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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 
FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended: March 31, 2005

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
77-0556376
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
2033 Gateway Place, Suite 150, San Jose, California
95110-1002
(Address of Principal Executive Offices)
(Zip Code)

(408) 514-2900
(Registrant’s Telephone Number, Including Area Code)

 
Indicate by check mark whether the registrant: (1) has filed all reports 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x  No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 18,733,394 shares of common stock, $0.001 par value, as of May 3, 2005.




TABLE OF CONTENTS

 
Page
PART I.   FINANCIAL INFORMATION
 
 
 
Item  1.    Financial Statements (Unaudited)
 
4
 
                Interim Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004
 
4
 
                Interim Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004
 
5
 
                Interim Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2005 and 2004
 
6
 
                Interim Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
 
7
 
                Notes to the Interim Condensed Consolidated Financial Statements
 
8
 
Item  2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
12
 
Item  3.    Quantitative and Qualitative Disclosures About Market Risk
 
26
 
Item  4.    Controls and Procedures
 
26
 
PART II. OTHER INFORMATION
 
 
 
Item  1.    Legal Proceedings
 
27
 
Item  6.    Exhibits and Reports on Form 8-K
 
28
 
SIGNATURES
 
29
 
 
2


FORWARD-LOOKING STATEMENTS

This quarterly report includes forward-looking statements that are subject to a number of risks and uncertainties. All statements, other than statements of historical facts, included in this quarterly report regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “will”, “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements in this report contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic alliances. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That Could Affect Our Operating Results” and elsewhere in this quarterly report. We do not assume any obligations to update any of the forward-looking statements we make.

*****
 
3


PART I. FINANCIAL INFORMATION

Item 1.    FINANCIAL STATEMENTS

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and per share data

   
March 31,
2005
 
December 31,
2004 (1) 
 
   
Unaudited
 
 
 
ASSETS
         
Current assets:
         
Cash and cash equivalents
 
$
33,220
 
$
28,844
 
Marketable securities
   
27,118
   
30,794
 
Trade receivables, net
   
9,045
   
10,835
 
Deferred tax assets
   
158
   
125
 
Prepaid expenses
   
1,539
   
703
 
Other current assets
   
943
   
647
 
Total current assets
   
72,023
   
71,948
 
Long-term investments:
             
Severance pay fund
   
1,693
   
1,713
 
Deferred tax assets
   
59
   
70
 
Property and equipment, net
   
4,184
   
4,471
 
Goodwill
   
38,398
   
38,398
 
Other intangible assets, net
   
2,452
   
2,563
 
Total assets
 
$
118,809
 
$
119,163
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Current liabilities:
             
Trade payables
 
$
1,555
 
$
1,714
 
Accrued expenses and other payables
   
8,026
   
9,816
 
Taxes payable
   
624
   
707
 
Deferred revenues
   
1,987
   
1,751
 
Total current liabilities
   
12,192
   
13,988
 
Accrued severance pay
   
1,847
   
1,844
 
Accrued liabilities
   
667
   
782
 
Total long-term liabilities
   
2,514
   
2,626
 
Stockholders’ equity:
             
Common Stock:
             
$0.001 par value: 100,000,000 shares authorized; 18,733,053 and 18,557,818 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively
   
19
   
19
 
Additional paid in-capital
   
137,795
   
136,868
 
Accumulated deficit
   
(33,711
)
 
(34,338
)
Total stockholders’ equity
   
104,103
   
102,549
 
Total liabilities and stockholders’ equity
 
$
118,809
 
$
119,163
 

 
(1) The December 31, 2004 balance sheet information has been derived from the December 31, 2004 audited consolidated financial statements of the Company.

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

4

 
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
U.S. dollars in thousands, except per share data


   
Three months ended
March 31,
 
   
2005
 
2004
 
   
Unaudited
 
Unaudited
 
Revenues:
         
Licensing and royalties
 
$
8,847
 
$
7,769
 
Other revenue
   
1,194
   
1,445
 
Total revenues
   
10,041
   
9,214
 
Cost of revenues
   
1,293
   
1,510
 
Gross profit
   
8,748
   
7,704
 
Operating expenses:
             
Research and development, net
   
4,926
   
4,009
 
Sales and marketing
   
1,676
   
1,673
 
General and administrative
   
1,471
   
1,459
 
Amortization of intangible assets
   
223
   
223
 
Total operating expenses
   
8,296
   
7,364
 
Operating income
   
452
   
340
 
Other income, net
   
335
   
189
 
Income before taxes on income
   
787
   
529
 
Taxes on income
   
160
   
120
 
Net income
 
$
627
 
$
409
 
Basic and diluted net income per share
 
$
0.03
 
$
0.02
 
Weighted-average number of shares of Common Stock used in computation of net income per share (in thousands):
             
Basic
   
18,675
   
18,326
 
Diluted
   
19,227
   
19,257
 
               

The accompanying notes are an integral part of the interim consolidated financial statements.
 
5


INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
U.S. dollars in thousands, except share data

 
   
Common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Total
stockholders’
equity
 
   
Three months ended March 31, 2005
 
Shares
 
Amount
 
Balance as of January 1, 2005
   
18,557,818
 
$
19
 
$
136,868
 
$
(34,338
)
$
102,549
 
Net income
   
   
   
   
627
   
627
 
Stock-based compensation
   
   
   
47
   
   
47
 
Issuance of Common Stock upon exercise of stock options
   
21,997
   
—(*
)
 
121
   
   
121
 
Issuance of Common Stock upon purchase of ESPP shares
   
153,238
   
(*
)
 
759
   
   
759
 
Balance as of March 31, 2005
   
18,733,053
 
$
19
 
$
137,795
 
$
(33,711
)
$
104,103
 
 
   
Common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Total
stockholders’
equity
 
   
Three months ended March 31, 2004
 
Shares
 
Amount
 
Balance as of January 1, 2004
   
18,167,332
 
$
18
 
$
134,449
 
$
(35,988
)
$
98,479
 
Net income
   
   
   
   
409
   
409
 
Issuance of Common Stock upon exercise of stock options
   
113,407
   
—(*
)
 
1,056
   
   
1,056
 
Issuance of Common Stock upon purchase of ESPP shares
   
99,018
   
(*
)
 
377
   
   
377
 
Balance as of March 31, 2004
   
18,379,757
 
$
18
 
$
135,882
 
$
(35,579
)
$
100,321
 

(*) Amount less than $1.

The accompanying notes are an integral part of the interim consolidated financial statements.

