Prepared by R.R. Donnelley Financial -- FORM S-1
As filed with the Securities and Exchange Commission on July 30, 2002
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CEVA, INC.
(Exact name of registrant as specified in its charter)
Delaware |
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3674 |
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77-0556376 |
(State or Other Jurisdiction of Incorporation or Organization) |
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(Primary Standard Industrial Classification Code No.) |
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(I.R.S. Employer Identification No.) |
3120 Scott Boulevard
Santa Clara, California 95054
(408) 986-4300
(Address and telephone number of principal executive offices and principal place of business)
Eliyahu Ayalon.
Chief Executive Officer
Ceva, Inc.
3120 Scott Boulevard
Santa Clara, California 95054
(408) 986-4300
(Name, address, and telephone number of agent for service)
Copies to:
Bruce A. Mann Esq. David
Goldenberg, Esq. Jaclyn Liu, Esq. Linda K. Lee,
Esq. Morrison & Foerster LLP 425 Market
Street San Francisco, California 94105 |
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John A. Burgess, Esq. Wendell C.
Taylor, Esq. Jessica S. Semerjian, Esq. Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 |
Approximate date of commencement of proposed distribution: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment
filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. ¨
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered |
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Amount to be Registered |
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Proposed Maximum Offering Price Per Unit (1) |
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Amount of Registration Fee |
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Common Stock, $0.001 par value per share |
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9,019,331 shares |
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$0.44 |
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$365.10 |
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(1) |
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Estimated solely for the purpose of calculating the registration fee and, pursuant to Rule 457(f)(2) under the Securities Act, is based upon the book value of
the Common Stock computed as of June 30, 2002. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically
states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to
said Section 8(a), may determine.
The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted
SUBJECT TO COMPLETION, DATED JULY 30, 2002
PROSPECTUS RELATING TO THE SEPARATION OF
CEVA, INC. FROM DSP GROUP, INC.
AND COMBINATION OF CEVA, INC. WITH PARTHUS TECHNOLOGIES PLC
Common Stock
(par value $0.001 per share)
This prospectus is being furnished in connection with (i) the pro rata distribution by DSP Group, Inc. to its stockholders of all outstanding shares of common stock of Ceva, Inc. in connection with the
separation of Ceva from DSP Group, and (ii) the subsequent combination of Parthus Technologies plc with Ceva and the issuance of ParthusCevas common stock to the former Parthus shareholders.
Pursuant to the terms and conditions of the Separation Agreement and related agreements among DSP Group, Ceva and certain other
subsidiaries of DSP Group, DSP Group contributed its DSP cores licensing business to Ceva and its subsidiaries and distributed all of the issued and outstanding stock of Ceva to DSP Group stockholders. Shares of Cevas common stock were
distributed to holders of record of DSP Groups common stock as of the close of business on the record date of the distribution, which was , 2002. Each of those holders
received one share of Ceva common stock for every three shares of DSP Group common stock held on , 2002, the record date. You do not have to take any action to receive your
shares of Ceva common stock. The Ceva common stock will be delivered as promptly as practicable after the date of this prospectus. No consideration will be paid by holders of DSP Group common stock for the shares of Ceva common stock they receive.
Immediately following the distribution described above, pursuant to the terms and conditions of a Combination
Agreement dated as of April 4, 2002, by and among DSP Group, Ceva and Parthus, as amended, Parthus combined with Ceva and Ceva changed its name to ParthusCeva, Inc. The combination was effected as a scheme of arrangement under the laws of the
Republic of Ireland. The existing shares of Parthus were cancelled and the existing Parthus shareholders received one share of ParthusCevas common stock for every Parthus
ordinary shares held by them.
Prior to the separation, no public market existed for ParthusCevas common
stock. ParthusCeva has filed applications to list its common stock on the Nasdaq National Market under the symbol PCVA and on the London Stock Exchange under the symbol PCV.
Stockholders with inquiries relating to the distribution should contact American Stock Transfer & Trust Company, the distribution
agent, at +1-718-921-8145 or +1-800-937-5449, or Elaine Coughlan, Chief Financial Officer of ParthusCeva, at +353-1-402-5700.
In reviewing this prospectus, you should carefully consider the matters described under the caption Risk Factors beginning on page 7.
DSP Group, as the sole stockholder of Ceva, approved the transactions entered into by Ceva relating to the separation and combination. DSP Group stockholder approval of
the separation and combination is not required or sought. We are not asking DSP Group stockholders for a proxy and you are requested not to send us a proxy. This prospectus is first being mailed to holders of record of DSP Groups common stock
on , 2002.
This prospectus is not
an offer to sell, or a solicitation of an offer to buy, any securities of ParthusCeva.
Neither the
Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus
is , 2002
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You should rely only on the information contained in this document.
We have not authorized anyone to provide you with the information that is different. This document may only be used where it is legal to distribute these securities.
The following is a summary of some of the information
contained in this prospectus. We urge you to read the entire prospectus carefully, especially the risks associated with our business discussed under Risk Factors and our financial statements.
Except for our historical financial statements or as otherwise indicated, we describe in this prospectus the business contributed to us
by DSP Group, Inc. (see Separation of DSP Cores Licensing Business from DSP Group), and the business acquired by us in the combination with Parthus (see Combination with Parthus Technologies plc) as if they had been operated
by ParthusCeva for all periods presented herein. We are an independent public company, and DSP Group has no continuing stock ownership in us. Accordingly, our historical financial results as part of DSP Group may not reflect our financial results in
the future as an independent company or what our financial results would have been had we been a stand-alone company during the periods presented herein.
Our Business
ParthusCeva licenses to semiconductor companies and electronic
equipment manufacturers (also known as original equipment manufacturers, or OEMs) complete, integrated intellectual property (IP) solutions that enable a wide variety of electronic devices. Our programmable digital signal processing (DSP) cores and
application-level IP platforms power handheld wireless devices, global positioning system (GPS) devices, consumer audio products, automotive applications and a range of other consumer products. We intend to license complete system solutions
consisting of our IP platforms built around our DSP cores technology, while also continuing to license our DSP cores and IP platforms as stand-alone offerings. ParthusCeva was formed in 2002 through the combination of Ceva, the former DSP cores
licensing business of DSP Group, founded in 1991, and Parthus, a provider of platform-level IP for the consumer electronics market, founded in 1993.
Our DSP cores licensing business (formerly the business of Ceva) develops and licenses designs of programmable DSP cores and DSP core-based sub-systems. A programmable DSP core is a special-purpose,
software-controlled processor that, through complex mathematical calculations, analyzes, manipulates and enhances digital voice, audio and video signals. Chips incorporating these core designs as their central processor are used in a wide variety of
electronic devices, including digital cellular telephones, modems, hard disk drive controllers, MP3 players, voice over packet products and digital cameras, and are critical to the performance of the electronic products in which they are used. A DSP
core-based sub-system incorporates additional hardware blocks required as interfaces from the DSP core for the overall system.
Our platform-level IP business (formerly the business of Parthus) develops semiconductor intellectual property for a range of consumer electronic products and licenses this technology to semiconductor manufacturers and OEMs. Our
portfolio of IP platforms spans major broadband and local area wireless connectivity technologies as well as key application IP including multimedia, location and smartphone/handheld technologies. The intellectual property we license can take the
form of schematics and designs for silicon chips and circuitry and software to perform particular functions on those chips. In addition, we also sell finished modules (which we refer to as Hard IP) to these customers.
Strategy
Our goal
is to become the leading licensor of programmable DSP cores and platform-level IP solutions. In particular, we seek to establish our DSP core technology and IP solutions as the standards for high-volume and emerging applications. To meet these goals
we intend to:
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Provide an integrated solution. We seek to maximize our competitive advantage by focusing on providing integrated
solutions, both for our programmable DSP cores and our application-level IP platforms, and we intend to continue to invest in the development of technology for complete systems. |
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Enhance our performance leadership. We seek to maximize our expertise in DSP, analog, mixed-signal and related
software technology, and to capitalize on that expertise to address critical customer demands. We intend to enhance our existing DSP cores and IP platforms with additional features and performance, while developing new offerings that will focus on
other emerging applications across the range of end markets we serve. |
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Target top-tier customers. We seek to strengthen relationships and expand licensing and royalty arrangements with our
existing customers and to extend our customer base with other key industry companies in order to facilitate the development of our technology. We believe that we can achieve the best results by targeting our sales and marketing activities at
high-volume semiconductor companies and leading OEMs with a track record of successful end-user deployments. Parthus and Ceva together have entered into license agreements with nine of the top ten semiconductor companies worldwide.
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Focus on large and fast-growing markets. We believe that our expertise in programmable DSP cores and platform-level IP
allows us to target fast-growing segments within the consumer electronics market, such as wireless communications, mobile computing, automotive electronics, and consumer entertainment. We intend to strengthen our relationships and expand licensing
and royalty arrangements with customers in those markets and to extend our customer base with key industry leaders within each of those segments. |
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Take advantage of the industry shift towards open-standard architectures. We believe that the industries in which we
compete are moving away from proprietary IP solutions towards open-standard architectures, and that this trend creates an opportunity for providers of licensable DSP cores and platform-level IP. As a consequence, we intend to use our expertise to
create leading products and services in critical open standards fields, such as Bluetooth, GPS and multimedia, to position ourselves to take advantage of this trend. We also participate in the development of industry standards in these and other
emerging technology areas. |
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Focus on a portfolio approach to the licensing of our IP platforms. We seek to differentiate ourselves through the breadth
of our IP offerings and our ability to integrate these offerings into a single solution built around our family of state-of-the-art DSP cores. In tandem with targeting top-tier customers, we intend to focus on offering a variety of solutions. Our
product architecture is designed to allow multiple platforms to reside on the same piece of silicon, significantly reducing the cost and complexity of integration while simultaneously improving power dissipation and time to market for
next-generation devices. This approach enables our customers to develop product solutions for next-generation devices that incorporate multiple functions. This approach will also provide our customers with the benefits of one-stop
shopping and a technology roadmap for the next generation of multi-functional devices. |
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Establish, maintain and expand relationships with key technology providers. We have established and seek to expand our
close working relationships with: |
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contract semiconductor companies, usually referred to as silicon foundries, in order to assure adequate supplies of chips for our customers who purchase our
technology in chip form and in order to give OEMs a means of obtaining competitive manufacturing capabilities; |
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third-party suppliers of block-level semiconductor IP, in order to have access to their most current technologies; and |
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developers of both application-level and system-level software so that we can continue to offer complete platform solutions. |
In addition, we have and seek to expand our relationships with companies that offer complementary technologies for designing
system-on-a-chip applications based on our DSP core designs. We believe that these relationships will increase the markets for our products.
2
Separation of the DSP Cores Licensing Business from DSP Group
Ceva, Inc. was formed as a Delaware corporation and wholly-owned subsidiary of DSP Group in November 1999. The separation of the DSP cores licensing business from DSP
Group, including the transfer of related assets, liabilities and intellectual property rights, was completed in , 2002.
We believe that we will realize the following benefits by separating from DSP Group:
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We will be able to focus on developing our business and pursuing strategic opportunities in the licensing of technology to third parties, increase our research
and development efforts, better target our markets, and focus our sales and support infrastructures in different markets than those of DSP Group. |
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As a stand-alone, independent company, our management will be able to devote time and energy exclusively to our business. |
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We plan to make our technology accessible to all potential users, free of competitive considerations faced by DSP Group. |
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Our employees will be motivated by incentive compensation programs tied to the market performance of our common stock. |
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As a more focused company, we expect to be able to make decisions more quickly, deploy resources more rapidly and efficiently and enhance our responsiveness to
customers and partners. |
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We expect to have direct access to the capital markets to issue debt or equity securities and to grow through acquisitions. |
Combination of Parthus and Ceva
In , 2002, Parthus and Ceva combined their businesses under the terms and conditions of a Combination Agreement, dated as of April 4, 2002, as amended,
by and among DSP Group, Ceva and Parthus. As part of the combination, Ceva changed its name to ParthusCeva, Inc., and Parthus became a wholly-owned subsidiary of ParthusCeva. Pursuant to arms-length negotiations between DSP Group and Parthus, and as
set forth in the Combination Agreement, immediately following the separation and combination, approximately 50.1% of the outstanding shares of common stock of ParthusCeva were held by the stockholders of DSP Group, and approximately 49.9% were held
by the former shareholders of Parthus.
Our principal headquarters are located at 2033 Gateway Place, Suite 150,
San Jose, CA 95110-1002, and our telephone number at this location is +1-408-514-2900.
PalmDSPcore, PineDSPcore,
OakDSPcore, OCEM, TeakDSPcore, Pine, Teak and Teaklite are United States registered trademarks of ParthusCeva or its affiliates. Parthus, the Parthus logo and BlueStream are European Community trademarks of ParthusCeva or its affiliates. The
registration of the following trademarks is pending in the United States: ParthusCeva, the ParthusCeva logo, Ceva, the Ceva logo, SmartCores, Assyst, Parthus, the Parthus logo, MachStream, MobiStream, WarpStream, MediaStream, BlueStream and
NavStream. Application for the following trademarks is pending in other jurisdictions: ParthusCeva, the ParthusCeva logo, Ceva, the Ceva logo, SmartCores, Assyst, Parthus, the Parthus logo, MachStream, MobiStream, WarpStream, MediaStream,
InfoStream, BlueStream and NavStream. The following trademarks are in use: PalmASSYST, PINE ASSYST SIMULATOR, XpertTeak, XpertDSP, XpertPalm, OpenKey, DSCKey, VoPKey, EDP, SmartCores Enabled, PDKit, ODKit, TLDKit, TDKit and In8Stream. All other
trademarks and service marks appearing in this prospectus are the property of their respective owners.
3
Summary Unaudited Pro Forma Combined Condensed Consolidated Financial Data
The following table presents summary unaudited pro forma combined condensed consolidated financial data of
ParthusCeva, giving effect to the combination of Parthus and Ceva as if it had occurred as of January 1, 2001 for statements of operations purposes and on June 30, 2002 for balance sheet purposes. Per share data and the number of shares outstanding
have been computed on the assumption that one share of Cevas common stock will be distributed for every three shares of DSP Groups common stock outstanding on the record date for the distribution and that the aggregate number of shares
of Cevas common stock to be issued to Parthus shareholders in connection with the combination will represent 49.9% of the total number of shares of ParthusCevas common stock outstanding after the combination. This information should be
read in conjunction with the unaudited pro forma combined condensed consolidated financial statements and related notes included elsewhere in this prospectus. This summary unaudited pro forma combined condensed consolidated financial data is
presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have been achieved had the combination been consummated as of the dates indicated or that may be achieved in the
future.
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Year Ended December 31, 2001
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Six Months Ended June 30, 2002
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(U.S. Dollars in thousands) |
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Pro Forma Combined Condensed Consolidated Statements of Operations Data: |
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Revenues |
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$ |
66,163 |
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$ |
30,173 |
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Gross profit |
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52,848 |
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24,913 |
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Operating expenses |
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82,532 |
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33,302 |
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Operating loss |
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(29,684 |
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(8,389 |
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Net loss for the period |
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$ |
(26,724 |
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$ |
(7,759 |
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Basic and diluted net loss per share |
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$ |
(1.48 |
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$ |
(0.43 |
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Weighted average number of shares used in computing basic and diluted net loss per share |
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18,003 |
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18,003 |
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June 30, 2002
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(U.S. Dollars in thousands) |
Pro Forma Combined Condensed Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
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$ |
90,643 |
Working capital |
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76,564 |
Total assets |
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238,190 |
Total stockholders equity |
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$ |
203,423 |
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4
Summary Historical Consolidated Financial Data of Ceva
The following table presents summary historical consolidated financial data of Ceva, giving effect to the transfer of the DSP cores
licensing business from DSP Group to Ceva as if this business had operated as a separate entity throughout the relevant periods. This information should be read in conjunction with the financial statements and related notes included elsewhere in
this prospectus. This summary historical consolidated financial data is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have been achieved had the separation been
consummated as of the dates indicated or that may be achieved in the future.
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Year Ended December 31, 2001
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Six Months Ended June 30, 2002
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(U.S. Dollars in thousands) |
Consolidated Statement of Income Data: |
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Revenues |
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$ |
25,244 |
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$ |
8,682 |
Gross profit |
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23,993 |
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8,066 |
Operating expenses |
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10,845 |
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6,064 |
Operating income |
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13,148 |
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2,002 |
Net income |
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$ |
10,355 |
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$ |
1,510 |
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June 30, 2002
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(U.S. Dollars in thousands) |
Consolidated Balance Sheet Data: |
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Working capital |
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$ |
6,055 |
Total assets |
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14,544 |
Total stockholders equity and Parent company investment |
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$ |
8,738 |
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5
FORWARD-LOOKING STATEMENTS
This prospectus and other materials filed or to be
filed by ParthusCeva with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made or to be made by ParthusCeva, contain forward-looking statements that involve risks and
uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. We use words such as anticipate,
expect, intend, plan, believe, seek, estimate and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the
forward-looking statements. These risks and uncertainties include those described in Risk Factors and elsewhere in this prospectus and the documents incorporated by reference in this prospectus. You should not place undue reliance on
these forward-looking statements, which reflect our view only as of the date of this prospectus.
6
You should carefully consider each of the following risks and
uncertainties associated with our company and ownership of our common stock, as well as all other information set forth in this prospectus. Holding our common stock involves risk. The occurrence of any of the following risks could materially and
adversely affect our business, financial condition and operating results, which could result in a decline in the trading price of our common stock.
RISKS RELATING TO THE SEPARATION OF
OUR DSP CORES LICENSING BUSINESS FROM DSP GROUP
We may have potential business conflicts of interest with DSP Group with respect to our past and ongoing relationships and we may not be able to
resolve these conflicts on terms that are most favorable to us.
Conflicts of interest may arise between DSP
Group and us in a number of areas relating to our past and ongoing relationships, including:
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labor, tax, employee benefit, indemnification and other matters arising from our separation from DSP Group; |
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intellectual property matters; |
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employee retention and recruiting; |
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the nature, quality and pricing of transitional services DSP Group has agreed to provide us; and |
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business opportunities that may be attractive to both DSP Group and us. |
We may not be able to resolve any of the potential conflicts of interest discussed above, and even if we do, the resolution may be less favorable than if we were dealing
with an unaffiliated party. Under the separation agreement, DSP Group has agreed not to compete with us for a period of five years in the business of developing and licensing designs for programmable digital signal processor cores, and we have
agreed not to compete with DSP Group in the business of designing, manufacturing and marketing high performance digital signal processor-based integrated circuit devices for integrated digital cordless telephones and voice-over broadband products
for a period of five years.
We currently use DSP Groups operational, administrative and technical infrastructure and if these
services are not sufficient to meet our needs or if we are not able to replace these services, we may be unable to manage critical operational functions of our business.
Pursuant to our transition services agreements, DSP Group and its subsidiaries have agreed to provide us and our subsidiaries with certain general and administrative
services, including management and information services and network, hardware and software maintenance and support.
In addition, DSP Group, Ltd. has assigned to us a lease covering the facilities we will occupy in Herzeliya, Israel. We also use a portion of DSP Groups Santa Clara, California facilities under the transition services
agreements referred to above.
The transition services agreements provide that DSP Group and its subsidiaries will
continue to provide these services to us in exchange for fees payable by us to DSP Group and its subsidiaries until terminated in accordance with their terms. Although those entities are contractually obligated to provide us with these services,
these services may not be provided at the same level as when we were part of DSP Group, and we may not be able to obtain the same benefits. In addition, we cannot assure you that during the initial terms of the transition services agreements, the
quality of services and level of responsiveness will meet our needs. If we are unable to obtain sufficient quality of these services or replace these services which are not effectively provided, our business and results of operations could be
harmed.
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After the initial terms of the transition services agreements, we will need to
either extend the term of these agreements, engage others to perform these services or perform these services internally. We cannot assure you that DSP Group or its subsidiaries will continue to provide us with these services after the initial terms
of the transition services agreements, that the quality of services and level of responsiveness will meet our needs or that the cost of these services will not be significantly higher if we purchase them from unaffiliated providers or employ staff
to handle them internally.
Although agreed in the context of arms-length negotiations between DSP Group and
Parthus in connection with the combination, the transition services agreements were entered into in the context of a parent-subsidiary relationship with DSP Group. As a result, the prices charged to us under these transition services agreements may
be lower than the prices that we may be required to pay third parties for similar services or the costs of similar services if we undertake them ourselves. If we fail to find replacements for these services in a timely fashion, or if we are not able
to replace them on favorable terms, our business, results of operations and financial condition could be harmed.
For a more detailed description of the services provided to us by DSP Group and certain of its subsidiaries, please see Separation of DSP Cores Licensing Business from DSP Group.
Restrictions on our ability to issue stock and take certain other actions could inhibit our growth.
The restrictions in the separation agreement on issuances of our capital stock and other specified actions by us during the one-year period following the distribution,
or the liquidation, disposition or discontinuation of the DSP cores licensing business during the two-year period following the distribution, and the requirement that we indemnify DSP Group if we do not comply with these restrictions, could limit
our ability to grow our business and compete effectively during the period following the distribution. In addition, these restrictions and indemnification obligations could make us a less attractive acquisition or merger candidate during this
period.
We could be subject to joint and several liability for taxes of DSP Group.
As a former member of a group filing consolidated income tax returns with DSP Group, we could be liable for federal income taxes of DSP
Group and other members of the consolidated group, including taxes, if any, incurred by DSP Group on the distribution of our stock to the stockholders of DSP Group. DSP Group has agreed to indemnify us against these taxes, other than taxes for which
we have agreed to indemnify DSP Group pursuant to the terms of the tax indemnification and allocation agreement and separation agreement we entered into with DSP Group.
Our historical financial information may not be representative of our results as a separate company.
Cevas historical consolidated financial statements have been carved out from the consolidated financial statements of DSP Group using the historical results of operations and historical bases of
the assets and liabilities of the DSP cores licensing business. Accordingly, the historical financial information we have included in this prospectus does not necessarily reflect what our financial position, results of operations and cash flows
would have been had this business operated as a separate, stand-alone entity during the periods presented. DSP Group did not account for us, and we did not operate, as a separate, stand-alone entity for the periods presented. Our costs and expenses
include allocations from DSP Group for centralized corporate services and infrastructure costs, including accounting and legal, research and development, sales and marketing, and general administration costs. In addition, because Cevas
financial statements included herein relate to a period ending several months prior to the separation of the DSP cores licensing business from DSP Group, the balances of assets and liabilities transferred in the separation will be subject to change
between the date of the financial statements and the separation.
These allocations have been determined on bases
that we and DSP Group consider to reasonably reflect the utilization of services provided to us or the benefit we received. The historical financial information for Ceva and
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Parthus presented herein is not necessarily indicative of what our results of operations, financial position and cash flows will be in the future. We have not made adjustments to either
companys historical financial information to reflect the significant changes in the cost structure, funding and operations which will result from the separation of the DSP cores licensing business from DSP Group and the combination with
Parthus, potentially including increased costs associated with reduced economies of scale, increased marketing expenses related to building our brand and increased costs associated with being a stand-alone, publicly traded company. If our actual
results differ significantly from these estimates, our stock price could be harmed.
Some of our directors and executive officers may
have conflicts of interest because of their ownership of DSP Groups common stock.
Some of our directors
and executive officers, including Eliyahu Ayalon, the Chairman of our board of directors, Gideon Wertheizer, our Executive Vice PresidentBusiness Development and Chief Technology Officer, Issachar Ohana, our Vice President and General Manager
of the DSP Intellectual Property Licensing Division and Bat-Sheva Ovadia, our Chief ScientistDSP Technologies, will continue to hold a significant number of shares of DSP Groups common stock and options to purchase shares of DSP
Groups common stock. Ownership of DSP Groups common stock by certain of our directors and executive officers after our separation from DSP Group could create, or appear to create, conflicts of interest when they are faced with decisions
that could have different implications for DSP Group and us.
RISKS RELATING TO THE DISTRIBUTION
We have agreed to indemnify DSP Group if certain of our actions or Parthus actions cause the distribution to be taxable to DSP Group.
DSP Group has received a private letter ruling from the Internal Revenue Service to the effect that, among
other things, the distribution of our stock to the DSP Group stockholders will be tax-free under Section 355 of the Internal Revenue Code of 1986, as amended, and that the receipt of shares of our common stock in the distribution will not result in
the recognition of income, gain or loss to stockholders of DSP Group for federal income tax purposes. The continuing validity of this ruling is subject to factual representations and assumptions made in the private letter ruling request. We are not
currently aware of any facts or circumstances which would cause these representations and assumptions to be untrue.
Notwithstanding the receipt of this private letter ruling, if we and/or DSP Group engage in certain activities, the distribution may become taxable to DSP Group and possibly to its stockholders. For example, it is possible that even
a small issuance of our capital stock, when combined with the 49.9% of our capital stock issued to shareholders of Parthus in the combination, may cause the distribution to be taxable.
The separation agreement generally provides that we will not issue capital stock or take other specified actions during the one-year period following the distribution, or
liquidate, dispose of, discontinue or take similar actions with respect to the DSP cores licensing business during the two-year period following the distribution, unless either DSP Group consents to the action, or we receive a supplemental ruling
from the Internal Revenue Service or an opinion of tax counsel satisfactory to DSP Group providing that the action will not cause the distribution to be taxable to either DSP Group or to its stockholders.
If we make such an issuance or take any other prohibited actions without complying with the terms of the separation agreement, we will be
required to indemnify DSP Group for any resulting tax liability.
We also have agreed to indemnify DSP Group for
any tax liability of DSP Group to the extent that the liability results from the inaccuracy of any factual information provided or representation made by Parthus, or by us after the distribution, in the application for rulings filed with the
Internal Revenue Service or in connection with any tax opinion regarding the separation and distribution.
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If the distribution were rendered taxable to DSP Group and its stockholders,
then:
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corporate-level taxable gain would be recognized by DSP Group in an amount equal to the difference between the market value of the Cevas common stock at
the time of distribution to the DSP Group stockholders and DSP Groups basis in that stock (and the tax would be determined by multiplying such gain by DSP Groups net effective tax rate at the time of the distribution (currently
approximately 38%)); and |
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each holder of DSP Groups common stock who received shares of our common stock in the distribution would be treated as having received a taxable dividend
in an amount equal to the fair market value of our common stock received (assuming that DSP Group had sufficient current or accumulated earnings and profits). |
The distribution could adversely affect the aggregate value of an existing investment in DSP Groups common stock.
Following the separation and distribution, the value of our common stock and DSP Groups common stock will not necessarily be related. The combined value of our common
stock and DSP Groups common stock after the separation and distribution may be less than the trading price of DSP Groups common stock immediately before the separation and distribution. As a result of the separation and distribution, the
trading price range of DSP Groups common stock may be lower than the trading price range of DSP Groups common stock immediately before the separation and distribution.
RISKS RELATING TO THE COMBINATION OF PARTHUS AND CEVA
You
should not consider any particular information in this prospectus, in published news reports, or any published financial targets, without carefully evaluating the risks and other information contained in this prospectus.
During April 2002, articles appeared in the Irish and the U.K. press regarding the combination, including statements that
ParthusCevas target for revenues in 2003 is approximately $75-$80 million with targeted profits between $17-$18 million. These stories also noted that the combined companys current strategic goal is to achieve operating margins of
approximately 20% in 2003. You should be aware that these targets are forward looking statements that are necessarily speculative in nature and it can be anticipated that one or more of the estimates or assumptions upon which the published
projections were based will not materialize, or will vary significantly from actual results, and that these variances will likely increase over time. In addition, the financial and business targets appearing or reflected in these articles were based
on information available in April 2002, and have not been updated for any subsequently available information, including the continued worldwide slow-down in the semiconductor industry and significant depression in share equity values. Accordingly,
our actual results are likely to vary from such targets, and those variations may be material.
A number of factors could impair our
ability to successfully integrate the businesses of Parthus and Ceva, and thereby harm the combined companys business, financial condition and operating results.
We must integrate the operations of Ceva and Parthus, each of which has previously operated independently of the other. We cannot assure you that we will be able to
successfully integrate these businesses in a timely and efficient manner, if at all. To integrate operations, we will need to focus on a number of key tasks, including:
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retaining and integrating management, engineering and other key employees of each of Ceva and Parthus; |
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retaining existing customers, suppliers, distributors, licensees, vendors and others that have historically done business with Ceva or Parthus;
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integrating sales efforts so that customers can do business easily with the combined company; and |
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preventing delays in ongoing research and development activities to permit efficient time-to-market introductions and time-to-volume production for acquired
products and new technologies. |
We may face difficulties in effecting the successful
integration of these businesses, including the following:
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impairment and/or loss of relationships with employees, customers, suppliers, distributors, licensees, vendors and others that have historically done business
with Ceva or Parthus; |
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adverse financial results associated with integration of the two businesses, including unanticipated expenses related to the integration and deployment of
acquired technologies; and |
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disruption of our business and distraction of our management. |
In addition, the anticipated benefits of the combination may not be realized because, among other reasons:
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ParthusCevas technology may not be as robust as expected or may not achieve the expected performance, features or product yield;
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ParthusCevas intellectual property, including its patent portfolio, may not be as valuable as expected; and |
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the value of the combination may not be accretive. |
We may not succeed in addressing these risks. Further, we cannot assure you that our growth rate will equal the historical growth rates experienced by Ceva or Parthus.
The integration of Parthus and Ceva, as well as any future acquisitions or strategic investments, could interrupt our business and our financial condition
could be harmed.
The integration of Parthus and Ceva and any future acquisitions or strategic investments may
entail numerous risks, including the following:
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difficulties integrating acquired operations, personnel, technologies or products; |
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diversion of managements focus from our core business concerns; |
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write-offs related to acquired assets, including write-offs related to impairment of goodwill and other intangible assets; and |
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dilution to existing stockholders and earnings per share. |
Any such difficulties encountered as a result of the integration of Parthus and Ceva or any future acquisitions or strategic investments could adversely affect our
business, operating results and financial condition. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which requires that
goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment annually, or more frequently when events or circumstances occur indicating that goodwill might be impaired. If we determine
through the impairment review process that goodwill has been impaired, we will record the impairment charge in our statement of operations. Any future write-off of goodwill or intangible assets could be significant and would likely have an adverse
impact on our reported operating results. As a result, the market price of ParthusCevas common stock could be significantly and adversely affected.
In connection with the combination, we expect to write off substantial acquired in-process research and development, which may adversely affect our stock price.
The amount of excess cost attributable to in-process research and development of Parthus is estimated to be approximately $16.5 million. This in-process research and
development was not considered to have reached technological feasibility and had no alternative or future use and, in accordance with generally accepted accounting principles, the value of such in-process research and development will be expensed by
ParthusCeva.
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This amount will be recorded as part of ParthusCevas research and development expense in the fiscal quarter during which the combination is consummated. This write-off will reduce
ParthusCevas net income, negatively impact ParthusCevas results of operations and reduce ParthusCevas earnings per share for that fiscal quarter. As a result, ParthusCevas stock price could be significantly and adversely
affected.
Employee uncertainty related to the combination could harm the combined company.
Former Ceva and Parthus employees may experience uncertainty about their future roles with the combined company until or after strategies
for ParthusCeva are implemented and may terminate their respective employment relationships as a result of the combination. In addition, we may streamline our operations to achieve cost savings or in response to general economic conditions. We
cannot assure you that any such efforts will be properly tailored or will achieve the cost savings and other benefits we want. Employee uncertainty may adversely affect our ability to attract and retain employees necessary to implement our
strategies and may disrupt our operations.
