UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 000-49842
CEVA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2033 Gateway Place, Suite 150, San Jose, California
(Address of principal executive offices)
77-0556376
(I.R.S. Employer
Identification No.)
95110-1002
(Zip Code)
(408) 514-2900
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Name of each exchange on which registered
NASDAQ GLOBAL MARKET
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]
No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ]
No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of ―large accelerated filer,‖ ―accelerated filer,‖ and ―smaller reporting company‖ in Rule 12b-2 of
the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
As of June 30, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$107,483,000 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation
System National Market System. Shares of common stock held by each officer, director, and holder of 5% or more of the outstanding
common stock of the Registrant have been excluded from this calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $0.001 par value per share
Outstanding at March 6, 2009
19,530,111 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on June 2, 2009 (the ―2009
Proxy Statement‖) are incorporated by reference into Item 5 of Part II and Items 10, 11, 12, 13, and 14 of Part III.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
PART II
Page
3
9
16
16
17
17
18
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 19
Item 6. Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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22
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements
Signatures
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41
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42
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43
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43
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F-1
1
FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Annual Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that if
they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such
forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be
deemed forward-looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by
words such as ―will,‖ ―may,‖ ―should,‖ ―could,‖ ―expect,‖ ―suggest,‖ ―believe,‖ ―anticipate,‖ ―intend,‖ ―plan,‖ or other similar words.
Forward-looking statements include the following:
• Our belief that there is an industry shift towards licensing DSP technology from third party IP providers as opposed to
developing it in-house;
• Our belief that the growing demand for highly integrated, licensable application platforms incorporating DSP cores and all
the necessary hardware and software will drive demand for our technology;
• Our belief that the handsets market, including the penetration of handsets in rural sites such as in China, the increasing
market share of Smartphones and the trend towards 3G/3G+ capabilities in handsets, presents significant growth
opportunities for CEVA;
• Our belief that the full scale migration to our DSP cores and technologies in the handsets market has not been fully realized
and continues to progress;
• Our belief that Texas Instruments’ announcement of its intent to exit the merchant baseband market, after historically being
the largest player in this space, is a strong positive driver for our future market share expansion;
• Our belief that our research and development expenses may increase in the future to keep pace with new trends in our
industry;
• Our belief that our new mobile multimedia platforms and CEVA-HD-Audio technology may increase our future royalty
potential;
• Our anticipation that our current cash on hand, short-term deposits and marketable securities, along with cash from
operations, will provide sufficient capital to fund our operations for at least the next 12 months; and
• Our belief that changes in interest rates within our investment portfolio will not have a material affect on our financial
position on an annual or quarterly basis.
Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-
looking statements contained in this report are based on information that is currently available to us and expectations and assumptions
that we deem reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking
statements in this report or in any of our other communications, except as required by law. All such forward-looking statements
should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be
complete or accurate at a later date.
Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements
contained in this report. These factors include, but are not limited to, those risks set forth in Item 1A: Risk Factors.
This report contains market data prepared by third parties, including Gartner, Inc., Informa Telecoms & Media, ABI
Research and iSupply. Actual market results may differ from the projections of such organizations. This report includes trademarks
and registered trademarks of CEVA. Products or service names of other companies mentioned in this Annual Report on Form 10-K
may be trademarks or registered trademarks of their respective owners.
2
ITEM 1. BUSINESS
Company Overview
PART I
Headquartered in San Jose, California, CEVA is a leading licensor of silicon intellectual property (SIP) primarily for the
handsets, portable multimedia and consumer electronics markets. For more than fifteen years, CEVA has been licensing a portfolio of
DSP cores, subsystems and platforms to leading, semiconductor and original equipment manufacturer (OEM) companies worldwide.
These technologies include:
a family of programmable Digital Signal Processor (DSP) cores with a range of cost, power-efficiency and
performance points;
DSP-based subsystems (the essential hardware components integrated with the DSP core to form a System-on-Chip
(SoC) design); and
a portfolio of application-specific platforms, including video, audio, Voice over Internet Protocols (VoIP), Bluetooth
and Serial Advanced Technology Attachment (SATA).
In 2008, analyst firm Gartner Inc. reported CEVA’s share of the licensable DSP market at 61%.
Our technology is licensed to leading semiconductor and OEM companies throughout the world. These companies
incorporate our IP into application-specific integrated circuits (―ASICs‖) and application-specific standard products (―ASSPs‖) that
they manufacture, market and sell to consumer electronics companies. Our IP is primarily deployed in high volume markets,
including handsets (e.g. GSM/GPRS/EDGE/WCDMA/LTE/WiMax, CDMA and TD-SCDMA), portable multimedia (e.g. portable
video players, MobileTVs, personal navigation devices and MP3/MP4 players), home entertainment (e.g. DVD/blu-ray players, set-
top boxes and digital TVs), game consoles (portable and home systems), storage (e.g. hard disk drives and Solid Storage Devices
(SSD)) and telecommunication devices (e.g. residential gateways, femtocells, VoIP phones and network infrastructure).
Our revenue mix contains primarily IP licensing fees, per unit and prepaid royalties and other revenues. Other revenues
include revenues from support, training and sale of development systems. We have built a strong network of licensing customers who
rely on our technologies to deploy their silicon solutions. Our technologies are widely licensed and power some of the world’s leading
consumer electronics and semiconductor companies, including Broadcom, Ericsson, Freescale, Infineon, InterDigital, Intersil,
Marvell, Mediatek, Mindspeed, NXP, RadioFrame Networks, Renesas, Samsung, Sharp, Solomon Systech, Sony, Spreadtrum, ST
Wireless, STMicroelectronics, Sunplus, Thomson, VIA Telecom and Zoran.
In 2008, CEVA’s licensees shipped 307 million CEVA-powered chipsets targeted for a wide range of diverse end markets, an
increase of 36% over 2007 shipments of 227 million chipsets. To date, over one billion CEVA-powered chipsets have been deployed
by the world’s top consumer electronics brands, including ASUS, Amoi, Casio, Dell, Fujitsu, Haier, i-mate, Lenovo, LG Electronics,
Nintendo, Nokia, Palm, Panasonic, Philips, Pioneer, Samsung, Sharp, Sony, Sony Ericsson, Toshiba and ZTE.
CEVA was created through the combination of the DSP IP licensing division of DSP Group, Inc. (―DSPG‖) and Parthus
Technologies plc (―Parthus‖) in November 2002. We have over 180 employees worldwide, with research and development facilities
in Israel, Ireland and the United Kingdom, and sales and support offices throughout Asia Pacific (APAC), Japan, Sweden, Israel and
the United States.
CEVA is traded on both NASDAQ Global Market (CEVA) and the London Stock Exchange (CVA).
Industry Background
Digital Signal Processor (DSP) Cores
Digital Signal Processors continue to be one of the fastest growing sectors of the semiconductor industry. DSP is
fundamental to all broadband communication (wireless and wired), as well as digital multimedia processing (e.g. voice, audio, video
and image). DSP converts an analog signal (such as the human voice or music) into digital form. Such digital form then permits
features such as voice, video, audio and data compression (a mandatory feature for saving memory space and allowing more users to
share the scarce frequency band in wireless or wired communication), as well as audio and video enhancements for devices such
DVDs, digital TVs and MP3 players.
3
Design Gap
The demand for high end and ultra-low-cost (ULC) handsets, mobile multimedia devices and home entertainment equipments
has grown substantially in recent years. As consumers demand electronic products with more connectivity, portability and capability,
semiconductor manufacturers face ever growing pressures to make smaller, feature-rich integrated circuits that are more reliable, less
expensive and have greater performance, all in the face of decreasing product lifecycles and constrained battery power. While
semiconductor manufacturing processes have advanced significantly to allow a substantial increase in the number of circuits placed on
a single chip, resources for design capabilities have not kept pace with the advances in manufacturing processes, resulting in a
growing ―design gap‖ between the increasing manufacturing potential and the constrained design capabilities.
CEVA Business
CEVA addresses the requirements of the handsets, portable multimedia and home entertainment markets by designing and
licensing programmable DSP cores, DSP-based subsystems, application-specific platforms and a range of software components which
enable the rapid design of DSP-based chipsets or application-specific solutions for developing a wide variety of applications.
Given the ―design gap,‖ as well as the complexity and the unique skill set required to develop a DSP core, many
semiconductor design and manufacturing companies increasingly choose to license proven intellectual property, such as processor
cores (e.g. DSPs) and memory and application-specific platforms, from silicon intellectual property (SIP) companies like CEVA
rather than develop those technologies in-house. In addition, with more complex designs and shorter time to market, it is no longer
cost efficient and becoming progressively more difficult for most semiconductor companies to develop the software, such as video,
audio and VoIP, required for their DSP-based applications. As a result, in addition to licensing DSP cores, companies increasingly
seek to license application-specific software and hardware from third parties such as CEVA or a third-party community of developers,
such as CEVAnet, CEVA’s third-party network.
Our IP Business Model
Our objective is for our CEVA DSP cores to become the DSP-of-choice in the embedded DSP market. To enable this goal,
we have licensed and continue to license on a worldwide basis to semiconductor and OEM companies that design, manufacture and
source CEVA-based solutions that are combined with their own differentiating technology. We believe our business model offers us
some key advantages. By not focusing on manufacturing or selling silicon products, we are free to widely license our technology and
free to focus most of our resources on research and development of DSP technologies. By choosing to license the programmable DSP
core, manufacturers can achieve the advantage of creating their own differentiated solutions and develop their own unique product
roadmaps. Through our licensing efforts, we have established a worldwide community developing CEVA-based solutions, and
therefore we can leverage their strengths, customer relationships, proprietary technology advantages and existing sales and marketing
infrastructure. In addition, as our intellectual property is widely licensed and deployed, system OEM companies can obtain CEVA-
based chipsets from a wide range of suppliers, thus reducing dependence on any one supplier and fostering price competition, both of
which help to contain the cost of CEVA-based products.
We operate a licensing and per unit royalty business model. We typically charge a license fee for access to our technology
and a royalty fee for each unit of silicon which incorporates our technology. License fees are invoiced in accordance with agreed-
upon contractual terms. Royalties are reported and invoiced one quarter in arrears and generally are based on a fixed unit rate or a
percentage of the sale price for the CEVA-based silicon product.
Strategy
We believe there is a growing demand for high performance and low power DSP and application-specific platforms
incorporating DSP cores and all the necessary hardware and software for target applications. We believe the growth in the demand for
these platforms will drive demand for our technology. As CEVA offers expertise developing these complete solutions in a number of
key growth markets, including handsets, video, audio, Bluetooth and storage, we believe we are well positioned to take full advantage
of this industry shift. To capitalize on this industry shift, we intend to:
continue to develop and enhance our range of DSP cores and associated subsystems — we seek to enhance our existing
family of DSP cores and DSP-based subsystems with additional features, performance and capabilities;
continue to develop and enhance our range of complete and highly integrated platform solutions — we intend to continue
developing our integrated IP solutions which combine application-specific software and dedicated logic – such as video,
audio and VoIP - built around our DSP cores, and delivered to our licensing partners as a complete and verified system
solution;
4
capitalize on our relationships and leadership — we seek to expand our worldwide community of semiconductor and
OEM licensees who are developing CEVA-based solutions; and
capitalize on our IP licensing and royalty business model — we seek to maximize the advantages of our IP model which
we believe is the best vehicle for a pervasive adoption of our technology and allows us to focus our resources on research
and development of new licensable technologies and applications.
Products
We are the leading licensor of SIP platform solutions and DSP cores to the semiconductor industry. We offer a family of
programmable DSP cores, associated subsystems and a portfolio of application-specific platforms, including multimedia, audio, VoIP,
Bluetooth and SATA.
CEVA DSP Cores
We market a family of synthesizable, programmable DSP cores, each delivering a different balance of performance, power
dissipation and cost, thereby allowing customers to select a DSP core ideally suited for their target application. The ability to match
processing power to the application is a crucial consideration when designers select a DSP supplier. Our family of DSP cores is
largely software compatible, meaning that software from one core can be applied to another core, which significantly reduces
investment in code development, tools and design engineer training.
We deliver our DSP cores in the form of a hardware description language definition (known as a soft core or a synthesizable
core). All CEVA DSP cores can be manufactured on any process using any physical library, and all are accompanied by a complete
set of tools and an integrated development environment. An extensive third-party network supports CEVA DSP cores with a wide
range of complementing software and platforms. In addition, we provide development platforms, software development kits and
software debug tools, which facilitate system design, debug and software development.
CEVA DSP-based Subsystems
Designers today face escalating design costs and shrinking design timelines. To further reduce the cost, complexity and
associated risk of bringing products to market, CEVA has developed a range of DSP-based subsystems which combine selected
hardware peripherals, which are essential to designers deploying CEVA DSP cores, with software modules and chip designs. Our
subsystems contain a collection of peripherals, such as on-chip data and program memory controllers, high performance DMA
controller, Buffered Time Division Multiplexing Port (BTDMP), high-throughput Host Processor Interface (HPI) and power
management unit (PMU). These hardware subsystems are designed to easily integrate into existing SoCs, providing standard
protocols and interfaces, such as AHB and APB bridges for Host-DSP efficient communications.
CEVA Application-Specific Platforms
CEVA application-specific platforms are a family of complete system solutions for a range of applications. These
application-specific platforms fundamentally reduce the complexity, cost of ownership and time-to-market for products developed
utilizing the platforms. Platforms typically integrate a CEVA DSP core, hardware subsystem and application-specific (e.g. video
processing) software. Our family of platforms spans multimedia (audio, video and image) and voice (VoIP). We also offer platforms
solution for Bluetooth and high speed serial communications (SATA).
Customers
We have licensed our DSP cores, DSP-based subsystems and application-specific platforms to leading semiconductor and
OEM companies throughout the world. These companies incorporate our IP into application-specific chipsets or custom-designed
chipsets that they manufacture, market and sell to consumer electronics companies. We also license our DSP cores, DSP-based
subsystems and application-specific platforms to OEMs directly. Included among our licensees are the following customers:
Broadcom, Ericsson, Freescale, Infineon, InterDigital, Intersil, Marvell, Mediatek, Mindspeed, NXP, RadioFrame Networks, Renesas,
Samsung, Sharp, Solomon Systech, Sony, Spreadtrum, ST Wireless, STMicroelectronics, Sunplus, Thomson, VIA Telecom and
Zoran. The majority of our licenses have royalty components, of which 27 customers were shipping products incorporating our
technologies at the end of 2008. Of these 27 customers, 21 were under per unit royalty arrangements and six were under prepaid
royalty arrangements. One customer accounted for 20% of our total revenues for 2008. The identity of our greater-than-10%
customers varies from period to period, and we do not believe that we are materially dependent on any one specific customer or any
specific small number of licensees.
5
International Sales and Operations
Customers based in EME (Europe and Middle East) and APAC (Asia Pacific) accounted for 87% of our total revenues for
2008, 79% for 2007 and 64% for 2006. Although all of our sales to foreign customers are denominated in United States dollars, we
are subject to risks of conducting business internationally. These risks include fluctuations in exchange rates, unexpected changes in
regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, other barriers and
restrictions and the burden of complying with a variety of foreign laws. Information on the geographic breakdown of our revenues
and location of our long-lived assets is contained in Note 10 to our consolidated financial statements, which appear elsewhere in this
annual report.
Moreover, part of our expenses in Israel and Europe are paid in Israeli currency (NIS) and Euro, which subjects us to the
risks of foreign currency fluctuations and economic pressures in those regions. Our primary expenses paid in NIS and Euro are
employee salaries. As a result, an increase in the value of NIS and Euro in comparison to the U.S. dollar could increase the cost of our
technology development, research and development expenses and general and administrative expenses. To protect against the
increase in value of forecasted foreign currency cash flow resulting from salaries paid in NIS and Euro, we instituted in the second
quarter of 2007, a foreign currency cash flow hedging program. We hedge portions of the anticipated payroll of our Israeli and Irish
employees denominated in NIS and Euro for a period of one to twelve months with forward and put options contracts. There are no
assurances that future hedging transactions will successfully mitigate losses caused by currency fluctuations.
Sales and Marketing
We license our technology through a direct sales force. As of December 31, 2008, we had 20 employees in sales and
marketing. We have sales offices and representation in Asia Pacific (APAC) region, Japan, Sweden, Israel and the United States.
Maintaining close relationships with our customers and strengthening these relationships are central to our strategy. We
typically launch each new DSP core, platform or solution upgrade with a signed license agreement with a tier-one customer, which
signifies to the market that we are focused on viable applications that meet broad industry needs. Staying close to our customers
allows us to create a roadmap for the future development of existing cores and application platforms, and helps us to anticipate the
next potential applications for the market. We seek to use our customer relationships to deliver new products in a faster time to
market.
We use a variety of marketing initiatives to stimulate demand and brand awareness in our target markets. These marketing
efforts include contacts with industry analysts, presenting at key industry trade shows and conferences and posting information on our
website. Our marketing group runs competitive benchmark analyses to help us maintain our competitive position.
Technical Support
We offer technical support services through our offices in Israel, Ireland, Asia Pacific, Japan, Sweden and the United States.
Our technical support services include:
assistance with implementation, responding to customer-specific inquiries, training and, when and if they become
available, distributing updates and upgrades of our products;
application support, consisting of providing general hardware and software design examples, ready-to-use software
modules and guidelines to our licensees to assist them in using our technology; and
design services, consisting of creating customer-specific implementations of our DSP cores and application platforms.
We believe that our technical support services are the means to enable our licensees to embed our cores and platforms in their
designs and products. Our technology is highly complex, combining sophisticated DSP core architecture, integrated circuit designs
and development tools. Effective customer support in helping our customers to implement our solutions enables them to shorten the
time to market for their applications. Our support organization is made up of experienced engineers and professional support
personnel. We conduct technical training for our licensees and their customers, and meet with them from time to time to track the
implementation of our technology.
Research and Development
Our research and development team is focused on improving and enhancing our existing products, as well as developing new
products to broaden our offerings and market opportunities. These efforts are largely driven by current and anticipated customer
needs.
6
Our research and development and customer technical support teams, consisting of 128 engineers as of December 31, 2008,
work in five development centers located in Israel, Ireland and the United Kingdom. This team consists of engineers who possess
significant experience in developing DSP cores and solutions. In addition, we engage third party contractors with specialized skills as
required to support our research and development. Our research and development expenses, net of related research grants, were
approximately $19 million in both 2006 and 2007 and $20 million in 2008.
We encourage our research and development personnel to maintain active roles in various international organizations that
develop and maintain standards in the electronics and related industries. This involvement allows us to influence the development of
new standards; keeps us informed as to important new developments regarding standards; and allows us to demonstrate our expertise
to existing and potential customers who also participate in these standards-setting bodies.
Competition
The markets in which we operate are intensely competitive. They are subject to rapid change and are significantly affected
by new product introductions. We compete with other suppliers of licensed DSP cores and solutions. We believe that the principal
competitive elements in our field are processor performance, overall system cost, power consumption, flexibility, reliability, software
availability, design cycle time, ease of implementation, customer support, financial strength, name recognition and reputation. We
believe that we compete effectively in each of these areas, but can offer no assurance that we will have the financial resources,
technical expertise, and marketing or support capabilities to compete successfully in the future.
The markets in which we compete are dominated by large, fully-integrated semiconductor companies that have significant
brand recognition, a large installed base and a large network of support and field application engineers. We face direct and indirect
competition from:
IP vendors that offer programmable DSP cores;
IP vendors of general purpose processors with DSP extensions;
internal design groups of large chip companies that develop proprietary DSP solutions for their own application-specific
chipsets; and
semiconductor companies that offer off-the-shelf programmable DSP chipsets.
We face direct competition in the DSP core area mainly from Verisilicon that license DSP cores in addition to its
semiconductor business.
In recent years, we also have faced competition from companies that offer microcontroller/microprocessor intellectual
property. These companies’ products are used for computing functions in various applications, such as in mobile and home
entertainment products. These applications typically also incorporate a programmable DSP that is responsible for communication and
video/audio/voice compression. Recently, microprocessor companies, such as ARC, ARM Holdings, MIPS Technologies and
Tensilica have added a DSP extension and make use of it to provide platform solutions in the areas of video and audio.
With respect to certain large potential customers, we also compete with internal engineering teams, which may design
programmable DSP core products in-house. Companies such as NXP, STMicroelectronics and Zoran license our designs for some
applications and use their own proprietary cores for other applications. These companies also may choose to license their proprietary
DSP cores to third parties and, as a result, become direct competitors.
We also compete indirectly with several general purpose semiconductor companies, such as Analog Devices and Texas
Instruments. OEMs may prefer to buy off-the-shelf general purpose chipsets or DSP-based application-specific chipsets from these
large, established semiconductor companies rather than purchase chipsets from our licensees.
Aside from the in-house research and development groups, we do not compete with any individual company across the range
of our market offerings. Within particular market segments, however, we do face competition to a greater or lesser extent from other
industry participants. For example, in the following specific areas we compete with the companies indicated:
in the multimedia market – ARC, Chips & Media, Hantro (acquired by On2), Imagination Technologies and Tensilica;
in the serial storage technology area – ARM Holdings, Gennum, Silicon Image and Synopsys;
in VoIP applications – ARM Holdings, MIPS Technologies and Verisilicon; and
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in audio applications – ARC, ARM Holdings, Tensilica and Verisilicon.
Proprietary Rights
Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our
intellectual property and to operate without infringing the proprietary rights of others. We rely on a combination of patent, trademark,
trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. These legal
protections afford only limited protection of our technology. We also seek to limit disclosure of our intellectual property and trade
secrets by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with
us and by restricting access to our source code and other intellectual property. Due to rapid technological change, we believe that
factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing
products are more important than specific legal protections of our technology in establishing and maintaining a technology leadership
position.
We have an active program to protect our proprietary technology through the filing of patents. Our patents relate to our DSP
cores, DSP-based subsystems and application-specific platform technologies. As of December 31, 2008, we hold 40 patents in the
United States and seven patents in the EME (Europe and Middle East) region with expiration dates between 2013 and 2022. In
addition, as of December 31, 2008, we have 11 patent applications pending in the United States, one pending patent application in
Canada, eight pending patent applications in the EME region and three pending patent applications in Asia Pacific (APAC).
We actively pursue foreign patent protection in countries where we feel it is prudent to do so. Our policy is to apply for
patents or for other appropriate statutory protection when we develop valuable new or improved technology. The status of patents
involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, there are no assurances
that any patent application filed by us will result in a patent being issued, or that our issued patents, and any patents that may be issued
in the future, will afford us adequate protection against competitors with similar technology; nor can we be assured that patents issued
to us will not be infringed or that others will not design around our technology. In addition, the laws of certain countries in which our
products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same
extent as the laws of the United States. We can provide no assurance that our pending patent applications or any future applications
will be approved or will not be challenged by third parties, that any issued patents will effectively protect our technology, or that
patents held by third parties will not have an adverse effect on our ability to do business.
The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights.
Questions of infringement in the semiconductor field involve highly technical and subjective analyses. Litigation may in the future be
necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement or invalidity. We cannot assure you that we would be
able to prevail in any such litigation, or be able to devote the financial resources required to bring such litigation to a successful
conclusion.
In any potential dispute involving our patents or other intellectual property, our licensees could also become the targets of
litigation. We are generally bound to indemnify licensees under the terms of our license agreements. Although our indemnification
obligations are generally subject to a maximum amount, these obligations could nevertheless result in substantial expenses. In
addition to the time and expense required for us to indemnify our licensees, a licensee’s development, marketing and sale of products
embodying our solutions could be severely disrupted or shut down as a result of litigation.
We also rely on trademark, copyright and trade secret laws to protect our intellectual property. We have applied for the
registration in the United States of our trademark in the name CEVA and the related CEVA logo, and currently market our DSP cores
and other technology offerings under this trademark.
Employees
The table below presents the number of employees of CEVA as of December 31, 2008 by function and geographic location.
Total employees
Function
Research and development
8
Number
187
128
Sales and marketing
Technical support
Administration
Location
Israel
Ireland
United Kingdom
United States
Elsewhere
20
15
24
126
30
7
9
15
Subsequent to year-end 2008, we restructured our SATA business activities in Ireland. As a result of such restructuring, the
number of Irish employees was reduced to 18. As of March 1, 2009, we had a total of 175 employees.
Our employees are not represented by any collective bargaining agreements, and we have never experienced a work
stoppage. We believe our employee relations are good.
A number of our employees are located in Israel. Certain provisions of Israeli law and the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (the Israeli
federation of employers’ organizations) apply to our Israeli employees.
In 2004, we finalized and adopted a new Code of Business Conduct and Ethics regarding the standards of conduct of our
directors, officers and employees, and the Code is available on our website at www.ceva-dsp.com.
Corporate History
Our company was incorporated in Delaware on November 22, 1999 under the name DSP Cores, Inc. We changed our name
to ParthusCeva, Inc. in November 2002 and to CEVA, Inc. in December 2003.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website at
www.ceva-dsp.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange
Commission and are also available on the SEC’s website at www.sec.gov.
Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual
Report on Form 10-K.
ITEM 1A. RISK FACTORS
We caution you that the following important factors, among others, could cause our actual future results to differ materially
from those expressed in forward-looking statements made by or on behalf of us in filings with the Securities and Exchange
Commission, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this
annual report, and in any other public statements we make, may turn out to be wrong. They can be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be
important in determining future results. We undertake no obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our
reports filed with the Securities and Exchange Commission.
9
The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and
lower revenue.
The markets for the products in which our technology is incorporated are highly competitive. Aggressive competition could
result in substantial declines in the prices that we are able to charge for our intellectual property. Many of our competitors are striving
to increase their share of the growing DSP market and are reducing their licensing and royalty fees to attract customers. The
following factors may have a significant impact on our competitiveness:
microprocessor IP providers, such as ARC, ARM Holdings, MIPS Technologies and Tensilica, are offering DSP
extensions to their IP;
our video solution is software-based and competes with hardware implementation offered by companies such as
Hantro (acquired by On2) and companies offering other software solutions, such as Imagination Technologies,
Tensilica and ARC;
ARC is offering a licensing model based on royalty payments specifically for Chinese customers that waive initial
licensee fees; and
SATA IP market is highly standardized with several vendors offering similar products, leading to pricing pressures
for both licensing and royalty revenue.
In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of
our customers also may decide to satisfy their needs through in-house design. We compete on the basis of processor performance,
overall system cost, power consumption, flexibility, reliability, software availability, design cycle time, ease of implementation,
customer support, name recognition, 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.
Our quarterly operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle,
and may not be a meaningful indicator of future performance.
In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause
our stock price to fall. Factors that may affect our quarterly results of operations in the future include, among other things:
the timing of the introduction of new or enhanced technologies by us and our competitors, as well as the market
acceptance of such technologies;
the timing and volume of orders and production by our customers, as well as fluctuations in royalty revenues
resulting from fluctuations in unit shipments by our licensees and shifts by our customers from prepaid royalty
arrangements to per unit royalty arrangements;
the mix of revenues among licensing revenues, per unit and prepaid royalties and service revenues;
our lengthy sales cycle and specifically in the third quarter of any fiscal year during which summer vacations slow
down decision-making processes of our customers in executing contracts;
the gain or loss of significant licensees, partly due to our dependence on a limited number of customers generating a
significant amount of quarterly revenues;
any delay in execution of any anticipated licensing arrangement during a particular quarter;
delays in the commercialization of end products that incorporate our technology;
currency fluctuations of the Euro and NIS versus the U.S. dollar;
increased operating expenses and gross margin fluctuations associated with the introduction of new or enhanced
technologies;
changes in our pricing policies and those of our competitors;
restructuring, asset and goodwill impairment and related charges, as well as other accounting changes or
adjustments; and
general economic conditions, including the current global economic slowdown, and its effect on the semiconductor
industry and sales of consumer products into which our technologies are incorporated.
Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations.