6


INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands


   
Three months ended
March 31,
 
   
2005
 
2004
 
   
Unaudited
 
Unaudited
 
Cash flows from operating activities:
         
Net income
 
$
627
 
$
409
 
Adjustments required to reconcile net income to net cash provided from (used in) operating activities:
             
Depreciation
   
547
   
635
 
Amortization of intangible assets
   
223
   
223
 
Stock-based compensation
   
47
   
 
Profit on disposal of property and equipment
   
(6
)
 
(8
)
Unrealized loss on investments
   
37
   
 
Currency translation differences
   
(60
)
 
2
 
Marketable securities
   
3,639
   
 
Changes in operating assets and liabilities:
             
Trade receivables
   
1,767
   
(478
)
Other current assets and prepaid expenses
   
(1,158
)
 
698
 
Deferred income taxes
   
(22
)
 
 
Trade payables
   
(99
)
 
(403
)
Deferred revenues
   
236
   
(197
)
Accrued expenses and other payables
   
(1,733
)
 
(1,762
)
Taxes payable
   
(83
)
 
(32
)
Accrued severance pay, net
   
23
   
45
 
Net cash provided from (used in) operating activities
   
3,985
   
(868
)
Cash flows from investing activities:
             
Purchase of property and equipment
   
(260
)
 
(947
)
Proceeds from sale of property and equipment
   
6
   
42
 
Purchase of technology
   
   
(30
)
Net cash used in investing activities
   
(254
)
 
(935
)
Cash flows from financing activities:
             
Proceeds from issuance of Common Stock upon exercise of options
   
121
   
1,056
 
Proceeds from issuance of Common Stock under employee stock purchase plan
   
759
   
377
 
Net cash provided by financing activities
   
880
   
1,433
 
Effect of exchange rate movements on cash
   
(235
)
 
(145
)
Changes in cash and cash equivalents
   
4,376
   
(515
)
Cash and cash equivalents at the beginning of the period
   
28,844
   
59,130
 
Cash and cash equivalents at the end of the period
 
$
33,220
 
$
58,615
 
 
The accompanying notes are an integral part of the interim consolidated financial statements.
 
7

 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share amounts)
 
NOTE 1:    BUSINESS

The financial information in this quarterly report includes the results of CEVA, Inc. and its subsidiaries (the “Company” or “CEVA”). CEVA licenses Digital Signal Processor (DSP) intellectual property and related technologies. We design, develop and support DSP cores and integrated application solutions that power wireless and digital multimedia products such as cellular phones, music players, digital television and personal digital assistants. Licensees of CEVA technology either source chips for these devices and applications from foundries or manufacture them in-house.

NOTE 2:    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, reference is made to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.

The consolidated financial statements incorporate the financial statements of the Company and all of its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2004, contained in the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on March 31, 2005, as further amended on April 26, 2005 (File No. 000-49842), have been applied consistently in these financial statements.

NOTE 3:    GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA

a. Summary information about geographic areas:

The Company manages its business on the basis of one industry 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:

   
Three months ended
March 31,
 
   
2005
 
2004
 
Revenues based on customer location:
         
United States
 
$
2,191
 
$
1,819
 
Europe, Middle East and Africa
   
2,523
   
4,144
 
Asia (1)
   
5,327
   
3,251
 
 
 
$
10,041
 
$
9,214
 
               
(1) Japan
 
$
1,754
 
$
1,286
 

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.

   
Three months ended
March 31,
 
   
2005
 
2004
 
Customer A
   
22.7
%
 
 
Customer B
   
   
19.9
%
Customer C
   
   
17.4
%
 
8

 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(U.S. dollars in thousands, except share and per share amounts)
NOTE 4:    NET INCOME PER SHARE OF COMMON STOCK

Basic net income per share is computed based on the weighted-average number of shares of Common Stock outstanding during each period. Diluted net income per share is computed based on the weighted average number of shares of Common Stock outstanding during each period, plus potential dilutive shares of Common Stock considered outstanding during the period, in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 128, “Earnings Per Share”.

   
Three months ended
March 31,
 
   
2005
 
2004
 
Numerator:
         
Numerator for basic and diluted net income per share
 
$
627
 
$
409
 
 
Denominator:
             
Denominator for basic net income per share
             
Weighted-average number of shares of Common Stock
   
18,675
   
18,326
 
Effect of employee stock options
   
552
   
931
 
 
   
19,227
   
19,257
 
Net income per share
             
Basic
 
$
0.03
 
$
0.02
 
Diluted
 
$
0.03
 
$
0.02
 


NOTE 5:    MARKETABLE SECURITIES

Marketable securities consist of certificates of deposits and U.S. government and agency securities. Marketable securities are stated at market value, and by policy, CEVA invests in high grade marketable securities to reduce risk of loss. All marketable securities are defined as trading securities under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and unrealized holding gains and losses are reflected in the Consolidated Statements of Income.

   
As at March 31, 2005
 
   
Cost
 
Unrealized Gain (loss)
 
Market Value
 
               
Certificates of deposits
 
$
4,587
 
$
(1
)
$
4,586
 
U.S. government and agency securities
   
22,518
   
14
   
22,532
 
 
 
$
27,105
 
$
13
 
$
27,118
 


NOTE 6:    STOCK-BASED COMPENSATION PLANS

The Company issues stock options to its employees, directors and certain consultants and provides the right to purchase stock pursuant to approved stock option and employee stock purchase programs. The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Options Issued to Employees” (“APB No. 25”), and related interpretations (collectively “APB No. 25”), in accounting for its stock option plans. Under APB No. 25, when the exercise price of an employee stock option is less than the market price of the underlying stock on the date of grant, compensation expense is recognized. All options granted under these plans had an exercise price equal to the fair market value of the underlying Common Stock on the date of grant.

Certain stock options issued to non-employee consultants are accounted for under SFAS No. 123, “Accounting for Stock-Based Compensation” using the fair value method. A stock compensation charge of $47 in respect of 96,000 fully vested options granted to non-employee consultants is reflected in the Consolidated Statements of Income for the quarter ended March 31, 2005, as required under APB No.25. There was no similar charge in the quarter ended March 31, 2004. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 2%; dividend yield of 0%; volatility factor of 80%; and a weighted-average expected life of the options of four years. No options were exercised during the quarter ended March 31, 2005 and options to purchase 96,000 shares were outstanding as of March 31, 2005.

During the first quarter of 2005, the Company granted options to purchase 51,000 shares of Common Stock, at exercise prices ranging from $7.93 to $8.51 per share, and the Company issued 175,235 shares of Common Stock under its stock option and purchase programs for consideration of $880. Options to purchase 5,820,471 shares were outstanding at March 31, 2005. During the comparable period of 2004, the Company granted options to purchase 382,000 shares of Common Stock, at exercise prices ranging from $8.75 to $11.75 per share, and the Company issued 212,425 shares of Common Stock under its stock option and purchase programs for consideration of $1,433. Options to purchase 5,219,065 shares were outstanding at March 31, 2004.

9

 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(U.S. dollars in thousands, except share and per share amounts)
 
Under SFAS No. 123, pro forma information regarding net income (loss) per share is required, and has been determined as if CEVA had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

   
Three months ended
March 31,
 
   
2005
 
2004
 
Dividend yield
   
0
%
 
0
%
Expected volatility
   
39
%
 
80
%
Risk-free interest rate
   
2
%
 
2
%
Expected life
   
3-4 Years
   
4 Years
 

The fair value for rights to purchase awards under the Employee Share Purchase Plan was estimated at the date of grant using the same assumptions above except the expected life was assumed to be 6 months.

The weighted-average fair value of the options granted during the three months ended March 31, 2005, was $8.21. During the comparable period of 2004 the weighted-average fair value of the options granted was $10.25. The exercise prices of such options were equal to the market price of the Company’s Common Stock at the date of the respective option grants.

The following pro forma information includes the effect of the options granted to the Company’s employees. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.