RISKS RELATING TO THE PARTHUSCEVA BUSINESS
We may not be successful in licensing integrated, system-level solutions.
We intend to offer our application-level IP platforms built around our DSP cores, as well as to continue to offer our DSP cores and IP platforms on a stand-alone basis, as
Ceva and Parthus, respectively, have done in the past. We have no experience in offering DSP cores and IP platforms as an integrated solution, and may not be successful in obtaining licensees for these integrated solutions. Any licenses for these
integrated solutions may be on terms less favorable than we currently anticipate.
We may be required to invest
substantial resources, including to support additional sales and marketing efforts and to fund additional research and development expenditures, to attract customers and improve the technologies for our integrated solutions. We cannot assure you
that any increased expenditure related to the offering of our integrated solutions will generate a corresponding return for our business.
We rely significantly on revenue derived from a small number of licensees and customers and the success of the products they introduce, and our business and results of operations may be materially harmed if we do not continue to
obtain agreements with new customers or expand our relationships with existing and former customers.
We
expect that a limited number of licensees and customers will account for a substantial portion of our revenues in any period. For example, two DSP core licensees generated more than 58% of Cevas revenues in the second quarter of 2002 with
revenues from one licensee accounting for 35%. Similarly, more than 10% of Parthus annual revenues in each of 1999, 2000 and 2001 were derived from a single customer, STMicroelectronics. We expect to continue to derive a significant portion of
our revenue from a small number of licensees and customers in the future.
Moreover, we anticipate that we will
depend upon new license agreements and purchase orders to generate revenues for future quarters because, historically, Cevas license agreements have not generally provided for substantial ongoing license payments, although they may provide for
royalties based on product shipments. Therefore, significant portions of our anticipated future revenue will likely depend upon our success in attracting new customers or expanding our relationships with existing and former customers. Our ability to
attract new customers and expand our relationships with existing and former customers will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products. Our failure to obtain agreements
with these customers will impede our future revenue growth.
In addition, our unit royalties from licenses are
totally dependent upon the success of our licensees in introducing products incorporating our technology and the success of those products in the marketplace. If we do not retain our current licensees and customers and continue to attract new
licensees and customers, our business may be harmed.
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Our quarterly operating results will fluctuate due to a variety of factors and are not a meaningful
indicator of future quarterly performance.
The operating results of each of Cevas DSP cores licensing
business and Parthus IP platforms licensing business have fluctuated from quarter to quarter in the past, and our operating results as a combined company may continue to do so in the future. As a result, it is possible that in some quarters,
ParthusCevas 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 results of operations in the future include, among other things:
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timely introduction, demand and market acceptance of new or enhanced products; |
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new product announcements and introductions by competitors; |
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supply constraints for and changes in the cost of components incorporated in our products; |
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timing and volume of orders and production; |
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gain or loss of significant customers, licensees, distributors and suppliers; and |
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changes in our pricing policies and those of our competitors and suppliers. |
ParthusCevas operating results will also be affected by general economic and other conditions affecting the timing of customer orders and capital spending.
Unfavorable general economic conditions have harmed Cevas DSP cores licensing business and Parthus IP platforms licensing business in the past and may continue to harm our business in the future.
Seasonal trends may cause our quarterly operating results to fluctuate, which may adversely affect the market price of our common stock.
Historically, there have been seasonal variations in the operating results of our DSP cores licensing business. Typically this
business has generated more licensing revenues in the last quarter of the fiscal year, which we believe may be due to our licensees desire to exhaust their year-end budgets, as well as prepare for the next years new design trends. These
seasonal trends may cause ParthusCevas operating results to fluctuate, which may have an adverse effect on our stock price.
We
depend on market acceptance of third-party semiconductor intellectual property.
In recent years, both the
manufacturing processes and the complexity of semiconductor chips have advanced significantly, requiring chip manufacturers to either devote the substantial resources required to develop all of the components found in many of todays complex
chips, or outsource some of these functions to third parties. Due to a lack of qualified personnel, many semiconductor designers and manufacturers are increasingly licensing from third parties proven re-useable intellectual property components, such
as DSP cores, general purpose processors, memory technologies and logic blocks. Our programmable DSP technology is part of a relatively young and evolving market for third-party semiconductor intellectual property (SIP). Our future growth will
depend on the level of acceptance by the market of this intellectual property concept and the variety of intellectual property offerings available on the market, which to a large extent are not in our control. If the market shifts and third-party
SIP is no longer desired by our customers, our business, results of operations and financial condition could be materially harmed.
Since we do not sell our products directly to end users, we depend on the success of our licensees to promote our solutions in the marketplace.
We license our technology primarily to semiconductor companies, such as STMicroelectronics, Texas Instruments and National Semiconductor, who then incorporate our
technology into the products they sell or incorporate our intellectual property with technology from other sources to produce components that they sell. We rely to a large extent on manufacturers and designers of application-specific integrated
circuits (ASICs) and
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application-specific standard products (ASSPs) to add value to our licensed DSP cores by providing complete SmartCores-based programmable DSP solutions to meet the specific application needs of
system OEMs. We believe that our licensee network is essential to improving our brand name recognition, bringing more rapid acceptance of our architectures and platforms and ensuring that there are multiple, reliable sources of products
incorporating our technologies available at competitive prices. We cannot assure you that we will be able to maintain our current relationships or establish new relationships with additional licensees, and any failure by us to do so could have a
material adverse effect on our business. Existing and potential licensees are not contractually obligated to use our architecture and some of them design and develop processors based on competing architectures, including their own, and others may do
so in the future. None of our current semiconductor manufacturer customers is obligated to license new or future generations of our technology designs. In addition, 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 to consumer product manufacturers. We cannot assure you that our licensees will devote satisfactory efforts to
promote our solutions which is important to our business and future growth.
We also depend significantly on system OEMs to adopt our
solutions and on their success in selling products containing our technology.
Although we have licensed
directly to system OEMs in the past, these companies typically purchase chips or components containing our technology from our semiconductor manufacturing licensees. As system OEMs are the creators of many of the final products containing our
technology, our success is substantially dependent upon the adoption and continued use of chips containing our technology by system OEMs. We face numerous risks because of this fact, including the potential difficulties in persuading large system
OEMs to rely on our technology for their critical components, rather than developing the technology themselves or relying on competing products of more established companies with greater resources and name recognition than we have. In addition, we
might face difficulties in persuading users of our technologies to bear certain development costs associated with adopting our technologies and to make other necessary investments to produce embedded processors using our technologies, and of
electronic product manufacturers to incorporate our technologies into their products. We depend on electronic product manufacturers to incorporate our technology in their products, and any failure by them to do so or to successfully sell their
products to end users could substantially limit our revenue growth.
We also face substantial risks which are
beyond our control that influence the success or failure of our existing or potential system OEM customers, including the competition they face and the market acceptance of their products; their engineering, marketing and management capabilities and
the technical challenges unrelated to our technology that they face in developing their products; and their financial and other resources. The failure of one or more of the system OEMs using our technology may have a material adverse effect on our
business, results of operations and financial condition.
If we are unable to meet the changing needs of our end-users or address
evolving market demands, our business may be harmed.
The markets for programmable DSP cores and IP platforms
are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, requiring significant expenditure for research and development. Our future success will depend on our ability to develop enhancements to and
new generations of our IP platforms and our SmartCores family of DSP cores, DSP based sub-systems and related development tools to address the requirements of specific product applications, and to introduce these new technologies in a timely manner.
Our success will further depend upon our ability to successfully identify, anticipate and respond to technological changes in hardware, software and architecture, and the needs associated with emerging markets within our field. 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.
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To remain competitive, we must be able to meet our needs for substantial capital, and financing from
other sources may not be available on favorable terms, if at all.
We believe that success in our markets
requires substantial capital in order to maintain the flexibility to take advantage of opportunities as they arise and to fund our anticipated combined research and development needs. Our capital requirements may vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations in our operating results, financing activities, acquisitions and investments and receipt of receivables. In the past, capital needs for our DSP cores licensing business
have been satisfied by DSP Group. However, as a result of the separation of the DSP cores licensing business from DSP Group, DSP Group will no longer provide funds to finance our working capital or other cash requirements. We believe that the
existing resources of Ceva and Parthus, including existing cash and cash equivalents, and anticipated cash flows from operations, will be adequate to meet the combined companys projected working capital, capital expenditure and research and
development requirements for at least the next 12 months. However, we may need to raise funds sooner if, among other things, we acquire additional businesses, products or technologies. We cannot assure you that additional financing will be available
on commercially reasonable terms, if at all, which may prevent ParthusCeva from taking advantage of available opportunities. To the extent that existing resources and anticipated cash flows are not adequate for the combined companys
operational and other cash needs, our operating results and financial position could be harmed. If additional funds were raised through the issuance of equity securities, your percentage ownership in ParthusCeva would be reduced. Moreover, our
ability to raise funds using equity securities may be limited because the separation agreement provides that we will not issue capital stock or take certain other actions during the one-year period following the distribution unless either DSP Group
consents to the action or we receive a supplemental ruling from the Internal Revenue Service or an opinion of tax counsel satisfactory to DSP Group to the effect that the action will not cause the distribution to be taxable to either DSP Group or
its stockholders. If we were to issue equity securities without fulfilling these conditions, we would be required to indemnify DSP Group if such issuance causes the distribution to be taxable to DSP Group. Similarly, future debt financings could
involve restrictive covenants that may limit our ability to manage and grow our business.
We depend on a limited number of key
personnel who would be difficult to replace. If we lose the services of these individuals or cannot hire additional qualified personnel, our business will be harmed.
The success of ParthusCeva will depend to a significant extent upon our key employees and senior management. The loss of the service of these employees could materially
harm us. We believe that the future success of ParthusCeva will depend in large part upon our ability to attract and retain highly skilled technical, managerial and marketing personnel. Competition for skilled employees in these fields is intense.
We cannot assure you that we will be successful in attracting and retaining the required personnel. In addition, we cannot assure you that the Ceva and Parthus management teams who became part of our company as a result of the separation and the
combination, or their respective employees, will remain employed by ParthusCeva, or if they remain employed, will successfully work together to build our business.
The continued growth and success of ParthusCeva will also depend on the managerial and technical skills of key technical, sales and management personnel, whose knowledge of
our business and industry would be difficult to replace. In addition, although Ceva employees have executed agreements containing non-competition provisions, the enforceability of these provisions in Israel has been questioned and we cannot assure
you that a court would enforce the terms of these provisions. Because of these facts, our employees could join competitors. If any of the members of ParthusCevas senior management team, including Kevin Fielding, Gideon Wertheizer or Eoin
Gilley, are unable or unwilling to continue in ParthusCevas employ, our results of operations could be materially harmed.
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ParthusCevas success will also depend on our ability to manage our expanding and geographically
dispersed operations successfully.
Any expansion of our operations in the near future is likely to place a
significant strain on our existing managerial resources and may require us to retain additional management personnel. Expansion may also require us to implement additional operating and financial controls, improve coordination among engineering and
finance functions, and hire additional personnel. As part of this process, we would need to install additional reporting and management information systems for production monitoring and financial reporting. To the extent we are unable to attract
additional management personnel in a timely fashion, or lose the services of our existing management personnel, our operating results and financial position could be harmed.
Although ParthusCeva will be headquartered in San Jose, California, most of our executives will be based in Dublin, Ireland and Herzeliya, Israel and most of our employees
will be based in Dublin. 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
ParthusCevas customers and respond to changes in our markets. If we are unable to effectively manage our remote operations, our business may be harmed.
We may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses, which could disrupt our business and harm our financial condition.
We may pursue acquisitions of businesses, products and technologies, or establish joint venture arrangements in the future that could
expand our business. The negotiation of potential acquisitions or joint ventures, as well as the integration of acquired or jointly developed businesses, technologies or products could cause diversion of managements time and our resources.
Future acquisitions could result in:
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potential dilutive issuances of equity securities; |
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the incurrence of debt and contingent liabilities; |
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amortization of intangibles and impairment of goodwill; |
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research and development write-offs; and |
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other acquisition-related expenses. |
Acquired businesses or joint ventures may not be successfully integrated with our operations. If any acquisition or joint venture were to occur, ParthusCeva may not receive the intended benefits of the
acquisition or joint venture. If future acquisitions or joint ventures disrupt our operations, or if we have difficulty integrating the businesses or technologies we acquire, our business, financial condition and results of operations could suffer.
ParthusCeva may not be able to adequately protect its intellectual property.
ParthusCevas success and ability to compete will depend in large part upon protecting our proprietary technologies. We will 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.
As part of their confidentiality procedures, both
Cevas DSP cores licensing business and Parthus IP platforms licensing business generally have entered into non-disclosure agreements with their employees, consultants and corporate partners and have attempted to control access to and
distribution of their technologies,
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documentation and other proprietary information. We plan to continue these procedures. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our
technologies or independently develop similar technologies. The steps Parthus and Ceva have taken and that ParthusCeva may take in the future may not prevent misappropriation of our solutions or technologies, particularly in foreign countries where
laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.
Effective protection of intellectual property rights may be unavailable or limited, both in the United States and in foreign countries. Patent protection throughout the world is generally established on a country-by-country basis.
Ceva and Parthus have applied for patent protection for some of their technologies both inside the United States and in various countries outside the United States. However, we cannot assure you that pending patents that are being transferred
and assigned to ParthusCeva will issue or that the issued patents will be valid or enforceable. We cannot assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar
technologies, duplicate our services or design around any patents or other intellectual property rights we hold.
Our tradenames or trademarks may be registered or utilized by third parties in countries other than those in which we have registered them, impairing our ability to enter and compete in these markets. In the United States, the
trademark SmartCore has been registered by an unrelated company. While we have successfully co-existed with this other trademark holder, we cannot assure you that this state of affairs will continue. If we were forced to change any of our brand
names, we could lose a significant amount of our brand equity.
If we fail to protect our intellectual property
rights and proprietary technologies adequately, if there are changes in applicable laws that are adverse to our interests, or if we become involved in litigation relating to our intellectual property rights and proprietary technologies or relating
to the intellectual property rights of others, our business, results of operations and financial condition could be harmed.
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 neither DSP Group (with respect to the DSP cores licensing business) nor Parthus was involved in any material litigation regarding its respective intellectual
property prior to the combination, we will be subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others in the future. Many participants in the semiconductor intellectual property
industry have an increasing number of patents and patent applications and have frequently demonstrated a readiness to pursue litigation based on allegations of patent and other intellectual property infringement. Our products rely on technology that
could be the subject of existing patents or patent applications of third parties. There are a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active. We have not, and cannot
reasonably, investigate all such patents. From time to time, we have become aware of patents in our technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our business, and we will
continue to seek such counsel when appropriate in the future. Third parties may assert infringement claims in the future with respect to our current or future products. These 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. For additional discussion of our intellectual property and proprietary rights, see BusinessProprietary Rights.
In any potential dispute involving our patents or other intellectual property, our licensees could also become the target of litigation. Some of our license agreements require us to provide technical support and information
to a licensee who is subject to litigation involving the use of our technology. We are also generally bound to indemnify many of our licensees under the terms of their license agreements, particularly with respect to our IP
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platforms licensing business, and we may agree to indemnify others in the future. We could incur substantial expenses for these support and indemnification obligations. In addition to the time
and expense required for us to supply support or indemnification to these licensees, their development, marketing and sales of products incorporating our technology could be severely disrupted or shut down as a result of litigation, which in turn
could have a material adverse effect on our business, financial condition and results of operations.
The industries in which we
license our technologies are experiencing a challenging period of slow growth and have experienced and will continue to experience other cyclical effects which may negatively impact our operating results and business.
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. These downturns are characterized by production overcapacity and reduced
revenues, which at times may, if the downturn is sufficiently prolonged or severe, encourage semiconductor companies or electronic product manufacturers to reduce their expenditure on our technology. During 2001, the semiconductor industry as a
whole experienced the most severe contraction in its history, with total semiconductor sales worldwide declining by more than 30%, according to the Semiconductor Industry Association. The market for semiconductors used in mobile communications was
particularly hard hit, with the overall decline in sales worldwide estimated by Gartner Dataquest to have been well above 30%. If the market does not recover by the third quarter of 2002, our business could be materially and adversely affected. In
addition, economic problems in certain regions have harmed and may continue to negatively affect our business. For example, in recent years certain Asian countries have experienced significant economic difficulties, including currency devaluation
and instability, business failures and a depressed business environment. These difficulties triggered a significant downturn in the semiconductor market, resulting in reduced budgets for our solutions which, in turn, negatively impacted our Asian
activity. Our business is harmed when capital and research and development budgets of our current and potential customers are curtailed.
The slow growth of the telecommunication and semiconductor industries has resulted and may continue to result in the reduction of capital and research and development budgets or the delay of product introduction, both of
which have resulted and may continue to result in a reduction in demand for our products. Our success depends on increasing demand for products that use our technology. In particular, in 2001, more than 56% of Cevas sales of DSP cores were to
chip manufacturers whose products are incorporated in or are being developed for use in digital cellular telephones. Recently there has been a downturn in the cellular handset industry. As a result, the growth rate of sales by our customers and
potential customers has slowed significantly. Demand for other products that incorporate our DSP cores, such as MP3 devices, hard disk drives and voice over packet network services, has also weakened. For example, Cevas total revenues
decreased by 35% for the second quarter of 2002 as compared to the second quarter of 2001 as a result of the global economic slowdown which inhibited Cevas ability to obtain new licensees. Continued weakening demand for digital cellular
telephone and these other products will adversely affect our ability to maintain our current growth rate, and could harm our financial results.
Our failure to detect unknown defects could materially harm our relationship with customers, reputation and business.
Designs as complex as those we offer frequently contain undetected errors. Despite testing, errors may occur in existing or new designs, which could result in loss of revenue or market share, failure
to achieve market acceptance, diversion of development resources, injury to our reputation, indemnification claims, litigation, increased insurance costs and increased service costs, any of which could materially harm our business. Furthermore, we
often provide implementation, customization, consulting and other technical services in connection with our IP. In addition, since we typically do not control the manufacturing of products containing our technology, which are made in many different
foundries chosen by our licensees, we may be blamed for their
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manufacturing defects. Our inability to meet customer expectations in a timely manner could also result in a loss of or delay in revenue, loss of market share, failure to achieve market
acceptance, injury to our reputation, litigation and increased costs which could harm our results of operations and financial condition.
Because customers rely on our DSP core designs as a central part of their applications, errors in our products might discourage customers from purchasing our products. These errors could also result in product liability or
warranty claims. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and liability limitation clauses in our license agreements, these contractual provisions may not be enforceable or sufficient
in every instance. Furthermore, although we maintain errors and omissions insurance, this insurance coverage may not adequately cover these claims. If a court refused to enforce the liability-limiting provisions of our agreements for any reason, or
if liabilities arose that were not contractually limited or adequately covered by insurance, our business could be materially harmed.
We have a very lengthy sales cycle, which increases the likelihood that our quarterly revenue will fluctuate and which may, in turn, adversely affect the market price of our common stock.
Our lengthy sales cycle may also cause our revenue and operating results to vary unpredictably from period to period. The period of time
between our initial contact with a potential customer and the receipt of a request for a quote on an intellectual property license is generally at least six months, and the time from such a request to a binding contract is generally at least another
four to six months. Due to the complexity of our technology and of the legal framework in which our industry operates, we must devote a substantial amount of time to negotiating the terms of our licensing arrangements with our customers. In
addition, customers perform, and require us to perform, extensive process and product evaluation and testing before entering into purchase or licensing arrangements. Even after we enter into an agreement and provide a final product to a customer in
the form of silicon or intellectual property, we expect that it will be at least six months more before the customer begins to sell its products incorporating our technology, and therefore even longer before we begin to receive royalty income.
Many of the milestones along the sales cycle for our IP platforms business are beyond our control and difficult
to predict. This fact makes it more difficult to forecast our quarterly results and can cause substantial variations in operating results from quarter to quarter that are unrelated to the long-term trends in our business. This lack of predictability
and variability in our results could harm our stock price and could significantly affect it in particular periods.
The markets in
which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenue.
The markets for the products in which our technology is used are highly competitive. Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property. It could also
cause our existing customers to move their orders to our competitors. Many of our competitors are large companies that have significantly greater financial and other resources than we have. As a result, they may be able more quickly and effectively
to:
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respond to new technologies or technical standards; |
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react to changing customer requirements and expectations; |
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devote needed resources to the development, production, promotion and sale of products; or |
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deliver competitive products at lower prices. |
In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of our customers may also decide to satisfy their needs through in-house design and
production. We compete on the basis of price, product quality, design cycle time, reliability, performance, customer support, name recognition and reputation and financial strength. Our inability to compete effectively on these bases could have a
material adverse effect on our business, results of operations and financial condition.
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Terrorist attacks and threats or actual war may negatively impact all aspects of ParthusCevas
operations, revenues, costs and stock price.
Recent terrorist attacks in the United States, as well as any
future events occurring in response to or in connection with them, including, without limitation, future terrorist attacks against United States targets, rumors or threats of war, actual conflicts involving the United States or its allies or
military or trade disruptions impacting our domestic or foreign suppliers, may substantially negatively impact our operations. Any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the
United States and worldwide financial markets and economy. They also could result in economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results, revenues and costs.
RISKS RELATING TO THE DSP CORES LICENSING BUSINESS
Our DSP cores licensing business depends on OEMs and their suppliers to obtain required complementary components.
Some of the raw materials, components and subassemblies included in the products manufactured by our OEM customers, which also incorporate our DSP cores products, are
obtained from a limited group of suppliers. Supply disruptions, shortages or termination of any of these sources could have an adverse effect on the business and results of operations of our DSP cores licensing business due to the delay or
discontinuance of orders for our products by customers until those necessary components are available.
The future growth of our DSP
cores licensing business depends in part on our ability to license to system OEMs and small-to-medium-sized semiconductor companies directly.
Historically our DSP cores licensing business has derived a substantial portion of its revenue in any period from license fees from a relatively small number of licenses. Because of the high license
fees we currently charge, only large semiconductor companies or vertically integrated system OEMs typically license our DSP core technologies. Part of our current growth strategy for our DSP cores licensing business is to broaden its client base by
offering tailored packages to small- and medium-sized semiconductor companies and other system OEMs to enable them to license our DSP core technology. We plan to expand the sales and marketing organization of our DSP cores licensing business for
this purpose. We cannot assure you that we will be successful in expanding this marketing and sales organization for this purpose and in promoting its products to system OEMs and small- to medium-sized semiconductor companies. If we are unable to
effectively develop and market its intellectual property through this model, our DSP cores licensing business revenues will continue to be dependent on a smaller number of licensees and the failure to secure these types of relationships could harm
our business and results of operations.
The success of our DSP cores licensing business depends on its ability to compete
successfully with other providers of DSP solutions.
The market for programmable DSP solutions is highly
competitive and is dominated by large, fully integrated semiconductor companies that have significant brand recognition, a large installed base of customers and a large network of field support and field application engineers. We and the companies
that license our technology from us compete with companies such as 3DSP, BOPS, LSI Logic and StarCore, a venture formed by Infineon, Agere and Motorola, which license DSP cores, and companies such as Analog Devices, Agere, Motorola, and Texas
Instruments, which sell their own complete general purpose DSP or application specific DSP solutions. Our DSP cores licensing business faces competition also from some of its strategic partners, which are not committed exclusively to our technology
and may develop products competing with our DSP cores products, or products based on architectures of our direct competitors.
As demand for programmable DSP solutions increases, large manufacturers of off-the-shelf chips and system manufacturers may make their intellectual property available to others, and developers of
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microprocessors, microcontrollers or other processors may devote more resources to create DSP extensions to their products. It is also possible that new competitors or alliances among competitors
could emerge. For example, Infineon, Agere and Motorola formed a venture to develop and market DSP technologies used in communications systems, wireless phones and consumer electronic products. These existing or future alliances could rapidly
acquire significant market share in our markets.
We cannot assure you that our DSP cores licensing business will
be able to compete successfully against current or future competitors, or that we will be able to improve or even maintain our competitive position or that our new products will achieve market acceptance. If our DSP cores licensing business is
unable to maintain its competitive position in the marketplace, its business, results of operations and financial condition may be harmed.
Our DSP cores licensing business may need to increase its research and development efforts to remain competitive.
The DSP cores market is experiencing extensive efforts by some of our competitors to use new technologies to manipulate their chip designs to increase the parallel processing of the chips and/or designs they offer. For
example, one such technology used is Very Long Instruction Word (VLIW), of which some of our competitors possess elements, but which we do not possess at the present time. If such technology continues to improve the programming processing of these
chips, or if other new technologies are demanded by our customers, we may need to change the focus of our research and development to obtain such technologies. Failure to do so could hurt our ability to remain competitive and could have an adverse
effect on our results of operations. Our DSP cores licensing business spent $1.6 million, or 34% of its total revenues, on research and development in the second quarter of 2002 and $5.1 million, or 20% of its total revenues, in 2001, on research
and development and we expect to continue to invest heavily in this area. However, we cannot assure you that these past or future expenditures will result in new and enhanced products or such products will be accepted in the market.
RISKS RELATING TO OUR IP PLATFORMS LICENSING BUSINESS
We utilize third-party foundries to produce the chips we sell, and any failure by them to deliver the chips we require on time could limit our ability to satisfy our customers demands.
Our business strategy calls for revenue from the sale of silicon chips embodying our intellectual property to
comprise an increasing percentage of the total revenue of our IP platforms licensing business over the next two years. We currently utilize third party foundries to produce chips using our designs. Any interruption in our relationship with these
third party foundries could harm our ability to develop this part of our business profitably. We do not have the ability to produce chips independently and thus depend on these foundries to:
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allocate a portion of their manufacturing capacity to our needs; |
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produce acceptable quality silicon wafers and chips with acceptable manufacturing yields; and |
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deliver chips on a timely basis at a competitive price. |
We are dependent upon our relationships with other providers of intellectual property and software in the semiconductor industry, and our ability to innovate and to meet changing market demands may
be limited if such relationships do not continue and grow.
Our ability to succeed in the mobile Internet
device market will depend on maintaining existing and developing new relationships with other providers of intellectual property and other software developers in the semiconductor industry. We believe that these relationships are important to our
continued ability to develop and license intellectual property that meets the needs of our target markets. Our business, financial condition and results of operations could be materially harmed if we cannot retain or attract these types of
relationships or if one or more of our successful relationships deteriorates or is terminated.
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RISKS RELATING TO PARTHUSCEVAS INTERNATIONAL OPERATIONS
Potential political, economic and military instability in Israel may adversely affect our results of operations.
Some of our principal research and development facilities are located in the State of Israel. In addition, although we are incorporated in
Delaware, some of our directors and executive officers are residents of Israel. Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and
military conditions affecting Israel. Any major hostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm our business, operating results and financial
condition.
Israels economy has been subject to numerous destabilizing factors, including a period of
rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. In addition, Israel and companies doing business with Israel have been the subject of an
economic boycott by the Arab countries since Israels establishment. Although they have not done so to date, these restrictive laws and policies may have an adverse impact on our operating results, financial condition or expansion of our
business.
Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in
degree and intensity, between Israel and the Arab countries. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to
resolve some of the economic and political problems in the Middle East, hostilities between Israel and some of its Arab neighbors have recently escalated and intensified. We cannot predict whether or in what manner these conflicts will be resolved.
Our results of operations may be negatively affected by the obligation of key personnel to perform military service. In addition, certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense
Forces and are subject to being called for active military duty at any time. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our
operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service.
The Israeli tax benefits and government program that we currently receive or participate in require us to meet several conditions and may be terminated or reduced in the future, which could increase our costs.
We were assigned certain tax benefits in Israel from DSP Group, particularly as a result of the Approved Enterprise
status of our facilities and programs. To maintain our eligibility for these tax benefits, we must continue to meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli
Ministry of Industry and Trade and to periodic reporting obligations. We believe that we will be able to continue to meet such conditions. Should we fail to meet such conditions in the future, however, these benefits would be cancelled and we would
be subject to corporate tax in Israel at the standard rate of 36%, and could be required to refund tax benefits already received. In addition, we cannot assure you that such grants and tax benefits will be continued in the future at their current
levels or otherwise.
We also receive funding as part of our participation in Magnet research programs supported
by the Office of Chief Scientist operated by Israels Ministry of Industry and Trade. In the second quarter of 2002, we received $318,000 in grants to us from these programs. In the years 2001 and 2000, we recorded $542,000 and $578,000,
respectively, in grants to us from these programs. All of these grants are non-refundable.
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.
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The corporate tax rate applicable to our IP platforms licensing business may increase, which could
adversely impact our cash flow, financial condition and results of operations.
We have significant operations
in the Republic of Ireland and a substantial portion of the taxable income on our IP platforms licensing business has historically been generated there. Currently, some of our Irish subsidiaries are taxed at rates substantially lower than U.S. tax
rates. Although there is no expectation of any changes to Irish tax law, if our Irish subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating results could be materially
adversely affected. In addition, because the IP platforms licensing business will be owned by subsidiaries of a U.S. corporation, distributions to the U.S. corporation, and in certain circumstances undistributed income of the subsidiaries, may be
subject to U.S. tax. Moreover, if U.S. or other foreign tax authorities were to change applicable tax laws or successfully challenge the manner in which our subsidiaries profits are currently recognized, our overall taxes could increase, and
our business, cash flow, financial condition and results of operations could be materially adversely affected.
Our results of
operations may be affected by currency fluctuations.
Due to our multinational operations, our business is
subject to fluctuations based upon changes in the exchange rates between the U.S. dollar, British pound, the euro and new Israeli shekels, the currencies in which we collect revenues or pay expenses. Part of our expenses in Israel are paid in
Israeli currency, which subjects us to the risks of foreign currency fluctuations and to economic pressures resulting from Israels general rate of inflation. Additionally, some of our revenues and part of our expenses in Dublin, Ireland are
paid in euros, which subjects us to similar risks with respect to the European economies. While a significant part of our sales and expenses are denominated in United States dollars, a portion of our expenses are denominated in new Israeli shekels
and the euro. As a result, an increase in the value of Israeli shekels and/or the euro in comparison to the United States dollar could increase the cost of our technology development, research and development expenses and general and administrative
expenses. We cannot assure you that currency fluctuations, changes in the rate of inflation between these regions and the U.S. or any of the other factors mentioned above will not have a material adverse effect on our business, financial condition
and results of operations. From time to time, we may use derivative instruments in order to minimize the effects of such developments. Our hedging positions may be partial, may not exist at all in the future or may not succeed to minimize our
foreign currency fluctuation risks. Our reporting currency will be the U.S. dollar and, therefore, fluctuations in the exchange rate between the U.S. dollar and other currencies in which we transact business may cause fluctuations in our reported
financial information.
Foreign courts might not enforce judgments rendered in the United States, which may make it difficult to
collect on judgments rendered against us.
Most of our directors and officers, as well as the experts named in
this prospectus, are not residents of the United States, and most of our assets and their assets are located outside the United States. Service of process upon our non-U.S. resident directors, officers or the experts named herein and the enforcement
of judgments obtained in the United States against us, our directors and executive officers, or the experts named herein, may be difficult to obtain.
