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,
2009
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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
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For the transition period
from to
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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, Inc.
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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 shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o 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
or any amendment to this
Form 10-K. o
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 o
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Accelerated
filer þ
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Non-accelerated
filer o
(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
share, NIS 0.0175 par value per share, held by
non-affiliates of the registrant on June 30, 2009, the last
business day of the registrants most recently completed
second fiscal quarter, was approximately $291.8 million
(based on the closing sales price of the registrants
common share on that date). Ordinary shares held by each
director and executive officer of the registrant, as well as
shares held by each holder of more than 10% of the ordinary
shares 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 28, 2010, was 33,158,212.
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 2010 Annual General
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, 2009.
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;
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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
us, 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 connectivity products that facilitate efficient
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 we are the leading supplier of field-proven
InfiniBand-compliant semiconductor products that deliver
industry-leading performance and capabilities, which is
demonstrated by the performance, efficiency and scalability of
clustered computing and storage systems that incorporate our
products. In addition to supporting InfiniBand, our products
also support the industry standard Ethernet interconnect
specification, which provide unique product differentiation and
connectivity flexibility.
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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, gateway and switch ICs, all of which are silicon
devices that provide high performance connectivity. We also
offer adapter cards that incorporate our adapter ICs and switch
and gateway systems that incorporate our switch and gateway ICs.
These ICs are added to servers, storage and communication
infrastructure equipment and embedded systems by either
integrating them directly on circuit boards or inserting adapter
cards into slots on the circuit board. We have been shipping our
InfinBand products since 2001 and our Ethernet products since
2007. During 2008 we introduced Virtual Protocol Interconnect,
or VPI, into our adapter ICs and cards. VPI provides the ability
for an adapter to automatically sense whether a communications
port is connected to an Ethernet fabric or an InfiniBand fabric.
Data centers which use VPI adapters in their servers have the
ability to dynamically select the connectivity protocol for use
by those servers. 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 server vendors, IBM, Hewlett-Packard, Dell, Sun
Microsystems and Fujitsu-Siemens, which collectively shipped the
majority of servers in 2009, according to the industry research
firm Gartner. We also supply leading storage and communications
infrastructure equipment vendors such as LSI/Engenio
Corporation, Sun Microsystems, Network Appliance, Isilon, Data
Direct Networks, Voltaire and Xyratex. Additionally, our
products are used as embedded solutions by GE Fanuc, Toshiba
Medical, SeaChange International and others.
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 supports and
promotes Ethernet solutions. We are also a participating member
of the Institute of Electrical and Electronic Engineers, or
IEEE, organization which facilitates the advancement of the
Ethernet standard, Ethernet Alliance and other industry
organizations advancing various networking and storage related
standards.
Our business headquarters are in Sunnyvale, California, and our
engineering headquarters are in Yokneam, Israel. Our total
assets for the years ended December 31, 2007, 2008 and 2009
were approximately $202.4 million, $244.8 million and
$275.4 million, respectively. During the years ended
December 31, 2007, 2008 and 2009 we generated approximately
$84.1 million, $107.7 million and $116.0 million
in revenues, respectively, and approximately $35.6 million,
$22.4 million and $12.9 million in net income,
respectively.
We measure our business based on one reportable segment: the
development, manufacturing, marketing and sales of inter-connect
semiconductor products. Additional information required by this
item is incorporated herein by reference to Note 12,
Segment Information, of the Notes to Consolidated
Financial Statements, included in Part IV, Item 15 of
this report
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
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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 containing 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 both virtualized and non-virtualized
servers, storage and communication infrastructure equipment and
embedded systems that enable deployment of commercial
applications, such as customer relationship management,
financial trading and risk management applications, enterprise
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, geosciences 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,
fueled by the increasing reliance on enterprises on information
technology, or IT, for everyday operations. The increase in
compute resources for virtual product design, the increase in
online banking and electronic medical records for healthcare and
government regulations requiring digital records retention
require increased IT capacity. Due to greater amounts of
information to be processed, stored and retrieved, data centers
rely on high-performance computing and high-capacity storage
systems to optimize price/performance, minimize total cost of
ownership, utilize power efficiently 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 original equipment manufacturers, or 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
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cluster I/O bandwidth results in processor underutilization,
thereby reducing the overall capability and performance of the
cluster.
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Data center infrastructure consolidation. IT
managers are increasingly faced with the need to optimize total
cost of ownership associated with the data centers they manage.
As the demand for I/O to servers increases, so does the need for
a unified I/O interconnect. In the past the solution was to add
more I/O adapters and cables to each server, which resulted in
increased costs, power consumption and management complexity.
This has led to a widespread trend of consolidating network
infrastructures to reduce costs and generate a higher return on
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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Cloud computing. Cloud computing is a
convergence of two interdependent IT trends IT
efficiency (converting IT costs from capital expenses to
operating expenses) and business agility. The recent emergence
of massive network bandwidth and virtualization technologies has
enabled this transformation to a new services-oriented
infrastructure. Cloud computing enables IT organizations to
increase their hardware utilization and to scale up to massive
capacities in an instant without having to invest in new
infrastructure or license new software. With increased I/O
bandwidth and lower latency, cloud providers can perform system
provisioning, workload migrations and support multiple
users requests faster and in the most efficient way.
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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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Virtual product design. A significant
reduction in cost and turn-around time of product design can be
accomplished by carrying out the design activities using
simulation and optimization tools and reducing the number of
prototypes and physical testing. To accomplish this, a detailed
representation of the products physical properties, high
capability simulations software tools and an intensive compute
environment are required. Such environments mandate high-speed
networking to become effective and carry the compute intensive
simulations.
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Green computing. With the growth in IT
capacity, data centers have become major consumers of electrical
energy. Furthermore, data center networks have increased in size
and managing a growing
multi-infrastructure
has become a daunting task. Enterprise data centers currently
use three different networks Storage Area Networks
using Fibre Channel transport for storage access, Local Area
Network using Ethernet transport for standard network access and
System Area Networks using InfiniBand transport for
inter-process communication and high-performance clustering. In
order to reduce energy, real estate, management and
infrastructure costs of modern data centers, a new field of data
center architecture was defined the green data
center. The new architecture leverages from I/O virtualization
and consolidation to enable green, simple-managed,
highly-utilized modern data centers. The ability to consolidate
data center I/O mandates the use of high-throughput networks to
deliver the needed bandwidth equal or greater than the sum of
the separate networks.
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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, cloud computing and storage environments, high
bandwidth and low latency are key requirements to capture the
full performance capabilities of a cluster.
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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,
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. The number of supercomputers that
use proprietary interconnect solutions has been declining
largely due to the availability of industry standards-based
interconnects that offer 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 2, 4 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 industry efforts
to support the Fibre Channel data transmission protocol over
interconnect technologies including Ethernet (Fibre Channel over
Ethernet) and InfiniBand (Fibre Channel over InfiniBand).
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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 1Gb/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. An 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 ongoing efforts to standardize
additional features within the Ethernet specification to improve
its reliability and scalability in EDCs. These
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enhancements are in the definition and standardization process
as part of the IEEE 802.1 Working Group and are generally
referred to as Data Center Bridging.
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In the HPC, EDC and embedded markets, the predominant
interconnects today 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 and better overall performance in these markets.
Overview
of the InfiniBand Standard
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 the
IBTA, which was founded in 1999 and is composed of leading IT
vendors and hardware and software solution providers including
Mellanox, Fujitsu, 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.
Advantages
of InfiniBand
We believe that InfiniBand-based solutions have 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 system 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
10Gb/s 120Gb/s switch-to-switch
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Performance in terms of latency varies depending on system
configurations and applications. According to 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 are increasing numbers 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
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single cable or backplane interconnect, which is critical for
blade servers and embedded systems. InfiniBand also consolidates
the transmission of clustering, communications and storage and
management data types over a single connection.
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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.
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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.
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Our
InfiniBand Solution
We provide comprehensive solutions based on InfiniBand,
including HCA, switch and gateway ICs, adapter cards, switch and
gateway systems 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 10Gbs (Single Data Rate
or SDR), 20Gb/s (Double Data Rate or DDR) and 40Gb/s (Quad Data
Rate or QDR) 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 2009
illustrates the benefits of our solutions. 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 142 as of November 2008 to 182 as
of November 2009, which represents a 28% increase.
InfiniBand-based clusters represented five of the top 10 and 63%
of the top 100. The November 2009 TOP500 list also illustrates
that InfiniBand interconnects have continued to replace
proprietary interconnects in supercomputers. Proprietary
interconnects have declined significantly since the November
2007 list, and represent less than 2% of the latest 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 2009 TOP500 list of
the Worlds Fastest Supercomputers compare favorably to
clusters based on other interconnect technologies.
Our
Ethernet Solution
Advances in server virtualization, network storage and compute
clusters have driven the need for faster network throughput to
address application latency and availability problems in the
Enterprise. To service this need, we provide competitive, high
bandwidth 10 and 40 Gigabit Ethernet adapters for use in
Enterprise Data Centers, High-Performance Computing and Embedded
environments. These adapters remove I/O bottlenecks in
mainstream servers that are limiting application performance and
support hardware-based I/O virtualization, providing dedicated
adapter resources and guaranteed isolation and protection for
virtual machines within the server.
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VPI:
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 1Gb/s, 10Gb/s and 40Gb/s. In
developing this dual interconnect support, we created VPI. VPI
enables us to offer products that concurrently support both
Ethernet and InfiniBand with network ports having the ability to
auto sense the type of switch to which it is connected and then
take on the characteristics of that fabric. In addition, 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.
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. We were 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
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 27 issued 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 gained 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 who 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
end-to-end
connectivity solutions for servers and storage that optimize
data center performance 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 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
VPI enabled 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 expand our efforts to promote the benefits of InfiniBand
and VPI directly to end users to increase demand for high
performance interconnect 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 their 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.
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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 include adapter ICs and cards
(InfiniHost®
product family) and switch ICs
(InfiniScale®
product family) and systems, gateway ICs
(BridgeX®
product family) and gateway systems. Our latest 4th and 5th
generation adapters and cards
(ConnectX®
and ConnectX-2 product families) also support the Ethernet
interconnect standard in addition to InfiniBand. Our gateway
devices support bridging capabilities from InfiniBand to
Ethernet and Fibre Channel, and from Ethernet to Fibre Channel.
We have registered Mellanox, BridgeX,
ConnectX, InfiniBridge,
InfiniHost, InfiniPCI,
InfiniRISC and InfiniScale as trademarks
in the United States. We have a trademark application pending to
register FabricIT and
CORE-Direct.
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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, Solaris and VxWorks.
We also 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. Our 4th generation switch IC (InfiniScale
IV) supports up to 120Gb/s InfiniBand throughput. We have
also introduced our 40Gb/s InfiniBand switch systems that
include 36-port, 108-port, 216-portm, 324-port and 648-port.
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.
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.
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 efficiently utilize the features of the
interconnect. 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 provide a suite of software tools and a
comprehensive management software solution, FabricIT, for
managing, optimizing, testing and verifying the operation of
InfiniBand switch fabrics. We also provide gateway management
software, FabricIT BridgeX Manager, which runs on top of our
BridgeX gateway systems to manage I/O consolidation from an
InfiniBand network to Ethernet and Fibre Channel for cluster,
cloud and virtual environments.
We provide an extensive selection of passive and optical cabling
and modules to enable InfiniBand and Ethernet connectivity.
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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 data transmission 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 used 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,
which saves 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
InfiniRISC®
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 (in
2004) and PCI Express 2.0 interface (in 2007), and we
believe this provides an example of the technical proficiency of
our development team.
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
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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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HP
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Sun Microsystems
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GE Fanuc
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HP
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LSI/Engenio Corporation
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Voltaire
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Toshiba Medical
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IBM
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Network Appliance
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Xsigo
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Seachange International
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Sun Microsystems
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Isilon
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We sold products to more than 230 customers worldwide in the
year ended December 31, 2009, 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.
A small number of customers account for a significant portion of
our revenues. In the year ended December 31, 2009, sales to
Hewlett Packard accounted for 15% of our total revenues, sales
to IBM accounted for 11% of our total revenues and sales to
Supermicro Computer Inc. accounted for 10% of our total
revenues. In the year ended December 31, 2008, sales to
Hewlett-Packard accounted for 19% of our total revenues, sales
to Sun Microsystems accounted for 17% of our total revenues, and
sales to QLogic Corporation accounted for 11% of our total
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, and sales
to Cisco Systems and QLogic Corporation each accounted for 11%
of our total revenues.
Sales and
Marketing
We sell our products worldwide through multiple channels,
including our direct sales force, our network of domestic and
international sales representatives and independent
distributors. We have strategically located sales personnel in
the United States, Europe, China, India 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 expanded our business development team which
engages directly with end users promoting the benefits of our
products 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 North
America are supported by our staff in California and customers
outside of the North America are supported by our 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.
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, Blade.org 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, mixed-signal and analog 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. 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, design verification and transfer
to production.
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, as well as better time to
market.
We choose first tier technology vendors for our 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. 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.
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. Our research and development expense was
$42.2 million in 2009, $39.5 million in 2008 and
$24.6 million in 2007.
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 and custom adapter card products 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 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.
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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 the ability to generate characterization
reports that are made 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 the 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 technologies developed under projects
funded by the government to third parties outside of 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 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, 2009, we had 329 full-time
employees and 42 part-time employees located in the United
States and Israel including 261 in research and development, 54
in sales and marketing, 28 in general and administrative and 28
in operations. Of our 329 full-time employees, 265 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 above
the required minimums.
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
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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, 2009, we had 19 issued patents and 30
patent applications pending in the United States, five issued
patents in Taiwan and three issued patents and two 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.
The risks associated with patents and intellectual property are
more fully discussed under the section entitled Risk
Factors under Item 1A of this report.
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 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.
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 Intel 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
17
based on the InfiniBand standard primarily compete with the
industry-standard Ethernet and Fibre Channel interconnect
technologies. 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
the Tel-Aviv Share 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 350 Oakmead Parkway, Suite 100, Sunnyvale, California
94085, and our principal executive offices in Israel are located
at Hermon Building, Yokneam, Israel 20692. The majority of our
assets are located in the United States. Our telephone number in
Sunnyvale, California is
(408) 970-3400,
and our telephone number in Yokneam, Israel is +972-4-909-7200.
Michael Gray is our agent for 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
report and the inclusion of our website address in this report
is an inactive textual reference only.
Available
Information
We file reports with the SEC, including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any other filings required by the SEC. We post on the
Investor Relations pages of our website, ir.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 and
Nominating and Corporate Governance Committees of our board of
directors and the charter of our Disclosure Committee. Our
filings with the SEC, including our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any other filings required by the SEC, are posted on our
website 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., 350 Oakmead Parkway, Suite 100
Sunnyvale, California 94085 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 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
The
global recession and the downturn in the semiconductor industry
may cause our revenues and profitability to
decline.
The general worldwide economic condition has significantly
deteriorated due to many factors including credit conditions and
liquidity concerns resulting from the financial crisis affecting
the banking system and financial markets, slower economic
activity, decreased consumer confidence, reduced corporate
profits and capital spending and adverse business conditions.
Although conditions in the semiconductor market in which we
participate have recently improved and general economic
conditions have recently shown signs of improvement in the
United States and certain other countries, if general global
economic conditions do not improve or deteriorate further, it
could
18
adversely affect the semiconductor market and be extremely
difficult for us, our customers and our vendors to accurately
forecast and plan future business activities, and it could cause
U.S. and foreign businesses to reduce spending on our
products and services, which would delay and lengthen sales
cycles. Furthermore, during challenging economic times, our
customers may face issues gaining timely access to sufficient
credit, which could impair their ability to make timely
payments. We cannot predict the timing, strength or duration of
any economic slowdown or subsequent economic recovery, either
worldwide, or in the semiconductor industry. If the economy does
not improve or if it continues to deteriorate, our customers or
potential customers could reduce or delay their purchases of our
products, which would adversely impact our revenues and our
ability to manage inventory levels, collect customer receivables
and, ultimately, our profitability.
We do
not expect to sustain our historical revenue growth rate, which
may reduce our share price.
Our revenues increased by 73%, 28% and 8% in 2007, 2008 and
2009, respectively. Our revenues increased from
$48.5 million to $84.1 million to $107.7 million
to $116.0 million for the years ended December 31,
2006, 2007, 2008 and 2009, respectively. Our revenue growth rate
has slowed during recent years and we may not be able to sustain
this 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.
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 demand. 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 our 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.
19
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, 2009, sales to
Hewlett Packard accounted for 15% of our total revenues, sales
to IBM accounted for 11% of our total revenues and sales to
Supermicro Computer Inc. accounted for 10% of our total
revenues. In the year ended December 31, 2008, sales to
Hewlett-Packard accounted for 19% of our total revenues, sales
to Sun Microsystems accounted for 17% of our total revenues, and
sales to QLogic Corporation accounted for 11% of our total
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, and sales
to Cisco Systems and QLogic Corporation each accounted for 11%
of our total revenues. Because the majority of servers, storage,
communications infrastructure equipment and embedded systems are
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.