   
Three months ended
March 31,
 
   
2005
 
2004
 
Net income as reported
 
$
627
 
$
409
 
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
 
 
(1,376
)
 
(3,226
)
Pro forma net (loss)
 
$
(749
)
$
(2,817
)
Net income (loss) per share:
             
Basic as reported
 
$
0.03
 
$
0.02
 
Basic pro forma
 
$
(0.04
)
$
(0.15
)
Diluted as reported
 
$
0.03
 
$
0.02
 
Diluted pro forma
 
$
(0.04
)
$
(0.15
)

NOTE 7:    REORGANIZATION, RESTRUCTURING AND SEVERANCE CHARGE
 
Management was required to make certain estimates and assumptions in assessing the underutilized building operating lease charge arising from the reduction in facility requirements. The underutilized building operating lease charge was calculated by taking into consideration (1) the committed annual rental charge associated with the vacant square footage, (2) an assessment of the sublet rents that could be achieved based on current market conditions, vacancy rates and future outlook, (3) the estimated periods that facilities would be empty before being sublet, (4) an assessment of the percentage increases in the primary lease rent and the sublease rent at each five-year rent review, and (5) the application of a discount rate of 4.75% over the remaining period of the lease. The Company revise their assumptions quarterly, as appropriate in respect of future vacancy rates and sublet rents in light of current market conditions and their discount rate based on projected interest rates applicable. There was no effect on net income in the quarter ended March 31, 2005.

10

 
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(U.S. dollars in thousands, except share and per share amounts)
 
The major components of the restructuring and other charges of which $1,723 is included in accrued expenses and other payables and $667 is included in long term accrued liabilities, at March 31, 2005 are as follows:

   
Severance and related costs
 
Underutilized building operating lease obligations
 
Legal and professional fees
 
Non-performing assets
 
Total
 
Balance as of December 31, 2003
 
$
1,704
 
$
3,153
 
$
100
 
$
 
$
4,957
 
Reallocation
   
   
50
   
(50
)
 
   
 
Cash outlays
   
(849
)
 
(992
)
 
(50
)
 
   
(1,891
)
Balance as of December 31, 2004
 
$
855
 
$
2,211
 
$
 
$
 
$
3,066
 
Cash outlays
   
(253
)
 
(423
)
 
   
   
(676
)
Balance as of March 31, 2005
 
$
602
 
$
1,788
 
$
 
$
 
$
2,390
 
 
11


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the unaudited financial statements and related notes appearing elsewhere in this quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under “—Factors That Could Affect Our Operating Results”, as well as those otherwise discussed in this section and elsewhere in this quarterly report. See “Forward-Looking Statements”.

BUSINESS OVERVIEW

The financial information in this quarterly report includes the results of CEVA, Inc. and its subsidiaries (the “Company” or “CEVA”). CEVA is one of the world’s leading licensor of DSP cores and related application solutions to the semiconductor and electronics industry. For more than ten years, CEVA has been licensing DSP cores and application-specific intellectual property (“IP”) to leading semiconductor and electronics companies worldwide.

We design and license high performance, low-cost, power-efficient embedded DSP cores and integrated application solutions. We license our technology as intellectual property to leading electronics companies, which in turn manufacture, market and sell DSP application specific integrated circuits (“ASICs”) and application specific standard products (“ASSPs”) based on CEVA technology to systems companies for incorporation into a wide variety of end products. Our IP is primarily deployed in high volume wireless (e.g. cellular baseband and application solutions), portable consumer multimedia (e.g. portable digital players), consumer home multimedia (e.g. DVD systems, gaming consoles), storage markets (e.g. hard disk drive), location markets (eg: GPS for automotive and wireless handsets), and communication markets (e.g. serial ATA).

CEVA addresses the requirements of the embedded communications and multimedia markets by designing and licensing programmable DSP cores, system platform, software and system solutions tools which enable the rapid design of embedded DSP and application specific solutions for use across a wide variety of applications. Our solution includes a family of programmable DSP cores with a range of cost, power-efficiency and performance points; associated system-on- chip (SoC) system - - platform (the essential SoC hardware and software infrastructure integrated with the core); and a portfolio of complete system-solutions in the areas of video processing, audio processing, speech processing, GPS location, VoIP communications and Bluetooth communications. Our services division assists our customers in the deployment of their CEVA based solutions.

We believe that the growth in DSP based solutions will drive demand for our technology. We believe that the growing complexity of applications will drive demand for licensing of more powerful and sophisticated cores and solutions to meet the demands of smart, digital connected devices. We also believe that the increased cost, complexity and time-to-market pressures of modern DSP applications, have led companies to license completed system solutions rather than just the core. As CEVA offers expertise in DSP cores combined with integrated system-solutions, we believe we are well positioned to take full advantage of these major industry shifts. To do so we intend to:

 Continue to develop sophisticated cores and SoC platforms. We seek to enhance our existing family of DSP cores and SoC platforms with additional features, performance and capabilities.

 Provide an integrated system-solution. We seek to offer integrated IP solutions which combine application specific software and dedicated logic - such as video processing or GPS - built around our DSP cores, and delivered to our licensing partners as a complete and verified system solution.

 Provide an integrated, open-standard solution. We seek to offer integrated IP solutions which combine application specific software and logic - such as video processing or GPS - built around our DSP cores which further reduces the cost, risk and time-to-market for our licensing partners.

 Capitalize on our relationships and leadership. We seek to expand our worldwide community of semiconductor and system OEM licensees who are developing CEVA based solutions.

 Capitalize on our IP licensing and royalty business model. We seek to maximize the advantages of our IP model which we believe is the best vehicle for pervasive adoption of our technology. Furthermore, by not having to focus on manufacturing or selling of silicon products, we are free to focus most of our resources on research and development.

12

 
RESULTS OF OPERATIONS

Total Revenues

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Total revenues (in millions)
 
$
9.2
 
$
9.2
 
$
10.0
 
Change from fourth quarter 2004
               
9.5
%
Change from first quarter 2004
               
9.0
%

The increase in total revenues over the first quarter of 2004 reflects higher licensing and royalty revenues offset by lower design and consulting service revenues. The increase from the fourth quarter of 2004 reflects higher licensing revenue offset by a seasonal decrease in royalty revenues and lower design and consulting service revenues.

Licensing and royalty revenues accounted for 88% of our total revenues in the first quarter of 2005 compared with 84% and 86% for the first and fourth quarters, respectively, of 2004. One customer accounted for more than 10% of revenues in the first quarter of 2005 compared to two customers in both the first and fourth quarters of 2004. Because of the nature of our license agreements and the associated large initial payments due, our major customers generally vary from quarter to quarter.

The Company generates its revenues from licensing IP, which in certain circumstances is modified to customer-specific requirements. Revenues from license fees that involve customization of the Company’s IP to customer specifications are recognized in accordance with Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. The Company accounts for all of its other IP license revenues in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended.

