SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended: September 30, 2002March 31, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number:file number: 000-49842
PARTHUSCEVA, INC.ParthusCeva, Inc.
Exact Name of Registrant as Specified in Its Charter
Delaware | ||
(State or Other Jurisdiction of Incorporation or Organization) | 77-0556376 (I.R.S. Employer Identification No.) |
2033 Gateway Place, Suite 150, San Jose, California 95110-1002
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (408) 514-2900
Indicate by check whether the registrant: (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ No x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 18,040,73818,079,119 shares of common stock, $0.001 par value, as of December 13, 2002
Page | ||||||
PART I. | 4 | |||||
Item 1. | 4 | |||||
Interim Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 | 4 | |||||
5 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
Item 2. | Management’s Discussion and Analysis Of Financial Condition and Results of Operations | 15 | ||||
Item 3. | 33 | |||||
Item 4. | 33 | |||||
PART II. | 34 | |||||
Item 6. | 34 | |||||
35 | ||||||
36 |
CERTIFICATIONSFORWARD-LOOKING STATEMENTS
This Quarterly Reportquarterly report includes forward-looking statements that are subject to a number of risks and uncertainties. All statements, other than statements of historical facts, included in this quarterly report regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “will”, “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, and similar expressions are intended to identify forward-looking statements, although not all forward- looking statements in this report contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undue reliance on Form 10-Q containsour forward-looking statements. Our forward-looking statements do not reflect the financialpotential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic alliances. Our actual results could differ materially from those anticipated in these forward-looking statements and Management’sas a result of various factors, including the risks described in “Management’s Discussion and Analysis forof Financial Condition and Results of Operations—Factors That Could Affect Our Operating Results” and elsewhere in this quarterly report. We do not assume any obligations to update any of the DSP cores licensing businessforward-looking statements we make.
*****
ParthusCeva was formed through the combination of ParthusCeva for the quarter ended September 30, 2002. This business was part of DSP Group, Inc. until November 1, 2002, on which date (1) DSP Group contributed this business toParthus Technologies plc (‘Parthus’) and ParthusCeva (formerly known as Ceva, Inc.), which was then a wholly owned subsidiary of DSP Group; (2) DSP Group distributed all on November 1, 2002.Unless otherwise indicated, the financial information in this quarterly report includes the results of the existing common stockbusiness of ParthusCeva to the stockholders of DSP Group; and (3) ParthusCeva immediately thereafter combined with Parthus Technologies plc. These transactions are described in detail in the Report on Form 8-K of ParthusCeva dated November 1, 2002, as amended, as well as the Registration Statement on Form S-1 of ParthusCeva filed on October 30, 2002. This discussion assumes that the DSP cores licensing business had operated as a stand-alone entityonly for the periods presented. This discussion does not give effect tofollowing the combination of this business with Parthus.on November 1, 2002.
U.S. dollars in thousands,
December 31, 2001 | September 30, 2002 | |||||
Note 1c | (unaudited) | |||||
ASSETS | ||||||
CURRENT ASSETS: | ||||||
Trade receivables | $ | 8,115 | $ | 8,181 | ||
Other accounts receivable and prepaid expenses | 319 | 3,104 | ||||
Deferred income taxes | 240 | 240 | ||||
Inventories | 50 | 60 | ||||
Total current assets | 8,724 | 11,585 | ||||
LONG-TERM INVESTMENT: | ||||||
Severance pay fund | 1,084 | 1,234 | ||||
Long-term lease deposits | 190 | 167 | ||||
1,274 | 1,401 | |||||
PROPERTY AND EQUIPMENT, NET | 2,199 | 2,336 | ||||
Total assets | $ | 12,197 | $ | 15,322 | ||
LIABILITIES, STOCKHOLDERS’ EQUITY AND PARENT COMPANY INVESTMENT | ||||||
CURRENT LIABILITIES: | ||||||
Trade payables | $ | 707 | $ | 935 | ||
Employees and payroll accruals | 2,006 | 1,274 | ||||
Income tax payable | 3,496 | 1,201 | ||||
Accrued expenses | 519 | 543 | ||||
Deferred revenues | — | 245 | ||||
Total current liabilities | 6,728 | 4,198 | ||||
ACCRUED SEVERANCE PAY | 1,124 | 1,256 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||
STOCKHOLDERS’ EQUITY AND PARENT COMPANY INVESTMENT: | ||||||
Common Stock: | ||||||
$ 0.001 par value: 100,000,000 shares authorized at December 31, 2001, and September 30, 2002; 20,000,000 shares issued and outstanding at December 31, 2001 and September 30, 2002 | 20 | 20 | ||||
Parent Company’s investment | 4,325 | 9,848 | ||||
Retained earnings | — | — | ||||
Total stockholders’ equity and parent Company investment | 4,345 | 9,868 | ||||
Total liabilities, stockholders’ equity and parent company investment | $ | 12,197 | $ | 15,322 | ||
March 31, 2003 | December 31, 20021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 68,519 |
| $ | 73,810 |
| ||
Trade receivables, net |
| 9,281 |
|
| 6,471 |
| ||
Other accounts receivable and prepaid expenses |
| 1,513 |
|
| 1,748 |
| ||
Inventories, net |
| 296 |
|
| 168 |
| ||
Total current assets |
| 79,609 |
|
| 82,197 |
| ||
Long-term investments: | ||||||||
Severance pay fund |
| 1,311 |
|
| 1,152 |
| ||
Investment in other company |
| 1,350 |
|
| 1,350 |
| ||
| 2,661 |
|
| 2,502 |
| |||
Property and equipment, net |
| 8,264 |
|
| 6,593 |
| ||
Goodwill |
| 38,398 |
|
| 38,398 |
| ||
Other intangible assets, net |
| 5,208 |
|
| 5,492 |
| ||
Total assets | $ | 134,140 |
| $ | 135,182 |
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Trade payables | $ | 5,334 |
| $ | 2,491 |
| ||
Accrued expenses and other payables |
| 16,309 |
|
| 18,982 |
| ||
Taxes payable |
| 1,233 |
|
| 1,291 |
| ||
Deferred revenues |
| 1,108 |
|
| 1,115 |
| ||
Total current liabilities |
| 23,984 |
|
| 23,879 |
| ||
Accrued severance pay |
| 1,321 |
|
| 1,231 |
| ||
Stockholders’ equity: | ||||||||
Common Stock: | ||||||||
$ 0.001 par value: 100,000,000 shares authorized at December 31, 2002, and March 31, 2003; 18,053,507 and 18,079,119 shares issued and outstanding at December 31, 2002 and March 31, 2003 |
| 18 |
|
| 18 |
| ||
Additional paid in capital |
| 134,132 |
|
| 134,051 |
| ||
Accumulated deficit |
| (25,315 | ) |
| (23,997 | ) | ||
Total stockholders’ equity |
| 108,835 |
|
| 110,072 |
| ||
Total liabilities and stockholders’ equity | $ | 134,140 |
| $ | 135,182 |
| ||
The accompanying notes are an integral part of the interim consolidated financial statements.
1 | The December 31, 2002 balance sheet information has been derived from the December 31, 2002 audited consolidated financial statements of the Company. |
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
U.S. dollars in thousands, except per share data
Nine months ended September 30, | Three months ended September 30, | |||||||||||
2001 | 2002 | 2001 | 2002 | |||||||||
(unaudited) | ||||||||||||
Revenues: | ||||||||||||
License and royalties | $ | 17,583 | $ | 10,915 | $ | 6,917 | $ | 3,921 | ||||
Technical support, maintenance and other | 3,217 | 2,619 | 895 | 931 | ||||||||
Total revenues | 20,800 | 13,534 | 7,812 | 4,852 | ||||||||
Cost of revenues | 951 | 938 | 344 | 322 | ||||||||
Gross profit | 19,849 | 12,596 | 7,468 | 4,530 | ||||||||
Operating expenses: | ||||||||||||
Research and development, net | 3,979 | 4,624 | 1,291 | 1,408 | ||||||||
Sales and marketing | 1,984 | 2,227 | 654 | 734 | ||||||||
General and administrative | 2,163 | 2,367 | 809 | 1,013 | ||||||||
Total operating expenses | 8,126 | 9,218 | 2,754 | 3,155 | ||||||||
Operating income | 11,723 | 3,378 | 4,714 | 1,375 | ||||||||
Financial income, net | 346 | 75 | 125 | 25 | ||||||||
Income before taxes on income | 12,069 | 3,453 | 4,839 | 1,400 | ||||||||
Taxes on income | 2,802 | 961 | 1,679 | 419 | ||||||||
Net income | $ | 9,267 | $ | 2,492 | $ | 3,160 | $ | 981 | ||||
Three months ended March 31, | |||||||
2003 | 2002 | ||||||
Revenues: | |||||||
Licensing and royalties | $ | 6,981 |
| $ | 3,213 | ||
Other revenue |
| 1,862 |
|
| 883 | ||
Total revenues |
| 8,843 |
|
| 4,096 | ||
Cost of revenues |
| 1,638 |
|
| 311 | ||
Gross profit |
| 7,205 |
|
| 3,785 | ||
Operating expenses: | |||||||
Research and development, net |
| 4,049 |
|
| 1,650 | ||
Sales and marketing |
| 1,373 |
|
| 703 | ||
General and administrative |
| 1,478 |
|
| 693 | ||
Amortization of intangible assets |
| 284 |
|
| — | ||
Reorganization and severance charge |
| 1,380 |
|
| — | ||
Total operating expenses |
| 8,564 |
|
| 3,046 | ||
Operating income (loss) |
| (1,359 | ) |
| 739 | ||
Financial income, net |
| 240 |
|
| 18 | ||
Currency translation differences |
| (199 | ) |
| — | ||
Income (loss) before taxes on income |
| (1,318 | ) |
| 757 | ||
Taxes on income |
| — |
|
| 242 | ||
Net income (loss) |
| (1,318 | ) |
| 515 | ||
Basic and diluted net earnings (loss) per share | $ | (0.073 | ) | $ | 0.057 | ||
Weighted average number of Common Stock used in computation of basic and diluted net earnings (loss) per share |
| 18,070 |
|
| 9,041 | ||
The accompanying notes are an integral part of the interim consolidated financial statements.
