e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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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, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(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, Inc.
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K/A
or any amendment to this
Form 10-K/A. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if
a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the registrants common
stock, NIS 0.0175 par value per share, held by
non-affiliates of the registrant on June 30, 2008, the last
business day of the registrants most recently completed
second fiscal quarter, was approximately $219.9 million
(based on the closing sales price of the registrants
common stock on that date). Ordinary shares held by each
director and executive officer of the registrant, as well as
shares held by each holder of more than 5% of the ordinary
shares known to the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not a determination for other purposes.
The total number of shares outstanding of the registrants
ordinary shares, nominal value NIS 0.0175 per share, as of
February 28, 2009, was 31,902,998.
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 2009 Annual General
Meeting of Shareholders of Mellanox Technologies, Ltd.
(hereinafter referred to as the Proxy Statement) are
incorporated by reference in Part III of this report. Such
Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the conclusion of
the registrants fiscal year ended December 31, 2008.
MELLANOX
TECHNOLOGIES, LTD.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. We have based
these forward-looking statements largely on our current
expectations and projections about future events and financial
trends affecting the financial condition of our business.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by which, such
performance or results will be achieved. Forward-looking
statements are based on information available at the time those
statements are made
and/or
managements good faith belief as of that time with respect
to future events, and are subject to risks and uncertainties
that could cause actual performance or results to differ
materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause
such differences include, but are not limited to:
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levels of capital spending in the semiconductor industry, in
general, and in the market for high-performance interconnect
products, specifically;
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our ability to achieve new design wins;
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our ability to successfully introduce new products;
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competition and competitive factors;
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our dependence on a relatively small number of customers;
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our ability to expand our presence with existing customers;
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our ability to protect our intellectual property;
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future costs and expenses; and
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other risk factors included under Risk Factors in
this report.
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In addition, in this report, the words believe,
may, will, estimate,
continue, anticipate,
intend, expect, predict,
potential and similar expressions, as they relate to
Mellanox, our business and our management, are intended to
identify forward-looking statements. In light of these risks and
uncertainties, the forward-looking events and circumstances
discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the
forward-looking statements.
You should not put undue reliance on any forward-looking
statements. We assume no obligation to update forward-looking
statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information,
except to the extent required by applicable laws. If we update
one or more forward-looking statements, no inference should be
drawn that we will make additional updates with respect to those
or other forward-looking statements.
Overview
We are a leading supplier of semiconductor-based,
high-performance connectivity products that facilitate efficient
data transmission between servers, communications infrastructure
equipment and storage systems. Our products are an integral part
of a total solution focused on computing, storage and
communication applications used in enterprise data centers,
high-performance computing and embedded systems. We are one of
the pioneers of InfiniBand, an industry standard architecture
that provides specifications for high-performance interconnects.
We believe we are the leading supplier of field-proven
InfiniBand-compliant semiconductor products that deliver
industry-leading performance and capabilities, which we believe
is demonstrated by the performance, efficiency and scalability
of clustered computing and storage systems that incorporate our
products. In addition to supporting InfiniBand, our latest
generation of products also supports the industry standard
Ethernet interconnect specification, which we believe provide
unique product differentiation and connectivity flexibility that
expands our total addressable market.
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We are a fabless semiconductor company that provides
high-performance interconnect products based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our adapter ICs and switch systems that
incorporate our switch ICs. These ICs are added to servers,
storage, communication infrastructure equipment and embedded
systems by either integrating them directly on circuit boards or
inserting adapter cards into slots on the circuit board. Since
we introduced our first product in 2001, we have shipped
products containing over 4.4 million InfiniBand ports (as
of December 31, 2008), which we believe demonstrates an
established customer and end-user base for our products. We
began shipping our Ethernet products in 2007 and have seen
customer acceptance grow steadily. During 2008 we introduced
Virtual Protocol Interconnect (VPI) into our adapter ICs and
cards. VPI provides the ability for an adapter to automatically
sense whether a communications port is connected to an Ethernet
fabric or an InfiniBand Fabric. Data Centers which use VPI
adapters in their servers have the ability to dynamically select
the connectivity for use by those servers, providing improved
return on investment (ROI) by avoiding complete upgrades in the
future. 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 2008, according to the industry research
firm IDC. We also supply leading storage and communications
infrastructure equipment vendors such as LSI/Engenio
Corporation, Sun Microsystems, Network Appliance, Isilon, Data
Direct Networks, Voltaire and Xyratex. Additionally, our
products are used as embedded solutions by GE Fanuc, Toshiba
Medical, SeaChange International and others.
In order to accelerate adoption of our high-performance
interconnect solutions and our products, we work with leading
vendors across related industries, including:
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processor vendors such as Intel, AMD, IBM and Sun Microsystems;
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operating system vendors such as Microsoft, Novell and Red
Hat; and
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software applications vendors such as Oracle, IBM and VMware.
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We are a Steering Committee member of the InfiniBand Trade
Association, or IBTA, and the OpenFabrics Alliance, or OFA, both
of which are industry trade organizations that maintain and
promote InfiniBand technology. Additionally, OFA supports and
promotes Ethernet solutions. We are also a participating member
of the Institute of Electrical and Electronic Engineers or IEEE
organization which facilitates the advancement of the Ethernet
standard as well as other industry organizations advancing
various networking and storage related standards.
Our business headquarters are in Sunnyvale, California, and our
engineering headquarters are in Yokneam, Israel. Our total
assets for the years ended December 31, 2006, 2007 and 2008
were approximately $43.1 million, $202.4 million and
$244.8 million, respectively. During the years ended
December 31, 2006, 2007 and 2008 we generated approximately
$48.5 million, $84.1 million and $107.7 million
in revenues, respectively, and approximately $7.2 million,
$35.6 million and $22.4 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
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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, communication
infrastructure equipment and embedded systems that enable
deployment of commercial applications such as customer
relationship management, financial trading and risk management
applications, enterprise resource planning,
E-commerce
and web service applications. EDCs typically provide multiple
data processing and storage resources to one or many
organizations and are capable of supporting several applications
at the same time.
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High-Performance Computing, or HPC. HPC
encompasses applications that utilize the computing power of
advanced parallel processing over multiple servers, commonly
called a supercomputer. The expanding list of HPC applications
includes financial modeling, government research, computer
automated engineering, geoscience and bioscience research and
digital content creation. HPC systems typically focus data
processing and storage resources on one application at a time.
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Embedded. Embedded applications encompass
computing, storage and communication functions that use
interconnect solutions contained in a chassis which has been
optimized for a particular environment. Examples of embedded
applications include storage and data acquisition equipment,
military operations, industrial and medical equipment and
telecommunications and data communications infrastructure
equipment.
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A number of semiconductor-based interconnect solutions have been
developed to address different applications. These solutions
include proprietary technologies as well as standard
technologies, including Fibre Channel, Ethernet and most
recently InfiniBand, which was specifically created for
high-performance computing, storage and embedded applications.
Trends
Affecting High-Performance Interconnect
Demand for computing power and data storage capacity is rising,
fueled by the increasing reliance of enterprises on information
technology, or IT, for everyday operations. The increase in
compute resources for virtual products design, the increase in
online banking and electronic medical records for healthcare and
government regulations requiring digital records retention
require increased IT capacity. Due to greater amounts of
information to be processed, stored and retrieved, data centers
rely on high-performance computing and high-capacity storage
systems to optimize price/performance, minimize total cost of
ownership, utilize power efficiently and simplify management. We
believe that several IT trends impact the demand for
interconnect solutions and the performance required from these
solutions. These trends include:
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Transition to blade systems, clustered computing and storage
using connections among multiple standard
components. Historically, enterprises addressed
the requirements for high-end computing and storage using
monolithic systems, which are based on proprietary components.
These systems typically require significant upfront capital
expenditures as well as high ongoing operating and maintenance
expense. More recently, enterprises have deployed systems with
multiple
off-the-shelf
standardized servers and storage systems linked by high-speed
interconnects, also known as clusters. Clustering enables
significant improvements in performance, reliability,
scalability, cost, and power savings. The need for better
utilization of floor space and power consumption has driven the
adoption of compact form factor (size and shape) blade servers.
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Transition to multiple and multi-core processors in
servers. In order to increase processing
capabilities, processor vendors have integrated multiple
computing cores into a single processor device. In addition,
server 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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Data center infrastructure consolidation. IT
managers are increasingly faced with the need to optimize total
cost of ownership associated with the data centers they manage.
As the demand for I/O to servers increases, so does the need for
a unified I/O interconnect. In the past the solution was to add
more I/O adapters and cables to each server, which resulted in
increased costs, power consumption and management complexity.
This has led to a widespread trend of consolidating network
infrastructures to reduce costs and generate a higher return on
investments.
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Increasing deployment of virtualized computing
resources. Enterprises are turning to
virtualization software, which allows multiple applications to
run on a single server, thereby improving resource utilization
and requiring increased I/O bandwidth in the EDC.
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Increasing deployments of mission-critical, latency sensitive
applications. There is an increasing number of
applications that require extremely fast response times in order
to deliver an optimal result or user experience. Reducing
latency, the absolute time it takes for information to be sent
from one resource to another over a high-performance
interconnect, is critical to enhancing application performance
in clustered environments. Some examples of applications that
benefit from low-latency interconnect include financial trading,
clustered databases and parallel processing solutions used in
HPC.
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Virtual product design. A significant
reduction in cost and turn around time of product design can be
accomplished by carrying out the design activities using
simulation and optimization tools and reducing the number of
prototypes and physical testing. To accomplish this, a detailed
representation of the products physical properties, high
capability simulations software tools and an intensive compute
environment are required. Such environments mandate high-speed
networking to become effective and carry the compute intensive
simulations.
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Green computing. With the growth in IT
capacity, data centers have become major consumers of electrical
energy to power and cool the equipment. Furthermore, data center
networks have increased in size and managing a growing
multi-infrastructure has become a daunting task. Enterprise data
centers currently use three different
networks Storage Area Networks using Fibre Channel
transport for storage access, Local Area Network using Ethernet
transport for standard network access and System Area Networks
using InfiniBand transport for inter-process communication and
high-performance clustering. In order to reduce energy, real
estate, management and infrastructure costs of modern data
centers, a new field of data center architecture was
defined the green data center. The new architecture
leverages from I/O virtualization and consolidation, to enable
green, simple-managed, highly-utilized modern data centers. The
ability to consolidate data center I/O mandates the use of
high-throughput networks to deliver the needed bandwidth equal
or greater than the sum of the separate networks.
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Challenges
Faced by High-Performance Interconnect
The trends described above indicate that high-performance
interconnect solutions will play an increasingly important role
in IT infrastructures and will drive strong growth in unit
demand. Performance requirements for interconnect solutions,
however, continue to evolve and lead to high demand for
solutions that are capable of resolving the following challenges
to facilitate broad adoption:
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Performance limitations. In clustered
computing, cloud computing and storage environments, high
bandwidth and low latency are key requirements to capture the
full performance capabilities of a cluster. With the usage of
multiple multi-core processors in server, storage and embedded
systems, I/O bandwidth has not been able to keep pace with
processor advances, creating performance bottlenecks. Fast data
access has become a critical requirement to accommodate
microprocessors increased compute power. In addition,
interconnect latency has become a limiting factor in a
clusters overall performance.
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Increasing complexity. The increasing usage of
clustered servers and storage systems as a critical IT tool has
led to an increase in complexity of interconnect configurations.
The number of configurations and connections have also
proliferated in EDCs, making them increasingly complicated to
manage and expensive to operate. Additionally, managing multiple
software applications utilizing disparate interconnect
infrastructures has become increasingly complex.
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Interconnect inefficiency. The deployment of
clustered computing and storage has created additional
interconnect implementation challenges. As additional computing
and storage systems, or nodes, are added to a cluster, the
interconnect must be able to scale in order to provide the
expected increase in cluster performance. Additionally, recent
government attention on data center energy efficiency is causing
IT managers to look for ways to adopt more energy-efficient
implementations.
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Limited reliability and stability of
connections. Most interconnect solutions are not
designed to provide reliable connections when utilized in a
large clustered environment, which can cause data transmission
interruption. As more applications in EDCs share the same
interconnect, advanced traffic management and application
partitioning become necessary to maintain stability and reduce
system down time. Such capabilities are not offered by most
interconnect solutions.
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Poor price/performance economics. In order to
provide the required system bandwidth and efficiency, most
high-performance interconnects are implemented with complex,
multi-chip semiconductor solutions. These implementations have
traditionally been extremely expensive.
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In addition to InfiniBand, proprietary and other
standards-based, high-performance interconnect solutions,
including Fibre Channel and Ethernet, are currently used in EDC,
HPC and embedded markets. Performance and usage requirements,
however, continue to evolve and are now challenging the
capabilities of these interconnect solutions:
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Proprietary interconnect solutions have been designed for use in
supercomputer applications by supporting low latency and
increased reliability. These solutions are only supported by a
single vendor for product and software support, and there is no
standard organization maintaining and facilitating improvements
and changes to the technology. The number of supercomputers that
use proprietary interconnect solutions has been declining
largely due to the availability of industry standards-based
interconnects that offer superior price/performance, a lack of
compatible storage systems, and the required use of proprietary
software solutions.
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Fibre Channel is an industry standard interconnect solution
limited to storage applications. The majority of Fibre Channel
deployments support 2 and 4 Gb/s while recently announced
solutions support 8Gb/s. Fibre Channel lacks a standard software
interface, does not provide server cluster capabilities and
remains more expensive relative to other standards-based
interconnects. There have been recent industry efforts to
support the Fibre Channel data transmission protocol over
interconnect technologies including Ethernet (Fibre Channel over
Ethernet or FCoE) and InfiniBand (Fibre Channel over InfiniBand
or FCoIB).
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Ethernet is an industry-standard interconnect solution that was
initially designed to enable basic connectivity between a local
area network of computers or over a wide area network, where
latency, connection reliability and performance limitations due
to communication processing are non-critical. While Ethernet has
a broad installed base at 1 Gb/s and lower data rates, its
overall efficiency, scalability and reliability have been less
optimal than certain alternative interconnect solutions in
high-performance computing, storage and communication
applications. A recent increase to 10Gb/s, a significant
reduction in application latency and more efficient software
solutions have improved Ethernets capabilities to address
specific high-performance applications that do not demand the
highest scalability. There are also on-going efforts to
standardize additional features within the Ethernet
specification to improve its reliability and scalability in EDCs
which are generically referred to as Data Center Ethernet or
Converged Enhanced Ethernet.
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In the HPC, EDC and embedded markets, the predominant
interconnects are 1Gb/s Ethernet and 4Gb/s Fibre Channel. Based
on our knowledge of the industry, we believe there is
significant demand for interconnect products that provide higher
bandwidth and better overall performance 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
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storage systems, and switch solutions that connect all the
systems together. The physical connection of multiple HCAs and
switches is commonly known as an InfiniBand fabric.
The InfiniBand standard was developed under the auspices of the
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, Fujitsu,
Hitachi, IBM, Intel, LSI Corporation, NEC, QLogic Corporation,
Sun Microsystems and Voltaire. The IBTA tests and certifies
vendor products and solutions for interoperability and
compliance. Our products meet the specifications of the
InfiniBand standard and have been tested and certified by the
IBTA.
The OpenFabrics Alliance, or OFA, is an organization responsible
for the development and distribution of open-source,
industry-standard software solutions that are compatible with
InfiniBand hardware solutions. Founded in June 2004 as the
OpenIB Alliance and a partner organization to IBTA, OFAs
initial sole charter was to develop InfiniBand software
solutions that are interoperable among multiple vendors. As a
result of its success at developing standard InfiniBand software
solutions, the organization expanded its charter in March 2006
to leverage its software development capabilities over other
interconnect solutions including Ethernet, and changed its name
from OpenIB to OpenFabrics. OFAs members include leading
enterprise IT vendors, hardware and software solution providers
including Mellanox, AMD, Cisco Systems, Hewlett-Packard, IBM,
Intel, Network Appliance and Sun Microsystems in addition to
national laboratory end users such as Sandia, Los Alamos,
Lawrence Livermore National Laboratories and financial services
end-user Credit Suisse.
InfiniBand solutions may be perceived to have disadvantages to
products based on other existing interconnect standards that
have been available for longer periods of time with larger
installed bases. These perceived disadvantages include the
requirement for additional software support, new cabling and
equipment infrastructure and a limited number of
enterprise-class storage solutions, which impacted early
adoption rates of InfiniBand. In addition, a continuing
challenge is educating the IT community about the advantages of
InfiniBand and increasing familiarity with InfiniBand relative
to other interconnect standards. With the solutions now offered
by OFA in addition to key industry software providers,
InfiniBand software support has become widely available and is
included in leading operating systems, in addition to production
released software solutions for mainstream financial, retail and
other commercial applications, contributing to increased
adoption rates. In addition, we believe the superior price
performance of InfiniBand has justified the costs of new cabling
and equipment infrastructure. Finally, InfiniBand-based
enterprise-class storage solutions have recently been introduced
and deployed.
We believe the primary driver of InfiniBand product shipments in
the near future is the increasing usage of InfiniBand in
servers, storage and communications infrastructure equipment.
Based on data provided by IDC in April 2008 in a report called
Worldwide InfiniBand
2007-2011
Forecast Update, the number of InfiniBand HCAs expected to
ship to the market will increase at a 51.5% compound annual
growth rate (CAGR) from 124,000 in 2006 to 991,000 in 2011. IDC
also forecasts that the number of InfiniBand switch ports
expected to ship to the market will increase at a 54.5% CAGR
from 177,000 ports in 2006 to 1.56 million ports in 2011.
IDC credits the growth of InfiniBand usage to increasing
deployment in HPC, scale-out database, shared virtualized I/O,
and financial services environments.
Advantages
of InfiniBand
We believe that InfiniBand-based solutions have advantages
compared to solutions based on alternative interconnect
architectures. InfiniBand addresses the significant challenges
within IT infrastructures created by more demanding requirements
of the high-performance interconnect market. More specifically,
we believe that InfiniBand has the following advantages:
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Superior performance. In comparison to other
interconnect technologies that were architected to have a heavy
reliance on communication processing, InfiniBand was designed
for implementation in an IC that relieves the central processing
unit, or CPU, of communication processing functions. InfiniBand
is able to provide superior bandwidth and latency relative to
other existing interconnect technologies and has maintained this
advantage with each successive generation of products. For
example, our current InfiniBand adapters provide bandwidth up to
40Gb/s, and our current switch ICs support bandwidth up to
120Gb/s, which is significantly higher than the 10Gb/s or less
supported by competing technologies. The InfiniBand
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specification supports the design of interconnect products with
up to 120Gb/s bandwidth, which is the highest performance
industry-standard interconnect specification. In addition,
InfiniBand fully leverages the I/O capabilities of PCI Express,
a high-speed system bus interface standard.
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The following table provides a bandwidth comparison of the
various high performance interconnect solutions.
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Proprietary
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Fibre Channel
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Ethernet
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InfiniBand
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Supported bandwidth of available solutions
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2Gb/s 10Gb/s
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2Gb/s 8Gb/s
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1Gb/s 10Gb/s
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10Gb/s 40Gb/s
server-to-server
30Gb/s 120Gb/s
switch-to-switch
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Performance in terms of latency varies depending on system
configurations and applications. According to recent independent
benchmark reports, latency of InfiniBand solutions was less than
half of that of tested 10Gb/s Ethernet and proprietary
solutions. Fibre Channel, which is used only as a storage
interconnect, is typically not benchmarked on latency
performance. HPC typically demands low latency interconnect
solutions. In addition, there are 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 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 in the EDC.
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Our
Solution
We provide comprehensive solutions based on InfiniBand,
including HCA and switch ICs, adapter cards, switch systems and
software. InfiniBand enables us to provide products that we
believe offer superior performance and meet the needs of the
most demanding applications, while also offering significant
improvements in total cost of ownership compared to alternative
interconnect technologies. For example, our current InfiniBand
HCAs provide bandwidth up to 40Gb/s and our switch ICs provide
bandwidth up to 120Gb/s per interface, which is significantly
higher than the 10Gb/s or less supported by competing
technologies. As part of our comprehensive solution, we perform
validation and interoperability testing from the physical
interface to the applications software. Our
9
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 2008
illustrates the benefits of our solutions. TOP500.org is an
independent organization that was founded in 1993 to provide a
reliable basis for reporting trends in high-performance
computing by publishing a list of the most powerful computers
twice a year. The number of listed InfiniBand-based
supercomputers has grown from 125 as of November 2007 to 142 as
of November 2008, which represents a 17% increase.
InfiniBand-based clusters represented 4 of the Top 10, including
the #1 fastest supercomputer in the world, Los Alamos
National Labs Roadrunner, and 54% of the Top100. The
November 2008 TOP500 list also illustrates that InfiniBand
interconnects have continued to replace interconnects in
supercomputers based on proprietary interconnect technologies,
which had a 54% decline since the November 2007 list, and
represent less than 2% of the latest list. We believe that the
majority of these InfiniBand-based supercomputers incorporate
our HCA products and that all of them use our switch silicon
products. Additionally, we believe the current cluster
implementations that incorporate both our HCA and switch silicon
products in the November 2008 TOP500 list of the Worlds
Fastest Supercomputers compare favorably to clusters based on
other interconnect technologies.
Specifically, clusters in the above list that incorporate our
products compare favorably versus Ethernet as follows:
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Performance. Performance of clusters is
measured in GFLOPS, where one GFLOP represents one billion
mathematical calculations per second. Clusters that utilize our
products average approximately 46,500 GFLOPS, while clusters
based on Gigabit Ethernet technology average 17,500 GFLOPS.
According to the November 2008 TOP500 list of the Worlds
Fastest Supercomputers, there were no clusters reported using 10
Gigabit Ethernet technology for server to server communication.
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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 75%
efficiency, compared to 51% for clusters that utilize Gigabit
Ethernet.
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Scalability. Clusters that utilize our
products average approximately 6,050 CPUs per cluster, compared
to an average of 3,344 CPUs per cluster for clusters that
utilize Gigabit Ethernet. There is a strong dependency on the
reliability and fault tolerance capabilities of a high
performance interconnect when determining the scalability of a
cluster.
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VPI:
Providing Connectivity to InfiniBand and Ethernet
In addition to supporting InfiniBand, our latest generation
adapter products also support the industry standard Ethernet
interconnect specification at both 1Gb/s and 10Gb/s. In
developing this dual interconnect support, Mellanox created
Virtual Protocol Interconnect (VPI). VPI enables Mellanox to
offer products that concurrently support both Ethernet and
InfiniBand with network ports having the ability to auto sense
the type of switch to which it is connected and then take on the
characteristics of that fabric. In addition, these products
extend certain InfiniBand advantages to Ethernet fabrics, such
as reduced complexity and superior price/performance, by
utilizing existing, field-proven InfiniBand software solutions.
These software solutions include applications, operating
systems, communication protocols, and virtualization and
management packages used in EDC, HPC and embedded markets.
Integrating InfiniBand and Ethernet in the same product provides
our OEM customers and partners the ability to support both
interconnect standards with a single development effort and
provides end-users the flexibility to choose between fabrics or
simultaneously connect to both depending on the environment and
performance requirements.
The figure below illustrates our VPI enabled unified software
strategy that allows applications to utilize industry-standard
communication protocols to seamlessly interface with the leading
fabric technologies including:
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10, 20 and 40Gb/s InfiniBand including Fibre Channel over
InfiniBand
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1 and 10Gb/s Ethernet including Fibre Channel over Ethernet
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10
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Data Center Ethernet/Converged Enhanced Ethernet
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Complete
Application Transparency
We believe that InfiniBand solutions will continue to deliver
superior price/performance when compared to any other high
performance interconnect technology because of their base
architecture, proven scalability, reliability and feature set.
At the same time, as Ethernet is a widely deployed interconnect
technology, we expect there will be an increasing number of
deployments at 10Gb/s in EDCs. Our next generation adapter
products, with VPI technology, support high-performance
connectivity to both InfiniBand and Ethernet enabling us to
provide products to an expanding number of 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 in addition to
launching our first Ethernet products. We believe we have
developed strong competencies in integrating mixed-signal
design, including industry-leading data transmission technology
such as Serializer/Deserializer, or SerDes, and developing
complex ICs. We have used these competencies along with our
knowledge of InfiniBand to design our innovative, next
generation, high-performance products that also support the
Ethernet interconnect standard. We also consider our software
development capability as a key strength, and we believe that
our software allows us to offer complete solutions. We have
developed a significant portfolio of intellectual property, or
IP, and have 15 issued patents. We believe our experience,
competencies and IP will enable us to remain a leading supplier
of high-performance interconnect solutions.
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We believe we are the leading merchant supplier of InfiniBand
ICs with a multi-year competitive advantage. We
have gained in-depth knowledge of the InfiniBand standard
through active participation in its development. We were first
to market with InfiniBand products in 2001 and InfiniBand
products that support the standard PCI Express interface (in
2004) and PCI Express 2.0 interface (in 2007). We have
sustained our leadership position through the introduction of
several generations of products. Because of our market
leadership, vendors have developed and continue to optimize
their software products based on our semiconductor solutions. We
believe that this places us in an advantageous position to
benefit from continuing market adoption of our products.
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We have a comprehensive set of technical capabilities to
deliver innovative and reliable products. In
addition to designing our ICs, we design standard adapter card
products and custom adapter card and switch
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11
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products, providing us a deep understanding of the associated
circuitry and component characteristics. We believe this
knowledge enables us to develop solutions that are innovative
and can be efficiently implemented in target applications. We
have devoted significant resources to develop our in-house test
development capabilities, which enables us to rapidly finalize
our mass production test programs, thus reducing time to market.
We have synchronized our test platform with our outsourced
testing provider and are able to conduct quality control tests
with minimal disruption. We believe that because our
capabilities extend from product definition, through IC design,
and ultimately management of our high-volume manufacturing
partners, we have better control over our production cycle and
are able to improve the quality, availability and reliability of
our products.
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We have extensive relationships with our key OEM customers
and many end users. Since our inception we have
worked closely with major OEMs, including leading server,
storage, communications infrastructure equipment and embedded
systems vendors, to develop products that accelerate market
adoption of InfiniBand. During this process we have obtained
valuable insight into the challenges and objectives of our
customers, and gained visibility into their product development
plans. We also have established end-user relationships with
influential IT executives which allow us access to firsthand
information about evolving EDC, HPC and embedded market trends.
We believe that our OEM customer and end-user relationships
allow us to stay at the forefront of developments and improve
our ability to provide compelling solutions to address their
needs.
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Our
Strategy
Our goal is to be the leading supplier of
end-to-end
connectivity solutions for servers and storage that optimize
data center performance for computing, storage and
communications applications. To accomplish this goal, we intend
to:
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Continue to develop leading, high-performance interconnect
products. We will continue to expand our
technical expertise and customer relationships to develop
leading interconnect products. We are focused on extending our
leadership position in high-performance interconnect technology
and pursuing a product development plan that addresses emerging
customer and end-user demands and industry standards. In order
to expand our market opportunity, we have added products that
are compatible with the Ethernet interconnect standard in
addition to InfiniBand. These products will allow our customers
to capture certain advantages of InfiniBand while providing
connectivity to Ethernet-based infrastructure equipment. Our
unified software strategy is to use a single software stack to
support connectivity to InfiniBand and Ethernet with the same
VPI enabled hardware adapter device.
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Facilitate and increase the continued adoption of
InfiniBand. We will facilitate and increase the
continued adoption of InfiniBand in the high-performance
interconnect marketplace by expanding our partnerships with key
vendors that drive high-performance interconnect adoption, such
as suppliers of processors, operating systems and other
associated software. In conjunction with our OEM customers, we
will 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 their ability to be
a unified fabric and superior price/performance economics.