Also, we license our technology to OEM customers for incorporation into their end products for consumer markets, including handsets
and consumer electronics products. The royalties we generate are reported by our customers and invoiced by us one quarter in arrears.
As a result, our royalty revenues are affected by seasonal buying patterns of consumer products sold by our OEM customers that
incorporate our technology and the market acceptance of such ends products supplied by our OEM customers. The fourth quarter in
any given year is usually the strongest quarter for sales by our OEM customers in the consumer markets, and thus, the first quarter in
any given year is usually the strongest quarter for royalty revenues as our royalties are reported and invoiced one quarter in arrears.
By contrast, the second quarter in any given year is usually the weakest quarter for us in relation to royalty revenues. However, this
10
general quarterly fluctuation may be impacted by the current global economic slowdown. Specifically, given the decrease in sales of
consumer electronics products during Christmas 2008, we can provide no assurance that the first quarter of 2009 will be the strongest
quarter for our royalty revenues.
We rely significantly on revenue derived from a limited number of customers.
We expect that a limited number of customers, varying in identity from period-to-period, will account for a substantial
portion of our revenues in any period. Our five largest customers, varying in identity from period-to-period, accounted for 49% of
total revenues in 2008, 53% in 2007 and 42% in 2006. Our five largest customers paying per unit royalties, varying in identity from
period-to-period, accounted for 79% of total royalty revenues in 2008, 68% in 2007 and 75% in 2006. Moreover, license agreements
for our DSP cores have not historically provided for substantial ongoing license payments. Significant portions of our anticipated
future revenue, therefore, will likely depend upon our success in attracting new customers or expanding our relationships with existing
customers. Our ability to succeed in these efforts will depend on a variety of factors, including the performance, quality, breadth and
depth of our current and future products, as well as our sales and marketing skills. In addition, some of our licensees may decide to
satisfy their needs through in-house design and production. Our failure to obtain future customer licenses would impede our future
revenue growth and could materially harm our business.
We depend on market acceptance of third-party semiconductor intellectual property.
The semiconductor intellectual property (SIP) industry is a relatively small and emerging industry. Our future growth will
depend on the level of market acceptance of our third-party licensable intellectual property model, the variety of intellectual property
offerings available on the market, and a shift in customer preference away from in house development of proprietary DSPs towards
licensing open DSP cores. These trends that would enable our growth are largely beyond our control. Semiconductor customers may
also choose to adopt a multi-chip, off-the-shelf chip solution versus licensing or using highly-integrated chipsets that embed our
technologies. If the above referenced market shifts do not materialize or third-party SIP does not achieve market acceptance, our
business, results of operations and financial condition could be materially harmed.
Because our IP solutions are components of end products, if semiconductor companies and electronic equipment
manufacturers do not incorporate our solutions into their end products or if the end products of our customers do not achieve
market acceptance, we may not be able to generate adequate sales of our products.
We do not sell our IP solutions directly to end-users; we license our technology primarily to semiconductor companies
and electronic equipment manufacturers, who then incorporate our technology into the products they sell. As a result, we rely on our
customers to incorporate our technology into their end products at the design stage. Once a company incorporates a competitor’s
technology into its end product, it becomes significantly more difficult for us to sell our technology to that company because changing
suppliers involves significant cost, time, effort and risk for the company. As a result, we may incur significant expenditures on the
development of a new technology without any assurance that our existing or potential customers will select our technology for
incorporation into their own product and without this ―design win,‖ it becomes significantly difficult to sell our IP solutions.
Moreover, even after a customer agrees to incorporate our technology into its end products, the design cycle is long and may be
delayed due to factors beyond our control, which may result in the end product incorporating our technology not reaching the market
until long after the initial ―design win‖ with such customer. From initial product design-in to volume production, many factors could
impact the timing and/or amount of sales actually realized from the design-in. These factors include, but are not limited to, changes in
the competitive position of our technology, our customers’ financial stability, and our ability to ship products according to our
customers’ schedule. Moreover, the current global economic downturn may further prolong a customer’s decision-making process
and design cycle.
Further, because we do not control the business practices of our customers, we do not influence the degree to which they
promote our technology or set the prices at which they sell products incorporating our technology. We cannot assure you that our
customers will devote satisfactory efforts to promote our IP solutions. In addition, our unit royalties from licenses are dependent upon
the success of our customers in introducing products incorporating our technology and the success of those products in the
marketplace. The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and
electronic equipment manufacturers, particularly in the telecommunications field. These industries are highly cyclical and have been
subject to significant economic downturns at various times, particularly in recent periods, including the current global economic
downturn. These downturns are characterized by production overcapacity and reduced revenues, which at times may encourage
semiconductor companies or electronic product manufacturers to reduce their expenditure on our technology. If we do not retain our
current customers and continue to attract new customers, our business may be harmed.
11
We depend on a limited number of key personnel who would be difficult to replace.
Our success depends to a significant extent upon certain of our key employees and senior management, the loss of which
could materially harm our business. Competition for skilled employees in our field is intense. We cannot assure you that in the future
we will be successful in attracting and retaining the required personnel.
The sales cycle for our IP solutions is lengthy, which makes forecasting of our customer orders and revenues difficult.
The sales cycle for our IP solutions is lengthy, often lasting three to nine months. Our customers generally conduct
significant technical evaluations, including customer trials, of our technology as well as competing technologies prior to making a
purchasing decision. In addition, purchasing decisions also may be delayed because of a customer’s internal budget approval process.
Furthermore, given the current market conditions, we have less ability to predict the timing of our customers’ purchasing cycle and
potential unexpected delays in such a cycle. Because of the lengthy sales cycle and potential delays, our dependence on a limited
number of customers to generate a significant amount of revenues for a particular period and the size of customer orders, if orders
forecasted for a specific customer for a particular period do not occur in that period, our revenues and operating results for that
particular quarter could suffer. Moreover, a portion of our expenses related to an anticipated order is fixed and difficult to reduce or
change, which may further impact our operating results for a particular period.
We may dispose of or discontinue existing product lines and technology developments, which may adversely impact our future
results.
On an ongoing basis, we evaluate our various product offerings and technology developments in order to determine whether
any should be discontinued or, to the extent possible, divested. For example, in connection with our reorganization and restructuring
plans in 2003 and 2005, we ceased manufacturing of our hard IP products and certain non-strategic technology areas. In June 2006,
we divested our GPS technology and related business. In December 2008, we restructured our SATA activities to better fit SATA’s
operating expense levels to its overall revenue contribution. We cannot guarantee that we have correctly forecasted, or will correctly
forecast in the future, the right product lines and technology developments to dispose or discontinue or that our decision to dispose of
or discontinue various investments, products lines and technology developments is prudent if market conditions change. In addition,
there are no assurances that the discontinuance of various product lines will reduce our operating expenses or will not cause us to incur
material charges associated with such decision. Furthermore, the discontinuance of existing product lines entails various risks,
including the risk that we will not be able to find a purchaser for a product line or the purchase price obtained will not be equal to at
least the book value of the net assets for the product line. Other risks include managing the expectations of, and maintaining good
relations with, our customers who previously purchased products from our disposed or discontinued product lines, which could
prevent us from selling other products to them in the future. We may also incur other significant liabilities and costs associated with
our disposal or discontinuance of product lines, including employee severance costs and excess facilities costs.
Because our IP solutions are complex, the detection of errors in our products may be delayed, and if we deliver products with
defects, our credibility will be harmed, the sales and market acceptance of our products may decrease and product liability
claims may be made against us.
Our IP solutions are complex and may contain errors, defects and bugs when introduced. If we deliver products with errors,
defects or bugs, our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the
nature of our products may also delay the detection of any such error or defect. If our products contain errors, defects and bugs, then
we may be required to expend significant capital and resources to alleviate these problems. This could result in the diversion of
technical and other resources from our other development efforts. Any actual or perceived problems or delays may also adversely
affect our ability to attract or retain customers. Furthermore, the existence of any defects, errors or failure in our products could lead
to product liability claims or lawsuits against us or against our customers. A successful product liability claim could result in
substantial cost and divert management’s attention and resources, which would have a negative impact on our financial condition and
results of operations.
Our operating results may fluctuate significantly due to the cyclicality of the semiconductor industry or global economy
slowdown, which could adversely affect the market price of our stock.
Our primary operations are in the semiconductor industry, which is cyclical and subject to rapid technological change and
evolving industry standards. From time to time, the semiconductor industry has experienced significant downturns such as the one we
experienced during the 2000 and 2001 periods. In addition, the current general worldwide economic downturn has materially
adversely impacted the semiconductor industry. Downturns in the semiconductor industry are characterized by diminished product
demand, excess customer inventories, accelerated erosion of prices and excess production capacity. These factors could cause
substantial fluctuations in our revenues and in our results of operations. The downturn we experienced during the 2000 and 2001
periods was, and the current downturn in the semiconductor industry may be, severe and prolonged. Also, the failure of the
12
semiconductor industry to fully recover from the current downturn or any future downturns could seriously impact our revenue and
harm our business, financial condition and results of operations, which could cause our stock price to decline.
Moreover, the current general worldwide economic downturn, due to the credit conditions impacted by the subprime-
mortgage turmoil and other factors, has resulted in slower economic activity, concerns about inflation and deflation, decreased
consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These
conditions make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities,
and could cause reduced spending on our products and services. Furthermore, a significant portion of our technologies is incorporated
in consumer electronics products. The current general worldwide economic downturn has decreased consumer electronics retailers’
demand for products or resulted in a build up of their current inventory, both of which may cause our customers to slow down their
product shipments, which in turn would adversely impact our royalty revenues. During challenging economic times, our customers
also may face longer product design cycles and issues with gaining timely access to sufficient credit, which could result in an
impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for
doubtful accounts and our days sales outstanding would be negatively impacted. Therefore, the worldwide economic downturn and
specifically the volatility in the semiconductor and consumer electronics industry could seriously impact our revenue and harm our
business, financial condition and results of operations, which could cause our stock price to decline.
Our success will depend on our ability to successfully manage our geographically dispersed operations.
Most of our employees are located in Israel and Ireland. Accordingly, our ability to compete successfully will depend in part
on the ability of a limited number of key executives located in geographically dispersed offices to integrate management, address the
needs of our customers and respond to changes in our markets. If we are unable to effectively manage and integrate our remote
operations, our business may be materially harmed.
Our operations in Israel may be adversely affected by instability in the Middle East region.
One of our principal research and development facilities is located in, and our executive officers and some of our directors
are residents of, Israel. Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless
directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel, including
the current conflict with Hamas in the West Bank, could significantly harm our business, operating results and financial condition.
In addition, certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense
Forces and are subject to being called to active military duty at any time. Although we have operated effectively under these
requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could
be disrupted by the absence, for a significant period, of one or more of our key officers or key employees due to military service.
Our research and development expenses may increase if the grants we currently receive from the Israeli and Irish
governments are reduced or withheld.
We currently receive research grants from programs of the Chief Scientist of Israel and under the funding programs of
Enterprise Ireland and Invest Northern Ireland. We received an aggregate of $959,000, $319,000 and $276,000 in 2008, 2007 and
2006, respectively. To be eligible for these grants, we must meet certain development conditions and comply with periodic reporting
obligations. Although we have met such conditions in the past, should we fail to meet such conditions in the future our research
grants may be repayable, reduced or withheld. The repayment or reduction of such research grants may increase our research and
development expenses which in turn may reduce our operating income.
We are exposed to fluctuations in currency exchange rates.
A significant portion of our business is conducted outside the United States. Although most of our revenue is transacted in
U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to
transact business in local currencies. Moreover, the bulk of our expenses in Israel and Europe are paid in Israeli currency (NIS) and
Euro, which subjects us to the risks of foreign currency fluctuations. Our primary expenses paid in NIS and Euro are employee
salaries. Increases in the volatility of the exchange rates of the Euro and the NIS versus the U.S. dollar could have an adverse effect
on the expenses and liabilities that we incur in Euro and NIS when remeasured into U.S. dollars for financial reporting purposes. For
example, the devaluation of the U.S. dollar against the Euro and NIS during the past year had a margin impact on increasing our
operating expenses for the year 2008 which was offset by other cost saving measures. During the second quarter of 2007, we
instituted a foreign cash flow hedging program to minimize the effects of currency fluctuations. However, hedging transactions may
not successfully mitigate losses caused by currency fluctuations, and our hedging positions may be partial or may not exist at all in the
future. We review our monthly expected non-U.S. dollar denominated expenditure and look to hold equivalent non-U.S. dollar cash
balances to mitigate currency fluctuations. This approach has resulted in a foreign exchange loss of $134,000 in 2008, a foreign
13
exchange gain of $38,000 in 2007 and a foreign exchange loss of $150,000 in 2006. We expect to continue to experience the effect of
exchange rate currency fluctuations on an annual and quarterly basis.
Because we have significant international operations, we may be subject to political, economic and other conditions relating to
our international operations that could increase our operating expenses and disrupt our revenues and business.
Approximately 87% of our total revenues in 2008, 79% in 2007 and 64% in 2006 were derived from customers located
outside of the United States. We expect that international customers will continue to account for a significant portion of our revenue
for the foreseeable future. As a result, the occurrence of any negative international political, economic or geographic events could
result in significant revenue shortfalls. These shortfalls could cause our business, financial condition and results of operations to be
harmed. Some of the risks of doing business internationally include:
unexpected changes in regulatory requirements;
fluctuations in the exchange rate for the U.S. dollar;
imposition of tariffs and other barriers and restrictions;
burdens of complying with a variety of foreign laws;
political and economic instability; and
changes in diplomatic and trade relationships.
If we are unable to meet the changing needs of our end-users or to address evolving market demands, our business may be
harmed.
The markets for programmable DSP cores and application IP are characterized by rapidly changing technology, emerging
markets and new and developing end-user needs, and requiring significant expenditure for research and development. We cannot
assure you that we will be able to introduce systems and solutions that reflect prevailing industry standards on a timely basis, meet the
specific technical requirements of our end-users or avoid significant losses due to rapid decreases in market prices of our products, and
our failure to do so may seriously harm our business.
We may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses.
We may pursue acquisitions of businesses, products and technologies, or establish joint venture arrangements in the future
that could expand our business. We are unable to predict whether or when any other prospective acquisition will be completed. The
process of negotiating potential acquisitions or joint ventures, as well as the integration of acquired or jointly developed businesses,
technologies or products may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources
and management’s attention. We cannot assure you that we will be able to successfully identify suitable acquisition candidates,
complete acquisitions or integrate acquired businesses or joint ventures with our operations. If we were to make any acquisitions or
enter into a joint venture, we may not receive the intended benefits of the acquisition or joint venture or such an acquisition or joint
venture may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as
expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Future
acquisitions or joint venture may require substantial capital resources, which may require us to seek additional debt or equity
financing.
Future acquisitions or joint venture by us could result in the following, any of which could seriously harm our results of
operations or the price of our stock:
issuance of equity securities that would dilute our current stockholders’ percentages of ownership;
large one-time write-offs;
incurrence of debt and contingent liabilities;
difficulties in the assimilation and integration of operations, personnel, technologies, products and information
systems of the acquired companies;
diversion of management’s attention from other business concerns;
contractual disputes;
risks of entering geographic and business markets in which we have no or only limited prior experience; and
potential loss of key employees of acquired organizations.
We may not be able to adequately protect our intellectual property.
Our success and ability to compete depend in large part upon the protection of our proprietary technologies. We rely on a
combination of patent, copyright, trademark, trade secret, mask work and other intellectual property rights, confidentiality procedures
14
and licensing arrangements to establish and protect our proprietary rights. These agreements and measures may not be sufficient to
protect our technology from third-party infringement or to protect us from the claims of others. As a result, we face risks associated
with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility
that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us
without infringing our patents and the possibility that our products may infringe patent rights of third parties.
Our trade names or trademarks may be registered or utilized by third parties in countries other than those in which we have
registered them, impairing our ability to enter and compete in these markets. If we were forced to change any of our brand names, we
could lose a significant amount of our brand identity.
Our business will suffer if we are sued for infringement of the intellectual property rights of third parties or if we cannot
obtain licenses to these rights on commercially acceptable terms.
We are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others.
There are a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active.
We have not, and cannot reasonably, investigate all such patents. From time to time, we have become aware of patents in our
technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our
business, and we will continue to seek such counsel when appropriate in the future. Infringement claims may require us to enter into
license arrangements or result in protracted and costly litigation, regardless of the merits of these claims. Any necessary licenses may
not be available or, if available, may not be obtainable on commercially reasonable terms. If we cannot obtain necessary licenses on
commercially reasonable terms, we may be forced to stop licensing our technology, and our business would be seriously harmed.
Our business depends on our customers and their suppliers obtaining required complementary components.
Some of the raw materials, components and subassemblies included in the products manufactured by our OEM customers are
obtained from a limited group of suppliers. Supply disruptions, shortages or termination of any of these sources could have an adverse
effect on our business and results of operations due to the delay or discontinuance of orders for products containing our IP, especially
our DSP cores, until those necessary components are available.
The future growth of our business depends in part on our ability to license to system OEMs and small-to-medium-sized
semiconductor companies directly and to expand our sales geographically.
Historically, a substantial portion of our licensing revenues has been derived in any given period from a relatively small
number of licensees. Because of the substantial license fees we charge, our customers tend to be large semiconductor companies or
vertically integrated system OEMs. Part of our current growth strategy is to broaden the adoption of our products by small and mid-
size companies by offering different versions of our products targeted at these companies. If we are unable to develop and market
effectively our intellectual property through these models, our revenues will continue to be dependent on a smaller number of
licensees and a less geographically dispersed pattern of licensees, which could materially harm our business and results of operations.
The Israeli tax benefits that we currently receive and the government programs in which we participate require us to meet
certain conditions and may be terminated or reduced in the future, which could increase our tax expenses.
We enjoy certain tax benefits in Israel, particularly as a result of the ―Approved Enterprise‖ and the ―Benefited 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. Should we fail to meet such conditions in the future, however, these benefits would be
cancelled and we would be subject to corporate tax in Israel at the standard corporate rate of 27% in 2008 and 26% in 2009 and could
be required to refund tax benefits already received. In addition, we cannot assure you that these tax benefits will be continued in the
future at their current levels or otherwise. The tax benefits under our current investment programs are scheduled to gradually expire.
The termination or reduction of certain programs and tax benefits (particularly benefits available to us as a result of the ―Approved
Enterprise‖ and the ―Benefited Enterprise‖ status of our facilities and programs) or a requirement to refund tax benefits already
received may seriously harm our business, operating results and financial condition.
Our corporate tax rate may increase, which could adversely impact our cash flow, financial condition and results of
operations.
We have significant operations in Israel and the Republic of Ireland and a substantial portion of our taxable income
historically has been generated there. Currently, some of our Israeli and Irish subsidiaries are taxed at rates substantially lower than
the U.S. tax rates. Although there is no current expectation of any changes to Israeli and Irish tax laws, if our Israeli and Irish
subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating
15
results could be materially adversely affected. In addition, because our Israeli and Irish operations are owned by subsidiaries of our
U.S. parent corporation, distributions to the U.S. parent corporation, and in certain circumstances undistributed income of the
subsidiaries, may be subject to U.S. taxes. Moreover, if U.S. or other authorities were to change applicable tax laws or successfully
challenge the manner in which our subsidiaries’ profits are currently recognized, our overall tax expenses could increase, and our
business, cash flow, financial condition and results of operations could be materially adversely affected. Also our taxes on the Irish
interest income may be double taxed both in Ireland and in the U.S. due to U.S. tax regulations and Irish tax restrictions on NOLs to
off-set interest income.
Our cash and cash equivalents and investment portfolio could be adversely affected by the current downturn in the financial
and credit markets.
We invest our cash and cash equivalents in highly liquid investments with original maturities of generally 12 months or less
at the time of purchase and maintain them with reputable major financial institutions. Nonetheless, deposits with these banks exceed
the Federal Deposit Insurance Corporation (―FDIC‖) insurance limits or similar limits in foreign jurisdictions, to the extent such
deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash and cash equivalent balances
in the operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial
institutions with which we deposit fails or is subject to other adverse conditions in the financial or credit markets. To date we have
experienced no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that
access to our invested cash and cash equivalents will not be affected if the financial institutions in which we hold our cash and cash
equivalents fail or the financial and credit markets continue to worsen. Furthermore, we hold an investment portfolio consisting
principally of corporate bonds and securities and U.S. government and agency securities. We intend, and have the ability, to hold such
investments until recovery of temporary declines in market value or maturity; however, we can provide no assurance that we will
recover declines in the market value of our investments.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in San Jose, California and we have principal offices in Herzeliya, Israel and Dublin, Ireland.
We lease land and buildings for our executive offices, and engineering, sales, marketing, administrative and support
operations and design centers. The following table summarizes information with respect to the principal facilities leased by us as of
December 31, 2008:
Location
San Jose, CA, U.S.
Herzeliya, Israel
Dublin, Ireland
Cork, Ireland (*)
Limerick, Ireland
Belfast, UK (**)
Term
Expiration
Area
(Sq. Feet)
Principal Activities
3 years
2010
5,250
Headquarters; sales and marketing; administration
4 years
2010
27,300
Research and development; administration
1 year
2009
2,270
Research and development; administration
25 years
2025
10,000
Research and development
10 years
2010
4,000
Research and development
15 years
2019
2,600
Research and development
(*) Break clause in the lease exercisable in 2010
(**) Break clause in the lease exercisable in 2009
16
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of
business. We are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, would have a
material adverse effect on our results of operations or financial position
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
EXECUTIVE OFFICERS OF THE REGISTRANT
Below are the names, ages and principal recent business experience of our current executive officers. All such persons have
been appointed by our board of directors to serve until their successors are elected and qualified or until their earlier resignation or
removal.
Gideon Wertheizer, age 52, has served as our Chief Executive Officer since May 2005. Mr. Wertheizer has 26 years of
experience in the semiconductor and Silicon Intellectual Property (SIP) industries. He previously served as the Executive Vice
President and General Manager of the DSP business unit at CEVA. Prior to joining CEVA in November 2002, Mr. Wertheizer held
various executive positions at DSP Group, Inc., including such roles as Executive VP - Strategic Business Development, Vice
President for Marketing and Vice President of VLSI design. Mr. Wertheizer holds a BsC for electrical engineering from Ben Gurion
University in Israel and executive MBA from Bradford University in the United Kingdom.
Yaniv Arieli, age 40, has served as our Chief Financial Officer since May 2005. Prior to his current position, Mr. Arieli
served as President of U.S. Operations and Director of Investor Relations of DSP Group beginning in August 2002 and Vice President
of Finance, Chief Financial Officer and Secretary of DSP Group’s DSP Cores Licensing Division prior to that time. Before joining
DSP Group in 1997, Mr. Arieli served as an account manager and certified public accountant at Kesselman & Kesselman, a member
of PricewaterhouseCoopers, a leading accounting firm. Mr. Arieli is a CPA and holds a B.A. in Accounting and Economics from
Haifa University in Israel and an M.B.A. from Newport University and is also a member of the National Investor Relation Institute.
Issachar Ohana, age 43, has served as our Vice President, Worldwide Sales, since November 2002 and our Executive Vice
President, Worldwide Sales, since July 2006. Prior to joining CEVA in November 2002, Mr. Ohana was with DSP Group beginning
in August 1994 as a VLSI design engineer. He was appointed Project Manager of DSP Group’s research and development in July
1995, Director of Core Licensing in August 1998, and Vice President—Sales of the Core Licensing Division in May 2000. Mr. Ohana
holds a B.Sc. in Electrical and Computer Engineering from Ben Gurion University in Israel and an MBA from Bradford University in
the United Kingdom.
18
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock began trading on The NASDAQ Global Market and the London Stock Exchange on November 1, 2002.
Our common stock currently trades under the ticker symbol ―CEVA‖ on NASDAQ and under the ticker symbol ―CVA‖ on the
London Stock Exchange. As of March 6, 2009, there were approximately 8,000 holders of record, which we believe represents
approximately 12,650 beneficial holders. The closing price of our common stock on The NASDAQ Global Market on March 6, 2009
was $5.23 per share. The following table sets forth, for the periods indicated, the range of high and low closing prices per share of our
common stock, as reported on The NASDAQ Global Market.
2008
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range of
Common Stock
High
Low
$ 12.04 $ 7.44
$ 9.95 $ 7.87
$ 10.44 $ 7.49
$ 8.73 $ 5.46
$ 8.11 $ 6.49
$ 8.58 $ 7.11
$ 9.41 $ 7.81
$ 13.22 $ 8.63
We have never paid any cash dividends. We intend to retain future earnings, if any, to fund the development and growth of
our business and currently do not anticipate paying cash dividends in the foreseeable future.
Information as of December 31, 2008 regarding options granted under our option plans and remaining available for issuance
under those plans will be contained in the definitive 2009 Proxy Statement for the 2009 annual meeting of stockholders to be held on
June 2, 2009 and incorporated herein by reference.
Unregistered Sales of Equity Securities and Use of Proceeds
The table below sets forth the information with respect to repurchases of our common stock during the three months ended
December 31, 2008.
Period
Month #1 (October 1, 2008 to
October 31, 2008)
Month #2 (November 1, 2008 to
November 30, 2008)
Month #3 (December 1, 2008 to
December 31, 2008)
(a) Total Number of
Shares Purchased
(b) Average Price Paid
per Share
(c) Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
(d) Maximum Number of
Shares that May Yet Be
Purchased Under the Plans
or Programs (1)
475,730
78,263
____--
$7.75
$6.31
475,730
78,263
--
--
325,500
247,237
--
19
TOTAL
553,993
$7.55
553,993
247,237(2)
(1) On August 4, 2008, our board of directors approved a share repurchase program for up to 1.0 million shares of common stock.
On September 3, 2008, our board approved the adoption of a share repurchase plan in accordance with Rule 10b5-1 of the United
States Securities Exchange Act of 1934, as amended (the ―10b5-1 Plan‖), for the repurchase of up to 500,000 of the 1.0 million
shares of common stock authorized by the board for repurchase under the repurchase program. We have fully utilized the shares
available for repurchase under the 10b5-1 Plan. Our repurchase program is being affected from time to time, depending on
market conditions and other factors, through open market purchases and privately negotiated transactions. The repurchase
program has no set expiration or termination date.
(2) The number represents the number of shares of our common stock that remain available for the repurchase pursuant to our
Board’s authorizations as of December 31, 2008.
Subsequent to 2008 year-end, we repurchased an additional 47,143 shares of our common stock at a weighted average price per
share of $6.44 through open market purchases and privately negotiated transactions in accordance with Rule 10b-18 of the United
States Securities Exchange Act of 1934, as amended. Also subsequent to 2008 year-end, our board of directors approved the adoption
of another 10b5-1 Plan in February 2009 authorizing the repurchase of 200,064 shares of our common stock, representing the
remaining shares available for repurchase pursuant to our board-authorized share repurchase program. As of March 6, 2009, 50,000
shares of our common stock were repurchased pursuant to the 10b5-1 Plan at a weighted average price per share of $5.49.
2009 Annual Meeting of Stockholders
We anticipate that the 2009 annual meeting of our stockholders will be held on June 2, 2009 in New York, NY.
20
Stock Performance Graph
Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this proxy statement or future
filings made by the Company under those statutes, the below Stock Performance Graph shall not be deemed filed with the United
States Securities and Exchange Commission and shall not be deemed incorporated by reference into any of those prior filings or into
any future filings made by the Company under those statutes.
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
CEVA, Inc
100.00
87.48
60.13
62.15
117.29
NASDAQ Composite
100.00
110.08
112.88
126.51
138.13
Specialized Semiconductor
100.00
84.28
88.76
97.89
130.71
67.24
80.47
65.41
The stock performance graph above compares the percentage change in cumulative stockholder return on the common stock
of our company for the period from December 31, 2003, through December 31, 2008, with the cumulative total return on The
NASDAQ Global Market (U.S.) and the Hemscott Specialized Semiconductor Group Index.
