e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-49842
CEVA, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0556376
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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2033 Gateway Place,
Suite 150, San Jose, California
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95110-1002
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(Address of principal executive
offices)
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(Zip Code)
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(408) 514-2900
(Registrants telephone
number, including area code)
None
(Former name, former address and
former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par
value per share
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NASDAQ NATIONAL MARKET
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o
No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o
No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o
No þ
As of June 30, 2006, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $85,075,820 based on the closing sale price as
reported on the National Association of Securities Dealers
Automated Quotation System National Market System. Shares of
common stock held by each officer, director, and holder of 5% or
more of the outstanding common stock of the Registrant have been
excluded from this calculation in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at March 8, 2007
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Common Stock, $0.001 par
value per share
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19,466,805 shares
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DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on May 15,
2007 (the 2007 Proxy Statement) are incorporated by
reference into Item 5 of Part II and
Items 10, 11, 12, 13, and 14 of Part III.
FORWARD-LOOKING
STATEMENTS AND INDUSTRY DATA
This Annual Report contains forward-looking statements that
involve risks and uncertainties, as well as assumptions that if
they materialize or prove incorrect, could cause the results of
CEVA to differ materially from those expressed or implied by
such forward-looking statements and assumptions. All statements
other than statements of historical fact are statements that
could be deemed forward-looking statements. Forward-looking
statements are generally written in the future tense
and/or are
preceded by words such as will, may,
should, could, expect,
suggest, believe,
anticipate, intend, plan, or
other similar words. Forward-looking statements include the
following:
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Our belief that given the complexity of applications for DSPs,
there is increasingly an industry shift away from the
traditional approach of licensing standalone DSPs, and towards
licensing highly integrated application platforms incorporating
all the necessary hardware and software for their target
applications;
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Forward Concepts forecasts total DSP semiconductor shipments
will grow 15% in 2007 to $9.7 billion, while
system-on-chips
incorporating DSP technology continues to be another growth
sector for the technology;
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Our belief that the industry is indicating a continued demand
for highly integrated, licensable application platforms
incorporating DSP cores and all the necessary hardware and
software and that the growth in the demand for these platforms
will drive demand for our technology and that we are well
positioned to take full advantage of these major industry shifts;
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Our anticipation that the APAC region, specifically China, will
represent future growth potential for our business;
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Our planned future products are anticipated to enable true
mobile multimedia integration into cellular handsets and the
possible inclusion of other technologies and that these pioneer
solutions will allow us to provide the desired flexibility for
wireless semiconductors;
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Our belief that our introduction of additional features, such as
advances in our video technology, high-end audio technologies
and home entertainment applications will also contribute to our
growth in future periods;
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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
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Our belief that a successful surrender of our long-term lease in
Dublin, Ireland in 2007 will result in an associated cash
outflow of approximately $3.3 million associated with
restructuring charges.
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Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. The
forward-looking statements contained in this report are based on
information that is currently available to us and expectations
and assumptions that we deem reasonable at the time the
statements were made. We do not undertake any obligation to
update any forward-looking statements in this report or in any
of our other communications, except as required by law. All such
forward-looking statements should be read as of the time the
statements were made and with the recognition that these
forward-looking statements may not be complete or accurate at a
later date.
Many factors may cause actual results to differ materially from
those expressed or implied by the forward-looking statements
contained in this report. These factors include, but are not
limited to, those risks set forth in Item 1A: Risk Factors.
This report contains market data prepared by third parties,
including Gartner-Dataquest and Forward Concepts. Actual market
results may differ from the projections of such organizations.
This report includes trademarks and registered trademarks of
CEVA. Products or service names of other companies mentioned in
this Annual Report on
Form 10-K
may be trademarks or registered trademarks of their respective
owners.
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PART I
Company
Overview
Headquartered in San Jose, California, CEVA is a leading
licensor of innovative intellectual property (IP) platform
solutions and DSP cores for wireless, consumer and multimedia
applications. For more than fifteen years, CEVA has been
licensing DSP cores and platforms to leading semiconductor and
electronics companies worldwide.
We license a family of programmable DSP cores, DSP-based
subsystems and application-specific platforms, including
multimedia, audio,
Voice-over-IP
(Internet Protocol), Bluetooth and Serial ATA (SATA).
Our technology is licensed to leading electronics companies as
IP, which in turn manufacture, market and sell
application-specific integrated circuits (ASICs) and
application-specific standard products (ASSPs) based
on CEVA technology to systems companies for incorporation into a
wide variety of end products. Our IP is primarily deployed in
high volume markets, including wireless handsets (e.g. cellular
baseband, multimedia solutions and Bluetooth), portable
multimedia (e.g. portable video players and portable audio
players), home entertainment (e.g. DVD), storage markets
(e.g. hard disk drives) and communications markets (e.g.
high-speed serial storage and
Voice-over-IP
solutions).
Our revenue mix contains IP licensing fees,
per-unit
royalties and support and training fees and other type of
revenues. We have built a strong network of licensing partners
who rely on our technology to deploy their silicon solutions.
Today our technologies are widely licensed and power some of the
worlds leading wireless and consumer electronics brands,
including Atmel, Broadcom, Chipnuts, Freescale, Fujitsu,
Hitachi, Infineon, Marvell, National Semiconductor, NXP, Oki,
Renesas, ROHM, Samsung, Sharp, Silicon Laboratories (acquired by
NXP), Sony, Spreadtrum, STMicroelectronics, Thomson and Zoran.
In 2006 our licensees shipped over 190 million
CEVA-powered
chips, an increase of 45% over 2005 shipments of
131 million units.
CEVA was created through the combination of the DSP IP licensing
division of DSP Group, Inc. (DSPG) and Parthus
Technologies plc (Parthus) in November 2002. We have
over 190 employees worldwide, with research and development
facilities in Israel, Ireland and the United Kingdom, and sales
and support offices throughout Asia Pacific (APAC), Europe,
Israel and the United States. CEVA is traded on both NASDAQ
(CEVA) and the London Stock Exchange (CVA).
Industry
Background
Digital
Signal Processor(DSP) Cores
Digital Signal Processor (DSP) is one of the fastest-growing
sectors of the semiconductor industry. DSP is fundamental to all
communication (wireless, broadband, Voice over Internet Protocol
(VoIP), and to all digital multimedia processing (audio, video,
image). For example, in wireless, DSP converts an analog signal,
such as the human voice, to digital form, before being
transferred through an air-interface, and converts that digital
form back to an analog signal on the receiving side. DSPs power
the communication and multimedia functions of a wide array of
devices, including the baseband modems of cellular phones,
digital multimedia signals for devices including cellular
phones, portable multimedia players, camcorders and digital
still cameras. Digital Signal Processing techniques are also
widely used in applications such as digital DVDs/DVRs, HDTVs,
set-top boxes and the hard disk drives used for PCs and consumer
electronic devices.
As the number of electronic devices that require the processing
of digital data has grown, so has the demand for reliable and
ever more sophisticated DSP cores and associated algorithms
built around them. Analyst firm Forward Concepts forecasts total
DSP semiconductor shipments will grow 15% in 2007 to
$9.7 billion, while
system-on-chips
incorporating DSP technology continues to be another growth
sector for the technology.
Semiconductor
Intellectual Property (SIP)
The demand for wireless devices and multimedia applications has
grown substantially in recent years. As consumers demand
electronic products with more connectivity, portability and
capability, semiconductor
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manufacturers face ever growing pressure to make smaller,
feature-rich integrated circuits that are more reliable, less
expensive and have greater performance, all in the face of
decreasing product lifecycles and constrained battery power.
While semiconductor manufacturing processes have advanced
significantly to allow a substantial increase in the number of
circuits placed on a single chip, design capabilities resources
have not kept pace with the advances in this technology,
resulting in a growing design gap between their
increasing manufacturing potential and restrained design
capabilities. To address this design gap, many
semiconductor designers and manufacturers are increasingly
choosing to license proven intellectual property, such as
processor cores (including DSPs), memory and
application-specific platforms, from third party SIP companies
rather than to develop those technologies
in-house.
CEVA
Business
CEVA addresses the requirements of the embedded communications
and multimedia markets by designing and licensing programmable
DSP cores, DSP-based subsystems, application-specific platforms,
and range of software components which enable the rapid design
of DSP-based chips or application-specific solutions for
developing a wide variety of applications. Our offerings include
a family of programmable DSP cores with a range of cost,
power-efficiency and performance points; DSP-based subsystems
(the essential hardware components integrated with the DSP core
to form a
System-on-Chip
(SoC) design); and a portfolio of application platforms,
including multimedia, audio, Voice over Packet (VoP), Bluetooth
and Serial ATA (SATA).
Given the complexity of applications for DSPs, there is
increasing industry shift away from the traditional approach of
licensing standalone DSPs, and towards licensing highly
integrated application platforms incorporating all the necessary
hardware and software for their target applications. With more
complex designs and shorter design cycles it is no longer cost
efficient and becoming progressively more difficult for most
semiconductor companies and designers to develop the technology
in-house. Therefore, companies increasingly rely on licensing
other intellectual property, such as DSP cores, from third
parties like CEVA. Such business models also enable
semiconductor companies to further enhance their
open-architecture-based offerings with complementary products,
available through a third-party community of developers, such as
CEVAnet, CEVAs third-party network.
IP
Business Model
Our objective is that our CEVA DSP cores become the
DSP-of-choice
in the embedded DSP market. To enable this goal, we have and
continue to license on a worldwide basis to semiconductor and
system OEM companies that design, manufacture and source
CEVA-based solutions combined with their own differentiating
technology. We believe our business model offers us some key
advantages. By not focusing on manufacturing or selling of
silicon products, we are free to widely license our technology,
and free to focus most of our resources on research and
development and DSP technologies. By choosing to license the
programmable DSP core, manufacturers can achieve the advantage
of creating their own differentiated solutions, and develop
their own unique product roadmaps. Through our extensive
licensing, we have established a worldwide community developing
CEVA-based solutions, and therefore we can leverage their
strengths, customer relationships, proprietary technology
advantages, and existing sales and marketing infrastructure. In
addition, as our intellectual property is widely licensed and
deployed, system OEM companies can obtain CEVA-based chips from
a wide range of suppliers, thus reducing dependence on any one
supplier, fostering price competition which thereby helps
contain the cost of CEVA-based products.
We operate a licensing and
per-unit
royalty business model. We typically charge a license fee for
access to our technology, and a royalty fee for each unit of
silicon which incorporates our technology. License fees are
invoiced in accordance with contract terms. Royalties are
reported and invoiced one quarter in arrears and are generally a
percentage of the sales price of the CEVA-based silicon product
or a fixed unit rate.
Strategy
We believe the industry is indicating a continuing demand for
highly integrated, licensable application platforms
incorporating DSP cores and all the necessary hardware and
software for their target applications. We
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believe that the growth in the demand for these platforms will
drive demand for our technology. As CEVA offers expertise
developing these complete solutions in a number of key growth
markets including mobile multimedia, audio Bluetooth and
storage, we believe we are well positioned to take full
advantage of these major industry shifts. To do so we intend to:
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Continue to develop and enhance our range of DSP cores and
associated subsystems. We seek to enhance our
existing family of DSP cores and DSP-based subsystems with
additional features, performance and capabilities.
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Continue to develop and enhance our range of complete and
highly-integrated platform solutions. We intend
to continue developing our integrated IP solutions which combine
application-specific software and dedicated logic
such as video, audio and VOIP built around our DSP
cores, and deliver to our licensing partners as a complete and
verified system solution.
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Capitalize on our relationships and
leadership. We seek to expand our worldwide
community of semiconductor and system OEM licensees who are
developing CEVA-based solutions.
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Capitalize on our IP licensing and royalty business
model. We seek to maximize the advantages of our
IP model which we believe is the best vehicle for pervasive
adoption of our technology. Furthermore, by not having to focus
on manufacturing or selling of silicon products, we are free to
focus most of our resources on research and development of new
licensable technologies and applications.
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Products
We are the leading licensor of innovative IP platform solutions
and DSP cores for wireless, consumer and multimedia applications
to the semiconductor industry. We offer a family of programmable
DSP cores, associated subsystems and a portfolio of application
platforms including multimedia, audio, Voice over Packet (VoIP),
Bluetooth and Serial ATA (SATA).
The diagram below illustrates how our portfolio of DSP cores,
DSP-based subsystems and application-specific platforms
integrate into a typical
system-on-chip
(SOC).
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CEVA
DSP Cores
We market a family of synthesizable programmable DSP cores, each
delivering a different balance of performance, power dissipation
and cost, allowing customers to select a core ideally suited to
their target application. The ability to match processing power
to the application is an important consideration when designers
select a DSP supplier. Our family of cores is largely software
compatible, meaning that software from one core can be applied
to another which significantly reduces investment in code
development, tools and designer training.
Our current portfolio of programmable DSP cores includes:
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CEVA-X- CEVA-X is a scalable VLIW-SIMD DSP
architecture delivering high levels of performance at low power
consumption. CEVA-X is uniquely designed as a multipurpose
architecture, allowing multiple derivative cores with the
optimal performance/price/power point requirements to multiple
markets such as 2.5G/3G multimedia phones, PDAs, digital cameras
and camcorders, DTV, Set-top boxes and HD-DVD. CEVA-X combines
extendibility the architecture can be extended with
user-defined instruction sets with scalability,
supporting between 2 to 8 MAC units as well as additional
computational resources and memory bandwidth. CEVA-X enables
licensees to efficiently develop software using high-level
languages such as C and C++, which reduces the cost of
development.
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CEVA-X1620, the first implementation of the CEVA-X architecture
family, is a
16/32 bit
data width, dual MAC DSP with four 40-bit arithmetic units. The
CEVA-X1620 can run up to 8 instructions simultaneously and up to
20 SIMD operations at any given cycle. Demonstration CEVA-X1620
silicon runs at 400MHz (TSMC 0.13µ).
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CEVA-X1622 is the second implementation of the CEVA-X
architecture. It offers the same basic features as the CEVA-X
1620 but offers an enhanced memory architecture, including
configurable memory size (64KB or 128KB), and configurable
memory bank organizations in 2 or 4 blocks.
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CEVA-X1641 is the third implementation of the CEVA-X
architecture. It is the first Quad-MAC DSP CEVA-X core and is
designed specifically to run highly computational intensive
tasks that require substantial data throughput and high memory
bandwidth, such as WiMAX, WiBro, 3G LTE and advanced multimedia
standards.
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CEVA-X DSP cores are complemented by development platforms and
Software Development Kits (SDK). All components of CEVA-X tools
are developed in-house by CEVA to deliver optimal performance.
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CEVA-X Markets: 4G/WiMAX, 3G wireless,
portable multimedia video & audio processing, and home
entertainment (Digital TV, HDTV, PVR and HD-DVD).
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CEVA-Teak- CEVA-Teak is a 16-bit fixed-point
general-purpose DSP core. Its dual MAC architecture features
high-performance and bandwidth for complex signal processing
implementations. Its capabilities to run up to 4 instructions
simultaneously while using only a single 16-bit instruction word
make it ideal for portable multimedia and wireless communication
markets.
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CEVA-Teak Markets: 2.5/3G wireless, portable
multimedia, portable audio players, digital still cameras and
VoIP.
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CEVA-TeakLite- CEVA-TeakLite is a single
Multiply-Accumulate (MAC) 16-bit fixed point DSP core. The
TeakLite core is the most established and successful DSP core in
CEVAs DSP family with over 750 million chips powered
by CEVA- TeakLite shipped to date. CEVA-TeakLite is positioned
to meet high volume, but very cost sensitive markets such as
2G/2.5G and ultra-low-cost (ULC) wireless handsets, portable
audio players, hard disk drives, optical drives, and home
entertainment and communication devices. CEVA-TeakLite is fully
compatible to the legacy CEVA-Oak DSP at assembly and binary
levels which reduces our customers software development
costs.
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CEVA-TeakLite Markets: 2/2.5G and ULC
wireless, portable audio players, VoIP phones, hard disk drives
and hearing aids.
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CEVA-TeakLite-II- CEVA-TeakLite-II is a single
Multiply-Accumulate (MAC) 16-bit fixed point DSP core. The core
extends the architecture of CEVA-TeakLite and CEVA-Oak, the most
established and successful DSP cores to date in CEVAs DSP
family. CEVA-TeakLite-II achieves a performance increase
compared to its predecessor core, and delivers higher-level of
integration in a small silicon die size. CEVA-TeakLite-II is
positioned to meet high volume, but very cost sensitive markets
such as 2G/2.5G wireless handsets, portable media players, hard
disk drives, optical drives, and digital cordless phones.
CEVA-TeakLite-II is fully compatible to both CEVA-TeakLite and
CEVA-Oak DSPs at assembly and binary levels, which reduces our
customers software development costs.
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CEVA-TeakLite-II Markets: 2/2.5G wireless,
portable audio players, VoIP phones and hard disk drives.
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We deliver our technology in two ways: either in the form of a
mask-level chip layout (called a hard core), or in the form of a
hardware description language definition (known as a soft core
or a synthesizable core). All CEVA DSP cores are soft cores that
can be manufactured on any process using any physical library,
and all are accompanied by a complete set of tools and an
integrated development environment. An extensive third-party
network supports CEVA DSP cores with a wide range of
complementing software and platforms. In addition, we provide
the necessary development platforms, SDK and software debug
tools, which facilitate system design, debug and software
development.
CEVA
DSP-based Subsystems
Designers today face escalating design costs and shrinking
design timelines combined with ever decreasing probability of
right-first-time silicon. To further reduce the cost, complexity
and associated risk in bringing products to market, CEVA has
developed a range of DSP-based subsystems which combine selected
hardware peripherals which are essential to designers deploying
CEVA DSP cores. Our subsystems contain a collection of
peripherals, such as on-chip data and program memory
controllers, high-performance DMA controller, Buffered Time
Division Multiplexing Port (BTDMP), high-throughput Host
Processor Interface (HPI), and power management unit. These
hardware subsystems are designed to be easily integrated into
existing
system-on-chips
(SoCs), providing standard protocols and interfaces, such as AHB
and APB bridges for Host-DSP efficient communications.
Our family currently includes five DSP-based subsystems:
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CEVA-XS1100 a low-power,
highly-integrated DSP-based subsystem, designed to ease the
development and integration process and further reduce
development costs and
time-to-market
for CEVA-X1620 DSP-based 3G wireless baseband designs. The
CEVA-XS1100 exploits multiple innovative power-saving techniques
such as system modules active only when needed, level-two memory
architecture and caching, adjustable DSP system speed,
decentralized interconnect topology and selective
hardware/software
wake-up
events. The CEVA-XS1100 includes a complete set of DSP
peripherals and interfaces, such as an Interrupt Controller,
Power Management Unit, Timers and General Purpose I/Os, and
provides easy means of connectivity to other systems present on
chip.
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CEVA-XS1100 Markets: 3G Wireless Modems.
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CEVA-XS1102 a low-power,
highly-integrated DSP-based subsystem, designed to ease the
development and integration process and further reduce
development costs and
time-to-market
for CEVA-X1622 DSP-based 3G wireless baseband designs. The
CEVA-XS1102 exploits multiple innovative power-saving techniques
such as system modules active only when needed, level-two memory
architecture and caching, adjustable DSP system speed,
decentralized interconnect topology and selective
hardware/software
wake-up
events. The CEVA-XS1102 includes a complete set of DSP
peripherals and interfaces, such as an Interrupt Controller,
Power Management Unit, Timers and General Purpose I/Os, and
provides easy means of connectivity to other systems present on
chip.
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CEVA-XS1102 Markets: 3G/3.5G Wireless Modems.
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CEVA-XS1200 a low-power,
highly-integrated DSP-based subsystem, designed to ease the
development and integration process and further reduce
development costs and
time-to-market
for CEVA-X DSP-based
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designs. The CEVA-XS1200 subsystem is based on the CEVA-XS1100
subsystem and enhanced with a programmable 3D DMA co-processor
and glue- less TDM ports. This provides designers with the
ability to target high-performance applications, such as
Multimedia, Communications, VoIP and Storage.
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CEVA-XS1200 Markets: 3G wireless applications,
portable multimedia players, home entertainment and high
fidelity audio systems and VoIP multi-channel applications.
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Xpert-TeakLite-II a complete, low
power, low cost, programmable DSP-based subsystem, designed for
the embedded application markets. It includes configurable
cached program memory, direct program, data memories, high
performance Direct Memory Access (DMA) controller, Buffered Time
Division Multiplexing Port (BTDMP), Host processor
interface unit (PIU), standard AMBA bridges (AHB & APB)
and optional Ethernet MAC.
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Xpert-TeakLite-II Markets: 2G/2.5G wireless
applications, portable multimedia players, consumer/professional
audio, VoIP, VoCable, VoDSL and Voice over optical networks
applications.
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Xpert-Teak a complete DSP-based
subsystem for low-power, low-cost SoC designs targeted at
applications, such as wireless baseband and portable multimedia
markets. Xpert-Teak includes multiple hardware peripherals and
incorporates on-chip data and program memories, high-performance
DMA controller, Buffered Time Division Multiplexing Port
(BTDMP), high-throughput Host Processor Interface (HPI) and
other peripherals.
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Xpert-Teak Markets: 2/2.5G wireless
applications, image and video processing, consumer/professional
audio, VoIP, VoCables and VoDSL applications.
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CEVA
Application-Specific Platforms
CEVA application-specific platforms are a family of complete
system solutions for a range of applications. Platforms
typically integrate a CEVA DSP core, hardware subsystem and
application-specific (e.g. video processing) software and logic.
Our family of platforms spans multimedia (audio, video, image),
voice (VoIP), Bluetooth and high-speed serial communications
(SATA). CEVA application-specific platforms fundamentally reduce
the complexity, cost of ownership, and
time-to-market
for products developed utilizing the platforms.
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CEVA-Audio- a high performance, low-power audio
platform for consumer devices. CEVA-Audio is a fully
synthesizable soft IP, operating at up to 200MHz, and built
around a small DSP core and cache memory subsystem. With overall
die size of less than two square mm, and 0.1 mW/MHz for stereo
MP3 decoder (using TSMC 0.13u G process), it supports all of the
industry standard audio and speech codecs, including MP3, WMA,
AAC, HE-AAC, Ogg Vorbis, BSAC,
NB-AMR and
WB-AMR.
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CEVA-Audio Markets: portable audio players,
cellular handsets and home entertainment systems.
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CEVA Mobile-Media2000- a flexible, integrated
software based platform, combining audio, video, voice and
imaging functions at extremely low power consumption and at a
small die size. Programmable for a wide range of multimedia
standards, resolutions and frame rates, the CEVA
Mobile-Media2000 solution allows licensees to re-target a single
silicon platform for any multimedia processing requirements,
thus negating the need for costly, time-consuming silicon
re-spins.
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CEVA Mobile-Media2000 solution is a complete hardware plus
software platform. The hardware portion includes the high
performance CEVA-X1620 DSP core, the CEVA-XS1200 subsystem
platform. The software element is a collection of industry
standard video and audio codes, such as H.264 decoder and
encoder, MPEG4 decoder and encoder, MP3 and AMR. The video codes
of Mobile-Media2000 make use of CEVA-patented FST technology
that allows high resolution video (DVD quality) to be processed
fully in software using a low cost and low power DSP.
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Mobile-Media2000 Markets: high-end feature
phones, smartphones and portable multimedia devices.
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CEVA-VoP- is a complete platform enabling a wide
range of cost-sensitive VoIP products targeting residential and
enterprise telecom markets. Based on CEVAs
Xpert-TeakLite-II, the CEVA-VoP platform is a complete hardware
and software solution that can be deployed as a subsystem in an
integrated networking
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and VoP SoC. The platform integrates the widely adopted,
programmable CEVA-TeakLite-II DSP core, with added hardware
peripherals capable of handling multiple, simultaneous,
packet-voice channels on a single core. The solution includes
all required DSP software, such as speech compression and
decompression, echo cancellation, telephony functions and
signaling/networking. The software is open, allowing design
licensees to add proprietary algorithms and broaden the use of
the design for other markets or applications.