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12
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Leverage our fabless business model to deliver strong
financial performance. We intend to continue
operating as a fabless semiconductor company and consider
outsourced manufacturing of our ICs and adapter cards to be a
key element of our strategy. Our fabless business model offers
flexibility to meet market demand and allows us to focus on
delivering innovative solutions to our customers. We plan to
continue to leverage the flexibility and efficiency offered by
our business.
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Our
Products
We provide complete solutions which are based on and meet the
specifications of the InfiniBand standard in addition to
products that also support the Ethernet standard. Our InfiniBand
products including adapter ICs and cards
(InfiniHost®
product family) and switch ICs
(InfiniScale®
product family) and systems, bridge ICs (BridgeX product family)
and gateway systems, as announced February 2009. Our latest
4th generation adapter and cards
(ConnectX®
product family) also support the Ethernet interconnect standard
in addition to InfiniBand. Our bridge devices support bridging
capabilities from InfiniBand to Ethernet and Fibre Channel, and
from Ethernet to Fibre Channel.
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.
We provide adapters to server, storage, communications
infrastructure and embedded systems OEMs as ICs or standard card
form factors with PCI-X or PCI Express interfaces. Adapter ICs
or cards are incorporated into OEM server and storage systems to
provide InfiniBand
and/or
Ethernet connectivity. All of our adapter products interoperate
with standard programming interfaces and are compatible with
previous generations, providing broad industry support. We also
support server operating systems including Linux, Windows, AIX,
HPUX, Solaris and VxWorks.
We also provide our InfiniBand switch ICs to server, storage,
communications infrastructure and embedded systems OEMs to
create switching equipment that is at the core of InfiniBand
fabrics. To deploy an InfiniBand fabric, any number of server or
storage systems that contain an HCA can be connected to an
InfiniBand-based communications infrastructure system such as an
InfiniBand switch. We have recently introduced our 4th
generation switch IC (InfiniScale IV) which support up to
120Gb/s InfiniBand throughput. We have also introduced our
switch systems that include 36-port and 324-port 40Gb/s
InfiniBand switch.
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.
13
Our products generally vary by the number and performance of
InfiniBand
and/or
Ethernet ports supported. The tables below summarize the
available adapter and switch ICs that Mellanox provides.
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Uni-Directional
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InfiniBand
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# InfiniBand
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Bandwidth
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Total
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Adapter ICs and Cards
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Host Interface
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Port Interface
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Ports
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per Port
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Bandwidth(3)
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InfiniBridge(1)
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PCI(2)
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InfiniBand
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8
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2.5Gb/s
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40Gb/s
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2
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10Gb/s
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40Gb/s
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InfiniHost
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PCI-X(2)
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InfiniBand
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2
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10Gb/s
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40Gb/s
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InfiniHost III Lx
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PCI Express
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InfiniBand
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1
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20Gb/s
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40Gb/s
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InfiniHost III Ex
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PCI Express
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InfiniBand
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2
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20Gb/s
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80Gb/s
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ConnectX
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PCI Express 2.0
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InfiniBand and/or
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2
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40Gb/s
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80Gb/s
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Ethernet
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ConnectX EN
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PCI Express 2.0
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Ethernet
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2
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10Gb/s
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40Gb/s
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Uni-Directional
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InfiniBand
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# InfiniBand
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Bandwidth
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Total
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Switch ICs
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Ports
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per Port
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Bandwidth(3)
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InfiniBridge(1)
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8
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2.5Gb/s
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40Gb/s
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2
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10Gb/s
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40Gb/s
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InfiniScale
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8
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10Gb/s
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160Gb/s
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InfiniScale III
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24
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20Gb/s
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960Gb/s
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8
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60Gb/s
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960Gb/s
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InfiniScale IV
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36
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40Gb/s
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2880Gb/s
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12
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120Gb/s
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2880Gb/s
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MTS3600 36-port switch
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36
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40Gb/s
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2880Gb/s
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MTS3610 324-port switch
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324
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40Gb/s
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25920gb/s
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# InfiniBand
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# Ethernet
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# Fibre
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Bridge ICs and Systems
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Ports
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Ports
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Channel
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BridgeX
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2 up to
40Gb/s)
ports
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Up to 6x
10GigE
ports
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Up to 6x
2/4/8Gb/s
ports
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(1) |
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InfiniBridge®
functions as both an HCA and switch and is our first generation
device. |
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(2) |
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PCI and PCI-X are the predecessor interface standards to PCI
Express. |
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(3) |
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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.
14
High-performance
mixed-signal design
One of the key technology differentiators of our ICs is our
mixed-signal SerDes technology. SerDes I/O directly drives the
interconnect interface, which provides signaling and
transmission of data over copper interconnects and cables, or
fiber optic interfaces for longer distance connections. We are
the only company that has shipped field-proven integrated
controller ICs that operate with a 5Gb/s SerDes over a ten meter
InfiniBand copper cable (up to 60Gb/s connections with 12 SerDes
working in parallel on our switch IC). Additionally, we are able
to integrate several of these high-performance SerDes onto a
single, low-power IC, enabling us to provide the highest
bandwidth, merchant switch ICs based on an industry-standard
specification. We have developed a 10Gb/s SerDes I/O that is
intended for use in our 4th generation ConnectX adapter that
supports both InfiniBand and Ethernet as well as our
4th generation InfiniScale IV switch IC that supports
InfiniBand. Our 10Gb/s SerDes enables our ConnectX adapters to
support 40Gb/s bandwidth (4 10Gb/s SerDes operating in parallel)
in addition to providing a direct 10Gb/s connection to standard
XFP and SFP+ fiber modules to provide long range Ethernet
connectivity without the requirement of additional components,
which saves power, cost and board space. In addition, our 10Gb/s
SerDes supports 40Gb/s (4 10Gb/s SerDes operating in parallel)
as well as 120Gb/s (12 10Gb/s SerDes operating in parallel) port
bandwidth on our InfiniScale IV switch IC.
Specialized
communication processing and switching functions
We also specialize in high-performance, low-latency design
architectures that incorporate significant memory and logic
areas requiring proficient synthesis and verification. Our
adapter ICs are specifically designed to perform communication
processing, effectively offloading this very intensive task from
server and storage processors in a cost-effective manner. Our
switch ICs are specifically designed to switch cluster
interconnect data transmissions from one port to another with
high bandwidth and low latency, and we have developed a packet
switching engine and non-blocking crossbar switch fabric to
address this.
We have developed a custom embedded Reduced Instruction Set
Computer processor called
InfiniRISC®
that specializes in offloading network processing from the host
server or storage system and adds flexibility, product
differentiation and customization. We integrate a different
number of these processors in a device depending on the
application and feature targets of the particular product.
Integration of these processors also shortens development cycles
as additional features can be added by providing new programming
packages after the ICs are manufactured, and even after they are
deployed in the field.
Advanced
interfaces
In addition to InfiniBand and Ethernet interfaces, we also
provide other industry-standard, high-performance advanced
interfaces such as PCI Express and PCI Express 2.0 which also
utilize our mixed-signal 2.5Gb/s and
5Gb/s SerDes
I/O technology. PCI Express is a high-speed
chip-to-chip
interface which provides a high-performance interface between
the adapter and processor in server and storage systems. PCI
Express and our high-performance interconnect interfaces are
complementary technologies that facilitate optimal bandwidth for
data transmissions along the entire connection starting from a
processor of one system in the cluster to another processor in a
different system. We were among the first to market with an IC
solution that integrates the PCI Express interface
(2004) and PCI Express 2.0 interface (2007), and we believe
this provides 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.
15
The below diagrams depict our ConnectX adapter IC and
InfiniScale IV switch IC architecture.
ConnectX
Adapter IC Architecture
InfiniScale IV
InfiniBand 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 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
Hewlett-Packard
IBM
Sun Microsystems
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Hewlett-Packard
LSI/Engenio Corporation
Network Appliance
Isilon
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Sun Microsystems
Voltaire
Xsigo
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GE Fanuc
Toshiba Medical
Seachange International
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16
We sold products to more than 257 customers worldwide in the
year ended December 31, 2008, many of whom are at the
evaluation stage of their product development. We currently
anticipate that several of these evaluations will result in
increased orders for our products as they move into the
production stage.
In the year ended December 31, 2008, sales to
Hewlett-Packard accounted for 19% of our total revenues, sales
to Sun accounted for 17% of our total revenues and sales to
QLogic Corporation accounted for 11% of our total revenues.
Sales and
Marketing
We sell our products worldwide through multiple channels,
including our direct sales force and our network of domestic and
international sales representatives. We have strategically
located sales personnel in the United States, Europe, China,
India and Taiwan. Our sales directors focus their efforts on
leading OEMs and target key decision makers. We are also in
frequent communication with our customers and
partners sales organizations to jointly promote our
products and partner solutions into end-user markets. We have
established a business development team to engage directly with
end users promoting the benefits of our products which we
believe creates additional demand for our customers
products that incorporate our products.
Our sales support organization is responsible for supporting our
sales channels and managing the logistics from order entry to
delivery of products to our customers. In addition, our sales
support organization is responsible for customer and revenue
forecasts, customer agreements and program management for our
large, multi-national customers. Customers within the United
States are supported by our staff in California and customers
outside of the United States are supported by our staff in
Israel.
To accelerate design and qualification of our products into our
OEM customers systems, and ultimately the deployment of
our technology by our customers to end users, we have a field
applications engineering, or FAE, team and an internal support
engineering team that provide direct technical support. In
certain situations, our OEM customers will also utilize our
expertise to support their end-user customers jointly. Our
technical support personnel have expertise in hardware and
software, and have access to our development team to ensure
proper service and support for our OEM customers. Our FAE team
provides OEM customers with design and review capabilities of
their systems in addition to technical training on the
technology we have implemented in our products.
Our marketing team is responsible for product strategy and
management, future product plans and positioning, pricing,
product introductions and transitions, competitive analysis,
marketing communications and raising the overall visibility of
our company. The marketing team works closely with both the
sales and research and development organizations to properly
align development programs and product launches with market
demands.
Our marketing team leads our efforts to promote our interconnect
technology and our products to the entire industry by:
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assuming leadership roles within IBTA, OFA, Blade.org and other
industry trade organizations;
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participating in trade shows, press and analyst briefings,
conference presentations and seminars for end-user
education; and
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building and maintaining active partnerships with industry
leaders whose products are important in driving InfiniBand and
Ethernet adoption, including vendors of processors, operating
systems and software applications.
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Research
and Development
Our research and development team is composed of experienced
semiconductor designers, software developers and system
designers. Our semiconductor design team has extensive
experience in all phases of complex, high-volume design,
including product definition and architecture specification,
hardware code development, mixed-signal and analog design and
verification. Our software team has extensive experience in
development, verification, interoperability testing and
performance optimization of software for use in computing and
storage applications. 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
17
phases of high-volume adapter card and custom switch designs
including product definition and architectural specification,
product design, design verification and transfer to production.
We design our products with careful attention to quality,
reliability, cost and performance requirements. We utilize a
methodology called Customer Owned Tooling, or COT, where we
control and manage a significant portion of timing and layout
design and verification in-house, before sending the
semiconductor design to our third-party manufacturer. Although
COT requires a significant up-front investment in tools and
personnel, it provides us with greater control over the quality
and reliability of our IC products as opposed to relying on
third-party verification services, as well as better time to
market.
We choose first tier technology vendors for our
state-of-the-art
design tools and continue to maintain long-term relationships
with our vendors to ensure timely support and updates. We also
select a mainstream silicon manufacturing process only after it
has proven its production worthiness for at least one year. We
verify that actual silicon characterization and performance
measurements strongly correlate to models that were used to
simulate the device while in design, and that our products meet
frequency, power and thermal targets with good margins.
Furthermore, we insert
Design-for-Test
circuitry into our IC products which increases product quality,
provides expanded debugging capabilities and ultimately enhances
system-level testing and characterization capabilities once the
device is integrated into our customers products. In
addition, we use an internally developed tool that examines IC
designs before sending them for manufacturing that is proven to
increase the yield (and consequently reduce device cost) by
increasing the performance margin on critical design areas.
Frequent interaction between our silicon, software and systems
design teams gives us a comprehensive view of the requirements
necessary to deliver quality, high-performance products to our
OEM customers.
Manufacturing
We depend on third-party vendors to manufacture, package and
production test our products as we do not own or operate a
semiconductor fabrication, packaging or production testing
facility. By outsourcing manufacturing, we are able to avoid the
high cost associated with owning and operating our own
facilities. This allows us to focus our efforts on the design
and marketing of our products.
Manufacturing and Testing. We use Taiwan
Semiconductor Manufacturing Company, or TSMC, to manufacture and
Advanced Semiconductor Engineering, or ASE, to assemble, package
and production test our IC products. We use Flextronics to
manufacture our standard adapter card products and custom
adapter cards and switch systems. We maintain close
relationships with our suppliers, which improves the efficiency
of our supply chain. We focus on mainstream processes,
materials, packaging and testing platforms, and have a
continuous technology assessment program in place to choose the
appropriate technologies to use for future products. We provide
all of our suppliers a
12-month
rolling forecast, and receive their confirmation that they are
able to accommodate our needs on a monthly basis. We have access
to on-line production reports that provide
up-to-date
status information of our products as they flow through the
manufacturing process. On a quarterly basis, we review
lead-time, yield enhancements and pricing with all of our
suppliers to obtain the optimal cost for our products.
Quality Assurance. We maintain an ongoing
review of product manufacturing and testing processes. Our IC
products are subjected to extensive testing to assess whether
their performance exceeds the design specifications. We own an
in-house Teradyne Tiger IC tester which provides us with
immediate test data and generates 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
18
outside of Israel when we filed the application for funding (and
provided the application was approved based on the information
disclosed in the application). We have indicated our intent to
manufacture outside of Israel on some of our grant applications,
and the OCS has approved the manufacture of our IC products
outside of Israel, subject to our undertaking to pay the OCS
royalties from the sales of these products up to 120% of the
amount of OCS funds granted. The manufacturing of our IC
products outside of Israel, including those products
manufactured by TSMC and ASE, is in compliance with the terms of
our grant applications and applicable provisions of Israeli law.
Under applicable Israeli law, Israeli government consent is
required to transfer technologies developed under projects
funded by the government to third parties outside of Israel.
Transfer of OCS-funded technologies outside of Israel is
permitted with the approval of the OCS and in accordance with
the restrictions and payment obligations set forth under Israeli
law. Israeli law further specifies that both the transfer of
know-how as well as the transfer of IP rights in such know-how
are subject to the same restrictions. These restrictions do not
apply to exports from Israel or the sale of products developed
with these technologies.
Employees
As of December 31, 2008, we had 262 full-time
employees and 41 part-time employees located in the United
States and Israel, including 215 in research and development, 39
in sales and marketing, 28 in general and administrative and 21
in operations. Of our 262 full-time employees, 217 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.
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 or Pension
Fund. 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 16.83% of
his or her salary (consisting of 5% 6% to the
retirement plan, 8.33% for severance payments and up to 2.5% for
insurance).
Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. Such
amounts also include payments by the employee for national
health insurance. The total payments to the National Insurance
Institute are equal to approximately 14.5% of the wages (up to a
specified amount), of which the employee contributes
approximately 66% and the employer contributes approximately 34%.
We have never experienced any employment-related work stoppages
and believe our relationship with our employees is good.
Intellectual
Property
One of the key values and drivers for future growth of our
high-performance interconnect IC products is the IP we develop
and use to improve them. We believe that the main value
proposition of our high-performance interconnect products and
success of our future growth will depend on our ability to
protect our IP. We rely on a combination of patent, copyright,
trademark, mask work, trade secret and other IP laws, both in
the United States and internationally, as well as
confidentiality, non-disclosure and inventions assignment
agreements with our employees, customers, partners, suppliers
and consultants to protect and otherwise seek to control access
to, and distribution of, our proprietary information and
processes. In addition, we have developed technical knowledge,
which, although not patented, we consider to be significant in
enabling us to compete. The proprietary nature of
19
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, 2008, we had 15 issued patents and 25
patent applications pending in the United States., 5 issued
patents in Taiwan and 1 issued patent and 5 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, 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
agreed only to use Vitesses technology licensed under the
agreement for integrated SerDes applications. In exchange for
this license, we agreed to pay a royalty to Vitesse based on the
total number of devices sold by us that use Vitesses
technology. In February 2008, Vitesse discharged us from paying
royalty payments due under this agreement.
Competition
The markets in which we compete are highly competitive and are
characterized by rapid technological change, evolving industry
standards and new demands on features and performance of
interconnect solutions. We compete primarily on the basis of:
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price/performance;
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time to market;
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features and capabilities;
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wide availability of complementary software solutions;
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reliability;
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power consumption;
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customer support; and
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product roadmap.
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We believe that we compete favorably with respect to each of
these criteria. Many of our current and potential competitors,
however, have longer operating histories, significantly greater
resources, greater economies of scale, stronger name recognition
and a larger base of customers than we do. This may allow them
to respond more quickly than we are able to respond to new or
emerging technologies or changes in customer requirements. In
addition, these competitors may have greater credibility with
our existing and potential customers. They may be able to
introduce new technologies or devote greater resources to the
development, marketing and sales of their products than we can.
20
Furthermore, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we
are unable.
We compete with other providers of semiconductor-based high
performance interconnect products based on InfiniBand, Ethernet,
Fibre Channel and proprietary technologies. With respect to
InfiniBand products, we compete with QLogic Corporation. In
EDCs, products based on the InfiniBand standard primarily
compete with two different industry-standard interconnect
technologies, namely Ethernet and Fibre Channel. For Ethernet
technology, the leading IC vendors include Intel and Broadcom
Corporation. The leading IC vendors that provide Ethernet and
Fibre Channel products to the market include Emulex Corporation
and QLogic Corporation. In HPC, products based on the InfiniBand
standard primarily compete with the industry-standard Ethernet
and Fibre Channel interconnect technologies. In embedded
markets, we typically compete with interconnect technologies
that are developed in-house by system OEM vendors and created
for specific applications.
Additional
Information
We were incorporated under the laws of Israel in March 1999. Our
ordinary shares began trading on the NASDAQ Global Market as of
February 8, 2007 under the symbol MLNX and on
the Tel-Aviv Stock Exchange as of July 9, 2007 under the
symbol MLNX. Prior to February 8, 2007, our
ordinary shares were not traded on any public exchange.
Our principal executive offices in the United States are located
at 350 Oakmead Parkway, Suite 100, Sunnyvale, California
95085, and our principal executive offices in Israel are located
at Hermon Building, Yokneam, Israel 20692. The majority of our
assets are located in the United States. Our telephone number in
Sunnyvale, California is
(408) 970-3400,
and our telephone number in Yokneam, Israel is +972-4-909-7200.
Michael Gray is our agent for service of process in the United
States, and is located at our principal executive offices in the
United States. Our website address is www.mellanox.com.
Information contained on our website is not a part of this
annual report and the inclusion of our website address in this
annual report is an inactive textual reference only.
Website
Access to Company Reports and Corporate Governance
Documents
We post on the Investor Relations pages of our website,
ir.mellanox.com, a link to our filings with the SEC, our Code of
Business Conduct and Ethics, our Complaint and Investigation
Procedures for Accounting, Internal Accounting Controls, Fraud
or Auditing Matters and the charters of our Audit, Compensation
and Nominating and Corporate Governance Committees of our board
of directors and the charter of our Disclosure Committee. Our
filings with the SEC 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., 350 Oakmead Parkway, Suite 100
Sunnyvale, California 95085 or by emailing us at:
ir@mellanox.com. All these documents and filings are available
free of charge. Please note that information contained on our
website is not incorporated by reference in, or considered to be
a part of, this report. Further, a copy of this annual report on
Form 10-K
is located at the SECs Public Reference Room at
100 F Street, NE, Washington, D.C. 20549.
Information on the operation of the Public Reference Room can be
obtained by calling the SEC at
1-800-SEC-0330.
The SEC maintains an internet site that contains reports, proxy
and information statements and other information regarding our
filings at www.sec.gov.
Investing in our ordinary shares involves a high degree of
risk. You should carefully consider the following risk factors,
in addition to the other information set forth in this report,
before purchasing our ordinary shares. Each of these risk
factors could harm our business, financial condition or
operating results, as well as decrease the value of an
investment in our ordinary shares.
21
Risks
Related to Our Business
Declining
general economic, business or industry conditions may cause our
revenues and profitability to decline.
Recently, concerns over inflation, energy costs, geopolitical
issues, the availability and cost of credit, the
U.S. mortgage market and a declining real estate market in
the United States have contributed to increased volatility and
diminished expectations for the global economy and expectations
of slower global economic growth going forward. These factors,
combined with volatile oil prices, declining business and
consumer confidence and increased unemployment, have
precipitated an economic slowdown and fears of a recession. If
the economic climate in the United States and abroad does not
improve from its current condition or continues to deteriorate,
our customers or potential customers could reduce or delay their
purchases of our products, which would adversely impact our
revenues, our ability to manage inventory levels, the collection
of customer receivables and our profitability.
We
have a history of losses, and, although we achieved
profitability in last four fiscal years, we may not sustain or
increase profitability in the future.
We first recorded a profit in the year ended December 31,
2005. We incurred net losses prior to the quarter ended
June 30, 2005 and incurred a net loss during the quarter
ended March 31, 2006. Although we recorded a profit in the
years ended December 31, 2006, 2007 and 2008, as of
December 31, 2008 we had an accumulated deficit of
approximately $11.3 million. We may not be able to sustain
or increase profitability on a quarterly or an annual basis.
This may, in turn, cause the price of our ordinary shares to
decline. To sustain or increase our profitability, we will need
to generate and sustain substantially higher revenues while
maintaining reasonable cost and expense levels. We expect to
manage our research and development, sales and marketing and
general and administrative expenses throughout 2009 to reflect
the current economic environment. 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 2004 to 2005, and increasing
by 15%, 73% and 28% in 2006, 2007 and 2008, respectively. Our
revenues increased from $20.3 million to $42.1 million
to $48.5 million to $84.1 million to
$107.7 million for the years ended December 31, 2004,
2005, 2006, 2007 and 2008, respectively. We do not expect to
sustain our recent growth rate in the current economic
environment. You should not rely on the revenue growth of any
prior quarterly or annual periods as an indication of our future
performance. If we are unable to maintain adequate revenue
growth, we may not have adequate resources to execute our
business objectives and our share price may decline.
InfiniBand
may not be adopted at the rate or extent that we anticipate, and
adoption of InfiniBand is largely dependent on third-party
vendors and end users.
While the usage of InfiniBand has increased since its first
specifications were completed in October 2000, continued
adoption of InfiniBand is dependent on continued collaboration
and cooperation among information technology, or IT, vendors. In
addition, the end users that purchase IT products and services
from vendors must find InfiniBand to be a compelling solution to
their IT system requirements. We cannot control third-party
participation in the development of InfiniBand as an industry
standard technology. We rely on server, storage, communications
infrastructure equipment and embedded systems vendors to
incorporate and deploy InfiniBand integrated circuits, or ICs,
in their systems. InfiniBand may fail to effectively compete
with other technologies, which may be adopted by vendors and
their customers in place of InfiniBand. The adoption of
InfiniBand is also impacted by the general replacement cycle of
IT equipment by end users, which is dependent on factors
unrelated to InfiniBand. These factors may reduce the rate at
which InfiniBand is incorporated by our current server vendor
customers and impede its adoption in the storage, communications
infrastructure and embedded systems markets, which in turn would
harm our ability to sell our InfiniBand products.
22
We
have limited visibility into end-user demand for our products,
which introduces uncertainty into our production forecasts and
business planning and could negatively impact our financial
results.
Our sales are made on the basis of purchase orders rather than
long-term purchase commitments. In addition, our customers may
defer purchase orders. We place orders with the manufacturers of
our products according to our estimates of customer demand. This
process requires us to make multiple demand forecast assumptions
with respect to both our customers and end users
demands. It is more difficult for us to accurately forecast
end-user demand because we do not sell our products directly to
end users. In addition, the majority of our adapter card
business is conducted on a short order fulfillment basis,
introducing more uncertainty into our forecasts. Because of the
lead time associated with fabrication of our semiconductors,
forecasts of demand for our products must be made in advance of
customer orders. In addition, we base business decisions
regarding our growth on our forecasts for customer demand. As we
grow, anticipating customer demand may become increasingly
difficult. If we overestimate customer demand, we may purchase
products from our manufacturers that we may not be able to sell
and may over-budget our operations. Conversely, if we
underestimate customer demand or if sufficient manufacturing
capacity were unavailable, we would forego revenue opportunities
and could lose market share or damage our customer relationships.
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, 2008, sales to
Hewlett-Packard accounted for 19% of our total revenues, sales
to Sun Microsystems accounted for 17% of our total revenues, and
sales to QLogic Corporation accounted for 11% of our total
revenues. In the year ended December 31, 2007, sales to
Hewlett-Packard accounted for 19% of our total revenues, sales
to Voltaire accounted for 15% of our total revenues, sales to
Cisco Systems and QLogic Corporation accounted for 11%, each, of
our total revenues. In the year ended December 31, 2006,
sales to Voltaire accounted for 18% of our total revenues, sales
to Cisco Systems accounted for 14% of our total revenues, sales
to Hewlett-Packard accounted for 12% of our total revenues, and
sales to SilverStorm Technologies (which was acquired by QLogic
Corporation in October 2006) accounted for 11% of our total
revenues. 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.
We
face intense competition and may not be able to compete
effectively, which could reduce our market share, net revenues
and profit margin.
The markets in which we operate are extremely competitive and
are characterized by rapid technological change, continuously
evolving customer requirements and declining average selling
prices. We may not be able to compete successfully against
current or potential competitors. With respect to InfiniBand
products, we compete with QLogic Corporation, which introduced
its latest generation 40Gb/s switch technology in the fourth
quarter of 2008. With respect to 10Gb Ethernet products, we
compete with Intel and Broadcom Corporation. We also compete
with providers of alternative technologies, including Ethernet,
Fibre Channel and proprietary interconnects. The companies that
provide IC products for these alternative technologies include
Marvell Technology Group, Broadcom Corporation, Intel, Emulex
Corporation, QLogic Corporation and Myricom.
Some of our customers are also integrated circuit and switch
suppliers and already have similar expertise
in-house.
The process of licensing our technology to and support of such
customers entails the transfer of technology that may enable
them to become a source of competition to us, despite our
efforts to protect our intellectual property rights. Further,
each new design by a customer presents a competitive situation.
In the past, we have lost design wins to divisions within our
customers and this may occur again in the future. We cannot
assure you that these customers will not continue to compete
with us, that they will continue to be our customers or that
they
23
will continue to buy products from us at the same volumes.
Competition could increase pressure on us to lower our prices
and could negatively impact our profit margins.
Many of our current and potential competitors have longer
operating histories, significantly greater resources, greater
economies of scale, stronger name recognition and larger
customer bases than we have. This may allow them to respond more
quickly than we are able to respond to new or emerging
technologies or changes in customer requirements. In addition,
these competitors may have greater credibility with our existing
and potential customers. If we do not compete successfully, our
market share, revenues and profit margin may decline, and, as a
result, our business may be adversely affected.
If we
fail to develop new products or enhance our existing products to
react to rapid technological change and market demands in a
timely and cost-effective manner, our business will
suffer.
We must develop new products or enhance our existing products
with improved technologies to meet rapidly evolving customer
requirements. We are currently engaged in the development
process for next generation products, and we need to
successfully design our next generation and other products for
customers who continually require higher performance and
functionality at lower costs. The development process for these
advancements is lengthy and will require us to accurately
anticipate technological innovations and market trends.
Developing and enhancing these products can be time-consuming,
costly and complex. Our ability to fund product development and
enhancements partially depends on our ability to generate
revenues from our existing products.
