valuation allowance ............................................................................... 8,888 (7,577) 33,264 (33,115) Total ....................................................................................................... 1,311 Total deferred tax assets ........................................................................ $ 1,311 $ 149 924 Deferred tax liabilities, net (Long term): Acquired intangible assets ..................................................................... Acquired carryforward tax losses .......................................................... 963 (487) 1,360 (515) Total deferred tax liabilities, net ............................................................ $ 476 $ 845 -81- U.S. dollars in thousands, except share and per share data. (1) The amount in 2015 is after a deduction of $207,405 carryforward tax losses of a foreign subsidiary that expired by December 31, 2015. Management believes that part of the deferred tax assets will not be realized based on current levels of future taxable income and potentially refundable taxes. Accordingly, a valuation allowance in the amount of $7,577 and $33,115 was recognized as of December 31, 2015 and 2014, respectively. As of December 31, 2015, the Company had cash and cash equivalents, marketable securities and time deposits of approximately $121.7 million. Out of total cash, cash equivalents and marketable securities of $121.7 million, $107.8 million was held by foreign subsidiaries of the Company. The Company intends to permanently reinvest earnings of its foreign operations and its current operating plans do not demonstrate a need to repatriate foreign earnings to fund the Company’s U.S. operations. However, if these funds were needed for the Company’s operations in the United States, the Company would be required to accrue and pay U.S. taxes as well as taxes in other countries to repatriate these funds. The determination of the amount of additional taxes related to the repatriation of these earnings is not practicable, as it may vary based on various factors such as the location of the cash and the effect of regulation in the various jurisdictions from which the cash would be repatriated. e. Uncertain tax positions: A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: 2015 2014 Gross unrecognized tax benefits at January 1 ............................... $ Increases in tax positions for previous years ................................ Increases in tax positions for current year .................................... Change in interest and linkage related to tax positions ................. Lapse in statute of limitations or finalization of tax assessment .. 1,031 $ 177 533 (30) - 1,892 115 71 (85) (858) Gross unrecognized tax benefits at December 31 ......................... $ 1,711 $ 1,031 The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1,711 and $1,031 at December 31, 2015 and 2014, respectively. The Company accrues interest and penalties relating to unrecognized tax benefits in its provision for income taxes. At December 31, 2015 and 2014, the Company had accrued interest and penalties related to unrecognized tax benefits of $180 and $135, respectively. The Company reversed income tax contingency reserves that were determined to be no longer required due to the expiration of applicable statute of limitations. Pursuant to this reversal, the Company recorded a tax benefit of $284 during 2013. During 2014, the Company recorded a tax benefit of $858 due to the finalization of a tax assessment. The Company and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The last examination conducted by U.S. tax authorities was with respect to the Company’s U.S. federal income tax returns for 2004. The statute of limitations relating to the Company’s consolidated Federal income tax return is closed for all tax years up to and including 2011. The last examination conducted by the Israeli tax authorities was with respect to the Company’s Israeli income tax returns for the years between 2006 and 2012. With respect to DSP Israel, the tax returns up to and including 2012 are considered to be final and not subject to any audits due to the expiration of the statute of limitations. -82- U.S. dollars in thousands, except share and per share data. With respect to the Company’s Swiss subsidiary, the statute of limitations related to its tax returns is opened for all tax years since its incorporation. A change in the amount of unrecognized tax benefit is reasonably possible in the next 12 months due to the examination by the German tax authorities of the Company’s German tax returns for 2007 – 2009. The Company currently cannot provide an estimate of the range of change in the amount of the unrecognized tax benefits due to the ongoing status of the examination. f. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“Investment Law”). The Investment Law provides certain Israeli tax benefits for eligible capital investments in a production facility, as discussed in greater detail below. On April 1, 2005, an amendment to the Investment Law came into effect (the “Amendment”) and significantly changed the provisions of the Investment Law. Generally, DSP Israel’s investment programs that obtained approval for Approved Enterprise status prior to enactment of the Amendment will continue to be subject to the old provisions of the Investment Law. The Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies are no longer required to get the Investment Center’s prior approval to qualify for tax benefits. An enterprise that receives tax benefits without the initial approval from the Investment Center is called a “Beneficiary Enterprise,” rather than the previous terminology of “Approved Enterprise” used under the Investment Law. The period of tax benefits for a new Beneficiary Enterprise commences in the “Year of Commencement,” which is the later of: (1) the year in which taxable income was first generated by the company, or (2) the year of election. In addition, under the Amendment, tax benefits are available for production facilities, which generally are required to derive more than 25% of their business income from export. Furthermore, in order to receive the tax benefits under the Amendment, a company is required to make an investment in the Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investment Law. DSP Israel chose the “alternative benefits” track for all of its investment programs. Accordingly, DSP Israel’s income from an “Approved Enterprise” and “Beneficiary Enterprise” is tax-exempt for a period of two or four years and is subject to a reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership) for an additional period of six or eight years. DSP Israel’s first, second, third, fourth, fifth and sixth investment programs, which were completed and commenced operations in 1994, 1996, 1998, 1999, 2002 and 2004, respectively, were tax exempt for a period of between two and four years, from the first year they had taxable income and were entitled to a reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership) for an additional period of between six to eight years. As of 2015, all those investment programs were no longer entitled to a reduced corporate tax rate. DSP Israel’s seventh and eighth investment programs have been in operation since 2006 and 2009, respectively, and entitles DSP Israel to a corporate tax exemption for a period of two years and a reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership) for an additional period of eight years from the first year it had taxable income. Beginning in 2016, the seventh investment program was no longer entitled to a reduced corporate tax rate. Since DSP Israel is operating under more than one approval, its effective tax rate is the result of a weighted combination of the various applicable tax rates and tax exemptions and the computation is made for income derived from each investment program on the basis and formulas specified in the Investment Law and the approvals. -83- U.S. dollars in thousands, except share and per share data. During 2006, DSP Israel received an approval for the erosion of tax basis in respect to its fifth and sixth investment programs. During 2008, DSP Israel received an approval for the erosion of tax basis with respect to its second, third and fourth investment programs. Those approvals resulted in increasing the taxable income attributable to the later investment programs, which are currently in operation and will be taxed at a lower tax rate than the previous investment programs, which in turn will decrease the overall effective tax rate. The Company’s investment programs that generate taxable income are currently subject to an average tax rate of up to approximately 10% based on a variety of factors, including percentage of foreign ownership and approvals for the erosion of the tax basis of our investment programs. The Company’s average tax rate for its investment programs may change in the future due to circumstances outside of its control and therefore, the Company cannot provide any assurances that its average tax rate for its investment programs will continue at an approximate rate of 10% in the future. Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 68): In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), 2011 (the “2011 Amendment”). The 2011 Amendment, which prescribes, among other things, amendments in the Law for the Encouragement of Capital Investments, 1959 (the “Law”). The 2011 Amendment became effective as of January 1, 2011. According to the 2011 Amendment, the benefit tracks in the Law were modified and a flat tax rate applies to the Company's entire preferred income under its status as a preferred company with a Preferred Enterprise (rather than the previous terminology of “Beneficiary Enterprise” under the Amendment). Commencing in 2011, the Company could elect (without possibility of reversal) to apply the 2011 Amendment in a certain tax year and from that year and thereafter, it would be subject to the amended tax rates. The tax rates under the 2011 Amendment were: 2011 and 2012 - 15% and in 2013 - 12.5%. As discussed in greater detail below, the Company evaluated the effect of the adoption of the 2011 Amendment and determined not to apply such amendment. Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 71): On August 5, 2013, the Israeli Parliament issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which consists of Amendment 71 to the Law for the Encouragement of Capital Investments (the “2013 Amendment”). According to the 2013 Amendment, the tax rate on preferred income from a Preferred Enterprise in 2014 and thereafter would be 16%. The 2013 Amendment also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise's earnings would be subject to a tax rate of 20%. The Company evaluated the effect of the adoption of the 2011 Amendment and the 2013 Amendment on its financial statements, and determined to not apply for either amendment. Rather the Company has continued to comply with the Investment Law as it was in effect prior to enactment of the amendments until the earlier of such time that compliance with the Investment Law prior to enactment of the amendments is no longer in the Company’s best interests or until the expiration of its current investment programs. The Company may change its position in the future. The Company is required to comply with the 2011 Amendment and the 2013 Amendment subsequent to the expiration of the Company’s current investment programs and for any new qualified investment program after a transitional period. Once the Company is required to comply with the amendments, its average tax rate may increase. As of December 31, 2015, DSP Israel believed that it met all the conditions required under the plans, which include, among other things, an obligation to invest certain amounts in property and equipment and an obligation to finance a percentage of investments by share capital. -84- U.S. dollars in thousands, except share and per share data. Should DSP Israel fail to meet such conditions in the future, it could be subject to corporate tax in Israel at the standard tax rate (26.5% for 2015) plus a consumer price index linkage adjustment and interest and could be required to refund tax benefits already received. As of December 31, 2015, approximately $33,293 was derived from tax exempt profits earned by DSP Israel’s “Approved Enterprises” and “Beneficiary Enterprises.” The Company has determined that such tax-exempt income will not be distributed as dividends and intends to reinvest the amount of its tax exempt income earned by DSP Israel. Accordingly, no provision for deferred income taxes has been provided on income attributable to DSP Israel’s “Approved Enterprises” and “Beneficiary Enterprises” as such income is essentially permanently reinvested. If DSP Israel’s retained tax-exempt income is distributed, the income would be taxed at the applicable corporate tax rate (currently 10%) as if it had not elected the alternative tax benefits under the Investment Law and an income tax liability of approximately $3,699 would have been incurred as of December 31, 2015. DSP Israel’s income from sources other than the “Approved Enterprises” and “Beneficiary Enterprises” during the benefit period will be subject to tax at the effective standard corporate tax rate in Israel (26.5% for 2015). g. The Law for Encouragement of Industry (Taxation), 1969: DSP Israel has the status of an “industrial company”, as defined by this law. According to this status and by virtue of regulations published thereunder, DSP Israel is entitled to claim a deduction of accelerated depreciation on equipment used in industrial activities, as determined in the regulations issued under the Inflationary Law. The Company is also entitled to amortize a patent or rights to use a patent or intellectual property that are used in the enterprise's development or advancement to deduct issuance expenses for shares listed for trading, and to file consolidated financial statements under certain conditions. h. Israeli tax rates: The rate of the Israeli corporate tax is as follows: 2013 – 25%, and 2014 and 2015 – 26.5%. Tax rate of 25% applies to capital gains arising after January 1, 2003. On January 4, 2016, the Israeli Parliament's Plenum approved by a second and third reading, the Bill for Amending the Income Tax Ordinance (No. 217) (Reduction of Corporate Tax Rate), 2015, which includes a reduction of the corporate tax rate from 26.5% to 25% for 2016. j. The Company has accumulated losses for federal and state tax purposes as of December 31, 2015 of approximately $12,110 and $2,432, respectively, which may be carried forward and offset against future taxable income for a period of fifteen to twenty years from its creation. DSP Israel has accumulated losses for tax purposes as of December 31, 2015, of approximately $18,837 (including research and development expense carry forwards), which may be carried forward and offset against future taxable income for an indefinite period. The Swiss subsidiary has accumulated losses for tax purposes as of December 31, 2015, of approximately $4,279, which may be carried forward and offset against future taxable income for a period of seven years from its creation. As of December 31, 2015, $207,405 of accumulated losses for tax purposes, which related to the Swiss subsidiary, expired. -85- U.S. dollars in thousands, except share and per share data. NOTE 16:- BASIC AND DILUTED LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share: Numerator: Net income .................................................................................... $ 1,562 $ 3,602 $ 2,676 Year ended December 31, 2014 2015 2013 Denominator: Weighted average number of shares of common stock outstanding during the year used to compute basic net earnings per share (in thousands) .............................................................. Incremental shares attributable to exercise of outstanding options, SARs and RSUs (assuming proceeds would be used to purchase treasury stock) (in thousands) ...................................... 