There is also doubt as to the enforceability in Ireland and in Israel of judgments obtained in any federal or state court in the United States in civil and commercial matters, including actions
predicated upon the civil liability provisions of the U.S. securities laws. The United States does not currently have a treaty with the Republic of Ireland and/or Israel providing for the reciprocal recognition and enforcement of judgments, other
than arbitration awards, in civil and commercial matters. Therefore, a final judgment for the payment of a fixed debt or sum of money rendered by any federal or state court in the United States based on civil liability, whether or not based solely
upon the U.S. federal securities laws, would not automatically be enforceable in the Republic of Ireland or in Israel. In addition, there is doubt as to whether an Irish or an Israeli court would impose civil liability based solely on the U.S.
federal securities laws in an action brought in a court of competent jurisdiction in the Republic of Ireland or in Israel.
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RISKS RELATING TO HOLDING PARTHUSCEVA COMMON STOCK
AND TO PARTHUSCEVA BECOMING A PUBLIC COMPANY
Our
securities have no prior market, and we cannot assure you that our stock price will not decline.
There has
not been a public market for our common stock, and an active public market for our common stock may not develop or be sustained. The market price of our common stock could be subject to significant fluctuations. Among the factors that could affect
the stock price are:
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negative market reaction to the separation of the DSP cores licensing business from DSP Group; |
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negative market reaction to the combination of Parthus and Ceva; |
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quarterly variations in our operating results; |
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changes in revenue or earnings estimates or publication of research reports by analysts; |
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speculation in the press or investment community; |
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strategic actions by us or our competitors, such as acquisitions or restructurings; |
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actions by institutional stockholders; |
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general market conditions; or |
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domestic and international economic factors unrelated to our performance. |
In particular, the realization of any of the risks described above could have a significant and adverse effect on the market price of our common stock. We cannot assure you
that you will be able to resell your shares of our common stock at any particular price, or at all.
Substantial sales of our common
stock may occur in connection with the distribution and combination, which could cause our stock price to decline.
DSP Group is distributing all of the shares of our common stock it holds to DSP Groups stockholders. In addition, we are issuing new shares to all of the former Parthus shareholders as part of the combination. Other than shares
held by certain of our insiders and former Parthus affiliates under applicable securities laws, substantially all of these shares will be eligible for immediate resale in the public market. We are unable to predict whether significant
amounts of common stock will be sold in the open market following the distribution and combination. We are also unable to predict whether a sufficient number of buyers will be in the market at that time. Any sales of substantial amounts of common
stock in the public market, or the perception that such sales might occur, whether as a result of the distribution or otherwise, could harm the market price of our common stock.
Market prices of technology companies have been highly volatile and the market for our common stock may be volatile as well.
The stock market has experienced significant price and trading volume fluctuations, and the market prices of shares of technology companies generally have been extremely
volatile and have recently experienced sharp declines. Broad market fluctuations may adversely affect the trading price of our common stock regardless of our actual performance. In the past, following periods of volatility in the market price of a
public companys securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial costs and a diversion of managements attention and resources.
The anti-takeover provisions in our charter documents and in Delaware law could prevent or delay transactions that our stockholders may favor.
Our certificate of incorporation and bylaws contain provisions which could make it harder for a third party
to acquire us without the consent of our board of directors. For example, if a potential acquirer were to make a
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hostile bid for us, the acquirer would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. The acquirer would also
be required to provide advance notice of its proposal to remove directors at an annual meeting. In addition, our board of directors will be authorized to issue preferred stock in series, with the terms of each series to be fixed by the board
of directors.
Section 203 of the General Corporation Law of the State of Delaware limits business combination
transactions with 15% stockholders that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if
the offer may be considered beneficial by some stockholders.
Our board of directors could choose not to negotiate
with an acquirer that it did not feel was in the strategic interests of ParthusCeva. If the acquirer were discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by the anti-takeover measures, you
could lose the opportunity to sell your shares at a favorable price.
Our ability to pay dividends is limited.
We currently intend to retain all future earnings to fund the development and growth of our business and, therefore, do not
anticipate paying any dividends. Section 170 of the General Corporation Law of the State of Delaware provides that we can pay dividends only out of surplus or net profits for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. In addition, because our Israeli subsidiary received certain benefits under Israeli laws relating to its Approved Enterprise status, the payment of dividends by our Israeli subsidiary to us may subject us to certain Israeli taxes to
which we would not otherwise be subject. For additional information regarding our dividend policy, please see Dividend Policy and Description of Capital Stock.
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SEPARATION OF DSP CORES LICENSING BUSINESS FROM DSP GROUP
Overview
In October 2000, DSP Group announced its plan to establish Ceva, one of its wholly-owned subsidiaries, as an independent business focused
on the licensing of technology for the design and manufacture of DSP cores. The separation of the DSP cores licensing business from DSP Group, including the transfer of related assets, liabilities and intellectual property rights, was substantially
completed on , 2002. DSP Group distributed its shares of Cevas common stock to the DSP Group stockholders on
, 2002.
Benefits of the Separation
We believe that we will realize benefits from the separation of the DSP cores licensing business from DSP
Group, including the following:
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Greater Strategic Focus. DSP Group designs, manufactures and markets DSP integrated circuit devices for highly-integrated digital
cordless phones, Internet telephony devices and other digital speech products. Our focus for the DSP cores licensing business will be on developing businesses and strategic opportunities in the licensing of technology to third parties for the
manufacturing of these products. Our separation from DSP Group and the subsequent combination with Parthus will allow the board of directors, management team and employees of the combined company to focus specifically on our business and strategic
opportunities. As a combined entity, we will have a greater ability to modify our business processes and organization to fulfill our goals with respect to enhanced research and development and the creation of targeted markets and sales and support
infrastructures that better accommodate the needs of our business, customers and employees. |
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Greater Management Focus. As a stand-alone, independent company, our management can devote time and energy exclusively to our
business. Our business requires a significant amount of executive attention at the sales and marketing level because license agreements are typically not finalized without the involvement of a sophisticated negotiator. The separation will enable our
management team to focus on the licensing business without the distractions of the competing needs of DSP Groups business. |
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Avoid Conflicts of Interest. As a licensor of intellectual property, we can make our technology accessible to all potential users.
Our relationship with DSP Group raised competitive considerations for both DSP Group and potential customers of the products of the DSP cores licensing business, including direct competitors of DSP Group. We believe our separation from DSP Group
will enable us to enter into license agreements with direct competitors of DSP Group, to offer more competitive agreements to potential customers, and to enter into mergers, joint ventures and technology development relationships as the
opportunities present themselves. |
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Better Incentives for Employees and Greater Accountability. We expect the motivation of our employees and the focus of our
management will be strengthened by incentive compensation programs tied to the market performance of our common stock. Our separation from DSP Group and combination with Parthus will enable us to offer our employees compensation directly linked to
the performance of our business, which we expect to enhance our ability to attract and retain qualified personnel. |
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Increased Speed and Responsiveness. As a stand-alone company, we expect to be able to make decisions more quickly, deploy
resources more rapidly and efficiently and operate with more agility than we could as a part of a more diverse organization. In addition, we expect to enhance our responsiveness to the needs of our customers and partners.
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Direct Access to Capital Markets. As a separate company, we will have direct access to the capital markets to finance our
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Arrangements Between Ceva and DSP Group
We have provided below a summary description of the separation agreement along with the other key agreements. The following description is a summary of the material
terms of these agreements. You should read the full text of these agreements, which have been filed with the Securities and Exchange Commission as exhibits to the registration statement of which this prospectus is a part.
Separation Agreement
The separation agreement contains the key provisions relating to our separation from DSP Group and DSP Groups distribution of our shares to its stockholders.
The Separation. The separation of the DSP cores licensing business from DSP Group, including the transfer of related assets, liabilities and
intellectual property rights, was substantially completed immediately prior to the consummation of Cevas combination with Parthus. The separation agreement provides for the transfer to Ceva of assets and liabilities from DSP Group related to
the DSP cores licensing business as described in this prospectus in exchange for the issuance by Ceva to DSP Group of 1,000 shares of Cevas common stock, effective on the separation date. Further, in accordance with the separation
agreement, DSP Groups Israeli subsidiary, DSP Group, Ltd., transferred to DSP Group all of the share capital of Corage, Ltd., an Israeli company, which DSP Group then contributed to Ceva. Ceva subsequently contributed all of the Corage, Ltd.
share capital to DSP Ceva, Inc., its wholly-owned subsidiary, and upon the closing of the combination, DSP Ceva, Inc. changed its name to DSP ParthusCeva, Inc. and Corage, Ltd. changed its name to ParthusCeva, Ltd. Following the separation,
ParthusCeva, Ltd. is a wholly-owned subsidiary of DSP ParthusCeva, Inc. After its contribution of assets to Ceva, DSP Group surrendered shares of Cevas common stock it held to Ceva without consideration, to adjust the number of shares of
Cevas common stock held by DSP Group, and then distributed the remaining shares of Ceva common stock it held to the DSP Group stockholders on the basis of one share of Ceva common stock for every three shares of DSP Group common stock held by
such stockholders on the record date for the distribution. Ceva then acquired Parthus pursuant to a scheme of arrangement. See Combination with Parthus Technologies plc. The various ancillary agreements that are exhibits to the
separation agreement (or forms thereof mutually agreed upon by the parties) and which detail the separation and various interim and ongoing relationships among DSP Group, its subsidiaries, Ceva and its subsidiaries following the separation date
include:
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a technology transfer agreement whereby DSP Group transfers and/or assigns certain technology, third party licenses and other contracts to Ceva;
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a technology transfer assignment and assumption agreement whereby Ceva transfer and/or assign the technology, as well as its rights under the transfer
agreement, to DSP Ceva, Inc.; |
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a technology transfer agreement whereby DSP Group, Ltd. transfers and/or assigns certain technology, third party licenses and other contracts to Corage, Ltd.;
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a transition services agreement among DSP Group, DSP Ceva, Inc. and Ceva; |
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a transition services agreement between DSP Group, Ltd. and Corage, Ltd.; and |
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a tax indemnification and allocation agreement between DSP Group and Ceva. |
To the extent that the terms of any of these ancillary agreements conflict with the separation agreement, the terms of these agreements will govern. These agreements are
described more fully below.
The Contribution. As part of the assets contributed to
Ceva in the separation, DSP Group also contributed to Ceva a total of the sum of $40 million as initial working capital plus cash equal to the amount by which the transaction costs of the separation and combination exceeded $2 million. In addition,
as part of the separation and distribution pursuant to the terms of the separation agreement, Ceva agreed with DSP Group to settle the intercompany investment account between them by (i) converting part of DSP Groups investment account in
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Ceva (consisting of the value of the property, equipment and inventory) into Cevas stockholders equity, (ii) allowing DSP Group to retain all rights to Cevas accounts receivable
existing on the date of the separation, and (iii) having DSP Group retain certain of Cevas current liabilities existing on the date of separation, such that the settlement arrangement resulted in the net amount of assets retained by DSP Group
to equal the amount of the intercompany account on the date of separation (as of June 30, 2002, approximately $8.7 million).
The Distribution. After the contribution of the assets related to the DSP cores licensing business discussed above, DSP Group surrendered shares of Cevas common stock it held to Ceva without
consideration, to adjust the number of shares of Cevas common stock held by DSP Group, and then distributed the remaining shares of Cevas common stock it held to the DSP Group stockholders on the basis of one share of Ceva common stock
for every three shares of DSP Group common stock held by such stockholders on the record date for the distribution. DSP Group did not issue any fractional shares in the distribution. Instead, DSP Group stockholders received cash for any fractional
shares owed to them in an amount equal to (1) the fractional share that would otherwise be issuable multiplied by (2) the closing price of the ParthusCeva common stock on the first day of trading of ParthusCeva common stock on Nasdaq after the
combination.
Representations, Warranties, Covenants and Indemnification Regarding the Distribution.
The separation agreement contains representations and warranties from DSP Group and Ceva as to the accuracy
of facts and representations made by DSP Group, Ceva and Parthus in connection with the tax rulings issued by the Internal Revenue Service in connection with the separation, distribution and combination. Under the separation agreement, we have
agreed that:
(a) during the two-year period immediately following completion of the distribution, we will not:
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liquidate or dispose of all or a substantial portion of the active trade or business as defined in the separation agreement;
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discontinue the conduct of our active trade or business; or |
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except in accordance with the provisions of the separation agreement, dispose of any business or assets that would cause us to be operated in a manner
inconsistent in any material respect with the business purposes of the distribution as set forth in the representation letter sent to, and the tax rulings issued by, the Internal Revenue Service in connection with the separation and distribution;
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(b) during the one-year period immediately following completion of the distribution, we will not, except in
accordance with the terms of the separation agreement, directly or indirectly, enter into any agreement, understanding, arrangement or substantial negotiations regarding a proposed acquisition transaction (as that term is defined in the separation
agreement);
unless (1) the IRS has ruled that such action or transaction is not pursuant to a plan or series of transaction related to
the distribution, (2) DSP Group expressly consents in writing to the action or transaction, which consent may be withheld by DSP Group in its sole discretion taking into account solely the preservation of the tax-free treatment of the distribution,
or (3) we obtain a supplemental ruling from the Internal Revenue Service or a tax opinion from a nationally recognized law firm or accounting firm reasonably acceptable to DSP Group that the action will not adversely affect the tax-free status of
the distribution. In addition, we have represented and warranted that any factual information presented or representations made by Parthus (or by us after the distribution) in the application for supplemental rulings or any supplement to this
application filed with the Internal Revenue Service regarding the separation, distribution and combination are true, correct and complete.
Under the terms of the separation agreement, we have agreed to indemnify DSP Group and its affiliates for any tax liability incurred by DSP Group or such affiliates with respect to the distribution as a result of our breach
of any of our representation, warranties or covenants made in the separation agreement or in any representation letter issued by us after the combination with respect to the tax matters listed in the separation agreement.
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In the event that the Internal Revenue Service subsequently determines that DSP
Groups distribution of Cevas common stock to its stockholders is not a tax-free transaction as to DSP Group, DSP Group will recognize a corporate-level taxable gain in an amount equal to the difference between the market value of the
Cevas common stock at the time of distribution to the DSP Group stockholders and DSP Groups basis in that stock (and its tax owed would be determined by multiplying this gain by DSP Groups net effective tax rate at the time of the
distribution (currently approximately 38%)).
These rights and obligations shall survive until 30 days following
the expiration of the applicable statute of limitations. There are no limitations on the rights and obligations relating to the amount of any claim for indemnification.
In addition, each of the parties has agreed to indemnify the other with respect to:
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the failure to pay, perform or discharge any liabilities for which it is responsible under the separation agreement; |
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the breach by it or any of its affiliates of the terms of the separation agreement and the ancillary agreements associated with the separation agreement; and
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the breach by it or any of its affiliates of any of the covenants or obligations in the combination agreement or any other documents or instruments executed or
delivered by that party in connection with the separation, distribution and combination. These rights and obligations shall survive until the second anniversary following the distribution date. The amount of any claims for indemnification will be
reduced by the amount of any insurance proceeds. There are no other limitations on the rights and obligations relating to the amount of any claim for indemnification. |
The limitations on the issuance of shares of our capital stock and other restrictions discussed above could have a negative impact on our financial flexibility following
the distribution.
Dispute Resolution. If problems arise between the parties to the
separation agreement, the parties have agreed to the following procedures:
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the parties will make a good-faith effort to first resolve the dispute through negotiation; |
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in connection with these attempts to resolve the dispute, the parties may agree to attempt to resolve the dispute through non-binding mediation; and
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after certain events occur as described in the separation agreement, the parties can resort to binding arbitration. In addition, under limited circumstances any
party acting in good faith may initiate litigation in lieu of complying with the arbitration provisions of the Separation Agreement. |
Noncompetition and Nonsolicitation. Subject to the restrictions and rights set forth in the technology transfer agreements, DSP Group has agreed that for a period of five
years from the distribution date, DSP Group will not, and will ensure that affiliates of DSP Group will not, directly or indirectly engage in any business which is competitive with the DSP cores licensing business. Furthermore, we have agreed that,
subject to the restrictions and rights set forth in the technology transfer agreements, for a period of five years from the distribution date, we will not, and will ensure that our affiliates will not, directly or indirectly engage in designing,
manufacturing and marketing high performance digital signal processor-based integrated circuit devices for integrated digital cordless phones and voice-over broadband products. This restriction does not, however, prevent us from licensing our
products to third parties who use them to make these or similar products. In addition, except in accordance with the terms of the agreement, for three years after the distribution date, the parties each agree that they will not solicit for hire any
employee of the other party.
Expenses. Each party to the separation agreement will
bear its own respective third party fees, costs and expenses paid or incurred in connection with the transactions contemplated thereby.
29
Ceva Technology Transfer Agreement
Asset Transfer and Assumption of Liabilities. The Ceva technology transfer agreement identifies the assets, including but not limited to
intellectual property, that DSP Group transferred to us and the liabilities that we assumed from DSP Group in the separation in exchange for the issuance by us to DSP Group of shares of our common stock. The agreement also describes when and how
these transfers and assumptions occurred.
Retention of Certain
Rights. Notwithstanding the assignment and assumption, DSP Group reserves for itself, its successors and assigns, the nonexclusive, royalty-free right to use, make, modify, reproduce, sell, import, prepare derivative works
from, and sublicense (subject to certain restrictions) the intangible property transferred by DSP Group to us, as such intangible property exists on the date of the transfer, solely in connection with the design, manufacture, development, testing,
use and sale or other distribution of its products. DSP Group also retains the right to use our trademarks and logos in connection with the marketing and distribution of its products.
DSP Ceva, Inc. Technology Transfer Agreement
The DSP Ceva,
Inc. technology transfer agreement implements the transfer from us to our wholly-owned subsidiary, DSP Ceva, Inc., of the assets transferred by DSP Group to us and the assumption by DSP Ceva, Inc. of liabilities assumed by us from DSP Group in the
separation in exchange for the issuance by DSP Ceva, Inc. to us of shares in its share capital. The agreement also describes when and how these transfers and assumptions occurred.
Corage, Ltd. Technology Transfer Agreement
Asset
Transfer and Assumption of Liabilities. The Corage, Ltd. technology transfer agreement identifies the assets that DSP Group, Ltd., an Israeli subsidiary of DSP Group, transferred to Corage, Ltd., our Israeli subsidiary, as
well as the liabilities Corage, Ltd. assumed from DSP Group, Ltd. in the separation in exchange for the issuance by Corage, Ltd. to DSP Group, Ltd. of shares in its share capital. The agreement also describes when and how these transfers and
assumptions occurred.
Retention of Certain Rights. Notwithstanding these
assignments and assumptions, DSP Group, Ltd. reserves, for itself and its successors and assigns, the nonexclusive, royalty-free right to use, make, modify, reproduce, sell, import, prepare derivative works from, and sublicense (subject to certain
restrictions) the intangible property transferred by DSP Group, Ltd. to us as that intangible property exists on the date of the transfer, solely in connection with the design, manufacture, development, testing, use and sale or other distribution of
its products. DSP Group, Ltd. also retains the right to use our trademarks and logos transferred to Corage, Ltd. in connection with the marketing and distribution of DSP Group, Ltd.s products.
ParthusCeva, as the owner of the intellectual property relating to the DSP cores licensing business, has the exclusive right to bring
actions against third parties for infringement of all intellectual property assigned to it. ParthusCeva also has the right to grant licenses and sublicenses of this intellectual property, and to give these rights to others (subject only to DSP
Groups existing rights). As a licensee, DSP Group has only the rights explicitly granted to it in the separation agreement and related documents, including the various technology transfer agreements. DSP Group is not able to engage in
ParthusCevas business for a period of five years after the separation, and after the non-competition period, DSP Group only has the right to grant sublicenses to the intellectual property relating to the DSP cores licensing business as part of
DSP Groups products that offer functions and features in addition to the DSP core functions. These agreements therefore prevent DSP Group from granting the type of license which ParthusCeva may grant to its licensees or customers in its
ordinary course of business.
Ceva and DSP Group have transferred the assets used for sales made by our DSP cores
licensing division in the United States to DSP Ceva, Inc. and for sales of our DSP cores licensing division made outside the United States to Corage, Ltd. to take advantage of the favorable tax treatment provided by this structure. Because
30
Corage, Ltd.s assets remain outside the United States, income from its operations that are entitled to an approved enterprise status are subject to advantageous tax rates in
Israel, and are not currently subject to U.S. taxation. In addition, in order for the transaction to be classified as a tax free transaction under the tax ruling issued by Israeli tax authorities, the transaction was structured so that Corage, Ltd.
stock was held by DSP Ceva, Inc., which is a subsidiary of Ceva after the separation. See Managements Discussion and Analysis of Financial Condition and Results of OperationsIsraeli Taxation and Investment Programs.
Transition Services Agreement Among DSP Group, DSP Ceva and Us
Services. The transition services agreement governs the provision of transitional services by DSP Group to us and to DSP Ceva, Inc. after the
separation date. DSP Group is obligated to provide certain general and administrative services, including management and information services, network, hardware and software maintenance and support, to us and to DSP Ceva, Inc., and we and DSP Ceva,
Inc. are obligated to pay DSP Group an agreed amount.
Term. The term of the
transition services agreement commences on the date of the separation agreement and continues until such time as DSP Group is no longer required to provide any transition services. However, we may terminate or limit the services to be provided by
DSP Group at any time upon at least 60 days prior notice.
Use of
Facilities. During the first year following the separation date, and for so long thereafter as the parties agree, we and DSP Ceva will occupy and utilize portions of DSP Groups facilities in Santa Clara, California.
We and DSP Ceva are obligated to pay an agreed amount to DSP Group for our respective pro rata shares of the rent and other costs of occupying and operating these facilities.
Transition Services Agreement between DSP Group, Ltd. and Corage, Ltd.
Services. The transition services agreement governs the provision of transitional services by DSP Group, Ltd. and the subsidiaries of DSP Group, Inc., Nikon DSP K.K. and DSP Group Europe Sarl, to Corage,
Ltd. after the separation date. DSP Group, Ltd. is obligated to provide certain general and administrative services, including management and information services and network, hardware and software maintenance and support, to Corage, Ltd., as
Corage, Ltd. requires and requests. In addition, Nikon DSP K.K. and DSP Group Europe Sarl are obligated to provide to Corage, Ltd., general and administrative services and management and information services with respect to Cevas operations in
Japan and Europe. For research and development services, Corage, Ltd., is obligated to pay DSP Group, Ltd. for services provided at agreed upon rates.
Term. The term of the transition services agreement commenced on the date of the separation agreement and continues until such time as DSP Group, Ltd., Nikon DSP K.K. and
DSP Group Europe Sarl are no longer required to provide any transition services. However, Corage, Ltd. may terminate or limit any of the services provided by DSP Group, Ltd., Nikon DSP K.K. or DSP Group Europe Sarl at any time upon at least 60
days prior notice.
Although agreed in the context of arms-length negotiations between DSP Group and Parthus
in connection with the combination, the transition services agreements were entered into in the context of a parent-subsidiary relationship with DSP Group. As a result, the prices charged to us under the transition services agreements may be lower
than the prices that we may be required to pay third parties for similar services or the costs of similar services if we undertake them ourselves. If we fail to find replacements for these services after the expiration of the term of the agreements,
or if we are unable to replace them on terms as favorable as those provided in the transition services agreements, our business, results of operations and financial condition could be harmed.
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Tax Indemnification and Allocation Agreement
We were included as part of DSP Groups consolidated group for federal income tax purposes until the separation date. In general,
under the U.S. Internal Revenue Code, each member of a consolidated group is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. Pursuant to arms-length negotiations between DSP Group and
Parthus to allocate the responsibilities between us and DSP Group for tax liabilities that may be asserted in the future, in addition to the indemnification provided in the separation agreement, we have entered into a tax indemnification and
allocation agreement with DSP Group pursuant to which DSP Group will be liable for, and will indemnify us for, any federal income tax related to the consolidated returns filed by it for all periods ending on or before the distribution date. Under
that agreement, we and DSP Group will each be liable for, and shall indemnify the other against, liability for our respective federal income tax for subsequent periods after the distribution. In the case of income taxes other than federal income
taxes, the tax indemnification and allocation agreement provides for an allocation that is generally similar to the allocation of federal income taxes. Taxes other than income taxes are allocated based on the legal entity on which the legal
incidence of the tax is imposed.
In general, the separation agreement described above, rather than the tax
indemnification and allocation agreement, governs indemnification for any taxes due by reason of the distribution.
Other Tax Matters
Our DSP cores licensing business operations have been granted Approved Enterprise status under Israeli law
under four separate investment plans which were assigned to us from DSP Group in the separation, and one plan has been approved for our activities, thereby entitling us to enjoy certain program and tax benefits.
Voting Agreements
As a condition to the combination of Parthus and Ceva, our stockholders Eliyahu Ayalon, Kevin Fielding, Brian Long, William McCabe, Peter McManamon, Sven-Christer Nilsson, Issachar Ohana, Michael Prince, Joan Scully, Gideon
Wertheizer, Enterprise Ireland and Kelburn Limited each entered into individual voting agreements with us on the following terms. These agreements, which cover approximately 20.2% of our outstanding stock as of the date of the combination (plus any
additional shares subsequently acquired by such stockholders, including upon exercise of options), provide that each stockholder will vote all his or her ParthusCeva shares for the ParthusCeva nominees to our board or directors and, with respect to
all other matters to be voted on by our stockholders, either in accordance with the recommendations of our board or directors or, if the board of directors makes no recommendation, for or against such matters in the same proportion as the shares
owned by all other stockholders (excluding the stockholder who is the subject of the voting agreement and any transferee or assignee who is an affiliate of that stockholder). Each voting agreement terminates upon the earlier of two years from the
date of the agreement, the sale of all or substantially all of our assets or a consolidation or merger of ParthusCeva as a result of which our stockholders prior to such a consolidation or merger hold less than 50% of the voting equity of the
surviving or resulting entity, a liquidation, dissolution or winding up of our business operations, the execution by us of a general assignment for the benefit of creditors or the appointment of a receiver or trustee to take possession of our
property and assets. In the event that any of these stockholders wishes to transfer any of their shares to a party or group who, after the transfer, will hold more than 3% of ParthusCevas common stock, the transferee must also agree to be
bound by the terms of this agreement.
Treatment of DSP Group Stock Options
On the distribution date, each outstanding option to purchase DSP Groups common stock granted prior to the distribution was adjusted as described below.
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On the distribution date, each DSP Group option held by any person who will serve
as an employee of ParthusCeva following the separation was converted into two options: an option to purchase the same number of shares of DSP Groups common stock covered by the original DSP Group option (which remained unexercised as of the
distribution date) and an option to purchase one share of ParthusCevas common stock for every three shares of DSP Groups common stock purchasable under the original DSP Group option.
The exercise prices per share for each converted DSP Group option and ParthusCeva option were established in a manner so that:
(i) the aggregate intrinsic value (which is the market value of the stock underlying the option,
less the exercise price of that option, multiplied by the number of shares then covered by that option) after the distribution of the converted DSP Group option plus the intrinsic value of the new ParthusCeva option was not greater than the
intrinsic value of the original DSP Group option immediately prior to the distribution;
(ii) the ratio of the exercise price of the converted DSP Group option to the market value per share of DSP Groups common stock after the distribution was not lower than the ratio of the exercise price of the
original DSP Group option to the market value per share of DSP Groups common stock immediately prior to the distribution; and
(iii) the ratio of the exercise price of the new ParthusCeva option to the market value per share of ParthusCevas common stock after the distribution was not lower than the ratio of
the exercise price of the original DSP Group option to the market value per share of DSP Groups common stock immediately prior to the distribution.
The determination of the exercise prices for each converted DSP Group option and ParthusCeva option was made by DSP Group with the advice of its professional advisors.
The terms of each converted DSP Group option and each new ParthusCeva option (other than the exercise price and the number of shares) are
substantially similar to the original DSP Group option from which they were converted. In the case of non-qualified stock options, if, and to the extent that, the vesting of any converted DSP Group non-qualified stock option is subject to vesting
based on the continuous employment of the option holder with DSP Group or its subsidiaries, the vesting of the converted DSP Group non-qualified stock option is subject to the same vesting schedule as the original DSP Group option and continuation
of the holders employment with either DSP Group or ParthusCeva or their respective subsidiaries, as the case may be, and giving credit for continuous employment with DSP Group or ParthusCeva or their respective subsidiaries, prior to the
distribution date.
In the case of stock options intended to qualify under Section 422 of the U.S. Internal
Revenue Code, if, and to the extent that, the vesting of any converted DSP Group incentive stock option is subject to vesting based on the continuous employment of the option holder with DSP Group or its subsidiaries, the vesting of the converted
DSP Group incentive stock option is subject to the same vesting schedule as the original DSP Group option and continuation of the holders employment with DSP Group or its respective subsidiaries, and giving credit for continuous employment
with DSP Group or ParthusCeva or their respective subsidiaries, prior to the distribution date. Any converted DSP Group incentive stock option held by an option holder who terminates employment with DSP Group or its subsidiaries as of the
distribution date will cease vesting and terminate on the forty-sixth day following the distribution. DSP Group may amend DSP Group incentive stock options held by individuals who will terminate employment with DSP Group as of the distribution to
provide that the option will vest based on continuation of the holders employment with ParthusCeva or their respective subsidiaries, as the case may be.
All of the ParthusCeva options issued in connection with the distribution are non-qualified stock options. The vesting of each ParthusCeva option is subject to the same vesting schedule as the original
DSP Group option and continuation of the holders employment with either DSP Group or ParthusCeva or their respective subsidiaries, as the case may be, with credit given for continuous employment with DSP Group or ParthusCeva or their
respective subsidiaries, prior to the distribution date. The ParthusCeva options granted with respect to each original DSP Group option were issued under the Ceva 2000 Stock Incentive Plan.
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COMBINATION WITH PARTHUS TECHNOLOGIES PLC
Overview
On , 2002, immediately after the
separation described above, Parthus and Ceva effected a combination of their businesses pursuant to the terms and conditions of a Combination Agreement, dated as of April 4, 2002, as amended, by and among DSP Group, Ceva and Parthus. As part of the
combination, Ceva immediately changed its name to ParthusCeva, Inc., and Parthus became a wholly owned subsidiary of ParthusCeva. Pursuant to arms-length negotiations between DSP Group and Parthus and as set forth in the Combination Agreement,
immediately following the combination, the stockholders of DSP Group and the former shareholders of Parthus owned approximately 50.1% and 49.9%, respectively, of the common stock of ParthusCeva. The parties recognized in their negotiations that
although Parthus had substantially greater assets and revenue, Ceva had realized significant earnings during each of the past two years and was expected to realize significant earnings in the current fiscal year. In contrast, Parthus incurred
substantial losses during each of the past two fiscal years and was expected to incur a loss during the current fiscal year. Both the $40 million cash included in the Ceva assets and the $60 million cash repayment of capital to the Parthus
shareholders were taken into account in arriving at the relative values of Parthus and Ceva. The amount of the distribution to the Parthus shareholders was viewed by the parties as the amount necessary for the allocation of more than 50% of the
combined value to the stockholders of DSP Group. The parties recognized that to reach agreement on a transaction it would be necessary for the distribution of Cevas stock to DSP Groups stockholders to be tax-free. To avoid taxation,
Section 355(e) of the U.S. Internal Revenue Code requires that DSP Groups stockholders own more than 50 percent of the acquiring entity. See Separation of DSP Cores Licensing Business From DSP GroupThe Separation and
Combination with Parthus Technologies plcTerms of the Combination.