There is a risk that these developments or enhancements, such as
migrating our next generation products from 130nm to 90nm to
lower geometry process technologies will be late, fail to meet
customer or market specifications and will not be competitive
with other products using alternative technologies that offer
comparable performance and functionality. We may be unable to
successfully develop additional next generation products, new
products or product enhancements. Our next generation products
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 and switches. We also rely on Advanced
Semiconductor Engineering, or ASE, to assemble, package and
production test our ICs. If these subcontractors do not provide
us with high-quality products, services and production and
production test capacity in a timely manner, or if one or more
of these subcontractors terminates its relationship with us, we
may be unable to obtain satisfactory replacements to fulfill
customer orders on a timely basis, our relationships with our
customers could suffer, our sales could decrease and our growth
could be limited. In particular, there are significant
challenges associated with moving our IC production from our
existing manufacturer to another manufacturer with whom we do
not have a pre-existing relationship.
We currently do not have long-term supply contracts with any of
our third-party subcontractors. Therefore, they are not
obligated to perform services or supply products to us for any
specific period, in any specific quantities or at any specific
price, except as may be provided in a particular purchase order.
None of our third-party subcontractors has provided contractual
assurances to us that adequate capacity will be available to us
to meet future demand for our products. Our subcontractors may
allocate capacity to the production of other companies
products while reducing deliveries to us on short notice. Other
customers that are larger and better financed than we are or
that have long-term agreements with these subcontractors may
cause these subcontractors to reallocate capacity to those
customers, thereby decreasing the capacity available to us.
24
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 stri kes;
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political instability in the regions where these subcontractors
are located; and
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natural disasters impacting these subcontractors.
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Our
sales cycle can be lengthy, which could result in uncertainty
and delays in generating revenues.
We have occasionally experienced a lengthy sales cycle for some
of our products, due in part to the constantly evolving nature
of the technologies on which our products are based. Some of our
products must be custom designed to operate in our
customers products, resulting in a lengthy process between
the initial design stage and the ultimate sale. We also compete
for design wins prior to selling products, which may increase
the length of the sales process. We may experience a delay
between the time we increase expenditures for research and
development, sales and marketing efforts and inventory and the
time we generate revenues, if any, from these expenditures. In
addition, because we do not have long-term supply contracts with
our customers and the majority of our sales are on a purchase
order basis, we must repeat our sales process on a continual
basis, including sales of new products to existing customers. As
a result, our business could be harmed if a customer reduces or
delays its orders.
The
average selling prices of our products have decreased in the
past and may do so in the future, which could harm our financial
results.
The products we develop and sell are subject to declines in
average selling prices. We have had to reduce our prices in the
past and we may be required to reduce prices in the future.
Reductions in our average selling prices to one customer could
impact our average selling prices to other customers. This would
cause our gross margin to decline. Our financial results will
suffer if we are unable to offset any reductions in our average
selling prices by increasing our sales volumes, reducing our
costs or developing new or enhanced products with higher selling
prices or gross margins.
We
expect gross margin to vary over time, and our recent level of
product gross margin may not be sustainable.
Our product gross margins vary from quarter to quarter, and the
recent level of gross margins may not be sustainable and may be
adversely affected in the future by numerous factors, including
product mix shifts, increased price competition in one or more
of the markets in which we compete, increases in material or
labor costs, excess product component or obsolescence charges
from our contract manufacturers, warranty related issues, or the
introduction of new products or entry into new markets with
different pricing and cost structures.
Fluctuations
in our revenues and operating results on a quarterly and annual
basis could cause the market price of our ordinary shares to
decline.
Our quarterly and annual revenues and operating results are
difficult to predict and have fluctuated in the past, and may
fluctuate in the future, from quarter to quarter and year to
year. It is possible that our operating results in some quarters
and years will be below market expectations. This would likely
cause the market price of our ordinary
25
shares to decline. Our quarterly and annual operating results
are affected by a number of factors, many of which are outside
of our control, including:
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unpredictable volume and timing of customer orders, which are
not fixed by contract but vary on a purchase order basis;
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the loss of one or more of our customers, or a significant
reduction or postponement of orders from our customers;
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our customers sales outlooks, purchasing patterns and
inventory levels based on end-user demands and general economic
conditions;
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seasonal buying trends;
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the timing of new product announcements or introductions by us
or by our competitors;
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our ability to successfully develop, introduce and sell new or
enhanced products in a timely manner;
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product obsolescence and our ability to manage product
transitions;
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changes in the relative sales mix of our products;
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decreases in the overall average selling prices of our products;
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changes in our cost of finished goods; and
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the availability, pricing and timeliness of delivery of other
components used in our customers products.
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We base our planned operating expenses in part on our
expectations of future revenues, and a significant portion of
our expenses is relatively fixed in the short-term. We have
limited visibility into customer demand from which to predict
future sales of our products. As a result, it is difficult for
us to forecast our future revenues and budget our operating
expenses accordingly. Our operating results would be adversely
affected to the extent customer orders are cancelled or
rescheduled. If revenues for a particular quarter are lower than
we expect, we likely would not be able to proportionately reduce
our operating expenses.
We
rely on our ecosystem partners to enhance our product offerings
and our inability to continue to develop or maintain such
relationships in the future would harm our ability to remain
competitive.
We have developed relationships with third parties, which we
refer to as ecosystem partners, which provide operating systems,
tool support, reference designs and other services designed for
specific uses of our products. We believe that these
relationships enhance our customers ability to get their
products to market quickly. If we are unable to continue to
develop or maintain these relationships, we might not be able to
enhance our customers ability to commercialize their
products in a timely manner and our ability to remain
competitive would be harmed.
We
rely primarily upon trade secret, patent and copyright laws and
contractual restrictions to protect our proprietary rights, and,
if these rights are not sufficiently protected, our ability to
compete and generate revenues could suffer.
We seek to protect our proprietary manufacturing specifications,
documentation and other written materials primarily under trade
secret, patent and copyright laws. We also typically require
employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps
taken by us to protect our proprietary information may not be
adequate to prevent misappropriation of our technology. In
addition, our proprietary rights may not be adequately protected
because:
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people may not be deterred from misappropriating our
technologies despite the existence of laws or contracts
prohibiting it;
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policing unauthorized use of our intellectual property may be
difficult, expensive and time-consuming, and we may be unable to
determine the extent of any unauthorized use; and
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the laws of other countries in which we market our products,
such as some countries in the Asia/Pacific region, may offer
little or no protection for our proprietary technologies.
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Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technologies could enable
third parties to benefit from our technologies without paying us
for doing so. Any inability to adequately protect our
proprietary rights could harm our ability to compete, generate
revenues and grow our business.
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, 2008, we
had 15 issued patents and 25 patent applications pending in the
United States, 5 issued patents in Taiwan and 2 issued patent
and 4 applications pending in Israel, each of which covers
aspects of the technology in our products. Patents that we
currently own do not cover all of the products that we presently
sell. Our patent applications may not result in issued patents,
and even if they result in issued patents, the patents may not
have claims of the scope we seek. Even in the event that these
patents are not issued, the applications may become publicly
available and proprietary information disclosed in the
applications will become available to others. In addition, any
issued patents may be challenged, invalidated or declared
unenforceable. The term of any issued patent in the United
States would be 20 years from its filing date, and if our
applications are pending for a long time period, we may have a
correspondingly shorter term for any patent that may be issued.
Our present and future patents may provide only limited
protection for our technology and may not be sufficient to
provide competitive advantages to us. For example, competitors
could be successful in challenging any issued patents or,
alternatively, could develop similar or more advantageous
technologies on their own or design around our patents. Also,
patent protection in certain foreign countries may not be
available or may be limited in scope and any patents obtained
may not be as readily enforceable as in the United States and
Israel, making it difficult for us to effectively protect our
intellectual property from misuse or infringement by other
companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may
harm our business. In addition, given the costs of obtaining
patent protection, we may choose not to protect certain
innovations that later turn out to be important.
Intellectual
property litigation, which is common in our industry, could be
costly, harm our reputation, limit our ability to sell our
products and divert the attention of management and technical
personnel.
The semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property
rights. We have indemnification obligations to most of our
customers with respect to infringement of third-party patents
and intellectual property rights by our products. If litigation
were to be filed against these customers in connection with our
technology, we may be required to defend and indemnify such
customers.
Questions of infringement in the markets we serve involve highly
technical and subjective analyses. Although we have not been
involved in intellectual property litigation to date, litigation
may be necessary in the future to enforce any patents we may
receive and other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
infringement or invalidity, and we may not prevail in any such
future litigation. Litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and
could divert the efforts and attention of our management and
technical personnel from normal business operations. In
addition, adverse determinations in litigation could result in
the loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology or selling our
products, any of which could seriously harm our business.
We
depend on key and highly skilled personnel to operate our
business, and if we are unable to retain our current personnel
and hire additional personnel, our ability to develop and
successfully market our products could be harmed.
Our business is particularly dependent on the interdisciplinary
expertise of our personnel, and we believe our future success
will depend in large part upon our ability to attract and retain
highly skilled managerial, engineering, finance and sales and
marketing personnel. The loss of any key employees or the
inability to attract or retain
27
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.
Equity awards generally comprise a significant portion of our
compensation packages for all employees. As a result of the
recent decline in our stock price, many of our key employees
hold options with exercise prices in excess of our current stock
price, and therefore retention of these key employees may be
difficult in a highly competitive market. We may modify our
compensation policies by, for example, increasing cash
compensation to certain employees
and/or
instituting awards of restricted stock units
and/or
modifying existing stock options. These modifications of our
compensation policies and the applicability of the
SFAS 123R requirement to expense the fair value of stock
options awarded to employees and officers may increase our
operating expenses. We cannot be certain that these and any
other changes in our compensation policies will or would improve
our ability to attract, retain and motivate employees. Our
inability to attract and retain additional key employees and the
increase in stock-based compensation expense could each have an
adverse effect on our business, financial condition and results
of operations.
We may
not be able to manage our future growth effectively, and we may
need to incur significant expenditures to address the additional
operational and control requirements of our
growth.
We have experienced growth and expansion over the past four
years. This expansion has placed a significant strain on our
management, personnel, systems and financial resources. If we
are able to maintain growth in the current economic environment,
we may 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
28
customers. In addition, product defects and errors could result
in additional development costs, diversion of technical
resources, delayed product shipments, increased product returns,
warranty expenses and product liability claims against us which
may not be fully covered by insurance. Any of these could harm
our business.
In addition, our production of existing and development of new
products can involve multiple iterations and unforeseen
manufacturing difficulties, resulting in reduced manufacturing
yields, delays and increased expenses. The evolving nature of
our products requires us to modify our manufacturing
specifications, which may result in delays in manufacturing
output and product deliveries. We rely on third parties to
manufacture our products and currently rely on one manufacturer
for our ICs and one manufacturer for our cards and switch
systems. Our ability to offer new products depends on our
manufacturers ability to implement our revised product
specifications, which is costly, time-consuming and complex.
If we
fail to maintain an effective system of internal controls, we
may not be able to report accurately our financial results or
prevent fraud. As a result, current and potential shareholders
could lose confidence in our financial reporting, which could
harm our business and the trading price of our ordinary
shares.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. We
have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our
management to report on, and our independent registered public
accounting firm to attest to, the effectiveness of our internal
control structure and procedures for financial reporting. We
have an ongoing program to perform the system and process
evaluation and testing necessary to comply with these
requirements. We have incurred and expect to continue to incur
significant expense and to devote significant management
resources to Section 404 compliance. In the event that our
chief executive officer, chief financial officer, or independent
registered public accounting firm determine that our internal
control over financial reporting is not effective as defined
under Section 404, investor perceptions of our company may
be adversely affected and could cause a decline in the market
price of our stock. In addition, future non-compliance with
Section 404 could subject us to a variety of administrative
sanctions, including the suspension or delisting of our ordinary
shares from The NASDAQ Global Select Market, which could reduce
our share price.
We may
pursue acquisitions or investments in new or complementary
products, technologies and businesses, which could harm our
operating results and may disrupt our business.
We may pursue acquisitions of, or investments in, new or
complementary products, technologies and businesses.
Acquisitions present a number of potential risks and challenges
that could, if not met, disrupt our business operations,
increase our operating costs and reduce the value to us of the
acquisition. For example, if we identify an acquisition
candidate, we may not be able to successfully negotiate or
finance the acquisition on favorable terms. Even if we are
successful, we may not be able to integrate the acquired
businesses, products or technologies into our existing business
and products. Furthermore, potential acquisitions and
investments, whether or not consummated, may divert our
managements attention and require considerable cash
outlays at the expense of our existing operations. In addition,
to complete future acquisitions, we may issue equity securities,
incur debt, assume contingent liabilities or have amortization
expenses and write-downs of acquired assets, which could
adversely affect our profitability.
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
29
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. Additionally, the SEC has issued for
comment a proposed roadmap regarding the potential use of
International Financial Reporting Standards, or IFRS, for the
preparation of financial statements by U.S. registrants. A
change from current accounting standards could have a
significant effect on the Companys results of operations.
Our
business is subject to the risks of earthquakes, fires, floods
and other natural catastrophic events, and to interruption by
manmade problems such as computer viruses or
terrorism.
Our U.S. corporate offices are located in the
San Francisco Bay Area, a region known for seismic
activity. A significant natural disaster, such as an earthquake,
fire or flood, could have a material adverse impact on our
business, operating results and financial condition. In
addition, our servers are vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering
with our computer systems. In addition, acts of terrorism could
cause disruptions in our or our customers businesses or
the economy as a whole. To the extent that such disruptions
result in delays or cancellations of customer orders, or the
deployment of our products, our business, operating results and
financial condition would be adversely affected.
Risks
Related to Our Industry
Due to
the cyclical nature of the semiconductor industry, our operating
results may fluctuate significantly, which could adversely
affect the market price of our ordinary shares.
The semiconductor industry is highly cyclical and subject to
rapid change and evolving industry standards and, from time to
time, has experienced significant downturns. These downturns are
characterized by decreases in product demand, excess customer
inventories and accelerated erosion of prices. These factors
could cause substantial fluctuations in our net revenues and in
our operating results. Any downturns in the semiconductor
industry may be severe and prolonged, and any failure of this
industry to fully recover from downturns could harm our
business. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the industry, which could
cause our share price to decline.
The
demand for semiconductors is affected by general economic
conditions, which could impact our business.
The semiconductor industry is affected by general economic
conditions, and a downturn may result in decreased demand for
our products and adversely affect our operating results. Our
business has been adversely affected by previous economic
downturns. For example, during the global economic downturn in
2002 to 2003, demand for many computer and consumer electronics
products suffered as consumers delayed purchasing decisions or
changed or reduced their discretionary spending. As a result,
demand for our products suffered and we had to implement
restructuring initiatives to align our corporate spending with a
slower than anticipated revenue growth during that timeframe.
Additionally, general worldwide economic conditions have
recently experienced a downturn due to market instability,
slower economic activity, concerns about inflation and
deflation, increased energy costs, decreased consumer
confidence, reduced corporate profits and capital spending,
adverse business conditions and liquidity concerns. These
conditions make it extremely difficult for our customers, our
vendors and us to accurately forecast and plan future business
activities, and they could cause U.S. and foreign
businesses to slow spending on our products and services, which
would delay and lengthen sales cycles. We cannot predict the
timing, strength or duration of any economic slowdown or
subsequent economic recovery, worldwide, or in the semiconductor
industry. If the economy or markets in which we operate continue
at their present levels, our business, financial condition and
results of operations will likely be materially and adversely
affected.
30
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, 2008, 217 full-time
and 41 part-time employees located in Israel. A significant
amount of our assets is located in Israel. Accordingly,
political, economic and military conditions in Israel may
directly affect our business. Since the establishment of the
State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors, as well as
incidents of civil unrest. During the winter of 2008 and the
summer of 2006, Israel was engaged in armed conflicts with Hamas
and Hezbollah. These conflicts involved missile strikes against
civilian targets in southern and northern Israel, and negatively
affected business conditions in Israel. In addition, Israel and
companies doing business with Israel have, in the past, been the
subject of an economic boycott. Although Israel has entered into
various agreements with Egypt, Jordan and the Palestinian
Authority, Israel has been and is subject to civil unrest and
terrorist activity, with varying levels of severity, since
September 2000. Any future armed conflicts or political
instability in the region may negatively affect business
conditions and adversely affect our results of operations.
Parties with whom we do business have sometimes declined to
travel to Israel during periods of heightened unrest or tension,
forcing us to make alternative arrangements when necessary. In
addition, the political and security situation in Israel may
result in parties with whom we have agreements involving
performance in Israel claiming that they are not obligated to
perform their commitments under those agreements pursuant to
force majeure provisions in the agreements.
We can give no assurance that security and political conditions
will have no impact on our business in the future. Hostilities
involving Israel or the interruption or curtailment of trade
between Israel and its present trading 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
conflicts with Hamas and Hezbollah referred to above, our
Israeli operations, which are located in northern Israel, are
within range of Hezbollah missiles and we or our immediate
surroundings may sustain damages in a missile attack, which
could adversely affect our operations.
In addition, our business insurance does not cover losses that
may occur as a result of events associated with the security
situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that
are caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained. Any losses
or damages incurred by us could have a material adverse effect
on our business.
Our
operations may be negatively affected by the obligations of our
personnel to perform military service.
Generally, all non-exempt male adult citizens and permanent
residents of Israel under the age of 45 (or older, for citizens
with certain occupations), including some of our officers,
directors and employees, are obligated to perform military
reserve duty annually, and are subject to being called to active
duty at any time under emergency circumstances. In the event of
severe unrest or other conflict, individuals could be required
to serve in the military for extended periods of time. In
response to increases in terrorist activity, there have been
periods of significant
call-ups of
military reservists, and recently some of our employees,
including those in key positions, have been
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called up in connection with armed conflicts. It is possible
that there will be additional
call-ups in
the future. Our operations could be disrupted by the absence for
a significant period of one or more of our officers, directors
or key employees due to military service. Any such disruption
could adversely affect our operations.
Our
operations may be affected by negative economic conditions or
labor unrest in Israel.
Due to significant economic measures adopted by the Israeli
government, there were several general strikes and work
stoppages in Israel in 2003 and 2004, affecting all banks,
airports and ports. These strikes had an adverse 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 41%, 47% and 48% of our revenues in the years ended
December 31, 2006, 2007 and 2008, 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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foreign currency exchange risks;
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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 risks in our international operations, we could experience
slower than expected revenue growth and our business could be
harmed.
It may
be difficult to enforce a U.S. judgment against us, our officers
and directors or to assert U.S. securities law claims in
Israel.
We are incorporated in Israel. Four of our executive officers
and one of our directors, who is also an executive officer, and
some of our accountants and attorneys are non-residents of the
United States and are located in Israel, and a significant
amount of our assets and the assets of these persons are located
outside the United States. Three of
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our executive officers and five of our directors are located in
the United States. Therefore, it may be difficult to enforce a
judgment obtained in the United States against us or any of
these persons in U.S. or Israeli courts based on the civil
liability provisions of the U.S. federal securities laws.
In addition, we have been informed by our legal counsel in
Israel, Yigal Arnon & Co., that it may be difficult
for a shareholder to enforce civil liabilities under
U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on a
violation of U.S. securities laws because Israel is not the
most appropriate forum to bring such a claim. In addition, even
if an Israeli court agrees to hear a claim, it may determine
that Israeli law, and not U.S. law, is applicable to the
claim. If U.S. law is found to be applicable, the content
of applicable U.S. law must be proved in court as a fact,
which can be a time-consuming and costly process. Certain
matters of procedure will also be governed by Israeli law. There
is little binding case law in Israel addressing the matters
described above.
Provisions
of Israeli law may delay, prevent or make difficult an
acquisition of us, which could prevent a change of control and
therefore depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires
special approvals for transactions involving directors, officers
or significant shareholders and regulates other matters that may
be relevant to these types of transactions. For example, a
merger may not be completed unless at least 50 days have
passed from the date that a merger proposal was filed by each
merging company with the Israeli Registrar of Companies and at
least 30 days from the date that the shareholders of both
merging companies approved the merger. In addition, the approval
of a majority of each class of securities of the target company
is required to approve a merger. Israeli corporate law further
requires that any person who wishes to acquire more than a
specified percentage of the companys share capital
complies with certain tender offer procedures. In addition,
Israeli corporate law allows us to create and issue shares
having rights different from those attached to our ordinary
shares, including rights that may delay or prevent a takeover or
otherwise prevent our shareholders from realizing a potential
premium over the market value of their ordinary shares. The
authorization of a new class of shares would require an
amendment to our articles of association, which requires the
prior approval of the holders of a majority of our shares at a
general meeting.
These provisions could delay, prevent or impede an acquisition
of us, even if such an acquisition would be considered
beneficial by some of our shareholders. See Risk
Factors Provisions of Israeli law could delay or
prevent an acquisition of our company, even if the acquisition
would be beneficial to our shareholders, and could make it more
difficult for shareholders to change management for a
further discussion of this risk factor.
Exchange
rate fluctuations between the U.S. dollar and the NIS may
negatively affect our earnings.
Although all of our revenues and a majority of our expenses are
denominated in U.S. dollars, a significant portion of our
research and development expenses are incurred in new Israeli
shekels, or NIS. As a result, we are exposed to risk to the
extent that the inflation rate in Israel exceeds the rate of
devaluation of the NIS in relation to the U.S. dollar or if
the timing of these devaluations lags behind inflation in
Israel. In that event, the U.S. dollar cost of our research
and development operations in Israel will increase and our
U.S. dollar-measured results of operations will be
adversely affected. To the extent that the value of the NIS
increases against the U.S. dollar, our expenses on a
U.S. dollar cost basis increase. We cannot predict any
future trends in the rate of inflation in Israel or the rate of
appreciation of the NIS against the U.S. dollar. The
Israeli rate of inflation (deflation) amounted to (0.1)%, 3.4%
and 3.8% for the years ended December 31, 2006, 2007 and
2008, respectively. The increase in value of the NIS against the
U.S. dollar amounted to 8.2%, 8.9% and 1.1% in the years
ended December 31, 2006, 2007 and 2008, respectively.
Moreover, during the summer of 2008 the value of the NIS against
the U.S. dollar increased by 18%. If the U.S. dollar
cost of our research and development operations in Israel
increases, our dollar-measured results of operations will be
adversely affected. Our operations also could be adversely
affected if we are unable to guard against currency fluctuations
in the future. Further, because all of our international
revenues are denominated in U.S. dollars, a strengthening
of the dollar versus other currencies could make our products
less competitive in foreign markets and the collection of
receivables more difficult. To help manage this risk we have
recently been engaged in foreign currency hedging activities.
These measures, however, may not adequately protect us from
33
material adverse effects due to the impact of inflation in
Israel and changes in value of the NIS against the
U.S. dollar.
The
government tax benefits that we currently receive require us to
meet several conditions and may be terminated or reduced in the
future, which would increase our costs.
Some of our operations in Israel have been granted
Approved Enterprise status by the Investment Center
in the Israeli Ministry of Industry Trade and Labor, which makes
us eligible for tax benefits under the Israeli Law for
Encouragement of Capital Investments, 1959. The availability of
these tax benefits is subject to certain requirements,
including, among other things, making specified investments in
fixed assets and equipment, financing a percentage of those
investments with our capital contributions, complying with our
marketing program which was submitted to the Investment Center,
filing of certain reports with the Investment Center and
complying with Israeli intellectual property laws. If we do not
meet these requirements in the future, these tax benefits may be
cancelled and we could be required to refund any tax benefits
that we have already received plus interest and penalties
thereon. The tax benefits that our current Approved
Enterprise program receives may not be continued in the
future at their current levels or at all. If these tax benefits
were reduced or eliminated, the amount of taxes that we pay
would likely increase, which could adversely affect our results
of operations. Additionally, if we increase our activities
outside of Israel, for example, by acquisitions, our increased
activities may not be eligible for inclusion in Israeli tax
benefit programs.
The
Israeli government grants that we received require us to meet
several conditions and may be reduced or eliminated due to
government budget cuts, and these grants restrict our ability to
manufacture and engineer products and transfer know-how outside
of Israel and require us to satisfy specified
conditions.
We have received, and may receive in the future, grants from the
government of Israel through the Office of the Chief Scientist
of Israels Ministry of Industry, Trade and Labor, or the
OCS, for the financing of a portion of our research and
development expenditures in Israel. When know-how or products
are developed using OCS grants, the terms of these grants
restrict the transfer of the know-how out of Israel. Transfer of
know-how abroad is subject to various conditions, including
payment of a percentage of the consideration paid to us or our
shareholders in the transaction in which the technology is
transferred. In addition, any decrease of the percentage of
manufacturing performed locally, as originally declared in the
application to the OCS, may require us to notify, or to obtain
the approval of the OCS and may result in increased royalty
payments to the OCS. These restrictions may impair our ability
to enter into agreements for those products or technologies
without the approval of the OCS. We cannot be certain that any
approval of the OCS will be obtained on terms that are
acceptable to us, or at all. Furthermore, in the event that we
undertake a transaction involving the transfer to a non-Israeli
entity of technology developed with OCS funding pursuant to a
merger or similar transaction, the consideration available to
our shareholders may be reduced by the amounts we are required
to pay to the OCS. Any approval, if given, will generally be
subject to additional financial obligations. If we fail to
comply with the conditions imposed by the OCS, including the
payment of royalties with respect to grants received, we may be
required to refund any payments previously received, together
with interest and penalties. We have received total grants from
the OCS in the amount of $2.8 million. As of
December 31, 2008, we concluded all our obligations in
respect of royalties payable to the OCS.
We may
be classified as a passive foreign investment company, which
could result in adverse U.S. federal income tax consequences to
U.S. holders of our ordinary shares.
For the 2008 taxable year we were not considered a passive
foreign investment company or PFIC, for U.S. federal
income tax purposes, and do not expect to be considered as such
for our current taxable year ending December 31, 2009.
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
34
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;
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|
the loss of the preferential rate applicable to dividends
received on our ordinary shares by individuals who are
U.S. holders; and
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|
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 $6.02 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:
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quarterly variations in our results of operations or those of
our competitors;
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announcements by us or our customers of acquisitions, new
products, significant contracts, commercial relationships or
capital commitments;
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our ability to develop and market new and enhanced products on a
timely basis;
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disruption to our operations;
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geopolitical instability;
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the emergence of new sales channels in which we are unable to
compete effectively;
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any major change in our board of directors or management;
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changes in financial estimates, including our ability to meet
our future revenue and operating profit or loss projections;
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changes in governmental regulations or in the status of our
regulatory approvals;
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general economic conditions, such as the current economic
recession, and slow or negative growth of related markets;
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commencement of, or our involvement in, litigation; and
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|
changes in earnings estimates or recommendations by securities
analysts.
|
In addition, the stock markets in general, and the markets for
semiconductor stocks in particular, have experienced extreme
volatility that often has been unrelated to the operating
performance of the issuer. As a result of the current credit
crisis and weak world wide economic conditions, the securities
markets have experienced
35
significant price and volume fluctuations. These broad market
fluctuations may adversely affect the trading price or liquidity
of our ordinary shares. In the past, when the market price of a
stock has been volatile and declined, holders of that stock have
sometimes instituted securities class action litigation against
the issuer. If any of our shareholders were to bring such a
lawsuit against us, we could incur substantial costs defending
the lawsuit and the attention of our management would be
diverted from the operation of our business.
The
ownership of our ordinary shares may continue to be highly
concentrated, and your interests may conflict with the interests
of our significant shareholders.