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 introduced
its latest generation 40Gb/s switch technology in the fourth
quarter of 2009. With respect to 10Gb Ethernet products, we
compete with Intel, Broadcom Corporation and QLogic Corporation.
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, Intel, Emulex Corporation, QLogic Corporation and
Myricom.
Some of our customers are also integrated circuit and switch
suppliers and already have similar expertise in-house. The
process of licensing our technology to and support of such
customers entails the transfer of technology that may enable
them to become a source of competition to us, despite our
efforts to protect our intellectual property rights. Further,
each new design by a customer presents a competitive situation.
In the past, we have lost design wins to divisions within our
customers and this may occur again in the future. We cannot
assure you that these customers will not continue to compete
with us, that they will continue to be our customers or that
they will continue to buy products from us at the same volumes.
Competition could increase pressure on us to lower our prices
and could negatively impact our profit margins.
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 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
20
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.
There is a risk that these developments or enhancements, such as
the migration of our next generation products from 90nm to 40nm
to lower geometry process technologies, 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 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 and switches. 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.
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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If we
fail to carefully manage the use of open source
software in our products, we may be required to license key
portions of our products on a royalty-free basis or expose key
parts of source code.
Certain of our software may be derived from open
source software that is generally made available to the
public by its authors
and/or other
third parties. Such open source software is often made available
to us under licenses, such as the GNU General Public License,
which impose certain obligations on us in the event we were to
distribute derivative works of the open source software. These
obligations may require us to make source code for the
derivative works available to the public
and/or
license such derivative works under a particular type of
license, rather than the forms of licenses customarily used to
protect our intellectual property. In the event the copyright
holder of any open source software were to successfully
establish in court that we had not complied with the terms of a
license for a particular work, we could be required to release
the source code of that work to the public
and/or stop
distribution of that work.
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 margins.
We
expect gross margin to vary over time, and our recent level of
product gross margin may not be sustainable.
Our product gross margins vary from quarter to quarter, and the
recent level of gross margins may not be sustainable and may be
adversely affected in the future by numerous factors, including
product mix shifts, product transitions, increased price
competition in one or more of the markets in which we compete,
increases in material or labor costs, excess product component
or obsolescence charges from our contract manufacturers,
warranty related issues, or the introduction of new products or
entry into new markets with different pricing and cost
structures.
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 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 be able to proportionately 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.
23
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, 2009, we
had 19 issued patents and 30 patent applications pending in the
United States, five issued patents in Taiwan and three issued
patent and two 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, and 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 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 our president and chief
executive officer and other senior executives. We do not have
long-term employment contracts
24
with our president and chief executive officer or any other key
personnel, and their knowledge of our business and industry
would be extremely difficult to replace.
In an effort to retain key employees, we may modify our
compensation policies by, for example, increasing cash
compensation to certain employees
and/or
instituting awards of restricted share units
and/or
modifying existing share options. For example, during 2009, we
offered eligible employees and contractors the opportunity to
exchange certain outstanding share options for a lesser number
of replacement options. These modifications of our compensation
policies and the requirement to expense the fair value of share
options awarded to employees and officers may increase our
operating expenses. We cannot be certain that these and any
other changes in our compensation policies will or would improve
our ability to attract, retain and motivate employees. Our
inability to attract and retain additional key employees and the
increase in share-based compensation expense could each have an
adverse effect on our business, financial condition and results
of operations.
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 Company 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, 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 and switch
systems. Our ability to
25
offer new products depends on our manufacturers ability to
implement our revised product specifications, which is costly,
time-consuming and complex.
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.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our
management to report on, and our independent registered public
accounting firm to attest to, the effectiveness of our internal
control structure and procedures for financial reporting. We
have an ongoing program to perform the system and process
evaluation and testing necessary to comply with these
requirements. We have incurred and expect to continue to incur
significant expense and to devote significant management
resources to Section 404 compliance. In the event that our
chief executive officer, chief financial officer or independent
registered public accounting firm determine that our internal
control over financial reporting is not effective as defined
under Section 404, investor perceptions of our company may
be adversely affected and could cause a decline in the market
price of our share. 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 Select Market, which could reduce
our share price.
We may
pursue acquisitions or investments in new or complementary
products, technologies and businesses, which could harm our
operating results and may disrupt our business.
We may pursue acquisitions of, or investments in, new or
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.
We have made, and could make in the future, investments in
technology companies, including privately-held companies in a
development stage. Many of these private equity investments are
inherently risky because the companies businesses may
never develop, and we may incur losses related to these
investments. In addition, we may be required to write down the
carrying value of these investments to reflect
other-than-temporary
declines in their value, which could have a material adverse
effect on our financial position and results of operations.
Unanticipated
changes in our tax provisions or adverse outcomes resulting from
examination of our income tax returns could adversely affect our
results of operations.
We are subject to income taxes in the United States and various
foreign jurisdictions. Our effective income tax could be
adversely affected by changes in tax laws or interpretations of
those tax laws, by changes in the mix of earnings in countries
with differing statutory tax rates, by discovery of new
information in the course of our tax return preparation process,
or by changes in the valuation of our deferred tax assets and
liabilities. Our effective income tax rates are also affected by
intercompany transactions for sales, services, funding and other
items. Given the increased global scope of our operations, and
the complexity of global tax and transfer pricing rules and
regulations, it has become increasingly difficult to estimate
earnings within each tax jurisdiction. If actual earnings within
a tax jurisdiction differ materially from our estimates, we may
not achieve our expected effective tax rate. Additionally, our
effective tax rate may be impacted by the tax effects of
acquisitions, newly enacted tax legislation, share-based
compensation and uncertain tax positions. Finally, we are
subject to the continuous examination of our income tax returns
by the Internal Revenue Service and other tax authorities which
may result in the assessment of
26
additional income taxes. We regularly assess the likelihood of
adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes. However,
unanticipated outcomes from these continuous examinations could
have a material adverse effect on our financial condition or
results of operations.
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 to 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 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.
Also, the SEC released a proposed roadmap regarding the
potential use by U.S. issuers of financial statements
prepared in accordance with International Financial Reporting
Standards, or IFRS. Under the proposed roadmap, we may be
required to prepare financial statements in accordance with
IFRS. The SEC announced it will make a determination in 2011
regarding the mandatory adoption of these new standards.
Adoption of IFRS may have material impact on our results of
operations.
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.
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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.
Additionally, general worldwide economic conditions have
recently experienced a downturn due to market instability,
slower economic activity, concerns about inflation and
deflation, increased energy costs, decreased consumer
confidence, reduced corporate profits and capital spending,
adverse business conditions and liquidity concerns. These
conditions make it extremely difficult for our customers, our
vendors and us to accurately forecast and plan future business
activities. We cannot predict the timing, strength or duration
of any economic slowdown or subsequent economic recovery,
worldwide, or in the semiconductor industry. If the economy or
markets in which we operate continue at their present levels,
our business, financial condition and results of operations will
likely be materially and adversely affected.
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 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, 2009, 265 full-time
and 42 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 winter of 2008 and the
summer of 2006, Israel was engaged in armed conflicts with Hamas
and Hezbollah. These conflicts involved missile strikes against
civilian targets in southern and 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. 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
28
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 conflicts with Hamas and 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 some of our employees, including those
in key positions, have been called upon 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 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 47%, 48% and 64% of our revenues in the years ended
December 31, 2007, 2008 and 2009, 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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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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adverse economic conditions;
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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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licenses, tariffs, other 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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foreign currency exchange risks;
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fluctuations in freight rates and transportation disruptions;
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political and economic instability;
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variance and unexpected changes in local laws and regulations;
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natural disasters and public health emergencies; and
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trade and travel restrictions.
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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 any
of the above risks 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 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 a significant
amount of our assets and the assets of these persons are located
outside the United States. Two 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 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 Israeli 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.
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Exchange
rate fluctuations between the U.S. dollar and the NIS may
negatively affect our earnings.
Although all of 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
appreciation of the NIS against the U.S. dollar. The
Israeli rate of inflation amounted to 3.4%, 3.8% and 3.9% for
the years ended December 31, 2007, 2008 and 2009,
respectively. The increase in value of the NIS against the
U.S. dollar amounted to 8.9%, 1.1% and 0.7% in the years
ended December 31, 2007, 2008 and 2009, respectively. Our
operations also could be adversely affected if we are unable to
guard against currency fluctuations in the future. Further,
because all of 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 the collection of receivables more difficult. To
help manage this risk we have recently been engaged in foreign
currency hedging activities. 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 the 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 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
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payment of royalties with respect to grants received, we may be
required to refund any payments previously received, together
with interest and penalties. We have received total grants from
the OCS in the amount of $2.8 million. As of
December 31, 2008, we concluded all our obligations in
respect of royalties payable to the OCS.
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 $6.02 per share. Factors that
could cause volatility in the market price of our ordinary
shares include, but are not limited to:
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quarterly variations in our results of operations or those of
our competitors;
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announcements by us, our customers or rumors from sources other
than the Company related to acquisitions, new products,
significant contracts, commercial relationships or capital
commitments;
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our ability to develop and market new and enhanced products on a
timely basis;
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disruption to our operations;
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geopolitical instability;
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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;
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general economic conditions and slow or negative growth of
related markets;
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commencement of, or our involvement in, litigation;
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changes in earnings estimates or recommendations by securities
analysts;
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continuing international conflicts and acts of
terrorism; and
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changes in accounting rules.
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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. 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.
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The
ownership of our ordinary shares may continue to be highly
concentrated, and your interests may conflict with the interests
of our significant shareholders.
Our executive officers and directors and their affiliates,
together with our current significant shareholders, beneficially
owned approximately 29% of our outstanding ordinary shares as of
December 31, 2009. Moreover, based on information filed
with SEC, two of our major shareholders, Fred Alger Management
and Fidelity Management and Research, beneficially owned
approximately 19% of our outstanding ordinary shares as of
December 31, 2009. 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 could 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:
|
|
|
|
|
no cumulative voting; and
|
|
|
|
an advance notice requirement for shareholder proposals and
nominations.
|
Furthermore, Israeli tax law treats some acquisitions,
particularly
share-for-share
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
33
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 rules adopted by the SEC and by The NASDAQ Stock
Market, will result in increased costs to us as we respond 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.
|
|
ITEM 1B
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our U.S. business headquarters are located in Sunnyvale,
California, and our engineering headquarters are located in
Yokneam, Israel. Our facility in Sunnyvale, California comprises
of approximately 25,500 square feet and has a lease term
that expires on June 4, 2014. Our facilities in Israel
comprise an aggregate of approximately 103,700 square feet
and have lease terms that expire at various dates through 2012.
We believe that our existing facilities are adequate to meet our
current requirements and that suitable additional or substitute
space will be available on acceptable terms to accommodate our
foreseeable needs.
|
|
ITEM 3
|
LEGAL
PROCEEDINGS
|
We are not currently involved in any material legal proceedings.
We may, from time to time, become a party to various legal
proceedings arising in the ordinary course of business. We may
also be indirectly affected by administrative or court
proceedings or actions in which we are not involved but which
have general applicability to the semiconductor industry.
|
|
ITEM 4
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None.
PART II
|
|
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 on
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 the Tel-Aviv
Share Exchange as of July 9, 2007 under the symbol
MLNX.
34
The following table summarizes the high and low sales prices for
our ordinary shares as reported by the NASDAQ Global Select
Market.
|
|
|
|
|
|
|
|
|
2009
|
|
High
|
|
Low
|
|
First quarter
|
|
$
|
9.66
|
|
|
$
|
6.90
|
|
Second quarter
|
|
$
|
12.60
|
|
|
$
|
8.25
|
|
Third quarter
|
|
$
|
16.71
|
|
|
$
|
11.88
|
|
Fourth quarter
|
|
$
|
19.79
|
|
|
$
|
15.76
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
Low
|
|
First quarter
|
|
$
|
19.95
|
|
|
$
|
10.85
|
|
Second quarter
|
|
$
|
17.47
|
|
|
$
|
12.00
|
|
Third quarter
|
|
$
|
14.88
|
|
|
$
|
9.00
|
|
Fourth quarter
|
|
$
|
10.29
|
|
|
$
|
6.02
|
|
As of February 28, 2010, we had approximately 93 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.
Share
Performance Graph
The graph below compares the cumulative total shareholder 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, 2009,
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 2007. Shareholder
returns over the indicated periods should not be considered
indicative of future share prices or shareholder returns.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/7/2007
|
|
|
6/30/2007
|
|
|
12/31/2007
|
|
|
6/30/2008
|
|
|
12/31/2008
|
|
|
6/30/2009
|
|
|
12/31/2009
|
Mellanox Technologies
|
|
|
|
100.00
|
|
|
|
|
121.88
|
|
|
|
|
107.18
|
|
|
|
|
79.65
|
|
|
|
|
46.24
|
|
|
|
|
70.76
|
|
|
|
|
111.12
|
|
NASDAQ Composite Index
|
|
|
|
100.00
|
|
|
|
|
104.53
|
|
|
|
|
106.50
|
|
|
|
|
92.07
|
|
|
|
|
63.32
|
|
|
|
|
73.68
|
|
|
|
|
91.11
|
|
Philadelphia Semiconductor Sector Index
|
|
|
|
100.00
|
|
|
|
|
106.38
|
|
|
|
|
86.61
|
|
|
|
|
78.15
|
|
|
|
|
45.04
|
|
|
|
|
55.86
|
|
|
|
|
76.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
$100 invested on 2/07/2007 in shares or index-including
reinvestment of dividends. |
35
Dividends
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 Israeli 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
Our equity compensation plan information required by this item
is incorporated by reference to the information in
Part III, Item 12 of this report. For additional
information on our share incentive plans and activity, see
Note 10, Share Option Plans included in
Part IV, Item 15 of this report.
Recent
Sales of Unregistered Securities
None.
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, after which the offering was
terminated. 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 primarily invested into short-term marketable
government agency obligations, commercial paper and corporate
notes. 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).
36
|
|
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, 2005,
2006 and 2007 and our consolidated statements of operations data
for the years ended December 31, 2005 and 2006, 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, 2009, as well the consolidated balance sheet
data as of December 31, 2008 and 2009, 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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
116,044
|
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
$
|
42,068
|
|
Cost of revenues(1)
|
|
|
(28,669
|
)
|
|
|
(23,406
|
)
|
|
|
(21,390
|
)
|
|
|
(13,533
|
)
|
|
|
(15,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profits
|
|
|
87,375
|
|
|
|
84,295
|
|
|
|
62,688
|
|
|
|
35,006
|
|
|
|
26,865
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
42,241
|
|
|
|
39,519
|
|
|
|
24,638
|
|
|
|
15,256
|
|
|
|
13,081
|
|
Sales and marketing(1)
|
|
|
17,034
|
|
|
|
15,058
|
|
|
|
12,739
|
|
|
|
8,935
|
|
|
|
7,395
|
|
General and administrative(1)
|
|
|
9,353
|
|
|
|
8,370
|
|
|
|
6,229
|
|
|
|
3,704
|
|
|
|
3,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
68,628
|
|
|
|
62,947
|
|
|
|
43,606
|
|
|
|
27,895
|
|
|
|
23,570
|
|
Income from operations
|
|
|
18,747
|
|
|
|
21,348
|
|
|
|
19,082
|
|
|
|
7,111
|
|
|
|
3,295
|
|
Other income, net
|
|
|
518
|
|
|
|
3,823
|
|
|
|
5,976
|
|
|
|
438
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
19,265
|
|
|
|
25,171
|
|
|
|
25,058
|
|
|
|
7,549
|
|
|
|
3,621
|
|
Benefit from (provision for) taxes on income
|
|
|
(6,379
|
)
|
|
|
(2,800
|
)
|
|
|
10,530
|
|
|
|
(301
|
)
|
|
|
(462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,886
|
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
$
|
3,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders basic(2)(3)
|
|
$
|
0.40
|
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
$
|
0.04
|
|
|
$
|
0.00
|
|
Net income per share attributable to ordinary
shareholders diluted(2)(3)
|
|
$
|
0.39
|
|
|
$
|
0.68
|
|
|
$
|
1.18
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
Shares used to compute net income per share(2)(3)
|
|
|
32,099
|
|
|
|
31,436
|
|
|
|
27,827
|
|
|
|
7,709
|
|
|
|
7,520
|
|
Shares used to compute diluted net income per share(2)(3)
|
|
|
33,400
|
|
|
|
32,843
|
|
|
|
30,201
|
|
|
|
9,683
|
|
|
|
9,091
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,640
|
|
|
$
|
110,153
|
|
|
$
|
100,650
|
|
|
$
|
20,570
|
|
|
$
|
12,350
|
|
Short-term investments
|
|
|
166,357
|
|
|
|
70,855
|
|
|
|
52,231
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
231,226
|
|
|
|
198,932
|
|
|
|
170,615
|
|
|
|
25,446
|
|
|
|
17,240
|
|
Total assets
|
|
|
275,386
|
|
|
|
244,771
|
|
|
|
202,400
|
|
|
|
43,101
|
|
|
|
31,154
|
|
Long-term liabilities
|
|
|
8,396
|
|
|
|
7,606
|
|
|
|
5,738
|
|
|
|
3,577
|
|
|
|
4,389
|
|
Total liabilities
|
|
|
32,503
|
|
|
|
30,691
|
|
|
|
25,283
|
|
|
|
16,069
|
|
|
|
13,270
|
|
Mandatorily redeemable convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,759
|
|
|
|
55,583
|
|
Convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,338
|
|
|
|
36,338
|
|
Total shareholders equity (deficit)
|
|
$
|
242,883
|
|
|
$
|
214,080
|
|
|
$
|
177,117
|
|
|
$
|
(65,065
|
)
|
|
$
|
(74,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts included in 2009, 2008, 2007 and 2006 reflect the
adoption of fair value recognition provisions related to
share-based compensation. |
|
(2) |
|
Net income in 2006 and 2005 is allocated between the ordinary
shareholders and other security holders based on their
respective rights to receive dividends. |
|
(3) |
|
On February 1, 2007, we effected a 1.75-to-1 reverse split
of our ordinary shares, mandatorily redeemable convertible
preferred shares and convertible preferred shares (the
Share Split) pursuant to the filing of our amended
and restated articles of association. The number of shares and
per share amounts have been adjusted to reflect the Share Split
for all periods presented. |
|
|
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 connectivity products that facilitate efficient
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 we are the leading supplier of field-proven
InfiniBand-compliant semiconductor products that deliver
industry-leading performance and capabilities, which is
demonstrated by the performance, efficiency and scalability of
clustered computing and storage systems that incorporate our
products. In addition to supporting InfiniBand, our products
also support the industry standard Ethernet interconnect
specification, which provide unique product differentiation and
connectivity flexibility.