The Company generates royalties from its licensing activities in two manners: royalties paid by our customers over the period in which they ship units which we refer to as per unit royalties and royalties which are paid in a lump sum which cover a fixed number of future unit shipments which we refer to as prepaid royalties.  The prepaid royalties may be negotiated as part of an initial license agreement or may be subsequently negotiated with an existing licensee who has begun making unit shipments and has used up all of the prepayments covered in their initial license agreement.  In the latter case, we negotiate an additional lump sum payment to cover a fixed number of additional future unit shipments.  In either case, these prepaid royalties are non-refundable payments and are recognized upon invoicing for payment, provided that no future obligation exists.  Only royalty revenue from customers who are paying as they ship units is recognized in our royalty revenue line.  These per unit royalties are invoiced and recognized on a quarterly basis as we receive quarterly shipment reports from our licensees.

Licensing and Royalty Revenues

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Licensing and royalty revenues (in millions)
 
$
7.8
 
$
7.8
 
$
8.8
 
Change from fourth quarter 2004
               
12.8
%
Change from first quarter 2004
               
13.9
%
 
of which:
                   
Licensing revenues (in millions)
 
$
6.6
 
$
5.8
 
$
7.1
 
Change from fourth quarter 2004
               
21.9
%
Change from first quarter 2004
               
7.5
%
Royalty revenues (in millions)
 
$
1.2
 
$
2.0
 
$
1.8
 
Change from fourth quarter 2004
               
(12.9
)%
Change from first quarter 2004
               
49.0
%

The increase in licensing revenue in the first quarter of 2005 over the first and fourth quarters of 2004 reflects continued strength across all product technologies: DSP, GPS 4000 and serial ATA.

The increase in royalty revenue in the first quarter of 2005 over the first quarter of 2004 was driven by increases in the underlying unit shipments of customers’ products incorporating our IP. In particular licensees of our CEVA -Teak and CEVA - -Teaklite cores continued to report increased unit shipments in 2/2.5G baseband cellular and portable audio players, camcorders, disk drive controllers and DSL chips. The decrease from the fourth quarter of 2004 reflects the seasonality of our consumer - oriented licensees’ product shipments.

13

 
We had 22 customers shipping units incorporating our technology offerings at March 31, 2005 compared with 26 at March 31, 2004 and 23 at December 31, 2004. At March 31, 2005 we had 15 customers paying per unit royalty and 7 in prepaid royalty compared to 18 and 8 at the year ago first quarter. At December 31, 2004 we had 15 customers paying per unit royalty and 8 in prepaid royalty.

The five largest customers paying per unit royalty accounted for 74.9% of total royalty revenues in the first quarter of 2005 compared to 77.7% in the first quarter of 2004 and 80.6% in the fourth quarter of 2004. Two customers, including those in prepaid royalty shipped in excess of 5 million units in the first quarter of 2005, compared to one customer in the first quarter of 2004 and two customers in the fourth quarter of 2004.
 
Our customers reported sales of 30 million chips incorporating our technology in the first quarter of 2005, compared with 19 million in the first quarter of 2004 and 33 million in the fourth quarter of 2004. The increase in units shipped in the first quarter of 2005 to the comparable period in 2004 reflects increased unit shipments of our CEVA-Teak and CEVA-Teaklite cores in 2/2.5G baseband cellular and portable audio players, camcorders, disk drive controllers and DSL chips. The decrease from the fourth quarter of 2004 reflects the seasonality of our consumer -oriented licensees’ product shipments.

Other Revenues

Other revenues includes design and consulting services and maintenance and support for licensees. 

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Other revenues (in millions)
 
$
1.4
 
$
1.3
 
$
1.2
 
Change from fourth quarter 2004
               
(10.2
)%
Change from first quarter 2004
               
(17.4
)%

The decrease from the first and fourth quarters of 2004 reflects the completion of design and consultancy services contracts during 2004.

Geographic Revenue Analysis

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
       
(in millions,except percentages)
 
     
United States
 
$
1.8
   
20
%
$
3.8
   
41
%
$
2.2
   
22
%
Europe, Middle East, Africa
 
$
4.1
   
45
%
$
3.2
   
35
%
$
2.5
   
25
%
Asia
 
$
3.3
   
35
%
$
2.2
   
24
%
$
5.3
   
53
%

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 quarter to quarter depending on the timing of deals in each region.

Cost of Revenues

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Cost of revenues (in millions)
 
$
1.5
 
$
1.0
 
$
1.3
 
Change from fourth quarter 2004
               
27.0
%
Change from first quarter 2004
               
(14.4
)%

Cost of revenues accounted for 13% of total revenues for the first quarter of 2005, compared with 16% and 11% for the first and fourth quarters, respectively, of 2004. Gross margins for the first quarter of 2005 were 87%, compared with 84% and 89% for the first and fourth quarters of 2004. The movement in total cost of revenues and gross margins in the first quarter of 2005 compared with the first quarter of 2004 reflects the shift in revenue mix with increased higher gross margin royalty revenue. The movement in total cost of revenues and gross margins compared to the fourth quarter of 2004 reflects an increase in the portion of revenue derived from our percentage to completion type licensing contracts which has a lower margin due to customization that is required coupled with a decrease in higher gross margin royalty revenues.
 
14


Operating Expenses

(in millions)
 
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Research and development, net
 
$
4.0
 
$
4.7
 
$
4.9
 
Sales and marketing
 
$
1.7
 
$
1.8
 
$
1.7
 
General and Administration
 
$
1.5
 
$
1.4
 
$
1.5
 
Amortization of intangible assets
 
$
0.2
 
$
0.2
 
$
0.2
 
Total operating expenses
 
$
7.4
 
$
8.1
 
$
8.3
 
Change from fourth quarter 2004
               
3.1
%
Change from first quarter 2004
               
12.7
%

The increase in total operating expenses in the first quarter of 2005 compared to the first quarter of 2004 principally reflects increased research and development programs. The increase in total operating expenses compared to the fourth quarter of 2004 reflects an increase in research and development programs and increased general and administration costs.


Research and Development Expenses, Net

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Research and development expenses, net (in millions)
 
$
4.0
 
$
4.7
 
$
4.9
 
Change from fourth quarter 2004
               
5.7
%
Change from first quarter 2004
               
22.9
%

The increase in research and development expenses in the first quarter of 2005 compared with the first quarter of 2004 principally reflects a combination of increased headcount and increased sub-contract design across our DSP, GPS 4000 and serial ATA research and development programs. The increase in research and development expenses in the first quarter of 2005 compared with the fourth quarter of 2004 principally reflects an increase in research and development on our multimedia software programs.

The number of research and development personnel was 177 at March 31, 2005, compared with 170 at December 31, 2004, and 154 at March 31, 2004.

Sales and Marketing Expenses

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Sales and Marketing expenses, net (in millions)
 
$
1.7
 
$
1.8
 
$
1.7
 
Change from fourth quarter 2004
               
(7.2
)%
Change from first quarter 2004
               
0.2
%

There was a slight increase in sales and marketing expenses in the first quarter of 2005 compared with the first quarter of 2004. Sales and marketing expenses as a percentage of total revenues were 16.7% for the first quarter of 2005 compared with 18.2% and 19.7% for the first and fourth quarters, respectively, of 2004. The total number of sales and marketing personnel was 20 at March 31, 2005, compared with 21 at December 31, 2004 and 21 at March 31, 2004.