Our executive officers and directors and their affiliates,
together with our current significant shareholders, beneficially
owned approximately 46% of our outstanding ordinary shares as of
December 31, 2008. Moreover, based on information filed
with SEC, three of our shareholders, Fred Alger Management,
Fidelity Management and Research and Sequoia Capital Partners,
beneficially owned approximately 34.5% of our outstanding
ordinary shares as of December 31, 2008. Accordingly, these
shareholders, acting as a group, have significant influence over
the outcome of corporate actions requiring shareholder approval,
including the election of directors, any merger, consolidation
or sale of all or substantially all of our assets or any other
significant corporate transaction. These shareholders could
delay or prevent a change of control of our company, even if
such a change of control would benefit our other shareholders.
The significant concentration of share ownership may adversely
affect the trading price of our ordinary shares due to
investors perception that conflicts of interest may exist
or arise.
If we
sell our ordinary shares in future financings, ordinary
shareholders will experience immediate dilution and, as a
result, our share price may go down.
We may from time to time issue additional ordinary shares at a
discount from the current trading price of our ordinary shares.
As a result, our ordinary shareholders would experience
immediate dilution upon the purchase of any ordinary shares sold
at such discount. In addition, as opportunities present
themselves, we may enter into equity financings or similar
arrangements in the future, including the issuance of debt
securities, preferred shares or ordinary shares. If we issue
ordinary shares or securities convertible into ordinary shares,
our ordinary shareholders could experience dilution.
Provisions
of Israeli law could delay or prevent an acquisition of our
company, even if the acquisition would be beneficial to our
shareholders, and could make it more difficult for shareholders
to change management.
Provisions of our amended and restated articles of association
may discourage, delay or prevent a merger, acquisition or other
change in control that shareholders may consider favorable,
including transactions in which shareholders might otherwise
receive a premium for their shares. In addition, these
provisions may frustrate or prevent any attempt by our
shareholders to replace or remove our current management by
making it more difficult to replace or remove our board of
directors. These provisions include:
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no cumulative voting; and
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|
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.
36
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 and
compliance.
Changes in the laws and regulations affecting public companies,
including rules adopted by the SEC and by The NASDAQ Stock
Market, will result in increased costs to us as we respond to
their requirements. For example, on
January 30th,
2009, the SEC adopted rules requiring companies to provide their
financial statements in interactive data format using the
eXtensible Business Reporting Language, or XBRL. We will have to
comply with these rules by
June 15th,
2011. These laws and regulations could make it more difficult or
more costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may
be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. The impact of these requirements could also make it
more difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as
executive officers. We cannot predict or estimate the amount or
timing of additional costs we may incur to respond to these
requirements.
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ITEM 1B
|
UNRESOLVED
STAFF COMMENTS.
|
None.
Our U.S. business headquarters are located in Sunnyvale,
California, and our engineering headquarters are located in
Yokneam, Israel. We currently lease office space of
approximately 43,000 square feet in Yokneam and of
approximately 9,000 square feet in Tel Aviv in Israel and
of approximately 25,500 square feet in Sunnyvale,
California pursuant to leases that expire on December 31,
2011, April 30, 2010 and June 4, 2014, respectively.
We believe that our existing facilities are adequate to meet our
current requirements and that suitable additional or substitute
space will be available on acceptable terms to accommodate our
foreseeable needs.
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ITEM 3
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LEGAL
PROCEEDINGS
|
We are not currently involved in any material legal proceedings.
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ITEM 4
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None
37
PART II
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ITEM 5
|
MARKET
FOR REGISTRANTS ORDINARY SHARES, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our ordinary shares began trading on The NASDAQ Global Market as
of February 8, 2007 under the symbol MLNX.
Prior to that date, our ordinary shares were not traded on any
public exchange. Our ordinary shares began trading on Tel-Aviv
Stock Exchange as of July 9, 2007 under the symbol
MLNX.
The following table summarizes the high and low closing prices
for our ordinary shares as reported by the NASDAQ Global Select
Market.
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2008
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High
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Low
|
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First quarter
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$
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19.31
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$
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11.05
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Second quarter
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$
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16.99
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$
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12.07
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Third quarter
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$
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14.22
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$
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9.25
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Fourth quarter
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$
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9.73
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$
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6.42
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2007
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High
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Low
|
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First quarter
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$
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23.91
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|
|
$
|
14.20
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|
Second quarter
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$
|
20.80
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|
$
|
13.90
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|
Third quarter
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|
$
|
22.54
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|
|
$
|
14.70
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Fourth quarter
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|
$
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24.27
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|
$
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16.09
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|
As of February 28, 2009, we had approximately 54 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.
38
Stock
Performance Graph
The graph below compares the cumulative total stockholder return
on our ordinary shares with the cumulative total return on The
NASDAQ Composite Index and The Philadelphia Semiconductor Index.
The period shown commences on February 7, 2007, the date of
our initial public offering, and ends on December 31, 2008,
the end of our last fiscal year. The graph assumes an investment
of $100 on February 7, 2007, and the reinvestment of any
dividends. No cash dividends have been declared on our ordinary
shares since our initial public offering in 2007. Shareholder
returns over the indicated periods should not be considered
indicative of future stock prices or shareholder returns.
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2/7/2007
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6/30/07
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12/31/07
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6/30/08
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12/31/08
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Mellanox Technologies
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100.00
|
|
|
|
|
121.88
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|
|
|
|
107.18
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|
|
|
|
79.65
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|
|
|
|
46.24
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|
NASDAQ Composite Index
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100.00
|
|
|
|
|
104.53
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|
|
|
|
106.50
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|
|
|
|
92.07
|
|
|
|
|
63.32
|
|
Philadelphia Semiconductor Sector Index
|
|
|
|
100.00
|
|
|
|
|
106.38
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|
|
|
|
86.61
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|
|
|
|
78.15
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|
|
|
|
45.04
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|
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* |
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$100 invested on 2/07/2007 in stock or index-including
reinvestment of dividends. |
Dividends
We have never declared or paid any cash dividends on our
ordinary shares in the past, and we do not anticipate paying
cash dividends in the foreseeable future. The Israel Companies
Law, 1999, or the Companies Law, also restricts our ability to
declare dividends. We can only distribute dividends from profits
(as defined in the Companies Law), or if we do not meet the
profit test, with court approval, provided in each case that
there is no reasonable concern that the dividend distribution
will prevent us from meeting our existing and foreseeable
obligations as they come due.
Securities
Authorized for Issuance under Equity Compensation
Plans
The information required by this item regarding equity
compensation plans will be contained in our definitive proxy
statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of our
Shareholders (the Proxy Statement), and is
incorporated in this report by reference. For additional
information on our share incentive plans and activity, see
Note 10, Share Option Plans included in
Part IV, Item 15 of this Report.
39
Recent
Sales of Unregistered Securities
None.
Use of
Proceeds from Registered Securities
Our initial public offering of 6,900,000 ordinary shares was
effected through a Registration Statement on
Form S-1
(File
No. 333-137659)
that was declared effective by the Securities and Exchange
Commission on February 7, 2007. We issued all
6,900,000 shares on February 13, 2007 for gross
proceeds of $117,300,000, after which the offering was
terminated. The underwriters of the offering were Credit Suisse
Securities (USA) LLC, J.P. Morgan Securities Inc., Thomas
Weisel Partners LLC and Jefferies & Company, Inc. We
paid the underwriters a commission of $8,211,000 and incurred
additional offering expenses of approximately $3,136,000. After
deducting the underwriters commission and the offering
expenses, we received net proceeds of approximately
$105,953,000. No payments for such expenses were made directly
or indirectly to (i) any of our directors, officers or
their associates, (ii) any person(s) owning 10% or more of
any class of our equity securities or (iii) any of our
affiliates. The net proceeds from our initial public offering
have been primarily invested into short-term marketable
government agency obligations, commercial paper and corporate
notes. There has been no material change in the planned use of
proceeds from our initial public offering as described in our
final prospectus filed with the SEC pursuant to Rule 424(b).
40
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ITEM 6
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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, 2004,
2005 and 2006 and our consolidated statements of operations data
for the years ended December 31, 2004 and 2005, 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, 2008, as well the consolidated balance sheet
data as of December 31, 2007 and 2008, 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.
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|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
$
|
42,068
|
|
|
$
|
20,254
|
|
Cost of revenues(1)
|
|
|
(23,406
|
)
|
|
|
(21,390
|
)
|
|
|
(13,533
|
)
|
|
|
(15,203
|
)
|
|
|
(8,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profits
|
|
|
84,295
|
|
|
|
62,688
|
|
|
|
35,006
|
|
|
|
26,865
|
|
|
|
11,518
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
39,519
|
|
|
|
24,638
|
|
|
|
15,256
|
|
|
|
13,081
|
|
|
|
12,864
|
|
Sales and marketing(1)
|
|
|
15,058
|
|
|
|
12,739
|
|
|
|
8,935
|
|
|
|
7,395
|
|
|
|
5,640
|
|
General and administrative(1)
|
|
|
8,370
|
|
|
|
6,229
|
|
|
|
3,704
|
|
|
|
3,094
|
|
|
|
1,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,947
|
|
|
|
43,606
|
|
|
|
27,895
|
|
|
|
23,570
|
|
|
|
20,223
|
|
Income (loss) from operations
|
|
|
21,348
|
|
|
|
19,082
|
|
|
|
7,111
|
|
|
|
3,295
|
|
|
|
(8,705
|
)
|
Other income, net
|
|
|
3,823
|
|
|
|
5,976
|
|
|
|
438
|
|
|
|
326
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
25,171
|
|
|
|
25,058
|
|
|
|
7,549
|
|
|
|
3,621
|
|
|
|
(8,582
|
)
|
Benefit from (provision for) taxes on income
|
|
|
(2,800
|
)
|
|
|
10,530
|
|
|
|
(301
|
)
|
|
|
(462
|
)
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
$
|
3,159
|
|
|
$
|
(8,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to ordinary
shareholders basic(2)(3)
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
$
|
0.04
|
|
|
$
|
0.00
|
|
|
$
|
(1.27
|
)
|
Net income (loss) per share attributable to ordinary
shareholders diluted(2)(3)
|
|
$
|
0.68
|
|
|
$
|
1.18
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
(1.27
|
)
|
Shares used to compute net income (loss) per share(2)(3)
|
|
|
31,436
|
|
|
|
27,827
|
|
|
|
7,709
|
|
|
|
7,520
|
|
|
|
7,117
|
|
Shares used to compute diluted net income (loss) per share(2)(3)
|
|
|
32,843
|
|
|
|
30,201
|
|
|
|
9,683
|
|
|
|
9,091
|
|
|
|
7,117
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
110,153
|
|
|
$
|
100,650
|
|
|
$
|
20,570
|
|
|
$
|
12,350
|
|
|
$
|
10,944
|
|
Short-term investments
|
|
|
70,855
|
|
|
|
52,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
198,932
|
|
|
|
170,615
|
|
|
|
25,446
|
|
|
|
17,240
|
|
|
|
13,391
|
|
Total assets
|
|
|
244,771
|
|
|
|
202,400
|
|
|
|
43,101
|
|
|
|
31,154
|
|
|
|
25,822
|
|
Long-term liabilities
|
|
|
7,606
|
|
|
|
5,738
|
|
|
|
3,577
|
|
|
|
4,389
|
|
|
|
4,164
|
|
Total liabilities
|
|
|
30,691
|
|
|
|
25,283
|
|
|
|
16,069
|
|
|
|
13,270
|
|
|
|
11,473
|
|
Mandatorily redeemable convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
55,759
|
|
|
|
55,583
|
|
|
|
55,417
|
|
Convertible preferred shares
|
|
|
|
|
|
|
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
Total shareholders equity (deficit)
|
|
$
|
214,080
|
|
|
$
|
177,117
|
|
|
$
|
(65,065
|
)
|
|
$
|
(74,037
|
)
|
|
$
|
(77,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts included in 2008, 2007 and 2006 reflect the adoption
of SFAS 123R, effective January 1, 2006. |
|
(2) |
|
See Note 1 of Notes to Consolidated Financial Statements,
included in Part IV, Item 15 of this Report, for an
explanation of the calculation of net income (loss) per share. |
|
(3) |
|
On February 1, 2007, the Company effected a 1.75-to-1
reverse split of the Companys ordinary shares, mandatorily
redeemable convertible preferred shares and convertible
preferred shares (the Share Split) pursuant to the
filing of the Amended and Restated Articles of Association. The
number of shares and per share amounts have been adjusted to
reflect the Share Split for all periods presented. |
42
|
|
ITEM 7
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion of our financial
condition and results of operations in conjunction with the
financial statements and the notes thereto included elsewhere in
this report. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below
and elsewhere in this report, particularly in the Risk
Factors.
Overview
General
We are a leading supplier of semiconductor-based,
high-performance connectivity products that facilitate efficient
data transmission between servers, communications infrastructure
equipment and storage systems. Our products are an integral part
of a total solution focused on computing, storage and
communication applications used in enterprise data center,
high-performance computing and embedded systems. We operate in
one reportable segment: the development, manufacturing,
marketing and sales of interconnect semiconductor products (see
Note 12 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 and switch systems that
incorporate our switch ICs. Growth in our target markets is
being driven by the need to improve the efficiency and
performance of clustered systems in data centers, as well as the
need to significantly reduce the total cost of ownership.
We outsource our manufacturing, assembly, packaging and
production test functions, which enables us to focus on the
design, development, sales and marketing of our products. As a
result, our business has relatively low capital requirements.
However, our ability to bring new products to market, fulfill
customer orders and achieve long-term growth depends on our
ability to maintain sufficient technical personnel and obtain
sufficient external subcontractor capacity.
We have experienced rapid growth in our total revenues in each
of the last three years. Our revenues increased from
$42.0 million to $48.5 million to $84.1 million
to $107.7 million for the years ended December 31,
2006, 2007 and 2008, respectively. In order to increase our
annual revenues, we must continue to achieve design wins over
other InfiniBand and Ethernet providers and providers of
competing interconnect technologies. We consider a design win to
occur when an OEM or contract manufacturer notifies us that it
has selected our products to be incorporated into a product or
system under development. Because the life cycles for our
customers products can last for several years if these
products have successful commercial introductions, we expect to
continue to generate revenues over an extended period of time
for each successful design win.
It is difficult for us to forecast the demand for our products,
in part because of the highly complex supply chain between us
and the end-user markets that incorporate our products. Demand
for new features changes rapidly. Due to our lengthy product
development cycle, it is critical for us to anticipate changes
in demand for our various product features and the applications
they serve to allow sufficient time for product design. Our
failure to accurately forecast demand can lead to product
shortages that can impede production by our customers and harm
our relationship with these customers. Conversely, our failure
to forecast declining demand or shifts in product mix can result
in excess or obsolete inventory.
Revenues. We derive revenues from sales of our
ICs and HCA cards. To date, we have derived a substantial
portion of our revenues from a relatively small number of
customers. Total sales to customers representing more than 10%
of revenues accounted for 47%, 56% and 55% of our total revenues
for the years ended December 31, 2008, 2007 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.
43
Cost of revenues and gross profit. The cost of
revenues consists primarily of the cost of silicon wafers
purchased from our foundry supplier, Taiwan Semiconductor
Manufacturing Company, or TSMC, costs associated with the
assembly, packaging and production testing of our products by
Advanced Semiconductor Engineering, or ASE, outside processing
costs associated with the manufacture of our HCA cards by
Flextronics, royalties due to third parties, including the
Office of the Chief Scientist of Israels Ministry of
Industry, Trade and Labor, or the OCS, the Binational Industrial
Research and Development Foundation, or BIRD, and a third-party
licensor, warranty costs, excess and obsolete inventory costs
and costs of personnel associated with production management and
quality assurance. In addition, after we purchase wafers from
our foundries, we also have the yield risk related to
manufacturing these wafers into semiconductor devices.
Manufacturing yield is the percentage of acceptable product
resulting from the manufacturing process, as identified when the
product is tested as a finished IC. If our manufacturing yields
decrease, our cost per unit increases, which could have a
significant adverse impact on our cost of revenues. We do not
have long-term pricing agreements with TSMC and ASE.
Accordingly, our costs are subject to price fluctuations based
on the cyclical demand for semiconductors.
We purchase our inventory pursuant to standard purchase orders.
We estimate that lead times for delivery of our finished
semiconductors from our foundry supplier and assembly, packaging
and production testing subcontractor are approximately three to
four months, lead times for delivery from our HCA card
manufacturing subcontractor are approximately eight to ten
weeks, and lead times for delivery from our switch systems
manufacturing subcontractor are approximately twelve weeks. We
build inventory based on forecasts of customer orders rather
than the actual orders themselves. In addition, as customers are
increasingly seeking opportunities to reduce their lead times,
we may be required to increase our inventory to meet customer
demand.
We expect our cost of revenues to increase over time as a result
of the expected increase in our sales volume. Although our cost
of revenues as a percentage of sales has decreased over time,
primarily due to manufacturing cost reductions and economies of
scale related to higher unit volumes, we expect our cost of
revenues as a percentage of sales to increase in the future as a
result of a reduction in the average sale price of our products
and higher percentage of revenue deriving from sales of HCA
cards and switch systems, which generally yield lower gross
margins. This trend will depend on overall customer demand for
our products, our product mix, competitive product offerings and
related pricing and our ability to reduce manufacturing costs.
Operational
expenses
Research and development expenses. Our
research and development expenses consist primarily of salaries
and associated costs for employees engaged in research and
development, costs associated with computer aided design
software tools, depreciation expense and tape out costs. Tape
out costs are expenses related to the manufacture of new
products, including charges for mask sets, prototype wafers,
mask set revisions and testing incurred before releasing new
products. We anticipate these expenses will increase in future
periods based on an increase in personnel to support our product
development activities and the introduction of new products. We
anticipate that our research and development expenses may
fluctuate over the course of a year based on the timing of our
product tape outs.
We received grants from the OCS for several projects. Under the
terms of these grants, if products developed from an OCS-funded
project generate revenue, we are required to pay a royalty of 4
to 4.5% of the net sales as soon as we begin to sell such
products until 120% of the dollar value of the grant plus
interest at LIBOR is repaid. All of the grants we have received
from the OCS have resulted in IC products sold by us. We
received no grants from the OCS during the years ended
December 31, 2008 and 2007. We have received total grants
from OCS in the amount of $2.8 million. As of
December 31, 2008, we had concluded all our obligations in
respect of royalties payable to the OCS.
The terms of OCS grants generally prohibit the manufacture of
products developed with OCS funding outside of Israel without
the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel of our IC products, subject to an
undertaking by us to pay the OCS royalties on the sales of our
OCS-supported products until such time as the total royalties
paid equal 120% of the amount of OCS grants.
Under applicable Israeli law, OCS consent is also required to
transfer technologies developed with OCS funding to third
parties in Israel. Transfer of OCS-funded technologies outside
of Israel is permitted with the
44
approval of the OCS and in accordance with the restrictions and
payment obligations set forth under Israeli law. Israeli law
further specifies that both the transfer of know-how as well as
the transfer of intellectual property rights in such know-how
are subject to the same restrictions. These restrictions do not
apply to exports of products from Israel or the sale of products
developed with these technologies.
Sales and marketing expenses. Sales and
marketing expenses consist primarily of salaries and associated
costs for employees engaged in sales, marketing and customer
support, commission payments to external sales representatives
and charges for trade shows, promotions and travel. We expect
these expenses will increase in absolute dollars in future
periods based on an increase in sales and marketing personnel
and increased commission payments.
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
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 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. The Company
expected the Approved Enterprise Tax Holiday associated with its
Yokneam and Tel Aviv operations to begin in 2009, but due to
certain favorable tax rulings obtained during the year ended
December 31, 2008, and revisions to the level of future
taxable profit in Israel, the Tax Holiday is now expected to
begin in 2011. The Yokneam Tax Holiday is expected to expire in
2020 and the Tel Aviv Tax Holiday is expected to expire between
2015 and 2018. The modification as to when the Tax Holiday is
expected to begin resulted in the Company recording additional
deferred tax assets associated with research and development
costs and net operating loss carryforwards that will offset
anticipated taxable profits in Israel during 2009 and 2010.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. We evaluate our estimates and
assumptions on an ongoing basis. Our estimates are based on
historical experience and various other assumptions that we
believe to be reasonable under the circumstances. Our actual
results could differ from these estimates.
We believe that the assumptions and estimates associated with
revenue recognition, allowance for doubtful accounts, fair value
of financial instruments, short-term investments, inventory
valuation, impairment of long-lived assets, warranty provision,
share-based compensation and income taxes have the greatest
potential impact on our consolidated financial statements.
Therefore, we consider these to be our critical accounting
policies and estimates. For further information on all of our
significant accounting policies, please see Note 1 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
45
shipping point,
30-day
payment terms, no right of return and no customer acceptance
provisions. We generally rely upon a purchase order as
persuasive evidence of an arrangement.
We determine whether collectibility is probable on a
customer-by-customer
basis. When assessing the probability of collection, we consider
the number of years the customer has been in business and the
history of our collections. Customers are subject to a credit
review process that evaluates the customers financial
positions and ultimately their ability to pay. If it is
determined at the outset of an arrangement that collection is
not probable, no product is shipped and no revenue is recognized
unless cash is received in advance.
For multiple element arrangements, that include a combination of
hardware and services, such as post-contract customer support,
revenue is allocated to the separate elements based on fair
value. If an arrangement includes undelivered elements that are
not essential to the functionality of the delivered elements,
the Company defers the fair value of the undelivered elements
and the residual revenue is allocated to the delivered elements.
If the undelivered elements are essential to the functionality
of the delivered elements, no revenue is recognized. The amount
and impact on our consolidated financial statements of
undelivered elements has historically been insignificant.
Allowance
for doubtful accounts
We estimate the allowance for doubtful accounts based on an
assessment of the collectibility of specific customer accounts.
If we determine that a specific customer is unable to meet its
financial obligations, we provide a specific allowance for
credit losses to reduce the net recognized receivable to the
amount we reasonably believe will be collected. Probability of
collection is assessed on a
customer-by-customer
basis and our historical experience with each customer.
Customers are subject to an ongoing credit review process that
evaluates the customers financial positions. We review and
update our estimates for allowance for doubtful accounts on a
quarterly basis. Our allowance for doubtful accounts totaled
approximately $277,000 and $186,000 at December 31, 2008
and 2007, respectively. Our bad debt expense totaled
approximately $125,000, $79,000 and $12,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Fair
value of financial instruments
Our financial instruments consist of cash, cash equivalents,
short-term investments, accounts receivable, accounts payable
and other accrued liabilities. We believe that the carrying
amounts of the financial instruments approximate their
respective fair values. When there is no readily available
market data, we may make fair value estimates, which may not
necessarily represent the amounts that could be realized in a
current or future sale of these assets.
Effective January 1, 2008, we adopted the provisions of
SFAS No. 157, Fair Value Measurements,
or SFAS 157, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements required under other accounting
pronouncements. SFAS 157 clarifies that fair value is an
exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. SFAS 157 also
requires that a fair value measurement reflect the assumptions
market participants would use in pricing an asset or liability
based on the best information available. Assumptions include the
risks inherent in a particular valuation technique (such as a
pricing model)
and/or the
risks inherent in the inputs to the model. The adoption of
SFAS 157 did not have a significant impact on our
consolidated financial statements.
Short-term
investments
We classify short-term investment as available-for-sale
securities. We view our available-for-sale-portfolio as
available for use in current operations. Available-for-sale
securities are recorded at fair value, and we record temporary
unrealized holding gains and losses as a separate component of
accumulated other comprehensive income. We charge unrealized
losses against net earnings when a decline in fair value is
determined to be other-than-temporary. We review several factors
to determine whether a loss is other-than-temporary. These
factors include but are not limited to: (1) the length of
time a security is in an unrealized loss position, (2) the
extent to which fair value is less than cost, (3) the
financial condition and near term prospects of the issuer, and
(4) our intent and ability to hold the security for a
period of time sufficient to allow for any anticipated recovery
in fair value. Realized gains and losses are accounted for on
the specific identification method.
46
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 six to nine months
period and market conditions. Inventory reserves are not
reversed and permanently reduce the cost basis of the affected
inventory until it is either sold or scrapped.
Impairment
of long-lived assets
Long-lived assets include equipment, furniture and fixtures,
equity investment in a privately-held company and intangible
assets. We adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, or SFAS 144, which 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 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. We review
for impairment on a regular basis.
As of December 31, 2008, we held a $1,000,000 investment in
a privately-held company. We account for this investment under
the cost method. To determine if impairment exists, we monitor
the privately-held companys revenue and earnings trends
relative to pre-defined milestones and overall business
prospects; the general market conditions in its industry and
other factors related to its ability to remain in business, such
as liquidity and receipt of additional funding.
During the fourth quarter of 2008, we identified certain events
or changes in circumstances indicating that the fair value of
this investment had been negatively impacted and determined that
the impairment of this investment was other than temporary. As a
result, we recorded a $500,000 impairment loss on this
investment. The impairment loss was included in other income
(expense) on the Consolidated Statements of Operations for the
year ended December 31, 2008.
Warranty
provision
We provide a limited warranty for periods of up to three years
from the date of delivery against defects in materials and
workmanship. If a customer has a defective product, we will
either repair the goods or provide replacement products at no
charge. We record estimated warranty expenses at the time we
recognize the associated product revenues based on our
historical rates of return and costs of repair over the
preceding
36-month
period. In addition, we recognize estimated warranty expenses
for specific defects at the time those defects are identified.
Share-based
compensation
The Company has in effect stock incentive plans under which
incentive stock options have been granted to employees and
non-qualified stock options have been granted to employees and
non-employee members of the Board of Directors. We also have an
employee stock purchase plan for all eligible employees.
Effective January 1, 2006 we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment, or SFAS 123R, which
requires all share-based payments to employees to be recognized
in the financial statements based upon their respective grant
date fair values.
SFAS 123R requires companies to estimate the fair value of
share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is principally recognized as
expense ratably over the requisite service periods. We have
estimated the fair value of stock options and stock purchase
rights as of the date of grant using the Black-Scholes option
pricing model, which was developed for use in estimating the
value of traded options that have no vesting restrictions and
that are freely transferable. The Black-Scholes model considers,
among other factors, the expected life of the award and the
expected volatility of
47
our stock price. We evaluate the assumptions used to value stock
options and stock purchase rights under SFAS 123R on a
quarterly basis.
Income
taxes
To prepare the Companys consolidated financial statements,
the Company estimates its income taxes in each of the
jurisdictions in which it operates. This process involves
estimating the Companys actual tax exposure together with
assessing temporary differences resulting from the differing
treatment of certain items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included within the Companys consolidated
balance sheet.
The Company must also make judgments regarding the realizability
of deferred tax assets. The carrying value of the Companys
net deferred tax asset is based on its belief that it is more
likely than not that the Company will generate sufficient future
taxable income in certain jurisdictions to realize these
deferred tax assets. A valuation allowance has been established
for deferred tax assets which the Company does not believe meets
the more likely than not criteria established by
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, or
SFAS 109. The Companys judgments regarding future
taxable income may change due to changes in market conditions,
changes in tax laws, tax planning strategies or other factors.
If the Companys assumptions and consequently its estimates
change in the future, the valuation allowances we have
established may be increased or decreased, resulting in a
respective increase or decrease in income tax expense. The
Companys effective tax rate is highly dependent upon the
geographic distribution of its worldwide earnings or losses, the
tax regulations and tax holidays in each geographic region, the
availability of tax credits and carryforwards, and the
effectiveness of its tax planning strategies.
Effective January 1, 2007, we adopted the provisions of
FASB Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN 48. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS No. 109. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon
ultimate settlement. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may
require periodic adjustments and which may not accurately
anticipate actual outcomes. Upon implementation of FIN 48,
the Company recognized no material adjustment to the
January 1, 2007 accumulated deficit balance.
