2010 Delaware Incorporation or Organization) 77-0556376 Identification No.)
SECURITIES AND EXCHANGE COMMISSIONxþ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. SeptemberJune 30, 2003¨o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. ParthusCeva,Delaware 77-0556376
(State or Other Jurisdiction of
(I.R.S. Employer2033 Gateway Place, Suite 150, San Jose, California 95110-1002
(Address of Principal Executive Offices) 95110-1002
(Zip Code)
(Registrant’s Telephone Number, Including Area Code)xþ Noo¨Large accelerated filer o Accelerated filer þ
Non-accelerated filer o
(Do not check if a smaller reporting company)Smaller reporting company o ¨ No xþ18,166,43721,243,241 shares of common stock, $0.001 par value, as of November 10, 2003.August 3, 2010.
FORWARD-LOOKING STATEMENTS
| • | Our belief that there is an industry shift towards licensing DSP technology from third party IP providers as opposed to developing it in-house; | ||
| • | Our belief that the penetration of handsets in emerging markets such as China, India and Latin America could generate future growth potential for CEVA; | ||
| • | Our belief that the full scale migration to our DSP cores and technologies in the handsets market has not been fully realized and continues to progress; | ||
| • | Our optimism about adoption of our technologies for new categories of products, such as data cards, USB dongles, smart metering, tablets, netbooks and eReaders; | ||
| • | Our belief that Texas Instruments’ and Freescale’s announcement of their intent to exit the baseband market, after historically having been large players in this market, is a strong positive driver for our future market share expansion; | ||
| • | Our belief that both the handsets and mobile broadband markets continue to present significant growth opportunities for us; | ||
| • | Subject to a return to normal seasonal growth, our optimism about 2010 resulting from key customers with production capability for high volume products, including portable consumer products, set-top boxes, ultra-low-cost phones and smartphones; | ||
| • | Our belief that we are well-positioned to capitalize on the growth in the ultra-low-cost phone, smarphones and mobile broadband markets; | ||
| • | Our belief that our operating expenses will increase in 2010 as compared to 2009; | ||
| • | Our belief that our new DSP core, CEVA-XC, is well positioned to expand our licensee base in existing wireless handsets and new wireless infrastructure markets; | ||
| • | We are experiencing strong interest and pipe line build-up for our DSP cores due to general business improvements in our primary markets, particularly the cellular baseband market, and the availability of CEVA-XC DSP core designs for 4G software; | ||
| • | Our anticipation that our current cash on hand, short-term deposits and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months; and | ||
| • | Our belief that changes in interest rates within our investment portfolio will not have a material affect on our financial position on an annual or quarterly basis. |
1
*****2
ParthusCeva was formed through the combination of Parthus Technologies plc (“Parthus”) and ParthusCeva on November 1, 2002.Unless otherwise indicated, the financial information in this quarterly report includes the results of the business of Parthus only for the periods following the combination on November 1, 2002.
September 30, 2003 June 30, 2003 December 31, 20021 ASSETS Current assets: Cash and cash equivalents Trade receivables, net Other accounts receivable and prepaid expenses Inventories, net Total current assets Long-term investments: Severance pay fund Investment in other company Property and equipment, net Goodwill Other intangible assets, net Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade payables Accrued expenses and other payables Taxes payable Deferred revenues Total current liabilities Accrued severance pay Stockholders’ equity: Common Stock: $0.001 par value: 100,000,000 shares authorized; 18,166,343, 18,080,476 and 18,053,507 shares issued and outstanding at September 30, 2003, June 30, 2003 and December 31, 2002, respectively Additional paid in capital Accumulated deficit Total stockholders’ equity Total liabilities and stockholders’ equity 3Item 1. FINANCIAL STATEMENTSItem 1.
U.S. dollars in thousands, except share and per share data Unaudited Unaudited $ 63,515 $ 65,294 $ 73,810 7,894 9,374 6,471 1,956 1,814 1,748 220 236 168 73,585 76,718 82,197 1,418 1,471 1,152 1,350 1,350 1,350 2,768 2,821 2,502 6,356 7,153 6,593 38,398 38,398 38,398 4,863 4,924 5,492 $ 125,970 $ 130,014 $ 135,182 $ 3,223 $ 4,138 $ 2,491 11,260 12,714 18,982 1,030 1,093 1,291 984 1,719 1,115 16,497 19,664 23,879 1,427 1,480 1,231 18 18 18 134,445 134,135 134,051 (26,417 ) (25,283 ) (23,997 ) 108,046 108,870 110,072 $ 125,970 $ 130,014 $ 135,182 1The December 31, 2002 balance sheet information has been derived from the December 31, 2002 audited consolidated financial statements of the Company. June 30, December 31, 2010 2009 Unaudited Audited Current assets: Cash and cash equivalents $ 22,228 $ 12,104 Short term bank deposits 12,079 40,056 Marketable securities (see Note 3) 59,214 48,438 Trade receivables (net of allowance for doubtful accounts of $700 at both June 30, 2010 and December 31, 2009) 5,546 5,995 Deferred tax assets 1,059 1,096 Prepaid expenses and other accounts receivable 3,938 5,345 Total current assets 104,064 113,034 Long term bank deposit 15,066 — Severance pay fund 4,536 4,455 Deferred tax assets 564 309 Property and equipment, net 1,346 1,148 Goodwill 36,498 36,498 Total long-term assets 58,010 42,410 Total assets $ 162,074 $ 155,444 Current liabilities: Trade payables $ 650 $ 530 Deferred revenues 527 432 Accrued expenses and other payables 8,064 9,735 Deferred tax liabilities 1,062 1,168 Total current liabilities 10,303 11,865 Long term liabilities: Accrued severance pay 4,558 4,483 Stockholders’ equity: Common Stock: $0.001 par value: 60,000,000 shares authorized; 21,093,079 and 20,429,736 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively 21 20 Additional paid in-capital 164,001 158,325 Treasury stock (1,133 ) — Accumulated other comprehensive income (loss) (336 ) 251 Accumulated deficit (15,340 ) (19,500 ) Total stockholders’ equity 147,213 139,096 Total liabilities and stockholders’ equity $ 162,074 $ 155,444
(unaudited)
U.S. dollars in thousands, except share and per share data
Nine months ended September 30, | Three months ended | |||||||||||||||||
| September 30, | June 30, 2003 | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| Unaudited | Unaudited | Unaudited | Unaudited | Unaudited | ||||||||||||||
Revenues: | ||||||||||||||||||
Licensing and royalties | $ | 21,802 | $ | 10,916 | $ | 7,651 | $ | 3,921 | $ | 7,170 | ||||||||
Other revenue | 5,430 | 2,618 | 1,651 | 931 | 1,917 | |||||||||||||
Total revenues | 27,232 | 13,534 | 9,302 | 4,852 | 9,087 | |||||||||||||
Cost of revenues | 4,654 | 938 | 1,415 | 322 | 1,601 | |||||||||||||
Gross profit | 22,578 | 12,596 | 7,887 | 4,530 | 7,486 | |||||||||||||
Operating expenses: | ||||||||||||||||||
Research and development, net | 12,591 | 4,624 | 4,490 | 1,408 | 4,052 | |||||||||||||
Sales and marketing | 4,258 | 2,227 | 1,436 | 734 | 1,449 | |||||||||||||
General and administrative | 4,418 | 2,368 | 1,455 | 1,013 | 1,485 | |||||||||||||
Amortization of intangible assets | 856 | — | 288 | — | 284 | |||||||||||||
Reorganization and severance charge | 2,782 | — | 1,402 | — | — | |||||||||||||
Total operating expenses | 24,905 | 9,219 | 9,071 | 3,155 | 7,270 | |||||||||||||
Operating income (loss) | (2,327 | ) | 3,377 | (1,184 | ) | 1,375 | 216 | |||||||||||
Financial income, net | 605 | 75 | 160 | 25 | 205 | |||||||||||||
Currency translation differences | (598 | ) | — | (10 | ) | — | (389 | ) | ||||||||||
Income (loss) before taxes on income | (2,320 | ) | 3,452 | (1,034 | ) | 1,400 | 32 | |||||||||||
Taxes on income | 100 | 961 | 100 | 419 | — | |||||||||||||
Net income (loss) | (2,420 | ) | 2,491 | (1,134 | ) | 981 | 32 | |||||||||||
Basic and diluted net income (loss) per share | $ | (0.134 | ) | $ | 0.276 | $ | (0.063 | ) | $ | 0.109 | $ | 0.002 | ||||||
Weighted average number of shares of Common Stock used in computation of net income (loss) per share (in thousands): | ||||||||||||||||||
Basic | 18,085 | 9,041 | 18,108 | 9,041 | 18,079 | |||||||||||||
Diluted | 18,085 | 9,041 | 18,108 | 9,041 | 18,149 | |||||||||||||
| Six months ended | Three months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Revenues: | ||||||||||||||||
| Licensing | $ | 9,315 | $ | 8,817 | $ | 4,593 | $ | 4,273 | ||||||||
| Royalties | 10,134 | 7,709 | 5,154 | 3,950 | ||||||||||||
| Other revenue | 1,761 | 2,097 | 862 | 887 | ||||||||||||
| Total revenues | 21,210 | 18,623 | 10,609 | 9,110 | ||||||||||||
| Cost of revenues | 1,577 | 2,362 | 863 | 1,152 | ||||||||||||