General and Administrative Expenses

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
General and Administrative expenses, net (in millions)
 
$
1.5
 
$
1.4
 
$
1.5
 
Change from fourth quarter 2004
               
8.6
%
Change from first quarter 2004
               
0.8
%

There was marginal movement in general and administrative expenses compared with the first quarter of 2004. The increase in general and administrative expenses compared to the fourth quarter 2004 principally reflects increased professional fees. The number of general and administrative personnel was 36 at both March 31, 2005 and December 31, 2004 compared with 37 at March 31,2004.

15

 
Amortization of Other Intangibles

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Amortization of intangible assets (in millions)
 
$
0.2
 
$
0.2
 
$
0.2
 
Change from fourth quarter 2004
               
0
%
Change from first quarter 2004
               
0
%

The amount of other intangible assets was $3.2 million at March 31, 2004, $2.6 million at December 31, 2004 and $2.5 million at March 31, 2005. We anticipate ongoing expense in connection with the amortization of remaining intangibles of approximately $223,000 per quarter.

Other Income, Net

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Other income, net (in millions)
 
$
0.19
 
$
0.30
 
$
0.33
 
of which:
                   
Interest income (in millions)
 
$
0.18
 
$
0.25
 
$
0.29
 
Foreign exchange gains (in millions)
 
$
0.01
 
$
0.05
 
$
0.04
 

Other income consists of interest earned on investments and foreign exchange movements. The increase in interest earned in the first three months of 2005 compared with the first and fourth quarters of 2004 reflects a combination of a higher interest rate environment and higher combined cash and marketable securities balances held.

We review our monthly expected non-US dollar denominated expenditure and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations and this has resulted in a small foreign exchange impact in the first quarter of 2005 and the first and fourth quarters of 2004.

Provision for Income Taxes

   
First Quarter
2004
 
Fourth Quarter
2004
 
First Quarter
2005
 
Provision for income taxes (in millions)
 
$
0.12
 
$
0.22
 
$
0.16
 

The provisions for income taxes in the first quarter of 2005 and the first and fourth quarters of 2004 reflects profits incurred domestically and in certain foreign jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2005, the Company had approximately $33.2 million in cash and cash equivalents and $27.1 million in marketable securities, totaling $60.3 million compared to $59.6 million at December 31, 2004. During the first quarter of 2005, the Company invested $9.0 million of its cash in certificates of deposits and U.S. government and agency securities with maturities from 4 to 9 months. In addition, certificates of deposits and U.S. government and agency securities were sold for cash amounting to $12.6 million. These instruments are classified as marketable securities and the purchases and sales are considered part of operating cash flow.

Net cash provided by operating activities in the first quarter of 2005 was $4.0 million, compared with $868,000 of net cash used in operating activities for the comparable period in 2004. Included in the operating cash inflow in the first quarter of 2005 were net proceeds of $3.6 million from marketable securities and $0.7 million outflow in connection with restructuring and reorganization costs. Excluding these items net cash provided by operations during the first quarter of 2005 was $1.1 million. The net cash outflow from operating activities for the quarter ended March 31, 2004 included $0.7 million in connection with restructuring and reorganization costs.

Cash flows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts and payments. Of the $2.4 million of restructuring and reorganization costs accrued at March 31, 2005, we expect a cash outflow of approximately $1.7 million in 2005, primarily relating to underutilized building rental payments and employee-related costs, including the repayment of government grants related to the number of employees. Our ongoing cash outflows from operating activities principally relate to payroll-related costs and obligations under our property leases and design tool licenses. Our primary sources of cash inflows are receipts from our accounts receivable and interest earned from our cash and marketable securities holdings. The timing of receipts from trade receivables is based upon the completion of agreed milestones or agreed dates as set out in the contracts.

16


Cash has been used to fund working capital requirements, as well as property and equipment expenditures, which to date have been relatively low due to the fact that our licensing business model requires no manufacturing facilities. Capital equipment purchases of computer hardware and software used in engineering development, company vehicles, furniture and fixtures amounted to approximately $260,000 in the first quarter of 2005 compared to $947,000 for the first quarter of 2004. The high level of capital expenditures in the quarter ended March 31, 2004 was principally due to investment in new design tools and tenant improvements associated with the move of our facility in Israel to new premises. Proceeds from the sale of property and equipment amounted to $6,000 in the first quarter of 2005 and $42,000 for the corresponding period in 2004.

Net cash provided by financing activities of $0.9 million in the first quarter of 2005 and $1.4 million for the corresponding period in 2004 reflects proceeds from the issuance of shares upon the exercise of stock options and the issuance of shares under our employee stock purchase plan.

We believe that our current cash on hand, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot provide assurances however, that the underlying assumed levels of revenues and expenses will prove to be accurate, which would likely detrimentally impact our cash on hand.

   
Payments Due by Period
(in thousands)
 
Contractual Obligations
 
Total
 
Less than 1 year
 
1-3 Years
 
3-5 Years
 
More than 5 years
 
Operating Lease Obligations - Leasehold properties
 
$
30,023
 
$
2,537
 
$
3,997
 
$
3,345
 
$
20,144
 
Operating Lease Obligations - Other
   
1,469
   
957
   
512
   
   
 
Purchase Obligations
   
229
   
229
   
   
   
 
Total
 
$
31,721
 
$
3,723
 
$
4,509
 
$
3,345
 
$
20,144
 

Operating leasehold obligations are principally on our leasehold properties located in the United States, Ireland, Israel and the United Kingdom. An amount of $1.8 million included in Operating Lease Obligations - Leasehold properties has been provided in the restructuring accrual at March 31, 2005.

Other operating lease obligations relate to license agreements entered into for design tools maintenance of $0.4 million and obligations under motor vehicle leases of $1.1 million.

Purchase obligations consist of capital commitments of $229,000.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (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:

Ÿ  
Revenue Recognition
Ÿ  
Allowances for Doubtful Accounts
Ÿ  
Accounting for Income Taxes
Ÿ  
Goodwill
Ÿ  
Other intangible assets
Ÿ  
Reorganization, restructuring and severance charge
Ÿ  
Foreign Currency

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.

17

 
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 the business or market conditions. Management judgments and estimates have been applied consistently and have been reliable historically.

A portion of our revenue is derived from license agreements that entail the customization of our application IP to the customer’s specific requirements. Revenues from initial license fees for such arrangements are recognized in accordance with Statement of Position 81-1, “Accounting for Performance of Construction—Type and Certain Production—Type Contracts”, based on the percentage of completion method over the period from signing of the license through to customer acceptance, as such IP requires significant modification or customization that takes time to complete. The percentage of completion is measured by monitoring progress using records of actual time incurred to date in the project compared with the total estimated project requirement, which corresponds to the costs related to earned revenues. Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology and are reviewed and updated regularly by management.

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. The complexity of the estimation process and the issues related to the assumptions, risks and uncertainties inherent with the application of the percentage of completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and specification and testing requirement changes.

We account for our other IP license revenue in accordance with the provisions of SOP 97-2, “Software Revenue Recognition,” issued by the American Institute of Certified Public Accountants and as amended by SOP 98-4 and SOP 98-9 and related interpretations (collectively, “SOP 97-2”). We exercise judgment and use estimates in connection with the determination of the amount of software license and services revenues to be recognized in each accounting period.

