e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended:
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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Commission File Number 001-33299
MELLANOX TECHNOLOGIES,
LTD.
(Exact name of registrant as
specified in its charter)
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Israel
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98-0233400
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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Mellanox Technologies, Ltd.
Hermon Building, Yokneam, Israel 20692
(Address of principal executive
offices, including zip code)
+972-4-909-7200
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Ordinary shares, nominal value NIS 0.0175 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K/A
or any amendment to this
Form 10-K/A. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the registrants common
stock, NIS 0.0175 par value per share, held by
non-affiliates of the registrant on June 30, 2007, the last
business day of the registrants most recently completed
second fiscal quarter, was approximately $254.6 million
(based on the closing sales price of the registrants
common stock on that date). Shares of common stock held by each
director and executive officer of the registrant, as well as
shares held by each holder of more than 5% of the common stock
known to the registrant, have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate
status is not a determination for other purposes.
The total number of shares outstanding of the Registrants
ordinary shares, nominal value NIS 0.0175 per share, as of
February 29, 2008, was 31,141,303.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement, to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A in connection with the 2008 Annual Meeting
of Shareholders of Mellanox Technologies, Ltd. (hereinafter
referred to as the Proxy Statement) are incorporated
by reference in Part III of this report. Such Proxy
Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the conclusion of
the registrants fiscal year ended December 31, 2007.
MELLANOX
TECHNOLOGIES, LTD.
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PART I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. We have based
these forward-looking statements largely on our current
expectations and projections about future events and financial
trends affecting the financial condition of our business.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such
performance or results will be achieved. Forward-looking
statements are based on information available at the time those
statements are made
and/or
managements good faith belief as of that time with respect
to future events, and are subject to risks and uncertainties
that could cause actual performance or results to differ
materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause
such differences include, but are not limited to:
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levels of capital spending in the semiconductor industry, in
general, and in the market for high-performance interconnect
products, specifically;
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our ability to achieve new design wins;
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our ability to successfully introduce new products;
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competition and competitive factors;
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our dependence on a relatively small number of customers;
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our ability to expand our presence with existing customers;
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our ability to protect our intellectual property;
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future costs and expenses; and
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other risk factors included under Risk Factors in
this report.
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In addition, in this report, the words believe,
may, will, estimate,
continue, anticipate,
intend, expect, predict,
potential and similar expressions, as they relate to
Mellanox, our business and our management, are intended to
identify forward-looking statements. In light of these risks and
uncertainties, the forward-looking events and circumstances
discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the
forward-looking statements.
You should not put undue reliance on any forward-looking
statements. We assume no obligation to update forward-looking
statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information,
except to the extent required by applicable laws. If we update
one or more forward-looking statements, no inference should be
drawn that we will make additional updates with respect to those
or other forward-looking statements.
Overview
We are a leading supplier of semiconductor-based,
high-performance interconnect products that facilitate data
transmission between servers, communications infrastructure
equipment and storage systems. Our products are an integral part
of a total solution focused on computing, storage and
communication applications used in enterprise data centers,
high-performance computing and embedded systems. We are one of
the pioneers of InfiniBand, an industry standard architecture
that provides specifications for high-performance interconnects.
We believe that we are the leading merchant supplier of
field-proven InfiniBand-compliant semiconductor products that
deliver industry-leading performance and capabilities, which we
believe is demonstrated by the performance, efficiency and
scalability of clustered computing and storage systems that
incorporate our products. In addition to supporting InfiniBand,
our latest generation of products also supports the industry
standard Ethernet interconnect specification, which we believe
provides unique product differentiation and connectivity
flexibility that expands our total addressable market.
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We are a fabless semiconductor company that provides
high-performance interconnect products based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our ICs. These ICs are added to servers,
storage, communications infrastructure equipment and embedded
systems by either integrating them directly on circuit boards or
inserting adapter cards into slots on the circuit board. Since
we introduced our first product in 2001, we have shipped
products containing over 2.8 million InfiniBand ports (as
of December 31, 2007), which we believe demonstrates an
established customer and end-user base for our products. We have
begun shipment of our Ethernet products. We have established
significant expertise with high-performance interconnect
solutions from successfully developing and implementing multiple
generations of our products. Our expertise enables us to develop
and deliver products that serve as building blocks for creating
reliable and scalable InfiniBand and Ethernet solutions with
leading performance at significantly lower cost than products
based on alternative interconnect solutions.
As the leading merchant supplier of InfiniBand ICs, we play a
significant role in enabling the providers of computing, storage
and communications applications to deliver high-performance
interconnect solutions. We have developed strong relationships
with our customers, many of which are leaders in their
respective markets. Our products are included in servers from
the five largest vendors, IBM, Hewlett-Packard, Dell, Sun
Microsystems and Fujitsu-Siemens, which collectively shipped the
majority of servers in 2007, according to the industry research
firm IDC. We also supply leading storage and communications
infrastructure equipment vendors such as Cisco Systems, LSI
Corporation, Network Appliance, QLogic Corporation, and
Voltaire. Additionally, our products are used by GE Fanuc,
Mercury Computers, SeaChange International and other vendors of
embedded systems.
In order to accelerate adoption of our high-performance
interconnect solutions and our products, we work with leading
vendors across related industries, including:
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processor vendors such as Intel, AMD, IBM and Sun Microsystems;
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operating system vendors such as Microsoft, Novell and Red
Hat; and
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software applications vendors such as Oracle, IBM and VMWare.
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We are a Steering Committee member of the InfiniBand Trade
Association, or IBTA, and the OpenFabrics Alliance, or OFA, both
of which are industry trade organizations that maintain and
promote InfiniBand technology. Additionally, OFA recently
expanded its charter to support and promote Ethernet solutions.
We are also a participating member of the IEEE organization
which facilitates the advancement of the Ethernet standard as
well as other industry organizations advancing various
networking and storage related standards.
Our business headquarters are in Santa Clara, California,
and our engineering headquarters are in Yokneam, Israel. During
the years ended December 31, 2005, 2006 and 2007 we
generated approximately $42.1 million, $48.5 million
and $84.1 million in revenues, respectively, and
approximately $3.2 million, $7.2 million and
$35.6 million in net income, respectively.
Industry
Background
High-Performance
Interconnect Market Overview
Computing and storage systems such as servers, supercomputers
and storage arrays handling large volumes of data require
high-performance interconnect solutions which enable fast
transfer of data and efficient sharing of resources.
Interconnect solutions are based on ICs that handle data
transfer and associated processing which are added to server,
storage, communications infrastructure equipment and embedded
systems by either integrating the ICs on circuit boards or by
inserting adapter cards that contain these ICs into slots on the
circuit board.
Interconnect solution requirements, such as high bandwidth, low
latency (response time), reliability, scalability and
price/performance, generally depend on the systems and the
applications they support. High-performance interconnect
solutions are used in the following markets:
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Enterprise Data Center, or EDC. EDCs are
facilities that house servers, storage, communications
infrastructure equipment and embedded systems that enable
deployment of commercial applications such as customer
relationship management, financial trading and risk management
applications, enterprise
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resource planning,
E-commerce
and web service applications. EDCs typically provide multiple
data processing and storage resources to one or many
organizations and are capable of supporting several applications
at the same time.
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High-Performance Computing, or HPC. HPC
encompasses applications that utilize the computing power of
advanced parallel processing over multiple servers, commonly
called a supercomputer. The expanding list of HPC applications
includes financial modeling, government research, computer
automated engineering, geoscience and bioscience research and
digital content creation. HPC systems typically focus data
processing and storage resources on one application at a time.
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Embedded. Embedded applications encompass
computing, storage and communication functions that use
interconnect solutions contained in a chassis which has been
optimized for a particular environment. Examples of embedded
applications include storage and data acquisition equipment,
military operations, industrial and medical equipment and
telecommunications and data communications infrastructure
equipment.
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A number of semiconductor-based interconnect solutions have been
developed to address different applications. These solutions
include proprietary technologies as well as standard
technologies including Fibre Channel, Ethernet and most recently
InfiniBand, which was specifically created for high-performance
computing, storage and embedded applications.
Trends
Affecting High-Performance Interconnect
Demand for computing power and data storage capacity is rising
at a high rate, fueled by the increasing reliance of enterprises
on information technology, or IT, for everyday operations.
Because enterprises rely on compute- and data-intensive
applications that create greater amounts of information to be
processed, stored and retrieved, they need high-performance
computing and high-capacity storage systems that optimize
price/performance, minimize total cost of ownership and simplify
management. We believe that several IT trends impact the demand
for interconnect solutions and the performance required from
these solutions. These trends include:
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Transition to blade systems, clustered computing and storage
using connections among multiple standard
components. Historically, enterprises addressed
the requirements for high-end computing and storage using
monolithic systems, which are based on proprietary components.
These systems typically require significant upfront capital
expenditures as well as high ongoing operating and maintenance
expense. More recently, enterprises have deployed systems with
multiple
off-the-shelf
standardized servers and storage systems linked by high-speed
interconnects, also known as clusters. Clustering enables
significant improvements in performance, reliability,
scalability, cost, and power savings. The need for better
utilization of floor space and power consumption has driven the
adoption of compact form factor (size and shape) blade servers.
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Transition to multiple and multi-core processors in
servers. In order to increase processing
capabilities, processor vendors have integrated multiple
computing cores into a single processor device. In addition,
server OEMs are incorporating several multi-core processors into
a single server. While this significantly increases the
computing capabilities of an individual server, the total
performance of a cluster of these servers is impacted by the
total input/output, or I/O, bandwidth. Inadequate cluster I/O
bandwidth results in processor underutilization, thereby
reducing the overall capability and performance of the cluster.
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Enterprise data center infrastructure
consolidation. IT managers are increasingly faced
with the need to optimize total cost of ownership associated
with the EDCs they manage. They are focused on reducing the
costs associated with running multiple networks, such as power
consumption and cabling, increasing flexibility and scalability,
and improving the utilization of existing resources in the EDC.
This has led to a widespread trend of consolidating the EDC
infrastructure to reduce costs and generate a higher return on
IT investments.
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Increasing deployment of virtualized computing
resources. Enterprises are turning to
virtualization software, which allows multiple applications to
run on a single server, thereby improving resource utilization
and requiring increased I/O bandwidth in the EDC.
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Increasing deployments of mission-critical, latency sensitive
applications. There is an increasing number of
applications that require extremely fast response times in order
to deliver an optimal result or user experience. Reducing
latency, the absolute time it takes for information to be sent
from one resource to another over a high-performance
interconnect, is critical to enhancing application performance
in clustered environments. Some examples of applications that
benefit from low-latency interconnect include financial trading,
clustered databases and parallel processing solutions used in
HPC.
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Challenges
Faced by High-Performance Interconnect
The trends described above indicate that high-performance
interconnect solutions will play an increasingly important role
in IT infrastructures and will drive strong growth in unit
demand. Performance requirements for interconnect solutions,
however, continue to evolve and lead to high demand for
solutions that are capable of resolving the following challenges
to facilitate broad adoption:
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Performance limitations. In clustered
computing and storage environments, high bandwidth and low
latency are key requirements to capture the full performance
capabilities of a cluster. With the usage of multiple multi-core
processors in server, storage and embedded systems, I/O
bandwidth has not been able to keep pace with processor
advances, creating performance bottlenecks. Fast data access has
become a critical requirement to accommodate
microprocessors increased compute power. In addition,
interconnect latency has become a limiting factor in a
clusters overall performance.
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Increasing complexity. The increasing usage of
clustered servers and storage systems as a critical IT tool has
led to an increase in complexity of interconnect configurations.
The number of configurations and connections have also
proliferated in EDCs, making them increasingly complicated to
manage and expensive to operate. Additionally, managing multiple
software applications utilizing disparate interconnect
infrastructures has become increasingly complex.
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Interconnect inefficiency. The deployment of
clustered computing and storage has created additional
interconnect implementation challenges. As additional computing
and storage systems, or nodes, are added to a cluster, the
interconnect must be able to scale in order to provide the
expected increase in cluster performance. Additionally, recent
government attention on data center energy efficiency is causing
IT managers to look for ways to adopt more energy-efficient
implementations.
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Limited reliability and stability of
connections. Most interconnect solutions are not
designed to provide reliable connections when utilized in a
large clustered environment, which can cause data transmission
interruption. As more applications in EDCs share the same
interconnect, advanced traffic management and application
partitioning become necessary to maintain stability and reduce
system down time. Such capabilities are not offered by most
interconnect solutions.
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Poor price/performance economics. In order to
provide the required system bandwidth and efficiency, most
high-performance interconnects are implemented with complex,
multi-chip semiconductor solutions. These implementations have
traditionally been extremely expensive.
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In addition to InfiniBand, proprietary and other
standards-based, high-performance interconnect solutions,
including Fibre Channel and Ethernet, are currently used in EDC,
HPC and embedded markets. Performance and usage requirements,
however, continue to evolve and are now challenging the
capabilities of these interconnect solutions:
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Proprietary interconnect solutions have been designed for use in
supercomputer applications by supporting low latency and
increased reliability. These solutions are only supported by a
single vendor for product and software support, and there is no
standard organization maintaining and facilitating improvements
and changes to the technology. One such proprietary interconnect
technology is Myrinet, which has been deployed at 2 gigabits per
second, or Gb/s (a unit of data transfer rate). Myrinet
solutions now support
10Gb/s in
addition to providing connectivity to 10Gb/s Ethernet
switch equipment, although still requiring proprietary software
solutions. The number of supercomputers that use proprietary
interconnect solutions has been declining largely due to the
availability of industry standards-based interconnects that
offer
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superior price/performance, a lack of compatible storage
systems, and the required use of proprietary software solutions.
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Fibre Channel is an industry standard interconnect solution
limited to storage applications. The majority of Fibre Channel
deployments support 2Gb/s while recently announced solutions
support 4Gb/s and 8Gb/s. Fibre Channel lacks a standard software
interface, does not provide server cluster capabilities and
remains more expensive relative to other standards-based
interconnects. There have been recent industry efforts to
support the Fibre Channel data transmission protocol over
interconnect technologies including Ethernet (Fibre Channel over
Ethernet or FCoE) and InfiniBand (Fibre Channel over InfiniBand
or FCoIB).
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Ethernet is an industry-standard interconnect solution that was
initially designed to enable basic connectivity between a local
area network of computers or over a wide area network, where
latency, connection reliability and performance limitations due
to communication processing are non-critical. While Ethernet has
a broad installed base at 1 Gb/s and lower data rates, its
overall efficiency, scalability and reliability have been less
optimal than certain alternative interconnect solutions in
high-performance computing, storage and communication
applications. A recent increase to 10Gb/s, a significant
reduction in application latency and more efficient software
solutions have improved Ethernets capabilities to address
specific high-performance applications that do not demand the
highest scalability. There are also on-going efforts to
standardize additional features within the Ethernet
specification to improve its reliability and scalability in EDCs
which is generically referred to as Data Center Ethernet or
Converged Enhanced Ethernet.
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In the HPC, EDC and embedded markets, the predominant
interconnects are 1Gb/s Ethernet and 4Gb/s Fibre Channel. Based
on our knowledge of the industry, we believe there is
significant demand for interconnect products that provide higher
bandwidth in these markets.
Overview
of the InfiniBand Standard and OpenFabrics
InfiniBand is an industry standard, high-performance
interconnect architecture that effectively addresses the
challenges faced by the IT industry by enabling cost-effective,
high-speed data communications. We believe that InfiniBand has
significant advantages compared to alternative interconnect
technologies. InfiniBand defines specifications for designing
host channel adapters, or HCAs, that fit into standard,
off-the-shelf
servers and storage systems, and switch solutions that connect
all the systems together. The physical connection of multiple
HCAs and switches is commonly known as an InfiniBand fabric.
The InfiniBand standard was developed under the auspices of
InfiniBand Trade Association, or IBTA, which was founded in 1999
and is composed of leading IT vendors and hardware and software
solution providers including Mellanox, Brocade, Cisco Systems,
Fujitsu, Hewlett-Packard, Hitachi, IBM, Intel, LSI Corporation,
NEC, QLogic Corporation, Sun Microsystems and Voltaire. The IBTA
tests and certifies vendor products and solutions for
interoperability and compliance. Our products meet the
specifications of the InfiniBand standard and have been tested
and certified by the IBTA.
The OpenFabrics Alliance, or OFA, is an organization responsible
for the development and distribution of open-source,
industry-standard software solutions that are compatible with
InfiniBand hardware solutions. Founded in June 2004 as the
OpenIB Alliance and a partner organization to IBTA, OFAs
initial sole charter was to develop InfiniBand software
solutions that are interoperable among multiple vendors. As a
result of its success at developing standard InfiniBand software
solutions, the organization expanded its charter in March 2006
to leverage its software development capabilities over other
interconnect solutions including Ethernet, and changed its name
from OpenIB to OpenFabrics. OFAs members include leading
enterprise IT vendors, hardware and software solution providers
including Mellanox, AMD, Cisco Systems, Hewlett-Packard, IBM,
Intel, Network Appliance and Sun Microsystems in addition to
national laboratory end users such as Sandia, Los Alamos,
Lawrence Livermore National Laboratories and financial services
end-user Credit Suisse.
InfiniBand solutions may be perceived to have disadvantages to
products based on other existing interconnect standards that
have been available for longer periods of time with larger
installed bases. These perceived disadvantages include the
requirement for additional software support, new cabling and
equipment infrastructure and a limited number of
enterprise-class storage solutions, which impacted early
adoption rates of InfiniBand. In
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addition, a continuing challenge is educating the IT community
about the advantages of InfiniBand and increasing familiarity
with InfiniBand relative to other interconnect standards. With
the solutions now offered by OFA in addition to key industry
software providers, InfiniBand software support has become
widely available and is included in leading operating systems,
in addition to production released software solutions for
mainstream financial, retail and other commercial applications,
contributing to increased adoption rates. In addition, we
believe superior price performance of InfiniBand has justified
the costs of new cabling and equipment infrastructure. Finally,
InfiniBand-based enterprise-class storage solutions have
recently been introduced and deployed.
We believe the primary driver of InfiniBand product shipments in
the near future is the increasing usage of InfiniBand in
servers, storage and communications infrastructure equipment.
Based on data provided by IDC in May 2007 in a report called
Worldwide InfiniBand
2007-2011
Forecast, the number of InfiniBand HCAs expected to ship
to the market will increase at a 50% compound annual growth rate
(CAGR) from 124K in 2006 to 936K in 2011. IDC also forecasts
that the number of InfiniBand switch ports expected to ship to
the market will increase at a 53% CAGR from 177K ports in 2006
to 1.47M ports in 2011. IDC credits the growth of InfiniBand
usage to increasing deployment in high-performance computing
(HPC), scale-out database, shared virtualized I/O, and financial
services environments.
Advantages
of InfiniBand
We believe that InfiniBand-based solutions have significant
advantages compared to solutions based on alternative
interconnect architectures. InfiniBand addresses the significant
challenges within IT infrastructures created by more demanding
requirements of the high-performance interconnect market. More
specifically, we believe that InfiniBand has the following
advantages:
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Superior performance. In comparison to other
interconnect technologies that were architected to have a heavy
reliance on communication processing, InfiniBand was designed
for implementation in an IC that relieves the central processing
unit, or CPU, of communication processing functions. InfiniBand
is able to provide superior bandwidth and latency relative to
other existing interconnect technologies and has maintained this
advantage with each successive generation of products. For
example, our current InfiniBand adapters provide bandwidth up to
40Gb/s, and our current switch ICs support bandwidth up to
120Gb/s, which is significantly higher than the 10Gb/s or less
supported by competing technologies. The InfiniBand
specification supports the design of interconnect products with
up to 120Gb/s bandwidth, which is the highest performance
industry-standard interconnect specification. In addition,
InfiniBand fully leverages the I/O capabilities of PCI Express,
a high-speed bus interface standard.
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The following table provides a bandwidth comparison of the
various high performance interconnect solutions.
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Proprietary
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Fibre Channel
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Ethernet
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InfiniBand
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Supported bandwidth of available solutions
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2Gb/s 10Gb/s
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2Gb/s 8Gb/s
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1Gb/s 10Gb/s
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10Gb/s 40Gb/s
server-to-server
30Gb/s 120Gb/s
switch-to-switch
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Highest bandwidth supported
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10Gb/s
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8Gb/s
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10Gb/s
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120Gb/s
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Performance in terms of latency varies depending on system
configurations and applications. According to recent independent
benchmark reports, latency of InfiniBand solutions was less than
half of that of tested 10Gb/s Ethernet and proprietary
solutions. Fibre Channel, which is used only as a storage
interconnect, is typically not benchmarked on latency
performance. HPC typically demands low latency interconnect
solutions. In addition, there is an increasing number of
latency-sensitive applications in the EDC and embedded markets,
and, therefore, there is a trend towards using industry-standard
InfiniBand and 10Gb/s Ethernet solutions that deliver lower
latency than Gigabit Ethernet, which is predominantly used today.
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Reduced complexity. While other interconnects
require use of individual cables to connect servers, storage and
communications infrastructure equipment, InfiniBand allows for
the consolidation of multiple I/Os on a single cable or
backplane interconnect, which is critical for blade servers and
embedded systems. InfiniBand
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also consolidates the transmission of clustering,
communications, storage and management data types over a single
connection. Competing interconnect technologies are not well
suited to be unified fabrics because their fundamental
architectures are not designed to support multiple traffic
types. Additionally, InfiniBand was designed to enable
distributed, clustered systems to be centrally managed and
controlled for more efficient and simplified overall system
management.
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Highest interconnect efficiency. InfiniBand
was developed to provide efficient scalability of multiple
systems. InfiniBand provides communication processing functions
in hardware, relieving the CPU of this task, and enables the
full resource utilization of each node added to the cluster. In
addition, InfiniBand incorporates Remote Direct Memory Access
which is an optimized data transfer protocol that further
enables the server processor to focus on application processing.
This contributes to optimal application processing performance.
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Reliable and stable connections. InfiniBand is
the only industry standard high-performance interconnect
solution which provides reliable
end-to-end
data connections. In addition, InfiniBand facilitates the
deployment of virtualization solutions, which allow multiple
applications to run on the same interconnect with dedicated
application partitions. As a result, multiple applications run
concurrently over stable connections, thereby minimizing down
time.
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Superior price/performance economics. In
addition to providing superior performance and capabilities,
standards-based InfiniBand solutions are generally available at
a lower cost than other high-performance interconnects. By
facilitating clustering and reducing complexity, InfiniBand
offers further opportunity for cost reduction.
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Our
Solution
We provide comprehensive solutions based on InfiniBand,
including HCA and switch ICs, adapter cards and software.
InfiniBand enables us to provide products that we believe offer
superior performance and meet the needs of the most demanding
applications, while also offering significant improvements in
total cost of ownership compared to alternative interconnect
technologies. For example, our current InfiniBand HCAs provide
bandwidth up to 40Gb/s and our switch ICs provide bandwidth up
to 120Gb/s per interface, which is significantly higher than the
10Gb/s or less supported by competing technologies. As part of
our comprehensive solution, we perform validation and
interoperability testing from the physical interface to the
applications software. Our expertise in performing validation
and testing reduces time to market for our customers and
improves the reliability of the fabric solution.
Data provided in the most recent list of the Worlds
Fastest Supercomputers published by TOP500.org in November 2007
illustrates the benefits of our solution. TOP500.org is an
independent organization that was founded in 1993 to provide a
reliable basis for reporting trends in high-performance
computing by publishing a list of the most powerful computers
twice a year. The number of listed InfiniBand-based
supercomputers has grown from 82 as of November 2006 to 125 as
of November 2007, which represents a 52% increase. The November
2007 TOP500 list also illustrates that InfiniBand interconnects
have continued to replace interconnects in supercomputers based
on proprietary interconnect technologies, which had a 70%
decline since the November 2006 list (less than 6% of the list).
We believe that the majority of these InfiniBand-based
supercomputers incorporate our HCA products and that all of them
use our switch silicon products. Additionally, we believe the
current cluster implementations that incorporate both our HCA
and switch silicon products in the November 2007 TOP500 list of
the Worlds Fastest Supercomputers compare favorably to
clusters based on other interconnect technologies.
Specifically, clusters that incorporate our products compare
favorably versus Ethernet as follows:
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Performance. Performance of clusters is
measured in GFLOPS, where one GFLOPS represents one billion
mathematical calculations per second. Clusters that utilize our
products average approximately 16,300 GFLOPS, while clusters
based on Gigabit Ethernet technology average 8,000 GFLOPS.
According to the November 2007 TOP500 list of Worlds
Fastest Supercomputers, there were no clusters reported using
10 Gigabit Ethernet technology.
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9
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Efficiency. Efficiency is measured by the
actual performance achieved divided by the theoretical maximum
performance. Clusters that utilize our products average 70%
efficiency, compared to 52% for clusters that utilize Gigabit
Ethernet.
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Scalability. Clusters that utilize our
products average approximately 2,700 CPUs per cluster, compared
to an average of 1,700 CPUs per cluster for clusters that
utilize Gigabit Ethernet. There is a strong dependency on the
reliability and fault tolerance capabilities of a high
performance interconnect when determining the scalability of a
cluster.
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Providing
Connectivity to InfiniBand and Ethernet
In addition to supporting InfiniBand, our latest generation
adapter products also support the industry standard Ethernet
interconnect specification at both 1Gb/s and 10Gb/s. These
products extend certain InfiniBand advantages to Ethernet
fabrics, such as reduced complexity and superior
price/performance, by utilizing existing, field-proven
InfiniBand software solutions. These software solutions include
applications, operating systems, communication protocols, and
virtualization and management packages used in EDC, HPC and
embedded markets. Integrating InfiniBand and Ethernet in the
same product provides our OEM customers and partners the ability
to support both interconnect standards with a single development
effort and provides end-users the flexibility to choose between
fabrics or simultaneously connect to both depending on the
environment and performance requirements.
The figure below illustrates our unified software strategy that
enables applications to utilize industry-standard communication
protocols to seamlessly interface with the leading fabric
technologies including:
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10, 20 and 40Gb/s InfiniBand including Fibre Channel over
InfiniBand
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1 and 10Gb/s Ethernet including Fibre Channel over Ethernet
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Data Center Ethernet/Converged Enhanced Ethernet
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We believe that InfiniBand solutions will continue to deliver
superior price/performance when compared to any other high
performance interconnect technology because of its base
architecture, proven scalability, reliability and feature set.
At the same time, as Ethernet is a widely deployed interconnect
technology, we expect there will be an increasing number of
deployments at 10Gb/s in EDCs. The ability of our next
generation adapter product to support high-performance
connectivity to both InfiniBand and Ethernet allows us to
provide products to an expanding number of applications and
environments.
10
Our
Strengths
We apply our strengths to enhance our position as a leading
supplier of semiconductor-based, high-performance interconnect
products. We consider our key strengths to include the following:
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We have expertise in developing high-performance interconnect
solutions. Mellanox was founded by a team with an
extensive background in designing and marketing semiconductor
solutions. Since our founding, we have been focused on
high-performance interconnect and have successfully launched
several generations of InfiniBand products in addition to
launching our first Ethernet products. We believe we have
developed strong competencies in integrating mixed-signal
design, including industry-leading data transmission technology
such as Serializer/Deserializer, or SerDes, and developing
complex ICs. We have used these competencies along with our
knowledge of InfiniBand to design our innovative, next
generation, high-performance products that also support the
Ethernet interconnect standard. We also consider our software
development capability as a key strength, and we believe that
our software allows us to offer complete solutions. We have
developed a significant portfolio of intellectual property, or
IP, and have 15 approved patents. We believe our experience,
competencies and IP will enable us to remain a leading supplier
of high-performance interconnect solutions.
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We believe we are the leading merchant supplier of InfiniBand
ICs with a multi-year competitive advantage. We
have developed in-depth knowledge of the InfiniBand standard
through active participation in its development. We were first
to market with InfiniBand products in 2001 and InfiniBand
products that support the standard PCI Express interface
(in 2004) and PCI Express 2.0 interface (in 2007). We have
sustained our leadership position through the introduction of
several generations of products. Because of our market
leadership, vendors have developed and continue to optimize
their software products based on our semiconductor solutions. We
believe that this places us in an advantageous position to
benefit from continuing market adoption of our products.
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We have a comprehensive set of technical capabilities to
deliver innovative and reliable products. In
addition to designing our ICs, we design standard adapter card
products and custom adapter card and switch products, providing
us a deep understanding of the associated circuitry and
component characteristics. We believe this knowledge enables us
to develop solutions that are innovative and can be efficiently
implemented in target applications. We have devoted significant
resources to develop our in-house test development capabilities,
which enables us to rapidly finalize our mass production test
programs, thus reducing time to market. We have synchronized our
test platform with our outsourced testing provider and are able
to conduct quality control tests with minimal disruption. We
believe that because our capabilities extend from product
definition, through IC design, and ultimately management of our
high-volume manufacturing partners, we have better control over
our production cycle and are able to improve the quality,
availability and reliability of our products.
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We have extensive relationships with our key OEM customers
and many end users. Since our inception we have
worked closely with major OEMs, including leading server,
storage, communications infrastructure equipment and embedded
systems vendors, to develop products that accelerate market
adoption of InfiniBand. During this process we have obtained
valuable insight into the challenges and objectives of our
customers, and gained visibility into their product development
plans. We also have established end-user relationships with
influential IT executives which allow us access to firsthand
information about evolving EDC, HPC and embedded market trends.
We believe that our OEM customer and end-user relationships
allow us to stay at the forefront of developments and improve
our ability to provide compelling solutions to address their
needs.