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, gateway and switch ICs, all of which are silicon
devices that provide high performance connectivity. We also
offer adapter cards that incorporate our adapter ICs and switch
and gateway systems that incorporate our switch and gateway ICs.
These ICs are added to servers, storage and communication
infrastructure equipment and embedded systems by either
integrating them
38
directly on circuit boards or inserting adapter cards into slots
on the circuit board. We have been shipping our Infinband
products since 2001 and our Ethernet products since 2007. During
2008 we introduced Virtual Protocol Interconnect, or VPI, into
our adapter ICs and cards. VPI provides the ability for an
adapter to automatically sense whether a communications port is
connected to an Ethernet fabric or an InfiniBand fabric. Data
centers which use VPI adapters in their servers have the ability
to dynamically select the connectivity protocol for use by those
servers. 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.
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 growth in our total revenues in each of the
last three years. Our revenues increased from $48.5 million
for the year ended December 31, 2006 to $84.1 million
to $107.7 million to $116.0 million for the years
ended December 31, 2007, 2008 and 2009, respectively. In
order to increase our annual 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 original equipment
manufacturer, or 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.
Revenues. We derive revenues from sales of our
ICs, cards, switch systems and accessories. To date, we have
derived a substantial portion of our revenues from a relatively
small number of customers. Sales to our top ten customers
represented 79%, 79% and 81% of our total revenues for the years
ended December 31, 2009, 2008 and 2007, respectively. Sales
to customers representing 10% or more of revenues accounted for
36%, 47% and 56% of our total revenues for the years ended
December 31, 2009, 2008 and 2007, 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 host channel
adapters, or HCA cards, and switch systems by Flextronics
International Ltd., or Flextronics, royalties due to third
parties, including the Office of the Chief Scientist of
Israels Ministry of Industry, Trade and Labor, or the OCS,
and the Binational Industrial Research and Development
Foundation, 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 with
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
39
semiconductors. As of December 31, 2008, we had concluded
all our obligations in respect of royalties payable to the OCS.
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, lead times for delivery from our HCA card
manufacturing subcontractor are approximately eight to ten
weeks, and lead times for delivery from our switch systems
manufacturing subcontractor are approximately twelve 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. We expect our cost
of revenues as a percentage of sales to increase in the future
as a result of a reduction in the average sale price of our
products and a higher percentage of revenue deriving from sales
of HCA cards and switch systems, which generally yield lower
gross margins. This trend 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,
share-based compensation 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
to 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. We
received no grants from the OCS during the years ended
December 31, 2009, 2008 and 2007. In total, we have
received grants from OCS in the amount of $2.8 million. As
of December 31, 2008, we had concluded all our obligations
in respect of royalties payable to the OCS.
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.
Sales and marketing expenses. Sales and
marketing expenses consist primarily of salaries, share-based
compensation and associated costs for employees engaged in
sales, marketing and customer support, commission payments to
external, third party sales representatives, advertising and
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.
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
40
accounting and corporate legal fees. We expect these expenses
will increase in absolute dollars in future periods based on an
increase in personnel to support our business activities.
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 and will be subject to a
reduced income tax rate (generally 10 to 25%, depending on the
percentage of foreign investment in the company) for the
following five to eight years. We expect the Approved Enterprise
Tax Holiday associated with our Yokneam and Tel Aviv operations
to begin in 2011. The Yokneam Tax Holiday is expected to expire
in 2020 and the Tel Aviv Tax Holiday is expected to expire
between 2015 and 2018.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States. 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, fair value
of financial instruments, short-term investments, inventory
valuation, and impairment of long-lived assets, warranty
provision, share-based compensation and income taxes 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, The Company and Summary of Significant
Accounting Policies, of the Notes to Consolidated
Financial Statements, included in Part IV, Item 15 of
this report.
Revenue
recognition
We recognize revenue from the sales of products when all of the
following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the
price is fixed or determinable; and (4) collection is
reasonably assured. We use a binding purchase order or a signed
agreement as evidence of an arrangement. Delivery occurs when
goods are shipped and title and risk of loss transfer to the
customer. Our standard arrangement with our customers typically
includes
freight-on-board
shipping point and no right of return and no customer acceptance
provisions. The customers obligation to pay and the
payment terms are set at the time of delivery and are not
dependent on the subsequent resale of the product. 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.
A portion of our sales are made to distributors under agreements
which contain a limited right to return unsold product and price
protection provisions. We recognize revenue from these
distributors based on the sell-through method using inventory
information provided by the distributor. Additionally, we
maintain accruals and allowances for price protection and
cooperative marketing programs. We classify the costs of these
programs based on the identifiable benefit received as either a
reduction of revenue, a cost of sale or an operating expense.
41
We also maintain inventory, or hubbing, arrangements with
certain customers. Pursuant to these arrangements we deliver
products to a customer or a designated third party warehouse
based upon the customers projected needs, but do not
recognize product revenue unless and until the customer reports
it has removed our product from the warehouse to be incorporated
into its end products.
We recognize revenue from the sale of hardware products and
software bundled with hardware that is essential to the
functionality of the hardware in accordance with general revenue
recognition accounting guidance. We recognize revenue in
accordance with industry specific software accounting guidance
for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales
of software upgrades and (iii) sales of software bundled
with hardware not essential to the functionality of the hardware.
For multiple element arrangements that include a combination of
hardware, software and services, such as post-contract customer
support, the arrangement consideration is allocated to the
separate elements based on fair value. Effective October 1,
2009, we adopted authoritative guidance allowing the allocation
of the arrangement consideration using our best estimate of
selling price. The change was made prospectively from the
beginning of the fiscal year 2009 and did not have a material
impact on our consolidated financial statements, including
interim consolidated financial statements reported in the year
of adoption. If an arrangement includes undelivered elements
that are not essential to the functionality of the delivered
elements, we defer the fair value or best estimate selling price
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. In the arrangements described above, we
recognize revenue upon shipment of each element, hardware or
software, assuming all other basic revenue recognition criteria
are met, as both the hardware or software are considered
delivered elements and the only undelivered element is
post-contract customer support. The revenue from the
post-contract customer support is recognized ratably over the
term of the related contract.
We account for multiple element arrangements that consist of
software or software-related products, including the sale of
upgrades to previously sold software and post-contract customer
support, in accordance with industry specific accounting
guidance for software and software-related transactions. For
such transactions, revenue on arrangements that include multiple
elements is allocated to each element based on the relative fair
value of each element, and fair value is generally determined by
vendor-specific objective evidence, or VSOE. If we cannot
objectively determine the fair value of any undelivered element
included in such multiple-element arrangements, we defer revenue
until all elements are delivered and services have been
performed, or until fair value can objectively be determined for
any remaining undelivered elements. When the fair value of a
delivered element has not been established, but fair value
exists for the undelivered elements, we use the residual method
to recognize revenue if the fair value of all undelivered
elements is determinable. Under the residual method, the fair
value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is allocated to the delivered
elements and is recognized as revenue. Post-contract support is
recognized ratably over the term of the related contract.
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, we record the
shipping and handling fees as revenue.
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 $290,000 and $277,000 at December 31, 2009
and 2008, respectively. Our bad debt expense totaled
approximately $59,000, $125,000 and $79,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
42
Fair
value of financial instruments
Our financial instruments consist of cash, cash equivalents,
short-term investments, accounts receivable, accounts payable
and other accrued liabilities. We believe that the carrying
amounts of the financial instruments approximate their
respective fair values. When there is no readily available
market data, we may make fair value estimates, which may not
necessarily represent the amounts that could be realized in a
current or future sale of these assets.
Short-term
investments
We classify short-term investment as
available-for-sale
securities. We view our
available-for-sale-portfolio
as available for use in current operations.
Available-for-sale
securities are recorded at fair value, and we record temporary
unrealized holding gains and losses as a separate component of
accumulated other comprehensive income. We charge unrealized
losses against net earnings when a decline in fair value is
determined to be
other-than-temporary.
We review several factors to determine whether a loss is
other-than-temporary.
These factors include but are not limited to: (1) the
length of time a security is in an unrealized loss position,
(2) the extent to which fair value is less than cost,
(3) the financial condition and near term prospects of the
issuer and (4) our intent and ability to hold the security
for a period of time sufficient to allow for any anticipated
recovery in fair value.
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 six to twelve months
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.
Impairment
of long-lived assets
We review long-lived assets, including equipment, furniture and
fixtures, equity investments in privately held companies and
intangible assets for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted (and without interest
charges) future cash flows expected to result from the use of
the asset and its eventual disposition are less than its
carrying amount. We review for impairment charges on a regular
basis.
As of December 31, 2009, we held $4.0 million of
investments in privately held companies. We account for
$3.5 million of these investments under the cost method. To
determine if impairment exists, we monitor each privately held
companys revenue and earnings trends relative to
pre-defined milestones and overall business prospects, the
general market conditions in its industry and other factors
related to its ability to remain in business, such as liquidity
and receipt of additional funding.
During the fourth quarter of 2009, we identified certain events
and changes in circumstances indicating that the fair value of
one of our private company investments had been negatively
impacted and determined that the impairment of this investment
was other than temporary. As a result, we recorded a
$0.5 million impairment loss on this investment to reduce
the carrying value to an estimated market value of
$0.5 million. The impairment loss was included in other
income, net on the Consolidated Statements of Operations for the
year ended December 31, 2009.
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.
43
Share-based
compensation
We have in effect share incentive plans under which incentive
share options have been granted to employees and non-qualified
share options have been granted to employees and non-employee
members of the Board of Directors. We also have an employee
share purchase plan for all eligible employees. We account for
share-based compensation expense based on the estimated fair
value of the share option awards as of the grant dates.
We estimate the fair value of share option awards using the
Black-Scholes option valuation model, which requires the input
of subjective assumptions including the expected share price
volatility, the calculation of expected term, and the fair value
of the underlying ordinary share on the date of grant, among
other inputs. Share compensation expense is recognized on a
straight-line basis over each optionees requisite service
period, which is generally the vesting period.
We base our estimate of expected volatility on a combination of
our historical volatility and reported market value data for a
group of publicly traded companies, which were selected from
market indices that we believe would be indicators of our future
share price volatility, after consideration of their size, stage
of lifecycle, profitability, growth, risk and return on
investment. We calculate the expected term of our options using
the simplified method as prescribed by the authoritative
guidance. The expected term for newly granted options is
approximately 6.25 years.
Share-based compensation expense is recorded net of estimated
forfeitures. Forfeitures are estimated at the time of grant and
this estimate is revised, if necessary, in subsequent periods.
If the actual number of forfeitures differs from that estimated,
adjustments may be required to share-based compensation expense
in future periods.
Income
taxes
To prepare our consolidated financial statements, we estimate
our income taxes in each of the jurisdictions in which we
operate. This process involves estimating our 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 our
consolidated balance sheet.
We must also make judgments regarding the realizability of
deferred tax assets. The carrying value of our net deferred tax
asset is based on its belief that it is more likely than not
that we 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 we do not believe meet the more likely than
not criteria. Our judgments regarding future taxable
income may change due to changes in market conditions, changes
in tax laws, tax planning strategies or other factors. If our
assumptions and consequently our 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. Our effective tax rate is highly dependent
upon the geographic distribution of our 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.
We use a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with the
guidance on judgments regarding the realizability of deferred
taxes. 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.
44
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,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
(25
|
)
|
|
|
(22
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
75
|
|
|
|
78
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
36
|
|
|
|
36
|
|
|
|
29
|
|
Sales and marketing
|
|
|
15
|
|
|
|
14
|
|
|
|
15
|
|
General and administrative
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
59
|
|
|
|
58
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
16
|
|
|
|
20
|
|
|
|
23
|
|
Other income, net
|
|
|
|
|
|
|
4
|
|
|
|
7
|
|
Benefit from (provision for) taxes on income
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11
|
|
|
|
21
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Year Ended December 31, 2009 to the Year Ended
December 31, 2008
Revenues.
The following tables represent our total revenues for the years
ended December 31, 2009 and 2008 by product category and
data rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
IC/Semiconductors
|
|
$
|
38,972
|
|
|
$
|
47,801
|
|
|
|
(19
|
)
|
Adapter Cards
|
|
|
61,556
|
|
|
|
56,540
|
|
|
|
9
|
|
Switch systems
|
|
|
9,996
|
|
|
|
1,111
|
|
|
|
800
|
|
Accessories and other
|
|
|
5,520
|
|
|
|
2,249
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
116,044
|
|
|
$
|
107,701
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Quad data rate (QDR)
|
|
$
|
61,409
|
|
|
$
|
13,131
|
|
|
|
368
|
|
Double data rate (DDR)
|
|
|
41,022
|
|
|
|
81,693
|
|
|
|
(50
|
)
|
Single data rate (SDR) and other
|
|
|
13,613
|
|
|
|
12,877
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
116,044
|
|
|
$
|
107,701
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues were $116.0 million for the year ended
December 31, 2009 compared to $107.7 million for the
year ended December 31, 2008, representing an increase of
approximately 8%. This increase in revenues resulted primarily
from increased unit sales of approximately 6% and an increase in
average selling prices of approximately 2%. The increase in unit
sales was primarily due to increases in sales to our tier one
customers. The increase in average selling price was primarily
due to an increase in revenues from adapter cards and switch
systems, which have higher average selling price than ICs, and
due to an increase in sales of our QDR products, for which we
charge higher average selling prices. The 2009 revenues are not
necessarily indicative of future results.
45
Gross Profit and Margin. Gross profit was
$87.4 million for the year ended December 31, 2009
compared to $84.3 million for the year ended
December 31, 2008, representing an increase of 4%. As a
percentage of revenues, gross margin decreased to 75% in the
year ended December 31, 2009 from approximately 78% in the
year ended December 31, 2008. The decrease in gross margins
was primarily due to a decrease in IC sales for which we
normally earn higher margins, and an increase in sales of our
switch systems for which we typically earn lower margins. Gross
margin for 2009 is not necessarily indicative of future results.
Research and Development. Research and
development expenses were $42.2 million for the year ended
December 31, 2009 compared to $39.5 million for the
year ended December 31, 2008, representing an increase of
approximately 7%. The increase was primarily attributable to
higher share-based compensation of approximately
$1.6 million due to new option grants and a
true-up of
estimated forfeitures for share-based compensation expense
calculation purposes, increased software related expenses of
approximately $946,000 primarily due to software licensing and
maintenance, higher new product expenses of approximately
$607,000 primarily due to non-recurring engineering charges and
increased outsourcing expenses of approximately $253,000 offset
by lower salary related expenses of approximately $760,000
primarily associated with temporary salary reductions. 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.