21,924 21,968 22,249 1,416 986 657 Weighted average number of shares of common stock used to compute diluted net earnings per share (in thousands) ............... 23,340 22,954 22,906 Basic net earnings per share .......................................................... $ Diluted net earnings per share ....................................................... $ 0.07 $ 0.07 $ 0.16 $ 0.16 $ 0.12 0.12 NOTE 17:- SEGMENT INFORMATION Description of segments: The Company operates under three reportable segments. The Company’s segment information has been prepared in accordance with ASC 280, “Segment Reporting.” Operating segments are defined as components of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. The Company’s CODM is its Chief Executive Officer, who evaluates the Company’s performance and allocates resources based on segment revenues and operating income. The Company’s operating segments are as follows: Home, Office and Mobile. The classification of the Company’s business segments is based on a number of factors that its management uses to evaluate, view and run its business operations, which include, but are not limited to, customer base, homogeneity of products and technology. A description of the types of products provided by each business segment is as follows: Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits targeted for cordless phones sold in retail or supplied by telecommunication service providers, home gateway devices supplied by telecommunication service providers which integrate the DECT/CAT-iq functionality, integrated circuits addressing home automation applications, as well as fixed-mobile convergence solutions. In this segment, (i) revenues from cordless telephony products exceeded 10% of the Company’s total consolidated revenues and amounted to 72%, 79% and 85% of the Company’s total revenues for 2015, 2014 and 2013, respectively, and (ii) revenues from home gateway products exceeded 10% of the Company’s total consolidated revenues and amounted to 10%, 8% and 6% of the Company’s total revenues for 2015, 2014 and 2013, respectively. -86- U.S. dollars in thousands, except share and per share data. Office - Comprehensive solution for Voice-over-IP (VoIP) office products, including office solutions that offer businesses of all sizes low-cost VoIP terminals with converged voice and data applications. Revenues from the Company’s VoIP products represented 15%, 10% and 6% of its total revenues for 2015, 2014 and 2013, respectively. No revenues derived from other products in the office segment exceeded 10% of the Company’s total consolidated revenues for the years 2015, 2014 and 2013. Mobile - Products for the mobile market that provides voice enhancement, always-on and far-end noise elimination targeted for mobile phone and mobile headsets and wearable devices that incorporate the Company’s noise suppression and voice quality enhancement HDClear technology. No revenues were derived from products in the mobile segment exceeded 10% of the Company’s total consolidated revenues for the years 2015, 2014 and 2013. Segment data: The Company derives the results of its business segments directly from its internal management reporting system and by using certain allocation methods. The accounting policies the Company uses to derive business segment results are substantially the same as those the Company uses for consolidation of its financial statements. The CODM measures the performance of each business segment based on several metrics, including earnings from operations. CODM uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. The Company does not allocate to its business segments certain operating expenses, which it manages separately at the corporate level. These unallocated costs include primarily amortization of purchased intangible assets, equity-based compensation expenses, proxy contest related expenses incurred during the second quarter of 2013 and certain corporate governance costs. The Company does not allocate any assets to segments and, therefore, no amount of assets is reported to management and disclosed in the financial information for segments. Selected operating results information for each business segment was as follows for the year ended December 31, 2015, 2014 and 2013: Year ended December 31 Home ................. $ Office ................. $ Mobile ............... $ Total .................. $ 2015 121,714 $ 22,216 $ 341 $ 144,271 $ Revenues 2014 128,690 $ 14,276 $ 70 $ 143,036 $ 2013 142,144 $ 8,849 $ 70 $ 151,063 $ Income (loss) from operations 