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CEVA-VoP Markets: residential and consumer
Voice over Packet (e.g. VoIP).
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CEVA Bluetooth- a flexible, silicon-proven
Bluetooth platform containing all the required deliverables for
OEM, semiconductor, ASIC, and fabless customers to rapidly
design
Bluetooth®technology
into their ASICs and ASSPs. The platform is designed to
accelerate Bluetooth deployment and reduce
time-to-certification
and
time-to-revenue.
It complies fully with Bluetooth version 1.2 and implements all
mandatory and optional features. The complete solution includes
Bluetooth baseband RTL, Bluetooth protocol stack and full
Bluetooth profile support.
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CEVA Bluetooth Markets: Wireless handsets,
smartphones / PDAs, cordless phones, wireless PBX and Bluetooth
headsets.
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CEVA SATA- a complete, verified Serial ATA
licensable solution combining a SATA 1.5Gbps PHY or SATA 3.0Gbps
PHY with a Link/Transport/Command Protocol stack, and is fully
compliant to the Serial ATA Revision 2.5 specification. The
SATA PHY is supplied in the form of a GDSII hard macro with
simulation models and physical views. The SATA Protocol (PHY
Control, Link, Transport and Command/DMA layers) is delivered in
the form of an RTL package, and supported by a comprehensive
test bench environment plus physical design scripts for
realization on the target semiconductor processes.
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CEVA-SATA Markets: Storage, set-top boxes, PVR
and HD-DVD.
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Sales of our Ceva-X family of products and services generated
21% of our revenues both for 2006 and 2005, and 18% for 2004.
Sales of our Ceva-TeakLite family of products and services
generated 41%, 16% and 30% of our revenues for 2006, 2005 and
2004, respectively. We expect these products will continue to
generate a significant portion of our revenues for 2007.
Principal
Markets
We target our portfolio of DSP cores, DSP-based subsystems and
application-specific platforms at six principal markets:
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CEVA is the worlds leading licensor of DSP technology to
the wireless industry. Hundreds of millions of cellphones have
deployed CEVA technology. Today seven of the worlds top 12
wireless handset companies utilize the ultra power efficient
high-performance CEVA DSP cores. With complete solutions
spanning modem and application processing platforms and
Bluetooth technologies, the portfolio of CEVA IP greatly
accelerate
time-to-market,
functionality and performance of next generation handsets.
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Portable Multimedia Players
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CEVAs portable multimedia solutions integrate a DSP core,
DSP-based subsystem and comprehensive software codecs that
support all industry audio, video and imaging standards in a
silicon proven platform. Architected for ultra low-power,
minimal memory requirements and highest levels of resolution,
the solutions offer the industries only complete software
programmable multimedia platform.
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CEVA offers a complete, highly-integrated, low-power, low-cost
audio platform for consumer devices, including wireless
handsets, portable audio players and home entertainment systems.
CEVA-Audio combines several CEVA-developed technologies,
including CEVA-TeakLite-II, the new and enhanced version
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of the widely-adopted CEVA-TeakLite DSP core, a cache memory
subsystem, audio peripherals, a comprehensive set of audio
codecs and complete tool chain support.
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CEVA technologies are incorporated annually in tens of millions
of disk drives, DVD players and recorders. CEVA technologies are
chosen for a combination of high-performance with small die size
and low power consumption. CEVA storage offerings include DSP
cores for magnetic and optical drive controllers, as well as
high speed serial communications, including SATA.
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Innovation in todays vehicles is principally driven by
microelectronics spanning diverse areas such as navigation,
wireless communication, handsfree systems, multimedia
entertainment and digital radio. CEVA provides a portfolio of
connectivity, multimedia and Bluetooth solutions, powered by
CEVA DSPs, for next generation telematic applications.
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CEVA provides networking and telecommunications semiconductor
vendors a broad range of solutions targeting
IP-phones,
Residential Gateways including PON (Passive Optical network).
Complete VoIP, Giga Ethernet and Serdes silicon verified
solutions from CEVA are architected to reduce the cost and
time-to-market
for telecom and networking products.
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Customers
We have licensed our DSP cores, DSP-based subsystems and
application-specific platforms to leading semiconductor
companies throughout the world. These companies incorporate our
IP into application-specific chips or custom-designed chips that
they manufacture, market and sell to original equipment
manufacturers (OEMs) of a variety of electronic products. We
also license our DSP cores, DSP-based subsystems and
application-specific platforms to OEMs directly. Included among
our licensees are the following customers; Atmel, Broadcom,
Chipnuts, EoNex, Freescale, Fujitsu, Infineon, Marvell,
National Semiconductor, NXP, Oki, Renesas, ROHM, Samsung, Sharp,
Silicon Laboratories (acquired by NXP), Sony, Spreadtrum,
STMicroelectronics, Thomson, VIA and Zoran. The majority of our
licenses have royalty components, of which 24 were shipping at
the end of 2006. Of these 24 customers, 16 were generating
royalty revenues per unit shipped and eight were under prepaid
royalty agreements. One customer accounted for 16% of our total
revenues in 2006. The identity of our greater-than-10% customers
varies from period to period, and we do not believe that we are
materially dependent on any one specific customer or any
specific small number of licensees.
International
Sales and Operations
Customers based in EMEA (Europe, Middle East and Africa) and
APAC (Asia Pacific) accounted for 64.1% of our total revenues
for 2006, 64.8% for 2005 and 70.5% for 2004. Although all of our
sales to foreign customers are denominated in United States
dollars, we are subject to risks of conducting business
internationally. These risks include unexpected changes in
regulatory requirements, fluctuations in exchange rates, delays
resulting from difficulty in obtaining export licenses for
certain technology, tariffs, other barriers and restrictions and
the burden of complying with a variety of foreign laws.
Information on the geographic breakdown of our revenues and
location of our long-lived assets is contained in Note 9 to
our consolidated financial statements, which appear elsewhere in
this annual report.
Moreover, part of our expenses in Israel and Europe are paid in
Israeli currency (NIS) and Euros, which subjects us to the risks
of foreign currency fluctuations and to economic pressures
resulting from Israels general rate of inflation. Our
primary expenses paid in NIS and Euro are employee salaries and
lease payments on our Israeli and Dublin facilities. As a
result, an increase in the value of NIS and Euro in comparison
to the U.S. dollar could increase the cost of our
technology development, research and development expenses and
general and administrative expenses. We have not in the past,
but may in the future, hedge against fluctuations in exchange
rates. Future hedging transactions may not successfully mitigate
losses caused by currency fluctuations.
8
Sales and
Marketing
We license our technology through a direct sales force. As of
December 31, 2006, we had 20 employees in sales and
marketing. We have sales offices and representation in nine
locations worldwide.
Maintaining close relationships with our customers is a central
part of our strategy. We typically launch each new core,
platform or solution upgrade with a signed license agreement
with a tier-one customer, which helps ensure that we are clearly
focused on viable applications that meet broad industry needs.
Staying close to our customers and strengthening these
relationships is a significant part of our strategy. It allows
us to create a roadmap for the future development of existing
cores and application platforms, and it helps us to anticipate
the next potential applications for the market. We seek to use
these relationships to deliver new products in a faster time to
market.
We use a variety of marketing initiatives to stimulate demand
and brand awareness in our target markets. These marketing
efforts include contacts with industry analysts, presenting at
key industry trade shows and conferences and posting information
on our website. Our marketing group runs competitive benchmark
analyses to help us maintain our competitive position.
Technical
Support
We offer technical support services through our offices in
Israel, Ireland, Asia Pacific and the United States. Our
technical support services include:
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assistance with implementation, responding to customer-specific
inquiries, training and, when and if they become available,
distributing updates and upgrades of our products;
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application support, consisting of providing general hardware
and software design examples,
ready-to-use
software modules and guidelines to our licensees to assist them
in using our technology; and
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design services, consisting of creating customer-specific
implementations of our DSP cores and application platforms.
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We believe that our technical support services are key factors
in our licensees ability to embed our cores and platforms
in their designs and products. Our technology is highly complex,
combining sophisticated DSP cores architecture, integrated
circuit designs and development tools. Effective customer
support is critical in helping our customers to implement our
solutions and helps to shorten the time to market for their
applications. Our support organization is made up of experienced
engineers and professional support personnel. We conduct
detailed technical training for our licensees and their
customers and meet with them on a regular basis to closely track
the implementation of our technology.
Research
and Development
Our research and development team is focused on improving and
enhancing our existing products as well as developing new
products to broaden our offering and market opportunity. These
efforts are largely driven by current and anticipated customer
needs.
Our research and development and customer technical support
teams consist of 136 engineers working in five development
centers located in Israel, Ireland, and the United Kingdom. This
team consists of engineers who possess significant experience in
developing DSP cores and solutions. In addition, we engage third
party contractors with specialized skills sets as required to
support our research and development. Our research and
development expenses, net of related research grants, were
approximately $17, $20 and $19 million in 2004, 2005 and
2006, respectively.
We encourage our research and development personnel to maintain
active roles in the various international organizations that
develop and maintain standards in the electronics and related
industries. This involvement allows us to influence the
development of new standards; keeps us informed as to important
new developments regarding standards; and allows us to
demonstrate our expertise to existing and potential customers
who also participate in these standards-setting bodies.
9
Competition
The markets in which we operate are intensely competitive. They
are subject to rapid change and are significantly affected by
new product introductions. We compete with other suppliers of
licensed DSP cores and solutions. We believe that the principal
competitive elements in our field are processor performance,
overall system cost, power consumption, flexibility,
reliability, software availability, design cycle time, ease of
implementation, customer support, financial strength and
reputation gained in over 15 years of successful DSP
deployment. We believe that we compete effectively in each of
these areas, but can offer no assurance that we will have the
financial resources, technical expertise, and marketing or
support capabilities to compete successfully in the future.
The market is dominated by large, fully integrated semiconductor
companies that have significant brand recognition, a large
installed base and a large network of support and field
application engineers. We face direct and indirect competition
from:
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IP vendors that offer programmable DSP cores;
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IP vendors of general purpose processors with DSP extensions;
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internal design groups of large chip companies that develop
proprietary DSP solutions for their own application-specific
chips; and
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semiconductor companies that offer
off-the-shelf
programmable DSP chips.
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We face direct competition in the DSP core area mainly from
Tensilica. Also, some chip companies such as Verisilicon that
license DSP cores in addition to their semiconductor business.
In recent years, we have also faced competition from companies
that offer microcontroller/microprocessor intellectual property.
These companies products are used for control and system
functions in various applications, including personal digital
assistants and video games. Embedded systems typically
incorporate both microprocessors responsible for system
management and a programmable DSP that is responsible for
communication and video/audio/voice compression. Recently,
companies such as ARC, ARM Holdings, MIPS, and Tensilica have
added a DSP extension and make use of it to provide platform
solutions in the areas of video and audio.
With respect to certain large potential customers, we also
compete with internal engineering teams, which may design
programmable DSP core products in-house. Companies such as NXP,
Renesas and Zoran, license our designs for some applications and
use their own proprietary cores for other applications. These
companies may also choose to license their proprietary DSP cores
to third parties and, as a result, become direct competitors.
We also compete indirectly with several general-purpose
semiconductor companies, such as, Analog Devices and Texas
Instruments. OEMs may prefer to buy off the shelf
general-purpose chips or DSP-based application specific chips
from these large, established semiconductor companies rather
than purchase chips from our licensees.
Aside from the in-house research and development groups, we do
not compete with any individual company across the range of our
market offerings. Within particular market segments, however, we
do face competition to a greater or lesser extent from other
industry participants. For example, in the following specific
areas we compete with the companies indicated:
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in the multimedia market Hantro, Imagination
Technologies, ARC, Chips & Media and Tensilica;
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in the serial storage technology area ARM, Synopsys
and Silicon Image;
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in
Voice-over-IP
applications MIPS Technologies, ARM; and
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in audio applications ARM, Tensilica and ARC.
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Proprietary
Rights
Our success and ability to compete are dependent on our ability
to develop and maintain the proprietary aspects of our
intellectual property and to operate without infringing the
proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright laws and
contractual restrictions to protect the proprietary aspects of
our technology. These legal protections afford only limited
protection of our technology. We
10
also seek to limit disclosure of our intellectual property and
trade secrets by requiring employees and consultants with access
to our proprietary information to execute confidentiality
agreements with us and by restricting access to our source code
and other intellectual property. Due to rapid technological
change, we believe that factors such as the technological and
creative skills of our personnel, new product developments and
enhancements to existing products are more important than
specific legal protections of our technology in establishing and
maintaining a technology leadership position.
We have an active program to protect our proprietary technology
through the filing of patents. Our patents relate to our DSP
cores, DSP-based subsystems and application-specific platform
technologies. We hold 36 patents in the United States and six
patents in the EMEA (Europe, Middle East and Africa) region with
expiration dates between 2013 and 2022. In addition, we have 16
patent applications pending in the United States, six pending
patent applications in the EMEA region and four pending patent
applications in Asia Pacific (APAC).
We actively pursue foreign patent protection in other countries
where we feel it is prudent to do so. Our policy is to apply for
patents or for other appropriate statutory protection when we
develop valuable new or improved technology. The status of
patents involves complex legal and factual questions, and the
breadth of claims allowed is uncertain. Accordingly, there are
no assurances that any patent application filed by us will
result in a patent being issued, or that our issued patents, and
any patents that may be issued in the future, will afford
adequate protection against competitors with similar technology;
nor can we be assured that patents issued to us will not be
infringed or that others will not design around our technology.
In addition, the laws of certain countries in which our products
are or may be developed, manufactured or sold may not protect
our products and intellectual property rights to the same extent
as the laws of the United States. We can provide no assurance
that our pending patent applications or any future applications
will be approved or will not be challenged by third parties,
that any issued patents will effectively protect our technology,
or that patents held by third parties will not have an adverse
effect on our ability to do business.
The semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property
rights. Questions of infringement in the semiconductor field
involve highly technical and subjective analyses. Litigation may
in the future be necessary to enforce our patents and other
intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or
invalidity. We cannot assure you that we would be able to
prevail in any such litigation, or be able to devote the
financial resources required to bring such litigation to a
successful conclusion.
In any potential dispute involving our patents or other
intellectual property, our licensees could also become the
targets of litigation. We are generally bound to indemnify
licensees under the terms of our license agreements. Although
our indemnification obligations are generally subject to a
maximum amount, these obligations could nevertheless result in
substantial expenses. In addition to the time and expense
required for us to indemnify our licensees, a licensees
development, marketing and sale of products embodying our
solutions could be severely disrupted or shut down as a result
of litigation.
We also rely on trademark, copyright and trade secret laws to
protect our intellectual property. We have applied for the
registration in the United States of our trademark in the name
CEVA and the related CEVA logo, and currently market our DSP
cores and other technology offerings under this trademark.
11
Employees
The table below presents the number of employees of CEVA as of
December 31, 2006 by function and geographic location.
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Number
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Total employees
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196
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Function
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Research and development
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136
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Sales and marketing
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20
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Technical support
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13
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Administration
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27
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Location
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Israel
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124
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Ireland
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35
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United Kingdom
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10
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United States
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12
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Elsewhere
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15
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Our employees are not represented by any collective bargaining
agreements, and we have never experienced a work stoppage. We
believe our employee relations are good.
A number of our employees are located in Israel. Certain
provisions of Israeli law and of the collective bargaining
agreements between the Histadrut (General Federation of Labor in
Israel) and the Coordination Bureau of Economic Organizations
(the Israeli federation of employers organizations) apply
to our Israeli employees.
In 2004, we finalized and adopted a new Code of Business Conduct
and Ethics regarding the standards of conduct of our directors,
officers and employees, and the Code is available on our website
at www.ceva-dsp.com.
Corporate
History
Our company was incorporated in Delaware on November 22,
1999 under the name DSP Cores, Inc. We changed our name to
ParthusCeva, Inc. in November 2002 and to CEVA, Inc. in December
2003. Further details are contained in item 7.
Available
Information
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to reports pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, are
available, free of charge, on our website at www.ceva-dsp.com,
as soon as reasonably practicable after such reports are
electronically filed with the Securities and Exchange Commission
and are also available of the SECs website at
www.sec.gov.
Our website and the information contained therein or connected
thereto are not intended to be incorporated into this Annual
Report on
Form 10-K.
12
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 all of our forward-looking
statements in this annual report, and in any other public
statements we make, may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future
results. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any further disclosures we make in our
reports filed with the Securities and Exchange Commission.
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
incorporated are highly competitive; for example, semiconductor
customers may choose to adopt a multi-chip,
off-the-shelf
chip solution versus licensing or using highly integrated chips
that embed our technologies. Aggressive competition could result
in substantial declines in the prices that we are able to charge
for our intellectual property. Many of our competitors are large
companies that have significantly greater financial and other
resources than we have. The following factors may have an impact
on our competitiveness:
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Microprocessor IP providers, such as ARM, MIPS Technologies,
Tensilica and ARC, are offering DSP extensions to their IP.
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SATA IP market is highly standardized with several vendors
offering similar products, leading to price pressure for both
licensing and royalty revenue.
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Our video solution is software based and competes with hardware
implementation offered by companies such as Hantro and other
software solution offered by Hantro, Imagination Technologies,
Tensilica and Chips & Media.
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ARC is offering a licensing model based on royalty payments
specifically for Chinese customers that waives initial licensee
fees.
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Lower license fees and overall erosion of average selling prices
of our IP.
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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. We compete on the basis of processor
performance, overall system cost, power consumption,
flexibility, reliability, software availability, design cycle
time, ease of implementation, customer support, name recognition
and reputation, and financial strength. Our inability to compete
effectively on these basis could have a material adverse effect
on our business, results of operations and financial condition.
Our
quarterly operating results fluctuate from quarter to quarter
due to a variety of factors, including our lengthy sales cycle,
and may not be 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:
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the timing of the introduction of new or enhanced technologies
by us and our competitors, as well as the market acceptance of
such technologies;
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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;
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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;
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the gain or loss of significant licensees;
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delays in the commercialization of end products that incorporate
our technology;
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changes in our pricing policies and those of our
competitors; and
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restructuring, asset impairment and related charges.
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We
rely significantly on revenue derived from a limited number of
customers.
We expect that a limited number of customers, varying in
identity from
period-to-period,
will account for a substantial portion of our revenues in any
period. Our five largest customers, varying in identity from
period-to-period,
accounted for 41% of total revenues in 2006, 36% in 2005 and 46%
in 2004. Our five largest customers paying per unit royalties,
varying in identity from
period-to-period,
accounted for 75% of total royalty revenues in 2006, 73% in 2005
and 67% in 2004. Moreover, license agreements for our DSP cores
have not historically provided for substantial ongoing license
payments. 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 succeed in these efforts will
depend on a variety of factors, including the performance,
quality, breadth and depth of our current and future products,
as well as our sales and marketing skills. In addition, some of
our licensees may decide to satisfy their needs through in-house
design and production. Our failure to obtain future customer
licenses would impede our future revenue growth and could
materially harm our business.
We
depend on market acceptance of third-party semiconductor
intellectual property.
The semiconductor intellectual property (SIP) industry is a
relatively new and emerging trend. Our future growth will depend
on the level of acceptance by the market 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 the traditional approach
of licensing standalone DSPs, and towards licensing highly
integrated application platforms incorporating all the necessary
hardware and software for their target applications. These
trends that will enable our growth are largely beyond our
control. Semiconductor customers may choose to adopt a
multi-chip,
off-the-shelf
chip solution versus licensing or using highly integrated chips
that embed our technologies. Semiconductor customers may also
decide to design programmable DSP core products in-house rather
than license them from us. 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.
Because
our IP solutions are components of end products, if
semiconductor companies and electronic equipment manufacturers
do not incorporate our solutions into their end products or if
the end products of our customers do not achieve market
acceptance, we may not be able to generate adequate sales of our
products.
We do not sell our IP solutions directly to end-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
upon our customers to incorporate our technology into their end
products at the design stage. Once our customer incorporates a
competitors technology into its end product, it becomes
significantly more difficult for us to sell our technology to
that customer because changing suppliers involves significant
cost, time, effort and risk for the customer. As a result, we
may incur significant expenditures on the development of a new
technology without any assurance that our customer will select
our technology for incorporation into its own product and
without this design win, it becomes significantly
difficult to sell our IP solutions. Moreover, even after our
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 to reach the market until long
after the initial design win with our 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 not limited to, changes in the
competitive position of our technology, our customers
financial stability, and our ability to ship products according
to our customers schedule.
14
Further, because we do not control the business practices of our
customers, 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
customers will devote satisfactory efforts to promote our IP
solutions. In addition, our unit royalties from licenses are
totally dependent upon the success of our customers in
introducing products incorporating our technology and 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. 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. If we do not retain
our current customers and continue to attract new customers, our
business may be harmed.
We
depend on a limited number of key personnel who would be
difficult to replace.
Our success depends to a significant extent upon certain of our
key employees and senior management; the loss of the service of
these employees could materially harm our business. Competition
for skilled employees in our field is intense. We cannot assure
you that in the future we will be successful in attracting and
retaining the required personnel.
The
sales cycle for our IP solutions is lengthy, which makes
forecasting of our customer orders and revenues
difficult.
The sales cycle for our IP solutions is lengthy, often lasting
three months to a year. Our customers generally conduct
significant technical evaluations, including customer trials, of
our technology as well as competing technologies prior to making
a purchasing decision. In addition, purchasing decisions may
also be delayed because of a customers internal budget
approval process. Because of the lengthy sales cycle and the
size of customer orders, if orders forecasted for a specific
customer for a particular period do not occur in that period,
our revenues and operating results for that particular quarter
could suffer. Moreover, a portion of our expenses related to an
anticipated order is fixed and difficult to reduce or change,
which may further impact our operating results for a particular
period.
We may
dispose of or discontinue existing product lines and technology
developments, which may adversely impact our future
results.
On an ongoing basis, we evaluate our various product offerings
and technology developments in order to determine whether any
should be discontinued or, to the extent possible, divested. For
example, in connection with our reorganization and restructuring
plans in 2003 and 2005, we ceased manufacturing of our hard IP
products and certain non-strategic technology areas. In June
2006, we divested our GPS technology and related business. We
cannot guarantee that we have correctly forecasted, or will
correctly forecast in the future, the right product lines and
technology developments to dispose or discontinue or that our
decision to dispose of or discontinue various investments,
products lines and technology developments is prudent if market
conditions change. In addition, there are no assurances that the
discontinuance of various product lines will reduce our
operating expenses or will not cause us to incur material
charges associated with such decision. Furthermore, the
discontinuance of existing product lines entails various risks,
including the risk that we will not be able to find a purchaser
for a product line or the purchase price obtained will not be
equal to at least the book value of the net assets for the
product line. Other risks include managing the expectations of,
and maintaining good relations with, our customers who
previously purchased products from our disposed or discontinued
product lines, which could prevent us from selling other
products to them in the future. We may also incur other
significant liabilities and costs associated with our disposal
or discontinuance of product lines, including employee severance
costs and excess facilities costs.
15
Our
restructuring efforts in 2005 and 2006, as well as the
divestment of our GPS technology and related business, could
disrupt the operation of our business, distract our management
from focusing on revenue-generating efforts, result in the
erosion of employee morale, and impair our ability to respond
rapidly to growth opportunities in the future.
We implemented reorganization and restructuring plans in 2005,
including personnel reduction of 9 people in 2005. In
connection with the implementation of our reorganization and
restructuring plan in 2005, we had excess facilities in Dublin,
Ireland. Throughout 2006, our management had exit negotiations
with the landlord in respect of this property. If we are
successful in surrendering the long term lease in respect of
this property, we would expect an associated cash outflow of
approximately $3.6 million in 2007, of which approximately
$3.3 million is associated with restructuring charges and
approximately $300,000 is associated with related expenses.