This graph assumes the investment of $100.00 in our common stock (at the closing price of our common stock on December
31, 2003), the NASDAQ Global Market (U.S.) and the Hemscott Specialized Semiconductor Group Index on December 31, 2003, and
assumes dividends, if any, are reinvested.
Comparisons in the graph above are based upon historical data and are not indicative of, nor intended to forecast, future
performance of our common stock.
21
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with, and are qualified by reference to, our consolidated
financial statements and the related notes, as well as our ―Management’s Discussion and Analysis of Financial Condition and Results
of Operations for the fiscal year ended December 31, 2008,‖ both appearing elsewhere in this annual report.
Consolidated Statements of Operations Data:
Revenues:
Licensing
Royalties
Other revenue
Total revenues
Cost of revenues
Gross profit
Operating expenses:
Year Ended December 31,
2004
2005
2006
2007
2008
(in thousands)
$
26,237 $
23,935 $
22,160 $
19,499 $
21,701
6,034
6,820
6,324
9,095
14,349
5,402
4,881
4,021
4,617
4,315
37,673
35,636
32,505
33,211
40,365
5,178
4,217
4,035
3,851
4,668
32,495
31,419
28,470
29,360
35,697
Research and development, net
Sales and marketing
General and administrative
Amortization of intangible assets
Reorganization, restructuring and severance charge
Impairment of assets
Total operating expenses
Operating income (loss)
Financial income, net
Other income, net
Income (loss) before taxes on income
Income tax expense (income)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
17,276
20,153
18,769
19,136
20,172
6,965
6,577
6,268
6,253
5,863
5,742
5,882
5,721
892
823
414
148
—
—
3,207
510
—
—
—
—
7,088
6,637
53
4,121
—
30,996
37,012
31,333
31,258
38,071
1,499
(5,593)
(2,863)
(1,898)
(2,374)
796
1,820
2,620
3,211
2,729
—
1,507
57
425
12,011
2,295
(2,266)
(186)
1,738
12,366
645
—
(88)
447
3,801
$
1,650 $
(2,266) $
(98) $
1,291 $
8,565
$
$
0.09 $
(0.12) $
(0.01) $
0.07 $
0.43
0.09 $
(0.12) $
(0.01) $
0.06 $
0.42
22
December 31,
2004
2005
2006
2007
2008
(in thousands)
$
57,960
$
61,240
$
65,001
$
77,312
$
83,886
119,163
115,749
121,080
128,989
137,586
2,626
4,295
4,216
4,647
3,788
$ 102,549
$ 102,233
$ 106,143
$ 114,388
$ 121,659
Consolidated Balance Sheet Data:
Working capital
Total assets
Total long-term liabilities
Total stockholders’ equity
QUARTERLY FINANCIAL INFORMATION
March 31,
June 30,
September 30, December 31, March 31,
June 30,
September 30, December 31,
Three months ended
2007
2008
$ 4,639 $ 5,534 $ 5,314 $ 4,012 $ 5,088 $ 6,026 $ 5,974 $ 4,613
1,957
1,918
2,178
3,042
3,733
3,038
3,296
4,282
1,130
1,063
1,237
1,187
1,246
1,019
936
1,114
7,726
8,515
8,729
8,241 10,067 10,083 10,206 10,009
1,007
918
1,001
925
1,170
1,268
1,105
1,125
6,719
7,597
7,728
7,316
8,897
8,815
9,101
8,884
Revenues:
Licensing
Royalties
Other revenue
Total revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Sales and marketing
General and administrative
Amortization of other intangible assets
Reorganization, restructuring and
severance charge
Total operating expenses
Operating income (loss)
Financial income, net
Other income, net
Income (loss) before taxes on income
(loss)
4,700
4,610
4,705
5,121
5,120
5,235
4,778
5,039
1,555
1,619
1,471
1,608
1,773
1,806
1,822
1,687
1,246
1,373
1,515
1,587
1,590
1,696
1,705
1,646
42
41
41
24
21
20
12
—
—
—
—
—
3,537
—
—
584
7,543
7,643
7,732
8,340 12,041
8,757
8,317
8,956
(824)
(46)
(4)
(1,024)
(3,144)
58
784
(72)
824
626
745
1,016
808
522
645
754
—
—
425
— 10,869
24
358
760
—
580
1,166
(8)
8,533
604
1,787
1,442
23
March 31,
June 30,
September 30, December 31, March 31,
June 30,
September 30, December 31,
Three months ended
2007
2008
Income taxes expense (income)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
—
150
54
243
3,022
(87)
384
482
$ — $
430 $ 1,112 $
(251) $ 5,511 $
691 $ 1,403 $
960
$ 0.00
$ 0.02
$ 0.06
$ (0.01) $ 0.27
$ 0.03
$ 0.07
$ 0.05
$ 0.00
$ 0.02
$ 0.05
$ (0.01) $ 0.27
$ 0.03
$ 0.07
$ 0.05
Weighted average number of shares of
Common Stock used in computation of
net income (loss) per share (in
thousands):
Basic
Diluted
19,420 19,473 19,647 19,873 20,095 20,140 20,157 19,647
19,420 19,776 20,287 19,873 20,724 20,804 20,799 19,977
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion together with the consolidated financials statements and related notes appearing
elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual
results may differ materially from those included in such forward-looking statements. Factors that could cause actual results to differ
materially include those set forth under “Risk Factors,” as well as those otherwise discussed in this section and elsewhere in this
annual report. See “Forward-Looking Statements and Industry Data.”
BUSINESS OVERVIEW
The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an
evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated
financial statements and notes thereto for the year ended December 31, 2008, both appearing elsewhere in this annual report.
CEVA is the leading licensor of DSP cores. Our technologies are widely licensed and power some of the world’s leading
semiconductor and original equipment manufacturer (OEM) companies. In 2008, our licensees shipped over 307 million CEVA-
powered chipsets, an increase of 36% over 2007 shipments of 227 million chipsets. In 2008, analyst firm Gartner Inc. reported our
share of the licensable DSP market at 61%.
Given the technological complexity of DSP-based applications, there are increased requirements to supplement the basic DSP
core IP with additional technologies in the form of integrated application-specific hardware peripherals and software components.
Therefore, we believe there is an industry shift from developing DSP technologies in-house to licensing them from third party IP
providers due to the design cycle time constantly shortening and the cost of ownership and maintenance of such architectures.
During the past two years, our business has shown significant progress as a result of the wide deployment of our DSP cores
with leading handset suppliers such as LG, Nokia, Panasonic, Samsung, Sony Ericsson and ZTE, as well as with a major US-based
SmartPhone manufacturer. This positive trend is evident from our royalty revenues which increased by 58% in 2008 from 2007 and
increased 127% when comparing 2008 to 2006. CEVA’s worldwide market share of baseband chips for handsets that incorporate our
technologies represented approximately 13% of the worldwide handsets volume in 2008 based on internal data and accounted for
approximately 51% of both our total annual royalty revenues and total annual revenues for 2008. We believe the full scale migration
to our DSP cores and technologies in the handsets market has not been fully realized and continues to progress. Texas Instruments’
announcement of its intent to exit the merchant baseband market, after historically being the largest player in this space, is a strong
positive driver for our future market share expansion.
We believe the handsets market continues to present significant growth opportunities for CEVA. Based on Informa
Telecoms & Media estimations, as of December 2008, there were 4 billion cellular connections worldwide, which is 60% of the entire
global population. Although broader markets will likely see a slowdown in 2009, based on ABI Research, the 3G segment of the
handsets market will grow from 39% of total shipment in 2008 to more than 50% in 2009. By 2013, more than 67% of all handsets
shipped will be 3G/3G+ capable. We are well-positioned to capitalize on this trend towards 3G/3G+ capabilities as three of the largest
3G chip suppliers use our technology. Another robust segment within the handsets market per ABI Research is the Smartphone
segment which captured 14% of the 2008 handsets market and is expected to grow despite the current challenging market
environment. ABI Research projects Smartphones will comprise 31% of the handsets market in 2013. Also, per iSupply, the handsets
market in China is expected to grow 8% in 2009 with 90 million of first time subscribers.
Beyond the handsets market, in 2008, we saw the production start of chips based on our new mobile multimedia platforms.
These platforms enrich our licensable product offerings and increase our future royalty potential. Also, during the fourth quarter of
2008, we had a substantial royalty contribution from an OEM of a well known new portable consumer product that started shipments
during the quarter. This shipped product is the newest generation of an existing product that is the clear leader in its product category
and has been sold in high volumes for the past three years. The latest version of this product includes advanced multimedia
capabilities for the first time, which are powered by our DSP technologies and software. We currently have three significant
customers in the mobile consumer market who are in production. Furthermore, we expect at least two more customers to start
production in the first half of 2009.
In January 2009, we announced a new product named CEVA-HD-Audio which offers high definition audio solutions for the
growing home entertainment products such as blu-ray DVDs, digital TVs, set-top boxes, IPTVs and home gateways. In 2008, we
licensed our technology to a leading Asian semiconductor company that will soon start shipping its product into the blu-ray market.
We believe these new business segments further highlight the potential for our royalty revenue growth.
25
Notwithstanding the various growth opportunities we have outlined above, our business operates in a highly competitive
environment. Competition has historically increased pricing pressures for our products and decreased our average selling prices.
Some of our competitors have reduced their licensing and royalty fees to attract customers and expand their market share. In order to
penetrate new markets and maintain our market share with our existing products, we may need to offer our products in the future at
lower prices which may result in lower profits. In addition, our future growth is dependent not only on the continued success of our
existing products but also the successful introduction of new products, which requires the dedication of resources into research and
development which in turn may increase our operating expenses. Yet we must continue to monitor and control our operating costs and
maintain our current level of gross margin in order to offset any future declines in shipment quantities of products based on our
technologies or any future declines in any per-unit royalty rates. Moreover, since our products are incorporated into end products of
our OEM customers, our business is very dependent on our OEM customers’ ability to achieve market acceptance of their end
products in the handsets and consumer electronic markets, which are similarly very competitive.
The ever-changing nature of the market also affects our continued business growth potential. For example, the success of our
video and audio products are highly dependent on the market adoption of new services and products, such as Smartphones, Internet
video, the migration from audio players to Personal Multimedia Players (PMP), as well as the migration to blu-ray DVDs, digital TVs,
set-top boxes with high definition audio and IPTVs. In addition, our business is affected by market conditions in developing markets,
such as China, India and Latin America, where the penetration of handsets in rural sites could generate future growth potential for our
business. The maintenance of our competitive position and our future growth are dependent on our ability to adapt to ever-changing
technology, short product life cycles, evolving industry standards, changing customer needs and the trend towards voice, audio and
video convergence in the markets that we operate.
Furthermore, the current general worldwide economic downturn has resulted in slower economic activity, concerns about
inflation and deflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions
and liquidity concerns. We also operate primarily in the semiconductor industry, which is cyclical, and the recent worldwide
economic downturn has resulted in a significant downturn of the semiconductor industry. These downturns are characterized by a
decrease in product demand, excess customer inventories, and accelerated erosion of prices. These conditions make it extremely
difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and could cause reduced
spending on our products and services. In addition, our royalty revenues currently are primarily generated from sales of chipsets used
in handsets and consumer electronics equipment, the demand for which may be adversely affected by decreased consumer confidence
and spending. Therefore, the worldwide economic downturn and specifically the volatility in the semiconductor and consumer
electronics industries could seriously impact our revenue and harm our business, financial condition and operating results. As a result,
our past operating results should not be relied upon as an indication of future performance.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United
States (U.S. GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that
these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the
periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results,
our financial statements will be affected. The significant accounting policies that we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following:
revenue recognition;
allowances for doubtful accounts;
accounting for income taxes;
impairment of goodwill;
equity-based compensation;
reorganization, restructuring and severance charges; and
accounting for marketable securities.
26
In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require
management’s judgment in its application. There are also areas in which management’s judgment in selecting among available
alternatives would not produce a materially different result.
Revenue Recognition
Significant management judgments and estimates must be made and used in connection with the recognition of revenue in
any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates
prove to be incorrect or if management’s estimates change on the basis of development of business or market conditions.
Management’s judgments and estimates have been applied consistently and have been reliable historically.
We generate our revenues from (1) licensing intellectual property, which in certain circumstances is modified to customer-
specific requirements, (2) royalty income and (3) other revenues, which include revenues from support, training and sale of
development systems. We license our IP to semiconductor companies throughout the world. These semiconductor companies then
manufacture, market and sell custom-designed chipsets to original equipment manufacturers of a variety of consumer electronics
products. We also license our technology directly to OEMs, which are considered end users.
We account for our IP license revenues and related services in accordance with Statement of Position 97-2, ―Software
Revenue Recognition,‖ as amended (―SOP 97-2‖). Under the terms of SOP 97-2, revenues are recognized when: (1) persuasive
evidence of an arrangement exists and no further obligation exists; (2) delivery has occurred; (3) the license fee is fixed or
determinable; and (4) collection is probable. A license may be perpetual or time limited in its application. SOP 97-2 generally
requires revenue earned on licensing arrangements involving multiple elements to be allocated to each element based on the relative
fair value of the elements. However, we have adopted SOP 98-9, ―Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions‖ (―SOP 98-9‖) for multiple element transactions. SOP 98-9 requires that revenue be recognized
under the ―residual method‖ when vendor specific objective evidence (―VSOE‖) of fair value exists for all undelivered elements and
VSOE does not exist for one of the delivered elements. The VSOE of fair value of the undelivered elements (mainly technical support
and training) is determined based on the substantive renewal rate as stated in the agreement. However, we do not believe we have
sufficient VSOE of fair value to make such allocations in certain cases in which we undertake services for our customers.
Accordingly, in multiple elements agreement which includes IP license and related services, and the related services are not essential
to the functionality of the IP license, the entire arrangement fee is recognized as the services are performed based on percentage of
completion method.
SOP 97-2 specifies that extended payment terms in a licensing arrangement may indicate that the license fees are not deemed
to be fixed or determinable. If the fee is not fixed or determinable, or if collection is not considered probable, revenue is recognized as
payments become due or collected from the customer, respectively, provided all other revenue recognition criteria have been met. Our
―revenue recognition policy‖ determines all arrangements that become due after 12 months as ―extended payments‖ and revenue is
recognized as each payment becomes due, provided all other revenue recognition criteria have been met.
Revenues from license fees that involve significant customization of our IP to customer-specific specifications are recognized
in accordance with the principles set out in Statement of Position 81-1, ―Accounting for Performance of Construction—Type and
Certain Production—Type Contracts‖ (―SOP 81-1‖), using contract accounting on a percentage of completion method, in accordance
with the ―Input Method.‖ The amount of revenue recognized is based on the total project fees (including the license fee and the
customization hours charged) under the agreement and the percentage of completion achieved. The percentage of completion is
measured by monitoring progress using records of actual time incurred to date in the project compared to the total estimated project
requirements, which corresponds to the costs related to earned revenues. Estimates of total project requirements are based on prior
experience of customization, delivery and acceptance of the same or similar technology and are reviewed and updated regularly by
management. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first
determined, in the amount of the estimated loss on the entire contract. As of December 31, 2008, no such losses were identified.
Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences
between actual performance and original forecasts. Such changes in estimated gross profit are recorded in results of operations when
they are reasonably determinable by us, on a cumulative catch-up basis.
We believe that the use of the percentage of completion method is appropriate as we have the ability to make reasonably
dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts
executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to
the contracts, the consideration to be exchanged and the manner and terms of settlement. In all cases we expect to perform our
contractual obligations, and our licensees are expected to satisfy their obligations under the contract.
27
When a sale of our IP is made to a third party who also supplies us with goods or services under separate agreements, we
evaluate each of the agreements to determine whether they are clearly separable, and independent of one another and that reliable fair
value exists for either the sale or purchase element in order to determine the appropriate revenue recognition.
Royalties from licensing the right to use our IP are recognized on a quarterly basis in arrears as we receive quarterly shipment
reports from our licensees. We determine such sales by receiving confirmation of sales subject to royalties from licensees. Non-
refundable payments on account of future royalties are recognized upon payment become due, provided no future obligation exists.
Prepaid royalties are recognized under the licensing revenue line.
Allowances for Doubtful Accounts
We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables
when collection becomes doubtful. Provisions are made based upon a detailed review of all significant outstanding receivables. In
determining the provision, we analyze our historical collection experience and current economic trends. We reassess these allowances
each accounting period. Historically, our actual losses and credits have been consistent with these provisions. If actual payment
experience with our customers is different than our estimates, adjustments to these allowances may be necessary resulting in
additional charges to our statements of operations.
Accounting for Income Taxes
In the ordinary course operation of our global business, there are many transactions and calculations where the ultimate tax
outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities,
the process of identifying items of revenue and expense that qualify for preferential tax treatment, segregation of foreign and domestic
income and expense to avoid double taxation and the complex issues involved in operating within multiple taxing jurisdictions. For
example, we do not provide for U.S. Federal income taxes on the undistributed earnings of our international subsidiaries because such
earnings are re-invested indefinitely and, in our opinion, will not be distributed to CEVA, Inc., the U.S. parent company. Although we
believe that our estimates relating to our worldwide income tax expenses are reasonable, the final tax outcome may be different than
those reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our effective tax
rate in a given financial statement period and therefore materially affect our income tax provision and net income (loss) in the period
in which such determination is made.
Moreover, we may be subject to audits in multiple jurisdictions. These audits can involve complex issues that may require an
extended period of time for resolution, including questions regarding our tax filing positions, the timing and amount of deductions and
the allocation of income among various tax jurisdictions. In evaluating the exposure associated with our various tax filing positions,
including state, foreign and local taxes, we record reserve for probable exposures. A number of years may elapse before a particular
matter, for which we have established a reserve, is audited and fully resolved. In our management’s opinion, adequate provisions for
income taxes have been made. To the extent we prevail in matters for which reserve has been established, or are required to pay
amounts in excess of the reserve, our effective tax rate in a given financial statement period could be materially affected. An
unfavorable tax settlement would require use of our cash and result in an increase in our effective tax rate in the year of resolution. A
favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.
Furthermore, deferred tax assets and liabilities are determined using enacted tax rates for the effects of net operating losses
and temporary differences between the book and tax bases of assets and liabilities. Our accounting for deferred taxes under Statement
of Financial Accounting Standards (―SFAS‖) No. 109, ―Accounting for Income Taxes‖ and Financial Accounting Standards Board
(―FASB‖) Interpretation No. 48, ―Accounting for Uncertainty in Income Taxes-an Interpretation of SFAS Statement No. 109‖
involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a valuation
allowance is required, we primarily consider such factors as our history of operating losses and expected future losses in certain
jurisdictions and the nature of our deferred tax assets. We provide valuation allowances in respect of deferred tax assets resulting
principally from the carryforward of tax losses. We currently believe that it is more likely than not that the deferred tax regarding the
carryforward of losses and certain accrued expenses will not be realized in the foreseeable future. In the event that we were to
determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to earnings in the period in which we make such a determination. Likewise, if we later determine that it is
more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously
provided valuation allowance. In order for us to realize our deferred tax assets we must be able to generate sufficient taxable income
in the tax jurisdictions in which the deferred tax assets are located.
Goodwill
Under SFAS No. 142, ―Goodwill and Other Intangible Assets,‖ goodwill and intangible assets with an identifiable useful life
are no longer amortized but are subject to annual impairment tests based on estimated fair value in accordance with SFAS No. 142
28
―Goodwill and Other Intangible Assets‖ (―SFAS No. 142‖). We determine fair value using widely accepted valuation techniques,
including discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates
regarding industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing
based on our current business strategy in light of present industry and economic conditions, as well as future expectations. We
conduct our annual test of impairment for goodwill on October 1st of each year. In addition we test if impairment exists periodically
whenever events or circumstances occur subsequent to our annual impairment tests that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Indicators we considered important which could trigger an impairment include,
but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in
the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a
significant decline in our stock price for a sustained period and our market capitalization relative to net book value.
In October 2008, we conducted our annual goodwill impairment test as required by SFAS No. 142. The goodwill impairment
test compared the fair value of the company with the carrying amount, including goodwill, on that date. Because our market
capitalization exceeded the carrying value, including goodwill, on the evaluate date, goodwill was considered not impaired.
Accounting for Equity-Based Compensation
We account for equity-based compensation in accordance with SFAS No. 123 (revised 2004), ―Share-Based Payment‖
(―SFAS 123(R)‖) which requires the measurement and recognition of compensation expense based on estimated fair values for all
share-based payment awards made to employees and directors. SFAS 123(R) requires companies to estimate the fair value of equity-
based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense over the requisite service periods on our consolidated income statement. We recognize
compensation expenses for the value of our awards, which have graded vesting based on the accelerated attribution method over the
requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-
vesting forfeitures. Since January 1, 2007, we have used the Monte-Carlo simulation model for options granted. Determining the fair
value of equity-based awards on the grant date requires the exercise of judgment, including the amount of equity-based awards that are
expected to be forfeited, which takes into account the probability of termination or retirement of the option holder. We consider many
factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Although our
management believes that their estimates and judgments about equity-based compensation expense are reasonable, actual results and
future changes in estimates may differ substantially from our current estimates.
Reorganization, Restructuring and Severance Charge
We have engaged in restructuring activities historically and may engage in future restructuring activities. Historical
restructuring activities have involved the restructuring of our corporate management, overhead reduction, geographical consolidation
of our activities, productivity improvements and expense reduction measures. Restructurings are accounted for under SFAS 112,
―Employers’ Accounting for Post Employment Benefits‖ and SFAS 146, ―Accounting for Costs Associated with Exit or Disposal
Activities.‖ In January 2008, we signed an assignment agreement with the landlord of our Harcourt lease in Dublin, Ireland to
surrender and termination the lease, a restructuring activity that began in 2005. In December 2008, our management implemented the
restructuring of our SATA activities. Our restructuring activities require us to make significant estimates in several areas including: 1)
realizable values of assets made redundant, obsolete or excess; 2) expenses for severance and other employee separation costs; 3) the
ability to generate sublease income, as well as our ability to terminate lease obligations at the amounts we have estimated; and 4) other
exit costs. The amounts we have accrued represent our best estimate of the obligations we expect to incur in connection with these
activities, but could be subject to change due to various factors. including market conditions and the outcome of negotiations with
third parties. Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially
impacted.
Accounting for Marketable Securities
We account for investments in debt and equity securities in accordance with SFAS No. 115, ―Accounting for Certain
Investments in Debt and Equity Securities.‖ Management determines the appropriate classification of its investments in debt and
equity securities at the time of purchase and re-evaluates such determination at each balance sheet date. FASB Staff Position (―FSP‖)
No. 115-1/124-1, ―The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments‖ (―FSP 115-1/124-
1‖) provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary and
measurement of an impairment loss. If, after consideration of all available evidence to evaluate the realizable value of the investment,
impairment is determined to be other-than-temporary, then an impairment loss is recognized in earnings as realized losses equal to the
difference between the investment’s cost and its fair value. Determining whether the decline in fair value is other-than-temporary
requires our management’s judgment based on the specific facts and circumstances of each investment. For investments in debt
instruments, these judgments primarily consider: (i) the length of time and the extent to which the fair value has been less than cost,
(ii) the financial condition and near-term prospects of the issuer, and (iii) our intent and ability to retain our investment in the issuer
29
for a period of time sufficient to allow for any anticipated recovery in cost. Given current market conditions, these judgments could
prove to be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their
obligations. In addition, a decision by our management to no longer hold an investment until maturity or recovery may result in the
recognition of an other-than-temporary impairment.
Recently issued accounting standards:
In December 2007, the FASB issued SFAS 141R ―Business Combinations‖ (―SFAS 141R‖). SFAS 141R establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for us
beginning January 1, 2009. The impact of the adoption of SFAS 141R on our consolidated financial position and results of operations
will largely be dependent on the size and nature of the business combinations we complete after the adoption of this statement.
In February 2008, the FASB issued FASB Staff Position (―FSP‖) 157-2 ―Effective Date of FASB Statement No. 157‖ (―FSP
157-2‖), which delays the effective date of SFAS 157 ―Fair Value Measurements‖ (―SFAS 157‖) for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements.
FSP 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of the FSP 157-2. The adoption of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities is effective for us beginning January 1, 2009. We do not expect the impact of this adoption to be material.
In March 2008, the FASB issued SFAS No. 161 ―Disclosures about Derivative Instruments and Hedging Activities‖ (―SFAS
No. 161‖), which will require increased disclosures about an entity’s strategies and objectives for using derivative instruments; the
location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged
items are accounted for under SFAS No. 133, and how derivative instruments and related hedged items affect its financial position,
financial performance, and cash flows. Certain disclosures will also be required with respect to derivative features that are credit risk-
related. SFAS No. 161 is effective for us beginning on January 1, 2009 on a prospective basis. We do not expect this standard to have
a material impact on our consolidated results of operations or financial condition.
In April 2008, the FASB issued FSP 142-3 ―Determination of the Useful Life of Intangible Assets‖ (―FSP 142-3‖). This
guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 ―Goodwill
and Other Intangible Assets‖ (―SFAS 142‖), and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141R when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a
material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset
must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical
experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142’s
entity-specific factors. FSP 142-3 is effective for us beginning January 1, 2009. We do not expect the impact of the adoption of FSP
142-3 to be material.
In October 2008, the FASB issued Staff Position No. 157-3, ―Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active‖ (―FSP157-3‖). FSP 157-3 amends SFAS 157 ―Fair Value Measurements,‖ to provide guidance
regarding the manner in which SFAS 157 should be applied in determining fair value of a financial asset when there is no active
market for such asset on the measurement date. We do not expect the adoption of FSP 157-3 to have a material impact on our
consolidated financial statements.
30
RESULTS OF OPERATIONS
The following table presents line items from our statements of operations as percentages of our total revenues for the periods
indicated:
Consolidated Statements of Operations Data:
Revenues:
Licensing
Royalties
Other revenue
Total revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Sales and marketing
General and administrative
Amortization of other intangible assets
Reorganization, restructuring and severance charge
Total operating expenses
Operating loss
Financial income, net
Other income
Income (loss) before taxes on income
Taxes on income
Net income (loss)
Discussion and Analysis
2006
2007
2008
68.2%
58.7%
53.8%
19.4%
27.4%
35.5%
12.4%
13.9%
10.7%
100.0%
100.0%
100.0%
12.4%
11.6%
11.6%
87.6%
88.4%
88.4%
57.7%
57.6%
50.0%
19.3%
18.8%
17.6%
18.1%
17.2%
16.4%
1.3%
0.5%
0.1%
—
—
10.2%
96.4%
94.1%
94.3%
(8.8)%
(5.7)%
(5.9)%
8.0%
0.2%
9.6%
6.7%
1.3%
29.8%
(0.6)%
5.2%
30.6%
(0.3)%
1.3%
9.4%
(0.3)%
3.9%
21.2%
Below we provide information on the significant line items in our statements of operations for each of the past three fiscal
years, including the percentage changes year-on-year, as well as an analysis of the principal drivers of change in these line items from
year-to-year.
31
Revenues
Total Revenues
Total revenues (in millions)
Change year-on-year
2006
2007
2008
$ 32.5
$ 33.2
$ 40.4
—
2.2%
21.5%
The increase in total revenues from 2007 to 2008 principally reflects a combination of higher licensing and royalty revenues.
The slight increase in total revenues from 2006 to 2007 principally reflects a combination of higher royalties and other revenues,
offset by lower licensing revenues. Revenues from baseband chips for handsets that incorporate our technologies accounted for
approximately 51% of our total annual revenues for 2008. The five largest customers accounted for 49% of total revenues in 2008,
53% in 2007 and 42% in 2006.
In 2008, one customer accounted for 20% of revenues, compared to three customers that accounted for 17%, 12% and 11% of
revenues in 2007 and one customer accounted for 16% of revenues in 2006. Because of the nature of our license agreements and the
associated large initial payments due, the identity of major customers generally varies from quarter to quarter and we do not believe
that we are materially dependent on any one specific customer or any specific small number of licensees.