2014 2015 2013 24,815 $ (4,861) $ (10,308) $ 9,646 $ 23,438 $ (2,805 ) $ (11,983 ) $ 8,650 $ 25,367 (4,656 ) (11,040 ) 9,671 The reconciliation of segment operating results information to the Company’s consolidated financial information was as follows: Income from operations ...................................... $ Unallocated corporate, general and administrative expenses * ............................... Proxy contest related expenses ........................... Equity-based compensation expenses ................. Intangible assets amortization expenses ............. Write–off of expired option related to investment in other company ......................... Financial income, net .......................................... Total consolidated income before taxes .............. $ Year ended December 31, 2015 2014 2013 9,646 $ 8,650 $ (2,156) - (5,092) (1,284) (400) 1,175 1,889 $ (2,161) - (5,359) (1,573) - 1,204 761 $ 9,671 (2,368) (1,403) (4,159) (1,672) - 2,457 2,526 *Includes mainly legal, accounting, board of directors and investors relation expenses. -87- U.S. dollars in thousands, except share and per share data. Major customers and geographic information The following is a summary of operations within geographic areas based on customer locations: Revenue distribution 2015 Year ended December 31, 2014 2013 Hong-Kong ................................................... $ Japan ............................................................. Europe ........................................................... United States ................................................. China ............................................................. Taiwan .......................................................... Other ............................................................. 72,608 $ 26,114 8,464 3,944 10,359 16,902 5,880 79,622 $ 31,261 6,787 4,702 6,568 9,077 5,019 86,090 34,377 7,370 4,342 6,999 7,093 4,792 $ 144,271 $ 143,036 $ 151,063 For a summary of revenues from major customers, please see Note 1. Sales to these customers were primarily related to the Company’s Home reportable segment. The following is a summary of long-lived assets within geographic areas based on the assets’ locations: December 31, 2015 2014 Long-lived assets Europe ................................................................................................ $ Israel .................................................................................................. Other .................................................................................................. 259 $ 2,989 516 $ 3,764 $ 188 2,264 391 2,843 -88- Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the updated 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2015. The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global, an independent registered public accounting firm, who audited and reported on the consolidated financial statements of the company for the year ended December 31, 2015, as stated in their report which is presented in this Annual Report on Form 10-K under Item 8. Item 9B. OTHER INFORMATION. None. -89- PART III Certain information required by Part III of this Annual Report is omitted and will be incorporated by reference herein from our definitive proxy statement pursuant to Regulation 14A in connection with the 2016 Annual Meeting of Stockholders to be held on June 6, 2016. Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information relating to our directors and executive officers will be presented under the captions “Proposal No. 1 – Election of Directors” and “Executive Officers and Directors” in our definitive proxy statement. Such information is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION. Information relating to executive compensation will be presented under the caption “Executive Compensation” in our definitive proxy statement. Such information is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information relating to the security ownership of our common stock by our management and other beneficial owners will be presented under the caption “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement. Such information is incorporated herein by reference. Information relating to our equity compensation plans will be presented under the caption “Equity Compensation Plan Information” in our definitive proxy statement. Such information is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Information relating to certain relationships of our directors and executive officers and related transactions, as well as director independence information, will be presented under the caption “Certain Relationships and Related Transactions” in our definitive proxy statement. Such information is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Information relating to principal accountant fees and services will be presented under the caption “Principal Accountant Fees and Services” in our definitive proxy statement. Such information is incorporated herein by reference. -90- Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. PART IV (a) 1. The following documents have been filed as a part of this Annual Report on Form 10-K. Index to Financial Statements. Description: Report of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements 2. Index to Financial Statement Schedules. The following financial statement schedule and related auditor’s report are filed as part of this Annual Report on Form 10-K: Description: Valuation and Qualifying Accounts Schedule II All other schedules are omitted because they are not applicable or the required information is included in the attached consolidated financial statements or the related notes for the year ended December 31, 2015. -91- List of Exhibits: Exhibit Number 3.1 Description Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 12, 2015, and incorporated herein by reference). 