Revisions to our estimates of this liability could materially
impact our operating results and financial position in future
periods if anticipated events and assumptions either change or
do not materialize. In June 2006, we divested our GPS technology
and related business, including the transfer of 25 employees.
The employee reductions and changes in connection with our
restructuring activities could result in an erosion of morale,
and affect the focus and productivity of our remaining
employees, including those directly responsible for revenue
generation, which in turn may adversely affect our revenue in
the future. Additionally, employees directly affected by the
reductions may seek future employment with our business
partners, customers or competitors. Such matters could divert
the attention of our employees, including management, away from
our operations, harm productivity, harm our reputation and
increase our expenses.
Because
our IP solutions are complex, the detection of errors in our
products may be delayed, and if we deliver products with
defects, our credibility will be harmed, the sales and market
acceptance of our products may decrease and product liability
claims may be made against us.
Our IP solutions are complex and may contain errors, defects and
bugs when introduced. If we deliver products with errors,
defects or bugs, our credibility and the market acceptance and
sales of our products could be significantly harmed.
Furthermore, the nature of our products may also delay the
detection of any such error or defect. If our products contain
errors, defects and bugs, then we may be required to expend
significant capital and resources to alleviate these problems.
This could result in the diversion of technical and other
resources from our other development efforts. Any actual or
perceived problems or delays may also adversely affect our
ability to attract or retain customers. Furthermore, the
existence of any defects, errors or 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 managements
attention and resources, which would have a negative impact on
our financial condition and results of operations.
Our
operating results may fluctuate significantly due to the
cyclicality of the semiconductor industry, which could adversely
affect the market price of our stock.
Our primary operations are in the semiconductor industry, which
is cyclical and subject to rapid technological change and
evolving industry standards. From time to time, the
semiconductor industry has experienced significant downturns
such as the one we experienced during the 2000 and 2001 periods
and from which the industry is slowly recovering. These
downturns are characterized by diminished product demand, excess
customer inventories, accelerated erosion of prices and excess
production capacity. These factors could cause substantial
fluctuations in our revenues and in our results of operations.
The downturn we inexperienced during the 2000 and 2001 periods
was, and future downturns in the semiconductor industry may be,
severe and prolonged. Also the slow recovery from the downturn
during the 2000 and 2001 periods and the failure of this
industry to fully recover or any future downturn could seriously
impact our revenue and harm our business, financial condition
and results of operations. The semiconductor industry also
periodically experiences increased demand and production
capacity constraints, which may affect our ability to ship
products in future periods. Our financial results may vary
significantly as a result of the general conditions in the
semiconductor industry, which could cause our stock price to
decline.
16
Our
success will depend on our ability to successfully manage our
geographically dispersed operations.
Most of our employees are located in Israel and Ireland.
Accordingly, our ability to compete successfully will depend in
part on the ability of a limited number of key executives
located in geographically dispersed offices to integrate
management, address the needs of our customers and respond to
changes in our markets. If we are unable to effectively manage
and integrate our remote operations, our business may be
materially harmed.
Our
operations in Israel may be adversely affected by instability in
the Middle East region.
One of our principal research and development facilities is
located in, and our executive officers and some of our directors
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 could significantly harm our business,
operating results and financial condition.
In addition, certain of our officers and employees are currently
obligated to perform annual reserve duty in the Israel Defense
Forces and are subject to being called to 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.
Our
research and development expenses may increase if the grants we
currently receive from the Israeli and Irish governments are
reduced or withheld.
We currently receive research grants from programs of the Chief
Scientist of Israel and under the funding programs of Enterprise
Ireland and Invest Northern Ireland. We received an aggregate of
$276,000, $574,000 and $346,000 in 2006, 2005 and 2004,
respectively. To be eligible for these grants, we must meet
certain development conditions and comply with periodic
reporting obligations. Although we have met such conditions in
the past, should we fail to meet such conditions in the future
our research grants may be repayable, reduced or withheld. The
repayment or reduction of such research grants may increase our
research and development expenses which in turn may reduce our
operating income.
We are
exposed to fluctuations in currency exchange
rates.
A significant portion of our business is conducted outside the
United States. Although most of our 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, a
portion of our expenses in Israel and Europe are paid in Israeli
currency (NIS) and Euros, which subjects us to the risks of
foreign currency fluctuations. Our primary expenses paid in NIS
and Euro are employee salaries and lease payments on our Israeli
and Dublin facilities. In the future, we may use derivative
instruments in order to minimize the effects of currency
fluctuations, but any hedging positions may not succeed in
minimizing our foreign currency fluctuation risks.
Because
we have significant international operations, we may be subject
to political, economic and other conditions relating to our
international operations that could increase our operating
expenses and disrupt our revenues and business.
Approximately 64% of our total revenues in 2006 are derived from
license agreements with customers located outside of the United
States. We expect that international customers will continue to
account for a significant portion of our revenue for the
foreseeable future. As a result, the occurrence of any negative
international political, economic or geographic events could
result in significant revenue shortfalls. These shortfalls could
cause our business, financial condition and results of
operations to be harmed. Some of the risks of doing business
internationally include:
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unexpected changes in regulatory requirements;
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fluctuations in the exchange rate for the United States dollar;
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17
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imposition of tariffs and other barriers and restrictions;
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burdens of complying with a variety of foreign laws;
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political and economic instability; and
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changes in diplomatic and trade relationships.
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If we
are unable to meet the changing needs of our end-users or to
address evolving market demands, our business may be
harmed.
The markets for programmable DSP cores and application IP are
characterized by rapidly changing technology, emerging markets
and new and developing end-user needs, requiring significant
expenditure for research and development. We cannot assure you
that we will be able to introduce systems and solutions that
reflect prevailing industry standards on a timely basis, to meet
the specific technical requirements of our end-users or to avoid
significant losses due to rapid decreases in market prices of
our products, and our failure to do so may seriously harm our
business. For example, we have already licensed our multimedia
solutions; however, this technology has not yet been deployed by
our licensees to their end markets and may be subject to further
modifications to address evolving market demands. In addition,
the reduction in the number of our employees in connection with
our recent restructuring efforts could adversely affect our
ability to attract or retain customers who require certain
research and development capabilities from their IP providers.
We may
seek to expand our business through acquisitions that could
result in diversion of resources and extra
expenses.
We may pursue acquisitions of businesses, products and
technologies, or establish joint venture arrangements in the
future that could expand our business. We are unable to predict
whether or when any other prospective acquisition will be
completed. The process of negotiating potential acquisitions or
joint ventures, as well as the integration of acquired or
jointly developed businesses, technologies or products may be
prolonged due to unforeseen difficulties and may require a
disproportionate amount of our resources and managements
attention. We cannot 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 acquisitions or
enter into a joint venture, we may not receive the intended
benefits of the acquisition or joint venture or such an
acquisition or joint venture may not achieve comparable levels
of revenues, profitability or productivity as our existing
business or otherwise perform as expected. The occurrence of any
of these events could harm our business, financial condition or
results of operations. Future acquisitions or joint venture may
require substantial capital resources, which may require us to
seek additional debt or equity financing.
Future acquisitions or joint venture by us could result in the
following, any of which could seriously harm our results of
operations or the price of our stock:
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issuance of equity securities that would dilute our current
stockholders percentages of ownership;
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large one-time write-offs;
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the incurrence of debt and contingent liabilities;
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difficulties in the assimilation and integration of operations,
personnel, technologies, products and information systems of the
acquired companies;
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diversion of managements attention from other business
concerns;
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contractual disputes;
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risks of entering geographic and business markets in which we
have no or only limited prior experience; and
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potential loss of key employees of acquired organizations.
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18
We may
not be able to adequately protect our intellectual
property.
Our success and ability to compete depend in large part upon the
protection of our proprietary technologies. We rely on a
combination of patent, copyright, trademark, trade secret, mask
work and other intellectual property rights, confidentiality
procedures and licensing arrangements to establish and protect
our proprietary rights. These agreements and measures may not be
sufficient to protect our technology from third-party
infringement or to protect us from the claims of others. As a
result, we face risks associated with our patent position,
including the potential need to engage in significant legal
proceedings to enforce our patents, the possibility that the
validity or enforceability of our patents may be denied, the
possibility that third parties will be able to compete against
us without infringing our patents and the possibility that our
products may infringe patent rights of third parties.
Our trade names or trademarks may be registered or utilized by
third parties in countries other than those in which we have
registered them, impairing our ability to enter and compete in
these markets. If we were forced to change any of our brand
names, we could lose a significant amount of our brand identity.
Our
business will suffer if we are sued for infringement of the
intellectual property rights of third parties or if we cannot
obtain licenses to these rights on commercially acceptable
terms.
Although we are not currently involved in any litigation, we are
subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others.
There are a large number of patents held by others, including
our competitors, pertaining to the broad areas in which we are
active. We have not, and cannot reasonably, investigate all such
patents. From time to time, we have become aware of patents in
our technology areas and have sought legal counsel regarding the
validity of such patents and their impact on how we operate our
business, and we will continue to seek such counsel when
appropriate in the future. Infringement claims may require us to
enter into license arrangements or result in protracted and
costly litigation, regardless of the merits of these claims. Any
necessary licenses may not be available or, if available, may
not be obtainable on commercially reasonable terms. If we cannot
obtain necessary licenses on commercially reasonable terms, we
may be forced to stop licensing our technology, and our business
would be seriously harmed.
Our
business depends on our customers and their suppliers obtaining
required complementary components.
Some of the raw materials, components and subassemblies included
in the products manufactured by our OEM customers are obtained
from a limited group of suppliers. Supply disruptions, shortages
or termination of any of these sources could have an adverse
effect on our business and results of operations due to the
delay or discontinuance of orders for products containing our
IP, especially our DSP cores, until those necessary components
are available.
The
future growth of our business depends in part on our ability to
license to system OEMs and
small-to-medium-sized
semiconductor companies directly and to expand our sales
geographically.
Historically, a substantial portion of our licensing revenues
has been derived in any period from a relatively small number of
licensees. Because of the substantial license fees we charge,
our customers tend to be large semiconductor companies or
vertically integrated system OEMs. Part of our current growth
strategy is to broaden the adoption of our products by small and
mid-size companies by offering different versions of our
products, targeted at these companies. In addition we plan to
continue expanding our sales to include additional geographic
areas. Asia, in particular, is a region we have targeted for
growth. If we are unable to develop and market effectively our
intellectual property through these models, our revenues will
continue to be dependent on a smaller number of licensees and a
less geographically dispersed pattern of licensees, which could
materially harm our business and results of operations.
19
The
Israeli tax benefits that we currently receive and the
government programs in which we participate require us to meet
certain conditions and may be terminated or reduced in the
future, which could increase our tax expenses.
We enjoy certain tax benefits in Israel, particularly as a
result of the Approved Enterprise status of our
facilities and programs. To maintain our eligibility for these
tax benefits, we must continue to meet certain conditions,
relating principally to adherence to the investment program
filed with the Investment Center of the Israeli Ministry of
Industry and Trade and to periodic reporting obligations. We
believe that we will be able to continue to meet such
conditions. Should we fail to meet such conditions in the
future, however, these benefits would be cancelled and we would
be subject to corporate tax in Israel at the standard corporate
rate of 31%-36% and could be required to refund tax benefits
already received. In addition, we cannot assure you that these
tax benefits will be continued in the future at their current
levels or otherwise. The termination or reduction of certain
programs and tax benefits (particularly benefits available to us
as a result of the Approved Enterprise status of our
facilities and programs) or a requirement to refund tax benefits
already received may seriously harm our business, operating
results and financial condition.
Our
corporate tax rate may increase, which could adversely impact
our cash flow, financial condition and results of
operations.
We have significant operations in Israel and the Republic of
Ireland and a substantial portion of our taxable income
historically has been generated there. Currently, some of our
Israeli and Irish subsidiaries are taxed at rates substantially
lower than the U.S. tax rates. Although there is no
expectation of any changes to Israeli and Irish tax law, if our
Israeli and Irish subsidiaries were no longer to qualify for
these lower tax rates or if the applicable tax laws were
rescinded or changed, our operating results could be materially
adversely affected. In addition, because our Israeli and Irish
operations are owned by subsidiaries of a U.S. corporation,
distributions to the U.S. Corporation, and in certain
circumstances undistributed income of the subsidiaries, may be
subject to U.S. tax. Moreover, if U.S. or other
authorities were to change applicable tax laws or successfully
challenge the manner in which our subsidiaries profits are
currently recognized, our overall tax expenses could increase,
and our business, cash flow, financial condition and results of
operations could be materially adversely affected.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our headquarters are located in San Jose, California and we
have principal offices in Herzeliya, Israel and Dublin, Ireland.
We lease land and buildings for our executive offices,
engineering, sales, marketing, administrative and support
operations and design centers. The following table summarizes
information with respect to the principal facilities leased by
us as of December 31, 2006:
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Area
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Location
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Term
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Expiration
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(Sq. Feet)
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Principal Activities
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San Jose, CA, U.S.
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2 years
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2007
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9,450
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Headquarters; sales and marketing;
administration
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Herzeliya, Israel
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4 years
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2010
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23,600
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Research and development;
administration
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Dublin, Ireland
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25 years
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2021/2025
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26,600
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Research and development;
administration
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Dublin, Ireland
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2 years
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2007
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2,270
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Research and development;
administration
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Cork, Ireland
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25 years
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2025
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10,000
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Research and development
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Limerick, Ireland
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10 years
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2010
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4,000
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Research and development
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Belfast, Northern Ireland
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15 years
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2019
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2,600
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Research and development
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20
In connection with the re-alignment of our business described
below, we have reviewed and continue to evaluate our property
needs and to consider appropriate steps to most efficiently
house our operations. We have made provisions in our financial
statements for the under-utilized building operating lease
obligations we anticipate. We believe that these facilities meet
our current operating needs. With regards to our San Jose
headquarters, the current lease expires in August 2007 and
management is currently negotiating an extension to this
property for a period of 3-5 years.
Throughout 2006 we continued exit negotiations with the landlord
of one of our properties in Dublin, Ireland. At
December 31, 2006, exit negotiations had not concluded and
we were required to update our accrual for this property on a
sub-let
basis. If we succeed in surrendering our long term lease
relating to this property, we would expect an associated cash
outflow of approximately $3.6 million in 2007. Revisions to
our estimates of this liability could materially impact our
operating results and financial position in future periods if
anticipated events and assumptions either change or do not
materialize.
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ITEM 3.
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LEGAL
PROCEEDINGS
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From time to time, we are involved in litigation relating to
claims arising out of our operations in the normal course of
business. We are not a party to any legal proceedings, the
adverse outcome of which, in managements opinion, would
have a material adverse effect on our results of operations or
financial position.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Below are the names, ages and principal recent business
experience of our current executive officers. All such persons
have been appointed by our board of directors to serve until
their successors are elected and qualified or until their
earlier resignation or removal.
Gideon Wertheizer, age 50, has served as our Chief
Executive Officer since May 2005. Mr. Wertheizer has
24 years of experience in the semiconductor and Silicon
Intellectual Property (SIP) industries. He previously served as
the Executive Vice President and General Manager of the DSP
business unit at CEVA. Prior to joining CEVA in November 2002,
Mr. Wertheizer held various executive positions at DSPG,
including such roles as Executive VP Strategic
Business Development, Vice President for Marketing and VP of
VLSI design. Mr. Wertheizer holds a BsC for electrical
engineering from Ben-Gourion University in Israel and executive
MBA form Bradford University in the United Kingdom.
Yaniv Arieli, age 38, has served as our Chief
Financial Officer since May 2005. Mr. Arieli served as
President of U.S. Operations and Director of Investor
Relations of DSPG from August 2002, prior to which he served as
DSPGs DSP Cores Licensing Divisions Vice President
of Finance, Chief Financial Officer and Secretary. Prior to
joining DSP Group in 1997, Mr. Arieli served as an account
manager and certified public accountant at Kesselman &
Kesselman, a member of PricewaterhouseCoopers, a leading
accounting firm. Mr. Arieli is a CPA and holds a B.A. in
Accounting and Economics from Haifa University in Israel and an
M.B.A. from Newport University and is also a member of the
National Investor Relation Institute.
Issachar Ohana, age 41, has served as our Vice
President, Worldwide Sales since November 2002 and our Executive
Vice President, Worldwide Sales since July 2006. Prior to
joining CEVA in November 2002, Mr. Ohana was with DSPG
beginning in August 1994 as a VLSI design engineer. He was
appointed Project Manager of DSPGs research and
development in July 1995, Director of Core Licensing in August
1998, and Vice President Sales of the Core Licensing
Division in May 2000. Mr. Ohana holds a B.Sc. in Electrical
and Computer Engineering from Ben Gurion University in Israel
and an MBA from University of Bradford in England.
21
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Our common stock began trading on The NASDAQ National Market and
the London Stock Exchange on November 1, 2002. Our common
stock currently trades under the ticker symbol CEVA
on NASDAQ and under the ticker symbol CVA on the
London Stock Exchange. As of March 1, 2007, there were
approximately 8,300 holders of record, which we believe
represents approximately 13,700 beneficial holders. The closing
price of our common stock on The NASDAQ National Market on
March 1, 2007 was $7.20 per share. The following table
sets forth, for the periods indicated, the range of high and low
closing prices per share of our common stock, as reported on The
NASDAQ National Market.
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Price Range of
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Common Stock
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High
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Low
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2005
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First Quarter
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$
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9.00
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$
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7.10
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Second Quarter
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$
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7.52
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$
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5.80
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Third Quarter
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$
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5.91
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$
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5.03
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Fourth Quarter
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$
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6.32
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$
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5.07
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2006
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First Quarter
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$
|
6.88
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$
|
5.80
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Second Quarter
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$
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7.90
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$
|
5.62
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Third Quarter
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$
|
6.15
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$
|
5.05
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Fourth Quarter
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$
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6.89
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$
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5.30
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We have never paid any cash dividends. We intend to retain
future earnings, if any, to fund the development and growth of
our business and currently do not anticipate paying cash
dividends in the foreseeable future.
Information as of December 31, 2006 regarding options
granted under our option plans and remaining available for
issuance under those plans is contained in the definitive 2007
Proxy Statement and incorporated herein by reference.
2007
Annual Meeting of Stockholders
We anticipate that the 2007 annual meeting of our stockholders
will be held on May 15, 2007.
22
Stock
Performance Graph
Notwithstanding anything to the contrary set forth in any of
the Companys previous or future filings under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, that might incorporate this Annual
Report on Form 10-K or future filings made by the Company
under those statutes, the below Stock Performance Graph shall
not be deemed filed with the United States Securities and
Exchange Commission and shall not be deemed incorporated by
reference into any of those prior filings or into any future
filings made by the Company under those statutes.
Comparison
of Cumulative Total Return among CEVA, Inc.,
The NASDAQ Stock Market (U.S.) and the MG Specialized
Semiconductor Group Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/01/02
|
|
|
12/31/02
|
|
|
12/31/03
|
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
CEVA, Inc.
|
|
|
|
100.00
|
|
|
|
|
112.14
|
|
|
|
|
197.53
|
|
|
|
|
172.81
|
|
|
|
|
118.79
|
|
|
|
|
122.77
|
|
Hemscott Specialized Semiconductor
Index
|
|
|
|
100.00
|
|
|
|
|
100.45
|
|
|
|
|
178.74
|
|
|
|
|
157.02
|
|
|
|
|
154.10
|
|
|
|
|
169.97
|
|
Nasdaq Market Index
|
|
|
|
100.00
|
|
|
|
|
100.45
|
|
|
|
|
151.33
|
|
|
|
|
165.87
|
|
|
|
|
167.33
|
|
|
|
|
184.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSUMES $100
INVESTED ON NOV. 01, 2002
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31, 2006
The stock performance graph above compares the percentage change
in cumulative stockholder return on the common stock of our
company for the period from November 1, 2002, the first day
of trading of our common stock, through December 31, 2006,
with the cumulative total return on The NASDAQ Stock Market
(U.S.) and the Hemscott Specialized Semiconductor Group Index.
This graph assumes the investment of $100.00 in our common stock
(at the closing price of our common stock on November 1,
2002), The NASDAQ Stock Market (U.S.) and the Hemscott
Specialized Semiconductor Group Index on November 1, 2002,
and assumes dividends, if any, are reinvested.
Comparisons in the graph above are based upon historical data
and are not indicative of, nor intended to forecast, future
performance of our common stock.
23
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
CEVA was formed through the combination of Parthus and the DSP
IP licensing division of DSPG in November 2002. With respect to
periods prior to November 1, 2002, the financial data below
have been prepared as if the separation from DSPG had been in
effect throughout the relevant periods. The financial data show
this business as an entity carved out from the consolidated
financial statements of DSPG using the historical results of
operations and historical bases of assets and liabilities of the
DSP IP licensing division, which appear elsewhere in this annual
report. The financial data below include the results of the
business of Parthus only for the period following the
combination on November 1, 2002.