Strategic Rationale for the Combination
The combination of Ceva and Parthus brings together the expertise of a provider of DSP cores architectures
with the expertise of a supplier of complete platform-level IP solutions, which we believe strongly positions us to become a leading supplier of open-standard IP solutions to the industry.
Management and Operations
ParthusCeva is
headquartered in San Jose, California, and has principal offices in Dublin, Ireland, and Herzeliya, Israel. It has over 400 employees, with 330 involved in research and development. The board of directors of ParthusCeva is comprised of eight
members, including five non-employee directors. The management includes former executive officers of both Parthus and Ceva.
We are incorporated under the laws of the State of Delaware. With respect to most of our subsidiaries, the jurisdiction of incorporation relates to the principal location of corporate operations and assets and reflects the
historically and geographically dispersed operations of ParthusCeva, principally in Ireland, Israel and the United States. In addition, our Irish subsidiaries hold patent rights which allows us to avail ourselves of certain incentives for research
and development in Ireland. Finally, Parthus Inc., a Cayman Islands corporation, manages certain investments on behalf of Parthus and its subsidiaries.
Terms of the Combination
The combination was effected through a scheme of arrangement
pursuant to the laws of the Republic of Irelanda form of corporate reorganization that is approved by the shareholders and sanctioned by the High Court of Ireland. The scheme provided as follows:
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Immediately prior to the combination with Ceva, Parthus cancelled a portion of its existing share capital and distributed to its shareholders an aggregate
repayment of $60 million in cash with respect to such cancellation. |
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The remaining existing Parthus shares were then cancelled and each Parthus shareholder received new shares of ParthusCevas common stock.
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Immediately following the combination, the stockholders of DSP Group and the former shareholders of Parthus own approximately 50.1% and 49.9%, respectively, of
the common stock of ParthusCeva. |
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ParthusCeva assumed all outstanding Parthus share options and the option plans and option agreements that govern them. These options continue with the same
terms and conditions, except that they have become options to purchase shares of ParthusCevas common stock and have been adjusted in the manner set forth below. Option holders will no longer be able to obtain Parthus shares or ADSs upon
exercise of such options. |
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The number of shares of ParthusCevas common stock purchasable upon the exercise of each Parthus option is equal to the number of shares of
ParthusCevas common stock that would have been received for the Parthus shares underlying the option, had the option been exercised prior to the combination with Ceva. The exercise price per share was also adjusted proportionately.
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Adjustment of Exercise Prices of Parthus Options
Immediately prior to the effective time of the combination, the exercise price of existing Parthus options that had an exercise price in excess of $0.267 per ordinary share
($2.67 per ADS) was adjusted to $0.267 per ordinary share ($2.67 per ADS). Options for the acquisition of an aggregate of 92,420,680 Parthus ordinary shares (9,242,068 ADSs) were adjusted. These included options to purchase an aggregate of
34,728,340 Parthus ordinary shares (3,472,834 ADSs) held by Kevin Fielding, Eoin Gilley, Elaine Coughlan, William McLean and Sven-Crister Nilsson, each of whom served as a director or executive officer of Parthus and each of whom serves as a
director or executive officer of ParthusCeva following the combination.
Parthus and Ceva agreed to effect the
adjustment in the exercise price of Parthus options to create a performance-oriented environment for employees in the combined company. Many of the Parthus options had an exercise price significantly in excess of the market price of Parthus shares
on July 24, 2002, the date Parthus and Ceva agreed to reprice the Parthus options. Furthermore, the distribution of $60 million to Parthus shareholders immediately before combination further reduced the market price of Parthus shares. As a result of
the reduction in the market price of Parthus shares, the Parthus options were no longer a meaningful incentive for the Parthus employees. Generally, the exercise price of Cevas options is equal to or less than the market price of Ceva common
stock, based upon the terms of the combination.
We believe the repricing permits both Parthus and Ceva's
employees to have an equally realistic possibility of participating in any increase in share value of ParthusCeva and enhances shareholder value by creating better performance incentives for, and thus increasing retention of, Parthus
employees.
Integration of Operations
We do not anticipate any significant relocation of employees, or material relocation or amalgamation of research and development and sales activities in connection with the combination. In view of our
target markets, and focused research and development activities, we believe that our business plan can most effectively be implemented, and our development targets best met, by drawing on the existing locations of our respective teams. Consequently,
we do not anticipate any material adjustments in facilities.
We do expect that there will be integration of
management and administrative functions. In that regard, we anticipate that certain activities may be located at our California offices, and others transferred, or enhanced, at our Dublin offices. In addition, we will evaluate all corporate
functions, with a view to minimizing duplication of activity and, where possible, achieving costs synergies. Both Parthus and Ceva are experienced in the management of geographically dispersed operations, and we believe that we will be able to
maintain effectively operations on a geographically dispersed basis after the combination.
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ParthusCeva Common Stock
We have filed applications to list our common stock on The Nasdaq National Market under the symbol PCVA and on the London Stock Exchange under the symbol
PCV.
We have never declared or paid any cash dividends on our capital
stock and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors will have discretion as to whether future dividends will be paid, after taking into account factors such as our financial condition, operating
results and current and anticipated cash needs.
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The following table sets forth our capitalization as of June 30,
2002:
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on an actual basis (not giving effect to the contribution and combination described below); |
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pro forma to give effect to: |
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the contribution of the DSP cores licensing business of DSP Group to us, including a sum of $40 million in cash and $2.5 million in other assets, plus
the amount by which the transaction costs of the separation and combination exceed $2 million, as though it had occurred on June 30, 2002; |
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the combination of Ceva and Parthus as though it had closed on June 30, 2002; |
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the results of the cancellation of certain shares of Cevas common stock in connection with its separation from DSP Group; and
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the repricing of certain Parthus options, including changes made as a result of Parthus $60 million cash repayment of capital to the Parthus
shareholders. |
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June 30, 2002
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Actual
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Pro Forma
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(U.S. Dollars in thousands) |
Stockholders equity and parent company investment: |
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Common stock, $.001 par value; 100,000,000 shares authorizedactual; 105,000,000 shares authorizedpro forma;
20,000,000 shares issued and outstandingactual; 18,002,657 shares issued and outstandingpro forma |
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$ |
20 |
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$ |
18 |
Preferred stock, $.001 par value; none authorizedactual; 5,000,000 shares authorizedactual and pro forma;
none issued and outstandingactual and pro forma |
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Parent company investment |
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8,718 |
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Additional paid-in capital, deferred stock compensation and accumulated deficit |
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203,405 |
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Total stockholders equity |
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$ |
8,738 |
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$ |
203,423 |
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All share numbers above exclude:
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2,517,020 (1,135,035 pro forma) shares of our common stock subject to outstanding options under our 2000 Stock Incentive Plan at a weighted average exercise
price of $5.54 per share ($12.29 per share pro forma); |
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3,482,980 (1,570,629 pro forma) shares of our common stock available for issuance pursuant to our 2000 Stock Incentive Plan. No option grants will be made under
our 2000 Stock Incentive Plan following the distribution; |
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2,210,155 (736,718 pro forma) shares of DSP Groups common stock will be subject to options to be granted on the distribution date to holders of options to
purchase shares of DSP Groups common stock. |
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3,991,622 (1,800,000 pro forma) shares of our common stock available for issuance pursuant to our 2002 Stock Incentive Plan; |
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2,217,568 (1,000,000 pro forma) shares of our common stock available for issuance pursuant to our 2002 Employee Stock Purchase Plan; and
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The pro forma share numbers above also exclude 1,644,435 additional shares of our common stock that will be subject to options to be assumed by us in connection
with the combination with Parthus. As of June 30, 2002, there were outstanding options to purchase an aggregate of 107,799,111 ordinary shares of Parthus. |
You should read this table together with Separation of DSP Cores Licensing Business from DSP GroupTreatment of DSP Group Stock Options,
ManagementStock Plans, Description of Capital Stock and Note 5 to our consolidated financial statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL DATA OF PARTHUSCEVA
The following unaudited pro forma condensed combined consolidated financial statements have been prepared to give effect to the
acquisition of Parthus under the purchase method of accounting after giving effect to the pro forma adjustments described in the accompanying notes.
The following unaudited pro forma condensed combined consolidated balance sheet as of June 30, 2002 gives effect to the acquisition of Parthus as if it had occurred on that date, and reflects the
allocation of the purchase price to the Parthus assets acquired and liabilities assumed, based on their estimated fair values at the date of acquisition based upon Cevas preliminary estimates of their fair values. The allocation of purchase
price for the acquisition is subject to revision when additional information concerning asset and liability valuations is obtained. In the opinion of Cevas management, the asset and liability valuations for the acquisition will not be
materially different from the pro forma financial data presented. The unaudited pro forma condensed combined consolidated financial information reflects Cevas best estimates; however, the actual financial position and results of operations may
differ significantly from the pro forma amounts reflected herein because of various factors, including, without limitation, access to additional information, changes in value and changes in operating results between the date of preparation of the
unaudited pro forma condensed financial information and the date on which the transaction closed, and the number of shares outstanding of DSP Group and Parthus and the value of the combined companys shares. The excess of the consideration
given by Ceva in the transaction over the fair value of Parthus identifiable assets and liabilities has been recorded as goodwill. Goodwill will be tested for impairment on an annual basis. Patents will be amortized over their useful
lives, unless the useful life is deemed to be indefinite. An intangible asset with an indefinite useful life will not be amortized until its useful life is determined to be no longer indefinite. Intangible assets that are amortized will be reviewed
for impairment annually and on an interim basis. Any portion of the purchase price allocated to in-process research and development and stock based compensation expenses related to vested Ceva options, which will be measured upon the consummation of
the combination of Ceva with Parthus based on the fair market value of Cevas common stock, will be charged to expenses immediately upon the consummation of the transaction.
The following unaudited pro forma condensed combined consolidated statements of operations for the six-month period ended June 30, 2002 and for the year ended December 31,
2001 give effect to the transaction as if it had occurred on January 1, 2001 and combine the historical statements of operations of Ceva and Parthus for those periods. Integration costs are not included in the accompanying pro forma condensed
combined consolidated financial statements.
This pro forma information should be read in conjunction with the
respective consolidated historical financial statements (including notes thereto) of Ceva and Parthus included in this prospectus.
Unaudited pro forma condensed combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have
actually been reported had the transaction occurred at the beginning of the periods presented, nor is it necessarily indicative of future financial position or results of operations. These unaudited pro forma condensed combined consolidated
financial statements are based upon the respective historical financial statements of Ceva and Parthus and do not incorporate, nor do they assume, any benefits from cost savings or synergies of the combined company. The pro forma adjustments are
based on available financial information and certain estimates and assumptions that Ceva believes are reasonable and that are set forth in the notes to the unaudited pro forma condensed combined consolidated financial statements.
38
PARTHUSCEVA, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
As of June 30, 2002
(U.S. Dollars in Thousands)
|
|
Ceva, Inc.
|
|
Parthus Technologies Plc
|
|
Pro forma adjustments
|
|
|
References
|
|
Pro forma combined
|
|
|
Historical
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
$ |
114,101 |
|
$ |
(23,458 |
) |
|
A, B, G, H |
|
$ |
90,643 |
Trade receivables, net |
|
|
8,683 |
|
|
5,421 |
|
|
|
|
|
|
|
|
14,104 |
Other accounts receivable and prepaid expenses |
|
|
1,592 |
|
|
3,968 |
|
|
(1,079 |
) |
|
G |
|
|
4,481 |
Deferred income tax |
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
240 |
Inventories |
|
|
125 |
|
|
517 |
|
|
|
|
|
|
|
|
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
10,640 |
|
|
124,007 |
|
|
(24,537 |
) |
|
|
|
|
110,110 |
Long term lease deposits |
|
|
209 |
|
|
|
|
|
|
|
|
|
|
|
209 |
Severance pay fund |
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
1,197 |
Property and equipment, net |
|
|
2,498 |
|
|
6,617 |
|
|
|
|
|
|
|
|
9,115 |
Investments |
|
|
|
|
|
4,500 |
|
|
|
|
|
|
|
|
4,500 |
Goodwill |
|
|
|
|
|
63,579 |
|
|
728 |
|
|
C, E |
|
|
64,307 |
Other intangible assets |
|
|
|
|
|
3,752 |
|
|
45,000 |
|
|
D, F |
|
|
48,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
14,544 |
|
$ |
202,455 |
|
$ |
21,191 |
|
|
|
|
$ |
238,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade payables |
|
$ |
1,582 |
|
$ |
4,680 |
|
$ |
|
|
|
|
|
$ |
6,262 |
Accrued expenses and other payables |
|
|
2,158 |
|
|
12,718 |
|
|
|
|
|
|
|
|
14,876 |
Related partyDSP Group Inc. |
|
|
|
|
|
|
|
|
6,095 |
|
|
P |
|
|
6,095 |
Income taxes payable |
|
|
783 |
|
|
1,554 |
|
|
|
|
|
|
|
|
2,337 |
Deferred revenues |
|
|
62 |
|
|
3,914 |
|
|
|
|
|
|
|
|
3,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
4,585 |
|
|
22,866 |
|
|
6,095 |
|
|
|
|
|
33,546 |
Accrued severance pay |
|
|
1,221 |
|
|
|
|
|
|
|
|
|
|
|
1,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,806 |
|
|
22,866 |
|
|
6,095 |
|
|
|
|
|
34,767 |
Parent company investment |
|
|
8,718 |
|
|
|
|
|
(8,718 |
) |
|
P, Q |
|
|
|
Stockholders equity |
|
|
20 |
|
|
179,589 |
|
|
23,814 |
|
|
B, J, G, K, I, Q, H |
|
|
203,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
14,544 |
|
$ |
202,455 |
|
$ |
21,191 |
|
|
|
|
$ |
238,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed combined
consolidated financial statements.
39
PARTHUSCEVA, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 2001
(U.S. Dollars in Thousands Except Per Share Data)
|
|
Ceva, Inc.
|
|
Parthus Technologies Plc
|
|
|
Pro forma adjustments
|
|
|
References
|
|
Pro forma combined
|
|
|
|
Historical
|
|
|
|
|
Revenues |
|
$ |
25,244 |
|
$ |
40,919 |
|
|
$ |
|
|
|
|
|
$ |
66,163 |
|
Cost of revenues |
|
|
1,251 |
|
|
12,064 |
|
|
|
|
|
|
|
|
|
13,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
23,993 |
|
|
28,855 |
|
|
|
|
|
|
|
|
|
52,848 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net |
|
|
5,095 |
|
|
28,578 |
|
|
|
|
|
|
|
|
|
33,673 |
|
Marketing and sales |
|
|
2,911 |
|
|
10,857 |
|
|
|
|
|
|
|
|
|
13,768 |
|
General and administration |
|
|
2,839 |
|
|
7,171 |
|
|
|
|
|
|
|
|
|
10,010 |
|
Amortization of other intangible assets |
|
|
|
|
|
9,195 |
|
|
|
555 |
|
|
L, M |
|
|
9,750 |
|
In process research and development |
|
|
|
|
|
10,895 |
|
|
|
|
|
|
|
|
|
10,895 |
|
Amortization of noncash stock compensation |
|
|
|
|
|
1,806 |
|
|
|
1,865 |
|
|
N, O |
|
|
3,671 |
|
Restructuring charge |
|
|
|
|
|
765 |
|
|
|
|
|
|
|
|
|
765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
10,845 |
|
|
69,267 |
|
|
|
2,420 |
|
|
|
|
|
82,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
13,148 |
|
|
(40,412 |
) |
|
|
(2,420 |
) |
|
|
|
|
(29,684 |
) |
Financial income, net |
|
|
462 |
|
|
6,153 |
|
|
|
|
|
|
|
|
|
6,615 |
|
Minority interest |
|
|
|
|
|
(100 |
) |
|
|
|
|
|
|
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income |
|
|
13,610 |
|
|
(34,359 |
) |
|
|
(2,420 |
) |
|
|
|
|
(23,169 |
) |
Taxes on income |
|
|
3,255 |
|
|
300 |
|
|
|
|
|
|
|
|
|
3,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
10,355 |
|
$ |
(34,659 |
) |
|
$ |
(2,420 |
) |
|
|
|
$ |
(26,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common Stock used in computation of basic and diluted loss per share (in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited
pro forma condensed combined consolidated financial statements.
40
PARTHUSCEVA, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30, 2002
(U.S. Dollars in Thousands Except Per Share Data)
|
|
Ceva, Inc.
|
|
Parthus Technologies Plc
|
|
|
Pro forma adjustments
|
|
|
|
|
Pro forma combined
|
|
|
|
Historical
|
|
|
References
|
|
Revenues |
|
$ |
8,682 |
|
$ |
21,491 |
|
|
$ |
|
|
|
|
|
$ |
30,173 |
|
Cost of revenues |
|
|
616 |
|
|
4,644 |
|
|
|
|
|
|
|
|
|
5,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
8,066 |
|
|
16,847 |
|
|
|
|
|
|
|
|
|
24,913 |
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net |
|
|
3,216 |
|
|
12,705 |
|
|
|
|
|
|
|
|
|
15,921 |
|
Marketing and sales |
|
|
1,493 |
|
|
4,436 |
|
|
|
|
|
|
|
|
|
5,929 |
|
General and administration |
|
|
1,355 |
|
|
2,979 |
|
|
|
|
|
|
|
|
|
4,334 |
|
Amortization of other intangible assets |
|
|
|
|
|
680 |
|
|
|
4,195 |
|
|
L, M |
|
|
4,875 |
|
Amortization of noncash stock compensation |
|
|
|
|
|
1,050 |
|
|
|
980 |
|
|
N, O |
|
|
2,030 |
|
Loss on disposal of division |
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
|
213 |
|
Combination costs |
|
|
|
|
|
1,463 |
|
|
|
(1,463 |
) |
|
R |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,064 |
|
|
23,526 |
|
|
|
3,712 |
|
|
|
|
|
33,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
2,002 |
|
|
(6,679 |
) |
|
|
(3,712 |
) |
|
|
|
|
(8,389 |
) |
Financial income, net |
|
|
50 |
|
|
1,122 |
|
|
|
|
|
|
|
|
|
1,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income |
|
|
2,052 |
|
|
(5,557 |
) |
|
|
(3,712 |
) |
|
|
|
|
(7,217 |
) |
Taxes on income |
|
|
542 |
|
|
|
|
|
|
|
|
|
|
|
|
542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,510 |
|
$ |
(5,557 |
) |
|
$ |
(3,712 |
) |
|
|
|
$ |
(7,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common Stock used in computation of basic net loss per share (in
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited
pro forma condensed combined consolidated financial statements.
41
NOTES TO PARTHUSCEVA UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
On April 4, 2002, Ceva, Inc.
(Ceva or the Company) entered into an agreement to acquire 100 percent of the outstanding share capital of Parthus Technologies plc (Parthus), an Irish company, in consideration of the assumed issuance of
8,983,326 shares of Cevas common stock equal to 49.9% of the aggregate number of shares of Cevas common stock outstanding immediately after the acquisition.
The total consideration for the acquisition is approximately $179 million (including $6 million of costs related to the acquisition), which will be financed by an assumed
issuance of 8,983,326 shares of common stock of the Company. However, the actual number of shares of common stock to be issued by Ceva, and the related consideration, will depend on the actual number of ordinary shares of Parthus and Common Stock of
DSP Group (the Parent) outstanding on the closing date of the acquisition, as well as the market price of the Companys common stock at that date. The transaction has been accounted for using the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based upon their fair values at the date the acquisition was completed. Because Ceva had no outstanding shares traded in a public market on the date
the transaction was announced, the value of the consideration given was not objectively evidenced. Accordingly, it was determined, based upon related authoritative guidance, to value this transaction based on the closing price of ParthusCevas
common stock on the consummation date of the transactions. The closing share price of Parthus ADSs on the Nasdaq National Market on July 18, 2002 was used in this pro forma presentation as the best estimate for the value of Cevas common
stock to be issued, as if the consummation of the transactions had occurred on that date, as the value of Cevas common stock to be issued is expected to approximate the value of the purchased Parthus ordinary shares. In a similar manner, the
number of shares used was the number of outstanding shares of DSP Group common stock and Parthus ordinary shares on that same date. As a result, the pro forma financial information presented herein is not necessarily indicative of the final value of
the consideration, which will be determined at the consummation date based on the actual number of shares of ParthusCevas common stock issued and the market price per share of ParthusCevas common stock as of the consummation date. Ceva
will adjust its shares outstanding prior to the distribution by means of an issuance of shares to DSP Group in exchange for the assets contributed, followed by a surrender of shares of Ceva common stock by DSP Group to Ceva for no consideration.
The number of shares to be issued upon the combination was calculated as follows:
Number of Cevas common stock currently issued to DSP Group |
|
20,000,000 |
|
Number of Cevas common stock outstanding following the separation (1:3 ratio) (giving effect to the issuance of 1,000 shares followed by the surrender for cancellation without consideration of all outstanding Cevas common stock not distributed
to DSPs Groups stockholders) |
|
9,019,331 |
(X) |
Percentage of Cevas common stock held by former DSP Groups stockholders post-combination
|
|
50.1 |
% |
Total number of ParthusCevas common stock outstanding post-combination |
|
18,002,657 |
(Y) |
Number of shares to be issued to former Parthus shareholders (constituting 49.9% of the ParthusCevas
common stock post-combination): |
|
8,983,326 |
(Y-X) |
The Ceva options issued in exchange for Parthus options are valued
herein by applying the Black-Scholes valuation model to the Parthus options in accordance with FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensationan Interpretation of APB
25. The calculations were made using the following assumptions: (i) valuation date is July 18, 2002, (ii) market share price is $2.673, which represents the fair value of the Ceva common stock after the $60 million cash capital repayment by
Parthus to its shareholders, (iii) risk-free interest rate is 2%, (iv) volatility is 60%, (v) time to expiration is 5 years and (vi) annual dividend rate is 0%. The calculations were made after taking into consideration the repricing of
42
NOTES TO PARTHUSCEVA UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
certain Parthus options and changes made as a result of Parthus $60 million cash repayment of capital to the Parthus shareholders. The intrinsic value of unvested options of Parthus has
been allocated to deferred compensation. Such deferred compensation was deducted from the fair value of the awards in determining the amount of the purchase price. The final amount of deferred compensation will also be determined on the consummation
date based on the closing price of ParthusCevas common stock on that date. The calculation of the deferred compensation amounting to $666,000 was based on the number of Parthus unvested options outstanding multiplied by the intrinsic value
which is the difference between the market price on that date of $2.673 (July 18, 2002 after taking into consideration the $60 million cash capital repayment by Parthus to its shareholders) and the various exercise prices. This deferred compensation
was deducted from the fair value of the awards in determining the amount of the purchase price.
The purchase
consideration is estimated as follows (U.S. Dollars in thousands):
Common Stock(1) |
|
$ |
158,033 |
|
Assumption of Parthus options |
|
|
15,893 |
|
LessDeferred compensation |
|
|
(666 |
) |
Estimated transaction expenses |
|
|
6,000 |
|
|
|
|
|
|
Total consideration(2) |
|
$ |
179,260 |
|
|
|
|
|
|
(1) The value of the 8,983,326 shares of
Cevas common stock to be issued upon the consummation of the acquisition was calculated based on the market price of Parthus ADSs on July 18, 2002 and after taking into consideration the future repayment of capital by Parthus to its
shareholders in the amount of $60 million, as follows (U.S. Dollars in thousands, except per share data):
Number of Parthus ADSs outstanding* |
|
|
58,936 |
|
Price per ADS |
|
$ |
3.69 |
|
Total value of Parthus ADSs |
|
$ |
218,033 |
|
LessRepayment of capital to be made |
|
$ |
(60,000 |
) |
|
|
|
|
|
Net value |
|
$ |
158,033 |
|
|
|
|
|
|
|
* |
|
Assuming all ordinary shares were held in the form of ADSs |
(2) The preliminary purchase price allocation, which is subject to change based on Cevas final analysis, is as follows (U.S. Dollars in
thousands):
Tangible assets acquired |
|
$ |
75,124 |
|
Intangible assets acquired: |
|
|
|
|
Patents |
|
|
48,752 |
|
Goodwill |
|
|
64,307 |
|
In-process research and development |
|
|
16,480 |
|
Liabilities assumed |
|
|
(22,866 |
) |
Merger and restructuring costs |
|
|
(2,537 |
) |
|
|
|
|
|
Total consideration |
|
$ |
179,260 |
|
|
|
|
|
|
43
NOTES TO PARTHUSCEVA UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill arising from acquisitions would not be amortized. In lieu of amortization, Ceva is required to perform an annual and interim impairment review. If Ceva determines, through the impairment review process, that goodwill has been
impaired, it will record the impairment charge in its statement of operations. Ceva will also assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
2. PRO FORMA ADJUSTMENTS
The amount of the excess cost attributable to in-process research and development of Parthus is estimated to be approximately $16.48 million. This amount will be recorded as a separate item line
In process research and development write-off during the fiscal quarter in which the acquisition is consummated. Stock based compensation expenses related to measurement of vested options granted to Cevas employees is estimated to
be approximately $2.3 million. This amount will be recorded during the fiscal quarter in which the combination is consummated. These expenses have not been included in the pro-forma condensed combined consolidated statements of operations, as
they do not represent a continuing expense.
Adjustments included in the pro forma condensed combined consolidated
balance sheet and statements of operations are summarized as follows:
(A) Distribution
of $60 million cash to Parthus shareholders by means of a repayment of capital prior to the acquisition.
(B) Additional cash investment of $44 million by DSP Group prior to the acquisition (representing DSP Groups contribution of cash equal to $40 million, plus the amount by which transaction expenses have been
estimated to exceed $2 million).
(C) Valuation of Parthus intangible assets
allocated to goodwill of $64.3 million.
(D) Valuation of Parthus intangible assets
allocated to patents of $49 million.
(E) Elimination of Parthus goodwill from
previous acquisitions of $63.6 million.
(F) Elimination of Parthus patents from
previous acquisitions of $3.7 million.
(G) Transaction costs paid by Ceva of $6
million, out of which $1 million were already paid as of June 30, 2002 and included in prepaid expenses.
(H) Transaction costs paid by Parthus of $2.5 million.
(I) Elimination of Parthus shareholders equity accounts of $180 million.
(J) Shares and options issued upon the acquisition by Ceva valued at $173.2 million.
(K) Write-off of estimated acquired in-process research and development of $16.5 million.
(L) Elimination of goodwill and patents amortization recorded in Parthus from previous acquisitions of $9.2 million for the year ended December 31, 2001 and $680,000 for the six month period ended June 30,
2002.
(M) Amortization of patents (amortized over 5 years) of $9.8 million for the
year ended December 31, 2001 and $4.8 million for the six month period ended June 30, 2002.
44
NOTES TO PARTHUSCEVA UNAUDITED PRO FORMA
CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(N) Amortization of deferred stock compensation
arising from the measurement of Cevas options of $1.5 million for the year ended December 31, 2001 and $819,000 for the six month period ended June 30, 2002.
(O) Amortization of deferred stock compensation arising from the options exchanged in the acquisition of $333,000 for the year ended December 31,
2001 and $167,000 for the six month period ended June 30, 2002.
(P) Conversion of
DSP Groups investment account in Ceva into an inter-company account of $6.1 million between Ceva and DSP Group. This amount will be settled between the parties under the terms of the Separation Agreement whereby DSP Group will retain all
rights to Cevas accounts receivable existing on the date of the separation and will also retain certain of Cevas current liabilities existing on the date of separation.
(Q) Conversion of DSP Groups investment account in Ceva into stockholders equity, consisting of the value of property and equipment and
inventory assigned by DSP Group upon consummation of the combination of $2.6 million.
(R) Elimination of combination costs paid by Parthus.
The pro forma combined
stockholders equity, after appropriate reclassifications, comprises the following (U.S. Dollars in thousands):
Common stock, $0.001 par value |
|
$ |
18 |
|
Additional paid in capital |
|
|
220,551 |
|
Deferred compensation |
|
|
(666 |
) |
Accumulated deficit |
|
|
(16,480 |
) |
|
|
|
|
|
Total stockholders equity |
|
$ |
203,423 |
|
|
|
|
|
|
Shares used in the pro forma net loss per share calculation reflect
approximately 18.0 million shares of Common Stock of Ceva, Inc. as if they had been outstanding from January 1, 2001. Pro forma weighted average number of shares used in computing basic and diluted net loss per share excludes employee stock options
outstanding in each period because they are anti-dilutive.
3. SENSITIVITY ANALYSIS:
As explained in Note 1 to these unaudited pro forma condensed combined financial data, the final determination of the purchase
price will be calculated based on the closing market price of ParthusCevas Common Stock at the date of the consummation date of the combination.
The following table represents the anticipated goodwill, total assets and total stockholders equity that would result from different price per share at the date of the closing:
|
|
Price per Parthus ADS (US Dollars)
|
|
|
$2.50
|
|
$3.00
|
|
$3.69
|
|
$4.00
|
|
$4.50
|
|
|
(in thousands) |
Goodwill and other intangible assets |
|
$ |
39,901 |
|
$ |
71,008 |
|
$ |
113,059 |
|
$ |
132,059 |
|
$ |
162,259 |
Total assets |
|
|
165,032 |
|
|
196,139 |
|
|
238,190 |
|
|
257,190 |
|
|
287,390 |
Stockholders equity |
|
$ |
130,265 |
|
$ |
161,372 |
|
$ |
203,423 |
|
$ |
222,423 |
|
$ |
252,623 |
45
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CEVA
Selected Historical Consolidated Financial
Data of Ceva
The following selected historical consolidated financial data of the DSP cores licensing
business of DSP Group transferred to Ceva should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and related notes to our consolidated financial statements and Managements Discussion
and Analysis of Financial Condition and Results of Operations.
The consolidated statement of income data
for 1999 through 2001 and the consolidated balance sheet data as of December 31, 2000 and 2001 are derived from, and are qualified by reference to, the audited consolidated financial statements included elsewhere in this prospectus, which have been
audited by Kost Forer & Gabbay, a member of Ernst & Young Global, our independent auditors. The selected consolidated statement of income data for 1997 and 1998 and the selected consolidated balance sheet data as of December 31, 1997 through
1999 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated financial data as of June 30, 2002 and for the six months ended June 30, 2001 and 2002 are derived from unaudited financial
statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a relevant fair presentation of our financial position and operating results for these periods.