| Gross profit | 19,633 | 16,261 | 9,746 | 7,958 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development, net | 9,114 | 8,071 | 4,505 | 3,996 | ||||||||||||
| Sales and marketing | 3,584 | 3,286 | 1,776 | 1,650 | ||||||||||||
| General and administrative | 3,116 | 3,030 | 1,570 | 1,558 | ||||||||||||
| Total operating expenses | 15,814 | 14,387 | 7,851 | 7,204 | ||||||||||||
| Operating income | 3,819 | 1,874 | 1,895 | 754 | ||||||||||||
| Financial income, net | 1,098 | 950 | 541 | 474 | ||||||||||||
| Other income (see Note 10) | — | 1,901 | — | 1,901 | ||||||||||||
| Income before taxes on income | 4,917 | 4,725 | 2,436 | 3,129 | ||||||||||||
| Income tax expenses | 735 | 1,042 | 313 | 814 | ||||||||||||
| Net income | $ | 4,182 | $ | 3,683 | $ | 2,123 | $ | 2,315 | ||||||||
| Basic net income per share | $ | 0.20 | $ | 0.19 | $ | 0.10 | $ | 0.12 | ||||||||
| Diluted net income per share | $ | 0.19 | $ | 0.19 | $ | 0.10 | $ | 0.12 | ||||||||
| Weighted-average number of shares of Common Stock used in computation of net income per share (in thousands): | ||||||||||||||||
| Basic | 20,859 | 19,536 | 21,061 | 19,515 | ||||||||||||
| Diluted | 21,991 | 19,884 | 22,069 | 20,014 | ||||||||||||
4
RELATED COMPANY INVESTMENT
(unaudited)
U.S. dollars in thousands, (exceptexcept share data)
Nine months ended September 30, 2003 | Common stock | Additional paid-in capital | Accumulated deficit | Total stockholders’ equity | |||||||||||||
| Shares | Amount | ||||||||||||||||
Balance as of January 1, 2003 | 18,053,507 | $ | 18 | $ | 134,051 | $ | (23,997 | ) | $ | 110,072 | |||||||
Net loss | — | — | — | (2,420 | ) | (2,420 | ) | ||||||||||
Issuance of Common Stock upon exercise of stock options | 14,658 | — | (*) | 39 | — | 39 | |||||||||||
Issuance of Common Stock upon purchase of ESPP shares | 98,178 | — | (*) | 355 | — | 355 | |||||||||||
Balance as of September 30, 2003 | 18,166,343 | $ | 18 | $ | 134,445 | $ | (26,417 | ) | $ | 108,046 | |||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | other | Total | Total | |||||||||||||||||||||||||||||
| Six months ended | Common stock | paid-in | Treasury | comprehensive | Accumulated | Comprehensive | stockholders’ | |||||||||||||||||||||||||
| June 30, 2010 | Shares | Amount | capital | stock | income (loss) | deficit | income | equity | ||||||||||||||||||||||||
| Balance as of January 1, 2010 | 20,429,736 | $ | 20 | $ | 158,325 | $ | — | $ | 251 | $ | (19,500 | ) | $ | 139,096 | ||||||||||||||||||
| Net income | — | — | — | — | — | 4,182 | $ | 4,182 | 4,182 | |||||||||||||||||||||||
| Unrealized loss from available-for-sale securities, net | — | — | — | — | (314 | ) | — | (314 | ) | (314 | ) | |||||||||||||||||||||
| Unrealized loss from hedging activities, net | — | — | — | — | (273 | ) | — | (273 | ) | (273 | ) | |||||||||||||||||||||
| Total comprehensive income | $ | 3,595 | ||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 1,124 | — | — | — | 1,124 | |||||||||||||||||||||||||
| Issuance of Common Stock upon exercise of employee stock options | 675,378 | 1 | 4,027 | — | — | — | 4,028 | |||||||||||||||||||||||||
| Issuance of Common Stock under employee stock purchase plan | 89,365 | — | (*) | 525 | — | — | — | 525 | ||||||||||||||||||||||||
| Purchase of Treasury Stock | (108,009 | ) | — | (*) | — | (1,207 | ) | — | — | (1,207 | ) | |||||||||||||||||||||
| Issuance of Treasury Stock upon exercise of employee stock options | 6,609 | — | (*) | — | 74 | — | (22 | ) | 52 | |||||||||||||||||||||||
| Balance as of June 30, 2010 | 21,093,079 | $ | 21 | $ | 164,001 | $ | (1,133 | ) | $ | (336 | ) | $ | (15,340 | ) | $ | 147,213 | ||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | other | Total | Total | |||||||||||||||||||||||||||||
| Six months ended | Common stock | paid-in | Treasury | comprehensive | Accumulated | Comprehensive | stockholders’ | |||||||||||||||||||||||||
| June 30, 2009 | Shares | Amount | capital | stock | income (loss) | deficit | income | equity | ||||||||||||||||||||||||
| Balance as of January 1, 2009 | 19,532,026 | $ | 20 | $ | 153,712 | $ | (5,077 | ) | $ | (24 | ) | $ | (26,972 | ) | $ | 121,659 | ||||||||||||||||
| Net income | — | — | — | — | — | 3,683 | $ | 3,683 | 3,683 | |||||||||||||||||||||||
| Unrealized gain from available-for-sale securities, net | — | — | — | — | 419 | — | 419 | 419 | ||||||||||||||||||||||||
| Unrealized gain from hedging activities, net | — | — | — | — | 2 | — | 2 | 2 | ||||||||||||||||||||||||
| Total comprehensive income | $ | 4,104 | ||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | 1,525 | — | — | — | 1,525 | |||||||||||||||||||||||||
| Purchase of Treasury Stock | (140,828 | ) | (1 | ) | — | (822 | ) | — | — | (823 | ) | |||||||||||||||||||||
| Issuance of Treasury Stock upon exercise of employee stock options | 50,052 | 1 | 1 | 370 | — | (56 | ) | 316 | ||||||||||||||||||||||||
| Issuance of Treasury Stock under employee stock purchase plan | 81,509 | — | (*) | — | 627 | — | (153 | ) | 474 | |||||||||||||||||||||||
| Balance as of June 30, 2009 | 19,522,759 | $ | 20 | $ | 155,238 | $ | (4,902 | ) | $ | 397 | $ | (23,498 | ) | $ | 127,255 | |||||||||||||||||
| (*) | Amount less than $1. |
Nine months ended September 30, 2002 | Common stock | Related Company investment | Retained earnings | Total stockholders’ equity and Related Company investment | ||||||||||||
Shares | Amount | |||||||||||||||
Balance as of January 1, 2002 | 20,000,000 | $ | 20 | $ | 4,325 | $ | — | $ | 4,345 | |||||||
Net income | — | — | — | 2,491 | 2,491 | |||||||||||
Capital return to Related Company | — | — | — | (2,491 | ) | (2,491 | ) | |||||||||
Contribution from Related Company | — | — | 5,523 | — | 5,523 | |||||||||||
Balance as of September 30, 2002 | 20,000,000 | $ | 20 | $ | 9,848 | $ | — | $ | 9,868 | |||||||
5
(unaudited)
U.S. dollars in thousands
Nine months ended September 30, | ||||||||
| 2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | (2,420 | ) | 2,491 | |||||
Adjustments required to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation | 2,876 | 697 | ||||||
Amortization of intangible assets | 856 | — | ||||||
Loss on disposal of property and equipment | 4 | — | ||||||
Currency translation differences | 259 | — | ||||||
Increase in trade receivables | (1,420 | ) | (66 | ) | ||||
Increase in other accounts receivable and prepaid expenses | (113 | ) | (2,762 | ) | ||||
Increase in inventories | (69 | ) | (10 | ) | ||||
Increase (decrease) in trade payables | (745 | ) | 228 | |||||
(Decrease) increase in deferred revenues | (131 | ) | 245 | |||||
Decrease in accrued expenses and other payables | (7,897 | ) | (708 | ) | ||||
Decrease in taxes payable | (231 | ) | (2,295 | ) | ||||
Decrease in accrued severance pay, net | (70 | ) | (18 | ) | ||||
Net cash used in operating activities | (9,101 | ) | (2,198 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (1,697 | ) | (834 | ) | ||||
Proceeds from sale of property and equipment | 38 | — | ||||||
Purchase of technology | (50 | ) | — | |||||
Net cash used in investing activities | (1,709 | ) | (834 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of Common Stock upon exercise of stock options | 39 | — | ||||||
Proceeds from issuance of Common Stock upon purchase of ESPP shares | 355 | — | ||||||
Contribution from Related Company | — | 3,032 | ||||||
Net cash provided by financing activities | 394 | 3,032 | ||||||
Effect of exchange rate movements on cash | 121 | — | ||||||
Changes in cash and cash equivalents | (10,295 | ) | — | |||||
Cash and cash equivalents at the beginning of the period | 73,810 | — | ||||||
Cash and cash equivalents at the end of the year period | $ | 63,515 | $ | — | ||||
Supplemental disclosure of Cash flow Information; | ||||||||
Income taxes paid | $ | 68 | $ | — | ||||
| Six months ended | ||||||||
| June 30, | ||||||||
| 2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
| Net income | $ | 4,182 | $ | 3,683 | ||||
| Adjustments required to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 258 | 248 | ||||||
| Equity-based compensation | 1,124 | 1,525 | ||||||
| Loss (gain) on available-for-sale marketable securities | (14 | ) | 57 | |||||
| Amortization of premiums on available-for-sale marketable securities | 718 | 187 | ||||||
| Accrued interest on short term bank deposits | (322 | ) | (545 | ) | ||||
| Unrealized foreign exchange loss (gain) | (51 | ) | 103 | |||||
| Gain on realization of investments | — | (1,901 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in trade receivables | 449 | (154 | ) | |||||
| Decrease (increase) in prepaid expenses and other accounts receivable | 1,268 | (215 | ) | |||||
| Decrease (increase) in deferred tax, net | (176 | ) | 16 | |||||
| Increase (decrease) in trade payables | 131 | (7 | ) | |||||
| Increase (decrease) in deferred revenues | 95 | (300 | ) | |||||
| Decrease in accrued expenses and other payables | (1,706 | ) | (1,856 | ) | ||||