The following selected financial data should be read in
conjunction with, and are qualified by reference to, our
consolidated financial statements and the related notes, as well
as our Managements Discussion and Analysis of
Financial Condition and Results of Operations, both
appearing elsewhere in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and royalties
|
|
$
|
14,739
|
|
|
$
|
29,795
|
|
|
$
|
32,271
|
|
|
$
|
30,755
|
|
|
$
|
28,484
|
|
Other revenue
|
|
|
4,457
|
|
|
|
7,041
|
|
|
|
5,402
|
|
|
|
4,881
|
|
|
|
4,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
19,196
|
|
|
|
36,836
|
|
|
|
37,673
|
|
|
|
35,636
|
|
|
|
32,505
|
|
Cost of revenues
|
|
|
2,168
|
|
|
|
6,061
|
|
|
|
5,178
|
|
|
|
4,217
|
|
|
|
4,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
17,028
|
|
|
|
30,775
|
|
|
|
32,495
|
|
|
|
31,419
|
|
|
|
28,470
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
8,414
|
|
|
|
17,382
|
|
|
|
17,276
|
|
|
|
20,153
|
|
|
|
18,769
|
|
Sales and marketing
|
|
|
3,356
|
|
|
|
6,058
|
|
|
|
6,965
|
|
|
|
6,577
|
|
|
|
6,268
|
|
General and administrative
|
|
|
3,557
|
|
|
|
6,109
|
|
|
|
5,863
|
|
|
|
5,742
|
|
|
|
5,882
|
|
Amortization of intangible assets
|
|
|
189
|
|
|
|
1,127
|
|
|
|
892
|
|
|
|
823
|
|
|
|
414
|
|
In-process research and development
|
|
|
15,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization, restructuring and
severance charge
|
|
|
6,442
|
|
|
|
8,620
|
|
|
|
|
|
|
|
3,207
|
|
|
|
|
|
Impairment of assets
|
|
|
|
|
|
|
3,233
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
37,729
|
|
|
|
42,529
|
|
|
|
30,996
|
|
|
|
37,012
|
|
|
|
31,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(20,701
|
)
|
|
|
(11,754
|
)
|
|
|
1,499
|
|
|
|
(5,593
|
)
|
|
|
(2,863
|
)
|
Financial income (expense), net
|
|
|
(207
|
)
|
|
|
63
|
|
|
|
796
|
|
|
|
1,820
|
|
|
|
2,620
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on
income
|
|
|
(20,908
|
)
|
|
|
(11,691
|
)
|
|
|
2,295
|
|
|
|
(2,266
|
)
|
|
|
(186
|
)
|
Taxes on income (loss)
|
|
|
1,014
|
|
|
|
300
|
|
|
|
645
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(21,922
|
)
|
|
$
|
(11,991
|
)
|
|
$
|
1,650
|
|
|
$
|
(2,266
|
)
|
|
$
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income
(loss) per share
|
|
$
|
(2.15
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Consolidated Balance Sheet
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
58,318
|
|
|
$
|
53,440
|
|
|
$
|
57,960
|
|
|
$
|
61,240
|
|
|
$
|
65,001
|
|
Total assets
|
|
|
135,182
|
|
|
|
119,433
|
|
|
|
119,163
|
|
|
|
115,749
|
|
|
|
121,080
|
|
Total long term liabilities
|
|
|
1,231
|
|
|
|
3,093
|
|
|
|
2,626
|
|
|
|
4,295
|
|
|
|
4,216
|
|
Total stockholders equity
|
|
$
|
110,072
|
|
|
$
|
98,479
|
|
|
$
|
102,549
|
|
|
$
|
102,233
|
|
|
$
|
106,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
QUARTERLY
FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
2005
|
|
|
2006
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and royalties
|
|
$
|
8,847
|
|
|
$
|
8,219
|
|
|
$
|
7,169
|
|
|
$
|
6,520
|
|
|
$
|
7,160
|
|
|
$
|
7,455
|
|
|
$
|
6,938
|
|
|
$
|
6,931
|
|
Other revenue
|
|
|
1,194
|
|
|
|
1,309
|
|
|
|
1,217
|
|
|
|
1,161
|
|
|
|
974
|
|
|
|
957
|
|
|
|
955
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
10,041
|
|
|
|
9,528
|
|
|
|
8,386
|
|
|
|
7,681
|
|
|
|
8,134
|
|
|
|
8,412
|
|
|
|
7,893
|
|
|
|
8,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
1,293
|
|
|
|
1,116
|
|
|
|
1,003
|
|
|
|
805
|
|
|
|
895
|
|
|
|
1,135
|
|
|
|
992
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,748
|
|
|
|
8,412
|
|
|
|
7,383
|
|
|
|
6,876
|
|
|
|
7,239
|
|
|
|
7,277
|
|
|
|
6,901
|
|
|
|
7,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
4,926
|
|
|
|
5,515
|
|
|
|
5,036
|
|
|
|
4,676
|
|
|
|
5,016
|
|
|
|
4,873
|
|
|
|
4,270
|
|
|
|
4,610
|
|
Sales and marketing
|
|
|
1,676
|
|
|
|
1,560
|
|
|
|
1,619
|
|
|
|
1,722
|
|
|
|
1,771
|
|
|
|
1,606
|
|
|
|
1,414
|
|
|
|
1,477
|
|
General and administrative
|
|
|
1,471
|
|
|
|
1,611
|
|
|
|
1,399
|
|
|
|
1,261
|
|
|
|
1,484
|
|
|
|
1,474
|
|
|
|
1,577
|
|
|
|
1,347
|
|
Amortization of other intangible
assets
|
|
|
223
|
|
|
|
218
|
|
|
|
191
|
|
|
|
191
|
|
|
|
190
|
|
|
|
141
|
|
|
|
42
|
|
|
|
41
|
|
Reorganization, restructuring and
severance charge
|
|
|
|
|
|
|
1,657
|
|
|
|
1,650
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of assets
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,296
|
|
|
|
11,071
|
|
|
|
9,895
|
|
|
|
7,750
|
|
|
|
8,461
|
|
|
|
8,094
|
|
|
|
7,303
|
|
|
|
7,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
452
|
|
|
|
(2,659
|
)
|
|
|
(2,512
|
)
|
|
|
(874
|
)
|
|
|
(1,222
|
)
|
|
|
(817
|
)
|
|
|
(402
|
)
|
|
|
(422
|
)
|
Financial income, net
|
|
|
335
|
|
|
|
443
|
|
|
|
475
|
|
|
|
567
|
|
|
|
541
|
|
|
|
573
|
|
|
|
778
|
|
|
|
728
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
(loss)
|
|
|
787
|
|
|
|
(2,216
|
)
|
|
|
(530
|
)
|
|
|
(307
|
)
|
|
|
(681
|
)
|
|
|
(187
|
)
|
|
|
376
|
|
|
|
306
|
|
Taxes on income (tax benefit)
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
120
|
|
|
|
30
|
|
|
|
35
|
|
|
|
(273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
627
|
|
|
$
|
(2,216
|
)
|
|
$
|
(530
|
)
|
|
$
|
(147
|
)
|
|
$
|
(801
|
)
|
|
$
|
(217
|
)
|
|
$
|
341
|
|
|
$
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
Diluted net income (loss) per share
|
|
$
|
0.03
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
Weighted average number of shares
of Common Stock used in computation of net income (loss) per
share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,675
|
|
|
|
18,742
|
|
|
|
18,875
|
|
|
|
18,923
|
|
|
|
19,061
|
|
|
|
19,142
|
|
|
|
19,239
|
|
|
|
19,315
|
|
Diluted
|
|
|
19,227
|
|
|
|
18,742
|
|
|
|
18,875
|
|
|
|
18,923
|
|
|
|
19,061
|
|
|
|
19,142
|
|
|
|
19,324
|
|
|
|
19,432
|
|
25
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion together with the
consolidated financials statements and related notes appearing
elsewhere in this annual report. This discussion contains
forward-looking statements that involve risks and uncertainties.
Actual results may differ materially from those included in such
forward-looking statements. Factors that could cause actual
results to differ materially include those set forth under
Risk Factors, as well as those otherwise discussed
in this section and elsewhere in this annual report. See
Forward-Looking Statements and Industry Data.
BUSINESS
OVERVIEW
The following discussion and analysis is intended to provide an
investor with a narrative of our financial results and an
evaluation of our financial condition and results of operations.
The discussion should be read in conjunction with our
consolidated financial statements and notes thereto for the year
ended December 31, 2006.
Our revenue mix contains IP licensing fees,
per-unit
royalties and support fees. We have built a strong customer base
who rely on our technology to deploy their silicon solutions. We
license our technology as IP to semiconductor companies who
manufacture, market and sell DSP application-specific integrated
circuits (ASICs) and application-specific standard
products (ASSPs) based on CEVA technology to systems
companies for incorporation into a wide variety of end products.
Our IP is primarily deployed in high volume markets, including
wireless handsets (e.g. cellular baseband and multimedia
solutions), portable multimedia (e.g. portable video players and
portable audio players), home entertainment (e.g. DVD), storage
(e.g. hard disk drives ), automotive, Bluetooth handsfree
communication and connectivity (e.g. high-speed serial storage).
Our current primary focus is DSP cores, DSP-based subsystems and
application-specific platforms which include software (video,
audio, imaging and voice) for the cellular handset market with
sales of our DSPs and related technologies representing a
majority of our total revenues for 2006.
Today our technologies are widely licensed and power some of the
worlds leading wireless and consumer electronics brands
including Atmel, Broadcom, Freescale, Fujitsu, Infineon,
Marvell, National Semiconductor, NXP, Oki, Renesas, ROHM,
Samsung, Sharp, Silicon Laboratories (acquired by NXP), Sony,
Spreadtrum, STMicroelectronics, Thomson, VIA and Zoran. In 2006
our licensees shipped over 190 million CEVA-powered chips,
an increase of 45% over 2005 shipments of 131 million units.
CEVA is the leading licensor of DSP cores. In 2006, Gartner
Dataquest reported CEVAs share of the licensable DSP
market at 49%. With many of our customers committed to our DSP
architecture, we have seen many customers choosing to re-license
and upgrade their licenses for CEVA DSP cores. Our legacy
CEVA-Oak, CEVA-Teak, CEVA-TeakLite and most recently,
CEVA-TeakLite-II DSPs, are all code-compatible, meaning
customers can leverage their knowledge in developing products
incorporating these DSP cores across a wide range of
applications. In recent years, we have introduced a new DSP
architecture, the CEVA-X DSP core and CEVA-X DSP-based
subsystem. We recognized a need in the DSP market for a more
powerful, programmable and scalable DSP in order to meet the
industry shift towards more fully-featured and smaller form
factor products. In addition, there has been an industry shift
towards licensing this type of technology as opposed to
developing it in-house, due to the design cycle time constantly
shortening and the cost of ownership and maintenance of such
architectures.
The industry is indicating a continued demand for highly
integrated, licensable application platforms incorporating DSP
cores and all the necessary hardware and software for their
target applications. We believe that the growth in the demand
for these platforms will drive demand for our technology. As
CEVA offers expertise developing these complete solutions in a
number of key growth markets, including mobile multimedia, audio
Bluetooth and storage, we believe we are well positioned to take
full advantage of these major industry shifts.
Nonetheless, we need to penetrate new markets and introduce new
products to further expand our business. In that regard, the
most important step we have taken is the initiation to penetrate
the mobile multimedia market. We introduced our first multimedia
platform for wireless handsets, Mobile-Media1000, in 2004 and in
2005 we announced and released a second generation mobile
multimedia platform, the Mobile-Media2000, which targets a
26
broad range of applications and devices. Our future growth is
substantially dependent on our success in penetrating tier one
companies and enabling them to use our software programmable
DSP-based multimedia products.
However, our business operates in a highly competitive
environment. Competition has historically increased pricing
pressures for our products and decreased our average selling
prices. In order to penetrate new markets and maintain our
market share with our existing products, we may need to offer
our products in the future at lower prices which may result in
lower profits. Our future growth is dependent not only on the
continued success of our existing products but also the
successful introduction of new products. Moreover, we must
continue to monitor and control our operating costs and to
maintain our current level of gross margin in order to offset
future declines in average selling prices. In addition, since
our products are incorporated into end products of our OEM
customers, our business is very dependent on their ability to
achieve market acceptance of their end products in consumer
electronic markets, which are similarly very competitive.
We operate in a changing market that challenges our continued
business growth potential. For example, the success of our video
products are highly dependent on the adoption of new services,
such as mobile TV and high resolution streaming video, and the
rate of adoption of Bluetooth technology in consumer products
and cell phones. In addition, our business may be affected by
market conditions in the APAC region, specifically China, where
we anticipate future growth potential for our business. Our
revenues are currently primarily generated from sales of
chipsets used in cellular handsets. As a result, a decline or
change in growth rate in the market for the sale of cellular
handsets would adversely affect our financial condition and
operating results.
In view of the current market trends, our planned future
products are anticipated to enable true mobile multimedia
integration into cellular handsets and the possible inclusion of
other technologies. We believe that these pioneer solutions will
allow us to provide the desired flexibility for wireless
semiconductors. We cannot provide any assurances however that
these features will achieve market acceptance, and allow us to
maintain our market share or provide for our future growth.
We believe that our introduction of additional features, such as
advances in our video technology, high-end audio technologies
and home entertainment applications will also contribute to our
growth in future periods. In addition, we are taking several
steps to penetrate additional markets, including China, Korea
and Taiwan with our existing products. However, our ability to
introduce new products and expand into new markets may not occur
and may require us to substantially increase our operating
expenses. As a result, our past operating results should not be
relied upon as an indication of future performance.
CRITICAL
ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States (U.S. GAAP). These accounting principles require us
to make certain estimates, judgments and assumptions. We believe
that the estimates, judgments and assumptions upon which we rely
are reasonable based upon information available to us at the
time that these estimates, judgments and assumptions are made.
These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities as of the date of the
financial statements, as well as the reported amounts of
revenues and expenses during the periods presented. To the
extent there are material differences between these estimates,
judgments or assumptions and actual results, our financial
statements will be affected. The significant accounting policies
that we believe are the most critical to aid in fully
understanding and evaluating our reported financial results
include the following:
|
|
|
|
|
revenue recognition;
|
|
|
|
allowances for doubtful accounts;
|
|
|
|
accounting for income taxes;
|
|
|
|
impairment of goodwill and other intangible assets;
|
|
|
|
stock based compensation;
|
|
|
|
reorganization, restructuring and severance charge;
|
27
|
|
|
|
|
investments in other companies; and
|
|
|
|
foreign currency.
|
In many cases, the accounting treatment of a particular
transaction is specifically dictated by U.S. GAAP and does
not require managements judgment in its application. There
are also areas in which managements judgment in selecting
among available alternatives would not produce a materially
different result.
Revenue
Recognition
Significant management judgments and estimates must be made and
used in connection with the recognition of revenue in any
accounting period. Material differences in the amount of revenue
in any given period may result if these judgments or estimates
prove to be incorrect or if managements estimates change
on the basis of development of the business or market
conditions. Management judgments and estimates have been applied
consistently and have been reliable historically.
We generate our revenues from (1) licensing intellectual
property, which in certain circumstances is modified to
customer-specific requirements, (2) royalty income and
(3) other revenues, which include revenues from support,
training and sale of development boards. We license our IP to
semiconductor companies throughout the world. These
semiconductor companies then manufacture, market and sell
custom-designed chips to original equipment manufacturers of a
variety of electronic products. We also license our technology
directly to OEMs, which are considered end users.
We account for our IP license revenues in accordance with
Statement of Position
97-2,
Software Revenue Recognition, as amended. Under the
terms of
SOP 97-2,
revenues are recognized when: (1) collection is probable;
(2) delivery has occurred; (3) the license fee is
fixed or determinable; and (4) persuasive evidence of an
arrangement exists and no further obligation exists.
SOP 97-2
generally requires revenue earned on licensing arrangements
involving multiple elements to be allocated to each element
based on the relative fair value of the elements. However, we
have adopted
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions, for multiple element transactions.
SOP 98-9
requires that revenue be recognized under the residual
method when vendor specific objective evidence
(VSOE) of fair value exists for all undelivered
elements and VSOE does not exist for one of the delivered
elements. The VSOE of fair value of the undelivered elements
(mainly technical support and training) is determined based on
the substantive renewal rate as stated in the agreement.
SOP 97-2
specifies that extended payment terms in a licensing arrangement
may indicate that the license fees are not deemed to be fixed or
determinable. If the fee is not fixed or determinable, or if
collection is not considered probable, revenue is recognized as
payments become due or collected from the customer,
respectively, provided all other revenue recognition criteria
have been met. Our revenue recognition policy
determines all arrangements that become due after 12 months
as extended payments and revenue is recognized as
each payment becomes due, provided all other revenue recognition
criteria have been met.
SOP 97-2
specifies that if a company has a standard business practice of
using extended payment terms in licensing arrangements and has a
history of successfully collecting the license fees under the
original terms of the licensing arrangement without making
concessions, the company should recognize the license fees when
all other
SOP 97-2
revenue recognition criteria are met.
Revenues from license fees that involve customization of our IP
to customer specific specifications are recognized in accordance
with the principles set out in Statement of Position
81-1,
Accounting for Performance of Construction
Type and Certain Production Type Contracts
(SOP 81-1),
using contract accounting on a percentage of completion method,
in accordance with the Input Method. The amount of
revenue recognized is based on the total project fees (including
the license fee and the customization hours charged) under the
agreement and the percentage of completion achieved. The
percentage of completion is measured by monitoring progress
using records of actual time incurred to date in the project
compared to the total estimated project requirements, 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.
Provisions for estimated losses on uncompleted contracts are
made in the period
28
in which such losses are first determined, in the amount of the
estimated loss on the entire contract. As of December 31,
2006, no such losses were identified.
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 us, 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.
When a sale of our IP is made to a third party who also supplies
us with goods or services under separate agreements, we evaluate
each of the agreements to determine whether they are clearly
separable, and independent of one another and that reliable fair
value exists for either the sale or purchase element in order to
determine the appropriate revenue recognition.
Royalties from licensing the right to use our IP are recognized
when the related sales are made. We determine such sales by
receiving confirmation of sales subject to royalties from
licensees. Non-refundable payments on account of future
royalties are recognized upon payment, provided no future
obligation exists. Prepaid royalties are recognized under the
licensing revenue line.
Allowances
for Doubtful Accounts
We make judgments as to our ability to collect outstanding
receivables and provide allowances for the portion of
receivables when collection becomes doubtful. Provisions are
made based upon a detailed review of all significant outstanding
receivables. In determining the provision, we analyze our
historical collection experience and current economic trends. We
reassess these allowances each accounting period. Historically,
our actual losses and credits have been consistent with these
provisions. If actual payment experience with our customers is
different than our estimates, adjustments to these allowances
may be necessary resulting in additional charges to our
statement of operations.
Accounting
for Income Taxes
Significant judgment is required in determining our worldwide
income tax expense provision. In the ordinary course of a global
business, there are many transactions and calculations where the
ultimate tax outcome is uncertain. Some of these uncertainties
arise as a consequence of cost reimbursement arrangements among
related entities, the process of identifying items of revenue
and expense that qualify for preferential tax treatment and
segregation of foreign and domestic income and expense to avoid
double taxation. Although we believe that our estimates are
reasonable, the final tax outcome of these matters may be
different than those is reflected in our historical income tax
provisions and accruals. Such differences could have a material
effect on our income tax provision and net income (loss) in the
period in which such determination is made.
Deferred tax assets and liabilities are determined using enacted
tax rates for the effects of net operating losses and temporary
differences between the book and tax bases of assets and
liabilities. Our accounting for deferred taxes under Statement
of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes, involves
the evaluation of a number of factors concerning the
realizability of our deferred tax assets. In concluding that a
valuation allowance is required, we primarily consider such
factors as our history of operating losses and expected future
losses in certain jurisdictions and the nature of our deferred
tax assets. We provide valuation allowances in respect of
deferred tax assets resulting principally from the carryforward
of tax losses. We currently believe that it is more likely than
not that the deferred tax regarding the carryforward of losses
and certain accrued expenses will not be realized in the
foreseeable future. In the event that we were to determine that
we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets
would be charged to earnings in the period in which we make such
a determination. Likewise, if we later determine that it is
29
more likely than not that the net deferred tax assets would be
realized, we would reverse the applicable portion of the
previously provided valuation allowance. In order for us to
realize our deferred tax assets we must be able to generate
sufficient taxable income in the tax jurisdictions in which the
deferred tax assets are located.
We do not provide for U.S. Federal income taxes on the
undistributed earnings of our international subsidiaries because
such earnings are re-invested and, in our opinion, will not be
distributed to CEVA, Inc., the parent company, and will continue
to be re-invested indefinitely. In addition, we operate within
multiple taxing jurisdictions involving complex issues, and we
provide for tax liabilities on investment activity as
appropriate.
In addition, we operate within multiple taxing jurisdictions and
may be subject to audits in these jurisdictions. These audits
can involve complex issues that may require an extended period
of time for resolution. In managements opinion, adequate
provisions for income taxes have been made.
Goodwill
Under SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and intangible assets with an
identifiable useful life are no longer amortized but are subject
to annual impairment tests based on estimated fair value in
accordance with SFAS No. 142. We conduct our annual
test of impairment for goodwill in October of each year. In
addition we test if impairment exists periodically whenever
events or circumstances occur subsequent to our annual
impairment tests that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Indicators
we considered important which could trigger an impairment
include, but are not limited to, significant underperformance
relative to historical or projected future operating results,
significant changes in the manner of use of the acquired assets
or the strategy for our overall business, significant negative
industry or economic trends, a significant decline in our stock
price for a sustained period and our market capitalization
relative to net book value.
In October 2006 and 2005, we conducted our annual goodwill
impairment test as required by SFAS No. 142. The
goodwill impairment test compared the fair value of the company
with the carrying amount, including goodwill, on that date.
Because the market capitalization exceeded the carrying value,
goodwill is considered not impaired.
Other
Intangible Assets
Other intangible assets represent costs of technology acquired
from acquisitions which have reached technological feasibility.
The costs of technology have been capitalized and are amortized
to the consolidated statements of operations over the period
during which economic benefits are expected to accrue, currently
estimated at five years. We are required to test our other
intangible assets for impairment whenever events or
circumstances indicate that the value of the assets may be
impaired. Factors we consider important, which could trigger
impairment include:
|
|
|
|
|
significant underperformance relative to expected historical or
projected future operating results;
|
|
|
|
significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
|
|
|
|
significant negative industry or economic trends;
|
|
|
|
significant decline in our stock price for a sustained
period; and
|
|
|
|
significant decline in our market capitalization relative to net
book value.
|
Where events and circumstances are present which indicate that
the carrying value may not be recoverable, we will recognize an
impairment loss. Such impairment loss is measured by comparing
the fair value of the asset with its carrying value. The
determination of the value of such intangible assets requires us
to make assumptions regarding future business conditions and
operating results in order to estimate 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 additional impairment
charges.
In the second quarter of 2006, there was a decrease in the
amount of other intangible assets, net of $0.8 million, as
a result of the divestment of our GPS technology and associated
business to GloNav Inc. (GloNav). In the
30
second quarter of 2005, we recorded an impairment charge of
$0.4 million in respect of certain technology acquired in
the combination with Parthus (Parthus) as we decided
to cease the development of this product line due to the minimal
differentiation between competing solutions.
Accounting
for Stock-Based Compensation:
On January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R))
which requires the measurement and recognition of compensation
expense based on estimated fair values for all share-based
payment awards made to employees and directors. SFAS 123(R)
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), for periods beginning in fiscal 2006.
In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107
(SAB 107) relating to SFAS 123(R). We
applied the provisions of SAB 107 upon our adoption of
SFAS 123(R).
Prior to January 1, 2006, we applied the intrinsic value
method of accounting for stock options as prescribed by
APB 25 and related interpretation, as permitted under
SFAS 123(R), whereby compensation expense is equal to the
excess, if any, of the quoted market price of the stock over the
exercise price at the grant date of the award.
We adopted the fair value recognition provision of
SFAS 123(R) using the modified prospective transition
method, effective January 1, 2006. Under that transition
method, compensation cost recognized in the year ended
December 31, 2006, included: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of Statement 123(R). Results for prior
periods have not been restated.
SFAS 123(R) requires companies to estimate the fair value
of equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as an expense over
the requisite service periods on our consolidated income
statement. We recognize compensation expenses for the value of
our awards, which have graded vesting based on the accelerated
attribution method over the requisite service period of each of
the awards, net of estimated forfeitures. Estimated forfeitures
are based on actual historical pre-vesting forfeitures.
As a result of adopting SFAS 123(R) on January 1,
2006, our net loss for the year ended December 31, 2006, is
$2,204 higher than if we had continued to account for
stock-based compensation under APB 25. Basic and diluted
net income per share for the year ended December 31, 2006,
are $0.11 higher than if we continued to account for share-based
compensation under APB 25.
Reorganization,
Restructuring and Severance Charge
We implemented a reorganization and restructuring plan in 2005
which resulted in a total charge of $3.2 million. We were
required to make and are required to review certain estimates
and assumptions in assessing the under-utilized building
operating lease charges arising from the reduction in facility
requirements. Management takes into account current market
conditions and our ability to either exit the lease property or
sub-let the
property in determining the estimates and assumptions used.
Throughout 2006, we continued exit negotiations with the
landlord of one of our properties in Dublin, Ireland. We updated
the accrual for this property during 2005 to reflect an exit
strategy. At December 31, 2006, exit negotiations had not
concluded. There was no additional charge to the income
statement during 2006. If we are successful in surrendering our
long term lease relating to this property, we would expect an
associated cash outflow of approximately $3.3 million
associated with restructuring charges. Revisions to our
estimates of this liability could materially impact our
operating results and financial position in future periods if
anticipated events and assumptions either change or do not
materialize.
If an exit strategy in respect of a leased property is
appropriate, the under-utilized building operating lease charge
is calculated taking into consideration the surrender value
based on a multiple of annual outgoings given the underlying
market conditions. Otherwise, the under-utilized building
operating lease charge is calculated on a
31
sub-let
basis by taking into consideration (1) the committed annual
rental charge associated with the vacant square footage,
(2) an assessment of the sublet rents that could be
achieved based on current market conditions, vacancy rates and
future outlook, (3) the estimated periods that facilities
would be empty before being sublet, (4) an assessment of
the percentage increases in the primary lease rent and the
sublease rent at each five-year rent review, and (5) the
application of a discount rate of 4.75% over the remaining
period of the lease. We expect to revise our assumptions
quarterly, as appropriate in respect of future vacancy rates and
sublet rents in light of current market conditions and the
applicable discount rate based on projected interest rates.