Sales and Marketing. Sales and marketing
expenses were $17.0 million for the year ended
December 31, 2009, compared to $15.1 million for the
year ended December 31, 2008, representing an increase of
approximately 13%. The increase was primarily attributable to
higher employee-related expenses of approximately $860,000
associated with increased headcount, an increase in share-based
compensation of approximately $528,000 primarily due to new
option grants and a
true-up of
estimated forfeitures for share-based compensation expense
calculation purposes and higher equipment related expenses of
approximately $391,000 primarily due to customer product
evaluations.
General and Administrative. General and
administrative expenses were $9.4 million for the year
ended December 31, 2009 compared to $8.4 million for
the year ended December 31, 2008, representing an increase
of approximately 12%. The increase was primarily due to higher
professional services of approximately $664,000, an increase in
share-based compensation due to new option grants and a
true-up of
estimated forfeitures for share-based compensation expense
calculation purposes and higher depreciation expenses of
approximately $345,000 offset by a decrease in other expenses of
approximately $338,000 primarily associated with the elimination
of some benefit programs.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cost of goods sold
|
|
$
|
305
|
|
|
$
|
228
|
|
Research and development
|
|
|
6,562
|
|
|
|
4,936
|
|
Sales and marketing
|
|
|
2,125
|
|
|
|
1,597
|
|
General and administrative
|
|
|
1,744
|
|
|
|
1,175
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,736
|
|
|
$
|
7,936
|
|
|
|
|
|
|
|
|
|
|
The amount of unearned share-based compensation currently
estimated to be expensed from 2010 through 2013 related to
unvested share-based payment awards at December 31, 2009 is
$22.7 million. Of this amount, $9.2 million,
$7.9 million, $4.7 million and $0.9 million are
currently estimated to be recorded in 2010, 2011, 2012 and 2013,
respectively. The weighted-average period over which the
unearned share-based compensation is expected to be recognized
is approximately 2.71 years. If there are any 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
46
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, foreign currency exchange gains and losses and
impairment of our investments in privately held companies. Other
income, net was $518,000 for the year ended December 31,
2009 compared to $3.8 million for the year ended
December 31, 2008. The decline is primarily attributable to
a decrease of $2.9 million in interest income on
investments in securities as a result of lower yields, foreign
exchange losses of $36,000 compared to foreign exchange gains of
$84,000 in the prior year and a reduction in other income of
$151,000.
As of December 31, 209, our investment portfolio included
investments of $4.0 million in privately held companies. In
the years ended December 31, 2009 and 2008, we determined
that the decline in our investment in the preferred stock of one
of the privately held companies was
other-than-temporary
and recorded impairment charges of $0.5 million and
$0.5 million, respectively, to reduce the carrying value of
this investment. The additional impairment charge in 2009 is a
result of the continued deterioration in one of the privately
held companys financial results and prospective business
outlook.
Benefit from (Provision for) Taxes on
Income. Our tax expense was $6.4 million for
the year ended December 31, 2009 as compared to
$2.8 million for the year ended December 31, 2008. The
higher tax expense was primarily due to increased taxes related
to the utilization of deferred tax assets associated with
carryforward losses and research and development costs in Israel.
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. We currently expect
the Approved Enterprise Tax Holiday in Israel to begin in 2011.
As a result, we currently expect to utilize approximately
$8.2 million of deferred tax assets associated with our
carryforward losses and research and developments costs in
Israel during the fiscal year 2010. Our effective tax rate for
the fiscal year 2010 may be significantly impacted by the
utilization of these deferred tax assets if our actual results
differ from our projected taxable income.
Our effective tax rate the year ended December 31, 2009 was
33.1% as compared to 11.1% for the year ended December 31,
2008. The increase in the effective tax rate was primarily due
to the fact that in 2008 we recorded a benefit from the
recognition of additional deferred tax assets associated with
net operating losses expected to be utilized in Israel before
the Approved Enterprise Tax Holiday begins.
Comparison
of Year Ended December 31, 2008 to the Year Ended
December 31, 2007
The following tables represent our total revenues for the years
ended December 31, 2008 and 2007 by product category and
data rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
IC/Semiconductors
|
|
$
|
47,801
|
|
|
$
|
36,050
|
|
|
|
33
|
|
Adapter Cards
|
|
|
56,540
|
|
|
|
46,762
|
|
|
|
21
|
|
Switch systems
|
|
|
1,111
|
|
|
|
5
|
|
|
|
22,120
|
|
Accessories and other
|
|
|
2,249
|
|
|
|
1,261
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Quad data rate (QDR)
|
|
$
|
13,131
|
|
|
$
|
55
|
|
|
|
23,774
|
|
Double data rate (DDR)
|
|
|
81,693
|
|
|
|
55,161
|
|
|
|
48
|
|
Single data rate (SDR) and other
|
|
|
12,877
|
|
|
|
28,862
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues were $107.7 million
for the year ended December 31, 2008 compared to
$84.1 million for the year ended December 31, 2007,
representing an increase of approximately 28%. This increase in
revenues resulted primarily from increased unit sales of
approximately 7% and an increase in average selling prices of
approximately 19%. The increase in unit sales was primarily due
to increases in sales to our tier one customers. The increase in
average selling price was primarily due to an increase in
revenues from adapter cards and switch systems, which have
higher average selling prices and due to an increased revenues
from our QDR and DDR products for which we charge higher average
selling prices. The 2008 revenues are not necessarily indicative
of future results.
Gross Profit and Margin. Gross profit was
$84.3 million for the year ended December 31, 2008
compared to $62.7 million for the year ended
December 31, 2007, representing an increase of 34%. As a
percentage of revenues, gross margin increased to 78% in the
year ended December 31, 2008 from approximately 75% in the
year ended December 31, 2007. 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 QDR and DDR products for which we receive
higher margins and to the conclusion of our OCS royalty
obligation. During 2008 we incurred royalty expenses of
$281,000, compared to $1.5 million in 2007. Gross margin
for 2008 is not necessarily indicative of future results.
Research and Development. Research and
development expenses were $39.5 million for the year ended
December 31, 2008 compared to $24.6 million for the
year ended December 31, 2007, representing an increase of
approximately 60%. The increase was primarily attributable to
higher salary related expenses of approximately
$8.2 million associated with increased headcount and merit
increases, an increase in share-based compensation of
approximately $2.9 million primarily due to new option
grants, an increase in new product expenses of approximately
$1.5 million primarily due to tape out costs and increased
depreciation and amortization of equipment, software and
intellectual property of approximately $1.0 million arising
from purchases of property, equipment and technology licenses..
Sales and Marketing. Sales and marketing
expenses were $15.1 million for the year ended
December 31, 2008, compared to $12.7 million for the
year ended December 31, 2007, representing an increase of
approximately 18%. The increase was primarily attributable to
higher salary-related expenses of approximately
$1.1 million associated with merit increases, an increase
in share-based compensation of approximately $733,000 primarily
due to new option grants and an increase in trade show and
advertising expenses of approximately $393,000 related to
expanding our sales and marketing activities, partially offset
by a decrease in external sales commission expenses of
approximately $306,000 related to the adoption of a new plan.
General and Administrative. General and
administrative expenses were $8.4 million for the year
ended December 31, 2008 compared to $6.2 million for
the year ended December 31, 2007, representing an increase
of approximately 34%. The increase was primarily due to higher
employee related expenses of approximately $941,000 associated
with increased headcount and merit increases, higher share-based
compensation of approximately $631,000 due to new option grants,
an increase of approximately $400,000 in professional service
fees and an increase of approximately $200,000 in audit fees,
which was primarily attributable to SOX section 404
implementation costs.
48
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of goods sold
|
|
$
|
228
|
|
|
$
|
87
|
|
Research and development
|
|
|
4,936
|
|
|
|
2,069
|
|
Sales and marketing
|
|
|
1,597
|
|
|
|
864
|
|
General and administrative
|
|
|
1,175
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,936
|
|
|
$
|
3,564
|
|
|
|
|
|
|
|
|
|
|
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 $3.8 million for the year ended
December 31, 2008 compared to $6.0 million for the
year ended December 31, 2007. The decline is primarily
attributable to a decrease of $2.3 million in interest
income on investments in securities as a result of lower yields
and a loss of $500,000 recognized as a result of the impairment
of our equity investment in a privately-held company.
Benefit from (Provision for) Taxes on
Income. Provision for taxes was $2.8 million
for the year ended December 31, 2008 as compared to a
benefit from taxes on income of $10.5 million for the year
ended December 31, 2007. In the year ended
December 31, 2007, we released a valuation allowance on
certain deferred tax assets of $12.1 million primarily
related to net operating losses in Israel expected to be
utilized before the Approved Enterprise Tax Holiday begins. In
the year ended December 31, 2008, we utilized
$1.9 million of the deferred tax assets. The
$14.0 million difference between the income from taxes
recognized as a result of the release of the valuation allowance
of $12.1 million on certain deferred tax assets in 2007 and
the tax expense of $1.9 million from the utilization of
those deferred tax assets in 2008 was the primary reason for the
change in our tax results.
Our effective tax rate for the year ended December 31, 2008
was 11.1% as compared to a tax benefit rate of 42.3% for the
year ended December 31, 2007. The increase in the effective
tax rate was primarily due to the fact that in 2007 we recorded
a benefit of $16.7 million from the release of a valuation
allowance on certain deferred tax assets and changes to loss
carryforwards.
Liquidity
and Capital Resources
Since our inception, we have financed our operations through a
combination of sales of equity securities and cash generated by
operations. As of December 31, 2009, our principal source
of liquidity consisted of cash and cash equivalents of
approximately $43.6 million and short-term investments of
approximately $166.4 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, and capital expenditures to support
our infrastructure and growth.
Operating
Activities
Net cash generated by our operating activities amounted to
approximately $32.8 million in the year ended
December 31, 2009. Net cash generated by operating
activities was primarily attributable to net income of
approximately $12.9 million adjusted for non-cash items
including $10.7 million for share-based compensation,
approximately $4.1 million for depreciation and
amortization and deferred taxes of approximately
$3.6 million.
49
Furthermore, net cash generated by operating activities
increased due to a decrease in accounts receivable of
approximately $3.0 million as a result of improved
linearity related to invoicing during the last quarter of 2009,
an increase of approximately $2.3 million in accrued
liabilities primarily associated with payroll and an increase of
approximately $0.5 million in accounts payable, partially
offset by an increase in inventory of approximately
$3.0 million due to higher safety stock levels and an
increase of approximately $1.0 million in prepaid expenses
and other assets.
Net cash generated by our operating activities amounted to
approximately $31.0 million in the year ended
December 31, 2008. Net cash generated by operating
activities was primarily attributable to net income of
approximately $22.4 million adjusted for non-cash items of
approximately $7.9 million for share-based compensation,
$3.6 million for depreciation and amortization, deferred
taxes of $1.3 million and an impairment of an equity
investment of $0.5 million, offset by gains on short-term
investments of $2.3 million. Furthermore, net cash
generated by operating activities increased due to an increase
of approximately $4.7 million in accrued liabilities
primarily associated with payroll and an advance payment from a
customer, and an increase of approximately $1.6 million in
accounts payable, partially offset by an increase in accounts
receivable, net of approximately $6.0 million, an increase
in inventory of approximately $1.3 million and an increase
of $1.3 million in prepaid expenses and other assets.
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 adjusted for non-cash items of
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
short-term investments of $2.3 million. Furthermore, net
cash generated by operating activities increased due to 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, partially offset by an increase in accounts
receivables, net of approximately $7.2 million and an
increase in inventory of approximately $1.3 million.
Investing
Activities
Net cash used in investing activities was approximately
$103.7 million in the year ended December 31, 2009.
Cash used in investing activities was primarily attributable to
net purchases of short-term investments of $94.8 million,
acquisitions of property and equipment of $3.7 million, an
equity investment in a privately held company of
$3.5 million and an increase in restricted cash deposits of
$880,000.
Net cash used in investing activities was approximately
$24.2 million in the year ended December 31, 2008.
Cash used in investing activities was primarily attributable to
net purchases of short-term investments of $16.1 million,
acquisitions of property and equipment of $4.5 million, an
equity investment in a privately held company of
$1.5 million and an increase in restricted cash deposits of
$1.4 million.
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.
Financing
Activities
Net cash provided by financing activities was approximately
$4.4 million in the year ended December 31, 2009. Cash
provided by financing activities was attributable to proceeds
from the exercise of share awards of $3.7 million and an
excess tax benefit from share-based compensation of
$1.2 million, partially offset by principal payments on
capital lease obligations of $465,000.
Net cash provided by financing activities was approximately
$2.7 million in the year ended December 31, 2008. Cash
provided by financing activities was attributable to proceeds
from the exercise of share awards of $3.7 million and an
excess tax benefit from share-based compensation of
$1.0 million, partially offset by principal payments on
capital lease obligations of $2.1 million.
50
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
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, partially offset
by principal payments on capital lease obligations of
$2.1 million.
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2009 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
|
|
$
|
1,009
|
|
|
$
|
535
|
|
|
$
|
474
|
|
|
$
|
|
|
Non-cancelable operating lease commitments
|
|
|
11,597
|
|
|
|
4,529
|
|
|
|
6,755
|
|
|
|
313
|
|
Service commitments
|
|
|
1,186
|
|
|
|
1,021
|
|
|
|
165
|
|
|
|
|
|
Purchase commitments
|
|
|
17,342
|
|
|
|
17,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,134
|
|
|
$
|
23,427
|
|
|
$
|
7,394
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, 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 and service 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.
The contractual obligation table excludes our unrecognized tax
benefit liabilities because we cannot make a reliable estimate
of the timing of cash payment. As of December 31, 2009, our
unrecognized tax benefits totaled approximately
$1.4 million, which would reduce our income tax expense and
effective tax rate, if recognized.
Recent
accounting pronouncements
In January 2010, the Financial Accounting Standards Board issued
updated guidance related to fair value measurements and
disclosures, which requires a reporting entity to disclose
separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and to
describe the reasons for the transfers. In addition, in the
reconciliation for fair value measurements using significant
unobservable inputs, or Level 3, a reporting entity should
disclose separately information about purchases, sales,
issuances and settlements (that is, on a gross basis rather than
one net number). The updated guidance also requires that an
entity should provide fair value measurement disclosures for
each class of assets and liabilities and disclosures about the
valuation techniques and inputs used to measure fair value for
both recurring and non-recurring fair value measurements for
Level 2 and Level 3 fair value measurements. The
updated guidance is effective for interim or annual financial
reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances and
settlements in the roll forward activity in Level 3 fair
value measurements, which are effective for fiscal years
beginning after December 15, 2010 and for interim periods
within those fiscal years. We do not expect adoption of the
updated guidance to have a material impact on our consolidated
results of operations or financial condition.
Off-Balance
Sheet Arrangements
As of December 31, 2009, we did not have any off-balance
sheet arrangements.
51
Impact of
Currency Exchange Rates
Exchange rate fluctuations could have a material adverse effect
on our business, financial condition and results of operations.
Our most significant foreign currency exposure is the new
Israeli shekel, or NIS. We do not enter into derivatives for
speculative or trading purposes. In fiscal year 2009, we used
foreign currency forward contracts to hedge a portion of
operating expenses denominated in NIS. Our derivative
instruments are recorded at fair value in assets or liabilities
with final gains or losses recorded in other income, net or as a
component of accumulated Other Comprehensive Income and
subsequently reclassified into operating expenses in the same
period in which the hedged operating expenses are recognized.
See Note 5, Derivatives and Hedging Activities,
of the Notes to Consolidated Financial Statements, included in
Part IV, Item 15 of this report.
|
|
ITEM 7A
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Interest
rate fluctuation risk
We do not have any long-term borrowings. Our investments consist
of cash and cash equivalents, short-term deposits, money market
funds and interest bearing investments in U.S. government
debt securities with an average maturity of less than one year.
The primary objective of our investment activities is to
preserve principal while maximizing income without significantly
increasing risk. The Company, by policy, limits the amount of
its credit exposure through diversification and restricting its
investments to highly rated securities. Individual securities
are limited to comprising no more than 5% of the portfolio value
at the time of purchase, except U.S Treasury or Agency
securities. Highly rated securities are defined as having a
minimum Moody or Standard & Poors rating of A2
or A respectively. The Company has not experienced any
significant losses on its cash equivalents or short-term
investments. 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 2% 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
We derive all of our revenues in U.S. dollars. The
U.S. dollar is our functional and reporting currency in all
of our foreign locations. However, a significant portion of our
headcount related expenses, consisting principally of salaries
and related personnel 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 protect against reductions in value and the volatility of
future cash flows caused by changes in foreign currency exchange
rates, we have established a balance sheet and anticipated
transaction risk management program. Currency forward contracts
and natural hedges are generally utilized in this hedging
program. We do not enter into forward contracts for trading or
speculative purposes. Our hedging program reduces, but does not
eliminate the impact of currency exchange rate movements (see
Part II, Item 1A, Risk Factors). If we
were to experience a 10% change in currency exchange rates, the
impact on assets and liabilities denominated in currencies other
than the U.S. dollar, after taking into account hedges and
offsetting positions, would result in a loss before taxes of
approximately $111,000 at December 31, 2009. There would
also be an impact on future operating expenses denominated in
currencies other than the U.S. dollar. At December 31,
2009, approximately $2.8 million of our monthly operating
expenses were denominated in NIS. As of December 31, 2009,
we had forward contracts in place that hedged future operating
expenses of approximately 46.8 million NIS, or
approximately $12.4 million based upon the exchange rate as
of December 31, 2009. The forward contracts cover future
NIS denominated operating expenses expected to occur over the
next twelve months. Our derivatives expose us to credit risk to
the extent that the counterparties may be unable to meet the
terms of the agreement. We seek to mitigate such risk by
limiting our counterparties to major financial institutions and
by spreading the risk across a number of major financial
52
institutions. However, under current market conditions, failure
of one or more of these financial institutions is possible and
could result in incurred losses.
