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, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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Commission File Number
001-33299
MELLANOX TECHNOLOGIES,
LTD.
(Exact name of registrant as
specified in its charter)
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Israel
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98-0233400
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification
Number)
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Mellanox Technologies, Ltd.
Hermon Building, Yokneam, Israel 20692
(Address of principal
executive offices, including zip code)
+972-4-909-7200
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Ordinary shares, nominal value NIS
0.0175 per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K/A
or any amendment to this
Form 10-K/A. þ
Indicate by check mark whether the registrant is a large
accelerated filer, and accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
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 ordinary shares held by
non-affiliates of the Registrant, based on the last sale price
for such shares on June 30, 2006: not applicable because
trading of the Registrants ordinary shares on the NASDAQ
Global Market commenced on February 8, 2007.
The total number of shares outstanding of the Registrants
ordinary shares, nominal value NIS 0.0175 per share, as of
March 1, 2007, was 29,822,726.
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 2007 Annual Meeting
of Shareholders of Mellanox Technologies, Ltd. (hereinafter
referred to as the Proxy Statement) are incorporated
by reference in Part III of this report. Such Proxy
Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the conclusion of
the registrants fiscal year ended December 31, 2006.
MELLANOX
TECHNOLOGIES, LTD.
2
PART I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. We have based
these forward-looking statements largely on our current
expectations and projections about future events and financial
trends affecting the financial condition of our business.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such
performance or results will be achieved. Forward-looking
statements are based on information available at the time those
statements are made
and/or
managements good faith belief as of that time with respect
to future events, and are subject to risks and uncertainties
that could cause actual performance or results to differ
materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause
such differences include, but are not limited to:
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levels of capital spending in the semiconductor industry, in
general, and in the market for high-performance interconnect
products, specifically;
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our ability to achieve new design wins;
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our ability to successfully introduce new products;
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competition and competitive factors;
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our dependence on a relatively small number of customers;
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our ability to expand our presence with existing customers;
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our ability to protect our intellectual property;
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future costs and expenses; and
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other risk factors included under Risk Factors in
this report.
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In addition, in this report, the words believe,
may, will, estimate,
continue, anticipate,
intend, expect, predict,
potential and similar expressions, as they relate to
Mellanox, our business and our management, are intended to
identify forward-looking statements. In light of these risks and
uncertainties, the forward-looking events and circumstances
discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the
forward-looking statements.
You should not put undue reliance on any forward-looking
statements. We assume no obligation to update forward-looking
statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information,
except to the extent required by applicable laws. If we update
one or more forward-looking statements, no inference should be
drawn that we will make additional updates with respect to those
or other forward-looking statements.
ITEM 1
BUSINESS
Overview
We are a leading supplier of semiconductor-based,
high-performance interconnect products that facilitate data
transmission between servers, communications infrastructure
equipment and storage systems. Our products are an integral part
of a total solution focused on computing, storage and
communication applications used in enterprise data centers,
high-performance computing and embedded systems. We are one of
the pioneers of InfiniBand, an industry standard architecture
that provides specifications for high-performance interconnects.
We believe that we are the leading merchant supplier of
field-proven InfiniBand-compliant semiconductor products that
deliver industry-leading performance and capabilities, which we
believe is demonstrated by the performance, efficiency and
scalability of clustered computing and storage systems that
incorporate our products. In addition to supporting InfiniBand,
our next generation of products also supports the industry
standard Ethernet interconnect specification, which we believe
will expand our total addressable market.
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We are a fabless semiconductor company that provides
high-performance interconnect products based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our ICs. These ICs are added to servers,
storage, communications infrastructure equipment and embedded
systems by either integrating them directly on circuit boards or
inserting adapter cards into slots on the circuit board. We have
established significant expertise with high-performance
interconnect solutions from successfully developing and
implementing multiple generations of our products. Our expertise
enables us to develop and deliver products that serve as
building blocks for creating reliable and scalable InfiniBand
and Ethernet solutions with leading performance at significantly
lower cost than products based on alternative interconnect
solutions.
As the leading merchant supplier of InfiniBand ICs, we play a
significant role in enabling the providers of computing, storage
and communications applications to deliver high-performance
interconnect solutions. We have developed strong relationships
with our customers, many of which are leaders in their
respective markets. Our products are included in servers from
the five largest vendors, IBM, Hewlett-Packard, Dell, Sun
Microsystems and Fujitsu-Siemens, which collectively shipped the
majority of servers in 2005, according to the industry research
firm IDC. We also supply leading storage and communications
infrastructure equipment vendors such as Cisco Systems, LSI
Logic, Network Appliance, QLogic Corporation, and Voltaire.
Additionally, our products are used by GE Fanuc, Mercury
Computers, SeaChange International and other vendors of embedded
systems.
In order to accelerate adoption of our high-performance
interconnect solutions and our products, we work with leading
vendors across related industries, including:
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processor vendors such as Intel, AMD, IBM and Sun Microsystems;
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operating system vendors such as Microsoft, Novell and Red
Hat; and
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software applications vendors such as Oracle, IBM and VMWare, an
EMC company.
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We are a Steering Committee member of the InfiniBand Trade
Association, or IBTA, and the OpenFabrics Alliance, or OFA, both
of which are industry trade organizations that maintain and
promote InfiniBand technology. Additionally, OFA recently
expanded its charter to support and promote high-performance
Ethernet solutions.
Our business headquarters are in Santa Clara, California,
and our engineering headquarters are in Yokneam, Israel. During
the years ended December 31, 2005 and 2006, we generated
approximately $42.1 million and $48.5 million in
revenues, respectively, and approximately $3.2 million and
$7.2 million in net income, respectively.
Industry
Background
High-Performance
Interconnect Market Overview
Computing and storage systems such as servers, supercomputers
and storage arrays handling large volumes of data require
high-performance interconnect solutions which enable fast
transfer of data and efficient sharing of resources.
Interconnect solutions are based on ICs that handle data
transfer and associated processing which are added to server,
storage, communications infrastructure equipment and embedded
systems by either integrating the ICs on circuit boards or by
inserting adapter cards that contain these ICs into slots on the
circuit board.
Interconnect solution requirements, such as high bandwidth, low
latency (response time), reliability, scalability and
price/performance, generally depend on the systems and the
applications they support. High-performance interconnect
solutions are used in the following markets:
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Enterprise Data Center, or EDC. EDCs are
facilities that house servers, storage, communications
infrastructure equipment and embedded systems that enable
deployment of commercial applications such as customer
relationship management, financial trading and risk management
applications, enterprise resource planning and
E-commerce
and web service applications. EDCs typically provide multiple
data processing and storage resources to one or many
organizations and are capable of supporting several applications
at the same time.
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High-Performance Computing, or HPC. HPC
encompasses applications that utilize the computing power of
advanced parallel processing over multiple servers, commonly
called a supercomputer. The expanding list of HPC applications
includes financial modeling, government research, computer
automated engineering, geoscience and bioscience research and
digital content creation. HPC systems typically focus data
processing and storage resources on one application at a time.
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Embedded. Embedded applications encompass
computing, storage and communication functions that use
interconnect solutions contained in a chassis which has been
optimized for a particular environment. Examples of embedded
applications include storage and data acquisition equipment,
military operations, industrial and medical equipment and
telecommunications and data communications infrastructure
equipment.
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A number of semiconductor-based interconnect solutions have been
developed to address different applications. These solutions
include Myrinet, Fibre Channel, Ethernet and most recently
InfiniBand, which was specifically created for high-performance
computing, storage and embedded applications.
Trends
Affecting High-Performance Interconnect
Demand for computing power and data storage capacity is rising
at a high rate, fueled by the increasing reliance of enterprises
on information technology, or IT, for everyday operations.
Because enterprises rely on compute- and data-intensive
applications that create greater amounts of information to be
processed, stored and retrieved, they need high-performance
computing and high-capacity storage systems that optimize
price/performance, minimize total cost of ownership and simplify
management. We believe that several IT trends impact the demand
for interconnect solutions and the performance required from
these solutions. These trends include:
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Transition to 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 and cost.
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Transition to multiple and multi-core processors in
servers. In order to increase processing
capabilities, processor vendors have integrated multiple
computing cores into a single processor device. In addition,
server OEMs are incorporating several multi-core processors into
a single server. While this significantly increases the
computing capabilities of an individual server, the total
performance of a cluster of these servers is impacted by the
total input/output, or I/O, bandwidth. Inadequate cluster I/O
bandwidth results in processor underutilization, thereby
reducing the overall capability and performance of the cluster.
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Enterprise data center infrastructure
consolidation. IT managers are increasingly faced
with the need to optimize total cost of ownership associated
with the EDCs they manage. They are focused on reducing the
costs associated with running multiple networks, such as power
consumption and cabling, increasing flexibility and scalability,
and improving the utilization of existing resources in the EDC.
This has led to a widespread trend of consolidating the EDC
infrastructure to reduce costs and generate a higher return on
IT investments. The need for better utilization of floor
space has helped drive the adoption of compact form factor (size
and shape) blade servers. Additionally, enterprises are turning
to virtualization software, which allows multiple applications
to run on a single server, thereby improving resource
utilization and requiring increased I/O bandwidth in the EDC.
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Increasing deployments of mission-critical, latency sensitive
applications. There is an increasing number of
applications that require extremely fast response times in order
to deliver an optimal result or user experience. Reducing
latency, the absolute time it takes for information to be sent
from one resource to another over a high-performance
interconnect, is critical to enhancing application performance
in clustered environments. Some examples of applications that
benefit from low-latency interconnect include financial trading,
clustered databases and parallel processing solutions used in
HPC.
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Challenges
Faced by High-Performance Interconnect
The trends described above indicate that high-performance
interconnect solutions will play an increasingly important role
in IT infrastructures and will drive strong growth in unit
demand. Performance requirements for interconnect solutions,
however, continue to evolve and lead to high demand for
solutions that are capable of resolving the following challenges
to facilitate broad adoption:
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Performance limitations. In clustered
computing and storage environments, high bandwidth and low
latency are key requirements to capture the full performance
capabilities of a cluster. With the usage of multiple multi-core
processors in server, storage and embedded systems, I/O
bandwidth has not been able to keep pace with processor
advances, creating performance bottlenecks. Fast data access has
become a critical requirement to accommodate
microprocessors increased compute power. In addition,
interconnect latency has become a limiting factor in a
clusters overall performance.
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Increasing complexity. The increasing usage of
clustered servers and storage systems as a critical IT tool has
led to an increase in complexity of interconnect configurations.
The number of configurations and connections have also
proliferated in EDCs, making them increasingly complicated to
manage and expensive to operate. Additionally, managing multiple
software applications utilizing disparate interconnect
infrastructures has become increasingly complex.
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Interconnect inefficiency. The deployment of
clustered computing and storage has created additional
interconnect implementation challenges. As additional computing
and storage systems, or nodes, are added to a cluster, the
interconnect must be able to scale in order to provide the
expected increase in cluster performance. Additionally, recent
government attention on data center energy efficiency is causing
IT managers to look for ways to adopt more energy-efficient
implementations.
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Limited reliability and stability of
connections. Most interconnect solutions are not
designed to provide reliable connections when utilized in a
large clustered environment, which can cause data transmission
interruption. As more applications in EDCs share the same
interconnect, advanced traffic management and application
partitioning become necessary to maintain stability and reduce
system down time. Such capabilities are not offered by most
interconnect solutions.
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Poor price/performance economics. In order to
provide the required system bandwidth and efficiency, most
high-performance interconnects are implemented with complex,
multi-chip semiconductor solutions. These implementations have
traditionally been extremely expensive.
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In addition to InfiniBand, proprietary and other
standards-based, high-performance interconnect solutions,
including Myrinet, 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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Myrinet is a proprietary interconnect solution that has been
designed for use in supercomputer applications by supporting low
latency and increased reliability. The majority of Myrinet
deployments support 2 gigabits per second, or Gb/s (a unit of
data transfer rate), while recently announced solutions support
10Gb/s in addition to providing connectivity to 10Gb/s Ethernet
switch equipment, although still requiring proprietary software
solutions. The number of supercomputers that use Myrinet 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 2Gb/s while recently announced solutions
support 4Gb/s. Fibre Channel lacks a standard software
interface, does not provide server cluster capabilities and
remains more expensive relative to other standards-based
interconnects.
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Ethernet is an industry-standard interconnect solution that was
initially designed to enable basic connectivity between a local
area network of computers or over a wide area network, where
latency, connection reliability and performance limitations due
to communication processing are non-critical. While Ethernet has
a broad installed base at 1 Gb/s and lower data rates, its
overall efficiency, scalability and reliability have
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been less optimal than certain alternative interconnect
solutions in high-performance computing, storage and
communication applications. A recent increase to 10Gb/s, a
significant reduction in application latency and more efficient
software solutions have improved Ethernets capabilities to
address specific high-performance applications that do not
demand the highest scalability.
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In the HPC, EDC and embedded markets, the predominant
interconnects are 1Gb/s Ethernet and 2Gb/s or
4Gb/s Fibre
Channel. Based on our knowledge of the industry, we believe
there is significant demand for interconnect products that
provide higher bandwidth in these markets.
Overview
of the InfiniBand Standard and OpenFabrics
InfiniBand is an industry standard, high-performance
interconnect architecture that effectively addresses the
challenges faced by the IT industry by enabling cost-effective,
high-speed data communications. We believe that InfiniBand has
significant advantages compared to alternative interconnect
technologies. InfiniBand defines specifications for designing
host channel adapters, or HCAs, that fit into standard,
off-the-shelf
servers and storage systems, and switch solutions that connect
all the systems together. The physical connection of multiple
HCAs and switches is commonly known as an InfiniBand fabric.
The InfiniBand standard was developed under the auspices of
InfiniBand Trade Association, or IBTA, which was founded in 1999
and is composed of leading IT vendors and hardware and software
solution providers including Mellanox, Brocade, Cisco Systems,
Fujitsu, Hewlett-Packard, Hitachi, IBM, Intel, LSI Logic, NEC,
QLogic Corporation, Sun Microsystems and Voltaire. The IBTA
tests and certifies vendor products and solutions for
interoperability and compliance. Our products meet the
specifications of the InfiniBand standard and have been tested
and certified by the IBTA.
The OpenFabrics Alliance, or OFA, is an organization responsible
for the development and distribution of open-source,
industry-standard software solutions that are compatible with
InfiniBand hardware solutions. Founded in June 2004 as the
OpenIB Alliance and a partner organization to IBTA, OFAs
initial sole charter was to develop InfiniBand software
solutions that are interoperable among multiple vendors. As a
result of its success at developing standard InfiniBand software
solutions, the organization expanded its charter in March 2006
to leverage its software development capabilities over other
interconnect solutions including Ethernet, and changed its name
from OpenIB to OpenFabrics. OFAs members include leading
enterprise IT vendors, hardware and software solution providers
including Mellanox, AMD, Cisco Systems, Dell, IBM, Intel,
Network Appliance and Sun Microsystems in addition to end users
such as Sandia, Los Alamos and Lawrence Livermore National
Laboratories.
InfiniBand solutions may be perceived to have disadvantages to
products based on other existing interconnect standards that
have been available for longer periods of time with larger
installed bases. These perceived disadvantages include the
requirement for additional software support, new cabling and
equipment infrastructure and a limited number of
enterprise-class storage solutions, which impacted early
adoption rates of InfiniBand. In addition, a continuing
challenge is educating the IT community about the advantages of
InfiniBand and increasing familiarity with InfiniBand relative
to other interconnect standards. With the solutions now offered
by OFA in addition to key industry software providers,
InfiniBand software support has recently become widely available
and is included in leading server operating systems,
contributing to increased adoption rates. In addition, we
believe superior price performance of InfiniBand has justified
the costs of new cabling and equipment infrastructure. Finally,
InfiniBand-based enterprise-class storage solutions have
recently been introduced and deployed.
As a result, InfiniBand has gained significant share of the HPC
market, including clustered computing deployments for
government, academic, scientific and research oriented
applications. According to IDC, InfiniBands share of the
HPC cluster interconnect revenue has grown from 1.7% in 2003 to
17.2% in 2005, while Ethernets share of the HPC cluster
interconnect revenue has declined from 64.1% in 2003 to 55.3% in
2005.
In addition to growth within the HPC market, InfiniBand usage is
expanding in the EDC market. This growth is facilitated by the
availability of production released software solutions for
mainstream financial, retail and other commercial applications.
We believe the primary driver of InfiniBand product shipments in
the near future is the increasing usage of InfiniBand in
servers. Based on data provided to us by IDC in a report that we
sponsored, we believe that of the
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7.7 million servers that will ship to the entire server
market in 2006, approximately 4% will integrate InfiniBand
products. Further, based on the same IDC data, we estimate that
from 2006 to 2010, usage of InfiniBand in servers will increase
at a 40% compound annual growth rate, resulting in over
1.1 million InfiniBand servers in 2010, or approximately
10% of the projected total number of servers that are expected
to ship in that year. Because there currently is significant
capacity for growth of InfiniBand products in servers regardless
of the growth of the overall server market, we believe that
fluctuations in volumes of the overall server market will not
significantly impact InfiniBands rate of adoption in the
near future. Ethernet at 1Gb/s has significant market share in
the server market, and Ethernet at 10Gb/s targets this market
but is not widely deployed.
In addition to servers, storage systems represent another
significant opportunity for InfiniBand products. According to
IDC, total port shipments of Fibre Channel adapters is expected
to increase from 1.8 million in 2005 to 4.7 million in
2010, and we believe that this is representative of the
potential market opportunity for InfiniBand in storage
applications assuming sales of Fibre Channel adapters are
converted to products based on the InfiniBand standard. Fibre
Channel-based storage systems represented 72% of the total
networked storage system revenues in 2005 according to IDC.
Ethernet at both 1Gb/s and 10Gb/s also target the storage system
market in addition to InfiniBand and Fibre Channel.
Advantages
of InfiniBand
We believe that InfiniBand-based solutions have significant
advantages compared to solutions based on alternative
interconnect architectures. InfiniBand addresses the significant
challenges within IT infrastructures created by more demanding
requirements of the high-performance interconnect market. More
specifically, we believe that InfiniBand has the following
advantages:
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Superior performance. In comparison to other
interconnect technologies that were architected to have a heavy
reliance on communication processing, InfiniBand was designed
for implementation in an IC that relieves the central processing
unit, or CPU, of communication processing functions. InfiniBand
is able to provide superior bandwidth and latency relative to
other existing interconnect technologies and has maintained this
advantage with each successive generation of products. For
example, our current InfiniBand adapters provide bandwidth up to
20Gb/s, and our current switch ICs support bandwidth up to
60Gb/s, which is significantly higher than the 10Gb/s or less
supported by competing technologies. The InfiniBand
specification supports the design of interconnect products with
up to 120Gb/s bandwidth, which is the highest performance
industry-standard interconnect specification. In addition,
InfiniBand fully leverages the I/O capabilities of PCI Express,
a high-speed bus interface standard.
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The following table provides a bandwidth comparison of the
various high performance interconnect solutions.
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Myrinet
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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 4Gb/s
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1Gb/s 10Gb/s
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10Gb/s 20Gb/s
server-to-server
30Gb/s 60Gb/s
switch-to-switch
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Highest bandwidth supported by
specification
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10Gb/s
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8Gb/s
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10Gb/s
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120Gb/s
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Performance in terms of latency varies depending on system
configurations and applications. According to recent independent
benchmark reports, latency of InfiniBand solutions was
approximately half of that of tested 10Gb/s Ethernet solutions
and comparable to the latency of tested Myrinet solutions. Fibre
Channel, which is used only as a storage interconnect, is
typically not benchmarked on latency performance. HPC typically
demands low latency interconnect solutions. In addition, there
is an increasing number of latency-sensitive applications in the
EDC and embedded markets, and, therefore, there is a trend
towards using industry-standard InfiniBand and 10Gb/s Ethernet
solutions that deliver lower latency than Gigabit Ethernet,
which is predominantly used today.
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Reduced complexity. While other interconnects
require use of individual cables to connect servers, storage and
communications infrastructure equipment, InfiniBand allows for
the consolidation of multiple I/Os on a single cable or
backplane interconnect, which is critical for blade servers and
embedded systems. InfiniBand
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also consolidates the transmission of clustering,
communications, storage and management data types over a single
connection. Competing interconnect technologies are not well
suited to be unified fabrics because their fundamental
architectures are not designed to support multiple traffic
types. Additionally, InfiniBand was designed to enable
distributed, clustered systems to be centrally managed and
controlled for more efficient and simplified overall system
management.
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Highest interconnect efficiency. InfiniBand
was developed to provide efficient scalability of multiple
systems. InfiniBand provides communication processing functions
in hardware, relieving the CPU of this task, and enables the
full resource utilization of each node added to the cluster. In
addition, InfiniBand incorporates Remote Direct Memory
Access which is an optimized data transfer protocol that further
enables the server processor to focus on application processing.
This contributes to optimal application processing performance.
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Reliable and stable connections. InfiniBand is
the only industry standard high-performance interconnect
solution which provides reliable
end-to-end
data connections. In addition, InfiniBand facilitates the
deployment of virtualization solutions, which allow multiple
applications to run on the same interconnect with dedicated
application partitions. As a result, multiple applications run
concurrently over stable connections, thereby minimizing down
time.
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Superior price/performance economics. In
addition to providing superior performance and capabilities,
standards-based InfiniBand solutions are generally available at
a lower cost than other high-performance interconnects. By
facilitating clustering and reducing complexity, InfiniBand
offers further opportunity for cost reduction.
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Our
Solution
We provide comprehensive solutions based on InfiniBand,
including HCA and switch ICs, adapter cards and software.
InfiniBand enables us to provide products that we believe offer
superior performance and meet the needs of the most demanding
applications, while also offering significant improvements in
total cost of ownership compared to alternative interconnect
technologies. For example, our current InfiniBand HCAs provide
bandwidth up to 20Gb/s and our switch ICs provide bandwidth up
to 60Gb/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 2006
illustrates the benefits of our solution. TOP500.org is an
independent organization that was founded in 1993 to provide a
reliable basis for reporting trends in high-performance
computing by publishing a list of the most powerful computers
twice a year. The number of listed InfiniBand-based
supercomputers has grown from 30 as of November 2005 to 40 in
June 2006, and most recently to 82 as of November 2006, which
represents a 105% increase in six months and a 173% increase in
one year. The November 2006 TOP500 list also illustrates that
InfiniBand interconnects have continued to replace interconnects
in supercomputers based on proprietary Myrinet, which had a 10%
decline since the June 2006 list, and lower-performing Gigabit
Ethernet, which had a 16% decline since the June 2006 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 2006 TOP500 list of
the Worlds Fastest Supercomputers compare favorably to
clusters based on other high-performance interconnect
technologies.
Specifically, clusters that incorporate our products compare as
follows:
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Performance. Performance of clusters is
measured in GFLOPS, where one GFLOPS represents one billion
mathematical calculations per second. Clusters that utilize our
products average approximately 8,900 GFLOPS, while clusters
based on Myrinet technology average 5,400 GFLOPS and
clusters based on Gigabit Ethernet technology average 3,600
GFLOPS. According to the November 2006 TOP500 list of
Worlds Fastest Supercomputers, there were no clusters
reported using 10 Gigabit Ethernet technology.
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Efficiency. Efficiency is measured by the
actual performance achieved divided by the theoretical maximum
performance. Clusters that utilize our products average 69%
efficiency, compared to 66% and 51% for clusters that utilize
Myrinet and Gigabit Ethernet, respectively.
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Scalability. Clusters that utilize our
products average approximately 1,800 CPUs per cluster, compared
to approximately 1,400 and 1,150 average CPUs per cluster for
clusters that utilize Myrinet and Gigabit Ethernet,
respectively. There is a strong dependency on the reliability
and fault tolerance capabilities of a high performance
interconnect when determining the scalability of a cluster.
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In addition to supporting InfiniBand, our next generation
adapter products also support the industry standard Ethernet
interconnect specification at both 1Gb/s and 10Gb/s. These
products extend certain InfiniBand advantages to Ethernet
fabrics, such as reduced complexity and superior
price/performance, by utilizing existing, field-proven
InfiniBand software solutions. These software solutions include
applications, operating systems and virtualization and
management packages used in EDC, HPC and embedded markets.
Integrating InfiniBand and Ethernet in the same product provides
our OEM customers and partners the ability to support both
interconnect standards with a single development effort and
provides end-users the flexibility to choose between fabrics or
simultaneously connect to both depending on the environment and
performance requirements.
We believe that InfiniBand solutions will continue to deliver
superior price/performance when compared to any other high
performance interconnect technology because of its base
architecture, proven scalability, reliability and feature set.
At the same time, as Ethernet is a widely deployed interconnect
technology, we expect there will be an increasing number of
high-performance deployments at 10Gb/s in EDCs. The ability of
our next generation adapter product to support high-performance
connectivity to both InfiniBand and Ethernet allows us to
provide products to an expanding number of high-performance
applications and environments.
Our
Strengths
We apply our strengths to enhance our position as a leading
supplier of semiconductor-based, high-performance interconnect
products. We consider our key strengths to include the following:
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We have expertise in developing high-performance interconnect
solutions. Mellanox was founded by a team with an
extensive background in designing and marketing semiconductor
solutions. Since our founding, we have been focused on
high-performance interconnect and have successfully launched
several generations of InfiniBand products. We believe we have
developed strong competencies in integrating mixed-signal
design, including industry-leading data transmission technology
such as Serializer/Deserializer, or SerDes, and developing
complex ICs. We have used these competencies along with our
knowledge of InfiniBand to design our innovative, next
generation, high-performance solutions 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 17 approved patents. We believe our
experience, competencies and IP will enable us to remain a
leading supplier of high-performance interconnect solutions.
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We believe we are the leading merchant supplier of InfiniBand
ICs with a multi-year competitive advantage. We
have developed in-depth knowledge of the InfiniBand standard
through active participation in its development. We were first
to market with InfiniBand products in 2001 and InfiniBand
products that support the standard PCI Express interface in
2004. 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
InfiniBand interconnect 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
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development capabilities, which enables us to rapidly finalize
our mass production test programs, thus reducing time to market.