48
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenues
|
|
|
(22
|
)
|
|
|
(25
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
78
|
|
|
|
75
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
36
|
|
|
|
29
|
|
|
|
31
|
|
Sales and marketing
|
|
|
14
|
|
|
|
15
|
|
|
|
18
|
|
General and administrative
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
58
|
|
|
|
52
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
20
|
|
|
|
23
|
|
|
|
15
|
|
Other income, net
|
|
|
4
|
|
|
|
7
|
|
|
|
1
|
|
Benefit from (provision for) taxes on income
|
|
|
(3
|
)
|
|
|
12
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
21
|
|
|
|
42
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Year Ended December 31, 2008 to the Year Ended
December 31, 2007
Revenues. Revenues were $107.7 million
for the year ended December 31, 2008 compared to
$84.1 million for the year ended December 31, 2007,
representing an increase of approximately 28%. This increase in
revenues resulted primarily from increased unit sales of
approximately 7%, and an increase in average selling prices of
19%. The increase in unit sales was primarily due to increases
in sales to our tier one customers. Unit sales to
Hewlett-Packard increased by 15%, to Sun Microsystems by 102%
and to QLogic by 17%. These were partially offset by a decrease
in unit sales to Cisco Systems of 87% and Voltaire of 38%. The
increase in average selling price was primarily due to a change
in product mix, that is an increase in sales of our quad
data-rate (QDR) and double data-rate (DDR) products for which we
charge higher average selling prices. Revenues attributable to
QDR products, which were introduced in the second quarter of
2008, represented 12% of total revenues in the year ended
December 31, 2008. Revenues attributable to DDR products
represented 76% and 66% of total revenues for the years ended
December 31, 2008 and 2007, respectively. The 2008 revenues
are not necessarily indicative of future results due to market
uncertainty and diminished expectations of slower global
economic growth.
Gross Profit and Margin. Gross profit was
$84.3 million for the year ended December 31, 2008
compared to $62.7 million for the year ended
December 31, 2007, representing an increase of 34%. As a
percentage of revenues, gross margin increased to 78.3% in the
year ended December 31, 2008 from approximately 74.6% in
the year ended December 31, 2007. This increase in gross
margin was primarily due to increased sales of QDR and DDR
products for which we receive higher margins and to the
conclusion of our OCS royalty obligation. During 2008 we
incurred royalty expenses of $281,000, compared to
$1.5 million in 2007. In addition, part of the gross margin
improvement was due to a reduction in production costs
associated with outsourced labor, raw materials and volume
discounts. Gross margin for 2008 is not necessarily indicative
of future results due to market uncertainty and diminished
expectations of slower global economic growth.
Research and Development. Research and
development expenses were $39.5 million for the year ended
December 31, 2008 compared to $24.6 million for the
year ended December 31, 2007, representing an increase of
approximately 60%. The increase was primarily attributable to
higher salary related expenses of approximately
$8.2 million associated with increased headcount and merit
increases, an increase in share-based compensation of
approximately $2.9 million primarily due to new option
grants, an increase in new product expenses of approximately
$1.5 million primarily due to tape out costs, and increased
depreciation and amortization of equipment,
49
software and intellectual property of approximately
$1.0 million arising from purchases of property, equipment
and technology licenses. We expect that research and development
expense will increase in absolute dollars in future periods as
we continue to devote resources to develop new products, meet
the changing requirements of our customers, expand into new
markets and technologies and hire additional personnel.
For a further discussion of share-based compensation included in
research and development expense, see Share-based
compensation expense below.
Sales and Marketing. Sales and marketing
expenses were $15.1 million for the year ended
December 31, 2008, compared to $12.7 million for the
year ended December 31, 2007, representing an increase of
approximately 18%. The increase was primarily attributable to
higher salary-related expenses of approximately
$1.1 million associated with merit increases, an increase
in share-based compensation of approximately $733,000 primarily
due to new option grants and an increase in trade show and
advertising expenses of approximately $393,000 related to
expanding our sales and marketing activities, partially offset
by a decrease in external sales commission expenses of
approximately $306,000 related to the adoption of a new plan.
For a further discussion of share-based compensation included in
sales and marketing expense, see Share-based compensation
expense below.
General and Administrative. General and
administrative expenses were $8.4 million for the year
ended December 31, 2008 compared to $6.2 million for
the year ended December 31, 2007 representing an increase
of approximately 34%. The increase was primarily due to higher
employee related expenses of approximately $941,000 associated
primarily with increased headcount and merit increases, an
increase in share based compensation of approximately $631,000
due to new option grants, an increase of approximately $400,000
in professional service fees and an increase of approximately
$200,000 in audit fees, which was primarily attributable to SOX
section 404 implementation costs.
Share-based compensation expense. The
following table presents details of total share-based
compensation expense that is included in each functional line
item in our consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of goods sold
|
|
$
|
228
|
|
|
$
|
87
|
|
Research and development
|
|
|
4,936
|
|
|
|
2,069
|
|
Sales and marketing
|
|
|
1,597
|
|
|
|
864
|
|
General and administrative
|
|
|
1,175
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,936
|
|
|
$
|
3,564
|
|
|
|
|
|
|
|
|
|
|
The amount of unearned share-based compensation currently
estimated to be expensed from 2009 through 2012 related to
unvested share-based payment awards at December 31, 2008 is
$26.0 million. Of this amount, $9.5 million,
$8.9 million, $6.2 million and $1.4 million are
currently estimated to be recorded in 2009, 2010, 2011 and 2012,
respectively. The weighted-average period over which the
unearned share-based compensation is expected to be recognized
is approximately 3 years.
The increase in unearned share-based compensation of
$2.4 million at December 31, 2008 from the
$23.6 million balance at December 31, 2007 was
primarily the result of share-based awards granted during 2008
including the grant of employee stock options to new employees,
merit grants to existing employees and the accumulation of
rights to purchase our ordinary shares by employees
participating in our employee stock purchase program, offset in
part by share-based compensation of $7.9 million expensed
during 2008. If there are any modifications or cancellations of
the underlying unvested awards, we may be required to
accelerate, increase or cancel any remaining unearned
share-based compensation expense. Future share-based
compensation expense and unearned share-based compensation will
increase to the extent that we grant additional equity awards to
employees or assume unvested equity awards in connection with
acquisitions.
50
Other Income, net. Other income, net consists
of interest earned on cash and cash equivalents and short-term
investments, and foreign currency exchange gains and losses.
Other income, net was $3.8 million for the year ended
December 31, 2008 compared to $6.0 million for the
year ended December 31, 2007. The decline is primarily
attributable to a decrease of $2.3 million in interest
income on investments in securities as a result of lower yields
and a loss of $500,000 recognized as a result of the impairment
of our equity investment in a privately-held company.
Benefit from (Provision for) Taxes on
Income. Provision for taxes was $2.8 million
for the year ended December 31, 2008 as compared to a
benefit from taxes on income of $10.5 million for the year
ended December 31, 2007. In the year ended
December 31, 2007, we released a valuation allowance on
certain deferred tax assets of $12.1 million primarily
related to net operating losses in Israel expected to be
utilized during 2008 before the Approved Enterprise Tax Holiday
was expected to begin. In the year ended December 31, 2008,
we recorded additional deferred tax assets associated with net
operating losses expected to be utilized to offset Israeli
taxable profits during 2009 and 2010 due to a modification as to
when the Tax Holiday would begin. The $14.0 million
difference between the income from taxes recognized as a result
of the release of the valuation allowance of $12.1 million
on certain deferred tax assets in 2007 offset by a net tax
expense of $1.9 million associated with taxable profits in
Israel during 2008, net of the additional deferred tax assets
recorded for the expected tax profits during 2009 and 2010, was
the primary reason for the change in our tax results.
In accordance with SFAS 109, we record net deferred tax
assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider
all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent
financial performance. Due to the recent economic slowdown and
its potential impact on our future profitability and the
implementation of certain tax planning strategies, we currently
expect the Approved Enterprise Tax Holiday to begin in 2011.
Comparison
of Year Ended December 31, 2007 to the Year Ended
December 31, 2006
Revenues. Revenues were $84.1 million for
the year ended December 31, 2007 compared to
$48.5 million for the year ended December 31, 2006,
representing an increase of approximately 73%. This increase in
revenues resulted primarily from increased unit sales of
approximately 91%, partially offset by a decrease in average
selling prices of 10%. The increase in unit sales was driven by
broader adoption of InfiniBand and our products and resulted
primarily from increased purchases by Hewlett-Packard, Voltaire
and Cisco, which accounted for 19%, 15% and 11%, respectively,
of our revenue for the year ended December 31, 2007 and
increased purchases by Network Appliance, Super Micro Computer
and Sun Microsystems, which each accounted for less than 10% of
our revenue for the year ended December 31, 2007. The
decrease in average sales prices was primarily attributed to the
decline in average sales price of ICs.
Gross Profit and Margin. Gross profit was
$62.7 million for the year ended December 31, 2007
compared to $35.0 million for the year ended
December 31, 2006, representing an increase of 79%. As a
percentage of revenues, gross margin increased to 75% in the
year ended December 31, 2007 from approximately 72% in the
year ended December 31, 2006. This increase in gross margin
was primarily due to a reduction in production costs associated
with outsourced labor, raw materials and volume discounts. In
addition, part of the gross margin improvement was due to
increased sales of next generation double-data rate (DDR)
products for which we receive higher margins. Revenues
attributable to DDR products were 66% and 38% of total revenues
in the years ended December 31, 2007 and 2006, respectively.
Research and Development. Research and
development expenses were $24.6 million for the year ended
December 31, 2007 compared to $15.3 million for the
year ended December 31, 2006, representing an increase of
approximately 61%. The increase was primarily attributable to
higher salary related expenses of approximately
$4.6 million associated with increased headcount, increased
share based compensation of approximately $1.9 million
primarily due to new option grants, an increase in new product
expenses of approximately $1.7 million primarily due to
tape out costs, and increased depreciation and amortization of
equipment, software and intellectual property of approximately
$835,000 arising from purchases of property, equipment and
technology licenses.
For a further discussion of share-based compensation included in
research and development expense, see Share-based
compensation expense below.
51
Sales and Marketing. Sales and marketing
expenses were $12.7 million for the year ended
December 31, 2007 compared to $8.9 million for the
year ended December 31, 2006, representing an increase of
approximately 43%. The increase was primarily attributable to
higher salary related expenses of approximately
$1.2 million associated with increased headcount, increased
external sales commission expenses of approximately
$1.2 million due to an increase in sales, increased share
based compensation of approximately $678,000 primarily due to
new option grants and an increase in tradeshow and advertising
expenses of approximately $332,000 related to expanding our
sales and marketing activities as we broadened our customer and
product base.
For a further discussion of share-based compensation included in
sales and marketing expense, see Share-based compensation
expense below.
General and Administrative. General and
administrative expenses were $6.2 million for the year
ended December 31, 2007 compared to $3.7 million for
the year ended December 31, 2006, representing an increase
of approximately 68%. The increase was primarily due to higher
salary related expenses of approximately $777,000 associated
with increased headcount, increased legal, accounting and other
professional fee expenses of approximately $771,000 as a result
of the Company becoming public, and increased share based
compensation expense of approximately $467,000 primarily due to
new option grants.
Share-based compensation expense. The
following table presents details of total share-based
compensation expense that is included in each functional line
item in our consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of goods sold
|
|
$
|
87
|
|
|
$
|
12
|
|
Research and development
|
|
|
2,069
|
|
|
|
193
|
|
Sales and marketing
|
|
|
864
|
|
|
|
187
|
|
General and administrative
|
|
|
544
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,564
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
The increase in unearned share-based compensation of
$18.2 million at December 31, 2007 compared to the
$5.4 million balance at December 31, 2006 was
primarily the result of share-based awards granted during 2007
including the grant of employee stock options to new employees,
merit grants to existing employees and the accumulation of
rights to purchase shares of our ordinary shares by employees
participating in our employee stock purchase program, offset in
part by share-based compensation of $3.6 million expensed
during 2007.
Other Income, net. Other income, net consists
of interest earned on cash and cash equivalents and short-term
investments, and foreign currency exchange gains and losses.
Other income, net was $6.0 million for the year ended
December 31, 2007 compared to $438,000 for the year ended
December 31, 2006. The increase is primarily attributable
to higher interest income resulting from investments of the net
proceeds of our initial public offering completed in the first
quarter of 2007.
Benefit from (Provision for) Taxes on
Income. Benefit from taxes on income was
$10.5 million for the year ended December 31, 2007
compared to a provision for taxes of $301,000 for the year ended
December 31, 2006. The change consists of the benefit from
the release of the valuation allowance on certain deferred tax
assets of $12.1 million primarily related to net operating
losses in Israel expected to be utilized in 2008 before the
Approved Enterprise Tax Holiday begins, which was offset by a
provision for income taxes of $1.6 million related to
interest income from investments of proceeds from our initial
public offering and higher income attributable to Mellanox
Technologies, Inc., our wholly owned subsidiary.
Liquidity
and Capital Resources
Since our inception, we have financed our operations through a
combination of sales of equity securities and cash generated by
operations. As of December 31, 2008, our principal source
of liquidity consisted of cash and cash equivalents of
approximately $110.2 million and short-term investments of
approximately $70.9 million. We expect that our current
cash and cash equivalents and short-term investments and our
cash flows from operating activities
52
will be sufficient to fund our operations over the next
12 months after taking into account potential business and
technology acquisitions, if any, and expected increases in
research and development expenses, including tape out costs,
sales and marketing expenses, general and administrative
expenses, and capital expenditures to support our infrastructure
and growth.
Operating
Activities
Net cash generated by our operating activities amounted to
approximately $31.0 million in the year ended
December 31, 2008. Net cash generated by operating
activities was primarily attributable to net income of
approximately $22.4 million, an increase of approximately
$4.7 million in accrued liabilities primarily associated
with payroll and an advance payment from a customer, and an
increase of approximately $1.6 million in accounts payable,
partially offset by an increase in accounts receivable, net of
approximately $6.0 million, an increase in inventory of
approximately $1.3 million and an increase of
$1.3 million in prepaid expenses and other assets.
Furthermore, net cash generated by operating activities was net
income adjusted for non-cash items of approximately
$7.9 million for share-based compensation,
$3.6 million for depreciation and amortization, deferred
taxes of $1.3 million and an impairment of an equity
investment of $500,000, offset by gains on short-term
investments of $2.3 million.
Net cash generated by our operating activities amounted to
approximately $25.9 million in the year ended
December 31, 2007. Net cash generated by operating
activities was primarily attributable to net income of
approximately $35.6 million, an increase of approximately
$4.8 million in accrued liabilities primarily associated
with payroll and other payables and an increase of approximately
$2.2 million in accounts payable, partially offset by an
increase in accounts receivables, net of approximately
$7.2 million and an increase in inventory of approximately
$1.3 million. Furthermore, net cash generated by operating
activities was net income adjusted for non-cash items of
approximately $3.6 million for share-based compensation and
$2.1 million for depreciation and amortization offset by an
increase in deferred taxes of $12.1 million and gains on
short-term investments of $2.3 million.
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.
Investing
Activities
Net cash used in investing activities was approximately
$24.2 million in the year ended December 31, 2008.
Cash used in investing activities was primarily attributable to
net purchases of short-term investments of $16.1 million,
acquisitions of property and equipment of $4.5 million,
purchase of equity investment in a private company of
$1.5 million and an increase in restricted cash deposits of
$1.4 million.
Net cash used in investing activities was approximately
$54.7 million in the year ended December 31, 2007.
Cash used in investment activities was primarily attributable to
purchases of short-term investments of $151.5 million and
purchases of property and equipment of $4.0 million, offset
by the maturity and sale of short-term investments of
$101.6 million.
Net cash used in investing activities was approximately $569,000
in the year ended December 31, 2006. Cash used in
investment activities was primarily attributable to purchases of
property and equipment and severance-related insurance policies
of $747,000 and $472,000, respectively, offset by the partial
return of a tenancy security deposit of $650,000 that was no
longer restricted due to the renegotiation of the tenancy
agreement.
Financing
Activities
Net cash provided by financing activities was approximately
$2.7 million in the year ended December 31, 2008. Cash
provided by financing activities was attributable to the
proceeds from the exercise of share awards of
53
$3.7 million and an excess tax benefit from share based
compensation of $1.0 million, offset by principal payments
on capital lease obligations of $2.1 million.
Net cash provided by financing activities was approximately
$108.8 million in the year ended December 31, 2007.
Cash provided by financing activities was attributable to the
proceeds from the initial public offering of
$106.0 million, proceeds from the exercise of share options
and warrants of $3.5 million and an excess tax benefit from
share based compensation of $1.5 million, offset by
principal payments on capital lease obligations of
$2.1 million.
Net cash used in financing activities was approximately $292,000
in the year ended December 31, 2006. Cash used in financing
activities was attributable to proceeds from the exercise of
share options and warrants of $1.4 million, offset by
principal payments on capital lease obligations of
$0.3 million and payments on deferred public offering costs
of $1.4 million.
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2008 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)
|
|
|
Commitments under capital lease
|
|
$
|
1,591
|
|
|
$
|
717
|
|
|
$
|
716
|
|
|
$
|
158
|
|
Non-cancelable operating lease commitments
|
|
|
8,467
|
|
|
|
2,601
|
|
|
|
4,080
|
|
|
|
1,786
|
|
Service commitments
|
|
|
756
|
|
|
|
523
|
|
|
|
205
|
|
|
|
28
|
|
Purchase commitments
|
|
|
8,662
|
|
|
|
8,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,476
|
|
|
$
|
12,503
|
|
|
$
|
5,001
|
|
|
$
|
1,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, we have no contractual obligations
expected to have an effect on our liquidity and cash flow in
periods beyond five years.
For purposes of this table, purchase and service obligations for
the purchase of goods or services are defined as agreements that
are enforceable and legally binding and that specify all
significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Our purchase orders are
based on our current manufacturing needs and are fulfilled by
our vendors within relatively short time horizons. In addition,
we have purchase orders that represent authorizations to
purchase rather than binding agreements. We do not have
significant agreements for the purchase of raw materials or
other goods specifying minimum quantities or set prices that
exceed our expected requirements.
The contractual obligation table excludes our FIN 48
liabilities because we cannot make a reliable estimate of the
timing of cash payment. As of December 31, 2008, our
unrecognized tax benefits totaled approximately $1,714,000,
which would reduce our income tax expense and effective tax
rate, if recognized.
Recent
accounting pronouncements
In May 2008 the FASB issued Statement of Financial Accounting
Standards No. 162, The Hierarchy of Generally
Accepted Accounting Principles, or SFAS 162.
SFAS 162 identifies the sources of accounting principles to
be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
generally accepted accounting principles, or GAAP, in the United
States. SFAS 162 is effective 60 days following the
SEC approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles. in the adoption of SFAS 162 did not have a
material impact on our consolidated financial statements.
In April 2008, the FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets, or
FSP
FAS 142-3.
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142,
54
Goodwill and Other Intangible Assets
(SFAS 142). The intent of FSP
FAS 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other applicable accounting
literature. FSP
FAS 142-3
is effective for fiscal years beginning after December 15,
2008. The Company does not believe that the implementation of
this standard will have a material impact on its consolidated
financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007),
Business Combinations, or SFAS 141(R),
and Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
or SFAS 160. SFAS 141(R) significantly changes
current practices regarding business combinations. Among the
more significant changes, SFAS 141(R) expands the
definition of a business and a business combination; requires
the acquirer to recognize the assets acquired, liabilities
assumed and noncontrolling interests (including goodwill),
measured at fair value at the acquisition date; requires
acquisition-related expenses and restructuring costs to be
recognized separately from the business combination; requires
assets acquired and liabilities assumed from contractual and
non-contractual contingencies to be recognized at their
acquisition-date fair values with subsequent changes recognized
in earnings; and requires in-process research and development to
be capitalized at fair value as an indefinite-lived intangible
asset. SFAS 160 will change the accounting and reporting
for minority interests, reporting them as equity separate from
the parent entitys equity, as well as requiring expanded
disclosures. SFAS 141(R) and SFAS 160 are effective
for financial statements issued for fiscal years beginning after
December 15, 2008. The Company does not believe that the
implementation of these standards will have a material impact on
its consolidated financial statements.
Off-Balance
Sheet Arrangements
As of December 31, 2008, we did not have any off-balance
sheet arrangements.
Impact of
Currency Exchange Rates
Exchange rate fluctuations could have a material adverse effect
on our business, financial condition and results of operations.
Our most significant foreign currency exposure is to the Israeli
New shekel, or NIS. We do not enter into derivatives for
speculative or trading purposes. In fiscal year 2008, we used
foreign currency forward contracts to hedge a portion of
operating expenses denominated in NIS. Our derivative
instruments are recorded at fair value in assets or liabilities
with final gains or losses recorded in other income (expense) or
as a component of accumulated OCI and subsequently reclassified
into operating expenses in the same period in which the hedged
operating expenses are recognized. See Note 5,
Derivatives and Hedging Activities, of the Notes to
Consolidated Financial Statements of this
Form 10-K
included in Item 15 of this report.
|
|
ITEM 7A
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the United States, recent market and economic conditions have
been unprecedented and challenging with tighter credit
conditions and slower growth throughout 2008, and have led to
increased market uncertainty and instability in both
U.S. and international capital and credit markets. These
conditions, combined with volatile oil prices, declining
business and consumer confidence and increased unemployment have
continued subsequent to the year end and contributed to
unprecedented levels of volatility.
As a result, the cost and availability of credit has been and
may continue to be adversely affected by illiquid credit markets
and wider credit spreads. Concern about the stability of the
markets generally and the strength of counterparties
specifically has led many lenders and institutional investors to
reduce, and in some cases, cease to provide funding to
borrowers. Continued turbulence in the U.S. and
international markets and economies may adversely affect our
liquidity and financial condition, and the liquidity and
financial condition of our customers. If these market conditions
continue, they may limit our ability, and the ability of our
customers, to timely replace maturing liabilities, and access
the capital markets to meet liquidity needs, resulting in an
adverse effect on our financial condition and results of
operations.
This credit crisis may have a potential impact on
the determination of the fair value of financial instruments or
may result in impairments in the future should the value of
certain investments suffer a decline which is
55
determined to be other than temporary. We do not currently
believe that the impact of this credit crisis on the value of
our marketable securities would be material or warrant a
determination of other than a temporary write down.
Interest
rate fluctuation risk
We do not have any long-term borrowings. Our investments consist
of cash and cash equivalents, short-term deposits and interest
bearing investments in marketable securities with maturities of
one year or less, consisting of commercial paper, government and
non-government debt securities. The primary objective of our
investment activities is to preserve principal while maximizing
income without significantly increasing risk. We do not enter
into investments for trading or speculative purposes. Our
investments are exposed to market risk due to a fluctuation in
interest rates, which may affect our interest income and the
fair market value of our investments. Due to the short term
nature of our investment portfolio, we do not believe an
immediate 2% change in interest rates would have a material
effect on the fair market value of our portfolio, and therefore
we do not expect our operating results or cash flows to be
materially affected to any degree by a sudden change in market
interest rates.
Foreign
currency exchange risk
We derive all of our revenues in U.S. dollars. The
U.S. dollar is our functional and reporting currency in all
of our foreign locations. However, a significant portion of our
headcount related expenses, consisting principally of salaries
and related personnel expenses, are denominated in new Israeli
shekels, or NIS. This foreign currency exposure gives rise to
market risk associated with exchange rate movements of the
U.S. dollar against the NIS. Furthermore, we anticipate
that a material portion of our expenses will continue to be
denominated in NIS. To the extent the U.S. dollar weakens
against the NIS, we will experience a negative impact on our
profit margins.
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.
To protect against reductions in value and the volatility of
future cash flows caused by changes in foreign currency exchange
rates, we have established a balance sheet and anticipated
transaction risk management program. Currency forward contracts
and natural hedges are generally utilized in this hedging
program. We do not enter into forward contracts for trading or
speculative purposes. Our hedging program reduces, but does not
eliminate the impact of currency exchange rate movements (see
Part II, Item 1A, Risk Factors). If we
were to experience a 10% change in currency exchange rates, the
impact on assets and liabilities denominated in currencies other
than the U.S. dollar, after taking into account hedges and
offsetting positions, would result in a loss before taxes of
approximately $232,000 at December 31, 2008. There would
also be an impact on future operating expenses denominated in
currencies other than the U.S. dollar. At December 31,
2008, approximately $2.4 million of our monthly operating
expenses were denominated in NIS. As of December 31, 2008,
the Company had forward contracts in place that hedged future
operating expenses of approximately 52.5 million NIS, or
approximately $14.0 million based upon the exchange rate as
of December 31, 2008. The forward contracts cover future
NIS denominated operating expenses expected to occur over the
next twelve months. The Companys derivatives expose it to
credit risk to the extent that the counterparties may be unable
to meet the terms of the agreement. The Company seeks to
mitigate such risk by limiting its counterparties to major
financial institutions and by spreading the risk across a number
of major financial institutions. However, under current market
conditions, failure of one or more of these financial
institutions is possible and could result in incurred losses.
56
|
|
ITEM 8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements required by Item 8 are submitted
as a separate section of this Annual Report on
Form 10-K
and are incorporated by reference into this Item 8. See
Item 15, Exhibits and Financial Statement
Schedules.
Summary
Quarterly Data Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands except per share data)
|
|
|
Total revenues
|
|
$
|
25,207
|
|
|
$
|
29,138
|
|
|
$
|
28,201
|
|
|
$
|
25,155
|
|
|
$
|
24,780
|
|
|
$
|
22,664
|
|
|
$
|
19,779
|
|
|
$
|
16,855
|
|
Cost of revenues
|
|
|
(5,662
|
)
|
|
|
(6,103
|
)
|
|
|
(5,706
|
)
|
|
|
(5,935
|
)
|
|
|
(6,499
|
)
|
|
|
(5,695
|
)
|
|
|
(4,926
|
)
|
|
|
(4,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
19,545
|
|
|
|
23,035
|
|
|
|
22,495
|
|
|
|
19,220
|
|
|
|
18,281
|
|
|
|
16,969
|
|
|
|
14,853
|
|
|
|
12,585
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,180
|
|
|
|
10,067
|
|
|
|
10,015
|
|
|
|
8,257
|
|
|
|
7,035
|
|
|
|
6,067
|
|
|
|
5,592
|
|
|
|
5,944
|
|
Sales and marketing
|
|
|
3,732
|
|
|
|
3,964
|
|
|
|
4,009
|
|
|
|
3,353
|
|
|
|
3,650
|
|
|
|
3,294
|
|
|
|
3,004
|
|
|
|
2,791
|
|
General and administrative
|
|
|
2,067
|
|
|
|
2,408
|
|
|
|
2,064
|
|
|
|
1,831
|
|
|
|
1,762
|
|
|
|
1,607
|
|
|
|
1,503
|
|
|
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,979
|
|
|
|
16,439
|
|
|
|
16,088
|
|
|
|
13,441
|
|
|
|
12,447
|
|
|
|
10,968
|
|
|
|
10,099
|
|
|
|
10,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,566
|
|
|
|
6,596
|
|
|
|
6,407
|
|
|
|
5,779
|
|
|
|
5,834
|
|
|
|
6,001
|
|
|
|
4,754
|
|
|
|
2,493
|
|
Other income, net
|
|
|
687
|
|
|
|
1,152
|
|
|
|
941
|
|
|
|
1,043
|
|
|
|
1,807
|
|
|
|
1,432
|
|
|
|
1,780
|
|
|
|
957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
3,253
|
|
|
|
7,748
|
|
|
|
7,348
|
|
|
|
6,822
|
|
|
|
7,641
|
|
|
|
7,433
|
|
|
|
6,534
|
|
|
|
3,450
|
|
Benefit from (provision for) taxes on income(1)
|
|
|
4,733
|
|
|
|
(2,590
|
)
|
|
|
(2,758
|
)
|
|
|
(2,185
|
)
|
|
|
12,084
|
|
|
|
(461
|
)
|
|
|
(929
|
)
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,986
|
|
|
$
|
5,158
|
|
|
$
|
4,590
|
|
|
$
|
4,637
|
|
|
$
|
19,725
|
|
|
$
|
6,972
|
|
|
$
|
5,605
|
|
|
$
|
3,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
$
|
7,986
|
|
|
$
|
5,158
|
|
|
$
|
4,590
|
|
|
$
|
4,637
|
|
|
$
|
19,725
|
|
|
$
|
6,972
|
|
|
$
|
5,605
|
|
|
$
|
3,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
|
0.25
|
|
|
|
0.16
|
|
|
|
0.15
|
|
|
|
0.15
|
|
|
|
0.64
|
|
|
|
0.23
|
|
|
|
0.19
|
|
|
|
0.16
|
|
Net income per share diluted
|
|
$
|
0.24
|
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
0.60
|
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
|
|
(1) |
|
See Notes 1 and 11 of Notes to Consolidated Financial
Statements, included in Part IV, Item 15 of this
Report, for an explanation of the calculation of benefit from
(provision for) taxes on income. |
|
|
ITEM 9
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Under the supervision and with the participation of certain
members of our management, including our Chief Executive Officer
and Chief Financial Officer, we completed an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in
Rules 13a-15(e)
and
15d-15(e) to
the Securities Exchange Act of 1934, as amended, or the Exchange
Act. Based on that evaluation, we and our management have
concluded that, our disclosure controls and procedures at
December 31, 2008 were effective to provide reasonable
assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the
57
SEC, and are designed to ensure that information required to be
disclosed by us in these reports is accumulated and communicated
to our management, as appropriate to allow timely decisions
regarding required disclosures.