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.
|
|
ITEM 8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements required by Item 8 are submitted
as a separate section of this report 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
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Total revenues
|
|
$
|
35,529
|
|
|
$
|
32,671
|
|
|
$
|
25,286
|
|
|
$
|
22,558
|
|
|
$
|
25,207
|
|
|
$
|
29,138
|
|
|
$
|
28,201
|
|
|
$
|
25,155
|
|
Cost of revenues
|
|
|
(8,673
|
)
|
|
|
(8,092
|
)
|
|
|
(6,552
|
)
|
|
|
(5,352
|
)
|
|
|
(5,662
|
)
|
|
|
(6,103
|
)
|
|
|
(5,706
|
)
|
|
|
(5,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,856
|
|
|
|
24,579
|
|
|
|
18,734
|
|
|
|
17,206
|
|
|
|
19,545
|
|
|
|
23,035
|
|
|
|
22,495
|
|
|
|
19,220
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,555
|
|
|
|
10,944
|
|
|
|
10,120
|
|
|
|
8,622
|
|
|
|
11,180
|
|
|
|
10,067
|
|
|
|
10,015
|
|
|
|
8,257
|
|
Sales and marketing
|
|
|
5,023
|
|
|
|
4,273
|
|
|
|
4,036
|
|
|
|
3,702
|
|
|
|
3,732
|
|
|
|
3,964
|
|
|
|
4,009
|
|
|
|
3,353
|
|
General and administrative
|
|
|
2,553
|
|
|
|
2,633
|
|
|
|
1,965
|
|
|
|
2,202
|
|
|
|
2,067
|
|
|
|
2,408
|
|
|
|
2,064
|
|
|
|
1,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,131
|
|
|
|
17,850
|
|
|
|
16,121
|
|
|
|
14,526
|
|
|
|
16,979
|
|
|
|
16,439
|
|
|
|
16,088
|
|
|
|
13,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,725
|
|
|
|
6,729
|
|
|
|
2,613
|
|
|
|
2,680
|
|
|
|
2,566
|
|
|
|
6,596
|
|
|
|
6,407
|
|
|
|
5,779
|
|
Other income (loss), net
|
|
|
(346
|
)
|
|
|
126
|
|
|
|
197
|
|
|
|
541
|
|
|
|
687
|
|
|
|
1,152
|
|
|
|
941
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
6,379
|
|
|
|
6,855
|
|
|
|
2,810
|
|
|
|
3,221
|
|
|
|
3,253
|
|
|
|
7,748
|
|
|
|
7,348
|
|
|
|
6,822
|
|
Benefit from (provision for) taxes on income(1)
|
|
|
(2,126
|
)
|
|
|
(2,082
|
)
|
|
|
(1,066
|
)
|
|
|
(1,105
|
)
|
|
|
4,733
|
|
|
|
(2,590
|
)
|
|
|
(2,758
|
)
|
|
|
(2,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,253
|
|
|
$
|
4,773
|
|
|
$
|
1,744
|
|
|
$
|
2,116
|
|
|
$
|
7,986
|
|
|
$
|
5,158
|
|
|
$
|
4,590
|
|
|
$
|
4,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
|
0.13
|
|
|
|
0.15
|
|
|
|
0.05
|
|
|
|
0.07
|
|
|
|
0.25
|
|
|
|
0.16
|
|
|
|
0.15
|
|
|
|
0.15
|
|
Net income per share diluted
|
|
$
|
0.12
|
|
|
$
|
0.14
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.24
|
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
|
|
(1) |
|
See Notes 1 and 11, The Company and Summary of
Significant Accounting Policies and Income
Taxes, respectively, of the Notes to Consolidated
Financial Statements, included in Part IV, Item 15 of
this report, for an explanation of the calculation of benefit
from (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
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms and that such information is accumulated and
communicated to our
53
management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC
Rule 13a-15(b),
we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive
officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of December 31, 2009. Based on this evaluation, our
chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective at
the reasonable assurance level as of December 31, 2009.
Changes
in Internal Control Over Financial Reporting
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 internal 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, 2009 using the
criteria established in Internal Control
Integrated Framework, issued by The Committee of
Sponsoring Organizations of the Treadway Commission. Based on
that evaluation, management believes our internal control over
financial reporting was effective as of December 31, 2009.
The certifications of our principal executive officer and
principal financial officer attached as Exhibits 31.1 and
31.2 to this report 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.
The effectiveness of our internal control over financial
reporting as of December 31, 2009 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included in
Item 15 of this 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 General
Meeting of our Shareholders, or the Proxy Statement, which is
expected to be filed no later than 120 days after the end
of our fiscal year ended December 31, 2009, 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.
54
|
|
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 and report of the independent registered public
accounting firm are included in Item 8:
|
|
|
|
|
|
|
Page
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
2. Financial Statement Schedules. The following financial
statement schedules of the Company are filed as part of this
report:
|
|
|
|
|
|
|
|
88
|
|
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. See Item 15(b) below. Each
management contract or compensatory plan or arrangement required
to be filed has been identified.
(a) Exhibits.
55
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Association of Mellanox
Technologies, Ltd. (as amended on May 18, 2008).
|
|
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)*
|
|
Amended Form of Indemnification Undertaking made by and between
Mellanox Technologies, Ltd. and each of its directors and
executive officers.
|
|
10
|
.5(8)
|
|
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
|
.6(9)*
|
|
Mellanox Technologies, Ltd. Global Share Incentive Plan
(2006) and forms of agreements and appendices relating
thereto.
|
|
10
|
.7(10)*
|
|
Mellanox Technologies, Ltd. Non-Employee Director Option Grant
Policy.
|
|
10
|
.8(11)*
|
|
Form of Mellanox Technologies, Ltd. Executive Severance Benefits
Agreement for U.S. Executives.
|
|
10
|
.9(12)*
|
|
Form of Mellanox Technologies, Ltd. Executive Severance Benefits
Agreement for Israel Executives.
|
|
10
|
.10(13)*
|
|
Mellanox Technologies, Ltd. Employee Share Purchase Plan.
|
|
10
|
.11(14)
|
|
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(15)
|
|
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).
|
|
10
|
.15(16)
|
|
Office Space Lease dated September 30, 2008 by and between
Oakmead Parkway Properties Partnership, a California general
partnership, as landlord, and Mellanox Technologies, Inc., as
tenant, as commenced on December 19, 2008.
|
|
21
|
.1(17)
|
|
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 3.1 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 12, 2009. |
56
|
|
|
(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 10.1 to the
Companys Quarterly Report on
Form 10-Q
(SEC File
No. 001-33299)
filed on August 6, 2009. |
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
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. |
|
(12) |
|
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. |
|
(13) |
|
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. |
|
(14) |
|
Incorporated by reference to Exhibit 10.13 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(15) |
|
Incorporated by reference to Exhibit 10.14 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(16) |
|
Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
(SEC File
No. 001-33299)
filed on November 7, 2008. |
|
(17) |
|
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. |
|
* |
|
Indicates management contract or compensatory plan, contract or
arrangement. |
57
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 subsidiaries at December 31, 2009 and
December 31, 2008, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial
statement schedule, for maintaining effective internal control
over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in Managements Annual Report on Internal Control
Over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the
Companys internal control over financial reporting based
on our audits (which were integrated audits in 2009 and 2008).
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
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. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 4, 2010
58
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,640
|
|
|
$
|
110,153
|
|
Short-term investments
|
|
|
166,357
|
|
|
|
70,855
|
|
Restricted cash
|
|
|
3,160
|
|
|
|
2,149
|
|
Accounts receivable, net
|
|
|
20,418
|
|
|
|
23,399
|
|
Inventories
|
|
|
9,328
|
|
|
|
6,740
|
|
Deferred taxes
|
|
|
8,605
|
|
|
|
5,753
|
|
Prepaid expenses and other
|
|
|
3,825
|
|
|
|
2,968
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
255,333
|
|
|
|
222,017
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
9,734
|
|
|
|
10,386
|
|
Severance assets
|
|
|
4,629
|
|
|
|
3,407
|
|
Intangible assets, net
|
|
|
428
|
|
|
|
465
|
|
Deferred taxes
|
|
|
812
|
|
|
|
7,302
|
|
Other long-term assets
|
|
|
4,450
|
|
|
|
1,194
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
275,386
|
|
|
$
|
244,771
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
8,775
|
|
|
|
8,265
|
|
Other accrued liabilities
|
|
|
14,804
|
|
|
|
14,103
|
|
Capital lease obligations, current
|
|
|
528
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
24,107
|
|
|
|
23,085
|
|
|
|
|
|
|
|
|
|
|
Accrued severance
|
|
|
5,778
|
|
|
|
5,042
|
|
Capital lease obligations
|
|
|
474
|
|
|
|
874
|
|
Other long-term obligations
|
|
|
2,144
|
|
|
|
1,690
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,503
|
|
|
|
30,691
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Ordinary shares: NIS 0.0175 par value, 137,143 shares
authorized, 32,682 and 31,775 shares issued and outstanding
at December 31, 2009 and 2008, respectively
|
|
|
135
|
|
|
|
131
|
|
Additional paid-in capital
|
|
|
240,807
|
|
|
|
225,180
|
|
Accumulated other comprehensive income
|
|
|
367
|
|
|
|
81
|
|
Retained earnings (accumulated deficit)
|
|
|
1,574
|
|
|
|
(11,312
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
242,883
|
|
|
|
214,080
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
275,386
|
|
|
$
|
244,771
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Total revenues
|
|
$
|
116,044
|
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
Cost of revenues
|
|
|
(28,669
|
)
|
|
|
(23,406
|
)
|
|
|
(21,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
87,375
|
|
|
|
84,295
|
|
|
|
62,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,241
|
|
|
|
39,519
|
|
|
|
24,638
|
|
Sales and marketing
|
|
|
17,034
|
|
|
|
15,058
|
|
|
|
12,739
|
|
General and administrative
|
|
|
9,353
|
|
|
|
8,370
|
|
|
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
68,628
|
|
|
|
62,947
|
|
|
|
43,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,747
|
|
|
|
21,348
|
|
|
|
19,082
|
|
Other income, net
|
|
|
518
|
|
|
|
3,823
|
|
|
|
5,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
19,265
|
|
|
|
25,171
|
|
|
|
25,058
|
|
Benefit from (provision for) taxes on income
|
|
|
(6,379
|
)
|
|
|
(2,800
|
)
|
|
|
10,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,886
|
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.40
|
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.39
|
|
|
$
|
0.68
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,099
|
|
|
|
31,436
|
|
|
|
27,827
|
|
Diluted
|
|
|
33,400
|
|
|
|
32,843
|
|
|
|
30,201
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
60
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF CONVERTIBLE PREFERRED
SHARES AND
SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
Total
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Earnings
|
|
|
Shareholders
|
|
|
|
Preferred Shares
|
|
|
Preferred Shares
|
|
|
Ordinary Shares
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 shares pursuant to employee share purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,133
|
|
|
|
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
851
|
|
Income tax benefit from share 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,371
|
|
|
|
22,371
|
|
Unrealized gains on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
|
|
287
|
|
Unrealized losses on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
|
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,398
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,936
|
|
|
|
|
|
|
|
|
|
|
|
7,936
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574,159
|
|
|
|
2
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
1,901
|
|
Issuance of shares pursuant to employee share purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,352
|
|
|
|
1
|
|
|
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
1,833
|
|
Income tax benefit from share options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
Income tax benefit from initial public offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
31,774,620
|
|
|
$
|
131
|
|
|
$
|
225,180
|
|
|
$
|
81
|
|
|
$
|
(11,312
|
)
|
|
$
|
214,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,886
|
|
|
|
12,886
|
|
Unrealized losses on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
(157
|
)
|
Unrealized gains on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443
|
|
|
|
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,172
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,736
|
|
|
|
|
|
|
|
|
|
|
|
10,736
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700,624
|
|
|
|
3
|
|
|
|
2,223
|
|
|
|
|
|
|
|
|
|
|
|
2,227
|
|
Issuance of shares pursuant to employee share purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,529
|
|
|
|
1
|
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
Income tax benefit from share options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,231
|
|
|
|
|
|
|
|
|
|
|
|
1,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
32,681,773
|
|
|
$
|
135
|
|
|
$
|
240,807
|
|
|
$
|
367
|
|
|
$
|
1,574
|
|
|
$
|
242,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
61
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,886
|
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,071
|
|
|
|
3,619
|
|
|
|
2,132
|
|
Deferred income taxes
|
|
|
3,638
|
|
|
|
1,259
|
|
|
|
(12,143
|
)
|
Share-based compensation expense
|
|
|
10,736
|
|
|
|
7,936
|
|
|
|
3,564
|
|
Gain on sale of investments
|
|
|
(827
|
)
|
|
|
(2,303
|
)
|
|
|
(2,328
|
)
|
Impairment of investments
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
2,981
|
|
|
|
(6,046
|
)
|
|
|
(7,212
|
)
|
Inventories
|
|
|
(3,014
|
)
|
|
|
(1,344
|
)
|
|
|
(1,317
|
)
|
Prepaid expenses and other assets
|
|
|
(982
|
)
|
|
|
(1,263
|
)
|
|
|
644
|
|
Accounts payable
|
|
|
510
|
|
|
|
1,562
|
|
|
|
2,213
|
|
Accrued liabilities and other liabilities
|
|
|
2,289
|
|
|
|
4,721
|
|
|
|
4,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
32,788
|
|
|
|
31,012
|
|
|
|
25,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of severance-related insurance policies
|
|
|
(857
|
)
|
|
|
(727
|
)
|
|
|
(868
|
)
|
Purchase of short-term investment
|
|
|
(236,680
|
)
|
|
|
(204,252
|
)
|
|
|
(151,465
|
)
|
Proceeds from sales of short-term investments
|
|
|
121,768
|
|
|
|
143,168
|
|
|
|
60,066
|
|
Proceeds from maturities of short-term investments
|
|
|
20,080
|
|
|
|
45,050
|
|
|
|
41,550
|
|
Purchase of property and equipment
|
|
|
(3,662
|
)
|
|
|
(4,495
|
)
|
|
|
(3,960
|
)
|
Return of (increase in) restricted cash deposit
|
|
|
(880
|
)
|
|
|
(1,435
|
)
|
|
|
(3
|
)
|
Purchase of equity investment in a private company
|
|
|
(3,500
|
)
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(103,731
|
)
|
|
|
(24,191
|
)
|
|
|
(54,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net
|
|
|
|
|
|
|
|
|
|
|
105,953
|
|
Principal payments on capital lease obligations
|
|
|
(465
|
)
|
|
|
(2,073
|
)
|
|
|
(2,053
|
)
|
Proceeds from exercise of share awards and warrants
|
|
|
3,664
|
|
|
|
3,734
|
|
|
|
3,450
|
|
Excess tax benefit from share-based compensation
|
|
|
1,231
|
|
|
|
1,021
|
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,430
|
|
|
|
2,682
|
|
|
|
108,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(66,513
|
)
|
|
|
9,503
|
|
|
|
80,080
|
|
Cash and cash equivalents at beginning of period
|
|
|
110,153
|
|
|
|
100,650
|
|
|
|
20,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,640
|
|
|
$
|
110,153
|
|
|
$
|
100,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
876
|
|
|
$
|
94
|
|
|
$
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Software acquired under capital leases
|
|
$
|
|
|
|
$
|
(259
|
)
|
|
$
|
(3,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements acquired under operating lease
|
|
$
|
|
|
|
$
|
(637
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible assets under capital leases
|
|
$
|
|
|
|
$
|
(235
|
)
|
|
$
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory capitalization
|
|
$
|
426
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares converted into ordinary shares
|
|
$
|
|
|
|
$
|
|
|
|
$
|
92,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
62
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.
Principles
of presentation
The consolidated financial statements include the Companys
accounts as well as those of its wholly owned subsidiary after
the elimination of all significant intercompany balances and
transactions.