3.2 Amended and Restated Bylaws, effective as of June 22, 2015 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 26, 2015, and incorporated herein by reference). 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 Amended and Restated 1991 Employee and Consultant Stock Plan (filed as Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† Amended and Restated 1993 Director Stock Option Plan (filed as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference). †† Form of Option Agreement for Israeli Directors under the Amended and Restated 1993 Director Stock Option Plan (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference). †† Form of Option Agreement for Non-Israeli Directors under the Amended and Restated 1993 Director Stock Option Plan (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference). †† Amended and Restated 1993 Employee Stock Purchase Plan and form of subscription agreement thereunder (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 10, 2015 and incorporated herein by reference). †† 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). 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, Herzliya 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). Lease, dated September 13, 1998, between DSP Group, Ltd. and Bayside Land Corporation Ltd., relating to the property located on Shenkar Street, Herzliya Pituach, Israel (filed as Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference). Amended and Restated 1998 Non-Officer Employee Stock Option Plan (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† Appendix Agreement, dated May 5, 1999, by and between DSP Group, Ltd. and Bayside Land Corporation Ltd., relating to the property located on Shenkar Street, Herzliya Pituach, Israel (filed as Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference). Non-Exclusive Distribution Agreement between the Registrant and Tomen Electronics Corporation as amended on October 12, 2000 (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference). Amended and Restated 2001 Stock Incentive Plan and form of option agreement thereunder (filed as Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† -92- Exhibit Number 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 10.25 Description Amended and Restated 2003 Israeli Share Incentive Plan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 4, 2011, and incorporated herein by reference) and form of option agreement thereunder (filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† Agreement, dated March 5, 2003, between DSP Group, Ltd. and The Gav-Yam Real Estate Company Ltd., relating to the property located on Shenkar Street, Herzliya Pituach, Israel (filed as Exhibit 10.33 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, and incorporated herein by reference). Form of Option Agreement under DSP Group, Inc.’s 2001 Stock Incentive Plan for Eliyahu Ayalon (filed as Exhibit 10.41 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† Manufacturing Capacity Agreement, effective as of July 1, 2004, by and among DSP Group, Inc., DSP Group, Ltd, and Taiwan Semiconductor Manufacturing Company Ltd (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference) (confidential treatment has been granted for portions of this exhibit). Form of Non-Qualified Stock Option Agreement Providing for the Grant of Options as a Material Inducement of Employment (filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 filed on July 21, 2005, and incorporated herein by reference). †† Form of Stock Appreciation Right Agreement for Executive Officers pursuant to the Amended and Restated 2003 Israeli Share Incentive Plan (filed as Exhibit 99.2 to Registrant’s Current Report on 8-K filed on April 11, 2006, and incorporated herein by reference). †† Intellectual Property Transfer and License Agreement, dated September 4, 2007, by and among DSP Group, Inc., DSP Group Ltd. and NXP, B.V. (filed as Exhibit 10.40 to Registrant’s Quarterly Report on 10-Q for the quarter ended September 30, 2007, and incorporated herein by reference) (confidential treatment has been granted for portions of this exhibit). Intellectual Property Library Services and R&D Agreement, dated September 4, 2007, by and among DSP Group, Inc., DSP Group Ltd. and NXP, B.V. (filed as Exhibit 10.41 to Registrant’s Quarterly Report on 10-Q for the quarter ended September 30, 2007, and incorporated herein by reference) (confidential treatment has been granted for portions of this exhibit). Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, effective June 25, 2009 (filed as Exhibit 10.32 to Registrant’s Annual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, effective January 31, 2011 (filed as Exhibit 10.33 to Registrant’s Annual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, as amended, effective as of May 16, 2011(filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed on May 20, 2011, and incorporated herein by reference). †† Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective June 9, 2002 (filed as Exhibit 10.34 to Registrant’s Annual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† Amendment to Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective January 31, 2011 (filed as Exhibit 10.35 the year ended December 31, 2010, and incorporated herein by reference). †† to Registrant’s Annual Report on 10-K for -93- Exhibit Number 10.26 10.27 10.28 10.29 Description Amendment to Employment Agreement by and between DSP Group, Ltd. and Dror Levy, as amended, effective as of May 16, 2011 (filed as Exhibit 10.3 to Registrant’s Current Report on 8-K filed on May 20, 2011, and incorporated herein by reference). †† Employment Agreement by and between DSP Group, Ltd. and David Dahan, effective February 1, 2012 (filed as Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference). †† Amendment to Employment Agreement by and among DSP Group, Inc., DSP Group, Ltd. and Ofer Elyakim, as amended, effective as of November 5, 2012(filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on November 9, 2012, and incorporated herein by reference). †† Amendment to Employment Agreement by and among DSP Group, Inc., DSP Group, Ltd. and Dror Levy, as amended, effective as of November 5, 2012 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed on November 9, 2012, and incorporated herein by reference). †† 10.30 DSP Group, Inc. Amended and Restated 2012 Stock Incentive Plan. (Filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on May 26, 2015, and incorporated herein by reference) †† 10.31 Amendment to Employment Agreement of Ofer Elyakim, effective March 5, 2013 (filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on March 8, 2013, and incorporated herein by reference). †† 10.32 Amendment to Employment Agreement of Dror Levy, effective March 5, 2013 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed on March 8, 2013, and incorporated herein by reference). †† 10.33 Amendment to Employment Agreement of David Dahan, effective March 5, 2013 (filed as Exhibit 10.3 to Registrant’s Current Report on 8-K filed on March 8, 2013, and incorporated herein by reference). †† 10.34 Form of Restricted Stock Unit Agreement for Israeli Resident Grantees under the 2012 Stock Incentive Plan (filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on August 21, 2013, and incorporated herein by reference). †† 10.35 Amendment to Employment Agreement of Ofer Elyakim, effective October 31, 2013 (filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on November 1, 2013, and incorporated herein by reference). †† 10.36 Amendment to Employment Agreement of Dror Levy, effective October 31, 2013 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed on November 1, 2013, and incorporated herein by reference). †† 10.37 10.38 10.39 10.40 Form of Restricted Stock Unit Agreement for Members of the Board of Directors under the 2012 Stock Incentive Plan. (filed as Exhibit 10.41 to Registrant's Annual Report on Form 10-K filed on March 18, 2014 and incorporated herein by reference). †† Form of Restricted Stock Unit Agreement for Members of the Board of Directors Who Are Israeli Residents under the 2012 Stock Incentive Plan. (filed as Exhibit 10.42 to Registrant's Annual Report on Form 10-K filed on March 18, 2014 and incorporated herein by reference). †† Amended and Restated Director Equity Sub-Plan under the 2012 Equity Incentive Plan. (filed as Exhibit 10.43 to Registrant's Annual Report on Form 10-K filed on March 18, 2014 and incorporated herein by reference). †† 2014 Performance-Based Bonus Plan applicable for the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer of DSP Group, Inc. the Company (terms set forth in the Registrant’s Current Report on Form 8-K filed on April 4, 2014, and incorporated herein by reference). 21.1 Subsidiaries of DSP Group, Inc.* -94- Exhibit Number 23.1 Description Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Registered Public Accounting Firm.* 24.1 Power of Attorney (See signature page of this Annual Report on Form 10-K).* 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.* 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.* 32.1 Section 1350 Certification of Chief Executive Officer.* 32.2 Section 1350 Certification of Chief Financial Officer.* XBRL Instance Document 101.INS 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Labels Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document †† Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. * Filed herewith. -95- 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. SIGNATURES DSP GROUP, INC. By: /s/ Ofer Elyakim Ofer Elyakim Chief Executive Officer (Principal Executive Officer) Power of Attorney KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ofer Elyakim and Dror Levy or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature /s/ Patrick Tanguy Patrick Tanguy Chairman of the Board Title Date March 15, 2016 /s/ Ofer Elyakim Ofer Elyakim Chief Executive Officer (Principal Executive Officer) and Director March 15, 2016 /s/ Dror Levy Dror Levy Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) March 15, 2016 /s/ Thomas A. Lacey Thomas A. Lacey /s/ Reuven Regev Reuven Regev /s/ Norman J. Rice III Norman J. Rice III /s/ Gabi Seligsohn Gabi Seligsohn /s/ Yair Seroussi Yair Seroussi /s/ Norman Taffe Norman Taffe /s/ Kenneth H. Traub Kenneth H. Traub Director Director Director Director Director Director Director -96- March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 Schedule II DSP GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands) Description Year ended December 31, 2013: Allowance for doubtful accounts Sales returns reserve ....................................................................... Year ended December 31, 2014: Allowance for doubtful accounts Sales returns reserve ....................................................................... Year ended December 31, 2015: Allowance for doubtful accounts Sales returns reserve ....................................................................... Balance at Beginning of Period Charged to (deducted from) Costs and Expenses Balance at End of Period - - - - - - - - - -97- Corporate Directory Management Ofer Elyakim Chief Executive Officer Dror Levy Corporate Vice President of Finance and Chief Financial Officer Lior Blanka Corporate Vice President and Chief Technology Officer Alex Sin Corporate Vice President of Sales Ran Klier Corporate Vice President of Sales, Marketing and BizDev Europe and Americas Tali Chen Corporate Vice President, Corporate Development Doron Koren Corporate Vice President and Platform Division Manager Dima Friedman Corporate Vice President of Operations Dotan Sokolov Corporate Vice President and IC Division Manager Jan Abelev Corporate Vice President of Product Marketing Avi Keren Corporate Vice President and HDMobile Division Manager Yosi Brosh Corporate Vice President of Sales & Marketing Korea, Taiwan Directors Patrick Tanguy Chairman of the Board Managing Director, Head of Operational Support, Wendel Ofer Elyakim Chief Executive Officer Tom Lacey Chief Executive Officer and Board Member, Tessera Dr. Reuven Regev Chairman & Chief Executive Officer, Topscan Ltd. Norman J. Rice III Executive Vice President of Global Marketing, Corporate Development, and the Stadium & Venue Business Unit, Extreme Networks Gabi Seligsohn CEO, Kornit Digital Ltd. Yair Seroussi Chairman of the Board of Directors, Bank Hapoalim B.M Norm P. Taffe VP, GM Power Plant Products and Solutions, SunPower Corporation Kenneth H. Traub Managing Partner, Raging Capital Management Independent Auditors Kost, Forer Gabbay & Kassierer A member of Ernst & Young Global, Tel Aviv, Israel General Legal Counsel Morrison & Foerster LLP, San-Francisco, California Registrar and Transfer Agent American Stock Transfer and Trust Company New York, NY Annual Meeting The annual meeting of stockholders will be held on June 6, 2016 at 8:30am local time New York Marriott East Side 525 Lexington Avenue New York, NY 10017 | Tel: +1 212.715 4000 Fax: +1 212.980 6175 www.nymarriotteastside.com About DSP Group DSP Group®, Inc. (NASDAQ: DSPG) is a leading global provider of wireless chipset solutions for converged communications. Delivering semiconductor system solutions with software and hardware reference designs, DSP Group enables OEMs/ODMs, consumer electronics (CE) manufacturers and service providers to cost-effectively develop new revenue-generating products with fast time to market.At the forefront of semiconductor innovation and operational excellence for over two decades, DSP Group provides a broad portfolio of wireless chipsets integrating DECT/CAT-iq, ULE, Wi-Fi, PSTN, HDClear™, video and VoIP technologies.DSP Group enables converged voice, audio, video and data connectivity across diverse mobile, consumer and enterprise products – from mobile devices, connected multimedia screens, and home automation & security to cordless phones, VoIP systems, and home gateways. Leveraging industry-leading experience and expertise, DSP Group partners with CE manufacturers and service providers to shape the future of converged communications at home, office and on the go. For more information, visit www.dspg.com. DSP Group, Inc. 161 S San Antonio Rd, Suite 10, Los Altos, CA 94022, USA Tel: +1(408) 986-4300 Fax: +1(408) 986-4323 www.dspg.com Copyright © 2016, DSP Group, Inc. All rights reserved. DSP Group, Inc. and DSP Group Logo are trademarks of DSP Group, Inc. Other third party trademarks are property of their respective owners. All product information, dates and figures are not warranted as accurate or complete, and may be revised based on further information without notice. For more information on our products and services, visit our website at: www.dspg.com or contact us at: ir@dspg.com

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