Dear Fellow Shareholders,
We are writing to let you know about an important development that is likely to have a significant impact upon DSP Group and its future.
Over the past twelve months, your board and management have been actively taking steps to enhance shareholder value. We have restructured the company, cut expenses, resumed non-GAAP profitability, generated $10 million in cash flow from operations, continued our stock buyback program (which returned $8 million to shareholders during 2012) and focused on new growth initiatives that fully leverage the company's core strengths in voice processing and short range wireless communications.
These actions, which were unanimously supported by your board of directors, have resulted in significantly improved operating results and have positioned the company for long-term growth and success. These measures and results have also been recognized by the investment community, as DSP Group has seen its stock price increase by almost 20% over the last twelve months and almost 30% year-to-date, outperforming the Russell 2000 Index, PHLX Semiconductor Index and the S&P Information Technology Index, as well as the stocks of well-known semiconductor companies as Texas Instruments and Broadcom.Despite this progress, Starboard Value, a New York-based investment advisor which owns approximately 10% of the company's shares, has threatened the company with a proxy fight for control of the board unless its demands are met. While DSP Group's board and management are doing everything possible to avoid a costly and distracting proxy contest, the board does not believe that Starboard's demands are in the best interests of the company or its shareholders, customers, or employees. As you may be aware, on April 3, 2012 we entered into an agreement with Starboard. This agreement allowed Starboard to nominate two directors, while DSP Group agreed to the resignation of a then-serving director. Starboard also agreed to a standstill clause that expires 90 days prior to the anniversary of 2012 annual meeting of shareholders ( i.e. mid February 2013). Now that the standstill period has expired, Starboard has made demands, which if accepted could effectively give Starboard control of the company, despite Starboard's ownership of only approximately 10% of the company's stock. Even though Starboard already has two nominees on your board, Starboard is demanding extra seats on the board, significant representation on all board committees, an effective majority on the compensation committee, which would include half Starboard nominees and a Starboard chairman, as well as the formation of a new strategic committee, which would also include half Starboard nominees and a Starboard chairman. We are confident that our current board is highly experienced, diversified and qualified and that there is no need to change the composition of our board.
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