AND PARENTAN RELATED COMPANY INVESTMENT
U.S. dollars in thousands (except share data)
Common stock | Parent company investment | Retained earnings | Total stockholders’ equity and parent company investment | |||||||||||||
Shares | Amount | |||||||||||||||
Balance as of January 1, 2001 (Note 1c) | 20,000,000 | $ | 20 | $ | 2,000 | $ | — | $ | 2,020 | |||||||
Net income (unaudited) | — | — | — | 9,267 | 9,267 | |||||||||||
Capital return to Parent Company (unaudited) | — | — | — | (9,267 | ) | (9,267 | ) | |||||||||
Contribution from Parent Company (unaudited) | — | — | 3,506 | — | 3,506 | |||||||||||
Balance as of September 30, 2001 (unaudited) | 20,000,000 | $ | 20 | $ | 5,506 | $ | — | $ | 5,526 | |||||||
Common stock | Parent company investment | Retained earnings | Total stockholders’ equity and parent company investment | |||||||||||||
Shares | Amount | |||||||||||||||
Balance as of January 1, 2002 (Note 1c) | 20,000,000 | $ | 20 | $ | 4,325 | $ | — | $ | 4,345 | |||||||
Net income (unaudited) | — | — | — | 2,492 | 2,492 | |||||||||||
Capital return to Parent Company (unaudited) | — | — | — | (2,492 | ) | (2,492 | ) | |||||||||
Contribution from Parent Company (unaudited) | — | — | 5,523 | — | 5,523 | |||||||||||
Balance as of September 30, 2002 (unaudited) | 20,000,000 | $ | 20 | $ | 9,848 | $ | — | $ | 9,868 | |||||||
Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ equity | ||||||||||||||
Shares | Amount | ||||||||||||||||
Balance as of January 1, 2003 (Note 1c) | 18,053,507 | $ | 18 |
| $ | 134,051 | $ | (23,997 | ) | $ | 110,072 |
| |||||
Net loss | — |
| — |
|
| — |
| (1,318 | ) |
| (1,318 | ) | |||||
Issuance of Common Stock upon exercise of stock options | 7,388 |
| — | (*) |
| 16 |
| — |
|
| 16 |
| |||||
Issuance of Common Stock upon purchase of ESPP shares | 18,224 |
| — | (*) |
| 65 |
| — |
|
| 65 |
| |||||
Balance as of March 31, 2003 | 18,079,119 | $ | 18 |
| $ | 134,132 | $ | (25,315 | ) | $ | 108,835 |
| |||||
(*) | Amount less than $1. |
Common stock | Related Company investment | Retained earnings | Total stockholders’ equity and Related Company investment | |||||||||||||
Shares | Amount | |||||||||||||||
Balance as of January 1, 2002 (Note 1c) | 20,000,000 | $ | 20 | $ | 4,325 | $ | — |
| $ | 4,345 |
| |||||
Net income | — |
| — |
| — |
| 515 |
|
| 515 |
| |||||
Capital return to Related Company | — |
| — |
| — |
| (515 | ) |
| (515 | ) | |||||
Contribution from Related Company | — |
| — |
| 3,508 |
| — |
|
| 3,508 |
| |||||
Balance as of March 31, 2002 | 20,000,000 | $ | 20 | $ | 7,833 | $ | — |
| $ | 7,853 |
| |||||
The accompanying notes are an integral part of the interim consolidated financial statements.
U.S. dollars in thousands
Nine months ended September 30, | ||||||||
2001 | 2002 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | 9,267 | 2,492 | ||||||
Adjustments required to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 477 | 697 | ||||||
Increase in trade receivables | (2,468 | ) | (66 | ) | ||||
Increase in other accounts receivable and prepaid expenses | (68 | ) | (2,785 | ) | ||||
Increase in inventories | (9 | ) | — | |||||
Increase in deferred income taxes | (69 | ) | (10 | ) | ||||
Increase in trade payables | 194 | 228 | ||||||
Increase in deferred revenues | 56 | 245 | ||||||
Increase (decrease) in employees and payroll accruals | 120 | (732 | ) | |||||
Increase (decrease) in accrued expenses | (56 | ) | 24 | |||||
Decrease in income tax payable | (636 | ) | (2,295 | ) | ||||
Increase (decrease) in accrued severance pay, net | 39 | (18 | ) | |||||
Net cash provided by (used in) operating activities | 6,847 | (2,220 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (986 | ) | (834 | ) | ||||
Investment in long term lease deposits, net | (100 | ) | 23 | |||||
Net cash used in investing activities | (1,086 | ) | (811 | ) | ||||
Cash flows from financing activities: | ||||||||
Capital return to Parent Company | (9,267 | ) | (2,492 | ) | ||||
Contribution from Parent Company | 3,506 | 5,523 | ||||||
Net cash provided by (used in) financing activities | (5,761 | ) | 3,031 | |||||
Changes in cash and cash equivalents | — | — | ||||||
Cash and cash equivalents at the beginning of the year | — | — | ||||||
Cash and cash equivalents at the end of the year | $ | — | $ | — | ||||
Three months ended | ||||||||
March 31, | ||||||||
2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) |
| (1,318 | ) |
| 515 |
| ||
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation |
| 896 |
|
| 189 |
| ||
Amortization of intangible assets |
| 284 |
|
| — |
| ||
Loss on disposal of property and equipment |
| 4 |
|
| — |
| ||
Currency translation differences |
| 100 |
|
| — |
| ||
Decrease (increase) in trade receivables |
| (2,795 | ) |
| 36 |
| ||
Decrease (increase) in other accounts receivable and prepaid expenses |
| 253 |
|
| (91 | ) | ||
Increase in inventories |
| (128 | ) |
| (59 | ) | ||
Increase in trade payables |
| 219 |
|
| 434 |
| ||
Increase (decrease) in deferred revenues |
| (7 | ) |
| 93 |
| ||
Increase (decrease) in accrued expenses and other payables |
| (2,741 | ) |
| 69 |
| ||
Decrease in taxes payable |
| (60 | ) |
| (3,254 | ) | ||
Decrease in accrued severance pay, net |
| (69 | ) |
| (869 | ) | ||
Net cash (used in) operating activities |
| (5,362 | ) |
| (2,937 | ) | ||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment |
| (86 | ) |
| (56 | ) | ||
Proceeds from sale of property and equipment |
| 38 |
|
| — |
| ||
Net cash used in investing activities |
| (48 | ) |
| (56 | ) | ||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of Common Stock upon exercise of stock options |
| 16 |
| |||||
Proceeds from issuance of Common Stock upon purchase of ESPP shares |
| 65 |
| |||||
Contribution from Related Company |
| — |
|
| 2,993 |
| ||
Net cash provided by financing activities |
| 81 |
|
| 2,993 |
| ||
Effect of exchange rate movements on cash |
| 38 |
|
| — |
| ||
Changes in cash and cash equivalents |
| (5,291 | ) |
| — |
| ||
Cash and cash equivalents at the beginning of the period |
| 73,810 |
|
| — |
| ||
Cash and cash equivalents at the end of the year period | $ | 68,519 |
| $ | — |
| ||
The accompanying notes are an integral part of the interim consolidated financial statements.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands) NOTE 1:- GENERAL Background: ParthusCeva, Inc. (formerly Ceva, Inc) (the “Company”) was a wholly-owned subsidiary of DSPG, Inc. (“DSPG”) until November 1, 2002. On November 1, 2002, DSPG, the Company and Parthus Technologies plc (“Parthus”) finalized the terms of the combination agreement dated April 4, 2002 (the “Combination Agreement”) pursuant to which the Company and Parthus agreed to effect a combination of their businesses. DSPG contributed the DSP cores licensing business and operations and the related assets and liabilities of such business and operations to the Company (the “Separation”); DSPG then spun-off the Company by distributing 9,040,851 shares of Common Stock of the Company to the existing stockholders of DSPG on a one-for-three basis (one share of the Company Common Stock for every three shares of DSPG Common Stock held); Parthus was acquired by the Company from the existing shareholders of Parthus in exchange for the issuance of 8,998,887 new shares of Common Stock of the Company (the “Combination”). The combined company was renamed ParthusCeva, Inc. (“ParthusCeva”). The Company was incorporated in Delaware on November 22, 1999. The Company had no business or operations prior to the transfer of the DSP cores licensing business and operations from DSPG. These financial statements give effect to the transfer by DSPG of the DSP cores licensing business and operations and the related assets and liabilities of such businesses to the Company for all periods presented and include the results of Parthus subsequent to the Combination on November 1, 2002. ParthusCeva licenses to semiconductor companies and electronic equipment manufacturers (also known as original equipment manufacturers, or OEMs) complete, integrated intellectual property (IP) solutions that enable a wide variety of electronic devices. The Company’s programmable digital signal processing (DSP) cores and application-level IP platforms power handheld wireless devices, global positioning system (GPS) devices, consumer audio products, automotive applications and a range of other consumer products. NOTE 2:- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation: The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial | ||||
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(U.S. dollars in thousands)
NOTE 2:- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, reference is made to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.