We have synchronized our test platform with our outsourced
testing provider and are able to conduct quality control tests
with minimal disruption. We believe that because our
capabilities extend from product definition, through IC design,
and ultimately management of our high-volume manufacturing
partners, we have better control over our production cycle and
are able to improve the quality, availability and reliability of
our products.
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We have extensive relationships with our key OEM customers
and many end users. Since our inception we have
worked closely with major OEMs, including leading server,
storage, communications infrastructure equipment and embedded
systems vendors, to develop products that accelerate market
adoption of InfiniBand. During this process we have obtained
valuable insight into the challenges and objectives of our
customers, and gained visibility into their product development
plans. We also have established end-user relationships with
influential IT executives which allow us access to firsthand
information about evolving EDC, HPC and embedded market trends.
We believe that our OEM customer and end-user relationships
allow us to stay at the forefront of developments and improve
our ability to provide compelling solutions to address their
needs.
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Our
Strategy
Our goal is to be the leading supplier of semiconductor-based,
high-performance interconnect products for computing, storage
and communications applications. To accomplish this goal, we
intend to:
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Continue to develop leading, high-performance interconnect
products. We will continue to expand our
technical expertise and customer relationships to develop
leading interconnect products. We are focused on extending our
leadership position in high-performance interconnect technology
and pursuing a product development plan that addresses emerging
customer and end-user demands and industry standards. In order
to expand our market opportunity, we are adding 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.
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Facilitate and increase the continued adoption of
InfiniBand. We will facilitate and increase the
continued adoption of InfiniBand in the high-performance
interconnect marketplace by expanding our partnerships with key
vendors that drive high-performance interconnect adoption, such
as suppliers of processors, operating systems and other
associated software. In conjunction with our OEM customers, we
will continue to promote the benefits of InfiniBand directly to
end users to increase demand for InfiniBand-based solutions.
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Expand our presence with existing server OEM
customers. We believe the leading server vendors
are influential drivers of high-performance interconnect
technologies to end users. We plan to continue working with and
expanding our relationships with server OEMs to increase our
presence in their current and future product platforms.
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Broaden our customer base with storage, communications
infrastructure and embedded systems OEMs. We
believe there is a significant opportunity to expand our global
customer base with storage, communications infrastructure and
embedded systems OEMs. In storage solutions specifically, we
believe our products are well suited to replace existing
technologies such as Fibre Channel. We believe our products are
the basis of superior interconnect fabrics for unifying
disparate storage interconnects, including back-end, clustering
and front-end connections, primarily due to its ability to be a
unified fabric and superior price/performance economics.
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Leverage our fabless business model to deliver strong
financial performance. We intend to continue
operating as a fabless semiconductor company and consider
outsourced manufacturing of our ICs and adapter cards to be a
key element of our strategy. Our fabless business model offers
flexibility to meet market demand and allows us to focus on
delivering innovative solutions to our customers. We plan to
continue to leverage the flexibility and efficiency offered by
our business model to deliver strong financial results.
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Our
Products
We provide complete solutions which are based on and meet the
specifications of the InfiniBand standard, including HCA and
switch ICs, adapter cards and software. Our next generation
adapter IC and card products also support the Ethernet
interconnect standard in addition to InfiniBand. Our available
product families include:
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InfiniHosttm
and
ConnectXtm
IB, InfiniBand HCA ICs and standard cards. We
provide InfiniBand HCAs to server, storage, communications
infrastructure and embedded systems OEMs as ICs or standard card
form factors with PCI-X or PCI Express interfaces. HCAs are
incorporated into OEM server and storage systems to provide
InfiniBand connectivity. We are currently in production with our
third generation of HCA products (InfiniHost) and have recently
introduced our fourth generation of HCA products (ConnectX IB).
Our HCAs interoperate with standard programming interfaces and
are compatible with previous generations, providing broad
industry support. We also support server operating systems
including Linux, Windows, AIX, HPUX, OSX, Solaris and VxWorks.
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InfiniScaletm
InfiniBand switch ICs. Our InfiniBand switch
ICs are used by server, storage, communications infrastructure
and embedded systems OEMs to create switching equipment that is
at the core of InfiniBand fabrics. To deploy an InfiniBand
fabric, any number of server or storage systems that contain an
HCA can be connected to an InfiniBand-based communications
infrastructure system such as an InfiniBand switch. We are
currently in production with our third generation of switch ICs.
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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 ports supported. The tables below summarize the
available HCA and switch ICs that Mellanox provides.
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Uni-Directional InfiniBand
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HCA ICs and Cards
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Interface
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# InfiniBand Ports
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Bandwidth per Port
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Total Bandwidth(3)
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InfiniBridge(1)
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PCI(2)
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8
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2.5Gb/s
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40Gb/s
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2
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10Gb/s
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40Gb/s
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InfiniHost
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PCI-X(2)
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2
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10Gb/s
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40Gb/s
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InfiniHost III Lx
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PCI Express
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1
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20Gb/s
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40Gb/s
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InfiniHost III Ex
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PCI Express
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2
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20Gb/s
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80Gb/s
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ConnectX IB
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PCI Express
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2
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20Gb/s
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80Gb/s
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12
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Uni-Directional InfiniBand
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Switch ICs
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# InfiniBand Ports
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Bandwidth per Port
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Total Bandwidth(3)
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InfiniBridge(1)
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8
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2.5Gb/s
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40Gb/s
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2
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10Gb/s
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40Gb/s
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InfiniScale
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8
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10Gb/s
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160Gb/s
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InfiniScale III
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24
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20Gb/s
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960Gb/s
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8
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60Gb/s
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960Gb/s
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InfiniBridgetm
functions as both a HCA and switch and is our first generation
device. |
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PCI and PCI-X are the predecessor interface standards to PCI
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Total bandwidth is the aggregate bandwidth of all input and
output ports operating simultaneously. |
We also offer custom products that incorporate our ICs to select
server and storage OEMs that meet their special system
requirements. Through these custom product engagements we gain
insight into the OEMs technologies and product strategies.
We also provide our OEM customers software and tools that
facilitate the use and management of our products. Developed in
conjunction with the OFA, our Linux- and Windows-based software
enables applications to utilize the features of the interconnect
efficiently. We have expertise in optimizing the performance of
software that spans the entire range of upper layer protocols
down through the lower level drivers that interface to our
products. We also provide basic software tools for managing,
testing and verifying the operation of InfiniBand fabrics.
Technology
We have technological core competencies in the design of
high-performance interconnect ICs that enable us to provide a
high level of integration, efficiency, flexibility and
performance for our adapter and switch ICs. Our products
integrate multiple complex components onto a single IC,
including high-performance mixed-signal design, specialized
communication processing functions and advanced interfaces.
High-performance
mixed-signal design
One of the key technology differentiators of our ICs is our
mixed-signal SerDes technology. SerDes I/O directly drives the
interconnect interface, which provides signaling and
transmission of data over copper connects and cables, or fiber
optic interfaces for longer distance connections. We are the
only company that has shipped field-proven ICs that operate with
a 5Gb/s SerDes over a ten meter InfiniBand copper cable (up to
60Gb/s connections with 12 SerDes working in parallel on our
switch IC). Additionally, we are able to integrate several of
these high-performance SerDes onto a single, low-power IC,
enabling us to provide the highest bandwidth, merchant switch
ICs based on an industry-standard specification. We have
developed a 10Gb/s SerDes I/O that is intended for use in future
generation InfiniBand and Ethernet devices. This SerDes
capability will enable up to 120Gb/s bandwidth on InfiniBand
devices.
Specialized
communication processing and switching functions
We also specialize in high-performance, low-latency design
architectures that incorporate significant memory and logic
areas requiring proficient synthesis and verification. Our
adapter ICs are specifically designed to perform communication
processing, effectively offloading this very intensive task from
server and storage processors in a cost-effective manner. Our
switch ICs are specifically designed to switch cluster
interconnect data transmissions from one port to another with
high bandwidth and low latency, and we have developed a packet
switching engine and non-blocking crossbar switch fabric to
address this.
We have developed a custom embedded Reduced Instruction Set
Computer processor called
InfiniRISCtm that
specializes in offloading network processing from the host
server or storage system and adds flexibility, product
differentiation and customization. We integrate a different
number of these processors in a device depending on the
application and feature targets of the particular product.
Integration of these processors also shortens development
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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 interfaces (and Ethernet interfaces in
our next generation adapter products), we also provide other
industry-standard, high-performance advanced interfaces such as
PCI Express which also utilize our mixed-signal 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
we believe this demonstrates an example of the technical
proficiency of our development team.
Not only has PCI Express increased the performance of our
products, but it has lowered cost, reduced power consumption,
minimized board area requirements and increased the overall
reliability of card and system products using our adapter ICs by
enabling a technology we call MemFree. Typically, memory is
designed onto high- performance adapter cards in addition to the
controller in order to store fabric connection information that
is required for cluster data transmission. With the introduction
of the high bandwidth PCI Express interface, the servers
or storage systems main memory can be used for this
purpose instead, and we have designed MemFree adapter card
solutions that are completely free of additional memory
components. We believe that we are the only company that
provides high-performance interconnect products with MemFree or
equivalent technology.
The below diagrams depict our adapter and switch IC architecture.
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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Isilon Systems
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Cisco Systems
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GE Fanuc
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Hewlett-Packard
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LSI Logic
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QLogic Corporation
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Mercury Computer Systems
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IBM
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Network Appliance
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Voltaire
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SeaChange International
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Sun Microsystems
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We sold products to more than 100 customers worldwide in the
year ended December 31, 2006, 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.
For the year ended December 31, 2006, Voltaire accounted
for approximately 18%, Cisco Systems accounted for approximately
14%, Hewlett-Packard accounted for approximately 12% and
SilverStorm Technologies, which was recently acquired by QLogic
Corporation, accounted for approximately 11% of our net revenues.
Sales and
Marketing
We sell our products worldwide through multiple channels,
including our direct sales force and our network of domestic and
international sales representatives. We have strategically
located sales personnel in the United States, Europe, China and
Taiwan. Our sales directors focus their efforts on leading OEMs
and target key decision makers. We are also in frequent
communication with our customers and partners sales
organizations to jointly promote our products and partner
solutions into end-user markets. We have dedicated specific
resources to promote the benefits of our products to end users,
which we believe creates additional demand for our
customers products that incorporate our products.
Our sales support organization is responsible for supporting our
sales channels and managing the logistics from order entry to
delivery of products to our customers. In addition, our sales
support organization is responsible for customer and revenue
forecasts, customer agreements and program management for our
large, multi-national customers. Customers within the United
States are supported by our support staff in California and
customers outside of the United States are supported by our
support staff in Israel.
To accelerate design and qualification of our products into our
OEM customers systems, and ultimately the deployment of
our technology by our customers to end users, we have a field
applications engineering, or FAE, team and an internal support
engineering team that provide direct technical support. In
certain situations, our OEM customers will also utilize our
expertise to support their end-user customers jointly. Our
technical support personnel have expertise in hardware and
software, and have access to our development team to ensure
proper service and support for our OEM customers. Our FAE team
provides OEM customers with design and review capabilities of
their systems in addition to technical training on the
technology we have implemented in our products.
Our marketing team is responsible for product strategy and
management, future product plans and positioning, pricing,
product introductions and transitions, competitive analysis,
marketing communications and raising the overall visibility of
our company. The marketing team works closely with both the
sales and research and development organizations to properly
align development programs and product launches with market
demands.
Our marketing team leads our efforts to promote InfiniBand
and Ethernet technology and our products to the entire industry
by:
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assuming leadership roles within IBTA, OFA and other industry
trade organizations;
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participating in trade shows, press and analyst briefings,
conference presentations and seminars for end-user
education; and
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building and maintaining active partnerships with industry
leaders whose products are important in driving InfiniBand and
Ethernet adoption, including vendors of processors, operating
systems and software applications.
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Research
and Development
Our research and development team is composed of experienced
semiconductor designers, software developers and system
designers. Our semiconductor design team has extensive
experience in all phases of complex, high-volume design,
including product definition and architecture specification,
hardware code development and mixed-signal design and
verification. Our software team has extensive experience in
development, verification, interoperability testing and
performance optimization of software for use in computing and
storage applications. Their efforts are focused on standard,
open-source software stacks, drivers, management software and
tools that work together with our IC and card products. Our
systems design team has extensive experience in all phases of
high-volume adapter card and custom switch designs including
product definition and architectural specification, product
design and design verification.
We design our products with careful attention to quality,
reliability, cost and performance requirements. We utilize a
methodology called Customer Owned Tooling, or COT, where we
control and manage a significant portion of timing and layout
design and verification in-house, before sending the
semiconductor design to our third-party manufacturer. Although
COT requires a significant up-front investment in tools and
personnel, it provides us with greater control over the quality
and reliability of our IC products as opposed to relying on
third-party verification services.
We choose first tier technology vendors for our
state-of-the-art
design tools and continue to maintain long-term relationships
with our vendors to ensure timely support and updates. We also
select a mainstream silicon manufacturing process only after it
has proven its production worthiness for at least one year. We
verify that actual silicon characterization and performance
measurements strongly correlate to models that were used to
simulate the device while in design, and that our products meet
frequency, power and thermal targets with good margins.
Furthermore, we insert
Design-for-Test
circuitry into our IC products which increases product quality,
provides expanded debugging capabilities and ultimately enhances
system-level testing and characterization capabilities once the
device is integrated into our customers products. In
addition, we use an internally developed tool that examines IC
designs before sending them for manufacturing that is proven to
increase the yield (and consequently reduce device cost) by
increasing the performance margin on critical design areas.
Frequent interaction between our silicon, software and systems
design teams gives us a comprehensive view of the requirements
necessary to deliver quality, high-performance products to our
OEM customers. For the years ended December 31, 2004, 2005
and 2006, our research and development expenses were
approximately $12.9 million, $13.1 million and
$15.3 million, respectively.
Manufacturing
We depend on third-party vendors to manufacture, package and
production test our products as we do not own or operate a
semiconductor fabrication, packaging or production testing
facility. By outsourcing manufacturing, we are able to avoid the
high cost associated with owning and operating our own
facilities. This allows us to focus our efforts on the design
and marketing of our products.
Manufacturing and Testing. We use Taiwan
Semiconductor Manufacturing Company, or TSMC, to manufacture and
Advanced Semiconductor Engineering, or ASE, to assemble, package
and production test our IC products. We use Flextronics to
manufacture our standard adapter card products and custom
adapter cards and switch systems. We maintain close
relationships with our suppliers, which improves the efficiency
of our supply chain. We focus on mainstream processes,
materials, packaging and testing platforms, and have a
continuous 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 generation of characterization reports
that we make available to our customers. Our adapter cards and
custom switch system products are subject to similar levels of
testing and characterization, and are additionally tested for
regulatory agency certifications such as Safety and EMC
(radiation test) which are made available to our customers. We
only use components on these products that are qualified to be
on our approved vendor list.
Requirements Associated with OCS. Israeli law
requires that we manufacture our products developed with
government grants in Israel unless we otherwise obtain approval
from the Office of the Chief Scientist of Israels Ministry
of Industry Trade and Labor, or the OCS. This approval, if
provided, is generally conditioned on an increase in the total
amount to be repaid to the OCS, ranging from 120% to 300% of the
amount of funds granted. The specific increase would depend on
the extent of the manufacturing to be conducted outside of
Israel. The restriction on manufacturing outside of Israel does
not apply to the extent that we disclosed our plans to
manufacture outside of Israel when we filed the application for
funding (and provided the application was approved based on the
information disclosed in the application). We have indicated our
intent to manufacture outside of Israel on some of our grant
applications, and the OCS has approved the manufacture of our IC
products outside of Israel, subject to our undertaking to pay
the OCS royalties from the sales of these products up to 120% of
the amount of OCS funds granted. The manufacturing of our IC
products outside of Israel, including those products
manufactured by TSMC and ASE, is in compliance with the terms of
our grant applications and applicable provisions of Israeli law.
Under applicable Israeli law, Israeli government consent is
required to transfer to Israeli third parties technologies
developed under projects funded by the government. Transfer of
OCS-funded technologies outside of Israel is permitted with the
approval of the OCS and in accordance with the restrictions and
payment obligations set forth under Israeli law. Israeli law
further specifies that both the transfer of know-how as well as
the transfer of IP rights in such know-how are subject to the
same restrictions. These restrictions do not apply to exports
from Israel or the sale of products developed with these
technologies.
Employees
As of December 31, 2006, we had 149 full-time
employees and 31 part time employees located in the
United States and Israel, including 97 in research and
development, 27 in sales and marketing, 18 in general and
administrative and 7 in operations. Of our 149 full-time
employees, 118 are located in Israel.
Certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel)
and the Coordination Bureau of Economic Organizations (including
the Industrialists Associations) are applicable to our
employees in Israel by order of the Israeli Ministry of Labor.
These provisions primarily concern the length of the workday,
minimum daily wages for professional workers, pension fund
benefits for all employees, insurance for work-related
accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. We generally
provide our employees with benefits and working conditions
beyond the required minimums. Further, in addition to salary and
other benefits, certain of our sales personnel are paid
commissions based on our performance in certain territories
worldwide.
Israeli law generally requires severance pay equal to one
months salary for each year of employment upon the
retirement, death or termination without cause (as defined in
the Israel Severance Pay Law) of an employee. To satisfy this
requirement, we make contributions on behalf of most of our
employees to a fund known as Managers Insurance. This fund
provides a combination of retirement plan, insurance and
severance pay benefits to the employee, giving the employee or
his or her estate payments upon retirement or death and securing
the severance pay, if legally entitled, upon termination of
employment. Each full-time employee is entitled to participate
in the plan, and each employee who participates contributes an
amount equal to 5% of his or her salary to the retirement plan
and we contribute between 13.33% and 15.83% of his or her salary
(consisting of 5% to the retirement plan, 8.33% for severance
payments and up to 2.5% for insurance).
Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. Such
amounts also include payments by the employee for national
health insurance. The total payments to the National Insurance
Institute are
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equal to approximately 14.5% of the wages (up to a specified
amount), of which the employee contributes approximately 66% and
the employer contributes approximately 34%.
We have never experienced any employment-related work stoppages
and believe our relationship with our employees is good.
Intellectual
Property
One of the key values and drivers for future growth of our
high-performance interconnect IC products is the IP we develop
and use to improve them. We believe that the main value
proposition of our high-performance interconnect products and
success of our future growth will depend on our ability to
protect our IP. We rely on a combination of patent, copyright,
trademark, mask work, trade secret and other IP laws, both in
the United States and internationally, as well as
confidentiality, non-disclosure and inventions assignment
agreements with our employees, customers, partners, suppliers
and consultants to protect and otherwise seek to control access
to, and distribution of, our proprietary information and
processes. In addition, we have developed technical knowledge,
which, although not patented, we consider to be significant in
enabling us to compete. The proprietary nature of such
knowledge, however, may be difficult to protect and we may be
exposed to competitors who independently develop the same or
similar technology or gain access to our knowledge.
The semiconductor industry is characterized by frequent claims
of infringement and litigation regarding patent and other IP
rights. We, like other companies in the semiconductor industry,
believe it is important to aggressively protect and pursue our
IP rights. Accordingly, to protect our rights, we may file suit
against parties whom we believe are infringing or
misappropriating our IP rights. These measures may not be
adequate to protect our technology from third party infringement
or misappropriation, and may be costly and may divert
managements attention away from
day-to-day
operations. We may not prevail in these lawsuits. If any party
infringes or misappropriates our IP rights, this
infringement or misappropriation could materially adversely
affect our business and competitive position.
As of December 31, 2006, we had 12 issued patents and 25
patent applications pending in the U.S., 5 issued patents in
Taiwan and 6 applications pending in Israel, each of which
covers aspects of the technology in our products. The term of
any issued patent in the United States is 20 years from its
filing date and if our applications are pending for a long time
period, we may have a correspondingly shorter term for any
patent that may be issued. Our present and future patents may
provide only limited protection for our technology and may not
be sufficient to provide competitive advantages to us.
Furthermore, we cannot assure you that any patents will be
issued to us as a result of our patent applications.
In addition to our own IP, we also rely on third-party
technologies for the development of our interconnect
IC products. Pursuant to a license agreement dated
September 10, 2001, Vitesse Semiconductor Corporation, or
Vitesse, a provider of high-speed physical layer semiconductor
products for the communications market, has granted us a
non-exclusive, worldwide, perpetual right and license to use and
incorporate into our Infiniband products Vitesses 2.5Gb/s
SerDes macro cell implemented in TSMCs 0.18 micron
Complementary Metal-Oxide Semiconductor, or CMOS, processes. We
have agreed only to use Vitesses technology licensed under
the agreement for integrated SerDes applications. In exchange
for this license, we have agreed to pay a royalty to Vitesse
based on the total number of devices sold by us that use
Vitesses technology.
Pursuant to a separate license agreement dated December 16,
2002, Vitesse has also granted us a non-exclusive, worldwide,
perpetual right and license to use and incorporate into our
InfiniBand products Vitesses 3.1Gb/s SerDes macro cell
implemented in TSMCs 0.13 micron CMOS processes. In
exchange for this license, we have agreed to make interim
payments to Vitesse based on the total number of devices sold by
us that use Vitesses technology, subject to certain caps
and limitations. We have guaranteed a $2 million payment
pursuant to this agreement, $1.2 million of which remained
to be paid as of December 31, 2006. All remaining amounts
relating to this agreement were paid in full by January 31,
2007.
We have registered Mellanox,
InfiniBridge, InfiniHost,
InfiniPCI, InfiniRISC and
InfiniScale as trademarks in the United States. We
have a trademark application pending to register
ConnectX.
18
Competition
The markets in which we compete are highly competitive and are
characterized by rapid technological change, evolving industry
standards and new demands on features and performance of
interconnect solutions. We compete primarily on the basis of:
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price/performance;
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time to market;
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features and capabilities;
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wide availability of complementary software solutions;
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reliability;
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power consumption;
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customer support; and
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product roadmap.
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We believe that we compete favorably with respect to each of
these criteria. Many of our current and potential competitors,
however, have longer operating histories, significantly greater
resources, greater economies of scale, stronger name recognition
and a larger base of customers than we do. This may allow them
to respond more quickly than we are able to respond to new or
emerging technologies or changes in customer requirements. In
addition, these competitors may have greater credibility with
our existing and potential customers. They may be able to
introduce new technologies, respond more quickly to changing
customer requirements or devote greater resources to the
development, marketing and sales of their products than we can.
Furthermore, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we
are unable to do so.
We compete with other providers of semiconductor-based high
performance interconnect products based on InfiniBand, Ethernet,
Fibre Channel and proprietary technologies. With respect to
InfiniBand products, we compete with QLogic Corporation. In
EDCs, products based on the InfiniBand standard primarily
compete with two different industry-standard interconnect
technologies, namely Ethernet and Fibre Channel. For Ethernet
technology, the leading IC vendors include Marvell Technology
Group and Broadcom Corporation. The leading IC vendors that
provide Ethernet and Fibre Channel products to the market
include Emulex Corporation and QLogic Corporation. In HPC,
products based on the InfiniBand standard primarily compete with
the industry-standard interconnect technologies used in EDCs
mentioned above, in addition to proprietary technologies
including Myrinet, while ICs are developed only by Myricom. 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. Prior
to that date, our ordinary shares were not traded on any public
exchange.
Our principal executive offices in the United States are located
at 2900 Stender Way, Santa Clara, California 95054, and our
principal executive offices in Israel are located at Hermon
Building, Yokneam, Israel 20692. Substantially all of our assets
are located in Israel. Our telephone number in Santa Clara,
California is
(408) 970-3400,
and our telephone number in Yokneam, Israel is +972-4-909-7200.
Michael Gray is our agent for 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
prospectus and the inclusion of our website address in this
prospectus is an inactive textual reference only.
Website
Access to Company Reports and Corporate Governance
Documents
We post on the Investor Relations pages of our website,
www.mellanox.com, a link to our filings with the SEC, our Code
of Business Conduct and Ethics, our Complaint and Investigation
Procedures for Accounting, Internal
19
Accounting Controls, Fraud or Auditing Matters and the charters
of our Audit, Compensation, Disclosure and Nominating and
Corporate Governance committees of our board of directors. Our
filings with the SEC are posted as soon as reasonably practical
after they are electronically filed with, or furnished to, the
SEC. You can also obtain copies of these documents, without
charge to you, by writing to us at: Investor Relations,
c/o Mellanox Technologies, Inc., 2900 Stender Way,
Santa Clara, California 95054 or by emailing us at:
ir@mellanox.com. All these documents and filings are available
free of charge. Please note that information contained on our
website is not incorporated by reference in, or considered to be
a part of, this report. Further, a copy of this annual report on
Form 10-K
is located at the SECs Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549. Information on the
operation of the Public Reference Room can be obtained by
calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding our
filings at www.sec.gov.
ITEM 1A
RISK FACTORS
Investing in our ordinary shares involves a high degree of
risk. You should carefully consider the following risk factors,
in addition to the other information set forth in this report,
before purchasing our ordinary shares. Each of these risk
factors could harm our business, financial condition or
operating results, as well as decrease the value of an
investment in our ordinary shares.
Risks
Related to Our Business
We
have a history of losses, have only recently become profitable
and may not sustain or increase profitability in the
future.
We have only recently become profitable, and we first recorded a
profit in the year ended December 31, 2005. We incurred net
losses prior to the quarter ended June 30, 2005 and
incurred a net loss during the quarter ended March 31,
2006. Although we recorded a profit in the year ended
December 31, 2006, as of December 31, 2006 we had an
accumulated deficit of approximately $69.3 million. In
addition, we recorded net losses of $15.6 million and
$8.9 million for the years ended December 31, 2003 and
2004, respectively. We may not be able to sustain or increase
profitability on a quarterly or an annual basis. This may, in
turn, cause the price of our ordinary shares to decline. To
sustain or increase our profitability, we will need to generate
and sustain substantially higher revenues while maintaining
reasonable cost and expense levels. We expect to increase
expense levels in each of the next several quarters to support
increased research and development, sales and marketing and
general and administrative efforts. These expenditures may not
result in increased revenues or customer growth, and we may not
remain profitable.