The financial information below reflects the separation of the DSP cores licensing business from DSP Group, and is presented as if this business had operated as a separate entity throughout the relevant periods. This information has
been derived from the consolidated financial statements of DSP Group using the historical results of operations and historical bases of assets and liabilities of our DSP cores licensing business. These historical results may not necessarily be
indicative of what our results of operations and financial position would have been had this business operated as a separate company during the periods presented, nor are they an indicator of future performance.
|
|
Year Ended December 31,
|
|
Six Months Ended June
30,
|
|
|
1997
|
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2001
|
|
2002
|
|
|
(in thousands) |
|
|
Consolidated Statement of Income Data: |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses and royalties |
|
$ |
6,790 |
|
|
$ |
11,614 |
|
$ |
16,249 |
|
$ |
19,951 |
|
$ |
20,959 |
|
$ |
10,666 |
|
$ |
6,995 |
Technical support, maintenance and other |
|
|
1,975 |
|
|
|
1,630 |
|
|
1,952 |
|
|
2,959 |
|
|
4,285 |
|
|
2,322 |
|
|
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
8,765 |
|
|
|
13,244 |
|
|
18,201 |
|
|
22,910 |
|
|
25,244 |
|
|
12,988 |
|
|
8,682 |
Cost of revenues |
|
|
288 |
|
|
|
280 |
|
|
207 |
|
|
410 |
|
|
1,251 |
|
|
607 |
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
8,477 |
|
|
|
12,964 |
|
|
17,994 |
|
|
22,500 |
|
|
23,993 |
|
|
12,381 |
|
|
8,066 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net |
|
|
2,692 |
|
|
|
3,404 |
|
|
3,230 |
|
|
4,835 |
|
|
5,095 |
|
|
2,688 |
|
|
3,216 |
Selling and marketing |
|
|
1,012 |
|
|
|
1,137 |
|
|
1,997 |
|
|
2,466 |
|
|
2,911 |
|
|
1,330 |
|
|
1,493 |
General and administrative |
|
|
1,877 |
|
|
|
2,020 |
|
|
2,480 |
|
|
2,810 |
|
|
2,839 |
|
|
1,354 |
|
|
1,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
5,581 |
|
|
|
6,561 |
|
|
7,707 |
|
|
10,111 |
|
|
10,845 |
|
|
5,372 |
|
|
6,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
2,896 |
|
|
|
6,403 |
|
|
10,287 |
|
|
12,389 |
|
|
13,148 |
|
|
7,009 |
|
|
2,002 |
Financial income, net |
|
|
92 |
|
|
|
174 |
|
|
292 |
|
|
322 |
|
|
462 |
|
|
221 |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income |
|
|
2,988 |
|
|
|
6,577 |
|
|
10,579 |
|
|
12,711 |
|
|
13,610 |
|
|
7,230 |
|
|
2,052 |
Taxes on income (benefit) |
|
|
(397 |
) |
|
|
359 |
|
|
1,453 |
|
|
3,438 |
|
|
3,255 |
|
|
1,123 |
|
|
542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,385 |
|
|
$ |
6,218 |
|
$ |
9,126 |
|
$ |
9,273 |
|
$ |
10,355 |
|
$ |
6,107 |
|
$ |
1,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
June 30, 2002
|
|
|
1997
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
|
|
(in thousands) |
|
|
Consolidated Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
94 |
|
$ |
893 |
|
$ |
1,173 |
|
$ |
411 |
|
$ |
1,996 |
|
$ |
6,055 |
Total assets |
|
$ |
2,093 |
|
$ |
3,831 |
|
$ |
6,915 |
|
$ |
9,615 |
|
$ |
12,197 |
|
$ |
14,544 |
Total Stockholders equity and Parent Company investment |
|
$ |
709 |
|
$ |
1,680 |
|
$ |
2,556 |
|
$ |
2,020 |
|
$ |
4,345 |
|
$ |
8,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF PARTHUS
The consolidated financial data set forth below for each of the years in the five-year period ended December 31, 2001,
have been derived from Parthus audited consolidated financial statements, which appear elsewhere in this prospectus. The consolidated financial data for the six month periods ended June 30, 2001 and 2002 have been derived from our unaudited
interimconsolidated financial statements also appearing in this prospectus. The interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our results for the unaudited
six month periods ended June 30, 2001 and 2002. Parthus has prepared its consolidated financial statements in accordance with U.S. generally accepted accounting principles, and Parthus financial statements have been audited by KPMG,
independent chartered accountants. The data set forth below should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and Parthus audited consolidated financial
statements and the related notes for the three years ended December 31, 2001 included elsewhere in this prospectus.
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2001
|
|
|
2002
|
|
|
|
(in thousands, except per share data) |
|
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP license |
|
$ |
|
|
|
$ |
119 |
|
|
$ |
5,214 |
|
|
$ |
16,059 |
|
|
$ |
29,998 |
|
|
$ |
13,016 |
|
|
$ |
18,766 |
|
IP creation |
|
|
12,820 |
|
|
|
15,450 |
|
|
|
13,826 |
|
|
|
12,433 |
|
|
|
6,756 |
|
|
|
4,302 |
|
|
|
1,427 |
|
Hard IP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,428 |
|
|
|
4,165 |
|
|
|
2,625 |
|
|
|
1,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
12,820 |
|
|
|
15,569 |
|
|
|
19,040 |
|
|
|
31,920 |
|
|
|
40,919 |
|
|
|
19,943 |
|
|
|
21,491 |
|
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP license |
|
|
|
|
|
|
|
|
|
|
983 |
|
|
|
2,960 |
|
|
|
5,052 |
|
|
|
2,149 |
|
|
|
2,943 |
|
IP creation |
|
|
7,459 |
|
|
|
8,621 |
|
|
|
8,325 |
|
|
|
8,334 |
|
|
|
4,751 |
|
|
|
3,034 |
|
|
|
1,002 |
|
Hard IP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,116 |
|
|
|
2,261 |
|
|
|
1,423 |
|
|
|
699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
7,459 |
|
|
|
8,621 |
|
|
|
9,308 |
|
|
|
13,410 |
|
|
|
12,064 |
|
|
|
6,606 |
|
|
|
4,644 |
|
Gross margin |
|
|
5,361 |
|
|
|
6,948 |
|
|
|
9,732 |
|
|
|
18,510 |
|
|
|
28,855 |
|
|
|
13,337 |
|
|
|
16,847 |
|
Research and development |
|
|
1,086 |
|
|
|
3,372 |
|
|
|
7,128 |
|
|
|
19,090 |
|
|
|
29,994 |
|
|
|
13,744 |
|
|
|
13,516 |
|
Sales and marketing |
|
|
812 |
|
|
|
1,200 |
|
|
|
2,479 |
|
|
|
9,012 |
|
|
|
11,054 |
|
|
|
5,604 |
|
|
|
4,554 |
|
General and administrative |
|
|
1,031 |
|
|
|
1,369 |
|
|
|
2,994 |
|
|
|
9,741 |
|
|
|
7,364 |
|
|
|
3,790 |
|
|
|
3,100 |
|
Amortization of goodwill & intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,081 |
|
|
|
9,195 |
|
|
|
1,674 |
|
|
|
680 |
|
In-process research & development charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,895 |
|
|
|
|
|
|
|
|
|
Restructuring charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
765 |
|
|
|
|
|
|
|
|
|
ParthusCeva merger costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,463 |
|
Loss on disposal of facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
2,929 |
|
|
|
5,941 |
|
|
|
12,601 |
|
|
|
38,924 |
|
|
|
69,267 |
|
|
|
24,812 |
|
|
|
23,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
2,432 |
|
|
|
1,007 |
|
|
|
(2,869 |
) |
|
|
(20,414 |
) |
|
|
(40,412 |
) |
|
|
(11,475 |
) |
|
|
(6,679 |
) |
Interest income, net |
|
|
56 |
|
|
|
127 |
|
|
|
145 |
|
|
|
5,346 |
|
|
|
6,394 |
|
|
|
3,784 |
|
|
|
1,337 |
|
Foreign exchange gain (loss) |
|
|
|
|
|
|
|
|
|
|
241 |
|
|
|
434 |
|
|
|
(241 |
) |
|
|
(89 |
) |
|
|
(215 |
) |
Minority interest |
|
|
(183 |
) |
|
|
(186 |
) |
|
|
(75 |
) |
|
|
(204 |
) |
|
|
(100 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
2,305 |
|
|
|
948 |
|
|
|
(2,558 |
) |
|
|
(14,838 |
) |
|
|
(34,359 |
) |
|
|
(7,880 |
) |
|
|
(5,557 |
) |
Provision for income taxes |
|
|
(312 |
) |
|
|
(231 |
) |
|
|
|
|
|
|
(1,205 |
) |
|
|
(300 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
1,993 |
|
|
|
717 |
|
|
|
(2,558 |
) |
|
|
(16,043 |
) |
|
|
(34,659 |
) |
|
|
(8,180 |
) |
|
|
(5,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends |
|
|
|
|
|
|
(29 |
) |
|
|
(54 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to ordinary shareholders |
|
$ |
1,993 |
|
|
$ |
688 |
|
|
$ |
(2,612 |
) |
|
$ |
(16,058 |
) |
|
$ |
(34,659 |
) |
|
$ |
(8,180 |
) |
|
$ |
(5,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per ordinary share Basic and diluted |
|
$ |
0.006 |
|
|
$ |
0.002 |
|
|
$ |
(0.007 |
) |
|
$ |
(0.034 |
) |
|
$ |
(0.062 |
) |
|
$ |
(0.015 |
) |
|
$ |
(0.010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per ordinary share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
314,022,800 |
|
|
|
317,075,870 |
|
|
|
362,473,760 |
|
|
|
471,389,525 |
|
|
|
558,946,827 |
|
|
|
538,661,930 |
|
|
|
583,404,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
356,688,700 |
|
|
|
386,074,820 |
|
|
|
362,473,760 |
|
|
|
471,389,525 |
|
|
|
558,946,827 |
|
|
|
538,661,930 |
|
|
|
583,404,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Non-cash stock compensation expenses for the years ended December 31, 1999, 2000
and 2001 and for the six months ended June 30, 2001 and 2002 have been recorded as follows:
|
|
Year ended December 31,
|
|
Six months ended June 30,
|
|
|
1999
|
|
2000
|
|
2001
|
|
2001
|
|
2002
|
|
|
(in thousands) |
Research and development |
|
$ |
36 |
|
$ |
923 |
|
$ |
1,416 |
|
$ |
590 |
|
$ |
811 |
Sales and marketing |
|
|
12 |
|
|
120 |
|
|
197 |
|
|
83 |
|
|
118 |
General and administrative |
|
|
4 |
|
|
4,497 |
|
|
193 |
|
|
83 |
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52 |
|
$ |
5,540 |
|
$ |
1,806 |
|
$ |
756 |
|
$ |
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parthus adopted Statement of Financial Accounting Standards,
otherwise known as SFAS, No. 142 effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but instead is tested for impairment at least annually. The following table provides a reconciliation of reported net income (loss) to
adjusted net income (loss) and net income (loss) per ordinary share excluding goodwill amortization for all periods presented.
|
|
Year ended December 31,
|
|
|
Six months ended June 30,
|
|
|
|
1997
|
|
1998
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2001
|
|
|
2002
|
|
|
|
(in thousands, except per share data) |
|
Reported net income (loss) |
|
$ |
1,993 |
|
$ |
688 |
|
$ |
(2,612 |
) |
|
$ |
(16,058 |
) |
|
$ |
(34,659 |
) |
|
$ |
(8,180 |
) |
|
$ |
(5,557 |
) |
Add back goodwill amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,824 |
|
|
|
942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
1,993 |
|
$ |
688 |
|
$ |
(2,612 |
) |
|
$ |
(16,058 |
) |
|
$ |
(26,835 |
) |
|
$ |
(7,238 |
) |
|
$ |
(5,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per ordinary share |
|
$ |
0.006 |
|
$ |
0.002 |
|
$ |
(0.007 |
) |
|
$ |
(0.034 |
) |
|
$ |
(0.062 |
) |
|
$ |
(0.015 |
) |
|
$ |
(0.010 |
) |
Add back goodwill amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.014 |
|
|
|
0.004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted basic and diluted net income (loss) per ordinary share |
|
$ |
0.006 |
|
$ |
0.002 |
|
$ |
(0.007 |
) |
|
$ |
(0.034 |
) |
|
$ |
(0.048 |
) |
|
$ |
(0.011 |
) |
|
$ |
(0.010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
June 30, 2002
|
|
|
1997
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
|
|
(in thousands) |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,415 |
|
$ |
14,350 |
|
$ |
10,314 |
|
$ |
159,865 |
|
$ |
121,503 |
|
$ |
114,101 |
Working capital |
|
|
3,365 |
|
|
13,117 |
|
|
8,057 |
|
|
147,386 |
|
|
107,273 |
|
|
101,141 |
Total assets |
|
|
7,626 |
|
|
19,208 |
|
|
16,900 |
|
|
179,246 |
|
|
205,820 |
|
|
202,455 |
Minority interest |
|
|
755 |
|
|
989 |
|
|
909 |
|
|
1,001 |
|
|
|
|
|
|
Redeemable shares |
|
|
987 |
|
|
2,598 |
|
|
1,635 |
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
3,558 |
|
$ |
12,109 |
|
$ |
7,881 |
|
$ |
157,516 |
|
$ |
182,087 |
|
$ |
179,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below of the financial condition and results of operations of our DSP cores licensing business assumes that this business
had operated as a stand-alone entity for the periods presented. This discussion does not give effect to the combination of this business with Parthus.
The discussion below of the financial condition and results of operations of Parthus does not give effect to the combination of Parthus with the DSP cores licensing business.
You should read the following discussion together with Cevas and Parthus consolidated financial statements and the related
notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result
of various factors, including those set forth under Risk Factors and elsewhere in this prospectus.
DSP Cores
Licensing Business Overview
Our DSP cores licensing business develops and licenses designs of programmable
digital signal processor (DSP) cores and DSP core-based sub-systems. A programmable DSP is a special-purpose, software-controlled processor that, through complex mathematical calculations, analyzes, manipulates and enhances digital voice, audio and
video signals. The programmable DSP cores we design are used as the central processors in semiconductor chips made for specific applications. These chips are used in a wide variety of electronic devices, including digital cellular telephones,
modems, hard disk drive controllers, MP3 players, voice over packet products and digital cameras, and are critical to the performance of the electronic products in which they are used. A DSP core-based sub-system incorporates additional hardware
blocks required as interfaces from the DSP core for the overall system.
Our DSP cores product line, first
introduced in 1991, consists of a family of five DSP core designs and one DSP core-based sub-system, the XpertTeak, that are sold under the SmartCores brand name throughout the world. Each of our SmartCores products offers a different balance of
high performance, power-efficiency and cost-effectiveness. Our designs are independent of specific semiconductor manufacturing processes, and can therefore be used by a wide variety of customers. The DSP cores we design are appropriate for use in
both current and emerging applications requiring digital signal processing. We market our designs as well as a wide array of software and hardware development tools and technical support services.
We license our designs to leading semiconductor companies throughout the world. These companies incorporate our cores and core-based
subsystems 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 designs to OEMs directly. To date, we have
licensed our cores to more than 60 licensees, including leading semiconductor companies and OEMs such as Atmel, Fujitsu, Infineon Technologies, Kawasaki, LSI Logic, Mitsubishi, National Semiconductor, NEC, Oki, Philips Semiconductors, Samsung,
Seiko-Epson, Sony and Tower Semiconductors, some of which have multiple licenses with us. We generate our revenues in our DSP cores licensing business from license and maintenance and support fees and from royalties. Our goal is to establish our
licensable DSP cores as the standard in DSP-based chips for high-volume and emerging digital signal processing applications.
For the purpose of separating the DSP cores licensing business and technology activities into an independent company, Ceva was incorporated in Delaware in November 1999 under the name DSP Cores, Inc. as a wholly-owned subsidiary of
DSP Group and changed our name to Ceva, Inc. in April 2002. We have two wholly-owned subsidiaries, DSP Ceva, Inc., a Delaware corporation, and ParthusCeva, Ltd., an Israeli company wholly owned by DSP Ceva. DSP Ceva holds our intellectual property
rights in the United States and conducts our marketing,
49
sales and technical support for our U.S. customers. In addition to conducting our research and development activities, ParthusCeva, Ltd. is engaged in marketing, sales, technical support and
certain general and administrative functions associated with the sale of our products in areas other than the United States. In addition, we utilize the services of DSP Group and its subsidiaries in Japan and France for sales and technical support
activities, and their costs are allocated to us under the transition service agreements with DSP Group and its subsidiaries. For additional information relating to the terms of various agreements we entered into with DSP Group in connection with the
separation of the DSP cores licensing business from DSP Group, including the separation agreement, the transition services agreements and the technology transfer agreements, please see the section captioned Separation of DSP Cores Licensing
Business from DSP Group.
The financial information presented in this prospectus and Cevas
consolidated financial statements reflect its separation from DSP Group and have been prepared as if the separation of the DSP cores licensing business from DSP Group had been in effect throughout the relevant periods. The historical consolidated
financial statements show the DSP cores licensing business as a carved out entity from the consolidated financial statements of DSP Group, using the historical results of operations and historical bases of assets and liabilities of our DSP cores
licensing business as described in this prospectus. This information may not be indicative of our future financial position, results of operations or cash flows, nor is it necessarily indicative of what our financial position, results of operations
or cash flows would have been had we been a separate, stand-alone entity for the periods presented. We have not made adjustments to our historical financial information to reflect the significant changes in the cost structure, funding and operations
which will result from the separation of the DSP cores licensing business from DSP Group and the combination with Parthus, including any increased costs associated with reduced economies of scale, increased marketing expenses related to building our
brand, and increased costs associated with being a stand-alone, publicly traded company. Additionally, upon the termination of the transition services agreements with DSP Group and its subsidiaries, we may be required to incur additional expenses
for services that DSP Group and its subsidiaries have agreed to provide pursuant to the transition services agreements, including general and administrative services, information services, sales and marketing services and certain research and
development services, because the prices charged to us by DSP Group and its subsidiaries for such services may be lower than the prices that we may be required to pay third parties for similar services or the costs of similar services if we
undertake them ourselves. As a result, the cost of retaining such services after the termination of the transaction services agreements with DSP Group and its subsidiaries may be higher than the cost allocation for such services reflected in our
historical financial statements. However, we do not believe that such additional costs, if any, will be material.
Cevas
Critical Accounting Policies and Estimates
Our discussion and analysis of the financial condition and results
of operations of our DSP cores licensing business are based upon the consolidated financial statements of this business, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to bad debts, taxes on income, financing operations, warranty obligations and contingencies and litigation. Ceva based its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In
December 2001, the Securities and Exchange Commission requested that all registrants discuss their critical accounting policies in the discussion and analysis of their financial condition and results of operations. The Securities and
Exchange Commission indicated that a critical accounting policy is one which is both important to the portrayal of a companys financial condition and results and requires managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Cevas significant accounting policies are fully described in Note 2 to its consolidated financial statements. Not all of these significant accounting policies, however, require management to make difficult, complex or
50
subjective judgements or estimates. We believe that the DSP cores licensing business accounting policies relating to revenue recognition, business combination, goodwill and other
identifiable intangibles and options to employees described below fit the definition of critical accounting policies.
Revenue Recognition
The DSP cores licensing business reports revenue in two categories:
licensing and royalties, and technical support and other. The first, licensing and royalty revenues are derived from the following: (i) licensing revenues from our license agreements; and (ii) royalty revenues when our licensees sell products
incorporating DSP cores technology. Technical support and other revenues are derived from providing training, maintenance and technical support services to our DSP cores licensing customers. All license, royalties and technical support agreements
are denominated in U.S. dollars. We recognize revenues based upon the country of origin of our licensees. Therefore, our geographic revenue stream for the DSP cores business fluctuates from period to period depending upon the country of origin of
new license agreements signed and recognized in a given period.
We recognize software revenue for the DSP cores
licensing business in accordance with SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. Under SOP 97-2, revenues are
recognized when: (1) collection is probable; (2) delivery has occurred; (3) the license fee is otherwise fixed or determinable; and (4) persuasive evidence of an arrangement exists and no further obligation exists. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. We have also adopted SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions, for all multiple element transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized under the residual method when vendor specific objective
evidence, otherwise known as 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 (maintenance and technical support) is determined
based on the renewal rate or on the price charged for the undelivered element when sold separately. SOP 97-2 specifies that extended payment terms in a software licensing arrangement may indicate that the software license fees are not 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. However, SOP 97-2 specifies that if a company has a standard business practice of using
extended payment terms in software licensing arrangements and has a history of successfully collecting the software license fees under the original terms of the software licensing arrangement without making concessions, the company should recognize
the software license fees when all other SOP 97-2 revenue recognition criteria are met. We have concluded that, in our DSP cores licensing business, for certain software arrangements with extended payment terms, the fixed or determinable
presumption has been overcome and software license fees have been recognized upon meeting the remaining SOP 97-2 revenue recognition criteria. Maintenance and technical support revenues included in multiple element arrangements in our DSP cores
licensing business are deferred and recognized on a straight-line basis over the term of the maintenance and the support agreement or when such services are performed.
Business Combinations
We
account for the combination with Parthus utilizing the purchase method of accounting with Ceva treated as the accounting acquirer. The purchase method of accounting requires the determination of the acquiring entity in all business combinations.
Statement 141 provides that all pertinent facts and circumstances should be considered. Statement 141 provides, in particular, a listing of facts and circumstances for consideration in determining the acquirer. Following is an analysis of the such
facts and circumstances as applicable to the combination:
Voting Rights
DSP Group stockholders will hold shares representing no less than 50.1% of the ParthusCeva common
stock issued and outstanding immediately following the combination. Former Parthus shareholders will receive
51
ParthusCeva common stock representing no more than 49.9% of the ParthusCeva common stock issued and outstanding immediately following the combination. Taking into account the exercise of options
granted by DSP Group and options and contingent share issuances granted by Parthus, DSP Group stockholders will hold shares representing between 50.1% to 51% of the ParthusCeva common stock in any scenario.
According to this criteria, Ceva is the legal and accounting acquirer.
Minority voting interest
No significant/large minority voting interest will exist in the combined company (ParthusCeva). The largest stockholder of DSP Group will hold approximately 4.5% in the combined company and the largest
percentage of voting interests held by one former shareholder of Parthus will be approximately 9% in the combined company. The particular former shareholder of Parthus agreed not to acquire shares of ParthusCeva during a period of one year from the
effective date of the combination (except for receipt of stock options meeting certain requirements). Immediately following the combination, no other stockholder of the combined company will hold 5% or more of the issued and outstanding common stock
of ParthusCeva.
Since immediately following the combination no shareholders group will hold a significant
minority voting interest and since both of the largest existing voting interests will be approximately the same, this criteria does not support either Ceva or Parthus as the acquirer for accounting purposes.
Composition of the Board of Directors
The board of directors of ParthusCeva will comprise eight members in total, including five non-executive directors. Four directors will be representatives of DSP Group
stockholders and four directors will be representatives of former Parthus shareholders. Except for specific circumstances, generally, matters brought before the board of directors will be made by vote of a majority of the directors.
It has been agreed by the parties that a two year voting agreement will be signed by certain former shareholders of Parthus and
stockholders of DSP Group who will hold in the aggregate approximately 17.5% and approximately 2.7% of the ParthusCeva shares as of the date of the combination (although the voting agreements apply to any additional shares subsequently acquired by
such stockholders, including upon the exercise of options), respectively.
The voting agreement obligates them to
vote together for the election of nominees to serve as members of the ParthusCeva board of directors. Further, with respect to all other matters to be voted on by stockholders, the stockholder must vote either: (X) in accordance with the
recommendations of the ParthusCeva board of directors, or (Y) for or against any such matter in the same proportion as the shares owned by all other stockholders that are voted with respect to such matters, if the board of directors makes no such
recommendation.
This criteria does not support that either Ceva or Parthus is the acquirer for accounting
purposes.
Senior Management
Key executives of ParthusCeva will include four executives from DSP Group and five executives from Parthus:
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DSP Group executives will hold the positions of Chairman of the board of directors; Executive Vice PresidentBusiness Development and Chief Technology
Officer; Vice President and General Manager of the DSP Intellectual Property Licensing Division; and Chief ScientistDSP Technologies. |
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Parthus executives will hold the positions of President and Chief Executive Officer, who will also be a board member of ParthusCeva; Vice Chairman; Executive
Vice President and Chief Operating Officer; Chief Financial Officer; and Vice PresidentSales. |
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In addition, ParthusCeva will have a management committee to decide on and be
responsible for significant issues. This committee will comprise two executives from DSP Group and two executives from Parthus. The Chief Financial Officer of ParthusCeva will be entitled to attend management committee meetings on a non-voting
basis. The management committee is to be consulted with respect to any proposed budget, business plan, major policy or business decision before implementation thereof by ParthusCeva or submission thereof to the board for review or approval.
Since the management committee will include two executives from DSP Group and two executives from Parthus, and
since key executives of ParthusCeva will include four persons from DSP Group and five persons from Parthus, but with the Chairman from DSP Group, this criteria does not support that either Ceva or Parthus is the acquirer for accounting purposes.
Premium Over the Market
FAS 141 indicates that this criteria can be used only if the two combining companies are public companies.
Only Parthus is a public company. Therefore, this criteria is irrelevant to this case.
Combining companies assets, revenues, and earnings
The revenues and net tangible assets of Parthus are greater then those of Ceva. However the gross margin and net income of Ceva
significantly exceed those of Parthus.
This criteria does not support either Ceva or Parthus as the acquirer for
accounting purposes but in an IP company net income is a more important factor than tangible assets.
Distribution of cash
Immediately prior to the closing,
Parthus will distribute a $60 million cash repayment of capital to its shareholders.
The total consideration
received by Parthus shareholders includes both cash and shares. According to this criteria, Ceva is the accounting acquirer.
Ceva is the issuer of the shares in the transaction, and accordingly the legal acquirer.
The FASB notes that in general no one factor set force above is more important than another in identifying the acquirer. Based on the above guidance and analysis, considering especially the fact that DSP Groups stockholders
will hold more than 50% (on an actual and on a fully diluted basis) of the voting stock of ParthusCeva, the existence of the management committee, that the Chairman of the board of directors of ParthusCeva is currently an employee of DSP Group, the
existence of voting agreements between the largest minority stockholders of ParthusCeva, that the former shareholders of Parthus will receive a $60 million cash repayment of capital and that Ceva is the legal acquirer, we came to the conclusion that
the acquirer for accounting purposes is Ceva.
The business combination of Parthus and Ceva requires management to
estimate the fair value of the assets acquired and liabilities assumed in the combination. These estimates of fair value are based on our business plan for the entities acquired including redundancies, restructuring, use of assets acquired and
assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. Should the actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair values would be
required. If a change in estimate occurs after one year of the acquisition, the change would be recorded in our statement of operations.
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Goodwill and Other Identifiable Intangibles
We assess the impairment of goodwill and other identifiable intangibles whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Some factors we consider important which could trigger an impairment review include the following:
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Significant under performance relative to expected historical or projected future operating results; |
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Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and |
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Significant negative industry or economic trends. |
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 we will cease amortizing goodwill arising from acquisitions completed prior to July 1, 2001. In
lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. If we determine through the impairment review process that goodwill has been impaired, we would record
the impairment charge in our statement of operations.
Accounting for Stock Based Compensation
In accordance with the provisions of the Financial Accounting Standards Boards (FASB)
Statement of Accounting Standard No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), the Company has elected to follow the Accounting Principles Boards Opinion No. 25, Accounting for Stock Issued to
Employees and the related interpretations (APB No. 25) in accounting for its employee stock based compensation plan. Because the transfer of the assets and liabilities and employees from DSP Group to Ceva has not yet occurred, the
measurement date for valuing the options that had previously granted to Ceva employees will be taking place upon the separation. Consequently, on the measurement date (i.e., separation date) compensation expense, which will be calculated as the
difference between actual fair value of the Companys shares on the separation date (i.e., first trading date) and the exercise prices of the options multiplied by the number of options granted to Ceva employees, may need to be recognized. For
the vested options the stock compensation expenses will be recorded immediately on the separation date. For the unvested options, the compensation expenses will be recorded ratably over the remaining vesting period.
Results of Operations for the DSP Cores Licensing Business
Three months ended June 30, 2002 and 2001
Total
Revenues
The total revenues for the DSP cores licensing business decreased to $4.6 million for the three
months ended June 30, 2002 from $7.0 million for the three months ended June 30, 2001. This decrease of 35% was due to our decreased revenues from licensing and royalty revenues, as well as decreased technical support and other revenues primarily
due to the slowdown in the global economy, which affected our ability to sign new license agreements.
Licensing
and royalty revenues for the DSP cores licensing business accounted for 82% of the total revenues for the DSP cores licensing business for the second quarter of 2002, as compared to 83% of the total revenues for the second quarter of 2001. Technical
support and other revenues in the DSP cores licensing business accounted for 18% of the total revenues for the DSP cores licensing business for the second quarter of 2002, as compared to 17% of the total revenues for the second quarter of 2001.
We had two customers who generated more than 58% of our revenues for the three months ended June 30, 2002, with
revenues from these two licensees accounting for 35% and 23% of the total revenues for the DSP cores licensing business. Revenues from three licensees generated more than 65% of our revenues for the three
54
months ended June 30, 2001, with revenues from these three licensees accounting for 34%, 18% and 13% of total revenues for the DSP cores licensing business in that period. Generally, the
composition of the significant customers that generate greater than 10% of revenues in our DSP cores licensing business varies quarter to quarter because we generally recognize a substantial amount of the revenues derived from a license agreement
during the quarter that the DSP cores technology is delivered to the customer, which is typically during the quarter of signing of the license agreement. As a result, our revenues in any given quarter for this line of business are largely dependent
on our ability to enter into license agreements with new customers.
Licensing and Royalty Revenues
Licensing and royalty revenues for our DSP cores licensing business decreased in the second quarter of
2002 to $3.8 million from $5.9 million in the same quarter of 2001. This decrease of 35% was primarily due to decreases in both licensing revenues and royalty revenues.
Licensing Revenues
Licensing revenues for the DSP cores licensing business decreased to $3.0 million for the three months ended June 30, 2002 from $4.1 million for the three months ended June 30, 2001. The decrease of approximately 27% was
primarily due to additional revenues received from existing license agreements in the second quarter of 2001, as compared to the same period in 2002, partially offset by additional revenues received from three new license agreements in the second
quarter of 2002 as compared to two new license agreements in the same period in 2001. We believe our ability to enter into new license agreements in 2002 was particularly hindered by the slowdown in the global wireless and cellular market.
Unit and Prepaid Royalty Revenues
Unit and prepaid royalty revenues for the DSP cores licensing business were $0.8 million for the three months ended June 30, 2002 and $1.8 million for the three months
ended June 30, 2001. We had nine licensees paying unit royalties for the three months ended June 30, 2002 as compared to seven licensees paying unit royalties in the DSP cores licensing business in the three months ended June 30, 2001. The
decrease was primarily due to lower per-unit royalties from some of our license agreements due to volume pricing, as the overall quantities of products shipped by our licensees, mostly in the cellular and hard disk drive markets, increased in the
second quarter of 2002 as compared to the same period in 2001. Royalty-generating licensees reported sales of 19.4 million chips incorporating our DSP cores technology for the three months ended June 30, 2002 and 17.6 million chips for the three
months ended June 30, 2001.
One royalty-generating licensee accounted for more than 58% of the total revenues for
the DSP cores licensing business for the three months ended June 30, 2002.
Technical Support and
Other Revenues
Technical support and other revenues for the DSP cores licensing business decreased to
$0.8 million for the three months ended June 30, 2002 from $1.2 million for the three months ended June 30, 2001. The decrease of approximately 31% was due primarily to provision of fewer technical support and related services to our licensees in
2002 as compared to 2001, primarily as a result of the slowdown in the global wireless and cellular markets.
Geographic Revenue Analysis
For the three months ended June 30, 2002, revenues for
the DSP cores licensing business in the United States represented 35% of total revenues for the DSP cores licensing business, while Japan represented 10%, the rest of Asia represented 9% and Europe and the rest of the world represented 46% of our
total revenues. For the three months ended June 30, 2001, revenues for the DSP cores licensing business in the United States represented 7% of the total revenues, while Japan represented 15%, the rest of Asia represented 19% and Europe and the rest
of the world represented 59% of the total revenues.