We will consider further actions and continue to evaluate the
effectiveness of our disclosure controls and internal controls
and procedures on an ongoing basis, taking corrective action as
appropriate. Management does not expect that disclosure controls
and procedures or internal controls can prevent all errors and
all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable and not absolute assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. While management believes
that its disclosure controls and procedures provide reasonable
assurance that fraud can be detected and prevented, because of
the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate control over financial reporting, as such term is
defined in
Rule 13a-15(f)
of the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2008 using the
criteria established in Internal Control
Integrated Framework, issued by The Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on that
evaluation, management concluded that our internal control over
financial reporting was effective as of December 31, 2008.
The effectiveness of our internal control over financial
reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report included herein.
Changes
in Internal Control Over Financial Reporting
During the fourth quarter of 2008, there has been no change in
our internal control over financial reporting that has
materially affected, or is reasonably likely to affect, our
internal control over financial reporting.
|
|
ITEM 9B
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item will be contained in our
definitive proxy statement to be filed with the Securities and
Exchange Commission in connection with the Annual General
Meeting of our Shareholders (the Proxy Statement),
which is expected to be filed no later than 120 days after
the end of our fiscal year ended December 31, 2008, and is
incorporated in this report by reference.
Our written Code of Business Conduct and Ethics applies to all
of our directors and employees, including our executive
officers. The Code of Business Conduct and Ethics is available
on our website at
http://www.mellanox.com.
Changes to or waivers of the Code of Business Conduct and Ethics
will be disclosed on the same website.
|
|
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.
58
|
|
ITEM 12
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
|
|
ITEM 13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
|
|
ITEM 14
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.
59
PART IV
|
|
ITEM 15
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Documents filed as part of this report.
1. Financial Statements. The following
financial statements of the Company and reports of the
independent registered public accounting firms are included in
this report:
|
|
|
|
|
|
|
Page
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
|
|
|
66
|
|
|
|
|
67
|
|
|
|
|
68
|
|
2. Financial Statement Schedules. The
following financial statement schedules of the Company are filed
as part of this report:
|
|
|
|
|
|
|
|
95
|
|
All other schedules have been omitted because they are not
applicable or not required, or the information is included in
the Consolidated Financial Statements or Notes thereto.
3. Exhibits. The following exhibits are
filed as part of this report:
60
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Association of Mellanox
Technologies, Ltd. (as amended on May 18, 2008).
|
|
4
|
.1(1)
|
|
Amended and Restated Investor Rights Agreement dated as of
October 9, 2001, by and among Mellanox Technologies, Ltd.,
purchasers of Series A Preferred Shares, Series B
Preferred Shares and Series D Redeemable Preferred Shares
who are signatories to such agreement and certain holders of
Ordinary Shares who are signatories to such agreement, and for
purposes of certain sections thereof, the holder of
Series C Preferred Shares issued or issuable pursuant to
the Series C Preferred Share Purchase Agreement dated
November 5, 2000.
|
|
4
|
.2(2)
|
|
Amendment to the Amended and Restated Investor Rights Agreement
dated as of February 2, 2007, by and among Mellanox
Technologies, Ltd., purchasers of Series A Preferred
Shares, Series B Preferred Shares and Series D
Redeemable Preferred Shares who are signatories to such
agreement and certain holders of Ordinary Shares who are
signatories to such agreement, and for purposes of certain
sections thereof, the holder of Series C Preferred Shares
issued or issuable pursuant to the Series C Preferred Share
Purchase Agreement dated November 5, 2000.
|
|
10
|
.1(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)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered Limited
Partnership, as landlord, as amended August 23, 2001 (as
translated from Hebrew).
|
|
10
|
.6(8)
|
|
Mellanox Technologies, Ltd. Global Share Incentive Plan
(2006) and forms of agreements and appendices relating
thereto.
|
|
10
|
.7(9)
|
|
Mellanox Technologies, Ltd. Non-Employee Director Option Grant
Policy.
|
|
10
|
.8(10)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for U.S. Executives.
|
|
10
|
.9(11)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for Israel Executives.
|
|
10
|
.10(12)
|
|
Mellanox Technologies, Ltd. Employee Share Purchase Plan.
|
|
10
|
.11(13)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered Limited
Partnership, as landlord, as amended May 15, 2007 (as
translated from Hebrew).
|
|
10
|
.14(14)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered Limited
Partnership, as landlord, as amended September 4, 2007 (as
translated from Hebrew).
|
|
10
|
.15(15)
|
|
Office Space Lease dated September 30, 2008 by and between
Oakmead Parkway Properties Partnership, a California general
partnership, as landlord, and Mellanox Technologies, Inc., as
tenant, as commenced on December 19, 2008.
|
|
21
|
.1(16)
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
|
|
24
|
.1
|
|
Power of Attorney (included on signature page to this annual
report on
Form 10-K).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(2) |
|
Incorporated by reference to Exhibit 4.3 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 26, 2007. |
61
|
|
|
(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) |
|
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. |
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
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. |
|
(12) |
|
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. |
|
(13) |
|
Incorporated by reference to Exhibit 10.13 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(14) |
|
Incorporated by reference to Exhibit 10.14 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(15) |
|
Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
(SEC File
No. 001-33299)
filed on November 7, 2008. |
|
(16) |
|
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. |
62
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Mellanox
Technologies, Ltd.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of
convertible preferred shares and shareholders equity
(deficit) and of cash flows present fairly, in all material
respects, the financial position of Mellanox Technologies, Ltd.
and its subsidiary at December 31, 2008 and
December 31, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in
Item 15.2 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. Also in our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for these
financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in Item 9A. Our
responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the
Companys internal control over financial reporting based
on our integrated audit (which was an integrated audit in 2008).
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 10, 2009
63
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
110,153
|
|
|
$
|
100,650
|
|
Short-term investments
|
|
|
70,855
|
|
|
|
52,231
|
|
Restricted cash
|
|
|
2,149
|
|
|
|
709
|
|
Accounts receivable, net
|
|
|
23,399
|
|
|
|
17,353
|
|
Inventories
|
|
|
6,740
|
|
|
|
5,396
|
|
Deferred taxes
|
|
|
5,753
|
|
|
|
12,312
|
|
Prepaid expenses and other
|
|
|
2,968
|
|
|
|
1,509
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
222,017
|
|
|
|
190,160
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
10,386
|
|
|
|
8,449
|
|
Severance assets
|
|
|
3,407
|
|
|
|
3,152
|
|
Intangible assets, net
|
|
|
465
|
|
|
|
395
|
|
Deferred taxes
|
|
|
7,302
|
|
|
|
126
|
|
Other long-term assets
|
|
|
1,194
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
244,771
|
|
|
$
|
202,400
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
8,265
|
|
|
|
6,703
|
|
Other accrued liabilities
|
|
|
14,103
|
|
|
|
11,282
|
|
Capital lease obligations, current
|
|
|
717
|
|
|
|
1,560
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,085
|
|
|
|
19,545
|
|
|
|
|
|
|
|
|
|
|
Accrued severance
|
|
|
5,042
|
|
|
|
4,058
|
|
Capital lease obligations
|
|
|
874
|
|
|
|
1,609
|
|
Other long-term obligations
|
|
|
1,690
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,691
|
|
|
|
25,283
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Ordinary shares: NIS 0.0175 par value, 137,143 shares
authorized, 31,774 and 31,040 shares issued and outstanding
at December 31, 2008 and 2007, respectively
|
|
|
131
|
|
|
|
128
|
|
Additional paid-in capital
|
|
|
225,180
|
|
|
|
210,618
|
|
Accumulated other comprehensive income
|
|
|
81
|
|
|
|
54
|
|
Accumulated deficit
|
|
|
(11,312
|
)
|
|
|
(33,683
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
214,080
|
|
|
|
177,117
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
244,771
|
|
|
$
|
202,400
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
64
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands except per share data)
|
|
|
Total revenues
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
Cost of revenues
|
|
|
(23,406
|
)
|
|
|
(21,390
|
)
|
|
|
(13,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
84,295
|
|
|
|
62,688
|
|
|
|
35,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
39,519
|
|
|
|
24,638
|
|
|
|
15,256
|
|
Sales and marketing
|
|
|
15,058
|
|
|
|
12,739
|
|
|
|
8,935
|
|
General and administrative
|
|
|
8,370
|
|
|
|
6,229
|
|
|
|
3,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
62,947
|
|
|
|
43,606
|
|
|
|
27,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
21,348
|
|
|
|
19,082
|
|
|
|
7,111
|
|
Other income, net
|
|
|
3,823
|
|
|
|
5,976
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes on income
|
|
|
25,171
|
|
|
|
25,058
|
|
|
|
7,549
|
|
Benefit from (provision for) taxes on income
|
|
|
(2,800
|
)
|
|
|
10,530
|
|
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series D mandatorily redeemable convertible
preferred shares
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
Income allocable to preferred shareholders
|
|
|
|
|
|
|
|
|
|
|
(6,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders basic
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders diluted
|
|
$
|
0.68
|
|
|
$
|
1.18
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing income per share attributable to
ordinary shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,436
|
|
|
|
27,827
|
|
|
|
7,709
|
|
Diluted
|
|
|
32,843
|
|
|
|
30,201
|
|
|
|
9,683
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF CONVERTIBLE PREFERRED
SHARES
AND SHAREHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Shares
|
|
|
Preferred Shares
|
|
|
Ordinary Shares
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2005
|
|
|
4,838,482
|
|
|
$
|
55,583
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
7,655,140
|
|
|
$
|
30
|
|
|
$
|
2,452
|
|
|
$
|
|
|
|
$
|
(76,519
|
)
|
|
$
|
(74,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,248
|
|
|
|
7,248
|
|
Accretion of mandatorily redeemable convertible preferred shares
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
469
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,908
|
|
|
|
1
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
270
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,694
|
|
|
|
1
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
1,130
|
|
Vesting of ordinary shares subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
4,838,482
|
|
|
$
|
55,759
|
|
|
|
6,799,192
|
|
|
$
|
36,338
|
|
|
|
7,861,742
|
|
|
$
|
32
|
|
|
$
|
4,174
|
|
|
$
|
|
|
|
$
|
(69,271
|
)
|
|
$
|
(65,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,588
|
|
|
|
35,588
|
|
Unrealized gains on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,642
|
|
Conversion of preferred shares into ordinary shares
|
|
|
(4,838,482
|
)
|
|
|
(55,759
|
)
|
|
|
(6,799,192
|
)
|
|
|
(36,338
|
)
|
|
|
15,035,712
|
|
|
|
62
|
|
|
|
92,035
|
|
|
|
|
|
|
|
|
|
|
|
92,097
|
|
Issuance of ordinary shares in connection with initial public
offering, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,900,000
|
|
|
|
29
|
|
|
|
105,924
|
|
|
|
|
|
|
|
|
|
|
|
105,953
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
3,564
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180,522
|
|
|
|
5
|
|
|
|
2,594
|
|
|
|
|
|
|
|
|
|
|
|
2,599
|
|
Issuance of stock pursuant to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,133
|
|
|
|
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
851
|
|
Income tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
1,471
|
|
Vesting of ordinary shares subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
31,040,109
|
|
|
$
|
128
|
|
|
$
|
210,618
|
|
|
$
|
54
|
|
|
$
|
(33,683
|
)
|
|
$
|
177,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,371
|
|
|
|
22,371
|
|
Unrealized gains on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
|
|
287
|
|
Unrealized losses on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260
|
)
|
|
|
|
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,398
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,936
|
|
|
|
|
|
|
|
|
|
|
|
7,936
|
|
Exercise of share options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574,159
|
|
|
|
2
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
1,901
|
|
Issuance of stock pursuant to employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,352
|
|
|
|
1
|
|
|
|
1,832
|
|
|
|
|
|
|
|
|
|
|
|
1,833
|
|
Income tax benefit from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
1,021
|
|
Income tax benefit from initial public offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
|
1,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
31,774,620
|
|
|
$
|
131
|
|
|
$
|
225,180
|
|
|
$
|
81
|
|
|
$
|
(11,312
|
)
|
|
$
|
214,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
66
MELLANOX
TECHNOLOGIES, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,619
|
|
|
|
2,132
|
|
|
|
1,954
|
|
Deferred income taxes
|
|
|
1,259
|
|
|
|
(12,143
|
)
|
|
|
(201
|
)
|
Share-based compensation expense
|
|
|
7,936
|
|
|
|
3,564
|
|
|
|
469
|
|
Gain on sale of investments
|
|
|
(2,303
|
)
|
|
|
(2,328
|
)
|
|
|
|
|
Impairment of investments
|
|
|
500
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(6,046
|
)
|
|
|
(7,212
|
)
|
|
|
(2,198
|
)
|
Inventories
|
|
|
(1,344
|
)
|
|
|
(1,317
|
)
|
|
|
(48
|
)
|
Prepaid expenses and other assets
|
|
|
(1,263
|
)
|
|
|
644
|
|
|
|
(313
|
)
|
Accounts payable
|
|
|
1,562
|
|
|
|
2,213
|
|
|
|
285
|
|
Accrued liabilities and other liabilities
|
|
|
4,721
|
|
|
|
4,798
|
|
|
|
1,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
31,012
|
|
|
|
25,939
|
|
|
|
9,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of severance-related insurance policies
|
|
|
(727
|
)
|
|
|
(868
|
)
|
|
|
(472
|
)
|
Purchase of short-term investment
|
|
|
(204,252
|
)
|
|
|
(151,465
|
)
|
|
|
|
|
Proceeds from sales of short-term investments
|
|
|
143,168
|
|
|
|
60,066
|
|
|
|
|
|
Proceeds from maturities of short-term investments
|
|
|
45,050
|
|
|
|
41,550
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(4,495
|
)
|
|
|
(3,960
|
)
|
|
|
(747
|
)
|
Return of (increase in) restricted cash deposit
|
|
|
(1,435
|
)
|
|
|
(3
|
)
|
|
|
650
|
|
Purchase of equity investment in a private company
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(24,191
|
)
|
|
|
(54,680
|
)
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering, net
|
|
|
|
|
|
|
105,953
|
|
|
|
|
|
Principal payments on capital lease obligations
|
|
|
(2,073
|
)
|
|
|
(2,053
|
)
|
|
|
(308
|
)
|
Payments on deferred public offering costs
|
|
|
|
|
|
|
|
|
|
|
(1,384
|
)
|
Proceeds from exercise of share awards and warrants
|
|
|
3,734
|
|
|
|
3,450
|
|
|
|
1,400
|
|
Excess tax benefit from share-based compensation
|
|
|
1,021
|
|
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,682
|
|
|
|
108,821
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
9,503
|
|
|
|
80,080
|
|
|
|
8,220
|
|
Cash and cash equivalents at beginning of period
|
|
|
100,650
|
|
|
|
20,570
|
|
|
|
12,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
110,153
|
|
|
$
|
100,650
|
|
|
$
|
20,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1
|
|
|
$
|
92
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
94
|
|
|
$
|
275
|
|
|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Software acquired under capital leases
|
|
$
|
(259
|
)
|
|
$
|
(3,966
|
)
|
|
$
|
(774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements acquired under operating lease
|
|
$
|
(637
|
)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of intangible assets under capital leases
|
|
$
|
(235
|
)
|
|
$
|
(295
|
)
|
|
$
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of tangible assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on mandatorily redeemable convertible preferred shares
|
|
$
|
|
|
|
$
|
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares converted into ordinary shares
|
|
$
|
|
|
|
$
|
92,097
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
67
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
THE
COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
|
Company
Mellanox Technologies, Ltd., an Israeli corporation, and its
wholly-owned subsidiary in the United States (collectively
referred to as the Company or Mellanox),
were incorporated and commenced operations in March 1999.
Mellanox is a supplier of high-performance semiconductor
interconnect products for computing, storage and communications
applications. The principal market for the Companys
products is the United States.
Principles
of presentation
The consolidated financial statements include the accounts of
the Company. All significant intercompany balances and
transactions have been eliminated.
On February 1, 2007, the Company effected a 1.75-to-1
reverse split of the Companys ordinary shares, mandatorily
redeemable convertible preferred shares and convertible
preferred shares (the Share Split) pursuant to the
filing of the Amended and Restated Articles of Association. All
references to shares in the consolidated financial statements
and the accompanying notes, including but not limited to the
number of shares and per share amounts, unless otherwise noted,
have been adjusted to reflect retroactively the Share Split.
Previously awarded options and warrants to purchase the
Companys ordinary shares have been also retroactively
adjusted to reflect the Share Split.
Risks
and uncertainties
The Company is subject to all of the risks inherent in a company
which operates in the dynamic and competitive semiconductor
industry. Significant changes in any of the following areas
could have a materially adverse impact on the Companys
financial position and results of operations: unpredictable
volume or timing of customer orders; the sales outlook and
purchasing patterns of the Companys customers, based on
consumer demands and general economic conditions; loss of one or
more of the Companys customers; decreases in the average
selling prices of products or increases in the average cost of
finished goods; the availability, pricing and timeliness of
delivery of components used in the Companys products;
reliance on a limited number of subcontractors to manufacture,
assemble, package and production test our products; the
Companys ability to successfully develop, introduce and
sell new or enhanced products in a timely manner; product
obsolescence and the Companys ability to manage product
transitions; and the timing of announcements or introductions of
new products by the Companys competitors.
Additionally, the Company has a significant presence in Israel,
including research and development activities, corporate
facilities and sales support operations. Uncertainty surrounding
the political, economic and military conditions in Israel may
directly impact the Companys financial results.
Use of
estimates
The preparation of financial statements in accordance with
United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of net revenue and
expenses in the reporting periods. We regularly evaluate
estimates and assumptions related to revenue recognition,
allowances for doubtful accounts, sales returns and allowances,
warranty reserves, inventory reserves, stock-based compensation
expense, long-term asset valuations, investments, deferred
income tax asset valuation allowances, uncertain tax positions,
tax contingencies, litigation and other loss contingencies.
These estimates and assumptions are based on current facts,
historical experience and various other factors that we believe
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities and the recording of revenue, costs and
expenses that are not readily apparent from other sources. The
actual results
68
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
we experience may differ materially and adversely from our
original estimates. To the extent there are material differences
between the estimates and actual results, our future results of
operations will be affected.
Cash
and cash equivalents
The Company considers all highly liquid investments with a
maturity of three months or less from the date of purchase to be
cash equivalents. Cash and cash equivalents consist of cash on
deposit with banks, money market funds, government agency
discount notes, and commercial paper.
Restricted
cash and deposits
The Company maintains certain cash amounts restricted as to
withdrawal or use. At December 31, 2008 the Company
maintained a balance of approximately $735,000 that represents
tenants security deposits in Israel restricted due to the
tenancy agreement and $1.4 million that represents security
deposits restricted due to a foreign exchange management
agreement with a bank.
The restricted deposits are presented at their cost, including
accrued interest at rates of approximately 2% per annum.
Fair
value of financial instruments
The Companys financial instruments consist of cash, cash
equivalents, short-term investments, accounts receivable,
accounts payable and other accrued liabilities. The Company
believes that the carrying amounts of the financial instruments
approximate their respective fair values. When there is no
readily available market data, fair value estimates may be made
by the Company, which may not necessarily represent the amounts
that could be realized in a current or future sale of these
assets.
Effective January 1, 2008, the Company adopted the
provisions of SFAS No. 157,Fair Value
Measurements, or SFAS 157, which defines fair
value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements required under
other accounting pronouncements. SFAS 157 clarifies that
fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants.
SFAS 157 also requires that a fair value measurement
reflect the assumptions market participants would use in pricing
an asset or liability based on the best information available.
Assumptions include the risks inherent in a particular valuation
technique (such as a pricing model)
and/or the
risks inherent in the inputs to the model. The adoption of
SFAS 157 did not have a significant impact on our
consolidated financial statements.
In February 2008, the Financial Accounting Standards Board
(FASB) issued Staff Position
No. 157-2,
or
FSP 157-2,
that delays the effective date of the application of
SFAS 157 to fiscal years beginning after November 15,
2008 for all non-financial assets and non-financial liabilities
that are recognized or disclosed at fair value in the financial
statements on a non-recurring basis. This standard is not
expected to have a material impact on our consolidated financial
statements.
Further information about the application of SFAS 157 may
be found in Note 3 below.
Concurrently with the adoption of SFAS 157, the Company
adopted Statement of Financial Accounting Standards
No. 159, Establishing the Fair Value Option for
Financial Assets and Liabilities, or SFAS 159,
which permits entities to elect, at specified election dates, to
measure eligible financial instruments at fair value. As of
December 31, 2008, the Company did not elect the fair value
option under SFAS 159 for any financial assets and
liabilities that were not previously measured at fair value.
69
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivatives
The Company recognizes derivative instruments as either assets
or liabilities and measures those instruments at fair value. The
accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting
designation. The Company accounts for derivative instruments in
accordance with authoritative accounting standards, including
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities, or SFAS 133, and Statement of
Financial Accounting Standards No. 52, Foreign
Currency Translation, or SFAS 52. For a
derivative instrument designated as a cash flow hedge, the
effective portion of the derivatives gain or loss is
initially reported as a component of accumulated other
comprehensive income and subsequently reclassified into earnings
when the hedged exposure affects earnings.
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, or SFAS 161.
SFAS 161 amends and expands the disclosure requirements of
SFAS 133, and requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. The Company adopted the reporting requirements per
SFAS 161 during the fourth quarter of fiscal year 2008.
For additional disclosure please see Note 5
Derivatives and hedging activity.
Short-term
investments
The Companys short-term investments, which are classified
as available-for-sale securities in accordance with Statement of
Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
or SFAS 115, are primarily invested in marketable
government agency obligations, commercial paper and corporate
notes.
Short-term investments are reported at fair value at
December 31, 2008 and 2007. Unrealized gains or losses are
recorded in shareholders equity and included in Other
Comprehensive Income (OCI). Realized gains and losses and
declines in value judged to be other than temporary on
available-for-sale securities are included in interest and other
income, net. In order to determine if a decline in value on an
available-for-sale security is other than temporary, we
evaluate, among other factors, general market conditions, the
duration and extent to which the fair value is less than cost,
as well as the Companys intent and ability to hold the
investment. Once a decline in fair value is determined to be
other than temporary, an impairment charge is recorded and a new
cost basis in the investment is established.
Concentration
of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable. Cash equivalents
and short-term investment balances are maintained with high
quality financial institutions, the composition and maturities
of which are regularly monitored by management. The
Companys accounts receivable are derived from revenue
earned from customers located in North America, Europe and Asia.
The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the
expected collectibility of accounts receivable. The Company
reviews its allowance for doubtful accounts quarterly by
assessing individual accounts receivable over a specific aging
and amount, and all other balances based on historical
collection experience and an economic risk assessment. If the
Company determines that a specific customer is unable to meet
its financial obligations to the Company, the Company provides
an allowance for credit losses to reduce the receivable to the
amount management reasonably believes will be collected.
70
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the revenues from customers
(including original equipment manufacturers) in excess of 10% of
the total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Hewlett-Packard
|
|
|
19
|
%
|
|
|
19
|
%
|
|
|
12
|
%
|
Sun Microsystems
|
|
|
17
|
%
|
|
|
*
|
|
|
|
*
|
|
QLogic
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
Voltaire
|
|
|
*
|
|
|
|
15
|
%
|
|
|
18
|
%
|
Cisco
|
|
|
*
|
|
|
|
11
|
%
|
|
|
14
|
%
|
At December 31, 2008, Hewlett-Packard, Sun Microsystems and
Promate Electronics accounted for 24%, 20% and 13%,
respectively, of the Companys total accounts receivable.
Inventory
Inventory includes finished goods,
work-in-process
and raw materials. Inventory is stated at the lower of cost
(principally standard cost which approximates actual cost on a
first-in,
first-out basis) or market value. Reserves for potentially
excess and obsolete inventory are made based on
managements analysis of inventory levels and future sales
forecasts. Once established, the original cost of the
Companys inventory less the related inventory reserve
represents the new cost basis of such products.
Property
and equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation and amortization is generally
calculated using the straight-line method over the estimated
useful lives of the related assets, which is three years for
computers, software license rights and other electronic
equipment, and seven to fifteen years for office furniture and
equipment. Leasehold improvements and assets acquired under
capital leases are amortized on a straight-line basis over the
term of the lease, or the useful 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.
Investments
The Company has an equity investment in a privately-held
company. This investment is recorded at cost because the Company
does not have the ability to exercise significant influence over
the operating and financial policies of this company. The
investment is included in other long-term assets on the
accompanying balance sheets. The Company monitors this
investment for impairment by considering available evidence
generally including financial, operational and economic data and
makes appropriate reductions in carrying values when an
impairment is deemed to be other than temporary.
71
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of long-lived assets
Long-lived assets include equipment, furniture and fixtures,
equity investment in privately-held company and intangible
assets. The Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, or SFAS 144,
which 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 possible
impairment on a regular basis.
Revenue
recognition
The Company accounts for its revenue under the provisions of
Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements, or SAB 104.
Under SAB No. 104, revenues from sales of products are
recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and
collection is reasonably assured. The Companys standard
arrangement with its customers includes
freight-on-board
shipping point,
30-day
payment terms, no right of return and no customer acceptance
provisions. The Company generally relies upon a purchase order
as persuasive evidence of an arrangement.
Probability of collection is assessed on a
customer-by-customer
basis. Customers are subject to a credit review process that
evaluates the customers financial position and ultimately
their ability to pay. If it is determined at the outset of an
arrangement that collection is not probable, no product is
shipped and no revenue is recognized unless cash is received in
advance.
The provisions of Emerging Issuers Task Force Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, or
EITF 00-21,
apply to sales arrangements with multiple elements that include
a combination of hardware and services, such as post-contract
customer support. For multiple element arrangements, revenue is
allocated to the separate elements based on fair value. If an
arrangement includes undelivered elements that are not essential
to the functionality of the delivered elements, the Company
defers the fair value of the undelivered elements and the
residual revenue is allocated to the delivered elements. If the
undelivered elements are essential to the functionality of the
delivered elements, no revenue is recognized. The amount and
impact on our consolidated financial statements of undelivered
elements have historically been insignificant.