We do
not expect to sustain our recent revenue growth rate, which may
reduce our share price.
Our revenues have grown rapidly over the last four years,
approximately doubling in size from each of 2003 to 2004 and
2005, and increasing by 15% in 2006. Our revenues increased from
$10.2 million to $20.3 million to $42.1 million
and to $48.5 million for the years ended December 31,
2003, 2004, 2005 and 2006, respectively. We do not expect to
sustain our recent growth rate in future periods. You should not
rely on the revenue growth of any prior quarterly or annual
periods as an indication of our future performance. If we are
unable to maintain adequate revenue growth, we may not have
adequate resources to execute our business objectives and our
share price may decline.
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,
20
or ICs, in their systems. InfiniBand may fail to effectively
compete with other technologies, which may be adopted by vendors
and their customers in place of InfiniBand. The adoption of
InfiniBand is also impacted by the general replacement cycle of
IT equipment by end users, which is dependent on factors
unrelated to InfiniBand. These factors may reduce the rate at
which InfiniBand is incorporated by our current server vendor
customers and impede its adoption in the storage, communications
infrastructure and embedded systems markets, which in turn would
harm our ability to sell our InfiniBand products.
We
have limited visibility into end-user demand for our products,
which introduces uncertainty into our production forecasts and
business planning and could negatively impact our financial
results.
Our sales are made on the basis of purchase orders rather than
long-term purchase commitments. In addition, our customers may
defer purchase orders. We place orders with the manufacturers of
our products according to our estimates of customer demand. This
process requires us to make multiple demand forecast assumptions
with respect to both our customers and end users
demands. It is more difficult for us to accurately forecast
end-user demand because we do not sell our products directly to
end users. In addition, the majority of our adapter card
business is conducted on a short order fulfillment basis,
introducing more uncertainty into our forecasts. Because of the
lead time associated with fabrication of our semiconductors,
forecasts of demand for our products must be made in advance of
customer orders. In addition, we base business decisions
regarding our growth on our forecasts for customer demands. As
we grow, anticipating customer demand may become increasingly
difficult. If we overestimate customer demand, we may purchase
products from our manufacturers that we may not be able to sell
and may over-budget company operations. Conversely, if we
underestimate customer demand or if sufficient manufacturing
capacity were unavailable, we would forego revenue opportunities
and could lose market share or damage our customer relationships.
We
depend on a small number of customers for a significant portion
of our sales, and the loss of any of these customers will
adversely affect our revenues.
A small number of customers account for a significant portion of
our revenues. In the year ended December 31, 2006, sales to
Voltaire accounted for 18% of our total revenues, sales to Cisco
Systems accounted for 14% of our total revenues, sales to
Hewlett-Packard accounted for 12% of our total revenues, and
sales to SilverStorm Technologies (which was acquired by QLogic
Corporation in October 2006) accounted for 11% of our total
revenues. In the year ended December 31, 2005, sales to
Cisco Systems and Topspin Communications (which was acquired by
Cisco Systems in May 2005) accounted for 44% of our total
revenues, and sales to Voltaire accounted for 12% of our total
revenues. Because the majority of servers, storage,
communications infrastructure equipment and embedded systems is
sold by a relatively small number of vendors, we expect that we
will continue to depend on a small number of customers to
account for a significant percentage of our revenues for the
foreseeable future. Our customers, including our most
significant customers, are not obligated by long-term contracts
to purchase our products and may cancel orders with limited
potential penalties. If any of our large customers reduces or
cancels its purchases from us for any reason, it could have an
adverse effect on our revenues and results of operations. For
example, one of our largest customers Cisco
Systems has ordered fewer products from us in the
year ended December 31, 2006 as compared to its order
history for the year ended December 31, 2005, which
resulted in a decrease to revenues from that customer by
approximately $11.9 million. A portion of this percentage
decline was attributable to an accumulation of inventory in 2005
by Cisco following its acquisition of Topspin Communications,
which we believe has been substantially sold in 2005 and 2006.
In addition, our sales are dependent on our customers
sales, and the loss of end-user customers by any of our OEM
customers 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 recently
acquired SilverStorm Technologies. We also compete with
providers of
21
alternative technologies, including Ethernet, Fibre Channel and
proprietary interconnects. The companies that provide IC
products for these alternative technologies include Marvell
Technology Group, Broadcom Corporation, Emulex Corporation,
QLogic Corporation and Myricom. Many of our current and
potential competitors have longer operating histories,
significantly greater resources, greater economies of scale,
stronger name recognition and larger customer bases than we
have. This may allow them to respond more quickly than we are
able to respond to new or emerging technologies or changes in
customer requirements. In addition, these competitors may have
greater credibility with our existing and potential customers.
If we do not compete successfully, our market share, revenues
and profit margin may decline, and, as a result, our business
may be adversely affected.
If we
fail to develop new products or enhance our existing products to
react to rapid technological change and market demands in a
timely and cost-effective manner, our business will
suffer.
We must develop new products or enhance our existing products
with improved technologies to meet rapidly evolving customer
requirements. We are currently engaged in the development
process for next generation products, and we need to
successfully design our next generation and other products
successfully for customers who continually require higher
performance and functionality at lower costs. The development
process for these advancements is lengthy and will require us to
accurately anticipate technological innovations and market
trends. Developing and enhancing these products can be
time-consuming, costly and complex. Our ability to fund product
development and enhancements partially depends on our ability to
generate revenues from our existing products. For example, we
recently introduced our next generation of products that also
support the industry standard Ethernet interconnect
specification.
There is a risk that these developments or enhancements, such as
migrating our next generation products from 130nm to 90nm
silicon process technology, will be late, fail to meet customer
or market specifications and will not be competitive with other
products using alternative technologies that offer comparable
performance and functionality. We may be unable to successfully
develop additional next generation products, new products or
product enhancements. Our next generation products that include
Ethernet support or any new products or product enhancements may
not be accepted in new or existing markets. Our business will
suffer if we fail to continue to develop and introduce new
products or product enhancements in a timely manner or on a
cost-effective basis.
We
rely on a limited number of subcontractors to manufacture,
assemble, package and production test our products, and the
failure of any of these third-party subcontractors to deliver
products or otherwise perform as requested could damage our
relationships with our customers, decrease our sales and limit
our growth.
While we design and market our products and conduct test
development in-house, we do not manufacture, assemble, package
and production test our products, and we must rely on
third-party subcontractors to perform these services. We
currently rely on Taiwan Semiconductor Manufacturing Company, or
TSMC, to produce our silicon wafers, and Flextronics
International Ltd. to manufacture and production test our
adapter cards. We also rely on Advanced Semiconductor
Engineering, or ASE, to assemble, package and production test
our ICs. If these subcontractors do not provide us with
high-quality products, services and production and production
test capacity in a timely manner, or if one or more of these
subcontractors terminates its relationship with us, we may be
unable to obtain satisfactory replacements to fulfill customer
orders on a timely basis, our relationships with our customers
could suffer, our sales could decrease and our growth could be
limited. In particular, there are significant challenges
associated with moving our IC production from our existing
manufacturer to another manufacturer with whom we do not have a
pre-existing relationship.
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.
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Other significant risks associated with relying on these
third-party subcontractors include:
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reduced control over product cost, delivery schedules and
product quality;
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potential price increases;
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inability to achieve sufficient production, increase production
or test capacity and achieve acceptable yields on a timely basis;
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increased exposure to potential misappropriation of our
intellectual property;
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shortages of materials used to manufacture products;
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capacity shortages;
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labor shortages or labor strikes;
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political instability in the regions where these subcontractors
are located; and
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natural disasters impacting these subcontractors.
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Our
sales cycle can be lengthy, which could result in uncertainty
and delays in generating revenues.
We have occasionally experienced a lengthy sales cycle for some
of our products, due in part to the constantly evolving nature
of the technologies on which our products are based. Some of our
products must be custom designed to operate in our
customers products, resulting in a lengthy process between
the initial design stage and the ultimate sale. We also compete
for design wins prior to selling products, which may increase
the length of the sales process. We may experience a delay
between the time we increase expenditures for research and
development, sales and marketing efforts and inventory and the
time we generate revenues, if any, from these expenditures. In
addition, because we do not have long-term supply contracts with
our customers and the majority of our sales are on a purchase
order basis, we must repeat our sales process on a continual
basis, including sales of new products to existing customers. As
a result, our business could be harmed if a customer reduces or
delays its orders.
The
average selling prices of our products have decreased in the
past and may do so in the future, which could harm our financial
results.
The products we develop and sell are subject to declines in
average selling prices. We have had to reduce our prices in the
past to meet market demand, and we may be required to reduce
prices in the future. Reductions in our average selling prices
to one customer could impact our average selling prices to other
customers. This would cause our gross margin to decline. Our
financial results will suffer if we are unable to offset any
reductions in our average selling prices by increasing our sales
volumes, reducing our costs or developing new or enhanced
products with higher selling prices or gross margin.
Fluctuations
in our revenues and operating results on a quarterly and annual
basis could cause the market price of our ordinary shares to
decline.
Our quarterly and annual revenues and operating results are
difficult to predict and have fluctuated in the past, and may
fluctuate in the future, from quarter to quarter and year to
year. It is possible that our operating results in some quarters
and years will be below market expectations. This would likely
cause the market price of our ordinary shares to decline. Our
quarterly and annual operating results are affected by a number
of factors, many of which are outside of our control, including:
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unpredictable volume and timing of customer orders, which are
not fixed by contract but vary on a purchase order basis;
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the loss of one or more of our customers, or a significant
reduction or postponement of orders from our customers;
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our customers sales outlooks, purchasing patterns and
inventory levels based on end-user demands and general economic
conditions;
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seasonal buying trends;
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the timing of new product announcements or introductions by us
or by our competitors;
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our ability to successfully develop, introduce and sell new or
enhanced products in a timely manner;
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product obsolescence and our ability to manage product
transitions;
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changes in the relative sales mix of our products;
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decreases in the overall average selling prices of our products;
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changes in our cost of finished goods; and
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the availability, pricing and timeliness of delivery of other
components used in our customers products.
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We base our planned operating expenses in part on our
expectations of future revenues, and a significant portion of
our expenses is relatively fixed in the short-term. We have
limited visibility into customer demand from which to predict
future sales of our products. As a result, it is difficult for
us to forecast our future revenues and budget our operating
expenses accordingly. Our operating results would be adversely
affected to the extent customer orders are cancelled or
rescheduled. If revenues for a particular quarter are lower than
we expect, we likely would not proportionately be able to reduce
our operating expenses.
We
rely primarily upon trade secret, patent and copyright laws and
contractual restrictions to protect our proprietary rights, and,
if these rights are not sufficiently protected, our ability to
compete and generate revenues could suffer.
We seek to protect our proprietary manufacturing specifications,
documentation and other written materials primarily under trade
secret, patent and copyright laws. We also typically require
employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps
taken by us to protect our proprietary information may not be
adequate to prevent misappropriation of our technology. In
addition, our proprietary rights may not be adequately protected
because:
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people may not be deterred from misappropriating our
technologies despite the existence of laws or contracts
prohibiting it;
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policing unauthorized use of our intellectual property may be
difficult, expensive and time-consuming, and we may be unable to
determine the extent of any unauthorized use; and
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the laws of other countries in which we market our products,
such as some countries in the Asia/Pacific region, may offer
little or no protection for our proprietary technologies.
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Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technologies could enable
third parties to benefit from our technologies without paying us
for doing so. Any inability to adequately protect our
proprietary rights could harm our ability to compete, generate
revenues and grow our business.
We may
not obtain sufficient patent protection on the technology
embodied in our products, which could harm our competitive
position and increase our expenses.
Our success and ability to compete in the future may depend to a
significant degree upon obtaining sufficient patent protection
for our proprietary technology. As of December 31, 2006, we
had 12 issued patents and 25 patent applications pending in the
United States, 5 issued patents in Taiwan and 6 applications
pending in Israel, each of which covers aspects of the
technology in our products. Patents that we currently own do not
cover all of the products that we presently sell. Our patent
applications may not result in issued patents, and even if they
result in issued patents, the patents may not have claims of the
scope we seek. Even in the event that these patents are not
issued, the applications may become publicly available and
proprietary information disclosed in the applications will
become available to others. In addition, any issued patents may
be challenged, invalidated or declared unenforceable. The term
of any issued patent in the United States would be 20 years
from its filing date, and if our applications are pending for a
long time period, we may have a correspondingly shorter term for
any patent that may be issued. Our present and future patents
may provide only limited protection for our technology and may
not be
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sufficient to provide competitive advantages to us. For example,
competitors could be successful in challenging any issued
patents or, alternatively, could develop similar or more
advantageous technologies on their own or design around our
patents. Also, patent protection in certain foreign countries
may not be available or may be limited in scope and any patents
obtained may not be as readily enforceable as in the United
States and Israel, making it difficult for us to effectively
protect our intellectual property from misuse or infringement by
other companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may
harm our business. In addition, given the costs of obtaining
patent protection, we may choose not to protect certain
innovations that later turn out to be important.
Intellectual
property litigation, which is common in our industry, could be
costly, harm our reputation, limit our ability to sell our
products and divert the attention of management and technical
personnel.
The semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property
rights. We have indemnification obligations to most of our
customers with respect to infringement of third-party patents
and intellectual property rights by our products. If litigation
were to be filed against these customers in connection with our
technology, we may be required to defend and indemnify such
customers.
Questions of infringement in the markets we serve involve highly
technical and subjective analyses. Although we have not been
involved in intellectual property litigation to date, litigation
may be necessary in the future to enforce any patents we may
receive and other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
infringement or invalidity, and we may not prevail in any such
future litigation. Litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and
could divert the efforts and attention of our management and
technical personnel from normal business operations. In
addition, adverse determinations in litigation could result in
the loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology or selling our
products, any of which could seriously harm our business.
We
depend on key and highly skilled personnel to operate our
business, and if we are unable to retain our current personnel
and hire additional personnel, our ability to develop and
successfully market our products could be harmed.
Our business is particularly dependent on the interdisciplinary
expertise of our personnel, and we believe our future success
will depend in large part upon our ability to attract and retain
highly skilled managerial, engineering, finance and sales and
marketing personnel. The loss of any key employees or the
inability to attract or retain qualified personnel could delay
the development and introduction of, and harm our ability to
sell, our products and harm the markets perception of us.
Competition for qualified engineers in the markets in which we
operate, primarily in Israel where our engineering operations
are based, is intense and, accordingly, we may not be able to
retain or hire all of the engineers required to meet our ongoing
and future business needs. If we are unable to attract and
retain the highly skilled professionals we need, we may have to
forego projects for lack of resources or be unable to staff
projects optimally. We believe that our future success is highly
dependent on the contributions of Eyal Waldman, our president
and chief executive officer. We do not have long-term employment
contracts with Mr. Waldman or any other key personnel, and
their knowledge of our business and industry would be extremely
difficult to replace.
We may
not be able to manage our future growth effectively, and we may
need to incur significant expenditures to address the additional
operational and control requirements of our
growth.
We are experiencing a period of growth and expansion. This
expansion has placed, and any future expansion will continue to
place, a significant strain on our management, personnel,
systems and financial resources. We plan to hire additional
employees to support an increase in research and development as
well as increases in our sales and marketing and general and
administrative efforts. To successfully manage our growth and
handle the responsibilities of being a public company, we
believe we must effectively:
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continue to enhance our customer relationship and supply chain
management and supporting systems;
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implement additional and improve existing administrative,
financial and operations systems, procedures and controls;
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expand and upgrade our technological capabilities;
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manage multiple relationships with our customers, distributors,
suppliers, end users and other third parties;
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manage the mix of our U.S., Israeli and other foreign
operations; and
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hire, train, integrate and manage additional qualified engineers
for research and development activities, sales and marketing
personnel and financial and IT personnel.
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Our efforts may require substantial managerial and financial
resources and may increase our operating costs even though these
efforts may not be successful. If we are unable to manage our
growth effectively, we may not be able to take advantage of
market opportunities, develop new products, satisfy customer
requirements, execute our business plan or respond to
competitive pressures.
We may
experience defects in our products, unforeseen delays, higher
than expected expenses or lower than expected manufacturing
yields of our products, which could result in increased customer
warranty claims, delay our product shipments and prevent us from
recognizing the benefits of new technologies we
develop.
Although we test our products, they are complex and may contain
defects and errors. In the past we have encountered defects and
errors in our products. Delivery of products with defects or
reliability, quality or compatibility problems may damage our
reputation and our ability to retain existing customers and
attract new customers. In addition, product defects and errors
could result in additional development costs, diversion of
technical resources, delayed product shipments, increased
product returns, warranty expenses and product liability claims
against us which may not be fully covered by insurance. Any of
these could harm our business.
In addition, our production of existing and development of new
products can involve multiple iterations and unforeseen
manufacturing difficulties, resulting in reduced manufacturing
yields, delays and increased expenses. The evolving nature of
our products requires us to modify our manufacturing
specifications, which may result in delays in manufacturing
output and product deliveries. We rely on third parties to
manufacture our products and currently rely on one manufacturer
for our ICs and one manufacturer for our cards. Our ability to
offer new products depends on our manufacturers ability to
implement our revised product specifications, which is costly,
time-consuming and complex.
If we
fail to maintain an effective system of internal controls, we
may not be able to report accurately our financial results or
prevent fraud. As a result, current and potential shareholders
could lose confidence in our financial reporting, which could
harm our business and the trading price of our ordinary
shares.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. We
have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement. In
addition, Section 404 of the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, requires us to evaluate and report on our
internal control over financial reporting and have our
independent registered public accounting firm annually attest to
our evaluation, as well as issue its own opinion on our internal
control over financial reporting. The Section 404 internal
control reporting requirements will be implemented according to
the regulatory phase-in schedule of the Securities and Exchange
Commission. The SEC recently adopted rules to delay the
implementation of Section 404 compliance for new public
companies. Under the SECs new rules, we will be required
to provide a management report on internal control over
financial reporting for the first time in connection with our
Annual Report on
Form 10-K
for the year ending December 31, 2007. We will be required
to provide both a management report and an independent
registered public accounting firm attestation report on internal
controls in connection with our Annual Report on
Form 10-K
for the year ending December 31, 2008. We are preparing for
compliance with Section 404 by strengthening, assessing and
testing our system of internal controls to provide the basis for
our report. However, the continuous process of strengthening our
internal controls and complying with Section 404 is
expensive and time-consuming and requires significant management
attention. We cannot be certain
26
that these measures will ensure that we will maintain adequate
control over our financial processes and reporting. Furthermore,
as we grow our business, our internal controls will become more
complex and will require significantly more resources to ensure
our internal controls remain effective overall. Failure to
implement new or improved controls, or difficulties encountered
in their implementation, could harm our operating results or
cause us to fail to meet our reporting obligations. If we or our
independent registered public accounting firm discover a
material weakness, the disclosure of that fact, even if quickly
remedied, could reduce the markets confidence in our
financial statements and harm our share price. In addition,
future non-compliance with Section 404 could subject us to
a variety of administrative sanctions, including the suspension
or delisting of our ordinary shares from The Nasdaq Global
Market, which could reduce our share price.
We may
pursue acquisitions or investments in complementary products,
technologies and businesses, which could harm our operating
results and may disrupt our business.
In the future, we may pursue acquisitions of, or investments in,
complementary products, technologies and businesses.
Acquisitions present a number of potential risks and challenges
that could, if not met, disrupt our business operations,
increase our operating costs and reduce the value to us of the
acquisition. For example, if we identify an acquisition
candidate, we may not be able to successfully negotiate or
finance the acquisition on favorable terms. Even if we are
successful, we may not be able to integrate the acquired
businesses, products or technologies into our existing business
and products. Furthermore, potential acquisitions and
investments, whether or not consummated, may divert our
managements attention and require considerable cash
outlays at the expense of our existing operations. In addition,
to complete future acquisitions, we may issue equity securities,
incur debt, assume contingent liabilities or have amortization
expenses and write-downs of acquired assets, which could
adversely affect our profitability.
Changes
to financial accounting standards may affect our results of
operations and cause us to change our business
practices.
We prepare our financial statements to conform with generally
accepted accounting principles, or GAAP, in the United States.
These accounting principles are subject to interpretation by the
Financial Accounting Standards Board, or FASB, the SEC and
various bodies formed to interpret and create appropriate
accounting policies. A change in those policies can have a
significant effect on our reported results and may affect our
reporting of transactions completed before a change is
announced. Changes to those rules or the questioning of current
practices may adversely affect our reported financial results or
the way we conduct our business. For example, accounting
policies affecting many aspects of our business, including rules
relating to employee share option grants, have recently been
revised. The FASB and other agencies have made changes to GAAP
that required us, as of our first quarter of 2006, to record a
charge to earnings for the estimated fair value of employee
share option grants and other equity incentives, whereas under
previous accounting rules charges were required only for the
intrinsic value, if any, of such awards to employees. We may
have significant and ongoing accounting charges under the new
rules resulting from option grants and other equity incentive
expensing that could reduce our net income. In addition, since
historically we have used equity-related compensation as a
component of our total employee compensation program, the
accounting change could make the use of equity-related
compensation less attractive to us and therefore make it more
difficult for us to attract and retain employees.
Our
business is subject to the risks of earthquakes, fires, floods
and other natural catastrophic events, and to interruption by
manmade problems such as computer viruses or
terrorism.
Our U.S. corporate offices are located in the
San Francisco Bay Area, a region known for seismic
activity. A significant natural disaster, such as an earthquake,
fire or flood, could have a material adverse impact on our
business, operating results and financial condition. In
addition, our servers are vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering
with our computer systems. In addition, acts of terrorism could
cause disruptions in our or our customers businesses or
the economy as a whole. To the extent that such disruptions
result in delays or cancellations of customer orders, or the
deployment of our products, our business, operating results and
financial condition would be adversely affected.
27
Risks
Related to Our Industry
Due to
the cyclical nature of the semiconductor industry, our operating
results may fluctuate significantly, which could adversely
affect the market price of our ordinary shares.
The semiconductor industry is highly cyclical and subject to
rapid change and evolving industry standards and, from time to
time, has experienced significant downturns. These downturns are
characterized by decreases in product demand, excess customer
inventories and accelerated erosion of prices. These factors
could cause substantial fluctuations in our net revenues and in
our operating results. Any downturns in the semiconductor
industry may be severe and prolonged, and any failure of this
industry to fully recover from downturns could harm our
business. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the industry, which could
cause our share price to decline.
The
demand for semiconductors is affected by general economic
conditions, which could impact our business.
The semiconductor industry is affected by general economic
conditions, and a downturn may result in decreased demand for
our products and adversely affect our operating results. Our
business has been adversely affected by previous economic
downturns. For example, during the global economic downturn in
2002 to 2003, demand for many computer and consumer electronics
products suffered as consumers delayed purchasing decisions or
changed or reduced their discretionary spending. As a result,
demand for our products suffered and we had to implement
restructuring initiatives to align our corporate spending with a
slower than anticipated revenue growth during that timeframe.
The
semiconductor industry is highly competitive, and we cannot
assure you that we will be able to compete successfully against
our competitors.
The semiconductor industry is highly competitive. Increased
competition may result in price pressure, reduced profitability
and loss of market share, any of which could seriously harm our
revenues and results of operations. Competition principally
occurs at the design stage, where a customer evaluates
alternative design solutions. We continually face intense
competition from semiconductor interconnect solutions companies.
Some of our competitors have greater financial and other
resources than we have with which to pursue engineering,
manufacturing, marketing and distribution of their products. As
a result, they may be able to respond more quickly to changing
customer demands or devote greater resources to the development,
promotion and sales of their products than we 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, 2006, 118 full-time
and 31 part-time employees located in Israel. Substantially
all of our assets are located in Israel. Accordingly, political,
economic and military conditions in Israel may directly affect
our business. Since the establishment of the State of Israel in
1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors, as well as incidents of civil
unrest. During the summer of 2006, Israel was engaged in an
armed conflict with Hezbollah, a Lebanese Islamist Shiite
militia group and political party. This conflict involved
missile strikes against civilian targets in northern Israel, and
negatively affected business conditions in Israel. In addition,
Israel and companies doing business with Israel have, in the
past, been the subject of an economic boycott. Although Israel
has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, Israel has been and is subject to civil
unrest and terrorist activity, with varying levels of severity,
since September 2000. The election in early 2006 of
representatives of the Hamas movement to a majority of seats in
the Palestinian Legislative Council and the tension among the
different Palestinian factions may create additional unrest and
uncertainty. Any future armed conflicts or political instability
in the region may negatively affect business conditions and
adversely affect
28
our results of operations. Parties with whom we do business have
sometimes declined to travel to Israel during periods of
heightened unrest or tension, forcing us to make alternative
arrangements when necessary. In addition, the political and
security situation in Israel may result in parties with whom we
have agreements involving performance in Israel claiming that
they are not obligated to perform their commitments under those
agreements pursuant to force majeure provisions in the
agreements.
We can give no assurance that security and political conditions
will have no impact on our business in the future. Hostilities
involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could adversely
affect our operations and could make it more difficult for us to
raise capital. While we did not sustain damages from the recent
conflict with Hezbollah referred to above, our Israeli
operations, which are located in northern Israel, are within
range of Hezbollah missiles and we or our immediate surroundings
may sustain damages in a missile attack, which could adversely
affect our operations.
In addition, our business insurance does not cover losses that
may occur as a result of events associated with the security
situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that
are caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained. Any losses
or damages incurred by us could have a material adverse effect
on our business.
Our
operations may be negatively affected by the obligations of our
personnel to perform military service.