The consolidated financial statements incorporate the financial statements of the Company and all of its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.
For periods prior to November 1, 2002, the Company’s financial statements present the financial position, results of operations and cash flows of the licensing business and operations of DSPG, which have been carved out from the financial statements of DSPG using the historical results of operations and historical bases of the assets and liabilities of the DSPG business that it comprises. The consolidated financial statements reflect the assets, liabilities, results of operations, changes in stockholders’ equity and related company investment, and cash flows (the “Company’s Business”) as if the Company and its subsidiaries had been a separate entity for the periods presented.
Changes in related company investment represent the DSPG contribution of its net investment after giving effect to the net income of the Company plus net cash transfers to or from DSPG. Based on the Separation Agreement, DSPG and the Company jointly agreed the balance on the net investment account as of November 1, 2002 was $796.
The Company began accumulating its retained earnings on November 1, 2002, the date on which DSPG transferred to the Company all of the assets and liabilities relating to the Company’s Business.
The transfer of assets, liabilities and operations of the Company’s Business from DSPG is a reorganization of entities under common control and has been accounted for in a manner similar to a pooling of interests. Accordingly, the financial statements of the Company have been restated to include the Company’s Business as if it had always been operated as a separate entity.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(U.S. dollars in thousands)
NOTE 2:- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
The Company’s consolidated financial statements for the period prior to 1 November 2002 include:
(1) | ||||
(2) | ||||
(3) | ||||
(4) | Payroll and related expenses, such as vacation, bonuses and compensation expenses, relating to the Company’s sales and marketing and research and development activities were attributed on a specific identification basis. Depreciation expenses were attributed based on the specific fixed assets attributed to the Company. General and administrative expenses, including corporate and officers’ salaries and related expenses, were attributed to the Company based on a weighted ratio composed of the percentage of time that |
(5) | Interest income shown in the consolidated financial statements prior to the Combination reflects the interest income associated with the aggregate |
(6) | All of the Company’s net income recorded during the |
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(U.S. dollars in thousands)
NOTE 2:- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Management believes that the foregoing allocations were made on a reasonable basis and would not have been materially different if the Company had operated as a stand-alone entity for all periods presented; however, the allocations of costs and expenses do not necessarily indicate the costs that would have been or will be incurred by the Company on a stand-alone basis.
The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2002, contained in the Company’s Registration Statement on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003 (File No. 000-49842), have been applied consistently in these financial statements.
NOTE 3:- GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA
a. | Summary information about geographic areas: |
Nine months ended September 30, | ||||||
2001 | 2002 | |||||
(Unaudited) | ||||||
Revenues based on customer location: | ||||||
United States | $ | 8,481 | $ | 4,934 | ||
Japan | 2,670 | 881 | ||||
Europe | 6,385 | 3,094 | ||||
Asia (Excluding Japan and Israel) | 3,229 | 2,722 | ||||
Israel | 35 | 1,903 | ||||
$ | 20,800 | $ | 13,534 | |||
September 30, | ||||||
2001 | 2002 | |||||
(Unaudited) | ||||||
Long-lived assets by geographical region | ||||||
United States | $ | 45 | $ | 33 | ||
Israel | 2,110 | 2,363 | ||||
Other | 63 | 107 | ||||
$ | 2,218 | $ | 2,503 | |||
The Company manages its business on a basis of one industry segment, licensing to semiconductor companies and electronic equipment manufacturers complete, integrated intellectual property solutions that enable a wide variety of electronic devices (see Note 1. for a brief description of the Company’s business) and follows the requirements of Statement of Financial Accounting Standard No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”).
The following is a summary of operations within geographic areas:
Three months ended March 31, | ||||||
2003 | 2002 | |||||
Revenues based on customer location: | ||||||
United States | $ | 5,574 | $ | 1,312 | ||
Europe, Middle east and Africa |
| 2,072 |
| 2,170 | ||
Asia |
| 1,197 |
| 614 | ||
$ | 8,843 | $ | 4,096 | |||
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(U.S. dollars in thousands)
NOTE 4:3:- GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA (cont.)
Major customer data as a percentage of total revenues:
The following table sets forth the customers that represented 10% or more of the Company’s net revenue in each of the periods set forth below.
| ||||||
| 2002 | |||||
Customer A | 22.6 | % | — | |||
Customer B | 10.4 | % | — | |||
Customer C | — | 29.3 | % | |||
Customer D | — | 14.4 | % | |||
Customer E | — | 12.7 | % | |||
Customer F | — | 10.4 | % | |||
Customer G | — | 10.0 | % |
NOTE 4:- NET INCOME (LOSS) PER COMMON STOCK
Basic net income (loss) per share is computed based on the weighted average number of shares of Common Stock outstanding during each period. Diluted net income (loss) per share is computed based on the weighted average number of shares of Common Stock outstanding during each period, plus dilutive potential shares of Common Stock considered outstanding during the period, in accordance with Statement of Financial Standard No. 128, “Earnings Per Share”. All outstanding stock options were granted in 2002 and have been excluded from the calculation of the diluted net loss per common share because the effect of all such securities was anti-dilutive.
Three months ended March 31, | |||||||
2003 | 2002 | ||||||
Net income (loss) | $ | (1,318 | ) | $ | 515 | ||
Basic and diluted net income (loss) per share | $ | (0.073 | ) | $ | 0.057 | ||
Weighted average number of shares of Common Stock used in computation of basic and diluted net income (loss) per share |
| 18,070 |
|
| 9,041 | ||
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(U.S. dollars in thousands)
NOTE 5:- STOCK BASED COMPENSATION PLANS
We issue stock options to our employees and directors and provide employees the right to purchase our stock pursuant to approved stock option and employee stock purchase programs. We account for our stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees and related interpretations. No stock-based employee compensation cost is reflected in net income for the three months ended March 31, 2003 as all options granted under these plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. There were no options outstanding in the three months ended March 31, 2002.
Under SFAS No. 123, as amended by SFAS No. 148: pro forma information regarding net income (loss) and net earnings (loss) per share is required, and has been determined as if ParthusCeva had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Schloles option-pricing model with the following weighted-average assumptions:
Three Months ended March 31, | |||||||
| |||||||
2002 | |||||||
Dividend yield | 0 | % | — | ||||
Expected volatility | 80 | % | — | ||||
Risk-free interest | 2 | % | — | ||||
Expected life | 4 Years | — | |||||
Weighted average fair value of the options granted to the employees of the Company whose exercise price is equal to market price of the shares of the Company at the date of grant are as follows:
Weighted average fair value of options grants at an exercise price | ||||
2003 | 2002 | |||
Equal to fair value at date of | $ — | $ — | ||
The following pro forma information includes the effect of the options granted to the Company’s employees to purchase shares.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(U.S. dollars in thousands)
NOTE 5:- STOCK BASED COMPENSATION PLANS (con’t)
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.
Three Months ended March 31, | |||||||
2003 | 2002 | ||||||
Net income (loss) as reported | $ | (1,318 | ) | $ | 515 | ||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| (1,131 | ) |
| — | ||
Pro forma net income (loss) | $ | (2,449 | ) | $ | 515 | ||
Loss per share: | |||||||
Basic & diluted as reported | $ | (0.073 | ) | ||||
Basic & diluted pro forma | $ | (0.135 | ) | ||||
There are no pro forma numbers for the first quarter of 2002 as ParthusCeva’s common stock has only been publicly trading since November 1, 2002. Refer to note 2 for further details.
NOTE 6:- REORGANIZATION AND SEVERANCE CHARGE
In the first quarter, the Company recorded a reorganization and severance charge of $1,380. This charge arose following the strategic initiative to strengthen the headquarters function in the U.S., including the planned hiring of a new chief executive officer and new chief financial officer to be based at our headquarters in San Jose, California, which involved the resignations of our Dublin, Ireland based chief executive officer and chief financial officer.
The major components of the fourth quarter 2002 restructuring charge and the first quarter 2003 reorganization charge are as follows:
Balance at December 31, 2002 | Charge | Cash | Balance at March 31, 2003 | |||||||||
Reorganization payments | $ | 125 | $ | 1,230 | $ | 116 | $ | 1,239 | ||||
Onerous leases |
| 2,898 |
| — |
| 732 |
| 2,166 | ||||
Professional fees |
| 231 |
| 150 |
| 6 |
| 375 | ||||
$ | 3,254 | $ | 1,380 | $ | 854 | $ | 3,780 | |||||
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
INTRODUCTION
ParthusCeva was formed through the DSP cores licensing businesscombination of ParthusCeva for the three-Parthus Technologies plc and nine-month periods ended September 30, 2002. This business was part of DSP Group, Inc. until November 1, 2002, on which date (1) DSP Group contributed this business to ParthusCeva (formerly known as Ceva, Inc.), which was then a wholly owned subsidiary of DSP Group; (2) DSP Group, distributed all of the existing common stock of ParthusCeva to the stockholders of DSP Group; and (3) ParthusCeva immediately thereafter combined with Parthus Technologies plc. These transactions areInc., on November 1, 2002. The transaction is described in detail in the Report on Form 8-K of ParthusCeva dated November 1, 2002, as amended, as well as the Registration Statement on Form S-1 of ParthusCeva filed on October 30, 2002. This discussion assumes that the DSP cores licensing business had operated as a stand-alone entity for theamended. With respect to periods presented.This discussion does not give effectprior to the combination of this business with Parthus.
BUSINESS OVERVIEW
ParthusCeva licenses to semiconductor companies and Ceva, uncertainties relating to the acceptanceelectronic equipment manufacturers complete, integrated intellectual property solutions that enable a wide variety of ourelectronic devices. Our programmable DSP cores and application-level IP platforms power wireless devices, handheld devices, consumer electronics products, GPS devices, consumer audio products and automotive applications. We develop and market our integrated portfolio of open-licensable IP in three distinct areas: DSP cores; system-on-a-chip sub-systems and application-specific platform IP.
Our strategy is to engage in licensing and royalty agreements with leading semiconductor intellectual property offerings, continuing or worsening weakness in our marketsmanufacturers and thoseOEMs that have a track record of successful adoption and deployment of key next-generation technologies. In addition, we derive a portion of our customers, quarterly variationsrevenues from development work, which we refer to as IP Creation, and from the sale of our technology in module form, which we refer to as Hard IP.
We seek to leverage our results,substantial investment to date in research and other uncertainties that are discussed in the registration statement on Form S-1 of ParthusCeva, on file with the U.S. Securitiesdevelopment and Exchange Commission.
RESULTS OF OPERATIONS
Total Revenues
Total revenues for the DSP cores licensing business decreased 35%increased 115.9% to $13.5$8.8 million for the nine monthsthree-month period ended September 30, 2002March 31, 2003 from $20.8$4.1 million for the nine months ended September 30, 2001. Totalcomparable period in 2002. Licensing and royalty revenue increased by $3.8 million and Other revenues of this business decreased 37% to $4.9 million for the third quarter 2002increased by $979,000 principally reflecting additional revenues from $7.8 million for the third quarter 2001. This decrease was due to decreased licensing and royalty revenues in our DSP cores licensing business — as well as, betweenroyalties on platform-level IP solutions, IP Creation and Hard IPas a result of the two nine-month periods, decreased technical support and other revenues — primarily due to the slowdown in the global economy, which affected our ability to sign new license agreements.
Licensing and royalty revenues accounted for 81%78.9% of theour total revenues for the DSP cores licensing business for the nine monthsthree-month period ended September 30, 2002,March 31, 2003, compared with 85%78.4% of the total revenues for the samecomparable period in 2001; they accounted for 81% of total revenues of this business for the third quarter 2002 compared with 82% of total revenues of this business for the third quarter 2001. Technical support and other2002. Other revenues accounted for 19%21.1% of the total revenues for the DSP cores licensing business for the nine monthsthree-month period ended September 30, 2002, asMarch 31, 2003, compared to 15%with 21.6% of the total revenues for the samecomparable period in 2001; they2002. Revenues from two customers accounted for 19% of total revenues of this business for the third quarter 2002 compared with 11% of total revenues of this business for the third quarter 2001.
Licensing and Royalty Revenues
Licensing and royalty revenues for our DSP cores licensing business decreased 38%increased 117.3% to $10.9$7.0 million for the nine monthsthree-month period ended September 30, 2002March 31, 2003 from $17.6$3.2 million for the samecomparable period in 2001. These revenues decreased 43% to $3.9 million in the third quarter 2002 from $6.9 million in the third quarter 2001.
Licensing revenues for the DSP cores licensing business decreased 52%increased 183.2% to $5.8$6.4 million for the nine monthsthree-month period ended September 30, 2002March 31, 2003 from $12.1$2.3 million for the nine months ended September 30, 2001. These revenues decreased 78% to $1.1 million forcomparable period in 2002. The increase reflects the third quarter 2002 from $5.1 million foradditional revenue generated following the third quarter 2001. The decrease was primarily due to the fact that we received greater revenues from certain of our agreements in the periods in 2001, comparedcombination with the periods in 2002, primarily because we were able to negotiate higher licensing fees for certain of our products in 2001. We believe our ability to enter into new license agreements in 2002 was particularly hindered by the slowdown in the global wireless and cellular market.
Unit and prepaid royalty revenues for our DSP cores licensing business were $5.1 milliondecreased 37.1% to $605,000 for the nine monthsthree-month period ended September 30, 2002, compared with $5.5 millionMarch 31, 2003, from $962,000 for the nine months ended September 30, 2001. This business had ten unit royalty-paying licenseescomparable period in both periods.2002. The decrease for the nine months ended September 30, 2002 compared with the same period in 2001such revenues was primarily due to lower per-unit royalties from some of the license agreements in this business due to volume pricing, as well as lower overall quantities of products shipped by our licensees that incorporated our technology (mostly in the cellular and hard disk drive markets). Royalty-generatingpricing. We had 18 royalty-paying licensees for this businessthe three-month period ended March 31, 2003 and 11 for the comparable period in 2002. Royalty-generating licensees reported sales of 59.18.0 million chips incorporating our technology for the nine monthsthree-month period ended September 30, 2002,March 31, 2003, compared with 61.328.9 million chips for the samecomparable period in 2001. One royalty-generating licensee accounted for 13% of the total revenues for this business2002. The primary reason for the nine months ended September 30, 2002.
Other Revenues
Other revenues for our DSP cores licensing business were $2.8increased 110.9 % to $1.9 million for the third quarter 2002, compared with $1.8three-month period ended March 31, 2003 from $0.9 million for the third quarter 2001. We had 10 unit royalty-paying licenseescomparable period in this business in both periods.2002. The decrease from the third quarter 2001 to the third quarter 2002increase was primarily due to revenues generated in IP Creation and Hard IP of $1.1 million following the reasons described above. Royalty-generating licensees for this business reported sales of 15.5 million chips incorporating our technologycombination with Parthus, offset by a small decrease in the third quarter 2002, compared with 14.1 million chips in the third quarter 2001. One royalty-generating licensee accounted for 35% of the total revenues for this business for the third quarter 2002.
Geographic Revenue Analysis
For the nine monthsthree-month period ended September 30,March 31, 2003, revenues in the United States represented 63.0% of total revenues, while Europe, Middle East and Africa represented 23.4% and Asia represented 13.6%. For the comparable period in 2002, revenues in the United States represented 36% of the total revenues of the DSP cores licensing business, while Japan represented 7%, the rest of Asia represented 20% and Europe and the rest of the world represented 37%. For the nine months ended September 30, 2001, revenues in the United States represented 41%32.0% of total revenues, for this business, while JapanEurope, Middle East and Africa represented 13%, the rest of53.0% and Asia represented 15% and Europe and the rest of the world represented 31%15.0%.
Cost of Revenues
Cost of revenues was $1.6 million for the DSP cores licensing business was $938,000three-month period ended March 31, 2003, compared with $0.3 million for the nine months ended September 30, 2002 and $322,000 for the third quarter 2002, compared with $951,000 for the nine months ended September 30, 2001 and $344,000 for the third quarter 2001.comparable period in 2002. Cost of revenues accounted for 7%18.5% of the total revenues for this businessthe three-month period ended March 31, 2003, compared with 7.6% for the nine months ended September 30, 2002, and 7%comparable period in 2002. Gross profit decreased to 81.5% for the third quarter 2002, compared with 5%three-month period ended March 31, 2003 from 92.4% for the nine months ended September 30, 2001 and 4% for the third quarter 2001.comparable period in 2002. The increase was primarily due to our lower revenues in the 2002 periods compared with the comparable periods in 2001. This resulted in total gross profits for our DSP cores licensing business of 93% and 95% for the nine months ended September 30, 2002 and 2001, respectively, and of 93% and 96% for the third quarters 2002 and 2001, respectively. Costcost of revenues for our DSP cores licensing business consisted mainlyand decrease in gross profit were due primarily to the change in revenue mix in 2003. In 2003 a lower amount of payroll of employees involved in providing various technicalrevenues were derived from higher gross margin royalty revenues and support services to our customersadditional lower margin revenues were generated from IP Creation and associated facilities expenses.
Research and Development Expenses, Net
Research and development expenses, for the DSP cores licensing business, net of related government research grants, we received from the Office of Chief Scientist of Israel magnet programs, were $4.6increased by 145.4% to $4.1 million, for the nine months ended September 30, 2002 and $1.4 million for the third quarter 2002, compared with $4.0 million for the nine months ended September 30, 2001 and $1.3 million for the third quarter 2001. We recorded research grants from the magnet programs of $711,000 for the nine months ended September 30, 2002 and $153,000 for the third quarter 2002, compared with grants of $396,000 for the nine months ended September 30, 2001 and $243,000 for the third quarter 2001. We have no obligation to pay royalties on the intellectual property developed using these research grants, and all monies received are non-refundable. The
Sales and Marketing Expenses
Sales and marketing expenses for the DSP cores licensing business increased by 12%95.3% to $2.2$1.4 million for the nine monthsthree-month period ended September 30, 2002March 31, 2003 from $2.0$0.7 million for the samecomparable period in 2001. These expenses increased by 12% to $734,000 for the third quarter 2002 from $654,000 for the third quarter 2001.2002. The increase was primarily due to an increase in absolute terms reflects the number ofadditional sales and marketing personnel following the combination with Parthus required to support increasedour sales and marketing efforts.efforts in 2003. Sales and marketing expenses as a percentage of total revenues were 15.5% for the DSP cores licensing business were 16%three-month period ended March 31, 2003, compared with 17.2% for the nine months ended September 30, 2002 and 15%comparable period in 2002. The percentage decrease reflects higher revenues for the third quarter 2002, compared with 10% for the nine monthsthree-month period ended September 30, 2001 and 8% for the third quarter 2001. The increase was primarily due to lower revenues for periods in 2002March 31, 2003 compared with the comparable periodsperiod in 2001. Sales and marketing expenses for our DSP cores licensing business consisted mainly2002. The total number of payroll of direct sales and marketing employees, production of marketing, literature and trade show expenses.
General and Administrative Expenses
General and administrative expenses for the DSP cores licensing business were $2.4 million for nine months ended September 30, 2002 and $1.0increased by 113.3% to $1.5 million for the third quarter 2002,three-month period ended March 31, 2003, compared with $2.2$0.7 million for the nine months ended September 30, 2001 and $809,000 for the third quarter 2001.comparable period in 2002. General and administrative expenses as a percentage of total revenues were 16.7% for the DSP cores licensing business were 17%three-month period ended March 31, 2003, compared with 16.9% for the nine months ended Septembercomparable period in
2002. The increase in absolute terms reflects the investment in a management and administrative structure to support our business going forward and increased facility costs following our combination with Parthus. The total number of general and administrative personnel was 30 2002 and 21%for at March 31, 2003, compared with 7 at March 31, 2002.
Amortization of Intangibles
We recorded an expense of $284,000 for the third quarter 2002, compared with 10% for the nine monthsthree-month period ended September 30, 2001 and 10% for the third quarter 2001. The increase was primarily due to lower revenuesMarch 31, 2003 in our DSP cores licensing business for the periods in 2002 comparedconnection with the same periodsamortization of intangible assets acquired in 2001. Generalthe combination with Parthus.
Reorganization and administrative expenses forSeverance Charge
We incurred a reorganization and severance charge of $1.4 million as a result of the decision to strengthen our DSP cores licensing business consisted mainlyheadquarters function in the U.S., including the planned hiring of allocated employee, accounting, legal, facilitya new chief executive officer and maintenance costs.
Financial Income, Netincome, net
Financial income, net, was $240,000 for the DSP cores licensing business was $75,000three-month period ended March 31, 2003, compared with $18,000 for the nine months ended September 30,comparable period in 2002, and $25,000reflecting the higher cash balances on hand following the combination with Parthus.
Operating Expenses
Total operating expenses for the third quarter 2002,three-month period ended March 31, 2003 were $8.6 million compared with $346,000 for the nine months ended September 30, 2001 and $125,000 for the third quarter 2001. This decrease was due primarily to lower net income in the DSP cores licensing business
Currency Translation Differences
We incurred foreign exchange losses of approximately $199,000 for the third quartersthree-month period ended March 31, 2003 arising principally on euro liabilities as a result of 2002 and 2001, respectively. The overall effective tax rate was lowerthe appreciation of the euro against the U.S. dollar.
Provision for Income Taxes
There is no provision for income taxes for the periodsthree-month period ended March 31, 2003 as a result of losses incurred in 2001 thanthe period. This compares with $242,000 for the same periodscomparable period in 2002, because a higher portion of income in the 2002 periodswhich was subject to taxation in the United States, which has a relatively higherprovided for domestic and foreign tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had approximately $68.5 million in cash and spin-off of the company from DSP Group was consummated. Immediately prior to the separation and spin-off, all of the year-end available cash from these operations was transferred to DSP Group. As part of the assets contributed to us in the separation, DSP Group contributed a total of the sum of $40.0 million as initial working capital plus cash equal to the amount by which the transaction costs of the separation and combination exceeded $2.0 million.
Net cash used during the nine months ended September 30, 2002 forin operating activities for the DSP cores licensing businessthree-month period ended March 31, 2003 was $2.2$5.4 million, compared with $6.8$2.9 million of net cash provided byused in operating activities for the nine monthscomparable period in 2002. The net cash outflow from operating activities for the three-month period ended September 30, 2001. Cash used byMarch 31, 2003 included the DSP cores licensing business duringsettlement of merger-related costs of approximately $3 million following the nine months ended September 30, 2002 was primarily due to lower income, a decrease in income tax payablecombination with Parthus and an increase in other accounts receivable and prepaid expenses, mainlycash outflow in connection with restructuring costs incurred in November 2002 amounting to approximately $500,000. Cash used in operating activities for the separationcomparable period in 2002 resulted from movements in taxes payable, trade payables and combination.accruals. Cash generatedflows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts and payments.
Cash outflows from capital equipment purchases amounted to approximately $86,000 for the three-month period ended March 31, 2003, compared with $56,000 for the comparable period in 2002. In addition we had proceeds from the sale of capital equipment of $38,000 for the three-month period ended March 31, 2003.
Net cash provided by this businessfinancing activities of $81,000 reflects proceeds from the issuance of shares upon exercise of stock options and purchase of ESPP shares during the nine monthsthree-month period ended September 30, 2001 was primarily from net income, which was off-setMarch 31, 2003. This compares with a capital contribution of approximately $3 million by an increase in trade receivables and decreases in income tax payable.
We believe that our current cash on hand including the amounts contributed to us by DSP Group upon our separation from DSP Group, along with cash from operations of the combined company, will provide sufficient capital to fund our operations for at least the next 12 months. We
The table below presents the principal categories of our contractual obligations as of March 31, 2003:
Payments Due by Period ($ in thousands) | ||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | |||||
Capital Lease Obligations | 29,130 | 2,042 | 3,015 | 2,820 | 21,253 | |||||
Operating Lease Obligations | 2,576 | 2,350 | 226 | — | — | |||||
Purchase Obligations | 3,298 | 2,648 | 650 | — | — | |||||
Total | 35,004 | 7,040 | 3,891 | 2,820 | 21,253 | |||||
Capital lease obligations are principally on our leasehold properties located in the United States, Ireland, Israel and the United Kingdom.
Our operating lease obligations relate to license agreements entered into for design tools of $2,201,000 and obligations under motor vehicle leases of $375,000.
Purchase obligations consist of capital commitments of $2,811,000, principally for design tools, and operating purchase order commitments of $487,000.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ESTIMATESASSUMPTIONS
The preparation of the financial condition and results of operations of our DSP cores licensing business are based upon the consolidated financial statements of this business, which have been prepared in accordance with U.S. generally accepted accounting principles generally accepted in the United States. The preparation of these financial statements requires usmanagement to make estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Management bases its estimates and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, taxes on income, financing operations, warranty obligations and contingencies and litigation. We have based our estimatesjudgments on historical experience and on various other assumptions we believefactors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.current circumstances. Actual results may differ from these estimates if these assumptions prove to be incorrect or if conditions develop other than as assumed for purposes of such estimates. In December 2001, the Securities and Exchange Commission requested that all registrants discuss their “critical accounting policies” in the discussion and analysis of their financial condition and results of operations. The Securities and Exchange Commission indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
Significant management judgments and estimates must be used and made in connection with the recognition of revenue forin any accounting period. Material differences in the DSP cores licensingamount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of the business in accordance with SOPor market conditions.
In recognizing revenue, we apply the provisions of Statement of Position No. 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “ModificationStatement of SOP 97-2, Software Revenue Recognition, with RespectPosition No.98-4 and 98-9. A portion of our revenue is derived from license agreements that entail the customization of our application IP to Certain Transactions.” Under SOP 97-2, revenuesthe customer’s specific requirements. Revenues from initial license fees for such arrangements are recognized when: (1) collection is probable; (2) delivery has occurred; (3) the license fee is otherwise fixed or determinable; and (4) persuasive evidence of an arrangement exists and no further obligation exists. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair valuepercentage to completion method over the period from signing of the elements. license through to customer acceptance, as such IP requires significant modification or customization that takes time to complete. The percentage to completion is measured by monitoring progress using records of actual time incurred to date in the project compared to the total estimated project requirement, which corresponds to the costs related to earned revenues. Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology and are reviewed and updated regularly by management. After delivery, if uncertainty exists about customer acceptance of the IP, license revenue is not recognized until acceptance. Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross
profit are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis.
We believe that the use of the percentage of completion method is appropriate as we have also adopted SOP 98-9, “Modificationthe ability to make reasonably dependable estimates of SOP 97-2, Software Revenue Recognition with Respectthe extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to Certain Transactions,” forbe provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement. In all multiple element transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognizedcases we expect to perform our contractual obligations and our licensees are expected to satisfy their obligations under the “residual method” when vendor specific objective evidence, otherwise known as VSOE, of fair value exists for all undelivered elements and VSOE doescontract.
If we do not exist for oneaccurately estimate the resources required or the scope of the delivered elements. The VSOE of fair value of the undelivered elements (maintenance and technical support) is determined based on the renewal rate or on the price charged for the undelivered element when sold separately. SOP 97-2 specifies that extended payment terms in a software licensing arrangement may indicate that the software license fees are not deemedwork to be fixedperformed, or determinable. Ifdo not manage our projects properly within the fee is not fixedplanned periods of time or determinable, or if collection is not considered probable, revenue is recognized as payments become due. However, SOP 97-2 specifies that if a company has a standard business practice of using extended payment terms in software licensing arrangements and has a history of successfully collecting the software license feessatisfy our obligations under the original terms ofcontracts, then future results may be significantly and negatively affected or losses on existing contracts may need to be recognized.
Acquired Intangibles
Intangible assets arising on acquisition are capitalized and amortized to the software licensing arrangement without making concessions, the company should recognize the software license fees when all other SOP 97-2 revenue recognition criteria are met. We have concluded that, in our DSP cores licensing business, for certain software arrangements with extended payment terms, the “fixed or determinable” presumption has been overcome and software license fees have been recognized upon meeting the remaining SOP 97-2 revenue recognition criteria. Maintenance and technical support revenues included in multiple element arrangements in our DSP cores licensing business are deferred and recognized on a straight-line basisincome statement over the term of the maintenance and the support agreement or when such servicesperiod during which benefits are performed.
Such impairment loss is measured by comparing the recoverable amount of the asset with its carrying value. The determination of the value of such intangible assets requires management to make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change in the future, we could be required to record impairment charges. Any material change in our valuation of assets in the future and any consequent adjustment for impairment could have a material adverse impact on our future reported financial results.
Goodwill
Goodwill associated with the excess purchase price over the fair value of assets acquired is currently reviewed for impairment annually or sooner if events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.
Factors considered important, which could trigger an interim impairment review, include the following:
Such impairment loss is measured by comparing the recoverable amount of goodwill with SFAS No. 142, “Goodwillits carrying value. The determination of the value of goodwill requires management to make assumptions regarding estimated future cash flows and Other Intangible Assets,” on January 1, 2002other factors to determine its fair value. If these estimates or the related assumptions change in the future, we ceased amortizing goodwill arising from acquisitions completed prior to July 1, 2001. In lieu of amortization, we arecould be required to perform an initialrecord impairment reviewcharges. Any material change in our valuation of our goodwill in 2002the future and an annualany consequent adjustment for impairment review thereafter. If we determine through the impairment review process that goodwill has been impaired, we would record the impairment charge incould have a material adverse impact on our statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001,June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amended APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business". SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by a sale. SFAS 144 requires that long-lived assets that are to be disposed of by a sale be measured at the lower of book value or fair value less this cost of sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. We adopted SFAS 144 as of January 1, 2002, and the adoption did not have a material effect on our financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“FIN 45”). FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by it in issuing the guarantee. It also expands the disclosure requirements in the financial statements of the guarantor with respect to its obligations under certain guarantees that it has issued. The Company is required to adopt the initial recognition and initial measurement accounting provisions of this interpretation on a prospective basis to guarantees issued or modified after December 31, 2002.
The Company does not expectanticipate that the adoption of SFAS 146 towill have a material effect on ourthe Company’s financial position, or results of operation.
In January 2003, the FASB issued FASB Interpretations No. 46, “Consolidation of Variable Interest Entities,” (“FIN 46”). This interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective February 1, 2003 for variable interest entities created after January 31, 2003, and July 31, 2003 for variable interest entities created prior to February 1, 2003. The adoption of FIN 46 did not have a material impact on the financial position, results of operations or cash flows of the Company.
FACTORS AFFECTINGTHAT COULD AFFECT OUR OPERATING RESULTS
We caution you that the following important factors, among others, could cause our actual future results to differ materially from those expressed in forward-looking statements made by or on behalf of ParthusCevaus in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Qquarterly report, and in any other public statements we make, may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.
RISKS RELATING TO THE SEPARATION OFOUR MARKETS AND OPERATIONS
The industries in which we license our technology are experiencing a challenging period of slow growth that has negatively impacted and could continue to negatively impact our business and operating results.
The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and electronic equipment manufacturers, particularly in the telecommunications field. These industries are highly cyclical and have 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 encourage semiconductor companies or electronic product manufacturers to reduce their expenditure on our technology. During 2001, the semiconductor industry as a whole experienced the most severe contraction in its history, with total semiconductor sales worldwide declining by more than 30%, according to the Semiconductor Industry Association. The market for semiconductors used in mobile communications was particularly hard hit, with the overall decline in sales worldwide estimated by Gartner Dataquest to have been well above 30%. These
adverse conditions stabilized but did not improve during the course of 2002. If the market does not recover during 2003, our business could be further materially and adversely affected.
The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenue.
The markets for the products in which our technology is used are highly competitive. Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property. It could also cause our existing customers to move their orders to our competitors. Many of our competitors are large companies that have significantly greater financial and other resources than we have.
In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of our customers may also decide to satisfy their needs through in-house design and production. We compete on the basis of price, product quality, design cycle time, reliability, performance, customer support, name recognition and reputation and financial strength. Our inability to compete effectively on these bases could have a material adverse effect on our business, results of operations and financial condition.
We have undertaken an effort to strengthen our headquarters functions in the U.S. and intend to hire a new CEO and CFO; this process may not be completed successfully and could be disruptive to our operations.
In the first quarter of 2002 we incurred a reorganization and severance charge of $1.4 million as a result of the decision to strengthen the headquarters function in the US. Although we believe that our announced goal to establish a U.S.-based management team will strengthen our sales and investor presence in the U.S., where most of our customers and stockholders are located, and will further advance the integration process arising from our combination with Parthus, we can provide no assurance that the anticipated benefits of this move will arise. Moreover, the transition to new management, including a new CEO and CFO, as well as a new independent chairman of the board of directors, may create operational difficulties that could hinder our ability to exploit our market opportunities. To the extent that this transition takes longer than planned, it could also delay our ability to implement our overall business strategy on a timely basis.
Our operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and are not a meaningful indicator of future performance.
In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall. Factors that may affect our quarterly results of operations in the future include, among other things:
Our corporate restructuring following the consummation of the combination resulted in a restructuring charge during the fourth quarter of 2002 of approximately $6.4 million. We expect that this restructuring will result in a short-term reduction in revenues. Our operating results will also be affected by general economic and other conditions affecting the timing of customer orders and capital spending. Unfavorable general economic conditions have harmed our business and the business of Parthus in the past and may harm our combined business in the future.
Our lengthy sales cycle may also cause our revenue and operating results to vary unpredictably from period to period. The period of time between our initial contact with a potential customer and the receipt of a request for a quote on an intellectual property license is generally at least 12 months, and the time from such a request to a binding contract is generally at least another four to six months. Due to the complexity of our technology and of the legal framework in which our industry operates, we must devote a substantial amount of time to negotiating the terms of our licensing arrangements with our customers. In addition, customers perform, and require us to perform, extensive process and product evaluation and testing before entering into purchase or licensing arrangements. Even after we enter into an agreement and provide a final product to a customer in the form of silicon or intellectual property, we expect that it will be at least six months more before the customer begins to sell its products incorporating our technology, and therefore even longer before we begin to receive royalty income. Many of the milestones along our sales cycle are beyond our control and difficult to predict. This fact makes it more difficult to forecast our quarterly results and can cause substantial variations in operating results from quarter to quarter that are unrelated to the long-term trends in our business. This lack of predictability and variability in our results could harm our stock price and could significantly affect it in particular periods.
We rely significantly on revenue derived from a limited number of licensees.
We expect that a limited number of licensees will account for a substantial portion of our revenues in any period. Moreover, license agreements for our DSP cores have not historically provided for substantial ongoing license payments, although they may provide for royalties based on product shipments. Significant portions of our anticipated future revenue, therefore, will likely depend upon our success in attracting new customers or expanding our relationships with existing customers. Our ability to attract new customers and expand our relationships with existing customers will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products. Our failure to obtain agreements with these customers will impede our future revenue growth.
We depend on market acceptance of third-party semiconductor intellectual property (SIP).
Our future growth will depend on the level of acceptance by the market of our third-party, licensable intellectual property model and the variety of intellectual property offerings available on the market, which to a large extent are not in our control. If the market shifts and third-party SIP is no longer desired by our customers, our business, results of operations and financial condition could be materially harmed.
We depend on the success of our licensees to promote our solutions in the marketplace.
We do not sell our technology directly to end-users; we license our technology primarily to semiconductor companies and to electronic equipment manufacturers, who then incorporate our technology into the products they sell. Because we do not control the business practices of our licensees, we do not influence the degree to which they promote our technology or set the prices at which they sell products incorporating our technology. We cannot assure you that our licensees will devote satisfactory efforts to promote our solutions. In addition, our unit royalties from licenses are totally dependent upon the success of our licensees in introducing products incorporating our technology and the success of those products in the marketplace. If we do not retain our current licensees and continue to attract new licensees, our business may be harmed.
We depend on a limited number of key personnel who would be difficult to replace.
Our success depends to a significant extent upon our key employees and senior management; the loss of the service of these employees could materially harm us. Competition for skilled employees in our field is intense. We cannot assure you that we will be successful in attracting and retaining the required personnel.
RISKS RELATING TO
POLITICAL AND ECONOMIC DEVELOPMENTS
Terrorist attacks and threats, and war or the threat of war, could adversely affect our operating results and the price of our common stock.
Recent terrorist attacks, the response to those attacks, the war in Iraq, and the related decline in consumer confidence and continued economic weakness have had an adverse impact on our operations. Recent consumer reports indicate that consumer confidence has reached its lowest level in nearly a decade. If consumer confidence continues to decline or does not recover, our revenues and results of operations may continue to be adversely impacted in 2003 and beyond. Any escalation in these events, or similar future events, may disrupt our operations or those of our licensees. Any of these events could also increase volatility in the U.S. and worldwide financial markets and economy, which could harm our stock price and may limit the capital resources available to us and our licensees. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock and on the future price of our common stock.
Potential political, economic and military instability in Israel may adversely affect our results of operations.
Some of our principal research and development facilities are located in, and some of our directors and executive officers are residents of, Israel. Although substantially all of our sales currently are being made to customers outside 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 current trading partners, could significantly harm our business, operating results and financial condition.
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.
RISKS RELATING TO OUR
DSP CORES LICENSING BUSINESSSEPARATION FROM DSP GROUP
We may have conflicts of interest with DSP Group with respect to our past and ongoing relationships and we may not be able to resolve these conflicts on terms that are most favorable to us.
The separation of our DSP cores licensing business from DSP Group including the transfer of related assets, liabilities and intellectual property rights to us, was completed in November 2002. Immediately thereafter, we combined with Parthus Technologies plc. Prior to that time, we were a wholly owned subsidiary of DSP Group. Conflicts of interest may arise between DSP Group and us in a number of areas relating to our past and ongoing relationships, including:
We currently use some of DSP Group’s operational, administrative and technical infrastructure and if these services are not sufficient to meet our needs or if we are not able to replace these services, we may be unable to manage critical operational functions of our business.infrastructure.
Although DSP Group Ltd. is contractually obligated to provide us with theseoperational, administrative and technical services pursuant to a transition services agreement, these services may not continue to be provided at the same level or quality as when we were part of DSP Group. In addition, we cannot assure you that the quality of services and level of responsiveness will meet our needs. If we are unable to obtain services of sufficient quality or replace any services that are not effectively provided, our business and results of operations could be harmed.
Restrictions on our ability to issue stock and take certain other actions could inhibit our growth.
The agreement governing our separation from DSP Group contains restrictions on issuances of our capital stock and other specified actions by us during the one-year period following our spin-off from DSP Group, and on the liquidation, disposition or discontinuation of our DSP cores licensing business during the two-year period following our spin-off. These restrictions, as well as our agreement to indemnify DSP Group if we do not comply with these restrictions, could limit our ability to grow our business and compete effectively during the period following the distribution. In addition, these restrictions and indemnification obligations could make us a less attractive acquisition or merger candidate during this period.
We could be subject to joint and several liability for taxes of DSP Group.
As a former member of a group filing consolidated income tax returns with DSP Group, we could be liable for federal income taxes of DSP Group and other members of the consolidated group, including taxes, if any, incurred by DSP Group on the distribution of our stock to the stockholders of DSP Group. DSP Group has agreed to indemnify us against these taxes, other than taxes for which we have agreed to indemnify DSP Group pursuant to the terms of the tax indemnification and allocation agreement and separation agreement we entered into with DSP Group.
Our historical financial information may not be representative of our results as a separate company.
Our historical consolidated financial statements of our DSP cores licensing business have been carved out from the consolidated financial statements of DSP Group using the historical results of operations and historical bases of the assets and liabilities of thisour business. Accordingly, this information does not necessarily reflect what our financial position, results of operations and cash flows would have been had thisour business operated as a separate, stand-alone entity during the periods presented. DSP Group did not account for us, and we did not operate, as a separate, stand-alone entity for the periods presented. The costs and expenses of this business include allocations from DSP Group for centralized corporate services and infrastructure costs, including accounting and legal, research and development, sales and marketing, and general administration costs. These allocations have been determined on bases that we and DSP Group consider to reasonably reflect the utilization of services provided to us or the benefit we received.
Some of our directors and executive officers may have conflicts of interest because of their ownership of DSP Group’s common stock.stock or position with DSP Group.
Some of our directors and executive officers, including Eliyahu Ayalon, who serves as the Chairman of our board of directors and Chairman of the board of directors of DSP Group; Gideon Wertheizer, our Executive Vice President—Business Development and Chief Technology Officer; Issachar Ohana, our Vice President—Sales;President Sales and General Manager of the DSP Intellectual Property Licensing Division; and Bat-Sheva Ovadia, our Chief Scientist—DSP Technologies, hold a significant number of shares of DSP Group’s common stock and options to purchase shares of DSP Group’s common stock. Ownership of DSP Group’s common stock by certain of our directors and executive officers could create, or appear to create, conflicts of interest when they are faced with decisions that could have different implications for DSP Group and us.
RISKS RELATING TO THEOUR
COMBINATION WITH PARTHUS
A number of factors could impair our ability to successfully integratecomplete the long-term integration of the combined businesses, and thereby harm our business, financial condition and operating results.
In November 2002, we combined our business with that of Parthus Technologies plc. As part of the combination,Technologies. Although we changedhave made substantial progress in integrating our name from Ceva, Inc. to ParthusCeva, Inc. and Parthus became our wholly owned subsidiary. We must integrate the operations these business, each of which previously operated independently of the other. Webusinesses, we cannot assure you that wesuch integration will be able to successfully integrate these businessescompleted in athe most efficient, effective and timely and efficient manner if at all.or ultimately be successful over the long-term. We may faceencounter future difficulties in effectingconnection with the successful integration of these businesses, including:
In connection with the combination, we expect to write off substantial acquired in-process research and development, which may adversely affect our stock price.
The industries in which we license our technologies are experiencing a challenging period of slow growth and have experienced andOur success will continue to experience other cyclical effects which may negatively impact our operating results and business.
Although we are headquartered in San Jose, California, most severe contraction in its history, with total semiconductor sales worldwide declining by more than 30%, according to the Semiconductor Industry Association. The market for semiconductors used in mobile communications was particularly hard hit, with the overall decline in sales worldwide estimated by Gartner Dataquest
We may not be successful in licensing integrated, system-level solutions.
We intend to offer our application-level IP platforms built around our DSP cores, as well as toand continue to offer our DSP cores and IP platforms on a stand-alone basis. We have limtedlimited experience in offering DSP cores and IP platforms as an integrated solution. AnyFuture licenses for these integrated solutions may be on terms less favorable than we currently anticipate.
The markets for programmable DSP cores and IP platforms are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, requiring significant expenditure for research and development. We cannot assure you that we will be able to introduce systems and solutions that reflect prevailing industry standards on a timely basis, to meet the specific technical requirements of our end-users or to avoid significant losses due to rapid decreases in market prices of our products, and our failure to do so may seriously harm our business. In addition, the reduction in the number of our employees in connection with our recent restructuring efforts could adversely affect our ability to attract or retain customers who require certain R&D capabilities from their IP providers.
We may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses, which could disrupt our business and harm our financial condition.expenses.
We may pursue acquisitions of businesses, products and technologies, or establish joint venture arrangements in the future that could expand our business. The negotiation of potential acquisitions or joint ventures, as well as the integration of acquired or jointly developed businesses, technologies or products could cause diversion of management’s time and our resources. Future acquisitions could result in:
We may not be able to adequately protect our intellectual property.
Our success and ability to compete will depend in large part upon the protection of our proprietary technologies. We rely on a combination of patent, copyright, trademark, trade secret, mask work and other intellectual property rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others. As a result, we face risks associated with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us without infringing our patents and the possibility that our products may infringe patent rights of third parties.
Our tradenames or trademarks may be registered or utilized by third parties in countries other than those in which we have registered them, impairing our ability to enter and compete in these markets. In the United States, the trademark SmartCore has been registered by an unrelated company. WhileAlthough we have successfully co-existed with this other trademark holder,we cannot assure you that this state of affairs will continue. If we were forced to change any of our brand names, we could lose a significant amount of our brand equity.
Our business will suffer if we are sued for infringement of the intellectual property rights of third parties or if we cannot obtain licenses to these rights on commercially acceptable terms.
Although we are not currently involved in any material litigation, we are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. Our products rely on technology that could be the subject of existing patents or patent applications of third parties. There are a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active. We have not, and cannot reasonably, investigate all such patents. From time to time, we have become aware of patents in our technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our business, and we will continue to seek such counsel when appropriate in the future. Third parties may assert infringement claims in the future with respect to our current or future products. These claimsClaims against us may require us to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of these claims. Any necessary licenses may not be available or, if available, may not be obtainable on commercially reasonable terms. If we cannot obtain necessary licenses on commercially reasonable terms, we may be forced to stop licensing our technology, and our business would be seriously harmed.
Our DSP cores licensing business depends on OEMs and their suppliers to obtainobtaining required complementary components.
Some of the raw materials, components and subassemblies included in the products manufactured by our OEM customers are obtained from a limited group of suppliers. Supply disruptions, shortages or termination of any of these sources could have an adverse effect on theour business and results of operations of our DSP cores licensing business due to the delay or discontinuance of orders for products containing our IP, or forespecially our productsDSP cores, until those necessary components are available.
The future growth of our DSP cores licensing business depends in part on our ability to license to system OEMs and small-to-medium-sized semiconductor companies directly.
Historically our DSP cores licensing business has derived a substantial portion of its revenuethe revenues from the licensing of our DSP cores has been derived in any period from license fees from a relatively small number of licenses.licensees. Because of the high license fees we currently charge, only large semiconductor companies or vertically integrated system OEMs typically license our DSP core technologies. Part of our current growth strategy for our DSP cores licensing business is to broaden itsour client base by offering tailored packages to small- and medium-sized semiconductor companies and other system OEMs to
We utilize third-party foundries to produce the chips we sell, and any failure by them to deliver the chips we require on time could limit our ability to satisfy our customers’ demands.
Part of our revenues is generated from the sale of silicon chips embodying our intellectual property, which we refer to comprise an increasing percentage of the total revenue of our IP platforms licensing business over the next two years. We currently utilize third party foundries to produce chips using our designs.as Hard IP. Any interruption in our relationship with thesethe third party foundries that produce these chips could harm our ability to develop this part of our business
profitably. We do not have the ability to produce chips independently and thus depend on these foundries to:
ADDITIONAL RISKS RELATING TO OUR
INTERNATIONAL OPERATIONS
The Israeli tax benefits and government program that we currently receive orand the government programs in which we participate in require us to meet severalcertain conditions and may be terminated or reduced in the future, which could increase our costs.
We were assigned certain tax benefits in Israel from DSP Group, and have received others for our Israeli facilities, particularly as a result of the “Approved Enterprise” status of our facilities and programs. To maintain our eligibility for these tax benefits, we must continue to meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations. We believe that we will be able to continue to meet such conditions. Should we fail to meet such conditions in the future, however, these benefits would be cancelled and we would be subject to corporate tax in Israel at the standard rate of 36% and could be required to refund tax benefits already received. In addition, we cannot assure you that these grants and tax benefits will be continued in the future at their current levels or otherwise. The termination or reduction of certain programs and tax benefits (particularly benefits available to us as a result of the Approved Enterprise status of our facilities and programs) or a requirement to refund tax benefits already received may seriously harm our business, operating results and financial condition.
TheOur corporate tax rate applicable to our IP platforms licensing business may increase, which could adversely impact our cash flow, financial condition and results of operations.
We have significant operations in the Republic of Ireland and a substantial portion of theour taxable income on our IP platforms licensing businesshistorically has historically been generated there. Currently, some of our Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates. Although there is no expectation of any changes to Irish tax law, if our Irish subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating results could be materially adversely affected. In addition, because the IP platforms licensing business isour Irish and Israeli operations are owned by subsidiaries of a U.S. corporation, distributions to the U.S. corporation, and in certain circumstances undistributed income of the subsidiaries, may be subject to U.S. tax. Moreover, if U.S. or other foreign tax authorities were to change applicable foreign tax laws or successfully challenge the manner in which our subsidiaries’ profits are currently recognized, our overall taxes could increase, and our business, cash flow, financial condition and results of operations could be materially adversely affected.
A majority of both theour revenues and expensesa portion of our DSP cores licensing businessexpenses are transacted in U.S. dollars and our assets and liabilities together with our cash holdings are predominately denominated in U.S. dollars. However, a portion of our expenses are denominated in currencies other than the U.S. dollars, we have experienced only insignificant foreign exchange gainsdollar, principally the euro, the Israeli NIS and losses to date. However, although we have not done so to date as part of the DSP cores licensing business, because recent increasesBritish pound. Increases in the volatility of the exchange raterates of the New Israeli Shekel (NIS)euro, NIS and pound versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur when translated into U.S. dollars. We incurred foreign exchange losses of approximately $199,000 for the three-month period ended March 31, 2003 arising principally on euro liabilities as a result of the appreciation of the euro against the U.S. dollar. As a result of such currency fluctuations and the conversion to U.S. dollars for financial reporting purposes, we may experience fluctuations in our operating results on an annual and a quarterly basis going forward. We have not in the State of Israel, wepast, but may hedge part of the risk of a devaluation of the NIS in the future.future, hedge against fluctuations in exchange rates. Future hedging transactions may not successfully mitigate losses caused by currency fluctuations. We will ensure that optionsexpect to continue to experience the effect of exchange rate fluctuations on an annual and forward contracts meetquarterly basis, and currency fluctuations could have a material adverse impact on our results of operations.
We are exposed to financial market risks, including changes in interest rates. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the requirementsmajority of cash flow hedges,our investments are short-term. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of our investment portfolio.
All the potential changes noted above are based on sensitivity analysis performed on our balances as defined by SFAS No. 133 and are all effective as hedges of these expenses. Such amounts will be recorded in earnings in the period in which they occur.
(a)Evaluation of disclosure controls and procedures.procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and are operating in an effective manner.
(b)Changes in internal controls.controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation.
(a) Exhibits
Exhibit No. | Description | |
99.1 | Certification of Brian Long pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.2 | Certification of Elaine Coughlan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | Reports on Form 8-K |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: | PARTHUSCEVA, INC. | |||||||
By: | /s/ | |||||||
Elaine Coughlan | ||||||||
Chief Financial Officer | ||||||||
(principal financial officer) |
I, Kevin Fielding,Brian Long, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of ParthusCeva, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) |
b) |
c) |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) |
b) |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Dated: May 13, 2003 | /s/ | |||||||
Brian Long | ||||||||
Chief Executive Officer | ||||||||
(principal executive officer) |
CERTIFICATIONS
I, Elaine Coughlan, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of ParthusCeva, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
c) | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Dated: May 13, 2003 | /s/ ELAINE COUGHLAN | |||||||
Elaine Coughlan | ||||||||
Chief Financial Officer | ||||||||
(principal financial officer) |
INDEX TO EXHIBITS
Exhibit No. | Description | |
99.1 | Certification of Brian Long pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.2 | Certification of Elaine Coughlan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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