Under SOP 97-2, revenues are recognized when: (1) collectability is probable; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) persuasive evidence of an arrangement exists. SOP 97-2 generally requires revenue earned on licensing arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements, as determined by “vendor specific objective evidence .” Vendor specific objective evidence of fair value for each element of an arrangement is based upon the normal pricing and discounting practices for each element when sold separately, including the renewal rate for support services. We have also adopted SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions” (“SOP 98-9”), for multiple element transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized under the “residual method” when 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 normally is determined based on the price charged for the undelivered element when sold separately.

We assess whether collectability is probable at the time of the transaction based on a number of factors, including the customer’s past transaction history and credit worthiness. If we determine that the collection of the fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon the receipt of cash.

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 sales or purchase element in order to determine the appropriate revenue recognition.

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 specific review of all significant outstanding receivables. In determining the provision, we analyze our historical collection experience and current economic trends. We reassess these allowances each accounting period. Historically, our actual losses and credits have been consistent with these provisions. If actual payment experience with our customers is different than our estimates, adjustments to these allowances may be necessary resulting in additional charges to our statement of operations.

18

 
Accounting for Income Taxes

Significant judgment is required in determining our worldwide income tax expense provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and segregation of foreign and domestic income and expense to avoid double taxation. Although we believe that our estimates are reasonable, the final tax outcome of these matters may be different than that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income (loss) in the period in which such determination is made.

Deferred tax assets and liabilities are determined using enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. We have provided a valuation allowance on the majority of our net deferred tax assets, which includes federal and foreign net operating loss carryforwards, because of the uncertainty regarding their realization. Our accounting for deferred taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”, involves the evaluation of a number of factors concerning the realizability of our deferred tax assets. In concluding that a valuation allowance was required, we primarily considered 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 assets 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 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.
 
We do not provide for US Federal Income taxes on the undistributed earnings of our international subsidiaries because such earnings are re-invested and, in our opinion, will continue to be re-invested indefinitely. In addition, we operate within multiple taxing jurisdictions involving complex issues and we provide for tax liabilities on investment activity as appropriate.
 
Goodwill

Under SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests based on estimated fair value in accordance with SFAS No. 142.
 
We conduct our annual test of impairment for goodwill in October of each year. In addition we test for impairment 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.
 
19


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. 131, “Disclosure About Segments of an Enterprise and Related Information,” as an operating segment or one level lower. We market our products and services in one segment and thus allocate goodwill to one reporting unit. Therefore, impairment is tested at the enterprise level using our market capitalization as fair value. Accordingly, in conducting the first step of this impairment test, we compare the carrying value of our assets and liabilities to our market capitalization. If the carrying value exceeds the fair value, the goodwill is potentially impaired and we then complete the second step in order to measure the impairment loss. If the fair value exceeds the carrying value, the second step in order to measure the impairment loss is not required.

In the second step of the impairment test, the fair value of all the unit’s balance sheet assets and liabilities, as well as the Company’s identifiable intangible assets, excluding goodwill, must be determined at the valuation date. We estimate 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. The discounted cash flows are then compared to the carrying amount of the Company’s assets and liabilities to determine if an impairment exists. If, upon review, the fair value is less than the carrying value, the carrying value is written down to estimated fair value.

Should our market capitalization decline, in assessing the recoverability of our goodwill, we 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 our estimates or their related assumptions change in subsequent periods or if actual cash flows are below our estimates, we may be required to record impairment charges for these assets not previously recorded.

In October 2004, we completed our annual impairment test and assessed the carrying value of goodwill as required by SFAS No. 142. The goodwill impairment test compared the carrying value of the Company (the “reporting unit”) with the fair value at that date. Because the market capitalization exceeded the carrying value significantly, no impairment arose. No indicators of impairment were identified between the date of the annual impairment test and March 31, 2005.

Other Intangible Assets

Other intangible assets represents costs of technology acquired from acquisitions which have reached technological feasibility. The costs of technology have been capitalized and are amortized to the Consolidated Statements of Operations over the period during which benefits are expected to accrue, currently estimated at five years. We are required to test our other intangible assets for impairment whenever events or circumstances indicate that the value of the assets may be impaired. Factors we consider important, which could trigger impairment include:

Ÿ  
significant underperformance relative to expected historical or projected future operating results;
Ÿ  
significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
Ÿ  
significant negative industry or economic trends;
Ÿ  
significant decline in our stock price for a sustained period; and
Ÿ  
significant decline in our market capitalization relative to net book value.

Where events and circumstances are present which indicate that the carrying value may not be recoverable, we will recognize an impairment loss. Such impairment loss is measured by comparing the fair value of the asset with its carrying value. The determination of the value of such intangible assets requires us to make assumptions regarding future business conditions and operating results in order to estimate future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change in the future, we could be required to record additional impairment charges.

Reorganization, restructuring and severance charge
 
We were required to make and are required to review certain estimates and assumptions in assessing the underutilized building operating lease charges arising from the reduction in facility requirements. The underutilized building operating lease charge was calculated by taking into consideration (1) the committed annual rental charge associated with the vacant square footage, (2) an assessment of the sublet rents that could be achieved based on current market conditions, vacancy rates and future outlook, (3) the estimated periods that facilities would be empty before being sublet, (4) an assessment of the percentage increases in the primary lease rent and the sublease rent at each five-year rent review, and (5) the application of a discount rate of 4.75% over the remaining period of the lease. We revise our assumptions quarterly in respect of future vacancy rates and sublet rents in light of current market conditions and our discount rate based on projected interest rates now applicable. There was no effect on net income in the quarter ended March 31, 2005. Revisions to our estimates of this liability could materially impact our operating results and financial position in future periods if anticipated events and assumptions either change or do not materialize. 

20


Foreign Currency

The U.S. dollar is the functional currency for the Company. The majority of our revenues and a portion of our expenses are transacted in U.S. dollars and our assets and liabilities together with our cash holdings are predominately denominated in U.S. dollars. However, a significant portion of our expenses are denominated in currencies other than the U.S. dollar, principally the euro and the Israeli NIS. Assets and liabilities denominated in foreign currencies are translated at year end exchange rates while revenues and expenses are translated at rates approximating those ruling at the dates of the related transactions. Increases in the volatility of the exchange rates of the euro and the NIS versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur when translated into U.S. dollars. We review our monthly expected non-US dollar denominated expenditure and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations and this has resulted in a gain of $42,000 in the first quarter of 2005 and $13,000 and $51,000 in the first and fourth quarters respectively, of 2004.

As a result of currency fluctuations and the conversion to U.S. dollars for financial reporting purposes, we may experience fluctuations in our operating results on an annual and a quarterly basis going forward. We have not in the past, but may in the future, hedge against fluctuations in exchange rates. Future hedging transactions may not successfully mitigate losses caused by currency fluctuations. We expect to continue to experience the effect of exchange rate fluctuations on an annual and quarterly basis, and currency fluctuations could have a material adverse impact on our results of operations.
 
RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant date fair value of those awards (with limited exceptions). SFAS 123R as published was to be effective for the first interim or annual reporting period that begins after June 15, 2005. In March 2005, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) 107, Share-Based Payment, which expresses views of the SEC Staff about the application of SFAS No. 123(R).
 