Generally, all non-exempt male adult citizens and permanent
residents of Israel under the age of 45 (or older, for citizens
with certain occupations), including some of our officers,
directors and employees, are obligated to perform military
reserve duty annually, and are subject to being called to active
duty at any time under emergency circumstances. In the event of
severe unrest or other conflict, individuals could be required
to serve in the military for extended periods of time. In
response to increases in terrorist activity, there have been
periods of significant
call-ups of
military reservists, and recently some of our employees,
including those in key positions, have been called up in
connection with armed conflicts. It is possible that there will
be additional
call-ups in
the future. Our operations could be disrupted by the absence for
a significant period of one or more of our officers, directors
or key employees due to military service. Any such disruption
could adversely affect our operations.
Our
operations may be affected by negative economic conditions or
labor unrest in Israel.
Due to significant economic measures adopted by the Israeli
government, there were several general strikes and work
stoppages in Israel in 2003 and 2004, affecting all banks,
airports and ports. These strikes have 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 24%, 28% and 41% of our revenues in the years ended
December 31, 2004, 2005 and 2006, respectively, from sales
outside North America. As a result, we face additional risks
from doing business internationally, including:
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reduced protection of intellectual property rights in some
countries;
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licenses, tariffs and other trade barriers;
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difficulties in staffing and managing foreign operations;
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longer sales and payment cycles;
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greater difficulties in collecting accounts receivable;
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seasonal reductions in business activity;
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potentially adverse tax consequences;
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laws and business practices favoring local competition;
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costs and difficulties of customizing products for foreign
countries;
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compliance with a wide variety of complex foreign laws and
treaties;
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tariffs, trade barriers, transit restrictions and other
regulatory or contractual limitations on our ability to sell or
develop our products in certain foreign markets;
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fluctuations in freight rates and transportation disruptions;
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political and economic instability; and
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variance and unexpected changes in local laws and regulations.
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Our principal research and development facilities are located in
Israel, and our directors, executive officers and other key
employees are located primarily in Israel and the United States.
In addition, we engage sales representatives in various
countries throughout the world to market and sell our products
in those countries and surrounding regions. If we encounter
these challenges in our international operations, we could
experience slower than expected revenue growth and our business
could be harmed.
It may
be difficult to enforce a U.S. judgment against us, our
officers and directors and some of the experts named in the
prospectus relating to the initial public offering of our
ordinary shares or to assert U.S. securities law claims in
Israel.
We are incorporated in Israel. Four of our executive officers
and one of our directors, who is also an executive officer, and
some of our accountants and attorneys are non-residents of the
United States and are located in Israel, and substantially all
of our assets and the assets of these persons are located
outside the United States. Three of our executive officers and
five of our directors are located in the United States.
Therefore, it may be difficult to enforce a judgment obtained in
the United States against us or any of these persons in
U.S. or Israeli courts based on the civil liability
provisions of the U.S. federal securities laws.
In addition, we have been informed by our legal counsel in
Israel, Yigal Arnon & Co., that it may be difficult for
a shareholder to enforce civil liabilities under
U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on a
violation of U.S. securities laws because Israel is not the
most appropriate forum to bring such a claim. In addition, even
if an Israeli court agrees to hear a claim, it may determine
that Israeli law, and not U.S. law, is applicable to the
claim. If U.S. law is found to be applicable, the content
of applicable U.S. law must be proved in court as a fact,
which can be a time-consuming and costly process. Certain
matters of procedure will also be governed by Israeli law. There
is little binding case law in Israel addressing the matters
described above.
Provisions
of Israeli law may delay, prevent or make difficult an
acquisition of us, which could prevent a change of control and
therefore depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires
special approvals for transactions involving directors, officers
or significant shareholders and regulates other matters that may
be relevant to these types of transactions. For example, a
merger may not be completed unless at least 50 days have
passed from the date that a merger proposal was filed by each
merging company with the Israel Registrar of Companies and at
least 30 days from the date that the shareholders of both
merging companies approved the merger. In addition, the approval
of a majority of each class of securities of the target company
is required to approve a merger. Israeli corporate law further
requires that any person who wishes to acquire more than a
specified percentage of the companys share capital
complies with certain tender offer procedures. In addition,
Israeli corporate law allows us to create and issue shares
having rights different from those attached to our ordinary
shares, including rights that may delay or prevent a takeover or
otherwise prevent our shareholders from realizing a potential
premium over the market value of their ordinary shares. The
authorization of a new class of shares would require an
amendment to our articles of association, which requires the
prior approval of the holders of a majority of our shares at a
general meeting.
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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 our charter documents or
Israeli law could delay or prevent an acquisition of our
company, even if the acquisition would be beneficial to our
shareholders, and could make it more difficult for shareholders
to change management for a further discussion of this risk
factor.
Exchange
rate fluctuations between the U.S. dollar and the NIS may
negatively affect our earnings.
Although most 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
devaluation of the NIS against the U.S. dollar. The Israeli
rate of inflation (deflation) amounted to 1.2%, 2.4% and (0.1)%
for the years ended December 31, 2004, 2005 and 2006,
respectively. If the U.S. dollar cost of our research and
development operations in Israel increases, our dollar-measured
results of operations will be adversely affected. Our operations
also could be adversely affected if we are unable to guard
against currency fluctuations in the future. Further, because
most 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 collection of receivables more difficult. We do not
currently engage in currency hedging activities but we may
choose to do so in the future. These measures, however, may not
adequately protect us from material adverse effects due to the
impact of inflation in Israel.
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 currently receive 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
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ability to enter into agreements for those products or
technologies without the approval of the OCS. We cannot be
certain that any approval of the OCS will be obtained on terms
that are acceptable to us, or at all. Furthermore, in the event
that we undertake a transaction involving the transfer to a
non-Israeli entity of technology developed with OCS funding
pursuant to a merger or similar transaction, the consideration
available to our shareholders may be reduced by the amounts we
are required to pay to the OCS. Any approval, if given, will
generally be subject to additional financial obligations. If we
fail to comply with the conditions imposed by the OCS, including
the payment of royalties with respect to grants received, we may
be required to refund any payments previously received, together
with interest and penalties. In the years ended
December 31, 2004 and 2005, the OCS approved grants
totaling $1.3 million and $43,000, respectively, of funding
in support of some of our research and development programs. No
grants to us were approved by the OCS in the year ended
December 31, 2006.
We may
be classified as a passive foreign investment company, which
could result in adverse U.S. federal income tax
consequences to U.S. holders of our ordinary
shares.
We do not expect to be considered a passive foreign
investment company, or PFIC, for U.S. federal income
tax purposes for our current taxable year ending
December 31, 2007. However, the application of the PFIC
rules is subject to ambiguity in several respects, and, in
addition, we must make a separate determination each taxable
year as to whether we are a PFIC (after the close of each
taxable year). Accordingly, we cannot assure you that we will
not be a PFIC for our current taxable year or any future taxable
year. A
non-U.S. corporation
will be considered a PFIC for any taxable year if either
(i) at least 75% of its gross income is passive income or
(ii) at least 50% of the value of its assets is
attributable to assets that produce or are held for the
production of passive income. The market value of our assets
generally will be determined based on the market price of our
ordinary shares, which has fluctuated since our ordinary shares
began trading on the NASDAQ Global Market on February 8,
2007 and is likely to fluctuate in the future. In addition, the
composition of our income and assets will be affected by how,
and how quickly, we spend the cash we raised in our initial
public offering. If we were treated as a PFIC for any taxable
year during which a U.S. person held an ordinary share,
certain adverse U.S. federal income tax consequences could
apply to such U.S. person, including:
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having gains realized on the sale of our ordinary shares treated
as ordinary income, rather than capital gain;
|
|
|
|
the loss of the preferential rate applicable to dividends
received on our ordinary shares by individuals who are
U.S. holders; and
|
|
|
|
having interest charges apply to the proceeds of share sales.
|
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 $14.71 per share.
An active and liquid trading market for our ordinary shares may
not develop or be sustained. Factors that could cause volatility
in the market price of our ordinary shares include, but are not
limited to:
|
|
|
|
|
quarterly variations in our results of operations or those of
our competitors;
|
|
|
|
announcements by us or our customers of acquisitions, new
products, significant contracts, commercial relationships or
capital commitments;
|
32
|
|
|
|
|
our ability to develop and market new and enhanced products on a
timely basis;
|
|
|
|
disruption to our operations;
|
|
|
|
geopolitical instability;
|
|
|
|
the emergence of new sales channels in which we are unable to
compete effectively;
|
|
|
|
any major change in our board of directors or management;
|
|
|
|
changes in financial estimates, including our ability to meet
our future revenue and operating profit or loss projections;
|
|
|
|
changes in governmental regulations or in the status of our
regulatory approvals;
|
|
|
|
general economic conditions and slow or negative growth of
related markets;
|
|
|
|
commencement of, or our involvement in, litigation; and
|
|
|
|
changes in earnings estimates or recommendations by securities
analysts.
|
In addition, the stock markets in general, and the markets for
semiconductor stocks in particular, have experienced extreme
volatility that often has been unrelated to the operating
performance of the issuer. These broad market fluctuations may
adversely affect the trading price or liquidity of our ordinary
shares. In the past, when the market price of a stock has been
volatile and declined, holders of that stock have sometimes
instituted securities class action litigation against the
issuer. If any of our shareholders were to bring such a lawsuit
against us, we could incur substantial costs defending the
lawsuit and the attention of our management would be diverted
from the operation of our business.
The
ownership of our ordinary shares will continue to be highly
concentrated, and your interests may conflict with the interests
of our existing shareholders.
Our executive officers and directors and their affiliates,
together with our current significant shareholders, beneficially
owned approximately 35% of our outstanding ordinary shares as of
March 1, 2007. Moreover, four of our shareholders, Sequoia
Capital Partners, U.S. Venture Partners, Intel Atlantic,
Inc. and Bessemer Venture Partners, beneficially owned
approximately 27% of our outstanding ordinary shares as of
March 1, 2007. In addition, individual partners of
U.S. Venture Partners and Bessemer Venture Partners serve
on our board of directors. 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.
A
significant portion of our outstanding ordinary shares may be
sold into the market in the near future. Substantial sales of
our shares, or the perception such sales are likely to occur,
could cause the price of our ordinary shares to
decline.
If our existing shareholders sell a large number of our ordinary
shares or the public market perceives that existing shareholders
might sell our ordinary shares, the market price of our ordinary
shares could decline significantly. Approximately
22.8 million ordinary shares may be sold upon the
expiration of
lock-up
agreements in August 2007. Existing shareholders holding an
aggregate of approximately 15.1 million ordinary shares
have rights with respect to the registration of these ordinary
shares with the SEC. If we register their ordinary shares
following the expiration of the
lock-up
agreements, they can sell those shares in the public market.
33
If we
sell our ordinary shares in future financings, ordinary
shareholders will experience immediate dilution and, as a
result, our share price may go down.
We may from time to time issue additional ordinary shares at a
discount from the current trading price of our ordinary shares.
As a result, our ordinary shareholders would experience
immediate dilution upon the purchase of any ordinary shares sold
at such discount. In addition, as opportunities present
themselves, we may enter into equity financings or similar
arrangements in the future, including the issuance of debt
securities, preferred shares or ordinary shares. If we issue
ordinary shares or securities convertible into ordinary shares,
our ordinary shareholders could experience dilution.
Provisions
of Israeli law could delay or prevent an acquisition of our
company, even if the acquisition would be beneficial to our
shareholders, and could make it more difficult for shareholders
to change management.
Provisions of our amended and restated articles of association
may discourage, delay or prevent a merger, acquisition or other
change in control that shareholders may consider favorable,
including transactions in which shareholders might otherwise
receive a premium for their shares. In addition, these
provisions may frustrate or prevent any attempt by our
shareholders to replace or remove our current management by
making it more difficult to replace or remove our board of
directors. These provisions include:
|
|
|
|
|
no cumulative voting; and
|
|
|
|
an advance notice requirement for shareholder proposals and
nominations.
|
Furthermore, Israeli tax law treats some acquisitions,
particularly
stock-for-stock
swaps between an Israeli company and a foreign company, less
favorably than U.S. tax law. Israeli tax law generally
provides that a shareholder who exchanges our shares for shares
in a foreign corporation is treated as if the shareholder has
sold the shares. In such a case, the shareholder will generally
be subject to Israeli taxation on any capital gains from the
sale of shares (after two years, with respect to one half of the
shares, and after four years, with respect to the balance of the
shares, in each case unless the shareholder sells such shares at
an earlier date), unless a relevant tax treaty between Israel
and the country of the shareholders residence exempts the
shareholder from Israeli tax. Please see Risk
Factors Provisions of Israeli law may delay, prevent
or make difficult an acquisition of us, which could prevent a
change of control and therefore depress the price of our
shares for a further discussion of Israeli laws relating
to mergers and acquisitions. These provisions in our amended and
restated articles of association and other provisions of Israeli
law could limit the price that investors are willing to pay in
the future for our ordinary shares.
We
have never paid cash dividends on our share capital, and we do
not anticipate paying any cash dividends in the foreseeable
future.
We have never declared or paid cash dividends on our share
capital, nor do we anticipate paying any cash dividends on our
share capital in the foreseeable future. We currently intend to
retain all available funds and any future earnings to fund the
development and growth of our business. As a result, capital
appreciation, if any, of our ordinary shares will be your sole
source of gain for the foreseeable future.
We may
incur increased costs as a result of changes in laws and
regulations relating to corporate governance
matters.
Changes in the laws and regulations affecting public companies,
including the provisions of Sarbanes-Oxley and rules adopted by
the SEC and by The Nasdaq Stock Market, will result in increased
costs to us as we respond 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.
34
ITEM 1B
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2
PROPERTIES
Our business headquarters are in Santa Clara, California,
and our engineering headquarters are in Yokneam, Israel. We
currently lease office space in Yokneam and Tel Aviv, Israel and
in Santa Clara, California pursuant to leases that expire
on December 31, 2011, December 31, 2008 and
March 31, 2009, respectively.
We believe that our existing facilities are adequate to meet
current requirements and that suitable additional or substitute
space will be available on acceptable terms to accommodate our
foreseeable needs.
ITEM 3
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On December 6, 2006, we held an extraordinary general
meeting of shareholders. Of the 34,079,367 ordinary and
preferred shares entitled to vote at the meeting, a total of
22,158,917 shares (on an as-converted basis) were
represented at the meeting in person or by proxy, constituting a
quorum. The voting results are as follows:
Proposal No. 1: Increase in authorized
share capital to NIS 2,400,000
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,584,051
|
|
204,596
|
|
45,729
|
Proposal No. 2: Amendment and
restatement of private company Articles of Association
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,641,344
|
|
131,761
|
|
45,729
|
Proposal No. 3: Reverse share split in
connection with initial public offering
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,597,051
|
|
106,576
|
|
128,207
|
Proposal No. 4: Adoption of public
company Articles of Association in connection with initial
public offering
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,641,344
|
|
113,532
|
|
45,729
|
Proposal No. 5: Adoption of Global Share
Incentive Plan (2006)
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,705,593
|
|
67,512
|
|
45,729
|
Proposal No. 6: Increase in number of
shares reserved for issuance under 1999 United States Equity
Incentive Plan and 2003 Israeli Share Option Plan to an
aggregate of 12,007,542 shares
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,705,593
|
|
67,512
|
|
45,729
|
Proposal No. 7: Adoption of Employee
Share Purchase Plan
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
22,190,146
|
|
0
|
|
45,729
|
Proposal No. 8: Authorization of
indemnification agreements with directors and officers
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
22,190,146
|
|
0
|
|
45,729
|
35
Proposal No. 9: Authorization to obtain
directors & officers liability insurance with coverage
up to $30 million per year
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
22,010,771
|
|
0
|
|
225,104
|
Proposal No. 10: Approval of cash
compensation policy for non-employee directors
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,808,717
|
|
134,695
|
|
292,463
|
Proposal No. 11: Approval of option
grant policy for non-employee directors
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
22,055,604
|
|
134,542
|
|
45,729
|
Proposal No. 12: Approval of executive
severance benefits agreement with Eyal Waldman, the
companys president and chief executive officer
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
22,122,634
|
|
64,402
|
|
48,839
|
Proposal No. 13: Inclusion of members of
the board of directors and their family members and associates
in the directed share program to purchase ordinary shares in the
initial public offering
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
21,933,522
|
|
179,375
|
|
109,978
|
Proposal No. 14: Approval of grant of an
option to purchase 100,000 ordinary shares to Amal M. Johnson
and an option to purchase 200,000 ordinary shares to Eyal
Waldman
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
22,058,385
|
|
67,512
|
|
109,978
|
PART II
|
|
ITEM 5
|
MARKET
FOR REGISTRANTS ORDINARY SHARES, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our ordinary shares began trading on The NASDAQ Global Market as
of February 8, 2007 under the symbol MLNX.
Prior to that date, our ordinary shares were not traded on any
public exchange. As of March 1, 2007, we had approximately
195 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.
We have never declared or paid any cash dividends on our
ordinary shares in the past, and we do not anticipate paying
cash dividends in the foreseeable future. The Israel Companies
Law, 1999, or the Companies Law, also restricts our ability to
declare dividends. We can only distribute dividends from profits
(as defined in the Companies Law), or if we do not meet the
profit test, with court approval, provided in each case that
there is no reasonable concern that the dividend distribution
will prevent us from meeting our existing and foreseeable
obligations as they come due.
The net proceeds from our initial public offering have been
invested into short-term, money market securities and repurchase
agreements. 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).
Securities
Authorized for Issuance under Equity Compensation
Plans
The information required by this item regarding equity
compensation plans will be contained in our definitive proxy
statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of our
Shareholders (the Proxy Statement), and is
incorporated in this report by reference. For additional
36
information on our share incentive plans and activity, see
Note 11, Share Option Plans included in
Part IV, Item 15 of this Report.
Recent
Sales of Unregistered Securities; Use of Proceeds from
Registered Securities
We have issued and sold the following unregistered securities
during the year ended December 31, 2006. The following
share numbers have been adjusted to reflect the
1.75-to-1
reverse split of our ordinary shares on February 1, 2007
and the conversion of preferred shares into ordinary shares
effected immediately prior to the completion of our initial
public offering.
1. We sold an aggregate of 108,908 ordinary shares to
employees, directors and consultants for cash consideration in
the aggregate amount of approximately $270,000 upon the exercise
of share options.
2. We granted share options to employees, directors and
consultants under our 1999 United States Equity Incentive Plan
and 2003 Israeli Share Option Plan covering an aggregate of
1,106,093 ordinary shares, with exercise prices ranging from
$7.44 to $9.19 and a weighted average exercise price of $9.12.
3. In September and October of 2006, we issued 97,694
ordinary shares upon the exercise of warrants originally issued
in October and November 2001, and February 2002, for an
aggregate exercise price of approximately $1,130,000.
We claimed exemption from registration under the Securities Act
of 1933, as amended (the Securities Act), for the
sales and issuances of securities in the transactions described
in paragraphs (1) and (2) above pursuant to
Rule 701 promulgated under the Securities Act, in that they
were offered and sold either pursuant to written compensatory
plans or pursuant to a written contract relating to
compensation, as provided by Rule 701.
We claimed exemption from registration under the Securities Act
for the sales and issuances of securities in the transactions
described in paragraph (3) above pursuant to
Regulation D promulgated under Section 4(2) of the
Securities Act as transactions not involving a public offering.
All of the purchasers of unregistered securities for which we
relied on Section 4(2) represented that they were
accredited investors as defined under the Securities Act. We
claimed such exemption on the basis that (a) the purchasers
in each case represented that they intended to acquire the
securities for investment only and not with a view to the
distribution thereof and that they had access to adequate
information about us and (b) appropriate legends were
affixed to the share certificates issued in such transactions.
Our initial public offering of 6,900,000 ordinary shares was
effected through a Registration Statement on
Form S-1
(File
No. 333-137659)
that was declared effective by the Securities and Exchange
Commission on February 7, 2007. We issued all
6,900,000 shares on February 13, 2007 for gross
proceeds of $117,300,000. The underwriters of the offering were
Credit Suisse Securities (USA) LLC, J.P. Morgan Securities
Inc., Thomas Weisel Partners LLC and Jefferies &
Company, Inc. We paid the underwriters a commission of
$8,211,000 and incurred additional offering expenses of
approximately $3,001,000. After deducting the underwriters
commission and the offering expenses, we received net proceeds
of approximately $106,088,000. 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. All of the net proceeds from
the initial public offering remain invested in short-term, money
market securities and repurchase agreements pending application
of the funds to general corporate purposes, as described in the
Registration Statement on
Form S-1.
Issuer
Purchases of Equity Securities
During the fourth quarter of 2006, we did not repurchase any
equity securities.
Share
Performance Graph
Our ordinary shares were not registered pursuant to
Section 12 of the Exchange Act in 2006. Our ordinary shares
began trading on the Nasdaq Global Market on February 7,
2007 under the symbol MLNX. Prior to such time there
was no public market for our ordinary shares. We plan to furnish
a stock performance graph in the proxy statement for our annual
general meeting in 2008. The closing share price for our
ordinary shares on March 19, 2007 as reported by The Nasdaq
Stock Market was $15.85.
37
This section is not soliciting material, is not
deemed filed with the SEC and is not to be
incorporated by reference in any of our filings under the
Securities Act or the Exchange Act whether made before or after
the date hereof and irrespective of any general incorporation
language in any such filing.
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, 2002,
2003 and 2004 and our consolidated statements of operations data
for the years ended December 31, 2002 and 2003, 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, 2006, as well the consolidated balance sheet
data as of December 31, 2005 and 2006, 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,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands except per share data)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
4,002
|
|
|
$
|
10,151
|
|
|
$
|
20,254
|
|
|
$
|
42,068
|
|
|
$
|
48,539
|
|
Cost of revenues
|
|
|
(1,514
|
)
|
|
|
(4,535
|
)
|
|
|
(8,736
|
)
|
|
|
(15,203
|
)
|
|
|
(13,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profits
|
|
|
2,488
|
|
|
|
5,616
|
|
|
|
11,518
|
|
|
|
26,865
|
|
|
|
35,006
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
17,297
|
|
|
|
14,457
|
|
|
|
12,864
|
|
|
|
13,081
|
|
|
|
15,256
|
|
Sales and marketing
|
|
|
4,749
|
|
|
|
5,298
|
|
|
|
5,640
|
|
|
|
7,395
|
|
|
|
8,935
|
|
General and administrative
|
|
|
2,141
|
|
|
|
1,720
|
|
|
|
1,719
|
|
|
|
3,094
|
|
|
|
3,704
|
|
Restructuring
|
|
|
2,327
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26,514
|
|
|
|
21,475
|
|
|
|
20,223
|
|
|
|
23,570
|
|
|
|
27,895
|
|
Income (loss) from operations
|
|
|
(24,026
|
)
|
|
|
(15,859
|
)
|
|
|
(8,705
|
)
|
|
|
3,295
|
|
|
|
7,111
|
|
Other income, net
|
|
|
993
|
|
|
|
308
|
|
|
|
123
|
|
|
|
326
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on
income
|
|
|
(23,033
|
)
|
|
|
(15,551
|
)
|
|
|
(8,582
|
)
|
|
|
3,621
|
|
|
|
7,549
|
|
Provision for taxes on income
|
|
|
|
|
|
|
(12
|
)
|
|
|
(306
|
)
|
|
|
(462
|
)
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(23,033
|
)
|
|
$
|
(15,563
|
)
|
|
$
|
(8,888
|
)
|
|
$
|
3,159
|
|
|
$
|
7,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
attributable to ordinary shareholders basic
|
|
|
(3.42
|
)
|
|
|
(2.32
|
)
|
|
|
(1.27
|
)
|
|
|
0.00
|
|
|
|
0.04
|
|
Net income (loss) per share
attributable to ordinary shareholders diluted
|
|
|
(3.42
|
)
|
|
|
(2.32
|
)
|
|
|
(1.27
|
)
|
|
|
0.00
|
|
|
|
0.03
|
|
Shares used to compute net income
(loss) per share
|
|
|
6,729
|
|
|
|
6,764
|
|
|
|
7,117
|
|
|
|
7,520
|
|
|
|
7,709
|
|
Shares used to compute diluted net
income (loss) per share
|
|
|
6,729
|
|
|
|
6,764
|
|
|
|
7,117
|
|
|
|
9,091
|
|
|
|
9,683
|
|
See Note 1 to our consolidated financial statements for a
description of the method used to compute shares used in
computing basic and diluted net loss per share.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,945
|
|
|
$
|
12,883
|
|
|
$
|
10,944
|
|
|
$
|
12,350
|
|
|
$
|
20,570
|
|
Working capital
|
|
|
29,980
|
|
|
|
19,978
|
|
|
|
13,391
|
|
|
|
17,240
|
|
|
|
25,446
|
|
Total assets
|
|
|
44,362
|
|
|
|
32,239
|
|
|
|
25,822
|
|
|
|
31,154
|
|
|
|
43,101
|
|
Long-term liabilities
|
|
|
2,792
|
|
|
|
4,429
|
|
|
|
4,164
|
|
|
|
4,389
|
|
|
|
3,577
|
|
Total liabilities
|
|
|
7,574
|
|
|
|
10,439
|
|
|
|
11,473
|
|
|
|
13,270
|
|
|
|
16,069
|
|
Mandatorily redeemable convertible
preferred shares
|
|
|
55,118
|
|
|
|
55,262
|
|
|
|
55,417
|
|
|
|
55,583
|
|
|
|
55,759
|
|
Convertible preferred shares
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
Total shareholders deficit
|
|
$
|
(54,668
|
)
|
|
$
|
(69,800
|
)
|
|
$
|
(77,406
|
)
|
|
$
|
(74,037
|
)
|
|
$
|
(65,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion of our financial
condition and results of operations in conjunction with the
financial statements and the notes thereto included elsewhere in
this report. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below
and elsewhere in this report, particularly in the Risk
Factors.