Investment
in Other Company, Net:
Investments in privately held companies in which we do not have
the ability to exercise significant influence over operating and
financial policy are presented at cost. The carrying value is
periodically reviewed by management for impairment. If this
review indicates that the cost is not recoverable, the carrying
value is reduced to its estimated fair value.
On June 23, 2006, we divested our GPS technology and
associated business to a new
U.S.-based
company, GloNav Inc. (GloNav)(for more details see
Note 4). The investment in GloNav is stated at cost, since
we do not have the ability to exercise significant influence
over operating and financial policies of GloNav. We recorded the
investment on our consolidated balance sheets as investment in
other company, net. This investment will be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the investment may not be
recoverable, in accordance with Accounting Principle Board
Opinion No. 18 The Equity Method of Accounting for
Investments in Common Stock (APB No. 18)
and Financial Statement Position FSP
115-1,
The Meaning of Other-Than Temporary Impairment and its
Application to Certain Investments.
Foreign
Currency
The U.S. dollar is the functional and reporting currency
for the company. The majority of our revenues and a portion of
our expenses are transacted in U.S. dollars and our assets
and liabilities together with our cash holdings are
predominately denominated in U.S. dollars. However, a
significant portion of our expenses are denominated in
currencies other than the U.S. dollar, principally the euro
and the Israeli NIS. Monetary assets and liabilities denominated
in foreign currencies are remeasured into U.S. dollars at
year end exchange rates while revenues and expenses are
remeasured at rates approximating those in place on the dates of
the related transactions. Increases in the volatility of the
exchange rates of the euro and the NIS versus the
U.S. dollar could have an adverse effect on the expenses
and liabilities that we incur when translated into
U.S. dollars. We review our expected monthly
non-U.S. dollar
denominated expenditure and look to hold equivalent
non-U.S. dollar
cash balances to mitigate currency fluctuations. This has
resulted in a foreign exchange loss of $150,000 in 2006 and
foreign exchange gain of $109,000 and $37,000 in 2005 and 2004,
respectively.
We have not in the past, but may in the future, hedge against
fluctuations in exchange rates. Future hedging transactions may
not successfully mitigate losses caused by currency
fluctuations. We expect to continue to experience the effect of
exchange rate fluctuations on an annual and quarterly basis, and
currency fluctuations could have a material adverse impact on
our results of operations.
Recently
Issued Accounting Standards:
In June 2006, the Financial Accounting Standards Board issued
FASB Interpretation 48, Accounting for Income Tax
Uncertainties (FIN 48), an interpretation
of FASB Statement No. 109. FIN 48 defines the
threshold for recognizing the benefits of tax return positions
in the financial statements as more-likely-than-not
to be sustained by the taxing authority. The recently issued
literature also provides guidance on derecognition, measurement
and classification of income tax uncertainties, along with any
related interest and penalties. FIN 48 also includes
guidance concerning accounting for income tax uncertainties in
interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The differences between the amounts
recognized in the statements of financial position prior to the
adoption of FIN 48 and the amounts reported after adoption
will be accounted for as a cumulative-effect
32
adjustment recorded to the beginning balance of retained
earnings. We estimate that the adoption of FIN 48 will not
have any significant impact on our consolidated financial
statements.
In September 2006, FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. Our management
believes SFAS No. 157 will not have a material effect
on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159).
SFAS No. 159 permits companies to choose to measure
certain financial instruments and certain other items at fair
value. SFAS No. 159 requires that unrealized gains and
losses on items for which the fair value option has been elected
be reported in earnings. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years, although earlier adoption is permitted. We are currently
evaluating the impact that SFAS No. 159 will have on
our consolidated financial statements.
RESULTS
OF OPERATIONS
The following table presents line items from our statement of
operations as percentages of our total revenues for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and royalties
|
|
|
85.7
|
%
|
|
|
86.3
|
%
|
|
|
87.6
|
%
|
Other revenue
|
|
|
14.3
|
%
|
|
|
13.7
|
%
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
13.7
|
%
|
|
|
11.8
|
%
|
|
|
12.4
|
%
|
Gross profit
|
|
|
86.3
|
%
|
|
|
88.2
|
%
|
|
|
87.6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
45.9
|
%
|
|
|
56.6
|
%
|
|
|
57.7
|
%
|
Sales and marketing
|
|
|
18.5
|
%
|
|
|
18.5
|
%
|
|
|
19.3
|
%
|
General and administrative
|
|
|
15.6
|
%
|
|
|
16.1
|
%
|
|
|
18.1
|
%
|
Amortization of other intangible
assets
|
|
|
2.3
|
%
|
|
|
2.3
|
%
|
|
|
1.3
|
%
|
Reorganization, restructuring and
severance charge
|
|
|
|
|
|
|
9.0
|
%
|
|
|
|
|
Impairment of assets
|
|
|
|
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
82.3
|
%
|
|
|
103.9
|
%
|
|
|
96.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
4.0
|
%
|
|
|
(15.7
|
)%
|
|
|
(8.8
|
)%
|
Financial income, net
|
|
|
2.1
|
%
|
|
|
5.1
|
%
|
|
|
8.0
|
%
|
Other income
|
|
|
|
|
|
|
4.2
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on
income
|
|
|
6.1
|
%
|
|
|
(6.4
|
)%
|
|
|
(0.6
|
)%
|
Taxes on income
|
|
|
1.7
|
%
|
|
|
|
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
4.4
|
%
|
|
|
(6.4
|
)%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
and Analysis
Below we provide information on the significant line items in
our statement of operations for each of the past three fiscal
years, including the percentage changes
year-on-year,
as well as an analysis of the principal drivers of change in
these line items from
year-to-year.
33
Revenues
Total
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Total revenues (in millions)
|
|
$
|
37.7
|
|
|
$
|
35.6
|
|
|
$
|
32.5
|
|
Change
year-on-year
|
|
|
|
|
|
|
(5.4
|
)%
|
|
|
(8.8
|
)%
|
The decrease in total revenues from 2005 to 2006 principally
reflects lower licensing in the GPS (as a result of the
divestment of our GPS technology and associated business to
GloNav in June 2006) and SATA product lines as well as
lower royalties and other revenues. The decrease in total
revenues from 2004 to 2005 principally reflects a combination of
lower licensing and other revenues, offset by higher royalties
revenues. The five largest customers accounted for 41% of total
revenues in 2006, 36% in 2005 and 46% in 2004.
In 2006, 2005 and 2004 revenue from greater-than-10%
identifiable customers accounted for 16%, 10% and 12% of total
revenues, respectively. 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.
We generate royalties from our licensing activities in two
manners: royalties paid by our customers over the period in
which they ship units, which we refer to as per unit royalties
and royalties which are paid in a lump sum which cover a fixed
number of future unit shipments, which we refer to as prepaid
royalties. In either case, these royalties are non-refundable
payments and are recognized upon invoicing for payment, provided
no future obligation exists. Prepaid royalties are recognized
under our licensing revenue line and accounted for 18% of total
revenue in 2006 and 19% of total revenue in both 2005 and 2004.
Only royalty revenue from customers who are paying as they ship
units is recognized in our royalty revenue line. These per unit
royalties are invoiced and recognized on a quarterly basis in
arrears as we receive quarterly shipment reports from our
licensees.
Licensing
and Royalty Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Licensing and royalty revenues (in
millions)
|
|
$
|
32.3
|
|
|
$
|
30.8
|
|
|
$
|
28.5
|
|
Change
year-on-year
|
|
|
|
|
|
|
(4.7
|
)%
|
|
|
(7.4
|
)%
|
of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing revenues (in millions)
|
|
$
|
26.3
|
|
|
$
|
23.9
|
|
|
$
|
22.2
|
|
Change
year-on-year
|
|
|
|
|
|
|
(8.8
|
)%
|
|
|
(7.4
|
)%
|
Royalty revenues (in millions)
|
|
$
|
6.0
|
|
|
$
|
6.8
|
|
|
$
|
6.3
|
|
Change
year-on-year
|
|
|
|
|
|
|
13.1
|
%
|
|
|
(7.3
|
)%
|
The decrease in licensing revenue from 2005 to 2006 principally
reflects lower revenues from our Oak DSP cores and CEVA-Teak DSP
cores, our SATA IP and our GPS IP as a result of the divestment
of the GPS activity, offset by growth in our CEVA-TeakLite DSP
core IP. The decrease in licensing revenue from 2004 to 2005
principally reflects lower revenues from our CEVA-TeakLite IP
DSP core and our GPS IP offset by growth in our CEVA-X DSP core
and SATA platform IP.
Licensing and royalty revenues accounted for 87.6% of our total
revenues in 2006, compared with 86.3% and 85.7% of total
revenues in 2005 and 2004, respectively. In 2006 we signed 38
new license agreements compared to 27 and 24 in 2005 and 2004,
respectively. Included in the license agreements in 2006 were
six new licensees for our flagship CEVA-X DSP core technology
compared to four and five in 2005 and 2004, respectively.
The decrease in royalty revenue from 2005 to 2006 was
principally from the phasing out of an older product line and
from a lower overall per unit royalty rate applied in 2006. This
was slightly offset by higher quantities of products using our
technology. The increase in royalty revenue from 2004 to 2005
was driven by increases in the underlying unit shipments of
customers products incorporating our IP. In particular
licensees of our CEVA-Teaklite DSP cores continued to report
increased unit shipments in 2/2.5G and 3G baseband cellular
phones and DVD Servo
34
products areas and disk drive controllers. The five largest
customers paying per unit royalty accounted for 75.2% of total
royalty revenues in 2006 compared to 72.8% and 67.2% in 2005 and
2004, respectively.
Both our per unit and prepaid royalty customers reported sales
of 190 million chips incorporating our technology in 2006,
compared with 131 million in 2005 and 106 million in
2004. The increase in units shipped in 2006 compared to 2005 and
2005 compared to 2004 reflects increased unit shipments of our
CEVA-TeakLite core by licensees in 2/2.5G and 3G baseband
cellular phones and DVD Servo products areas and disk drive
controllers.
Other
Revenues
Other revenues include support for licensees and sale of
development boards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Other revenues (in millions)
|
|
$
|
5.4
|
|
|
$
|
4.9
|
|
|
$
|
4.0
|
|
Change
year-on-year
|
|
|
|
|
|
|
(9.6
|
)%
|
|
|
(17.6
|
)%
|
The decrease in other revenues in 2006 compared to 2005
principally reflects the completion of a number of support
contracts. The decrease in other revenues in 2005 compared to
2004 principally reflects a decrease in revenues from our
application IP solutions.
Geographic
Revenue Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions, except percentages)
|
|
|
United States
|
|
$
|
11.2
|
|
|
|
29.5
|
%
|
|
$
|
12.5
|
|
|
|
35.2
|
%
|
|
$
|
11.7
|
|
|
|
35.9
|
%
|
Europe, Middle East, Africa (EMEA)
|
|
$
|
16.6
|
|
|
|
44.1
|
%
|
|
$
|
7.9
|
|
|
|
22.1
|
%
|
|
$
|
11.7
|
|
|
|
35.9
|
%
|
Asia Pacific (APAC)
|
|
$
|
9.9
|
|
|
|
26.4
|
%
|
|
$
|
15.2
|
|
|
|
42.7
|
%
|
|
$
|
9.2
|
|
|
|
28.2
|
%
|
Due to the nature of our license agreements and the associated
potential large individual contract amounts, the geographic
spilt of revenues both in absolute and percentage terms
generally varies from year to year.
Revenues increased in absolute and percentage terms in the EMEA
region from 2005 to 2006, primarily reflecting greater CEVA-X
and CEVA-Teaklite DSP cores IP licensing revenues offset by less
CEVA-Teak DSP core and GPS IP licensing revenues. The decrease
in revenues in absolute and percentage terms in the United
States and the APAC regions primarily reflecting lower revenues
from our Oak DSP cores, GPS IP, Mediastream and SATA platforms
IP offset by greater CEVA-TeakLite DSP core. Revenues increased
in absolute and percentage terms in the United States and APAC
regions from 2004 to 2005, primarily reflecting greater CEVA
Mobile-Media2000, CEVA-X DSP core and SATA platform IP licensing
revenues. The decrease in revenues in absolute and percentage
terms in EMEA reflects lower revenues from our CEVA-X DSP cores,
CEVA-TeakLite DSP cores and our GPS IP.
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cost of revenues (in millions)
|
|
$
|
5.2
|
|
|
$
|
4.2
|
|
|
$
|
4.0
|
|
Change
year-on-year
|
|
|
|
|
|
|
(18.6
|
)%
|
|
|
(4.3
|
)%
|
Cost of revenues accounted for 12.4% of total revenues in 2006,
compared with 11.8% in 2005 and 13.7% in 2004. The absolute and
percentage decrease in cost of revenues in 2006 compared to 2005
principally reflects the shift in revenue mix with increased
higher gross margin license offset by the non-cash stock
compensation expense of $53,000. The absolute and percentage
decrease in cost of revenues in 2005 compared to 2004
principally reflects the shift in revenue mix with increased
higher gross margin license and royalty revenue.
Cost of revenues includes related labor costs and, where
applicable, related overhead and material costs.
35
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Research and development, net
|
|
$
|
17.3
|
|
|
$
|
20.2
|
|
|
$
|
18.8
|
|
Sales and marketing
|
|
$
|
6.9
|
|
|
$
|
6.6
|
|
|
$
|
6.2
|
|
General and administration
|
|
$
|
5.9
|
|
|
$
|
5.7
|
|
|
$
|
5.9
|
|
Amortization of intangible assets
|
|
$
|
0.9
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
Reorganization, restructuring and
severance charge
|
|
$
|
|
|
|
$
|
3.2
|
|
|
$
|
|
|
Impairment of assets
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
31.0
|
|
|
$
|
37.0
|
|
|
$
|
31.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
year-on-year
|
|
|
|
|
|
|
19.4
|
%
|
|
|
(15.3
|
)%
|
The decrease in total operating expenses in 2006 compared to
2005 principally reflects no reorganization and impairment
charges in 2006, as well as cost saving measures taken as a
result of the divestment of our GSP technology and associated
business on June 23, 2006, offset by the non-cash stock
compensation expense of $2.2 million in 2006. Total
operating expenses increased in 2005 compared to 2004 due to a
combination of reorganization and impairment charges incurred in
2005 and a higher investment in research and development. There
were no reorganization or impairment charges in 2004.
Research
and Development Expenses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Research and development expenses,
net (in millions)
|
|
$
|
17.3
|
|
|
$
|
20.2
|
|
|
$
|
18.8
|
|
Change
year-on-year
|
|
|
|
|
|
|
16.7
|
%
|
|
|
(6.9
|
)%
|
The net decrease in research and development expenses in 2006
compared with 2005 primarily reflects lower expenses as a result
of the divestment of our GPS technology and associated business
which led to a lower number of research and development
personnel, as well as lower
sub-contract
design costs primarily in our serial ATA research and
development programs, offset by a non-cash stock compensation
expense of $0.7 million in 2006. Research and development
expenses increased in 2005 from 2004 primarily reflecting
increased investment in our latest multimedia platform, design
tools and
sub-contract
design and higher labor and associated costs from increased
average headcount. The average number of research and
development personnel in 2006 was 140 compared to 169 in 2005
and 163 in 2004. The number of research and development
personnel was 136 at December 31, 2006, compared with 158
at year-end 2005 and 170 at year-end 2004.
Research and development expenses, net of related government
grants, were 57.7% of total revenues in 2006, compared with
56.6% in 2005 and 45.9% in 2004. We recorded net research grants
under funding programs of the Chief Scientist of Israel and
under funding programs of Enterprise Ireland and Invest Northern
Ireland of $276,000 in 2006 compared with $574,000 in 2005 and
$346,000 in 2004. Grants received from the Chief Scientist of
Israel may become refundable if certain revenues are achieved
for products developed under these programs and grants received
from Enterprise Ireland and Invest Northern Ireland may become
repayable if certain criteria under the grants are not met.
Research and development expenses consist primarily of salaries
and associated costs connected with the development of our
intellectual property and are expensed as incurred. Research and
development expenses are net of related government research
grants. We view research and development as a principal
strategic investment and have continued our commitment to invest
heavily in this area, which represents the largest of our
ongoing operating expenses. We will need to continue to invest
in research and development and such expenses may increase in
the future to keep pace with new trends in our industry.
36
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Sales and marketing expenses (in
millions)
|
|
$
|
6.9
|
|
|
$
|
6.6
|
|
|
$
|
6.2
|
|
Change
year-on-year
|
|
|
|
|
|
|
(5.6
|
)%
|
|
|
(4.7
|
)%
|
The decrease in sales and marketing expenses in 2006 compared to
2005 principally reflects lower labor cost due to a change in
headcount mix and lower sales commission due to lower revenues
in 2006 offsets by non-cash stock compensation expense of
$0.4 million. The decrease in sales and marketing expenses
in 2005 compared to 2004 principally reflects lower consultancy
and promotional costs.
Sales and marketing expenses as a percentage of total revenues
were 19.3% in 2006 compared with 18.5% in 2005 and 2004. The
total number of sales and marketing personnel was 20 at year-end
2006 and year-end 2005 and 21 at year-end 2004. Sales and
marketing expenses consist primarily of salaries, commissions,
travel and other costs associated with sales and marketing
activity, as well as advertising, trade show participation,
public relations and other marketing costs.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
General and administrative
expenses (in millions)
|
|
$
|
5.9
|
|
|
$
|
5.7
|
|
|
$
|
5.9
|
|
Change
year-on-year
|
|
|
|
|
|
|
(2.1
|
)%
|
|
|
2.4
|
%
|
The increase in general and administrative expenses in 2006
compared with 2005 primarily reflects non-cash stock
compensation expense of $1.0 million offset by a
combination of lower corporate management, overhead,
professional services costs and facility costs. The decrease in
general and administrative expenses in 2005 compared with 2004
primarily reflects lower corporate management and overhead
charges following the reorganization in the second quarter of
2005. The total number of general and administrative personnel
was 27 at December 31, 2006, compared with 31 at year-end
2005 and 36 at year-end 2004. General and administrative
expenses consist primarily of salaries for directors, management
and administrative employees, accounting and legal fees,
expenses related to investor relations and facilities expenses
associated with general and administrative activities.
Amortization
of Other Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Amortization of other intangible
assets (in millions)
|
|
$
|
0.9
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
Change
year-on-year
|
|
|
|
|
|
|
(7.7
|
)%
|
|
|
(49.7
|
)%
|
The charges identified above were incurred in connection with
the amortization of intangible assets acquired in the
combination with Parthus. The decrease in amortization of other
intangible assets in 2006 compared with 2005 was mainly due to a
decrease in the amount of other intangible assets, net of
$0.85 million as a result of the divestment of our GPS
technology and associated business to GloNav. The decrease in
the 2005 charges reflects lower amortization as a result of
separate impairment charges incurred relating to certain
technology acquired in the combination with Parthus. The
impairment charges incurred reduced the carrying value of the
intangible assets and subsequently led to a lower amortization
charge going forward. As of December 31, 2006, 2005 and
2004, the net amount of other intangible assets was
$0.2 million, $1.5 million and $2.6 million,
respectively. We anticipate ongoing expense in connection with
the amortization of remaining intangibles of approximately
$41,000 per quarter.
Reorganization,
Restructuring and Severance Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Reorganization, restructuring and
severance charge (in millions)
|
|
$
|
|
|
|
$
|
3.2
|
|
|
$
|
|
|
The implementation of reorganization and restructuring plans in
2005 resulted in a total charge of $3.2 million. The charge
arose in connection with the decision to restructure our
corporate management, reduce overhead and
37
consolidate its activities. The charges included severance
charges and employee-related liabilities arising in connection
with a head-count reduction of nine employees and provision for
future operating lease charges on idle facilities.
We were required to make and are required to review certain
estimates and assumptions in assessing the under-utilized
building operating lease charges arising from the reduction in
facility requirements. Our management takes into account current
market conditions, and our ability to either exit the lease
property or
sub-let the
property, as well as exit scenario, in determining the estimates
and assumptions used. We expect to revise our assumptions
quarterly, as appropriate in respect of future vacancy rates and
sublet rents in light of current market conditions and the
applicable discount rate based on projected interest rates.
Throughout 2006, our management continued exit negotiations with
the landlord in respect of one of our properties in Dublin,
Ireland. Our management updated our provision in respect of this
property to reflect an exit strategy. At December 31, 2006,
exit negotiations had not been concluded. There was no
additional charge to the income statement of operation during
2006. If we are successful in surrendering the long term lease
in respect of the above property, we would expect an associated
cash outflow of approximately $3.3 million associated with
restructuring charges. Revisions to our estimates of this
liability could materially impact our operating results and
financial position in future periods if anticipated events and
assumptions either change or do not materialize.
Impairment
of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Impairment of assets (in millions)
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
|
|
We recorded an impairment charge of $0.4 million in the
second quarter of 2005 in respect of certain technology acquired
in the combination with Parthus as we decided to cease the
development of this product line due to the minimal
differentiation between competing solutions. We also recorded an
impairment charge of $0.1 million in the same period
relating to non-performing assets following the implementation
of our reorganization plan.
Financial
Income, net and Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Financial income, net (in millions)
|
|
$
|
0.80
|
|
|
$
|
1.82
|
|
|
$
|
2.62
|
|
of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and gains from
marketable securities (in millions)
|
|
$
|
0.76
|
|
|
$
|
1.71
|
|
|
$
|
2.77
|
|
Foreign exchange gain (loss) (in
millions)
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
(0.15
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on realization of investment
(in millions)
|
|
$
|
|
|
|
$
|
1.51
|
|
|
$
|
0.06
|
|
Financial income, net and other income, consists of interest
earned on investments, gains from marketable securities, foreign
exchange movements and gain on realization of investment. The
increase in interest and gains from marketable securities earned
in 2006 from 2005 and in 2005 from 2004 reflects a combination
of a higher interest rate environment and higher combined cash
and marketable securities balances held.
We review our monthly expected
non-U.S. dollar
denominated expenditure and look to hold equivalent
non-U.S. dollar
cash balances to mitigate currency fluctuations and this
resulted in a foreign exchange loss of $0.15 million in
2006, and a gain of $0.11 and $0.04 million in 2005 and
2004, respectively.
We recorded a gain of $0.06 and $1.51 million in the 2006
and 2005, respectively, from the realization of a minority
investment in a private company acquired in the combination with
Parthus. In December 2003, we had fully written down the
carrying value of the investment having assessed the carrying
value of the investment taking into consideration the potential
discounted projected future cash flows, the valuation derived
from the then proposed private placement, the liquidity of the
investment and the general market conditions in which this
private company operated at that time.
38
Provision
for Income Taxes
In 2006, we recorded a tax income of $88,000 mainly due to the
release of a certain tax provision as a result of a
re-calculation of the provision for income taxes based on
approvals received during the year from a certain tax authority
in a foreign jurisdiction, offset by tax expenses on income
earned domestically and in certain foreign jurisdictions. We had
no provision for income taxes in 2005 primarily due to losses
incurred domestically and in certain foreign jurisdictions. The
provision for income taxes in 2004 reflects income earned
domestically and in certain foreign jurisdictions. 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.
The Irish operating subsidiary currently qualifies for a
10 percent tax rate, which under current legislation will
remain in force until December 31, 2010. The Israeli
operating subsidiarys production facilities have been
granted Approved Enterprise status under Israeli law
in connection with six separate investment plans. Accordingly,
income from an Approved Enterprise is tax-exempt for
a period of two or four years and is subject to a reduced
corporate tax rate of 10 percent to 25 percent (based
on percentage of foreign ownership) for an additional period of
six or eight years. Certain expenditure in connection with the
investment plans is allowable as a tax deduction over a three
year period which has resulted in higher deferred tax asset in
2006.
LIQUIDITY
AND CAPITAL RESOURCES
As of December 31, 2006, we had approximately
$38.0 million in cash and cash equivalents and
$26.2 million in deposits and marketable securities,
totaling $64.2 million compared to $61.6 million at
December 31, 2005. During 2006, we invested
$30.9 million of our cash in certificates of deposits and
corporate bonds and securities and U.S. government and
agency securities with maturities up to 25 months. In
addition, certificates of deposits and corporate bonds and
securities and U.S. government and agency securities were
sold or redeemed for cash amounting to $25.8 million.