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 the Companys
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 accordance with
United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of net revenue and
expenses in the reporting periods. The Company regularly
evaluates estimates and assumptions related to revenue
recognition, allowances for doubtful accounts, warranty
reserves, inventory reserves, share-based compensation expense,
long-term asset valuations, investments, deferred income tax
asset valuation allowances, uncertain tax positions, litigation
and other loss contingencies. These estimates and assumptions
are based on current facts, historical experience and various
other factors that the Company believes to be reasonable under
the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities and the recording of revenue, costs and expenses
that are not readily apparent from other sources. The actual
results the Company experiences may differ materially and
adversely from the Companys original estimates. To the
extent there are material differences between the estimates and
actual results, the Companys future results of operations
will be affected.
Cash
and cash equivalents
The Company considers all highly liquid investments with a
maturity of three months or less from the date of purchase to be
cash equivalents. Cash and cash equivalents consist of cash on
deposit with banks, money market funds, government agency
discount notes and commercial paper.
63
Restricted
cash and deposits
The Company maintains certain cash amounts restricted as to
withdrawal or use. At December 31, 2009 the Company
maintained a balance of approximately $665,000 that represents
tenants security deposits restricted due to the tenancy
agreement and $2.5 million that represents security
deposits restricted due to a foreign exchange management
agreement with a bank.
The restricted deposits are presented at their cost, including
accrued interest at rates of approximately 0.74% per annum.
Fair
value of financial instruments
The Companys financial instruments consist of cash, cash
equivalents, short-term investments, accounts receivable,
accounts payable and other accrued liabilities. The Company
believes that the carrying amounts of the financial instruments
approximate their respective fair values. The Company regularly
reviews its investment portfolio to identify and evaluate
investments that have indications of possible impairment.
Factors considered in determining whether a loss is temporary
include: the length of time and extent to which fair value has
been lower than the cost basis; the financial condition, credit
quality and near-term prospects of the investee; and whether it
is more likely than not that the Company will be required to
sell the security prior to any anticipated recovery in fair
value. When there is no readily available market data, fair
value estimates may be made by the Company, which may not
necessarily represent the amounts that could be realized in a
current or future sale of these assets.
Derivatives
The Company recognizes derivative instruments as either assets
or liabilities and measures those instruments at fair value. The
accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting
designation. The Company enters into forward contracts
designated as cash flow hedges. For a derivative instrument
designated as a cash flow hedge, the effective portion of the
derivatives gain or loss is initially reported as a
component of accumulated other comprehensive income, or OCI, and
subsequently reclassified into earnings when the hedged exposure
affects earnings.
Short-term
investments
The Companys short-term investments are classified as
available-for-sale
securities and are reported at fair value. Unrealized gains or
losses are recorded in shareholders equity and included in
OCI. The Company views its
available-for-sale
portfolio as available for use in its current operations.
Accordingly, the Company has classified all investments in
available for sale securities with readily available markets as
short-term, even though the stated maturity date may be one year
or more beyond the current balance sheet date, because of the
intent and ability to sell these securities prior to maturity to
meet liquidity needs or as part of a risk management program.
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. Cash equivalents
and short-term investments balances are maintained with high
quality financial institutions, the composition and maturities
of which are regularly monitored by management. 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.
64
The following table summarizes the revenues from customers
(including original equipment manufacturers) in excess of 10% of
the total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Hewlett-Packard
|
|
|
15
|
%
|
|
|
19
|
%
|
|
|
19
|
%
|
IBM
|
|
|
11
|
%
|
|
|
|
*
|
|
|
|
*
|
Supermicro Computer Inc
|
|
|
10
|
%
|
|
|
|
*
|
|
|
|
*
|
Sun Microsystems
|
|
|
|
*
|
|
|
17
|
%
|
|
|
|
*
|
QLogic
|
|
|
|
*
|
|
|
11
|
%
|
|
|
11
|
%
|
Voltaire
|
|
|
|
*
|
|
|
|
*
|
|
|
15
|
%
|
Cisco
|
|
|
|
*
|
|
|
|
*
|
|
|
11
|
%
|
At December 31, 2009, IBM and Hewlett-Packard accounted for
21% and 13%, respectively, of the Companys total accounts
receivable. At December 31, 2008, Hewlett-Packard, Sun
Microsystems and Promate Electronics accounted for 24%, 20% and
13%, 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, which is 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 lives 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.
Investments
The Company has equity investments in privately-held companies.
These investments are recorded at cost because the Company does
not have the ability to exercise significant influence over the
operating and financial policies of the companies. The
investments are included in other long-term assets on the
accompanying balance sheets. The Company monitors these
investments for impairment by considering available evidence
generally including financial, operational and economic data and
makes appropriate reductions in carrying values when an
impairment is deemed to be other than temporary.
Impairment
of long-lived assets
Long-lived assets include equipment, furniture and fixtures,
equity investments in privately-held companies and intangible
assets. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances
65
indicate that the carrying amount of the assets may not be fully
recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) from 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 possible impairment on a regular basis.
Revenue
recognition
The Company recognizes revenue from the sales of products when
all of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has
occurred; (3) the price is fixed or determinable; and
(4) collection is reasonably assured. The Company uses a
binding purchase order or a signed agreement as evidence of an
arrangement. Delivery occurs when goods are shipped and title
and risk of loss transfer to the customer. The Companys
standard arrangement with its customers typically includes
freight-on-board
shipping point and no right of return and no customer acceptance
provisions. The customers obligation to pay and the
payment terms are set at the time of shipment and are not
dependent on the subsequent resale of the product. The Company
determines whether collectibility is probable on a
customer-by-customer
basis. When assessing the probability of collection, the Company
considers the number of years the customer has been in business
and the history of the Companys 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.
A portion of the Companys sales are made to distributors
under agreements which contain a limited right to return unsold
product and price protection provisions. The Company recognizes
revenue from these distributors based on the sell-through method
using inventory information provided by the distributor.
Additionally, the Company maintains accruals and allowances for
price protection and cooperative marketing programs. The Company
classifies the costs of these programs based on the identifiable
benefit received as either a reduction of revenue, a cost of
revenues, or an operating expense.
The Company also maintain inventory, or hubbing, arrangements
with certain customers. Pursuant to these arrangements the
Company delivers products to a customer or a designated third
party warehouse based upon the customers projected needs,
but does not recognize product revenue unless and until the
customer reports it has removed the Companys product from
the warehouse to be incorporated into its end products.
The Company recognizes revenue from the sale of hardware
products and software bundled with hardware that is essential to
the functionality of the hardware in accordance with general
revenue recognition accounting guidance. The Company recognizes
revenue in accordance with industry specific software accounting
guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales
of software upgrades and (iii) sales of software bundled
with hardware not essential to the functionality of the hardware.
For multiple element arrangements, that include a combination of
hardware, software and services, such as post-contract customer
support, the arrangement consideration is allocated to the
separate elements based on fair value. Effective October 1,
2009 the Company adopted authoritative guidance allowing the
allocation of the arrangement consideration using the
Companys best estimate of selling price. The change was
made prospectively from the beginning of the fiscal year 2009
and did not have a material impact on the Companys
consolidated financial statements, including interim
consolidated financial statements reported in the year of
adoption. If an arrangement includes undelivered elements that
are not essential to the functionality of the delivered
elements, the Company defers the fair value or best estimate
selling price 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. In the
arrangements described above, the Company recognizes revenue
upon shipment of each element, hardware or software, assuming
all other basic revenue recognition criteria are met, as both
the hardware or software are considered delivered elements and
only undelivered element is post-contract customer support. The
revenue from the post-contract customer support is recognized
ratably over the term of the related contract.
The Company accounts for multiple element arrangements that
consist of software or software-related products, including the
sale of upgrades to previously sold software and post-contract
customer support, in accordance with industry specific
accounting guidance for software and software-related
transactions. For such
66
transactions, revenue on arrangements that include multiple
elements is allocated to each element based on the relative fair
value of each element, and fair value is generally determined by
vendor-specific objective evidence, or VSOE. If the Company
cannot objectively determine the fair value of any undelivered
element included in such multiple-element arrangements, the
Company defers revenue until all elements are delivered and
services have been performed, or until fair value can
objectively be determined for any remaining undelivered
elements. When the fair value of a delivered element has not
been established, but fair value exists for the undelivered
elements, the Company uses the residual method to recognize
revenue if the fair value of all undelivered elements is
determinable. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of
the arrangement fee is allocated to the delivered elements and
is recognized as revenue. Post-contract support is recognized
ratably over the term of the related contract.
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 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, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of the period
|
|
$
|
997
|
|
|
$
|
704
|
|
New warranties issued during the period
|
|
|
687
|
|
|
|
1,013
|
|
Reversal of warranty reserves
|
|
|
(426
|
)
|
|
|
(597
|
)
|
Settlements during the period
|
|
|
(356
|
)
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
902
|
|
|
$
|
997
|
|
|
|
|
|
|
|
|
|
|
Research
and development
Costs incurred in research and development are charged to
operations as incurred, including mask sets. The Company
expenses all costs for internally developed patents as incurred.
Total research and development operating expenses reported in
the Consolidated Statement of Operations for the years ended
December 31, 2009, 2008 and 2007 were $42.2 million,
$39.5 million and $24.6 million, respectively.
Advertising
Cost related to advertising and promotion of products is charged
to sales and marketing expense as incurred. Advertising expense
was approximately $26,000, $155,000 and $141,000 for the years
ended December 31, 2009, 2008 and 2007, respectively.
Share-based
compensation
The Company has in effect share incentive plans under which
incentive share options have been granted to employees and
non-qualified share options have been granted to employees and
non-employee members of the Board of Directors. The Company also
has an employee share purchase plan for all eligible employees.
The Company accounts for share-based compensation expense based
on the estimated fair value of the share option awards as of the
grant dates.
67
The Company estimates the fair value of share option awards
using the Black-Scholes option valuation model, which requires
the input of subjective assumptions including the expected share
price volatility, the calculation of expected term, and the fair
value of the underlying common share on the date of grant, among
other inputs. Share compensation expense is recognized on a
straight-line basis over each optionees requisite service
period, which is generally the vesting period.
The Company bases its estimate of expected volatility on a
combination of historical volatility of the Company stock and
reported market value data for a group of publicly traded
companies, which were selected from market indices that it
believes would be indicators of its future share price
volatility, after consideration of their size, stage of
lifecycle, profitability, growth, risk and return on investment.
The Company calculates the expected term of its options using
the simplified method as prescribed by the authoritative
guidance. The expected term for newly granted options is
approximately 6.25 years.
Share-based compensation expense is recorded net of estimated
forfeitures. Forfeitures are estimated at the time of grant and
this estimate is revised, if necessary, in subsequent periods.
If the actual number of forfeitures differs from the estimate,
adjustments may be required to share-based compensation expense
in future periods.
Comprehensive
income
Accumulated other comprehensive income, net of tax, presented in
the accompanying balance sheets consists of the accumulated
unrealized gains and losses on
available-for-sale
securities, and the accumulated unrealized gains and losses
related to derivative instruments accounted for as cash flow
hedges (in thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Accumulated net unrealized gain (loss) on:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
184
|
|
|
$
|
341
|
|
Derivative instruments
|
|
|
183
|
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
367
|
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
The amount of income tax expense allocated to unrealized gain
(loss) on
available-for-sale
securities and hedging activities was not material at
December 31, 2009 and 2008.
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
Operations as part of Other income, net.
Net
income per share
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.
68
The following table sets forth the computation of basic and
diluted net income per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income
|
|
$
|
12,886
|
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used to compute
basic net income per share
|
|
|
32,099
|
|
|
|
31,436
|
|
|
|
27,827
|
|
Dilutive effect on employee stock option plan
|
|
|
1,301
|
|
|
|
1,407
|
|
|
|
2,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net income per share
|
|
|
33,400
|
|
|
|
32,843
|
|
|
|
30,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$
|
0.40
|
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$
|
0.39
|
|
|
$
|
0.68
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth potential ordinary shares that
are not included in the diluted net income per share above
because to do so would be antidilutive for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Ordinary share options
|
|
|
2,882
|
|
|
|
2,723
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
|
|
2,723
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
reporting
The Company has one reportable segment: the development,
manufacturing, marketing and sales of inter-connect
semiconductor products.
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 meet
the more likely than not criteria. 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 it has 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.
Income tax positions must meet a more-likely-than-not
recognition threshold to be recognized. Income tax positions
that previously failed to meet the more-likely-than-not
threshold are recognized in the first subsequent financial
reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the
more-likely-than-not threshold are derecognized in the first
subsequent financial reporting period in which that
69
threshold is no longer met. The Company recognizes potential
accrued interest and penalties related to unrecognized tax
benefits within the consolidated statements of income as income
tax expense.
Recent
accounting pronouncements
In January 2010, the Financial Accounting Standards Board issued
updated guidance related to fair value measurements and
disclosures, which requires a reporting entity to disclose
separately the amounts of significant transfers in and out of
Level 1 and Level 2 fair value measurements and to
describe the reasons for the transfers. In addition, in the
reconciliation for fair value measurements using significant
unobservable inputs, or Level 3, a reporting entity should
disclose separately information about purchases, sales,
issuances and settlements (that is, on a gross basis rather than
one net number). The updated guidance also requires that an
entity should provide fair value measurement disclosures for
each class of assets and liabilities and disclosures about the
valuation techniques and inputs used to measure fair value for
both recurring and non-recurring fair value measurements for
Level 2 and Level 3 fair value measurements. The
updated guidance is effective for interim or annual financial
reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances and
settlements in the roll forward activity in Level 3 fair
value measurements, which are effective for fiscal years
beginning after December 15, 2010 and for interim periods
within those fiscal years. The Company does not expect adoption
of the updated guidance to have a material impact on its
consolidated results of operations or financial condition.
70
|
|
NOTE 2
|
BALANCE
SHEET COMPONENTS:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
14,359
|
|
|
$
|
33,357
|
|
Money market funds
|
|
|
29,281
|
|
|
|
71,497
|
|
U.S. Treasury and agency securities
|
|
|
|
|
|
|
5,299
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,640
|
|
|
$
|
110,153
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
|
|
|
$
|
5,030
|
|
U.S. Treasury and agency securities
|
|
|
166,357
|
|
|
|
62,951
|
|
Corporate notes
|
|
|
|
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities
|
|
|
166,357
|
|
|
|
76,154
|
|
Less amounts classified as cash equivalents
|
|
|
|
|
|
|
5,299
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,357
|
|
|
$
|
70,855
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
20,708
|
|
|
$
|
23,676
|
|
Less: allowance for doubtful accounts
|
|
|
(290
|
)
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,418
|
|
|
$
|
23,399
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
941
|
|
|
$
|
940
|
|
Work-in-process
|
|
|
1,497
|
|
|
|
1,189
|
|
Finished goods
|
|
|
6,890
|
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,328
|
|
|
$
|
6,740
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and other:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,648
|
|
|
$
|
1,433
|
|
Federal taxes recoverable
|
|
|
949
|
|
|
|
1,390
|
|
Other receivable
|
|
|
949
|
|
|
|
|
|
Forward contracts
|
|
|
183
|
|
|
|
|
|
Other
|
|
|
96
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,825
|
|
|
$
|
2,968
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
28,175
|
|
|
$
|
27,321
|
|
Furniture and fixtures
|
|
|
1,809
|
|
|
|
1,689
|
|
Leasehold improvements
|
|
|
2,184
|
|
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,168
|
|
|
|
31,015
|
|
Less: Accumulated depreciation and amortization
|
|
|
(22,434
|
)
|
|
|
(20,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,734
|
|
|
$
|
10,386
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled approximately
$3.9 million, $3.5 million and $2.1 million for
the years ended December 31, 2009, 2008 and 2007,
respectively.
71
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
|
Equity investments in private companies
|
|
$
|
4,000
|
|
|
$
|
1,000
|
|
Prepaid expenses
|
|
|
387
|
|
|
|
88
|
|
Long term deposits
|
|
|
63
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,450
|
|
|
$
|
1,194
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
8,170
|
|
|
$
|
6,568
|
|
Professional services
|
|
|
3,169
|
|
|
|
2,407
|
|
Warranty
|
|
|
902
|
|
|
|
997
|
|
Income tax payable
|
|
|
683
|
|
|
|
398
|
|
Sales commissions
|
|
|
548
|
|
|
|
517
|
|
Advance payment from a customer
|
|
|
|
|
|
|
1,925
|
|
Forward contracts
|
|
|
|
|
|
|
260
|
|
Other
|
|
|
1,332
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,804
|
|
|
$
|
14,103
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations:
|
|
|
|
|
|
|
|
|
Federal income tax payable
|
|
$
|
1,510
|
|
|
$
|
1,143
|
|
Other
|
|
|
634
|
|
|
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,144
|
|
|
$
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
|
INVESTMENTS
AND FAIR VALUE MEASUREMENTS:
|
Fair
value hierarchy:
Fair value is defined as an exit price, representing the amount
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering
such assumptions, the authoritative guidance establishes a
three-tier value hierarchy, which prioritizes the inputs used in
measuring fair value as follows: (Level 1) observable
inputs such as quoted prices in active markets;
(Level 2) inputs other than the quoted prices in
active markets that are observable either directly or
indirectly; and (Level 3) unobservable inputs in which
there is little or no market data, which require the Company to
develop its own assumptions. This hierarchy requires companies
to use observable market data, when available, and to minimize
the use of unobservable inputs when determining fair value. The
three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active
markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not
active or financial instruments for which all significant inputs
are observable, either directly or indirectly; and
Level 3 Prices or valuations that require
inputs that are both significant to the fair value measurement
and unobservable.