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Our
Strategy
Our goal is to be the leading supplier of semiconductor-based,
high-performance interconnect products for computing, storage
and communications applications. To accomplish this goal, we
intend to:
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Continue to develop leading, high-performance interconnect
products. We will continue to expand our
technical expertise and customer relationships to develop
leading interconnect products. We are focused on extending our
leadership position in high-performance interconnect technology
and pursuing a product
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development plan that addresses emerging customer and end-user
demands and industry standards. In order to expand our market
opportunity, we have added products that are compatible with the
Ethernet interconnect standard in addition to InfiniBand. These
products will allow our customers to capture certain advantages
of InfiniBand while providing connectivity to Ethernet-based
infrastructure equipment. Our unified software strategy is to
use a single software stack to support connectivity to
InfiniBand and Ethernet with the same hardware adapter device.
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Facilitate and increase the continued adoption of
InfiniBand. We will facilitate and increase the
continued adoption of InfiniBand in the high-performance
interconnect marketplace by expanding our partnerships with key
vendors that drive high-performance interconnect adoption, such
as suppliers of processors, operating systems and other
associated software. In conjunction with our OEM customers, we
will continue to promote the benefits of InfiniBand directly to
end users to increase demand for InfiniBand-based solutions.
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Expand our presence with existing server OEM
customers. We believe the leading server vendors
are influential drivers of high-performance interconnect
technologies to end users. We plan to continue working with and
expanding our relationships with server OEMs to increase our
presence in their current and future product platforms.
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Broaden our customer base with storage, communications
infrastructure and embedded systems OEMs. We
believe there is a significant opportunity to expand our global
customer base with storage, communications infrastructure and
embedded systems OEMs. In storage solutions specifically, we
believe our products are well suited to replace existing
technologies such as Fibre Channel. We believe our products are
the basis of superior interconnect fabrics for unifying
disparate storage interconnects, including back-end, clustering
and front-end connections, primarily due to its ability to be a
unified fabric and superior price/performance economics.
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Leverage our fabless business model to deliver strong
financial performance. We intend to continue
operating as a fabless semiconductor company and consider
outsourced manufacturing of our ICs and adapter cards to be a
key element of our strategy. Our fabless business model offers
flexibility to meet market demand and allows us to focus on
delivering innovative solutions to our customers. We plan to
continue to leverage the flexibility and efficiency offered by
our business model to deliver strong financial results.
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Our
Products
We provide complete solutions which are based on and meet the
specifications of the InfiniBand standard in addition to
products that also support the Ethernet standard. Our InfiniBand
products including adapter ICs and cards
(InfiniHosttm
product family) and switch ICs
(InfiniScaletm
product family). Our latest 4th generation adapter and cards
(ConnectXtm
product family) also support the Ethernet interconnect standard
in addition to InfiniBand.
We provide adapters to server, storage, communications
infrastructure and embedded systems OEMs as ICs or standard card
form factors with PCI-X or PCI Express interfaces. Adapter ICs
or cards are incorporated into OEM server and storage systems to
provide InfiniBand
and/or
Ethernet connectivity. All of our adapter products interoperate
with standard programming interfaces and are compatible with
previous generations, providing broad industry support. We also
support server operating systems including Linux, Windows, AIX,
HPUX, OSX, Solaris and VxWorks.
We provide our InfiniBand switch ICs to server, storage,
communications infrastructure and embedded systems OEMs to
create switching equipment that is at the core of InfiniBand
fabrics. To deploy an InfiniBand fabric, any number of server or
storage systems that contain an HCA can be connected to an
InfiniBand-based communications infrastructure system such as an
InfiniBand switch. We have recently introduced our
4th
generation switch IC (InfiniScale IV).
12
The figure below illustrates the components of servers and
storage equipment clustered with a high-performance interconnect
and how our products are incorporated into the total solution.
Our products generally vary by the number and performance of
InfiniBand
and/or
Ethernet ports supported. The tables below summarize the
available adapter and switch ICs that Mellanox provides.
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Uni-Directional
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InfiniBand
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# InfiniBand
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Bandwidth
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Total
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Adapter ICs and Cards
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Host Interface
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Port Interface
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Ports
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per Port
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Bandwidth(3)
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InfiniBridge(1)
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PCI(2)
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InfiniBand
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8
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2.5Gb/s
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40Gb/s
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2
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10Gb/s
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40Gb/s
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InfiniHost
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PCI-X(2)
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InfiniBand
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2
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10Gb/s
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40Gb/s
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InfiniHost III Lx
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PCI Express
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InfiniBand
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1
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20Gb/s
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40Gb/s
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InfiniHost III Ex
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PCI Express
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InfiniBand
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2
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20Gb/s
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80Gb/s
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ConnectX
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PCI Express 2.0
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InfiniBand and/or
Ethernet
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2
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20Gb/s
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80Gb/s
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ConnectX EN
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PCI Express 2.0
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Ethernet
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2
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10Gb/s
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40Gb/s
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Uni-Directional
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InfiniBand
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# InfiniBand
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Bandwidth
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Total
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Switch ICs
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Ports
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per Port
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Bandwidth(3)
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InfiniBridge(1)
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8
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2.5Gb/s
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40Gb/s
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2
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10Gb/s
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40Gb/s
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InfiniScale
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8
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10Gb/s
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160Gb/s
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InfiniScale III
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24
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20Gb/s
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960Gb/s
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8
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60Gb/s
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960Gb/s
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InfiniScale IV
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36
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40Gb/s
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2880Gb/s
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12
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120Gb/s
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2880Gb/s
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(1) |
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InfiniBridgetm
functions as both an HCA and switch and is our first generation
device. |
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PCI and PCI-X are the predecessor interface standards to PCI
Express. |
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Total bandwidth is the aggregate bandwidth of all input and
output ports operating simultaneously. |
We also offer custom products that incorporate our ICs to select
server and storage OEMs that meet their special system
requirements. Through these custom product engagements we gain
insight into the OEMs technologies and product strategies.
13
We also provide our OEM customers software and tools that
facilitate the use and management of our products. Developed in
conjunction with the OFA, our Linux- and Windows-based software
enables applications to utilize the features of the interconnect
efficiently. We have expertise in optimizing the performance of
software that spans the entire range of upper layer protocols
down through the lower level drivers that interface to our
products. We also provide basic software tools for managing,
testing and verifying the operation of InfiniBand fabrics.
Technology
We have technological core competencies in the design of
high-performance interconnect ICs that enable us to provide a
high level of integration, efficiency, flexibility and
performance for our adapter and switch ICs. Our products
integrate multiple complex components onto a single IC,
including high-performance mixed-signal design, specialized
communication processing functions and advanced interfaces.
High-performance
mixed-signal design
One of the key technology differentiators of our ICs is our
mixed-signal SerDes technology. SerDes I/O directly drives the
interconnect interface, which provides signaling and
transmission of data over copper interconnects and cables, or
fiber optic interfaces for longer distance connections. We are
the only company that has shipped field-proven integrated
controller ICs that operate with a 5Gb/s SerDes over a ten meter
InfiniBand copper cable (up to 60Gb/s connections with 12 SerDes
working in parallel on our switch IC). Additionally, we are able
to integrate several of these high-performance SerDes onto a
single, low-power IC, enabling us to provide the highest
bandwidth, merchant switch ICs based on an industry-standard
specification. We have developed a 10Gb/s SerDes I/O that is
intended for use in our
4th
generation ConnectX adapter that supports both InfiniBand and
Ethernet as well as our 4th generation InfiniScale IV
switch IC that supports InfiniBand. Our 10Gb/s SerDes enables
our ConnectX adapters to support 40Gb/s bandwidth (4 10Gb/s
SerDes operating in parallel) in addition to providing a direct
10Gb/s connection to standard XFP and SFP+ fiber modules to
provide long range Ethernet connectivity without the requirement
of additional components saving power, cost and board space. In
addition, our 10Gb/s SerDes supports 40Gb/s (4 10Gb/s SerDes
operating in parallel) as well as 120Gb/s (12 10Gb/s SerDes
operating in parallel) port bandwidth on our InfiniScale IV
switch IC.
Specialized
communication processing and switching functions
We also specialize in high-performance, low-latency design
architectures that incorporate significant memory and logic
areas requiring proficient synthesis and verification. Our
adapter ICs are specifically designed to perform communication
processing, effectively offloading this very intensive task from
server and storage processors in a cost-effective manner. Our
switch ICs are specifically designed to switch cluster
interconnect data transmissions from one port to another with
high bandwidth and low latency, and we have developed a packet
switching engine and non-blocking crossbar switch fabric to
address this.
We have developed a custom embedded Reduced Instruction Set
Computer processor called
InfiniRISCtm
that specializes in offloading network processing from the host
server or storage system and adds flexibility, product
differentiation and customization. We integrate a different
number of these processors in a device depending on the
application and feature targets of the particular product.
Integration of these processors also shortens development cycles
as additional features can be added by providing new programming
packages after the ICs are manufactured, and even after they are
deployed in the field.
Advanced
interfaces
In addition to InfiniBand and Ethernet interfaces, we also
provide other industry-standard, high-performance advanced
interfaces such as PCI Express and PCI Express 2.0 which also
utilize our mixed-signal 2.5Gb/s and 5Gb/s SerDes I/O
technology. PCI Express is a high-speed
chip-to-chip
interface which provides a high-performance interface between
the adapter and processor in server and storage systems. PCI
Express and our high-performance interconnect interfaces are
complementary technologies that facilitate optimal bandwidth for
data transmissions along the entire connection starting from a
processor of one system in the cluster to another processor in a
different system. We were among the first to market with an IC
solution that integrates the PCI Express interface (2004), and
PCI
14
Express 2.0 interface (2007) and we believe this
demonstrates an example of the technical proficiency of our
development team.
Not only has PCI Express increased the performance of our
products, but it has lowered cost, reduced power consumption,
minimized board area requirements and increased the overall
reliability of card and system products using our adapter ICs by
enabling a technology we call MemFree. Typically, memory is
designed onto high- performance adapter cards in addition to the
controller in order to store fabric connection information that
is required for cluster data transmission. With the introduction
of the high bandwidth PCI Express interface, the servers
or storage systems main memory can be used for this
purpose instead, and we have designed MemFree adapter card
solutions that are completely free of additional memory
components.
The below diagrams depict our ConnectX adapter IC and
InfiniScale IV switch IC architecture.
ConnectX
Adapter IC Architecture
InfiniScale IV
InfiniBand Switch IC Architecture
15
Customers
EDC, HPC and embedded end-user markets for systems utilizing our
products are mainly served by leading server, storage and
communications infrastructure OEMs. In addition, our customer
base includes leading embedded systems OEMs that integrate
computing, storage and communication functions that use
high-performance interconnect solutions contained in a chassis
which has been optimized for a particular environment.
Representative OEM customers in these areas include:
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Communications
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Server
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Storage
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Infrastructure Equipment
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Embedded Systems
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Dell
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Isilon Systems
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Cisco Systems
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GE Fanuc
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Hewlett-Packard
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LSI Corporation
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QLogic Corporation
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Mercury Computer Systems
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IBM
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Network Appliance
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Voltaire
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SeaChange International
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Sun Microsystems
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We sold products to more than 200 customers worldwide in the
year ended December 31, 2007, many of whom are at the
evaluation stage of their product development. We currently
anticipate that several of these evaluations will result in
increased orders for our products as they move into the
production stage.
In the year ended December 31, 2007, sales to
Hewlett-Packard accounted for 19% of our total revenues, sales
to Voltaire accounted for 15% of our total revenues, sales to
Cisco Systems and QLogic Corporation accounted for 11%, each, of
our total revenues.
Sales and
Marketing
We sell our products worldwide through multiple channels,
including our direct sales force and our network of domestic and
international sales representatives. We have strategically
located sales personnel in the United States, Europe, China and
Taiwan. Our sales directors focus their efforts on leading OEMs
and target key decision makers. We are also in frequent
communication with our customers and partners sales
organizations to jointly promote our products and partner
solutions into end-user markets. We have dedicated specific
resources to promote the benefits of our products to end users,
which we believe creates additional demand for our
customers products that incorporate our products.
Our sales support organization is responsible for supporting our
sales channels and managing the logistics from order entry to
delivery of products to our customers. In addition, our sales
support organization is responsible for customer and revenue
forecasts, customer agreements and program management for our
large, multi-national customers. Customers within the United
States are supported by our support staff in California and
customers outside of the United States are supported by our
support staff in Israel.
To accelerate design and qualification of our products into our
OEM customers systems, and ultimately the deployment of
our technology by our customers to end users, we have a field
applications engineering, or FAE, team and an internal support
engineering team that provide direct technical support. In
certain situations, our OEM customers will also utilize our
expertise to support their end-user customers jointly. Our
technical support personnel have expertise in hardware and
software, and have access to our development team to ensure
proper service and support for our OEM customers. Our FAE team
provides OEM customers with design and review capabilities of
their systems in addition to technical training on the
technology we have implemented in our products.
Our marketing team is responsible for product strategy and
management, future product plans and positioning, pricing,
product introductions and transitions, competitive analysis,
marketing communications and raising the overall visibility of
our company. The marketing team works closely with both the
sales and research and development organizations to properly
align development programs and product launches with market
demands.
16
Our marketing team leads our efforts to promote our interconnect
technology and our products to the entire industry by:
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assuming leadership roles within IBTA, OFA and other industry
trade organizations;
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participating in trade shows, press and analyst briefings,
conference presentations and seminars for end-user
education; and
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building and maintaining active partnerships with industry
leaders whose products are important in driving InfiniBand and
Ethernet adoption, including vendors of processors, operating
systems and software applications.
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Research
and Development
Our research and development team is composed of experienced
semiconductor designers, software developers and system
designers. Our semiconductor design team has extensive
experience in all phases of complex, high-volume design,
including product definition and architecture specification,
hardware code development and mixed-signal design and
verification. Our software team has extensive experience in
development, verification, interoperability testing and
performance optimization of software for use in computing and
storage applications. Their efforts are focused on standard,
open-source software stacks, drivers, management software and
tools that work together with our IC and card products. Our
systems design team has extensive experience in all phases of
high-volume adapter card and custom switch designs including
product definition and architectural specification, product
design and design verification.
We design our products with careful attention to quality,
reliability, cost and performance requirements. We utilize a
methodology called Customer Owned Tooling, or COT, where we
control and manage a significant portion of timing and layout
design and verification in-house, before sending the
semiconductor design to our third-party manufacturer. Although
COT requires a significant up-front investment in tools and
personnel, it provides us with greater control over the quality
and reliability of our IC products as opposed to relying on
third-party verification services.
We choose first tier technology vendors for our
state-of-the-art
design tools and continue to maintain long-term relationships
with our vendors to ensure timely support and updates. We also
select a mainstream silicon manufacturing process only after it
has proven its production worthiness for at least one year. We
verify that actual silicon characterization and performance
measurements strongly correlate to models that were used to
simulate the device while in design, and that our products meet
frequency, power and thermal targets with good margins.
Furthermore, we insert
Design-for-Test
circuitry into our IC products which increases product quality,
provides expanded debugging capabilities and ultimately enhances
system-level testing and characterization capabilities once the
device is integrated into our customers products. In
addition, we use an internally developed tool that examines IC
designs before sending them for manufacturing that is proven to
increase the yield (and consequently reduce device cost) by
increasing the performance margin on critical design areas.
Frequent interaction between our silicon, software and systems
design teams gives us a comprehensive view of the requirements
necessary to deliver quality, high-performance products to our
OEM customers.
Manufacturing
We depend on third-party vendors to manufacture, package and
production test our products as we do not own or operate a
semiconductor fabrication, packaging or production testing
facility. By outsourcing manufacturing, we are able to avoid the
high cost associated with owning and operating our own
facilities. This allows us to focus our efforts on the design
and marketing of our products.
Manufacturing and Testing. We use Taiwan
Semiconductor Manufacturing Company, or TSMC, to manufacture and
Advanced Semiconductor Engineering, or ASE, to assemble, package
and production test our IC products. We use Flextronics to
manufacture our standard adapter card products and custom
adapter cards and switch systems. We maintain close
relationships with our suppliers, which improves the efficiency
of our supply chain. We focus on mainstream processes,
materials, packaging and testing platforms, and have a
continuous
17
technology assessment program in place to choose the appropriate
technologies to use for future products. We provide all of our
suppliers a
12-month
rolling forecast, and receive their confirmation that they are
able to accommodate our needs on a monthly basis. We have access
to on-line production reports that provide
up-to-date
status information of our products as they flow through the
manufacturing process. On a quarterly basis, we review
lead-time, yield enhancements and pricing with all of our
suppliers to obtain the optimal cost for our products.
Quality Assurance. We maintain an ongoing
review of product manufacturing and testing processes. Our
IC products are subjected to extensive testing to assess
whether their performance exceeds the design specifications. We
own an in-house Teradyne Tiger IC tester which provides us with
immediate test data and generates of characterization reports
that we make available to our customers. Our adapter cards and
custom switch system products are subject to similar levels of
testing and characterization, and are additionally tested for
regulatory agency certifications such as Safety and EMC
(radiation test) which are made available to our customers. We
only use components on these products that are qualified to be
on our approved vendor list.
Requirements Associated with OCS. Israeli law
requires that we manufacture our products developed with
government grants in Israel unless we otherwise obtain approval
from the Office of the Chief Scientist of Israels Ministry
of Industry Trade and Labor, or the OCS. This approval, if
provided, is generally conditioned on an increase in the total
amount to be repaid to the OCS, ranging from 120% to 300% of the
amount of funds granted. The specific increase would depend on
the extent of the manufacturing to be conducted outside of
Israel. The restriction on manufacturing outside of Israel does
not apply to the extent that we disclosed our plans to
manufacture outside of Israel when we filed the application for
funding (and provided the application was approved based on the
information disclosed in the application). We have indicated our
intent to manufacture outside of Israel on some of our grant
applications, and the OCS has approved the manufacture of our IC
products outside of Israel, subject to our undertaking to pay
the OCS royalties from the sales of these products up to 120% of
the amount of OCS funds granted. The manufacturing of our IC
products outside of Israel, including those products
manufactured by TSMC and ASE, is in compliance with the terms of
our grant applications and applicable provisions of Israeli law.
Under applicable Israeli law, Israeli government consent is
required to transfer to Israeli third parties technologies
developed under projects funded by the government. Transfer of
OCS-funded technologies outside of Israel is permitted with the
approval of the OCS and in accordance with the restrictions and
payment obligations set forth under Israeli law. Israeli law
further specifies that both the transfer of know-how as well as
the transfer of IP rights in such know-how are subject to the
same restrictions. These restrictions do not apply to exports
from Israel or the sale of products developed with these
technologies.
Employees
As of December 31, 2007, we had 228 full-time
employees and 38 part time employees located in the
United States and Israel, including 195 in research and
development, 40 in sales and marketing, 23 in general and
administrative and 8 in operations. Of our 228 full-time
employees, 186 are located in Israel.
Certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel)
and the Coordination Bureau of Economic Organizations (including
the Industrialists Associations) are applicable to our
employees in Israel by order of the Israeli Ministry of Labor.
These provisions primarily concern the length of the workday,
minimum daily wages for professional workers, pension fund
benefits for all employees, insurance for work-related
accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. We generally
provide our employees with benefits and working conditions
beyond the required minimums. Further, in addition to salary and
other benefits, certain of our sales personnel are paid
commissions based on our performance in certain territories
worldwide.
Israeli law generally requires severance pay equal to one
months salary for each year of employment upon the
retirement, death or termination without cause (as defined in
the Israel Severance Pay Law) of an employee. To satisfy this
requirement, we make contributions on behalf of most of our
employees to a fund known as Managers Insurance. This fund
provides a combination of retirement plan, insurance and
severance pay benefits to the employee, giving the employee or
his or her estate payments upon retirement or death and securing
the severance pay, if legally entitled, upon termination of
employment. Each full-time employee is entitled to participate
in the plan, and each employee who participates contributes an
amount equal to 5% of his or her salary to the retirement
18
plan and we contribute between 13.33% and 15.83% of his or her
salary (consisting of 5% to the retirement plan, 8.33% for
severance payments and up to 2.5% for insurance).
Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. Such
amounts also include payments by the employee for national
health insurance. The total payments to the National Insurance
Institute are equal to approximately 14.5% of the wages (up to a
specified amount), of which the employee contributes
approximately 66% and the employer contributes approximately 34%.
We have never experienced any employment-related work stoppages
and believe our relationship with our employees is good.
Intellectual
Property
One of the key values and drivers for future growth of our
high-performance interconnect IC products is the IP we develop
and use to improve them. We believe that the main value
proposition of our high-performance interconnect products and
success of our future growth will depend on our ability to
protect our IP. We rely on a combination of patent, copyright,
trademark, mask work, trade secret and other IP laws, both in
the United States and internationally, as well as
confidentiality, non-disclosure and inventions assignment
agreements with our employees, customers, partners, suppliers
and consultants to protect and otherwise seek to control access
to, and distribution of, our proprietary information and
processes. In addition, we have developed technical knowledge,
which, although not patented, we consider to be significant in
enabling us to compete. The proprietary nature of such
knowledge, however, may be difficult to protect and we may be
exposed to competitors who independently develop the same or
similar technology or gain access to our knowledge.
The semiconductor industry is characterized by frequent claims
of infringement and litigation regarding patent and other IP
rights. We, like other companies in the semiconductor industry,
believe it is important to aggressively protect and pursue our
IP rights. Accordingly, to protect our rights, we may file suit
against parties whom we believe are infringing or
misappropriating our IP rights. These measures may not be
adequate to protect our technology from third party infringement
or misappropriation, and may be costly and may divert
managements attention away from
day-to-day
operations. We may not prevail in these lawsuits. If any party
infringes or misappropriates our IP rights, this
infringement or misappropriation could materially adversely
affect our business and competitive position.
As of December 31, 2007, we had 15 issued patents and 22
patent applications pending in the U.S., 5 issued patents in
Taiwan and 6 applications pending in Israel, each of which
covers aspects of the technology in our products. The term of
any issued patent in the United States is 20 years from its
filing date and if our applications are pending for a long time
period, we may have a correspondingly shorter term for any
patent that may be issued. Our present and future patents may
provide only limited protection for our technology and may not
be sufficient to provide competitive advantages to us.
Furthermore, we cannot assure you that any patents will be
issued to us as a result of our patent applications.
In addition to our own IP, we also rely on third-party
technologies for the development of our interconnect
IC products. Pursuant to a license agreement dated
September 10, 2001, Vitesse Semiconductor Corporation, or
Vitesse, a provider of high-speed physical layer semiconductor
products for the communications market, has granted us a
non-exclusive, worldwide, perpetual right and license to use and
incorporate into our Infiniband products Vitesses 2.5Gb/s
SerDes macro cell implemented in TSMCs 0.18 micron
Complementary Metal-Oxide Semiconductor, or CMOS, processes. We
have agreed only to use Vitesses technology licensed under
the agreement for integrated SerDes applications. In exchange
for this license, we have agreed to pay a royalty to Vitesse
based on the total number of devices sold by us that use
Vitesses technology. In February 2008 Vitesse discharged
us from paying royalty payments due under this agreement.
Pursuant to a separate license agreement dated December 16,
2002, Vitesse has also granted us a non-exclusive, worldwide,
perpetual right and license to use and incorporate into our
InfiniBand products Vitesses 3.1Gb/s SerDes macro cell
implemented in TSMCs 0.13 micron CMOS processes. In
exchange for this license, we have agreed to make interim
payments to Vitesse based on the total number of devices sold by
us that use Vitesses
19
technology, subject to certain caps and limitations. We have
guaranteed a $2 million payment pursuant to this agreement
and amounts relating to this agreement were paid in full by
January 31, 2007.
We have registered Mellanox,
InfiniBridge, InfiniHost,
InfiniPCI, InfiniRISC and
InfiniScale as trademarks in the United States. We
have a trademark application pending to register
ConnectX.
Competition
The markets in which we compete are highly competitive and are
characterized by rapid technological change, evolving industry
standards and new demands on features and performance of
interconnect solutions. We compete primarily on the basis of:
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price/performance;
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time to market;
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features and capabilities;
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wide availability of complementary software solutions;
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reliability;
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power consumption;
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customer support; and
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product roadmap.
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We believe that we compete favorably with respect to each of
these criteria. Many of our current and potential competitors,
however, have longer operating histories, significantly greater
resources, greater economies of scale, stronger name recognition
and a larger base of customers than we do. This may allow them
to respond more quickly than we are able to respond to new or
emerging technologies or changes in customer requirements. In
addition, these competitors may have greater credibility with
our existing and potential customers. They may be able to
introduce new technologies, respond more quickly to changing
customer requirements or devote greater resources to the
development, marketing and sales of their products than we can.
Furthermore, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we
are unable to do so.
We compete with other providers of semiconductor-based high
performance interconnect products based on InfiniBand, Ethernet,
Fibre Channel and proprietary technologies. With respect to
InfiniBand products, we compete with QLogic Corporation. In
EDCs, products based on the InfiniBand standard primarily
compete with two different industry-standard interconnect
technologies, namely Ethernet and Fibre Channel. For Ethernet
technology, the leading IC vendors include Marvell Technology
Group and Broadcom Corporation. The leading IC vendors that
provide Ethernet and Fibre Channel products to the market
include Emulex Corporation and QLogic Corporation. In HPC,
products based on the InfiniBand standard primarily compete with
the industry-standard interconnect technologies used in EDCs
mentioned above, in addition to proprietary technologies
including Myrinet, based on ICs that are developed by Myricom
only. In embedded markets, we typically compete with
interconnect technologies that are developed in-house by system
OEM vendors and created for specific applications.
Additional
Information
We were incorporated under the laws of Israel in March 1999. Our
ordinary shares began trading on the NASDAQ Global Market as of
February 8, 2007 under the symbol MLNX and on
Tel-Aviv Stock Exchange as of July 9, 2007 under the symbol
MLNX. Prior to February 8, 2007, our ordinary
shares were not traded on any public exchange.
Our principal executive offices in the United States are located
at 2900 Stender Way, Santa Clara, California 95054,
and our principal executive offices in Israel are located at
Hermon Building, Yokneam, Israel 20692. Substantially all of our
assets are located in Israel. Our telephone number in
Santa Clara, California is
(408) 970-3400,
and our telephone number in Yokneam, Israel is +972-4-909-7200.
Michael Gray is our agent for
20
service of process in the United States, and is located at our
principal executive offices in the United States. Our website
address is www.mellanox.com. Information contained on our
website is not a part of this annual report and the inclusion of
our website address in this annual report is an inactive textual
reference only.
Website
Access to Company Reports and Corporate Governance
Documents
We post on the Investor Relations pages of our website,
www.mellanox.com, a link to our filings with the SEC, our Code
of Business Conduct and Ethics, our Complaint and Investigation
Procedures for Accounting, Internal Accounting Controls, Fraud
or Auditing Matters and the charters of our Audit, Compensation,
Disclosure and Nominating and Corporate Governance committees of
our board of directors. Our filings with the SEC are posted as
soon as reasonably practical after they are electronically filed
with, or furnished to, the SEC. You can also obtain copies of
these documents, without charge to you, by writing to us at:
Investor Relations,
c/o Mellanox
Technologies, Inc., 2900 Stender Way, Santa Clara,
California 95054 or by emailing us at: ir@mellanox.com. All
these documents and filings are available free of charge. Please
note that information contained on our website is not
incorporated by reference in, or considered to be a part of,
this report. Further, a copy of this annual report on
Form 10-K
is located at the SECs Public Reference Room at
100 F Street, NE, Washington, D.C. 20549.
Information on the operation of the Public Reference Room can be
obtained by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding our
filings at www.sec.gov.
Investing in our ordinary shares involves a high degree of
risk. You should carefully consider the following risk factors,
in addition to the other information set forth in this report,
before purchasing our ordinary shares. Each of these risk
factors could harm our business, financial condition or
operating results, as well as decrease the value of an
investment in our ordinary shares.
Risks
Related to Our Business
We
have a history of losses, have only recently become profitable
and may not sustain or increase profitability in the
future.
We have only recently become profitable, and we first recorded a
profit in the year ended December 31, 2005. We incurred net
losses prior to the quarter ended June 30, 2005 and
incurred a net loss during the quarter ended March 31,
2006. Although we recorded a profit in the years ended
December 31, 2006 and 2007, as of December 31, 2007 we
had an accumulated deficit of approximately $33.7 million.
We may not be able to sustain or increase profitability on a
quarterly or an annual basis. This may, in turn, cause the price
of our ordinary shares to decline. To sustain or increase our
profitability, we will need to generate and sustain
substantially higher revenues while maintaining reasonable cost
and expense levels. We expect to increase expense levels in each
of the next several quarters to support increased research and
development, sales and marketing and general and administrative
efforts. These expenditures may not result in increased revenues
or customer growth, and we may not remain profitable.
We do
not expect to sustain our recent revenue growth rate, which may
reduce our share price.
Our revenues have grown rapidly over the last four years,
approximately doubling in size from each of 2003 to 2004 and
2005, and increasing by 15% and 73% in 2006 and 2007,
respectively. Our revenues increased from $10.2 million to
$20.3 million to $42.1 million to $48.5 million
and to $84.1 million for the years ended December 31,
2003, 2004, 2005, 2006 and 2007, respectively. We do not expect
to sustain our recent growth rate in future periods. You should
not rely on the revenue growth of any prior quarterly or annual
periods as an indication of our future performance. If we are
unable to maintain adequate revenue growth, we may not have
adequate resources to execute our business objectives and our
share price may decline.
21
InfiniBand
may not be adopted at the rate or extent that we anticipate, and
adoption of InfiniBand is largely dependent on third-party
vendors and end users.