On April 14, 2005, the SEC announced the adoption of a rule that defers the required effective date of SFAS No. 123R. The SEC rule provides that SFAS No. 123R is now effective for registrants as of the beginning of the first fiscal year beginning after June 15, 2005, instead of at the beginning of the first quarter after June 15, 2005, delaying the required change until January 1, 2006. We are evaluating the requirements of SFAS 123R and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.
 
21

 
FACTORS THAT COULD AFFECT OUR OPERATING RESULTS
 
We caution you that the following important factors, among others, could cause our actual future results to differ materially from those expressed in forward-looking statements made by or on behalf of us in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this quarterly 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.

RISKS RELATING TO OUR MARKETS

The industries in which we license our technology have experienced a challenging period of slow growth that has negatively impacted and could continue to negatively impact our business and operating results.

The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and electronic equipment manufacturers, particularly in the telecommunications field. These industries are highly cyclical and have been subject to significant economic downturns at various times, particularly in recent periods. These downturns are characterized by production overcapacity and reduced revenues, which at times may encourage semiconductor companies or electronic product manufacturers to reduce their expenditure on our technology. During 2001, the semiconductor industry as a whole experienced the most severe contraction in its history, with total semiconductor sales worldwide declining by more than 30%, according to the Semiconductor Industry Association. The market for semiconductors used in mobile communications was particularly hard hit, with the overall decline in sales worldwide estimated by Gartner Dataquest to have been well above 30%. These adverse conditions stabilized but did not improve during the course of 2002. During the course of 2003 and 2004, a recovery appeared to begin although this recovery began to slow in the later half of 2004. If this apparent recovery is not sustained through 2005 and beyond our business could be further materially and adversely affected.
 
The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenue.

The markets for the products in which our technology is used are highly competitive. Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property. It could also cause our existing customers to move their orders to our competitors. Many of our competitors are large companies that have significantly greater financial and other resources than we have.
 
In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of our customers may also decide to satisfy their needs through in-house design and production. We compete on the basis of price, product quality, design cycle time, reliability, performance, customer support, name recognition and reputation, and financial strength. Our inability to compete effectively on these bases could have a material adverse effect on our business, results of operations and financial condition.
 
Our operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and are not a meaningful indicator of future performance.

In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall. Factors that may affect our quarterly results of operations in the future include, among other things:
 
Ÿ  
the timing of the introduction of new or enhanced technologies, as well as the market acceptance of such technologies;
Ÿ  
new product announcements and introductions by competitors;
Ÿ  
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;
Ÿ  
our lengthy sales cycle
Ÿ  
the gain or loss of significant licensees; and
Ÿ  
changes in our pricing policies and those of our competitors.

We rely significantly on revenue derived from a limited number of licensees.

We expect that a limited number of licensees, varying in identity from period-to-period, will account for a substantial portion of our revenues in any period. Moreover, license agreements for our DSP cores have not historically provided for substantial ongoing license payments, although they may provide for royalties based on product shipments. Significant portions of our anticipated future revenue, therefore, will likely depend upon our success in attracting new customers or expanding our relationships with existing customers. Our ability to succeed in these efforts will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products and our sales and marketing skills. Our failure to obtain future customer licenses would impede our future revenue growth.

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We depend on market acceptance of third-party semiconductor intellectual property.

Our future growth will depend on the level of acceptance by the market of our third-party, licensable intellectual property model and the variety of intellectual property offerings available on the market, which to a large extent are not in our control. If the market shifts and third-party semiconductor IP is no longer desired by our customers, our business, results of operations and financial condition could be materially harmed.

We depend on the success of our licensees to promote our solutions in the marketplace.

We do not sell our technology directly to end-users; we license our technology primarily to semiconductor companies and to electronic equipment manufacturers, who then incorporate our technology into the products they sell. Because we do not control the business practices of our licensees, we do not influence the degree to which they promote our technology or set the prices at which they sell products incorporating our technology. We cannot assure you that our licensees will devote satisfactory efforts to promote our solutions. In addition, our unit royalties from licenses are totally dependent upon the success of our licensees in introducing products incorporating our technology and the success of those products in the marketplace. If we do not retain our current licensees and continue to attract new licensees, our business may be harmed.

We depend on a limited number of key personnel who would be difficult to replace.

Our success depends to a significant extent upon our key employees and senior management; the loss of the service of these employees could materially harm us. Competition for skilled employees in our field is intense. We cannot assure you that we will be successful in attracting and retaining the required personnel.

RISKS RELATING TO OUR
SEPARATION FROM DSP GROUP

We could be subject to joint and several liability for taxes of DSP Group.

As a former member of a group filing consolidated income tax returns with DSP Group, we could be liable for federal income taxes of DSP Group and other members of the consolidated group, including taxes, if any, incurred by DSP Group on the distribution of our stock to the stockholders of DSP Group. DSP Group has agreed to indemnify us against these taxes, other than taxes for which we have agreed to indemnify DSP Group pursuant to the terms of the tax indemnification and allocation agreement and separation agreement we entered into with DSP Group.



ADDITIONAL RISKS RELATING TO OUR BUSINESS

Our success will depend on our ability to manage our geographically dispersed operations successfully.

Although we are headquartered in San Jose, California, 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 our remote operations, our business may be 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 some of our directors and executive officers are residents of, Israel. Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel 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 for active military duty at any time. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service.

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If we are unable to meet the changing needs of our end-users or to address evolving market demands, our business may be harmed.

The markets for programmable DSP cores and application IP are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, requiring significant expenditure for research and development. We cannot assure you that we will be able to introduce systems and solutions that reflect prevailing industry standards on a timely basis, to meet the specific technical requirements of our end-users or to avoid significant losses due to rapid decreases in market prices of our products, and our failure to do so may seriously harm our business. In addition, the reduction in the number of our employees in connection with our recent restructuring efforts could adversely affect our ability to attract or retain customers who require certain R&D capabilities from their IP providers.

We may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses.

We may pursue acquisitions of businesses, products and technologies, or establish joint venture arrangements in the future that could expand our business. The negotiation of potential acquisitions or joint ventures, as well as the integration of acquired or jointly developed businesses, technologies or products could cause diversion of management’s time and our resources. We may not be able to successfully integrate acquired businesses or joint ventures with our operations. If we were to make any acquisition or enter into a joint venture, we may not receive the intended benefits of the acquisition or joint venture. If future acquisitions or joint ventures disrupt our operations, or if we have difficulty integrating the businesses or technologies we acquire, our business, financial condition and results of operations could suffer.

We may not be able to adequately protect our intellectual property.

Our success and ability to compete depend in large part upon the protection of our proprietary technologies. We rely on a combination of patent, copyright, trademark, trade secret, mask work and other intellectual property rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others. As a result, we face risks associated with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us without infringing our patents and the possibility that our products may infringe patent rights of third parties.

Our trade names or trademarks may be registered or utilized by third parties in countries other than those in which we have registered them, impairing our ability to enter and compete in these markets. If we were forced to change any of our brand names, we could lose a significant amount of our brand equity.

Our business will suffer if we are sued for infringement of the intellectual property rights of third parties or if we cannot obtain licenses to these rights on commercially acceptable terms.