During 2005, we invested $45.6 million of our cash in
certificates of deposits and corporate bonds and securities and
U.S. government and agency securities with maturities up to
20 months. In addition, certificates of deposits and
corporate bonds and securities and U.S. government and
agency securities were sold or redeemed for cash amounting to
$58.2 million. These instruments are classified as
marketable securities and the purchases and sales are considered
part of operating cash flow. Deposits are short-term bank
deposits with maturities of more than three months but less than
one year. The deposits are in U.S. dollars and are
presented at their cost, including accrued interest, and
purchases and sales are considered part of cash flows from
investing activities.
Net cash used in operating activities in 2006 was
$3.4 million, compared with $12.7 million of net cash
provided by operating activities in 2005 and $29.8 million
of net cash used in operating activities in 2004. Included in
the operating cash inflow in 2006 was a net investment of
$5.1 million in marketable securities. Excluding this item,
net cash provided by operations during 2006 was
$1.7 million. Included in the operating cash inflow in 2005
was a net disposal of $12.6 million in marketable
securities and $2.9 million outflow in connection with
restructuring and reorganization costs. Excluding these items,
net cash provided by operations during 2005 was
$3.0 million. Included in the operating cash outflow in
2004 was a net investment of $30.7 million in marketable
securities and $1.9 million outflow in connection with
restructuring and reorganization costs. Excluding these items,
net cash provided by operations during 2004 was
$2.8 million.
Cash flows from operating activities may vary significantly from
quarter to quarter depending on the timing of our receipts and
payments. Throughout 2006, we continued exit negotiations with
the landlord in respect of one of our properties in Dublin,
Ireland. If we are successful in surrendering our long term
lease relating to the under-utilized premises in Ireland, we
would expect an associated cash outflow of approximately
$3.6 million in 2007. Our ongoing cash outflows from
operating activities principally relate to payroll-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 and
marketable securities holdings. The timing of receipts from
customers is based upon the completion of agreed milestones or
agreed dates as set out in the contracts.
Net cash provided by investing activities in 2006 was
$3.9 million. Included in the investment cash inflow in
2006 was a net disposal of $5.2 million in short term bank
deposit. Included in the investment cash outflow in 2005
39
was an investment of $8.2 million in short term bank
deposit. Capital equipment purchases of computer hardware and
software used in engineering development, furniture and fixtures
amounted to approximately $0.4 million in 2006,
$0.9 million in 2005, and $3.1 million in 2004. The
high level of capital expenditures in 2004 was principally due
to investments in new design tools. Proceeds from the sale of
property and equipment amounted to $0 in 2006 compared with
$14,000 in 2005 and $54,000 in 2004. We had a cash outflow of
$0.9 million in 2006 in respect of transaction and related
costs of the divestment of our GPS technology and associated
business. We had a cash outflow of $0, $153,000 and $115,000 for
acquired technology in 2006, 2005 and 2004, respectively, and a
cash inflow of $57,000 and $1.5 million from the disposal
of a minority investment in a private company in 2006 and 2005,
respectively.
Net cash provided by financing activities of $1.8 million
in both 2006 and 2005 and $2.2 million in 2004 reflects
proceeds from the issuance of shares upon exercise of employee
stock options and issuance of shares under our employee stock
purchase plan.
We believe that our current cash on hand and marketable
securities, along with cash from operations, will provide
sufficient capital to fund our operations for at least the next
12 months. We cannot assure you, however, that the
underlying assumed levels of revenues and expenses will prove to
be accurate.
Contractual
Obligations
The table below presents the principal categories of our
contractual obligations as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
($ in thousands)
|
|
|
Operating Lease
Obligations Leasehold properties
|
|
|
24,301
|
|
|
|
2,675
|
|
|
|
4,689
|
|
|
|
4,018
|
|
|
|
12,919
|
|
Operating Lease
Obligations Other
|
|
|
2,472
|
|
|
|
1,071
|
|
|
|
1,247
|
|
|
|
154
|
|
|
|
|
|
Purchase Obligations
|
|
|
579
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,352
|
|
|
|
4,325
|
|
|
|
5,936
|
|
|
|
4,172
|
|
|
|
12,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leasehold obligations principally relate to our
offices in Ireland, Israel and the United States. The most
material of these obligations relates to the lease on our
Harcourt Street offices in Dublin, which involves a total
commitment of $17.5 million over the remaining
15 years of the lease. A portion of rental space is
currently under-utilized as a result of the re-alignment of our
business and related headcount reductions in 2003. Other
operating lease obligations relate to license agreements entered
into for maintenance of design tools. Purchase obligations
consist of capital commitments of $0.3 million and
operating purchase order commitments of $0.3 million.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term
is defined in recently enacted rules by the Securities and
Exchange Commission, that have or are reasonably likely to have
a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources
that are material to investors.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
A majority of our revenues and a portion of our expenses are
transacted in U.S. dollars and our assets and liabilities
together with our cash holdings are predominately denominated in
U.S. dollars. However, the bulk of our expenses are
denominated in currencies other than the U.S. dollar,
principally the euro and the Israeli NIS. Increases in the
volatility of the exchange rates of the euro and the NIS versus
the U.S. dollar could have an adverse effect on the
expenses and liabilities that we incur when remeasured into
U.S. dollars. We review our monthly expected
non-U.S. dollar
denominated expenditure and look to hold equivalent
non-U.S. dollar
cash balances to mitigate currency fluctuations and this has
resulted in a foreign exchange loss of $150,000 in 2006 and a
foreign exchange gain of $109,000 and $37,000 in 2005 and 2004,
respectively.
40
As a result of such currency fluctuations and the conversion to
U.S. dollars for financial reporting purposes, we may
experience fluctuations in our operating results on an annual
and a quarterly basis going forward. We have not in the past,
but may in the future, hedge against fluctuations in exchange
rates. Future hedging transactions may not successfully mitigate
losses caused by currency fluctuations. We expect to continue to
experience the effect of exchange rate and currency fluctuations
on an annual and quarterly basis; although the impact of
currency fluctuations has not been material to date.
We invest our cash in high grade certificates of deposits,
U.S. government and agency securities and corporate bonds.
Cash held by foreign subsidiaries is generally held in
short-term time deposits denominated in the local currency.
Interest income and gains from marketable securities were
$2.8 million in 2006, $1.7 million in 2005 and
$759,000 in 2004. The increase in interest and gains from
marketable securities earned in 2006 from 2005 and in 2005 from
2004 reflects a combination of a higher interest rate
environment and higher combined cash and marketable securities
balances held.
We are exposed primarily to fluctuations in the level of U.S.
and EMU (European Monetary Union) interest rates. To the extent
that interest rates rise, fixed interest investments may be
adversely impacted, whereas a decline in interest rates may
decrease the anticipated interest income for variable rate
investments.
We are exposed to financial market risks, including changes in
interest rates. We typically do not attempt to reduce or
eliminate our market exposures on our investment securities
because the majority of our investments are short-term. We
currently do not have any derivative instruments but may have in
the future.
The fair value of our investment portfolio or related income
would not be significantly impacted by either a 100 basis
point increase or decrease in interest rates due mainly to the
short-term nature of our investment portfolio. All the potential
changes noted above are based on sensitivity analysis performed
on our balances as of December 31, 2006.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
See the Index to Financial Statements and Supplementary Data on
page F-1.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not Applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are
effective in timely alerting them to material information
required to be included in this report.
There has been no change in our internal control over financial
reporting that occurred during our most recent fiscal quarter
that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
41
Managements
Annual Report on Internal Control Over Financial
Reporting.
CEVA, Inc.s management is responsible for establishing and
maintaining adequate internal control over the companys
financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. CEVA, Inc.s
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles. There are inherent limitations in the
effectiveness of any internal control, including the possibility
of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only
reasonable assurances with respect to financial statement
preparation. Further because of changes in conditions, the
effectiveness of internal controls may vary over time such that
the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of CEVA, Inc.s
internal control over financial reporting as of
December 31, 2006. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on its assessment using
those criteria, management believes that, as of
December 31, 2006, CEVA, Inc.s internal control over
financial reporting is effective.
CEVA, Inc.s independent registered public accountants
audited the financial statements included in this Annual Report
on
Form 10-K
and have issued an attestation report on managements
assessment of the companys internal control over financial
reporting. This report appears on page 43.
42
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of CEVA, Inc.
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that CEVA, Inc. and its subsidiaries
maintained effective internal control over annual financial
reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). CEVA Inc. and its
subsidiaries management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that CEVA, Inc. and
its subsidiaries maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, CEVA, Inc. and its subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2006, based on
the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of CEVA, Inc. and its subsidiaries
as of December 31, 2006 and 2005, and the related
consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the two
years in the period ended December 31, 2006 of CEVA, Inc.
and its subsidiaries and our report dated March 16, 2007
expressed an unqualified opinion thereon.
/s/ Kost
Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 16, 2007
43
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
We are holding the 2007 Annual Meeting of Stockholders on
May 15, 2007 (the 2007 Annual Meeting). In
2006, the annual meeting of stockholders was held on
July 18, 2006. As the date of the 2007 Annual Meeting is
advanced by more than 30 days from the date of our previous
annual meeting, in accordance with the applicable rules of the
Securities and Exchange Commission, we are hereby notifying our
stockholders of the new meeting date for the 2007 Annual
Meeting. We will be mailing the proxy statement and related
materials in connection with the 2007 Annual Meeting on or about
March 30, 2007. In light of this accelerated mailing
schedule, we are hereby notifying our stockholders that
March 21, 2007, is the latest date for submitting
stockholder proposals for inclusion in our proxy statement for
the 2007 Annual Meeting. Stockholder proposals received by us
after March 21, 2007 will be considered untimely and will
not be included in our proxy statement for the 2007 Annual
Meeting.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information regarding our directors required by this item is
incorporated herein by reference to the 2007 Proxy Statement.
Information regarding the members of the Audit Committee, our
code of business conduct and ethics, the identification of the
Audit Committee Financial Expert, stockholder nominations of
directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934 is also incorporated herein by
reference to the 2007 Proxy Statement.
The information regarding our executive officers required by
this item is contained in Part I of this annual report.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item is incorporated herein by
reference to the 2007 Proxy Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK HOLDER MATTERS
|
The information required by this item is incorporated herein by
reference to the 2007 Proxy Statement.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item is incorporated herein by
reference to the 2007 Proxy Statement.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item is incorporated herein by
reference to the 2007 Proxy Statement.
44
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of or are
included in this Annual Report on
Form 10-K:
1. Financial Statements:
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2006 and
2005.
|
|
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004.
|
|
|
|
Statements of Changes in Stockholders Equity for the Years
Ended December 31, 2006, 2005 and 2004.
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004.
|
|
|
|
Notes to Consolidated Financial Statements.
|
2. Financial Statement Schedules:
|
|
|
|
|
Schedule II: Valuation and Qualifying Accounts
|
Other financial statement schedules have been omitted since they
are either not required or the information is otherwise included.
3. Exhibits:
The exhibits filed as part of this Annual Report on
Form 10-K
are listed on the exhibit index immediately preceding such
exhibits, which exhibit index is incorporated herein by
reference. Some of these documents have previously been filed as
exhibits with the Securities and Exchange Commission and are
being incorporated herein by reference to such earlier filings.
CEVAs file number under the Securities Exchange Act of
1934 is
000-49842.
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the board of Directors and Stockholders of CEVA, Inc.
We have audited the accompanying consolidated balance sheets of
CEVA, Inc. (the Company) and its subsidiaries as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, changes in stockholders equity
and cash flows for each of the two years in the period ended
December 31, 2006. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)2.
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries at
December 31, 2006 and 2005, and the consolidated results of
their operations and their cash flows for each of the two years
in the period ended December 31, 2006 in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1(s) to the consolidated financial
statements, in 2006, the Company adopted Financial Accounting
Standards Board Statement No. 123R, Share-Based
Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company and its subsidiaries internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 16, 2007
expressed an unqualified opinion thereon.
/s/ Kost
Forer Gabbay & Kasierer
KOST
FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 16, 2007
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CEVA, INC.
We have audited the accompanying consolidated statements of
operations, changes in stockholders equity, and cash flow
of CEVA, Inc. and its subsidiaries (the Company) for
the year ended December 31, 2004. Our audits also included
the financial statement schedule listed in the Index at
Item 15(a) 2. These consolidated financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated results of operations and cash flows of CEVA, Inc.
and its subsidiaries for the year ended December 31, 2004,
in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young llp
Dublin, Ireland
March 29, 2005
F-3
CEVA,
INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(U.S. dollars in thousands, except share and per share
data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,111
|
|
|
$
|
37,968
|
|
Short term bank deposits
|
|
|
8,335
|
|
|
|
3,029
|
|
Marketable securities (Note 2)
|
|
|
18,174
|
|
|
|
23,237
|
|
Trade receivables (net of
allowance for doubtful accounts of $667 in 2005 and $682 in 2006)
|
|
|
6,159
|
|
|
|
8,421
|
|
Deferred tax assets (Note 11)
|
|
|
600
|
|
|
|
613
|
|
Prepaid expenses (Note 6)
|
|
|
1,040
|
|
|
|
564
|
|
Other accounts receivable
(Note 6)
|
|
|
1,042
|
|
|
|
1,890
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
70,461
|
|
|
|
75,722
|
|
|
|
|
|
|
|
|
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
Severance pay fund
|
|
|
1,912
|
|
|
|
2,338
|
|
Deferred tax assets (Note 11)
|
|
|
292
|
|
|
|
382
|
|
Property and equipment, net
(Note 3)
|
|
|
3,226
|
|
|
|
1,706
|
|
Investment in other company, net
(Note 4)
|
|
|
|
|
|
|
4,233
|
|
Goodwill (Note 5)
|
|
|
38,398
|
|
|
|
36,498
|
|
Other intangible assets, net
(Note 5)
|
|
|
1,460
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,288
|
|
|
|
45,358
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
115,749
|
|
|
$
|
121,080
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
548
|
|
|
$
|
718
|
|
Accrued expenses and other
payables (Note 7)
|
|
|
7,778
|
|
|
|
9,462
|
|
Taxes payable
|
|
|
442
|
|
|
|
135
|
|
Deferred revenues
|
|
|
453
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,221
|
|
|
|
10,721
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Accrued severance pay
|
|
|
2,100
|
|
|
|
2,519
|
|
Accrued expenses (Note 12)
|
|
|
2,195
|
|
|
|
1,697
|
|
|
|
|
|
|
|
|
|
|
Total long term liabilities
|
|
|
4,295
|
|
|
|
4,216
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent
(Note 14)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock:
|
|
|
|
|
|
|
|
|
$0.001 par value:
5,000,000 shares authorized at December 31, 2005 and
2006; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
$0.001 par value:
60,000,000 shares authorized at December 31, 2005, and
2006; 18,923,071 and 19,330,144 shares issued and
outstanding at December 31, 2005 and 2006, respectively
|
|
|
19
|
|
|
|
19
|
|
Additional paid in capital
|
|
|
138,818
|
|
|
|
142,826
|
|
Accumulated deficit
|
|
|
(36,604
|
)
|
|
|
(36,702
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
102,233
|
|
|
|
106,143
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
115,749
|
|
|
$
|
121,080
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
CEVA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(U.S. dollars in thousands, except share and per share
data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing and royalties
|
|
$
|
32,271
|
|
|
$
|
30,755
|
|
|
$
|
28,484
|
|
Other revenue
|
|
|
5,402
|
|
|
|
4,881
|
|
|
|
4,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
37,673
|
|
|
|
35,636
|
|
|
|
32,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
5,178
|
|
|
|
4,217
|
|
|
|
4,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32,495
|
|
|
|
31,419
|
|
|
|
28,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
17,276
|
|
|
|
20,153
|
|
|
|
18,769
|
|
Sales and marketing
|
|
|
6,965
|
|
|
|
6,577
|
|
|
|
6,268
|
|
General and administrative
|
|
|
5,863
|
|
|
|
5,742
|
|
|
|
5,882
|
|
Amortization of intangible assets
|
|
|
892
|
|
|
|
823
|
|
|
|
414
|
|
Reorganization, restructuring and
severance charge (Note 12)
|
|
|
|
|
|
|
3,207
|
|
|
|
|
|
Impairment of assets
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
30,996
|
|
|
|
37,012
|
|
|
|
31,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,499
|
|
|
|
(5,593
|
)
|
|
|
(2,863
|
)
|
Financial income, net
|
|
|
796
|
|
|
|
1,820
|
|
|
|
2,620
|
|
Other income
|
|
|
|
|
|
|
1,507
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on
income
|
|
|
2,295
|
|
|
|
(2,266
|
)
|
|
|
(186
|
)
|
Income Taxes expense (income)
(Note 11)
|
|
|
645
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,650
|
|
|
$
|
(2,266
|
)
|
|
$
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
of Common Stock used in computation of net income (loss) per
share (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,421
|
|
|
|
18,807
|
|
|
|
19,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
19,016
|
|
|
|
18,807
|
|
|
|
19,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
CEVA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(U.S. dollars in thousands, except share data)
|
|
|
Balance as of January 1,
2004
|
|
|
18,167,332
|
|
|
$
|
18
|
|
|
|
$
|
134,449
|
|
|
$
|
(35,988
|
)
|
|
$
|
98,479
|
|
Issuance of Common Stock upon
exercise of employee stock options(a)
|
|
|
193,886
|
|
|
|
|
(
|
*)
|
|
|
1,417
|
|
|
|
|
|
|
|
1,417
|
|
Issuance of Common Stock under
employee stock purchase plan(a)
|
|
|
196,600
|
|
|
|
1
|
(
|
*)
|
|
|
773
|
|
|
|
|
|
|
|
774
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
229
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,650
|
|
|
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
18,557,818
|
|
|
$
|
19
|
|
|
|
$
|
136,868
|
|
|
$
|
(34,338
|
)
|
|
$
|
102,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock upon
exercise of employee stock options(a)
|
|
|
72,820
|
|
|
|
|
(
|
*)
|
|
|
369
|
|
|
|
|
|
|
|
369
|
|
Issuance of Common Stock under
employee stock purchase plan(a)
|
|
|
292,433
|
|
|
|
|
(
|
*)
|
|
|
1,386
|
|
|
|
|
|
|
|
1,386
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
195
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,266
|
)
|
|
|
(2,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
18,923,071
|
|
|
$
|
19
|
|
|
|
$
|
138,818
|
|
|
$
|
(36,604
|
)
|
|
$
|
102,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock upon
exercise of employee stock options(a)
|
|
|
86,536
|
|
|
|
|
(
|
*)
|
|
|
430
|
|
|
|
|
|
|
|
430
|
|
Issuance of Common Stock under
employee stock purchase plan(a)
|
|
|
320,537
|
|
|
|
|
(
|
*)
|
|
|
1,374
|
|
|
|
|
|
|
|
1,374
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
2,204
|
|
|
|
|
|
|
|
2,204
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
|
19,330,144
|
|
|
$
|
19
|
|
|
|
$
|
142,826
|
|
|
$
|
(36,702
|
)
|
|
$
|
106,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Represent an amount lower than $1. |
|
(a) |
|
See Note 8 to these consolidated financial statements. |
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
CEVA,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,650
|
|
|
$
|
(2,266
|
)
|
|
$
|
(98
|
)
|
Adjustments required to reconcile
net income (loss) to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,523
|
|
|
|
2,016
|
|
|
|
1,422
|
|
Impairment of tangible assets
|
|
|
|
|
|
|
110
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
892
|
|
|
|
823
|
|
|
|
414
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
400
|
|
|
|
|
|
Stock-based compensation
|
|
|
229
|
|
|
|
195
|
|
|
|
2,204
|
|
Gain from sale of property and
equipment
|
|
|
(9
|
)
|
|
|
(14
|
)
|
|
|
|
|
Loss (gain) on marketable securities
|
|
|
(50
|
)
|
|
|
16
|
|
|
|
52
|
|
Unrealized foreign exchange loss
(gain)
|
|
|
(72
|
)
|
|
|
(109
|
)
|
|
|
48
|
|
Accrued interest on short term bank
deposits
|
|
|
|
|
|
|
(131
|
)
|
|
|
102
|
|
Gain on realization of investment
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
(57
|
)
|
Marketable securities
|
|
|
(30,744
|
)
|
|
|
12,604
|
|
|
|
(5,115
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in trade
receivables
|
|
|
(569
|
)
|
|
|
4,526
|
|
|
|
(2,262
|
)
|
Decrease (increase) in other
accounts receivable and prepaid expenses
|
|
|
612
|
|
|
|
(806
|
)
|
|
|
(332
|
)
|
Increase in deferred income taxes
|
|
|
(195
|
)
|
|
|
(697
|
)
|
|
|
(103
|
)
|
Increase (decrease) in trade
payables
|
|
|
(404
|
)
|
|
|
(1,052
|
)
|
|
|
145
|
|
Increase (decrease) in deferred
revenues
|
|
|
687
|
|
|
|
(1,298
|
)
|
|
|
(47
|
)
|
Increase (decrease) in accrued
expenses and other payables
|
|
|
(4,233
|
)
|
|
|
142
|
|
|
|
582
|
|
Decrease in taxes payable
|
|
|
(184
|
)
|
|
|
(265
|
)
|
|
|
(307
|
)
|
Increase (decrease) in accrued
severance pay, net
|
|
|
108
|
|
|
|
57
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
(29,759
|
)
|
|
|
12,744
|
|
|
|
(3,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(3,125
|
)
|
|
|
(908
|
)
|
|
|
(424
|
)
|
Proceeds from sale of property and
equipment
|
|
|
54
|
|
|
|
14
|
|
|
|
|
|
Investment in short term bank
deposits
|
|
|
|
|
|
|
(8,204
|
)
|
|
|
(3,930
|
)
|
Proceeds from short term bank
deposits
|
|
|
|
|
|
|
|
|
|
|
9,134
|
|
Transaction cost related to the GPS
divestment
|
|
|
|
|
|
|
|
|
|
|
(927
|
)
|
Proceeds from realization of
investment
|
|
|
|
|
|
|
1,507
|
|
|
|
57
|
|
Purchase of technology
|
|
|
(115
|
)
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
(3,186
|
)
|
|
|
(7,744
|
)
|
|
|
3,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Common
Stock upon exercise of employee options
|
|
|
1,417
|
|
|
|
369
|
|
|
|
430
|
|
Proceeds from issuance of Common
Stock under employee stock purchase plan
|
|
|
774
|
|
|
|
1,386
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
2,191
|
|
|
|
1,755
|
|
|
|
1,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate movements
on cash
|
|
|
468
|
|
|
|
(488
|
)
|
|
|
514
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
(30,286
|
)
|
|
|
6,267
|
|
|
|
2,857
|
|
Cash and cash equivalents at the
beginning of the year
|
|
|
59,130
|
|
|
|
28,844
|
|
|
|
35,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
end of the year
|
|
$
|
28,844
|
|
|
$
|
35,111
|
|
|
$
|
37,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information of
cash-flows activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and withholding taxes, net
|
|
$
|
842
|
|
|
$
|
1,383
|
|
|
$
|
652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions (see
Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
(1,900
|
)
|
Intangible asset
|
|
|
|
|
|
|
|
|
|
|
(845
|
)
|
Net working capital
|
|
|
|
|
|
|
|
|
|
|
(522
|
)
|
Transaction cost related to the GPS
divestment
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
Deferred gain related to GPS
divestment transaction
|
|
|
|
|
|
|
|
|
|
|
(1,751
|
)
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
CEVA,
INC.