While the usage of InfiniBand has increased since its first
specifications were completed in October 2000, continued
adoption of InfiniBand is dependent on continued collaboration
and cooperation among information technology, or IT, vendors. In
addition, the end users that purchase IT products and services
from vendors must find InfiniBand to be a compelling solution to
their IT system requirements. We cannot control third-party
participation in the development of InfiniBand as an industry
standard technology. We rely on server, storage, communications
infrastructure equipment and embedded systems vendors to
incorporate and deploy InfiniBand integrated circuits, or ICs,
in their systems. InfiniBand may fail to effectively compete
with other technologies, which may be adopted by vendors and
their customers in place of InfiniBand. The adoption of
InfiniBand is also impacted by the general replacement cycle of
IT equipment by end users, which is dependent on factors
unrelated to InfiniBand. These factors may reduce the rate at
which InfiniBand is incorporated by our current server vendor
customers and impede its adoption in the storage, communications
infrastructure and embedded systems markets, which in turn would
harm our ability to sell our InfiniBand products.
We
have limited visibility into end-user demand for our products,
which introduces uncertainty into our production forecasts and
business planning and could negatively impact our financial
results.
Our sales are made on the basis of purchase orders rather than
long-term purchase commitments. In addition, our customers may
defer purchase orders. We place orders with the manufacturers of
our products according to our estimates of customer demand. This
process requires us to make multiple demand forecast assumptions
with respect to both our customers and end users
demands. It is more difficult for us to accurately forecast
end-user demand because we do not sell our products directly to
end users. In addition, the majority of our adapter card
business is conducted on a short order fulfillment basis,
introducing more uncertainty into our forecasts. Because of the
lead time associated with fabrication of our semiconductors,
forecasts of demand for our products must be made in advance of
customer orders. In addition, we base business decisions
regarding our growth on our forecasts for customer demands. As
we grow, anticipating customer demand may become increasingly
difficult. If we overestimate customer demand, we may purchase
products from our manufacturers that we may not be able to sell
and may over-budget company operations. Conversely, if we
underestimate customer demand or if sufficient manufacturing
capacity were unavailable, we would forego revenue opportunities
and could lose market share or damage our customer relationships.
We
depend on a small number of customers for a significant portion
of our sales, and the loss of any of these customers will
adversely affect our revenues.
A small number of customers account for a significant portion of
our revenues. In the year ended December 31, 2007, sales to
Hewlett-Packard accounted for 19% of our total revenues, sales
to Voltaire accounted for 15% of our total revenues, sales to
Cisco Systems and QLogic Corporation accounted for 11%, each, of
our total revenues. In the year ended December 31, 2006,
sales to Voltaire accounted for 18% of our total revenues, sales
to Cisco Systems accounted for 14% of our total revenues, sales
to Hewlett-Packard accounted for 12% of our total revenues, and
sales to SilverStorm Technologies (which was acquired by QLogic
Corporation in October 2006) accounted for 11% of our total
revenues. In the year ended December 31, 2005, sales to
Cisco Systems and Topspin Communications (which was acquired by
Cisco Systems in May 2005) accounted for 44% of our total
revenues, and sales to Voltaire accounted for 12% of our total
revenues. Because the majority of servers, storage,
communications infrastructure equipment and embedded systems is
sold by a relatively small number of vendors, we expect that we
will continue to depend on a small number of customers to
account for a significant percentage of our revenues for the
foreseeable future. Our customers, including our most
significant customers, are not obligated by long-term contracts
to purchase our products and may cancel orders with limited
potential penalties. If any of our large customers reduces or
cancels its purchases from us for any reason, it could have an
adverse effect on our revenues and results of operations.
22
We
face intense competition and may not be able to compete
effectively, which could reduce our market share, net revenues
and profit margin.
The markets in which we operate are extremely competitive and
are characterized by rapid technological change, continuously
evolving customer requirements and declining average selling
prices. We may not be able to compete successfully against
current or potential competitors. With respect to InfiniBand
products, we compete with QLogic Corporation, which recently
acquired SilverStorm Technologies in October 2006. We also
compete with providers of alternative technologies, including
Ethernet, Fibre Channel and proprietary interconnects. The
companies that provide IC products for these alternative
technologies include Marvell Technology Group, Broadcom
Corporation, Emulex Corporation, QLogic Corporation and Myricom.
Many of our current and potential competitors have longer
operating histories, significantly greater resources, greater
economies of scale, stronger name recognition and larger
customer bases than we have. This may allow them to respond more
quickly than we are able to respond to new or emerging
technologies or changes in customer requirements. In addition,
these competitors may have greater credibility with our existing
and potential customers. If we do not compete successfully, our
market share, revenues and profit margin may decline, and, as a
result, our business may be adversely affected.
If we
fail to develop new products or enhance our existing products to
react to rapid technological change and market demands in a
timely and cost-effective manner, our business will
suffer.
We must develop new products or enhance our existing products
with improved technologies to meet rapidly evolving customer
requirements. We are currently engaged in the development
process for next generation products, and we need to
successfully design our next generation and other products
successfully for customers who continually require higher
performance and functionality at lower costs. The development
process for these advancements is lengthy and will require us to
accurately anticipate technological innovations and market
trends. Developing and enhancing these products can be
time-consuming, costly and complex. Our ability to fund product
development and enhancements partially depends on our ability to
generate revenues from our existing products. For example, we
recently introduced our next generation of products that also
support the industry standard Ethernet interconnect
specification.
There is a risk that these developments or enhancements, such as
migrating our next generation products from 130nm to 90nm
silicon process technology, will be late, fail to meet customer
or market specifications and will not be competitive with other
products using alternative technologies that offer comparable
performance and functionality. We may be unable to successfully
develop additional next generation products, new products or
product enhancements. Our next generation products that include
Ethernet support or any new products or product enhancements may
not be accepted in new or existing markets. Our business will
suffer if we fail to continue to develop and introduce new
products or product enhancements in a timely manner or on a
cost-effective basis.
We
rely on a limited number of subcontractors to manufacture,
assemble, package and production test our products, and the
failure of any of these third-party subcontractors to deliver
products or otherwise perform as requested could damage our
relationships with our customers, decrease our sales and limit
our growth.
While we design and market our products and conduct test
development in-house, we do not manufacture, assemble, package
and production test our products, and we must rely on
third-party subcontractors to perform these services. We
currently rely on Taiwan Semiconductor Manufacturing Company, or
TSMC, to produce our silicon wafers, and Flextronics
International Ltd. to manufacture and production test our
adapter cards. We also rely on Advanced Semiconductor
Engineering, or ASE, to assemble, package and production test
our ICs. If these subcontractors do not provide us with
high-quality products, services and production and production
test capacity in a timely manner, or if one or more of these
subcontractors terminates its relationship with us, we may be
unable to obtain satisfactory replacements to fulfill customer
orders on a timely basis, our relationships with our customers
could suffer, our sales could decrease and our growth could be
limited. In particular, there are significant challenges
associated with moving our IC production from our existing
manufacturer to another manufacturer with whom we do not have a
pre-existing relationship.
23
We currently do not have long-term supply contracts with any of
our third-party subcontractors. Therefore, they are not
obligated to perform services or supply products to us for any
specific period, in any specific quantities or at any specific
price, except as may be provided in a particular purchase order.
None of our third-party subcontractors has provided contractual
assurances to us that adequate capacity will be available to us
to meet future demand for our products. Our subcontractors may
allocate capacity to the production of other companies
products while reducing deliveries to us on short notice. Other
customers that are larger and better financed than we are or
that have long-term agreements with these subcontractors may
cause these subcontractors to reallocate capacity to those
customers, thereby decreasing the capacity available to us.
Other significant risks associated with relying on these
third-party subcontractors include:
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reduced control over product cost, delivery schedules and
product quality;
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potential price increases;
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inability to achieve sufficient production, increase production
or test capacity and achieve acceptable yields on a timely basis;
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increased exposure to potential misappropriation of our
intellectual property;
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shortages of materials used to manufacture products;
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capacity shortages;
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labor shortages or labor strikes;
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political instability in the regions where these subcontractors
are located; and
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natural disasters impacting these subcontractors.
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Our
sales cycle can be lengthy, which could result in uncertainty
and delays in generating revenues.
We have occasionally experienced a lengthy sales cycle for some
of our products, due in part to the constantly evolving nature
of the technologies on which our products are based. Some of our
products must be custom designed to operate in our
customers products, resulting in a lengthy process between
the initial design stage and the ultimate sale. We also compete
for design wins prior to selling products, which may increase
the length of the sales process. We may experience a delay
between the time we increase expenditures for research and
development, sales and marketing efforts and inventory and the
time we generate revenues, if any, from these expenditures. In
addition, because we do not have long-term supply contracts with
our customers and the majority of our sales are on a purchase
order basis, we must repeat our sales process on a continual
basis, including sales of new products to existing customers. As
a result, our business could be harmed if a customer reduces or
delays its orders.
The
average selling prices of our products have decreased in the
past and may do so in the future, which could harm our financial
results.
The products we develop and sell are subject to declines in
average selling prices. We have had to reduce our prices in the
past and we may be required to reduce prices in the future.
Reductions in our average selling prices to one customer could
impact our average selling prices to other customers. This would
cause our gross margin to decline. Our financial results will
suffer if we are unable to offset any reductions in our average
selling prices by increasing our sales volumes, reducing our
costs or developing new or enhanced products with higher selling
prices or gross margin.
Fluctuations
in our revenues and operating results on a quarterly and annual
basis could cause the market price of our ordinary shares to
decline.
Our quarterly and annual revenues and operating results are
difficult to predict and have fluctuated in the past, and may
fluctuate in the future, from quarter to quarter and year to
year. It is possible that our operating results in some quarters
and years will be below market expectations. This would likely
cause the market price of our ordinary
24
shares to decline. Our quarterly and annual operating results
are affected by a number of factors, many of which are outside
of our control, including:
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unpredictable volume and timing of customer orders, which are
not fixed by contract but vary on a purchase order basis;
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the loss of one or more of our customers, or a significant
reduction or postponement of orders from our customers;
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our customers sales outlooks, purchasing patterns and
inventory levels based on end-user demands and general economic
conditions;
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seasonal buying trends;
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the timing of new product announcements or introductions by us
or by our competitors;
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our ability to successfully develop, introduce and sell new or
enhanced products in a timely manner;
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product obsolescence and our ability to manage product
transitions;
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changes in the relative sales mix of our products;
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decreases in the overall average selling prices of our products;
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changes in our cost of finished goods; and
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the availability, pricing and timeliness of delivery of other
components used in our customers products.
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We base our planned operating expenses in part on our
expectations of future revenues, and a significant portion of
our expenses is relatively fixed in the short-term. We have
limited visibility into customer demand from which to predict
future sales of our products. As a result, it is difficult for
us to forecast our future revenues and budget our operating
expenses accordingly. Our operating results would be adversely
affected to the extent customer orders are cancelled or
rescheduled. If revenues for a particular quarter are lower than
we expect, we likely would not proportionately be able to reduce
our operating expenses.
We
rely on our ecosystem partners to enhance our product offerings
and our inability to continue to develop or maintain such
relationships in the future would harm our ability to remain
competitive.
We have developed relationships with third parties, which we
refer to as ecosystem partners, which provide operating systems,
tool support, reference designs and other services designed for
specific uses of our products. We believe that these
relationships enhance our customers ability to get their
products to market quickly. If we are unable to continue to
develop or maintain these relationships, we might not be able to
enhance our customers ability to commercialize their
products in a timely manner and our ability to remain
competitive would be harmed.
We
rely primarily upon trade secret, patent and copyright laws and
contractual restrictions to protect our proprietary rights, and,
if these rights are not sufficiently protected, our ability to
compete and generate revenues could suffer.
We seek to protect our proprietary manufacturing specifications,
documentation and other written materials primarily under trade
secret, patent and copyright laws. We also typically require
employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps
taken by us to protect our proprietary information may not be
adequate to prevent misappropriation of our technology. In
addition, our proprietary rights may not be adequately protected
because:
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people may not be deterred from misappropriating our
technologies despite the existence of laws or contracts
prohibiting it;
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policing unauthorized use of our intellectual property may be
difficult, expensive and time-consuming, and we may be unable to
determine the extent of any unauthorized use; and
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the laws of other countries in which we market our products,
such as some countries in the Asia/Pacific region, may offer
little or no protection for our proprietary technologies.
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Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technologies could enable
third parties to benefit from our technologies without paying us
for doing so. Any inability to adequately protect our
proprietary rights could harm our ability to compete, generate
revenues and grow our business.
We may
not obtain sufficient patent protection on the technology
embodied in our products, which could harm our competitive
position and increase our expenses.
Our success and ability to compete in the future may depend to a
significant degree upon obtaining sufficient patent protection
for our proprietary technology. As of December 31, 2007, we
had 15 issued patents and 22 patent applications pending in the
United States, 5 issued patents in Taiwan and 6 applications
pending in Israel, each of which covers aspects of the
technology in our products. Patents that we currently own do not
cover all of the products that we presently sell. Our patent
applications may not result in issued patents, and even if they
result in issued patents, the patents may not have claims of the
scope we seek. Even in the event that these patents are not
issued, the applications may become publicly available and
proprietary information disclosed in the applications will
become available to others. In addition, any issued patents may
be challenged, invalidated or declared unenforceable. The term
of any issued patent in the United States would be 20 years
from its filing date, and if our applications are pending for a
long time period, we may have a correspondingly shorter term for
any patent that may be issued. Our present and future patents
may provide only limited protection for our technology and may
not be sufficient to provide competitive advantages to us. For
example, competitors could be successful in challenging any
issued patents or, alternatively, could develop similar or more
advantageous technologies on their own or design around our
patents. Also, patent protection in certain foreign countries
may not be available or may be limited in scope and any patents
obtained may not be as readily enforceable as in the United
States and Israel, making it difficult for us to effectively
protect our intellectual property from misuse or infringement by
other companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may
harm our business. In addition, given the costs of obtaining
patent protection, we may choose not to protect certain
innovations that later turn out to be important.
Intellectual
property litigation, which is common in our industry, could be
costly, harm our reputation, limit our ability to sell our
products and divert the attention of management and technical
personnel.
The semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property
rights. We have indemnification obligations to most of our
customers with respect to infringement of third-party patents
and intellectual property rights by our products. If litigation
were to be filed against these customers in connection with our
technology, we may be required to defend and indemnify such
customers.
Questions of infringement in the markets we serve involve highly
technical and subjective analyses. Although we have not been
involved in intellectual property litigation to date, litigation
may be necessary in the future to enforce any patents we may
receive and other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
infringement or invalidity, and we may not prevail in any such
future litigation. Litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and
could divert the efforts and attention of our management and
technical personnel from normal business operations. In
addition, adverse determinations in litigation could result in
the loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology or selling our
products, any of which could seriously harm our business.
We
depend on key and highly skilled personnel to operate our
business, and if we are unable to retain our current personnel
and hire additional personnel, our ability to develop and
successfully market our products could be harmed.
Our business is particularly dependent on the interdisciplinary
expertise of our personnel, and we believe our future success
will depend in large part upon our ability to attract and retain
highly skilled managerial, engineering, finance and sales and
marketing personnel. The loss of any key employees or the
inability to attract or retain
26
qualified personnel could delay the development and introduction
of, and harm our ability to sell, our products and harm the
markets perception of us. Competition for qualified
engineers in the markets in which we operate, primarily in
Israel where our engineering operations are based, is intense
and, accordingly, we may not be able to retain or hire all of
the engineers required to meet our ongoing and future business
needs. If we are unable to attract and retain the highly skilled
professionals we need, we may have to forego projects for lack
of resources or be unable to staff projects optimally. We
believe that our future success is highly dependent on the
contributions of Eyal Waldman, our president and chief executive
officer. We do not have long-term employment contracts with
Mr. Waldman or any other key personnel, and their knowledge
of our business and industry would be extremely difficult to
replace.
We may
not be able to manage our future growth effectively, and we may
need to incur significant expenditures to address the additional
operational and control requirements of our
growth.
We are experiencing a period of growth and expansion. This
expansion has placed, and any future expansion will continue to
place, a significant strain on our management, personnel,
systems and financial resources. We plan to hire additional
employees to support an increase in research and development as
well as increases in our sales and marketing and general and
administrative efforts. To successfully manage our growth and
handle the responsibilities of being a public company, we
believe we must effectively:
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continue to enhance our customer relationship and supply chain
management and supporting systems;
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implement additional and improve existing administrative,
financial and operations systems, procedures and controls;
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expand and upgrade our technological capabilities;
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manage multiple relationships with our customers, distributors,
suppliers, end users and other third parties;
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manage the mix of our U.S., Israeli and other foreign
operations; and
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hire, train, integrate and manage additional qualified engineers
for research and development activities, sales and marketing
personnel and financial and IT personnel.
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Our efforts may require substantial managerial and financial
resources and may increase our operating costs even though these
efforts may not be successful. If we are unable to manage our
growth effectively, we may not be able to take advantage of
market opportunities, develop new products, satisfy customer
requirements, execute our business plan or respond to
competitive pressures.
We may
experience defects in our products, unforeseen delays, higher
than expected expenses or lower than expected manufacturing
yields of our products, which could result in increased customer
warranty claims, delay our product shipments and prevent us from
recognizing the benefits of new technologies we
develop.
Although we test our products, they are complex and may contain
defects and errors. In the past we have encountered defects and
errors in our products. Delivery of products with defects or
reliability, quality or compatibility problems may damage our
reputation and our ability to retain existing customers and
attract new customers. In addition, product defects and errors
could result in additional development costs, diversion of
technical resources, delayed product shipments, increased
product returns, warranty expenses and product liability claims
against us which may not be fully covered by insurance. Any of
these could harm our business.
In addition, our production of existing and development of new
products can involve multiple iterations and unforeseen
manufacturing difficulties, resulting in reduced manufacturing
yields, delays and increased expenses. The evolving nature of
our products requires us to modify our manufacturing
specifications, which may result in delays in manufacturing
output and product deliveries. We rely on third parties to
manufacture our products and currently rely on one manufacturer
for our ICs and one manufacturer for our cards. Our ability to
offer new products depends on our manufacturers ability to
implement our revised product specifications, which is costly,
time-consuming and complex.
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If we
fail to maintain an effective system of internal controls, we
may not be able to report accurately our financial results or
prevent fraud. As a result, current and potential shareholders
could lose confidence in our financial reporting, which could
harm our business and the trading price of our ordinary
shares.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. We
have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement. In
addition, Section 404 of the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, requires us to evaluate and report on our
internal control over financial reporting and have our
independent registered public accounting firm annually attest to
our internal control over financial reporting. The
Section 404 internal control reporting requirements will be
implemented according to the regulatory phase-in schedule of the
Securities and Exchange Commission. The SEC recently adopted
rules to delay the implementation of Section 404 compliance
for new public companies. Under the SECs new rules, we are
required to provide a management report on internal control over
financial reporting for the first time in connection with this
Annual Report on
Form 10-K
for the year ending December 31, 2007. As required by the
Section 404, we will provide both a management report and
an independent registered public accounting firm attestation
report on internal controls over financial reporting in
connection with our Annual Report on
Form 10-K
for the year ending December 31, 2008. We are preparing for
compliance with Section 404 by strengthening, assessing and
testing our system of internal controls to provide the basis for
our report. However, the continuous process of strengthening our
internal controls over financial reporting and complying with
Section 404 is expensive and time-consuming and requires
significant management attention. We cannot be certain that
these measures will ensure that we will maintain adequate
control over our financial processes and reporting. Furthermore,
as we grow our business, our internal controls will become more
complex and will require significantly more resources to ensure
our internal controls remain effective overall. Failure to
implement new or improved controls, or difficulties encountered
in their implementation, could harm our operating results or
cause us to fail to meet our reporting obligations. If we or our
independent registered public accounting firm discover a
material weakness, the disclosure of that fact, even if quickly
remedied, could reduce the markets confidence in our
financial statements and harm our share price. In addition,
future non-compliance with Section 404 could subject us to
a variety of administrative sanctions, including the suspension
or delisting of our ordinary shares from The NASDAQ Global
Market, which could reduce our share price.
We may
pursue acquisitions or investments in complementary products,
technologies and businesses, which could harm our operating
results and may disrupt our business.
In the future, we may pursue acquisitions of, or investments in,
complementary products, technologies and businesses.
Acquisitions present a number of potential risks and challenges
that could, if not met, disrupt our business operations,
increase our operating costs and reduce the value to us of the
acquisition. For example, if we identify an acquisition
candidate, we may not be able to successfully negotiate or
finance the acquisition on favorable terms. Even if we are
successful, we may not be able to integrate the acquired
businesses, products or technologies into our existing business
and products. Furthermore, potential acquisitions and
investments, whether or not consummated, may divert our
managements attention and require considerable cash
outlays at the expense of our existing operations. In addition,
to complete future acquisitions, we may issue equity securities,
incur debt, assume contingent liabilities or have amortization
expenses and write-downs of acquired assets, which could
adversely affect our profitability.
Changes
to financial accounting standards may affect our results of
operations and cause us to change our business
practices.
We prepare our financial statements to conform with generally
accepted accounting principles, or GAAP, in the United States.
These accounting principles are subject to interpretation by the
Financial Accounting Standards Board, or FASB, the SEC and
various bodies formed to interpret and create appropriate
accounting policies. A change in those policies can have a
significant effect on our reported results and may affect our
reporting of transactions completed before a change is
announced. Changes to those rules or the questioning of current
practices may adversely affect our reported financial results or
the way we conduct our business. For example, accounting
policies affecting many aspects of our business, including rules
relating to employee share option grants, have
28
recently been revised. The FASB and other agencies have made
changes to GAAP that required us, as of our first quarter of
2006, to record a charge to earnings for the estimated fair
value of employee share option grants and other equity
incentives, whereas under previous accounting rules charges were
required only for the intrinsic value, if any, of such awards to
employees. We may have significant and ongoing accounting
charges under the new rules resulting from option grants and
other equity incentive expensing that could reduce our net
income. In addition, since historically we have used
equity-related compensation as a component of our total employee
compensation program, the accounting change could make the use
of equity-related compensation less attractive to us and
therefore make it more difficult for us to attract and retain
employees.
Our
business is subject to the risks of earthquakes, fires, floods
and other natural catastrophic events, and to interruption by
manmade problems such as computer viruses or
terrorism.
Our U.S. corporate offices are located in the
San Francisco Bay Area, a region known for seismic
activity. A significant natural disaster, such as an earthquake,
fire or flood, could have a material adverse impact on our
business, operating results and financial condition. In
addition, our servers are vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering
with our computer systems. In addition, acts of terrorism could
cause disruptions in our or our customers businesses or
the economy as a whole. To the extent that such disruptions
result in delays or cancellations of customer orders, or the
deployment of our products, our business, operating results and
financial condition would be adversely affected.
Risks
Related to Our Industry
Due to
the cyclical nature of the semiconductor industry, our operating
results may fluctuate significantly, which could adversely
affect the market price of our ordinary shares.
The semiconductor industry is highly cyclical and subject to
rapid change and evolving industry standards and, from time to
time, has experienced significant downturns. These downturns are
characterized by decreases in product demand, excess customer
inventories and accelerated erosion of prices. These factors
could cause substantial fluctuations in our net revenues and in
our operating results. Any downturns in the semiconductor
industry may be severe and prolonged, and any failure of this
industry to fully recover from downturns could harm our
business. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the industry, which could
cause our share price to decline.
The
demand for semiconductors is affected by general economic
conditions, which could impact our business.
The semiconductor industry is affected by general economic
conditions, and a downturn may result in decreased demand for
our products and adversely affect our operating results. Our
business has been adversely affected by previous economic
downturns. For example, during the global economic downturn in
2002 to 2003, demand for many computer and consumer electronics
products suffered as consumers delayed purchasing decisions or
changed or reduced their discretionary spending. As a result,
demand for our products suffered and we had to implement
restructuring initiatives to align our corporate spending with a
slower than anticipated revenue growth during that timeframe.
The
semiconductor industry is highly competitive, and we cannot
assure you that we will be able to compete successfully against
our competitors.
The semiconductor industry is highly competitive. Increased
competition may result in price pressure, reduced profitability
and loss of market share, any of which could seriously harm our
revenues and results of operations. Competition principally
occurs at the design stage, where a customer evaluates
alternative design solutions. We continually face intense
competition from semiconductor interconnect solutions companies.
Some of our competitors have greater financial and other
resources than we have with which to pursue engineering,
manufacturing, marketing and distribution of their products. As
a result, they may be able to respond more quickly to changing
customer demands or devote greater resources to the development,
promotion and sales of their products than we
29
can. We cannot assure you that we will be able to increase or
maintain our revenues and market share, or compete successfully
against our current or future competitors in the semiconductor
industry.
Risks
Related to Operations in Israel and Other Foreign
Countries
Regional
instability in Israel may adversely affect business conditions
and may disrupt our operations and negatively affect our
revenues and profitability.
We have engineering facilities and corporate and sales support
operations and, as of December 31, 2007, 186 full-time
and 37 part-time employees located in Israel. A significant
amount of our assets is located in Israel. Accordingly,
political, economic and military conditions in Israel may
directly affect our business. Since the establishment of the
State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors, as well as
incidents of civil unrest. During the summer of 2006, Israel was
engaged in an armed conflict with Hezbollah, a Lebanese Islamist
Shiite militia group and political party. This conflict involved
missile strikes against civilian targets in northern Israel, and
negatively affected business conditions in Israel. In addition,
Israel and companies doing business with Israel have, in the
past, been the subject of an economic boycott. Although Israel
has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, Israel has been and is subject to civil
unrest and terrorist activity, with varying levels of severity,
since September 2000. The election in early 2006 of
representatives of the Hamas movement to a majority of seats in
the Palestinian Legislative Council and the tension among the
different Palestinian factions may create additional unrest and
uncertainty. Any future armed conflicts or political instability
in the region may negatively affect business conditions and
adversely affect our results of operations. Parties with whom we
do business have sometimes declined to travel to Israel during
periods of heightened unrest or tension, forcing us to make
alternative arrangements when necessary. In addition, the
political and security situation in Israel may result in parties
with whom we have agreements involving performance in Israel
claiming that they are not obligated to perform their
commitments under those agreements pursuant to force majeure
provisions in the agreements.
We can give no assurance that security and political conditions
will have no impact on our business in the future. Hostilities
involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could adversely
affect our operations and could make it more difficult for us to
raise capital. While we did not sustain damages from the recent
conflict with Hezbollah referred to above, our Israeli
operations, which are located in northern Israel, are within
range of Hezbollah missiles and we or our immediate surroundings
may sustain damages in a missile attack, which could adversely
affect our operations.
In addition, our business insurance does not cover losses that
may occur as a result of events associated with the security
situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that
are caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained. Any losses
or damages incurred by us could have a material adverse effect
on our business.
Our
operations may be negatively affected by the obligations of our
personnel to perform military service.
Generally, all non-exempt male adult citizens and permanent
residents of Israel under the age of 45 (or older, for citizens
with certain occupations), including some of our officers,
directors and employees, are obligated to perform military
reserve duty annually, and are subject to being called to active
duty at any time under emergency circumstances. In the event of
severe unrest or other conflict, individuals could be required
to serve in the military for extended periods of time. In
response to increases in terrorist activity, there have been
periods of significant
call-ups of
military reservists, and recently some of our employees,
including those in key positions, have been called up in
connection with armed conflicts. It is possible that there will
be additional
call-ups in
the future. Our operations could be disrupted by the absence for
a significant period of one or more of our officers, directors
or key employees due to military service. Any such disruption
could adversely affect our operations.
Our
operations may be affected by negative economic conditions or
labor unrest in Israel.
Due to significant economic measures adopted by the Israeli
government, there were several general strikes and work
stoppages in Israel in 2003 and 2004, affecting all banks,
airports and ports. These strikes had an adverse
30
effect on the Israeli economy and on business, including our
ability to deliver products to our customers and to receive raw
materials from our suppliers in a timely manner. From time to
time, the Israeli trade unions threaten strikes or work
stoppages, which, if carried out, may have a material adverse
effect on the Israeli economy and our business.
We are
susceptible to additional risks from our international
operations.
We derived 28%, 41% and 47% of our revenues in the years ended
December 31, 2005, 2006 and 2007, respectively, from sales
outside North America. As a result, we face additional risks
from doing business internationally, including:
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reduced protection of intellectual property rights in some
countries;
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licenses, tariffs and other trade barriers;
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difficulties in staffing and managing foreign operations;
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longer sales and payment cycles;
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greater difficulties in collecting accounts receivable;
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seasonal reductions in business activity;
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potentially adverse tax consequences;
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laws and business practices favoring local competition;
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costs and difficulties of customizing products for foreign
countries;
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compliance with a wide variety of complex foreign laws and
treaties;
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tariffs, trade barriers, transit restrictions and other
regulatory or contractual limitations on our ability to sell or
develop our products in certain foreign markets;
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fluctuations in freight rates and transportation disruptions;
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political and economic instability; and
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variance and unexpected changes in local laws and regulations.
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Our principal research and development facilities are located in
Israel, and our directors, executive officers and other key
employees are located primarily in Israel and the United States.
In addition, we engage sales representatives in various
countries throughout the world to market and sell our products
in those countries and surrounding regions. If we encounter
these challenges in our international operations, we could
experience slower than expected revenue growth and our business
could be harmed.
It may
be difficult to enforce a U.S. judgment against us, our officers
and directors and some of the experts named in the prospectus
relating to the initial public offering of our ordinary shares
or to assert U.S. securities law claims in Israel.
We are incorporated in Israel. Four of our executive officers
and one of our directors, who is also an executive officer, and
some of our accountants and attorneys are non-residents of the
United States and are located in Israel, and substantially all
of our assets and the assets of these persons are located
outside the United States. Three of our executive officers and
five of our directors are located in the United States.
Therefore, it may be difficult to enforce a judgment obtained in
the United States against us or any of these persons in
U.S. or Israeli courts based on the civil liability
provisions of the U.S. federal securities laws.