We generate royalty revenue from our customers based on two models: royalties paid by our customers during the period in
which they ship units of chipsets incorporating our technology, which we refer to as ―per unit royalties‖, and royalties which are paid
in a lump sum and in advance to cover a pre-defined fixed number of future unit shipments, which we refer to as ―prepaid royalties‖.
In either case, these royalties are non-refundable payments and are recognized when payment becomes due, provided no future
obligation exists. Prepaid royalties are recognized under our licensing revenue line and accounted for 3%, 16% and 18% of total
revenues in 2008, 2007 and 2006, respectively. Only royalty revenue from customers who are paying as they ship units of chipsets
incorporating our technology is recognized in our royalty revenue line. These per unit royalties are invoiced and recognized on a
quarterly basis in arrears as we receive quarterly shipment reports from our licensees.
Licensing Revenues
Licensing revenues (in millions)
Change year-on-year
2006
2007
2008
$ 22.2
$ 19.5
$ 21.7
—
(12.0)% 11.3%
The increase in licensing revenues from 2007 to 2008 resulted mainly from licensing revenue received pursuant to our
agreement with u-blox AG to resolve a license dispute matter. The decrease in licensing revenues from 2006 to 2007 principally
reflects lower revenues from our SATA IP and BlueTooth IP.
Licensing revenues accounted for 53.8% of our total revenues in 2008, compared with 58.7% and 68.2% of our total
revenues in 2007 and 2006, respectively. The percentage decrease in licensing revenues principally reflects the shift in revenue mix
especially with increased in royalty revenues. In 2008, we signed 30 new license agreements compared to 36 and 38 in 2007 and 2006,
respectively.
Royalty Revenues
Royalty revenues (in millions)
Change year-on-year
2006
2007
2008
$ 6.3
$ 9.1
$ 14.3
—
43.8%
57.8%
CEVA’s worldwide market share of baseband chips for handsets that incorporate our technologies represented approximately
13% of the worldwide handsets volume in 2008 based on internal data and accounted for approximately 51% of our total annual
32
royalty revenues for 2008. With regards to average royalty per unit, royalties from other consumer electronics products incorporating
our technologies generally are higher per unit than royalties per unit from handsets incorporating our technologies.
The increase in royalty revenues from 2007 to 2008 reflected increased unit shipments and market share expansion in 3G and
2G handsets markets. This increase was mainly due to a substantial production ramp-up by two of our customers in different
segments of the handsets market. The increase in royalty revenues from 2006 to 2007 was mainly due to a substantial production
ramp-up by one of our customers in the consumer electronics market, as well as a few of our reporting customers in the handsets
market. The five largest customers paying per unit royalty accounted for 78.9% of total royalty revenues in 2008 compared to 67.9%
and 75.2% in 2007 and 2006, respectively.
Our per unit and prepaid royalty customers reported sales of 307 million chipsets incorporating our technology in 2008,
compared to 227 million in 2007 and 190 million in 2006. The increase in units shipped in 2008 compared to 2007 reflects increased
unit shipments of our CEVA-DSP cores by licensees in the 2/3G baseband cellular phone markets. This increase reflects market share
expansion of our technologies in the baseband market by replacing chips from Texas Instruments and Qualcomm with our technology.
The increase in 2008 was partially offset by lower shipments of chips incorporated in DVD and hard disc drive products, mainly as a
result of the recent slowdown in the consumer electronics market. The increase in units shipped in 2007 compared to 2006 reflected
increased unit shipments of our CEVA-DSP cores by licensees in the markets for 2/2.5G baseband cellular phones, set-top boxes,
DVD servo products and disk drive controllers.
Other Revenues
Other revenues include support and training for licensees and sale of development systems.
Other revenues (in millions)
Change year-on-year
2006
2007
2008
$ 4.0
$ 4.6
$ 4.3
—
14.8%
(6.5)%
The decrease in other revenues in 2008 compared to 2007 principally reflects a decrease in revenues from sales of
development systems, offset by higher support revenues. The increase in other revenues in 2007 compared to 2006 principally reflects
an increase in revenues from sales of development systems.
Geographic Revenue Analysis
United States
Europe, Middle East (EME) (1) (2)
Asia Pacific (APAC) (3) (4)
(1) Sweden
(2) Switzerland
(3) Japan
(4) Taiwan
*) Less than 10%
2006
2007
2008
(in millions, except percentages)
$ 11.7
35.9% $ 6.9
20.9% $ 5.3
13.1%
$ 11.7
35.9% $ 11.5
34.6% $ 22.3
55.2%
$ 9.2
28.2% $ 14.8
44.5% $ 12.8
31.7%
*)
*)
*)
*)
*)
$ 3.8
11.3% $ 8.0
19.9%
*)
*)
*)
$ 5.9
14.7%
*)
$ 4.4
13.2% $ 5.1
12.7%
*)
$ 6.1
18.2%
*)
*)
Due to the nature of our license agreements and the associated potential large individual contract amounts, the geographic
spilt of revenues both in absolute and percentage terms generally varies from year to year.
33
In the United States, revenues decreased in 2008 compared to 2007 in all segments of our business due to the U.S. economic
slowdown and fewer development sites for handsets OEMs. The increase in revenues in absolute and percentage terms in the EME
region in 2008 compared to 2007 primarily reflects higher revenues from our GPS IP, mainly as a result of our agreement with u-blox
AG to resolve a license dispute, as well as higher revenues from our CEVA-DSP core family of products. The decrease in revenues in
absolute and percentage terms in the APAC region in 2008 compared to 2007 primarily reflects lower revenues from our CEVA-DSP
core family of products in that region. Revenues decreased in absolute and percentage terms in the United States from 2006 to 2007,
primarily reflecting lower revenues from our SATA IP and CEVA-DSP core family of products in that region. The slight decrease in
revenues in absolute and percentage terms in the EME region from 2006 to 2007 primarily reflects lower revenues from CEVA-DSP
core family of products and lower revenues from Bluetooth IP licensing in that region. The increase in revenues in absolute and
percentage terms in the APAC region from 2006 to 2007 primarily reflects greater revenues from CEVA-DSP core family of products
in that region, partially offset by lower revenues from Bluetooth IP licensing.
Cost of Revenues
Cost of revenues (in millions)
Change year-on-year
2006
2007
2008
$ 4.0
$ 3.9
$ 4.7
—
(4.6)% 21.2%
Cost of revenues accounted for 11.6% of total revenues in both 2008 and 2007, compared with 12.4% in 2006. The absolute
and percentage increase in cost of revenues in 2008 compared to 2007 principally reflected (i) the execution of a larger number of
license agreements with engineering service requirements which increased cost of goods labor expenses during 2008, as compared to
2007, (ii) higher royalty payback expenses paid to the Chief Scientist of Israel, and (iii) higher labor-related costs mainly due to the
recruitment of additional employees for our support team. Royalty payback expenses relate to royalties amounting to 3%-3.5% of the
actual sales of certain of our products the development of which previously included grants from the Chief Scientist of Israel. The
absolute and percentage decrease in cost of revenues in 2007 compared to 2006 principally reflects the shift in revenue mix with an
increase in higher gross margin licensing and royalty revenue.
Cost of revenues includes related labor costs and, where applicable, related overhead, subcontractor, material costs, royalty
payback expenses paid to the Chief Scientist of Israel and non-cash equity-based compensation expenses.
Operating Expenses
Research and development, net
Sales and marketing
General and administration
Amortization of intangible assets
Reorganization, restructuring and severance charge
Total operating expenses
Change year-on-year
2006
$ 18.8
6.2
$
5.9
$
$
0.4
$ —
$ 31.3
—
2007
(in millions)
$ 19.1
6.2
$
5.7
$
$
0.2
$ —
$ 31.2
(0.2)%
2008
$ 20.2
7.1
$
6.6
$
0.1
$
4.1
$
$ 38.1
21.8%
The increase in total operating expenses in 2008 compared to 2007 principally reflects (i) a restructuring and reorganization
expense in the amount of $4.1 million as a result of the termination of the Harcourt property lease in Dublin, Ireland during the first
quarter of 2008, (ii) expenses associated with the restructuring of SATA activities, (iii) higher salary and related costs, partially as a
result of the devaluation of the U.S. dollar against the Euro and the Israeli NIS, (iv) higher professional services costs, and (v) higher
non-cash equity-based compensation expenses, partially offset by an increase in research and development grants received from the
Israeli government. The slight decrease in total operating expenses in 2007 compared to 2006 principally reflects a decrease in
investment in design tools and lower amortization of intangible assets, partially offset by higher salary costs and marketing activities.
34
Research and Development Expenses, Net
Research and development expenses, net (in millions)
Change year-on-year
2006
2007
2008
$ 18.8
$ 19.1
$ 20.2
—
2.0%
5.4%
The net increase in research and development expenses in 2008 compared with 2007 reflects higher salary and related
expenses, mainly as a result of the devaluation of the U.S. dollar against the Euro and the Israeli NIS and higher non-cash equity-
based compensation expense, offset by an increase in research grants received from the Israeli government. The slight increase in
research and development expenses in 2007 compared with 2006 reflects higher salary and related expenses and project-related
expenses, as well as higher non-cash equity-based compensation expenses, partially offset by lower research and development
expenses in GPS activities as a result of the divestment of our GPS technology and associated business on June 23, 2006, which led to
a lower number of research and development personnel and a decrease in investment in design tools. The average number of research
and development personnel in 2008 was 127, compared to 136 in 2007 and 140 in 2006. The number of research and development
personnel was 128 at December 31, 2008, compared with 136 at year-end 2007 and 136 at year-end 2006. Subsequent to year end
2008 and in connection with the restructuring of our SATA activities, the aggregate number of research and development personnel
was reduced to 116.
Research and development expenses, net of related government grants, were 50.0% of total revenues in 2008, compared with
57.6% in 2007 and 57.7% in 2006. We recorded net research grants under funding programs of the Chief Scientist of Israel,
Enterprise Ireland and Invest Northern Ireland of $959,000 in 2008, compared with $319,000 in 2007 and $276,000 in 2006. Grants
received from the Chief Scientist of Israel, Enterprise Ireland and Invest Northern Ireland may become repayable if certain criteria
under the grants are not met.
Research and development expenses consist primarily of salaries and associated costs and project-related expenses connected
with the development of our intellectual property which are expensed as incurred, and non-cash equity-based compensation expenses.
Research and development expenses are net of related government research grants. We view research and development as a principal
strategic investment and have continued our commitment to invest heavily in this area, which represents the largest of our ongoing
operating expenses. We will need to continue to invest in research and development and such expenses may increase in the future to
keep pace with new trends in our industry.
Sales and Marketing Expenses
Sales and marketing expenses (in millions)
Change year-on-year
2006
2007
2008
$
6.2
$
6.2
$
7.1
—
(0.2)%
13.4%
The increase in sales and marketing expenses in 2008 compared to 2007 principally reflects higher salary and related costs,
higher commission expenses, higher marketing expenses due to more marketing-related and corporate awareness activities, mainly
associated with trade shows and technology conferences in Asia, Europe and the U.S., as well as higher non-cash equity-based
compensation expenses. The slight decrease in sales and marketing expenses in 2007 compared to 2006 principally reflects lower
salary costs as well as lower non-cash stock compensation expense, partially offset by an increase in marketing and trade shows
activities.
Sales and marketing expenses as a percentage of total revenues were 17.6% in 2008, compared with 18.8% in 2007 and
19.3% in 2006. The total number of sales and marketing personnel was 20 at year-end 2008, compared with 19 at year-end 2007 and
20 at year-end 2006. Sales and marketing expenses consist primarily of salaries, commissions, travel and other costs associated with
sales and marketing activities, as well as advertising, trade show participation, public relations and other marketing costs and non-cash
equity-based compensation expenses.
35
General and Administrative Expenses
General and administrative expenses (in millions)
Change year-on-year
2006
2007
2008
$
5.9
$
5.7
$
6.6
—
(2.7)%
16.0%
The increase in general and administrative expenses in 2008 compared to 2007 principally reflects higher salary and related
costs, higher professional services costs and higher non-cash equity-based compensation expenses, partially offset by a decrease in
doubtful debt expenses. The slight decrease in general and administrative expenses in 2007 compared to 2006 principally reflects
lower director fees as well as lower rent and non-cash equity-based compensation expenses, partially offset by an increase in salary
costs and bad debt expenses. The total number of general and administrative personnel was 24 at December 31, 2008, compared with
25 at year-end 2007 and 27 at year-end 2006. General and administrative expenses consist primarily of fees for directors, salaries for
management and administrative employees, accounting and legal fees, expenses related to investor relations and facilities expenses
associated with general and administrative activities and non-cash equity-based compensation expenses.
Amortization of Other Intangible Assets
Amortization of other intangible assets (in millions)
Change year-on-year
2006
2007
2008
$
0.4
$
0.2
$
0.1
—
(64.3)%
(64.2)%
The charges identified above were incurred in connection with the amortization of intangible assets acquired in the
combination with Parthus in 2002. The decrease in amortization of other intangible assets in 2007 compared with 2006 was mainly
due to a decrease in the amount of other intangible assets, net of $0.9 million, as a result of the divestment of our GPS technology and
associated business to Glonav. As of December 31, 2008 and 2007, the net amount of other intangible assets was $0 million and $0.1
million, respectively.
Reorganization, Restructuring and Severance Charge
Reorganization, restructuring and severance charge (in millions)
2006
2007
2008
$ —
$ —
$ 4.1
We implemented reorganization and restructuring plans in 2005, which resulted in a total charge of $3.2 million. The charge
arose in connection with our decision to restructure our corporate management, reduce overhead and consolidate our activities. The
charges included severance charges and employee-related liabilities arising in connection with a head-count reduction of employees
and a provision for future operating lease charges on idle facilities, one of which was our facilities in Dublin, Ireland, known as the
Harcourt lease. The Harcourt lease provided for an aggregate annual rental of approximately $1.3 million and expired in 2021. We
initiated exit negotiations with the Harcourt landlord to terminate the lease in September 2005. Of the total charge of $3.2 million in
2005, the portion of the restructuring reserve related to the Harcourt lease was 1.7 million.
Throughout 2006, we continued exit negotiations with the Harcourt landlord to terminate the lease. At December 31, 2005,
the provision for this under-utilized property was $3.0 million (including legal and professional fees). At December 31, 2006, exit
negotiations regarding the Harcourt lease had not concluded. There was no additional restructuring charge to the statement of
operations relating to the Harcourt lease during 2006 (approximately $760,000 was accrued as expenses under other liabilities, of
which approximately $270,000 was paid in 2006). In July 2007, the Harcourt landlord initiated legal proceedings against us for full
payment of rent for the period from July 2006 to September 2007, including interest on arrears. We paid an amount equal to
approximately $1.5 million (of which approximately $0.8 million was included in accrued expenses under restructuring and
approximately $0.7 million was included in accrued expenses under other liabilities) representing the full rent payments for the said
period and various associated legal fees, as well as payment of late interest charges in the amount of approximately $0.2 million.
Subsequently, the legal proceedings against us were dropped. During the third quarter of 2007, we re-initiated exit negotiations with
the Harcourt landlord. At December 31, 2007, we concluded that we had no assurance whether, and if so when, the exit negotiations
36
would result in a lease termination. Pursuant to a sublet strategy in accordance with SFAS No. 146, as of December 31, 2007, the
portion of the restructuring reserve related to the Harcourt lease was $2.2 million. There was no additional restructuring charge to the
statement of operations relating to the Harcourt lease during 2007 (approximately $0.2 million was accrued as expenses under other
liabilities).
On January 18, 2008, we signed an assignment agreement with the Harcourt landlord for the surrender and termination of the
Harcourt lease. In 2008, we paid approximately $5.9 million for the termination of the lease and related termination costs, consisting
primarily of legal and professional fees. We also successfully managed during the first quarter of 2008 to terminate part of our lease
obligation in another office in Limerick, Ireland, where we had unused space. We recorded in 2008 an aggregate of $3.5 million for
the above lease terminations as an additional reorganization expense. As a result of the above lease terminations, we have no under-
utilized building operating lease obligations as of December 31, 2008.
In October 2008, our board of directors approved a reduction in expenses associated with our SATA activities. In December
2008, our management implemented the reduction with the termination in employment of a number of SATA-related technology
engineers across our Irish offices. A one-time restructuring expense associated with the down-sizing of the SATA team in the amount
of $584,000 was recorded in 2008 in accordance with SFAS No. 146.
Financial Income, net and Other Income
Financial income, net
of which:
2006
2007
2008
(in millions)
$ 2.62
$ 3.21
$ 2.73
Interest income and gains and losses from marketable securities, net
Foreign exchange gain (loss)
$ 2.77
$3.17
$2.86
$ (0.15)
$0.04
$(0.13)
Other income, net
of which:
Gain on realization of investments
Impairment of assets
$ 0.06
$ 0.43
$ 12.01
$ 0.06
$ 0.43
$ 12.15
$ —
$ —
$ (0.14)
Financial income, net, consists of interest earned on investments, gains and losses from marketable securities, amortization of
discount and premium on marketable securities and foreign exchange movements. The decrease in financial income, net, in 2008
from 2007 reflects a combination of lower interest rates and realized losses from marketable securities in 2008 as compared to a
realized gain in 2007, offset by higher combined cash and marketable securities balances held. The increase in interest and gains from
marketable securities earned in 2007 from 2006 reflects a combination of higher interest rates and higher combined cash and
marketable securities balances held.
We review our monthly expected non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash
balances to mitigate currency fluctuations. This has resulted in a foreign exchange loss of $0.13 million in 2008, a foreign exchange
gain of $0.04 million in 2007 and a foreign exchange loss of $0.15 million in 2006.
Other income, net, consists of gains on realization of investments and impairment of assets. We recorded a gain of $12.12
million in 2008 from the divestment of our equity investment in Glonav to NXP Semiconductors (for more information see Note 5 to
the attached Notes to Consolidated Financial Statement for the year ended December 31, 2008). We also recorded a gain of
$0.03 million, $0.43 million and $0.06 million in 2008, 2007 and 2006, respectively, from the realization of a minority investment in a
private company acquired in the combination with Parthus. In 2008, we recorded a loss of $0.14 million related to the disposal of
SATA-related fixed assets in connection with the restructuring of SATA activities.
37
Provision for Income Taxes
The provision for income taxes reflects income earned domestically and in certain foreign jurisdictions. In 2008, we
recorded tax expenses of $3.1 million related to a capital gain from the divestment of our equity investment in Glonav to NXP
Semiconductors, a tax expense of $0.8 million related to income earned in certain foreign jurisdictions, as well as an income tax
benefit of $0.1 million related to domestically deferred tax assets such as accrued expenses, deferred revenue and depreciation. The
benefit of the deferred tax is expected to be realized in the future. In 2007, we recorded tax expenses of $0.1 million related to a gain
from the disposal of an investment, $0.2 million related to interest income earned in Ireland, which was subject to a tax rate of 25%, as
well as $0.1 million related to income earned in certain foreign jurisdictions. In 2006, we recorded a tax income of $0.1 million
mainly due to the release of a certain tax provision as a result of a re-calculation of the provision for income taxes based on approvals
received during the year from a certain tax authority in a foreign jurisdiction, offset by tax expenses on income earned domestically
and in certain foreign jurisdictions. We have significant operations in Israel and the Republic of Ireland and a substantial portion of
our taxable income is generated there. Currently, our Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. tax
rates.
The Irish operating subsidiary currently qualifies for a 10 percent tax rate on its trade, which under current legislation will
remain in force until December 31, 2010. After this date, a rate of 12.5 percent tax rate shall apply.
The Israeli operating subsidiary’s production facilities have been granted ―Approved Enterprise‖ status under Israeli law in
connection with six separate investment plans. Accordingly, income from an ―Approved Enterprise‖ is tax-exempt for a period of two
or four years and is subject to a reduced corporate tax rate of 10 percent to 25 percent (based on percentage of foreign ownership) for
an additional period of six or eight years. The tax benefit under the first, second and third plans have expired and are subject to
corporate tax of 27 percent in 2008 and 26 percent in 2009. However, since the Israeli operating subsidiary received during 2008 an
approval for the erosion of the tax basis in respect to its second and third plans, no taxable income were attributed to these plans.
On April 1, 2005, an amendment to the Israeli Investment Law came into effect (the ―Amendment‖) and significantly
changed the provisions of the Investment Law. The Amendment included revisions to the criteria for investments qualified to receive
tax benefits as an ―Approved Enterprise.‖ The Amendment applies to new investment programs and investment programs
commencing after 2004, and does not apply to investment programs approved prior to December 31, 2004, and therefore benefits
included in any certificate of approval that was granted before the Amendment came into effect will remain subject to the provisions
of the Investment Law as they were on the date of such approval. Our Israeli subsidiary’s seventh plan (commenced in 2007) is
subject to the provisions of the Amendment. We believe that we are currently in compliance with the requirements of the
Amendment. However, if we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory
rate of 27 percent for 2008 and 26 percent for 2009). We could also be required to refund tax benefits, with interest and adjustments
for inflation based on the Israeli consumer price index.
Certain expenditures pursuant to Israeli law are permitted to be recognized as a tax deduction over a three year period which
has resulted deferred tax asset in 2008.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2008, we had approximately $13.3 million in cash and cash equivalents and $71.3 million in deposits
and marketable securities, totaling $84.6 million compared to $76.4 million at December 31, 2007. During 2008, we invested $76.4
million of cash, in certificates of deposits and corporate bonds and securities and U.S. government and agency securities with
maturities up to 29 months. In addition, certificates of deposits and corporate bonds and securities and U.S. government and agency
securities were sold or redeemed for cash amounting to $40.9 million. During 2007, we invested $45.0 million of our cash in
certificates of deposits and corporate bonds and securities and U.S. government and agency securities with maturities up to 32 months.
In addition, certificates of deposits and corporate bonds and securities and U.S. government and agency securities were sold or
redeemed for cash amounting to $35.8 million. Tradable certificates of deposits and corporate bonds and securities and U.S.
government and agency securities instruments are classified as marketable securities. The purchase and sale or redemption of trading
marketable securities are considered part of operating cash flow, whereas the purchase and sale or redemption of available-for-sale
marketable securities are considered part of investing cash flow. In accordance with Statement of Financial Accounting Standard No.
115 ―Accounting for Certain Investments in Debt and Equity Securities‖ (―SFAS No. 115‖), available-for-sale securities are stated at
fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of
stockholders’ equity, net of taxes. Realized gains and losses on sales of investments, as determined on a specific identification basis,
are included in the consolidated statements of operations. Determining whether the decline in fair value is other-than-temporary
requires management judgment based on the specific facts and circumstances of each investment. For investments in debt
instruments, these judgments primarily consider: (i) the length of time and the extent to which the fair value has been less than cost,
(ii) the financial condition and near-term prospects of the issuer, and (iii) our intent and ability to retain our investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in cost. Given current market conditions, these judgments could
38
prove to be wrong, and companies with relatively high credit ratings and solid financial conditions may not be able to fulfill their
obligations. In addition, a decision by management to no longer hold an investment until maturity or recovery may result in the
recognition of an other-than-temporary impairment.
Trading securities are held for resale in anticipation of short-term market movements. Under SFAS No. 115, marketable
securities classified as trading securities are stated at the quoted market prices at each balance sheet date. Gains and losses (realized
and unrealized) related to trading securities, as well as interest on such securities, are included as financial income or expenses as
appropriate. Non-tradable deposits are short-term bank deposits with maturities of more than three months but less than one year.
The non-tradable deposits are presented at their cost, including accrued interest, and purchases and sales are considered part of cash
flows from investing activities.
Net cash used in operating activities in 2008 was $3.4 million, compared with $28.2 million of net cash provided by
operating activities in 2007 and $3.4 million of net cash used in operating activities in 2006. Included in the operating cash outflow in
2008 were $5.9 million cash outflow in connection with reorganizations, mainly the termination of the Harcourt lease, and $3.4
million cash outflow in connection with taxes associated with a capital gain from the divestment of our equity investment in Glonav to
NXP Semiconductors. Included in the operating cash inflow in 2007 was a disposal of $21.3 million in marketable securities.
Included in the operating cash outflow in 2006 was a net investment of $5.1 million in marketable securities.
Cash flows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts
and payments. Our ongoing cash outflows from operating activities principally relate to payroll-related costs and obligations under
our property leases and design tool licenses. Our primary sources of cash inflows are receipts from our accounts receivable and
interest earned from our cash, deposits and marketable securities holdings. The timing of receipts of accounts receivable from
customers is based upon the completion of agreed milestones or agreed dates as set out in the contracts.
Net cash used in investing activities in 2008 was $19.5 million, compared with $30.9 million of net cash used in investing
activities in 2007 and $3.9 million of net cash provided by investing activities in 2006. We had a cash outflow of $28.5 million and a
cash inflow of $24.6 million in respect of investments in marketable securities during 2008. Included in the cash outflow during 2008
was a net investment of $31.6 million in short-term bank deposit. We had a cash outflow of $40.0 million and a cash inflow of $13.5
million in respect of investments in marketable securities during 2007. Included in the investment cash outflow in 2007 was a net
disposal of $4.0 million in short-term bank deposit. Included in the investment cash inflow in 2006 was a net disposal of $5.2 million
in short-term bank deposit. Capital equipment purchases of computer hardware and software used in engineering development,
furniture and fixtures amounted to approximately $0.5 million in 2008, $0.8 million in 2007 and $0.4 million in 2006. The main
increase in capital expenditures in 2007 was associated with tester equipment for the SATA product line. We had a cash outflow of
$39,000 and $0.9 million in 2007 and 2006, respectively, in respect of transaction-related costs associated with the divestment of our
GPS technology and associated business to Glonav. We had a cash inflow of $16.4 million in 2008 from the divestment of our equity
investment in Glonav to NXP Semiconductors, and a cash inflow of $27,000, $0.4 million and $57,000 from the disposal of a minority
investment in a private company in 2008, 2007 and 2006, respectively.
Net cash used in financing activities in 2008 was $4.2 million, compared with net cash provided by financing activities of
$4.8 million and $1.8 million in 2007 and 2006, respectively.
On August 4, 2008, we announced that our board of directors approved a share repurchase program for up to 1.0 million
shares of common stock. On September 3, 2008, we announced the adoption of a share repurchase plan in accordance with Rule
10b5-1 of the United States Securities Exchange Act of 1934, as amended (the ―10b5-1 Plan‖), to repurchase up to 500,000 of the 1.0
million shares of common stock authorized by the board for repurchase pursuant to the repurchase program. In 2008, we repurchased
752,763 shares of common stock at an average purchase price of $7.7 per share, for an aggregate purchase price of $5.8 million. We
have fully utilized the shares available for repurchase under the 10b5-1 Plan. As of December 31, 2008, 247,237 shares of common
stock remain authorized for repurchase pursuant to our repurchase program.
During the years 2008, 2007 and 2006, we received $1.6, $4.8 and $1.8 million, respectively, from the issuance of shares
upon exercise of employee stock options and under our employee stock purchase plan.
We believe that our current cash on hand and marketable securities, along with cash from operations, will provide sufficient
capital to fund our operations for at least the next 12 months. We cannot assure, however, that the underlying assumed levels of
revenues and expenses will prove to be accurate.
In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and
technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or
businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or
equity financing. We cannot assure that we will be able to successfully identify suitable acquisition candidates, complete acquisitions,
39
integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot assure that additional
financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See ―Risk Factors—We
may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses.‖ for more detailed
information.
Contractual Obligations
The table below presents the principal categories of our contractual obligations as of December 31, 2008:
Operating Lease Obligations – Leasehold properties
Operating Lease Obligations – Other
Purchase Obligations
Severance Pay (*)
Total
Payments Due by Period
($ in thousands)
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
1,987
1,194
793
—
1,881
1,313
568
—
102
102
—
—
3,788
—
—
—
7,758
2,609
1,361
—
—
—
—
—
—
Operating leasehold obligations principally relate to our offices in Ireland, Israel and the United States. Other operating lease
obligations relate to license agreements entered into for maintenance of design tools. Purchase obligations consist of capital and
operating purchase order commitments.