| Increase (decrease) in accrued severance pay, net | (6 | ) | 2 | |||||
| Net cash provided by operating activities | 5,950 | 843 | ||||||
Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (456 | ) | (164 | ) | ||||
| Investment in bank deposits | (19,432 | ) | (35,527 | ) | ||||
| Proceeds from bank deposits | 32,625 | 30,867 | ||||||
| Investment in available-for-sale marketable securities | (35,448 | ) | (19,201 | ) | ||||
| Proceeds from maturity and sale of available-for-sale marketable securities | 23,528 | 16,354 | ||||||
| Proceeds from realization of investments | — | 1,901 | ||||||
| Net cash provided by (used in) investing activities | 817 | (5,770 | ) | |||||
Cash flows from financing activities: | ||||||||
| Purchase of Treasury Stock | (1,207 | ) | (823 | ) | ||||
| Proceeds from issuance of Common Stock upon exercise of employee stock options | 4,028 | — | ||||||
| Proceeds from issuance of Common Stock under employee stock purchase plan | 525 | — | ||||||
| Proceeds from issuance of Treasury Stock upon exercise of employee stock options | 52 | 316 | ||||||
| Proceeds from issuance of Treasury Stock under employee stock purchase plan | — | 474 | ||||||
| Net cash provided by (used in) financing activities | 3,398 | (33 | ) | |||||
| Effect of exchange rate movements on cash | (41 | ) | (153 | ) | ||||
| Increase (decrease) in cash and cash equivalents | 10,124 | (5,113 | ) | |||||
| Cash and cash equivalents at the beginning of the period | 12,104 | 13,328 | ||||||
| Cash and cash equivalents at the end of the period | $ | 22,228 | $ | 8,215 | ||||
6
(U.S. dollars in thousands, except share and per share amounts)
ParthusCeva, Inc. (“ParthusCeva or the Company”) was a wholly owned subsidiary of DSP Group, Inc. (“DSPG”) until November 1, 2002. On that date, DSPG contributed its DSP cores licensing business and operations and the related assets and liabilities 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’s Common Stock for every three shares of DSPG common stock held); and Parthus was acquired by the Company from the existing shareholders of Parthus BUSINESS
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 business to the Company for all periods presented and includethis quarterly report includes the results of Parthus subsequentCEVA, Inc. and its subsidiaries (the “Company” or “CEVA”).
ParthusCeva licenses toleading semiconductor companies and electronic equipment manufacturers (also known as original equipment manufacturers, or OEMs) complete, integratedmanufacturer (OEM) companies in the form of intellectual property (IP) solutions that enable. These companies design, manufacture, market and sell application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) based on CEVA’s technology to OEM companies for incorporation into a wide variety of electronic devices. The Company’s programmableend products. CEVA’s IP is primarily deployed in high volume markets, including wireless handsets (e.g., GSM/GPRS/EDGE/WCDMA/WiMax/LTE, CDMA and TD-SCDMA), mobile broadband (USB dongles, tablets, notebooks, netbooks, Mobile Internet Devices (MID), M2M, eReader), portable multimedia (e.g., portable video players, MobileTVs, Mobile Internet Devices, personal navigation devices and MP3/MP4 players), home entertainment (e.g., DVD/Blu-ray players, set-top boxes and digital signal processing (DSP) coresTVs), game consoles (portable and application-level IP platforms power handheld wirelesshome systems), storage (e.g., hard disk drives and solid state drives (SSD)) and telecommunication devices global positioning system (GPS) devices, consumer audio products, automotive applications(e.g., residential gateways, femtocells, VoIP phones and a range of other consumer products.
network infrastructure).
2009.
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 “Company’s Business”). The consolidated financial statements reflect the assets, liabilities, results of operations, changes in stockholders’ equity and related company investment, and cash flows as if the Company’s Business had operated as a separate entity for the periods presented.
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.
The Company’s consolidated financial statements for the period prior to November 2002 include:
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(U.S. dollars in thousands, except share and per share amounts)
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.
7
| As at June 30, 2010 (Unaudited) | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||
| cost | gains | losses | value | |||||||||||||
| Certificates of deposits | $ | 5,351 | $ | 8 | $ | — | $ | 5,359 | ||||||||
| Corporate bonds and securities | 54,054 | 108 | (307 | ) | 53,855 | |||||||||||
| $ | 59,405 | $ | 116 | $ | (307 | ) | $ | 59,214 | ||||||||
| As at December 31, 2009 (Audited) | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||
| cost | gains | losses | value | |||||||||||||
| Certificates of deposits | $ | 1,842 | $ | 6 | $ | (1 | ) | $ | 1,847 | |||||||
| U.S. government and agency securities | 1,934 | 16 | — | 1,950 | ||||||||||||
| Corporate bonds and securities | 44,413 | 318 | (90 | ) | 44,641 | |||||||||||
| $ | 48,189 | $ | 340 | $ | (91 | ) | $ | 48,438 | ||||||||
| As at June 30, 2010 (Unaudited) | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||
| cost | gains | losses | value | |||||||||||||
| Due in one year or less | $ | 23,506 | $ | 96 | $ | (12 | ) | $ | 23,590 | |||||||
| Due after one year to three years | 35,899 | 20 | (295 | ) | 35,624 | |||||||||||
| $ | 59,405 | $ | 116 | $ | (307 | ) | $ | 59,214 | ||||||||
| As at December 31, 2009 (Audited) | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Fair | |||||||||||||
| cost | gains | losses | value | |||||||||||||
| Due in one year or less | $ | 19,528 | $ | 159 | $ | (2 | ) | $ | 19,685 | |||||||
| Due after one year to three years | 28,661 | 181 | (89 | ) | 28,753 | |||||||||||
| $ | 48,189 | $ | 340 | $ | (91 | ) | $ | 48,438 | ||||||||
8
| Level 1 | Unadjusted quoted prices in active markets that are accessible on the measurement date for identical, unrestricted assets or liabilities; | |
| Level 2 | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and | |
| Level 3 | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
| Description | June 30, 2010 | Level I | Level II | Level III | ||||||||||||
| Assets: | ||||||||||||||||
| Short term bank deposits | $ | 12,079 | $ | — | $ | 12,079 | $ | — | ||||||||
| Marketable securities: | ||||||||||||||||
| Certificates of deposits | 5,359 | — | 5,359 | — | ||||||||||||
| Corporate bonds and securities | 53,855 | — | 53,855 | — | ||||||||||||
| Foreign exchange contracts | 221 | — | 221 | — | ||||||||||||
| Long term bank deposits | 15,066 | — | 15,066 | — | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts | 194 | — | 194 | — | ||||||||||||
| Description | December 31, 2009 | Level I | Level II | Level III | ||||||||||||
| Assets: | ||||||||||||||||
| Short term bank deposits | $ | 40,056 | $ | — | $ | 40,056 | $ | — | ||||||||
| Marketable securities: | ||||||||||||||||
| Certificates of deposits | 1,847 | — | 1,847 | — | ||||||||||||
| U.S. government and agency securities | 1,950 | — | 1,950 | — | ||||||||||||
| Corporate bonds and securities | 44,641 | — | 44,641 | — | ||||||||||||
| Foreign exchange contracts | 128 | — | 128 | — | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts | 27 | — | 27 | — | ||||||||||||
9
The following is a summary of operationsrevenues within geographic areas:
Nine months ended September 30, | Three months ended September 30, | Three 2003 | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||
Revenues based on customer location: | |||||||||||||||
United States | $ | 13,275 | $ | 4,932 | $ | 3,516 | $ | 1,990 | $ | 4,185 | |||||
Europe, Middle East and Africa | 8,513 | 5,000 | 3,403 | 734 | 3,038 | ||||||||||
Asia | 5,444 | 3,602 | 2,383 | 2,128 | 1,864 | ||||||||||
| $ | 27,232 | $ | 13,534 | $ | 9,302 | $ | 4,852 | $ | 9,087 | ||||||
| Six months ended | Three months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Revenues based on customer location: | ||||||||||||||||
| United States | $ | 3,714 | $ | 3,056 | $ | 1,879 | $ | 2,497 | ||||||||
| Europe and Middle East (1) (2) | 11,217 | 8,772 | 4,503 | 3,519 | ||||||||||||
| Asia Pacific (3) (4) (5) | 6,279 | 6,795 | 4,227 | 3,094 | ||||||||||||
| $ | 21,210 | $ | 18,623 | $ | 10,609 | $ | 9,110 | |||||||||
| (1) Sweden | $ | 2,587 | $ | 4,444 | $ | 1,197 | $ | 1,141 | ||||||||
| (2) Germany | $ | 5,158 | *) | *) | *) | |||||||||||
| (3) China | $ | 2,897 | *) | $ | 2,314 | *) | ||||||||||
| (4) S. Korea | *) | $ | 2,037 | $ | 1,141 | *) | ||||||||||
| (5) Japan | *) | $ | 2,696 | *) | $ | 1,409 | ||||||||||
| *) | Less than 10% |
Nine months ended September 30, | Three months ended September 30, | Three months 2003 | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||
Customer A | 11.5 | % | — | 10.1 | % | — | 14.0 | % | |||||||