72
The following table represents the fair value hierarchy of the
Companys financial assets and liabilities measured at fair
value on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
29,281
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29,281
|
|
U.S. Treasury and agency securities
|
|
|
|
|
|
|
166,357
|
|
|
|
|
|
|
|
166,357
|
|
Forward contracts
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
29,281
|
|
|
$
|
166,540
|
|
|
$
|
|
|
|
$
|
195,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the fair value hierarchy of the
Companys financial assets and liabilities measured at fair
value on a recurring basis as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
71,497
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
71,497
|
|
Commercial papers
|
|
|
|
|
|
|
5,030
|
|
|
|
|
|
|
|
5,030
|
|
Corporate notes
|
|
|
|
|
|
|
8,173
|
|
|
|
|
|
|
|
8,173
|
|
U.S. Treasury and agency securities
|
|
|
|
|
|
|
62,951
|
|
|
|
|
|
|
|
62,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
71,497
|
|
|
$
|
76,154
|
|
|
$
|
|
|
|
$
|
147,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
At December 31, 2009 and 2008, the Company held short-term
investments classified as
available-for-sale
securities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
29,281
|
|
|
$
|
|
|
|
$
|
29,281
|
|
U.S. Treasury and agency securities
|
|
|
166,173
|
|
|
|
184
|
|
|
|
166,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities
|
|
|
195,454
|
|
|
|
184
|
|
|
|
195,638
|
|
Less amounts classified as cash equivalents
|
|
|
(29,281
|
)
|
|
|
|
|
|
|
(29,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,173
|
|
|
$
|
184
|
|
|
$
|
166,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
71,497
|
|
|
$
|
|
|
|
$
|
71,497
|
|
Commercial paper
|
|
|
5,014
|
|
|
|
16
|
|
|
|
5,030
|
|
U.S. Treasury and agency securities
|
|
|
62,597
|
|
|
|
354
|
|
|
|
62,951
|
|
Corporate bonds
|
|
|
8,202
|
|
|
|
(29
|
)
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities
|
|
|
147,310
|
|
|
|
341
|
|
|
|
147,651
|
|
Less amounts classified as cash equivalents
|
|
|
(76,796
|
)
|
|
|
|
|
|
|
(76,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,514
|
|
|
$
|
341
|
|
|
$
|
70,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
The contractual maturities of marketable securities classified
as short-term investments at December 31, 2009 and 2008 are
due in one year or less. Realized gains upon the sale of
marketable securities were approximately $827,000 and $2,303,000
for the years ended December 31, 2009 and December 31,
2008, respectively.
Investments
in privately-held companies:
As of December 31, 2009, the Companys investment
portfolio included investments of $4.0 million in
privately-held companies. The Company accounts for
$3.5 million of these investments under the cost method. To
determine if impairment exists, the Company monitors the
portfolio companies revenue and earnings trends relative
to pre-defined milestones and overall business prospects, the
general market conditions in its industry and other factors
related to its ability to remain in business, such as liquidity
and receipt of additional funding.
During the fourth quarter of 2009, the Company identified
certain events and changes in circumstances indicating that the
fair value of the investments in one of the portfolio companies
had been negatively impacted and determined that the impairment
of this investment was other than temporary. In determining
whether a decline in value of its investment has occurred and is
other than temporary, an assessment was made by considering
available evidence, including the general market conditions in
the companys industry, its financial condition, near-term
prospects and subsequent rounds of financing. The valuation also
takes into account the companys capital structure,
liquidation preferences for its capital and other economic
variables as well as other inputs that require management
judgment. As a result of the assessment, the Company recorded a
$0.5 million impairment loss on this investment to reduce
the carrying value to its estimated market value. The impairment
loss was included in other income, net, on the Consolidated
Statements of Operations for the year ended December 31,
2009. The carrying value of the Companys investment was
$0.5 million and is classified within other long term
assets on the Companys Consolidated Balance Sheets as of
December 31, 2009.
|
|
NOTE 4
|
INTANGIBLE
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Licensed technology
|
|
$
|
866
|
|
|
$
|
724
|
|
Less: Accumulated amortization
|
|
|
(438
|
)
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
428
|
|
|
$
|
465
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible assets totaled approximately
$179,000, $165,000 and $67,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
Amortization expense is expected to be $191,000 for each of the
years ended December 31, 2010 and 2011, and $46,000 for the
year ended December 31, 2012. The intangible assets are
expected to be fully amortized in 2012.
|
|
NOTE 5
|
DERIVATIVES
AND HEDGING ACTIVITIES:
|
The Company uses derivative instruments primarily to manage
exposures to foreign currency. The company enters into forward
contracts to manage its exposure to changes in the exchange rate
of the New Israeli Shekel (NIS) against the
U.S. dollar. The Companys primary objective in
entering these arrangements is to reduce the volatility of
earnings and cash flows associated with changes in foreign
currency exchange rates. The program is not designated for
trading or speculative purposes. The Companys forward
contracts expose the Company to credit risk to the extent that
the counterparties may be unable to meet the terms of the
agreement. The Company seeks to mitigate such risk by limiting
its counterparties to major financial institutions and by
spreading the risk across a number of major financial
institutions. In addition, the potential risk of loss with any
one counterparty resulting from this type of credit risk is
monitored on an ongoing basis.
The Company uses forward contracts designated as cash flow
hedges to hedge a substantial portion of forecasted operating
expenses in NIS. The gain or loss on the effective portion of a
cash flow hedge is initially reported as a component of OCI and
subsequently reclassified into operating expenses in the same
period in which the hedged operating expenses are recognized, or
reclassified into other income, net, if the hedged transaction
74
becomes probable of not occurring. Any gain or loss after a
hedge is de-designated because it is no longer probable of
occurring or related to an ineffective portion of a hedge, as
well as any amount excluded from the Companys hedge
effectiveness, is recognized as other income, net immediately.
The net gains or losses relating to ineffectiveness were not
material in the year ended December 31, 2009. As of
December 31, 2009, the Company had forward contracts in
place that hedged future operating expenses of approximately
46.8 million NIS, or approximately $12.4 million based
upon the exchange rate as of December 31, 2009. The forward
contracts cover future NIS denominated operating expenses
expected to occur over the next twelve months.
The Company does not use derivative financial instruments for
purposes other than cash flow hedges.
Fair
value of Derivative Contracts
The fair value of derivative contracts as of December 31,
2009 and December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets Reported in
|
|
|
Derivative Liabilities Reported in
|
|
|
|
Other Current Assets
|
|
|
Other Current Liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Foreign exchange contracts designated as cash flow hedges
|
|
$
|
183
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
$
|
183
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Designated Derivative Contracts on Accumulated Other
Comprehensive Income
The following table represents the balance of derivative
contracts designated as cash flow hedges as of December 31,
2009 and 2008, and their impact on OCI for the year ended
December 31, 2009 (in thousands):
|
|
|
|
|
December 31, 2008
|
|
$
|
(260
|
)
|
Amount of gain recognized in OCI (effective portion)
|
|
|
623
|
|
Amount of loss reclassified from OCI to income (effective
portion)
|
|
|
(546
|
)
|
|
|
|
|
|
December 31, 2009
|
|
$
|
183
|
|
|
|
|
|
|
Foreign exchange contracts designated as cash flow hedges relate
primarily to operating expenses and the associated gains and
losses are expected to be recorded in operating expenses when
reclassed out of OCI. The Company expects to realize the
accumulated OCI balance related to foreign exchange contracts
within the next twelve months.
Effect
of Derivative Contracts on the Condensed Consolidated Statement
of Operations.
Impact of derivative contracts on total operating expense in the
twelve months ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Loss on foreign exchange contracts designated as cash flow hedges
|
|
$
|
546
|
|
|
$
|
215
|
|
|
$
|
|
|
|
|
NOTE 6
|
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 $16,500 for the
year ended December 31, 2009, subject to certain
limitations. The Company matches employee
75
contributions of up to 4% of their annual base salaries. The
total expenses for these contributions were approximately
$228,000 and $180,000 for the years ended December 31, 2009
and 2008, respectively.
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 calculated based on the salary of each
employee multiplied by the number of years of such
employees employment and is presented in the
Companys balance sheet in long-term liabilities, as if it
was payable at each balance sheet date on an undiscounted basis.
This liability is partially funded by the purchase of insurance
policies in the name of the employees. The surrender value of
the insurance policies is presented in long-term assets.
Severance pay expenses for years ended December 31, 2009,
2008 and 2007 were approximately $419,000, $799,000 and
$194,000, respectively, and included gains of $503,000, losses
of $277,000 and gains of $322,000, respectively, from
investments in severance assets. The severance pay detail is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued severance liability
|
|
$
|
5,778
|
|
|
$
|
5,042
|
|
Severance assets
|
|
|
4,629
|
|
|
|
3,407
|
|
|
|
|
|
|
|
|
|
|
Unfunded portion
|
|
$
|
1,149
|
|
|
$
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7
|
COMMITMENTS
AND CONTINGENCIES:
|
Leases
The Company leases office space and motor vehicles under
operating leases with various expiration dates through 2014.
Rent expense was approximately $2.1 million,
$1.8 million and $1.3 million for the years ended
December 31, 2009, 2008 and 2007 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
electronic design automation software. The total amount of
assets under capital lease agreements within Property and
equipment, net was approximately $3.3 million and
$5.7 million for the years ended December 31, 2009 and
2008, respectively. At December 31, 2009, future minimum
lease payments under non-cancelable operating and capital leases
totaled approximately $12.6 million. For the years ended
December 31, 2009 and 2008, the accumulated amortization
for assets under capital lease agreements totaled approximately
$2.3 million and $3.0 million, respectively. At
December 31, 2009, 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:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
Year Ended December 31,
|
|
Leases
|
|
|
Leases
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
535
|
|
|
$
|
4,529
|
|
2011
|
|
|
316
|
|
|
|
3,772
|
|
2012
|
|
|
158
|
|
|
|
2,238
|
|
2013
|
|
|
|
|
|
|
745
|
|
2014
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments and sublease income
|
|
|
1,009
|
|
|
$
|
11,597
|
|
|
|
|
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations
|
|
|
1,002
|
|
|
|
|
|
Less: Current portion
|
|
|
(528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Service
commitments
At December 31, 2009, the Company had non-cancelable
service commitments of $1.2 million, $1.0 million of
which is expected to be paid in 2010 and $165,000 in 2011 and
beyond.
Purchase
commitments
At December 31, 2009, the Company had non-cancelable
purchase commitments of $17.3 million expected to be paid
within one year. At December 31, 2009, 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, 2009, the Company had
repaid and accrued approximately $553,000 to the BIRD
Foundation, and the contingent liability in respect of royalties
payable is approximately $347,000.
The Company has also received and paid off approximately
$2.8 million 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.
The Company had concluded all its obligations in respect of
royalties payable to the OCS in 2008.
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.
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.
77
|
|
NOTE 8
|
MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE
PREFERRED SHARES:
|
All outstanding preferred shares were converted into ordinary
shares upon the closing of the Companys 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 shares
into ordinary shares upon the closing of the Companys
initial public offering on February 7, 2007, the holders of
the Companys 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
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 affected 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 affected 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.
78
Dividends
The holders of Series D shares were entitled to receive
dividends in preference to any dividend on the Series A,
Series B, 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 times 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 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.
79
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
did 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.
|
|
NOTE 9
|
ORDINARY
SHARES:
|
On February 1, 2007, the Companys amended and
restated articles of association authorized the Company to issue
137,142,857 ordinary shares of nominal value 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 10
|
SHARE
OPTION PLANS:
|
The Company has four option plans: the 1999 United States Equity
Incentive Plan, 1999 Israeli Share Option Plan, 2003 Israeli
Share Option Plan (collectively, the Prior Plans)
and the 2006 Global Share Incentive Plan (the Global
Plan).
The Global Plan was adopted by the board of directors in October
2006 and approved by shareholders in December 2006. The Global
Plan replaces the Prior Plans and became effective on
February 6, 2007. The Company has authorized for issuance
under the 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
number of ordinary shares reserved for issuance under the 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 lower of: (i) 2% of total number of ordinary shares
outstanding on a fully diluted basis on the date of the
increase, (ii) 685,714 ordinary shares, or (iii) a
smaller number determined by the 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. The Global Plan was automatically increased by 685,714,
685,714 and 680,513 shares on January 1, 2010, 2009
and 2008, respectively.
80
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, 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
|
|
Options increased to plan
|
|
|
680,513
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,926,438
|
)
|
|
|
1,926,438
|
|
|
$
|
10.30
|
|
Options exercised
|
|
|
|
|
|
|
(574,159
|
)
|
|
$
|
3.31
|
|
Options canceled
|
|
|
453,186
|
|
|
|
(453,186
|
)
|
|
$
|
12.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
718,072
|
|
|
|
6,928,619
|
|
|
$
|
10.20
|
|
Options increased to plan
|
|
|
685,714
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,778,031
|
)
|
|
|
2,778,031
|
|
|
$
|
10.72
|
|
Options exercised
|
|
|
|
|
|
|
(700,624
|
)
|
|
$
|
3.18
|
|
Options canceled
|
|
|
2,602,347
|
|
|
|
(2,602,347
|
)
|
|
$
|
17.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
1,228,102
|
|
|
|
6,403,679
|
|
|
$
|
8.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was
approximately $7.73, $6.12 and $11.26 for the years ended
December 31, 2009, 2008 and 2007, respectively. The
following tables provide additional information about all
options outstanding and exercisable at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
Options Exercisable at
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
$0.18 - $1.47
|
|
|
724,471
|
|
|
|
1.58
|
|
|
$
|
1.33
|
|
|
|
724,471
|
|
|
$
|
1.33
|
|
$2.63 - $6.65
|
|
|
862,921
|
|
|
|
5.16
|
|
|
$
|
4.83
|
|
|
|
862,358
|
|
|
$
|
4.83
|
|
$7.27 - $7.44
|
|
|
70,269
|
|
|
|
8.14
|
|
|
$
|
7.31
|
|
|
|
30,613
|
|
|
$
|
7.37
|
|
$8.23 - $8.23
|
|
|
927,384
|
|
|
|
8.97
|
|
|
$
|
8.23
|
|
|
|
232,165
|
|
|
$
|
8.23
|
|
$8.45 - $9.10
|
|
|
456,338
|
|
|
|
8.73
|
|
|
$
|
8.89
|
|
|
|
92,172
|
|
|
$
|
8.90
|
|
$9.19 - $9.19
|
|
|
766,292
|
|
|
|
6.80
|
|
|
$
|
9.19
|
|
|
|
637,371
|
|
|
$
|
9.19
|
|
$10.23 - $10.23
|
|
|
1,899,437
|
|
|
|
9.28
|
|
|
$
|
10.23
|
|
|
|
|
|
|
|
|
|
$10.50 - $18.22
|
|
|
638,446
|
|
|
|
9.30
|
|
|
$
|
13.68
|
|
|
|
72,601
|
|
|
$
|
15.37
|
|
$18.43 - $18.43
|
|
|
45,712
|
|
|
|
7.36
|
|
|
$
|
18.43
|
|
|
|
39,364
|
|
|
$
|
18.43
|
|
$20.02 - $20.02
|
|
|
12,389
|
|
|
|
6.53
|
|
|
$
|
20.02
|
|
|
|
7,844
|
|
|
$
|
20.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.18 - $20.02
|
|
|
6,403,679
|
|
|
|
7.44
|
|
|
$
|
8.38
|
|
|
|
2,698,959
|
|
|
$
|
5.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the 2,698,959 options exercisable at December 31, 2009,
2,658,668 options were fully vested and 40,291 were unvested but
exercisable by U.S. employees under the 1999 Plan.
81
The total pretax intrinsic value of options exercised in 2009
was $9.0 million. This intrinsic value represents the
difference between the fair market value of the Companys
ordinary shares on the date of exercise and the exercise price
of each option. Based on the closing price of the Companys
ordinary shares of $18.89 on December 31, 2009, the total
pretax intrinsic value of all outstanding options was
$67.3 million. The total pretax intrinsic value of
exercisable options at December 31, 2009 was
$35.0 million.