(*) Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor laws. These
obligations are payable only upon termination, retirement or death of the respective employee. Of this amount, only $0.3 million
is unfunded.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and
Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to
investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A majority of our revenues and a portion of our expenses are transacted in U.S. dollars and our assets and liabilities together
with our cash holdings are predominately denominated in U.S. dollars. However, the majority of our expenses are denominated in
currencies other than the U.S. dollar, principally the Euro and the Israeli NIS. Increases in the volatility of the exchange rates of the
Euro and the NIS versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur when remeasured
into U.S. dollars. We review our monthly expected non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S.
dollar cash balances to mitigate currency fluctuations. This has resulted in a foreign exchange loss of $0.1 million in 2008, a foreign
exchange gain of $0.04 million in 2007 and a foreign exchange loss of $0.2 million in 2006.
As a result of currency fluctuations and the remeasurement of non-U.S. dollar denominated expenditures to U.S. dollars for
financial reporting purposes, we may experience fluctuations in our operating results on an annual and quarterly basis going forward.
To protect against the increase in value of forecasted foreign currency cash flow resulting from salaries paid in Israeli NIS and Euro
during the year, we instituted in the second quarter of 2007, a foreign currency cash flow hedging program. We hedge portions of the
anticipated payroll for our Israeli and Irish employees denominated in NIS and Euro for a period of one to twelve months with forward
and put option contracts. As of December 31, 2008, we recorded comprehensive income of $0.1 million from our forward and put
options contracts in respect to anticipated payroll for our Israeli and Irish employees expected in 2009. Such amounts will be recorded
in earnings in 2009. We recognized a net gain of $0.02 million in both 2008 and 2007, related to forward and put options contracts.
However, hedging transactions may not successfully mitigate losses caused by currency fluctuations. We expect to continue to
experience the effect of exchange rate and currency fluctuations on an annual and quarterly basis.
40
We invest our cash and cash equivalents in highly liquid investments with original maturities of generally 12 months or less
at the time of purchase and maintain them with reputable major financial institutions. Cash held by foreign subsidiaries is generally
held in short-term time deposits denominated in the local currency and in dollars. Nonetheless, deposits with these banks exceed the
Federal Deposit Insurance Corporation (―FDIC‖) insurance limits or similar limits in foreign jurisdictions, to the extent such deposits
are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash and cash equivalent balances in the
operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions
with which we deposit fails or is subject to other adverse conditions in the financial or credit markets. To date we have experienced
no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our
invested cash and cash equivalents will not be affected if the financial institutions in which we hold our cash and cash equivalents fail
or the financial and credit markets continue to worsen. Furthermore, we hold an investment portfolio consisting principally of
corporate bonds and securities and U.S. government and agency securities. We intend, and have the ability, to hold such investments
until recovery of temporary declines in market value or maturity; however, we can provide no assurance that we will recover declines
in the market value of our investments.
Interest income and gains from marketable securities, net, were $2.9 million in 2008, $3.2 million in 2007 and $2.8 million in
2006. The decrease in interest and gains from marketable securities in 2008 from 2007 reflects a combination of lower interest rates
and realized losses from marketable securities in 2008 as compared to a realized gain in 2007, offset by higher combined cash and
marketable securities balances held. The increase in interest and gains from marketable securities earned in 2007 from 2006 reflects a
combination of higher interest rates and higher combined cash and marketable securities balances held.
We are exposed primarily to fluctuations in the level of U.S. and EMU (European Monetary Union) interest rates. To the
extent that interest rates rise, fixed interest investments may be adversely impacted, whereas a decline in interest rates may decrease
the anticipated interest income for variable rate investments. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are short-term. We currently do not have any derivative
instruments but may put them in place in the future. Fluctuations in interest rates within our investment portfolio have not had, and
we do not currently anticipate such fluctuations will have, a material affect on our financial position on an annual or quarterly basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and Supplementary Data on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures are effective.
There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter
that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting.
CEVA, Inc.’s management is responsible for establishing and maintaining adequate internal control over the company’s
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. CEVA, Inc.’s internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are
inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial
statement preparation. Further because of changes in conditions, the effectiveness of internal controls may vary over time such that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of CEVA, Inc.’s internal control over financial reporting as of December 31, 2008.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
41
Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment using those criteria, management believes
that CEVA, Inc.’s internal control over financial reporting was effective as of December 31, 2008.
CEVA, Inc.’s independent registered public accountants audited the financial statements included in this Annual Report on
Form 10-K and have issued a report concurring with management’s assessment of the company’s internal control over financial
reporting, which appears in Item 8 of this Annual Report.
ITEM 9B. OTHER INFORMATION
None.
42
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information regarding our directors required by this item is incorporated herein by reference to the 2009 Proxy
Statement. Information regarding the members of the Audit Committee, our code of business conduct and ethics, the identification of
the Audit Committee Financial Expert, stockholder nominations of directors and compliance with Section 16(a) of the Securities
Exchange Act of 1934 is also incorporated herein by reference to the 2009 Proxy Statement.
The information regarding our executive officers required by this item is contained in Part I of this annual report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the 2009 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCK HOLDER MATTERS
The information required by this item is incorporated herein by reference to the 2009 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the 2009 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the 2009 Proxy Statement.
43
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of or are included in this Annual Report on Form 10-K:
PART IV
1. Financial Statements:
Consolidated Balance Sheets as of December 31, 2008 and 2007.
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006.
Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Schedule II: Valuation and Qualifying Accounts
Other financial statement schedules have been omitted since they are either not required or the information is otherwise
included.
3. Exhibits:
The exhibits filed as part of this Annual Report on Form 10-K are listed on the exhibit index immediately preceding such
exhibits, which exhibit index is incorporated herein by reference. Some of these documents have previously been filed as exhibits
with the Securities and Exchange Commission and are being incorporated herein by reference to such earlier filings. CEVA’s file
number under the Securities Exchange Act of 1934 is 000-49842.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2008
Report of Independent Registered Public Accounting Firm (Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-4
F-5
F-6
F-7
F-9
sf-2645631
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CEVA, Inc.
We have audited the accompanying consolidated balance sheets of CEVA, Inc. (the ―Company‖) and subsidiaries as of December 31,
2007 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at
Item 15(a) 2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
the Company and subsidiaries at December 31, 2007 and 2008, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 13, 2009 expressed an unqualified opinion thereon.
/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 13, 2009
sf-2645631
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CEVA, Inc.
We have audited CEVA, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). CEVA Inc.’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, CEVA, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the accompanying consolidated balance sheets of CEVA, Inc. and subsidiaries as of December 31, 2007 and 2008, and the related
consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2008 of CEVA, Inc. and our report dated March 13, 2009 expressed an unqualified opinion thereon.
/s/ K OST F ORER G ABBAY & K ASIERER
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 13, 2009
sf-2645631
F-3
CEVA, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term bank deposits
Marketable securities (Note 2)
Trade receivables (net of allowance for doubtful accounts of $ 868 in 2007 and $ 743 in 2008)
Deferred tax assets (Note 12)
Investment in other company, net (Note 5)
Prepaid expenses and other accounts receivable (Note 7)
Total current assets
Long-term assets:
Severance pay fund
Deferred tax assets (Note 12)
Property and equipment, net (Note 4)
Goodwill (Note 6)
Other intangible assets, net (Note 6)
Total long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables
Deferred revenues
Taxes payable
Accrued expenses and other payables (Note 8)
Total current liabilities
Long-term liabilities:
Accrued severance pay
sf-2645631
F-4
December 31, December 31,
2007
2008
$ 40,697 $ 13,328
7,130
39,423
28,548
31,878
2,502
5,390
861
1,085
4,233
—
3,295
4,921
87,266
96,025
3,091
3,441
455
351
1,626
1,271
36,498
36,498
53
—
41,723
41,561
$ 128,989 $ 137,586
$
455 $
615
727
1,034
320
44
8,452
10,446
9,954
12,139
3,141
3,788
CEVA, INC.
Accrued liabilities (Note 13)
Total long-term liabilities
Commitments and contingencies liabilities (Note 15)
Stockholders’ equity:
Preferred Stock:
$0.001 par value: 5,000,000 shares authorized at December 31, 2007 and 2008; none issued and
outstanding
Common Stock:
1,506
—
4,647
3,788
—
—
$0.001 par value: 60,000,000 shares authorized at December 31, 2007, and 2008; 20,033,897
and 19,532,026 shares issued and outstanding at December 31, 2007 and 2008, respectively
20
20
Additional paid in capital
Treasury Stock
Accumulated other comprehensive income (loss)
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
149,772 153,712
—
(5,077)
7
(24)
(35,411)
(26,972)
114,388 121,659
$ 128,989 $ 137,586
The accompanying notes are an integral part of the consolidated financial statements.
sf-2645631
F-5
CEVA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
Revenues:
Licensing
Royalties
Other revenues
Total revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development, net
Sales and marketing
General and administrative
Amortization of intangible assets
Reorganization, restructuring and severance charge (Note 13)
Total operating expenses
Operating loss
Financial income, net (Note 11)
Other income, net (Note 11)
Income (loss) before taxes on income
Income taxes expense (income) (Note 12)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Weighted average number of shares of Common Stock used in computation of net
income (loss) per share (in thousands)
Basic
Diluted
Year Ended December 31,
2006
2007
2008
$
22,160 $
19,499
$
21,701
6,324
9,095
14,349
4,021
4,617
4,315
32,505
33,211
40,365
4,035
3,851
4,668
28,470
29,360
35,697
18,769
19,136
20,172
6,268
6,253
5,882
5,721
414
—
148
—
7,088
6,637
53
4,121
31,333
31,258
38,071
(2,863)
(1,898)
(2,374)
2,620
3,211
2,729
57
425
12,011
(186)
1,738
12,366
(88)
447
3,801
$
(98) $
1,291
$
8,565
$
(0.01) $
0.07
$
0.43
$
(0.01) $
0.06
$
0.42
19,191
19,606
20,009
19,191
20,150
20,575
The accompanying notes are an integral part of the consolidated financial statements.
sf-2645631
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
CEVA, INC.
(U.S. dollars in thousands, except share data)
Balance as of January 1, 2006
Issuance of Common Stock upon exercise
of employee stock options (a)
Issuance of Common Stock under
employee stock purchase plan (a)
Equity-based compensation
Net loss
Balance as of December 31, 2006
Issuance of Common Stock upon exercise
of employee stock options (a)
Issuance of Common Stock under
employee stock purchase plan (a)
Equity-based compensation
Unrealized loss from available-for-sale
securities, net
Unrealized gain from hedging activities,
net
Net income
Balance as of December 31, 2007
Issuance of Common Stock upon exercise
of employee stock options (a)
Issuance of Common Stock under
employee stock purchase plan (a)
Purchase of Treasury Stock (a)
Issuance of Treasury Stock upon exercise
of employee stock options (a)
Issuance of Treasury Stock under
employee stock purchase plan (a)
Equity-based compensation
Unrealized loss from available-for-sale
securities, net
Unrealized gain from hedging activities,
net
Common Stock
Shares
Amount
Additional
paid-in
capital
Treasury Stock
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
stockholders’
equity
18,923,071
$
19
$ 138,818 $
—
$
—
$
(36,604) $ 102,233
86,536
—(*)
430
320,537
—(*)
1,374
—
—
—
—
2,204
—
—
—
—
—
—
—
—
—
—
430
—
1,374
—
2,204
(98)
(98)
19,330,144
$
19
$ 142,826 $
—
$
—
$
(36,702) $ 106,143
498,043
1
3,918
205,710
—(*)
897
—
—
—
—
—
2,131
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,919
—
897
—
2,131
(58)
65
—
—
(58)
65
—
—
—
1,291
1,291
20,033,897
$
20
$ 149,772 $
— $
7 $
(35,411) $ 114,388
58,693
—(*)
410
99,631
—(*)
608
—
—
(752,763)
—(*)
—
(5,821)
23,368
—(*)
—
192
69,200
—(*)
—
552
—
—
—
—
2,922
—
—
—
—
—
—
—
—
—
—
—
—
—
—
410
—
608
—
(5,821)
(48)
144
(78)
474
—
2,922
(111)
80
—
—
(111)
80
sf-2645631
F-7
Net income
Balance as of December 31, 2008
—
—
—
—
—
8,565
8,565
19,532,026
$
20
$ 153,712 $
(5,077) $
(24) $
(26,972) $ 121,659
CEVA, INC.
Accumulated unrealized loss from available-for-sale securities, net
Accumulated unrealized gain from hedging activities, net
Accumulated other comprehensive loss, net as of December 31, 2008
$
$
$
(169)
145
(24)
(*) Represent an amount lower than $ 1.
(a) See Note 9 to these consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
sf-2645631
F-8
CEVA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments required to reconcile net income (loss) to net cash provided by (used in)
Year ended December 31,
2006
2007
2008
$
(98) $
1,291 $
8,565
operating activities:
Depreciation
Impairment of assets
Amortization of intangible assets
Equity-based compensation
Gain from sale of property and equipment
Loss (gain) on trading marketable securities
Loss on sale of available-for-sale marketable securities
Amortization of discount (premium) on available-for-sale marketable securities
Unrealized foreign exchange loss (gain)
Accrued interest on short-term bank deposits
Gain on realization of investments
Trading marketable securities, net
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables
Increase in other accounts receivable and prepaid expenses
Increase in deferred tax assets
Increase (decrease) in trade payables
Increase (decrease) in deferred revenues
Increase (decrease) in accrued expenses and other payables
Increase (decrease) in taxes payable
Increase (decrease) in accrued severance pay, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
sf-2645631
F-9
1,422
882
—
—
414
148
673
138
53
2,204
2,131
2,922
—
(3)
52
(137)
—
4
—
(26)
48
(40)
(4)
—
287
179
223
102
(127)
(729)
(57)
(425)
(12,145)
(5,115)
21,312
—
(2,262)
5,919
(2,888)
(332)
(712)
(1,571)
(103)
(321)
(120)
145
(283)
(47)
321
582
(1,735)
160
307
492
(307)
185
(276)
(19)
(151)
306
(3,371)
28,233
(3,428)
CEVA, INC.
Purchase of property and equipment
Proceeds from sale of property and equipment
Investment in short-term bank deposits
Proceeds from short-term bank deposits
Investment in available-for-sale marketable securities
Proceeds from maturity and sale of available-for-sale marketable securities
Transaction cost related to the GPS divestment
Proceeds from realization of investment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Purchase of Treasury Stock
Proceeds from issuance of Common Stock and Treasury Stock upon exercise of employee
stock options
Proceeds from issuance of Common Stock and Treasury Stock under employee stock
purchase plan
Net cash provided by (used in) financing activities
Effect of exchange rate movements on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
(424)
(807)
(456)
—
8
4
(3,930)
(5,000)
(47,911)
9,134
—
—
1,026
(39,990)
13,468
16,347
(28,485)
24,578
(927)
(39)
—
57
425
16,378
3,910
(30,909)
(19,545)
—
—
(5,821)
430
3,919
554
1,374
897
1,082
1,804
4,816
(4,185)
514
589
(211)
2,857
2,729
(27,369)
35,111
37,968
40,697
$ 37,968 $ 40,697 $ 13,328
The accompanying notes are an integral part of the consolidated financial statements.
sf-2645631
F-10
CEVA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(U.S. dollars in thousands)
Supplemental information of cash-flows activities:
Cash paid during the year for:
Income and withholding taxes, net
Non-cash transactions (see Note 5):
Goodwill
Intangible asset
Net working capital
Transaction cost related to the GPS divestment
Deferred gain related to the GPS divestment
Year ended December 31,
2006
2007
2008
$
652 $
889 $
5,124
(1,900)
—
(845)
—
(522)
—
(39)
—
(1,751)
—
—
—
—
—
—
The accompanying notes are an integral part of the consolidated financial statements.
sf-2645631
F-11
CEVA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
CEVA, Inc. (―CEVA‖ or the ―Company‖) was incorporated in Delaware on November 22, 1999. The Company was formed
through the combination of Parthus Technologies plc (―Parthus‖) and the digital signal processor (DSP) cores licensing business and
operations of DSP Group, Inc. (―DSPG‖) in November 2002. The Company had no business or operations prior to the combination.
CEVA licenses a family of programmable DSP cores, DSP-based subsystems and application-specific platforms,including
video, audio, Voice over Internet Protocols (VoIP), Bluetooth, and Serial Advanced Technology Attachment (SATA).
CEVA’s technology is licensed to leading semiconductor and original equipment manufacturer (OEM) companies in the
form of intellectual property (IP). These companies manufacture, market and sell application-specific integrated circuits (―ASICs‖)
and application-specific standard products (―ASSPs‖) based on CEVA’s technology to original equipment manufacturer (OEM)
companies for incorporation into a wide variety of end products. CEVA’s IP is primarily deployed in high volume markets, including
handsets (e.g. GSM/GPRS/EDGE/WCDMA/LTE/WiMax, CDMA and TD-SCDMA), portable multimedia (e.g. portable video
players, MobileTVs, personal navigation devices and MP3/MP4 players), home entertainment (e.g. DVD/blu-ray players, set-top
boxes and digital TVs), game consoles (portable and home systems), storage (e.g. hard disk drives and solid storage devices (SSD))
and telecommunication devices (e.g. residential gateways, femtocells, VoIP phones and network infrastructure).
Basis of presentation:
The consolidated financial statements have been prepared according to United States Generally Accepted Accounting
Principles (―U.S. GAAP‖).
Use of estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from
those estimates.
Financial statements in U.S. dollars:
A majority of the revenue of the Company and its subsidiaries is generated in U.S. dollars (―dollars‖). In addition, a portion
of the Company and its subsidiaries’ costs are incurred in dollars. The Company’s management has determined that the dollar is the
primary currency of the economic environment in which the Company and its subsidiaries principally operate. Thus, the functional
and reporting currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with
Statement of Financial Accounting Standard No. 52, ―Foreign Currency Translation.‖ All transaction gains and losses from
remeasurement of monetary balance sheet items are reflected in the consolidated statements of operations as financial income or
expenses as appropriate, which is included in ―financial income, net.‖ The Company recorded a foreign exchange loss of $150 in
2006, a foreign exchange gain of $38 in 2007 and a foreign exchange loss of $134 in 2008. The foreign exchange gains and losses
arose principally on Euro and Israeli NIS liabilities as a result of the currency fluctuations of the Euro and the NIS against the dollar.
The Company reviews its monthly expected non U.S. denominated expenditures and looks to hold equivalent non-dollar cash balances
to mitigate currency fluctuations, and this approach has resulted in a lower impact of exchange rate conversion fluctuations in the said
years.
Principles of consolidation:
The consolidated financial statements incorporate the financial statements of the Company and all of its subsidiaries. All
significant inter-company balances and transactions have been eliminated on consolidation.
sf-2645631
F-12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three
months or less from the date acquired.
Short-term bank deposits:
Short-term bank deposits are with maturities of more than three months from deposit day but less than one year. The deposits
are in dollars and presented at their cost, including accrued interest. The deposits bear interest at an average rate of 5.12% and 3.68%
annually during 2007 and 2008, respectively.
Marketable securities:
Marketable securities consist of certificates of deposits, corporate bonds and securities and U.S. government and agency
securities. The Company accounts for investments in debt and equity securities in accordance with Financial Accounting Standards
No. 115, ―Accounting for Certain Investments in Debt and Equity Securities‖ (―SFAS 115‖). Management determines the appropriate
classification of its investments in debt and equity securities at the time of purchase and re-evaluates such determination at each
balance sheet date. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated
other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of
investments, as determined on a specific identification basis, are included in the consolidated statements of operations. Trading
securities are held for resale in anticipation of short-term market movements. Under SFAS No. 115, marketable securities classified
as trading securities are stated at the quoted market prices at each balance sheet date. Gains and losses (realized and unrealized)
related to trading securities, as well as interest on such securities, are included as financial income or expenses, as appropriate. On
December 31, 2007 and 2008, the Company classified its marketable securities as available-for-sale securities.
FASB Staff Position (―FSP‖) No. 115-1/124-1, ―The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments‖ (―FSP 115-1/124-1‖) provides guidance for determining when an investment is considered impaired, whether
impairment is other-than-temporary and measurement of an impairment loss. An investment is considered impaired if the fair value of
the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of the investment,
impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between
the investment’s cost and its fair value. FSP 115-1/124-1 nullifies certain provisions of Emerging Issues Task Force (―EITF‖) Issue
No. 03-1, ―The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments‖ (―EITF 03-1‖) while
retaining the disclosure requirements of EITF 03-1.
Property and equipment, net:
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets, at the following annual rates:
Computers, software and equipment
Office furniture and equipment
Leasehold improvements
%
15-33
7-25
10-25
(the shorter of the lease term or
useful economic life)
The Company and its subsidiaries’ long-lived assets and certain identifiable intangibles are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No. 144, ―Accounting for the Impairment or Disposal of Long-Lived
Assets‖ (―SFAS No. 144‖) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of the carrying amount of assets to be held and used is measured by a comparison of the carrying amount
of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the
sf-2645631
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs. The Company
recorded impairment charges of $138 during 2008 related to the disposal of SATA-related fixed assets in connection with the
restructuring of the Company’s SATA activities. The impairment charges were included in ―other income, net‖ on the Company’s
consolidated statements of operations for the year ended December 31, 2008.
Investment in other company, net:
Investments in privately held companies in which the Company does not have the ability to exercise significant influence
over operating and financial policy are presented at cost. The carrying value is periodically reviewed by management for impairment.
If this review indicates that the cost is not recoverable, the carrying value is reduced to its estimated fair value.
On June 23, 2006, the Company divested its GPS technology and associated business to a U.S.-based company, Glonav Inc.
(―Glonav‖) in return for an equity ownership of 19.9% in Glonav on a fully diluted basis (for more details see Note 5). The
investment in Glonav was stated at cost since the Company did not have the ability to exercise significant influence over operating and
financial policies of Glonav. At December 31, 2007, the Company recorded the investment on its consolidated balance sheets as
investment in other company, net. This investment was reviewed for impairment whenever events or changes in circumstances
indicated that the carrying amount of the investment may not be recoverable, in accordance with Accounting Principle Board Opinion
No.18 ―The Equity Method of Accounting for Investments in Common Stock‖ (―APB No.18‖) and Financial Statement Position FSP
115-1, ―The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.‖
In January 2008, the Company divested its entire equity stake in Glonav following Glonav’s acquisition by NXP
Semiconductors (for more details see Note 5).
As part of the combination with Parthus in November 2002, CEVA acquired a minority investment in a private company (the
―Portfolio Company‖). CEVA has no influence or control over the Portfolio Company or any board representation. In December
2003, the Portfolio Company commenced a round of private funding at a significantly reduced valuation to CEVA’s original
investment. As a result, the Company recognized an impairment and the investment was presented as $0. The Company recorded a
gain of $57, $425 and $27 in 2006, 2007 and 2008, respectively, from the realization of this minority investment in the Portfolio
Company due to proceeds received from the Portfolio Company of the same amount. In 2007 and 2008, CEVA recorded tax expenses
of $85 and $12, respectively, related to a gain from the realization of this minority investment in the Portfolio Company.
Goodwill:
Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. Under SFAS
No. 142, ―Goodwill and Other Intangible Assets‖ (―SFAS No. 142‖), goodwill acquired in a business combination on or after July 1,
2001, is not amortized. As a result of the combination with Parthus in November 2002, the Company recorded goodwill in the amount
of $38,398. In the second quarter of 2006, there was a decrease in the amount of goodwill of $1,900 as a result of the divestment of
the Company’s GPS technology and associated business to Glonav (See note 5).
SFAS No. 142 requires goodwill to be tested for impairment at least annually or between annual tests in certain
circumstances and written down when impaired.
The Company conducts its annual test of impairment for goodwill on October 1st of each year. In addition, the Company
tests to see if impairment exists periodically whenever events or circumstances occur subsequent to its annual impairment test that
would more likely than not reduce the fair value of a reporting unit below its carrying amount. Important indicators which the
Company considers in determining whether an impairment is triggered include, but are not limited to, significant underperformance
relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy
for the Company’s overall business, significant negative industry or economic trends, a significant decline in the Company’s stock
price for a sustained period and the Company’s market capitalization relative to net book value.
The goodwill impairment test, which is based on fair value, is performed on a reporting unit level. A reporting unit is defined
by SFAS No. 142 as an operating segment or one level below an operating segment. The Company markets its products and services
in one segment and allocates goodwill to one reporting unit. Therefore, impairment is tested at the enterprise level using the
Company’s market capitalization as fair value. Accordingly, in conducting the first step of this impairment test, the Company
compares the carrying value of its assets and liabilities, including goodwill, to its market capitalization. If the carrying value exceeds
sf-2645631
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
the fair value, the goodwill is potentially impaired and the Company then completes the second step in order to measure the
impairment loss. If the fair value exceeds the carrying value, the second step to measure the impairment loss is not required.
The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the
carrying amount of the goodwill. To estimate the implied fair value of the goodwill, the Company allocates the fair value of the
reporting unit among the assets and liabilities of the reporting unit, including any unrecognized, intangible assets. The excess of the
fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Company
estimates the future cash flows to determine the fair value of these assets and liabilities. These cash flows are then discounted at rates
reflecting the respective specific industry’s cost of capital. If, upon review, the carrying value of the goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in the amount equal to that excess.
Should the Company’s market capitalization decline, in assessing the recoverability of goodwill, the Company may be
required to make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective
assets. This process is subjective and requires judgment at many points throughout the analysis. If the Company’s estimates or their
related assumptions change in subsequent periods or actual cash flows are below their estimates, an impairment loss not previously
recorded may be required for these assets.
In October 2006, 2007 and 2008, the Company conducted its annual goodwill impairment test as required by SFAS No. 142.
The goodwill impairment test compared the fair value of the Company with the carrying amount, including goodwill, on those dates.
Because the market capitalization of the Company exceeded the carrying value of the Company's stockholders’ equity, goodwill was
considered not impaired.
Other intangible assets net:
Intangible assets acquired in a business combination should be amortized over their useful life using a method of
amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in
accordance with SFAS No. 144, ―Accounting for Impairment of Long-Lived Assets‖ (―SFAS No. 144‖). The costs of technology
have been capitalized and are amortized in the consolidated statements of operations over the period during which benefits are
expected to accrue, currently estimated at five years.
The Company is required to test its other intangible assets for impairment whenever events or circumstances indicate that the
value of the assets may be impaired in accordance with SFAS No. 144. Factors that the Company considers to be important, which
could trigger impairment include:
significant underperformance relative to expected historical or projected future operating results;
significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall
business;
significant negative industry or economic trends;
significant decline in the Company’s stock price for a sustained period; and
significant decline in the Company’s market capitalization relative to net book value.
Where events or circumstances are present which indicate that the carrying amount of an intangible asset may not be
recoverable, the Company will recognize an impairment loss. Such impairment loss is measured by comparing the fair value of the
assets with their carrying value. The determination of the value of such intangible assets requires the Company to make assumptions
regarding future business conditions and operating results in order to estimate future cash flows and other factors to determine the fair
value of the respective assets. In the second quarter of 2006, there was a decrease in the amount of other intangible assets, net, of
$845 as a result of the divestment of the Company’s GPS technology and associated business to Glonav (see Note 5). The Company
assessed the carrying value of the remaining intangible assets based on the future expected cash flow from these assets and determined
there was no impairment at years end 2006, 2007 and 2008. The amount of other intangible assets was $0 at December 31, 2008.
sf-2645631
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Revenue recognition:
The Company generates its revenues from (1) licensing intellectual property, which in certain circumstances is modified for
customer-specific requirements, (2) royalty revenues, and (3) other revenues, which include revenues from support, training and sale
of development systems. The Company licenses its IP to semiconductor companies throughout the world. These semiconductor
companies then manufacture, market and sell custom-designed chipsets to OEMs for incorporation into a variety of end products. The
Company also licenses its technology directly to OEMs, which are considered end users.