In accordance with Emerging Issuers Task Force Issue
No. 00-10,
Accounting for Shipping and Handling Fees and
Costs, or
EITF 00-10,
costs incurred for shipping and handling expenses to customers
are recorded as cost of revenues. To the extent these amounts
are billed to the customer in a sales transaction, the Company
records the shipping and handling fees as revenue.
Product
warranty
The Company typically offers a limited warranty for its products
for periods of up to three years. The Company accrues for
estimated returns of defective products at the time revenue is
recognized based on prior historical activity. The determination
of these accruals requires the Company to make estimates of the
frequency and extent of warranty activity and estimated future
costs to either replace or repair the products under warranty.
If the actual warranty activity
and/or
repair and replacement costs differ significantly from these
estimates, adjustments to
72
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2008, 2007 and
2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of the period
|
|
$
|
704
|
|
|
$
|
528
|
|
|
$
|
517
|
|
New warranties issued during the period
|
|
|
416
|
|
|
|
497
|
|
|
|
340
|
|
Adjustments due to changes in estimates during the period
|
|
|
|
|
|
|
|
|
|
|
(44
|
)
|
Settlements during the period
|
|
|
(123
|
)
|
|
|
(321
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
997
|
|
|
$
|
704
|
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
Costs incurred in research and development are charged to
operations as incurred, including mask sets. The Company
expenses all costs for internally developed patents as incurred
Total research and development operating expenses reported in
the Consolidated Statement of Operations for the years ended
December 31, 2008, 2007 and 2006 were $39,519, $24,638 and
$15,256, respectively.
In June 2007, the FASB ratified Emerging Issues Task Force
No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities, or
EITF 07-3.
EITF 07-3
requires non-refundable advance payments for goods and services
to be used in future research and development activities to be
recorded as an asset and the payments to be expensed when the
research and development activities are performed.
EITF 07-3
was effective for the Company on January 1, 2008. The
adoption of this standard did not have a material effect on the
Companys financial statements.
Advertising
Cost related to advertising and promotion of products is charged
to sales and marketing expense as incurred. Advertising expense
was approximately $155,000, $141,000, and $85,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Share-based
compensation
The Company has in effect stock incentive plans under which
incentive stock options have been granted to employees and
non-qualified stock options have been granted to employees and
non-employee members of the Board of Directors. We also have an
employee stock purchase plan for all eligible employees.
Effective January 1, 2006 we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment, or SFAS 123R, which
requires all share-based payments to employees to be recognized
in the financial statements based upon their respective grant
date fair values.
SFAS 123R requires companies to estimate the fair value of
share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is principally recognized as
expense ratably over the requisite service periods. We have
estimated the fair value of stock options and stock purchase
rights as of the date of grant or assumption using the
Black-Scholes option pricing model, which was developed for use
in estimating the value of traded options that have no vesting
restrictions and that are freely transferable. The Black-Scholes
model considers, among other factors, the expected life of the
award and the expected volatility of our stock price. We
evaluate the assumptions used to value stock options and stock
purchase rights under SFAS 123R on a quarterly basis.
73
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive
income
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, or
SFAS 130, establishes standards for reporting and
displaying comprehensive income and its components in the
consolidated financial statements. Accumulated other
comprehensive income, net of tax, presented in the accompanying
balance sheets consists of the accumulated unrealized gains and
losses on available-for-sale investments, and the accumulated
unrealized gains and losses related to derivative instruments
accounted for as cash flow hedges (in thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated net unrealized gain (loss) on:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
341
|
|
|
$
|
54
|
|
Hedging activities
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
81
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
The amount of income tax expense allocated to unrealized gain
(loss) on available-for-sale securities and hedging activities
was not material at December 31, 2008 and 2007.
Foreign
currency translation
The Company uses the U.S. dollar as its functional
currency. Foreign currency assets and liabilities are remeasured
into U.S. dollars at the end-of-period exchange rates
except for non-monetary assets and liabilities, which are
remeasured at historical exchange rates. Revenue and expenses
are remeasured each day at the exchange rate in effect on the
day the transaction occurred, except for those expenses related
to balance sheet amounts, which are remeasured at historical
exchange rates. Gains or losses from foreign currency
transactions are included in the Consolidated Statements of
Operations as part of Other income, net.
Net
income per share attributable to ordinary
shareholders
Basic and diluted net income per share is computed by dividing
the net income for the period by the weighted average number of
ordinary shares outstanding during the period. The calculation
of diluted net income per share excludes potential ordinary
shares if the effect is antidilutive. Potential ordinary shares
are comprised of ordinary shares subject to repurchase rights,
incremental ordinary shares issuable upon the exercise of share
options or warrants and shares issuable upon conversion of
convertible preferred shares.
In accordance with Emerging Issue Task Force Issue
No. 03-6,
Participating Securities and the
Two-Class Method
under FASB Statement No. 128, or
EITF 03-6,
earnings are allocated between the ordinary shareholders and
other security holders based on their respective rights to
receive dividends. When determining basic earnings per share
under
EITF 03-6,
undistributed earnings for a period are allocated to a
participating security based on the contractual participation
rights of the security to share in those earnings as if all of
the earnings for the period had been distributed. The form of
such participation does not have to be a dividend. Any form of
participation in undistributed earnings would constitute
participation by that security, regardless of whether the
payment to the security holder was referred to as a dividend.
74
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
$
|
7,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series D mandatorily redeemable convertible
preferred shares
|
|
|
|
|
|
|
|
|
|
|
(176
|
)
|
Income allocable to preferred shareholders
|
|
|
|
|
|
|
|
|
|
|
(6,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
$
|
22,371
|
|
|
$
|
35,588
|
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding
|
|
|
31,436
|
|
|
|
27,827
|
|
|
|
7,713
|
|
Weighted average unvested ordinary shares subject to repurchase
Shares used to compute basic net income per share
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,436
|
|
|
|
27,827
|
|
|
|
7,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share options
|
|
|
1,405
|
|
|
|
2,365
|
|
|
|
1,974
|
|
Contingently issuable shares
|
|
|
2
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential ordinary shares
|
|
|
1,407
|
|
|
|
2,374
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net income per share
|
|
|
32,843
|
|
|
|
30,201
|
|
|
|
9,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders basic
|
|
$
|
0.71
|
|
|
$
|
1.28
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary
shareholders diluted
|
|
$
|
0.68
|
|
|
$
|
1.18
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth potential ordinary shares that
are not included in the diluted net income per share
attributable to ordinary shareholders above because to do so
would be antidilutive for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Convertible preferred shares (Series A, B and C) upon
conversion to ordinary shares
|
|
|
|
|
|
|
|
|
|
|
6,799
|
|
Convertible preferred shares (Series D) upon
conversion to ordinary shares
|
|
|
|
|
|
|
|
|
|
|
4,838
|
|
Warrants to purchase ordinary shares
|
|
|
|
|
|
|
|
|
|
|
725
|
|
Options to purchase ordinary shares
|
|
|
2,723
|
|
|
|
597
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,723
|
|
|
|
597
|
|
|
|
12,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
reporting
Statement of Financial Accounting Standards No. 131,
Disclosure about Segments of an Enterprise and Related
Information, or SFAS 131, 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
75
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 inter-connect
semiconductor products.
Income
taxes
To prepare the Companys consolidated financial statements,
the Company estimates its income taxes in each of the
jurisdictions in which it operates. This process involves
estimating the Companys actual tax exposure together with
assessing temporary differences resulting from the differing
treatment of certain items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included within the Companys consolidated
balance sheet.
The Company must also make judgments regarding the realizability
of deferred tax assets. The carrying value of the Companys
net deferred tax asset is based on its belief that it is more
likely than not that the Company will generate sufficient future
taxable income in certain jurisdictions to realize these
deferred tax assets. A valuation allowance has been established
for deferred tax assets which the Company does not believe meets
the more likely than not criteria established by
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, or
SFAS 109. The Companys judgments regarding future
taxable income may change due to changes in market conditions,
changes in tax laws, tax planning strategies or other factors.
If the Companys assumptions and consequently its estimates
change in the future, the valuation allowances we have
established may be increased or decreased, resulting in a
respective increase or decrease in income tax expense. The
Companys effective tax rate is highly dependent upon the
geographic distribution of its worldwide earnings or losses, the
tax regulations and tax holidays in each geographic region, the
availability of tax credits and carryforwards, and the
effectiveness of its tax planning strategies.
Effective January 1, 2007, we adopted the provisions of
FASB Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN 48. FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS No. 109. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon
ultimate settlement. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may
require periodic adjustments and which may not accurately
anticipate actual outcomes. Upon implementation of FIN 48,
the Company recognized no material adjustment to the
January 1, 2007 accumulated deficit balance.
Recent
accounting pronouncements
In May 2008 the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles,
or SFAS 162. SFAS 162 identifies the sources of
accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles, or
GAAP, in the United States. SFAS 162 is effective
60 days following the SEC approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles. The adoption
of SFAS 162 did not have a material impact on our
consolidated financial statements.
In April 2008, the FASB issued Staff Position
No. FAS 142-3,
Determination of the Useful Life of Intangible Assets, or
FSP
FAS 142-3.
FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142). The intent of FSP
FAS 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the
asset under SFAS 141(R) and other applicable accounting
literature. FSP
FAS 142-3
76
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is effective for fiscal years beginning after December 15,
2008. The Company does not believe that the implementation of
this standard will have a material impact on its consolidated
financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007),
Business Combinations, or SFAS 141(R),
and Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
or SFAS 160. SFAS 141(R) significantly changes
current practices regarding business combinations. Among the
more significant changes, SFAS 141(R) expands the
definition of a business and a business combination; requires
the acquirer to recognize the assets acquired, liabilities
assumed and noncontrolling interests (including goodwill),
measured at fair value at the acquisition date; requires
acquisition-related expenses and restructuring costs to be
recognized separately from the business combination; requires
assets acquired and liabilities assumed from contractual and
non-contractual contingencies to be recognized at their
acquisition-date fair values with subsequent changes recognized
in earnings; and requires in-process research and development to
be capitalized at fair value as an indefinite-lived intangible
asset. SFAS 160 will change the accounting and reporting
for minority interests, reporting them as equity separate from
the parent entitys equity, as well as requiring expanded
disclosures. SFAS 141(R) and SFAS 160 are effective
for financial statements issued for fiscal years beginning after
December 15, 2008. The Company does not believe that the
implementation of these standards will have a material impact on
its consolidated financial statements.
|
|
NOTE 2
|
BALANCE
SHEET COMPONENTS:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
33,357
|
|
|
$
|
8,028
|
|
Money market funds
|
|
|
71,497
|
|
|
|
4,330
|
|
Government agency discount notes
|
|
|
5,299
|
|
|
|
58,735
|
|
Commercial paper
|
|
|
|
|
|
|
29,557
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,153
|
|
|
$
|
100,650
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
23,676
|
|
|
$
|
17,539
|
|
Less: allowance for doubtful accounts
|
|
|
(277
|
)
|
|
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,399
|
|
|
$
|
17,353
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
940
|
|
|
$
|
642
|
|
Work-in-process
|
|
|
1,189
|
|
|
|
1,379
|
|
Finished goods
|
|
|
4,611
|
|
|
|
3,375
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,740
|
|
|
$
|
5,396
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and other:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,433
|
|
|
$
|
512
|
|
Federal taxes recoverable
|
|
|
1,390
|
|
|
|
914
|
|
Other
|
|
|
145
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,968
|
|
|
$
|
1,509
|
|
|
|
|
|
|
|
|
|
|
77
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
$
|
27,321
|
|
|
$
|
24,030
|
|
Furniture and fixtures
|
|
|
1,689
|
|
|
|
1,146
|
|
Leasehold improvements
|
|
|
2,005
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,015
|
|
|
|
25,842
|
|
Less: Accumulated depreciation and amortization
|
|
|
(20,629
|
)
|
|
|
(17,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,386
|
|
|
$
|
8,449
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled approximately
$3,454,000, $2,065,000, $1,260,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
|
Equity investments in private companies
|
|
$
|
1,000
|
|
|
$
|
|
|
Other
|
|
|
194
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,194
|
|
|
$
|
118
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
6,568
|
|
|
$
|
5,311
|
|
Professional services
|
|
|
2,407
|
|
|
|
1,418
|
|
Royalties
|
|
|
103
|
|
|
|
1,233
|
|
Warranty
|
|
|
997
|
|
|
|
704
|
|
Income tax payable
|
|
|
398
|
|
|
|
997
|
|
Sales commissions
|
|
|
517
|
|
|
|
888
|
|
Advance payment from a customer
|
|
|
1,925
|
|
|
|
|
|
Other
|
|
|
1,188
|
|
|
|
731
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,103
|
|
|
$
|
11,282
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations:
|
|
|
|
|
|
|
|
|
Federal income tax payable
|
|
$
|
1,143
|
|
|
$
|
64
|
|
Other
|
|
|
547
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,690
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
78
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 3
|
INVESTMENTS AND FAIR VALUE MEASUREMENTS:
|
Fair
value hierarchy:
SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest
priority to unobservable inputs (level 3 measurements). The
three levels of the fair value hierarchy under
SFAS No. 157 are described below:
Level 1 Unadjusted quoted prices in
active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that
are not active or financial instruments for which all
significant inputs are observable, either directly or indirectly;
Level 3 Prices or valuations that
require inputs that are both significant to the fair value
measurement and unobservable.
A financial instruments level within the fair value
hierarchy is based on the lowest level of any input that is
significant to the fair value measurement.
In accordance with SFAS 157, the following table represents
the fair value hierarchy of the Companys financial assets
and liabilities measured at fair value as of December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
71,497
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
71,497
|
|
Commercial papers
|
|
|
|
|
|
|
5,030
|
|
|
|
|
|
|
|
5,030
|
|
Corporate notes
|
|
|
|
|
|
|
8,173
|
|
|
|
|
|
|
|
8,173
|
|
Government agency discount notes
|
|
|
|
|
|
|
62,951
|
|
|
|
|
|
|
|
62,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
71,497
|
|
|
$
|
76,154
|
|
|
$
|
|
|
|
$
|
147,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
|
|
|
$
|
260
|
|
|
$
|
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
At December 31, 2008 and 2007, the Company held short-term
investments classified as available-for-sale securities as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains (Losses)
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
71,497
|
|
|
$
|
|
|
|
$
|
71,497
|
|
Commercial paper
|
|
|
5,014
|
|
|
|
16
|
|
|
|
5,030
|
|
Government agency discount notes
|
|
|
62,597
|
|
|
|
354
|
|
|
|
62,951
|
|
Corporate bonds
|
|
|
8,202
|
|
|
|
(29
|
)
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities
|
|
|
147,310
|
|
|
|
341
|
|
|
|
147,651
|
|
Less amounts classified as cash equivalents
|
|
|
(76,796
|
)
|
|
|
|
|
|
|
(76,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,514
|
|
|
$
|
341
|
|
|
$
|
70,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Money market funds
|
|
$
|
4,330
|
|
|
$
|
|
|
|
$
|
4,330
|
|
Commercial paper
|
|
|
40,947
|
|
|
|
23
|
|
|
|
40,970
|
|
Government agency discount notes
|
|
|
99,522
|
|
|
|
31
|
|
|
|
99,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities
|
|
|
144,799
|
|
|
|
54
|
|
|
|
144,853
|
|
Less amounts classified as cash equivalents
|
|
|
(92,622
|
)
|
|
|
|
|
|
|
(92,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,177
|
|
|
$
|
54
|
|
|
$
|
52,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of marketable securities classified
as short-tem investments at December 31, 2008 are due in
one year or less. Realized gains upon the sale of marketable
securities were approximately $2,303,000 and $2,328,000 for the
years ended December 31, 2008 and December 31, 2007,
respectively.
Investment
in a privately-held company:
As of December 31, 2008, the Companys investment
portfolio included a $1,000,000 investment in a privately-held
company. The Company accounts for this investment under the cost
method. To determine if impairment exists, the Company monitors
the privately-held company revenue and earnings trends relative
to pre-defined milestones and overall business prospects; the
general market conditions in its industry and other factors
related to its ability to remain in business, such as liquidity
and receipt of additional funding.
During the fourth quarter of 2008, the Company identified
certain events or changes in circumstances indicating that the
fair value of this investment had been negatively impacted and
determined that the impairment of this investment was other than
temporary. As a result, the Company recorded a $500,000
impairment loss on this investment. The impairment loss was
included in other income (expense) on the Consolidated
Statements of Operations for the year ended December 31,
2008.
|
|
NOTE 4
|
INTANGIBLE
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Licensed technology
|
|
$
|
724
|
|
|
$
|
489
|
|
Less: Accumulated amortization
|
|
|
(259
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
465
|
|
|
$
|
395
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible assets totaled approximately
$165,000, $67,000 and $694,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Amortization expense is expected to be $176,000 in the year
2009, $144,000 in 2010, $144,000 in 2011. The intangible assets
are expected to be fully amortized in 2011.
|
|
NOTE 5
|
DERIVATIVES
AND HEDGING ACTIVITIES:
|
The Company uses derivative instruments primarily to manage
exposures to foreign currency. The company enters into forward
contracts to manage its exposure to changes in exchange rate of
New Israeli Shekel (NIS) against U.S. dollar.
The Companys primary objective in entering into these
arrangements is to reduce the volatility of earnings and cash
flows associated with changes in foreign currency exchange
rates. The program is not designated for trading or speculative
purposes. The Companys forward contracts expose the
Company to credit risk to the extent that the counterparties may
be unable to meet the terms of the agreement. The Company seeks
to
80
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
mitigate such risk by limiting its counterparties to major
financial institutions and by spreading the risk across a number
of major financial institutions. In addition, the potential risk
of loss with any one counterparty resulting from this type of
credit risk is monitored on an ongoing basis.
The Company uses forward contracts designated as cash flow
hedges to hedge a substantial portion of future forecasted
operating expenses in NIS. The gain or loss on the effective
portion of a cash flow hedge is initially reported as a
component of accumulated other comprehensive income (loss)
(OCI) and subsequently reclassified into operating
expenses in the same period in which the hedged operating
expenses are recognized, or reclassified into other income, net,
if the hedged transaction becomes probable of not occurring. Any
gain or loss after a hedge is de-designated because it is no
longer probable of occurring or related to an ineffective
portion of a hedge, as well as any amount excluded from the
Companys hedge effectiveness, is recognized as other
income (expense) immediately. The net gains or losses relating
to ineffectiveness were not material in the year ended
December 31, 2008. As of December 31, 2008, the
Company had forward contracts in place that hedged future
operating expenses of approximately 52.5 million NIS, or
approximately $14.0 million based upon the exchange rate as
of December 31, 2008. The forward contracts cover future
NIS denominated operating expenses expected to occur over the
next twelve months.
The Company does not use derivative financial instruments for
purposes other than cash flow hedges.
Fair
value of Derivative Contracts
Fair value of derivative contracts under SFAS 133 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets Reported in
|
|
|
Derivative Liabilities Reported in
|
|
|
|
Other Current Assets
|
|
|
Other Current Liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Foreign exchange contracts designated as cash flow hedges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
260
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
|
|
Total derivatives not designated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
|
|
|
$
|
|
|
|
$
|
260
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Designated Derivative Contracts on Accumulated Other
Comprehensive Income
The following table represents only the balance of designated
derivative contracts as cash flow hedges under SFAS 133 as
of December 31, 2008 and 2007, and their impact on OCI for
the year ended December 31, 2008 (in thousands):
|
|
|
|
|
December 31, 2007
|
|
$
|
|
|
Amount of loss recognized in OCI (effective portion)
|
|
|
475
|
|
Amount of loss reclassified from OCI to income (effective
portion)
|
|
|
(215
|
)
|
|
|
|
|
|
December 31, 2008
|
|
$
|
260
|
|
|
|
|
|
|
Foreign exchange contracts designated as cash flow hedges relate
primarily to operating expenses and the associated gains and
losses are expected to be recorded in operating expenses when
reclassed out of OCI. The Company expects to realize the
accumulated OCI balance related to foreign exchange contracts
within the next twelve months.
81
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effect
of Derivative Contracts on the Condensed Consolidated Statement
of Operations.
Impact of derivative contracts under SFAS 133 on total
operating expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Loss on foreign exchange contracts designated as cash flow hedges
|
|
$
|
215
|
|
|
$
|
|
|
|
$
|
|
|
Gain (loss) on non-designated derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional disclosure please see Note 1
The company and summary of significant accounting
policies.
|
|
NOTE 6
|
EMPLOYEE
BENEFIT PLANS:
|
The Company adopted a 401(k) Profit Sharing Plan and Trust (the
401(k) Plan) effective January 2000, which is
intended to qualify under Section 401(k) of the Internal
Revenue Code. The 401(k) Plan allows eligible employees in the
United States to voluntarily contribute a portion of their
pre-tax salary, subject to a maximum limit of $15,500 for the
year ended December 31, 2008, subject to certain
limitations. In 2008, the Company began matching employee
contributions of up to 4% of their annual base salaries. In the
year ended December 31, 2008, the total expense for these
contributions was approximately $180, 000.
Under Israeli law, the Company is required to make severance
payments to its retired or dismissed Israeli employees and
Israeli employees leaving its employment in certain other
circumstances. The severance pay liability of the Company to its
Israeli employees is calculated based on the salary of each
employee multiplied by the number of years of such
employees employment and is presented in the
Companys balance sheet in long-term liabilities, as if it
was payable at each balance sheet date on an undiscounted basis.
This liability is partially funded by the purchase of insurance
policies in the name of the employees. The surrender value of
the insurance policies is presented in long-term assets.
Severance pay expenses for years ended December 31, 2008,
2007 and 2006 were approximately $799,000, $194,000 and
$244,000, respectively and included losses of $277,000 and gains
of $322,000 and 149,000, respectively, from investments in
severance assets. The severance pay detail is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accrued severance liability
|
|
$
|
5,042
|
|
|
$
|
4,058
|
|
Severance assets
|
|
|
3,407
|
|
|
|
3,152
|
|
|
|
|
|
|
|
|
|
|
Unfunded portion
|
|
$
|
1,635
|
|
|
$
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7
|
COMMITMENTS
AND CONTINGENCIES:
|
Leases
The Company leases office space and motor vehicles under
operating leases with various expiration dates through 2014.
Rent expense was $1,762,000, $1,260,000 and $1,020,000 for the
years ended December 31, 2008, 2007 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.
The Company has entered into capital lease agreements for
electronic design automation software. The total amount of
assets under capital lease agreements within Property and
equipment, net was approximately $5,745,000 and $5,486,000
for the years ended December 31, 2008 and 2007,
respectively. At December 31, 2008, future minimum lease
payments under non-cancelable operating and capital leases
totaled approximately
82
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$10,100,000. For the years ended December 31, 2008 and
2007, the accumulated amortization for assets under capital
lease agreements totaled approximately $2,978,000 and
$1,598,000, respectively. At December 31, 2008, future
minimum lease payments under non-cancelable operating and
capital leases, and future minimum sublease rental receipts
under non-cancelable operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Sublease
|
|
Year Ended December 31,
|
|
Leases
|
|
|
Leases
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
732
|
|
|
$
|
2,601
|
|
|
$
|
40
|
|
2010
|
|
|
405
|
|
|
|
2,327
|
|
|
|
|
|
2011
|
|
|
316
|
|
|
|
1,753
|
|
|
|
|
|
2012
|
|
|
158
|
|
|
|
729
|
|
|
|
|
|
2013 and beyond
|
|
|
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments and sublease income
|
|
|
1,611
|
|
|
$
|
8,467
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations
|
|
|
1,591
|
|
|
|
|
|
|
|
|
|
Less: Current portion
|
|
|
(717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations
|
|
$
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
commitments
At December 31, 2008, the Company had non-cancelable
software tool maintenance commitments of $756,000, $523,000 of
which is expected to be paid in 2009 and $233,000 in 2010 and
beyond.
Purchase
commitments
At December 31, 2008, the Company had non-cancelable
purchase commitments of $8.7 million expected to be paid
within one year. At December 31, 2008, 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, 2008, the Company had
repaid and accrued approximately $549,000 to the BIRD
Foundation, and the contingent liability in respect of royalties
payable is approximately $351,000.
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.
83
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The terms of OCS grants generally prohibit the manufacture of
products developed with OCS funding outside of Israel without
the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel by the Company of its IC products,
subject to an undertaking by the Company to pay the OCS
royalties on the sales of the Companys OCS-supported
products until such time as the total royalties paid equal 120%
of the amount of OCS grants.
As of December 31, 2008, we had concluded all our
obligations in respect of royalties payable to the OCS.
Under applicable Israeli law, OCS consent is also required for
the Company to transfer technologies developed with OCS funding
to third parties in Israel. Transfer of OCS-funded technologies
outside of Israel is permitted with the approval of the OCS and
in accordance with the restrictions and payment obligations set
forth under Israeli law. Israeli law further specifies that both
the transfer of know-how as well as the transfer of intellectual
property rights in such know-how are subject to the same
restrictions. These restrictions do not apply to exports of
products from Israel or the sale of products developed with
these technologies. The Company does not anticipate the need to
transfer any of its intellectual property rights outside of
Israel at this time.
Contingencies
The Company is not currently subject to any material legal
proceedings. The Company may, from time to time, become a party
to various legal proceedings arising in the ordinary course of
business. The Company may also be indirectly affected by
administrative or court proceedings or actions in which the
Company is not involved but which have general applicability to
the semiconductor industry.
|
|
NOTE 8
|
MANDATORILY
REDEEMABLE CONVERTIBLE PREFERRED SHARES AND CONVERTIBLE
PREFERRED SHARES:
|
All outstanding preferred shares were converted into ordinary
shares upon the closing of our initial public offering on
February 7, 2007.
Convertible preferred shares at December 31, 2006,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of
|
|
|
|
Shares
|
|
|
Liquidation
|
|
|
Issuance
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Costs
|
|
|
Series A-1
Convertible Preferred Shares
|
|
|
2,857,142
|
|
|
|
2,742,846
|
|
|
$
|
4,800,000
|
|
|
$
|
4,800,000
|
|
Series A-2
Convertible Preferred Shares
|
|
|
1,714,285
|
|
|
|
1,600,000
|
|
|
|
2,800,000
|
|
|
|
2,800,000
|
|
Series B-1
Convertible Preferred Shares
|
|
|
1,714,285
|
|
|
|
1,710,674
|
|
|
|
19,788,344
|
|
|
|
19,788,344
|
|
Series B-2
Convertible Preferred Shares
|
|
|
571,428
|
|
|
|
514,257
|
|
|
|
5,948,683
|
|
|
|
5,948,683
|
|
Series C Convertible Preferred Shares(1)
|
|
|
231,428
|
|
|
|
231,415
|
|
|
|
3,000,894
|
|
|
|
3,000,894
|
|
Series D Mandatorily Redeemable Convertible Preferred Shares
|
|
|
6,483,714
|
|
|
|
4,838,482
|
|
|
|
83,954,112
|
|
|
|
54,983,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,572,282
|
|
|
|
11,637,674
|
|
|
$
|
120,292,033
|
|
|
$
|
91,320,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Series C convertible preferred shares were issued in
exchange for software. |
84
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the conversion of the Companys preferred share
into ordinary shares upon the closing of our initial public
offering on February 13, 2007, the holders of our preferred
shares had various rights and preferences as follows:
Voting
The holders of
Series A-1
convertible preferred shares
(Series A-1),
Series B-1
convertible preferred shares
(Series B-1),
Series C convertible preferred shares
(Series C) and Series D mandatorily
redeemable convertible preferred shares
(Series D) had voting rights based on the
number of ordinary shares into which the
Series A-1,
Series B-1,
Series C and Series D shares were convertible. The
holders of
Series A-2
convertible preferred shares
(Series A-2
and together with
Series A-1,
Series A) and
Series B-2
convertible preferred shares
(Series B-2
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
85
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in respect of share splits, share dividends and like events),
plus all declared but unpaid dividends. The remaining assets and
funds legally available for distribution, if any, would be
distributed equally to the holders of the Series A,
Series B and Series C shares (on an as-converted
basis) and ordinary shares until such time as the holders of the
Series A, Series B and Series C shares received
an amount per share equal to two times their respective original
issue prices (subject to adjustment in respect of share splits,
share dividends and like events).
Conversion
Each share of Series A, Series B, Series C and
Series D was, at the option of the holder of such share, at
any time, convertible into one ordinary share, subject to
certain adjustments. The outstanding Series A,
Series B, Series C and Series D shares would
automatically convert into ordinary shares upon the closing of
an underwritten public offering with at least $15 million
(in the case of the Series A) and $50 million (in
the case of the Series B, Series C and
Series D) in net proceeds to the Company, and an
offering price per share of at least $5.25 (in the case of the
Series A) and $28.93 (in the case of the
Series B, Series C and Series D), subject in each
case to adjustments for share splits, dividends,
reclassifications and the like (a Qualified IPO). In
addition, the Series A, Series B, Series C and
Series D would be automatically converted into ordinary
shares upon the affirmative vote of the holders of the majority
of the issued and outstanding Series D shares (including
the vote of Bessemer Venture Partners for so long as Bessemer
Venture Partners continues to hold at least 324,285
Series D shares) in connection with the consummation of an
underwritten public offering in which the offering price per
share is less than $28.93 (subject to adjustments for share
splits, dividends, reclassifications and the like) or in
connection with a liquidation transaction, as described in the
Companys amended and restated articles of association. In
addition, the
Series A-2
and
Series B-2 shares
would be converted to
Series A-1
and
Series B-1 shares
upon the transfer of such shares to a bona fide purchaser
unaffiliated with the transferor or immediately prior to the
consummation of a Qualified IPO.
Anti-dilution
adjustments
The Series D would be protected against dilution if the
Company issued any capital shares or securities convertible into
or exchangeable for capital shares at a price per share less
than the price per share paid by the holders of the
Series D, in which case such adjustment would be on a
full-ratchet basis. In addition, the per share conversion rate
of the Series D was determined by multiplying $11.57, as
adjusted for share splits, by 2.5, and dividing by the $17.00
price per share paid in the offering. Therefore, the holders of
the Series D received 1.7011 ordinary shares for each share
of Series D converted in connection with the initial public
offering. The adjustment to the Series D conversion price
did not trigger any other antidilution adjustments, nor did it
trigger any rights of first offer or other preemptive rights.
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.
86
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Series D shares were required to be redeemed by the
Company upon the request of holders of a majority of the
outstanding Series D shares at any time after
September 30, 2007. The shares were required to be redeemed
by the Company at a price equal to the original issue price and
declared but unpaid dividends. The difference between the
carrying value of the Series D shares and their redemption
value was accreted using the effective interest method through
the initial public offering.
Warrants
In conjunction with the issuance of the Series D shares,
the holders of Series D shares received warrants to
purchase an aggregate of 725,730 ordinary shares at an exercise
price of $11.57 per share. The warrants were recorded as a
component of the shareholders deficit at a fair value of
approximately $54,000 on the date of issuance. The fair value
was estimated by using the Black-Scholes option-pricing model.
Assumptions used in the model included a risk-free interest rate
of 4.02%, term to maturity of 5 years, 50% volatility and
0% dividend yield. The warrants were exercisable for a period
ending at the earlier of an IPO, a merger or liquidation or
October 2006 or November 2006, as the case may be. At
December 31, 2006, warrants had been exercised for 98,551
ordinary shares and warrants to purchase the remaining 627,179
ordinary shares expired unexercised. There were no outstanding
warrants at December 31, 2008 and December 31, 2007.
|
|
NOTE 9
|
ORDINARY
SHARES:
|
On February 1, 2007, the Companys amended and
restated articles of association authorized the Company to issue
137,142,857 ordinary shares of nominal value New Israeli Shekels
(NIS) 0.0175 each. A portion of the shares sold
prior to the initial public offering were subject to a right of
repurchase by the Company subject to vesting, which is generally
over a four-year period from the earlier of issuance date or
employee hire date, as applicable, until vesting is complete.
|
|
NOTE 10
|
SHARE
OPTION PLANS:
|
The company has four option plans: the 1999 United States Equity
Incentive Plan, 1999 Israeli Share Option Plan, 2003 Israeli
Share Option Plan (collectively, the Prior Plans)
and the 2006 Global Share Incentive Plan, or the Global 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 Prior 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 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
lower of: (i) 2% of total number of ordinary shares
outstanding on a fully diluted basis on the date of the
increase, (ii) 685,714 ordinary shares or (iii) a
smaller number determined by 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. On January 1, 2009, the Global Plan was
automatically increased by 685,714 shares.
87
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity under the Plans, the
Global Plan and other share-based arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Number
|
|
|
Average
|
|
|
|
Available
|
|
|
of
|
|
|
Exercise
|
|
|
|
for Grant
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at December 31, 2005
|
|
|
470,422
|
|
|
|
4,587,917
|
|
|
$
|
3.04
|
|
Options increased to plan
|
|
|
342,857
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,106,093
|
)
|
|
|
1,106,093
|
|
|
$
|
9.12
|
|
Options exercised
|
|
|
|
|
|
|
(108,908
|
)
|
|
$
|
2.65
|
|
Options canceled
|
|
|
418,287
|
|
|
|
(418,287
|
)
|
|
$
|
5.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
125,473
|
|
|
|
5,166,815
|
|
|
$
|
4.19
|
|
Options increased to plan
|
|
|
3,428,571
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,253,878
|
)
|
|
|
2,253,878
|
|
|
$
|
18.32
|
|
Options exercised
|
|
|
|
|
|
|
(1,180,522
|
)
|
|
$
|
2.20
|
|
Options canceled
|
|
|
210,645
|
|
|
|
(210,645
|
)
|
|
$
|
9.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
1,510,811
|
|
|
|
6,029,526
|
|
|
$
|
9.68
|
|
Options increased to plan
|
|
|
680,513
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,926,438
|
)
|
|
|
1,926,438
|
|
|
$
|
10.30
|
|
Options exercised
|
|
|
|
|
|
|
(574,159
|
)
|
|
$
|
3.31
|
|
Options canceled
|
|
|
453,186
|
|
|
|
(453,186
|
)
|
|
$
|
12.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
718,072
|
|
|
|
6,928,619
|
|
|
$
|
10.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted was
approximately $6.12, $11.26 and $6.48 for the years ended
December 31, 2008, 2007 and 2006, respectively. The
following tables provide additional information about all
options outstanding and exercisable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at
|
|
|
Options Exercisable at
|
|
|
|
December 31, 2008
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
$0.18 - $1.30
|
|
|
831,531
|
|
|
|
1.97
|
|
|
$
|
1.14
|
|
|
|
831,531
|
|
|
$
|
1.14
|
|
$1.47 - $3.85
|
|
|
786,932
|
|
|
|
4.68
|
|
|
$
|
2.63
|
|
|
|
786,732
|
|
|
$
|
2.63
|
|
$4.38 - $7.44
|
|
|
681,850
|
|
|
|
6.96
|
|
|
$
|
6.29
|
|
|
|
504,030
|
|
|
$
|
6.16
|
|
$8.23 - $8.23
|
|
|
976,358
|
|
|
|
9.98
|
|
|
$
|
8.23
|
|
|
|
|
|
|
$
|
|
|
$8.45 - $9.10
|
|
|
231,418
|
|
|
|
9.12
|
|
|
$
|
8.97
|
|
|
|
32,631
|
|
|
$
|
8.76
|
|
$9.19 - $9.19
|
|
|
833,176
|
|
|
|
7.67
|
|
|
$
|
9.19
|
|
|
|
536,502
|
|
|
$
|
9.19
|
|
$12.72 - $16.48
|
|
|
721,660
|
|
|
|
9.08
|
|
|
$
|
14.85
|
|
|
|
82,322
|
|
|
$
|
15.07
|
|
$17.00 - $17.97
|
|
|
359,774
|
|
|
|
8.41
|
|
|
$
|
17.62
|
|
|
|
134,656
|
|
|
$
|
17.62
|
|
$18.22 - $18.22
|
|
|
913,250
|
|
|
|
8.99
|
|
|
$
|
18.22
|
|
|
|
226,693
|
|
|
$
|
18.22
|
|
$18.43 - $21.50
|
|
|
592,670
|
|
|
|
8.54
|
|
|
$
|
19.75
|
|
|
|
211,702
|
|
|
$
|
19.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.18 - $21.50
|
|
|
6,928,619
|
|
|
|
7.35
|
|
|
$
|
10.20
|
|
|
|
3,346,799
|
|
|
$
|
6.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Of the 3,346,799 options exercisable at December 31, 2008,
3,237,114 options were fully vested and 109,685 were unvested
but exercisable by U.S. employees under the 1999 Plan.
The total pretax intrinsic value of options exercised in 2008
was $6.3 million. This intrinsic value represents the
difference between the fair market value of our ordinary shares
on the date of exercise and the exercise price of each option.
Based on the closing price of our ordinary shares of $7.86 on
December 31, 2008, the total pretax intrinsic value of all
outstanding options was $10.8 million. The total pretax
intrinsic value of exercisable options at December 31, 2008
was $10.6 million.
Our Employee Share Purchase Plan, or ESPP, was adopted by our
board of directors in November 2006 and approved by our
shareholders in December 2006, and became effective immediately
prior to our initial public offering on February 7, 2007.
The ESPP is designed to allow our eligible employees to purchase
our ordinary shares, at semi-annual intervals, with their
accumulated payroll deductions. A participant may contribute up
to 15% of his or her base compensation through payroll
deductions, and the accumulated deductions will be applied to
the purchase of shares on the purchase date, which is the last
trading day of the offering period. The purchase price per share
will be equal to 85% of the fair market value per share on the
start date of the offering period in which the participant is
enrolled or, if lower, 85% of the fair market value per share on
the purchase date. 571,428 shares have been initially
reserved for issuance pursuant to purchase rights under the
ESPP. In addition, the number of ordinary shares reserved under
our ESPP will increase automatically on the first day of each
fiscal year during the term, beginning in 2008, by a number of
ordinary shares equal to the lower of (i) 0.5% of the total
number of ordinary shares outstanding on a fully diluted basis
on the date of the increase, (ii) 171,428 shares, or
(iii) a smaller number of shares as determined by our board
of directors. In any event, the maximum aggregate number of
ordinary shares that may be issued over the term of the ESPP may
in no event exceed 2,114,285 shares. In addition, no
participant in our ESPP may be issued or transferred more than
$25,000 worth of ordinary shares pursuant to purchase rights
under the ESPP per calendar year. During the years ended
December 31, 2008 and 2007, 160,352 and 62,133 shares,
respectively, were issued under this plan at weighted average
per share prices of $11.42 and $13.69, respectively. At
December 31, 2008, 348,943 shares were available for
future issuance under the ESPP. No additional ordinary shares
were added to the plan on January 1, 2009.
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 SFAS No. 123
will also continue to be recognized as the options vest.
Accordingly, 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 SFAS 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.
89
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 weighted average assumptions are used to value
share options granted in connection with the Companys
share incentive plans for the years ended December 31, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock
|
|
|
Employee Stock
|
|
|
|
Options
|
|
|
Purchase Plan
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Dividend yield, %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility, %
|
|
|
62.6
|
|
|
|
62.1
|
|
|
|
54.9
|
|
|
|
58.3
|
|
Risk free interest rate, %
|
|
|
2.42
|
|
|
|
4.12
|
|
|
|
1.76
|
|
|
|
4.71
|
|
Expected life, years
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
0.50
|
|
|
|
0.53
|
|
Estimated forfeiture rate, %
|
|
|
8.40
|
|
|
|
9.25
|
|
|
|
|
|
|
|
|
|
The following table summarizes the distribution of total
share-based compensation expense in the Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Share-based compensation expense by caption:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
228
|
|
|
$
|
87
|
|
|
$
|
12
|
|
Research and development
|
|
|
4,936
|
|
|
|
2,069
|
|
|
|
193
|
|
Sales and marketing
|
|
|
1,597
|
|
|
|
864
|
|
|
|
187
|
|
General and administrative
|
|
|
1,175
|
|
|
|
544
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
7,936
|
|
|
$
|
3,564
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
7,242
|
|
|
$
|
3,000
|
|
|
$
|
469
|
|
ESPP
|
|
|
694
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
7,936
|
|
|
$
|
3,564
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, there was $26.0 million of total
unrecognized share-based compensation costs related to
non-vested share-based compensation arrangements. The costs are
expected to be recognized over a weighted average period of
approximately 3 years.
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
1,194
|
|
|
$
|
1,416
|
|
|
$
|
806
|
|
Foreign
|
|
|
23,977
|
|
|
|
23,642
|
|
|
|
6,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
25,171
|
|
|
$
|
25,058
|
|
|
$
|
7,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the provision for (benefit from) income taxes
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
1,448
|
|
|
$
|
662
|
|
|
$
|
471
|
|
State and local
|
|
|
289
|
|
|
|
232
|
|
|
|
32
|
|
Foreign
|
|
|
(196
|
)
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,541
|
|
|
|
1,613
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
(497
|
)
|
|
$
|
(54
|
)
|
|
$
|
(174
|
)
|
State and local
|
|
|
(128
|
)
|
|
|
2
|
|
|
|
(28
|
)
|
Foreign
|
|
|
1,884
|
|
|
|
(12,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,259
|
|
|
|
(12,143
|
)
|
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) taxes on income
|
|
$
|
2,800
|
|
|
$
|
(10,530
|
)
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, temporary differences which
gave rise to significant deferred tax assets and liabilities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and credit carryforwards
|
|
$
|
8,481
|
|
|
$
|
12,002
|
|
Research and development costs
|
|
|
6,569
|
|
|
|
2,326
|
|
Reserves and accruals
|
|
|
1,221
|
|
|
|
593
|
|
Depreciation and amortization
|
|
|
20
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
16,291
|
|
|
|
14,929
|
|
Valuation allowance
|
|
|
(3,236
|
)
|
|
|
(2,491
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
13,055
|
|
|
|
12,438
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
13,055
|
|
|
$
|
12,438
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS 109, we record net deferred tax
assets to the extent we believe these assets will more likely
than not be realized. In making such determination, we consider
all available positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent
financial performance. Management believes that historical
profitability combined with the expectation of future
profitability supports the future realization of certain
deferred tax assets and accordingly, during the year ended
December 31, 2007, released the valuation allowance for
certain foreign deferred tax assets. During the year 2008, the
Company recorded additional deferred tax assets associated with
research and development costs and net operating losses that are
expected to offset taxable profits in Israel during 2009 and
2010. Also, the valuation allowance increased by $745,000 due to
an increase in certain deferred tax assets that are not expected
to be realized.
At December 31, 2008, we had state and foreign net
operating loss carryforwards of approximately $16.8 million
and $36.7 million, respectively. If unutilized, the state
net operating loss carryforwards will expire
91
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
between the years 2012 and 2017. The foreign net operating
losses have no expiration date. Included in these net operating
loss carryforwards is $15.2 million related to stock option
deductions.
The reconciliation of the statutory federal income tax rate to
the Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State, net of federal benefit
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
0.1
|
|
Meals and entertainment
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
0.1
|
|
Tax at rates other than the statutory rate
|
|
|
(33.2
|
)
|
|
|
(30.1
|
)
|
|
|
(30.2
|
)
|
Share-based compensation
|
|
|
2.0
|
|
|
|
0.8
|
|
|
|
|
|
Changes in valuation allowance
|
|
|
5.0
|
|
|
|
(49.6
|
)
|
|
|
|
|
Other, net
|
|
|
2.7
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) taxes
|
|
|
11.1
|
%
|
|
|
(42.3
|
)%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 10, 2005, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position
No. FAS 123(R)-3. which requires a company to
calculate the pool of excess tax benefits available to absorb
tax deficiencies recognized subsequent to adopting
SFAS No. 123(R) (termed the APIC Pool). The Company
elected to use the method under which each award grant is
tracked on an
employee-by-employee
basis and
grant-by-grant
basis to determine if there is a tax benefit situation or tax
deficiency situation for such award. The Company then compares
the fair value expense to the tax deduction received for each
grant and aggregates the benefits and deficiencies to determine
whether there is a hypothetical APIC pool (net tax benefit
situation). For the years ended December 31, 2008 and 2007,
the Company recognized a tax benefit to APIC of $2.9 and
$1.5 million, respectively.
Our operations in Israel have been granted Approved
Enterprise status by the Investment Center of the Israeli
Ministry of Industry, Trade and Labor, which makes us eligible
for tax benefits under the Israeli Law for Encouragement of
Capital Investments, 1959. Under the terms of the Approved
Enterprise program, income that is attributable to our
operations in Yokneam, Israel will be exempt from income tax for
a period of ten years commencing when we first generate taxable
income after setting off our losses from prior years. Income
that is attributable to our operations in Tel Aviv, Israel will
be exempt from income tax for a period of two years commencing
when we first generate taxable income and will be subject to a
reduced income tax rate (generally
10-25%,
depending on the percentage of foreign investment in the
Company) for the following five to eight years. The Company
expected the Approved Enterprise Tax Holiday associated with its
Yokneam and Tel Aviv operations to begin in 2009, but due to
certain favorable tax rulings obtained during the year ended
December 31, 2008, and revisions to the level of future
taxable profit in Israel, the Tax Holiday is now expected to
begin in 2011. The Yokneam Tax Holiday is expected to expire in
2020 and the Tel Aviv Tax Holiday is expected to expire between
2015 and 2018. The modification as to when the Tax Holiday is
expected to begin resulted in the Company recording additional
deferred tax assets associated with research and development
costs and net operating loss carryforwards that will offset
anticipated taxable profits in Israel during 2009 and 2010.
As a multinational corporation, the Company conducts business in
many countries and is subject to taxation in many jurisdictions.
The taxation of the Companys business is subject to the
application of multiple and sometimes conflicting tax laws and
regulations as well as multinational tax conventions. The
application of tax laws and regulations is subject to legal and
factual interpretation, judgment and uncertainty. Tax laws
themselves are subject to change as a result of changes in
fiscal policy, changes in legislation and the evolution of
regulations and court rulings. Consequently, taxing authorities
may impose tax assessments or judgments against the Company that
could materially impact its tax liability
and/or its
effective income tax rate.
Effective January 1, 2007, we adopted the provisions of
FASB Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
or FIN 48. FIN 48 contains a two-step approach to
92
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognizing and measuring uncertain tax positions accounted for
in accordance with SFAS No. 109. The first step is to
evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than
not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon
ultimate settlement. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may
require periodic adjustments and which may not accurately
anticipate actual outcomes. Upon implementation of FIN 48,
the Company recognized no material adjustment to the
January 1, 2007 balance of retained earnings. As of
December 31, 2008 and 2007, our unrecognized tax benefits
totaled approximately $1,714,000 and $1,139,000, respectively,
which would reduce our income tax expense and effective tax
rate, if recognized.
The following summarizes the activity related to our
unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Gross unrecognized tax benefits, beginning of the period
|
|
$
|
1,139
|
|
|
$
|
798
|
|
Increases in tax positions for prior years
|
|
|
|
|
|
|
|
|
Decreases in tax positions for prior years
|
|
|
(284
|
)
|
|
|
(39
|
)
|
Increases in tax positions for current year
|
|
|
859
|
|
|
|
380
|
|
Decreases in tax positions for current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits, end of the period
|
|
$
|
1,714
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
It is the Companys policy to classify accrued interest and
penalties as part of the accrued FIN 48 liability and
record the expense in the provision for income taxes. For the
years ended December 31, 2008 and 2007, the amount of
accrued interest or penalties related to unrecognized tax
benefit totaled $20,000 and $9,000, respectively. For
unrecognized tax benefits that exist at December 31, 2008,
the Company does not anticipate any significant changes within
the next twelve months.
We file income tax returns in the U.S. federal
jurisdictions, and various states and foreign jurisdictions. The
2004 through 2008 tax years are open and may be subject to
potential examination in one or more jurisdictions. The Company
is not currently under federal, state or foreign income tax
examination.
Undistributed earnings of the Companys subsidiary,
Mellanox Technologies, Inc., are indefinitely reinvested in the
respective operations. If its earnings were to be repatriated,
the Company would be subject to additional tax.
|
|
NOTE 12
|
SEGMENT
INFORMATION:
|
The Company operates in one reportable segment, the development,
manufacturing, marketing and sales of semiconductor interconnect
products. The Companys chief operating decision maker is
the CEO. Since the Company operates in one segment, all
financial segment information can be found in the accompanying
Consolidated Financial Statements.
93
MELLANOX
TECHNOLOGIES, LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues by geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
North America
|
|
$
|
56,432
|
|
|
$
|
44,779
|
|
|
$
|
28,711
|
|
Israel
|
|
|
11,994
|
|
|
|
15,751
|
|
|
|
10,026
|
|
Europe
|
|
|
15,689
|
|
|
|
11,339
|
|
|
|
5,379
|
|
Asia
|
|
|
23,586
|
|
|
|
12,209
|
|
|
|
4,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to countries based on the geographic
location of the customers. Intercompany sales between geographic
areas have been eliminated.
Revenues by product group are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
IC/Semiconductors
|
|
$
|
47,801
|
|
|
$
|
36,050
|
|
|
$
|
19,395
|
|
Cards and switch systems
|
|
|
57,651
|
|
|
|
46,767
|
|
|
|
27,675
|
|
Options and miscellaneous other
|
|
|
2,249
|
|
|
|
1,261
|
|
|
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
107,701
|
|
|
$
|
84,078
|
|
|
$
|
48,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net by geographic location are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Israel
|
|
$
|
8,774
|
|
|
$
|
8,175
|
|
|
$
|
2,548
|
|
United States
|
|
|
1,612
|
|
|
|
274
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
10,386
|
|
|
$
|
8,449
|
|
|
$
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net is attributed to the geographic
location in which it is located.
|
|
NOTE 13
|
OTHER
INCOME, NET:
|
Other income, net, is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
4,187
|
|
|
$
|
6,452
|
|
|
$
|
687
|
|
Foreign exchange gains (losses)
|
|
|
84
|
|
|
|
(283
|
)
|
|
|
(229
|
)
|
Loss on equity investment in a private company
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
52
|
|
|
|
(193
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
3,823
|
|
|
$
|
5,976
|
|
|
$
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
SCHEDULE II
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
MELLANOX
TECHNOLOGIES, LTD.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
(Credited) to
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
Balance at
|
|
Description:
|
|
Year
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
End of Year
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
186
|
|
|
$
|
125
|
|
|
$
|
(34
|
)
|
|
$
|
277
|
|
Allowance for sales returns and adjustments
|
|
|
109
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
295
|
|
|
$
|
31
|
|
|
$
|
(34
|
)
|
|
$
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
107
|
|
|
$
|
79
|
|
|
$
|
|
|
|
$
|
186
|
|
Allowance for sales returns and adjustments
|
|
|
9
|
|
|
|
100
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
116
|
|
|
$
|
179
|
|
|
$
|
|
|
|
$
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
95
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
107
|
|
Allowance for sales returns and adjustments
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deductions for Allowance for doubtful accounts are for accounts
receivable written-off. |
95
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 10, 2009.
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 10, 2009
|
|
|
|
|
|
/s/ Michael
Gray
Michael
Gray
|
|
Chief Financial Officer
(principal financial and accounting officer)
and Authorized Representative
in the United States
|
|
March 10, 2009
|
|
|
|
|
|
/s/ Rob
S. Chandra
Rob
S. Chandra
|
|
Director
|
|
March 11, 2009
|
|
|
|
|
|
/s/ Irwin
Federman
Irwin
Federman
|
|
Director
|
|
March 11, 2009
|
|
|
|
|
|
/s/ Thomas
J. Riordan
Thomas
J. Riordan
|
|
Director
|
|
March 11, 2009
|
|
|
|
|
|
/s/ C.
Thomas Weatherford
C.
Thomas Weatherford
|
|
Director
|
|
March 9, 2009
|
|
|
|
|
|
/s/ Amal
Johnson
Amal
Johnson
|
|
Director
|
|
March 10, 2009
|
96
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Association of Mellanox
Technologies, Ltd. (as amended on May 18, 2008).
|
|
4
|
.1(1)
|
|
Amended and Restated Investor Rights Agreement dated as of
October 9, 2001, by and among Mellanox Technologies, Ltd.,
purchasers of Series A Preferred Shares, Series B
Preferred Shares and Series D Redeemable Preferred Shares
who are signatories to such agreement and certain holders of
Ordinary Shares who are signatories to such agreement, and for
purposes of certain sections thereof, the holder of
Series C Preferred Shares issued or issuable pursuant to
the Series C Preferred Share Purchase Agreement dated
November 5, 2000.
|
|
4
|
.2(2)
|
|
Amendment to the Amended and Restated Investor Rights Agreement
dated as of February 2, 2007, by and among Mellanox
Technologies, Ltd., purchasers of Series A Preferred
Shares, Series B Preferred Shares and Series D
Redeemable Preferred Shares who are signatories to such
agreement and certain holders of Ordinary Shares who are
signatories to such agreement, and for purposes of certain
sections thereof, the holder of Series C Preferred Shares
issued or issuable pursuant to the Series C Preferred Share
Purchase Agreement dated November 5, 2000.
|
|
10
|
.1(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)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered Limited
Partnership, as landlord, as amended August 23, 2001 (as
translated from Hebrew).
|
|
10
|
.6(8)
|
|
Mellanox Technologies, Ltd. Global Share Incentive Plan
(2006) and forms of agreements and appendices relating
thereto.
|
|
10
|
.7(9)
|
|
Mellanox Technologies, Ltd. Non-Employee Director Option Grant
Policy.
|
|
10
|
.8(10)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for U.S. Executives.
|
|
10
|
.9(11)
|
|
Form of Mellanox Technologies, Ltd. Executive Severance
Agreement for Israel Executives.
|
|
10
|
.10(12)
|
|
Mellanox Technologies, Ltd. Employee Share Purchase Plan.
|
|
10
|
.11(13)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered Limited
Partnership, as landlord, as amended May 15, 2007 (as
translated from Hebrew).
|
|
10
|
.14(14)
|
|
Lease Contract, dated May 9, 2001, by and between the
Company, as tenant, and Shaar Yokneam, Registered Limited
Partnership, as landlord, as amended September 4, 2007 (as
translated from Hebrew).
|
|
10
|
.15(15)
|
|
Office Space Lease dated September 30, 2008 by and between
Oakmead Parkway Properties Partnership, a California general
partnership, as landlord, and Mellanox Technologies, Inc., as
tenant, as commenced on December 19, 2008.
|
|
21
|
.1(16)
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
|
|
24
|
.1
|
|
Power of Attorney (included on signature page to this annual
report on
Form 10-K).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Incorporated by reference to Exhibit 4.4 to the
Companys Registration Statement on
Form S-1
(SEC File
No. 333-137659)
filed on September 28, 2006. |
|
(2) |
|
Incorporated by reference to Exhibit 4.3 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 26, 2007. |
97
|
|
|
(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) |
|
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. |
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
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. |
|
(12) |
|
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. |
|
(13) |
|
Incorporated by reference to Exhibit 10.13 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(14) |
|
Incorporated by reference to Exhibit 10.14 to the
Companys Annual Report on
Form 10-K
(SEC File
No. 001-33299)
filed on March 24, 2008. |
|
(15) |
|
Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
(SEC File
No. 001-33299)
filed on November 7, 2008. |
|
(16) |
|
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. |
98