In addition, we have been informed by our legal counsel in
Israel, Yigal Arnon & Co., that it may be difficult
for a shareholder to enforce civil liabilities under
U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on a
violation of U.S. securities laws because Israel is not the
most appropriate forum to bring such a claim. In addition, even
if an Israeli court agrees to hear a claim, it may determine
that Israeli law, and not U.S. law, is applicable to the
claim. If U.S. law is found to be applicable, the content
of
31
applicable U.S. law must be proved in court as a fact,
which can be a time-consuming and costly process. Certain
matters of procedure will also be governed by Israeli law. There
is little binding case law in Israel addressing the matters
described above.
Provisions
of Israeli law may delay, prevent or make difficult an
acquisition of us, which could prevent a change of control and
therefore depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires
special approvals for transactions involving directors, officers
or significant shareholders and regulates other matters that may
be relevant to these types of transactions. For example, a
merger may not be completed unless at least 50 days have
passed from the date that a merger proposal was filed by each
merging company with the Israel Registrar of Companies and at
least 30 days from the date that the shareholders of both
merging companies approved the merger. In addition, the approval
of a majority of each class of securities of the target company
is required to approve a merger. Israeli corporate law further
requires that any person who wishes to acquire more than a
specified percentage of the companys share capital
complies with certain tender offer procedures. In addition,
Israeli corporate law allows us to create and issue shares
having rights different from those attached to our ordinary
shares, including rights that may delay or prevent a takeover or
otherwise prevent our shareholders from realizing a potential
premium over the market value of their ordinary shares. The
authorization of a new class of shares would require an
amendment to our articles of association, which requires the
prior approval of the holders of a majority of our shares at a
general meeting.
These provisions could delay, prevent or impede an acquisition
of us, even if such an acquisition would be considered
beneficial by some of our shareholders. See Risk
Factors Provisions of Israeli law could delay or
prevent an acquisition of our company, even if the acquisition
would be beneficial to our shareholders, and could make it more
difficult for shareholders to change management for a
further discussion of this risk factor.
Exchange
rate fluctuations between the U.S. dollar and the NIS may
negatively affect our earnings.
Although all our revenues and a majority of our expenses are
denominated in U.S. dollars, a significant portion of our
research and development expenses are incurred in new Israeli
shekels, or NIS. As a result, we are exposed to risk to the
extent that the inflation rate in Israel exceeds the rate of
devaluation of the NIS in relation to the U.S. dollar or if
the timing of these devaluations lags behind inflation in
Israel. In that event, the U.S. dollar cost of our research
and development operations in Israel will increase and our
U.S. dollar-measured results of operations will be
adversely affected. To the extent that the value of the NIS
increases against the U.S. dollar, our expenses on a
U.S. dollar cost basis increase. We cannot predict any
future trends in the rate of inflation in Israel or the rate of
devaluation of the NIS against the U.S. dollar. The Israeli
rate of inflation (deflation) amounted to 2.4%, (0.1)% and 3.4%
for the years ended December 31, 2005, 2006 and 2007,
respectively. The increase (decrease) in value of the NIS
against the U.S. dollar amounted to (6.8)%, 8.2% and 8.9%
in the years ended December 31, 2005, 2006 and 2007,
respectively. If the U.S. dollar cost of our research and
development operations in Israel increases, our dollar-measured
results of operations will be adversely affected. Our operations
also could be adversely affected if we are unable to guard
against currency fluctuations in the future. Further, because
all our international revenues are denominated in
U.S. dollars, a strengthening of the dollar versus other
currencies could make our products less competitive in foreign
markets and collection of receivables more difficult. We do not
currently engage in currency hedging activities but we may
choose to do so in the future. These measures, however, may not
adequately protect us from material adverse effects due to the
impact of inflation in Israel and changes in value of NIS
against the U.S. dollar.
The
government tax benefits that we currently receive require us to
meet several conditions and may be terminated or reduced in the
future, which would increase our costs.
Some of our operations in Israel have been granted
Approved Enterprise status by the Investment Center
in the Israeli Ministry of Industry Trade and Labor, which makes
us eligible for tax benefits under the Israeli Law for
Encouragement of Capital Investments, 1959. The availability of
these tax benefits is subject to certain requirements,
including, among other things, making specified investments in
fixed assets and equipment, financing a percentage of those
investments with our capital contributions, complying with our
marketing program which was
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submitted to the Investment Center, filing of certain reports
with the Investment Center and complying with Israeli
intellectual property laws. If we do not meet these requirements
in the future, these tax benefits may be cancelled and we could
be required to refund any tax benefits that we have already
received plus interest and penalties thereon. The tax benefits
that our current Approved Enterprise program
receives may not be continued in the future at their current
levels or at all. If these tax benefits were reduced or
eliminated, the amount of taxes that we pay would likely
increase, which could adversely affect our results of
operations. Additionally, if we increase our activities outside
of Israel, for example, by acquisitions, our increased
activities may not be eligible for inclusion in Israeli tax
benefit programs.
The
Israeli government grants that we received require us to meet
several conditions and may be reduced or eliminated due to
government budget cuts, and these grants restrict our ability to
manufacture and engineer products and transfer know-how outside
of Israel and require us to satisfy specified
conditions.
We have received, and may receive in the future, grants from the
government of Israel through the Office of the Chief Scientist
of Israels Ministry of Industry, Trade and Labor, or the
OCS, for the financing of a portion of our research and
development expenditures in Israel. When know-how or products
are developed using OCS grants, the terms of these grants
restrict the transfer of the know-how out of Israel. Transfer of
know-how abroad is subject to various conditions, including
payment of a percentage of the consideration paid to us or our
shareholders in the transaction in which the technology is
transferred. In addition, any decrease of the percentage of
manufacturing performed locally, as originally declared in the
application to the OCS, may require us to notify, or to obtain
the approval of the OCS, and may result in increased royalty
payments to the OCS. These restrictions may impair our ability
to enter into agreements for those products or technologies
without the approval of the OCS. We cannot be certain that any
approval of the OCS will be obtained on terms that are
acceptable to us, or at all. Furthermore, in the event that we
undertake a transaction involving the transfer to a non-Israeli
entity of technology developed with OCS funding pursuant to a
merger or similar transaction, the consideration available to
our shareholders may be reduced by the amounts we are required
to pay to the OCS. Any approval, if given, will generally be
subject to additional financial obligations. If we fail to
comply with the conditions imposed by the OCS, including the
payment of royalties with respect to grants received, we may be
required to refund any payments previously received, together
with interest and penalties. In the year ended December 31,
2005, the OCS approved grants totaling $43,000, of funding in
support of some of our research and development programs. No
grants to us were approved by the OCS in the years ended
December 31, 2006 and 2007.
We may
be classified as a passive foreign investment company, which
could result in adverse U.S. federal income tax consequences to
U.S. holders of our ordinary shares.
For the 2007 taxable year we were not considered a passive
foreign investment company or PFIC, for U.S. federal
income tax purposes, and do not expect to be considered as such
for our current taxable year ending December 31, 2008.
However, the application of the PFIC rules is subject to
ambiguity in several respects, and, in addition, we must make a
separate determination each taxable year as to whether we are a
PFIC (after the close of each taxable year). Accordingly, we
cannot assure you that we will not be a PFIC for our current
taxable year or any future taxable year. A
non-U.S. corporation
will be considered a PFIC for any taxable year if either
(i) at least 75% of its gross income is passive income or
(ii) at least 50% of the value of its assets is
attributable to assets that produce or are held for the
production of passive income. The market value of our assets
generally will be determined based on the market price of our
ordinary shares, which has fluctuated since our ordinary shares
began trading on the NASDAQ Global Market on February 8,
2007 and is likely to fluctuate in the future. In addition, the
composition of our income and assets will be affected by how,
and how quickly, we spend the cash we raised in our initial
public offering. If we were treated as a PFIC for any taxable
year during which a U.S. person held an ordinary share,
certain adverse U.S. federal income tax consequences could
apply to such U.S. person, including:
|
|
|
|
|
having gains realized on the sale of our ordinary shares treated
as ordinary income, rather than capital gain;
|
|
|
|
the loss of the preferential rate applicable to dividends
received on our ordinary shares by individuals who are
U.S. holders; and
|
|
|
|
having interest charges apply to the proceeds of share sales.
|
33
Your
rights and responsibilities as a shareholder will be governed by
Israeli law and differ in some respects from the rights and
responsibilities of shareholders under U.S. law.
We are incorporated under Israeli law. The rights and
responsibilities of holders of our ordinary shares are governed
by our amended and restated articles of association and by
Israeli law. These rights and responsibilities differ in some
respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of
an Israeli company has a duty to act in good faith toward the
company and other shareholders and to refrain from abusing his,
her or its power in the company, including, among other things,
in voting at the general meeting of shareholders on certain
matters.
Risks
Related to Our Ordinary Shares
The
price of our ordinary shares may continue to be volatile, and
the value of an investment in our ordinary shares may
decline.
We sold ordinary shares in our initial public offering in
February 2007 at a price of $17.00 per share, and our shares
have subsequently traded as low as $11.05 per share. An active
and liquid trading market for our ordinary shares may not
develop or be sustained. Factors that could cause volatility in
the market price of our ordinary shares include, but are not
limited to:
|
|
|
|
|
quarterly variations in our results of operations or those of
our competitors;
|
|
|
|
announcements by us or our customers of acquisitions, new
products, significant contracts, commercial relationships or
capital commitments;
|
|
|
|
our ability to develop and market new and enhanced products on a
timely basis;
|
|
|
|
disruption to our operations;
|
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|
|
geopolitical instability;
|
|
|
|
the emergence of new sales channels in which we are unable to
compete effectively;
|
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|
|
any major change in our board of directors or management;
|
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|
|
changes in financial estimates, including our ability to meet
our future revenue and operating profit or loss projections;
|
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|
|
changes in governmental regulations or in the status of our
regulatory approvals;
|
|
|
|
general economic conditions and slow or negative growth of
related markets;
|
|
|
|
commencement of, or our involvement in, litigation; and
|
|
|
|
changes in earnings estimates or recommendations by securities
analysts.
|
In addition, the stock markets in general, and the markets for
semiconductor stocks in particular, have experienced extreme
volatility that often has been unrelated to the operating
performance of the issuer. As a result of the current credit
crisis, the securities markets have experienced significant
price and volume fluctuations. These broad market fluctuations
may adversely affect the trading price or liquidity of our
ordinary shares. In the past, when the market price of a stock
has been volatile and declined, holders of that stock have
sometimes instituted securities class action litigation against
the issuer. If any of our shareholders were to bring such a
lawsuit against us, we could incur substantial costs defending
the lawsuit and the attention of our management would be
diverted from the operation of our business.
The
ownership of our ordinary shares will continue to be highly
concentrated, and your interests may conflict with the interests
of our existing shareholders.
Our executive officers and directors and their affiliates
beneficially owned approximately 25% of our outstanding ordinary
shares as of February 29, 2008. Moreover, three of our
shareholders, Sequoia Capital Partners, Fidelity Management and
Research and Fred Alger Management, beneficially owned
approximately 31%
34
of our outstanding ordinary shares as of February 29, 2008.
Accordingly, these shareholders, acting as a group, have
significant influence over the outcome of corporate actions
requiring shareholder approval, including the election of
directors, any merger, consolidation or sale of all or
substantially all of our assets or any other significant
corporate transaction. These shareholders could delay or prevent
a change of control of our company, even if such a change of
control would benefit our other shareholders. The significant
concentration of share ownership may adversely affect the
trading price of our ordinary shares due to investors
perception that conflicts of interest may exist or arise.
If we
sell our ordinary shares in future financings, ordinary
shareholders will experience immediate dilution and, as a
result, our share price may go down.
We may from time to time issue additional ordinary shares at a
discount from the current trading price of our ordinary shares.
As a result, our ordinary shareholders would experience
immediate dilution upon the purchase of any ordinary shares sold
at such discount. In addition, as opportunities present
themselves, we may enter into equity financings or similar
arrangements in the future, including the issuance of debt
securities, preferred shares or ordinary shares. If we issue
ordinary shares or securities convertible into ordinary shares,
our ordinary shareholders could experience dilution.
Provisions
of Israeli law could delay or prevent an acquisition of our
company, even if the acquisition would be beneficial to our
shareholders, and could make it more difficult for shareholders
to change management.
Provisions of our amended and restated articles of association
may discourage, delay or prevent a merger, acquisition or other
change in control that shareholders may consider favorable,
including transactions in which shareholders might otherwise
receive a premium for their shares. In addition, these
provisions may frustrate or prevent any attempt by our
shareholders to replace or remove our current management by
making it more difficult to replace or remove our board of
directors. These provisions include:
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|
|
no cumulative voting; and
|
|
|
|
an advance notice requirement for shareholder proposals and
nominations.
|
Furthermore, Israeli tax law treats some acquisitions,
particularly stock-for-stock swaps between an Israeli company
and a foreign company, less favorably than U.S. tax law.
Israeli tax law generally provides that a shareholder who
exchanges our shares for shares in a foreign corporation is
treated as if the shareholder has sold the shares. In such a
case, the shareholder will generally be subject to Israeli
taxation on any capital gains from the sale of shares (after two
years, with respect to one half of the shares, and after four
years, with respect to the balance of the shares, in each case
unless the shareholder sells such shares at an earlier date),
unless a relevant tax treaty between Israel and the country of
the shareholders residence exempts the shareholder from
Israeli tax. Please see Risk Factors
Provisions of Israeli law may delay, prevent or make difficult
an acquisition of us, which could prevent a change of control
and therefore depress the price of our shares for a
further discussion of Israeli laws relating to mergers and
acquisitions. These provisions in our amended and restated
articles of association and other provisions of Israeli law
could limit the price that investors are willing to pay in the
future for our ordinary shares.
We
have never paid cash dividends on our share capital, and we do
not anticipate paying any cash dividends in the foreseeable
future.
We have never declared or paid cash dividends on our share
capital, nor do we anticipate paying any cash dividends on our
share capital in the foreseeable future. We currently intend to
retain all available funds and any future earnings to fund the
development and growth of our business. As a result, capital
appreciation, if any, of our ordinary shares will be your sole
source of gain for the foreseeable future.
We may
incur increased costs as a result of changes in laws and
regulations relating to corporate governance
matters.
Changes in the laws and regulations affecting public companies,
including the provisions of Sarbanes-Oxley and rules adopted by
the SEC and by The NASDAQ Stock Market, will result in increased
costs to us as we respond
35
to their requirements. These laws and regulations could make it
more difficult or more costly for us to obtain certain types of
insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same
or similar coverage. The impact of these requirements could also
make it more difficult for us to attract and retain qualified
persons to serve on our board of directors, our board committees
or as executive officers. We cannot predict or estimate the
amount or timing of additional costs we may incur to respond to
these requirements.
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ITEM 1B
|
UNRESOLVED
STAFF COMMENTS.
|
None.
Our business headquarters are in Santa Clara, California,
and our engineering headquarters are in Yokneam, Israel. We
currently lease office space in Yokneam and Tel Aviv, Israel and
in Santa Clara, California pursuant to leases that expire
on December 31, 2011, May 31, 2008 and March 31,
2009, respectively.
We believe that our existing facilities are adequate to meet
current requirements and that suitable additional or substitute
space will be available on acceptable terms to accommodate our
foreseeable needs.
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ITEM 3
|
LEGAL
PROCEEDINGS
|
We are not currently involved in any material legal proceedings.
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ITEM 4
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None
PART II
|
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ITEM 5
|
MARKET
FOR REGISTRANTS ORDINARY SHARES, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our ordinary shares began trading on The NASDAQ Global Market as
of February 8, 2007 under the symbol MLNX.
Prior to that date, our ordinary shares were not traded on any
public exchange. Our ordinary shares began trading on Tel-Aviv
Stock Exchange as of July 9, 2007 under the symbol
MLNX.
The following table summarizes the high and low closing prices
for our ordinary shares as reported by the NASDAQ Global Select
Market.
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2007
|
|
High
|
|
|
Low
|
|
|
First quarter
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|
$
|
23.91
|
|
|
$
|
14.20
|
|
Second quarter
|
|
$
|
20.80
|
|
|
$
|
13.90
|
|
Third quarter
|
|
$
|
22.54
|
|
|
$
|
14.70
|
|
Fourth quarter
|
|
$
|
24.27
|
|
|
$
|
16.09
|
|
As of February 29, 2008, we had approximately 88 holders of
record of our ordinary shares. This number does not include the
number of persons whose shares are in nominee or in street
name accounts through brokers.
36
Stock
Performance Graph
The graph below compares the cumulative total stockholder return
on our ordinary shares with the cumulative total return on The
NASDAQ Composite Index and The Philadelphia Semiconductor Index.
The period shown commences on February 7, 2007, the date of
our initial public offering, and ends on December 31, 2007,
the end of our last fiscal year. The graph assumes an investment
of $100 on February 7, 2007, and the reinvestment of any
dividends. No cash dividends have been declared on our ordinary
shares since our initial public offering in 2000. Shareholder
returns over the indicated periods should not be considered
indicative of future stock prices or shareholder returns.
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|
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|
|
|
|
|
|
|
|
|
|
|
Cumilative Total Return
|
|
|
|
|
2/7/2007
|
|
|
|
3/31/07
|
|
|
|
6/30/07
|
|
|
|
9/30/07
|
|
|
|
12/31/07
|
|
Mellanox Technologies
|
|
|
$
|
100.00
|
|
|
|
$
|
85.88
|
|
|
|
$
|
121.88
|
|
|
|
$
|
114.88
|
|
|
|
$
|
107.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Composite Index
|
|
|
|
100.00
|
|
|
|
|
97.24
|
|
|
|
|
104.53
|
|
|
|
|
108.47
|
|
|
|
|
106.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philadelphia Semiconductor Sector Index
|
|
|
|
100.00
|
|
|
|
|
98.82
|
|
|
|
|
106.38
|
|
|
|
|
106.15
|
|
|
|
|
86.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
$100 invested on 2/07/2007 in stock or index-including
reinvestment of dividends. |
Dividend
We have never declared or paid any cash dividends on our
ordinary shares in the past, and we do not anticipate paying
cash dividends in the foreseeable future. The Israel Companies
Law, 1999, or the Companies Law, also restricts our ability to
declare dividends. We can only distribute dividends from profits
(as defined in the Companies Law), or if we do not meet the
profit test, with court approval, provided in each case that
there is no reasonable concern that the dividend distribution
will prevent us from meeting our existing and foreseeable
obligations as they come due.
Securities
Authorized for Issuance under Equity Compensation
Plans
The information required by this item regarding equity
compensation plans will be contained in our definitive proxy
statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of our
Shareholders (the Proxy Statement), and is
incorporated in this report by reference. For additional
information on our share incentive plans and activity, see
Note 9, Share Option Plans included in
Part IV, Item 15 of this Report.
37
Recent
Sales of Unregistered Securities;
On October 15, 2007 and November 7, 2007,
respectively, certain institutional sales representatives
exercised options to purchase 14,285 and 2,857 of our ordinary
shares pursuant to options that we had granted to each of them
outside of our equity incentive plans. As a result, in the
aggregate, we issued to these institutions 17,142 unregistered
ordinary shares and received proceeds of $19,885. The issuances
of these securities were effected in reliance on the exemption
from the registration requirements of the Securities Act of 1933
afforded by Section 4(2) thereof for the institutions
residing in the United States and Regulation S thereof for
institutions residing outside of the United States. No
underwriters were involved in the foregoing issuance of
securities.
Use of
Proceeds from Registered Securities
Our initial public offering of 6,900,000 ordinary shares was
effected through a Registration Statement on
Form S-1
(File
No. 333-137659)
that was declared effective by the Securities and Exchange
Commission on February 7, 2007. We issued all
6,900,000 shares on February 13, 2007 for gross
proceeds of $117,300,000. The underwriters of the offering were
Credit Suisse Securities (USA) LLC, J.P. Morgan Securities
Inc., Thomas Weisel Partners LLC and Jefferies &
Company, Inc. We paid the underwriters a commission of
$8,211,000 and incurred additional offering expenses of
approximately $3,136,000. After deducting the underwriters
commission and the offering expenses, we received net proceeds
of approximately $105,953,000. No payments for such expenses
were made directly or indirectly to (i) any of our
directors, officers or their associates, (ii) any person(s)
owning 10% or more of any class of our equity securities or
(iii) any of our affiliates. The net proceeds from our
initial public offering have been invested into short-term
marketable government agency obligations and commercial paper.
There has been no material change in the planned use of proceeds
from our initial public offering as described in our final
prospectus filed with the SEC pursuant to Rule 424(b).
38
|
|
ITEM 6
|
SELECTED
FINANCIAL DATA
|
The following selected consolidated financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this report. We derived the consolidated
balance sheet data for the years ended December 31, 2003,
2004 and 2005 and our consolidated statements of operations data
for the years ended December 31, 2003 and 2004, from our
audited consolidated financial statements not included in this
report. We derived the consolidated statements of operations
data for each of the three years in the period ended
December 31, 2007, as well the consolidated balance sheet
data as of December 31, 2006 and 2007, from our audited
consolidated financial statements included elsewhere in this
report. Our historical results are not necessarily indicative of
results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
$
|
42,068
|
|
|
$
|
20,254
|
|
|
$
|
10,151
|
|
Cost of revenues(1)
|
|
|
(21,390
|
)
|
|
|
(13,533
|
)
|
|
|
(15,203
|
)
|
|
|
(8,736
|
)
|
|
|
(4,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profits
|
|
|
62,688
|
|
|
|
35,006
|
|
|
|
26,865
|
|
|
|
11,518
|
|
|
|
5,616
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
24,638
|
|
|
|
15,256
|
|
|
|
13,081
|
|
|
|
12,864
|
|
|
|
14,457
|
|
Sales and marketing(1)
|
|
|
12,739
|
|
|
|
8,935
|
|
|
|
7,395
|
|
|
|
5,640
|
|
|
|
5,298
|
|
General and administrative(1)
|
|
|
6,229
|
|
|
|
3,704
|
|
|
|
3,094
|
|
|
|
1,719
|
|
|
|
1,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
43,606
|
|
|
|
27,895
|
|
|
|
23,570
|
|
|
|
20,223
|
|
|
|
21,475
|
|
Income (loss) from operations
|
|
|
19,082
|
|
|
|
7,111
|
|
|
|
3,295
|
|
|
|
(8,705
|
)
|
|
|
(15,859
|
)
|
Other income, net
|
|
|
5,976
|
|
|
|
438
|
|
|
|
326
|
|
|
|
123
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
25,058
|
|
|
|
7,549
|
|
|
|
3,621
|
|
|
|
(8,582
|
)
|
|
|
(15,551
|
)
|
Benefit from (provision for) taxes on income
|
|
|
10,530
|
|
|
|
(301
|
)
|
|
|
(462
|
)
|
|
|
(306
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
$
|
3,159
|
|
|
$
|
(8,888
|
)
|
|
$
|
(15,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to ordinary
shareholders basic(2)(3)
|
|
|
1.28
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
(1.27
|
)
|
|
|
(2.32
|
)
|
Net income (loss) per share attributable to ordinary
shareholders diluted(2)(3)
|
|
|
1.18
|
|
|
|
0.03
|
|
|
|
0.00
|
|
|
|
(1.27
|
)
|
|
|
(2.32
|
)
|
Shares used to compute net income (loss) per share(2)(3)
|
|
|
27,827
|
|
|
|
7,709
|
|
|
|
7,520
|
|
|
|
7,117
|
|
|
|
6,764
|
|
Shares used to compute diluted net income (loss)
per share(2)(3)
|
|
|
30,201
|
|
|
|
9,683
|
|
|
|
9,091
|
|
|
|
7,117
|
|
|
|
6,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
100,650
|
|
|
$
|
20,570
|
|
|
$
|
12,350
|
|
|
$
|
10,944
|
|
|
$
|
12,883
|
|
Short-term investments
|
|
|
52,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
170,615
|
|
|
|
25,446
|
|
|
|
17,240
|
|
|
|
13,391
|
|
|
|
19,978
|
|
Total assets
|
|
|
202,400
|
|
|
|
43,101
|
|
|
|
31,154
|
|
|
|
25,822
|
|
|
|
32,239
|
|
Long-term liabilities
|
|
|
5,738
|
|
|
|
3,577
|
|
|
|
4,389
|
|
|
|
4,164
|
|
|
|
4,429
|
|
Total liabilities
|
|
|
25,283
|
|
|
|
16,069
|
|
|
|
13,270
|
|
|
|
11,473
|
|
|
|
10,439
|
|
Mandatorily redeemable convertible preferred shares
|
|
|
|
|
|
|
55,759
|
|
|
|
55,583
|
|
|
|
55,417
|
|
|
|
55,262
|
|
Convertible preferred shares
|
|
|
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
Total shareholders equity (deficit)
|
|
$
|
177,117
|
|
|
$
|
(65,065
|
)
|
|
$
|
(74,037
|
)
|
|
$
|
(77,406
|
)
|
|
$
|
(69,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts included in 2007 and 2006 reflect the adoption of
SFAS 123R, effective January 1, 2006. |
39
|
|
|
(2) |
|
See Note 1 of Notes to Consolidated Financial Statements,
included in Part IV, Item 15 of this Report, for an
explanation of the calculation of net income (loss) per share. |
|
(3) |
|
On February 1, 2007, the Company effected a 1.75-to-1
reverse split of the Companys ordinary shares, mandatorily
redeemable convertible preferred shares and convertible
preferred shares (the Share Split) pursuant to the
filing of the Amended and Restated Articles of Association. The
number of shares and per share amounts have been adjusted to
reflect retroactively the Share Split. |
|
|
ITEM 7
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion of our financial
condition and results of operations in conjunction with the
financial statements and the notes thereto included elsewhere in
this report. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below
and elsewhere in this report, particularly in the Risk
Factors.
Overview
General
We are a leading supplier of semiconductor-based,
high-performance interconnect products that facilitate data
transmission between servers, communications infrastructure
equipment and storage systems. Our products are an integral part
of a total solution focused on computing, storage and
communication applications used in enterprise data center,
high-performance computing and embedded systems. We operate in
one reportable segment: the development, manufacturing,
marketing and sales of interconnect semiconductor products (see
Note 11 Segment Information, of the
accompanying notes to our consolidated financial statements).
We are a fabless semiconductor company that provides
high-performance interconnect products based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our ICs. Growth in our target markets is
being driven by the need to improve the efficiency and
performance of clustered systems in data centers, as well as the
need to significantly reduce the total cost of ownership.
We outsource our manufacturing, assembly, packaging and
production test functions, which enables us to focus on the
design, development, sales and marketing of our products. As a
result, our business has relatively low capital requirements.
However, our ability to bring new products to market, fulfill
customer orders and achieve long-term growth depends on our
ability to maintain sufficient technical personnel and obtain
sufficient external subcontractor capacity.
We have experienced rapid growth in our total revenues in each
of the last three years. Our revenues increased from
$42.1 million to $48.5 million to $84.1 million
for the years ended December 31, 2005, 2006 and 2007,
respectively. In order to continue to increase our revenues, we
must continue to achieve design wins over other InfiniBand and
Ethernet providers and providers of competing interconnect
technologies. We consider a design win to occur when an OEM or
contract manufacturer notifies us that it has selected our
products to be incorporated into a product or system under
development. Because the life cycles for our customers
products can last for several years if these products have
successful commercial introductions, we expect to continue to
generate revenues over an extended period of time for each
successful design win.
It is difficult for us to forecast the demand for our products,
in part because of the highly complex supply chain between us
and the end-user markets that incorporate our products. Demand
for new features changes rapidly. Due to our lengthy product
development cycle, it is critical for us to anticipate changes
in demand for our various product features and the applications
they serve to allow sufficient time for product design. Our
failure to accurately forecast demand can lead to product
shortages that can impede production by our customers and harm
our relationship with these customers. Conversely, our failure
to forecast declining demand or shifts in product mix can result
in excess or obsolete inventory.
40
Revenues. We derive revenues from sales of our
ICs and HCA cards. To date, we have derived a substantial
portion of our revenues from a relatively small number of
customers. Total sales to customers representing more than 10%
of revenues accounted for 56%, 55% and 56% of our total revenues
for the years ended December 31, 2007, 2006 and 2005,
respectively. The loss of one or more of our principal customers
or the reduction or deferral of purchases of our products by one
of these customers could cause our revenues to decline
materially if we are unable to increase our revenues from other
customers.
Cost of revenues and gross profit. The cost of
revenues consists primarily of the cost of silicon wafers
purchased from our foundry supplier, Taiwan Semiconductor
Manufacturing Company, or TSMC, costs associated with the
assembly, packaging and production testing of our products by
Advanced Semiconductor Engineering, or ASE, outside processing
costs associated with the manufacture of our HCA cards by
Flextronics, royalties due to third parties, including the
Office of the Chief Scientist of Israels Ministry of
Industry, Trade and Labor, or the OCS, the Binational Industrial
Research and Development Foundation, or BIRD, and a third-party
licensor, warranty costs, excess and obsolete inventory costs
and costs of personnel associated with production management and
quality assurance. In addition, after we purchase wafers from
our foundries, we also have the yield risk related to
manufacturing these wafers into semiconductor devices.
Manufacturing yield is the percentage of acceptable product
resulting from the manufacturing process, as identified when the
product is tested as a finished IC. If our manufacturing yields
decrease, our cost per unit increases, which could have a
significant adverse impact on our cost of revenues. We do not
have long-term pricing agreements with TSMC and ASE.
Accordingly, our costs are subject to price fluctuations based
on the cyclical demand for semiconductors.
We purchase our inventory pursuant to standard purchase orders.
We estimate that lead times for delivery of our finished
semiconductors from our foundry supplier and assembly, packaging
and production testing subcontractor are approximately three to
four months and that lead times for delivery from our HCA card
manufacturing subcontractors are approximately eight to ten
weeks. We build inventory based on forecasts of customer orders
rather than the actual orders themselves. In addition, as
customers are increasingly seeking opportunities to reduce their
lead times, we may be required to increase our inventory to meet
customer demand.
We expect our cost of revenues to increase over time as a result
of the expected increase in our sales volume. Generally, our
cost of revenues as a percentage of sales revenues has decreased
over time, primarily due to manufacturing cost reductions,
economies of scale related to higher unit volumes and our
decision to discontinue sales of our lower margin switch systems
products in 2005. This trend may not continue in the future, and
will depend on overall customer demand for our products, our
product mix, competitive product offerings and related pricing
and our ability to reduce manufacturing costs.
Operational
expenses
Research and development expenses. Our
research and development expenses consist primarily of salaries
and associated costs for employees engaged in research and
development, costs associated with computer aided design
software tools, depreciation expense and tape out costs. Tape
out costs are expenses related to the manufacture of new
products, including charges for mask sets, prototype wafers,
mask set revisions and testing incurred before releasing new
products. We anticipate these expenses will increase in future
periods based on an increase in personnel to support our product
development activities and the introduction of new products. We
anticipate that our research and development expenses may
fluctuate over the course of a year based on the timing of our
product tape outs.
We received grants from the OCS for several projects. Under the
terms of these grants, if products developed from an OCS-funded
project generate revenue we are required to pay a royalty of
4%-4.5% of the net sales as soon as we begin to sell such
products until 120% of the dollar value of the grant plus
interest at LIBOR is repaid. All of the grants we have received
from the OCS have resulted in IC products sold by us. In 2005,
we received an aggregate of $43,000 of approved grants in
support of some of our research and development programs. We
received no grants from the OCS during the years ended
December 31, 2007 and 2006. In total, we have received
grants from OCS in amount of $2.8 million. As of
December 31, 2007, our contingent obligation in respect of
royalties payable to the OCS totaled approximately $256,000,
payable out of future net sales, if any, of products that were
developed under projects funded by the OCS. The continued
repayment of OCS grants is contingent on future sales of
products
41
developed with the support of such grants, and we have no
obligation to refund these grants if future sales are not
generated. All reported research and development expenses are
net of OCS and other government grants.
The terms of OCS grants generally prohibit the manufacture of
products developed with OCS funding outside of Israel without
the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel of our IC products, subject
to an undertaking by us to pay the OCS royalties on the sales of
our OCS-supported products until such time as the total
royalties paid equal 120% of the amount of OCS grants.
Under applicable Israeli law, OCS consent is also required to
transfer technologies developed with OCS funding to third
parties in Israel. Transfer of OCS-funded technologies outside
of Israel is permitted with the approval of the OCS and in
accordance with the restrictions and payment obligations set
forth under Israeli law. Israeli law further specifies that both
the transfer of know-how as well as the transfer of intellectual
property rights in such know-how are subject to the same
restrictions. These restrictions do not apply to exports of
products from Israel or the sale of products developed with
these technologies. We do not anticipate the need to transfer
any of our intellectual property rights outside of Israel at
this time.
Sales and marketing expenses. Sales and
marketing expenses consist primarily of salaries and associated
costs for employees engaged in sales, marketing and customer
support, commission payments to external, third party sales
representatives and charges for trade shows, promotions and
travel. We expect these expenses will increase in absolute
dollars in future periods based on an increase in sales and
marketing personnel and increased commission payments on higher
sales volumes.
General and administrative expenses. General
and administrative expenses consist primarily of salaries and
associated costs for employees engaged in finance, human
resources and administrative activities and charges for
accounting and corporate legal fees. We expect these expenses
will increase in absolute dollars in future periods based on an
increase in personnel to meet the requirements associated with
our anticipated growth and being a public company.
Taxes on
Income
Our operations in Israel have been granted Approved
Enterprise status by the Investment Center of the Israeli
Ministry of Industry, Trade and Labor, which makes us eligible
for tax benefits under the Israeli Law for Encouragement of
Capital Investments, 1959. Under the terms of the Approved
Enterprise program, income that is attributable to our
operations in Yokneam, Israel will be exempt from income tax for
a period of ten years commencing when we first generate taxable
income (after setting off our losses from prior years). Income
that is attributable to our operations in Tel Aviv, Israel will
be exempt from income tax for a period of two years commencing
when we first generate taxable income (after setting off our
losses from prior years), and will be subject to a reduced
income tax rate (generally
10-25%,
depending on the percentage of foreign investment in our
company) for the following five to eight years.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures.
We evaluate our estimates and assumptions on an ongoing basis.
Our estimates are based on historical experience and various
other assumptions that we believe to be reasonable under the
circumstances. Our actual results could differ from these
estimates.
We believe that the assumptions and estimates associated with
revenue recognition, allowance for doubtful accounts, inventory
valuation, warranty provision, income taxes and share-based
compensation have the greatest potential impact on our
consolidated financial statements. Therefore, we consider these
to be our critical accounting policies and estimates. For
further information on all of our significant accounting
policies, please see Note 1 of the accompanying notes to
our consolidated financial statements.
42
Revenue
recognition
We account for our revenue under the provisions of Staff
Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements (SAB 104).
Under SAB 104, revenues from sales of products are
recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and
collection is reasonably assured. Our standard arrangement with
our customers typically includes
freight-on-board
shipping point,
30-day
payment terms, no right of return and no customer acceptance
provisions. We generally rely upon a purchase order as
persuasive evidence of an arrangement.
We determine whether collectibility is probable on a
customer-by-customer
basis. When assessing the probability of collection, we consider
the number of years the customer has been in business and the
history of our collections. Customers are subject to a credit
review process that evaluates the customers financial
positions and ultimately their ability to pay. If it is
determined at the outset of an arrangement that collection is
not probable, no product is shipped and no revenue is recognized
unless cash is received in advance.
For multiple element arrangements, revenue is allocated to the
separate elements based on fair value. If an arrangement
includes undelivered elements that are not essential to the
functionality of the delivered elements, the Company defers the
fair value of the undelivered elements and the residual revenue
is allocated to the delivered elements. If the undelivered
elements are essential to the functionality of the delivered
elements, no revenue is recognized. The amount and impact on our
consolidated financial statements of undelivered elements have
historically been insignificant.
Allowance
for doubtful accounts
We estimate the allowance for doubtful accounts based on an
assessment of the collectibility of specific customer accounts.
If we determine that a specific customer is unable to meet its
financial obligations, we provide a specific allowance for
credit losses to reduce the net recognized receivable to the
amount we reasonably believe will be collected. Probability of
collection is assessed on a
customer-by-customer
basis and our historical experience with each customer.
Customers are subject to an ongoing credit review process that
evaluates the customers financial positions. We review and
update our estimates for allowance for doubtful accounts on a
quarterly basis. Our allowance for doubtful accounts totaled
approximately $186,000 and $107,000 at December 31, 2007
and 2006, respectively. Our bad debt expense totaled
approximately $86,000, $10,000 and $70,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Inventory
valuation
We value our inventory at the lower of cost or market. Market is
determined based on net realizable value. Cost is determined for
raw materials on a
first-in,
first-out basis, for work in process based on actual costs
and for finished goods based on standard cost, which
approximates actual cost on a
first-in,
first-out basis. We reserve for excess and obsolete inventory
based on forecasted demand generally over a nine-month period
and market conditions. Inventory reserves are not reversed and
permanently reduce the cost basis of the affected inventory
until it is either sold or scrapped.
Warranty
provision
We provide a limited warranty for periods of up to three years
from the date of delivery against defects in materials and
workmanship. If a customer has a defective product, we will
either repair the goods or provide replacement products at no
charge. We record estimated warranty expenses at the time we
recognize the associated product revenues based on our
historical rates of return and costs of repair over the
preceding
36-month
period. In addition, we recognize estimated warranty expenses
for specific defects at the time those defects are identified.
Share-based
compensation
Through December 31, 2005, we elected to account for
share-based compensation in accordance with the intrinsic value
method described in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25) and related
interpretations rather than adopting the fair value method
provided under Statement of Financial Accounting Standards
No. 123, Accounting for Share-based
Compensation
43
(SFAS 123). We have generally not recognized
any compensation expense for share options we granted to our
employees where the exercise price equals the fair market value
of the shares on the date of grant and the exercise price,
number of shares eligible for issuance under the options and
vesting period are fixed.
Effective January 1, 2006, we adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)), which requires
that we measure compensation expense for all share-based payment
awards made to employees and directors, including employee share
options, based on estimated fair values and recognize that
expense over the required service period.
We adopted SFAS 123(R) using the prospective transition
method. Under this method, SFAS 123(R) is applied to new
awards and to awards modified, repurchased or cancelled after
January 1, 2006. Compensation cost previously recorded
under APB 25 for unvested options will continue to be recognized
as the required services are rendered. Accordingly, for the year
ended December 31, 2006, share-based compensation expense
includes compensation costs related to estimated fair values of
awards granted after the date of adoption of SFAS 123(R)
and compensation costs related to unvested awards at the date of
adoption based on the intrinsic values as previously recorded
under APB 25.
For options granted after January 1, 2006, and valued in
accordance with SFAS 123(R), we use the straight-line
method for expense attribution. For options granted prior to
January 1, 2006, we use the multiple grant approach for
expense attribution, which results in substantially higher
amounts of amortization in earlier years as opposed to the
straight-line method, which results in equal amortization over
the vesting period of the options.
Upon adoption of SFAS 123(R), we were required to estimate
the number of outstanding options that are not expected to vest.
In subsequent periods, if actual forfeitures differ from these
estimates, we will revise our estimates. No compensation cost is
recognized for options that do not vest. Under the multiple
grant approach, forfeitures of unvested options resulting from
employee terminations result in the reversal during the period
in which the termination occurred of previously expensed share
compensation associated with the unvested options with
maturities similar to the expected terms of the respective
options. Share compensation from vested options, whether
forfeited or not, is not reversed.
We estimated the fair value of options granted after
January 1, 2006 using the Black-Scholes option valuation
model. This valuation model requires us to make assumptions and
judgments about the variables used in the calculation. These
variables and assumptions include the weighted average period of
time that the options granted are expected to be outstanding,
the volatility of our ordinary shares, the risk-free interest
rate and the estimated rate of forfeitures of unvested share
options. If actual results differ from our estimates, we will
record the difference as a cumulative adjustment in the period
we revise our estimates. Because our ordinary shares were not
publicly traded until February 8, 2007, we used the
simplified calculation of expected life described in the SEC
Staff Accounting Bulletin No. 107 and we estimated our
ordinary shares volatility based on an average of the
historical volatilities of the companys peer group in the
industry in which it does business. The risk-free rate is based
on U.S. Treasury securities with maturities similar to the
expected terms of the respective options. We estimated expected
forfeitures based on our historical experience.
Accounting
for income taxes
Income taxes are accounted for using an asset and liability
approach, which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been
recognized in our financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets
are based on the provisions of enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to affect taxable
income. Valuation allowances are provided if, based on the
weight of available evidence, it is considered more likely than
not that some or all of the deferred tax assets will not be
realized.
Effective January 1, 2007, we adopted the provisions of
FASB Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN 48. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS No. 109. The first step is
44
to evaluate the tax position for recognition by determining if
the weight of available evidence indicates it is more likely
than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon
ultimate settlement. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may
require periodic adjustments and which may not accurately
anticipate actual outcomes. Upon implementation of FIN 48,
the Company recognized no material adjustment to the
January 1, 2007 balance of retained earnings. As of
December 31, 2007, our unrecognized tax benefits totaled
approximately $1,139,000.
Results
of Operations
The following table sets forth our consolidated statements of
operations as a percentage of revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
(25
|
)
|
|
|
(28
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
75
|
|
|
|
72
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
29
|
|
|
|
31
|
|
|
|
31
|
|
Sales and marketing
|
|
|
15
|
|
|
|
18
|
|
|
|
18
|
|
General and administrative
|
|
|
8
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52
|
|
|
|
57
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
23
|
|
|
|
15
|
|
|
|
8
|
|
Other income, net
|
|
|
7
|
|
|
|
1
|
|
|
|
1
|
|
Benefit from (provision for) taxes on income
|
|
|
12
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
42
|
|
|
|
15
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Year Ended December 31, 2007 to the Year Ended
December 31, 2006
Revenues. Revenues were $84.1 million for
the year ended December 31, 2007 compared to
$48.5 million for the year ended December 31, 2006,
representing an increase of approximately 73%. This increase in
revenues resulted primarily from increased unit sales of
approximately 91%, offset by a decrease in average selling
prices of 10%. The increase in unit sales was driven by broader
adoption of Infiniband and our products and resulted primarily
from increased purchases by Hewlett-Packard, Voltaire and Cisco,
which accounted for 19%, 15% and 11%, respectively, of our
revenue for the year ended December 31, 2007 and increased
purchases by Network Appliance, Super Micro Computer and SUN
Microsystems, which each accounted for less than 10% of our
revenue for the year ended December 31, 2007. The decrease
in average sales prices was primarily attributed to the decline
in average sales price of ICs.
Gross Profit and Margin. Gross profit was
$62.7 million for the year ended December 31, 2007
compared to $35.0 million for the year ended
December 31, 2006, representing an increase of 79%. As a
percentage of revenues, gross margin increased to 75% in the
year ended December 31, 2007 from approximately 72% in the
year ended December 31, 2006. This increase in gross margin
was primarily due to a reduction in production costs associated
with outsourced labor, raw materials and volume discounts. In
addition, part of the gross margin improvement was due to
increased sales of next generation double-data rate
(DDR) products for which we receive higher margins.
Revenues attributable to DDR products were 66% and 38% of total
revenues in the years ended December 31, 2007 and 2006,
respectively.
45
Research and Development. Research and
development expenses were $24.6 million for the year ended
December 31, 2007 compared to $15.3 million for the
year ended December 31, 2006, representing an increase of
approximately 61%. The increase was primarily attributable to
higher salary related expenses of approximately
$4.6 million associated with increased headcount, increased
share based compensation of approximately $1.9 million
primarily due to new option grants, an increase in new product
expenses of approximately $1.7 million primarily due to
tape out costs, increased depreciation and amortization of
equipment, software and intellectual property of approximately
$835,000 arising from purchases of property, equipment and
technology licenses. We expect that research and development
expense will increase in absolute dollars in future periods as
we continue to devote resources to develop new products, meet
the changing requirements of our customers, expand into new
markets and technologies, and hire additional personnel.
For a further discussion of share-based compensation included in
research and development expense, see Share-based
compensation expense below.
Sales and Marketing. Sales and marketing
expenses were $12.7 million for the year ended
December 31, 2007 compared to $8.9 million for the
year ended December 31, 2006, representing an increase of
approximately 43%. The increase was primarily attributable to
higher salary related expenses of approximately
$1.2 million associated with increased headcount, increased
external sales commission expenses of approximately
$1.2 million due to increase in sales, increased share
based compensation of approximately $678,000 primarily due to
new option grants and an increase in tradeshow and advertising
expenses of approximately $332,000 related to expanding our
sales and marketing activities as we broadened our customer and
product base.
For a further discussion of share-based compensation included in
sales and marketing expense, see Share-based compensation
expense below.
General and Administrative. General and
administrative expenses were $6.2 million for the year
ended December 31, 2007 compared to $3.7 million for
the year ended December 31, 2006, representing an increase
of approximately 68%. The increase was primarily due to higher
salary related expenses of approximately $777,000 associated
with increased headcount, increased legal, accounting and other
professional fee expenses of approximately $771,000 as a result
of the Company becoming public and increased share based
compensation expense of approximately $467,000 primarily due to
new option grants.
Share-based compensation expense. The
following table presents details of total share-based
compensation expense that is included in each functional line
item in our consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of goods sold
|
|
$
|
87
|
|
|
$
|
12
|
|
Research and development
|
|
|
2,069
|
|
|
|
193
|
|
Sales and marketing
|
|
|
864
|
|
|
|
187
|
|
General and administrative
|
|
|
544
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,564
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
The amount of unearned share-based compensation currently
estimated to be expensed from 2008 through 2011 related to
unvested share-based payment awards at December 31, 2007 is
$23.6 million. Of this amount, $7.1 million,
$6.6 million, $6.2 million and $3.7 million are
currently estimated to be recorded in 2008, 2009, 2010 and 2011,
respectively. The weighted-average period over which the
unearned share-based compensation is expected to be recognized
is approximately 3.22 years.
The increase in unearned share-based compensation of
$18.2 million at December 31, 2007 from the
$5.4 million balance at December 31, 2006 was
primarily the result of share-based awards granted during 2007
including the grant of employee stock options to new employees,
merit grants to existing employees and the accumulation of
rights to purchase shares of our ordinary shares by employees
participating in our employee stock purchase program, offset in
part by share-based compensation of $3.6 million expensed
during 2007. If there are any
46
modifications or cancellations of the underlying unvested
awards, we may be required to accelerate, increase or cancel any
remaining unearned share-based compensation expense. Future
share-based compensation expense and unearned share-based
compensation will increase to the extent that we grant
additional equity awards to employees or assume unvested equity
awards in connection with acquisitions.
Other Income, net. Other income, net consists
of interest earned on cash and cash equivalents and short-term
investments and foreign currency exchange gains and losses.
Other income, net was $6.0 million for the year ended
December 31, 2007 compared to $438,000 for the year ended
December 31, 2006. The increase is primarily attributable
to higher interest income resulting from investments of the net
proceeds of our initial public offering completed in the first
quarter of 2007.
Benefit from (Provision for) Taxes on
Income. Benefit from taxes on income was
$10.5 million for the year ended December 31, 2007
compared to a provision for taxes of $301,000 for the year ended
December 31, 2006. The change consists of the benefit from
the release of valuation allowance on certain deferred tax
assets of $12.1 million primarily related to net operating
losses in Israel expected to be utilized in 2008 before the
Approved Enterprise Tax Holiday begins, which was offset by a
provision for income taxes of $1.6 million related to
interest income from investments of proceeds from our initial
public offering and higher income attributable to Mellanox
Technologies, Inc., our wholly owned subsidiary.
In accordance with SFAS 109, we record net deferred tax
assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider
all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent
financial performance. Management believes that historical
profitability combined with the expectation of future
profitability supports the future realization of certain
deferred tax assets and accordingly, released valuation
allowance for certain foreign deferred tax assets in the year
2007.
Comparison
of Year Ended December 31, 2006 to the Year Ended
December 31, 2005
Revenues. Revenues were approximately
$48.5 million for the year ended December 31, 2006
compared to $42.1 million for the year ended
December 31, 2005, representing an increase of
approximately 15%. This increase in revenues resulted primarily
from increased unit sales of approximately 27%, driven by
broader adoption of InfiniBand and our products, offset by a
decrease in average sales prices of 9%. A portion of the
decrease in average sales prices was due to the decline from 6%
to 3% in the percentage of revenues attributable to switch
systems, which have significantly higher sales prices. In
addition, Cisco, one of our largest customers that represented
approximately 14% of our revenues in the year ended
December 31, 2006, and approximately 44% of our revenues in
the year ended December 31, 2005. A portion of this
percentage decline was attributable to an accumulation of
inventory in 2005 by Cisco following its acquisition of Topspin
Communications. We believe this inventory was substantially sold
in 2005 and 2006. Cisco remained one of our largest customers
for the year ended December 31, 2006.
Gross Profit and Margin. Gross profit was
approximately $35.0 million for the year ended
December 31, 2006 compared to approximate
$26.9 million for the year ended December 31, 2005,
representing an increase of 30%. As a percentage of revenues,
gross margin increased to 72% in the year ended
December 31, 2006 from approximately 64% in the year ended
December 31, 2005. This increase in gross margin was
primarily due to a reduction in production costs associated with
outsourced labor, raw materials and volume discounts. In
addition, part of the gross margin improvement was due to
increased sales of next generation products for which we receive
higher margins.
Research and Development. Research and
development expenses were approximately $15.3 million for
the year ended December 31, 2006 compared to approximately
$13.1 million for the year ended December 31, 2005,
representing an increase of approximately 17%. The increase was
primarily attributable to higher salary related expenses of
approximately $2.1 million associated with increased
headcount, and increased depreciation and amortization of
equipment, software and intellectual property of approximately
$281,000, partially offset by decreased purchases of new
equipment, software and associated customer support of
approximately $201,000.
47
Sales and Marketing. Sales and marketing
expenses were approximately $8.9 million for the year ended
December 31, 2006 compared to approximately
$7.4 million for the year ended December 31, 2005,
representing an increase of approximately 20%. The increase was
primarily attributable to higher salary related expenses of
approximately $1.1 million associated with increased
headcount, an increase in tradeshow and advertising expenses of
approximately $271,000 and an increase in travel related
expenses of $151,000.
General and Administrative. General and
administrative expenses were approximately $3.7 million for
the year ended December 31, 2006 compared to approximately
$3.1 million for the year ended December 31, 2005,
representing an increase of approximately 19%. The increase was
primarily due to higher salary related expenses of approximately
$353,000 associated with increased headcount and an increase in
legal, accounting and consulting fees of approximately $410,000,
partially offset by a decrease in travel related expenses of
approximately $84,000.
Other Income, net. Other income, net consists
of interest earned on cash equivalents and marketable securities
and foreign currency exchange gains and losses. Other income,
net was approximately $438,000 for the year ended
December 31, 2006 compared to approximately $326,000 for
the year ended December 31, 2005, representing an increase
of approximately 34%. The increase was due to higher net
interest income on cash deposits partially offset by higher
foreign exchange losses.
Provision for Taxes on Income. Provision for
taxes on income was approximately $301,000 for the year ended
December 31, 2006 compared to approximately $462,000 for
the year ended December 31, 2005, representing a decrease
of 35%. The decrease was primarily related to the decline in the
percentage of total revenues generated within the United States.
For the year ended December 31, 2006, revenues generated in
the United States represented 58% of all revenues, compared to
71% of all revenues for the year ended December 31, 2005.
Generally, revenues generated outside the United States are
exempt from income tax under the Approved Enterprise Tax Holiday
in Israel.
Liquidity
and Capital Resources
Since our inception until our initial public offering in
February 2007, we have financed our operations primarily through
private placements of our convertible preferred shares totaling
approximately $89.3 million. We incurred net losses from
operations since inception until the second quarter of 2005. In
August 2005, we entered into an agreement with a financial
institution to provide us with a line of credit of up to
approximately $5.0 million for general working capital
requirements. The line of credit was not utilized and on
June 30, 2007, the agreement expired.
On February 13, 2007, we closed the initial public offering
of our ordinary shares. We sold 6,900,000 ordinary shares in the
offering, which number of shares included the underwriters
exercise in full of their option to purchase up to
900,000 shares to cover over-allotments, at an offering
price of $17.00 per share. Net proceeds generated by the
offering, after adjusting for offering costs, totaled
approximately $106 million.
As of December 31, 2007, our principal source of liquidity
consisted of cash and cash equivalents of approximately
$100.7 million and short-term investments of approximately
$52.2 million. We expect that our current cash and cash
equivalents and short-term investments and our cash flows from
operating activities, will be sufficient to fund our operations
over the next 12 months after taking into account potential
business and technology acquisitions, if any, and expected
increases in research and development expenses, including tape
out costs, sales and marketing expenses, general and
administrative expenses, primarily for increased headcount, and
capital expenditures to support our infrastructure and growth.
Operating
Activities
Net cash generated by our operating activities amounted to
approximately $25.9 million in the year ended
December 31, 2007. Net cash generated by operating
activities was primarily attributable to net income of
approximately $35.6 million, an increase of approximately
$4.8 million in accrued liabilities primarily associated
with payroll and other payables and an increase of approximately
$2.2 million in accounts payable, offset by an increase in
accounts receivables, net of approximately $7.2 million and
an increase in inventory of approximately $1.3 million.
Furthermore, net cash generated by operating activities was net
income adjusted for non-cash items of
48
approximately $3.6 million for share-based compensation and
$2.1 million for depreciation and amortization offset by an
increase in deferred taxes of $12.1 million and gains on
investments of $2.3 million.
Net cash generated by our operating activities amounted to
approximately $9.1 million for the year ended
December 31, 2006. Net cash generated by operating
activities was primarily attributable to net income of
approximately $7.2 million and an increase in accrued
liabilities of approximately $1.9 million. Cash generated
by operating activities in 2006 included increases in accounts
receivable resulting from increased product sales of
approximately $2.2 million, partially offset by non-cash
charges of approximately $2.0 million for depreciation and
amortization.
Net cash generated by operating activities in 2005 was
approximately $770,000. Our net income of approximately
$3.2 million was impacted by a non-cash charge of
approximately $1.7 million for depreciation and
amortization. Cash generated by operating activities in 2005
included increases in accounts receivable resulting from
increased product sales and inventories resulting from increased
projected product demand of approximately $3.2 million and
$2.3 million, respectively, and an increase in accrued
liabilities and other payables of approximately
$1.0 million.
Investing
Activities
Net cash used in investing activities was approximately
$54.7 million in the year ended December 31, 2007.
Cash used in investment activities was primarily attributable to
purchases of short-term investments of $151.5 million and
purchases of property and equipment of $4.0 million, offset
by the maturity and sale of short-term investments of
$101.6 million.
Net cash used in investing activities was approximately $569,000
in the year ended December 31, 2006. Cash used in
investment activities was primarily attributable to purchases of
property and equipment and severance-related insurance policies
of $747,000 and $472,000, respectively, offset by the partial
return of a tenancy security deposit of $650,000 that was no
longer restricted due to the renegotiation of the tenancy
agreement.
Net cash generated by investment activities was approximately
$462,000 in the year ended December 31, 2005 and was
primarily attributable to net sales and maturities of marketable
securities (net of purchases) of $1.6 million, offset by
purchases of property and equipment of $1.0 million and
severance-related insurance policies of $0.2 million.
Financing
Activities
Net cash provided by financing activities was approximately
$108.8 million in the year ended December 31, 2007.
Cash provided by financing activities was attributable to the
proceeds from the initial public offering of
$106.0 million, proceeds from the exercise of share options
and warrants of $3.5 million and an excess tax benefit from
share based compensation of $1.5 million, offset by
principal payments on capital lease obligations of
$2.1 million.
Net cash used in financing activities was approximately $292,000
in the year ended December 31, 2006. Cash used in financing
activities was attributable to proceeds from the exercise of
share options and warrants of $1.4 million, offset by
principal payments on capital lease obligations of
$0.3 million and payments on deferred public offering costs
of $1.4 million.
Our financing activities generated approximately $174,000 in
2005 and were attributable to proceeds from the exercise of
share options of $342,000, partially offset by principal
payments on capital lease obligations of $168,000.
49
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2007 and the effect those obligations are
expected to have on our liquidity and cash flow in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
Contractual Obligations:
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
|
(In thousands)
|
|
|
Commitments under capital lease
|
|
$
|
3,169
|
|
|
$
|
1,560
|
|
|
$
|
1,135
|
|
|
$
|
474
|
|
Non-cancelable operating lease commitments
|
|
|
5,027
|
|
|
|
1,935
|
|
|
|
2,319
|
|
|
|
773
|
|
Purchase commitments
|
|
|
5,744
|
|
|
|
5,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,940
|
|
|
$
|
9,239
|
|
|
$
|
3,454
|
|
|
$
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, we have no contractual obligations
expected to have an effect on our liquidity and cash flow in
periods beyond five years.
For purposes of this table, purchase obligations for the
purchase of goods or services are defined as agreements that are
enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Our purchase orders are based on our
current manufacturing needs and are fulfilled by our vendors
within relatively short time horizons. In addition, we have
purchase orders that represent authorizations to purchase rather
than binding agreements. We do not have significant agreements
for the purchase of raw materials or other goods specifying
minimum quantities or set prices that exceed our expected
requirements.
As of December 31, 2007, our unrecognized tax benefits
totaled approximately $1,139,000, which would reduce our income
tax expense and effective tax rate, if recognized.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS No. 157, which defines
fair value, establishes a framework for measuring fair value
under generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source
of the information. SFAS No. 157 is effective for the
company as of January 1, 2008. We expect that the financial
impact, if any, of the adoption of SFAS No. 157 will
not be material on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities,
or SFAS No. 159, which permits entities to elect to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
This election is irrevocable. SFAS No. 159 will be
effective for us on January 1, 2008. We expect that the
financial impact, if any, of the adoption of
SFAS No. 159 will not be material on our consolidated
financial statements.
In June 2007 the FASB ratified Emerging Issuers Task Force
No. 07-3,
or
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities.
EITF 07-3
requires non-refundable advance payments for goods and services
to be used in future research and development activities to be
recorded as an asset and the payments to be expensed when the
research and development activities are performed.
EITF 07-3
is effective for us on January 1, 2008. This standard is
not expected to have a material impact on our consolidated
financial statements.
Off-Balance
Sheet Arrangements
As of December 31, 2007, we did not have any off-balance
sheet arrangements.
50
|
|
ITEM 7A
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The recent decline in the market value of certain securities
backed by residential mortgage loans has led to a large
liquidity crisis effecting the broader U.S. housing market,
the financial services industry and global financial markets.
Investors in many industry sectors have experienced substantial
decreases in asset valuations and uncertain market liquidity.
Furthermore, credit rating authorities have, in many cases, been
slow to respond to the rapid changes in the underlying value of
certain securities and pervasive market illiquidity, regarding
these securities.
As a result, this credit crisis may have a potential
impact on the determination of the fair value of financial
instruments or may result in impairments in the future should
the value of certain investments suffer a decline which is
determined to be other than temporary. We do not currently
believe that the impact of this credit crisis on the value of
our marketable securities would be material or warrant a
determination of an other than temporary write down.
Interest
rate fluctuation risk
We do not have any long-term borrowings. Our investments consist
of cash and cash equivalents, short-term deposits and interest
bearing investments in marketable securities with maturities of
one year or less, consisting of commercial paper, government and
non- government debt securities. The primary objective of our
investment activities is to preserve principal while maximizing
income without significantly increasing risk. We do not enter
into investments for trading or speculative purposes. Our
investments are exposed to market risk due to a fluctuation in
interest rates, which may affect our interest income and the
fair market value of our investments. Due to the short-term
nature of our investment portfolio, we do not believe an
immediate 5% change in interest rates would have a material
effect on the fair market value of our portfolio, and therefore
we do not expect our operating results or cash flows to be
materially affected to any degree by a sudden change in market
interest rates.
Foreign
currency exchange risk
All of our sales are invoiced in U.S. dollars. The
U.S. dollar is our functional and reporting currency.
However, a significant portion of our headcount related
expenses, consisting principally of salaries and related
personnel expenses, and facilities and maintenance expenses are
denominated in new Israeli shekels, or NIS. This foreign
currency exposure gives rise to market risk associated with
exchange rate movements of the U.S. dollar against the NIS.
Furthermore, we anticipate that a material portion of our
expenses will continue to be denominated in NIS. To the extent
the U.S. dollar weakens against the NIS, we will experience
a negative impact on our profit margins. To manage this risk, we
have on occasion converted U.S. dollars into NIS within two
to three weeks of monthly pay dates in Israel to lock in the
related salary expense given the different currencies. We do not
currently engage in currency hedging activities but we may
choose to do so in the future. These measures, however, may not
adequately protect us from material adverse effects due to the
impact of inflation in Israel. At December 31, 2007,
approximately $1.6 million of our monthly operating
expenses were denominated in NIS. This amount may increase in
the future due to hiring additional employees in Israel and
expanding our facilities there.
Inflation
related risk
We believe that the rate of inflation in Israel has not had a
material impact on our business to date. Our cost in Israel in
U.S. dollar terms will increase if inflation in Israel
exceeds the devaluation of the NIS against the U.S. dollar
or if the timing of such devaluation lags behind inflation in
Israel.
51
|
|
ITEM 8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements required by Item 8 are submitted
as a separate section of this Annual Report on
Form 10-K
and are incorporated by reference into this Item 8. See
Item 15, Exhibits and Financial Statement
Schedules.
Summary
Quarterly Data Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands except per share data)
|
|
|
Total revenues
|
|
$
|
24,780
|
|
|
$
|
22,664
|
|
|
$
|
19,779
|
|
|
$
|
16,855
|
|
|
$
|
15,798
|
|
|
$
|
13,422
|
|
|
$
|
10,813
|
|
|
$
|
8,506
|
|
Cost of revenues
|
|
|
(6,499
|
)
|
|
|
(5,695
|
)
|
|
|
(4,926
|
)
|
|
|
(4,270
|
)
|
|
|
(3,932
|
)
|
|
|
(3,651
|
)
|
|
|
(3,444
|
)
|
|
|
(2,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
18,281
|
|
|
|
16,969
|
|
|
|
14,853
|
|
|
|
12,585
|
|
|
|
11,866
|
|
|
|
9,771
|
|
|
|
7,369
|
|
|
|
6,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
7,035
|
|
|
|
6,067
|
|
|
|
5,592
|
|
|
|
5,944
|
|
|
|
4,192
|
|
|
|
3,821
|
|
|
|
3,683
|
|
|
|
3,560
|
|
Sales and marketing
|
|
|
3,650
|
|
|
|
3,294
|
|
|
|
3,004
|
|
|
|
2,791
|
|
|
|
2,855
|
|
|
|
2,122
|
|
|
|
2,173
|
|
|
|
1,785
|
|
General and administrative
|
|
|
1,762
|
|
|
|
1,607
|
|
|
|
1,503
|
|
|
|
1,357
|
|
|
|
1,160
|
|
|
|
926
|
|
|
|
792
|
|
|
|
826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,447
|
|
|
|
10,968
|
|
|
|
10,099
|
|
|
|
10,092
|
|
|
|
8,207
|
|
|
|
6,869
|
|
|
|
6,648
|
|
|
|
6,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
5,834
|
|
|
|
6,001
|
|
|
|
4,754
|
|
|
|
2,493
|
|
|
|
3,659
|
|
|
|
2,902
|
|
|
|
721
|
|
|
|
(171
|
)
|
Other income (expense), net
|
|
|
1,807
|
|
|
|
1,432
|
|
|
|
1,780
|
|
|
|
957
|
|
|
|
206
|
|
|
|
101
|
|
|
|
(3
|
)
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
7,641
|
|
|
|
7,433
|
|
|
|
6,534
|
|
|
|
3,450
|
|
|
|
3,865
|
|
|
|
3,003
|
|
|
|
718
|
|
|
|
(37
|
)
|
Benefit from (provision for) taxes on income(1)
|
|
|
12,084
|
|
|
|
(461
|
)
|
|
|
(929
|
)
|
|
|
(164
|
)
|
|
|
(30
|
)
|
|
|
(148
|
)
|
|
|
(69
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,725
|
|
|
$
|
6,972
|
|
|
$
|
5,605
|
|
|
$
|
3,286
|
|
|
$
|
3,835
|
|
|
$
|
2,855
|
|
|
$
|
649
|
|
|
$
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ordinary shareholders
|
|
$
|
19,725
|
|
|
$
|
6,972
|
|
|
$
|
5,605
|
|
|
$
|
3,286
|
|
|
$
|
298
|
|
|
$
|
0
|
|
|
$
|
135
|
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
|
0.64
|
|
|
|
0.23
|
|
|
|
0.19
|
|
|
|
0.16
|
|
|
|
0.04
|
|
|
|
0.00
|
|
|
|
0.02
|
|
|
|
(0.02
|
)
|
Net income (loss) per share diluted
|
|
$
|
0.60
|
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
|
|
|
(1) |
|
See Notes 1 and 10 of Notes to Consolidated Financial
Statements, included in Part IV, Item 15 of this
Report, for an explanation of the calculation of benefit
(provision) for taxes on income. |
|
|
ITEM 9
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Under the supervision and with the participation of certain
members of our management, including our Chief Executive Officer
and Chief Financial Officer, we completed an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) to
the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Based on that evaluation, we and our management have
concluded that, our disclosure controls and procedures at
December 31, 2007 were effective to ensure 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 rules and
forms of the SEC, and are designed to ensure that information
required to be disclosed by us in these reports is accumulated
and communicated to our management, as appropriate to allow
timely decisions regarding required disclosures.
52
We will consider further actions and continue to evaluate the
effectiveness of our disclosure controls and internal controls
and procedures on an ongoing basis, taking corrective action as
appropriate. Management does not expect that disclosure controls
and procedures or internal controls can prevent all errors and
all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable and not absolute assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. While management believes
that its disclosure controls and procedures provide reasonable
assurance that fraud can be detected and prevented, because of
the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected.
Changes
in Internal Control Over Financial Reporting
During the fourth quarter of 2007, there has been no change in
our internal control over financial reporting that has
materially affected, or is reasonably likely to affect, our
internal control over financial reporting.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate control over financial reporting, as such term is
defined in
Rule 13a-15(f)
of the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2007. Based on that
evaluation, management believes our internal control over
financial reporting was effective as of December 31, 2007.
The certifications of our Principal Executive Officer and
Principal Financial Officer attached as Exhibits 31.1 and
31.2 to this Annual Report on
Form 10-K
include, in paragraph 4 of such certifications, information
concerning our disclosure controls and procedures and internal
controls over financial reporting. Such certifications should be
read in conjunction with the information contained in this
Item 9A for a more complete understanding of the matters
covered by such certifications.
This annual report does not include an attestation report of the
Companys registered public accounting firm regarding
internal control over financial reporting. Managements
report was not subject to attestation by the Companys
registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company
to provide only managements report in this annual report.
|
|
ITEM 9B
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item will be contained in our
definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of our
Shareholders (the Proxy Statement), which is
expected to be filed no later than 120 days after the end
of our fiscal year ended December 31, 2007, and is
incorporated in this report by reference.
Our written Code of Business Conduct and Ethics applies to all
of our directors and employees, including our executive
officers. The Code of Business Conduct and Ethics is available
on our website at
http://www.mellanox.com.
Changes to or waivers of the Code of Business Conduct and Ethics
will be disclosed on the same website.
53
|
|
ITEM 11
|
EXECUTIVE
COMPENSATION
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
|
|
ITEM 12
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
|
|
ITEM 13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
|
|
ITEM 14
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
PART IV
|
|
ITEM 15
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Documents filed as part of this report.
1. Financial Statements. The following
financial statements of the Company and reports of the
independent registered public accounting firms are included in
this report:
|
|
|
|
|
|
|
Page
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
2. Financial Statement Schedules. The
following financial statement schedules of the Company are filed
as part of this report:
|
|
|
|
86
|
|
All other schedules have been omitted because they are not
applicable or not required, or the information is included in
the Consolidated Financial Statements or Notes thereto.
3. Exhibits. The following exhibits are
filed as part of this report:
54
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Association of Mellanox
Technologies, Ltd.
|
|
4
|
.1(2)
|
|
Amended and Restated Investor Rights Agreement dated as of
October 9, 2001, by and among Mellanox Technologies, Ltd.,
purchasers of Series A Preferred Shares, Series B
Preferred Shares and Series D Redeemable Preferred Shares
who are signatories to such agreement and certain holders of
Ordinary Shares who are signatories to such agreement, and for
purposes of certain sections thereof, the holder of
Series C Preferred Shares issued or issuable pursuant to
the Series C Preferred Share Purchase Agreement dated
November 5, 2000.
|
|
4
|
.2(3)
|
|
Amendment to the Amended and Restated Investor Rights Agreement
dated as of February 2, 2007, by and among Mellanox
Technologies, Ltd., purchasers of Series A Preferred
Shares, Series B Preferred Shares and Series D
Redeemable Preferred Shares who are signatories to such
agreement and certain holders of Ordinary Shares who are
signatories to such agreement, and for purposes of certain
sections thereof, the holder of Series C Preferred Shares
issued or issuable pursuant to the Series C Preferred Share
Purchase Agreement dated November 5, 2000.
|
|
10
|
.1(4)
|
|
Mellanox Technologies, Ltd. 1999 United States Equity Incentive
Plan and forms of agreements relating thereto.
|
|
10
|
.2(5)
|
|
Mellanox Technologies, Ltd. 1999 Israeli Share Option Plan and
forms of agreements relating thereto.
|
|
10
|
.3(6)
|
|
Mellanox Technologies, Ltd. 2003 Israeli Share Option Plan and
forms of agreements relating thereto.
|
|
10
|
.4(7)
|
|
Form of Indemnification undertaking made by and between Mellanox
Technologies, Ltd. and each of its directors and executive
officers.
|
|
10
|
.5(8)(9)
|
|
License Agreement between Vitesse Semiconductor Corporation and
the Company, dated September 10, 2001.
|
|
10
|
.6(10)
|
|
Net Lease Agreement between S.I. Hahn, LLC and Mellanox
Technologies, Inc., dated January 1, 2002.
|
|
10
|
.7(11)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered
Limited Partnership, as landlord, as amended August 23,
2001 (as translated from Hebrew).
|
|
10
|
.8(12)
|
|
Mellanox Technologies, Ltd. Global Share Incentive Plan
(2006) and forms of agreements and appendices relating
thereto.
|
|
10
|
.9(13)
|
|
Mellanox Technologies, Ltd. Non-Employee Director Option Grant
Policy.
|
|
10
|
.10(14)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for U.S. Executives.
|
|
10
|
.11(15)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for Israel Executives.
|
|
10
|
.12(16)
|
|
Mellanox Technologies, Ltd. Employee Share Purchase Plan.
|
|
10
|
.13
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered
Limited Partnership, as landlord, as amended May 15, 2007
(as translated from Hebrew).
|
|
10
|
.14
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered
Limited Partnership, as landlord, as amended September 4,
2007 (as translated from Hebrew).
|
|
14
|
.1(17)
|
|
Code of Business Conduct and Ethics.
|
|
21
|
.1(18)
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
|
|
24
|
.1
|
|
Power of Attorney (included on signature page to this annual
report on
Form 10-K).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Incorporated by reference to Exhibit 3.2 to Amendment
No. 4 to the Companys Registration Statement on
Form S-1
(SEC File No.
333-137659)
filed on January 22, 2007. |
55
|
|
|
(2) |
|
Incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(3) |
|
Incorporated by reference to Exhibit 4.3 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 26, 2007. |
|
(4) |
|
Incorporated by reference to Exhibit 10.1 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(5) |
|
Incorporated by reference to Exhibit 10.2 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(6) |
|
Incorporated by reference to Exhibit 10.3 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(7) |
|
Incorporated by reference to Exhibit 10.4 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(8) |
|
Confidential treatment granted as to certain portions, which
portions, have been omitted and filed separately with the
Securities and Exchange Commission. |
|
(9) |
|
Incorporated by reference to Exhibit 10.5 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(10) |
|
Incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(11) |
|
Incorporated by reference to Exhibit 10.9 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(12) |
|
Incorporated by reference to Exhibit 10.10 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(13) |
|
Incorporated by reference to Exhibit 10.11 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(14) |
|
Incorporated by reference to Exhibit 10.12 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(15) |
|
Incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(16) |
|
Incorporated by reference to Exhibit 10.14 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on December 7, 2006. |
|
(17) |
|
Incorporated by reference to Exhibit 14.1 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 26, 2007. |
|
(18) |
|
Incorporated by reference to Exhibit 21.1 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Mellanox
Technologies, Ltd.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of
convertible preferred shares and shareholders equity
(deficit) and of cash flows present fairly, in all material
respects, the financial position of Mellanox Technologies, Ltd.
and its subsidiary at December 31, 2007 and
December 31, 2006, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in
Item 15.2 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 9 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 24, 2008
57
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
100,650
|
|
|
$
|
20,570
|
|
Short-term investments
|
|
|
52,231
|
|
|
|
|
|
Restricted cash
|
|
|
709
|
|
|
|
678
|
|
Accounts receivable, net
|
|
|
17,353
|
|
|
|
10,141
|
|
Inventories
|
|
|
5,396
|
|
|
|
4,079
|
|
Deferred taxes
|
|
|
12,312
|
|
|
|
288
|
|
Prepaid expenses and other
|
|
|
1,509
|
|
|
|
2,182
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
190,160
|
|
|
|
37,938
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
8,449
|
|
|
|
2,588
|
|
Severance assets
|
|
|
3,152
|
|
|
|
2,284
|
|
Intangible assets, net
|
|
|
395
|
|
|
|
167
|
|
Other long-term assets
|
|
|
244
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
202,400
|
|
|
$
|
43,101
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE PREFERRED SHARES AND
SHAREHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
6,703
|
|
|
|
4,490
|
|
Other accrued liabilities
|
|
|
11,282
|
|
|
|
6,426
|
|
Capital lease obligations, current
|
|
|
1,560
|
|
|
|
420
|
|
Other liabilities, current
|
|
|
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,545
|
|
|
|
12,492
|
|
|
|
|
|
|
|
|
|
|
Accrued severance
|
|
|
4,058
|
|
|
|
2,940
|
|
Capital lease obligations
|
|
|
1,609
|
|
|
|
541
|
|
Other long-term obligations
|
|
|
71
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
25,283
|
|
|
|
16,069
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Mandatorily redeemable convertible preferred shares:
Series D, NIS 0.0175 par value, 6,484 shares
authorized, 4,838 shares issued and outstanding;
liquidation preference of $83,954, at December 31, 2006
|
|
|
|
|
|
|
55,759
|
|
Convertible preferred shares:
Series A-1/2,
NIS 0.0175 par value, 4,571 shares authorized,
4,343 shares issued and outstanding, liquidation preference
of $7,600;
Series B-1/2,
NIS 0.0175 par value, 2,286 shares authorized,
2,225 shares issued and outstanding, liquidation preference
of $25,737; Series C, NIS 0.01 par value,
231 shares authorized, 231 shares issued and
outstanding, liquidation preference of $3,000, at
December 31, 2006
|
|
|
|
|
|
|
36,338
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit)
|
|
|
|
|
|
|
|
|
Ordinary shares: NIS 0.0175 par value, 137,143 shares
authorized, 31,040 and 7,862 shares issued and outstanding
at December 31, 2007 and 2006, respectively
|
|
|
128
|
|
|
|
32
|
|
Additional paid-in capital
|
|
|
210,618
|
|
|
|
4,174
|
|
Accumulated other comprehensive income
|
|
|
54
|
|
|
|
|
|
Accumulated deficit
|
|
|
(33,683
|
)
|
|
|
(69,271
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
177,117
|
|
|
|
(65,065
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred shares and
shareholders equity (deficit)
|
|
$
|
202,400
|
|
|
$
|
43,101
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
58
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands except per share data)
|
|
|
Total revenues
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
$
|
42,068
|
|
Cost of revenues
|
|
|
(21,390
|
)
|
|
|
(13,533
|
)
|
|
|
(15,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
62,688
|
|
|
|
35,006
|
|
|
|
26,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
24,638
|
|
|
|
15,256
|
|
|
|
13,081
|
|
Sales and marketing
|
|
|
12,739
|
|
|
|
8,935
|
|
|
|
7,395
|
|
General and administrative
|
|
|
6,229
|
|
|
|
3,704
|
|
|
|
3,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
43,606
|
|
|
|
27,895
|
|
|
|
23,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19,082
|
|
|
|
7,111
|
|
|
|
3,295
|
|
Other income, net
|
|
|
5,976
|
|
|
|
438
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
25,058
|
|
|
|
7,549
|
|
|
|
3,621
|
|
Benefit from (provision for) taxes on income
|
|
|
10,530
|
|
|
|
(301
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
$
|
3,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series D mandatorily redeemable convertible
preferred shares
|
|
|
|
|
|
|
(176
|
)
|
|
|
(166
|
)
|
Income allocable to preferred shareholders
|
|
|
|
|
|
|
(6,774
|
)
|
|
|
(2,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
$
|
35,588
|
|
|
$
|
298
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders basic
|
|
$
|
1.28
|
|
|
$
|
0.04
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders diluted
|
|
$
|
1.18
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing income per share attributable to
ordinary shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,827
|
|
|
|
7,709
|
|
|
|
7,520
|
|
Diluted
|
|
|
30,201
|
|
|
|
9,683
|
|
|
|
9,091
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
MELLANOX
TECHNOLOGIES, LTD.
SHARES
AND SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Shares
|
|
|
Preferred Shares
|
|
|
Ordinary Shares
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2004
|
|
|
4,838,482
|
|
|
$
|
55,417
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
7,303,275
|
|
|
$
|
29
|
|
|
$
|
2,246
|
|
|
$
|
(3
|
)
|
|
$
|
(79,678
|
)
|
|
$
|
(77,406
|
)
|
Comprehensive income Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,159
|
|
|
|
3,159
|
|
Unrealized gains on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,162
|
|
Accretion of mandatorily redeemable convertible preferred shares
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
(166
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,865
|
|
|
|
1
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,838,482
|
|
|
$
|
55,583
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
7,655,140
|
|
|
$
|
30
|
|
|
$
|
2,452
|
|
|
$
|
|
|
|
$
|
(76,519
|
)
|
|
$
|
(74,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,248
|
|
|
|
7,248
|
|
Accretion of mandatorily redeemable convertible preferred shares
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
469
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,908
|
|
|
|
1
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,694
|
|
|
|
1
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
1,130
|
|
Vesting of ordinary shares subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
4,838,482
|
|
|
$
|
55,759
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
7,861,742
|
|
|
$
|
32
|
|
|
$
|
4,174
|
|
|
$
|
|
|
|
$
|
(69,271
|
)
|
|
$
|
(65,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,588
|
|
|
|
35,588
|
|
Unrealized gains on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,642
|
|
Conversion of preferred shares into ordinary shares
|
|
|
(4,838,482
|
)
|
|
|
(55,759
|
)
|
|
|
(6,799,192
|
)
|
|
|
(36,338
|
)
|
|
|
15,035,712
|
|
|
|
62
|
|
|
|
92,035
|
|
|
|
|
|
|
|
|
|
|
|
92,097
|
|
Issuance of ordinary shares in connection with initial public
offering, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,900,000
|
|
|
|
29
|
|
|
|
105,924
|
|
|
|
|
|
|
|
|
|
|
|
105,953
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
3,564
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180,522
|
|
|
|
5
|
|
|
|
2,594
|
|
|
|
|
|
|
|
|
|
|
|
2,599
|
|
Issuance of stock pursuant to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,133
|
|
|
|
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
851
|
|
Income tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
1,471
|
|
Vesting of ordinary shares subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
31,040,109
|
|
|
$
|
128
|
|
|
$
|
210,618
|
|
|
$
|
54
|
|
|
$
|
(33,683
|
)
|
|
$
|
177,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
$
|
3,159
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,132
|
|
|
|
1,954
|
|
|
|
1,730
|
|
Deferred income taxes
|
|
|
(12,143
|
)
|
|
|
(201
|
)
|
|
|
10
|
|
Share-based compensation expense
|
|
|
3,564
|
|
|
|
469
|
|
|
|
31
|
|
Gain on sale of investments
|
|
|
(2,328
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(7,212
|
)
|
|
|
(2,198
|
)
|
|
|
(3,192
|
)
|
Inventories
|
|
|
(1,317
|
)
|
|
|
(48
|
)
|
|
|
(2,339
|
)
|
Prepaid expenses and other assets
|
|
|
644
|
|
|
|
(313
|
)
|
|
|
(191
|
)
|
Accounts payable
|
|
|
2,213
|
|
|
|
285
|
|
|
|
543
|
|
Accrued liabilities and other payables
|
|
|
4,798
|
|
|
|
1,885
|
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,939
|
|
|
|
9,081
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of severance-related insurance policies
|
|
|
(868
|
)
|
|
|
(472
|
)
|
|
|
(187
|
)
|
Purchase of short-term investment
|
|
|
(151,465
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of short-term investments
|
|
|
101,616
|
|
|
|
|
|
|
|
1,611
|
|
Purchase of property and equipment
|
|
|
(3,960
|
)
|
|
|
(747
|
)
|
|
|
(962
|
)
|
Return of (purchase of) restricted cash deposit
|
|
|
(3
|
)
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(54,680
|
)
|
|
|
(569
|
)
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net
|
|
|
105,953
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations
|
|
|
(2,053
|
)
|
|
|
(308
|
)
|
|
|
(168
|
)
|
Payments on deferred public offering costs
|
|
|
|
|
|
|
(1,384
|
)
|
|
|
|
|
Proceeds from exercise of share awards and warrants
|
|
|
3,450
|
|
|
|
1,400
|
|
|
|
342
|
|
Excess tax benefit from share-based compensation
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
108,821
|
|
|
|
(292
|
)
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
80,080
|
|
|
|
8,220
|
|
|
|
1,406
|
|
Cash and cash equivalents at beginning of period
|
|
|
20,570
|
|
|
|
12,350
|
|
|
|
10,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
100,650
|
|
|
$
|
20,570
|
|
|
$
|
12,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
92
|
|
|
$
|
3
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
275
|
|
|
$
|
291
|
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Software acquired under capital leases
|
|
$
|
(3,966
|
)
|
|
$
|
(774
|
)
|
|
$
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible assets
|
|
$
|
(295
|
)
|
|
$
|
(194
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of tangible assets
|
|
$
|
|
|
|
$
|
42
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on mandatorily redeemable convertible preferred shares
|
|
$
|
|
|
|
$
|
176
|
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares converted into ordinary shares
|
|
$
|
92,097
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
THE
COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
|
Company
Mellanox Technologies, Ltd., an Israeli corporation, and its
wholly-owned subsidiary in the United States (collectively
referred to as the Company or Mellanox),
were incorporated and commenced operations in March 1999.
Mellanox is a supplier of high-performance semiconductor
interconnect products for computing, storage and communications
applications. The principal market for the Companys
products is the United States.
Principles
of presentation
The consolidated financial statements include the accounts of
the Company. All significant intercompany balances and
transactions have been eliminated.
On February 1, 2007, the Company effected a 1.75-to-1
reverse split of the Companys ordinary shares, mandatorily
redeemable convertible preferred shares and convertible
preferred shares (the Share Split) pursuant to the
filing of the Amended and Restated Articles of Association. All
references to shares in the consolidated financial statements
and the accompanying notes, including but not limited to the
number of shares and per share amounts, unless otherwise noted,
have been adjusted to reflect retroactively the Share Split.
Previously awarded options and warrants to purchase the
Companys ordinary shares have been also retroactively
adjusted to reflect the Share Split.
Risks
and uncertainties
The Company is subject to all of the risks inherent in a company
which operates in the dynamic and competitive semiconductor
industry. Significant changes in any of the following areas
could have a materially adverse impact on the Companys
financial position and results of operations: unpredictable
volume or timing of customer orders; the sales outlook and
purchasing patterns of the Companys customers, based on
consumer demands and general economic conditions; loss of one or
more of the Companys customers; decreases in the average
selling prices of products or increases in the average cost of
finished goods; the availability, pricing and timeliness of
delivery of components used in the Companys products;
reliance on a limited number of subcontractors to manufacture,
assemble, package and production test our products; the
Companys ability to successfully develop, introduce and
sell new or enhanced products in a timely manner; product
obsolescence and the Companys ability to manage product
transitions; and the timing of announcements or introductions of
new products by the Companys competitors.
Additionally, the Company has a significant presence in Israel,
including research and development activities, corporate
facilities and sales support operations. Uncertainty surrounding
the political, economic and military conditions in Israel may
directly impact the Companys financial results.
Use of
estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash
and cash equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. Balances in individual bank accounts in excess of
$100,000 are not insured. To mitigate risks, the Company
deposits cash and cash equivalents with high credit quality
financial institutions.
62
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restricted
cash and deposits
The Company maintains certain cash amounts restricted as to
withdrawal or use. At December 31, 2007 the Company
maintained a balance of approximately $709,000 that represents
tenants security deposits in Israel that are restricted
due to the tenancy agreement.
The restricted deposits in Israel are presented at their cost,
including accrued interest at rates of approximately 5% per
annum.
Fair
value of financial instruments
The Companys financial instruments, including cash, cash
equivalents, accounts receivable, accounts payable and other
accrued liabilities are carried at cost, which approximates
their fair value because of the short-term nature of these
instruments. Please see Note 3 Short-term
investments regarding the fair value of short-term
investments.
Short-term
investments
The Companys short-term investments, which are classified
as available-for-sale securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, are primarily invested in marketable
government agency obligations and commercial papers.
Short-term investments are reported at fair value at
December 31, 2007 and 2006. Unrealized gains or losses are
recorded in stockholders equity and included in
Accumulated other comprehensive income. Realized
gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in
interest and other income, net. In order to determine if a
decline in value on an available-for-sale security is other than
temporary, we evaluate, among other factors, general market
conditions, the duration and extent to which the fair value is
less than cost, as well as the Companys intent and ability
to hold the investment. Once a decline in fair value is
determined to be other than temporary, an impairment charge is
recorded and a new cost basis in the investment is established.
Concentration
of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable. The
Companys accounts receivable are derived from revenue
earned from customers located in North America, Europe and Asia.
The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the
expected collectibility of accounts receivable. The Company
reviews its allowance for doubtful accounts quarterly by
assessing individual accounts receivable over a specific aging
and amount, and all other balances based on historical
collection experience and an economic risk assessment. If the
Company determines that a specific customer is unable to meet
its financial obligations to the Company, the Company provides
an allowance for credit losses to reduce the receivable to the
amount management reasonably believes will be collected.
63
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the revenues from customers
(including original equipment manufacturers) in excess of 10% of
the total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Hewlett-Packard
|
|
|
19
|
%
|
|
|
12
|
%
|
|
|
*
|
|
Voltaire
|
|
|
15
|
%
|
|
|
18
|
%
|
|
|
12
|
%
|
Cisco
|
|
|
11
|
%
|
|
|
14
|
%
|
|
|
44
|
%
|
QLogic
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
*
|
|
At December 31, 2007, Voltaire, Hewlett-Packard and IBM
accounted for 16%, 11% and 11%, respectively, of the
Companys total accounts receivable.
Inventory
Inventory includes finished goods,
work-in-process
and raw materials. Inventory is stated at the lower of cost
(principally standard cost which approximates actual cost on a
first-in,
first-out basis) or market value. Reserves for potentially
excess and obsolete inventory are made based on
managements analysis of inventory levels and future sales
forecasts. Once established, the original cost of the
Companys inventory less the related inventory reserve
represents the new cost basis of such products.
Property
and equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation and amortization is generally
calculated using the straight-line method over the estimated
useful lives of the related assets over three years for
computers, software license rights and other electronic
equipment, and seven to fifteen years for office furniture and
equipment. Leasehold improvements and assets acquired under
capital leases are amortized on a straight-line basis over the
term of the lease, or the useful life of the assets, whichever
is shorter. Maintenance and repairs are charged to expense as
incurred, and improvements are capitalized. When assets are
retired or otherwise disposed of, the cost and accumulated
depreciation or amortization are removed from the accounts and
any resulting gain or loss is reflected in the results of
operations in the period realized.
Intangible
assets
Intangible assets consist of license rights that represent
technology which the Company has purchased a perpetual right to
use. They are amortized over an estimated useful life of three
years using the straight-line method (see also Note 4).
Impairment
of long-lived assets
The Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 requires that long-lived assets held
and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Under SFAS No. 144,
if the sum of the expected future cash flows (undiscounted and
without interest charges) of the long-lived assets is less than
the carrying amount of such assets, an impairment loss would be
recognized, and the assets would be written down to their
estimated fair values. The Company reviews for impairment on a
regular basis. To date, the Company has not recorded any
impairment charges relating to its long-lived assets.
64
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue
recognition
The Company accounts for its revenue under the provisions of
Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition in Financial Statements. Under
SAB No. 104, revenues from sales of products are
recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and
collection is reasonably assured. The Companys standard
arrangement with its customers includes
freight-on-board
shipping point,
30-day
payment terms, no right of return and no customer acceptance
provisions. The Company generally relies upon a purchase order
as persuasive evidence of an arrangement.
Probability of collection is assessed on a
customer-by-customer
basis. Customers are subject to a credit review process that
evaluates the customers financial position and ultimately
their ability to pay. If it is determined at the outset of an
arrangement that collection is not probable, no product is
shipped and no revenue is recognized unless cash is received in
advance.
The provisions of EITF Issue
No. 00-21
apply to sales arrangements with multiple elements that include
a combination of hardware and services. For multiple element
arrangements, revenue is allocated to the separate elements
based on fair value. If an arrangement includes undelivered
elements that are not essential to the functionality of the
delivered elements, the Company defers the fair value of the
undelivered elements and the residual revenue is allocated to
the delivered elements. If the undelivered elements are
essential to the functionality of the delivered elements, no
revenue is recognized. The amount and impact on our consolidated
financial statements of undelivered elements have historically
been insignificant.
In accordance with Emerging Issuers Task Force (EITF) Issue
No. 00-10,
Accounting for Shipping and Handling Fees and
Costs, costs incurred for shipping and handling
expenses to customers are recorded as cost of revenues. To the
extent these amounts are billed to the customer in a sales
transaction, the Company records the shipping and handling fees
as revenue.
Product
warranty
The Company typically offers a limited warranty for its products
for periods of up to three years. The Company accrues for
estimated returns of defective products at the time revenue is
recognized based on prior historical activity. The determination
of these accruals requires the Company to make estimates of the
frequency and extent of warranty activity and estimated future
costs to either replace or repair the products under warranty.
If the actual warranty activity
and/or
repair and replacement costs differ significantly from these
estimates, adjustments to record additional cost of revenues may
be required in future periods. Changes in the Companys
liability for product warranty during the years ended
December 31, 2007, 2006 and 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of the period
|
|
$
|
528
|
|
|
$
|
517
|
|
|
$
|
250
|
|
New warranties issued during the period
|
|
|
497
|
|
|
|
340
|
|
|
|
817
|
|
Adjustments due to changes in estimates during the period
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
Settlements during the period
|
|
|
(321
|
)
|
|
|
(285
|
)
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
704
|
|
|
$
|
528
|
|
|
$
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Research
and development
Research and development expenses are charged to operations as
incurred. Funds received from the Office of the Chief Scientist
of Israels Ministry of Industry (the OCS)
relating to the development of approved projects are recognized
as a reduction of expenses when the Company is entitled to
receive those funds. Research and development expenses included
in the statements of operations were reduced by grants from the
OCS in the amounts for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Gross research and development operating expenses
|
|
$
|
24,638
|
|
|
$
|
15,256
|
|
|
$
|
13,124
|
|
Reduction due to OCS grants during the period
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development operating expenses reported in
the Statements of Consolidated Operations
|
|
$
|
24,638
|
|
|
$
|
15,256
|
|
|
$
|
13,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
Cost related to advertising and promotion of products is charged
to sales and marketing expense as incurred. Advertising expense
was approximately $141,000, $85,000 and $7,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
Share-based
compensation
The Company maintains performance incentive plans under which
incentive and non-qualified share options are granted primarily
to employees and non-employee consultants. Prior to
January 1, 2006, the Company accounted for share-based
compensation for non-employee consultants in accordance with
SFAS No. 123, Accounting for Share-based
Compensation, and Financial Accounting Standards Board
Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans (FIN 28). FIN 28 provides for
accelerated recognition of expense over the option vesting
period. Prior to January 1, 2006, the Company accounted for
share-based compensation for employees in accordance with
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. Under APB No. 25, share-based
compensation expense is recognized over the vesting period of
the option to the extent that the fair value of the share
exceeds the exercise price of the share option at the date of
the grant.
In December 2004, the Financial Accounting Standards Board
(FASB) issued a revision of SFAS No. 123. The revision
is referred to as SFAS No. 123(R),
Share-based Payment, which supersedes APB
No. 25 and requires companies to expense share-based
compensation using a fair-value based method for costs related
to share-based payments, including share options and shares
issued under the Companys employee share option plans.
Under this standard, the fair value of each employee share
option is estimated on the date of grant using an options
pricing model. The Company currently uses the Black-Scholes
valuation model to estimate the fair value of its share-based
payments. The unrecognized compensation amount calculated under
the fair-value method will then be recorded as compensation
expense over the respective requisite period of the share
option, which is generally the vesting period.
The Company adopted SFAS No. 123R using the modified
prospective transition method and consequently has not
retroactively adjusted results from prior periods. Share-based
compensation expense recognized in the Companys financial
statements starting on January 1, 2006 and thereafter is
based on awards that are expected to vest. These amounts have
been reduced by using an estimated forfeiture rate. Forfeitures
are required to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ
from those estimates. The Company evaluates the assumptions used
to value share awards on a quarterly basis. The benefits of tax
deductions in excess of recognized compensation cost is reported
as a cash flow from financing activities.
66
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
To the extent that the Company grants additional equity
securities to employees, share-based compensation expense will
be increased by the additional compensation resulting from those
additional grants.
Comprehensive
income
Comprehensive income, as defined in SFAS No. 130,
Reporting Comprehensive Income, includes all
changes in shareholders equity (deficit) during a period
from non-owner sources. The Company had unrealized gains of
$54,000 and $3,000 during the years ended December 31, 2007
and 2005, respectively, as a result of changes in value of
marketable securities that were categorized as
available-for-sale. The Company had no unrealized gains or
losses during the year ended December 31, 2006.
Foreign
currency translation
The Company uses the U.S. dollar as its functional
currency. Foreign currency assets and liabilities are remeasured
into U.S. dollars at the end-of-period exchange rates
except for non-monetary assets and liabilities, which are
remeasured at historical exchange rates. Revenue and expenses
are remeasured each day at the exchange rate in effect on the
day the transaction occurred, except for those expenses related
to balance sheet amounts, which are remeasured at historical
exchange rates. Gains or losses from foreign currency
transactions are included in the Consolidated Statements of
Operaions as part of Other income, net.
Net
income per share attributable to ordinary
shareholders
Basic and diluted net income per share is computed by dividing
the net income for the period by the weighted average number of
ordinary shares outstanding during the period. The calculation
of diluted net income per share excludes potential ordinary
shares if the effect is antidilutive. Potential ordinary shares
are comprised of ordinary shares subject to repurchase rights,
incremental ordinary shares issuable upon the exercise of share
options or warrants and shares issuable upon conversion of
convertible preferred shares.
In accordance with Emerging Issue Task Force (EITF) Issue
03-6,
Participating Securities and the
Two-Class Method
under FASB Statement No. 128, earnings are
allocated between the common shareholders and other security
holders based on their respective rights to receive dividends.
When determining basic earnings per share under
EITF 03-6,
undistributed earnings for a period are allocated to a
participating security based on the contractual participation
rights of the security to share in those earnings as if all of
the earnings for the period had been distributed. The form of
such participation does not have to be a dividend. Any form of
participation in undistributed earnings would constitute
participation by that security, regardless of whether the
payment to the security holder was referred to as a dividend.
67
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table sets forth the computation of basic and
diluted net income per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
$
|
3,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series D mandatorily redeemable convertible
preferred shares
|
|
|
|
|
|
|
(176
|
)
|
|
|
(166
|
)
|
Income allocable to preferred shareholders
|
|
|
|
|
|
|
(6,774
|
)
|
|
|
(2,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
$
|
35,588
|
|
|
$
|
298
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding
|
|
|
27,827
|
|
|
|
7,713
|
|
|
|
7,529
|
|
Weighted average unvested ordinary shares subject to repurchase
|
|
|
|
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic net income per share
|
|
|
27,827
|
|
|
|
7,709
|
|
|
|
7,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share options
|
|
|
2,365
|
|
|
|
1,974
|
|
|
|
1,571
|
|
Contingently issuable shares
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential ordinary shares
|
|
|
2,374
|
|
|
|
1,974
|
|
|
|
1,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net income per share
|
|
|
30,201
|
|
|
|
9,683
|
|
|
|
9,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders basic
|
|
$
|
1.28
|
|
|
$
|
0.04
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders diluted
|
|
$
|
1.18
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth potential ordinary shares that
are not included in the diluted net income per share
attributable to ordinary shareholders above because to do so
would be antidilutive for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Convertible preferred shares (Series A, B and C) upon
conversion to ordinary shares
|
|
|
|
|
|
|
6,799
|
|
|
|
6,799
|
|
Convertible preferred shares (Series D) upon
conversion to ordinary shares
|
|
|
|
|
|
|
4,838
|
|
|
|
4,838
|
|
Warrants to purchase ordinary shares
|
|
|
|
|
|
|
725
|
|
|
|
725
|
|
Options to purchase ordinary shares
|
|
|
597
|
|
|
|
233
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
597
|
|
|
|
12,595
|
|
|
|
12,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
reporting
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, requires that
companies report separately in the financial statements certain
financial and descriptive information about operating segments
profit or loss, certain specific revenue and expense items and
segment assets. Additionally, companies are required to report
information about the revenues derived from their products and
service groups,
68
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
about geographic areas in which the Company earns revenues and
holds assets and about major customers. The Company has one
reportable segment: the development, manufacturing, marketing
and sales of inter-connect semiconductor products (see
Note 11, Segment Information).
Income
taxes
To prepare the Companys consolidated financial statements,
the Company estimates its income taxes in each of the
jurisdictions in which it operates. This process involves
estimating the Companys actual tax exposure together with
assessing temporary differences resulting from the differing
treatment of certain items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included within the Companys consolidated
balance sheet.
The Company must also make judgments regarding the realizability
of deferred tax assets. The carrying value of the Companys
net deferred tax asset is based on its belief that it is more
likely than not that the Company will generate sufficient future
taxable income in certain jurisdictions to realize these
deferred tax assets. A valuation allowance has been established
for deferred tax assets which the Company does not believe meets
the more likely than not criteria established by
SFAS No. 109, Accounting for Income Taxes.
The Companys judgments regarding future taxable income may
change due to changes in market conditions, changes in tax laws,
tax planning strategies or other factors. If the Companys
assumptions and consequently its estimates change in the future,
the valuation allowances we have established may be increased or
decreased, resulting in a respective increase or decrease in
income tax expense. The Companys effective tax rate is
highly dependent upon the geographic distribution of its
worldwide earnings or losses, the tax regulations and tax
holidays in each geographic region, the availability of tax
credits and carryforwards, and the effectiveness of its tax
planning strategies.
Effective January 1, 2007, we adopted the provisions of
FASB Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN 48. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS No. 109. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon
ultimate settlement. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may
require periodic adjustments and which may not accurately
anticipate actual outcomes. Upon implementation of FIN 48,
the Company recognized no material adjustment to the
January 1, 2007, balance of accumulated deficit. As of
December 31, 2007, our unrecognized tax benefits totaled
approximately $1,139,000.
Recent
accounting pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS No. 157, which defines
fair value, establishes a framework for measuring fair value
under generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source
of the information. SFAS No. 157 is effective for the
company as of January 1, 2008. We expect that the financial
impact, if any, of the adoption of SFAS No. 157 will
not be material on our consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities,
or SFAS No. 159, which permits entities to elect to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. This election is irrevocable. SFAS No. 159
will be effective for us on January 1, 2008. We expect that
the financial impact, if any, of the adoption of
SFAS No. 159 will not be material on our consolidated
financial statements.
69
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 2007 the FASB ratified EITF
No. 07-3,
or
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities.
EITF 07-3
requires non-refundable advance payments for goods and services
to be used in future research and development activities to be
recorded as an asset and the payments to be expensed when the
research and development activities are performed.
EITF 07-3
is effective for us on January 1, 2008. This standard is
not expected to have a material impact on our consolidated
financial statements.
|
|
NOTE 2
|
BALANCE
SHEET COMPONENTS:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,028
|
|
|
$
|
8,212
|
|
Money market funds
|
|
|
4,330
|
|
|
|
2,585
|
|
Government agency discount notes
|
|
|
58,735
|
|
|
|
|
|
Commercial papers
|
|
|
29,557
|
|
|
|
|
|
Repurchase agreements
|
|
|
|
|
|
|
9,773
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100,650
|
|
|
$
|
20,570
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
17,539
|
|
|
$
|
10,248
|
|
Less: allowance for doubtful accounts
|
|
|
(186
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,353
|
|
|
$
|
10,141
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
642
|
|
|
$
|
692
|
|
Work-in-process
|
|
|
1,379
|
|
|
|
1,492
|
|
Finished goods
|
|
|
3,375
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,396
|
|
|
$
|
4,079
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and other:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
512
|
|
|
$
|
223
|
|
Deferred public offering costs
|
|
|
|
|
|
|
1,827
|
|
Federal taxes recoverable
|
|
|
914
|
|
|
|
13
|
|
Other
|
|
|
83
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,509
|
|
|
$
|
2,182
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
24,030
|
|
|
$
|
16,580
|
|
Furniture and fixtures
|
|
|
1,146
|
|
|
|
793
|
|
Leasehold improvements
|
|
|
666
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,842
|
|
|
|
17,916
|
|
Less: Accumulated depreciation and amortization
|
|
|
(17,393
|
)
|
|
|
(15,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,449
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense totaled approximately $2,065,000,
$1,260,000, $1,063,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
70
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
5,311
|
|
|
$
|
2,618
|
|
Professional services
|
|
|
1,418
|
|
|
|
1,927
|
|
Royalties
|
|
|
1,233
|
|
|
|
526
|
|
Warranty
|
|
|
704
|
|
|
|
528
|
|
Income tax payable
|
|
|
997
|
|
|
|
181
|
|
Sales commissions
|
|
|
888
|
|
|
|
519
|
|
Other
|
|
|
731
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,282
|
|
|
$
|
6,426
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations:
|
|
|
|
|
|
|
|
|
Federal income tax payable
|
|
$
|
64
|
|
|
$
|
64
|
|
Other
|
|
|
7
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
SHORT-TERM INVESTMENTS:
At December 31, 2007 the Company had available-for-sale
securities, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
4,330
|
|
|
$
|
|
|
|
$
|
4,330
|
|
Commercial papers
|
|
|
40,947
|
|
|
|
23
|
|
|
|
40,970
|
|
Government agency discount notes
|
|
|
99,522
|
|
|
|
31
|
|
|
|
99,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities
|
|
|
144,799
|
|
|
|
54
|
|
|
|
144,853
|
|
Less amounts classified as cash equivalents
|
|
|
(92,622
|
)
|
|
|
|
|
|
|
(92,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,177
|
|
|
$
|
54
|
|
|
$
|
52,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no short-term investments at December 31,
2006.
The contractual maturities of marketable securities classified
as short-tem investments at December 31, 2007 are due in
one year or less. Realized gains upon the sale of marketable
securities were approximately $2,328,000.
|
|
NOTE 4
|
INTANGIBLE
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Licensed technology
|
|
$
|
489
|
|
|
$
|
194
|
|
Less: Accumulated amortization
|
|
|
(94
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
395
|
|
|
$
|
167
|
|
|
|
|
|
|
|
|
|
|
71
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Amortization expense of intangible assets totaled approximately
$67,000, $694,000 and $667,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
In December 2003, the Company entered into a perpetual license
agreement with Vitesse Semiconductor Corporation to use certain
intellectual property (IP) in the development of future products
for a total price of $2,000,000. The terms of the license
agreement require that the total license amount of $2,000,000 be
paid through periodic payments as products that incorporate the
acquired IP are sold with the total amount due in full by
January 31, 2007. Interim payments are payable quarterly on
or before 30 days after the end of the quarter in which
sales of the products giving rise to the accelerated payment
obligation occurred, if any. The Company has no payment
obligations in excess of the original $2,000,000 cost of the IP.
At December 31, 2006, approximately $1,156,000 remained
payable. This amount was included as Other liabilities,
current in the consolidated balance sheet. All of the
remaining amounts were paid in full to Vitesse by
January 31, 2007.
|
|
NOTE 5
|
EMPLOYEE
BENEFIT PLANS:
|
The Company adopted a 401(k) Profit Sharing Plan and Trust (the
401(k) Plan) effective January 2000, which is
intended to qualify under Section 401(k) of the Internal
Revenue Code. The 401(k) Plan allows eligible employees in the
United States to voluntarily contribute a portion of their
pre-tax salary, subject to a maximum limit of $15,000 for the
year ended December 31, 2007, subject to certain
limitations. The Company has not made discretionary matching
contributions to the 401(k) Plan on behalf of employees through
2007.
Under Israeli law, the Company is required to make severance
payments to its retired or dismissed Israeli employees and
Israeli employees leaving its employment in certain other
circumstances. The severance pay liability of the Company to its
Israeli employees is based upon the number of years of service
and the latest monthly salary. The Company partially funds this
liability through the purchase of insurance policies. Once an
amount is contributed, the Company generally does not have
access to those assets except for use in fulfillment of its
severance obligation.
The deposited funds include profits accumulated through the
balance sheet date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to Israeli
severance pay law or labor agreements. The carrying value of the
deposited funds is based on the cash surrender value of these
policies. The Company records the obligation as if it were
payable at each balance sheet date on an undiscounted basis.
At December 31, 2007, the severance liability and severance
assets totaled approximately $4,058,000 and $3,152,000,
respectively. At December 31, 2006, the severance liability
and severance assets totaled approximately $2,940,000 and
$2,284,000, respectively.
|
|
NOTE 6
|
COMMITMENTS
AND CONTINGENCIES:
|
Leases
The Company leases office space and motor vehicles under
operating leases with various expiration dates through 2011.
Rent expense was $1,260,000, $1,020,000 and $1,130,000 for the
years ended December 31, 2007, 2006 and 2005 respectively.
The terms of the facility lease provide for rental payments on a
graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period, and has accrued for
rent expense incurred but not paid.
The Company has entered into capital lease agreements for the
electronic design automation software. The total amount of
assets under capital lease agreements within Property and
equipment, net was approximately $5,271,000 and $1,370,000
for the years ended December 31, 2007 and 2006,
respectively. At December 31, 2007, future minimum lease
payments under non-cancelable operating and capital leases
totaled approximately $8,200,000. For the years ended
December 31, 2007 and 2006, the accumulated amortization
for assets under
72
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
capital lease agreements totaled approximately $1,418,000 and
$438,000, respectively. At December 31, 2007, future
minimum lease payments under non-cancelable operating and
capital leases, and future minimum sublease rental receipts
under non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Sublease
|
|
Year Ended December 31,
|
|
Leases
|
|
|
Leases
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
1,572
|
|
|
$
|
1,935
|
|
|
$
|
157
|
|
2009
|
|
|
701
|
|
|
|
1,353
|
|
|
|
40
|
|
2010
|
|
|
444
|
|
|
|
966
|
|
|
|
|
|
2011
|
|
|
316
|
|
|
|
773
|
|
|
|
|
|
2012
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments and sublease income
|
|
|
3,191
|
|
|
$
|
5,027
|
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations
|
|
|
3,169
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
(1,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
$
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
commitments
At December 31, 2007, the Company had non-cancelable
purchase commitments of $5.7 million expected to be paid
within one year. At December 31, 2007, the Company had no
non-cancelable purchase commitments with suppliers beyond one
year.
Royalty
obligations
Prior to 2003, the Company received funds totaling $600,000 from
the Binational Industrial Research and Development Foundation
(the BIRD Foundation). As a result, the Company is
obligated to pay the BIRD Foundation royalties from sales of
products in the research and development of which the BIRD
Foundation participated by way of grants. Royalty rates range
from 1.45% to 2.95% of qualifying product revenue.
Since the length of time of repayment has exceeded four years,
the grant amount to be repaid has increased to $900,000.
However, should the Company decide to discontinue sales of the
qualifying products, no additional amounts are
required to be paid. At December 31, 2007, the Company had
repaid / accrued approximately $518,000 to the BIRD
Foundation, and the contingent liability in respect of royalties
payable is approximately $382,000.
Since 2003, the Company has also received approximately
$2,800,000 in OCS funding. The terms of the OCS grants require
the Company to pay the OCS royalties if products are developed
using the OCS funding. For those products that are developed and
ultimately result in revenues to the Company, royalties will be
paid to the OCS at the rate of 4% of net sales of such
OCS-funded products. As of January 1, 2007, that rate
increased to 4.5%. Grants from the OCS are repaid with an annual
interest rate based on the LIBOR interest rate on the date of
payment. The repayment of OCS grants is contingent on future
sales of products developed with the support of such grants and
the Company has no obligation to refund these grants if future
sales are not generated.
The terms of OCS grants generally prohibit the manufacture of
products developed with OCS funding outside of Israel without
the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel by the Company of its IC products,
subject to an undertaking by the Company to pay the OCS
royalties on the sales of the Companys OCS-supported
products until such time as the total royalties paid equal 120%
of the amount of OCS grants.
73
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Under applicable Israeli law, OCS consent is also required for
the Company to transfer technologies developed with OCS funding
to third parties in Israel. Transfer of OCS-funded technologies
outside of Israel is permitted with the approval of the OCS and
in accordance with the restrictions and payment obligations set
forth under Israeli law. Israeli law further specifies that both
the transfer of know-how as well as the transfer of intellectual
property rights in such know-how are subject to the same
restrictions. These restrictions do not apply to exports of
products from Israel or the sale of products developed with
these technologies. The Company does not anticipate the need to
transfer any of its intellectual property rights outside of
Israel at this time.
At December 31, 2007, the Company had
repaid / accrued approximately $2,973,000 to the OCS,
and the maximum amount of the contingent liability in respect of
royalties payable to the OCS is approximately $256,000.
Contingencies
The Company is not currently subject to any material legal
proceedings. The Company may, from time to time, become a party
to various legal proceedings arising in the ordinary course of
business. The Company may also be indirectly affected by
administrative or court proceedings or actions in which the
Company is not involved but which have general applicability to
the semiconductor industry.
|
|
NOTE 7
|
MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE
PREFERRED SHARES:
|
All outstanding preferred shares were converted into ordinary
shares upon the closing of our initial public offering on
February 7, 2007.
Convertible preferred shares at December 31, 2006,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of
|
|
|
|
Shares
|
|
|
Liquidation
|
|
|
Issuance
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Costs
|
|
|
Series A-1
Convertible Preferred Shares
|
|
|
2,857,142
|
|
|
|
2,742,846
|
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
Series A-2
Convertible Preferred Shares
|
|
|
1,714,285
|
|
|
|
1,600,000
|
|
|
|
2,800,000
|
|
|
|
2,800,000
|
|
Series B-1
Convertible Preferred Shares
|
|
|
1,714,285
|
|
|
|
1,710,674
|
|
|
|
19,788,344
|
|
|
|
19,788,344
|
|
Series B-2
Convertible Preferred Shares
|
|
|
571,428
|
|
|
|
514,257
|
|
|
|
5,948,683
|
|
|
|
5,948,683
|
|
Series C Convertible Preferred Shares(1)
|
|
|
231,428
|
|
|
|
231,415
|
|
|
|
3,000,894
|
|
|
|
3,000,894
|
|
Series D Mandatorily Redeemable Convertible Preferred Shares
|
|
|
6,483,714
|
|
|
|
4,838,482
|
|
|
|
83,954,112
|
|
|
|
54,983,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,572,282
|
|
|
|
11,637,674
|
|
|
$
|
120,292,033
|
|
|
$
|
91,320,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Series C convertible preferred shares were issued in
exchange for software. |
Prior to the conversion of the Companys preferred share
into ordinary shares upon the closing of our initial public
offering on February 13, 2007, the holders of our preferred
shares had various rights and preferences as follows:
Voting
The holders of
Series A-1
convertible preferred shares
(Series A-1),
Series B-1
convertible preferred shares
(Series B-1),
Series C convertible preferred shares
(Series C) and Series D mandatorily
redeemable convertible preferred shares
(Series D) had voting rights based on the
number of ordinary shares into which the
Series A-1,
Series B-1,
Series C and Series D shares were convertible. The
holders of
Series A-2
convertible preferred shares
(Series A-2
and together with
Series A-1,
Series A) and
Series B-2
convertible preferred shares
(Series B-2
74
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and together with
Series B-1,
Series B) had no voting rights. Certain voting
rights of the holders of the preferred shares applied with
respect to certain matters, as specified in the Companys
amended and restated articles of association in effect prior to
the initial public offering. The Company had to obtain approval
from the holders of a majority of the
Series A-1,
Series B-1,
Series C and Series D shares, voting together as a
single class, to increase the authorized number of directors
(unless such increase is approved by at least 75% of the board
of directors) or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of
the voting power of the surviving entity. The Company had to
obtain approval from the holders of 67% of the
Series A-1,
Series B-1
and Series C, voting together as a single class, to:
increase the number of authorized preferred shares; authorize,
create or issue any securities senior to the preferred shares;
alter the amended and restated articles of association in a
manner that adversely affects the preferred shares; repurchase
or redeem any ordinary shares other than in connection with
termination of employment; or pay any dividends on the ordinary
shares. The Company had to obtain approval from the holders of a
majority of the Series D shares to: change the authorized
number of directors; increase or decrease the number of
authorized ordinary shares or preferred shares; authorize,
create or issue any securities on parity with or senior to the
Series D shares; alter the amended and restated articles of
association; alter the rights, preferences, privileges or
restrictions of the Series D shares in a manner that
adversely affects such shares; repurchase or redeem any ordinary
shares or preferred shares other than in connection with
termination of employment or the redemption of the Series D
shares in accordance with the amended and restated articles of
association; pay any dividends on the ordinary shares or
preferred shares; or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of
the voting power of the surviving entity.
Dividends
The holders of Series D shares were entitled to receive
dividends in preference to any dividend on the Series A,
Series B, and Series C and ordinary shares at an
annual rate equal to 7% of their original issue price.
Thereafter, holders of Series A, Series B and
Series C shares were entitled to receive dividends in
preference to any dividend on the ordinary shares at an annual
rate equal to 7% of their respective original issue prices. Such
dividends on the Series A, Series B, Series C and
Series D shares were non-cumulative and would be paid only
when and if declared. After payment of such dividends to the
holders of Series A, Series B and Series C
shares, any additional dividends declared would be distributed
among all holders of Series D and ordinary shares in
proportion to the number of ordinary shares that would be held
by each such holder if the Series D shares were converted
into ordinary shares. No dividends on Series A,
Series B, Series C or Series D or ordinary shares
had been declared by the board from inception through
December 31, 2006.
Liquidation
Upon liquidation or dissolution of the Company, the holders of
the Series D shares would be entitled to receive, prior and
in preference to any other holders of shares of the Company, an
amount per share equal to one and a half times their original
issue price (subject to adjustment in respect of share splits,
share dividends and like events), plus all declared but unpaid
dividends. Then, the holders of the Series A,
Series B, Series C and Series D shares would be
entitled to receive an amount per share equal to one time their
respective original issue price (subject to adjustment in
respect of share splits, share dividends and like events), plus
all declared but unpaid dividends. The remaining assets and
funds legally available for distribution, if any, would be
distributed equally to the holders of the Series A,
Series B and Series C shares (on an as-converted
basis) and ordinary shares until such time as the holders of the
Series A, Series B and Series C shares received
an amount per share equal to two times their respective original
issue prices (subject to adjustment in respect of share splits,
share dividends and like events).
Conversion
Each share of Series A, Series B, Series C and
Series D was, at the option of the holder of such share, at
any time, convertible into one ordinary share, subject to
certain adjustments. The outstanding Series A,
Series B, Series C and Series D shares would
automatically convert into ordinary shares upon the closing of
an underwritten
75
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
public offering with at least $15 million (in the case of
the Series A) and $50 million (in the case of the
Series B, Series C and Series D) in net
proceeds to the Company, and an offering price per share of at
least $5.25 (in the case of the Series A) and $28.93
(in the case of the Series B, Series C and
Series D), subject in each case to adjustments for share
splits, dividends, reclassifications and the like (a
Qualified IPO). In addition, the Series A,
Series B, Series C and Series D would be
automatically converted into ordinary shares upon the
affirmative vote of the holders of the majority of the issued
and outstanding Series D shares (including the vote of
Bessemer Venture Partners for so long as Bessemer Venture
Partners continues to hold at least 324,285 Series D
shares) in connection with the consummation of an underwritten
public offering in which the offering price per share is less
than $28.93 (subject to adjustments for share splits, dividends,
reclassifications and the like) or in connection with a
liquidation transaction, as described in the Companys
amended and restated articles of association. In addition, the
Series A-2
and
Series B-2 shares
would be converted to
Series A-1
and
Series B-1 shares
upon the transfer of such shares to a bona fide purchaser
unaffiliated with the transferor or immediately prior to the
consummation of a Qualified IPO.
Anti-dilution
adjustments
The Series D would be protected against dilution if the
Company issued any capital shares or securities convertible into
or exchangeable for capital shares at a price per share less
than the price per share paid by the holders of the
Series D, in which case such adjustment would be on a
full-ratchet basis. In addition, the per share conversion rate
of the Series D was determined by multiplying $11.57, as
adjusted for share splits, by 2.5, and dividing by the $17.00
price per share paid in the offering. Therefore, the holders of
the Series D received 1.7011 ordinary shares for each share
of Series D converted in connection with the initial public
offering. The adjustment to the Series D conversion price
did not trigger any other antidilution adjustments, nor did it
trigger any rights of first offer or other preemptive rights.
Redemption
The Companys
Series A-1,
Series A-2,
Series B-1,
Series B-2
and Series C preferred shares were considered redeemable
for accounting purposes. The Company initially recorded the
Series A-1,
Series A-2,
Series B-1,
Series B-2
and Series C preferred shares at their fair values on the
dates of issuance, net of issuance costs. A deemed liquidation
event could have occurred as a result of the sale of all or
substantially all of the assets of the Company or any
acquisition of the Company by another entity by means of a
merger or consolidation in which the shareholders of the Company
do not hold at least 50% of the voting power of the surviving
entity or its parent. Because the deemed redemption event was
outside the control of the Company, all preferred shares have
been presented outside of permanent equity in accordance with
EITF Topic D-98, Classification and Measurement of
Redeemable Securities. Further, the Company has not
adjusted the carrying values of the
Series A-1,
Series A-2,
Series B-1,
Series B-2
and Series C preferred shares to the redemption value of
such shares, because it was uncertain whether or when a
redemption event would occur.
The Series D shares were required to be redeemed by the
Company upon the request of holders of a majority of the
outstanding Series D shares at any time after
September 30, 2007. The shares were required to be redeemed
by the Company at a price equal to the original issue price and
declared but unpaid dividends. The difference between the
carrying value of the Series D shares and their redemption
value was accreted using the effective interest method through
the initial public offering.
Warrants
In conjunction with the issuance of the Series D shares,
the holders of Series D shares received warrants to
purchase an aggregate of 725,730 ordinary shares at an exercise
price of $11.57 per share. The warrants were recorded as a
component of the shareholders deficit at a fair value of
approximately $54,000 on the date of issuance. The fair value
was estimated by using the Black-Scholes option-pricing model.
Assumptions used in the model included a risk-free interest rate
of 4.02%, term to maturity of 5 years, 50% volatility and
0% dividend yield.
76
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The warrants were exercisable for a period ending at the earlier
of an IPO, a merger or liquidation or October 2006 or November
2006, as the case may be. At December 31, 2006, warrants
had been exercised for 98,551 ordinary shares and warrants to
purchase the remaining 627,179 ordinary shares expired
unexercised. There were no outstanding warrants at
December 31, 2007.
|
|
NOTE 8
|
ORDINARY
SHARES:
|
On February 1, 2007, the Companys amended and
restated articles of association authorize the Company to issue
137,142,857 ordinary shares of nominal value new Israeli shekels
(NIS) 0.0175 each. A portion of the shares sold
prior to the initial public offering were subject to a right of
repurchase by the Company subject to vesting, which is generally
over a four-year period from the earlier of issuance date or
employee hire date, as applicable, until vesting is complete.
|
|
NOTE 9
|
SHARE
OPTION PLANS:
|
In 1999, the Companys board of directors approved share
option plans for U.S. and Israeli optionees (together, the
1999 Plan), pursuant to which options may be granted
to directors, employees and consultants of the Company. In 2003,
the Companys board of directors approved an additional
share option plan for Israeli optionees (the 2003
Plan and together with the 1999 Plan, the
Plans), pursuant to which options may be granted to
directors, employees and consultants of the Company.
Share options granted to U.S. employees under the 1999 Plan
include an early exercise option, pursuant to which unvested
options can be exercised and the related shares received are
subject to a repurchase right held by the Company. The related
shares are considered issued and outstanding for accounting
purposes but are not deemed exercised until the Companys
repurchase right expires. Accordingly, the Company accounts for
the cash received in consideration for the early exercised
options as a liability. The purchase price of the early
exercised shares subject to the Companys repurchase right
is equal to the original exercise price of the share options.
The Companys repurchase right lapses as the early
exercised shares vest. At December 31, 2006 and 2005, 3,787
and 8,571 ordinary shares, respectively, were subject to
repurchase. At December 31, 2007, no ordinary shares were
subject to repurchase.
Our 2006 Global Share Incentive Plan (the Global
Plan) was adopted by our board of directors in October
2006 and approved by our shareholders in December 2006. The
Global Plan replaces the Plans and became effective on
February 6, 2007. We have authorized for issuance under our
Global Plan an aggregate of 3,428,571 ordinary shares, plus the
number of ordinary shares available for issuance under the Prior
Plans that are not subject to outstanding options, as of the
effective date of the Global Plan. In addition, the share
reserve under the Global Plan will be increased by the number of
ordinary shares issuable pursuant to options outstanding under
the Plans that would have otherwise reverted to the Plans
because they expired, were canceled or were otherwise terminated
without being exercised, following the date that our Global Plan
became effective. In addition, the number of ordinary shares
reserved for issuance under our Global Plan will increase
automatically on the first day of each fiscal year, beginning in
2008, by a number of ordinary shares equal to the least of:
(i) 2% of ordinary shares outstanding on a fully diluted
basis on such date, (ii) 685,714 ordinary shares or
(iii) a smaller number determined by our board of
directors. In any event, the maximum aggregate number of
ordinary shares that may be issued or transferred under the
Global Plan during the term of the Global Plan may in no event
exceed 15,474,018 ordinary shares.
77
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the activity under the Plans, the
Global Plan and other share-based arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Number
|
|
|
Average
|
|
|
|
Available
|
|
|
of
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at December 31, 2004
|
|
|
1,645,179
|
|
|
|
3,765,018
|
|
|
$
|
1.69
|
|
Options granted
|
|
|
(1,399,142
|
)
|
|
|
1,399,142
|
|
|
$
|
5.91
|
|
Options exercised
|
|
|
|
|
|
|
(354,485
|
)
|
|
$
|
0.99
|
|
Options repurchased
|
|
|
2,627
|
|
|
|
|
|
|
$
|
2.38
|
|
Options canceled
|
|
|
221,758
|
|
|
|
(221,758
|
)
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
470,422
|
|
|
|
4,587,917
|
|
|
$
|
3.04
|
|
Options increased to plan
|
|
|
342,857
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,106,093
|
)
|
|
|
1,106,093
|
|
|
$
|
9.12
|
|
Options exercised
|
|
|
|
|
|
|
(108,908
|
)
|
|
$
|
2.65
|
|
Options canceled
|
|
|
418,287
|
|
|
|
(418,287
|
)
|
|
$
|
5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
125,473
|
|
|
|
5,166,815
|
|
|
$
|
4.19
|
|
Options increased to plan
|
|
|
3,428,571
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,253,878
|
)
|
|
|
2,253,878
|
|
|
$
|
18.32
|
|
Options exercised
|
|
|
|
|
|
|
(1,180,522
|
)
|
|
$
|
2.20
|
|
Options canceled
|
|
|
210,645
|
|
|
|
(210,645
|
)
|
|
$
|
9.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
1,510,811
|
|
|
|
6,029,526
|
|
|
$
|
9.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was
approximately $11.26, $6.48 and $0.90 for the years ended
December 31, 2007, 2006 and 2005, respectively. The
following tables provide additional information about all
options outstanding and exercisable at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at
|
|
|
Options Exercisable at
|
|
|
|
December 31, 2007
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
$ 0.18 - $ 1.16
|
|
|
348,114
|
|
|
|
2.21
|
|
|
$
|
0.76
|
|
|
|
348,114
|
|
|
$
|
0.76
|
|
$ 1.30 - $ 1.30
|
|
|
721,936
|
|
|
|
3.30
|
|
|
$
|
1.30
|
|
|
|
721,936
|
|
|
$
|
1.30
|
|
$ 1.47 - $ 3.50
|
|
|
801,866
|
|
|
|
5.62
|
|
|
$
|
2.49
|
|
|
|
792,005
|
|
|
$
|
2.48
|
|
$ 3.85 - $ 6.65
|
|
|
959,542
|
|
|
|
7.66
|
|
|
$
|
5.82
|
|
|
|
655,768
|
|
|
$
|
5.79
|
|
$ 7.44 - $ 8.93
|
|
|
77,425
|
|
|
|
8.34
|
|
|
$
|
8.35
|
|
|
|
32,525
|
|
|
$
|
8.29
|
|
$ 9.19 - $ 9.19
|
|
|
905,530
|
|
|
|
8.62
|
|
|
$
|
9.19
|
|
|
|
418,204
|
|
|
$
|
9.19
|
|
$14.95 - $17.97
|
|
|
556,154
|
|
|
|
9.44
|
|
|
$
|
16.94
|
|
|
|
8,081
|
|
|
$
|
17.26
|
|
$18.22 - $18.22
|
|
|
1,000,950
|
|
|
|
9.96
|
|
|
$
|
18.22
|
|
|
|
|
|
|
|
|
|
$18.43 - $20.05
|
|
|
548,209
|
|
|
|
9.60
|
|
|
$
|
19.36
|
|
|
|
8,888
|
|
|
$
|
18.43
|
|
$21.50 - $21.50
|
|
|
109,798
|
|
|
|
9.50
|
|
|
$
|
21.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.18 - $21.50
|
|
|
6,029,526
|
|
|
|
7.46
|
|
|
$
|
9.68
|
|
|
|
2,985,521
|
|
|
$
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Of the 2,985,521 options exercisable at December 31, 2007,
2,614,137 options were fully vested and 371,384 were unvested
but exercisable by U.S. employees under the 1999 Plan.
The total pretax intrinsic value of options exercised in 2007
was $20.1 million. This intrinsic value represents the
difference between the fair market value of our ordinary shares
on the date of exercise and the exercise price of each option.
Based on the closing price of our ordinary shares of $18.22 on
December 31, 2007, the total pretax intrinsic value of all
outstanding options was $52.8 million. The total pretax
intrinsic value of exercisable options at December 31, 2007
was $43.0 million.
Our Employee Share Purchase Plan, or ESPP, was adopted by our
board of directors in November 2006 and approved by our
shareholders in December 2006, and became effective immediately
prior to our initial public offering on February 7, 2007.
The ESPP is designed to allow our eligible employees to purchase
our ordinary shares, at semi-annual intervals, with their
accumulated payroll deductions. A participant may contribute up
to 15% of his or her compensation through payroll deductions,
and the accumulated deductions will be applied to the purchase
of shares on the purchase date, which is the last trading day of
the offering period. The purchase price per share will be equal
to 85% of the fair market value per share on the start date of
the offering period in which the participant is enrolled or, if
lower, 85% of the fair market value per share on the purchase
date. 571,428 shares have been initially reserved for
issuance pursuant to purchase rights under the ESPP. In
addition, the number of ordinary shares reserved under our ESPP
will increase automatically on the first day of each fiscal year
during the term, beginning in 2008, by a number of ordinary
shares equal to the least of (i) 0.5% of the total number
of ordinary shares outstanding on a fully diluted basis on the
date of the increase, (ii) 171,428 shares, or
(iii) a smaller number of shares as determined by our board
of directors. In any event, the maximum aggregate number of
ordinary shares that may be issued over the term of the ESPP may
in no event exceed 2,114,285 shares. In addition, no
participant in our ESPP may be issued or transferred more than
$25,000 worth of ordinary shares pursuant to purchase rights
under the ESPP per calendar year. In 2007, 62,133 shares
were issued under this plan at average per share prices of
$13.69. At December 31, 2007, 509,295 shares were
available for future issuance under the ESPP.
Share-based
compensation
As discussed in Note 1, the Company adopted
SFAS No. 123(R) as of January 1, 2006 using the
prospective transition method. Under this method,
SFAS No. 123(R) is applied to new awards and to awards
modified, repurchased or cancelled after the adoption date of
January 1, 2006. Compensation cost that was previously
recorded under APB No. 25 for employee awards outstanding
at the adoption date, such as unvested options, will continue to
be recognized as the options vest. Compensation cost for
non-employees that was recorded under FAS No. 123 will
also continue to be recognized as the options vest. Accordingly,
for the year ended December 31, 2006, share-based
compensation expense includes compensation cost related to
estimated fair values of awards granted after the adoption of
SFAS No. 123(R), compensation costs related to
unvested awards at the date of adoption based on the intrinsic
values as previously recorded under APB No. 25, and
compensation costs for share-based awards granted to
non-employees prior and subsequent to January 1, 2006
recorded under FAS No. 123.
The fair value of options granted after January 1, 2006 is
estimated on the grant date using the Black-Scholes option
valuation model. This valuation model requires the Company to
make assumptions and judgments about the variables used in the
calculation including the expected term the options granted are
expected to be outstanding, the volatility of the Companys
ordinary shares, an assumed risk-free interest rate and the
estimated forfeitures of unvested share options. To the extent
actual forfeitures differ from the estimates, the difference
will be recorded as an adjustment in the period estimates are
revised. No compensation cost is recorded for options that do
not vest. Since the Companys shares were not publicly
traded prior to February 8, 2007, volatility is based on an
average of the historical volatilities of the Companys
peer group in the industry in which it does business. The
expected term is calculated using the simplified method
described in Question 6 of SEC Staff Accounting Bulletin (SAB)
No. 107. The risk-free rate is based on the five-year
Treasury bond yield as of the last day of the quarter. Expected
forfeitures are based on the Companys historical
experience.
79
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following weighted average assumptions are used to value
share options granted in connection with the Companys
share incentive plans for the years ended December 31, 2007
and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock
|
|
|
Employee Stock
|
|
|
|
Options
|
|
|
Purchase Plan
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Dividend yield, %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility, %
|
|
|
62.1
|
|
|
|
78.0
|
|
|
|
58.3
|
|
|
|
|
|
Risk free interest rate, %
|
|
|
4.12
|
|
|
|
5.43
|
|
|
|
4.71
|
|
|
|
|
|
Expected life, years
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
0.53
|
|
|
|
|
|
Estimated forfeiture rate, %
|
|
|
9.25
|
|
|
|
9.80
|
|
|
|
|
|
|
|
|
|
Had compensation cost for the Companys share-based
compensation plan been determined prior to January 1, 2006
based on the fair value at the grant dates for the awards under
the minimum-value method prescribed by SFAS No. 123,
the Companys net income would have been decreased to the
pro forma amounts indicated below:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
|
(In thousands,
|
|
|
|
except per share
|
|
|
|
data)
|
|
|
Net income as reported:
|
|
$
|
3,159
|
|
Add total employee share-based compensation included in the
determination of net income
|
|
|
17
|
|
Deduct total employee share-based compensation determined under
minimum-value method
|
|
|
(192
|
)
|
|
|
|
|
|
Net income pro forma:
|
|
$
|
2,984
|
|
|
|
|
|
|
Shares used to compute basic income per share
|
|
|
7,520
|
|
Shares used to compute diluted income per share
|
|
|
9,091
|
|
Net income per share attributable to ordinary
shareholders pro forma basic and diluted
|
|
$
|
0.00
|
|
Pro forma disclosures for the years ended December 31, 2007
and 2006 are not presented because share-based compensation was
accounted for under SFAS No. 123(R)s fair-value
method during this period.
80
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes the distribution of total
share-based compensation expense in the Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Share-based compensation expense by caption:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
87
|
|
|
$
|
12
|
|
|
$
|
0
|
|
Research and development
|
|
|
2,069
|
|
|
|
193
|
|
|
|
0
|
|
Sales and marketing
|
|
|
864
|
|
|
|
187
|
|
|
|
16
|
|
General and administrative
|
|
|
544
|
|
|
|
77
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
3,564
|
|
|
$
|
469
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
3,000
|
|
|
$
|
469
|
|
|
$
|
31
|
|
ESPP
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
3,564
|
|
|
$
|
469
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, there was $23.6 million of total
unrecognized share-based compensation costs related to
non-vested share-based compensation arrangements. The costs are
expected to be recognized over a weighted average period of
3.22 years.
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
1,416
|
|
|
$
|
806
|
|
|
$
|
498
|
|
Foreign
|
|
|
23,642
|
|
|
|
6,743
|
|
|
|
3,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
25,058
|
|
|
$
|
7,549
|
|
|
$
|
3,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The components of the provision for (benefit from) income taxes
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
662
|
|
|
$
|
471
|
|
|
$
|
394
|
|
State and local
|
|
|
232
|
|
|
|
32
|
|
|
|
26
|
|
Foreign
|
|
|
719
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,613
|
|
|
|
503
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(54
|
)
|
|
$
|
(174
|
)
|
|
$
|
36
|
|
State
|
|
|
2
|
|
|
|
(28
|
)
|
|
|
6
|
|
Foreign
|
|
|
(12,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,143
|
)
|
|
|
(202
|
)
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) taxes on income
|
|
$
|
(10,530
|
)
|
|
$
|
301
|
|
|
$
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, temporary differences which
gave rise to significant deferred tax assets and liabilities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
12,002
|
|
|
$
|
14,827
|
|
Research and development costs
|
|
|
2,326
|
|
|
|
4,143
|
|
Reserves and accruals
|
|
|
593
|
|
|
|
515
|
|
Depreciation and amortization
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
14,929
|
|
|
|
19,492
|
|
Valuation allowance
|
|
|
(2,491
|
)
|
|
|
(19,197
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
12,438
|
|
|
|
295
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
12,438
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS 109, we record net deferred tax
assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider
all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent
financial performance. Management believes that historical
profitability combined with the expectation of future
profitability supports the future realization of certain
deferred tax assets and accordingly, released the valuation
allowance for certain foreign deferred tax assets. During the
year 2007, the valuation allowance decreased by
$16.7 million due to release of the valuation allowance on
certain deferred tax assets and changes to loss carryforwards
partially offset by an increase as a result of foreign tax net
losses from traded securities sustained during the year.
At December 31, 2007 we had state and foreign net operating
loss carryforwards of approximately $16.8 million and
$70.0 million, respectively. If unutilized, the state net
operating loss will expire between the years 2012 and 2017. The
foreign net operating losses have no expiration date. Included
in these net operating losses carryforwards is
$14.3 million related to stock option deductions.
82
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The reconciliation of the statutory federal income tax rate to
the Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State, net of federal benefit
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
1.4
|
|
Meals and entertainment
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.3
|
|
Tax at rates other than the statutory rate
|
|
|
(30.1
|
)
|
|
|
(30.2
|
)
|
|
|
(20.6
|
)
|
Share-based compensation
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
Changes in valuation allowance
|
|
|
(49.6
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) taxes
|
|
|
(42.3
|
)%
|
|
|
4.0
|
%
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 10, 2005, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position
No. FAS 123(R)-3. which requires a company to
calculate the pool of excess tax benefits available to absorb
tax deficiencies recognized subsequent to adopting
SFAS No. 123 (R) (termed the APIC Pool). The Company
elected to use the method under which each award grant is
tracked on an
employee-by-employee
basis and
grant-by-grant
basis to determine if there is a tax benefit situation or tax
deficiency situation for such award. The Company then compare
the fair value expense to the tax deduction received for each
grant and aggregate the benefits and deficiencies to determine
whether there is a hypothetical APIC pool (net tax benefit
situation). For the year ended December 31, 2007, the
Company recognized a tax benefit to APIC of $1.5 million.
The Companys operations in Israel have been granted
Approved Enterprise status by the Investment Center
in the Israeli Ministry of Industry Trade and Labor, which makes
the Company eligible for tax benefits under the Israeli Law for
Encouragement of Capital Investments, 1959. Under the terms of
the Approved Enterprise program, income that is attributable to
the Companys operations in Yokneam, Israel, will be exempt
from income tax for a period of ten years commencing when the
Company first generates taxable income (after setting off its
losses from prior years). Currently, the Company expects the
Approved Enterprise Tax Holiday associated with its Yokneam
operations to begin in 2009 and expire in 2018. Income that is
attributable to the Companys operations in Tel Aviv,
Israel, will be exempt from income tax for a period of two years
commencing when the Company first generates taxable income
(after setting off its losses from prior years), and will be
subject to a reduced income tax rate (generally
10-25%,
depending on the percentage of foreign investment in the
Company) for the following five to eight years. Currently, the
Company expects the Approved Enterprise Tax Holiday associated
with its Tel Aviv operations to begin in 2009 and expire between
the years 2013 and 2016.
As a multinational corporation, the Company conducts business in
many countries and is subject to taxation in many jurisdictions.
The taxation of the Companys business is subject to the
application of multiple and sometimes conflicting tax laws and
regulations as well as multinational tax conventions. The
application of tax laws and regulations is subject to legal and
factual interpretation, judgment and uncertainty. Tax laws
themselves are subject to change as a result of changes in
fiscal policy, changes in legislation and the evolution of
regulations and court rulings. Consequently, taxing authorities
may impose tax assessments or judgments against the Company that
could materially impact its tax liability
and/or its
effective income tax rate.
Effective January 1, 2007, we adopted the provisions of
FASB Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN 48. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS No. 109. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon
ultimate settlement. We consider many factors when evaluating
and estimating our tax
83
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual
outcomes. Upon implementation of FIN 48, the Company
recognized no material adjustment to the January 1, 2007
balance of retained earnings. As of December 31, 2007, our
unrecognized tax benefits totaled approximately $1,139,000,
which would reduce our income tax expense and effective tax
rate, if recognized.
The following summarizes the activity related to our
unrecognized tax benefits (in thousands):
|
|
|
|
|
Gross unrecognized tax benefits at January 1, 2007
|
|
$
|
798
|
|
Increases in tax positions for prior years
|
|
|
|
|
Decreases in tax positions for prior years
|
|
|
(39
|
)
|
Increases in tax positions for current year
|
|
|
380
|
|
Decreases in tax positions for current year
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31, 2007
|
|
$
|
1,139
|
|
|
|
|
|
|
It is the Companys policy to classify accrued interest and
penalties as part of the accrued FIN 48 liability and
record the expense in the provision for income taxes. For the
year ended December 31, 2007 the amount of accrued interest
or penalties related to unrecognized tax benefit totaled $9,000.
For unrecognized tax benefits that exist at December 31,
2007, the Company does not anticipate any significant changes
within the next twelve months.
We file income tax returns in the U.S. federal
jurisdictions, and various states and foreign jurisdictions. The
2004 through 2007 tax returns are open and may be subject to
potential examination in one or more jurisdictions. The Company
is not currently under federal, state or foreign income tax
examination.
Undistributed earnings of the Company subsidiary, Mellanox
Technologies, Inc., are indefinitely reinvested in the
respective operations. If there earnings were to be repatriated,
the Company would be subject to additional tax.
|
|
NOTE 11
|
SEGMENT
INFORMATION:
|
The Company operates in one reportable segment, the development,
manufacturing, marketing and sales of InfiniBand semiconductor
products. The Companys chief operating decision maker is
the CEO.
Revenues by geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
North America
|
|
$
|
44,779
|
|
|
$
|
28,711
|
|
|
$
|
30,436
|
|
Israel
|
|
|
15,751
|
|
|
|
10,026
|
|
|
|
5,586
|
|
Europe
|
|
|
11,339
|
|
|
|
5,379
|
|
|
|
4,060
|
|
Asia
|
|
|
12,209
|
|
|
|
4,423
|
|
|
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
$
|
42,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by product group are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
IC/Semiconductors
|
|
$
|
36,050
|
|
|
$
|
19,395
|
|
|
$
|
17,548
|
|
Cards
|
|
|
46,767
|
|
|
|
27,675
|
|
|
|
23,156
|
|
Options and miscellaneous other
|
|
|
1,261
|
|
|
|
1,469
|
|
|
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
$
|
42,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Tangible long-lived assets by geographic location are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Israel
|
|
$
|
8,175
|
|
|
$
|
2,548
|
|
United States
|
|
|
274
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Total tangible long-lived assets
|
|
$
|
8,449
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 12
|
OTHER
INCOME, NET:
|
Other income, net, is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
6,452
|
|
|
$
|
687
|
|
|
$
|
149
|
|
Foreign exchange gains (losses)
|
|
|
(283
|
)
|
|
|
(229
|
)
|
|
|
100
|
|
Other
|
|
|
(193
|
)
|
|
|
(20
|
)
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
5,976
|
|
|
$
|
438
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
MELLANOX
TECHNOLOGIES, LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged (Credited)
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
to Costs
|
|
|
|
|
|
Balance at
|
|
Description:
|
|
Year
|
|
|
and Expenses
|
|
|
Deductions(1)
|
|
|
End of Year
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
107
|
|
|
$
|
79
|
|
|
$
|
|
|
|
$
|
186
|
|
Allowance for sales returns and adjustments
|
|
|
9
|
|
|
|
100
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
116
|
|
|
$
|
179
|
|
|
$
|
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
95
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
107
|
|
Allowance for sales returns and adjustments
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
50
|
|
|
$
|
45
|
|
|
$
|
|
|
|
$
|
95
|
|
Allowance for sales returns and adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50
|
|
|
$
|
45
|
|
|
$
|
|
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deductions for Allowance for doubtful accounts are for accounts
receivable written-off. |
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Mellanox Technologies, Ltd. has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 24, 2008.
MELLANOX TECHNOLOGIES, LTD.
Eyal Waldman
President and Chief Executive Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Eyal Waldman
and Michael Gray, his or her attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities,
to sign any amendments to this Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the U.S. Securities and
Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact, or his or her or their substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Eyal
Waldman
Eyal
Waldman
|
|
Chief Executive Officer and Director (principal executive
officer)
|
|
March 24, 2008
|
|
|
|
|
|
/s/ Michael
Gray
Michael
Gray
|
|
Chief Financial Officer
(principal financial and accounting officer) and Authorized
Representative in the United States
|
|
March 24, 2008
|
|
|
|
|
|
/s/ Rob
S. Chandra
Rob
S. Chandra
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
/s/ Irwin
Federman
Irwin
Federman
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
/s/ Thomas
J. Riordan
Thomas
J. Riordan
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
/s/ C.
Thomas Weatherford
C.
Thomas Weatherford
|
|
Director
|
|
March 24, 2008
|
|
|
|
|
|
/s/ Amal
Johnson
Amal
Johnson
|
|
Director
|
|
March 24, 2008
|
87
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Association of Mellanox
Technologies, Ltd.
|
|
4
|
.1(2)
|
|
Amended and Restated Investor Rights Agreement dated as of
October 9, 2001, by and among Mellanox Technologies, Ltd.,
purchasers of Series A Preferred Shares, Series B
Preferred Shares and Series D Redeemable Preferred Shares
who are signatories to such agreement and certain holders of
Ordinary Shares who are signatories to such agreement, and for
purposes of certain sections thereof, the holder of
Series C Preferred Shares issued or issuable pursuant to
the Series C Preferred Share Purchase Agreement dated
November 5, 2000.
|
|
4
|
.2(3)
|
|
Amendment to the Amended and Restated Investor Rights Agreement
dated as of February 2, 2007, by and among Mellanox
Technologies, Ltd., purchasers of Series A Preferred
Shares, Series B Preferred Shares and Series D
Redeemable Preferred Shares who are signatories to such
agreement and certain holders of Ordinary Shares who are
signatories to such agreement, and for purposes of certain
sections thereof, the holder of Series C Preferred Shares
issued or issuable pursuant to the Series C Preferred Share
Purchase Agreement dated November 5, 2000.
|
|
10
|
.1(4)
|
|
Mellanox Technologies, Ltd. 1999 United States Equity Incentive
Plan and forms of agreements relating thereto.
|
|
10
|
.2(5)
|
|
Mellanox Technologies, Ltd. 1999 Israeli Share Option Plan and
forms of agreements relating thereto.
|
|
10
|
.3(6)
|
|
Mellanox Technologies, Ltd. 2003 Israeli Share Option Plan and
forms of agreements relating thereto.
|
|
10
|
.4(7)
|
|
Form of Indemnification undertaking made by and between Mellanox
Technologies, Ltd. and each of its directors and executive
officers.
|
|
10
|
.5(8)(9)
|
|
License Agreement between Vitesse Semiconductor Corporation and
the Company, dated September 10, 2001.
|
|
10
|
.6(10)
|
|
Net Lease Agreement between S.I. Hahn, LLC and Mellanox
Technologies, Inc., dated January 1, 2002.
|
|
10
|
.7(11)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered
Limited Partnership, as landlord, as amended August 23,
2001 (as translated from Hebrew).
|
|
10
|
.8(12)
|
|
Mellanox Technologies, Ltd. Global Share Incentive Plan
(2006) and forms of agreements and appendices relating
thereto.
|
|
10
|
.9(13)
|
|
Mellanox Technologies, Ltd. Non-Employee Director Option Grant
Policy.
|
|
10
|
.10(14)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for U.S. Executives.
|
|
10
|
.11(15)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for Israel Executives.
|
|
10
|
.12(16)
|
|
Mellanox Technologies, Ltd. Employee Share Purchase Plan.
|
|
10
|
.13
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered
Limited Partnership, as landlord, as amended May 15, 2007
(as translated from Hebrew).
|
|
10
|
.14
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered
Limited Partnership, as landlord, as amended September 4,
2007 (as translated from Hebrew).
|
|
14
|
.1(17)
|
|
Code of Business Conduct and Ethics.
|
|
21
|
.1(18)
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
|
|
24
|
.1
|
|
Power of Attorney (included on signature page to this annual
report on
Form 10-K).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Incorporated by reference to Exhibit 3.2 to Amendment
No. 4 to the Companys Registration Statement on
Form S-1
(SEC File No.
333-137659)
filed on January 22, 2007. |
|
(2) |
|
Incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |
|
|
|
(3) |
|
Incorporated by reference to Exhibit 4.3 to the
Companys Annual Report on
Form 10-K
(SEC File No. 001-33299)
filed on March 26, 2007. |
|
(4) |
|
Incorporated by reference to Exhibit 10.1 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |
|
(5) |
|
Incorporated by reference to Exhibit 10.2 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |
|
(6) |
|
Incorporated by reference to Exhibit 10.3 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |
|
(7) |
|
Incorporated by reference to Exhibit 10.4 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |
|
(8) |
|
Confidential treatment granted as to certain portions, which
portions, have been omitted and filed separately with the
Securities and Exchange Commission. |
|
(9) |
|
Incorporated by reference to Exhibit 10.5 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |
|
(10) |
|
Incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |
|
(11) |
|
Incorporated by reference to Exhibit 10.9 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(12) |
|
Incorporated by reference to Exhibit 10.10 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(13) |
|
Incorporated by reference to Exhibit 10.11 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(14) |
|
Incorporated by reference to Exhibit 10.12 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(15) |
|
Incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on November 14, 2006. |
|
(16) |
|
Incorporated by reference to Exhibit 10.14 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on December 7, 2006. |
|
(17) |
|
Incorporated by reference to Exhibit 14.1 to the
Companys Annual Report on
Form 10-K
(SEC File No. 001-33299)
filed on March 26, 2007. |
|
(18) |
|
Incorporated by reference to Exhibit 21.1 to the
Companys Registration Statement on
Form S-1
(SEC File No. 333-137659)
filed on September 28, 2006. |