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Cost of Revenues
Cost of revenues for the DSP cores licensing business was $305,000 for the three months ended June 30, 2002, as compared to $341,000 for
the three months ended June 30, 2001. The decrease of approximately 11% in cost of revenues was primarily due to high costs of manufacturing development boards and additional development tools in the second quarter of 2001, as compared to the same
period in 2002, as a result of higher level of sales of these tools in the second quarter of 2001 as compared to the same period in 2002. Cost of revenues for the DSP cores licensing business accounted for 7% of the total revenues in the DSP cores
licensing business for the three months ended June 30, 2002, as compared to 5% of total revenues for the three months ended June 30, 2001. The increase was primarily due to lower revenues for our DSP cores licensing business in the three months
ended June 30, 2002, as compared to the same period in 2001. The above resulted in total gross profits of 93% and 95% for the three months ended June 30, 2002 and 2001, respectively. Cost of revenues for the DSP cores licensing business consisted
mainly of payroll of employees involved in providing various technical and support services to our customers and associated facilities expenses.
Research and Development Expenses, Net
Research and
development expenses for the DSP cores licensing business, net of related research grants we received from the Office of Chief Scientist magnet programs, were $1.6 million for the three months ended June 30, 2002, as compared to $1.5 million
for the three months ended June 30, 2001. For the three months ended June 30, 2002, we recorded $318,000 in research grants from the magnet programs for the DSP cores licensing business. For the three months ended June 30, 2001, we recorded
$56,000 in these research grants. We have no obligation to pay royalties on the intellectual property developed using these research grants, and all monies received are non-refundable. The increase of approximately 6% in research and development
expenses in 2002, as compared to 2001, was primarily due to an increase in engineering personnel by 8% and additional investment in the development of our new XpertTeak platform. Research and development expenses as a percentage of total revenues
within the DSP cores licensing business was 34% for the three months ended June 30, 2002 as compared to 21% for the three months ended June 30, 2001. The increase was primarily due to our lower revenues for the three months ended June 30, 2002, as
compared to the same period in 2001. Research and development expenses consisted mainly of payroll for employees involved in research and development, depreciation and maintenance fees relating to equipment and software tools and associated
facilities expenses.
Sales and Marketing Expenses
Sales and marketing expenses for the DSP cores licensing business increased by 13% to $790,000 for the three months ended June 30, 2002
from $702,000 for the same quarter in 2001. This increase was due primarily to an increase in the number of sales and marketing personnel as a result of increased sales and marketing efforts for our DSP cores licensing business. Sales and marketing
expenses as a percentage of total revenues for the DSP cores licensing business were 17% for the three months ended June 30, 2002 as compared to 10% for the three months ended June 30, 2001. The increase was primarily due to our lower revenues for
the three months ended June 30, 2002, as compared to the same period in 2001. Sales and marketing expenses for our DSP cores licensing business consisted mainly of payroll of direct sales and marketing employees, sales commissions, production of
marketing literature and trade show expenses.
General and Administrative Expenses
General and administrative expenses for the DSP cores licensing business were $662,000 for the three months ended June 30, 2002
as compared to $674,000 in the three months ended June 30, 2001. General and administrative expenses as a percentage of total revenues for the DSP cores licensing business were 14% for the three months ended June 30, 2002, as compared to 10% for the
three months ended June 30, 2001. The increase was primarily due to our lower revenues for the three months ended June 30, 2002, as compared to the same period in 2001. General and administrative expenses for our DSP cores licensing business
consisted mainly of allocated employee, accounting, legal, facility and maintenance costs.
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Financial Income, Net
Financial income, net, for the DSP cores licensing business was $32,000 for the three months ended June 30, 2002, as compared to $115,000 for the three months ended
June 30, 2001. This decrease was due primarily to our lower net income for the three months ended June 30, 2002, as compared to the same period in 2001, which resulted from less income for investment purposes.
Taxes on Income
The DSP cores licensing business had an effective tax expense of $300,000 and $265,000 for the three months ended June 30, 2002 and 2001, respectively. The effective tax expense in the second quarter
of 2001 was lower than the effective tax expense in 2002 even though income before taxes was higher in the second quarter of 2001 than in the same period of 2002, due to a lower percentage of revenues generated in the United States, which are
subject to higher tax rates than revenues earned elsewhere because revenues earned elsewhere generally benefit from Israeli tax holiday treatment and tax-exempt income status. Revenues generated in the United States represented 35% of the total
revenues for the DSP cores licensing business for the three months ended June 30, 2002 as compared to 7% of total revenues for the three months ended June 30, 2001.
Six Months Ended June 30, 2002 and 2001
Total Revenues
The total revenues for the DSP cores
licensing business decreased to $8.7 million for the six months ended June 30, 2002 from $13.0 million for the six months ended June 30, 2001. This decrease of 33% was due to decreased revenues from licensing royalty revenues in our DSP cores
licensing business, as well as decreased technical support and other revenues primarily due to the slowdown in the global economy, which affected our ability to sign new license agreements.
Licensing and royalty revenues accounted for 81% of the total revenues for the DSP cores licensing business for the six months ended June 30, 2002, as compared to 82% of
the total revenues for the same period in 2001. Technical support and other revenues accounted for 19% of the total revenues for the DSP cores licensing business for the six months ended June 30, 2002, as compared to 18% of the total revenues for
the same period in 2001.
We had three customers who generated more than 45% of the revenues for our DSP cores
licensing business in the six months ended June 30, 2002, with revenues from these three licensees accounting for approximately 19%, 14% and 12% of total revenues in that period. Revenues from four licensees generated more than 71% of the revenues
for our DSP cores licensing business in the six months ended June 30, 2001, with revenues from these four licensees accounting for approximately 21%, 18%, 17% and 15% of total revenues for the DSP cores licensing business in that period. Generally,
the composition of our significant customers that generate greater than 10% of revenues for our DSP cores licensing business varies from quarter to quarter because we generally recognize a substantial amount of the revenues derived from a license
agreement during the quarter that the DSP cores technology is delivered to the customer, which is typically during the quarter of signing of the license agreement. As a result, revenues in any given quarter for our DSP cores licensing business are
largely dependent on our ability to enter into license agreements with new customers.
Licensing and Royalty Revenues
Licensing and royalty
revenues for our DSP cores licensing business decreased for the six months ended June 30, 2002 to $7.0 million from $10.7 million for the same period in 2001. This decrease of approximately 34% was primarily due to decreases in both licensing
revenues and royalty revenues.
Licensing Revenues
Licensing revenues for the DSP cores licensing business decreased to $4.7 million for the six months
ended June 30, 2002 from $7.0 million for the six months ended June 30, 2001. The decrease of approximately 33% was primarily due to the fact that we received greater revenues from certain of our agreements in 2001, as
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compared to 2002, primarily because we were able to negotiate higher licensing fees for certain of our products in 2001. We believe our ability to enter into new license agreements in 2002 was
particularly hindered by the slowdown in the global wireless and cellular market.
Unit and Prepaid Royalty Revenues
Unit and prepaid royalty
revenues for our DSP cores licensing business were $2.3 million for the six months ended June 30, 2002, as compared to $3.7 million for the six months ended June 30, 2001. We had nine and seven unit royalty-paying licensees in this business for the
six months ended June 30, 2002 and 2001, respectively. The decrease was primarily due to lower per-unit royalties from some of the license agreements in our DSP cores licensing business due to volume pricing, as well as lower overall quantities of
products shipped by our licensees that incorporated our technology (mostly in the cellular and hard disk drive markets) for the six months ended June 30, 2002, as compared to the same period in 2001. Royalty-generating licensees for our DSP cores
licensing business reported sales of 41.2 million chips incorporating our technology for the six months ended June 30, 2002, as compared to 46.7 million DSP core-based chips for the same period in 2001.
One royalty-generating licensee accounted for 19% of the total revenues for the DSP cores licensing business for the six months ended June
30, 2002.
Technical Support and Other Revenues
Technical support and other revenues for the DSP cores licensing business decreased to $1.7 million for the six months ended
June 30, 2002 from $2.3 million for the six months ended June 30, 2001. The decrease of approximately 26% was primarily due to the provision of fewer technical support and related services to our DSP cores licensees in 2002, as compared to 2001,
primarily as a result of the slowdown in the global wireless and cellular markets.
Geographic Revenue Analysis
For the six months ended June
30, 2002, revenues for the DSP cores licensing business in the United States represented 34% of the total revenues for the DSP cores licensing business, while Japan represented 8%, the rest of Asia represented 9% and Europe and the rest of the world
represented 49% of our total revenues. For the six months ended June 30, 2001, revenues for the DSP cores licensing business in the United States represented 24% of the total revenues, while Japan represented 19%, the rest of Asia represented 19%
and Europe and the rest of the world represented 38% of our total revenue.
Cost of
Revenues
Cost of revenues for the DSP cores licensing business was $616,000 for the six months ended June
30, 2002, as compared to $607,000 for the six months ended June 30, 2001. Cost of revenues for the DSP cores licensing business accounted for 7% of the total revenues for the DSP cores licensing business for the six months ended June 30, 2002, as
compared to 5% of the total revenues for the six months ended June 30, 2001. The increase was primarily due to our lower revenues for the six months ended June 30, 2002, as compared to the same period in 2001. The above resulted in total gross
profits for our DSP cores licensing business of 93% and 95% for the six months ended June 30, 2002 and 2001, respectively. Cost of revenues consisted for our DSP cores licensing business mainly of payroll of employees involved in providing various
technical and support services to our customers and associated facilities expenses.
Research and Development Expenses, Net
Research and
development expenses for the DSP cores licensing business, net of related research grants we received from the Office of Chief Scientist magnet programs, were $3.2 million for the six months ended June 30, 2002, as compared to $2.7 million for
the six months ended June 30, 2001. For the six months ended
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June 30, 2002, we recorded $558,000 in research grants from the magnet programs for the DSP cores licensing business. For the six months ended June 30, 2001, we recorded $153,000 in these
research grants. We have no obligation to pay royalties on the intellectual property developed using these research grants, and all monies received are non-refundable. The increase of approximately 20% in research and development expenses in 2002,
as compared to 2001, was primarily due to an 8% increase in the number of engineering personnel and additional investment in the development of our new XpertTeak platform. Research and development expenses as a percentage of total revenues for the
DSP cores licensing business was approximately 37% for the six months ended June 30, 2002, as compared to 21% for the six months ended June 30, 2001. The increase of 16% was primarily due to lower revenues for the six months ended June 30, 2002, as
compared to the same period in 2001. Research and development expenses for our DSP cores licensing business consisted mainly of payroll for employees involved in research and development, depreciation and maintenance fees relating to equipment and
software tools and associated facilities expenses.
Sales and Marketing Expenses
Sales and marketing expenses for the DSP cores licensing business increased by 12% to $1.5 million for
the six months ended June 30, 2002 from $1.3 million for the same period in 2001. This increase was primarily due to an increase in the number of sales and marketing personnel as a result of increased sales and marketing efforts. Sales and marketing
expenses as a percentage of total revenues for the DSP cores licensing business were 17% for the six months ended June 30, 2002 as compared to 10% for the six months ended June 30, 2001. The increase was primarily due to lower revenues for the six
months ended June 30, 2002, as compared to the same period in 2001. Sales and marketing expenses for our DSP cores licensing business consisted mainly of payroll of direct sales and marketing employees, sales commissions, production of marketing
literature and trade show expenses.
General and Administrative Expenses
General and administrative expenses for the DSP cores licensing business were $1.4 million for both of
the six months ended June 30, 2002 and 2001, respectively. General and administrative expenses as a percentage of total revenues for the DSP cores licensing business were 16% for the six months ended June 30, 2002, as compared to 10% for the six
months ended June 30, 2001. The increase was primarily due to lower revenues in our DSP cores licensing business for the six months ended June 30, 2002, as compared to the same period in 2001. General and administrative expenses for our DSP cores
licensing business consisted mainly of allocated employee, accounting, legal, facility and maintenance costs.
Financial Income, Net
Financial income, net, for the DSP
cores licensing business was $50,000 for the six months ended June 30, 2002, as compared to $221,000 for the six months ended June 30, 2001. This decrease was due primarily to lower net income for in DSP cores licensing business for the six months
ended June 30, 2002, as compared to the same period in 2001, which resulted from less income for investment purposes.
Taxes on Income
The DSP cores
licensing business had an effective tax expense of $0.5 million and $1.1 million for the six months ended June 30, 2002 and 2001, respectively. The overall effective tax rate for the six months ended June 30, 2001 was lower than the effective tax
rate for the same period in 2002, due to a lower percentage of its revenues generated in the United States, which are subject to higher tax rates than revenues earned elsewhere because revenues earned elsewhere generally benefit from Israeli tax
holiday treatment and tax-exempt income status. Revenues generated in the United States for the DSP cores licensing business represented 34% of its total revenues for the six months ended June 30, 2002, as compared to 24% of total revenues for the
six months ended June 30, 2001.
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Years Ended December 31, 2001 and 2000
Total Revenues
Total revenues for our DSP cores licensing business were $25.2 million in 2001, as compared to $22.9 million in 2000. This increase of 10% was primarily the result of
an increase in revenues from new licensees of our technology and higher number of technical support agreements.
Licensing and royalty revenues accounted for 83% of the total revenues for the DSP cores licensing business in 2001, as compared to 87% of the total revenues in 2000. Technical support and other revenues accounted for 17% of the
total revenues for the DSP cores licensing business in 2001, as compared to 13% of the total revenues in 2000. Revenues from three customers accounted for 24%, 15% and 14% of the total revenues for the DSP cores licensing business in 2001. Revenues
from one customer accounted for 18% of the total revenues for the DSP cores licensing business in 2000.
Licensing and Royalty Revenues
Licensing and royalty
revenues increased in 2001 to $21.0 million from $20.0 million in 2000. This increase of 5% was primarily due to an increase in licensing and royalty revenues that was off-set by a slight decrease in royalty revenues.
Licensing Revenues
Licensing revenues for the DSP cores licensing business increased by 9% to $13.7 million in 2001 from $12.6 million in 2000 primarily due to more revenues received from
certain of our agreements in 2001, as compared to 2000, primarily as a result of higher licensing fees we were able to negotiate for the licensing of certain of our products in 2001.
Unit and Prepaid Royalty Revenues
Unit and prepaid royalty revenues for the DSP cores licensing business in 2001 were $7.3 million, as compared to $7.4 million in 2000, representing a slight decrease of 1%. Our royalty-paying licensees
reported sales of 79.2 million units of DSP core-based chips incorporating our DSP core technology in 2001, as compared to 111.3 million units in 2000. To date, a majority of the royalties for our DSP cores licensing business have been from
PineDSPCores and OakDSPCores. In 2001, our first TeakLite DSP Core licensee started to ship products utilizing our TeakLite technology, and 47% of our total unit and prepaid royalties in 2001 were generated from the agreement with this TeakLite DSP
core licensee, which generates higher royalty revenues than our license agreements for Pine and Oak Cores. In the future, we expect more of the royalties for our DSP cores licensing business to be derived from our newer products, Teak, TeakLite and
PalmDSPCore.
Technical Support and Other Revenues
Technical support and other revenues for the DSP cores licensing business increased to $4.3 million in 2001 from $2.9 million
in 2000, representing an increase of 48%. This growth was driven mainly by the increasing number of technical support agreements we entered into with our licensees and the broader offering of applications, services and development tools we licensed
in 2001.
Geographic Revenue Analysis
In 2001, revenues generated in the Unites States for the DSP cores licensing business represented 43% of its total revenues, while Japan
represented 13%, the rest of Asia represented 16% and Europe and the rest of the world represented 28%. In 2000, revenues generated in the United States represented 52% of total revenues for the DSP cores licensing business, while Japan represented
15%, the rest of Asia represented 12% and Europe and the rest of the world represented 21%. The decrease in the revenues generated in the United States was primarily due to fewer licensing deals signed with U.S. companies and recognized in 2001, as
compared with 2000.
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Cost of Revenues
Cost of revenues for the DSP cores licensing business increased significantly to $1.3 million in 2001 from $0.4 million in 2000. The
increase was primarily due to an increase in support personnel of 233% for our DSP cores licensing business, as our business grew and we began to provide more support to our licensees. We expect the cost of revenues for our DSP cores licensing
business to increase in the future as we continue to expand our technical support services for the DSP cores licensing business. Cost of revenues accounted for 5% of the total revenues for our DSP cores licensing business in 2001, as compared to 2%
of its total revenues in 2000.
Research and Development Expenses, Net
Research and development expenses, net, for the DSP cores licensing business increased by 6% to
$5.1 million in 2001 from $4.8 million in 2000. Research and development costs for the DSP cores licensing business are net of related research grants from the Office of Chief Scientist magnet programs in Israel. In 2001 and 2000, we recorded
$542,000 and $578,000, respectively, in these research grants from the magnet programs. We have no obligation to pay royalties on the intellectual property developed using these grants, and all monies received are non-refundable. The increase of
approximately 6% in research and development expenses for the DSP cores licensing business in 2001, as compared to 2000, primarily resulted from a slight increase in engineering personnel. We intend to continue to expand our research and development
efforts to focus on the development of DSP cores with high performance, low power consumption and manufacturing process independence, while maintaining compatibility with our existing DSP cores products. Research and development expenses for the DSP
cores licensing business, as a percentage of the total revenues for the DSP cores licensing business, were 20% in 2001, as compared to 21% in 2000.
Sales and Marketing Expenses
Sales and marketing expenses for the DSP cores licensing business increased to $2.9 million in 2001 from $2.5 million in 2000. The increase of approximately 16% in sales and marketing expenses in 2001, as compared to those in 2000
was primarily due to an increase in commissions paid to our sales representatives. In addition, we incurred higher facility and overhead costs for the services we used from DSP Groups Japanese subsidiary, Nikon DSP K.K., which provides
marketing and sales services for our DSP cores licensing business in Japan, and an increase in our market data research and communications efforts. Sales and marketing expenses, as a percentage of total revenues for the DSP cores licensing business,
were 12% in 2001 and 11% in 2000.
General and Administrative Expenses
General and administrative expenses for our DSP cores licensing business were $2.8 million in both 2001
and 2000. General and administrative expenses as a percentage of total revenues for the DSP cores licensing business decreased to 11% in 2001 from 12% in 2000. The decrease was due to higher total revenues in this business in 2001 as compared to
2000.
Financial Income, Net
Financial income, net for our DSP cores licensing business was $462,000 in 2001, as compared to $322,000 in 2000. This increase of 43% was
due to higher levels of net income in our DSP cores licensing business from operations.
Provision for Income Taxes
The DSP cores licensing business
had an effective tax rate of 24% in 2001, as compared to 27% in 2000. The decrease in the effective tax rate for the DSP cores licensing business was primarily due to a lower percentage of its total revenues generated in the United States, which are
subject to higher tax rates than revenues earned elsewhere because revenues earned elsewhere generally benefit from Israeli tax holiday treatment and tax-exempt income status. Revenues generated in the United States represented 43% of the total
revenues for the DSP cores licensing business in 2001, as compared to 52% of total revenues in 2000. If our United States revenues increase in the future, our effective tax rate may increase as well.
61
Years Ended December 31, 2000 and 1999
Total Revenues
Total revenues for the DSP cores licensing business were $22.9 million in 2000, as compared to $18.2 million in 1999. This increase of approximately 26% was primarily
due to increases in licensing revenues, as well as an increase in royalty revenues.
Licensing and royalty
revenues accounted for 87% of the total revenues in the DSP cores licensing business in 2000, as compared to 89% of those total revenues in 1999. Technical support and other revenues accounted for 13% of the total revenues in 2000 for the DSP cores
licensing business, as compared to 11% of total revenues in 1999. Revenues from one customer accounted for 18% of the total revenues for this business in 2000, while revenues from four customers accounted for 15%, 12%, 11% and 10% of its total
revenues in 1999.
Licensing and Royalty Revenues
Licensing and royalty revenues for our DSP cores licensing business increased in 2000 to $20.0 million from $16.2 million in 1999. This
increase of 23% was primarily due to an increase in both licensing and royalty revenues.
Licensing Revenues
Licensing revenues for the DSP cores
licensing business increased by 21% from $10.4 million in 1999 to $12.6 million in 2000, primarily due to an increased number of licenses of our newer DSP cores products.
Unit and Prepaid Royalty Revenues
Unit and prepaid royalty revenues for the DSP cores licensing business increased by 26% to $7.4 million in 2000, as compared to $5.9 million in 1999. Royalty-generating licensees of our DSP cores
reported sales of approximately 111.3 million units of DSP core-based chips incorporating our technologies in 2000, as compared to approximately 55.3 million units in 1999. Unit and prepaid royalty revenues for this business increased by 38% in 2000
as compared to 1999.
Technical Support and Other Revenues
Technical support and other revenues for our DSP cores licensing business increased by 45% to $2.9
million in 2000 from $2.0 million in 1999. This increase was primarily due to a different mix and pricing for technical support services and the broader offering of development tools associated with our licenses, as well as a higher number of
technical support agreements in 2000, as compared to 1999.
Geographic Revenue
Analysis
In 2000, revenues generated in the United States represented 52% of the total revenues for the
DSP cores licensing business, while Japan represented 15%, the rest of Asia represented 12% and Europe and the rest of the world represented 21% of these total revenues. In 1999 revenues generated in the United States represented 25% of the total
revenues for the DSP cores licensing business, while Japan represented 37%, the rest of Asia represented 9% and Europe and the rest of the world represented 29% of these total revenues.
Cost of Revenues
Cost of revenues for the DSP cores licensing business was $410,000 in 2000, as compared to $207,000 in 1999. This increase of approximately 98% was due to the addition to our technical support staff of a third member. Cost
of revenues accounted for 2% of the total revenues in 2000 for the DSP cores licensing business, as compared to 1% of these revenues in 1999.
62
Research and Development Expenses, Net
Research and development expenses for the DSP cores licensing business increased to $4.8 million in 2000
from $3.2 million in 1999. Research and development costs for the DSP cores licensing business are net of related research grants from the Office of Chief Scientist magnet programs in Israel. In 2000, we received $578,000 in these research grants,
and in 1999 we received $70,000 in grants. We have no obligation to pay royalties on the intellectual property developed using these grants, and all monies received are non-refundable. The 50% increase of our research and development expenses in
2000, as compared to 1999, was primarily due to an approximate 32% increase in the number of engineering personnel in our DSP cores licensing business, as well as from higher expenses associated with mask charges for our Teak and TeakLite DSP
Cores development chips. Research and development expenses for the DSP cores licensing business, as a percentage of the total revenues for the DSP cores licensing business, were 21% in 2000 as compared to 18% in 1999.
Sales and Marketing Expenses
Sales and marketing expenses for the DSP cores licensing business increased to $2.5 million in 2000 from $2.0 million in 1999. This increase of 25% was primarily due to an
increase in the compensation paid to our sales and marketing personnel. The increase in expenses was also attributed to our increased sales and marketing efforts, including travel expenses and higher facility costs. Sales and marketing expenses for
the DSP cores licensing business were 11% of our total revenues in both 2000 and 1999.
General and Administrative Expenses
General and
administrative expenses for the DSP cores licensing business increased to $2.8 million in 2000 from $2.5 million in 1999. This increase of 12% was primarily due to an increase in accounting, tax and legal professional expenses we incurred with
respect to preparations for the proposed separation of the licensing division from DSP Group, including the tax planning and filing of an application with the tax authorities in both Israel and the United States in order to receive a tax-free ruling
for the separation. General and administrative expenses for the DSP cores licensing business, as a percentage of the total revenues for the DSP cores licensing business, decreased slightly to 12% in 2000 from 14% in 1999.
Financial Income, Net
Financial income, net, for the DSP cores licensing business was $322,000 in 2000 as compared to $292,000 in 1999. This increase of 10% was primarily due to higher levels of
net income in our DSP cores licensing business operations.
Provision for Income
Taxes
The effective tax rate for our DSP cores licensing business was 27% in 2000 as compared to 14% in
1999. The higher tax rate in 2000 was due to a higher percentage of total revenues generated in the United States, which are subject to higher tax rates than revenues earned elsewhere because revenues earned elsewhere generally benefit from Israeli
tax holiday treatment and tax-exempt income status. Revenues generated in the United States for the DSP cores licensing business represented 52% of the total revenues in 2000, as compared to 25% of total revenues in 1999.
DSP Cores Licensing Business Liquidity and Capital Resources
Prior to the separation of the DSP cores licensing business from DSP Group, all of the year end available cash from these operations was transferred to DSP Group. As part of the assets contributed to
us in the separation, DSP Group also contributed a total of the sum of $40 million as initial working capital plus cash equal to the amount by which the transaction costs of the separation and combination exceeded $2 million.
Operating activities for the DSP cores licensing business provided net cash of $9.5 million in 2001, $10.6 million in 2000
and $9.1 million in 1999. Cash generated from operations in all three years was primarily
63
from net income, and, in 2000 and 1999, the corresponding increases in income tax payables were additionally offset by increases in trade receivables. In 2001, our net income was mainly offset by
the increase in our trade receivables. Net cash used during the six months ended June 30, 2002 for operating activities for the DSP cores licensing business was $2.1 million, as compared to $3.7 million of net cash provided by operating activities
for the six months ended June 30, 2001. Cash used by the DSP cores licensing business during the six months ended June 30, 2002 was primarily due to lower income, a decrease in income tax payable and an increase in other accounts receivable and
prepaid expenses, mainly in connection with the separation and combination. Cash generated by this business during the six months ended June 30, 2001 was primarily from net income, which was off-set by decreases in income tax payable.
Cash flow from operations of the DSP cores licensing business has been used to fund working capital requirements, as well as
property and equipment expenditures which to date have been relatively low due to the fact that the DSP cores licensing business model requires no manufacturing facilities. Capital equipment purchases of computer hardware and software used in
engineering development in the DSP cores licensing business, the company vehicles, furniture and fixtures amounted to approximately $1.5 million in 2001, $696,000 in 2000 and $832,000 in 1999. Capital expenditures for the DSP cores licensing
business were $752,000 during the six months ended June 30, 2002, as compared to $729,000 during the six months ended June 30, 2001. The high level of expenditures in 2001 as compared to 2000 and to 1999 was due to investments in new software for
the design of our next generation of DSP cores for our research and development team.
In the future, we may
invest significantly in purchasing new engineering tools for the DSP cores licensing business and renewing current engineering software licenses that we shared with DSP Group prior to the separation. We also may invest in integrating our management,
accounting, sales and technical support systems and software with those of Parthus. Additionally, as our business expands, we may need to devote increasing amounts of cash to fund working capital needs, principally for the anticipated increases in
headcount and office space expansion.
Future capital requirements for the DSP cores licensing business
will depend on a number of factors, including the timing and rate of the expansion of the business of the new combined company. We anticipate a substantial increase in our capital expenditures for the combined company to support anticipated growth
in operations, purchases of hardware and software for research and development and increases in personnel. We believe that current working capital and cash flow from operations of the combined company and the remainder of the $40 million
contribution will provide sufficient capital to fund our operations for the next 12 months. We cannot assure you, however, that the underlying assumed levels of revenues and expenses will prove to be accurate. We may need to raise additional
funds through public or private financing or other arrangements in order to:
|
|
|
support more rapid expansion of the business of the new combined company than we currently anticipate; |
|
|
|
develop and introduce new or enhanced DSP core designs or services; |
|
|
|
respond to competitive pressures; |
|
|
|
invest in or acquire complementary businesses or technologies; or |
|
|
|
respond to unanticipated requirements or developments. |
We cannot be certain that external financing will be available to us when we need it on favorable terms, if at all. If additional funds are raised through the issuance of
equity securities, dilution to existing stockholders may result. Future debt financings could involve restrictive covenants that may limit our ability to manage and grow our business. If sufficient funds are not available, we may not be able to
introduce new or enhanced DSP core designs or related services, expand our operations or compete effectively in any of our markets, any of which could materially harm our business, financial condition and results of operations.
64
Seasonality
We have experienced seasonal variations in the operating results of our DSP cores licensing business. Historically it has generated more licensing and prepaid royalty
revenues in the last quarter of the fiscal year, which we believe may be due to our licensees desire to exhaust their year-end budgets as well as prepare for the next years new design trends. Therefore, licensing and prepaid royalty
revenues for the DSP cores licensing business may continue to be higher in the fourth quarter, which could result in our revenues being flat or slightly down in the subsequent fiscal first quarter. See also Risk Factors. We depend on a
relatively small number of licensees in each particular period and our inability to enter into new license agreements in a specific period, as well as other factors, could cause our operating results to fluctuate significantly, which may affect our
stock price.
DSP Cores Licensing Business Israeli Taxation and Investment Programs
Our DSP cores licensing business operations have been granted Approved Enterprise status under Israeli law under four separate investment
plans which were assigned to us from DSP Group in the separation, and one plan approved for our activities. According to the provisions of such Israeli plans, we have chosen to enjoy alternative plan benefits, which provide for tax
exemption in Israel instead of receipt of governmental grants. Accordingly, our Israeli subsidiary, Corage, Ltd.s 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% or 25% for an additional period of six or eight years subject to the percentage of the company capital stock which is held by non-Israeli shareholders. In addition, by virtue of related Israeli law, Corage, Ltd. is entitled to claim
accelerated rates of depreciation on equipment used by an Approved Enterprise during the first five tax years from the beginning of use of the equipment. We are currently being taxed under the 10% tax bracket for our DSP cores licensing business
operations outside of the United States. The period of tax benefits is subject to limits of the earlier of 12 years from the commencement of production, or 14 years from receiving the approval and are scheduled to gradually expire starting in 2005
through 2009. To maintain Corage, Ltd.s eligibility for these tax benefits, we must continue to meet several conditions, including making specified investments in fixed assets and equity funding. According to the fifth approval we received for
our operations from the government of Israel, we were obligated to invest $970,000 in specified properties by the end of 2002. As of June 30, 2002, we have already invested the required investment amount. Recently we applied for an extension of the
plan, pursuant to which we would invest an additional $1,110,000. We are also obligated to finance thirty percent of these investments by the issuance of additional shares of Corage, Ltd. to its parent company, DSP Ceva, Inc. However, even if we
meet these conditions, these programs and tax benefits may not continue in the future at their current levels or at any level, and if we fail to comply with these conditions in the future, the benefits received could be cancelled, we may be required
to refund tax benefits already received, and we could be required to pay increased taxes.
We also receive funding
as part of our participation in research programs supported by the Office of Chief Scientist operated by Israels Ministry of Industry and Trade. We have received $558,000 of royalty-free Magnet grants for the six months ended June 30, 2002,
$542,000 in 2001, $578,000 in 2000 and $70,000 in 1999. The Israeli government has reduced the benefits available under these programs in recent years and has indicated that it may reduce or eliminate these benefits in the future.
DSP Cores Licensing Business Quantitative and Qualitative Disclosures About Market Risk
As a significant part of both the revenues and expenses of our DSP cores licensing business are denominated in U.S. dollars, we have experienced only insignificant
foreign exchange gains and losses to date. However, although we have not done so to date as part of the DSP cores licensing business, because recent increases in the volatility of the exchange rate of the NIS versus U.S. dollar could have an adverse
effect on the expenses that we incur in the State of Israel, we may hedge part of the risk of a devaluation of the NIS in the future. We will ensure that options and forward contracts meet the requirements of cash flow hedges, as defined by SFAS No.
133 (as discussed further below), and are all effective as hedges of these expenses. Such amounts will be recorded in earnings in 2002.