The Company accounts for its IP license revenues and related services in accordance with Statement of Position 97-2,
―Software Revenue Recognition,‖ as amended (―SOP 97-2‖). Under the terms of SOP 97-2, revenues are recognized when: (1)
persuasive evidence of an arrangement exists and no further obligation exists, (2) delivery has occurred, (3) the license fee is fixed or
determinable, and (4) collection is probable. A license may be perpetual or time limited in its application. SOP 97-2 generally
requires revenue earned on licensing arrangements involving multiple elements to be allocated to each element based on the relative
fair value of the elements. However, the Company has adopted SOP 98-9, ―Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions,‖ for multiple element transactions. SOP 98-9 requires that revenue be recognized
under the ―residual method‖ when vendor specific objective evidence (―VSOE‖) of fair value exists for all undelivered elements and
VSOE does not exist for one of the delivered elements. The VSOE of fair value of the undelivered elements (mainly, technical
support and training) is determined based on the substantive renewal rate as stated in the agreement. However, the Company does not
believe it has sufficient VSOE of fair value to make such allocations in certain cases in which the Company undertakes services for its
customers. Accordingly, in a multiple elements agreement which includes the IP license and related services, and the related services
are not essential to the functionality of the IP license, the entire arrangement fee is recognized as the services are performed based on
―percentage of completion‖ method.
SOP 97-2 specifies that extended payment terms in a licensing arrangement may indicate that the license fees are not deemed
to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer
unless collection is not considered probable, then revenue is recognized as payments are collected from the customer, provided all
other revenue recognition criteria have been met. The Company’s ―revenue recognition policy‖ characterizes all arrangements that
become due after 12 months as ―extended payment‖ and revenue is recognized as each payment becomes due, provided all other
revenue recognition criteria have been met.
Revenues from license fees that involve significant customization of the Company’s IP to customer-specific specifications
are recognized in accordance with the principles set out in Statement of Position 81-1, ―Accounting for Performance of
Construction—Type and Certain Production—Type Contracts‖ (―SOP 81-1‖), using contract accounting on a percentage of
completion method, in accordance with the ―Input Method.‖ The amount of revenue recognized is based on the total project fees
(including the license fee and the customization hours charged) under the agreement and the percentage of completion achieved. The
percentage of completion is measured by monitoring progress using records of actual time incurred to date in the project compared to
the total estimated project requirements, which corresponds to the costs related to earned revenues. Estimates of total project
requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology and are
reviewed and updated regularly by management. Provisions for estimated losses on uncompleted contracts are made in the period in
which such losses are first determined, in the amount of the estimated loss on the entire contract. As of December 31, 2008, no such
estimated losses were identified. The amount of revenue recognized under SOP 81-1 that was unbilled was $1,271, $514 and $0 at
December 31, 2006, 2007 and 2008, respectively.
Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences
between actual performance and original forecasts. Such changes in estimated gross profit are recorded in results of operations when
they are reasonably determinable by management, on a cumulative catch-up basis.
The Company believes that the use of the percentage of completion method is appropriate as the Company has prior
experience and the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues
and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to
be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement. In
all cases the Company expects to perform its contractual obligations, and its licensees are expected to satisfy their obligations under
the contracts.
sf-2645631
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Royalties from licensing the right to use the Company’s IP are recognized on a quarterly basis in arrears as the Company
receives quarterly shipment reports from its licensees. The Company determines such sales by receiving confirmation of sales subject
to royalties from licensees. Non-refundable payments on account of future royalties are recognized upon payment becoming due,
provided no future obligation exists. Prepaid royalties are recognized under the licensing revenue line.
In addition to license fees, contracts with customers generally contain an agreement to provide support and training, which
consists of an identified customer contact at the Company and telephone or e-mail support. Fees for post contract support, which
takes place after delivery to the customer, are specified in the contract and are generally mandatory for the first year. After the
mandatory period, the customer may extend the support agreement on similar terms on an annual basis. The Company recognizes
revenue for post contract support on a straight-line basis over the period for which technical support is contractually agreed to be
provided to the licensee. Revenue from training is recognized as the training is performed.
Revenue from the sale of development systems is recognized when title to the product passes to the customer and all other
revenue recognition criteria have been met.
The Company usually does not provide rights of return. When rights of return are included in the license agreements,
revenue is deferred until rights of return expire.
When a sale of the Company’s IP is made to a third party who also supplies the Company with goods or services under
separate agreements, the Company evaluates each of the agreements to determine whether they are clearly separable, and independent
of one another and that reliable fair value exists for either the sale or purchase element in order to determine the appropriate revenue
recognition in accordance with EITF Issue No. 01-9 ―Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products.‖
Deferred revenues include unearned amounts received under license agreements, unearned technical support and training fees
and amounts paid by customers not yet recognized as revenues.
Cost of revenue:
Cost of revenue includes the costs of products and services. Cost of product revenue includes shipping, handling, materials
and the portion of development costs associated with product development arrangements. Cost of service revenue includes the salary
costs for personnel engaged in services, training and customer support, and telephone and other support costs.
Income taxes:
The Company accounts for income taxes in accordance with SFAS No. 109, ―Accounting for Income Taxes‖ (―SFAS
No. 109‖). This statement prescribes the use of the liability method whereby deferred tax asset and liability account balances are
determined based on differences between the book and tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to be reversed. The Company and its subsidiaries provide a valuation
allowance, as necessary, to reduce deferred tax assets to their estimated realizable value.
Deferred tax assets and liabilities are determined using enacted statutory tax rates for the effects of net operating losses and
temporary differences between the book and tax bases of assets and liabilities. Accounting for deferred taxes under SFAS No. 109
involves the evaluation of a number of factors concerning the realizability of the Company’s deferred tax assets. In concluding that a
valuation allowance is required, the Company primarily considers such factors as its history of operating losses and expected future
losses in certain jurisdictions and the nature of its deferred tax assets. The Company provides valuation allowances in respect of
deferred tax assets resulting principally from the carryforward of tax losses. Management currently believes that it is more likely than
not that the deferred tax regarding the carryforward of losses and certain accrued expenses will not be realized in the foreseeable
future. In the event that the Company is to determine that it would not be able to realize all or part of its deferred tax assets in the
future, an adjustment to the deferred tax assets will be charged to earnings in the period in which it makes such a determination.
Likewise, if the Company later determines that it is more likely than not that the net deferred tax assets will be realized, the Company
will reverse the applicable portion of the previously provided valuation allowance. In order for the Company to realize its deferred tax
assets, it must be able to generate sufficient taxable income in the tax jurisdictions in which the deferred tax assets are located.
sf-2645631
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
In June 2006, the Financial Accounting Standards Board (―FASB‖) issued FASB Interpretation No. 48, ―Accounting for
Uncertainty in Income Taxes-an Interpretation of SFAS Statement No. 109‖ (―FIN 48‖). FIN 48 contains a two step approach to
recognizing and measuring uncertain tax positions accounted for in accordance with SFAS Statement No. 109. The first step is to
evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to
measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. FIN 48 was
effective for the Company at the beginning of fiscal 2007. The adoption of FIN 48 by the Company did not have any material impact
on its consolidated financial statements.
The Company does not have a provision for U.S. Federal income taxes on the undistributed earnings of its international
subsidiaries because such earnings are re-invested and, in the opinion of management, will not be distributed to CEVA, Inc., the U.S.
parent company, and will continue to be re-invested indefinitely. In addition, the Company operates within multiple taxing
jurisdictions involving complex issues, and it has provisions for tax liabilities on investment activities as appropriate.
Research and development:
Research and development costs are charged to the consolidated statements of operations as incurred.
Government grants:
Government grants received by the Company relating to categories of operating expenditures are credited to the consolidated
statements of operations in the period in which the expenditure to which they relate is charged. Non-royalty-bearing grants from the
Government of Israel for funding certain approved research and development projects are recognized at the time when the Company is
entitled to such grants, on the basis of the related costs incurred, and included as a deduction from research and development costs.
The Company and its subsidiaries recorded grants in the amounts of $276, $319 and $959 for the years ended December 31,
2006, 2007 and 2008, respectively. The Israeli subsidiary is obligated to pay royalties amounting to 3%-3.5% of the sales of certain
products which received grants from the Chief Scientist of Israel in previous years. The obligation to pay these royalties is continued
on actual sales of the products. Grants received from Enterprise Ireland, Invest Northern Ireland and Government of Israel may
become repayable if certain criteria under the grants are not met.
Employee benefit plan:
Certain of the Company’s employees are eligible to participate in a defined contribution pension plan (the ―plan‖).
Participants in the plan may elect to defer a portion of their pre-tax earnings into the plan, which is run by an independent party. The
Company makes pension contributions at rates varying up to 10% of the participant’s pensionable salary. Contributions to the plan
are recorded as an expense in the consolidated statements of operations.
The Company’s U.S. operations maintain a retirement plan (the ―U.S. Plan‖) that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. Participants in the U.S. Plan may elect to defer a portion of their pre-tax earnings,
up to the Internal Revenue Service annual contribution limit. The Company matches 100% of each participant’s contributions up to a
maximum of 6% of the participant’s base pay. Each participant may contribute up to 15% of base remuneration. Contributions to this
plan are recorded in the year contributed as an expense in the consolidated statements of operations.
Total contributions for the years ended December 31, 2006, 2007 and 2008 were $520, $400 and $382, respectively.
Accrued severance pay:
The liability of CEVA’s Israeli subsidiary for severance pay is calculated pursuant to Israeli severance pay laws for all Israeli
employees, based on the most recent salary of each employee multiplied by the number of years of employment for that employee as
of the balance sheet date. The Israeli subsidiary’s liability is fully provided for by monthly deposits with severance pay funds,
insurance policies and an accrual.
The deposited funds include profits and losses accumulated up to the balance sheet date. The deposited funds may be
withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements. The value of these
policies is recorded as an asset on the Company’s consolidated balance sheets.
sf-2645631
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
In light of recent markets conditions, the Company recorded in 2008 losses of approximately $200 to reflect the reduction in
the fair value of the severance pay funds.
Severance pay expenses, net of related income, for the years ended December 31, 2006, 2007 and 2008, were approximately
$740, $663 and $1,156, respectively.
Accounting for equity-based compensation:
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), ―Share-
Based Payment‖ (―SFAS 123(R)‖) which requires the measurement and recognition of compensation expense based on estimated fair
values for all equity-based payment awards made to employees and directors. SFAS 123(R) supersedes Accounting Principles Board
Opinion No. 25, ―Accounting for Stock Issued to Employees‖ (―APB 25‖), for periods beginning in fiscal 2006.
Prior to January 1, 2006, the Company applied the intrinsic value method of accounting for stock options as prescribed by
APB 25, whereby compensation expense is equal to the excess, if any, of the quoted market price of the stock over the exercise price
on the grant date of the award.
The Company adopted the fair value recognition provision of SFAS 123(R) using the modified prospective transition
method, effective January 1, 2006. Under that transition method, compensation cost recognized in the years ended December 31,
2006, 2007 and 2008, includes: (a) compensation cost for all equity-based payments granted prior to, but not yet vested as of, January
1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b)
compensation cost for all equity-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.
SFAS 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the
requisite service periods on the Company’s consolidated statements of operations. The Company recognizes compensation expenses
for the value of its awards, which have graded vesting based on the accelerated attribution method over the requisite service period of
each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.
The Company used the Black-Scholes option-pricing model through December 31, 2006 and the Monte-Carlo simulation
model for options granted thereafter. The Black-Scholes option-pricing model requires a number of assumptions, of which the most
significant are the expected stock price volatility and option term. Expected volatility was calculated based upon actual historical
stock price movements over the most recent periods ending on the grant date, equal to the expected option term. The expected option
term represents the period that the Company’s stock options are expected to be outstanding and was determined based on historical
experience of similar options, giving consideration to the contractual terms of the stock options. The Company has historically not
paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from U.S. Treasury
zero-coupon bonds with an equivalent term. The Monte-Carlo model considers characteristics of fair value option pricing that are not
available under the Black-Scholes model. Similar to the Black-Scholes model, the Monte-Carlo model takes into account variables
such as volatility, dividend yield rate and risk free interest rate. However, the Monte-Carlo model also considers the contractual term
of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination
or retirement of the option holder in computing the value of the option. For these reasons, the Company believes that the Monte-Carlo
model provides a fair value that is more representative of actual experience and future expected experience than that calculated using
the Black-Scholes model.
sf-2645631
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
The fair value for the Company’s stock options granted to employees and directors was estimated using the following
assumptions:
In the Black-Scholes option pricing model for the year:
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected option term
Expected forfeiture (employees)
Expected forfeiture (executives)
In the Monte-Carlo simulation model for the years:
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected forfeiture (employees)
Expected forfeiture (executives)
Contractual term of up to
Suboptimal exercise multiple (employees)
Suboptimal exercise multiple (executives)
2006
0%
40%
5%
4 years
10%
10%
2007
2008
0%
30%-46%
3.9%-5.1%
20%
10%
7 years
1.6
1.6
0%
37%-64%
1.4%-3.8%
15%
10%
7 years
1.6
1.2
The fair value for rights to purchase shares of common stock under the Company’s employee share purchase plan was
estimated on the date of grant using the same assumptions set forth above for the years ended 2008, 2007 and 2006 except the
expected life, which was assumed to be six to 24 months, and except the expected volatility, which was assumed to be in a range of
21%-42% in 2007.
During the years ended December 31, 2006, 2007 and 2008, the Company recognized equity-based compensation expense
related to employee stock options in the amount of $2,204, $2,131 and $2,922, respectively, as follows:
Cost of revenue
Research and development, net
Sales and marketing
General and administrative
Total equity-based compensation expense
Year ended December 31,
2007
2008
2006
$
53
656
449
1,046
$ 2,204
$
83
935
334
779
$ 2,131
$
112
1,088
531
1,191
$ 2,922
Net income for the year ended December 31, 2007 was $277 lower than had the Company continued to account for equity-
based compensation expense using the Black-Scholes option pricing model. Basic net income per share for the year ended December
31, 2007 was $0.02 lower than had the Company continued to account for equity-based compensation expense using the Black-
Scholes option pricing model. Diluted net income per share for the year ended December 31, 2007 was $0.01 lower than had the
Company continued to account for equity-based compensation expense using the Black-Scholes option pricing model.
As of December 31, 2006, 2007 and 2008, there were balances of $1,253, $1,530 and $2,422, respectively, of unrecognized
compensation expense related to unvested awards.
sf-2645631
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Fair value of financial instruments:
The carrying amount of cash, cash equivalents, bank deposits, trade receivables, other accounts receivable, trade payables and
other accounts payable approximates fair value due to the short-term maturities of these instruments. The fair value of marketable
securities (classified as available-for-sale) is based on quoted market prices at year end. The fair value of derivative instruments is
estimated by obtaining quotes from banks.
Comprehensive income (loss):
The Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, ―Reporting Comprehensive
Income‖. This statement establishes standards for the reporting and display of comprehensive income (loss) and its components in a
full set of general purpose financial statements. Comprehensive income (loss) generally represents all changes in stockholders’ equity
during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its
items of other comprehensive income (loss) relate to unrealized gains and losses on hedging derivative instruments and unrealized
gains and losses on available-for-sale securities.
Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash
equivalents, bank deposits, marketable securities and trade receivables. The Company invests its surplus cash in cash deposits and
marketable securities in financial institutions and has established guidelines relating to the diversification and maturities that maintain
safety and liquidity.
The Company invests its cash and cash equivalents in highly liquid investments with original maturities of generally 12
months or less at the time of purchase and maintains them with reputable major financial institutions. Cash held by foreign
subsidiaries is generally held in short-term time deposits denominated in the local currency and in dollars. Nonetheless, deposits with
these banks exceed the Federal Deposit Insurance Corporation (―FDIC‖) insurance limits or similar limits in foreign jurisdictions, to
the extent such deposits are even insured in such foreign jurisdictions. While the Company monitors on a systematic basis the cash
and cash equivalent balances in the operating accounts and adjust the balances as appropriate, these balances could be impacted if one
or more of the financial institutions with which the Company deposit fails or is subject to other adverse conditions in the financial or
credit markets. To date the Company have experienced no loss of principal or lack of access to its invested cash or cash equivalents;
however, the Company can provide no assurance that access to its invested cash and cash equivalents will not be affected if the
financial institutions in which the Company hold its cash and cash equivalents fail or the financial and credit markets continue to
worsen. Furthermore, the Company holds an investment portfolio consisting principally of corporate bonds and securities and U.S.
government and agency securities. The Company intends, and has the ability, to hold such investments until recovery of temporary
declines in market value or maturity; however, the Company can provide no assurance that it will recover declines in the market value
of its investments.
Interest income was $2,822 in 2006, $3,014 in 2007 and $3,329 in 2008. The Company is exposed primarily to fluctuations
in the level of U.S. and EMU interest rates. To the extent that interest rates rise, fixed interest investments may be adversely
impacted, whereas a decline in interest rates may decrease the anticipated interest income for variable rate investments.
The Company is exposed to financial market risks, including changes in interest rates. The Company typically does not
attempt to reduce or eliminate its market exposures on its investment securities because the majority of its investments are short-term.
The Company’s trade receivables are geographically diverse and are derived from sales to OEMs, mainly in the United
States, Europe and Asia. Concentration of credit risk with respect to trade receivables is limited by credit limits, ongoing credit
evaluation and account monitoring procedures. The Company performs ongoing credit evaluations of its customers and to date has
not experienced any material losses. The Company makes judgments on its ability to collect outstanding receivables and provides
allowances for the portion of receivables for which collection becomes doubtful. Provisions are made based upon a specific review of
all significant outstanding receivables. In determining the provision, the Company considers the historical collection experience and
current economic trends. Allowance for doubtful accounts amounted to $868 and $743 as of December 31, 2007 and 2008,
respectively.
The Company has no off-balance-sheet concentration of credit risk.
sf-2645631
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Derivative and hedging activities:
Statement of Financial Accounting Standard No. 133 ―Accounting for Derivative Instruments and Hedging Activities‖
(―SFAS No. 133‖), as amended, requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income (loss) until the hedged item is recognized in earnings.
The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.
To protect against the increase in value of forecasted foreign currency cash flow resulting from salaries paid in Israeli NIS
and Euro during the year, the Company instituted in the second quarter of 2007, a foreign currency cash flow hedging program. The
Company hedges portions of the anticipated payroll of its Israeli employees denominated in NIS and for its Irish employees
denominated in Euro for a period of one to twelve months with forward and put option contracts.
During 2007 and 2008, the Company recorded accumulated other comprehensive income of $65 and $80, respectively, from
its forward and put option contracts in respect to anticipated payroll for its Israeli and Irish employees . Such amounts will be
recorded in the consolidated statements of operations in the following year.
The Company recognized a net gain of $170 and $20 during the years ended December 31, 2007 and 2008, respectively,
related to forward and put options contracts.
The Company measured the fair value of the contracts in accordance with Statement of Financial Accounting Standard No.
157 ―Fair Value Measurements‖ (see Note 3).
Advertising expenses:
Advertising expenses are charged to consolidated statements of operations as incurred. Advertising expenses for the years
ended December 31, 2006, 2007 and 2008 were $218, $544 and $720, respectively.
Treasury stock:
The Company repurchases its common stock from time to time pursuant to a board-authorized share repurchase program
through open market purchases, privately negotiated transactions and repurchase plans in accordance with Rule 10b5-1 of the United
States Securities Exchange Act of 1934, as amended. The repurchased common stock is held as treasury stock. The Company
presents the cost of the repurchased treasury stock as a reduction in its stockholders’ equity. Upon reissuance of shares of treasury
stock, the Company charges the excess of the repurchase cost over reissuance price using the weighted-average method to
accumulated deficit, in accordance with Accounting Principles Board Opinion No. 6, ―Status of Accounting Research Bulletins.‖
Net income (loss) per share of common stock:
Basic net income (loss) per share is computed based on the weighted-average number of shares of common stock outstanding
during each year. Diluted net income per share is computed based on the weighted-average number of shares of common stock
outstanding during each year, plus dilutive potential shares of common stock considered outstanding during the year, in accordance
with SFAS No. 128, ―Earnings Per Share.‖
(in thousands except per share data)
Numerator:
Year ended December 31,
2006
2007
2008
Numerator for basic and diluted net income (loss) per share
$
(98) $
1,291 $
8,565
Denominator:
Denominator for basic net income (loss) per share
19,191
19,606
20,009
sf-2645631
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
(in thousands except per share data)
Effect of employee stock options
Denominator for diluted net income (loss) per share
Year ended December 31,
2006
2007
2008
—
19,191
544
20,150
566
20,575
Basic net income (loss) per share
Diluted net income (loss) per share
$
$
(0.01) $
(0.01) $
0.07 $
0.06 $
0.43
0.42
The weighted average number of shares related to the outstanding options excluded from the calculation of diluted net
income (loss) per share, since their effect was anti-dilutive, were 4,717,761, 1,902,560 and 1,442,691 shares for the years ended
December 31, 2006, 2007 and 2008, respectively.
Recently issued accounting standards:
In December 2007, the Financial Accounting Standards Board (the ―FASB‖) issued Statements of Financial Accounting
Standards (―SFAS‖) 141R ―Business Combinations‖ (―SFAS 141R‖). SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. This statement is effective for the Company beginning January 1, 2009. The
impact of the adoption of SFAS 141R on the Company’s consolidated financial position and results of operations will largely be
dependent on the size and nature of the business combinations it completes after the adoption of this statement.
In February 2008, the FASB issued FASB Staff Position (―FSP‖) 157-2 ―Effective Date of FASB Statement No. 157‖ (―FSP
157-2‖), which delays the effective date of SFAS 157 ―Fair Value Measurements‖ (―SFAS 157‖) for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at
least annually). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements.
FSP 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of the FSP 157-2. The adoption of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities is effective for the Company beginning January 1, 2009. The Company does not expect the impact of this
adoption to be material.
In March 2008, the FASB issued SFAS No. 161 ―Disclosures about Derivative Instruments and Hedging Activities‖ (―SFAS
No. 161‖), which will require increased disclosures about an entity’s strategies and objectives for using derivative instruments; the
location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged
items are accounted for under SFAS No. 133, and how derivative instruments and related hedged items affect its financial position,
financial performance, and cash flows. Certain disclosures will also be required with respect to derivative features that are credit risk-
related. SFAS No. 161 is effective for the Company beginning on January 1, 2009 on a prospective basis. The Company does not
expect this standard to have a material impact on its consolidated results of operations or financial condition.
In April 2008, the FASB issued FSP 142-3 ―Determination of the Useful Life of Intangible Assets‖ (―FSP 142-3‖). This
guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 ―Goodwill
and Other Intangible Assets‖ (―SFAS 142‖), and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141R when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a
material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset
must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical
experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142’s
entity-specific factors. FSP 142-3 is effective for the Company beginning January 1, 2009. The Company does not expect the impact
of the adoption of FSP 142-3 to be material.
In October 2008, the FASB issued FSP No. 157-3, ―Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active‖ (―FSP157-3‖). FSP 157-3 amends SFAS 157 ―Fair Value Measurements,‖ to provide guidance regarding
the manner in which SFAS 157 should be applied in determining fair value of a financial asset when there is no active market for such
asset at the measurement date. The Company does not expect the impact of the adoption of FSP 157-3 to be material.
sf-2645631
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
NOTE 2: MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at December 31, 2007 and 2008:
Certificates of deposits
U.S. government and agency securities
Corporate bonds and securities
U.S. government and agency securities
Corporate bonds and securities
Amortized
cost
As at December 31, 2008
Gross
unrealized
gains
Gross
unrealized
losses
$ 1,743
6,401
23,903
$ 32,047
$
$
8
85
30
123
$
$
-
-
(292)
(292)
Amortized
cost
As at December 31, 2007
Gross
unrealized
gains
Gross
unrealized
losses
$ 4,997
23,609
$ 28,606
$ 8
13
$ 21
$ -
(79)
$ (79)
Fair
value
$ 1,751
6,486
23,641
$ 31,878
Fair
value
$ 5,005
23,543
$ 28,548
The following table summarizes our investments in marketable securities by the contractual maturity date of the security:
Amortized
cost
As at December 31, 2008
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Due in one year or less
Due after one year to two years
$ 21,959
10,088
$ 32,047
$ 55
68
$ 123
$ (168)
(124)
$ (292)
$ 21,846
10,032
$ 31,878
Of the unrealized losses outstanding as of December 31, 2008, $62 of the unrealized losses was outstanding for more than 12
months and $230 of the unrealized losses was outstanding for less than 12 months. The total fair value of marketable securities with
outstanding unrealized losses for more than 12 months as of December 31, 2008 amounted to $4,846, and of marketable securities
with outstanding unrealized losses for less than 12 months amounted to $10,538. Of the unrealized losses outstanding as of
December 31, 2007, the entire amount of $79 was outstanding for less than 12 months. The total fair value of marketable securities
with outstanding unrealized losses as of December 31, 2007 amounted to $17,491.
Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other
things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term
prospects of the issuer, and (iii) the intent and ability of the Corporation to retain its investment in the issuer until maturity or for a
period of time sufficient to allow for any anticipated recovery in cost.
Management has the ability and intent to hold the securities which incurred losses until maturity or for a period of time
sufficient for a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at
the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or
re-pricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due
to reasons of credit quality. Accordingly, as of December 31, 2007 and 2008, management believes the losses detailed in the tables
above are temporary and no impairment loss has been realized in the Company consolidated statements of operations.
sf-2645631
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Proceeds from maturity and sales of available-for-sale securities during 2008 were $24,578. Gross realized gains and losses
from the sale of available-for-sale securities during 2008 were $89 and $376, respectively.
NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS
In September 2006, the FASB issued SFAS No. 157 ―Fair Value Measurements‖ (―SFAS No. 157‖). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157
applies to other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new
fair value measurements. The provisions of SFAS No. 157 were adopted by the Company on January 1, 2008 for financial assets and
liabilities, and will be adopted by the Company on January 1, 2009 for non-financial assets and liabilities.
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:
Level 1
Level 2
Level 3
Unadjusted quoted prices in active markets that are accessible on the measurement
date for identical, unrestricted assets or liabilities;
Quoted prices in markets that are not active, or inputs that are observable, either
directly or indirectly, for substantially the full term of the asset or liability; and
Prices or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (supported by little or no market activity).
In accordance with SFAS 157, the Company measures its marketable securities and foreign currency derivative contracts at
fair value. Marketable securities are classified within Level 1. This is because these assets are valued using quoted market prices.
Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market
observable data of similar instruments.
The table below sets forth the Company’s financial assets measured at fair value by level within the fair value hierarchy. As
required by SFAS No. 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to
the fair value measurement.
Description
Marketable securities
Derivative assets
December 31, 2008
31,878
145
$
$
Level I
$ 31,878
—
$
Level II
$
$
—
145
Level III
—
—
$
$
NOTE 4: PROPERTY AND EQUIPMENT, NET
Composition of assets, grouped by major classifications, is as follows:
Cost:
Computers, software and equipment
Office furniture and equipment
Leasehold improvements
Less – Accumulated depreciation
Depreciated cost
sf-2645631
F-25
Year ended December 31,
2007
2008
$ 11,150
$ 10,727
960
894
1,126
13,236
668
12,289
(11,610)
(11,018)
$
1,626
$
1,271
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Depreciation expenses were $1,422, $882 and $673 for the years ended December 31, 2006, 2007 and 2008, respectively.
In the fourth quarter of 2008, the Company recorded an impairment charge of $138 for SATA-related fixed assets associated
with the Company’s restructuring of its SATA activities. In the second quarter of 2006, there was a decrease in the amount of
property and equipment, net, of $522 as a result of the divestment of the Company’s GPS technology and associated business to
Glonav (for more details see Note 5).