The Companys Employee Share Purchase Plan, or ESPP, was
adopted by the board of directors in November 2006 and approved
by shareholders in December 2006, and became effective
immediately prior to the Companys initial public offering
on February 7, 2007. The ESPP is designed to allow eligible
employees to purchase the Companys ordinary shares, at
semi-annual intervals, with their accumulated payroll
deductions. A participant may contribute up to 15% of his or her
base 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 the
Companys ESPP will increase automatically on the first day
of each fiscal year during the term, beginning in 2009, by a
number of ordinary shares equal to the lower 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 the 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 the ESPP
may be issued or transferred more than $25,000 worth of ordinary
shares pursuant to purchase rights under the ESPP per calendar
year. During the years ended December 31, 2009 and 2008,
206,529 and 160,352 shares, respectively, were issued under
this plan at weighted average per share prices of $6.96 and
$11.42, respectively. At December 31, 2009,
142,414 shares were available for future issuance under the
ESPP.
Share
option exchange program
In April 2009, the Company completed an offer to exchange
certain employee share options issued under the Global Plan. The
option exchange program allowed eligible employees and
contractors of the Company to exchange their outstanding options
that had an exercise price greater than $13.65 per share for a
lesser number of options calculated in accordance with exchange
ratios. The ratios were determined using the Black-Scholes
option pricing model based on, among other things, the closing
price of the Companys ordinary shares as quoted on The
Nasdaq Global Select Market on March 16, 2009 and the
exercise prices of the options eligible for exchange. The
exchange ratios used were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Subject to
|
|
|
Shares Subject to Option
|
|
Replacement Option
|
Exercise Price Range
|
|
Surrendered
|
|
Granted
|
|
$13.66 to $16.99
|
|
|
1.10
|
|
|
|
1
|
|
$17.00 and above
|
|
|
1.21
|
|
|
|
1
|
|
Pursuant to the program, 255 eligible participants tendered, and
the Company accepted for exchange, options to purchase an
aggregate of 2,340,334 ordinary shares, representing
approximately 96% of eligible options. In exchange, the Company
granted 1,983,797 options with an exercise price of $10.23 per
share, which was the closing price of the Companys
ordinary shares as reported by the Nasdaq Global Select Market
on April 22, 2009.
For options originally granted in 2007, the replacement options
granted in the option exchange program vest as follows:
one-third (1/3) of the options replaced vest and become
exercisable on the one-year anniversary of the replacement grant
date, with the remaining shares vesting and becoming exercisable
in equal monthly increments over the 24 months following
the first anniversary of the replacement grant date. For options
originally granted in 2008, the replacement options vest as
follows: one-fourth (1/4) of the shares subject to each
replacement option vest and become exercisable on the one-year
anniversary of the replacement grant date, with the remaining
shares vesting and becoming exercisable in equal monthly
increments over the 36 months following the first year
anniversary of the replacement grant date.
A modification charge resulting from the share option exchange
program was immaterial.
82
Share-based
compensation
The Company has in effect share incentive plans under which
incentive share options have been granted to employees and
non-qualified share options have been granted to employees and
non-employee members of the Board of Directors. The Company also
has an employee share purchase plan for all eligible employees.
Effective January 1, 2006, the Company accounts for
share-based compensation expense based on the estimated fair
value of the share option awards as of the grant dates.
The Company estimates the fair value of share option awards
using the Black-Scholes option valuation model, which requires
the input of subjective assumptions including the expected share
price volatility, the calculation of expected term, and the fair
value of the underlying common share on the date of grant, among
other inputs. Share compensation expense is recognized on a
straight-line basis over each optionees requisite service
period, which is generally the vesting period.
The Company bases its estimate of expected volatility on a
combination of historical volatility of the Company stock and
reported market value data for a group of publicly traded
companies, which were selected from market indices that it
believes would be indicators of its future share price
volatility, after consideration of their size, stage of
lifecycle, profitability, growth, risk and return on investment.
The Company calculates the expected term of its options using
the simplified method as prescribed by the authoritative
guidance. The expected term for newly granted options is
approximately 6.25 years.
Share-based compensation expense is recorded net of estimated
forfeitures. Forfeitures are estimated at the time of grant and
this estimate is revised, if necessary, in subsequent periods.
If the actual number of forfeitures differs from that estimated,
adjustments may be required to share-based compensation expense
in future periods.
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,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
|
|
Employee Stock Purchase Plan
|
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
Dividend yield, %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility, %
|
|
|
62.9
|
|
|
|
62.6
|
|
|
|
62.1
|
|
|
|
56.1
|
|
|
|
54.9
|
|
|
|
58.3
|
|
Risk free interest rate, %
|
|
|
2.61
|
|
|
|
2.42
|
|
|
|
4.12
|
|
|
|
0.10
|
|
|
|
1.76
|
|
|
|
4.71
|
|
Expected life, years
|
|
|
6.20
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
0.53
|
|
|
|
0.50
|
|
|
|
0.53
|
|
Estimated forfeiture rate, %
|
|
|
8.66
|
|
|
|
8.40
|
|
|
|
9.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the distribution of total
share-based compensation expense in the Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Share-based compensation expense by caption:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
305
|
|
|
$
|
228
|
|
|
$
|
87
|
|
Research and development
|
|
|
6,562
|
|
|
|
4,936
|
|
|
|
2,069
|
|
Sales and marketing
|
|
|
2,125
|
|
|
|
1,597
|
|
|
|
864
|
|
General and administrative
|
|
|
1,744
|
|
|
|
1,175
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
10,736
|
|
|
$
|
7,936
|
|
|
$
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share options
|
|
$
|
10,233
|
|
|
$
|
7,242
|
|
|
$
|
3,000
|
|
ESPP
|
|
|
503
|
|
|
|
694
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
10,736
|
|
|
$
|
7,936
|
|
|
$
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
At December 31, 2009, there was $22.7 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
approximately 2.71 years.
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
976
|
|
|
$
|
1,194
|
|
|
$
|
1,416
|
|
Foreign
|
|
|
18,289
|
|
|
|
23,977
|
|
|
|
23,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
19,265
|
|
|
$
|
25,171
|
|
|
$
|
25,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for (benefit from) income taxes
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
1,241
|
|
|
$
|
1,448
|
|
|
$
|
662
|
|
State and local
|
|
|
214
|
|
|
|
289
|
|
|
|
232
|
|
Foreign
|
|
|
152
|
|
|
|
(196
|
)
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,607
|
|
|
|
1,541
|
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(279
|
)
|
|
$
|
(497
|
)
|
|
$
|
(54
|
)
|
State and local
|
|
|
15
|
|
|
|
(128
|
)
|
|
|
2
|
|
Foreign
|
|
|
5,036
|
|
|
|
1,884
|
|
|
|
(12,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,772
|
|
|
|
1,259
|
|
|
|
(12,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) taxes on income
|
|
$
|
6,379
|
|
|
$
|
2,800
|
|
|
$
|
(10,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, temporary differences which
gave rise to significant deferred tax assets and liabilities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
8,819
|
|
|
$
|
8,481
|
|
Research and development costs
|
|
|
2,548
|
|
|
|
6,569
|
|
Reserves and accruals
|
|
|
1,283
|
|
|
|
1,221
|
|
Depreciation and amortization
|
|
|
(47
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
12,603
|
|
|
|
16,291
|
|
Valuation allowance
|
|
|
(3,186
|
)
|
|
|
(3,236
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
9,417
|
|
|
|
13,055
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
9,417
|
|
|
$
|
13,055
|
|
|
|
|
|
|
|
|
|
|
The Company records net deferred tax assets to the extent it
believes these assets will more likely than not be realized. In
making such determination, the Company considers all available
positive and negative evidence,
84
including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies and
recent financial performance.
At December 31, 2009, the Company had foreign net operating
loss carryforwards of approximately $35.7 million. The
foreign net operating losses have no expiration date.
The reconciliation of the statutory federal income tax rate to
the Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State, net of federal benefit
|
|
|
1.2
|
|
|
|
0.5
|
|
|
|
0.8
|
|
Meals and entertainment
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.4
|
|
Tax at rates other than the statutory rate
|
|
|
(5.3
|
)
|
|
|
(33.2
|
)
|
|
|
(30.1
|
)
|
Share-based compensation
|
|
|
2.8
|
|
|
|
2.0
|
|
|
|
0.8
|
|
Changes in valuation allowance
|
|
|
|
|
|
|
5.0
|
|
|
|
(49.6
|
)
|
Other, net
|
|
|
0.3
|
|
|
|
2.7
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) taxes
|
|
|
33.1
|
%
|
|
|
11.1
|
%
|
|
|
(42.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company calculates the pool of excess tax benefits available
to absorb tax deficiencies recognized using 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 compares
the fair value expense to the tax deduction received for each
grant and aggregates the benefits and deficiencies to determine
whether there is a hypothetical additional paid in capital
(APIC) pool (net tax benefit situation). For the years ended
December 31, 2009 and 2008, the Company recognized a tax
benefit to APIC of $1.2 and $2.9 million, respectively.
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 2011 and expire in 2020. 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 2011 and expire between
the years 2015 and 2018.
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.
The Company uses a two-step approach to recognizing and
measuring uncertain tax positions. 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.
The Company considers many factors when evaluating and
estimating its tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate
actual outcomes. Upon implementation of this guidance, the
Company recognized no material adjustment to the
85
January 1, 2007 accumulated deficit balance. As of
December 31, 2009 and 2008, the unrecognized tax benefits
totaled approximately $1.4 million and $1.7 million,
respectively, which would reduce the Companys income tax
expense and effective tax rate, if recognized.
The following summarizes the activity related to the
Companys unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Gross unrecognized tax benefits, beginning of the period
|
|
$
|
1,714
|
|
|
$
|
1,139
|
|
Increases in tax positions for prior years
|
|
|
|
|
|
|
|
|
Decreases in tax positions for prior years
|
|
|
(665
|
)
|
|
|
(284
|
)
|
Increases in tax positions for current year
|
|
|
393
|
|
|
|
859
|
|
Decreases in tax positions for current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits, end of the period
|
|
$
|
1,442
|
|
|
$
|
1,714
|
|
|
|
|
|
|
|
|
|
|
It is the Companys policy to classify accrued interest and
penalties as part of the accrued unrecognized tax benefits
liability and record the expense in the provision for income
taxes. For the years ended December 31, 2009 and 2008, the
amount of accrued interest or penalties related to unrecognized
tax benefit totaled $67,000 and $20,000, respectively. For
unrecognized tax benefits that existed at December 31,
2009, the Company does not anticipate any significant changes
within the next twelve months.
The Company files income tax returns in the U.S. federal
jurisdictions, and various states and foreign jurisdictions. The
2005 through 2009 tax years 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 Companys subsidiary,
Mellanox Technologies, Inc., are indefinitely reinvested in the
respective operations. If its earnings were to be repatriated,
the Company would be subject to additional tax.
|
|
NOTE 12
|
SEGMENT
INFORMATION:
|
The Company operates in one reportable segment, the development,
manufacturing, marketing and sales of semiconductor interconnect
products. The Companys chief operating decision maker is
the chief executive officer. Since the Company operates in one
segment, all financial segment information can be found in the
accompanying Consolidated Financial Statements.
Revenues by geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
North America
|
|
$
|
41,843
|
|
|
$
|
56,432
|
|
|
$
|
44,779
|
|
Israel
|
|
|
8,158
|
|
|
|
11,994
|
|
|
|
15,751
|
|
Europe
|
|
|
20,457
|
|
|
|
15,689
|
|
|
|
11,339
|
|
Asia
|
|
|
45,586
|
|
|
|
23,586
|
|
|
|
12,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
116,044
|
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on the geographic
location of the customers. Intercompany sales between geographic
areas have been eliminated.
86
Revenues by product group are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
IC/Semiconductors
|
|
$
|
38,972
|
|
|
$
|
47,801
|
|
|
$
|
36,050
|
|
Adapter Cards
|
|
|
61,556
|
|
|
|
56,540
|
|
|
|
46,762
|
|
Switch systems
|
|
|
9,996
|
|
|
|
1,111
|
|
|
|
5
|
|
Accessories and other
|
|
|
5,520
|
|
|
|
2,249
|
|
|
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
116,044
|
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net by geographic location are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Israel
|
|
$
|
8,291
|
|
|
$
|
8,774
|
|
United States
|
|
|
1,443
|
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
9,734
|
|
|
$
|
10,386
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net is attributed to the geographic
location in which it is located.
|
|
NOTE 13
|
OTHER
INCOME, NET:
|
Other income, net, is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
1,289
|
|
|
$
|
4,187
|
|
|
$
|
6,452
|
|
Foreign exchange gains (losses)
|
|
|
(36
|
)
|
|
|
84
|
|
|
|
(283
|
)
|
Loss on equity investment in a private company
|
|
|
(500
|
)
|
|
|
(500
|
)
|
|
|
|
|
Other
|
|
|
(235
|
)
|
|
|
52
|
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
518
|
|
|
$
|
3,823
|
|
|
$
|
5,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
MELLANOX
TECHNOLOGIES, LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
(Credited)
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
to Costs
|
|
|
|
|
|
Balance at
|
|
Description:
|
|
Year
|
|
|
and Expenses
|
|
|
Deductions(1)
|
|
|
End of Year
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
277
|
|
|
$
|
59
|
|
|
$
|
(46
|
)
|
|
$
|
290
|
|
Allowance for sales returns and adjustments
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
292
|
|
|
$
|
59
|
|
|
$
|
(46
|
)
|
|
$
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
186
|
|
|
$
|
125
|
|
|
$
|
(34
|
)
|
|
$
|
277
|
|
Allowance for sales returns and adjustments
|
|
|
109
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
295
|
|
|
$
|
31
|
|
|
$
|
(34
|
)
|
|
$
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deductions for Allowance for doubtful accounts are for accounts
receivable written-off. |
88
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 4, 2010.
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, and each of them, his or her attorneys-in-fact
and agents, each with the power of substitution, for him or her
in any and all capacities, to sign any and all 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 4, 2010
|
|
|
|
|
|
/s/ Michael
Gray
Michael
Gray
|
|
Chief Financial Officer
(principal financial and accounting officer)
and Authorized Representative in the United States
|
|
March 4, 2010
|
|
|
|
|
|
/s/ Glenda
Dorchak
Glenda
Dorchak
|
|
Director
|
|
March 4, 2010
|
|
|
|
|
|
/s/ Irwin
Federman
Irwin
Federman
|
|
Director
|
|
March 4, 2010
|
|
|
|
|
|
/s/ Amal
Johnson
Amal
Johnson
|
|
Director
|
|
March 4, 2010
|
|
|
|
|
|
/s/ Thomas
J. Riordan
Thomas
J. Riordan
|
|
Director
|
|
March 4, 2010
|
|
|
|
|
|
/s/ C.
Thomas Weatherford
C.
Thomas Weatherford
|
|
Director
|
|
March 4, 2010
|
89
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Association of Mellanox
Technologies, Ltd. (as amended on May 18, 2008).
|
|
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)*
|
|
Amended Form of Indemnification Undertaking made by and between
Mellanox Technologies, Ltd. and each of its directors and
executive officers.
|
|
10
|
.5(8)
|
|
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
|
.6(9)*
|
|
Mellanox Technologies, Ltd. Global Share Incentive Plan
(2006) and forms of agreements and appendices relating
thereto.
|
|
10
|
.7(10)*
|
|
Mellanox Technologies, Ltd. Non-Employee Director Option Grant
Policy.
|
|
10
|
.8(11)*
|
|
Form of Mellanox Technologies, Ltd. Executive Severance Benefits
Agreement for U.S. Executives.
|
|
10
|
.9(12)*
|
|
Form of Mellanox Technologies, Ltd. Executive Severance Benefits
Agreement for Israel Executives.
|
|
10
|
.10(13)*
|
|
Mellanox Technologies, Ltd. Employee Share Purchase Plan.
|
|
10
|
.11(14)
|
|
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(15)
|
|
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).
|
|
10
|
.15(16)
|
|
Office Space Lease dated September 30, 2008 by and between
Oakmead Parkway Properties Partnership, a California general
partnership, as landlord, and Mellanox Technologies, Inc., as
tenant, as commenced on December 19, 2008.
|
|
21
|
.1(17)
|
|
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 3.1 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 12, 2009. |
90
|
|
|
(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 10.1 to the
Companys Quarterly Report on
Form 10-Q
(SEC File
No. 001-33299)
filed on August 6, 2009. |
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
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. |
|
(12) |
|
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. |
|
(13) |
|
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. |
|
(14) |
|
Incorporated by reference to Exhibit 10.13 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(15) |
|
Incorporated by reference to Exhibit 10.14 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(16) |
|
Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
(SEC File
No. 001-33299)
filed on November 7, 2008. |
|
(17) |
|
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. |
|
* |
|
Indicates management contract or compensatory plan, contract or
arrangement. |
91