65
Parthus Overview
Parthus was established in 1993 as a contract developer of semiconductor intellectual property for semiconductor manufacturers and electronic product manufacturers. Between
1993 and 1998, Parthus accumulated expertise in the design and development of digital, analog, mixed-signal and software technology for our customers, focusing in particular on data storage technologies.
In late 1998 Parthus decided to leverage its existing expertise into new and emerging markets, refocusing its strategy to become a leading
supplier of fully integrated platform solutions to electronic product manufacturers and semiconductor manufacturers for applications in the mobile Internet market. With this strategy, Parthus generates revenues from IP licensing, IP creation, and
Hard IP.
Parthus Principal Developments in 2001
Total revenue for the year increased 28% to $40.9 million from $31.9 million in 2000. IP licensing revenue was Parthus largest revenue stream, accounting for 72% of
its total revenue in 2001. Parthus entered into 25 license agreements during the year, including a portfolio license, with 14 new licensing customers, making a total of 74 license agreements in place by December 31, 2001.
In April 2001, Parthus entered into a multi-year technology portfolio licensing and royalty agreement with STMicroelectronics for the
complete suite of its mobile Internet IP platforms. In June 2001 Parthus also acquired the remaining 20% minority interest in Silicon Systems Design Limited from STMicroelectronics for approximately $13.0 million in cash and approximately 18.4
million new Parthus ordinary shares.
In May 2001, Parthus completed its acquisition of Chicory Systems Inc., a
privately held company based in Austin, Texas, for approximately $11.7 million in cash and approximately 22.2 million Parthus ordinary shares, plus contingent consideration of up to a maximum of 21.9 million additional Parthus ordinary shares
issuable upon the achievement of certain performance milestones. Through this transaction, Parthus acquired Chicorys advanced technology for accelerating mobile Internet applications by migrating complex systems software into high-performance
silicon.
Parthus Recent Developments
In April 2002, Parthus signed an agreement with DSP Group, Inc., and Ceva, Inc., providing for the combination of Parthus with Ceva, the intellectual property licensing subsidiary of DSP Group, in a
merger of equals. Subject to tax and other regulatory approvals, Parthus anticipates that this transaction will close in the third quarter of 2002.
In the first quarter of 2002 Parthus announced a broad ranging strategic agreement with UbiNetics, an established expert and market leader in 3G wireless device technology. Under a license agreement,
UbiNetics will integrate Parthus GPRS/GSM technology into its 3G WCDMA silicon and software technologies to create a fully integrated multi-mode 2.5G/3G (W-CDMA/GPRS/GSM) solution. Parthus will market this multi-mode 2.5G/3G solution as part
of its portfolio of technologies, licensing the solution through its global sales channel and semiconductor relationships. To underpin the alliance, Parthus subscribed for a minority shareholding interest in UbiNetics.
Parthus Revenue
IP license. The intellectual property that Parthus licenses consists of IP that Parthus developed in its IP creation business for other customers in the past, IP developed in Parthus
research and development activities and third-party IP, and consists of circuit designs, software and related documentation that enable a customer to produce integrated circuits and related technology and software.
66
Fees for Parthus agreements are payable upon completion of agreed-upon
milestones, such as the delivery of specifications and technical documentation. Each license is designed to meet the specific requirements of the particular customer and can vary from rights to allow the customer to incorporate Parthus
technology into the customers own product to the complete design of a system-on-a-chip product by Parthus.
Revenue from Parthus initial license fees is recognized based on the percentage-of-completion method over the period from signing of the license to customer acceptance. The amount of revenue recognized is based on the total
license fees under the license agreement and the percentage to completion achieved. The percentage to completion is measured by monitoring progress using records of actual time incurred to date on the project compared with the total estimated
project requirements, which corresponds to the costs of earned revenue. Parthus continuously reviews the expected time of customer acceptance based on Parthus experience with similar projects and make adjustments in revenue recognition
accordingly. As a result of this method of revenue recognition, payment and the recognition of revenue are often not contemporaneous. This timing difference means that Parthus typically has deferred, and may occasionally have accrued, revenue on its
balance sheet.
In addition to the initial license fees, Parthus receives revenue in two additional ways under its
license agreements: re-use fees and per-unit royalties. Parthus will receive re-use fees each time a manufacturer uses intellectual property licensed from Parthus to manufacture a different product. Per-unit royalties are calculated either as a
percentage of the licensees sale price for products containing Parthus IP or as a fixed amount per unit sold. Alternatively, licensees may pay a one-time buyout fee in lieu of subsequent re-use fees and per-unit royalties. These per-unit
royalties are payable by licensees upon shipment of products and Parthus will recognize revenue as they are earned. Through December 31, 2001, Parthus had entered into 51 contracts that provide for Parthus to receive royalties.
IP creation. Historically, the most significant component of Parthus revenue arose
from payments for IP creation. For 1999, IP creation accounted for 73% of Parthus total revenue, compared with 39% of Parthus total revenue in 2000 and 17% of Parthus total revenue in 2001. Parthus expects its new multi-technology
portfolio agreement with STMicroelectronics to result in a further significant reduction in the level of IP creation revenue in absolute terms and as a percentage of revenue, as a greater proportion of Parthus business with STMicroelectronics
will be based on the IP licensing model. As noted above, Parthus IP creation contracts are usually multi-year contracts. IP creation involves the performance of fee-for-service contracts that are reimbursed on a time-and-materials basis. It is
Parthus policy to retain ownership of, or rights to use, the IP created pursuant to Parthus IP creation arrangements. Under the overall terms of a typical IP creation contract Parthus agrees to perform specific projects. Parthus
recognizes revenue from IP creation when the service has been provided and all obligations to the customer under the contract have been fulfilled.
Hard IP. Parthus refers to the incorporation of its intellectual property into reference designs (either as silicon chips or printed circuit boards) as Hard IP.
Parthus Cost of Revenue
Cost of IP license revenue includes related labor costs directly attributable to developing or customizing the licensed technology to the customers specific needs.
Cost of IP creation revenue includes related labor, travel and other non-recoverable costs directly attributable
to consulting work performed for third parties as well as the costs of support and maintenance services to licensees.
Cost of Hard IP revenue includes labor costs and materials directly attributable to the production of reference boards incorporating Parthus IP.
67
Parthus Gross Margin
Parthus IP license margin reflects the economies associated with licensing previously developed technology. Accordingly, Parthus believes that the margins to be
earned on Parthus IP licensing business will continue to be significantly higher than the margins earned on either Parthus IP creation business or Hard IP business.
Parthus Operating Expenses
Parthus operating
expenses increased due to Parthus continued investment, internally and by acquisition, in developing and licensing a strong portfolio of technology platforms.
Research and development expenses for Parthus consist primarily of related labor and associated costs connected with the development of its intellectual
property. Because technological feasibility is generally not established until all design, coding and testing activities are completed, Parthus expenses all development costs as incurred. Work that Parthus performs to develop technology for
customers on a fee-for-services basis is not included in research and development expenses; nevertheless, Parthus generally retains the right to use intellectual property developed in this manner. Research and development expenses include payments
that Parthus makes to third parties to license technology from them when Parthus incorporates their technology into Parthus intellectual property as part of Parthus research and development activities.
Sales and marketing expenses for Parthus consist of related labor costs, including commissions, travel and other costs
associated with sales activity, as well as advertising, trade show participation, public relations and other marketing costs.
General and administrative expenses for Parthus consist primarily of related labor and recruitment costs, information systems and technology, infrastructure, facilities costs, telephone and other office costs and
depreciation.
Parthus Minority Interest
Parthus performed much of its IP creation work through its subsidiary Silicon Systems Design Limited. STMicroelectronics owned 20% of that subsidiary until June 29, 2001 at which time Parthus purchased
its interest.
Parthus Provision for Income Taxes
Parthus operates as a holding company with operating subsidiaries in Ireland, the United Kingdom and the United States. Each subsidiary is taxed based on the law of the
jurisdiction in which it is incorporated. Because taxes are incurred at the subsidiary level, and one subsidiarys tax losses cannot be used to offset the taxable income of subsidiaries in other tax jurisdictions, Parthus consolidated
effective tax rate may increase to the extent that Parthus reports tax losses in some subsidiaries and taxable income in others. In addition, Parthus tax rate may be affected by costs that are not deductible in certain jurisdictions for tax
purposes, such as amortization of goodwill.
Parthus has significant operations in the Republic of Ireland. Some
of Parthus Irish operating subsidiaries are taxed at rates substantially lower than U.S. or U.K. tax rates. Two Irish subsidiaries currently qualify for a 10% tax rate, which, under current legislation, will remain in force until December 31,
2010, and three other Irish subsidiaries qualify for an exemption from income tax as their revenue source is license fees from qualifying patents within the meaning of Section 234 of the Irish Taxes Consolidation Act 1997. Parthus currently
anticipates that Parthus will continue to benefit from this tax treatment, although the extent of the benefit could vary from period to period, and Parthus tax situation may change. In addition, if these subsidiaries were no longer to qualify
for these tax rates or if the tax laws were rescinded or changed, Parthus operating results could be materially adversely affected.
68
Parthus Currency Risk
A portion of Parthus revenue, costs, assets and liabilities are denominated in currencies other than the U.S. dollar. Through 2001, Parthus and all of its
subsidiaries, other than Parthus U.S. subsidiaries, had functional currencies other than the U.S. dollar. Parthus has implemented a strategic shift over the past three years from being a contractor of semiconductor IP to being a supplier of
platform solutions, with emphasis on licensing to the semiconductor industry. Because this industry is predominantly U.S.-dollar-based, the economic environment in which Parthus operates has consequently shifted to the U.S. dollar. As a result,
beginning January 1, 2002, Parthus and certain of its subsidiaries adopted the U.S. dollar as their functional currency. The principal economic facts and circumstances which led Parthus to conclude a change was appropriate were: (i) the increase in
US dollar denominated cash that Parthus held; (ii) a shift in business focus from intellectual property (IP) creation (primarily contract research and development) to IP licensing; and (iii) the increase in US operations and other US dollar
denominated costs. Each of these factors is described in more detail below.
Change in Capitalization
Prior to Parthus initial public offering in May 2000, Parthus satisfied its working capital
requirements and fixed asset expenditures through cash generated by operations and equity private placements. In May 2000, Parthus received approximately US$140.2 million of gross proceeds from the initial public offering of its ordinary shares and
ADSs, and in November 2000, Parthus received approximately US$23.9 million of gross proceeds from a follow-on offering of Parthus ordinary shares and ADSs. Over 90% of Parthus current cash balances are held in US dollar accounts which
Parthus draws on as required to fund working capital requirements and fixed asset expenditures.
Change in
Business Focus
Parthus has historically derived the majority of its revenues from research and
development contracts. The cash inflows and outflows under these arrangements were generally in currencies other than the US dollar (predominantly the Irish pound). Beginning in 1998, Parthus decided to change the strategy for its business and focus
on the development and subsequent licensing of intellectual property. The change in strategy has meant that Parthus cash inflows have become predominantly denominated in US dollars over time. Parthus markets its intellectual property to the
semiconductor industry and the pricing of Parthus intellectual property licenses is almost entirely denominated in US dollars. Parthus success in implementing its strategy has resulted in the following changes in the US dollar cash flows
over the past three years.
|
|
Year ended December 31,
|
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
Parthus US$ revenue as a percentage of total revenues |
|
30 |
% |
|
61 |
% |
|
85 |
% |
Parthus US$ cash expenses as a percentage of total cash expenses |
|
19 |
% |
|
29 |
% |
|
41 |
% |
Increase in US Operations and US Dollar Costs
Parthus cash expenses exceeded its revenues in each of the past three fiscal years. As part of
Parthus change in strategy, Parthus has experienced growth in US-based business, both organically and through acquisition, in particular the acquisition of Chicory Systems, which is included in Parthus results of operations for only 7
months of the year ended December 31, 2001. Parthus US sales force has more than doubled from 5 at December 31, 1999 to 11 at December 31, 2001. Parthus expects this trend to continue in 2002 with continued growth in the percentage of US
dollar expenses due to the continued growth in Parthus sales force and expected increases when Chicory is consolidated in Parthus financial statements for a full 12 month period.
Parthus business continues to develop in line with the strategy outlined above and, while a clear date change was not evident, Parthus deemed January 1, 2002 an
appropriate date from which to apply the amended functional currency. This judgment was reached following consideration of all of the above factors, but was mainly due to the change in cash outflows, which currently exceed inflows.
69
Parthus does not anticipate that either changes in the underlying facts and
circumstances noted above, or the change in functional currency, will have a material impact on Parthus business or financial statements.
Certain of Parthus subsidiaries continue to use functional currencies other than the U.S. dollar. These currencies may fluctuate significantly against the U.S. dollar. As a result of such
currency fluctuations and the conversion to U.S. dollars for financial reporting purposes, Parthus may experience fluctuations in its operating results on an annual and a quarterly basis. Parthus has not in the past, but we may in the future, hedge
against fluctuations in exchange rates. Future hedging transactions may not successfully mitigate losses caused by currency fluctuations. Parthus expects 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 Parthus results of operations.
The
conversion to the euro has not had a material effect on the pricing of, or the market for, Parthus licenses and services, and Parthus does not expect the conversion will have a material effect in the future.
Parthus Results of Operations
The following table presents Parthus results of operations expressed as a percentage of total revenue, after giving effect to rounding, for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
IP license |
|
27 |
% |
|
50 |
% |
|
73 |
% |
IP creation |
|
73 |
|
|
39 |
|
|
17 |
|
Hard IP |
|
|
|
|
11 |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
100 |
|
|
100 |
|
|
100 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
IP license |
|
5 |
|
|
9 |
|
|
12 |
|
IP creation |
|
44 |
|
|
26 |
|
|
12 |
|
Hard IP |
|
|
|
|
7 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
49 |
|
|
42 |
|
|
29 |
|
Gross margin |
|
51 |
|
|
58 |
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Research and development |
|
37 |
|
|
60 |
|
|
73 |
|
Sales and marketing |
|
13 |
|
|
28 |
|
|
27 |
|
General and administrative |
|
16 |
|
|
30 |
|
|
19 |
|
Amortization of goodwill and intangible assets |
|
|
|
|
3 |
|
|
22 |
|
In-process research and development charge |
|
|
|
|
|
|
|
27 |
|
Restructuring charge |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
66 |
|
|
121 |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
(15 |
) |
|
(63 |
) |
|
(99 |
) |
Other income: |
|
|
|
|
|
|
|
|
|
Interest income, net |
|
1 |
|
|
16 |
|
|
16 |
|
Exchange gain, net |
|
1 |
|
|
1 |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Minority interest |
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
(13 |
) |
|
(47 |
) |
|
(84 |
) |
Provisions for income taxes |
|
|
|
|
(3 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
(13 |
)% |
|
(50 |
)% |
|
(85 |
)% |
|
|
|
|
|
|
|
|
|
|
70
Parthus six months ended June 30, 2002 compared with six months ended June 30, 2001
Revenue
Total revenue for Parthus for the six months ended June 30, 2002 amounted to $21.5 million, up 8% over the first half 2001 total revenue of $19.9 million. The
increase in total revenue was due to the increase in IP license revenue, offset by a continued anticipated decrease in IP creation revenue and a decrease in Hard IP revenue.
IP licensing and royalty revenue for Parthus grew to $18.8 million, up 44% year-on-year from $13.0 million in the first half 2001,
reflecting strong licensing activity. Parthus royalty revenue increased to $1.0 million, up 266% year-on-year from $282,000 in the first half 2001 as customers are shipping products mainly in the consumer electronics area.
IP creation revenue for Parthus declined to $1.4 million, down 67% year-on-year from
$4.3 million in the first half of 2001. The decrease was attributable to a planned reduction in the number of IP creation engagements in 2002 as Parthus continued to focus its resources on expanding its IP license business.
Hard IP revenue for Parthus declined to $1.3 million, down 51% year-on-year from $2.6 million in
the first half of 2001.
Cost of revenue
Total cost of revenue for Parthus decreased in the first half of 2002 to $4.6 million from $6.6 million for the same period last
year, a 30% decrease year-on-year. Parthus total gross margin increased to 78% for the first half of 2002, from 67% in the first six months of 2001. This reflects the continuing change in business mix to higher margin IP licensing and royalty
revenue, which represents 87% of total revenue in the first half 2002.
Cost of IP licensing
and royalty revenue for Parthus increased by 37% to $2.9 million or 16% of its IP licensing and royalty revenue year-on-year from $2.1 million or 17% of IP licensing and royalty revenue
Cost of IP creation revenue for Parthus decreased by 67% to $1 million or 70% of IP creation
revenue year-on-year from $3 million or 71% of IP creation revenue. The absolute decrease in the cost of its IP creation revenue reflects lower IP creation revenue for the period.
Cost of Hard IP revenue for Parthus decreased by 51% to $0.7 million or 54% of Hard IP revenue year-on-year from $1.4 million or
54% of its Hard IP revenue. The absolute decrease in the cost of Hard IP revenue reflects lower Hard IP revenue for the period.
Operating expenses
Total operating expenses for Parthus, excluding
merger expenses in connection with the proposed combination with Ceva, declined $2.7 million or 11% from $24.8 million to $22.1 million, principally reflecting the full benefits of the cost management program in 2002 and lower amortization costs of
$1 million following Parthus adoption of SFAS 142 on 1 January 2002 which changes the accounting for goodwill from an amortization method to an impairment-approach only.
Research and development expenses for Parthus declined $228,000 or 2% year-on-year to $13.5 million
from $13.7 million in the first half of 2001. The 2002 period includes increased expenses associated with the business Parthus acquired from Chicory Systems, Inc., which Parthus completed near the end of the first half of 2001. This increase in
costs was offset by the reduction in costs arising from Parthus reduced investment in 2.5/3G development and the impact of Parthus cost reduction measures begun in the fourth quarter of 2001.
Sales and marketing expenses for Parthus decreased by $1.1 million or 19% year-on-year to $4.6
million from $5.6 million in the first half of 2001, reflecting targeted cost savings in 2002.
71
General and administration expenses for
Parthus declined by $690,000 or 18% year-on-year to $3.1 million from $3.8 million in the first half 2001, reflecting the benefits of the cost management program in 2002.
Amortization of goodwill & intangibles for Parthus decreased $994,000 to $680,000 in the first
half 2002 from $1.7 in the first half 2001, reflecting changes in the accounting for goodwill from an amortization method to an impairment-only approach following the adoption of SFAS 142 on 1 January 2002.
Merger expenses for Parthus associated with the proposed transaction with Ceva amounted to $1.5
million.
Other
Interest income and similar income for Parthus amounted to $1.3 million for the first half of 2002, compared with
$3.8 million for the first half of 2001. This decrease in interest income reflects Parthus lower cash balances and the lower interest rate environment in the first half of this year. The most significant changes in cash in the period
relates primarily to acquisitions of $25 million during the first half of 2001.
Net
loss for Parthus was $5.6 million, representing a loss of $0.010 per ordinary share or $0.095 per ADS. This represents a 32% decline in the overall reported net loss for the company from the same period last year.
Parthus 2001 Compared with 2000
Revenue
Total revenue for Parthus increased by 28% from
$31.9 million in 2000 to $40.9 million in 2001. The increase in total revenue was due to the increase in IP license revenue and Hard IP revenue, offset by a continued anticipated decrease in IP creation revenue. Parthus continued to expand its
customer base in 2001, while maintaining and extending existing key relationships. Revenue from Parthus largest customer, STMicroelectronics, although higher in absolute terms, decreased to 31% of total revenue compared with 39% in 2000, a
direct result of broadening Parthus customer base.
In terms of geographic spread, Parthus improved its
penetration into the Asian market, which accounted for 11% of total revenue in 2001 compared to 6% in 2000. The United States and Europe represented 47% and 42% of total revenue in 2001 respectively, compared to 2000 when each represented 47% of its
total revenue.
IP license revenue for Parthus increased by 87% from $16.1 million, or 50% of total
revenue, in 2000 to $30.0 million, or 73% of total revenue, in 2001. The increase reflects the strong licensing activity during 2001. IP license revenue from Parthus royalties increased to $532,000 compared to $124,000 in the previous year.
Royalty revenue was first recognized in the third quarter of 2000.
IP creation revenue for Parthus
decreased from $12.4 million, or 39% of total revenue, in 2000 to $6.8 million, or 17% of total revenue, in 2001. This decrease was attributable to a planned reduction in the number of IP creation engagements in 2001 as Parthus continued to focus
its resources on expanding its IP license business.
Hard IP revenue for Parthus increased by 2%
from $3.4 million, or 11% of total revenue, in 2000 to $4.2 million, or 10% of total revenue, in 2001. Parthus expects Hard IP revenue to remain relatively constant in absolute terms but to decrease as a percentage of total revenue over the next
several years.
Cost of Revenue
Total cost of revenue for Parthus decreased by 11% from $13.4 million, or 42% of total revenue, in 2000 to $12.1 million, or 29% of total revenue, in 2001.
Parthus gross margin increased to 71% in 2001 from 58% in 2000. The increase in total cost of revenue and gross margin was due primarily to the continuing change in revenue mix, with the majority of revenue derived from higher gross margin IP
licensing activity.
72
Cost of IP license revenue for Parthus increased by 71% from $3.0
million, or 19% of IP license revenue, in 2000 to $5.1 million, or 17% of IP license revenue, in 2001. Parthus expects this line item to continue to decrease in future periods as a percentage of IP license revenue as Parthus receives royalties from
its customers, because the associated costs are minimal.
Cost of IP creation revenue for Parthus
decreased from $8.3 million, or 67% of IP creation revenue, in 2000 to $4.8 million, or 70% of IP creation revenue, in 2001. The increase in cost of Parthus IP creation revenue as a percentage of its IP creation revenue was primarily due to
increased labor costs. Parthus expects that these costs may continue to increase as a percentage of its IP creation revenue due to continuing increases in labor costs.
Cost of Hard IP revenue for Parthus marginally increased from $2.1 million in 2000 to $2.3 million in 2001. Cost of Parthus Hard IP revenue as a
percentage of Hard IP revenue decreased from 62% in 2000 to 54% principally due to change in product mix with focus on higher margin products.
Operating Expenses
Total operating expenses for
Parthus for 2001 were $69.3 million, an increase of 78%. This increase was due to Parthus continued investment, internally and by acquisition, in developing and licensing a strong portfolio of technology platforms. The investment has resulted
in higher engineering staff, facilities costs, patent costs and depreciation charges for Parthus throughout, as planned, 2001. Parthus incurred a one-time non-cash charge of $10.9 million in the third quarter 2001 relating to in-process R&D in
connection with its acquisition of Chicory Systems Inc. Parthus also incurred a restructuring charge of $765,000, representing severance charges following a headcount reduction of 29 employees in December 2001. Amortization charges for Parthus for
2001 of $9.2 million increased by $8.1 million from $ 1.1 million in 2000 reflecting the impact of acquisitions made during 2001. Non-cash stock compensation expense for Parthus decreased from $5.5 million in 2000 to $1.8 million in 2001 due to
one-time charges in 2000. The increase also reflects the continued expansion of Parthus sales and marketing and administrative capabilities to support and leverage Parthus investments.
Research and development expenses for Parthus, the largest element of operating expenses, increased by 57%
from $19.1 million, or 60% of its total revenue, in 2000 to $30.0 million, or 73% of total revenue, in 2001. Parthus views research and development as a principal strategic investment and has continued its commitment to invest heavily in this area.
This commitment is reflected primarily in higher labor and associated costs resulting from increased headcount throughout 2001 and increased investment in design tools and sub-contract design. The number of Parthus research and development personnel
was 307 at December 31, 2001 compared with 308 in 2000 and during 2001 peaked at 336. Included in Parthus research and development expenses is a non cash stock compensation charge of $1.4 million which increased from $0.9 million in
2000.
Sales and marketing expenses for Parthus increased by 22% from $9.0 million, or 28% of total
revenue, in 2000 to $11.1 million, or 27% of total revenue, in 2001. The increase primarily resulted from the recruitment of additional sales personnel into Parthus existing sales operations to a peak of 49 during 2001 compared to 40 in 2000,
related sales commissions and increases in Parthus direct marketing activities and travel costs.
General and administrative expenses for Parthus decreased by 24% from $9.7 million, or 30% of total revenue, in 2000 to $7.4 million, or 19% of total revenue, in 2001. Included in general and administrative expenses is
a non cash stock compensation charge of $0.2 million which decreased from $4.5 million in 2000. The charge in 2000 included a one-time non cash compensation expense of $4.3 million as a result of stock options which were granted to
some of Parthus executives. Excluding the non-cash stock compensation charge, general and administrative expenses increased by 37% from $5.2 million in 2000 to $7.2 million in 2001. This increase reflects the additional infrastructure costs
associated with the successful integration of Parthus acquisitions and increased facility costs arising from additional sales locations.
Amortization of goodwill and intangible assets for Parthus increased from $1.1 million in 2000 to $9.2 million in 2001. The increase related primarily to the amortization of goodwill of
$7.8 million on Parthus
73
acquisitions of Chicory Systems Inc. and the remaining 20% minority interest in Silicon Systems Design Limited.
In-process research and development charge for Parthus of $10.9 million in 2001 represents a one time non cash charge relating to Parthus acquisition of
Chicory Systems Inc.
The value assigned to purchased in-process technology related to two microprocessor
architecture projects, designated as Project A and Project B, was $7,370,000 and $3,525,000, respectively. These projects involved the development of technology to accelerate Internet applications by migrating complex software to silicon chips.
Technological feasibility or commercial viability of these projects was not established at the acquisition date. These products were considered to have no alternative future use other than the technological indications for which they were in
development. Projects A and B were estimated to be 80% and 50% complete, respectively, estimated costs to completion of these products were approximately $570,000 and $700,000, respectively, and discount rates of 35% and 40%, respectively, were
used. Both projects involve completion of hardware and software elements. The hardware component must be finalized before the software piece (consisting of validation work, completion of the driver code, etc.) can be started. At the valuation date,
Project A had not completed the software element and Project B had not completed the hardware component. These projects were expected to be completed by the end of 2001 when Parthus expected to commence sales of the products. The principal
risks relating to the development of the Project A product technology include developing the reference software and reference manual, testing and debugging. The principal risks relating to the development of the Project B product technology
include completing the micro-architecture, developing the driver code and software for the end product, debugging and testing. Each of these steps must be completed before the products can be released into the market.
Parthus primary focus was on the completion of Project A, not only as a stand-alone architecture, but also with the ability to fully
integrate it with existing and future Parthus technology platforms. Costs of approximately $700,000 were incurred on the completion of the Project A architecture. Project A was completed, in line with expectations, in the fourth quarter of 2001 and
is the primary architecture used in Parthus Machstream platform technology, which Parthus is currently licensing.
In the third quarter of 2001 after a strategic review Parthus decided to suspend further investment in Project B. Parthus does not believe that this refocus of effort will adversely impact Parthus overall expected return
on investment, future results and financial condition.
Restructuring charge for Parthus of $765,000
in 2001 represents severance charges following a headcount reduction of 29 employees in December 2001.
Interest Income
Parthus interest income, net, increased from $5.3
million in 2000 to $6.4 million in 2001. The increase was due to higher cash balances held throughout 2001 as a result of the closing of Parthus initial public offering in May 2000 and Parthus follow-on offering in November 2000, which
generated combined net proceeds to Parthus of approximately $157 million. This was offset by the lower interest rate environment in 2001 which impacted overall returns on cash and cash equivalents invested.
Provision for Income Taxes
The provision for income taxes for Parthus was $300,000 in 2001 compared to $1.2 million in 2000 and was provided for tax liabilities in non-Irish jurisdictions.
Parthus 2000 Compared with 1999
Revenue
Total revenue for Parthus increased by 68% from $19.0 million
in 1999 to $31.9 million in 2000. The increase in Parthus total revenue was due to the increase in Parthus IP license revenue described below as well
74
as the introduction of Hard IP revenue, offset in part by a planned decrease in IP creation revenue. Parthus expanded its customer base significantly in 2000, while continuing to maintain and
extend existing key relationships. Revenue from Parthus largest customer, STMicroelectronics, although higher in euro terms, decreased to 39% of total revenue compared with 68% in 1999, a direct result of broadening Parthus customer base
and a weakening of the euro against the U.S. dollar.
In terms of geographic spread, Parthus entered new markets
in Asia in 2000, which accounted for 6% of total revenue for that year. Parthus also achieved a greater balance between Europe and the United States as Parthus customer based developed and expanded. Europe and the United States each
represented 47% of Parthus total revenue in 2000, compared to 68% and 32%, respectively, in 1999.
IP
license revenue for Parthus increased by 208% from $5.2 million, or 27% of total revenue, in 1999 to $16.1 million, or 50% of its total revenue, in 2000. The increase in its IP license revenue was driven by strong licensing activity and
growth in average deal size. Parthus also recognized IP license revenue from royalties for the first time in the third quarter of 2000. The amount of these royalties was $124,000 for the year.
IP creation revenue for Parthus decreased by 10% from $13.8 million, or 73% of total revenue, in 1999 to $12.4 million, or 39% of its total revenue, in
2000. This decrease was attributable both to the weakness of the euro against the U.S. dollar and to a planned reduction in the number of IP creation engagements in 2000 as Parthus continued to refocus its resources on expanding its IP license
business.
Hard IP revenue for Parthus was $3.4 million in 2000. Parthus had no Hard IP revenue in
1999. Parthus Hard IP revenue derives from its acquisition in March 2000 of the GPS division of Symmetricom Limited.
Cost of Revenue
Total cost of revenue for Parthus increased by 44%
from $9.3 million, or 49% of its total revenue, in 1999 to $13.4 million, or 42% of total revenue, in 2000. Parthus gross margin increased to 58% in 2000 from 51% in 1999. The increase in its total cost of revenue and gross margin was due
primarily to the continuing change in revenue mix, with the majority of revenue derived from higher gross margin IP licensing activity.
Cost of IP license revenue for Parthus increased by 201% from $983,000, or 19% of IP license revenue, in 1999 to $3.0 million, or 18% of IP license revenue, in 2000.
Cost of IP creation revenue for Parthus remained level at $8.3 million in 1999 and 2000, respectively, representing 60% of
its IP creation revenue in 1999 and 67% of IP creation revenue in 2000. The increase in cost of IP creation revenue as a percentage of IP creation revenue was primarily due to increased labor costs.
Cost of Hard IP revenue for Parthus amounted to $2.1 million in 2000, the first year in which Parthus recognized Hard IP
revenue. Cost of Hard IP revenue as a percentage of Hard IP revenue was 62% in 2000.
Operating Expenses
Parthus total operating expenses for 2000 were $38.9 million, an increase of 209%. This increase
was due to Parthus significant investment in developing the licensing and royalty business model and launching key new product platforms, which resulted in planned higher engineering staff, facilities costs, patent costs and depreciation
charges. The increase also reflects the continued expansion of Parthus sales and marketing capabilities and the opening of sales offices in new geographic regions to support and leverage the R&D effort, as well as non cash stock
compensation charges.
Research and development expenses, the largest element of Parthus
operating expenses, increased by 169% from $7.1 million, or 37% of total revenue, in 1999 to $19.1 million, or 60% of total revenue, in 2000. Parthus views research and development as a principal strategic investment and has continued
its commitment to invest
75
heavily in this area. This commitment is reflected primarily in higher labor and associated costs resulting from Parthus increased headcount, including through Parthus acquisition of
the GPS division of Symmetricom Limited. Parthus research and development personnel increased to 308 as of December 31, 2000 from 205 as of December 31, 1999. Included in Parthus research and development expenses is a non-cash stock
compensation charge of $0.9 million which increased from $36,000 in 1999.
Sales and marketing
expenses for Parthus increased by 260% from $2.5 million, or 13% of its total revenue, in 1999 to $9.0 million, or 28% of total revenue, in 2000. The increase primarily resulted from the recruitment of additional sales personnel into
Parthus existing sales operations, the expansion of Parthus sales offices into Japan, Korea, Finland and Sweden, related sales commissions, the launch of the new corporate brand and increases in Parthus direct marketing activities
and travel costs.
General and administrative expenses for Parthus increased by 223% from $3.0
million, or 16% of its total revenue, in 1999 to $9.7 million, or 30% of its total revenue, in 2000. Included in Parthus general and administrative expenses is a non-cash stock compensation charge of $4.5 million which increased from
$4,000 in 1999. The charge includes a one-time non cash compensation expense of $4.3 million as a result of stock options that were granted to some of Parthus executives. Excluding the non-cash compensation charge, Parthus general and
administrative expenses increased from $3.0 million in 1999 to $5.2 million in 2000. This increase reflects Parthus commitment to investing in a management and administrative structure to support Parthus business going forward
and increased facility costs arising from additional locations.
Amortization of intangible assets
for Parthus of $1.1 million in 2000 related primarily to the amortization of patents acquired as part of Parthus acquisitions of the GPS division of Symmetricom Limited and of the GSM and GPRS technologies and design center of Frontier Design
Inc.
Interest Income
Parthus interest income, net, increased from $0.1 million of interest income, net, in 1999 to $5.3 million of interest income, net, in 2000. The increase was
due to higher cash balances as a result of the closing of Parthus initial public offering in May 2000, which generated net proceeds to Parthus of approximately $133 million, and of a follow-on offering in November 2000, which generated net
proceeds to Parthus of approximately $24 million.
Provision for Income Taxes
Parthus provision for income taxes was $1.2 million in 2000 and was provided for tax liabilities in non-Irish
jurisdictions for 2000.
Parthus Liquidity and Capital Resources
At June 30, 2002, Parthus had working capital of $101.1 million including $114.1 million in cash or cash equivalents. At December 31, 2001, Parthus had working capital of
$107.3 million, including $121.5 million in cash and cash equivalents, compared with working capital at December 31, 2000 of $147.4 million, including $159.9 million in cash and cash equivalents. The principal reason for the annual change is
the $25.1 million invested in acquisitions undertaken in 2001. Parthus has no borrowings.
Prior to Parthus
initial public offering, Parthus satisfied its working capital requirements and fixed asset expenditures principally through cash generated by operations and equity private placements. In May 2000, Parthus received approximately $140.2 million of
gross proceeds from the initial public offering of its ordinary shares and ADSs and in November 2000, Parthus received approximately $23.9 million of gross proceeds from a follow-on offering of its ordinary shares and ADSs. The proceeds from these
financings have been and are currently being expended primarily to fund research and development of Parthus portfolio of technology platforms and expansion both organically and through acquisitions.
76
Parthus believes that the net proceeds from its initial and follow-on public
offerings, and existing cash and cash equivalents will suffice to meet Parthus present requirements. The total cash outflow from operating activities for first six months of 2002 amounted to $4.0 million and continues to be in line with
Parthus budgeted cash flow range for the business. The total cash outflow from operating activities in 2001 amounted to $7.9 million and is within the annual cash flow range Parthus anticipated for the business. This compares with a cash
inflow of $2.9 million in 2000. Several factors affected Parthus cash flow in 2001, particularly in the second half of the year as conditions deteriorated in the operating environment. The timing of signing of Parthus license agreements
shifted in the third and fourth quarter to the latter end of the quarter. Payment terms under license agreements have changed, as customers implement aggressive cash management measures, with a smaller upfront cash component under each contract.
These have extended the timing of Parthus cash receipts.
Parthus expects that its business will continue to
consume cash from operating activities mainly through its investment in growing Parthus IP licensing business until Parthus planned return to profitability, targeted for the second half of 2002. Parthus accounts receivable and
deferred revenues may vary unpredictably and will be affected by the timing of signing Parthus contracts, the milestone terms and the credit terms.
In the first six months of 2002, Parthus capital expenditures amounted to $1.1 million. Parthus capital expenditures and acquisition costs were $31.4 million in 2001 and $10.9 million in
2000. Although Parthus has no material commitments for capital expenditures, Parthus anticipates an increase in the rate of capital expenditures consistent with its continued growth in operations, infrastructure and personnel. In January 2002,
Parthus realized $1.8 million from the sale of short term investments and spent approximately $4.9 million on its minority interest investment in UbiNetics and disposal of facility to UbiNetics. In May 2001, Parthus spent approximately $12 million
in cash in connection with its purchase of Chicory Systems Inc., and in June 2001 Parthus spent approximately $13 million in cash in connection with its purchase from STMicroelectronics of its minority shareholding in Parthus subsidiary,
Silicon Systems Design Limited. In March 2000, Parthus invested approximately $6.5 million in cash to partially finance the purchase of the GPS business of Symmetricom Limited.
Parthus net cash provided by financing activities of $1.1 million in the first six months of 2002 and $1.4 million in 2001 reflects net proceeds from the issuance of
share capital. In 2000, Parthus net cash provided by financing activities was $158.2 million, reflecting principally Parthus initial and follow-on public offerings conducted in that year.
Parthus contractual obligations are limited to operating leases as disclosed in note 21 to Parthus financial statements for
the year ended December 31, 2001.
Parthus Critical Accounting Policies, Estimates and Assumptions
The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States
requires Parthus management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Parthus
management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if these assumptions prove to be incorrect or
if conditions develop other than as assumed for purposes of such estimates. Parthus significant accounting policies and the basis of preparation of our consolidated financial statements are detailed in note 2 on pages F-52 to F-58. The
following is a brief discussion of the critical accounting policies used by Parthus which require estimates and judgments by management:
Revenue Recognition. Significant management judgments and estimates must be made and used in connection with the recognition of Parthus revenue in any accounting period. Material
differences in the amount of Parthus revenue in any given period may result if these judgments or estimates prove to be incorrect or if Parthus managements estimates change on the basis of development of the business or market
conditions.
77
Parthus applies the provisions of Statement of Position No.97-2 and No.98-4
Software Revenue Recognition in recognizing its revenue. A significant portion of Parthus revenue is derived from license agreements with customers to enable them to use Parthus IP, which is customized to each customers
specific requirements. Revenues from Parthus initial license fees are recognized based on the percentage to completion method over the period from signing of the license through to customer acceptance, as IP requires significant modification
or customization that takes time to complete. The percentage to completion is measured by monitoring progress using records of actual time incurred to date in the project compared to the total estimated project requirement, which corresponds to the
costs related to earned revenues.
Estimates of total project requirements for Parthus are based on prior
experience of customization, delivery and acceptance of the same or similar technology and are reviewed and updated regularly by management. After delivery, if uncertainty exists about customer acceptance of the IP, license revenue would not be
recognized by Parthus until acceptance. Under the percentage to completion method, provisions for estimated losses on Parthus uncompleted contracts are recognized in the period in which the likelihood of such losses is determined.
If Parthus does not accurately estimate the resources required or the scope of the work to be performed, or does
not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future results may be significantly and negatively affected or losses on existing contracts may need to be recognized.
Acquired Intangibles and Goodwill. Parthus intangible fixed assets and
goodwill arising on acquisition are capitalized and amortized to the income statement over the period during which benefits are expected to accrue, currently estimated at five years. Where events and circumstances are present which indicate that the
carrying value may not be recoverable, Parthus will recognize an impairment loss. Factors Parthus considers important which could trigger an impairment include:
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significant underperformance relative to expected historical or projected future operating results; |
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significant changes in the manner of Parthus use of the acquired assets or the strategy for Parthus overall business;
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significant negative industry or economic trends; |
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significant decline in our stock price for a sustained period; and |
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changes in the ratio of Parthus market capitalization to net book value. |
Parthus measures such impairment loss by comparing the recoverable amount of the asset with its carrying value. The determination of the value of such intangible assets
requires management to make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change in the future, Parthus could be required to
record impairment charges.
Parthus incurred expenses of $10,895,000 relating to amounts assigned to acquired
in-process technology in 2001. Parthus determined the value assigned to acquired in-process technology by identifying those acquired specific in-process research and development projects that would be continued and for which:
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technological feasibility had not been established at the acquisition date; |
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there was no alternative future use and; |
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the fair value was estimable with reasonable certainty. |
78
Parthus Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, otherwise known as FASB, issued SFAS No. 141, Business Combinations. This statement requires that
the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of this standard did not have any impact on Parthus consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142 Goodwill and Other Intangible Assets which revises the accounting for purchased
goodwill and other intangible assets. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. Parthus adopted SFAS No. 142 effective from January 1, 2002. Under SFAS No. 142, purchased goodwill
and intangible assets with indefinite lives are no longer amortized, but instead tested for impairment at least annually. Accordingly, Parthus ceased amortization of all goodwill as of January 1, 2002. Parthus goodwill amortization amounted to
$7,824,000 for the year ended December 31, 2001. No goodwill amortization for Parthus arose in either of the years ended December 31, 1999 and 2000. Parthus does not have any intangible assets, other than goodwill, with indefinite lives.
Parthus intangible assets with finite lives, primarily patents and intellectual property, will continue to be amortized over their useful lives, currently estimated at five years. Parthus recorded amortization of intangible assets of $Nil,
$1,081,000 and $1,371,000 for the years ended December 31, 1999, 2000 and 2001 respectively.
SFAS No. 142
requires a two step impairment test for goodwill. The first step is to compare the carrying amount of the reporting units assets to the fair value of the reporting unit. If the carrying amount exceeds the fair value then the second step is
required to be completed, which involves the fair value of the reporting unit being allocated to each asset and liability with the excess being implied goodwill. The impairment loss is the amount by which the recorded goodwill exceeds the implied
goodwill. Parthus is required to complete a transitional impairment test for goodwill as of the beginning of the fiscal year in which the statement is adopted. This transitional impairment test requires that Parthus completed step one of
the goodwill impairment test within six months from December 31, 2001. Parthus is currently completing this transitional impairment test and does not expect to incur any impairment charges to goodwill.
SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143), addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Parthus does not expect that SFAS No. 143 will have a material impact on the financial statements.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144) addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The provisions of this statement are effective for Parthus financial statements issued for fiscal years beginning after December 15, 2001. Parthus does not expect that SFAS No. 144 will have a material impact on the
financial statements.
In April 2002, FASB issued SFAS No. 145 Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease
modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be adopted beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13, which
will be adopted for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on Parthus consolidated financial statements.
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Overview
ParthusCeva licenses to semiconductor companies and electronic equipment manufacturers complete, integrated intellectual property solutions that enable a wide variety of
electronic devices. Our programmable DSP cores and application-level IP platforms power wireless connectivity, handheld devices, consumer electronics products, GPS devices, consumer audio products and automotive applications. We intend to license
highly integrated system solutions consisting of our IP platforms built around our DSP cores technology, while also continuing to license our DSP cores and IP platforms as stand-alone offerings. ParthusCeva was formed in
, 2002 through the combination of Ceva, the former DSP cores licensing business of DSP Group, founded in 1991, and Parthus, a provider of platform-level IP for the consumer
electronics market, founded in 1993.
Our DSP cores licensing business (formerly the business of Ceva) develops
and licenses designs of programmable DSP cores and DSP core-based sub-systems. A programmable DSP core is a special-purpose, software-controlled processor that, through complex mathematical calculations, analyzes, manipulates and enhances digital
voice, audio and video signals. These chips are used in a wide variety of electronic devices, including digital cellular telephones, modems, hard disk drive controllers, MP3 players, voice over packet products and digital cameras, and are critical
to the performance of the electronic products in which they are used. A DSP core-based sub-system incorporates additional hardware blocks required as interfaces from the DSP core for the overall system.
Our platform-level IP business (formerly the business of Parthus) develops semiconductor intellectual property for a range of consumer
electronic products and licenses this technology to semiconductor manufacturers and OEMs. Our portfolio of IP platforms spans broadband and local area wireless connectivity as well as key application IP including multimedia, location and
technologies and smartphone/handheld technologies. The intellectual property we license can take the form of schematics and designs for silicon chips and circuitry and software to perform particular functions on those chips. In addition, we also
sell finished modules (which we refer to as Hard IP) to these customers.
We believe that the continuing evolution
of the wireless and consumer electronics market has created significant demand for semiconductor intellectual property providers that can add greater value by delivering complete system solutions that combine DSP processor cores with
application-specific IP platforms (such as analog, mixed-signal, digital baseband and software). We anticipate that our approach will permit our customers to introduce feature-rich products while simultaneously minimizing their development cost,
risk, complexity and time to market.
Industry Background
Semiconductors, the key building blocks of electronic products, are devices that permit the controlled flow of electronic signals. An integrated circuit is a semiconductor
that combines a number of individual electronic circuits, each of which performs a particular function. Continuous improvements in semiconductor design have led to smaller, more complex integrated circuits that perform a wide range of functions. As
the performance of semiconductors has improved and their size, cost, and power consumption have decreased, they have been used in an increasing number of applications, including telecommunications systems, automotive electronics, audio and video
devices and a range of other consumer electronics products. Rising consumer expectations have increased the demand for more frequent introductions of high-performance semiconductors with lower power consumption and enhanced functionality.
System-on-a-Chip
Semiconductor manufacturing processes have advanced significantly in recent years to allow a substantial increase in the number of circuits placed on a single chip. At the same time, requirements for
increased product
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functionality, higher performance and lower cost have driven demand for such system-level integration. Through this integration, complete electronic systems containing both analog and digital
functions are combined on a single silicon chip, known as a system-on-a-chip. A typical system-on-a-chip incorporates a processor (such as a DSP core or a general purpose processor), memory, input/output devices and other specific components, as
well as software.
The increased complexity of system-on-a-chip design and manufacturing requires a high level of
design resources to fully capitalize on the improvements in semiconductor manufacturing technology and to maximize functionality. Designers capabilities and semiconductor companies internal design resources have not kept pace with the
advances in this technology. As a result, chip manufacturers are facing a growing design gap between their increasing manufacturing potential and needs and their limited chip design capabilities.
Semiconductor Intellectual Property
To address this design gap, many semiconductor designers and manufacturers are increasingly choosing to license proven intellectual property components, such as processor cores and
application-specific IP from third parties, rather than to develop those technologies internally. By relying on third parties for the most advanced designs of specialized components, system-on-a-chip designers and manufacturers can create
differentiated products while reducing their development costs, complexity, risk and time to market.
The creation
of licensable, re-useable design components, which we refer to as third-party semiconductor intellectual property (SIP), is a relatively new and emerging trend in the semiconductor market. According to Gartner-Dataquest, the market for semiconductor
intellectual property was $892 million in 2001, representing a 25% year-on-year growth from 2000.
Semiconductor
intellectual property providers have traditionally delivered intellectual property blocks only for digital functions and only for individual components with a relatively narrow function, referred to as block-level IP. The continuing evolution of
electronic products has created significant demand for semiconductor intellectual property providers that add greater value by offering complete, integrated analog and digital systems, as well as software, which we refer to as platform-level IP. We
believe that this approach provides semiconductor companies and electronic product manufacturers with several key advantages, including improved time to market and a reduction in the risks, costs and complexities in bringing new products and
technologies to market.
Digital Signal Processor Cores
A key piece of semiconductor IP in the computer chips driving many electronic products is the DSP core, which processes the digital data
derived from converted analog signals. Once a signal (such as the human voice) has been converted to digital form, a DSP core is used to analyze, manipulate and enhance the data. The signal can then be transmitted over a network (such as the
cellular telephone network), compressed and stored (such as in answering machines) or recognized as a command (such as through voice recognition). Digital signal processing is used in many fields, including telecommunications, speech and music
processing, imaging, medicine and seismology. As the number of electronic devices that require the processing of digital data has grown, so has the demand for reliable DSP cores.
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As illustrated in the diagram below, a DSP-based system-on-a-chip includes
several components. The DSP core controls the processing of the chip and uses mathematical calculations to process information. Other parts of the system-on-a-chip include data memory components, which host the data before and after it is processed
by the DSP core, and the program memory component, which stores the software used to operate the DSP core. A chip designer may add its own specific proprietary technology to provide differentiated functionality (such as special functions and
input/output electronics, which control the transfer of data between the DSP core and other electronic devices that are connected to the chip), referred to as logic and input/output in the diagram below.
Programmable DSP cores are instructed by software programs to process
ultra-fast mathematical calculations, including addition, subtraction and multiplication. The math-intensive signal processing performed by the DSP core is generally used for data compression, error correction, voice recognition and security.
A programmable DSP-based design allows the same chip to be programmed and reprogrammed with different software
and used for several generations and different applications of products, which reduces the internal development costs for manufacturers and allows them to differentiate their products through varying the software functionality. In addition, a
programmable approach allows for field upgrades of the technology, such as replacement of software through remote downloading, rather than physical removal and replacement of the entire chip.
According to Forward Concepts, a market research firm, worldwide programmable DSP chip shipments have increased to $6.1 billion in 2000
and then decreased to $4.3 billion in 2001. Forward Concepts predicts that this market will grow at a compound annual rate of 18% from 2000 to 2005.
Licensable DSP cores are typically licensed to semiconductor companies or directly to system OEMs. By using licensable DSP cores, manufacturers of ASSPs (application-specific standard products, which
are off-the-shelf chips targeted to a specific type of application for a broad range of system OEMs) and ASICs (application-specific integrated circuits, which are chips that are customized to meet a specific customers needs) have multiple
sources of DSP technology, thereby enabling competition among their chip suppliers as well as a wider variety of more differentiated products.
The manufacturers of DSP-based system-on-a-chip face a make or buy dilemmawhether to develop a given DSP chip design or to license it from a third party. Internal development of a DSP
core requires considerable design resources and specialization, which many semiconductor companies do not have. In todays rapidly evolving markets, the scarcity of engineering talent means that it is usually not cost-effective for most
semiconductor companies and designers to devote the engineering resources necessary to develop complicated components such as a programmable DSP core. Therefore, companies may concentrate on the integration of software, hardware and embedded memory,
and rely on licensing other intellectual property, such as DSP cores, from third parties.
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Licensing also offers a substantial time-to-market advantage, which in most cases
is a crucial factor for a manufacturers competitive market positioning. Further, the licensee can choose the method and source of chip production. This is a significant advantage for the licensee, as a licensed chip can easily be produced by
several manufacturers, eliminating its dependence upon a single source of chip production.
End Markets
Third-party semiconductor intellectual property is licensed and deployed by semiconductor companies and
electronic equipment manufacturers serving a wide variety of high-volume end markets. These include the markets for:
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Second-generation (2G), second-and-a-half-generation (2.5G) and third-generation (3G) cellular telephonescellular telephones that
combine voice communications and high-speed data transmission capabilities, permitting access to the Internet and other advanced features; |
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Internet-enabled personal digital assistants, or PDAshand-held devices that incorporate electronic calendars, address books and remote access to
the Internet and other data networks; |
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Intelligent pagerspersonal paging devices that incorporate advanced data communications features, such as access to e-mail, news,
weather and stock quotes; |
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Global positioning system (GPS) devicesdevices used in automobiles, wireless connections for personal computers and industrial controls accessed
through wireless Internet connections; |
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Other internet devicesproducts such as laptop computers, set-top boxes, Internet appliances and gaming consoles, which are increasingly connected
to the Internet via either broadband wireless technologies or wireless local area network (W-LAN) technologies; |
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Hard drive controllersthe devices which control the reading and writing of data for personal computers; |
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voice over packet products, such as voice-over Internet Protocol (VoIP) and voice-over digital subscriber line (VoDSL) applications;
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wireline telecommunications applications, such as digital subscriber line (DSL) applications; |
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automotive applications; |
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consumer audio devices, such as MP3 players; and |
Products such as these require state-of-the-art functionality, but generally must also be easy to use and convenient in terms of both size and battery life. Providers of semiconductor intellectual property help address these
requirements by focusing on integrated circuit technology that:
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permits high-data-rate communications in conformity with industry standards; |
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allows the integration of more advanced features at reasonable prices by combining functions on a single system-on-a-chip; and |
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helps speed time to market by reducing product development time through design reuse. |
The ParthusCeva Solution
We offer complete,
open, integrated DSP cores solutions for semiconductor manufacturers and OEMs, comprising wireless communication, application and multimedia IP platforms built around our DSP processor core architectures. Our IP licensing business model, including
royalties, offers a scalable business with multiple revenue streams and solid gross margins.
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Our DSP cores licensing business develops and licenses designs of programmable
DSP cores. These designs are used in a wide variety of electronic devices, including digital cellular telephones, modems, hard disk drive controllers, MP3 players, voice over packet products and digital cameras, and are critical to the performance
of the electronic products in which they are used. Our designs are independent of specific semiconductor manufacturing processes, and can therefore be used by a wide variety of customers. The DSP cores we design are appropriate for use in both
current and emerging applications requiring digital signal processing. We market our technology and designs as well as a wide array of software and hardware development tools and technical support services. We license our DSP core designs to leading
semiconductor companies throughout the world. These companies incorporate our designs into application-specific chips or custom-designed chips that they manufacture, market and sell to OEMs of a variety of electronic products. We also license our
designs to OEMs directly.
Our IP platforms licensing business develops highly integrated semiconductor
intellectual property solutions that are crucial to the cost-effective implementation of new generations of consumer electronic devices, including mobile-Internet products. Our IP platforms enable a range of wireless devices that are used by
individuals to communicate, transact business and access information easily, flexibly and affordably. Our extensive intellectual property portfolio covers broadband wireless solutions (2G, 2.5G, 3G), wireless local area networking solutions (802.11,
Bluetooth) and key application and multimedia solutions (including audio, multimedia, GPS and smartphone technologies). We make our intellectual property available to our customers under licenses, as part of development projects or in silicon chip
form.
The key benefits we offer our licensees include:
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An extensive IP portfolio. Our IP portfolio spans the bulk of mobile Internet, wireless application and multimedia
technologies, as well as a suite of programmable DSP cores. This portfolio often allows us to provide a customer with the required solution with reduced development cost, complexity and risk, therefore reducing the customers time to market.
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The ability to deliver complete system solutions. Our broad IP portfolio allows us to provide our customers with complete
solutions at the system level, including application-specific IP platforms and general-purpose DSP cores. Our company combines the expertise of a provider of DSP architectures with the expertise of a supplier of complete platform level-IP solutions,
which we believe strongly positions us to become a leading supplier of open-standard IP solutions to the industry. |
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Flexible IP deployment and support. To meet specific customer circumstances and requirements, we intend to offer
system-level solutions composed of our IP platforms built around our DSP cores, as well as to license our platforms and cores as stand-alone offerings. We make our solutions available in the form of licensed intellectual property rights, dedicated
development projects, or hard IP embodied in silicon chips or circuit boards. In addition, we offer our licensees specialized intellectual property integration support. We believe that this flexibility facilitates the adoption and
integration of our intellectual property. |
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Leading-edge technology. Our licensing relationships with a number of leading semiconductor companies and OEMs, as well as
our communications with potential customers, help to assure that we are developing additional intellectual property that meets market requirements as they evolve. A number of our employees also participate actively in international standards-setting
bodies in order to influence and learn about new technological developments. |
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The ability to provide a production-ready solution. We fully test the platforms and DSP cores we provide so that they are
ready for product integration. In addition, we utilize third-party foundries that manufacture chips to our design. These relationships allow us to assure our customers access to low-cost production. |
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A diverse and experienced research and development staff. We have more than 310 employees engaged in product development in
a broad range of areas, including analog, digital, software, mixed-signal and digital signal processing technology. We believe that the breadth of knowledge, experience, and stability of our workforce allow us to provide better and faster services
to our customers, and to maintain and develop our core intellectual property efficiently. |
Strategy
The combination of Parthus and Ceva will position us to address what we believe to be two of the major
converging trends in our industry. First, we believe that our industry is moving towards open-standard processor architectures and away from traditional proprietary solutions. Second, we believe that increased semiconductor product complexity and
demands for reduced time-to-market have led more companies to decide to license complete platform level-IP solutions, rather than licensing individual components from multiple suppliers. ParthusCeva will combine the expertise of a provider of DSP
architectures with the expertise of a supplier of complete platform level IP solutions. We believe ParthusCeva will be well positioned to take full advantage of these major industry shifts and become a leading supplier of open-standard DSP solutions
to the industry.
Our goal is to become a leading licensor of programmable DSP cores and platform-level IP
solutions. To meet these goals we intend to:
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Provide an integrated solution. We seek to maximize the competitive advantage provided by our ability to offer an
integrated IP solutionincluding communications, applications and multimedia IP built around our DSP processor core architectures. We believe that this integrated solution will favorably position us to capitalize on what we believe is the
industry trend towards the licensing of open-standard IP architectures. |
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Take advantage of the industry shift towards open-standard architectures. We believe that the industry trend away from
proprietary IP towards open-standard architectures creates an opportunity for providers of licensable DSP cores and platform-level IP. As a consequence, we intend to use our expertise in critical open standards fields, such as Bluetooth, GPS and
multimedia, in order to position ourselves to take advantage of this trend. Towards this end, we have participated and intend to continue to participate in the development of industry standards in these and other emerging technology areas.
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Focus on a portfolio approach to the licensing of our IP platforms. We seek to differentiate ourselves through the breadth
of our IP offerings and our capability to integrate these offerings into a single solution built around our family of state-of-the-art DSP cores. We intend to continue to expand our portfolio of broadband wireless solutions (2G, 2.5G, 3G), wireless
local area networking solutions (802.11, Bluetooth), and key application and multimedia solutions (including audio, multimedia, GPS and smartphone technologies). |
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Focus on convergence of technologies through an open architecture. We seek to ensure that our platforms, as well as other
third-party IP, can be rapidly integrated into a single integrated circuit through adherence to the specifications of our open, flexible and highly power-efficient architectures. |
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Maximize our expertise. We seek to maximize our expertise in DSP, analog, mixed-signal and radio frequency technology and
to use that expertise to address critical customer demands. We intend to enhance our existing DSP cores and IP platforms with additional features and performance, while developing new offerings that will focus on other emerging applications across
the range of end markets we serve. |
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Target top-tier customers. We seek to strengthen relationships and expand licensing and royalty arrangements with our
existing customers and to extend our customer base with key industry companies in order to facilitate the development of our technology. We believe that we can achieve the best rate of return on our investment in technology by targeting our sales
and marketing activities at high-volume semiconductor companies and leading electronic product manufacturers with a track record of
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successful end-user deployments. Parthus and Ceva together have entered into license agreements with nine of the top ten semiconductor companies worldwide.
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Focus on large and fast-growing markets. We believe that our expertise in programmable DSP cores and platform-level IP
favorably positions us to target fast-growing segments within the consumer electronics market, such as wireless communications, mobile computing, automotive electronics, and consumer entertainment. We intend to strengthen our relationships and
expand licensing and royalty arrangements with customers in those markets and to extend our customer base with key industry leaders within each of those segments. We believe that we can achieve the best results by targeting our sales activities at
leaders within those markets. |
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Establish, maintain and expand relationships with key technology providers. We have established and seek to expand our
close working relationships with: |
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contract semiconductor companies, usually referred to as silicon foundries, in order to assure adequate supplies of chips for our customers who purchase our
technology in chip form and in order to give OEMs a means of obtaining competitive manufacturing capabilities; |
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third-party suppliers of block-level semiconductor intellectual property, in order to have access to their most current technologies; and
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developers of both application-level and system-level software so that we can continue to offer complete platform solutions. |
In addition, we have and seek to expand our relationships with companies that offer complementary technologies for designing
system-on-a-chip applications based on our DSP core designs. We believe that these relationships will increase the markets for our products.
Products and Technology
DSP Cores Licensing Business
Our DSP cores licensing business develops and licenses designs of programmable DSP cores. A programmable DSP core is a special purpose,
software-controlled processor that, through complex mathematical calculations, analyzes, manipulates and enhances digital voice, audio and video signals. The programmable DSP cores we design are used as the central processors in semiconductor chips
made for specific applications. These chips are used in a wide variety of electronic devices, including digital cellular telephones, modems, hard disk drive controllers, MP3 players, voice over packet products and digital cameras, and are critical
to the performance of the electronic products in which they are used.
Our SmartCores family of cores is currently
composed of five offerings: PineDSPCore, OakDSPCore, TeakLite, Teak and PalmDSPCore and a DSP core-based sub-system: the XpertTeak. By offering a range of performance, price and power consumption balances, our cores family addresses a wide range of
applications, from low-end, high-volume applications, such as digital answering machines, hard disk controllers, low-speed modems and VoIP terminals, to high-performance applications such as 3G cellular communication devices, broadband modems,
consumer multimedia and VoIP gateways. Our current offerings are:
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PineDSPCore. Introduced in 1991, the PineDSPCore was the first DSP core we developed. Due to its small die size and compact
instruction code, it has been primarily used for low-end, high-volume applications, including digital answering machines, fax machines, low-speed modems and hard disk drive controllers. We currently generate revenues from the PineDSPCore, although
we are no longer actively promoting it. |
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OakDSPCore. The OakDSPCores hardware units are operative through a set of soft cores known as an instruction set,
which is a central processing unit (CPU) type instruction allowing the core to also
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provide micro-control functionality. The small die size, low-power consumption and balance between cost and performance of our OakDSPCore make it well suited for second generation (2G) digital
cellular telephones using GSM, TDMA and CDMA (code-division multiple access) standards, soft modems, voice-over packet network applications and Internet audio devices.
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TeakLite. TeakLite is a soft core which significantly facilitates its incorporation of its design into a
licensees chip and foundry specifications. TeakLite offers the same instruction set as OakDSPCore; it is superior to the OakDSPCore in terms of portability, operating speed and power consumption. TeakLite is primarily designed for 2G and 2.5G
cellular telephones, modems, consumer multimedia (digital still cameras and audio appliances, including MP3 players), hard disk drive controllers and voice-over IP applications. |
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Teak. Like TeakLite, Teak is a soft core and is designed with a focus on power reduction features. The Teak
offers high performance, the ability to process multiple instructions in parallel and excellent code density, making it well suited for 2.5G and 3G cellular telephones, broadband modems and consumer multimedia applications.
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PalmDSPCore. With faster processing capabilities and the ability to process multiple instructions in parallel, PalmDSPCore
is a sub-family of three DSP soft cores designed to meet the high-performance, low-cost and low-power requirements of a range of applications. These include 2.5G cellular telephones, broadband modems, and voice-over packet network gateways, for
which we offer a 16-bit core, and consumer audio and video applications, for which we offer 20-bit and 24-bit cores. |
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XpertTeak. XpertTeak is a highly integrated, low power Teak core-based DSP sub-system. In addition to the Teak core, it
incorporates advanced peripherals and a system interface set, such as direct memory accesses (DMA) controllers, timers, power consumption management units, serial ports and CPU interfaces. |
Our designs are independent of specific semiconductor manufacturing processes, and can therefore be used by a wide variety of customers.
The DSP cores we design are appropriate for use in both current and emerging applications requiring digital signal processing. We market our technology and designs as well as a wide array of software development tools and technical support services.
Revenues from hardware development tools have not been significant to date.
We believe the following to be the
key benefits of our DSP cores offerings:
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Low power consumption. Our cores have been designed to satisfy low power consumption requirementsa key feature
of products that rely on batteries, such as cell phones and portable audio products, or are sensitive to power dissipation, such as telecom |