CEVA

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for ParthusCeva, Inc. (formerly Ceva, Inc.). The financial statements present the results of the DSP cores licensing business, which was a wholly-owned subsidiary of DSP Group, Inc. until November 1, 2002. On that date, the business was spun off to DSP Group stockholders and immediately combined with Parthus Technologies plc. The data is presented on a "carve-out" basis, assuming the business operated as a stand-alone entity, and does not reflect the combination with Parthus.

Key Financial Metrics

Note: Cash and cash equivalents are reported as zero in the statement of cash flows as all cash was transferred to the Parent Company prior to the spin-off.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 35% for the nine months ended September 30, 2002, compared to the prior year. This was driven by a 38% drop in licensing and royalty revenues and a 19% drop in technical support revenues.
• Licensing Fees: Licensing revenues fell 52% year-over-year for the nine-month period, attributed to the global economic slowdown and an inability to negotiate fees as high as in 2001.
• Operating Expenses: While revenues fell, operating expenses increased slightly. Research and Development (R&D) expenses rose 16% to $4.6 million due to increased engineering headcount and investment in the XpertTeak platform. Sales and marketing expenses increased 12%.
• Cash Flow Reversal: The company shifted from generating $6.8 million in operating cash flow in the prior year to using $2.2 million in the current period. This was primarily due to lower net income, a significant decrease in income tax payable, and an increase in other accounts receivable and prepaid expenses related to the separation process.
• Customer Concentration: Customer concentration shifted. In the nine months of 2002, three customers accounted for 37% of revenues, whereas in 2001, three customers accounted for 59% of revenues.

Guidance, Outlook, and Risks

• Spin-off and Combination: The company became a standalone entity on November 1, 2002, receiving $40 million in initial working capital from DSP Group. It immediately combined with Parthus Technologies plc.
• Upcoming Charges: Management expects to record a one-time restructuring charge of $5 million to $7 million in the fourth quarter of 2002. Additionally, an estimated $14.1 million write-off of acquired in-process research and development from Parthus is expected to be expensed in the fourth quarter.
• Liquidity: Management believes current cash on hand, including the $40 million contribution, combined with cash flows from the combined entity, will fund operations for the next 12 months.
• Key Risks:
  • Market Conditions: Continued weakness in the global wireless, cellular, and semiconductor markets.
  • Integration: Risks associated with integrating the Parthus and Ceva businesses, including potential loss of key personnel and customers.
  • Customer Dependence: Reliance on a limited number of licensees; two customers generated 67% of Q3 2002 revenues.
  • Intellectual Property: Risks regarding the protection of proprietary technology and potential infringement claims.
  • Geopolitical: Operations in Israel expose the company to political, economic, and military instability.

Investor Verification Checklist

• Verify the impact of the $14.1 million in-process R&D write-off and the $5-7 million restructuring charge on Q4 2002 earnings.
• Confirm the status of the integration with Parthus Technologies plc and the realization of anticipated synergies.
• Monitor the recovery of the global semiconductor and wireless markets, which are critical to licensing revenue growth.
• Assess the company's ability to diversify its customer base to reduce reliance on its top two licensees.
• Review the transition services agreement with DSP Group to ensure operational continuity post-spin-off.