(in
thousands, except share data)
|
|
NOTE 1:
|
ORGANIZATION
AND SIGNIFICANT ACCOUNTING POLICIES
|
Organization:
CEVA, Inc. (CEVA or the Company) was
incorporated in Delaware on November 22, 1999. The Company
was formed through the combination of Parthus Technologies plc
(Parthus) and the digital signal processor (DSP)
cores licensing business and operations of DSP Group, Inc.
(DSPG) in November 2002. The Company had no business
or operations prior to the combination.
CEVA license a family of programmable DSP cores, DSP-based
subsystems and application-specific platforms, including
multimedia, audio,
Voice-over-IP
(Internet Protocol), Bluetooth, and Serial ATA (SATA).
CEVA license its technology as Intellectual Property (IP)
to leading electronics companies, which in turn manufacture,
market and sell application-specific integrated circuits
(ASICs) and application-specific standard products
(ASSPs) based on CEVA technology to systems
companies for incorporation into a wide variety of end products.
CEVAs IP is primarily deployed in high volume markets,
including wireless handsets (e.g. cellular baseband, multimedia
solutions and Bluetooth), portable multimedia (e.g. portable
video players and portable audio players), home entertainment
(e.g. DVD), storage markets (e.g. hard disk drives) and
communications markets (e.g. high-speed serial storage and
Voice-over-IP
solutions).
a. Basis
of presentation
The consolidated financial statements have been prepared
according to United States Generally Accepted Accounting
Principles (U.S. GAAP).
b. Use
of estimates:
The preparation of financial statements in conformity with
United States Generally Accepted Accounting Principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
c. Financial
statements in U.S. dollars:
A majority of the revenue of the Company and its subsidiaries is
generated in U.S. dollars (dollars). In
addition, a portion of the Company and its subsidiaries
costs are incurred in dollars. The Companys management has
determined that the dollar is the primary currency of the
economic environment in which the Company and its subsidiaries
principally operate. Thus, the functional and reporting currency
of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into dollars in accordance with
Statement of Financial Accounting Standard No. 52,
Foreign Currency Translation. All transaction gains
and losses from remeasurement of monetary balance sheet items
are reflected in the consolidated statements of operations as
financial income or expenses as appropriate, which is included
in Financial income (expense). The Company recorded
a foreign exchange loss of $150 in 2006 and foreign exchange
gain of $109 and $37 in 2005 and 2004, respectively. The foreign
exchange losses arose principally on euro and NIS liabilities as
a result of the appreciation of the Euro and the NIS against the
dollar. The Company reviews its monthly expected non
U.S. denominated expenditure and looks to hold equivalent
non-dollar cash balances to mitigate currency fluctuations and
this has resulted in a lower exchange impact in the said years.
d. Principles
of consolidation:
The consolidated financial statements incorporate the financial
statements of the Company and all of its subsidiaries. All
significant inter-company balances and transactions have been
eliminated on consolidation.
F-8
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
e. Cash
equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with maturities of three months
or less from the date acquired.
f. Short
term bank deposits:
Short-term bank deposits are with maturities of more than three
months from deposit day but less than one year. The deposits are
in dollars and are presented at their cost, including accrued
interest. The deposits bear interest at an average rate of 4.42%
annually during 2006.
g. Marketable
securities:
Marketable securities consist of certificates of deposits,
corporate bonds and securities and U.S. government and
agency securities. The Companys account for investments in
debt and equity securities in accordance with Financial
Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities
(SFAS 115). Management determines the
appropriate classification of its investments in debt and equity
securities at the time of purchase and reevaluates such
determination at each balance sheet date. Marketable securities
are stated at market value, and by policy, the Company invests
in high grade marketable securities. All marketable securities
are defined as trading securities under the provisions of
SFAS 115, and realized and unrealized holding gains and
losses are reflected in the consolidated statements of
operations.
h. Property
and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets, at the
following annual rates:
|
|
|
|
|
%
|
|
Computers, software and equipment
|
|
25-33
|
Office furniture and equipment
|
|
7-25
|
Leasehold improvements
|
|
10-25
|
|
|
(the shorter of the lease term
or useful economic life)
|
The Company and its subsidiaries long-lived assets and
certain identifiable intangibles are reviewed for impairment in
accordance with Statement of Financial Accounting Standard
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144)
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of the carrying amount of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to the future undiscounted cash flows expected to be
generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less selling
costs. The Company recorded impairment charges of $110 during
2005.
i. Investment
in other company, net:
Investments in privately held companies in which the Company
does not have the ability to exercise significant influence over
operating and financial policy are presented at cost. The
carrying value is periodically reviewed by management for
impairment. If this review indicates that the cost is not
recoverable, the carrying value is reduced to its estimated fair
value.
On June 23, 2006, the Company divested its GPS technology
and associated business to a new
U.S.-based
company, GloNav Inc. (GloNav) (for more details see
Note 4). The investment in GloNav is stated at cost, since
F-9
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company does not have the ability to exercise significant
influence over operating and financial policies of GloNav. The
Company records the investment on its Consolidated Balance
Sheets as investment in other company, net. This investment will
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the
investment may not be recoverable, in accordance with Accounting
Principle Board Opinion No. 18 The Equity Method of
Accounting for Investments in Common Stock (APB
No. 18) and Financial Statement Position FSP
115-1,
The Meaning of
Other-Than-Temporary
Impairment and Its Application to Certain Investments.
As part of the combination with Parthus, CEVA acquired a
minority investment in a private company
(the Portfolio Company). CEVA has no influence
or control over the Portfolio Company or any board
representation. In December 2003, the Portfolio Company
commenced a round of private funding at a significantly reduced
valuation to CEVAs original investment. As a result, the
Company recognized impairment and the investment was presented
on $0. The Company recorded a gain of $57 and $1,507 in 2006 and
2005, respectively, from the realization of this minority
investment in the Portfolio Company due to proceeds received
from the Portfolio Company of the same amount.
j. Goodwill:
Goodwill represents the excess of purchase price over the fair
value of the net assets of businesses acquired. Under
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), goodwill
acquired in a business combination on or after July 1,
2001, is not amortized. As a result of the combination in
November 2002, the Company recorded goodwill in the amount of
$38,398. In the second quarter of 2006, there was a decrease in
the amount of goodwill of $1,900 as a result of the divestment
of the Companys GPS technology and associated business to
GloNav (See note 4).
SFAS No. 142 requires goodwill to be tested for
impairment at least annually or between annual tests in certain
circumstances, and written down when impaired.
The Company conducts its annual test of impairment for goodwill
in October of each year. In addition the Company tests if
impairment exists periodically whenever events or circumstances
occur subsequent to its annual impairment test that would more
likely than not reduce the fair value of a reporting unit below
its carrying amount. Important indicators which the Company
considers in determining whether an impairment is triggered
include, but are not limited to, significant underperformance
relative to historical or projected future operating results,
significant changes in the manner of use of the acquired assets
or the strategy for the Companys overall business,
significant negative industry or economic trends, a significant
decline in the Companys stock price for a sustained period
and the Companys market capitalization relative to net
book value.
The goodwill impairment test, which is based on fair value, is
performed on a reporting unit level. A reporting unit is defined
by SFAS No. 142, as an operating segment or one level
below an operating segment. The Company markets its products and
services in one segment and thus allocates goodwill to one
reporting unit. Therefore, impairment is tested at the
enterprise level using the Companys market capitalization
as fair value. Accordingly, in conducting the first step of this
impairment test, the Company compares the carrying value of its
assets and liabilities, including goodwill, to its market
capitalization. If the carrying value exceeds the fair value,
the goodwill is potentially impaired and the Company then
completes the second step in order to measure the impairment
loss. If the fair value exceeds the carrying value, the second
step in order to measure the impairment loss is not required.
The second step of the goodwill impairment test compares the
implied fair value of the reporting units goodwill with
the carrying amount of the goodwill. To estimate the implied
fair value of the goodwill, the Company allocates the fair value
of the reporting unit among the assets and liabilities of the
reporting unit, including any unrecognized, intangible assets.
The excess of the fair value of a reporting unit over the
amounts assigned to its assets and liabilities is the implied
fair value of goodwill. The Company estimates the future cash
flows to determine the fair value of these assets and
liabilities. These cash flows are then discounted at rates
reflecting the respective
F-10
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
specific industrys cost of capital. If, upon review, the
carrying value of the goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in the amount
equal to that excess.
Should the Companys market capitalization decline, in
assessing the recoverability of goodwill, the Company may be
required to make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the
respective assets. This process is subjective and requires
judgment at many points throughout the analysis. If the
Companys estimates or their related assumptions change in
subsequent periods or actual cash flows are below their
estimates, an impairment loss may be required for these assets
not previously recorded.
In October 2006 and 2005, the Company conducted its annual
goodwill impairment test as required by SFAS No. 142.
The goodwill impairment test compared the fair value of the
Company with the carrying amount, including goodwill, on that
date. Because the market capitalization exceeded the carrying
value, goodwill is considered not impaired.
k. Other
intangible assets:
Intangible assets acquired in a business combination should be
amortized over their useful life using a method of amortization
that reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise used up, in
accordance with SFAS No. 144, Accounting for
Impairment of Long-Lived Assets
(SFAS No. 144). The costs of technology
have been capitalized and are amortized to the Consolidated
Statements of Operations over the period during which benefits
are expected to accrue, currently estimated at five years.
The Company is required to test their other intangible assets
for impairment whenever events or circumstances indicate that
the value of the assets may be impaired in accordance with
SFAS No. 144. Factors that the Company considers to be
important, which could trigger impairment include:
|
|
|
|
|
significant underperformance relative to expected historical or
projected future operating results;
|
|
|
|
significant changes in the manner of the Companys use of
the acquired assets or the strategy for the Companys
overall business;
|
|
|
|
significant negative industry or economic trends;
|
|
|
|
significant decline in the Companys stock price for a
sustained period; and
|
|
|
|
significant decline in the Companys market capitalization
relative to net book value.
|
Where events or circumstances are present which indicate that
the carrying amount of an intangible asset may not be
recoverable, the Company will recognize an impairment loss. Such
impairment loss is measured by comparing the fair value of the
assets with their carrying value. The determination of the value
of such intangible assets requires the Company to make
assumptions regarding future business conditions and operating
results in order to estimate future cash flows and other factors
to determine the fair value of the respective assets. The
Company incurred an impairment charge of $400 in the second
quarter of 2005 in respect of certain technology acquired in the
combination with Parthus as the Company decided to cease the
development of this product line due to the minimal
differentiation between competing solutions. In the second
quarter of 2006, there was a decrease in the amount of other
intangible assets, net of $845, as a result of the divestment of
the Companys GPS technology and associated business to
GloNav (see Note 4). The Company assessed the carrying
value of the remaining intangible assets based on the future
expected cash flow from these assets and determined there was no
impairment at year end.
l. Revenue
recognition:
The Company generates its revenues from (1) licensing
intellectual property, which in certain circumstances is
modified to customer-specific requirements, (2) royalty
income and (3) other revenues, which include revenues from
support, training and sale of development boards. The Company
licenses its IP to semiconductor companies
F-11
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
throughout the world. These semiconductor companies then
manufacture, market and sell custom-designed chips to original
equipment manufacturers of a variety of electronic products. The
Company also licenses its technology directly to OEMs, which are
considered end users.
The Company accounts for its IP license revenues in accordance
with Statement of Position
97-2,
Software Revenue Recognition, as amended
(SOP 97-2).
Under the terms of
SOP 97-2,
revenues are recognized when: (1) collection is probable;
(2) delivery has occurred; (3) the license fee is
fixed or determinable; and (4) persuasive evidence of an
arrangement exists and no further obligation exists.
SOP 97-2
generally requires revenue earned on licensing arrangements
involving multiple elements to be allocated to each element
based on the relative fair value of the elements. However, the
Company has adopted
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions, for multiple element transactions.
SOP 98-9
requires that revenue be recognized under the residual
method when vendor specific objective evidence
(VSOE) of fair value exists for all undelivered
elements and VSOE does not exist for one of the delivered
elements. The VSOE of fair value of the undelivered elements
(mainly, technical support and training) is determined based on
the substantive renewal rate as stated in the agreement.
SOP 97-2
specifies that extended payment terms in a licensing arrangement
may indicate that the license fees are not deemed to be fixed or
determinable. If the fee is not fixed or determinable, revenue
is recognized as payments become due from the customer unless
collection is not considered probable, then revenue is
recognized as payments are collected from the customer, provided
all other revenue recognition criteria have been met. The
Companys revenue recognition policy
characterizes all arrangements that become due after
12 months as extended payment and revenue is
recognized as each payment becomes due, provided all other
revenue recognition criteria have been met.
SOP 97-2
specifies that if a company has a standard business practice of
using extended payment terms in licensing arrangements and has a
history of successfully collecting the license fees under the
original terms of the licensing arrangement without making
concessions, the company should recognize the license fees when
all other
SOP 97-2
revenue recognition criteria are met.
Revenues from license fees that involve customization of the
Companys IP to customer specific specifications are
recognized in accordance with the principles set out in
Statement of Position
81-1,
Accounting for Performance of Construction
Type and Certain Production Type Contracts
(SOP 81-1),
using contract accounting on a percentage of completion method,
in accordance with the Input Method. The amount of
revenue recognized is based on the total project fees (including
the license fee and the customization hours charged) under the
agreement and the percentage of completion achieved. The
percentage of completion is measured by monitoring progress
using records of actual time incurred to date in the project
compared to the total estimated project requirements, 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.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are first determined, in
the amount of the estimated loss on the entire contract. As of
December 31, 2006, no such estimated losses were
identified. The amount of revenue recognized under
SOP 81-1
that was unbilled was $1,271 at December 31, 2006 and
$1,025 at December 31, 2005.
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.
The Company believes that the use of the percentage of
completion method is appropriate as the Company has a prior
experience and 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 the Company expects to
perform its contractual obligations, and its licensees are
expected to satisfy their obligations under the contract.
F-12
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Royalties from licensing the right to use the Companys IP
are recognized when the related sales are made. The Company
determines such sales by receiving confirmation of sales subject
to royalties from licensees. Non-refundable payments on account
of future royalties are recognized upon payment, provided no
future obligation exists. Prepaid royalties are recognized under
the licensing revenue line.
Revenues from licensing sales are composed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Licensing and royalties revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
|
|
$
|
26,240
|
|
|
$
|
23,935
|
|
|
$
|
22,160
|
|
Royalties
|
|
|
6,031
|
|
|
|
6,820
|
|
|
|
6,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,271
|
|
|
$
|
30,755
|
|
|
$
|
28,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to license fees, contracts with customers generally
contain an agreement to provide support and training, which
consists of an identified customer contact at the Company and
telephone or
e-mail
support. Fees for post contract support, which take place after
the delivery to the customer, are specified in the contract and
are generally mandatory for the first year. After the mandatory
period, the customer may extend the support agreement on similar
terms on an annual basis. The Company recognizes revenue for
post contract support on a straight-line basis over the period
for which technical support are contractually agreed with the
licensee.
Revenue from sale of development boards is recognized when title
to the product passes to the customer.
The Company usually does not provide rights of return. When
rights of return are included in the license agreements, revenue
is deferred until rights of return expire.
When a sale of the Companys IP is made to a third party
who also supplies the Company with goods or services under
separate agreements, the Company evaluates each of the
agreements to determine whether they are clearly separable, and
independent of one another and that reliable fair value exists
for either the sales or purchase element in order to determine
the appropriate revenue recognition.
Deferred revenues include unearned amounts received under
license agreements, unearned technical support, training and
amounts paid by customers not yet recognized as revenues.
m. Cost
of revenue:
Cost of revenue includes the costs of products and services.
Cost of product revenue includes shipping, handling, materials
and the portion of development costs associated with product
development arrangements. Cost of service revenue includes the
salary costs for personnel engaged in training and customer
support, and telephone and other support costs.
n. Income
taxes:
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). This Statement prescribes
the use of the liability method whereby deferred tax assets and
liability account balances are determined based on differences
between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. The Company and its subsidiaries provide a valuation
allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
Deferred tax assets and liabilities are determined using enacted
statutory tax rates for the effects of net operating losses and
temporary differences between the book and tax bases of assets
and liabilities. Accounting for deferred taxes under
SFAS No. 109, involves the evaluation of a number of
factors concerning the realizability of
F-13
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Companys deferred tax assets. In concluding that a
valuation allowance was required, the Company primarily
considered such factors as their history of operating losses and
expected future losses in certain jurisdictions and the nature
of their deferred tax assets. The Company provides valuation
allowances in respect of deferred tax assets resulting
principally from the carryforward of tax losses. Management
currently believes that it is more likely than not that the
deferred tax regarding the carryforward of losses and certain
accrued expenses will not be realized in the foreseeable future.
In the event that the Company was to determine that it would not
be able to realize all or part of its deferred tax assets in the
future, an adjustment to the deferred tax assets would be
charged to earnings in the period in which it makes such
determination. Likewise, if the Company later determines that it
is more likely than not that the net deferred tax assets would
be realized, the Company would reverse the applicable portion of
the previously provided valuation allowance. In order for the
Company to realize its deferred tax assets it must be able to
generate sufficient taxable income in the tax jurisdictions in
which the deferred tax assets are located.
The Company does not provide for U.S. Federal income taxes
on the undistributed earnings of its international subsidiaries
because such earnings are re-invested and, in the opinion of
management, will not be distributed to CEVA, Inc., the parent
company, and will continue to be re-invested indefinitely. In
addition, the Company operates within multiple taxing
jurisdictions involving complex issues, and it provides for tax
liabilities on investment activity as appropriate.
o. Research
and development:
Research and development costs are charged to the consolidated
statement of operations as incurred.
p. Government
grants:
Government Grants received by the Company relating to categories
of operating expenditures are credited to the consolidated
statement of operations in the period in which the expenditure
to which they relate is charged. Non-royalty-bearing grants from
the Government of Israel for funding certain approved research
and development projects are recognized at the time when the
Company is entitled to such grants, on the basis of the related
costs incurred, and included as a deduction from research and
development costs.
The Company and its subsidiaries recorded grants in the amounts
of $346, $574 and $276 for the years ended December 31,
2004, 2005 and 2006, respectively. The Israeli subsidiary is
obligated to pay royalties amounting to 3% of the sales of
certain products which received grants from the Chief Scientist
of Israel in previous years. The obligation to pay these
royalties is continued on actual sales of the products. Grants
received from Enterprise Ireland and Invest Northern Ireland may
become repayable if certain criteria under the grants are not
met.
q. Employee
benefit plan:
Certain of the Companys employees are eligible to
participate in a defined contribution pension plan
(the plan). Participants in the plan may elect
to defer a portion of their pre-tax earnings into the plan,
which is run by an independent party. The Company makes pension
contributions at rates varying up to 10% of the
participants pensionable salary. Contributions to the plan
are recorded as an expense in the consolidated statement of
operations.
The Companys U.S. operations maintain a retirement
plan (the U.S. Plan) that qualifies as a
deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. Participants in the U.S. Plan may
elect to defer a portion of their pre-tax earnings, up to the
Internal Revenue Service annual contribution limit. The Company
matches 100% of each participants contributions up to a
maximum of 6% of the participants base pay. Each
participant may contribute up to 15% of base remuneration.
Contributions to this plan are recorded in the year contributed
as an expense in the consolidated statement of operations.
Total contributions for the years ended December 31, 2004,
2005 and 2006 were $850, $707 and $520, respectively.
F-14
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
r. Accrued
severance pay:
CEVAs Israeli subsidiarys liability for severance
pay is calculated pursuant to Israeli severance pay laws for all
employees, based on the most recent salary of each employee
multiplied by the number of years of employment for that
employee as of the balance sheet date. The Israeli
subsidiarys liability is fully provided by monthly
deposits with severance pay funds, insurance policies and by an
accrual.
The deposited funds include profits accumulated up to the
balance sheet date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to Israeli
severance pay laws or labor agreements. The value of these
policies is recorded as an asset on the Companys balance
sheet.
Severance pay expenses, net of related income for the years
ended December 31, 2004, 2005 and 2006, were approximately
$488, $550 and $740, respectively.
s. Accounting
for stock-based compensation:
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R))
which requires the measurement and recognition of compensation
expense based on estimated fair values for all share-based
payment awards made to employees and directors. SFAS 123(R)
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), for periods beginning in fiscal 2006.
In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107
(SAB 107) relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 upon its
adoption of SFAS 123(R).
Prior to January 1, 2006, the Company applied the intrinsic
value method of accounting for stock options as prescribed by
APB 25 and related interpretation, as permitted under
SFAS 123(R), whereby compensation expense is equal to the
excess, if any, of the quoted market price of the stock over the
exercise price at the grant date of the award.
The Company adopted the fair value recognition provision of
SFAS 123(R)using the modified prospective transition
method, effective January 1, 2006. Under that transition
method, compensation cost recognized in the year ended
December 31, 2006, includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
Statement 123, and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of Statement 123R. Results for prior periods
have not been restated.
SFAS 123(R) requires companies to estimate the fair value
of equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as an expense over
the requisite service periods on the Companys consolidated
income statement. The Company recognizes compensation expenses
for the value of its awards, which have graded vesting based on
the accelerated attribution method over the requisite service
period of each of the awards, net of estimated forfeitures.
Estimated forfeitures are based on actual historical pre-vesting
forfeitures.
As a result of adopting SFAS 123(R) on January 1,
2006, the Companys net loss for the year ended
December 31, 2006, is $2,204 higher than if it had
continued to account for stock-based compensation under
APB 25. Basic and diluted net loss per share for the year
ended December 31, 2006, are $0.11 higher than if the
Company had continued to account for share-based compensation
under APB 25.
The Company estimates the fair value of stock options granted
using the Black-Scholes-Merton option-pricing model. The
option-pricing model requires a number of assumptions, of which
the most significant are, expected stock price volatility, and
the expected option term. Expected volatility was calculated
based upon actual historical stock price movements over the most
recent periods ending on the grant date, equal to the expected
option term. The expected option term represents the period that
the Companys stock options are expected to be outstanding
and was
F-15
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined based on historical experience of similar options,
giving consideration to the contractual terms of the stock
options. The Company has historically not paid dividends and has
no foreseeable plans to issue dividends. The risk-free interest
rate is based on the yield from U.S. Treasury zero-coupon
bonds with an equivalent term.
The fair value for the Companys stock options granted to
employees and directors was estimated using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
58
|
%
|
|
|
35
|
%
|
|
|
40
|
%
|
Risk-free interest rate
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
5
|
%
|
Expected term
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
Forfeiture rate
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
Weighted average fair value of the options granted to the
employees of the Company whose exercise price is equal to the
market price of the shares of the Company on the date of grant
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Fair Value
|
|
|
of Option Grants at an
|
|
|
Exercise Price
|
|
|
2004
|
|
2005
|
|
Equal to fair value at dates of
grant
|
|
$
|
8.10
|
|
|
$
|
5.79
|
|
|
|
|
|
|
|
|
|
|
The pro-forma table below reflects the Companys stock
based compensation expense, net income (loss) and basic and
diluted income (loss) per share, had the Company applied the
fair value recognition provisions of SFAS 123 to options
granted under the Companys stock option plans in all
periods presented prior to the adoption of Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
Net income (loss) as reported
|
|
$
|
1,650
|
|
|
$
|
(2,266
|
)
|
Add: Total stock based employee
compensation expense determined under the fair value based
method of SFAS 123 for all awards, net of related tax
effects
|
|
|
(10,462
|
)
|
|
|
(2,892
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss:
|
|
$
|
(8,812
|
)
|
|
$
|
(5,158
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted as
reported
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted
pro-forma
|
|
$
|
(0.48
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
For purpose of pro-forma disclosures stock based compensation is
estimated using a Black-Scholes-Merton option pricing model and
amortized over the vesting period using the accelerated
attribution method. Pro-forma compensation expense under
SFAS 123, among other computational differences, does not
consider potential pre-vesting forfeitures. Because of these
differences, the pro-forma stock based compensation expense
presented above for the prior years ended December 31, 2004
and 2005 under SFAS 123 and the stock based compensation
expense recognized during the year ended December 31, 2006
under SFAS 123(R) are not directly comparable.