Overview
General
We are a leading supplier of semiconductor-based,
high-performance interconnect products that facilitate data
transmission between servers, communications infrastructure
equipment and storage systems. Our products are an integral part
of a total solution focused on computing, storage and
communication applications used in enterprise data center,
high-performance computing and embedded systems. We operate in
one reportable segment: the development, manufacturing,
marketing and sales of InfiniBand semiconductor products (see
Note 14, Segment Information, of the
accompanying notes to our consolidated financial statements).
We are a fabless semiconductor company that provides
high-performance interconnect products based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our ICs. Growth in our target markets is
being driven by the need to improve the efficiency and
performance of clustered systems, as well as the need to
significantly reduce the total cost of ownership. In addition,
we believe that demand for our products will largely depend upon
the magnitude and timing of capital spending by end users.
We outsource our manufacturing, assembly, packaging and
production test functions, which enables us to focus on the
design, development, sales and marketing of our products. As a
result, our business has relatively low capital requirements.
However, our ability to bring new products to market, fulfill
customer orders and achieve long-term growth depends on our
ability to maintain sufficient technical personnel and obtain
sufficient external subcontractor capacity.
We have experienced rapid growth in our total revenues in each
of the last three years. Our revenues increased from
$20.3 million to $42.1 million to $48.5 million
for the years ended December 31, 2004, 2005 and 2006,
respectively. In order to continue to increase our revenues, we
must continue to achieve design wins over other InfiniBand
providers and providers of competing interconnect technologies.
We consider a design win to occur when an OEM or contract
manufacturer notifies us that it has selected our products to be
incorporated into a product or system under development. Because
the life cycles for our customers products can last for
several years if these products have successful commercial
introductions, we expect to continue to generate revenues over
an extended period of time for each successful design win.
39
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 and cards. To date, we have derived a substantial portion of
our revenues from a relatively small number of customers. Total
sales to customers representing more than 10% of revenues
accounted for 52%, 56% and 55% of our total revenues for the
years ended December 31, 2004, 2005 and 2006, respectively.
The loss of one or more of our principal customers or the
reduction or deferral of purchases of our products by one of
these customers could cause our revenues to decline materially
if we are unable to increase our revenues from other customers.
Cost of revenues and gross profit. The cost of
revenues consists primarily of the cost of silicon wafers
purchased from our foundry supplier, Taiwan Semiconductor
Manufacturing Company, or TSMC, costs associated with the
assembly, packaging and production testing of our products by
Advanced Semiconductor Engineering, or ASE, outside processing
costs associated with the manufacture of our HCA cards by
Flextronics, royalties due to third parties, including the
Office of the Chief Scientist of Israels Ministry of
Industry, Trade and Labor, or the OCS, the Binational Industrial
Research and Development (BIRD) Foundation and a third-party
licensor, warranty costs, excess and obsolete inventory costs
and costs of personnel associated with production management and
quality assurance. In addition, after we purchase wafers from
our foundries, we also have the yield risk related to
manufacturing these wafers into semiconductor devices.
Manufacturing yield is the percentage of acceptable product
resulting from the manufacturing process, as identified when the
product is tested as a finished IC. If our manufacturing yields
decrease, our cost per unit increases, which could have a
significant adverse impact on our cost of revenues. We do not
have long-term pricing agreements with TSMC and ASE.
Accordingly, our costs are subject to price fluctuations based
on the cyclical demand for semiconductors.
We purchase our inventory pursuant to standard purchase orders.
We estimate that lead times for delivery of our finished
semiconductors from our foundry supplier and assembly, packaging
and production testing subcontractor are approximately three to
four months and that lead times for delivery from our HCA card
manufacturing subcontractors are approximately eight to ten
weeks. We build inventory based on forecasts of customer orders
rather than the actual orders themselves. In addition, as
customers are increasingly seeking opportunities to reduce their
lead times, we may be required to increase our inventory to meet
customer demand.
We expect our cost of revenues to increase over time as a result
of the expected increase in our sales volume. Generally, our
cost of revenues as a percentage of sales revenues has decreased
over time, primarily due to manufacturing cost reductions,
economies of scale related to higher unit volumes and our
decision to discontinue sales of our lower margin switch systems
products in 2005. This trend may not continue in the future, and
will depend on overall customer demand for our products, our
product mix, competitive product offerings and related pricing
and our ability to reduce manufacturing costs.
Operational
expenses
Research and development expenses. Our
research and development expenses consist primarily of salaries
and associated costs for employees engaged in research and
development, costs associated with computer aided design
software tools, depreciation expense and tape out costs. Tape
out costs are expenses related to the manufacture of new
products, including charges for mask sets, prototype wafers,
mask set revisions and testing incurred before releasing new
products. We anticipate these expenses will increase in future
periods based on an increase in personnel to support our product
development activities and the introduction of new products. We
anticipate that our research and development expenses may
fluctuate over the course of a year based on the timing of our
product tape outs.
We received grants from the OCS for several
projects. Under the terms of these grants, if
products developed from an OCS-funded project generate revenue
we are required to pay a royalty of 4% of the net sales as soon
as we
40
begin to sell such products until 120% of the dollar value of
the grant plus interest at LIBOR is repaid. All of the grants we
have received from the OCS have resulted in IC products sold by
us. In 2004 and 2005, we received an aggregate of
$1.3 million and $43,000, respectively, of approved grants
in support of some of our research and development programs. We
received no grants from the OCS during the year ended
December 31, 2006. As of December 31, 2006, our
contingent obligation in respect of royalties payable to the OCS
totaled approximately $2.0 million, payable out of future
net sales, if any, of products that were developed under
projects funded by the OCS. The continued repayment of OCS
grants is contingent on future sales of products developed with
the support of such grants, and we have no obligation to refund
these grants if future sales are not generated. All reported
research and development expenses are net of OCS and other
government grants.
The terms of OCS grants generally prohibit the manufacture of
products developed with OCS funding outside of Israel without
the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel of our IC products, subject to an
undertaking by us to pay the OCS royalties on the sales of our
OCS-supported products until such time as the total royalties
paid equal 120% of the amount of OCS grants.
Under applicable Israeli law, OCS consent is also required to
transfer technologies developed with OCS funding to third
parties in Israel. Transfer of OCS-funded technologies outside
of Israel is permitted with the approval of the OCS and in
accordance with the restrictions and payment obligations set
forth under Israeli law. Israeli law further specifies that both
the transfer of know-how as well as the transfer of intellectual
property rights in such know-how are subject to the same
restrictions. These restrictions do not apply to exports of
products from Israel or the sale of products developed with
these technologies. We do not anticipate the need to transfer
any of our intellectual property rights outside of Israel at
this time.
Sales and marketing expenses. Sales and
marketing expenses consist primarily of salaries and associated
costs for employees engaged in sales, marketing and customer
support, commission payments to external, third party sales
representatives, sales-related legal costs for contract reviews,
and charges for trade shows, promotions and travel. We expect
these expenses will increase in absolute dollars in future
periods based on an increase in sales and marketing personnel
and increased commission payments on higher sales volumes.
General and administrative expenses. General
and administrative expenses consist primarily of salaries and
associated costs for employees engaged in finance, human
resources and administrative activities and charges for
accounting and corporate legal fees. We expect these expenses
will increase in absolute dollars in future periods based on an
increase in personnel to meet the requirements associated with
our anticipated growth and being a public company.
Taxes on
Income
Our operations in Israel have been granted Approved
Enterprise status by the Investment Center of the Israeli
Ministry of Industry, Trade and Labor, which makes us eligible
for tax benefits under the Israeli Law for Encouragement of
Capital Investments, 1959. Under the terms of the Approved
Enterprise program, income that is attributable to our
operations in Yokneam, Israel will be exempt from income tax for
a period of ten years commencing when we first generate taxable
income (after setting off our losses from prior years). Income
that is attributable to our operations in Tel Aviv, Israel will
be exempt from income tax for a period of two years commencing
when we first generate taxable income (after setting off our
losses from prior years), and will be subject to a reduced
income tax rate (generally
10-25%,
depending on the percentage of foreign investment in our
company) for the following five to eight years.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures.
We evaluate our estimates and assumptions on an ongoing basis.
Our estimates are based on historical experience and various
other assumptions that we believe to be reasonable under the
circumstances. Our actual results could differ from these
estimates.
41
We believe that the assumptions and estimates associated with
revenue recognition, allowance for doubtful accounts, inventory
valuation, warranty provision, income taxes and share-based
compensation have the greatest potential impact on our
consolidated financial statements. Therefore, we consider these
to be our critical accounting policies and estimates. For
further information on all of our significant accounting
policies, please see Note 1 of the accompanying notes to
our consolidated financial statements.
Revenue
recognition
We account for our revenue under the provisions of Staff
Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements (SAB 104).
Under SAB 104, revenues from sales of products are
recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and
collection is reasonably assured. Our standard arrangement with
our customers typically includes
freight-on-board
shipping point,
30-day
payment terms, no right of return and no customer acceptance
provisions. We generally rely upon a purchase order as
persuasive evidence of an arrangement.
We determine whether collectibility is probable on a
customer-by-customer
basis. When assessing the probability of collection, we consider
the number of years the customer has been in business and the
history of our collections. Customers are subject to a credit
review process that evaluates the customers financial
positions and ultimately their ability to pay. If it is
determined at the outset of an arrangement that collection is
not probable, no product is shipped and no revenue is recognized
unless cash is received in advance.
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 $95,000 and $107,000 at December 31, 2005 and
2006, respectively. Our bad debt expense totaled approximately
$72,000, $70,000 and $10,000 for the years ended
December 31, 2004, 2005 and 2006, respectively.
Inventory
valuation
We value our inventory at the lower of cost or market. Market is
determined based on net realizable value. Cost is determined for
raw materials on a
first-in,
first-out basis, for work in process based on actual costs
and for finished goods based on standard cost, which
approximates actual cost on a
first-in,
first-out basis. We reserve for excess and obsolete inventory
based on forecasted demand generally over a nine-month period
and market conditions. Inventory reserves are not reversed and
permanently reduce the cost basis of the affected inventory
until it is either sold or scrapped.
Warranty
provision
We provide a standard
12-month
warranty 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
12-month
period. In addition, we recognize estimated warranty expenses
for specific defects at the time those defects are identified.
Depending on the nature of the specific defect, we may extend
the warranty period beyond the standard 12 months from the
date of delivery.
Share-based
compensation
Through December 31, 2005, we elected to account for
share-based compensation in accordance with the intrinsic value
method described in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
42
Employees (APB 25) and related
interpretations rather than adopting the fair value method
provided under SFAS No. 123, Accounting for
Stock Based Compensation (SFAS 123). We have
generally not recognized any compensation expense for share
options we granted to our employees where the exercise price
equals the fair market value of the shares on the date of grant
and the exercise price, number of shares eligible for issuance
under the options and vesting period are fixed.
Effective January 1, 2006, we adopted
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)), which requires that we
measure compensation expense for all share-based payment awards
made to employees and directors, including employee share
options, based on estimated fair values and recognize that
expense over the required service period.
We adopted SFAS 123(R) using the prospective transition
method. Under this method, SFAS 123(R) is applied to new
awards and to awards modified, repurchased or cancelled after
January 1, 2006. Compensation cost previously recorded
under APB 25 for unvested options will continue to be
recognized as the required services are rendered. Accordingly,
for the year ended December 31, 2006, share-based
compensation expense includes compensation costs related to
estimated fair values of awards granted after the date of
adoption of SFAS 123(R) and compensation costs related to
unvested awards at the date of adoption based on the intrinsic
values as previously recorded under APB 25.
For options granted after January 1, 2006, and valued in
accordance with SFAS 123(R), we use the straight-line
method for expense attribution. For options granted prior to
January 1, 2006, we use the multiple grant approach for
expense attribution, which results in substantially higher
amounts of amortization in earlier years as opposed to the
straight-line method, which results in equal amortization over
the vesting period of the options.
Upon adoption of SFAS 123(R), we were required to estimate
the number of outstanding options that are not expected to vest.
In subsequent periods, if actual forfeitures differ from these
estimates, we will revise our estimates. No compensation cost is
recognized for options that do not vest. Under the multiple
grant approach, forfeitures of unvested options resulting from
employee terminations result in the reversal during the period
in which the termination occurred of previously expensed share
compensation associated with the unvested options with
maturities similar to the expected terms of the respective
options. Share compensation from vested options, whether
forfeited or not, is not reversed.
We estimated the fair value of options granted after
January 1, 2006 using the Black-Scholes option valuation
model. This valuation model requires us to make assumptions and
judgments about the variables used in the calculation. These
variables and assumptions include the weighted average period of
time that the options granted are expected to be outstanding,
the volatility of our ordinary shares, the risk-free interest
rate and the estimated rate of forfeitures of unvested share
options. If actual results differ from our estimates, we will
record the difference as a cumulative adjustment in the period
we revise our estimates. Because our ordinary shares were not
publicly traded until February 8, 2007, we used the
simplified calculation of expected life described in the SEC
Staff Accounting Bulletin No. 107 and we estimated our
ordinary shares volatility based on an average of the
historical volatilities of the companys peer group in the
industry in which it does business. The risk-free rate is based
on U.S. Treasury securities with maturities similar to the
expected terms of the respective options. We estimated expected
forfeitures based on our historical experience.
Accounting
for income taxes
Income taxes are accounted for using an asset and liability
approach, which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been
recognized in our financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets
are based on the provisions of enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to
43
affect taxable income. Valuation allowances are provided if,
based on the weight of available evidence, it is considered more
likely than not that some or all of the deferred tax assets will
not be realized.
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Total Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
(43
|
)
|
|
|
(36
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
57
|
|
|
|
64
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
64
|
|
|
|
31
|
|
|
|
31
|
|
Sales and marketing
|
|
|
28
|
|
|
|
18
|
|
|
|
18
|
|
General and administrative
|
|
|
8
|
|
|
|
7
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
100
|
|
|
|
56
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(43
|
)
|
|
|
8
|
|
|
|
15
|
|
Other income, net
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Provision for taxes on income
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(44
|
)
|
|
|
8
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Year Ended December 31, 2006 to the Year Ended
December 31, 2005
Revenues. Revenues were approximately
$48.5 million for the year ended December 31, 2006
compared to approximately $42.1 million for the year ended
December 31, 2005, representing an increase of
approximately 15%. This increase in revenues resulted primarily
from increased unit sales of approximately 27%, driven by
broader adoption of InfiniBand and our products, offset by a
decrease in average sales prices of 9%. A portion of the
decrease in average sales prices was due to the decline from 6%
to 3% in the percentage of revenues attributable to switch
systems, which have significantly higher sales prices. In
addition, Cisco, one of our largest customers that represented
approximately 14% of our revenues in the year ended
December 31, 2006, represented approximately 44% of our
revenues in the year ended December 31, 2005. A portion of
this percentage decline was attributable to an accumulation of
inventory in 2005 by Cisco following its acquisition of Topspin
Communications. We believe this inventory has been substantially
sold in 2005 and 2006. Cisco remained one of our largest
customers for the year ended December 31, 2006.
Gross Profit and Margin. Gross profit was
approximately $35.0 million for the year ended
December 31, 2006 compared to approximate
$26.9 million for the year ended December 31, 2005,
representing an increase of 30%. As a percentage of revenues,
gross margin increased to 72% in the year ended
December 31, 2006 from approximately 64% in the year ended
December 31, 2005. This increase in gross margin was
primarily due to a reduction in production costs associated with
outsourced labor, raw materials and volume discounts. In
addition, part of the gross margin improvement was due to
increased sales of next generation products for which we receive
higher margins.
Research and Development. Research and
development expenses were approximately $15.3 million for
the year ended December 31, 2006 compared to approximately
$13.1 million for the year ended December 31, 2005,
representing an increase of approximately 17%. The increase was
primarily attributable to higher salary related expenses of
approximately $2.1 million associated with increased
headcount, and increased depreciation and amortization of
equipment, software and intellectual property of approximately
$281,000, partially offset by decreased purchases of new
equipment, software and associated customer support of
approximately $201,000.
44
Sales and Marketing. Sales and marketing
expenses were approximately $8.9 million for the year ended
December 31, 2006 compared to approximately
$7.4 million for the year ended December 31, 2005,
representing an increase of approximately 20%. The increase was
primarily attributable to higher salary related expenses of
approximately $1.1 million associated with increased
headcount, an increase in tradeshow and advertising expenses of
approximately $271,000 and an increase in travel related
expenses of $151,000.
General and Administrative. General and
administrative expenses were approximately $3.7 million for
the year ended December 31, 2006 compared to approximately
$3.1 million for the year ended December 31, 2005,
representing an increase of approximately 19%. The increase was
primarily due to higher salary related expenses of approximately
$353,000 associated with increased headcount and an increase in
legal, accounting and consulting fees of approximately $410,000,
partially offset by a decrease in travel related expenses of
approximately $84,000.
Other Income, net. Other income, net consists
of interest earned on cash equivalents and marketable securities
and foreign currency exchange gains and losses. Other income,
net was approximately $438,000 for the year ended
December 31, 2006 compared to approximately $326,000 for
the year ended December 31, 2005, representing an increase
of approximately 34%. The increase was due to higher net
interest income on cash deposits partially offset by higher
foreign exchange losses.
Provision for Taxes on Income. Provision for
taxes on income was approximately $301,000 for the year ended
December 31, 2006 compared to approximately $462,000 for
the year ended December 31, 2005, representing a decrease
of 35%. The decrease was primarily related to the decline in the
percentage of total revenues generated within the United States.
For the year ended December 31, 2006, revenues generated in
the United States represented 58% of all revenues, compared to
71% of all revenues for the year ended December 31, 2005.
Generally, revenues generated outside the United States are
exempt from income tax under the Approved Enterprise Tax Holiday.
Comparison
of the Year Ended December 31, 2005 to the Year Ended
December 31, 2004
Revenues. Revenues were approximately
$42.1 million for the year ended December 31, 2005
compared to approximately $20.3 million for the year ended
December 31, 2004, representing an increase of 107%. This
significant increase in revenues resulted primarily from
increased unit sales of approximately 103%, driven by broader
adoption of InfiniBand and our products, and an increase in
average sales prices of 2%.
Gross Profit and Margin. Gross profit was
approximately $26.9 million for the year ended
December 31, 2005 compared to approximately
$11.5 million for the year ended December 31, 2004,
representing an increase of approximately 133%. As a percentage
of revenues, gross profit increased to approximately 64% in 2005
from 57% in 2004. This increase in gross profit margin was
primarily due to an approximate 5% reduction in production costs
coupled with an approximate 2% increase in average sales prices.
Part of the gross margin improvement was also due to a decline
in the percentage of revenues attributable to switch systems,
historically a lower margin business, which declined to
approximately 6% from approximately 14% of total revenues during
the year.
Research and Development. Research and
development expenses were approximately $13.1 million for
the year ended December 31, 2005 compared to approximately
$12.9 million for the year ended December 31, 2004,
representing an increase of approximately 2%. The change in
spending consisted of a reduction in tape out costs in 2005 of
approximately $1.2 million offset by $43,000 in OCS funding
in 2005, compared to $1.3 million of OCS funding received
in 2004, which was recorded as a reduction to research and
development.
Sales and Marketing. Sales and marketing
expenses were approximately $7.4 million for the year ended
December 31, 2005 compared to approximately
$5.6 million for the year ended December 31, 2004,
representing an increase of approximately 32%. The increase was
primarily attributable to approximately $1.1 million of
higher external sales representative commissions associated with
increased revenues, higher salary and travel related expenses
due to staff additions of approximately $828,000, higher
marketing related expenses and enterprise resource planning, or
ERP, related expenses of approximately $291,000 and $121,000,
respectively, partially offset by approximately $488,000 of
lower share-based compensation expense.
General and Administrative. General and
administrative expenses were approximately $3.1 million for
the year ended December 31, 2005 compared to approximately
$1.7 million for the year ended December 31, 2004,
45
representing an increase of approximately 82%. The increase in
2005 was due to higher salary related expenses associated with
headcount additions of approximately $788,000, increased
facilities related expenses of approximately $326,000, increased
legal and accounting costs of approximately $251,000 and ERP
system implementation related consulting expenses of
approximately $149,000, partially offset by approximately
$176,000 of lower share-based compensation expense.
Other Income, net. Other income, net was
approximately $326,000 for the year ended December 31, 2005
compared to approximately $123,000 for the year ended
December 31, 2004, representing an increase of
approximately 165%. The increase was primarily attributable to
gains of $217,000 from foreign currency exchange fluctuations.
Provision for Taxes on Income. Provision for
taxes on income was approximately $462,000 for the year ended
December 31, 2005 compared to approximately $306,000 for
the year ended December 31, 2004, representing an increase
of approximately 51%. The increase was related to higher income
attributable to Mellanox Technologies, Inc.
Liquidity
and Capital Resources
Since our inception until our initial public offering in
February 2007, we have financed our operations primarily through
private placements of our convertible preferred shares totaling
approximately $89.3 million. We incurred net losses from
operations since inception until the second quarter of 2005 and
had an accumulated deficit of approximately $69.3 million
as of December 31, 2006. As of December 31, 2006, our
principal source of liquidity consisted of cash and cash
equivalents of approximately $20.6 million. In August 2005,
we entered into an agreement with a financial institution to
provide us with a line of credit of up to approximately
$5.0 million for general working capital requirements. As
of December 31, 2006, we had not drawn down on this line of
credit.
On February 13, 2007, we closed the initial public offering
of our ordinary shares. We sold 6,900,000 ordinary shares in the
offering, which number of shares included the underwriters
exercise in full of their option to purchase up to
900,000 shares to cover over-allotments, at an offering
price of $17.00 per share. Net proceeds generated by the
offering, after adjusting for offering costs, totaled
approximately $106 million. We expect these proceeds, in
addition to our cash flows from operating activities, to be
sufficient to fund our operations over the next 12 months
after taking into account expected increases in research and
development expenses, including tape out costs, sales and
marketing expenses, general and administrative expenses,
primarily for increased headcount, and capital expenditures to
support our infrastructure and growth.
In addition, as of December 31, 2006, we were required to
make total remaining payments of approximately $1.2 million
to Vitesse Semiconductor Corporation pursuant to a license
agreement dated December 16, 2002. This agreement
terminated on December 31, 2006, and the $1.2 million
was paid by January 31, 2007.
During the months of January and February 2007, we incurred
costs of approximately $1 million for the tapeout of our
new ConnectX semiconductor product. These additional costs were
paid in full during the first quarter of 2007.
Operating
Activities
Net cash generated by our operating activities amounted to
approximately $9.1 million for the year ended
December 31, 2006. Net cash generated by operating
activities was primarily attributable to net income of
approximately $7.2 million and an increase in accrued
liabilities of approximately $1.9 million. Cash generated
by operating activities in 2006 included increases in accounts
receivable resulting from increased product sales of
approximately $2.2 million, partially offset by non-cash
charges of approximately $2.0 million for depreciation and
amortization.
Net cash generated by operating activities in 2005 was
approximately $770,000. Our net income of approximately
$3.2 million was impacted by a non-cash charge of
approximately $1.7 million for depreciation and
amortization. Cash generated by operating activities in 2005
included increases in accounts receivable resulting from
increased product sales and inventories resulting from increased
projected product demand of approximately
46
$3.2 million and $2.3 million, respectively, and an
increase in accrued liabilities and other payables of
approximately $1.0 million.
Net cash used in operating activities in 2004 was approximately
$5.7 million. Our net losses of approximately
$8.9 million were offset by non-cash charges of
approximately $2.5 million for depreciation and
amortization and approximately $1.0 million for share-based
compensation expense. Cash used for operating activities in 2004
included increases in accounts receivable of approximately
$2.9 million, partially offset by a decrease in prepaid
expenses of approximately $1.3 million and an increase in
accounts payable of approximately $1.4 million.
In the years ended December 31, 2004 and 2005, we received
from the OCS an aggregate of $1.3 million and $43,000,
respectively, of approved grants in support of some of our
research and development programs. We did not receive any grants
from the OCS during the year ended December 31, 2006.
Investing
Activities
Net cash used in investing activities was approximately $569,000
in the year ended December 31, 2006. Cash used in
investment activities was primarily attributable to purchases of
property and equipment and severance-related insurance policies,
offset by the partial return of a tenancy security deposit in
Israel that was no longer restricted due to the renegotiation of
the tenancy agreement.
Net cash generated by investment activities was approximately
$462,000 in the year ended December 31, 2005 and
approximately $3.9 million in the year ended
December 31, 2004, and was primarily attributable to net
sales and maturities of marketable securities (net of purchases)
offset by purchases of property and equipment and
severance-related insurance policies.
Financing
Activities
Net cash used in financing activities was approximately $292,000
in the year ended December 31, 2006. Cash used in financing
activities was attributable to proceeds from the exercise of
share options and warrants, offset by principal payments on
capital lease obligations and payments on deferred public
offering costs.
Our financing activities generated approximately $174,000 in
2005 and were attributable to proceeds from the exercise of
share options, partially offset by principal payments on capital
lease obligations. Our financing activities used approximately
$65,000 in the year ended December 31, 2004, and were
primarily attributable to principal payments on capital lease
obligations partially offset by proceeds from share option
exercises.
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2006 and the effect those obligations are
expected to have on our liquidity and cash flow in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
Beyond
|
|
Contractual Obligations:
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3 Years
|
|
|
|
(In thousands of dollars)
|
|
|
Commitments under capital lease
|
|
$
|
961
|
|
|
$
|
420
|
|
|
$
|
541
|
|
|
$
|
|
|
Non-cancelable operating lease
commitments
|
|
|
6,658
|
|
|
|
1,927
|
|
|
|
3,185
|
|
|
|
1,546
|
|
Purchase commitments
|
|
|
1,628
|
|
|
|
1,628
|
|
|
|
|
|
|
|
|
|
Obligation on purchase of
intangible assets
|
|
|
1,156
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,403
|
|
|
$
|
5,131
|
|
|
$
|
3,726
|
|
|
$
|
1,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of this table, purchase obligations for the
purchase of goods or services are defined as agreements that are
enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Our purchase orders are based on our
current manufacturing needs and are fulfilled by our vendors
within short time horizons. In addition, we have purchase orders
that represent authorizations to purchase rather
47
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.