Although we are not currently involved in any litigation, we are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. There are a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active. We have not, and cannot reasonably, investigate all such patents. From time to time, we have become aware of patents in our technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our business, and we will continue to seek such counsel when appropriate in the future. Claims against us 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 OEMs 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 the revenues from the licensing of our products has been derived in any period from a relatively small number of licensees. Because of the substantial license fees we charge, our customers tend to be large semiconductor companies or vertically integrated system OEMs. Part of our current growth strategy is to broaden the adoption of our products by small to mid-size companies by offering different versions of our products, targeted at these companies. In addition we plan to continue expanding our sales to include additional geographies. Asia, in particular, is a region we have targeted for growth. If we are unable to effectively develop and market 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 harm our business and results of operations.

24

 
Our independent registered public accounting firm may qualify in their attestation on the adequacy of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

The Securities and Exchange Commission, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on internal controls over financial reporting in their annual reports on Form 10-K that contain an assessment by management of the effectiveness of the Company’s internal controls over financial reporting. In addition, the Company’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the internal controls over financial reporting. Although we intend to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with the Section 404 requirements on an annual basis, if our independent registered public accounting firm is not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules and/or regulations differently from us, then they may decline to attest to management’s assessment or may issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our consolidated financial statements, which ultimately could negatively impact our stock price.
 
Changes in accounting rules for stock-based compensation may adversely affect our operating results, our stock price and our competitiveness in the employee marketplace.

We have a history of using employee stock options and other stock-based compensation to hire, motivate and retain our workforce.  Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment, as amended” will require us, starting in 2006, to measure compensation costs for all stock-based compensation (including stock options and our employee stock purchase plan) at fair value and to recognize these costs as expenses in our statements of operations.  The recognition of these expenses in our statements of operations will result in lower net income (loss) per share, which could negatively impact our future stock price.  In addition, if we reduced or alter our use of stock-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which could put us at a competitive disadvantage in the employee marketplace.
 

ADDITIONAL RISKS RELATING TO OUR
INTERNATIONAL 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 costs.

We enjoy certain tax benefits in Israel, particularly as a result of the “Approved Enterprise” status of our facilities and programs. To maintain our eligibility for these tax benefits, we must continue to meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations. We believe that we will be able to continue to meet such conditions. Should we fail to meet such conditions in the future, however, these benefits would be cancelled and we would be subject to corporate tax in Israel at the standard rate of 36% and could be required to refund tax benefits already received. In addition, we cannot assure you that these grants and tax benefits will be continued in the future at their current levels or otherwise. The termination or reduction of certain programs and tax benefits (particularly benefits available to us as a result of the Approved Enterprise status of our facilities and programs) or a requirement to refund tax benefits already received may seriously harm our business, operating results and financial condition.

Our corporate tax rate may increase, which could adversely impact our cash flow, financial condition and results of operations.

We have significant operations in the Republic of Ireland and a substantial portion of our taxable income historically has been generated there. Currently, some of our Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates. Although there is no expectation of any changes to Irish tax law, if our Irish subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating results could be materially adversely affected. In addition, because our Irish and Israeli operations are owned by subsidiaries of a U.S. corporation, distributions to the U.S. corporation, and in certain circumstances undistributed income of the subsidiaries, may be subject to U.S. tax. Moreover, if U.S. or other foreign tax authorities were to change applicable foreign tax laws or successfully challenge the manner in which our subsidiaries’ profits are currently recognized, our overall taxes could increase, and our business, cash flow, financial condition and results of operations could be materially adversely affected.

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Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A majority of our revenues and a portion of our expenses are transacted in U.S. dollars and our assets and liabilities together with our cash holdings are predominately denominated in U.S. dollars. However, the bulk of our expenses are denominated in currencies other than the U.S. dollar, principally the euro and the Israeli NIS. Increases in the volatility of the exchange rates of the euro and the NIS versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur when translated into U.S. dollars. We review our monthly expected non-US dollar denominated expenditure and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations and this has resulted in a gain of $42,000 in the first quarter of 2005 and $13,000 and $51,000 in the first and fourth quarters respectively, of 2004.

As a result of currency fluctuations and the conversion to U.S. dollars for financial reporting purposes, we may experience fluctuations in our operating results on an annual and a quarterly basis going forward. We have not in the past, but may in the future, hedge against fluctuations in exchange rates. Future hedging transactions may not successfully mitigate losses caused by currency fluctuations. We expect to continue to experience the effect of exchange rate fluctuations on an annual and quarterly basis, and currency fluctuations could have a material adverse impact on our results of operations.

We invest our cash in high grade certificates of deposits and U.S. government and agency securities. Cash held by foreign subsidiaries is generally held in short-term time deposits denominated in the local currency.

Net interest income was $293,000 in the first quarter of 2005 and $176,000 and $249,000 in the first and fourth quarters respectively, of 2004. We are 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.

We are exposed to financial market risks, including changes in interest rates. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term. We do not have any derivative instruments.
 
Item 4.    CONTROLS AND PROCEDURES

Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) during the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were (1) designed to ensure that information relating to CEVA, including our consolidated subsidiaries, is made known to them by others within those entities, particularly in the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
As we disclosed in our 10-K/A filed with the SEC on April 26, 2005 (the "10-K/A"), during the first quarter of 2005, we began analyzing the steps to be taken to remediate the material weakness described in our 10-K/A. We plan to complete the following remediation actions during 2005:
 
·  
perform a comprehensive review of all past and future agreements when we are entering into a new revenue generating agreement with a customer where we have an existing relationship with this party such as an existing customer, supplier or service provider relationship;
 
·  
require accounting and finance personnel to receive regular training and updates on revenue recognition; and
 
·  
retain a third party accounting firm to consult on complicated technical accounting issues.
 
We believe that these corrective actions, taken as a whole, will remediate the material weakness referenced above, but we will continue to monitor the effectiveness of these actions and will make any other changes or take such other actions as management and our board of directors determines to be appropriate. During the first quarter of 2005 we took the following steps as part of these remediation efforts: 
 
·  
set up procedures to ensure that a comprehensive review of all past and future agreements is undertaken when we are entering into a new revenue generating agreement with a customer where we have an existing relationship with this party such as an existing customer, supplier or service provider relationship; and
 
·  
retained a third party accounting firm to consult on complicated technical accounting issues.
 
We are in the process of scheduling training and updates for our accounting and finance personnel on revenue recognition policies.
 
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PART II.    OTHER INFORMATION
Item 1.    LEGAL PROCEEDINGS

The Company is not 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. 
 
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Item 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit
No.
 
Description
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32
 
Section 1350 Certification of Chief Executive Officer and Principal Financial Officer

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
CEVA, INC.
 
Date: May 10, 2005
By:    /s/ GIDEON WERTHEIZER
 
Gideon Wertheizer
Chief Executive Officer
(principal executive officer)
 
Date: May 10, 2005
 
By:    /s/    JOHN BOURKE
 
John Bourke
Vice President of Finance & Controller 
(principal financial officer and principal accounting officer)
 
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INDEX TO EXHIBITS

Exhibit
No.
 
Description
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32
 
Section 1350 Certification of Chief Executive Officer and Principal Financial Officer
 
30