F-16
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2006, the Company
recognized stock-bases compensation expense related to employee
stock options in the amount of $2,204, as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Cost of revenue
|
|
$
|
53
|
|
Research and development, net
|
|
|
656
|
|
Sales and marketing
|
|
|
449
|
|
General and administrative
|
|
|
1,046
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
2,204
|
|
|
|
|
|
|
t. Fair
value of financial instruments:
The carrying amount of cash, cash equivalents, bank deposits,
marketable securities, trade receivables, other accounts
receivable, unbilled revenue, and trade payables and other
accounts payable approximates fair value due to the short-term
maturities of these instruments. The fair value of marketable
securities (classified as trading) are based on quoted market
prices at year end.
u. Concentration
of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, marketable securities and trade receivables. The
Company invests its surplus cash in cash deposits and marketable
securities in financial institutions with strong credit ratings
and has established guidelines relating to the diversification
and maturities that maintain safety and liquidity. The Company
performs ongoing credit evaluations of its customers and to date
has not experienced any material losses. The Company makes
judgments on its ability to collect outstanding receivables and
provides allowances for the portion of receivables for which
collection becomes doubtful. Provisions are made based upon a
specific review of all significant outstanding receivables. In
determining the provision, the Company considers the historical
collection experience and current economic trends.
The Company invests cash in high grade certificates of deposits,
corporate bonds and securities and U.S. government and
agency securities. Cash held by foreign subsidiaries is
generally held in short-term time deposits denominated in the
local currency and in dollars.
Net interest income was $2,771 in 2006, $1,711 in 2005 and $759
in 2004. The Company is exposed primarily to fluctuations in the
level of U.S. and EMU interest rates. To the extent that
interest rates rise, fixed interest investments may be adversely
impacted, whereas a decline in interest rates may decrease the
anticipated interest income for variable rate investments.
The Company is exposed to financial market risks, including
changes in interest rates. The Company typically does not
attempt to reduce or eliminate its market exposures on its
investment securities because the majority of its investments
are short-term. The Company does not have any derivative
instruments.
The Companys trade receivables are geographically
diversified and derived from sales to OEMs mainly in the United
States, Europe and Asia. Concentration of credit risk with
respect to trade receivables is limited by credit limits,
ongoing credit evaluation and account monitoring procedures. The
Company performs ongoing credit evaluations of its clients and
establishes an allowance for doubtful accounts for specific
debts that are doubtful of collection.
The Company has no off-balance-sheet concentration of credit
risk such as foreign exchange contracts, option contracts or
other foreign hedging arrangements.
F-17
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
v. Advertising
expenses:
Advertising expenses are charged to statements of operations as
incurred. Advertising expenses for the years ended
December 31, 2004, 2005 and 2006 were $52, $179 and $218,
respectively.
w. Net
income (loss) per share of common stock:
Basic net income (loss) per share is computed based on the
weighted-average number of shares of common stock outstanding
during each year. Diluted net income per share is computed based
on the weighted-average number of shares of common stock
outstanding during each year, plus dilutive potential shares of
common stock considered outstanding during the year, in
accordance with SFAS No. 128, Earnings Per
Share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted
net income (loss) per share
|
|
$
|
1,650
|
|
|
$
|
(2,266
|
)
|
|
$
|
(98
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income
(loss) per share
|
|
|
18,421
|
|
|
|
18,807
|
|
|
|
19,191
|
|
Effect of employee stock options
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income
(loss) per share
|
|
|
19,016
|
|
|
|
18,807
|
|
|
|
19,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
issued accounting standards:
In June 2006, the Financial Accounting Standards Board (the
FASB) issued FASB Interpretation 48,
Accounting for Income Tax Uncertainties
(FIN 48), an Interpretation of FASB Statement
No. 109 (FASB 109). FIN 48 defines
the threshold for recognizing the benefits of tax return
positions in the financial statements as
more-likely-than-not to be sustained by the taxing
authority. The recently issued literature also provides guidance
on derecognition, measurement and classification of income tax
uncertainties, along with any related interest and penalties.
FIN 48 also includes guidance concerning accounting for
income tax uncertainties in interim periods and increases the
level of disclosures associated with any recorded income tax
uncertainties. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The differences between
the amounts recognized in the statements of financial position
prior to the adoption of FIN 48 and the amounts reported
after adoption will be accounted for as a cumulative-effect
adjustment recorded to the beginning balance of retained
earnings. The Company estimates that the adoption of FIN 48
will not have any significant impact on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). This Standard defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. Management believes this Standard
will not have a material effect on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159).
SFAS No. 159 permits companies to choose to measure
certain financial instruments and certain other items at fair
value. SFAS No. 159 requires that unrealized gains and
losses on items for which the fair value option has been elected
be reported in earnings. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years, although earlier
F-18
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adoption is permitted. The Company is currently evaluating the
impact that SFAS No. 159 will have on its consolidated
financial statements.
|
|
NOTE 2:
|
MARKETABLE
SECURITIES
|
Marketable securities consist of corporate bonds and securities
and U.S. government and agency securities. Marketable
securities are stated at market value, and by policy, CEVA
invests in high grade marketable securities to reduce risk of
loss. All marketable securities are defined as trading
securities under the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and holding gains and losses are reflected in
the consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2005
|
|
|
As at December 31, 2006
|
|
|
|
Cost
|
|
|
Gain (loss)
|
|
|
Market Value
|
|
|
Cost
|
|
|
Gain (loss)
|
|
|
Market Value
|
|
|
Corporate bonds and securities
|
|
|
8,284
|
|
|
|
(11
|
)
|
|
|
8,273
|
|
|
|
15,382
|
|
|
|
(112
|
)
|
|
|
15,270
|
|
U.S. government and agency
securities
|
|
|
9,906
|
|
|
|
(5
|
)
|
|
|
9,901
|
|
|
|
7,923
|
|
|
|
44
|
|
|
|
7,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,190
|
|
|
$
|
(16
|
)
|
|
$
|
18,174
|
|
|
$
|
23,305
|
|
|
$
|
(68
|
)
|
|
$
|
23,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3:
|
PROPERTY
AND EQUIPMENT, NET
|
Composition of assets, grouped by major classifications, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Computers, software and equipment
|
|
$
|
11,452
|
|
|
$
|
10,424
|
|
Office furniture and equipment
|
|
|
986
|
|
|
|
957
|
|
Leasehold improvements
|
|
|
1,044
|
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,482
|
|
|
|
12,437
|
|
Less Accumulated
depreciation
|
|
|
(10,256
|
)
|
|
|
(10,731
|
)
|
|
|
|
|
|
|
|
|
|
Depreciated cost
|
|
$
|
3,226
|
|
|
$
|
1,706
|
|
|
|
|
|
|
|
|
|
|
Depreciation expenses were $2,523, $2,016 and $1,422 for the
years ended December 31, 2004, 2005 and 2006, respectively.
In the second quarter of 2006, there was a decrease in the
amount of property and equipment, net of $522, as a result of
the divestment of the Companys GPS technology and
associated business to GloNav (for more details see
Note 4). In the second quarter of 2005, the Company
recorded an impairment charge of $110 relating to non-performing
assets following the implementation of its reorganization plan.
|
|
NOTE 4:
|
INVESTMENT
IN OTHER COMPANY, NET
|
On June 23, 2006, the Company divested its GPS technology
and associated business to GloNav in return for an equity
ownership of 19.9% in GloNav on a fully diluted basis. Out of
the 19.9%, CEVA received as consideration 10% in
Series A-1
Convertible Voting Preferred Stock (the
Series A-1)
and 9.9% in
Series A-2
Convertible Non-Voting Preferred Stock (the
Series A-2).
The
Series A-1
and
Series A-2
are convertible into voting common stock and non-voting common
stock, respectively, of GloNav on a
one-for-one
basis. Subject to certain limitations, if GloNav engages in
future equity funding of up to $20,000, CEVA also will receive
additional shares of
Series A-2
for no consideration as anti-dilution protection. The additional
share issuance is capped at 6.8% of GloNavs then
outstanding shares of capital stock calculated on a post-funding
basis after completion of equity funding of up to
F-19
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$20,000. Although CEVA has transferred the GPS customer
contracts and GPS intellectual property to GloNav, CEVA will
continue to share with GloNav certain revenues relating to the
GPS assets. CEVAs valuation of its equity investment in
GloNav is $5,984 based on the value of the assets and cash
contributed to GloNav and the investment was recorded as an
investment in other company, net on the consolidated balance
sheets and stated at cost. Since GloNav is a highly leveraged
entity, and according to its forecast an additional funding will
be required, the gain resulting from the divestment of the GPS
technology and associated business in the total amount of $1,751
has been deferred and presented in the balance sheet as a
deduction from investment in other company. The
excess of the consideration from the divestment over the net
book value of the assets in the amount of $1,751 is set forth
below:
|
|
|
|
|
Equity investment in GloNav
|
|
$
|
5,984
|
|
Goodwill
|
|
|
(1,900
|
)
|
Intangible asset
|
|
|
(845
|
)
|
Net working capital
|
|
|
(522
|
)
|
Transaction cost related to the
GPS divestment
|
|
|
(966
|
)
|
|
|
|
|
|
Deferred gain related to
transaction with GloNav
|
|
$
|
1,751
|
|
|
|
|
|
|
Investment in other company, net:
|
|
|
|
|
Investment in other company
|
|
$
|
5,984
|
|
Deferred gain
|
|
|
(1,751
|
)
|
|
|
|
|
|
Total investment in other company,
net
|
|
$
|
4,233
|
|
|
|
|
|
|
GloNav also has licensed the CEVA-TeakLite DSP core for the
development of its GPS chipsets and will pay royalties to CEVA
based on its future GPS chip sales.
|
|
NOTE 5:
|
GOODWILL
AND OTHER INTANGIBLE ASSETS, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Loss/Asset
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Loss/Asset
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
write down
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
write down
|
|
|
Amortization
|
|
|
Net
|
|
|
Goodwill
|
|
$
|
38,398
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,398
|
|
|
$
|
38,398
|
|
|
$
|
1,900
|
|
|
$
|
|
|
|
$
|
36,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible
assets amortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parthus name
|
|
|
610
|
|
|
|
478
|
|
|
|
132
|
|
|
|
|
|
|
|
610
|
|
|
|
478
|
|
|
|
132
|
|
|
|
|
|
Patent portfolio
|
|
|
2,247
|
|
|
|
|
|
|
|
1,420
|
|
|
|
827
|
|
|
|
2,247
|
|
|
|
640
|
|
|
|
1,607
|
|
|
|
|
|
Current technology and customer
backlog
|
|
|
2,824
|
|
|
|
1,059
|
|
|
|
1,349
|
|
|
|
416
|
|
|
|
2,824
|
|
|
|
1,264
|
|
|
|
1,493
|
|
|
|
67
|
|
Purchased technology
|
|
|
347
|
|
|
|
|
|
|
|
130
|
|
|
|
217
|
|
|
|
347
|
|
|
|
|
|
|
|
213
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable intangible
assets
|
|
$
|
6,028
|
|
|
$
|
1,537
|
|
|
$
|
3,031
|
|
|
$
|
1,460
|
|
|
$
|
6,028
|
|
|
$
|
2,382
|
|
|
$
|
3,445
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets primarily represent the acquisition of certain
intellectual property together with the value of patents
acquired in the combination with Parthus.
F-20
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future estimated annual amortization charges are as follows for
the years ended:
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
$
|
148
|
|
2008
|
|
|
53
|
|
|
|
|
|
|
|
|
$
|
201
|
|
|
|
|
|
|
In the second quarter of 2006, there was a decrease in the
amount of goodwill and other intangible assets, net of $1,900
and $845, respectively, as a result of the divestment of the
Companys GPS technology and associated business to GloNav
(for more details see Note 4).
The Company recorded an impairment charge of $400 in the second
quarter of 2005 in respect of certain technology acquired in the
combination with Parthus as the Company decided to cease the
development of this product line due to the minimal
differentiation between competing solutions.
Amortization expenses were $892, $823 and $414 for the years
ended December 31, 2004, 2005 and 2006, respectively.
|
|
NOTE 6:
|
PREPAID
EXPENSES AND OTHER ACCOUNTS RECEIVABLE
|
PREPAID
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Prepaid leased design tools
|
|
$
|
500
|
|
|
$
|
219
|
|
Prepaid directors and officers
insurance
|
|
|
183
|
|
|
|
103
|
|
Prepaid car leases
|
|
|
182
|
|
|
|
116
|
|
Other prepaid expenses
|
|
|
175
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,040
|
|
|
$
|
564
|
|
|
|
|
|
|
|
|
|
|
OTHER
ACCOUNTS RECEIVABLE
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Indirect taxes
|
|
$
|
562
|
|
|
$
|
880
|
|
Rental deposits
|
|
|
119
|
|
|
|
119
|
|
Interest receivable
|
|
|
220
|
|
|
|
642
|
|
Other accounts receivable
|
|
|
141
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,042
|
|
|
$
|
1,890
|
|
|
|
|
|
|
|
|
|
|
F-21
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 7:
|
ACCRUED
EXPENSES AND OTHER PAYABLES
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Accrued compensation and benefits
|
|
$
|
3,841
|
|
|
$
|
4,237
|
|
Restructuring accruals (see
Note 12)
|
|
|
1,019
|
|
|
|
1,609
|
|
Engineering accruals
|
|
|
539
|
|
|
|
606
|
|
Professional fees
|
|
|
945
|
|
|
|
1,137
|
|
Other accruals
|
|
|
1,434
|
|
|
|
1,873
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,778
|
|
|
$
|
9,462
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8:
|
STOCKHOLDERS
EQUITY
|
a. Common
stock:
At the annual meeting of stockholders held on July 19,
2005, the stockholders voted to amend the Companys Amended
and Restated Certificate of Incorporation to reduce the number
of shares of common stock authorized for issuance from
100,000,000 shares to 60,000,000 shares.
Holders of the common stock are entitled to one vote per share
on all matters to be voted upon by the Companys
stockholders. In the event of liquidation, dissolution or
winding up, holders of the common stock are entitled to share
ratably in all of the Companys assets. The Board of
Directors may declare a dividend out of funds legally available
therefore and the holders of common stock are entitled to
receive ratably any such dividends. Holders of common stock have
no preemptive rights or other subscription rights to convert
their shares into any other securities.
During 2004, 2005 and 2006, the Company issued 390,486, 365,253
and 407,073 shares of common stock under its stock option
and purchase programs for a consideration of $2,191, $1,755 and
$1,804, respectively.
b. Preferred
stock:
The Company is authorized to issue up to 5,000,000 shares
of blank check preferred stock, par value
$0.001 per share. Such preferred stock may be issued by the
Board of Directors from time to time in one or more series, with
such designations, preferences and relative, participating,
optional or other special rights of such series, and any
qualifications, limitations or restrictions thereof; including
the dividend rights, dividend rates, conversion rights, exchange
rights, voting rights, rights and terms of redemption (including
sinking and purchase fund provisions), the redemption price or
prices, the dissolution preferences and the rights in respect of
any distribution of assets of any wholly unissued series of
preferred stock and the number of shares constituting any such
series, and the designation thereof.
c. Employee
and non-employee stock plans:
The Company issues stock options to its employees, directors and
certain consultants and provides the right to purchase stock
pursuant to approved stock option and employee stock purchase
programs. The Company has elected to follow SFAS 123(R),
and related interpretations in accounting for its stock option
plans. SFAS 123(R) supersedes APB 25, for periods
beginning in fiscal 2006. Most of the options granted under
these plans have been granted at fair market value. A stock
compensation charge of $2,204 in respect of options granted to
employees and directors is reflected in the statement of
operations for the year ended December 31, 2006 as required
under SFAS 123(R). A stock compensation charge of $229 and
$195 in respect of options granted to non-employee consultants
is reflected in the statement of operations for the years ended
December 31, 2004 and 2005, respectively, as required under
SFAS 123.
F-22
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006, the Company granted options to purchase
335,000 shares of common stock, at exercise prices ranging
from $5.50 to $7.59 per share, and the Company issued
407,073 shares of common stock under its stock option and
purchase programs for consideration of $1,804. Options totaling
1,017,937 with a weighted average exercise price of $9.59 were
forfeited in 2006 primarily reflecting departures of employees
and expiration of options which were granted in 1999. Options to
purchase 4,250,910 shares were outstanding at
December 31, 2006. During 2005, the Company granted options
to purchase 1,099,700 shares of common stock, at exercise
prices ranging from $5.14 to $8.51 per share, and the
Company issued 365,253 shares of common stock under its
stock option and purchase programs for consideration of $1,755.
Options totaling 1,904,131 with a weighted average exercise
price of $8.02 were forfeited in 2005 primarily reflecting a
change in the Companys corporate management during 2005.
Options to purchase 5,020,383 shares were outstanding at
December 31, 2005.
A summary of activity of options granted to purchase the
Companys common stock under the Companys stock
option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at the beginning of
the year
|
|
|
5,010,707
|
|
|
$
|
9.66
|
|
|
|
5,897,634
|
|
|
$
|
8.84
|
|
|
|
5,020,383
|
|
|
$
|
8.54
|
|
Granted
|
|
|
1,851,055
|
|
|
|
8.10
|
|
|
|
1,099,700
|
|
|
|
5.79
|
|
|
|
335,000
|
|
|
|
5.93
|
|
Exercised
|
|
|
(193,886
|
)
|
|
|
7.31
|
|
|
|
(72,820
|
)
|
|
|
5.07
|
|
|
|
(86,536
|
)
|
|
|
4.97
|
|
Forfeited or expired
|
|
|
(770,242
|
)
|
|
|
11.01
|
|
|
|
(1,904,131
|
)
|
|
|
8.02
|
|
|
|
(1,017,937
|
)
|
|
|
9.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
5,897,634
|
|
|
$
|
8.84
|
|
|
|
5,020,383
|
|
|
$
|
8.54
|
|
|
|
4,250,910
|
|
|
$
|
8.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable as
of December 31,
|
|
|
2,788,677
|
|
|
$
|
10.06
|
|
|
|
2,990,138
|
|
|
$
|
9.79
|
|
|
|
2,941,188
|
|
|
$
|
8.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of Options
|
|
|
Term
|
|
|
Value ($000)
|
|
|
Outstanding at beginning of year
|
|
|
5,020,383
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
335,000
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(86,536
|
)
|
|
|
|
|
|
|
|
|
Forfeiture or expired
|
|
|
(1,017,937
|
)
|
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2006
|
|
|
4,250,910
|
|
|
|
4.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, Vested or expected to
vest as of December 31, 2006
|
|
|
2,941,188
|
|
|
|
3.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining contractual life for the
2,941,188 exercisable options at December 31, 2006 is
3.4 years. The weighted average number of shares related to
the outstanding options excluded from the calculation of diluted
net income (loss) per share, since their effect was
anti-dilutive, were 5,301,854, 5,436,523 and 4,717,761 for the
years ended December 31, 2004, 2005 and 2006, respectvely.
F-23
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The options granted to employees and directors of the Company
which were outstanding as of December 31, 2006 have been
classified into a range of exercise prices as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Average
|
|
|
Exercisable
|
|
|
Price of
|
|
|
|
as of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
as of
|
|
|
Options
|
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Price
|
|
|
December 31,
|
|
|
Exercisable
|
|
Exercise Price (Range) $
|
|
2006
|
|
|
Life (Years)
|
|
|
$
|
|
|
2006
|
|
|
$
|
|
|
3.52-5.10
|
|
|
309,387
|
|
|
|
6.2
|
|
|
|
4.24
|
|
|
|
278,134
|
|
|
|
4.24
|
|
5.11-7.60
|
|
|
2,154,965
|
|
|
|
5.8
|
|
|
|
6.47
|
|
|
|
1,040,686
|
|
|
|
6.95
|
|
7.61-11.40
|
|
|
1,456,855
|
|
|
|
2.7
|
|
|
|
9.71
|
|
|
|
1,296,824
|
|
|
|
9.77
|
|
11.41-15.0
|
|
|
261,013
|
|
|
|
1.5
|
|
|
|
13.85
|
|
|
|
256,854
|
|
|
|
13.84
|
|
15.01-20.0
|
|
|
19,689
|
|
|
|
1.0
|
|
|
|
17.64
|
|
|
|
19,689
|
|
|
|
17.64
|
|
20.01-30.0
|
|
|
49,001
|
|
|
|
0.3
|
|
|
|
26.13
|
|
|
|
49,001
|
|
|
|
26.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,250,910
|
|
|
|
4.4
|
|
|
|
8.15
|
|
|
|
2,941,188
|
|
|
|
8.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Director
Stock Option Plan
The Companys 2003 Director Stock Option Plan (the
Director Plan) was adopted by the Board of Directors
in April 2003 and by the stockholders in June 2003. Up to
700,000 shares of common stock, subject to adjustment in
the event of stock splits and other similar events, are reserved
for issuance under the Director Plan, which became effective on
June 18, 2003.
A summary of activity of options granted to purchase common
stock under the Director Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding at the beginning of
the year
|
|
|
242,000
|
|
|
$
|
7.45
|
|
|
|
423,000
|
|
|
$
|
7.81
|
|
|
|
581,000
|
|
|
$
|
7.30
|
|
Granted
|
|
|
181,000
|
|
|
|
8.29
|
|
|
|
158,000
|
|
|
|
5.95
|
|
|
|
132,000
|
|
|
|
5.76
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,000
|
)
|
|
|
6.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
423,000
|
|
|
$
|
7.81
|
|
|
|
581,000
|
|
|
$
|
7.30
|
|
|
|
687,000
|
|
|
$
|
7.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Director Plan provides for the grant of nonqualified stock
options to non-employee directors. Options must be granted at an
exercise price equal to the fair market value of the common
stock on the date of grant. Options may not be granted for a
term in excess of ten years. The Director Plan permits the
following forms of payment of the exercise price of options:
(i) payment by cash or certified or bank check or
(ii) delivery to the Company of an irrevocable undertaking
by a broker to deliver sufficient funds or delivery to the
Company of irrevocable instructions to a broker to deliver
sufficient funds.
On June 18, 2003, each non-employee director on the
Companys board of directors was granted an option to
purchase 38,000 shares of common stock. Any person who
subsequently becomes a non-employee director of the Company will
automatically be granted an option to purchase
38,000 shares of common stock. Each option will vest as to
25% of the shares underlying the option on each anniversary of
the option grant.
On June 18, 2003, each non-employee director who had served
on the Companys Board of Directors for at least six months
was granted an additional option to purchase 13,000 shares
of common stock. Also on that date, any
F-24
CEVA,
INC.
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
non-employee director who had served as a chairperson of a
committee of the Companys Board of Directors for at least
six (6) months was granted an option to purchase
13,000 shares of common stock. Under the terms of the
Director Plan, on June 30 of each year, beginning in 2004,
each non-employee director who has served on the Companys
Board of Directors for at least six (6) months as of such
date will automatically be granted an option to purchase
13,000 shares of common stock, and each non-employee
director shall receive an option to purchase 13,000 shares
of common stock for each committee on which he or she shall have
served as chairperson for at least six months prior to such
date. On May 9, 2005, the Companys Board of Directors
approved to grant to the Chairman of the Board an additional
option to purchase 15,000 shares of common stock on an
annual basis.
As a result, options to purchase 181,000, 158,000 and
132,000 shares of common stock were granted during 2004,
2005 and 2006, respectively.
The Companys Board of Directors may grant additional
options to purchase a number of shares and with a vesting
schedule determined by the Board of Directors in recognition of
services provided by a non-employee director in his or her
capacity as a director.
The Companys Board of Directors has authority to
administer the Director Plan. The Companys Board of
Directors has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the
Director Plan and to interpret its provisions.
As of December 31, 2006, 13,000 options are available for
grant under the Director Plan.