Recent
Accounting Pronouncements
In June 2006, the FASB ratified Emerging Issues Task Force, or
EITF, Issue
06-3,
How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should be Presented in the Income
Statement. EITF
06-3
requires a company to disclose its accounting policy (i.e.,
gross or net presentation) regarding the presentation of taxes
within the scope of EITF
06-3. If
taxes are significant, a company should disclose the amount of
such taxes for each period for which an income statement is
presented. The guidance is effective for periods beginning after
December 15, 2006. We expect that the financial impact, if
any, of the adoption of EITF
06-3 will
not be material on our financial position and results of
operations upon the initial adoption of EITF
06-3.
In June 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS 109. FIN 48 prescribes a recognition and
measurement method of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently analyzing the effects
of FIN 48 on our consolidated financial position and
results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS No. 157, which defines
fair value, establishes a framework for measuring fair value
under generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source
of the information. SFAS No. 157 is effective for the
company as of January 1, 2008. We expect that the financial
impact, if any, of the adoption of SFAS No. 157 will
not be material on our financial statements upon the initial
adoption of SFAS 157.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities,
or SFAS No. 159, which permits entities to elect to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. This election is irrevocable. SFAS No. 159
will be effective for us on January 1, 2008. We are
currently assessing the potential impact that the adoption of
SFAS No. 159 will have on our financial statements.
Off-Balance
Sheet Arrangements
As of December 31, 2006, we did not have any off-balance
sheet arrangements.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk is the risk of loss related to changes in market
prices of financial instruments that may adversely impact our
consolidated financial position, results of operations or cash
flows.
Interest
rate fluctuation risk
We do not have any long-term borrowings. Our investments consist
of cash and cash equivalents, short-term deposits and interest
bearing investments in marketable securities with maturities of
one year or less, consisting of commercial paper, government and
non- government debt securities. The primary objective of our
investment activities is to preserve principal while maximizing
income without significantly increasing risk. We do not enter
into investments for trading or speculative purposes. Our
investments are exposed to market risk due to a fluctuation in
interest rates, which may affect our interest income and the
fair market value of our investments. Due to the short-term
nature of our investment portfolio, we do not believe an
immediate 10% increase 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.
48
Foreign
currency exchange risk
All of our sales are invoiced in U.S. dollars. The
U.S. dollar is our functional and reporting currency.
However, a significant portion of our headcount related
expenses, consisting principally of salaries and related
personnel expenses, are denominated in new Israeli shekels, or
NIS. This foreign currency exposure gives rise to market risk
associated with exchange rate movements of the U.S. dollar
against the NIS. Furthermore, we anticipate that a material
portion of our expenses will continue to be denominated in NIS.
To the extent the U.S. dollar weakens against the NIS, we
will experience a negative impact on our profit margins. To
manage this risk, we have on occasion converted
U.S. dollars into NIS within two to three weeks of monthly
pay dates in Israel to lock in the related salary expense given
the different currencies. We do not currently engage in currency
hedging activities but we may choose to do so in the future.
These measures, however, may not adequately protect us from
material adverse effects due to the impact of inflation in
Israel.
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 Annual Report on
Form 10-K
and are incorporated by reference into this Item 8. See
Item 15, Exhibits and Financial Statement
Schedules.
Summary
Quarterly Data Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands except per share data)
|
|
|
Total revenues
|
|
$
|
7,682
|
|
|
$
|
10,040
|
|
|
$
|
12,152
|
|
|
$
|
12,194
|
|
|
$
|
8,506
|
|
|
$
|
10,813
|
|
|
$
|
13,422
|
|
|
$
|
15,798
|
|
Cost of revenues
|
|
|
(3,134
|
)
|
|
|
(4,058
|
)
|
|
|
(4,061
|
)
|
|
|
(3,950
|
)
|
|
|
(2,506
|
)
|
|
|
(3,444
|
)
|
|
|
(3,651
|
)
|
|
|
(3,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,548
|
|
|
|
5,982
|
|
|
|
8,091
|
|
|
|
8,244
|
|
|
|
6,000
|
|
|
|
7,369
|
|
|
|
9,771
|
|
|
|
11,866
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,123
|
|
|
|
2,977
|
|
|
|
3,207
|
|
|
|
3,774
|
|
|
|
3,560
|
|
|
|
3,683
|
|
|
|
3,821
|
|
|
|
4,192
|
|
Sales and marketing
|
|
|
1,681
|
|
|
|
1,659
|
|
|
|
1,951
|
|
|
|
2,104
|
|
|
|
1,785
|
|
|
|
2,173
|
|
|
|
2,122
|
|
|
|
2,855
|
|
General and administrative
|
|
|
623
|
|
|
|
702
|
|
|
|
793
|
|
|
|
976
|
|
|
|
826
|
|
|
|
792
|
|
|
|
926
|
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,427
|
|
|
|
5,338
|
|
|
|
5,951
|
|
|
|
6,854
|
|
|
|
6,171
|
|
|
|
6,648
|
|
|
|
6,869
|
|
|
|
8,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(879
|
)
|
|
|
644
|
|
|
|
2,140
|
|
|
|
1,390
|
|
|
|
(171
|
)
|
|
|
721
|
|
|
|
2,902
|
|
|
|
3,659
|
|
Other income and expense, net
|
|
|
70
|
|
|
|
148
|
|
|
|
63
|
|
|
|
45
|
|
|
|
134
|
|
|
|
(3
|
)
|
|
|
101
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
(809
|
)
|
|
|
792
|
|
|
|
2,203
|
|
|
|
1,435
|
|
|
|
(37
|
)
|
|
|
718
|
|
|
|
3,003
|
|
|
|
3,865
|
|
Provision for taxes on income
|
|
|
(110
|
)
|
|
|
(130
|
)
|
|
|
(89
|
)
|
|
|
(133
|
)
|
|
|
(54
|
)
|
|
|
(69
|
)
|
|
|
(148
|
)
|
|
|
(30
|
)
|
Net income (loss)
|
|
$
|
(919
|
)
|
|
$
|
662
|
|
|
$
|
2,114
|
|
|
$
|
1,302
|
|
|
$
|
(91
|
)
|
|
$
|
649
|
|
|
$
|
2,855
|
|
|
$
|
3,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
ordinary shareholders
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(135
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share basic
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.06
|
|
Net income (loss) per
share diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
|
ITEM 9
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
49
ITEM 9A
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 Securities and
Exchange Commissions rules and forms and that such
information is accumulated and communicated to our 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 Securities and Exchange Commission
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 the end of the period covered by this report. Based on the
foregoing, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level.
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
companys registered public accounting firm due to a
transition period established by rules of the SEC for newly
public companies.
There has been no change in our internal control over financial
reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B
OTHER INFORMATION
None.
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by this item will be contained in our
definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with the Annual Meeting of our
Shareholders (the Proxy Statement), which is
expected to be filed not later than 120 days after the end
of our fiscal year ended December 31, 2006, and is
incorporated in this report by reference.
Our written Code of Business Conduct and Ethics applies to all
of its directors and employees, including its 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.
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.
50
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. The following financial statements of the Company and
reports of the independent registered public accounting firms
are included in this report:
|
|
|
|
|
|
|
Page
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
(b) Exhibits. The following exhibits are
filed as a part of this report:
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of
Association of Mellanox Technologies, Ltd.
|
|
4
|
.2(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
|
.3
|
|
Amendment to the 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.
|
|
10
|
.1(3)
|
|
Mellanox Technologies, Ltd. 1999
United States Equity Incentive Plan and forms of agreements
relating thereto.
|
|
10
|
.2(4)
|
|
Mellanox Technologies, Ltd. 1999
Israeli Share Option Plan and forms of agreements relating
thereto.
|
|
10
|
.3(5)
|
|
Mellanox Technologies, Ltd. 2003
Israeli Share Option Plan and forms of agreements relating
thereto.
|
|
10
|
.4(6)
|
|
Form of Indemnification
undertaking made by and between Mellanox Technologies, Ltd. and
each of its directors and executive officers.
|
|
10
|
.5(7)(8)
|
|
License Agreement between Vitesse
Semiconductor Corporation and the Company, dated
September 10, 2001.
|
|
10
|
.6(7)(9)
|
|
License Agreement between Vitesse
Semiconductor Corporation and the Company, dated
December 16, 2002.
|
51
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.7(10)
|
|
Net Lease Agreement between S.I.
Hahn, LLC and Mellanox Technologies, Inc., dated January 1,
2002.
|
|
10
|
.8(11)
|
|
Credit Agreement between Wells
Fargo Bank, National Association and Mellanox Technologies,
Inc., dated August 16, 2005, and the first amendment
thereto and Promissory Note, and addendum thereto.
|
|
10
|
.9(12)
|
|
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
|
.10(13)
|
|
Mellanox Technologies, Ltd. Global
Share Incentive Plan (2006) and forms of agreements and
appendices relating thereto.
|
|
10
|
.11(14)
|
|
Mellanox Technologies, Ltd.
Non-Employee Director Option Grant Policy.
|
|
10
|
.12(15)
|
|
Form of Mellanox Technologies,
Ltd. Executive Severance Agreement for U.S. Executives.
|
|
10
|
.13(16)
|
|
Form of Mellanox Technologies,
Ltd. Executive Severance Agreement for Israel Executives.
|
|
10
|
.14(17)
|
|
Mellanox Technologies, Ltd.
Employee Share Purchase Plan.
|
|
14
|
.1
|
|
Code of Business Conduct and
Ethics.
|
|
21
|
.1(18)
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP, independent registered public accounting firm.
|
|
23
|
.2
|
|
Consent of Kesselman &
Kesselman.
|
|
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 the Companys Registration
Statement on Form
S-1 (SEC
File
No. 333-137659)
filed on January 22, 2007. |
|
(2) |
|
Incorporated by reference to Exhibit 3.2 to Amendment
No. 4 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(3) |
|
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. |
|
(4) |
|
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. |
|
(5) |
|
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. |
|
(6) |
|
Incorporated by reference to Exhibit 10.4 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(7) |
|
Confidential treatment granted as to certain portions, which
portions, have been omitted and filed separately with the
Securities and Exchange Commission. |
|
(8) |
|
Incorporated by reference to Exhibit 10.5 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(9) |
|
Incorporated by reference to Exhibit 10.6 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(10) |
|
Incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(11) |
|
Incorporated by reference to Exhibit 10.8 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(12) |
|
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. |
52
|
|
|
(13) |
|
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. |
|
(14) |
|
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. |
|
(15) |
|
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. |
|
(16) |
|
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. |
|
(17) |
|
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. |
|
(18) |
|
Incorporated by reference to Exhibit 21.1 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
53
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 deficit and
of cash flows present fairly, in all material respects, the
financial position of Mellanox Technologies, Ltd. and its
subsidiary at December 31, 2006 and December 31, 2005,
and the results of their operations and their cash flows for the
years ended December 31, 2006 and December 31, 2005 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audit provide a reasonable basis for our
opinion.
As discussed in Note 11 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
PricewaterhouseCoopers LLP
San Jose, California
March 23, 2007
54
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Mellanox
Technologies, Ltd.
In our opinion, the accompanying consolidated statements of
operations, of convertible preferred shares and
shareholders deficit and of cash flows present fairly, in
all material respects, the results of operations and cash flows
of Mellanox Technologies, Ltd. and its subsidiary at December
31, 2004, in conformity with accounting principles generally
accepted in the United States of America. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit
of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
Kesselman & Kesselman
Haifa, Israel
June 29, 2006 except as to the stock
split described in Note 15, which
is as of February 1, 2007
55
MELLANOX
TECHNOLOGIES, LTD.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,350
|
|
|
$
|
20,570
|
|
Restricted cash
|
|
|
1,266
|
|
|
|
678
|
|
Accounts receivable, net of
allowance for doubtful accounts of $95 and $107 for
December 31, 2005, and December 31, 2006, respectively
|
|
|
7,943
|
|
|
|
10,141
|
|
Inventories
|
|
|
4,031
|
|
|
|
4,079
|
|
Prepaid expenses and other
|
|
|
531
|
|
|
|
2,470
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
26,121
|
|
|
|
37,938
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,327
|
|
|
|
2,588
|
|
Severance assets
|
|
|
1,812
|
|
|
|
2,284
|
|
Intangible assets, net
|
|
|
667
|
|
|
|
167
|
|
Other long-term assets
|
|
|
227
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
31,154
|
|
|
$
|
43,101
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, CONVERTIBLE
PREFERRED SHARES AND SHAREHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
4,011
|
|
|
|
4,490
|
|
Other accrued liabilities
|
|
|
4,654
|
|
|
|
6,426
|
|
Capital lease obligations, current
|
|
|
216
|
|
|
|
420
|
|
Other liabilities, current
|
|
|
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,881
|
|
|
|
12,492
|
|
|
|
|
|
|
|
|
|
|
Accrued severance
|
|
|
2,189
|
|
|
|
2,940
|
|
Capital lease obligations
|
|
|
292
|
|
|
|
541
|
|
Other long-term obligations
|
|
|
1,908
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,270
|
|
|
|
16,069
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Mandatorily Redeemable Convertible
Preferred Shares: Series D, NIS 0.0175 par value,
6,484 shares authorized, 4,838 shares issued and
outstanding; liquidation preference of $83,954, at
December 31, 2005 and 2006, respectively
|
|
|
55,583
|
|
|
|
55,759
|
|
Convertible Preferred Shares:
Series A-1/2,
NIS 0.0175 par value, 4,571 shares authorized,
4,343 shares issued and outstanding, liquidation preference
of $7,600;
Series B-1/2,
NIS 0.0175 par value, 2,286 shares authorized,
2,225 shares issued and outstanding, liquidation preference
of $25,737; Series C, NIS 0.01 par value,
231 shares authorized, 231 shares issued and
outstanding, liquidation preference of $3,000, at
December 31, 2005 and 2006, respectively
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficit
|
|
|
|
|
|
|
|
|
Ordinary shares: NIS
0.0175 par value, 123,571 shares authorized, 7,655 and
7,862 shares issued and outstanding at December 31,
2005 and 2006, respectively
|
|
|
30
|
|
|
|
32
|
|
Additional paid-in capital
|
|
|
2,452
|
|
|
|
4,174
|
|
Accumulated deficit
|
|
|
(76,519
|
)
|
|
|
(69,271
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(74,037
|
)
|
|
|
(65,065
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible
preferred shares and shareholders deficit
|
|
$
|
31,154
|
|
|
$
|
43,101
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
56
MELLANOX
TECHNOLOGIES, LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands except per share data)
|
|
|
Total revenues
|
|
$
|
20,254
|
|
|
$
|
42,068
|
|
|
$
|
48,539
|
|
Cost of revenues
|
|
|
(8,736
|
)
|
|
|
(15,203
|
)
|
|
|
(13,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,518
|
|
|
|
26,865
|
|
|
|
35,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,864
|
|
|
|
13,081
|
|
|
|
15,256
|
|
Sales and marketing
|
|
|
5,640
|
|
|
|
7,395
|
|
|
|
8,935
|
|
General and administrative
|
|
|
1,719
|
|
|
|
3,094
|
|
|
|
3,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,223
|
|
|
|
23,570
|
|
|
|
27,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(8,705
|
)
|
|
|
3,295
|
|
|
|
7,111
|
|
Other income, net
|
|
|
123
|
|
|
|
326
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on
income
|
|
|
(8,582
|
)
|
|
|
3,621
|
|
|
|
7,549
|
|
Provision for taxes on income
|
|
|
(306
|
)
|
|
|
(462
|
)
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,888
|
)
|
|
$
|
3,159
|
|
|
$
|
7,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series D
mandatorily redeemable convertible preferred shares
|
|
|
(155
|
)
|
|
|
(166
|
)
|
|
|
(176
|
)
|
Income allocable to preferred
shareholders
|
|
|
|
|
|
|
(2,993
|
)
|
|
|
(6,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
ordinary shareholders
|
|
|
(9,043
|
)
|
|
|
0
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
attributable to ordinary shareholders basic
|
|
$
|
(1.27
|
)
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
attributable to ordinary shareholders diluted
|
|
$
|
(1.27
|
)
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing income
(loss) per share attributable to ordinary shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,117
|
|
|
|
7,520
|
|
|
|
7,709
|
|
Diluted
|
|
|
7,117
|
|
|
|
9,091
|
|
|
|
9,683
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
57
MELLANOX
TECHNOLOGIES, LTD.
SHARES AND SHAREHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Shareholders
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Shares
|
|
|
Preferred Shares
|
|
|
|
Ordinary Shares
|
|
|
Paid-in
|
|
|
Note
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
(In thousands of dollars, except share data)
|
|
Balance at December 31, 2003
|
|
|
4,838,482
|
|
|
$
|
55,262
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
|
6,877,912
|
|
|
$
|
28
|
|
|
$
|
1,031
|
|
|
$
|
(77
|
)
|
|
$
|
8
|
|
|
$
|
(70,790
|
)
|
|
$
|
(69,800
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,888
|
)
|
|
|
(8,888
|
)
|
Unrealized loss on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,899
|
)
|
Accretion of mandatorily redeemable
convertible preferred shares
|
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155
|
)
|
Amortization of deferred
share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
790
|
|
Share-based compensation for
non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
424,506
|
|
|
|
1
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Repayment of receivables from
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
4,838,482
|
|
|
$
|
55,417
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
|
7,303,275
|
|
|
$
|
29
|
|
|
$
|
2,246
|
|
|
$
|
|
|
|
$
|
(3
|
)
|
|
$
|
(79,678
|
)
|
|
$
|
(77,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,159
|
|
|
|
3,159
|
|
Unrealized gains on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,162
|
|
Accretion of mandatorily redeemable
convertible preferred shares
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166
|
)
|
Share-based compensation for
non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,865
|
|
|
|
1
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,838,482
|
|
|
$
|
55,583
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
|
7,655,140
|
|
|
$
|
30
|
|
|
$
|
2,452
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(76,519
|
)
|
|
$
|
(74,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,248
|
|
|
|
7,248
|
|
Accretion of mandatorily redeemable
convertible preferred shares
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
Share-based compensation for
non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
|
|
Share-based compensation for
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,908
|
|
|
|
1
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,694
|
|
|
|
1
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,130
|
|
Vesting of ordinary shares subject
to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
4,838,482
|
|
|
$
|
55,759
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
|
7,861,742
|
|
|
$
|
32
|
|
|
$
|
4,174
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(69,271
|
)
|
|
$
|
(65,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
58
MELLANOX
TECHNOLOGIES, LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,888
|
)
|
|
$
|
3,159
|
|
|
$
|
7,248
|
|
Adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
50
|
|
|
|
45
|
|
|
|
12
|
|
Depreciation and amortization
|
|
|
2,452
|
|
|
|
1,730
|
|
|
|
1,954
|
|
Deferred income taxes
|
|
|
(137
|
)
|
|
|
10
|
|
|
|
(201
|
)
|
Realized loss on marketable
securities
|
|
|
48
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
1,024
|
|
|
|
31
|
|
|
|
469
|
|
Accrued interest on restricted cash
|
|
|
(60
|
)
|
|
|
(34
|
)
|
|
|
(62
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,942
|
)
|
|
|
(3,237
|
)
|
|
|
(2,210
|
)
|
Inventories
|
|
|
2
|
|
|
|
(2,339
|
)
|
|
|
(48
|
)
|
Prepaid expenses and other assets
|
|
|
1,342
|
|
|
|
(157
|
)
|
|
|
(251
|
)
|
Accounts payable
|
|
|
1,423
|
|
|
|
543
|
|
|
|
285
|
|
Accrued liabilities and other
payables
|
|
|
(51
|
)
|
|
|
1,019
|
|
|
|
1,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
(5,737
|
)
|
|
|
770
|
|
|
|
9,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(1,729
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities
of short-term investments
|
|
|
6,900
|
|
|
|
1,611
|
|
|
|
|
|
Purchase of severance-related
insurance policies
|
|
|
(248
|
)
|
|
|
(187
|
)
|
|
|
(472
|
)
|
Purchase of property and equipment
|
|
|
(1,060
|
)
|
|
|
(962
|
)
|
|
|
(747
|
)
|
Return of restricted cash deposit
|
|
|
|
|
|
|
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
3,863
|
|
|
|
462
|
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease
obligations
|
|
|
(489
|
)
|
|
|
(168
|
)
|
|
|
(308
|
)
|
Payments on deferred public
offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,384
|
)
|
Proceeds from exercise of share
options and warrants
|
|
|
347
|
|
|
|
342
|
|
|
|
1,400
|
|
Proceeds from shareholder notes
receivable
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(65
|
)
|
|
|
174
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
(1,939
|
)
|
|
|
1,406
|
|
|
|
8,220
|
|
Cash and cash equivalents at
beginning of period
|
|
|
12,883
|
|
|
|
10,944
|
|
|
|
12,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
10,944
|
|
|
$
|
12,350
|
|
|
$
|
20,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
17
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
25
|
|
|
$
|
460
|
|
|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Software acquired under capital
leases
|
|
$
|
(151
|
)
|
|
$
|
(403
|
)
|
|
$
|
(774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of tangible assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on mandatorily redeemable
convertible preferred shares
|
|
$
|
155
|
|
|
$
|
166
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
59
MELLANOX
TECHNOLOGIES, LTD.
NOTE 1
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Company
Mellanox Technologies, Ltd., an Israeli corporation, and its
wholly-owned subsidiary in the United States (collectively
referred to as the Company or Mellanox),
were incorporated and commenced operations in March 1999.
Mellanox is a supplier of high-performance semiconductor
interconnect products for computing, storage and communications
applications. The principal market for the Companys
products is the United States.
Principles
of presentation
The consolidated financial statements include the accounts of
the Company. All significant intercompany balances and
transactions have been eliminated.
Risks
and uncertainties
The Company is subject to all of the risks inherent in a company
which operates in the dynamic and competitive semiconductor
industry. Significant changes in any of the following areas
could have a materially adverse impact on the Companys
financial position and results of operations: unpredictable
volume or timing of customer orders; the sales outlook and
purchasing patterns of the Companys customers, based on
consumer demands and general economic conditions; loss of one or
more of the Companys customers; decreases in the average
selling prices of products or increases in the average cost of
finished goods; the availability, pricing and timeliness of
delivery of components used in the Companys products;
reliance on a limited number of subcontractors to manufacture,
assemble, package and production test our products; the
Companys ability to successfully develop, introduce and
sell new or enhanced products in a timely manner; product
obsolescence and the Companys ability to manage product
transitions; and the timing of announcements or introductions of
new products by the Companys competitors.
Additionally, the Company has a significant presence in Israel,
including research and development activities, corporate
facilities and sales support operations. Uncertainty surrounding
the political, economic and military conditions in Israel may
directly impact the Companys financial results.
Use of
estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash
and cash equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. Balances in individual bank accounts in excess of
$100,000 are not insured. To mitigate risks, the Company
deposits cash and cash equivalents with high credit quality
financial institutions.
Restricted
cash and deposits
The Company maintains certain cash amounts restricted as to
withdrawal or use. At December 31, 2006 the Company
maintained a balance of approximately $678,000 that represents
tenants security deposits in Israel that are restricted
due to the tenancy agreement. The restricted deposits in Israel
are recorded in U.S. dollars and presented at their cost,
including accrued interest at rates of approximately 5% per
annum.
60
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
value of financial instruments
The Companys financial instruments, including cash, cash
equivalents, accounts receivable and accounts payable are
carried at cost, which approximates their fair value because of
the short-term maturity of these instruments.
Short-term
investments
The Company classifies all short-term investments as
available-for-sale
in accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. The Company places its
short-term investments primarily in marketable government agency
obligations and commercial paper. The Company had no short-term
investments at December 31, 2006.
Concentration
of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable. The
Companys accounts receivable are derived from revenue
earned from customers located in North America, Europe and Asia.
The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the
expected collectibility of accounts receivable. The Company
reviews its allowance for doubtful accounts quarterly by
assessing individual accounts receivable over a specific aging
and amount, and all other balances based on historical
collection experience and an economic risk assessment. If the
Company determines that a specific customer is unable to meet
its financial obligations to the Company, the Company provides
an allowance for credit losses to reduce the receivable to the
amount management reasonably believes will be collected.
The following table summarizes the revenues from customers
(including original equipment manufacturers) in excess of 10% of
the total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Cisco
|
|
|
34%
|
|
|
|
44%
|
|
|
|
14%
|
|
Voltaire
|
|
|
18%
|
|
|
|
12%
|
|
|
|
18%
|
|
QLogic
|
|
|
6%
|
|
|
|
9%
|
|
|
|
11%
|
|
Hewlett-Packard
|
|
|
0%
|
|
|
|
0%
|
|
|
|
12%
|
|
At December 31, 2006, Voltaire accounted for 20% of total
accounts receivable and Hewlett-Packard accounted for 11% of
total accounts receivable.
Inventory
Inventory includes finished goods,
work-in-process
and raw materials. Inventory is stated at the lower of cost
(principally standard cost which approximates actual cost on a
first-in,
first-out basis) or market value. Reserves for potentially
excess and obsolete inventory are made based on
managements analysis of inventory levels and future sales
forecasts. Once established, the original cost of the
Companys inventory less the related inventory reserve
represents the new cost basis of such products.
Property
and equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation and amortization is generally
calculated using the straight-line method over the estimated
useful lives of the related assets over three years for
computers, software license rights and other electronic
equipment, and seven to 15 years for office
61
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
furniture and equipment. Leasehold improvements and assets
acquired under capital leases are amortized on a straight-line
basis over the term of the lease, or the useful life of the
assets, whichever is shorter. Maintenance and repairs are
charged to expense as incurred, and improvements are
capitalized. When assets are retired or otherwise disposed of,
the cost and accumulated depreciation or amortization are
removed from the accounts and any resulting gain or loss is
reflected in the results of operations in the period realized.