Customer B | 10.0 | % | — | — | — | 14.7 | % | ||||||||
Customer C | — | — | 13.7 | % | — | — | |||||||||
Customer D | — | — | 10.9 | % | — | — | |||||||||
Customer E | — | 13.5 | % | — | — | — | |||||||||
Customer F | — | 13.3 | % | — | 35.7 | % | — | ||||||||
Customer G | — | 11.2 | % | — | 31.3 | % | — | ||||||||
| Six months ended | Three months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Customer A | 18 | % | 16 | % | 17 | % | 14 | % | ||||||||
| Customer B | 24 | % | (*) | (*) | (*) | |||||||||||
| Customer C | (*) | (*) | 15 | % | (*) | |||||||||||
| Customer D | (*) | (*) | (*) | 18 | % | |||||||||||
| Customer E | (*) | 11 | % | (*) | (*) | |||||||||||
| (*) | Less than 10% |
(U.S. dollars in thousands, except share and per share amounts)
NOTE 4:-6: NET INCOME (LOSS) PER SHARE OF COMMON STOCK
| Nine months ended September 30, | Three months ended September 30, | Three 2003 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income (loss) | $ | (2,420 | ) | $ | 2,491 | $ | (1,134 | ) | $ | 981 | $ | 32 | |||||
Basic and diluted net income (loss) per share | $ | (0.134 | ) | $ | 0.276 | $ | (0.063 | ) | $ | 0.109 | $ | 0.002 | |||||
Weighted average number of shares of Common Stock used in computation of net income (loss) per share (in thousands): | |||||||||||||||||
Basic | 18,085 | 9,041 | 18,108 | 9,041 | 18,079 | ||||||||||||
Diluted | 18,085 | 9,041 | 18,108 | 9,041 | 18,149 | ||||||||||||
| Six months ended | Three months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Numerator: | ||||||||||||||||
| Numerator for basic and diluted net income per share | $ | 4,182 | $ | 3,683 | $ | 2,123 | $ | 2,315 | ||||||||
Denominator: | ||||||||||||||||
| Denominator for basic net income per share | 20,859 | 19,536 | 21,061 | 19,515 | ||||||||||||
| Effect of employee stock options | 1,132 | 348 | 1,008 | 499 | ||||||||||||
| Denominator for diluted net income per share | 21,991 | 19,884 | 22,069 | 20,014 | ||||||||||||
| Basic net income per share | $ | 0.20 | $ | 0.19 | $ | 0.10 | $ | 0.12 | ||||||||
| Diluted net income per share | $ | 0.19 | $ | 0.19 | $ | 0.10 | $ | 0.12 | ||||||||
NOTE 5:- STOCK-BASED COMPENSATION PLANS10
The Company issues stock options to its employees and directors and provides employees the right to purchase stock pursuant to approved stock option and employee stock purchase programs. The Company accounts for its 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- and nine-month periods ended September 30, 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 or nine months ended September 30, 2002. No options were granted in the quarter ended March 31, 2003. Options to purchase 1.4 million shares at exercise prices ranging from $3.36 to $7.45 per share were granted in the quarter ended June 30, 2003. Options to purchase 16,220 shares at an exercise price of $7.65 per share were granted in the quarter ended September 30, 2003.
In May 2003, the Company made an offer to its employees (including executive officers) and directors to exchange their outstanding options to purchase shares of Common Stock that had an exercise price of more than $5.50 per share. In exchange for eligible options, participants received a commitment for new stock options to be granted on or after December 19, 2003. Only those participants in the option exchange who are employees or directors of the Company on the date the new options are granted will be eligible to receive the new grant. In deciding to make this offer, the Company’s Board of Directors and management considered the need to motivate and retain employees. At the time, all then-outstanding options had exercise prices significantly in excess of the trading price of the Company’s common stock, which substantially eroded the incentive value of those options. In addition, the exercise price for the substantial majority of the then-outstanding options had been fixed prior to the spin-off of the Company and its combination with Parthus Technologies, based upon a third party’s estimated valuation, which included assumptions which proved unrealistic in the ensuing economic environment. As a consequence, the exercise prices of then-outstanding options never reflected actual trading values of the Company’s common stock. Options to purchase a total of 1,778,172 shares of Common Stock were accepted for exchange under the offer and accordingly were cancelled as of June 18, 2003. The Company intends to grant new options, to purchase approximately 1,778,172 shares, on or after December 19, 2003. The new options will have an exercise price per share equal to the closing price on the NASDAQ National Market on the date the new options are granted.
During the third quarter of 2003, the Company issued 98,178 shares of Common Stock to employees under the approved 2002 Employee Stock Purchase Plan for consideration of $355,000.
activity and related information for the three months ended June 30, 2010, is as follows: 11—(Continued)
(U.S. dollars in thousands, except share and per share amounts)As required by SFAS No. 123, as amended by SFAS No. 148, pro forma information regarding net income (loss) and net income (loss) per share is provided below, 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-Scholes option-pricing model with the following weighted-average assumptions:Three and ninemonths endedSeptember 30,20032002Dividend yield0%— Expected volatility80%— Risk-free interest rate2%— Expected life4 Years— fair valuenumber of shares related to the outstanding options excluded from the calculation of diluted net income per share since their effect was anti-dilutive was 51,404 and 46,486 shares for the three and six months ended June 30, 2010, respectively, and 2,078,256 and 2,733,197 shares for the corresponding periods of 2009.tounder the employees ofCompany’s stock-based compensation plans have been granted at the Company during the three and nine months ended September 30, 2003 was $4.54 and $3.64 per share, respectively. The exercise prices of such options were equal to thefair market pricevalue of the Company’s common stock aton the dategrant date. A summary of the respectiveCompany’s stock option grants. Weighted Number of average exercise options price Outstanding as of March 31, 2010 3,527,326 $ 7.83 Granted 142,500 12.49 Exercised (238,023 ) 4.91 Forfeited or expired (11,199 ) 9.13 Outstanding as of June 30, 2010 3,420,604 $ 8.23 Exercisable as of June 30, 2010 2,187,777 $ 7.81 pro forma information includestable shows the effecttotal equity-based compensation expense included in the condensed consolidated statement of operations: Six months ended Three months ended June 30, June 30, 2010 2009 2010 2009 (unaudited) (unaudited) (unaudited) (unaudited) Cost of revenue $ 33 $ 69 $ 15 $ 34 Research and development expenses 306 492 139 230 Sales and marketing expenses 208 304 96 142 General and administrative expenses 577 660 290 311 Total $ 1,124 $ 1,525 $ 540 $ 717 Three months ended June 30, 2010 2009 (unaudited) (unaudited) Expected dividend yield 0 % 0 % Expected volatility 38%-62 % 49%-78 % Risk-free interest rate 0.3%-2.6 % 0.5%-3.4 % Expected forfeiture (employees) 10 % 10 % Expected forfeiture (executives) 5 % 5 % Contractual term of up to 7 Years 7 Years Suboptimal exercise multiple (employees) 1.5 1.5 Suboptimal exercise multiple (executives) 1.3 1.3
Three months September 30, | Nine months ended September 30, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||
Net income (loss) as reported | $ | (1,134 | ) | $ | 981 | $ | (2,420 | ) | $ | 2,491 | ||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | $ | (3,024 | ) | $ | — | $ | (9,737 | ) | $ | — | ||||
Pro forma net income (loss) | $ | (4,158 | ) | $ | 981 | $ | (12,157 | ) | $ | 2,491 | ||||
Income (loss) per share: | ||||||||||||||
Basic & diluted as reported | $ | (0.063 | ) | $ | — | $ | (0.134 | ) | $ | — | ||||
Basic & diluted pro forma | $ | (0.230 | ) | $ | — | $ | (0.672 | ) | $ | — | ||||
effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change. As of June 30, 2010 and 2009, the notional principal amount of the Hedging Contracts held by the Company was $6,790 and $5,990, respectively.
There are no pro forma numbers2010, respectively, and a net loss of $123 and $362 for the first nine monthscomparable periods of 2002 as ParthusCeva’s common stock has only been publicly trading since November 1, 2002. Refer2009, related to Note 2 for further details.
NOTE 6:- REORGANIZATION AND SEVERANCE CHARGE
its Hedging Contracts. In the first and third quarters of 2003,addition, the Company recorded reorganizationin financial income, net, a gain of $216 and severance charges of $1,380$221 for the three and $1,402, respectively. six months ended June 30, 2010, respectively, related to derivatives not designated as hedging instruments. There were no derivatives not designated as hedging instruments for the three and six months ended June 30, 2009.