NOTE 5: INVESTMENT IN OTHER COMPANY, NET
On June 23, 2006, the Company divested its GPS technology and associated business to Glonav Inc. (―Glonav‖) in return for
an equity ownership of 19.9% in Glonav on a fully diluted basis. CEVA’s valuation of its equity investment in Glonav was $5,984
based on an independent expert’s valuation in consideration of the assets and cash contributed to Glonav. The determination of the
amount of reduction recorded for goodwill and intangible assets for the GPS technology and business was calculated in accordance
with paragraph 39 in SFAS No. 142 ―Goodwill and Other Intangible Assets‖ in consideration of the fair value of the GPS technology
and business purchased by Glonav and the fair value of the Company, both based on an independent valuation. The investment in
Glonav was recorded as an ―investment in other company, net‖ on the consolidated balance sheet as of December 31, 2007 and stated
at cost given that the Company’s equity investment in Glonav represented less than 20% of Glonav’s voting stock and in consideration
of the guidance provided in Accounting Principles Board Opinion No. 18 ―The Equity Method of Accounting for Investments in
Common Stock,‖ the Company did not have the ability to exercise significant influence over operating and financial policies of
Glonav. Since Glonav was a highly leveraged entity and received additional funding to continue its operations after the divestment by
the Company, the gain resulting from the divestment of the GPS technology and associated business in the total amount of $1,751 was
deferred and presented in the consolidated balance sheet as of December 31, 2007 as a deduction from ―investment in other company.‖
The excess of the consideration from the divestment over the net book value of the assets in the amount of $1,751 is set forth below:
Equity investment in Glonav
Goodwill
Intangible asset
Net working capital
Transaction cost related to the GPS divestment
Deferred gain related to the GPS divestment
Investment in other company, net:
Investment in other company
Deferred gain
Total investment in other company, net
$ 5,984
(1,900)
(845)
(522)
(966)
$ 1,751
December 31,
2007
$ 5,984
(1,751)
$ 4,233
In January 2008, the Company divested its entire equity investment in Glonav following Glonav’s acquisition by NXP
Semiconductors for an initial cash payment of $85,000, plus up to an additional $25,000 in cash payable to all of Glonav’s
stockholders, contingent upon Glonav reaching certain revenue and product development milestones within the two years after the
acquisition. In February 2008, the Company received its portion of the initial cash payment, less 10% which is being held in escrow
to satisfy indemnification claims and less its portion of certain fees and expenses incurred in connection with the transaction. After
the deductions, the Company’s portion of the initial cash payment totaled $14,561. During 2008, the Company received additional
payments of $1,790 in connection with Glonav’s achievement of its first, second and third product development milestones. In total,
the Company received $16,351 during 2008. In 2008, the Company recorded a capital gain of $12,118 from the divestment of its
equity investment in Glonav (including the deferred gain of $1,751 resulting from the recognition of the deferred gain, as detailed
above) and a tax expense of $3,104 related to such capital gain.
sf-2645631
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Year ended December 31, 2007
Year ended December 31, 2008
Gross
Carrying
Amount
Accumulated
Impairment
Loss/Asset
write down
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Impairment
Loss/Asset
write down
Accumulated
Amortization
Net
Goodwill
$ 38,398 $
1,900 $
— $ 36,498 $ 38,398 $
1,900 $
— $ 36,498
Other intangible assets –
amortizable
Parthus name
Patent portfolio
Current technology and
customer backlog
Purchased technology
610
478
132
—
610
478
132
2,247
640
1,607
—
2,247
640
1,607
2,824
1,264
1,560
—
2,824
1,264
1,560
347
—
294
53
347
—
347
Total identifiable intangible assets
$
6,028 $
2,382 $
3,593 $
53 $
6,028 $
2,382 $
3,646 $
—
—
—
—
—
Intangible assets primarily represent the acquisition of certain intellectual property together with the value of patents acquired
in the combination with Parthus.
In the second quarter of 2006, there was a decrease in the amount of goodwill and other intangible assets, net, of $1,900 and
$845, respectively, as a result of the divestment of the Company’s GPS technology and associated business to Glonav (for more
details see Note 5).
Amortization expenses amounted to $414, $148 and $53 for the years ended December 31, 2006, 2007 and 2008,
respectively.
NOTE 7: PREPAID EXPENSES AND OTHER ACCOUNTS RECEIVABLE
PREPAID EXPENSES
Prepaid leased design tools
Prepaid directors and officers insurance
Prepaid car leases
Prepaid rent
IT consumables
sf-2645631
F-27
Year ended December 31,
2007
2008
$
336 $
981
90
172
216
17
75
190
113
230
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Other prepaid expenses
OTHER ACCOUNTS RECEIVABLE
Taxes
Rental deposits
Interest receivable
Other
NOTE 8: ACCRUED EXPENSES AND OTHER PAYABLES
Accrued compensation and benefits
Restructuring accruals (see Note 13)
Engineering accruals
Professional fees
Other accruals
NOTE 9: STOCKHOLDERS’ EQUITY
a. Common stock:
Year ended December 31,
2007
2008
$
73
904 $
84
1,673
Year ended December 31,
2007
2008
$
1,260 $
2,286
144
718
88
428
269
2,391 $
446
3,248
$
Year ended December 31,
2007
2008
$
5,208 $
6,537
868
933
795
645
686
956
648
1,622
8,452 $ 10,446
$
Holders of the common stock are entitled to one vote per share on all matters to be voted upon by the Company’s
stockholders. In the event of liquidation, dissolution or winding up, holders of the common stock are entitled to share ratably in all of
the Company’s assets. The Board of Directors may declare a dividend out of funds legally available therefore and the holders of
common stock are entitled to receive ratably any such dividends. Holders of common stock have no preemptive rights or other
subscription rights to convert their shares into any other securities.
sf-2645631
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
During 2006, 2007 and 2008, the Company issued 407,073, 703,553 and 250,892 shares of common stock under its stock
option and purchase programs for a consideration of $1,804, $4,816 and $1,636, respectively.
b. Preferred stock:
The Company is authorized to issue up to 5,000,000 shares of ―blank check‖ preferred stock, par value $0.001 per share.
Such preferred stock may be issued by the Board of Directors from time to time in one or more series, with such designations,
preferences and relative, participating, optional or other special rights of such series, and any qualifications, limitations or restrictions
thereof; including the dividend rights, dividend rates, conversion rights, exchange rights, voting rights, rights and terms of redemption
(including sinking and purchase fund provisions), the redemption price or prices, the dissolution preferences and the rights in respect
of any distribution of assets of any wholly unissued series of preferred stock and the number of shares constituting any such series,
and the designation thereof.
c. Share repurchase program:
In August 4, 2008, the Company announced that its board of directors approved a share repurchase program for up to
1 million shares of common stock. On September 3, 2008, the Company announced that it adopted a share repurchase plan in
accordance with Rule 10b5-1 of the United States Securities Exchange Act of 1934, as amended (the ―10b5-1 Plan‖), to repurchase up
to 500,000 of the 1 million shares of common stock authorized by the board for repurchase pursuant to the Company’s repurchase
program.
In 2008, the Company repurchased 752,763 shares of common stock at an average purchase price of $ 7.73 per share, for an
aggregate purchase price of $ 5,821. The Company has fully utilized the shares available for repurchase under the 10b5-1 Plan. As of
December 31, 2008, 247,237 shares of common stock remain authorized for repurchase pursuant to the Company repurchase program.
Subsequent to 2008 year-end, the Company repurchased an additional 47,173 shares of its common stock at a weighted
average price per share of $6.44 through open market purchases and privately negotiated transactions in accordance with Rule 10b-18
of the United States Securities Exchange Act of 1934, as amended. Also subsequent to 2008 year-end, the Company’s board of
directors approved the adoption of another 10b5-1 Plan in February 2009 authorizing the repurchase of 200,064 shares of its common
stock, representing the remaining shares available for repurchase pursuant to the board-authorized share repurchase program. As of
March 6, 2009, 50,000 shares of the Company’s common stock were repurchased pursuant to the 10b5-1 Plan at a weighted average
price per share of $5.49.
The repurchases of common stock are accounted for as treasury stock, and result in a reduction of stockholders’ equity.
When treasury shares are reissued, the Company accounts for the reissuance in accordance with Accounting Principles Board Opinion
No. 6, ―Status of Accounting Research Bulletins‖ and charges the excess of the repurchase cost over reissuance price using the
weighted average method to accumulated deficit. In the event the repurchase cost using the weighted average method is lower than the
reissuance price, the Company credits the difference to additional paid-in capital.
In 2008, the Company issued 92,568 shares of common stock, out of treasury stock, to employees who exercised their stock
options or purchased shares from the Company’s 2002 Employee Stock Purchase Plan (―ESPP‖).
d. Employee and non-employee stock plans:
The Company grants stock options to employees and directors of the Company and its subsidiaries and provides the right to
purchase stock pursuant to the ESPP to employees of the Company and its subsidiaries. The Company has elected to follow SFAS
123(R) and related interpretations in accounting for its stock option plans. SFAS 123(R) supersedes APB 25 for periods beginning in
fiscal 2006. Most of the options granted under these plans have been granted at the fair market value of the Company’s common stock
on grant date. An equity-based compensation expense of $2,204, $2,131 and $2,922 in respect of options granted to employees and
directors is reflected in the consolidated statements of operations for the years ended December 31, 2006, 2007 and 2008, respectively,
as required under SFAS 123(R).
During 2008, the Company granted options to purchase 1,219,500 shares of common stock, at exercise prices ranging from
$7.36 to $9.80 per share, and the Company issued 250,892 shares of common stock under its stock option and purchase plans for a
consideration of $1,636. Options totaling 203,955 shares with a weighted average exercise price of $9.74 were forfeited or expired in
sf-2645631
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
2008, primarily reflecting departures of employees and expiration of options which were granted in 2001. Options to purchase
4,522,154 shares were outstanding at December 31, 2008. During 2007, the Company granted options to purchase 939,500 shares of
common stock, at exercise prices ranging from $7.22 to $9.18 per share, and the Company issued 703,753 shares of common stock
under its stock option and purchase plans for a consideration of $4,816. Options totaling 1,103,697 shares with a weighted average
exercise price of $10.63 were forfeited or expired in 2007, primarily reflecting departures of employees and expiration of options
which were granted in 2000. Options to purchase 3,588,670 shares were outstanding at December 31, 2007. During 2006, the
Company granted options to purchase 335,000 shares of common stock, at exercise prices ranging from $5.50 to $7.59 per share, and
the Company issued 407,073 shares of common stock under its stock option and purchase plans for a consideration of $1,804.
Options totaling 1,017,937 shares with a weighted average exercise price of $9.59 were forfeited in 2006, primarily reflecting
departures of employees and expiration of options which were granted in 1999. Options to purchase 4,250,910 shares were
outstanding at December 31, 2006.
A summary of the Company’s stock option activity and related information for the year ended December 31, 2008, is as
follows:
Weighted
average exercise
price
Weighted
average
remaining
contractual term
Aggregate
intrinsic value
($000)
Number of
options
Outstanding at the beginning of the year
Granted
Exercised
Forfeited or expired
Outstanding at the end of the year
Vested or expected to vest as of December 31
Exercisable as of December 31
3,588,670 $
7.33
1,219,500
8.98
(82,061)
6.75
(203,955)
9.74
4,522,154 $
7.68
4,284,854 $
7.65
2,529,060 $
7.23
4.8
4.7
3.9
$ -
$ -
$ -
The weighted-average grant-date fair value of options granted during the twelve months ended December 31, 2006, 2007 and
2008 was $1.9, $2.1 and $2.7, respectively. The total intrinsic value of option exercised during the years ended December 31, 2006,
2007 and 2008 was $122, $995 and $231, respectively.
The options granted to employees and directors of the Company and its subsidiaries which were outstanding as of December
31, 2008 have been classified into a range of exercise prices as follows:
Exercise price
(range)
$
4.25
4.26-7.59
7.60-10.40
10.41-17.64
Options
outstanding as of
December 31, 2008
Weighted average
remaining contractual
life (years)
Weighted average
exercise price $
Options exercisable as of
December 31, 2008
Weighted average
exercise price of
options exercisable $
296,251
2,232,643
1,853,335
139,925
4,522,154
4.3
4.4
5.7
0.2
4.8
$
4.25
296,251
$
4.25
6.59
9.03
14.33
7.68
$
1,642,815
450,069
6.62
9.18
139,925
2,529,060
$
14.33
7.23
sf-2645631
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
2003 Director Stock Option Plan
The Company’s 2003 Director Stock Option Plan (the ―Director Plan‖) was adopted by the Board of Directors in April 2003
and by the stockholders in June 2003. Up to 700,000 shares of common stock, subject to adjustment in the event of stock splits and
other similar events, were reserved for issuance under the Director Plan, which became effective on June 18, 2003.
A summary of activities relating to options granted to purchase common stock under the Director Plan is as follows:
Year ended December 31,
2006
2007
2008
Number of
options
Weighted
average exercise
price
Number of
options
Weighted
average exercise
price
Number of
options
Weighted
average exercise
price
Outstanding at the beginning of the year
581,000 $
7.30 687,000 $
7.02 667,500 $
7.03
Granted
Exercised
Forfeited or expired
Outstanding at the end of the year
132,000
5.76
—
—
—
—
(19,500)
6.87
(26,000)
6.88
—
—
—
—
—
—
—
—
687,000 $
7.02 667,500 $
7.03 667,500 $
7.03
The Director Plan provides for the grant of nonqualified stock options to non-employee directors. Options must be granted at
an exercise price equal to the fair market value of the common stock on the date of grant. Options may not be granted for a term in
excess of ten years. The Director Plan permits the following forms of payment of the exercise price of options: (i) payment by cash or
certified or bank check, or (ii) delivery to the Company of an irrevocable undertaking by a broker to deliver sufficient funds or
delivery to the Company of irrevocable instructions to a broker to deliver sufficient funds.
On June 18, 2003, each non-employee director on the Company’s board of directors was granted an option to purchase
38,000 shares of common stock. Any person who subsequently becomes a non-employee director of the Company will automatically
be granted an option to purchase 38,000 shares of common stock. Each option will vest as to 25% of the shares underlying the option
on each anniversary of the option grant.
On June 18, 2003, each non-employee director who had served on the Company’s Board of Directors for at least six months
was granted an additional option to purchase 13,000 shares of common stock. Also on that date, any non-employee director who had
served as a chairperson of a committee of the Company’s Board of Directors for at least six (6) months was granted an option to
purchase 13,000 shares of common stock. Under the terms of the Director Plan, on June 30 of each year, beginning in 2004, each
non-employee director who has served on the Company’s Board of Directors for at least six (6) months as of such date will
automatically be granted an option to purchase 13,000 shares of common stock, and each non-employee director shall receive an
option to purchase 13,000 shares of common stock for each committee on which he or she shall have served as chairperson for at least
six months prior to such date. On May 9, 2005, the Company’s Board of Directors approved granting the Chairman of the Board an
additional option to purchase 15,000 shares of common stock on an annual basis.
As a result, options to purchase 132,000 shares of common stock were granted during 2006. In 2007 and 2008, options to
purchase 132,000 shares of common stock were granted to non-employee directors from the 2000 Stock Incentive Plan as a result of
an insufficient number of authorized shares under the Director Plan for the automatic director grants.
The Company’s Board of Directors may grant additional options to purchase common stock with a vesting schedule to be
determined by the Board of Directors in recognition of services provided by a non-employee director in his or her capacity as a
director.
sf-2645631
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
The Company’s Board of Directors has authority to administer the Director Plan. The Company’s Board of Directors has the
authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the Director Plan and to interpret its
provisions.
As of December 31, 2008, options to purchase 13,000 shares of common stock were available for grant under the Director
Plan.
2002 Stock Incentive Plan
The Company’s 2002 Stock Incentive Plan (the ―2002 Plan‖) was adopted by the Board of Directors and sole stockholder in
July 2002. Up to 3,300,000 shares of common stock, subject to adjustment in the event of stock splits and other similar events, are
reserved for issuance under the 2002 Plan.
A summary of activity of options granted to purchase common stock under the 2002 Plan is as follows:
Year ended December 31,
2006
2007
2008
Number of
options
Weighted
average exercise
price
Number of
options
Weighted
average exercise
price
Number of
options
Weighted
average exercise
price
Outstanding at the beginning of the year
2,317,436 $
6.30 1,971,377 $
6.14 1,558,492 $
Granted
Exercised
Forfeited or expired
Outstanding at the end of the year
203,000
6.04
—
—
—
(64,377)
4.64 (285,931)
6.90
(58,706)
(484,682)
7.05 (126,954)
6.96
(20,133)
1,971,377 $
6.14 1,558,492 $
5.94 1,479,653 $
5.94
—
6.31
6.25
5.92
The 2002 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue
Code, nonqualified stock options and restricted stock awards. Officers, employees, directors, outside consultants and advisors of the
Company and those of the Company’s present and future parent and subsidiary corporations are eligible to receive awards under the
2002 Plan. Under current law, incentive stock options may only be granted to employees.
Optionees receive the right to purchase a specified number of shares of the common stock at a specified option price, subject
to the terms and conditions of the option grant. The Company may grant options at an exercise price less than, equal to or greater than
the fair market value of the common stock on the date of the grant. Under current law, incentive stock options and options intended to
qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code may not be granted at an exercise
price less than the fair market value of the common stock on the date of grant, or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting power of the Company’s securities. The 2002 Plan
permits the Board of Directors to determine how optionees may pay the exercise price of their options, including by cash, check or in
connection with a ―cashless exercise‖ through a broker, by surrender of shares of the common stock, or by any combination of the
permitted forms of payment.
The Company’s Board of Directors and its compensation committee have the authority to administer the 2002 Plan. The
Company’s Board of Directors or its compensation committee has the authority to adopt, amend and repeal the administrative rules,
guidelines and practices relating to the 2002 Plan and to interpret its provisions.
As of December 31, 2008, options to purchase 1,312,561 shares of common stock were available for grant under the 2002
Plan.
sf-2645631
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
2000 Stock Incentive Plan
In July 2000, the Company adopted the 2000 Stock Incentive Plan (the ―2000 Plan‖).
A summary of activity of options granted to purchase common stock under the 2000 Plan is as follows:
Year ended December 31,
2006
2007
2008
Number of
options
Weighted
average exercise
price
Number of
options
Weighted
average exercise
price
Number of
options
Weighted
average exercise
price
Outstanding at the beginning of the year
2,121,947 $
11.33 1,592,533 $
11.12 1,362,678 $
—
— 939,500
7.78 1,219,500
(22,159)
5.93 (192,612)
9.42
(23,355)
9.07
8.98
7.86
Granted (*)
Exercised
Forfeited or expired
(507,255)
12.16 (976,743)
11.10 (183,822)
10.12
Outstanding at the end of the year
1,592,533 $
11.12 1,362,678 $
9.07 2,375,001 $
8.95
(*) Options to purchase 132,000 shares of common stock were granted to non-employee directors during both 2007 and 2008. The
exercise price of such grants was $8.50 and $7.97 in 2007 and 2008, respectively.
Generally, options granted under our stock incentive plans vest at rates of 25% to 50% of the shares underlying the option
after one year and the remaining shares vest in equal portions over the following 4 to 12 quarters, such that all shares are vested after
two to four years. Options granted to non-employee directors will vest as to 25% of the shares underlying the option on each
anniversary of the option grant.
As of December 31, 2008, options to purchase 78,885 shares of common stock were available for grant under the 2000 Plan.
2002 Employee Stock Purchase Plan
The ESPP was adopted by the Company’s Board of Directors and sole stockholder in July 2002. The ESPP is intended to
qualify as an ―Employee Stock Purchase Plan‖ under Section 423 of the U.S. Internal Revenue Code and is intended to provide the
Company’s employees with an opportunity to purchase shares of common stock through payroll deductions. At the annual meeting of
stockholders held on July 18, 2006, the stockholders voted to increase the number of shares of common stock from 1,000,000 to
1,500,000. Accordingly, an aggregate of 1,500,000 shares of common stock (subject to adjustment in the event of future stock splits,
future stock dividends or other similar changes in the common stock or the Company’s capital structure) have been reserved for
issuance and as of December 31, 2008, 217,711 shares were available for future issuance under the ESPP. In 2006, 2007 and 2008,
the Company issued 320,537, 205,710 and 168,831 shares of common stock to employees under the ESPP for consideration of $1,374,
$897 and $1,082, respectively.
All of the Company’s employees who are regularly employed for more than five months in any calendar year and work
20 hours or more per week are eligible to participate in the ESPP. Non-employee directors, consultants, and employees subject to the
rules or laws of a foreign jurisdiction that prohibit or make impractical their participation in an employee stock purchase plan are not
eligible to participate in the ESPP.
The plan designates offer periods, purchase periods and exercise dates. Offer periods generally will be overlapping periods
of 24 months. Purchase periods generally will be six-month periods. Exercise dates are the last day of each purchase period. In the
event the Company merges with or into another corporation, sells all or substantially all of the Company’s assets, or enters into other
transactions in which all of the Company’s stockholders before the transaction own less than 50% of the total combined voting power
of the Company’s outstanding securities following the transaction, the Company’s Board of Directors or a committee designated by
the board may elect to shorten the offer period then in progress.
sf-2645631
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
The price per share at which shares of common stock may be purchased under the ESPP during any purchase period is the
lesser of:
85% of the fair market value of the common stock on the date of the grant of the purchase right, which is the
commencement of the offer period; or
85% of the fair market value of the common stock on the exercise date, which is the last day of a purchase period.
The participant’s purchase right is exercised in this manner on each exercise date arising in the offer period unless, on the
first day of any purchase period, the fair market value of the common stock is lower than the fair market value of the common stock
on the first day of the offer period. If so, the participant’s participation in the original offer period will be terminated, and the
participant will automatically be enrolled in the new offer period effective the same date.
The ESPP is administered by the Board of Directors or a committee designated by the Board, which will have the authority to
terminate or amend the plan, subject to specified restrictions, and otherwise to administer and resolve all questions relating to the
administration of the plan.
In accordance with SFAS 123(R), the ESPP is a compensatory plan and as such results in the recognition of compensation
expense. For the years ended December 31, 2006, 2007 and 2008, the Company recognized $332, 353 and $431, respectively, of
compensation expense in connection with the ESPP.
e. Dividend policy:
The Company has never declared or paid any cash dividends on its capital stock and does not anticipate paying any cash
dividends in the foreseeable future.
NOTE 10: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA
a. Summary information about geographic areas:
Statement of Financial Accounting Standards No. 131, ―Disclosures about Segments of an Enterprise and Related
Information,‖ established standards for reporting information about operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on a basis of
one reportable segment: the licensing of intellectual property to semiconductor companies and electronic equipment manufacturers
(see Note 1 for a brief description of the Company’s business). The following is a summary of operations within geographic areas:
Revenues based on customer location:
United States
Europe, Middle East (1) (2)
Asia Pacific (3) (4)
(1) Sweden
(2) Switzerland
(3) Japan
(4) Taiwan
*) Less than 10%
sf-2645631
F-34
Year ended December 31,
2006
2007
2008
$ 11,657 $
6,937 $
5,276
11,670
11,477
22,278
9,178
12,811
$ 32,505 $ 33,211 $ 40,365
14,797
*) $
*)
*) $
*) $
3,755 $
*) $
4,375 $
6,058
8,019
5,946
5,144
*)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Long-lived assets by geographic region:
United States
Ireland (*)
Israel
Other
December 31,
2006
2007
2008
$
80 $
44 $
253
283
28
36
1,280
1,261
1,188
93
1,706 $
38
1,626 $
19
1,271
$
(*) The Company recorded in its Irish subsidiary a loss of $138 in 2008 related to the disposal of SATA-related fixed assets in
connection with the restructuring of SATA activities.
b. Major customer data as a percentage of total revenues:
The following table sets forth the customers that represented 10% or more of the Company’s net revenue in each of the
periods set forth below:
Customer A
Customer B
Customer C
Customer D
*) Less than 10%
Year ended December 31,
2006
2007
2008
16%
*)
*)
*)
*)
17%
12%
11%
20%
*)
*)
*)
The identity of the Company’s greater-than-10% customers varies from period-to-period, and the Company does not believe
that it is materially dependent on any one specific customer or any specific small number of licensees.
c. Information about Products and Services:
Sales of the Company’s Ceva-X family of products and services generated 21%, 19% and 27% of its total revenues for 2006,
2007 and 2008, respectively. Sales of the Company’s Ceva-TeakLite family of products and services generated 41%, 45% and 38%
of its revenues for 2006, 2007 and 2008, respectively. Sales of the Company’s Ceva-Teak family of products and services generated
10%, 16% and 15% of its total revenues for 2006, 2007 and 2008, respectively. The Company expects these products will continue to
generate a significant portion of its revenues for 2009. The remaining amount consists of other families of products and services that
represented each less than 10% of total revenues.
sf-2645631
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
NOTE 11: SELECTED STATEMENTS OF OPERATIONS DATA
Financial income, net:
Interest income
Loss (gain) on marketable securities, net (*)
Foreign exchange gain (loss), net
Year ended December 31,
2006
2007
2008
$
2,822 $
3,014 $
3,329
(52)
159
(466)
(150)
2,620 $
38
3,211 $
(134)
2,729
$
(*) Including amortization of premium (discount) on marketable securities , net
Other income, net:
The Company recorded a capital gain of $12,118 in 2008 from the divestment of its equity investment in Glonav to NXP
Semiconductors, a capital gain of $4 in 2008 from sale of a property, and a gain of $57, $425 and $27 in 2006, 2007 and 2008,
respectively, related to the disposal of another investment (see Note 1). The Company also recorded a loss of $138 in 2008 related to
disposal of SATA-related fixed assets associated with the Company’s restructuring of its SATA activities.
NOTE 12: TAXES ON INCOME
a. A number of the Company’s operating subsidiaries are taxed at rates lower than U.S. rates.
1. Irish Subsidiaries
The Irish operating subsidiary currently qualifies for a 10% tax rate on its trade, which under current legislation will
remain in force until December 31, 2010. After this date, a 12.5% tax rate shall apply. Another Irish subsidiary qualifies for
an exemption from income tax as its revenue source is license fees from qualifying patents within the meaning of Section 140
of the Irish Taxes Consolidation Act 1997.
2. Israeli Subsidiary
A. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (―Investment Law‖):
According to the Investment Law, CEVA’s Israeli subsidiary is entitled to various tax benefits by virtue of
the ―approved enterprise‖ and/or ―benefited enterprise‖ status granted to a part of its enterprises, as defined by the
Investment Law.
According to the provisions of the Investment Law, CEVA’s Israeli subsidiary has elected the ―alternative
benefits track‖ - the waiver of grants in return for tax exemption and, accordingly, it is tax-exempt for a period of
two or four years commencing with the year it first earns taxable income, and subject to corporate taxes at the
reduced rate of 10% to 25%, depending upon the level of foreign ownership of the Company, for an additional
period of up to a total of six or eight years from when the tax exemption ends.
The period of tax benefits, detailed above, is limited to the earlier of 12 years from the commencement of
production, or 14 years from the approval date (except for the tax-exempt period of two years which is unlimited).
sf-2645631
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
CEVA’s Israeli subsidiary’s first, second, third, fourth, fifth and sixth plans under the ―Approved
Enterprise‖ status commenced operations in 1994, 1996, 1998, 1999, 2002, and 2004, respectively. The second plan
was tax exempt for four years from the first year it had taxable income and is entitled to a reduced corporate tax rate
of 10%-25% (based on the percentage of foreign ownership) for an additional period of six years. The other plans
are tax exempt for two years from the first year they had taxable income and are entitled to a reduced corporate tax
rate of 10%-25% (based on the percentage of foreign ownership) for an additional period of eight years. The tax
benefit under the first, second and third plans have expired.
On April 1, 2005, an amendment to the Investment Law came into effect (the ―Amendment‖) and
significantly changed the provisions of the Investment Law. The Amendment included revisions to the criteria for
investments qualified to receive tax benefits as an ―Approved Enterprise.‖ The Amendment applies to new
investment programs and investment programs commencing after 2004, and does not apply to investment programs
approved prior to December 31, 2004, and therefore benefits included in any certificate of approval that was granted
before the Amendment came into effect will remain subject to the provisions of the Investment Law as they were on
the date of such approval.
The Amendment simplifies the approval process for the ―Approved Enterprise.‖ As a result of the
Amendment, it is no longer necessary for a company to approach the Investment Center in order to receive the tax
benefits previously available under the ―alternative benefits track.‖ Rather, a company may claim the tax benefits
offered by the Investment Law directly in its tax returns or by notifying the Israeli Tax Authority within 12 months
from the end of that year (―the year of election‖), provided that its facilities meet the criteria for tax benefits set out
by the Amendment. An enterprise that receives tax benefits under the Amendment is called a ―Benefited
Enterprise,‖ rather than the previous terminology of Approved Enterprise.
The seventh ―Benefited Enterprise‖ program (commenced in 2007) of CEVA’s Israeli subsidiary is subject
to the provisions of the Amendment.
During 2006, CEVA’s Israeli subsidiary received an approval for the erosion of the tax basis in respect to
its fifth and sixth plans, and during 2008, CEVA’s Israeli subsidiary’s received an approval for the erosion of the tax
basis in respect to its second, third and fourth plans. These approvals resulted in increasing the taxable income
attributed to the seventh plan, which is currently in effect, and will be taxed at a lower tax rate than previous plans,
and will result in a decrease in the effective tax rate.
The principal benefits by virtue of the Investment Law are:
X. Tax benefits and reduced tax rates:
Since CEVA’s Israeli subsidiary is operating under more than one approval, its effective tax rate is
the result of a weighted combination of the various applicable rates.
The Company’s Board of Directors has determined that tax-exempt income earned by the Israeli
subsidiary’s ―Approved Enterprise‖ and ―Benefited Enterprise‖ programs will not be distributed as
dividends, and the Israeli subsidiary intends to reinvest the amount of its tax exempt income. Accordingly,
no deferred income taxes have been provided on income attributable to the Israeli subsidiary’s ―Approved
Enterprise‖ and ―Benefited Enterprise‖ programs as the undistributed tax exempt income is essentially
permanently reinvested.
In the event CEVA distributes a dividend out of the retained tax exempt profits, such profits will
be subject to corporate tax in the year the dividend is distributed, in respect of the gross amount of the
dividend distributed and at a rate that would have been applicable had the Company not elected the
―alternative benefits track‖ (10%-25%, depending on the level of foreign investment in the Company). In
addition, the dividend recipient is subject to tax at a reduced rate of 15% applicable to dividends from
―Approved Enterprises‖ if the dividend is distributed during the exemption period or within 12 years
thereafter. This tax must be withheld by CEVA at the source. However, in the event that the Company
qualifies as a Foreign Investors Company, there would be no such limitation.
sf-2645631
F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
As a result of the Amendment, tax-exempt income generated from a ―Benefited Enterprise‖ under
the provisions of the Amendment will subject the Company to taxes upon distribution or liquidation, and
the Company may be required to record deferred tax liability with respect to such tax-exempt income. As
of December 31, 2007 and 2008, the Company generated income under the provisions of the Investment
Law which in the case of distribution or liquidation of the Israeli subsidiary would result in the Israeli
subsidiary being taxed at the reduced corporate tax rate of 10% which in turn will generate tax liabilities of
$108 and $473, respectively.
Income from sources other than the ―Approved Enterprise‖ and ―Benefited Enterprise‖ programs
during the benefit period will be subject to tax at the statutory corporate tax rate.
Tax benefits are available under the Amendment to production facilities, which generally are
required to derive more than 25% of their business income from export. In order to receive the tax benefits
under the Amendment, a company must make an investment in the Benefited Enterprise exceeding a
certain percentage or a minimum amount specified in the Investment Law.
Y. Accelerated depreciation:
Under the Investment Law, CEVA’s Israeli subsidiary is entitled to claim accelerated rates of
depreciation on its property and equipment that are included in the ―Approved Enterprise‖ and ―Benefited
Enterprise‖ programs during the first five tax years of the asset’s operation.
Conditions for the entitlement to the benefits:
The entitlement to the above benefits is conditioned upon the Company’s fulfillment of the conditions
stipulated by the Investment Law, regulations published thereunder and the criteria set forth in the specific
certificate of approvals. In the event of the Company’s failure to comply with these conditions, the benefits may be
canceled, the income generated from the ―Approved Enterprise‖ and ―Benefited Enterprise‖ programs could be
subject to corporate tax in Israel at the standard corporate tax rate (27% for 2008 and 26% for 2009) and CEVA’s
Israeli subsidiary will be required to refund tax benefits already received plus a consumer price index linkage
adjustment and interest.
Management believes that as of December 31, 2008, CEVA’s Israeli subsidiary met all of the
aforementioned conditions.
B. Israeli corporate tax structure:
In June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 was passed by
the ―Knesset‖ (Israeli parliament) and on July 25, 2005, another law was passed, the amendment to the Income Tax
Ordinance (No. 147) 2005, according to which the corporate tax rate is to be progressively reduced to the following tax rates:
2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%. Capital gains will
be subject to a tax of 25%.
C. Final tax assessments:
CEVA’s Israeli subsidiary has received final tax assessments through 2005.
b. The provision for income taxes is as follows:
Domestic taxes:
Current
sf-2645631
F-38
Year ended December 31,
2006
2007
2008
$
17
$
52
$
3,104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
Deferred
Foreign taxes:
Current
Deferred
Taxes on income
Income (loss) before taxes on income:
Domestic
Foreign
Year ended December 31,
2006
2007
2008
—
—
(138)
(2)
716
(103)
(321)
817
18
$
(88) $
447
$
3,801
$
(939) $
(2,123) $
(3,321)
753
(186) $
3,861
1,738
$
15,687
12,366
$
c. Reconciliation between the Company’s effective tax rate and the U.S. statutory rate:
Income (loss) before taxes on income
Theoretical tax at U.S. statutory rate-35%
Foreign income taxes at rates other than U.S. rate
Subpart F
Non-deductible items
Valuation allowance
Other
Taxes on income
Year ended December 31,
2006
2007
2008
$
(186) $
1,738 $ 12,366
(65)
(88)
—
608
4,328
(962)
(4,017)
—
4,360
707
1,554
809
(924)
(548)
(1,187)
282
(205)
(492)
$
(88) $
447 $
3,801
sf-2645631
F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
d. Deferred taxes on income:
Deferred taxes on income reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s
deferred tax assets are as follows:
Operating loss carryforward
Accrued expenses
Temporary differences related to R&D expenses
Other
Valuation allowance
Balance at the end of the year (*)
Year ended December 31,
2007
2008
$ 8,534
$ 7,681
540
358
1,088
1,109
122
69
(8,968)
(7,781)
$ 1,316
$ 1,436
(*) Deferred tax for the year ended December 31, 2007 was only from a foreign jurisdiction. Deferred tax for the year ended
December 31, 2008 from domestic and foreign jurisdictions was $138 and $1,298, respectively.
The Company and its subsidiaries provide valuation allowances in respect of deferred tax assets resulting principally from the
carryforward of tax losses. Management currently believes that it is more likely than not that the deferred tax regarding the
carryforward of state losses and certain accrued expenses will not be realized in the foreseeable future. The Company does not have a
provision for U.S. Federal income taxes on the undistributed earnings of its international subsidiaries because such earnings are re-
invested and, in the opinion of management, will continue to be re-invested indefinitely.
e. Separation from DSPG:
As part of the incorporation of the Company in November 2002 (see Note 1), DSPG obtained a tax ruling for the tax-exempt
split plan pursuant to section 105A(a) to the Israeli Income Tax Ordinance (―section 105‖). According to the ruling provisions,
CEVA’s Israeli subsidiary is restricted to a minimum investment in Israel of 50% of its total capital.
f. Tax loss carryforwards:
As of December 31, 2008, CEVA and its subsidiaries had net operating loss carryforwards for California income tax
purposes of approximately $5,679, which are available to offset future California taxable income. Such loss carryforwards begin to
expire in 2014. As of December 31, 2008, CEVA and its subsidiaries had foreign operating losses of approximately $70,096,
principally in Ireland, which are available to offset future taxable income. Such foreign operating losses can be carried forward
indefinitely for tax purposes. Full valuation allowance was provided in relation to those carryforward tax losses due to the uncertainty
of their utilization in the foreseeable future.
g. FIN 48
On January 1, 2007, CEVA adopted FASB Interpretation No. 48, ―Accounting for Uncertainty in Income Taxes,‖
(―FIN 48‖), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. CEVA did not recognize a change to its
unrecognized tax benefits as a result of the implementation of FIN 48. The adoption of FIN 48 had no impact on CEVA’s financial
statements. CEVA had no unrecognized tax benefits as of December 31, 2008.
sf-2645631
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
h. CEVA files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few
exceptions, CEVA is no longer subject to U.S. federal income tax examinations by tax authorities for the years prior to 2005, and state
and local income tax examinations for the years prior to 2004.
NOTE 13: REORGANIZATION, RESTRUCTURING AND SEVERANCE CHARGE
The Company’s management and Board of Directors approved certain reorganization and restructuring plans in 2005, which
resulted in a total charge of $3,200. The charge arose in connection with the Company’s decision to restructure its corporate
management, reduce overhead and consolidate its activities. The charges included severance charges and employee-related liabilities
arising in connection with a head-count reduction of employees and a provision for future operating lease charges on idle facilities,
one of which was the Company’s facilities in Dublin, Ireland, known as the Harcourt lease. The Harcourt lease provided for an
aggregate annual rental of 888 Euro (approximately $1,300) and expired in 2021. Of the total charge of $3,200 in 2005, the portion of
the restructuring reserve related to the Harcourt lease was $1,700. With respect to assessing the charges for under-utilized leased
properties, the Company is required to make and review certain estimates and assumptions on a quarterly basis. In determining such
estimates and assumptions, management takes into account current market conditions and the Company’s ability to either exit a
particular under-utilized lease property or sub-let the property, all in accordance with SFAS No. 146. If an exit strategy in respect of a
leased property is appropriate, the under-utilized building operating lease charge is calculated taking into consideration the surrender
value given the underlying market conditions. Otherwise, the under-utilized building operating lease charge is calculated on a sub-let
basis by taking into consideration (1) the committed annual rental charge associated with the vacant square footage, (2) an assessment
of the sublet rents that could be achieved based on current market conditions, vacancy rates and future outlook, (3) the estimated
periods that facilities would be empty before being sublet, (4) an assessment of the percentage increases in the primary lease rent and
the sublease rent at each five-year rent review, and (5) the application of a discount rate over the remaining period of the lease based
on projected interest rates.
Throughout 2006, the Company continued exit negotiations with the Harcourt landlord to terminate the lease, which
negotiations commenced in September 2005. At December 31, 2006, the provision for under-utilized operating lease obligations was
determined in accordance with an exit strategy. There was no additional restructuring charge to the statement of operations relating to
the Harcourt lease during 2006 (approximately $760 was accrued as expenses under other liabilities, of which approximately $270
was paid in 2006).
In July 2007, the Harcourt landlord initiated legal proceedings against the Company for full payment of rent for the period
from July 2006 to September 2007, including interest on arrears. The Company paid an amount equal to approximately $1,500 (of
which approximately $800 was included in accrued expenses under restructuring and approximately $700 was included in accrued
expenses under other liabilities) representing the full rent payments for the said period and various associated legal fees, as well as
payment of late interest charges in the amount of approximately $200. Subsequently, the legal proceedings against the Company were
dropped. During the third quarter of 2007, the Company re-initiated exit negotiations with the Harcourt landlord. At December 31,
2007, the Company concluded that it had no assurance whether, and if so when, the exit negotiations would result in a lease
termination. Pursuant to a sublet strategy in accordance with SFAS No. 146, as of December 31, 2007, the portion of the restructuring
reserve related to the Harcourt lease was $2,231. There was no additional restructuring charge to the statement of operations relating
to the Harcourt lease during 2007 (approximately $200 was accrued as expenses under other liabilities).
On January 18, 2008, the Company signed an assignment agreement with the Harcourt landlord for the surrender and
termination of the Harcourt lease. In 2008, the Company paid approximately $5,900 for the termination of the lease and related
termination costs, consisting primarily of legal and professional fees. The Company also successfully managed during the first quarter
of 2008 to terminate part of its lease obligation in another office in Limerick, Ireland, where the Company had unused space. The
Company recorded in 2008 an aggregate of $3,537 for the above lease terminations as an additional reorganization expense. As a
result of the above lease terminations, the Company has no under-utilized building operating lease obligations as of December 31,
2008.
In October 2008, the Company’s board of directors approved a reduction in expenses associated with the Company’s SATA
activities. In December 2008, the Company’s management implemented the reduction with the termination in employment of a
number of SATA-related technology engineers across the Company’s Irish offices. A one-time restructuring expense associated with
the down-sizing of the SATA team in the amount of $584 was recorded in 2008 in accordance with SFAS No. 146.
sf-2645631
F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
The major components of the restructuring and other charges are as follows:
Severance and
related costs
Under-utilized
building operating
lease obligations
Legal and
professional fees
Total
Balance as of December 31, 2006 (1)
$
— $
2,976 $
330 $
3,306
Effect of exchange rate
Reallocation
Cash outlays
—
—
292
—
100
(100)
292
—
—
(1,224)
—
(1,224)
Balance as of December 31, 2007 (1)
$
— $
2,144 $
230 $
2,374
Charge, net
Effect of exchange rate
Cash outlays
663
3,586
(128)
4,121
61
3
5
69
(103)
(5,733)
(83)
(5,919)
Balance as of December 31, 2008 (2)
$
621 $
— $
24 $
645
(1) The legal and professional fees were related to the termination of the Harcourt lease.
(2) The legal and professional fees were related to charges associated with the restructuring of the SATA business.
Short-term – Restructuring accruals (see Note 8)
Long-term – Restructuring accruals
NOTE 14: RELATED PARTY TRANSACTIONS
Year ended December 31,
2007
2008
$
868 $
645
$
1,506 $
—
a. During the first two quarters of 2008, directors who are not employees of CEVA (other than the Chairman) were entitled to
an annual retainer of $30, payable in quarterly installments of $7.5 each. On July 2008, the Company’s Board of Directors determined
to increase the total cash compensation of the Company’s directors (other than the Chairman) to $40 annually with the increase to take
affect on a pro rata basis for the remaining two quarters of 2008. The Chairman receives an annual retainer of $60, payable in
quarterly installments of $15 each. The retainer contemplates attendance at four board meetings per year. Committee meetings of a
face-to-face nature and on a telephonic basis are compensated at the rate of $1 per meeting. All directors are reimbursed for expenses
incurred in connection with attending board and committee meetings. Directors are eligible to participate in the Company’s stock
option plans.
b. On July 1, 1996, one of CEVA’s Irish subsidiaries entered into a property lease agreement with Veton Properties Limited
to lease office space in Dublin, Ireland. The lease term was 25 years from July 1, 1996 and the annual rental payment was
approximately 888 Euro ($1,300). Peter McManamon, the Chairman of the Company’s Board of Directors, is a minority stockholder
of Veton Properties Limited. On January 18, 2008, the Company made a payment of approximately $5,700 to surrender and terminate
the lease, which is recorded as cash outflow in 2008 (for more details see Note 13).
c. One of the Company’s directors, Bruce Mann, is a partner of Morrison & Foerster LLP, the Company’s outside legal
counsel. Fees paid to Morrison & Foerster LLP during the years ended December 31, 2006, 2007 and 2008 were $499, $266 and
sf-2645631
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except share data)
CEVA, INC.
$263, respectively. The increase in fees paid in 2006 was mainly due to legal services provided by Morrison & Foerster LLP relating
to the divestment of the Company’s GPS technology and associated business to Glonav. The accounts receivable balances with
Morrison & Foerster LLP at December 31, 2006, 2007 and 2008 were $0, $2 and $0, respectively.
NOTE 15: COMMITMENTS AND CONTINGENCIES
a. The Company is not a party to any litigation or other legal proceedings that the Company believes could reasonably be
expected to have a material adverse effect on the Company’s business, results of operations and financial condition.
b. As of December 31, 2008, the Company and its subsidiaries had several non-cancelable operating leases, of which one
expires in 2025, primarily for facilities, equipment and vehicles. These leases generally contain renewal options and require the
Company and its subsidiaries to pay all executory costs such as maintenance and insurance.
Rent expense for the fiscal years ended December 31, 2006, 2007 and 2008, were $1,716, $1,097 and $937, respectively.
As of December 31, 2008, future purchase obligations and minimum rental commitments for leasehold properties and
operating leases with non-cancelable terms are as follows:
2009
2010
2011
c. Royalties:
Minimum rental
commitments for
leasehold properties
commitments for other
lease obligations
Other purchase
obligations
Total
$
1,194
$
1,313
$
102
$
2,609
787
6
1,987
$
368
200
1,881
$
-
-
102
1,155
206
3,970
$
$
The Company participated in programs sponsored by the Israeli government for the support of research and development
activities. Through December 31, 2008, the Company had obtained grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry and Trade (the ―OCS‖) aggregating $1,391 for certain of the Company’s research and development projects. The
Company is obligated to pay royalties to the OCS, amounting to 3%-3.5% of the sales of the products and other related revenues
(based on the U.S. dollar) generated from such projects, up to 100% of the grants received. For grants received after January 1, 1999,
the royalty payment obligations also bear interest at the LIBOR rate. The obligation to pay these royalties is contingent on actual sales
of the products and in the absence of such sales no payment is required.
Through December 31, 2008, the Company had paid royalties to the OCS in the amount of $954. As of December 31, 2008,
the aggregate contingent liability to the OCS amounted to $437.
sf-2645631
F-43
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CEVA, INC.
By:
/S/ Gideon Wertheizer
Gideon Wertheizer
Chief Executive Officer
March 13, 2009
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Gideon Wertheizer and Yaniv Arieli or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution
and re-substitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or
his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
/S/ Gideon Wertheizer
Gideon Wertheizer
/S/ Yaniv Arieli
Yaniv Arieli
Title
Chief Executive Officer
(Principal Executive Officer)
Date
March 13, 2009
Chief Financial Officer and Treasurer
March 13, 2009
(Principal Financial Officer and Principal
Accounting Officer)
/S/ PETER MCMANAMON
Director and Chairman
March 13, 2009
Peter McManamon
/S/ ELIYAHU AYALON
Director
Eliyahu Ayalon
/S/ ZVI LIMON
Zvi Limon
/S/ BRUCE MANN
Bruce Mann
Director
Director
/S/ SVEN-CHRISTER-NILSSON
Director
Sven-Christer Nilsson
/S/ LOUIS SILVER
Louis Silver
/S/ DAN TOCATLY
Dan Tocatly
Director
Director
sf-2645631
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
March 13, 2009
CEVA, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Year ended December 31, 2008
Allowance for doubtful accounts
Year ended December 31, 2007
Allowance for doubtful accounts
Year ended December 31, 2006
Allowance for doubtful accounts
Balance at
beginning of
period
Additions Deduction (1)
Balance at end
of period
$
868 $
— $
125 $
743
$
682 $
186 $
— $
868
$
667 $
15 $
— $
682
(1) Actual write-offs of uncollectible accounts receivables
sf-2645631
Exhibit
Number
2.1(1)
2.2(2)
3.1(1)
3.2(3)
3.3(4)
3.7(5)
4.1(2)
10.1(6)
10.2(6)
10.3(6)
10.4(6)
10.5(6)
EXHIBIT INDEX
Description
Combination Agreement, dated as of April 4, 2002, among DSP Group, Inc., the Registrant and CEVA Technologies
Limited (formerly Parthus Technologies plc)
Amendment No. 1 to Combination Agreement, dated as of August 29, 2002, among DSP Group, Inc., the Registrant
and CEVA Technologies Limited (formerly Parthus Technologies plc)
Amended and Restated Certificate of Incorporation of the Registrant
Certificate of Ownership and Merger (merging CEVA, Inc. into ParthusCeva, Inc.)
Third Amended and Restated Bylaws of the Registrant
Amendment to the Amended and Restated Certificate of Incorporation of the Registrant
Specimen of Common Stock Certificate
Separation Agreement among DSP Group, Inc., DSP Group, Ltd., the Registrant, CEVA Technologies, Inc.
(formerly DSP CEVA, Inc.) and CEVA D.S.P. Ltd. (formerly Corage, Ltd.) dated as of November 1, 2002
Tax Indemnification and Allocation Agreement between DSP Group, Inc. and the Registrant dated as of November 1,
2002
Technology Transfer Agreement between DSP Group, Inc. and the Registrant dated as of November 1, 2002
Technology Transfer Agreement between DSP Group, Ltd. and CEVA D.S.P. Ltd. (formerly Corage, Ltd.) dated as
of November 1, 2002
Technology Transfer Agreement between CEVA Technologies, Inc. (formerly DSP CEVA, Inc.) and the Registrant
dated as of November 1, 2002
10.6(7)†
10.7(7)†
10.8(7)†
10.9(7)†
CEVA, Inc. 2000 Stock Incentive Plan
CEVA, Inc. 2002 Stock Incentive Plan
CEVA, Inc. 2003 Director Stock Option Plan
Parthus 2000 Share Option Plan
10.10(8)†
CEVA, Inc. 2002 Employee Stock Purchase Plan
10.11(1)
Form of Indemnification Agreement
10.12(6)†
Employment Agreement between the Registrant and Gideon Wertheizer dated as of November 1, 2002
10.13(6)†
Employment Agreement between the Registrant and Issachar Ohana dated as of November 1, 2002
10.14(9)†
Personal and Special Employment Agreement between the Registrant and Yaniv Arieli dated as of August 18, 2005
10.15(10)†
Form of Stock Option Agreement under the CEVA, Inc. 2002 Stock Incentive Plan
10.16(10)†
Form of Israeli Stock Option Agreement under the CEVA, Inc. 2002 Stock Incentive Plan
10.17(10)†
Form of Stock Option Agreement under the CEVA, Inc. 2000 Stock Incentive Plan
10.18(10)†
Form of Israeli Stock Option Agreement under the CEVA, Inc. 2000 Stock Incentive Plan
10.19(10)†
Form of Option Agreement under the CEVA, Inc. 2003 Director Stock Option Plan
10.20(11)†
Form of Stock Option Agreement for Directors under the CEVA, Inc. 2000 Stock Incentive Plan
Yaniv Arieli’s Amended and Restated Nonstatutory Stock Option Agreement under the CEVA, Inc. 2002 Stock
Incentive Plan, dated as of August 1, 2007
Amendment, dated July 22, 2003, to the Employment Agreement by and between Issachar Ohana and CEVA, Inc.,
dated November 1, 2002
Amendment, effective as of November 1, 2007, to the Employment Agreement by and between Issachar Ohana and
10.21(11)†
10.22(12)†
10.23(13)†
sf-2645631
CEVA, Inc., dated November 1, 2002 and as amended on July 22, 2003
10.24(14)
Assignment of Leasehold Interest, dated January 18, 2008, by and between CEVA Ireland Limited and Ivor
Fitzpatrick
21.1*
23.1*
24.1*
31.1*
31.2*
32*
Subsidiaries of the Registrant
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global
Power of Attorney (See signature page of this Annual Report on Form 10-K)
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
(1) Filed as an exhibit to CEVA’s registration statement on Form 10, as amended, initially filed with the Commission on June 3, 2002
(registration number 000-49842), and incorporated herein by reference.
(2) Filed as an exhibit to CEVA’s registration statement on Form S-1, as amended, initially filed with the Commission on July 30,
2002 (registration number 333-97353), and incorporated herein by reference.
(3) Filed as an exhibit to CEVA’s Report on Form 8-K, filed with the Commission on December 8, 2003, and incorporated hereby by
reference.
(4) Filed as an exhibit to CEVA’s Current Report on Form 8-K, filed with the Commission on October 29, 2008, and incorporated
hereby by reference.
(5) Filed as an exhibit to CEVA’s Report on Form 8-K, filed with the Commission on July 22, 2005, and incorporated hereby by
reference.
(6) Filed as an exhibit to CEVA’s 2002 Annual Report on Form 10-K, filed with the Commission on March 28, 2003, and
incorporated hereby by reference.
(7) Filed as an exhibit to CEVA’s 2007 Annual Report on Form 10-K, filed with the Commission on March 14, 2008, and
incorporated hereby by reference.
(8) Filed as an exhibit to CEVA’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2006, and incorporated
hereby by reference.
(9) Filed as an exhibit to CEVA’s Quarterly Report on Form 10-Q, filed with the Commission on November 9, 2005, and
incorporated hereby by reference.
(10) Filed as an exhibit to CEVA’s Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2006, and incorporated
hereby by reference.
(11) Filed as an exhibit of the same number to CEVA’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange
Commission on August 9, 2007, and incorporated hereby by reference.
(12) Filed as Exhibit 10.27 to CEVA’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on
November 9, 2007, and incorporated hereby by reference.
(13) Filed as Exhibit 99.1 to CEVA’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November
7, 2007, and incorporated hereby by reference.
(14) Filed as Exhibit 10.1 to CEVA’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 18,
2008, and incorporated hereby by reference.
† Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-
K.
* Filed herewith.
sf-2645631
CEVA, INC.
Subsidiaries
Exhibit 21.1
The following are the subsidiaries of CEVA, Inc.
Name
CEVA Limited
CEVA Development, Inc.
CEVA Inc.
CEVA Ireland Limited
CEVA D.S.P. Limited
CEVA Services Limited
CEVA Systems LLC
Nihon CEVA K.K.
CEVA Technologies Limited
CEVA SARL (*)
CEVA Technologies, Inc.
(*) Currently in a liquidation process
Jurisdiction of Incorporation
Northern Ireland
California
Cayman Islands
Republic of Ireland
Israel
Republic of Ireland
Delaware
Japan
Republic of Ireland
France
Delaware
sf-2645631
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-101553, 333-107443, 333-115506
and 333-141355) pertaining to the 2002 Stock Incentive Plan, 2002 Employee Stock Purchase Plan, 2000 Stock Incentive Plan,
Parthus Technologies 2000 Share Incentive Plan, Chicory Systems, Inc. 1999 Employee Stock Option /Stock Issuance Plan, and 2003
Director Stock Option Plan of CEVA, Inc. (formerly ParthusCeva, Inc.) of our reports dated March 13, 2009, with respect to the
consolidated financial statements and financial statement schedule of CEVA, Inc. and subsidiaries, and the effectiveness of internal
control over financial reporting of CEVA, Inc. and subsidiaries included in this Annual Report on Form 10-K for the year ended
December 31, 2008.
Exhibit 23.1
/ s / KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
Tel-Aviv, Israel
March 13, 2009
sf-2645631
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Gideon Wertheizer, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CEVA, Inc. (the ―Company‖);
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 13, 2009
By:
Gideon Wertheizer
Chief Executive Officer
/s/ Gideon Wertheizer
sf-2645631
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Yaniv Arieli, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CEVA, Inc. (the ―Company‖);
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 13, 2009
By:
Yaniv Arieli
Chief Financial Officer
/s/ Yaniv Arieli
sf-2645631
EXHIBIT 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of CEVA, Inc. (the ―Company‖) for the year ended December 31, 2008, as filed
with the Securities and Exchange Commission on the date hereof (the ―Report‖), the undersigned, Gideon Wertheizer, Chief
Executive Officer of the Company, and Yaniv Arieli, Chief Financial Officer of the Company, each hereby certifies, that, to the best
of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company at the dates and for the periods indicated.
This certification will not be deemed ―filed‖ for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject
to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.
Date: March 13, 2009
/s/ Gideon Wertheizer
Gideon Wertheizer
Chief Executive Officer
/s/ Yaniv Arieli
Yaniv Arieli
Chief Financial Officer
sf-2645631