Intangible
assets
Intangible assets consist of license rights that represent
technology which the Company has purchased a perpetual right to
use. They are amortized over an estimated useful life of three
years using the straight-line method (see also Note 4).
Impairment
of long-lived assets
In 2002, the Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 requires that
long-lived assets held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable.
Under SFAS No. 144, if the sum of the expected future
cash flows (undiscounted and without interest charges) of the
long-lived assets is less than the carrying amount of such
assets, an impairment loss would be recognized, and the assets
would be written down to their estimated fair values. The
Company reviews for impairment on a regular basis. To date, the
Company has not recorded any impairment charges relating to its
long-lived assets.
Revenue
recognition
The Company accounts for its revenue under the provisions of
Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition in Financial Statements. Under
SAB No. 104, revenues from sales of products are
recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and
collection is reasonably assured. The Companys standard
arrangement with its customers includes
freight-on-board
shipping point,
30-day
payment terms, no right of return and no customer acceptance
provisions. The Company generally relies upon a purchase order
as persuasive evidence of an arrangement.
Probability of collection is assessed on a
customer-by-customer
basis. Customers are subject to a credit review process that
evaluates the customers financial position and ultimately
their ability to pay. If it is determined at the outset of an
arrangement that collection is not probable, no product is
shipped and no revenue is recognized unless cash is received in
advance.
In accordance with SFAS No. 5, Accounting for
Contingencies, the Company provides for potential
warranty liability costs in the same period as the related
revenues are recorded. This estimate is based on past experience
of historical warranty claims and other known factors. The
Companys warranty period for its products is generally one
year. In cases where the customer wishes to extend the warranty
for more than one year, the Company charges an additional fee.
This amount is recorded as deferred revenue and recognized over
the period that the extended warranty is provided and the
related performance obligation is satisfied. To date, amounts
received relating to extended warranty revenue have not been
significant.
In accordance with Emerging Issuers Task Force (EITF) Issue
No. 00-10,
Accounting for Shipping and Handling Fees and
Costs, costs incurred for shipping and handling
expenses to customers are recorded as cost of revenues. To the
extent these amounts are billed to the customer in a sales
transaction, the Company records the shipping and handling fees
as revenue.
Product
warranty
The Company typically offers a one-year limited warranty period
for its products. The Company accrues for estimated returns of
defective products at the time revenue is recognized based on
prior historical activity. The
62
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2004, 2005 and 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Balance, beginning of the period
|
|
$
|
0
|
|
|
$
|
250
|
|
|
$
|
517
|
|
New warranties issued during the
period
|
|
|
337
|
|
|
|
817
|
|
|
|
340
|
|
Adjustments due to changes in
estimates during the period
|
|
|
0
|
|
|
|
0
|
|
|
|
(44
|
)
|
Settlements during the period
|
|
|
(87
|
)
|
|
|
(550
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
250
|
|
|
$
|
517
|
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
Research and development expenses are charged to operations as
incurred. Funds received from the Office of the Chief Scientist
of Israels Ministry of Industry (the OCS)
relating to the development of approved projects are recognized
as a reduction of expenses when the Company is entitled to
receive those funds. Research and development expenses included
in the statements of operations were reduced by grants from the
OCS in the amounts for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Gross research and development
operating expenses
|
|
|
14,190
|
|
|
|
13,124
|
|
|
|
15,256
|
|
Reduction due to OCS grants during
the period
|
|
|
(1,326
|
)
|
|
|
(43
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
operating expenses reported in the Statement of Consolidated
Operations
|
|
|
12,864
|
|
|
|
13,081
|
|
|
|
15,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
Cost related to advertising and promotion of products is charged
to sales and marketing expense as incurred. Advertising expense
was approximately $7,000 and $85,000 for the years ended
December 31, 2005 and 2006, respectively. No advertising
expenses were incurred during the year ended December 31,
2004.
Share-based
compensation
The Company maintains performance incentive plans under which
incentive and non-qualified share options are granted primarily
to employees and non-employee consultants. Prior to
January 1, 2006, the Company accounted for share-based
compensation for non-employee consultants in accordance with
SFAS No. 123, Accounting for Stock-Based
Compensation, and Financial Accounting Standards Board
Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans (FIN 28). FIN 28 provides for
accelerated recognition of expense over the option vesting
period. Prior to January 1, 2006, the Company accounted for
share-based compensation for employees in accordance with
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. Under APB No. 25, share-based
compensation expense is recognized over the vesting period of
the option to the extent that the fair value of the share
exceeds the exercise price of the share option at the date of
the grant.
63
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2004, the Financial Accounting Standards Board
(FASB) issued a revision of SFAS No. 123. The revision
is referred to as SFAS No. 123(R),
Share-based Payment, which supersedes APB
No. 25 and requires companies to expense share-based
compensation using a fair-value based method for costs related
to share-based payments, including share options and shares
issued under the Companys employee share option plans. The
deferred compensation amount calculated under the fair-value
method will then be recognized over the respective requisite
period of the share option, which is generally the vesting
period.
Effective January 1, 2006, the Company adopted
SFAS No. 123(R), requiring measurement of the cost of
employee services received in exchange for all equity awards
granted based on the fair market value of the award on the grant
date. Under this standard, the fair value of each employee share
option is estimated on the date of grant using an options
pricing model. The Company currently uses the Black-Scholes
valuation model to estimate the fair value of its share-based
payments.
Share-based compensation expense recognized in the
Companys financial statements starting on January 1,
2006 and thereafter is based on awards that are expected to
vest. These amounts have been reduced by using an estimated
forfeiture rate. Forfeitures are required to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. The Company
will evaluate the assumptions used to value share awards on a
quarterly basis.
To the extent that the Company grants additional equity
securities to employees, share-based compensation expense will
be increased by the additional compensation resulting from those
additional grants.
Comprehensive
income
Comprehensive income, as defined in SFAS No. 130,
Reporting Comprehensive Income, includes all
changes in shareholders deficit during a period from
non-owner sources. The Company had unrealized losses of $11,000
and an unrealized gain of $3,000 during the years ended
December 31, 2004 and 2005, respectively, as a result of
changes in value of marketable securities that were categorized
as
available-for-sale.
The Company had no unrealized gains or losses during the year
ended December 31, 2006.
Foreign
currency translation
The Company uses the U.S. dollar as its functional
currency. Foreign currency assets and liabilities are remeasured
into U.S. dollars at the
end-of-period
exchange rates except for non-monetary assets and liabilities,
which are remeasured at historical exchange rates. Revenue and
expenses are remeasured each day at the exchange rate in effect
on the day the transaction occurred, except for those expenses
related to balance sheet amounts, which are remeasured at
historical exchange rates. Gains or losses from foreign currency
transactions are included in net income (loss) as part of
Other income, net.
Net
income (loss) per share attributable to ordinary
shareholders
Basic and diluted net income (loss) per share is computed by
dividing the net income (loss) for the period by the weighted
average number of ordinary shares outstanding during the period.
The calculation of diluted net income (loss) per share excludes
potential ordinary shares if the effect is antidilutive.
Potential ordinary shares are comprised of ordinary shares
subject to repurchase rights, incremental ordinary shares
issuable upon the exercise of share options or warrants and
shares issuable upon conversion of convertible preferred shares.
In accordance with Emerging Issue Task Force (EITF) Issue
03-6,
Participating Securities and the Two-Class Method
under FASB Statement No. 128, earnings are
allocated between the common shareholders and other security
holders based on their respective rights to receive dividends.
When determining basic earnings per share under EITF
03-6,
undistributed earnings for a period are allocated to a
participating security based on the contractual participation
rights of the security to share in those earnings as if all of
the earnings for the period had been distributed. The form of
such participation does not have to be a dividend. Any form of
participation in
64
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
undistributed earnings would constitute participation by that
security, regardless of whether the payment to the security
holder was referred to as a dividend.
The following table sets forth the computation of basic and
diluted net income (loss) per share for the periods indicated
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands except per share data)
|
|
|
Net income (loss)
|
|
$
|
(8,888
|
)
|
|
$
|
3,159
|
|
|
$
|
7,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series D
mandatorily redeemable convertible preferred shares
|
|
|
(155
|
)
|
|
|
(166
|
)
|
|
|
(176
|
)
|
Income allocable to preferred
shareholders
|
|
|
|
|
|
|
(2,993
|
)
|
|
|
(6,774
|
)
|
Net income (loss) attributable to
ordinary shareholders
|
|
|
(9,043
|
)
|
|
|
0
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares
outstanding
|
|
|
7,127
|
|
|
|
7,529
|
|
|
|
7,713
|
|
Weighted average unvested ordinary
shares subject to repurchase
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic net
income (loss) per share
|
|
|
7,117
|
|
|
|
7,520
|
|
|
|
7,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share options
|
|
|
|
|
|
|
1,571
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential ordinary shares
|
|
|
|
|
|
|
1,571
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net
income (loss) per share
|
|
|
7,117
|
|
|
|
9,091
|
|
|
|
9,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
attributable to ordinary shareholders basic
|
|
$
|
(1.27
|
)
|
|
$
|
0.00
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
attributable to ordinary shareholders diluted
|
|
$
|
(1.27
|
)
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth potential ordinary shares that
are not included in the diluted net income (loss) per share
attributable to ordinary shareholders above because to do so
would be antidilutive for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Convertible preferred shares
(Series A, B and C) upon conversion to ordinary shares
|
|
|
6,799
|
|
|
|
6,799
|
|
|
|
6,799
|
|
Convertible preferred shares
(Series D) upon conversion to ordinary shares
|
|
|
4,838
|
|
|
|
4,838
|
|
|
|
4,838
|
|
Warrants to purchase ordinary
shares
|
|
|
725
|
|
|
|
725
|
|
|
|
725
|
|
Options to purchase ordinary shares
|
|
|
169
|
|
|
|
187
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,531
|
|
|
|
12,549
|
|
|
|
12,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment
reporting
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, requires that
companies report separately in the financial statements certain
financial and descriptive information about operating segments
profit or loss, certain specific revenue and expense items and
segment assets. Additionally, companies are required to report
information about the revenues derived from their products and
service groups, about geographic areas in which the Company
earns revenues and holds assets and about major customers. The
Company has one reportable segment; the development,
manufacturing, marketing and sales of InfiniBand semiconductor
products (see Note 14, Segment Information).
Income
taxes
Income taxes are accounted for using an asset and liability
approach, which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been
recognized in the Companys financial statements or tax
returns. The measurement of current and deferred tax liabilities
and assets are based on the provisions of enacted tax law; the
effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced,
if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to affect taxable
income. Valuation allowances are provided if, based upon the
weight of available evidence, it is considered more likely than
not that some or all of the deferred tax assets will not be
realized.
Recent
accounting pronouncements
In June 2006, the FASB ratified Emerging Issues Task Force, or
EITF, Issue
06-3,
How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should be Presented in the Income
Statement. EITF
06-3
requires a company to disclose its accounting policy (i.e.,
gross or net presentation) regarding the presentation of taxes
within the scope of EITF
06-3. If
taxes are significant, a company should disclose the amount of
such taxes for each period for which an income statement is
presented. The guidance is effective for periods beginning after
December 15, 2006. We expect that the financial impact, if
any, of the adoption of EITF
06-3 will
not be material on our financial position and results of
operations upon the initial adoption of EITF
06-3.
In June 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS 109. FIN 48 prescribes a recognition and
measurement method of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently analyzing the effects
of FIN 48 on our consolidated financial position and
results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, or SFAS No. 157, which defines
fair value, establishes a framework for measuring fair value
under generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source
of the information. SFAS No. 157 is effective for the
company as of January 1, 2008. We expect that the financial
impact, if any, of the adoption of SFAS No. 157 will
not be material on our financial statements upon the initial
adoption of SFAS 157.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities,
or SFAS No. 159, which permits entities to elect to
measure
66
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
This election is irrevocable. SFAS No. 159 will be
effective for us on January 1, 2008. We are currently
assessing the potential impact that the adoption of
SFAS No. 159 will have on our financial statements.
|
|
NOTE 2
|
BALANCE
SHEET COMPONENTS:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,284
|
|
|
$
|
8,212
|
|
Money market funds
|
|
|
9,066
|
|
|
|
2,585
|
|
Repurchase agreements
|
|
|
0
|
|
|
|
9,773
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,350
|
|
|
$
|
20,570
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable,
net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
8,038
|
|
|
$
|
10,248
|
|
Less: Allowance for doubtful
accounts
|
|
|
(95
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,943
|
|
|
$
|
10,141
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
187
|
|
|
$
|
692
|
|
Work-in-process
|
|
|
1,655
|
|
|
|
1,492
|
|
Finished goods
|
|
|
2,189
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,031
|
|
|
$
|
4,079
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and
other:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
335
|
|
|
$
|
223
|
|
Deferred public offering costs
|
|
|
0
|
|
|
|
1,827
|
|
Deferred tax assets, current
|
|
|
87
|
|
|
|
288
|
|
Other
|
|
|
109
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
531
|
|
|
$
|
2,470
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
15,125
|
|
|
$
|
16,580
|
|
Furniture and fixtures
|
|
|
762
|
|
|
|
793
|
|
Leasehold improvements
|
|
|
549
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,436
|
|
|
|
17,916
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(14,109
|
)
|
|
|
(15,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,327
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
67
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation expense totaled approximately $1,785,000,
$1,063,000, $1,260,000 for the years ended December 31,
2004, 2005 and 2006, respectively. Amortization of intangible
assets totaled approximately $667,000, $667,000 and $694,000 for
the years ended December 31, 2004, 2005 and 2006,
respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Other accrued
liabilities:
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
1,819
|
|
|
$
|
2,618
|
|
Professional services
|
|
|
900
|
|
|
|
1,927
|
|
Royalties
|
|
|
566
|
|
|
|
526
|
|
Warranty
|
|
|
517
|
|
|
|
528
|
|
Restructuring, current
|
|
|
344
|
|
|
|
0
|
|
Sales commissions
|
|
|
408
|
|
|
|
519
|
|
Other
|
|
|
100
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,654
|
|
|
$
|
6,426
|
|
|
|
|
|
|
|
|
|
|
Other long-term
obligations:
|
|
|
|
|
|
|
|
|
Obligation on purchase of
intangible assets
|
|
$
|
1,592
|
|
|
$
|
0
|
|
Federal income tax payable
|
|
|
93
|
|
|
|
64
|
|
Other
|
|
|
223
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,908
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
|
SHORT-TERM
INVESTMENTS:
|
At December 31, 2004, the Company had
available-for-sale
debt securities of $1,608,000, consisting of U.S. Treasury
notes with an unamortized cost of $1,362,000 and gross
unrealized losses of $3,000, and corporate bonds with an
unamortized cost of $249,000 and no unrealized losses or gains.
These securities all matured in 2005 and were converted into
cash. At December 31, 2005 and 2006, the Company had no
marketable securities.
|
|
NOTE 4
|
INTANGIBLE
ASSETS:
|
In December 2003, the Company entered into a perpetual license
agreement with Vitesse Semiconductor Corporation to use certain
intellectual property (IP) in the development of future products
for a total price of $2,000,000. The terms of the license
agreement require that the total license amount of $2,000,000 be
paid through periodic payments as products that incorporate the
acquired IP are sold with the total amount due in full by
January 31, 2007. Interim payments are payable quarterly on
or before 30 days after the end of the quarter in which
sales of the products giving rise to the accelerated payment
obligation occurred, if any. The Company has no payment
obligations in excess of the original $2,000,000 cost of the IP.
At December 31, 2006, approximately $1,156,000 remained
payable. This amount was included as Other liabilities,
current in the consolidated balance sheet. All of the
remaining amounts were paid in full to Vitesse by
January 31, 2007.
Israeli law generally requires the payment of severance pay upon
the retirement, death or termination without cause of an
employee. The severance pay liability of the Company to its
Israeli employees is based upon the number of years of service
and the latest monthly salary. The Company partially funds this
liability through the purchase of
68
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
insurance policies. Once an amount is contributed, the Company
generally does not have access to those assets except for use in
fulfillment of its severance obligation.
The deposited funds include profits accumulated through the
balance sheet date. The deposited funds may be withdrawn only
upon the fulfillment of the obligation pursuant to Israeli
severance pay law or labor agreements. The carrying value of the
deposited funds is based on the cash surrender value of these
policies. The Company records the obligation as if it were
payable at each balance sheet date on an undiscounted basis.
At December 31, 2005, the severance liability and severance
assets totaled approximately $2,189,000 and $1,812,000,
respectively At December 31, 2006, the severance liability
and severance assets totaled approximately $2,940,000 and
$2,284,000, respectively.
Line
of credit
The Company entered into a two-year agreement with a financial
institution on August 16, 2005 for a credit facility,
pursuant to which it may, from time to time, borrow an aggregate
principal amount up to $5,000,000. Borrowings are unlimited up
to $2,000,000, after which they are not to exceed 80% of the
Companys eligible outstanding accounts receivable. The
Company may select the interest rate for any borrowings, based
on either a fluctuating rate determined by the lender of prime
less 0.75% or a fixed rate equal to LIBOR plus 2.1%. As security
for all indebtedness under the facility, the Company grants
collateral in the form of security interests of first priority
on all accounts receivable and other rights to payment, general
intangibles and inventory. The Company entered into an amendment
to the credit facility on June 30, 2006. Pursuant to the
terms of the credit facility, as amended, the Company must
maintain a minimum balance of cash and cash equivalents and be
profitable before taxes on an annual basis. The Company has not
borrowed any amounts under the line of credit as of
December 31, 2006.
|
|
NOTE 7
|
RESTRUCTURING
LIABILITY
|
During the year ended December 31, 2002, the Company
restructured its operations, including a significant reduction
in the research and development staff in Israel. As a result, a
portion of the Companys leased facilities were no longer
occupied, and the Company recorded a restructuring obligation
for the remaining lease payments. The Company paid the remaining
restructuring liability in full as of December 31, 2006.
The changes in the restructuring liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Restructuring liability at the
beginning of the period
|
|
$
|
1,426
|
|
|
$
|
811
|
|
|
$
|
344
|
|
Restructuring costs paid in the
year
|
|
|
(615
|
)
|
|
|
(467
|
)
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability at the end
of the period
|
|
$
|
811
|
|
|
$
|
344
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8
|
COMMITMENTS
AND CONTINGENCIES:
|
Leases
The Company leases office space and motor vehicles under
operating leases with various expiration dates through 2011.
Rent expense was $918,000, $1,130,000 and $1,020,000 for the
years ended December 31, 2004, 2005 and 2006 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.
69
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has entered into capital lease agreements for the
electronic design automation software. The total amount of
assets under capital lease agreements within Property and
equipment, net was approximately $777,000 and $1,370,000
for the years ended December 31, 2005 and 2006,
respectively. At December 31, 2006, future minimum lease
payments under non-cancelable operating and capital leases
totaled approximately $7,620,000. For the year ended
December 31, 2006, the accumulated amortization for assets
under capital lease agreements totaled approximately $438,000.
At December 31, 2006, 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
|
|
|
Sublease
|
|
Year Ended December 31,
|
|
Leases
|
|
|
Leases
|
|
|
Income
|
|
|
|
(In thousands of dollars)
|
|
|
2007
|
|
$
|
427
|
|
|
$
|
1,927
|
|
|
$
|
74
|
|
2008
|
|
|
408
|
|
|
|
1,913
|
|
|
|
0
|
|
2009
|
|
|
150
|
|
|
|
1,272
|
|
|
|
0
|
|
2010
|
|
|
0
|
|
|
|
773
|
|
|
|
0
|
|
2011
|
|
|
0
|
|
|
|
773
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments and
sublease income
|
|
|
985
|
|
|
$
|
6,658
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease
obligations
|
|
|
961
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
(420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease
obligations
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
commitments
At December 31, 2006, 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, 2006, the contingent
liability in respect of royalties payable to the BIRD Foundation
totaled $485,000.
Since 2003, the Company has also received approximately
$2,800,000 in OCS funding. The terms of the OCS grants require
the Company to pay the OCS royalties if products are developed
using the OCS funding. For those products that are developed and
ultimately result in revenues to the Company, royalties will be
paid to the OCS at the rate of 4% of net sales of such
OCS-funded products. As of January 1, 2007, that rate
increased to 4.5%. Grants from the OCS are repaid with an annual
interest rate based on the LIBOR interest rate on the date of
payment. The repayment of OCS grants is contingent on future
sales of products developed with the support of such grants and
the Company has no obligation to refund these grants if future
sales are not generated.
The terms of OCS grants generally prohibit the manufacture of
products developed with OCS funding outside of Israel without
the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel by the
70
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Under applicable Israeli law, OCS consent is also required for
the Company to transfer technologies developed with OCS funding
to third parties in Israel. Transfer of OCS-funded technologies
outside of Israel is permitted with the approval of the OCS and
in accordance with the restrictions and payment obligations set
forth under Israeli law. Israeli law further specifies that both
the transfer of know-how as well as the transfer of intellectual
property rights in such know-how are subject to the same
restrictions. These restrictions do not apply to exports of
products from Israel or the sale of products developed with
these technologies. The Company does not anticipate the need to
transfer any of its intellectual property rights outside of
Israel at this time.
At December 31, 2006, the Company had repaid approximately
$1,149,000 to the OCS, and the maximum amount of the contingent
liability in respect of royalties payable to the OCS totaled
approximately $2,025,000.
Contingencies
The Company is not currently subject to any material legal
proceedings. The Company may, from time to time, become a party
to various legal proceedings arising in the ordinary course of
business. The Company may also be indirectly affected by
administrative or court proceedings or actions in which the
Company is not involved but which have general applicability to
the semiconductor industry.
|
|
NOTE 9
|
MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE
PREFERRED SHARES:
|
Convertible preferred shares at December 31, 2004, 2005,
and 2006 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of
|
|
|
|
Shares
|
|
|
Liquidation
|
|
|
Issuance
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Costs
|
|
|
Series A-1
Convertible Preferred Shares
|
|
|
2,857,142
|
|
|
|
2,742,846
|
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
Series A-2
Convertible Preferred Shares
|
|
|
1,714,285
|
|
|
|
1,600,000
|
|
|
|
2,800,000
|
|
|
|
2,800,000
|
|
Series B-1
Convertible Preferred Shares
|
|
|
1,714,285
|
|
|
|
1,710,674
|
|
|
|
19,788,344
|
|
|
|
19,788,344
|
|
Series B-2
Convertible Preferred Shares
|
|
|
571,428
|
|
|
|
514,257
|
|
|
|
5,948,683
|
|
|
|
5,948,683
|
|
Series C Convertible
Preferred Shares(1)
|
|
|
231,428
|
|
|
|
231,415
|
|
|
|
3,000,894
|
|
|
|
3,000,894
|
|
Series D Mandatorily
Redeemable Convertible Preferred Shares
|
|
|
6,483,714
|
|
|
|
4,838,482
|
|
|
|
83,954,112
|
|
|
|
54,983,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,572,282
|
|
|
|
11,637,674
|
|
|
$
|
120,292,033
|
|
|
$
|
91,320,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Series C convertible preferred shares were issued in
exchange for software. |
Prior to the conversion of the Companys preferred share
into ordinary shares upon the closing of our initial public
offering on February 13, 2007, the holders of our preferred
shares had various rights and preferences as follows:
Voting
The holders of
Series A-1
convertible preferred shares
(Series A-1),
Series B-1
convertible preferred shares
(Series B-1),
Series C convertible preferred shares
(Series C) and Series D mandatorily
redeemable convertible preferred shares
(Series D) had voting rights based on the
number of ordinary shares into which the
Series A-1,
Series B-1,
Series C and Series D shares were convertible. The
holders of
Series A-2
convertible preferred shares
71
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(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 affects the preferred shares; repurchase
or redeem any ordinary shares other than in connection with
termination of employment; or pay any dividends on the ordinary
shares. The Company had to obtain approval from the holders of a
majority of the Series D shares to: change the authorized
number of directors; increase or decrease the number of
authorized ordinary shares or preferred shares; authorize,
create or issue any securities on parity with or senior to the
Series D shares; alter the amended and restated articles of
association; alter the rights, preferences, privileges or
restrictions of the Series D shares in a manner that
adversely affects such shares; repurchase or redeem any ordinary
shares or preferred shares other than in connection with
termination of employment or the redemption of the Series D
shares in accordance with the amended and restated articles of
association; pay any dividends on the ordinary shares or
preferred shares; or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of
the voting power of the surviving entity.
Dividends
The holders of Series D shares were entitled to receive
dividends in preference to any dividend on the Series A,
Series B, and Series C and ordinary shares at an
annual rate equal to 7% of their original issue price.
Thereafter, holders of Series A, Series B and
Series C shares were entitled to receive dividends in
preference to any dividend on the ordinary shares at an annual
rate equal to 7% of their respective original issue prices. Such
dividends on the Series A, Series B, Series C and
Series D shares were non-cumulative and would be paid only
when and if declared. After payment of such dividends to the
holders of Series A, Series B and Series C
shares, any additional dividends declared would be distributed
among all holders of Series D and ordinary shares in
proportion to the number of ordinary shares that would be held
by each such holder if the Series D shares were converted
into ordinary shares. No dividends on Series A,
Series B, Series C or Series D or ordinary shares
had been declared by the board from inception through
December 31, 2006.
Liquidation
Upon liquidation or dissolution of the Company, the holders of
the Series D shares would be entitled to receive, prior and
in preference to any other holders of shares of the Company, an
amount per share equal to one and a half times their original
issue price (subject to adjustment in respect of share splits,
share dividends and like events), plus all declared but unpaid
dividends. Then, the holders of the Series A,
Series B, Series C and Series D shares would be
entitled to receive an amount per share equal to one time their
respective original issue price (subject to adjustment in
respect of share splits, share dividends and like events), plus
all declared but unpaid dividends. The remaining assets and
funds legally available for distribution, if any, would be
distributed equally to the holders of the Series A,
Series B and Series C shares (on an as-converted
basis) and ordinary shares until such time as the holders of the
Series A, Series B and Series C shares received
an amount per share equal to two times their respective original
issue prices (subject to adjustment in respect of share splits,
share dividends and like events).