12
| As at June 30, | As of December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | (Audited) | |||||||
Derivative assets: | ||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||
| Foreign exchange option contracts | $ | — | $ | 103 | ||||
| Foreign exchange forward contracts | — | 25 | ||||||
| — | 128 | |||||||
| Derivatives not designated as hedging instruments: | ||||||||
| Foreign exchange forward contracts | 221 | — | ||||||
| Total | $ | 221 | $ | 128 | ||||
Derivative liabilities: | ||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||
| Foreign exchange option contracts | 4 | — | ||||||
| Foreign exchange forward contracts | 190 | 27 | ||||||
| Total | $ | 194 | $ | 27 | ||||
| Six months ended | Three months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||||
| Foreign exchange option contracts | $ | 11 | $ | (274 | ) | $ | (4 | ) | $ | 173 | ||||||
| Foreign exchange forward contracts | (223 | ) | (86 | ) | (225 | ) | 251 | |||||||||
| $ | (212 | ) | $ | (360 | ) | $ | (229 | ) | $ | 424 | ||||||
| Six months ended | Three months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||||
| Foreign exchange option contracts | $ | (118 | ) | $ | 284 | $ | — | $ | 157 | |||||||
| Foreign exchange forward contracts | 35 | 78 | 22 | (34 | ) | |||||||||||
| $ | (83 | ) | $ | 362 | $ | 22 | $ | 123 | ||||||||
13
The major components of the fourth quarter 2002 restructuring charge and the first and third quarter 2003 reorganization charges are as follows:14
Balance at 2002 | Charge | Cash | Balance at 2003 | |||||||||
Reorganization payments | $ | 125 | $ | 2,632 | $ | 2,178 | $ | 579 | ||||
Onerous leases | 2,898 | — | $ | 1,119 | 1,779 | |||||||
Professional fees | 231 | 150 | $ | 381 | — | |||||||
| $ | 3,254 | $ | 2,782 | $ | 3,678 | $ | 2,358 | |||||
15Actual resultsAny or all of our forward-looking statements in this quarterly report may differ materially from those indicatedturn out to be wrong. These forward-looking statements can be affected by suchinaccurate assumptions we might make or by known or unknown risks and uncertainties. We undertake no obligation to publicly update any forward-looking statements.statements, whether as a result of new information, future events or otherwise. Factors which could cause actual results to differ materially include those set forth under “—in Part II — Item 1A — “Risk Factors, That Could Affect Our Operating Results”,” as well as those otherwise discussed in this section and elsewhere in this quarterly report. See “Forward-Looking Statements”.Statements.”INTRODUCTIONParthusCeva was formed through the combination of Parthus Technologies plc and ParthusCeva, formerly a wholly owned subsidiary of DSP Group, Inc., on November 1, 2002. With respect to periods prior to November 1, 2002, the discussion below assumes that the separation of the DSP cores licensing business from DSP Group had been in effect throughout the relevant periods. Our financial statements show the DSP cores licensing business as an entity carved out from the consolidated financial statements of DSP Group using the historical results of operations and historical bases of assets and liabilities of this business. This information may not reflect what our financial position or results of operations actually would have been had we operated as a separate, stand-alone entity for the periods presented, and may not be indicative of our future financial position or results of operations. We have not made adjustments to our historicalfor periods prior to November 1, 2002 to reflect the significant changespresented in our cost structure, funding and operations that have resulted from the separation of the DSP cores licensing business from DSP Group and our combination with Parthus.This discussionthis quarterly report includes the results of CEVA, Inc. and its subsidiaries. CEVA is the businessworld’s leading licensor of Parthus only for the periods following the combination on November 1, 2002.BUSINESS OVERVIEWParthusCeva licenses to semiconductor companies and electronic equipment manufacturers complete, integrated intellectual property solutions that enable a wide variety of electronic devices. Our programmable DSP cores and application-levelplatform solutions. Our technologies are widely licensed and power some of the world’s leading semiconductor and original equipment manufacturer (OEM) companies. In 2009, our licensees shipped over 334 million CEVA-powered chipsets, an increase of 9% over 2008 shipments of 307 million chipsets. In 2009, Gartner Inc. reported our share of the licensable DSP market at 46%.platforms powerwith additional technologies in the form of integrated application-specific hardware peripherals and software components. Therefore, we believe there is an industry shift from developing DSP technologies in-house to licensing them from third party IP providers, like us, due to the design cycle time constantly shortening and the cost of ownership and maintenance of such architectures.devices, handheld devices, consumer electronics products GPS devices, consumer audiorequire much greater performance and flexibility than 3G products. In addition to our CEVA-X family of DSP cores currently being designed into multiple 4G chipsets, we introduced a new DSP architecture, the CEVA-XC, in February 2009, to specifically address the unique and evolving needs of implementing LTE/4G, WiMAX and Software Defined Radio (SDR)-based wireless communication applications. We further enhanced this product offering by adding critical LTE software libraries and a robust partner program in 2010. During the second quarter of 2010, we completed three licensing agreements for CEVA-XC; this underscores our belief that this new product line is well positioned to expand our licensee base in both existing wireless handsets and new wireless infrastructure markets.
Our strategy is to engage inour competitors have reduced their licensing and royalty agreementsfees to attract customers and expand their market share. In order to penetrate new markets and maintain our market share with leading semiconductor manufacturers and OEMs that have a track record of successful adoption and deployment of key next-generation technologies.our existing products, we may need to offer our products in the future at lower prices which may result in lower profits. In addition, we derive a portionour future growth is dependent not only on the continued success of our revenues fromexisting products but also the salesuccessful introduction of new products, which requires the dedication of resources into research and development boards and tool kits, development work which we referin turn may increase our operating expenses. We currently anticipate that our operating expenses will increase during 2010 in comparison to as IP Creation and the sale of our GPS technology in modular form which we refer2009, mainly due to as Hard IP. In the third quarter of 2003 management determined that Hard IP was not part of the future strategic focus of the Company and a plan has been implemented to end of life Hard IP by December 31, 2003.
We seek to leverage our substantial investment to dateincreased investments in research and development, including the addition of new engineers, and currency exchange expenses as the U.S. dollar is currently devalued against the New Israeli Shekel (“NIS”), Euro, and British Pound, which are the primary currencies for our employee salary expenses. In addition to utilizemonitoring and controlling our experienced R&D staffoperating expenses, we must maintain our current level of gross margin in order to enhanceoffset any future declines in shipment quantities of products based on our technologies or any future declines in any per-unit royalty rates. Furthermore, since our products are incorporated into end products of our OEM customers, our business is very dependent on our OEM customers’ ability to achieve market acceptance of their end products in the handsets and consumer electronic markets, which are similarly very competitive.
and harm our business, financial condition and operating results. As a result, our past operating results should not be relied upon as an indication of future performance.
Licensing and royalty revenues accounted for 82.3% of our total revenues in the third quarter and 80.1% in the first nine months of 2003, compared with 80.8% for the third quarter of 2002 and 80.7% for the first nine months of 2002. Revenues from three2009. Two customers accounted for 13.7, 10.9%18% and 10.1% of total revenues in the third quarter of 2003; revenues from two customers accounted for 11.5% and 10.0%24% of total revenues for the first nine monthshalf of 2003.
Licensing2010, as compared to two different customers that accounted for 16% and Royalty11% of total revenues for the first half of 2009. Because of the nature of our license agreements and the associated large initial payments due, the identity of major customers generally varies from quarter to quarter and we do not believe that we are materially dependent on any one specific customer or any specific small number of licensees. Our total revenues derived from the handsets market represented 70% and 69% of our total revenues for the second quarter and first half of 2010, respectively, as compared to 59% and 52% for the comparable periods of 2009.
Licensing from license fees that involve customization of our technology to customer specifications are recognized in accordance with the principles set out in Financial Accounting Standards Board (“FASB”) Accounting Standards Codifications (“ASC”) No. 605-35-25 “Construction-Type and Production-Type Contracts Recognition.” We account for all of our other IP license revenues and related services in accordance with FASB ASC No. 985-605, “Software Revenue Recognition.”
16
Of the total licensing and royalty revenues, royalty revenues were $1.2 million in the third quarter of 2003, an increase of 36.7% from $854,000 infor the second quarter and first half of 2003 and an increase of 430.5% from $220,0002010 reflected our market share expansion in the third quarter of 2002. Royalty revenues were $2.6 millionhandsets market, offset by a decrease in the first nine monthsaverage royalty rate per unit as a result of 2003, an increasea change in product mix due to higher shipments of 48.9% from $1.82G/EDGE phones as compare to high end smartphones. Our per unit and prepaid royalty customers reported sales of 126 and 247 million in the first nine months of 2002. The increase in the third quarter of 2003 compared withchipsets incorporating our technology for the second quarter and first half of 2003 was driven by increases in2010, respectively, compared to 65 and 124 million for the underlyingcomparable periods of 2009. The five largest customers paying per unit shipmentsroyalty accounted for 77% and 80% of customers’our total royalty revenues for the second quarter and first half of 2010, respectively, compared to 83% and 69% for the comparable periods of 2009.
Other Revenues
Other2009, respectively. The decrease in other revenues were $1.7 million in the third quarter of 2003, a decrease of 13.9% from $1.9 million infor the second quarter and first half of 2003. The third quarter 2003 figure represents an increase2010, as compared to the corresponding periods of 77.3%2009, reflected principally lower support-related revenues, mainly associated with our customers’ tighter expense controls and refraining from $931,000 in the third quarter of 2002.extending or renewing support-related agreements. Other revenues accounted for 8% of our total revenues for both the second quarter and first half of 2010, compared to 10% and 11% for the comparable periods of 2009. Other revenues include support and training for licensees and sale of development systems.
17
| First Half | First Half | Second Quarter | Second Quarter | |||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||
| (in millions, except percentages) | (in millions, except percentages) | |||||||||||||||||||||||||||||||
| United States | $ | 3.7 | 17 | % | $ | 3.0 | 16 | % | $ | 1.9 | 18 | % | $ | 2.5 | 27 | % | ||||||||||||||||
Europe and MiddleEast (1) (2) | $ | 11.2 | 53 | % | $ | 8.8 | 47 | % | $ | 4.5 | 42 | % | $ | 3.5 | 39 | % | ||||||||||||||||
AsiaPacific (3) (4) (5) | $ | 6.3 | 30 | % | $ | 6.8 | 37 | % | $ | 4.2 | 40 | % | $ | 3.1 | 34 | % | ||||||||||||||||
| (1) Sweden | $ | 2.6 | 12 | % | $ | 4.4 | 24 | % | $ | 1.2 | 11 | % | $ | 1.1 | 13 | % | ||||||||||||||||
| (2) Germany | $ | 5.2 | 24 | % | $ | *) | *) | $ | *) | *) | $ | *) | *) | |||||||||||||||||||
| (3) China | $ | 2.9 | 14 | % | $ | *) | *) | $ | 2.3 | 22 | % | $ | *) | *) | ||||||||||||||||||
| (4) S. Korea | $ | *) | *) | $ | 2.0 | 11 | % | $ | 1.1 | 11 | % | $ | *) | *) | ||||||||||||||||||
| (5) Japan | $ | *) | *) | $ | 2.7 | 14 | % | $ | *) | *) | $ | 1.4 | 15 | % | ||||||||||||||||||
| *) | Less than 10% |
Geographic Revenue Analysis
The following is a summary of operations within geographic areas:
| Nine months ended September 30, | Three months ended September 30, | Three 2003 | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||
Revenues based on customer location: | |||||||||||||||
United States | % | 48.7 | % | 36.4 | % | 37.8 | % | 41.0 | % | 46.1 | |||||
Europe, Middle East and Africa | 31.3 | 36.9 | 36.6 | 15.1 | 33.4 | ||||||||||
Asia | 20.0 | 26.7 | 25.6 | 43.9 | 20.5 | ||||||||||
| % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | ||||||
Cost of Revenues
Cost of revenues was $1.4 million in the third quarter of 2003, a decrease of 11.6% from $1.6 million in the second quarter of 2003. The third quarter 2003 figure represents an increase of 339.4% from $322,000 in the third quarter of 2002, reflecting the combination of an increase in revenues and a change in revenue mix.2009. Cost of revenues accounted for 15.2%8% and 17.1%7% of our total revenues for the thirdsecond quarter and first nine monthshalf of 2003,2010, respectively, compared with 6.6%to 13% for both the comparable periods of 2009. The decrease for the second quarter of 2010 principally reflected lower customization work for our licensees and 6.9%lower royalty payback expenses paid to the Office of Chief Scientist of Israel. The decrease for the first half of 2010 principally reflected lower customization work for our licensees, lower salary and related costs and lower royalty payback expenses paid to the Office of Chief Scientist of Israel. Royalty payback expenses amounted to 3%-3.5% of the actual sales of certain of our products, the development of which previously received grants from the Office of Chief Scientist of Israel. Included in cost of revenues for the second quarter and first half of 2010 was a non-cash equity-based compensation expense of $15,000 and $33,000, respectively, compared to $34,000 and $69,000 for the comparable periods of 2009.
18
Research
2009.
Sales
were $4.3 million in for the second quarter and first nine monthshalf of 2003, an increase2010 was a non-cash equity-based compensation expense of 91.2% from $2.2 million in$96,000 and $208,000, respectively, compared to $142,000 and $304,000 for the first nine monthscomparable periods of 2002. The increase in absolute terms over the 2002 periods principally reflects the additional sales and marketing personnel acquired through the combination with Parthus and required to support our expanded sales and marketing efforts in the 2003 periods.2009. Sales and marketing expenses as a percentage of our total revenues were 15.4% and 15.6%17% for thirdboth the second quarter and first nine monthshalf of 2003, respectively,2010, compared with 15.1%to 18% for both the second quarter and 16.5% for the respective comparable periods in 2002. The percentage decrease reflects higher revenues in the 2003 periods compared with the comparable periods in 2002, which offset the additional cost from the substantial increase in the numberfirst half of sales and marketing personnel. 2009.
2009.
General
2009.
| First Half | First Half | Second Quarter | Second Quarter | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Financial income, net | $ | 1.10 | $ | 0.95 | $ | 0.54 | $ | 0.47 | ||||||||
of which: | ||||||||||||||||
| Interest income and gains and losses from marketable securities, net | $ | 1.03 | $ | 1.07 | $ | 0.50 | $ | 0.54 | ||||||||
| Foreign exchange gain (loss) | $ | 0.07 | $ | (0.12 | ) | $ | 0.04 | $ | (0.07 | ) | ||||||
We recorded expensesinterest earned on investments, gains and losses from marketable securities and amortization of $288,000discount and $856,000premium on marketable securities. The slightly decrease in Interest income and gains and losses from marketable securities, net, during the thirdsecond quarter and first nine monthshalf of 2003, respectively,2010 principally reflected higher combined cash, bank deposits and marketable securities balances held, offset by lower interest rates.
Reorganization and Severance Charge
We incurred a reorganization and severance charge of $1.4 million in the third quarter of 2003 in connection with the resignations of the Company’s Chairman and Vice-Chairman from their executive management positions as part of our decision to strengthen our headquarters function in the U.S. and our decision to discontinue certain Hard IP operations in the United Kingdom. No comparable charge was incurred in the third quarter of 2002.
Financial income, net
Financial income, net, was $160,000 and $605,000 in the thirdsecond quarter and first nine monthshalf of 2003, respectively, compared with $25,0002010, and $75,000a foreign exchange loss of $70,000 and $124,000 for the comparable periods in 2002, respectively, reflecting the higher cash balances on hand following the combination with Parthus.
| First half | First Half | Second Quarter | Second Quarter | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Gain on realization of investments | $ | — | $ | 1.90 | $ | — | $ | 1.90 | ||||||||
Operating Expenses19
Total operating expenses were $9.1
Currency Translation Differences
We incurred foreign exchange losses of approximately $10,000 and $598,000equity investment in the third quarter and first nine months of 2003, respectively, arising principally on the translation of euro liabilities as a result of the appreciation of the euro against the U.S. dollar in the period.
GloNav Inc. to NXP Semiconductors.
We incurred a charge of $100,000
authority during the first half of 2010. We have significant operations in Israel and the Republic of Ireland, and a substantial portion of our taxable income is generated there. Currently, our Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates.
20
Cash Our ongoing cash outflows from capital equipment purchases amountedoperating activities principally relate to approximately $1.7 millionpayroll-related costs and obligations under our property leases and design tool licenses. Our primary sources of cash inflows are receipts from our accounts receivable and interest earned from our cash, deposits and marketable securities. The timing of receipts of accounts receivable from customers is based upon the completion of agreed milestones or agreed dates as set out in the contracts.
our equity investment in GloNav to NXP Semiconductors.
plan.
Payments Due by Period ($ in thousands) | ||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | |||||
Operating Lease Obligations – Leasehold properties | 29,138 | 2,284 | 3,843 | 3,118 | 19,893 | |||||
Operating Lease Obligations – Other | 652 | 463 | 189 | — | — | |||||
Purchase Obligations | 2,018 | 2,018 | — | — | — | |||||
Total | 31,808 | 4,765 | 4,032 | 3,118 | 19,893 | |||||
Operating leasehold obligations are principally on our leasehold properties located in the United States, Ireland, Israel and the United Kingdom.
Other operating lease obligations relate to license agreements entered into for design tools of $311,000 and obligations under motor vehicle leases of $341,000.
Purchase obligations consist of capital commitments of $1.4 million, principally for design tools, and operating purchase order commitments of $584,000.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amountsunderlying assumed levels of revenues and expenses during the reported period. Management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if these assumptionswill prove to be incorrectaccurate.
Revenue Recognition21
Significant management judgments
22
| • | We compete directly in the DSP core space with Tensilica and Verisilicon; | ||
| • | CPU IP providers, such as Virage Logic (through its acquisition of ARC), ARM Holdings, MIPS Technologies and Tensilica, who offer DSP and DSP extensions to their IP; | ||
| • | Our video solution is software-based and competes with hardware implementations offered by companies such as Hantro (acquired by On2), Imagination Technologies, Chips & Media, and Virage Logic (through its acquisition of ARC); | ||
| • | Internal engineering teams, such as Mediatek, NXP, STMicroelectronics and Zoran, may design programmable DSP core products in-house and therefore not license our technologies; and | ||
| • | SATA and SAS IP markets are highly standardized with several vendors, such as ARM Holdings, Gennum’s Snowbush IP group, Silicon Image and Synopsys, that offer similar products, thereby leading to pricing pressures for both licensing and royalty revenue. |
In recognizing revenue, we apply the provisions of Statement of Position No. 97-2, “Software Revenue Recognition,” as amended by Statements of Position Nos. 98-4DSP performance, overall chip cost, power consumption, flexibility, reliability, communication and 98-9. A portion of our revenue is derived from license agreements that entail the
customization of our application IPmultimedia software availability, design cycle time, tool chain, customer support, name recognition, reputation and financial strength. Our inability to the customer’s specific requirements. Revenues from initial license fees for such arrangements are recognized in accordance with Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” basedcompete effectively on the percentage-to-completion method over the period from signing of the
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 the ability to make reasonably dependable estimates of the 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 be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement. In all cases we expect to perform our contractual obligations, and our licensees are expected to satisfy their obligations under the contract.
If we do not accurately estimate the resources required or the scope of the work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, 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 statement of operations over the period during which benefits are expected to accrue, currently estimated at five years. Where events and circumstances are present which indicate that the carrying value may not be recoverable, we will recognize an impairment loss. Factors we consider important and which could trigger impairment include:
Such impairment loss is measured by comparing the recoverable value of the asset with its carrying amount. 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 impairmentbases could have a material adverse impacteffect on our future reportedbusiness, results of operations and financial results.
Goodwill23
Goodwill associated with the excess purchase price over the fair value
Such impairment loss is measured by comparing the recoverable valuequarterly results of goodwill with its carrying amount. The determination of the value of goodwill requires management to make assumptions regarding estimated future cash flows and other factors to determine its fair value. If these estimates or the related assumptions changeoperations in the future include, among other things:
| • | the timing of the introduction of new or enhanced technologies by us and our competitors, as well as the market acceptance of such technologies; | ||
| • | the timing and volume of orders and production by our customers, as well as fluctuations in royalty revenues resulting from fluctuations in unit shipments by our licensees and shifts by our customers from prepaid royalty arrangements to per unit royalty arrangements; | ||
| • | the mix of revenues among licensing revenues, per unit and prepaid royalties and service revenues; | ||
| • | our lengthy sales cycle and specifically in the third quarter of any fiscal year during which summer vacations slow down decision-making processes of our customers in executing contracts; | ||
| • | the gain or loss of significant licensees, partly due to our dependence on a limited number of customers generating a significant amount of quarterly revenues; | ||
| • | any delay in execution of any anticipated licensing arrangement during a particular quarter; | ||
| • | delays in the commercialization of end products that incorporate our technology; | ||
| • | currency fluctuations of the Euro and NIS versus the U.S. dollar; | ||
| • | fluctuations in operating expenses and gross margins associated with the introduction of new or enhanced technologies and adjustments to operating expenses resulting from restructurings; | ||
| • | our ability to scale our operations in response to changes in demand for our technologies; | ||
| • | entry into new markets, including China, India and Latin America; | ||
| • | changes in our pricing policies and those of our competitors; | ||
| • | restructuring, asset and goodwill impairment and related charges, as well as other accounting changes or adjustments; and | ||
| • | general economic conditions, including the current economic conditions, and its effect on the semiconductor industry and sales of consumer products into which our technologies are incorporated. |
24
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002,growth will depend on the FASB issued SFAS No. 146, “Accounting for Costs Associatedlevel of market acceptance of our third-party licensable intellectual property model, the variety of intellectual property offerings available on the market, and a shift in customer preference away from in-house development of proprietary DSPs towards licensing open DSP cores. Furthermore, the third-party licensable intellectual property model is highly dependent on the market adoption of new services and products, such as smartphones, mobile broad band, ultra-low-cost phones in emerging markets, Personal Multimedia Players (PMP), Blu-ray DVDs, connected digital TVs and set-top boxes with Exit or Disposal Activities,” which addresses significant issues regardinghigh definition audio and video. Such market adoption is important because the recognition, measurement, and reporting of costsincreased cost associated with exitownership and disposal activities, including restructuring activities. SFAS No. 146 requires that costs associated with exit or disposal activities be recognized when they are incurredmaintenance of the more complex architectures needed for the advanced services and products may motivate companies to license third-party intellectual property rather than atdesign them in-house.
In November 2002, the FASB issued FASB Interpretation No. 45 “Guarantor’s Accountingend products, if semiconductor companies 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 adoption of FIN 45 did not have any impact on the financial position, results of operations, cash flows of or disclosures by the Company.
In January 2003, the FASB issued FASB Interpretation 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 investorselectronic equipment manufacturers do not haveincorporate our solutions into their end products or if the characteristicsend products of a controlling financial interest orour customers do not have sufficient equity at risk for the entityachieve market acceptance, we may not be able 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.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement requires contracts with comparable characteristics be accounted for similarly. In particular, this Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133, (b) clarifies when a derivative contains a financing component and (c) amends the definition of an “underlying” to conform it to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Application of the new rules did not have a material impact on the consolidated financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption did not have any impact on the consolidated financial statements of the Company.
FACTORS THAT 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 us in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements. Any or allgenerate adequate sales of our forward-looking statements in this quarterly report, and in any other public statements we make, may turn outproducts.
RISKS RELATING TO OUR MARKETS AND OPERATIONS
The industries in whichend-users; we license our technology primarily to semiconductor companies and electronic equipment manufacturers, who then incorporate our technology into the products they sell. As a result, we rely on our customers to incorporate our technology into their end products at the design stage. Once a company incorporates a competitor’s technology into its end product, it becomes significantly more difficult for us to sell our technology to that company because changing suppliers involves significant cost, time, effort and risk for the company. As a result, we may incur significant expenditures on the development of a new technology without any assurance that our existing or potential customers will select our technology for incorporation into their own product and without this “design win,” it becomes significantly difficult to sell our IP solutions. Moreover, even after a customer agrees to incorporate our technology into its end products, the design cycle is long and may be delayed due to factors beyond our control, which may result in the end product incorporating our technology not reaching the market until long after the initial “design win” with such customer. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in. These factors include, but are experiencingnot limited to, changes in the competitive position of our technology, our customers’ financial stability, and our ability to ship products according to our customers’ schedule. Moreover, current economic conditions may further prolong a challenging periodcustomer’s decision-making process and design cycle.
the success of those products in the marketplace. 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.periods, including the global economic downturn that started in the second half of 2008. 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. The overall semiconductor market appears to have strengthened somewhat during the first nine months of 2003. If continued strengthening of the market is not sustained or if the market again weakens, 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 to put in place a new management team; this process may not be completed successfully and could be disruptive to our operations.
In April 2003 we announced our intention to strengthen our headquarters function in the U.S. We have hired Chet Silvestri to serve as our Chief Executive Officer and Christine Russell to serve as our Chief Financial Officer, and we expect to appoint a new independent Chairman of the Board. In connection with these steps, Eliyahu Ayalon and Brian Long resigned their executive positions with the Company as of the end of July 2003; they remain on the Board of Directors and continue to serve as Chairman and Vice Chairman of the Board, respectively.
Although we believe that these efforts 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 these efforts will arise. Moreover, the transition to new management, including a new Chairman, CEO and CFO, 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:
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 or prospective 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 promoting our solutions. In addition, our unit royalties 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 licenseescustomers and continue to attract new licensees,customers, our business may be harmed.
25
| • | unexpected changes in regulatory requirements; | ||
| • | fluctuations in the exchange rate for the U.S. dollar; | ||
| • | imposition of tariffs and other barriers and restrictions; | ||
| • | burdens of complying with a variety of foreign laws, treaties and technical standards; | ||
| • | uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property; | ||
| • | multiple and possibly overlapping tax structures and potentially adverse tax consequences; | ||
| • | political and economic instability; and | ||
| • | changes in diplomatic and trade relationships. |
RISKS RELATING TO26
POLITICAL AND ECONOMIC DEVELOPMENTS
27 28Weaknessworld economy as a resultdiversion of geopolitical events couldtechnical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects, errors or failure in our products could lead to product liability claims or lawsuits against us or against our customers. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and results of operations.pricehighly cyclical nature of our common stock.Recent declinesthe semiconductor industry.weakness as a resultdownturn made, and the current uncertainty about the sustainability of the Iraq warrecovery makes, it extremely difficult for our customers, the end-product customers, our vendors and terrorist incidents have hadus to accurately forecast and plan future business activities and make reliable projections. Furthermore, during challenging economic times our customers may face various economic issues, including reduced demand for their products, longer design or production cycles, inability to gain timely access to sufficient credit, focus on cash preservation and tighter inventory management, all of which could result in an impairment of their ability to make timely payments to us and could cause reduced spending on our technologies.operations. If consumer confidence does not recover or is not sustained, our revenuesbusiness and results of operations may continueoperations.be adversely impacted in 2003 and beyond. Any escalation in these events, or similar future events, may disruptsuccessfully manage our operations or thosegeographically dispersed operations.licensees. Anyemployees are located in Israel and Ireland. Accordingly, our ability to compete successfully will depend in part on the ability of these events could also increase volatilitya limited number of key executives located in geographically dispersed offices to integrate management, address 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 priceneeds of our common stock.Potential political, economiccustomers and military instabilityrespond to changes in our markets. If we are unable to effectively manage and integrate our remote operations, our business may be materially harmed.affect our results of operations.Someaffected by instability in the Middle East region.areis located in, and our executive officers and some of our directors and senior employees 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.forto 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 key officers or key employees due to military service.RISKS RELATING TO OURSEPARATION FROM DSP GROUPmay 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 businesscurrently receive research grants from DSP Group was completed in November 2002. Immediately thereafter, we combined with Parthus. 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 labor, tax, employee benefit, indemnification, intellectual property, employee retention and recruiting and business opportunities that may be attractive to both DSP Group and us. We may not be able to resolve anyprograms of the potential conflictsOffice of interest discussed above on favorable terms or at all.Restrictions on our ability to takethe Chief Scientist of Israel of the Israeli Ministry of Industry and Trade and under the funding programs of Enterprise Ireland and Invest Northern Ireland. To be eligible for these grants, we must meet certain actions could inhibit our growth.The agreement governing our separation from DSP Group contains restrictions on the liquidation, disposition or discontinuation of our DSP cores licensing business during the two-year period following our spin-off from DSP Group, which will end November 1, 2004. These restrictions, as well as our agreement to indemnify DSP Group if we do notdevelopment conditions and comply with these restrictions, could limit our ability to grow our business and compete effectively. 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 an independent company.Our historical consolidated financial statements for periods prior to November 1, 2002 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 our business. Accordingly, this information does not necessarily reflect what our financial position, results of operations and cash flows would have been had our business operated as a separate, stand-alone entity during those periods. We have not made adjustments to the historical financial information for such periods to reflect the significant changes in the cost structure, funding and operations that resulted from the separation of the DSP cores licensing business from DSP Group and the combination with Parthus.Some of our directors and senior employees may have conflicts of interest because of their ownership of DSP Group’s common stock or position with DSP Group.Some of our directors and senior employees, including Eliyahu Ayalon, who serves as the Chairman of our board of directors and 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 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 senior employees 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 OURCOMBINATION WITH PARTHUSA number of factors could impair our ability to maximize the long-term potential of our combined businesses, and thereby harm our business, financial condition and operating results.In November 2002, we combined our business with that of Parthus.periodic reporting obligations. Although we have integratedmet such conditions in the past, should we fail to meet such conditions in the future our businesses, we cannot assure you thatresearch grants may be repayable, reduced or withheld. The repayment or reduction of such integration will ultimately be successful over the long-term or that we will be able to fully capitalize on the potential of the combined business. Weresearch grants may encounter future difficulties stemming from the combination, including:the impairment and/or loss of relationships with employees, customers, suppliers, distributors, licensees, vendorsincrease our research and others;development expenses which in turn may reduce our operating income.adverse financial results associated with integration of the two businesses, including unanticipated expenses relatedthe integration and deployment of acquired technologies and personnel; andfluctuations in currency exchange rates.the disruptionA significant portion of our business and distractionis conducted outside the United States. Although most of our management.In addition,revenue is transacted in U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business in local currencies. Moreover, the majority of our combined technologyexpenses are denominated in foreign currencies, mainly New Israeli Shekel (NIS), Euro and British Pound, which subjects us to the risks of foreign currency fluctuations. Our primary expenses paid in the NIS, Euro and British Pound are employee salaries. Increases in the volatility of the exchange rates of the NIS, Euro and British Pound versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur in NIS, Euro and British Pound when remeasured into U.S. dollars for financial reporting purposes. We have instituted a foreign cash flow hedging program to minimize the effects of currency fluctuations. However, hedging transactions may not successfully mitigate losses caused by currency fluctuations, and our hedging positions may be as strong as anticipated, our business modelpartial or may not be successful, or other unanticipated difficulties may be encountered. Further, we cannot assure you thatexist at all in the future. We also review our growth rate will equal the historical growth rates experienced by the two businesses separately.ADDITIONAL RISKS RELATING TO OUR BUSINESSOur success will depend on our abilitymonthly expected non-U.S. dollar denominated expenditure and look to manage our geographically dispersed operations successfully.Although we are headquartered in San Jose, California, many of our executives and employees are located in Dublin, Ireland and Herzeliya, Israel. Accordingly, our abilityhold equivalent non-U.S. dollar cash balances to compete successfully will depend in part on the ability of a limited number of key executives located in geographically dispersed officesmitigate currency fluctuations. We expect to integrate management, address the needs of our customers and respond to changes in our markets. If we are unable to effectively manage our remote operations, our business may be harmed.We may not be successful in licensing integrated, system-level solutions.We offer our application-level IP platforms built around our DSP cores, and continue to offer our DSP coresexperience the effect of exchange rate currency fluctuations on an annual and IP platforms on a stand-alonequarterly basis. We have limited experience in offering DSP cores and IP platforms as an integrated solution. Future licenses for these integrated solutions may be more difficult to close or on terms less favorable than we currently anticipate.to address evolving market demands, our business may be harmed. platforms are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, and 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 restructuring and reorganization efforts in the fourth quarter of 2002 and the first and third quarters of 2003 could adversely affect our ability to attract or retain customers who require certain R&D capabilities from their IP providers.negotiationprocess of negotiating potential acquisitions or joint ventures, as well as the integration of acquired or jointly developed businesses, technologies or products could cause diversionmay be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s time and our resources.attention. We may notcannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions or integrate acquired businesses or joint ventures with our operations. If we were to make any acquisitionacquisitions or enter into a joint venture, we may not receive the intended benefits of the acquisition or joint venture. If future acquisitionsventure or such an acquisition or joint ventures disruptventure may not achieve comparable levels of revenues, profitability or productivity as our operations,existing business or if we have difficulty integrating the businesses or technologies we acquire,otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition andor results of operations. Future acquisitions or joint venture may require substantial capital resources, which may require us to seek additional debt or equity financing.could suffer.or the price of our stock:• issuance of equity securities that would dilute our current stockholders’ percentages of ownership; • large one-time write-offs; • incurrence of debt and contingent liabilities; • difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies; • diversion of management’s attention from other business concerns; • contractual disputes; • risks of entering geographic and business markets in which we have no or only limited prior experience; and • potential loss of key employees of acquired organizations.
our brand identity.
Although we are not currently involved in any material litigation, we
directly and to expand our sales geographically.
ADDITIONAL RISKS RELATING TO OUR
INTERNATIONAL OPERATIONS
tax expenses.
29
Also our taxes on the Irish interest income may be double taxed both in Ireland and in the U.S. due to U.S. tax regulations and Irish tax restrictions on NOLs to off-set interest income.
A majority
We are exposed to financialthe 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 majorityprice of our investments are short-term. We do not have any derivative instruments.
30
All the potential changes noted above are based on sensitivity analysis performed on our balances as of September 30, 2003.
Item 4. CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2003. Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were (1) designed to ensure that material information relating to ParthusCeva, including our consolidated subsidiaries, is made known to them by others within those entities, particularly in the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance 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.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurredcommon stock during the fiscal quarterthree months ended SeptemberJune 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
2010.
| (c) | (d) | |||||||||||||||
| Total Number of | Maximum Number | |||||||||||||||
| Shares Purchased | of Shares that May | |||||||||||||||
| (a) | (b) | as Part of Publicly | Yet Be Purchased | |||||||||||||
| Total Number of | Average Price | Announced Plans | Under the Plans | |||||||||||||
| Period | Shares Purchased | Paid per Share | or Programs | or Programs) | ||||||||||||
| Month #1 (April 1, 2010 to April 30, 2010) | — | — | — | 106,409 | ||||||||||||
| Month #2 (May 1, 2010 to May 31, 2010) | 21,716 | $ | 11.19 | 21,716 | 2,084,693 | (1) | ||||||||||
| Month #3 (June 1, 2010 to June 30, 2010) | 86,293 | $ | 11.17 | 86,293 | 1,998,400 | |||||||||||
| TOTAL | 108,009 | $ | 11.18 | 108,009 | 1,998,400 | (2) | ||||||||||
| (1) | In May 2010, our board of directors approved the expansion of our share repurchase program by another two million shares of common stock, with one million shares available for repurchase in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, and one million shares available for repurchase in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. This authorization is in addition to the previous announced share repurchase program of one million shares which was fully utilized during the second quarter of 2010. Any repurchases of the one million shares of common stock pursuant to Rule 10b5-1 shall be affected in accordance with predetermined parameters set forth in a Rule 10b5-1 plan that we established. Any repurchases of the one million shares of common stock pursuant to Rule 10b-18 shall be affected from time to time, depending on market conditions and other factors, through open market purchases and privately negotiated transactions; provided such repurchases are in accordance with Rule 10b-18. Our repurchase program has no set expiration or termination date. | |
| (2) | The number represents the number of shares of our common stock that remain available for the repurchase pursuant to our Board’s authorization as of May 2010. |
(a) Exhibits
|
| |
| No. | Description | |
| 10.24 | 2010 Executive Bonus Plan (filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on August 3, 2010, and incorporated herein by reference) | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |
| 32 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | |
(b) Reports on Form 8-K31
On July 22, 2003, the Company furnished a current report on Form 8-K dated July 22, 2003 under Items 9 and 12 containing a copy of a press release announcing the Company’s financial results for the second quarter of 2003.
PARTHUSCEVA, INC.Date: November 13, 2003By:/S/ CHESTER J. SILVESTRI Chester J. SilvestriCEVA, INC. Date: August 9, 2010 By: /s/ GIDEON WERTHEIZER Gideon Wertheizer Chief Executive Officer
(principal executive officer) Date: November 13, 2003By:/S/ CHRISTINE RUSSELL Christine RussellDate: August 9, 2010 By: /s/ YANIV ARIELI Yaniv Arieli Chief Financial Officer
(principal financial officer and
principal accounting officer)INDEX TO EXHIBITSExhibitNo. Description10.1Letter Agreement dated September 5, 2003 between ParthusCeva, Inc. and Christine Russell31.1Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer2632