Conversion
Each share of Series A, Series B, Series C and
Series D was, at the option of the holder of such share, at
any time, convertible into one ordinary share, subject to
certain adjustments. The outstanding Series A,
Series B,
72
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 (see Note 16, Subsequent Events). The
adjustment to the Series D conversion price did not trigger
any other antidilution adjustments, nor did it trigger any
rights of first offer or other preemptive rights.
Redemption
The Companys
Series A-1,
Series A-2,
Series B-1,
Series B-2
and Series C preferred shares were considered redeemable
for accounting purposes. The Company initially recorded the
Series A-1,
Series A-2,
Series B-1,
Series B-2
and Series C preferred shares at their fair values on the
dates of issuance, net of issuance costs. A deemed liquidation
event could have occurred as a result of the sale of all or
substantially all of the assets of the Company or any
acquisition of the Company by another entity by means of a
merger or consolidation in which the shareholders of the Company
do not hold at least 50% of the voting power of the surviving
entity or its parent. Because the deemed redemption event was
outside the control of the Company, all preferred shares have
been presented outside of permanent equity in accordance with
EITF Topic D-98, Classification and Measurement of
Redeemable Securities. Further, the Company has not
adjusted the carrying values of the
Series A-1,
Series A-2,
Series B-1,
Series B-2
and Series C preferred shares to the redemption value of
such shares, because it was uncertain whether or when a
redemption event would occur.
The Series D shares were required to be redeemed by the
Company upon the request of holders of a majority of the
outstanding Series D shares at any time after
September 30, 2007. The shares were required to be redeemed
by the Company at a price equal to the original issue price and
declared but unpaid dividends. The difference between the
carrying value of the Series D shares and their redemption
value was accreted using the effective interest method through
the initial public offering (see Note 16, Subsequent
Events).
Warrants
In conjunction with the issuance of the Series D shares,
the holders of Series D shares received warrants to
purchase an aggregate of 725,730 ordinary shares at an exercise
price of $11.57 per share. The warrants were recorded as a
component of the shareholders deficit at a fair value of
approximately $54,000 on the date of issuance. The fair value
was estimated by using the Black-Scholes option-pricing model.
Assumptions used in the
73
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
model included a risk-free interest rate of 4.02%, term to
maturity of 5 years, 50% volatility and 0% dividend yield.
The warrants were exercisable for a period ending at the earlier
of an IPO, a merger or liquidation or October 2006 or November
2006, as the case may be. At December 31, 2006, warrants
had been exercised for 98,551 ordinary shares and warrants to
purchase the remaining 627,179 ordinary shares expired
unexercised.
|
|
NOTE 10
|
ORDINARY
SHARES:
|
The Companys amended and restated articles of association
authorize the Company to issue 123,570,572 ordinary shares of
nominal value new Israeli shekels (NIS) 0.0175 each. A portion
of the shares sold are 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 11
|
SHARE
OPTION PLANS:
|
In 1999, the Companys board of directors approved share
option plans for U.S. and Israeli optionees (together, the
1999 Plan), pursuant to which options may be granted
to directors, employees and consultants of the Company. In 2003,
the Companys board of directors approved an additional
share option plan for Israeli optionees (the 2003
Plan and together with the 1999 Plan, the
Plans), pursuant to which options may be granted to
directors, employees and consultants of the Company.
Options granted under the Plans may be either incentive share
options or nonqualified share options. Incentive share options
(ISO) may be granted only to Company employees
(including officers and directors who are also employees).
Nonqualified share options (NSO) may be granted to
Company employees and consultants. In 2001, NSO options on an
additional 58,285 ordinary shares were approved by the
Companys board of directors for certain service providers
to the Company.
At December 31, 2006, the Company had reserved 6,861,452
ordinary shares for issuance under the Plans. Each option
granted under the Plans is exercisable until the earlier of ten
years from the date of the grant of the option or the expiration
date of the respective option. The exercise price of the options
granted under the Plans may not be less than the nominal value
of the shares for which such options are exercised. The options
vest primarily over a period of four years. Any options which
are forfeited or not exercised before expiration become
available for future grants.
Share options granted to U.S. employees under the 1999 Plan
include an early exercise option, pursuant to which unvested
options can be exercised and the related shares received are
subject to a repurchase right held by the Company. The related
shares are considered issued and outstanding for accounting
purposes but are not deemed exercised until the Companys
repurchase right expires. Accordingly, the Company accounts for
the cash received in consideration for the early exercised
options as a liability. The purchase price of the early
exercised shares subject to the Companys repurchase right
is equal to the original exercise price of the share options.
The Companys repurchase right lapses as the early
exercised shares vest. At December 31, 2004, 2005 and 2006,
7,786, 8,571 and 3,787 ordinary shares, respectively, were
subject to repurchase.
Our 2006 Global Share Incentive Plan (the Global
Plan) was adopted by our board of directors in October
2006 and approved by our shareholders in December 2006. The
Global Plan replaces the Plans and became effective on
February 6, 2007. We have authorized for issuance under our
Global Plan an aggregate of 3,428,571 ordinary shares, plus the
number of ordinary shares available for issuance under the Prior
Plans that are not subject to outstanding options, as of the
effective date of the Global Plan. In addition, the share
reserve under the Global Plan will be increased by the number of
ordinary shares issuable pursuant to options outstanding under
the Plans that would have otherwise reverted to the Plans
because they expired, were canceled or were otherwise terminated
without being exercised, following the date that our Global Plan
became effective. In addition, the number of ordinary shares
reserved for issuance under our Global Plan will increase
automatically on the first day of each fiscal year, beginning in
2008, by a number of ordinary shares equal to the least of:
(i) 2% of ordinary shares
74
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding on a fully diluted basis on such date,
(ii) 685,714 ordinary shares or (iii) a smaller number
determined by our board of directors. In any event, the maximum
aggregate number of ordinary shares that may be issued or
transferred under the Global Plan during the term of the Global
Plan may in no event exceed 15,474,018 ordinary shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Number
|
|
|
Average
|
|
|
|
Available
|
|
|
of
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at December 31,
2003
|
|
|
1,687,482
|
|
|
|
4,147,217
|
|
|
$
|
1.27
|
|
Options granted
|
|
|
(652,805
|
)
|
|
|
652,805
|
|
|
$
|
3.63
|
|
Options exercised
|
|
|
|
|
|
|
(424,502
|
)
|
|
$
|
0.84
|
|
Options canceled
|
|
|
610,502
|
|
|
|
(610,502
|
)
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
1,645,179
|
|
|
|
3,765,018
|
|
|
$
|
1.69
|
|
Options granted
|
|
|
(1,399,142
|
)
|
|
|
1,399,142
|
|
|
$
|
5.91
|
|
Options exercised
|
|
|
|
|
|
|
(354,485
|
)
|
|
$
|
0.99
|
|
Options repurchased
|
|
|
2,627
|
|
|
|
|
|
|
$
|
2.38
|
|
Options canceled
|
|
|
221,758
|
|
|
|
(221,758
|
)
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
470,422
|
|
|
|
4,587,917
|
|
|
$
|
3.04
|
|
Options granted
|
|
|
(1,106,093
|
)
|
|
|
1,106,093
|
|
|
$
|
9.12
|
|
Options exercised
|
|
|
|
|
|
|
(108,908
|
)
|
|
$
|
2.65
|
|
Options canceled
|
|
|
418,287
|
|
|
|
(418,287
|
)
|
|
$
|
5.02
|
|
Options increased to plan
|
|
|
342,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
125,473
|
|
|
|
5,166,815
|
|
|
$
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average fair value of options granted was
approximately $0.47, $0.90 and $6.48 for the years ended
December 31, 2004, 2005 and 2006, respectively. The
following tables provide additional information about all
options outstanding and exercisable at December 31, 2006:
At December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at
|
|
|
Options Exercisable at
|
|
|
|
December 31, 2006
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
$0.18 - $1.16
|
|
|
659,520
|
|
|
|
3.11
|
|
|
$
|
0.68
|
|
|
|
659,520
|
|
|
$
|
0.68
|
|
$1.30 - $1.30
|
|
|
1,061,409
|
|
|
|
4.31
|
|
|
$
|
1.30
|
|
|
|
1,061,413
|
|
|
$
|
1.30
|
|
$1.47 - $2.63
|
|
|
745,481
|
|
|
|
6.06
|
|
|
$
|
1.93
|
|
|
|
712,206
|
|
|
$
|
1.90
|
|
$3.50 - $3.85
|
|
|
595,320
|
|
|
|
7.75
|
|
|
$
|
3.63
|
|
|
|
473,115
|
|
|
$
|
3.36
|
|
$4.38 - $5.51
|
|
|
317,525
|
|
|
|
8.56
|
|
|
$
|
5.16
|
|
|
|
172,903
|
|
|
$
|
5.09
|
|
$6.65 - $6.65
|
|
|
705,804
|
|
|
|
8.93
|
|
|
$
|
6.65
|
|
|
|
390,127
|
|
|
$
|
6.65
|
|
$7.44 - $7.44
|
|
|
23,427
|
|
|
|
9.12
|
|
|
$
|
7.44
|
|
|
|
1,143
|
|
|
$
|
7.44
|
|
$8.58 - $8.58
|
|
|
27,713
|
|
|
|
9.40
|
|
|
$
|
8.58
|
|
|
|
857
|
|
|
$
|
8.58
|
|
$8.93 - $8.93
|
|
|
26,285
|
|
|
|
9.48
|
|
|
$
|
8.93
|
|
|
|
|
|
|
|
|
|
$9.19 - $9.19
|
|
|
1,004,331
|
|
|
|
9.81
|
|
|
$
|
9.19
|
|
|
|
297,961
|
|
|
$
|
9.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.18 - $9.19
|
|
|
5,166,815
|
|
|
|
6.84
|
|
|
$
|
4.19
|
|
|
|
3,769,245
|
|
|
$
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the 3,769,245 options exercisable at December 31, 2006,
3,050,118 options were fully vested and 719,127 were unvested
but exercisable by U.S. employees under the 1999 Plan.
Share-based
compensation
As discussed in Note 1, the Company adopted
SFAS No. 123(R) as of January 1, 2006 using
the prospective transition method. Under this method,
SFAS No. 123(R) is applied to new awards and to awards
modified, repurchased or cancelled after the adoption date of
January 1, 2006. Compensation cost that was previously
recorded under APB No. 25 for employee awards outstanding
at the adoption date, such as unvested options, will continue to
be recognized as the options vest. Compensation cost for
non-employees that was recorded under FAS No. 123 will
also continue to be recognized as the options vest. Accordingly,
for the year ended December 31, 2006, share-based
compensation expense includes compensation cost related to
estimated fair values of awards granted after the adoption of
SFAS No. 123(R), compensation costs related to
unvested awards at the date of adoption based on the intrinsic
values as previously recorded under APB No. 25, and
compensation costs for
share-based
awards granted to non-employees prior and subsequent to
January 1, 2006 recorded under FAS No. 123.
The fair value of options granted after January 1, 2006 is
estimated on the grant date using the Black-Scholes option
valuation model. This valuation model requires the Company to
make assumptions and judgments about the variables used in the
calculation including the expected term the options granted are
expected to be outstanding, the volatility of the Companys
ordinary shares, an assumed risk-free interest rate and the
estimated forfeitures of unvested share options. To the extent
actual forfeitures differ from the estimates, the difference
will be recorded as an adjustment in the period estimates are
revised. No compensation cost is recorded for options that do
not vest. Since the Companys shares were not publicly
traded prior to February 8, 2007, volatility is based on an
average of the historical volatilities of the Companys
peer group in the industry in which it does business. The
expected term is calculated using the simplified method
described in Question 6 of SEC Staff Accounting Bulletin (SAB)
No. 107.
76
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The risk-free rate is based on the five-year Treasury bond yield
as of the last day of the quarter. Expected forfeitures are
based on the Companys historical experience.
The following assumptions are used to value share options
granted for the year ended December 31, 2006: volatility of
78%, an average risk free rate is 5.43%, an expected term of
6.25 years, a dividend rate of zero and an estimated annual
forfeiture rate of 9.8%.
Had compensation cost for the Companys share-based
compensation plan been determined prior to January 1, 2006
based on the fair value at the grant dates for the awards under
the minimum-value method prescribed by SFAS No. 123,
the Companys net income (loss) would have been decreased
(increased) to the pro forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income (loss) as reported:
|
|
$
|
(8,888
|
)
|
|
$
|
3,159
|
|
Add total employee share-based
compensation included in the determination of net income (loss)
|
|
|
790
|
|
|
|
17
|
|
Deduct total employee share-based
compensation determined under minimum-value method
|
|
|
(412
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) pro forma:
|
|
$
|
(8,510
|
)
|
|
$
|
2,984
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic
income (loss) per share
|
|
|
7,117
|
|
|
|
7,520
|
|
Shares used to compute diluted
income (loss) per share
|
|
|
7,117
|
|
|
|
9,091
|
|
Net income (loss) per share
attributable to ordinary shareholders pro forma
basic and diluted
|
|
($
|
1.20
|
)
|
|
$
|
0.00
|
|
Pro forma disclosures for the year ended December 31, 2006
are not presented because share-based compensation was accounted
for under SFAS No. 123(R)s fair-value method
during this period.
The exercise price for options granted to employees generally
equals the fair value of the Companys ordinary shares at
the date of grant. However, for certain options, the exercise
prices were paid with funds received pursuant to loans granted
by the Company during the years 1999 and 2000, and accordingly
were subject to variable accounting until the repayment of the
loans. Therefore, in 2004, the Company charged to the statements
of operations compensation expense of $395,000 relating to these
options. All loans were fully repaid at December 31, 2004.
In 2004, the Company modified several employee share option
agreements to allow terminating employees to exercise their
options and purchase vested shares beyond the standard time
period allowed under the plans. The Company charged to the
statements of operations compensation expense of $395,000 in
respect of these options in 2004. In 2005, one option
holders option was modified to accelerate the vesting of a
portion of the shares subject to the option. The expense
associated with this modification was $16,500.
In 2005, two option grants for non-employee consultants were
cancelled. Share-based option expense was previously recognized
for these grants using an accelerated method. Therefore, at the
time of the cancellation, a credit to share-based expense was
recognized for that portion that was unvested at the time of
cancellation. This resulted in a total credit to share-based
compensation expense for the period of approximately $20,000.
For share options granted since January 1, 2006, the
Company estimates the fair value of the options as of the date
of grant using the Black-Scholes valuation model and applies the
straight-line method to attribute share-based compensation
expense. For the year ended December 31, 2006, the Company
recorded share-based compensation expense for employees totaling
$332,000.
77
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the grant of share options to non-employees,
the Company recorded share-based compensation expense under
FAS No. 123 of $234,000, $14,600 and $137,000 for the
years ended December 31, 2004, 2005 and 2006, respectively.
The following table sets forth the assumptions that were used in
determining the fair value of options granted to non-employees
for the years ended December 31, 2004, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Contractual life
|
|
|
10 years
|
|
|
|
10 years
|
|
|
|
10 years
|
|
Risk-free interest rates
|
|
|
3.46
|
%
|
|
|
4.38
|
%
|
|
|
5.43
|
%
|
Volatility
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
78
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The following table summarizes the distribution of total
share-based compensation expense in the Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Cost of goods sold
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
12
|
|
Research and development
|
|
|
329
|
|
|
|
0
|
|
|
|
193
|
|
Sales and marketing
|
|
|
504
|
|
|
|
16
|
|
|
|
187
|
|
General and administrative
|
|
|
191
|
|
|
|
15
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
expense
|
|
$
|
1,024
|
|
|
$
|
31
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income (loss) before income taxes are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
United States
|
|
$
|
493
|
|
|
$
|
498
|
|
|
$
|
806
|
|
Israel
|
|
|
(9,075
|
)
|
|
|
3,123
|
|
|
|
6,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(8,582
|
)
|
|
$
|
3,621
|
|
|
$
|
7,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
396
|
|
|
$
|
394
|
|
|
$
|
471
|
|
State and local
|
|
|
47
|
|
|
|
26
|
|
|
|
32
|
|
Foreign
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443
|
|
|
|
420
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(116
|
)
|
|
$
|
36
|
|
|
$
|
(174
|
)
|
Other
|
|
|
(21
|
)
|
|
|
6
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137
|
)
|
|
|
42
|
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes on
income
|
|
$
|
306
|
|
|
$
|
462
|
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005 and 2006, temporary differences which
gave rise to significant deferred tax assets and liabilities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
7
|
|
|
$
|
7
|
|
Reserves and accruals
|
|
|
87
|
|
|
|
288
|
|
Net operating loss and credit
carryforwards
|
|
|
161
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
255
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(161
|
)
|
|
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
94
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the statutory federal income tax rate to
the Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Tax at statutory rate
|
|
|
(35.00
|
)%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State, net of federal benefit
|
|
|
0.05
|
|
|
|
1.38
|
|
|
|
0.04
|
|
Meals and entertainment
|
|
|
0.06
|
|
|
|
0.30
|
|
|
|
0.14
|
|
Tax at rates other than the
statutory rate
|
|
|
38.74
|
%
|
|
|
(20.58
|
)%
|
|
|
(30.17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for taxes
|
|
|
3.85
|
%
|
|
|
15.10
|
%
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with generally accepted accounting principles, a
valuation allowance must be established for a deferred tax asset
if it is more likely than not that a tax benefit will not be
realized from the asset in the future. The Company had a
consolidated net operating loss of approximately
$69 million at December 31, 2006. This loss
carryforward will be offset against future income in Israel that
is subject to the Approved Enterprise Tax Holiday. The Company
will begin to enjoy the full benefit of the Approved Tax Holiday
once the net operating losses are fully realized.
79
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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). 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.
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.
|
|
NOTE 13
|
EMPLOYEE
BENEFIT PLANS:
|
The Company adopted a 401(k) Profit Sharing Plan and Trust (the
401(k) Plan) effective January 2000, which is
intended to qualify under Section 401(k) of the Internal
Revenue Code. The 401(k) Plan allows eligible employees in the
United States to voluntarily contribute a portion of their
pre-tax salary, subject to a maximum limit of $15,000 for the
year ended December 31, 2006, subject to certain
limitations. The Company does not make discretionary matching
contributions to the 401(k) Plan on behalf of employees.
|
|
NOTE 14
|
SEGMENT
INFORMATION:
|
The Company operates in one reportable segment, the development,
manufacturing, marketing and sales of InfiniBand semiconductor
products. The Companys chief operating decision maker is
the CEO.
Revenues by geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
North America
|
|
$
|
15,320
|
|
|
$
|
30,436
|
|
|
$
|
28,711
|
|
Israel
|
|
|
2,451
|
|
|
|
5,586
|
|
|
|
10,026
|
|
Europe
|
|
|
2,070
|
|
|
|
4,060
|
|
|
|
5,379
|
|
Asia
|
|
|
413
|
|
|
|
1,986
|
|
|
|
4,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
20,254
|
|
|
$
|
42,068
|
|
|
$
|
48,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues by product group are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Semiconductors
|
|
$
|
7,894
|
|
|
$
|
17,548
|
|
|
$
|
19,395
|
|
Cards
|
|
|
8,842
|
|
|
|
20,542
|
|
|
|
26,457
|
|
Switches
|
|
|
2,881
|
|
|
|
2,614
|
|
|
|
1,218
|
|
Options and miscellaneous other
|
|
|
637
|
|
|
|
1,364
|
|
|
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
20,254
|
|
|
$
|
42,068
|
|
|
$
|
48,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible long-lived assets by geographic location are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands of dollars)
|
|
|
Israel
|
|
$
|
2,250
|
|
|
$
|
2,548
|
|
United States
|
|
|
77
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Total tangible long-lived assets
|
|
$
|
2,327
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15
|
REVERSE
SHARE SPLIT:
|
On February 1, 2007, the Company effected a
1.75-to-1
reverse split of the Companys ordinary shares, mandatorily
redeemable convertible preferred shares and convertible
preferred shares (the Share Split) pursuant to the
filing of the Amended and Restated Articles of Association. All
references to shares in the consolidated financial statements
and the accompanying notes, including but not limited to the
number of shares and per share amounts, unless otherwise noted,
have been adjusted to reflect retroactively the Share Split.
Previously awarded options and warrants to purchase the
Companys ordinary shares have been also retroactively
adjusted to reflect the Share Split.
The Company also increased its authorized share capital to NIS
2,400,000, divided into a total of 123,570,572 ordinary shares
and 13,572,285 preferred shares.
|
|
NOTE 16
|
SUBSEQUENT
EVENTS:
|
On February 13, 2007, the Company closed the initial public
offering of its ordinary shares. The Company sold 6,900,000
ordinary shares in the offering, which included the
underwriters exercise in full of their option to purchase
up to 900,000 shares to cover over-allotments, at an
offering price of $17.00 per share. Net proceeds generated
by the offering, after adjusting for offering costs, totaled
approximately $106 million. Immediately prior to the
closing of our initial public offering, all preferred shares
converted into an aggregate of 15,035,712 ordinary shares.
81
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 23, 2007.
MELLANOX TECHNOLOGIES, LTD.
Eyal Waldman
President and Chief Executive Officer
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Eyal Waldman
and Michael Gray, his or her
attorneys-in-fact,
each with the power of substitution, for him or her in any and
all capacities, to sign any amendments to this Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the U.S. Securities and
Exchange Commission, hereby ratifying and confirming all that
said
attorneys-in-fact,
or his or her or their substitute or substitutes, may do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Eyal
Waldman
Eyal
Waldman
|
|
Chief Executive Officer and
Director (principal executive officer)
|
|
March 23, 2007
|
|
|
|
|
|
/s/ Michael
Gray
Michael
Gray
|
|
Chief Financial Officer (principal
financial and accounting officer) and Authorized Representative
in the United States
|
|
March 23, 2007
|
|
|
|
|
|
/s/ Rob
S. Chandra
Rob
S. Chandra
|
|
Director
|
|
March 23, 2007
|
|
|
|
|
|
/s/ Irwin
Federman
Irwin
Federman
|
|
Director
|
|
March 23, 2007
|
|
|
|
|
|
/s/ S.
Atiq Raza
S.
Atiq Raza
|
|
Director
|
|
March 23, 2007
|
|
|
|
|
|
/s/ C.
Thomas Weatherford
C.
Thomas Weatherford
|
|
Director
|
|
March 23, 2007
|
|
|
|
|
|
/s/ Amal
Johnson
Amal
Johnson
|
|
Director
|
|
March 23, 2007
|
82
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of
Association of Mellanox Technologies, Ltd.
|
|
4
|
.2(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
|
.3
|
|
Amendment to the 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.
|
|
10
|
.1(3)
|
|
Mellanox Technologies, Ltd. 1999
United States Equity Incentive Plan and forms of agreements
relating thereto.
|
|
10
|
.2(4)
|
|
Mellanox Technologies, Ltd. 1999
Israeli Share Option Plan and forms of agreements relating
thereto.
|
|
10
|
.3(5)
|
|
Mellanox Technologies, Ltd. 2003
Israeli Share Option Plan and forms of agreements relating
thereto.
|
|
10
|
.4(6)
|
|
Form of Indemnification
undertaking made by and between Mellanox Technologies, Ltd. and
each of its directors and executive officers.
|
|
10
|
.5(7)(8)
|
|
License Agreement between Vitesse
Semiconductor Corporation and the Company, dated
September 10, 2001.
|
|
10
|
.6(7)(9)
|
|
License Agreement between Vitesse
Semiconductor Corporation and the Company, dated
December 16, 2002.
|
|
10
|
.7(10)
|
|
Net Lease Agreement between S.I.
Hahn, LLC and Mellanox Technologies, Inc., dated January 1,
2002.
|
|
10
|
.8(11)
|
|
Credit Agreement between Wells
Fargo Bank, National Association and Mellanox Technologies,
Inc., dated August 16, 2005, and the first amendment
thereto and Promissory Note, and addendum thereto.
|
|
10
|
.9(12)
|
|
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
|
.10(13)
|
|
Mellanox Technologies, Ltd. Global
Share Incentive Plan (2006) and forms of agreements and
appendices relating thereto.
|
|
10
|
.11(14)
|
|
Mellanox Technologies, Ltd.
Non-Employee Director Option Grant Policy.
|
|
10
|
.12(15)
|
|
Form of Mellanox Technologies,
Ltd. Executive Severance Agreement for U.S. Executives.
|
|
10
|
.13(16)
|
|
Form of Mellanox Technologies,
Ltd. Executive Severance Agreement for Israel Executives.
|
|
10
|
.14(17)
|
|
Mellanox Technologies, Ltd.
Employee Share Purchase Plan.
|
|
14
|
.1
|
|
Code of Business Conduct and
Ethics.
|
|
21
|
.1(18)
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP, independent registered public accounting firm.
|
|
23
|
.2
|
|
Consent of Kesselman &
Kesselman.
|
|
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 the Companys Registration
Statement on Form
S-1 (SEC
File
No. 333-137659)
filed on January 22, 2007. |
|
|
|
(2) |
|
Incorporated by reference to Exhibit 3.2 to Amendment
No. 4 to the Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(3) |
|
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. |
|
(4) |
|
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. |
|
(5) |
|
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. |
|
(6) |
|
Incorporated by reference to Exhibit 10.4 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(7) |
|
Confidential treatment granted as to certain portions, which
portions, have been omitted and filed separately with the
Securities and Exchange Commission. |
|
(8) |
|
Incorporated by reference to Exhibit 10.5 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(9) |
|
Incorporated by reference to Exhibit 10.6 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(10) |
|
Incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(11) |
|
Incorporated by reference to Exhibit 10.8 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(12) |
|
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. |
|
(13) |
|
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. |
|
(14) |
|
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. |
|
(15) |
|
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. |
|
(16) |
|
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. |
|
(17) |
|
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. |
|
(18) |
|
Incorporated by reference to Exhibit 21.1 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |