e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
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 |
For the transition period to
Commission File No. 001-33299
MELLANOX TECHNOLOGIES, LTD.
(Exact Name of Registrant as Specified in Its Charter)
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ISRAEL
(State or Other Jurisdiction of
Incorporation or Organization)
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98-0233400
(I.R.S. Employer
Identification No.) |
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HERMON BUILDING, YOKNEAM, ISRAEL
(Address of Principal Executive Offices)
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20692
(Zip Code) |
Registrants Telephone Number, Including Area Code: +972-4-909-7200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes o No þ
The total number of outstanding shares of the registrants Ordinary Shares, nominal value of NIS
0.0175 per share, as of June 30, 2009, was 32,021,747.
MELLANOX TECHNOLOGIES, LTD.
2
PART I. FINANCIAL INFORMATION
ITEM 1 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MELLANOX TECHNOLOGIES, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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June 30, |
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December 31, |
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2009 |
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2008 |
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(In thousands) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
83,129 |
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$ |
110,153 |
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Short-term investments |
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107,557 |
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70,855 |
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Restricted cash |
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3,060 |
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2,149 |
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Accounts receivable, net |
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19,534 |
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23,399 |
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Inventories |
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6,405 |
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6,740 |
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Deferred taxes |
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4,290 |
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5,753 |
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Prepaid expenses and other |
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2,521 |
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2,968 |
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Total current assets |
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226,496 |
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222,017 |
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Property and equipment, net |
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9,421 |
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10,386 |
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Severance assets |
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3,899 |
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3,407 |
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Intangible assets, net |
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360 |
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465 |
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Deferred taxes |
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7,302 |
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7,302 |
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Other long-term assets |
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1,165 |
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1,194 |
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Total assets |
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$ |
248,643 |
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$ |
244,771 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
7,485 |
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$ |
8,265 |
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Other accrued liabilities |
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9,056 |
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14,103 |
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Capital lease obligations, current |
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450 |
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717 |
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Total current liabilities |
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16,991 |
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23,085 |
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Accrued severance |
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5,213 |
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5,042 |
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Capital lease obligations |
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632 |
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874 |
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Other long-term obligations |
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1,977 |
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1,690 |
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Total liabilities |
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24,813 |
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30,691 |
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Shareholders equity |
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Ordinary shares |
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132 |
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131 |
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Additional paid-in capital |
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230,796 |
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225,180 |
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Accumulated other comprehensive income |
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354 |
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81 |
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Accumulated deficit |
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(7,452 |
) |
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(11,312 |
) |
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Total shareholders equity |
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223,830 |
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214,080 |
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Total liabilities and shareholders equity |
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$ |
248,643 |
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$ |
244,771 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MELLANOX TECHNOLOGIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(In thousands, except per share data) |
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Total revenues |
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$ |
25,286 |
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$ |
28,201 |
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$ |
47,844 |
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$ |
53,356 |
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Cost of revenues |
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(6,552 |
) |
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(5,706 |
) |
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(11,904 |
) |
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(11,641 |
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Gross profit |
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18,734 |
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22,495 |
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35,940 |
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41,715 |
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Operating expenses: |
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Research and development |
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10,120 |
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10,015 |
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18,742 |
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18,272 |
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Sales and marketing |
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4,036 |
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4,009 |
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7,738 |
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7,362 |
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General and administrative |
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1,965 |
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2,064 |
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4,167 |
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3,895 |
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Total operating expenses |
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16,121 |
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16,088 |
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30,647 |
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29,529 |
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Income from operations |
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2,613 |
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6,407 |
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5,293 |
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12,186 |
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Other income, net |
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197 |
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941 |
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738 |
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1,984 |
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Income before taxes on income |
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2,810 |
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7,348 |
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6,031 |
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14,170 |
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Provision for taxes on income |
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(1,066 |
) |
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(2,758 |
) |
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(2,171 |
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(4,943 |
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Net income |
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$ |
1,744 |
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$ |
4,590 |
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$ |
3,860 |
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$ |
9,227 |
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Net income per share basic |
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$ |
0.05 |
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$ |
0.15 |
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$ |
0.12 |
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$ |
0.30 |
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Net income per share diluted |
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$ |
0.05 |
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$ |
0.14 |
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$ |
0.12 |
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$ |
0.28 |
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Shares used in computing income per share: |
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Basic |
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31,967 |
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31,328 |
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31,895 |
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31,208 |
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Diluted |
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33,154 |
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32,969 |
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32,986 |
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32,881 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MELLANOX TECHNOLOGIES, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Six Months Ended June 30, |
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2009 |
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2008 |
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(In thousands) |
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Cash flows from operating activities: |
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Net income |
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$ |
3,860 |
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$ |
9,227 |
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Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
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2,163 |
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1,761 |
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Deferred income taxes |
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1,463 |
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5,069 |
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Share-based compensation expense |
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4,553 |
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3,911 |
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Gain on sale of investments |
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(369 |
) |
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(1,456 |
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Changes in assets and liabilities: |
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Accounts receivable, net |
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3,865 |
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(4,423 |
) |
Inventories |
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335 |
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(601 |
) |
Prepaid expenses and other assets |
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419 |
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(694 |
) |
Accounts payable |
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(780 |
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(1,138 |
) |
Accrued liabilities and other payables |
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(4,227 |
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1,832 |
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Net cash provided by operating activities |
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11,282 |
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13,488 |
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Cash flows from investing activities: |
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Purchase of severance-related insurance policies |
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(478 |
) |
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(904 |
) |
Purchases of short-term investments |
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(107,387 |
) |
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(136,602 |
) |
Proceeds from sales of short-term investments |
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62,901 |
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54,741 |
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Proceeds from maturities of short-term investments |
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8,080 |
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45,050 |
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Increase in restricted cash deposit |
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(884 |
) |
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(99 |
) |
Purchase of property and equipment |
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(1,217 |
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(1,572 |
) |
Purchase of equity investment in a private company |
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(1,500 |
) |
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Net cash used in investing activities |
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(38,985 |
) |
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(40,886 |
) |
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Cash flows from financing activities: |
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Principal payments on capital lease obligations |
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(385 |
) |
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(1,456 |
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Proceeds from issuance of common stock to employees |
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1,064 |
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2,052 |
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Net cash provided by financing activities |
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679 |
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596 |
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Net decrease in cash and cash equivalents |
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(27,024 |
) |
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(26,802 |
) |
Cash and cash equivalents at beginning of period |
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110,153 |
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100,650 |
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Cash and cash equivalents at end of period |
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$ |
83,129 |
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$ |
73,848 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MELLANOX TECHNOLOGIES, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Company
Mellanox Technologies, Ltd., an Israeli company, and its wholly-owned subsidiary, Mellanox
Technologies, Inc., a California corporation (collectively referred to as the Company or
Mellanox), were incorporated and commenced operations in March 1999. Mellanox is a leading
supplier of end-to-end connectivity solutions for data center servers and storage.
Principles of presentation
The condensed consolidated financial statements included in this quarterly report on Form 10-Q
have been prepared by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, or the SEC. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures contained in this quarterly report
comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended,
for a quarterly report on Form 10-Q and are adequate to make the information presented not
misleading. The condensed consolidated financial statements included herein reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of management, necessary for
a fair statement of the financial position, results of operations and cash flows for the interim
periods presented. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Companys 2008 annual
report on Form 10-K dated March 12, 2009. The results of operations for the six months ended June
30, 2009 are not necessarily indicative of the results to be anticipated for the entire year ending
December 31, 2009 or thereafter.
The Company has evaluated subsequent events through August 5, 2009, the date the financial
statements were issued.
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 material adverse impact on the Companys financial position and results of operations:
unpredictable volume or timing of customer orders; the sales outlook and purchasing patterns of the
Companys customers, based on consumer demands and general economic conditions; loss of one or more
of the Companys customers; decreases in the average selling prices of products or increases in the
average cost of finished goods; the availability, pricing and timeliness of delivery of components
used in the Companys products; reliance on a limited number of subcontractors to manufacture,
assemble, package and production test the Companys products; the Companys ability to successfully
develop, introduce and sell new or enhanced products in a timely manner; product obsolescence and
the Companys ability to manage product transitions; and the timing of announcements or
introductions of new products by the Companys competitors.
Additionally, the Company has a significant presence in Israel, including research and
development activities, corporate facilities and sales support operations. Uncertainty surrounding
the political, economic and military conditions in Israel may directly impact the Companys
financial results.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of net revenues and expenses in the reporting
period. 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, litigation and other loss contingencies. These
estimates and
6
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 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.
Significant Accounting Policies
There have been no changes in our significant accounting policies that were disclosed in our
annual report on Form 10-K for the fiscal year ended December 31, 2008.
Concentration of credit risk
The following table summarizes the revenues from customers (including original equipment
manufacturers) in excess of 10% of the total revenues:
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2009 |
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2008 |
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2009 |
|
2008 |
Hewlett Packard |
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18 |
% |
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12 |
% |
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16 |
% |
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12 |
% |
Dell |
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14 |
% |
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* |
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10 |
% |
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* |
|
T-Platforms |
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13 |
% |
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* |
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|
* |
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* |
|
Supermicro Computer Inc. |
|
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11 |
% |
|
|
11 |
% |
|
|
13 |
% |
|
|
* |
|
Sun Microsystems |
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|
* |
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|
18 |
% |
|
|
* |
|
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|
11 |
% |
Q-Logic |
|
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* |
|
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|
14 |
% |
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|
* |
|
|
|
13 |
% |
At June 30, 2009, Hewlett Packard, T-Platforms and Dell accounted for 19%, 16% and 13%,
respectively, of the Companys total accounts receivable.
Product warranty
Changes in the Companys liability for product warranty during the six months ended June 30,
2009 and 2008 are as follows:
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|
Six Months Ended June 30, |
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|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Balance, beginning of the period |
|
$ |
997 |
|
|
$ |
704 |
|
New warranties issued during the period |
|
|
44 |
|
|
|
430 |
|
Settlements during the period |
|
|
(187 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
Balance, end of the period |
|
$ |
854 |
|
|
$ |
1,066 |
|
|
|
|
|
|
|
|
7
Net income per share
The following table sets forth the computation of basic and diluted net income per share for
the periods indicated:
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Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per share data) |
|
Net income |
|
$ |
1,744 |
|
|
$ |
4,590 |
|
|
$ |
3,860 |
|
|
$ |
9,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding |
|
|
31,967 |
|
|
|
31,328 |
|
|
|
31,895 |
|
|
|
31,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic net income per share |
|
|
31,967 |
|
|
|
31,328 |
|
|
|
31,895 |
|
|
|
31,208 |
|
Effect of dilutive securities ordinary share options |
|
|
1,187 |
|
|
|
1,641 |
|
|
|
1,091 |
|
|
|
1,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net income per share |
|
|
33,154 |
|
|
|
32,969 |
|
|
|
32,986 |
|
|
|
32,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary shareholders basic |
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.12 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to ordinary shareholders diluted |
|
$ |
0.05 |
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent accounting pronouncements
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets, or FSP 142-3. FSP 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, or SFAS 142. The
intent of FSP 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. We adopted FSP
142-3 effective January 1, 2009. The adoption of FSP 142-3 did not have a material impact on our
consolidated financial statements.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, or
SFAS 157, with respect to its financial assets and liabilities. In February 2008, the FASB issued
Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, or FSP 157-2, which
provided a one year deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, the Company adopted the provisions of SFAS
157 for non-financial assets and non-financial liabilities effective January 1, 2009. The adoption
of SFAS 157 for non-financial assets and non-financial liabilities did not have an impact on the
Companys consolidated results of operations or financial condition.
In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased
and Identifying Transactions That Are Not Orderly, or FSP 157-4, (ii) SFAS 115-2 and SFAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments, or FSP 115-2 and FSP 124-2, and
(iii) SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or
FSP 107 and APB 28-1, which will be effective for interim and annual periods ending after June 15,
2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities
under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair
value measurement remains an exit price. If we were to conclude that there has been a significant
decrease in the volume and level of activity of the asset or liability in relation to normal market
activities, quoted market values may not be representative of fair value and we may conclude that a
change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP
115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt
securities and revise the existing impairment model for such securities, by modifying the current
intent and ability indicator in determining whether a debt security is other-than-temporarily
impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157
for both interim and annual periods. The adoption of these Staff Positions did not have an impact
on the Companys consolidated financial statements.
Effective April 1, 2009, the Company adopted FSP FAS 115-2, Recognition and Presentation of
Other-Than-Temporary Impairments, or FSP FAS 115-2. FSP FAS 115-2 amends the other-than-temporary
impairment (OTTI) guidance in U.S. GAAP to make the guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements. Prior to FSP FAS
115-2, if OTTI was determined to exist, the Company recognized an OTTI charge into earnings in an
amount equal to the difference between the investments amortized cost basis and its fair value as
of the balance sheet date of the reporting period. Under FSP 115-2, if OTTI has been incurred, and
it is more-likely-than-not that the Company will not sell the investment security before the
recovery of its amortized cost basis, then the OTTI is separated into (a) the amount representing
the credit loss and (b) the amount related to all other factors. The amount of the total OTTI
related to the credit loss is recognized in earnings. The amount of the total OTTI related to other
factors is recognized in accumulated other comprehensive income (AOCI). The adoption of FSP FAS
115-2 did not have an impact on the Companys consolidated financial statements.
8
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, or SFAS 168. SFAS 168 represents the
last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and
amends the GAAP hierarchy established under SFAS 162. On July 1, 2009, the FASB launched FASBs new
Codification entitled The FASB Accounting Standards Codification. The Codification will supersede
all existing non-SEC accounting and reporting standards. SFAS 168 is effective in the first interim
and annual periods ending after September 15, 2009. This pronouncement will have no effect on our
unaudited condensed consolidated financial statements upon adoption other than current references
to GAAP which will be replaced with references to the applicable codification paragraphs.
NOTE 2 BALANCE SHEET COMPONENTS:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
12,734 |
|
|
$ |
33,357 |
|
Money market funds |
|
|
70,395 |
|
|
|
71,497 |
|
U.S. government agency discount notes |
|
|
|
|
|
|
5,299 |
|
|
|
|
|
|
|
|
|
|
$ |
83,129 |
|
|
$ |
110,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments: |
|
|
|
|
|
|
|
|
Commercial paper |
|
|
|
|
|
|
5,030 |
|
U.S. government agency discount notes |
|
|
83,422 |
|
|
|
62,951 |
|
U.S. Treasury bills |
|
|
24,135 |
|
|
|
|
|
Corporate notes |
|
|
|
|
|
|
8,173 |
|
|
|
|
|
|
|
|
Total investments in marketable securities |
|
|
107,557 |
|
|
|
76,154 |
|
Less amounts classified as cash equivalents |
|
|
|
|
|
|
(5,299 |
) |
|
|
|
|
|
|
|
|
|
$ |
107,557 |
|
|
$ |
70,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
19,793 |
|
|
$ |
23,676 |
|
Less: Allowance for doubtful accounts |
|
|
(259 |
) |
|
|
(277 |
) |
|
|
|
|
|
|
|
|
|
$ |
19,534 |
|
|
$ |
23,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
938 |
|
|
$ |
940 |
|
Work-in-process |
|
|
1,328 |
|
|
|
1,189 |
|
Finished goods |
|
|
4,139 |
|
|
|
4,611 |
|
|
|
|
|
|
|
|
|
|
$ |
6,405 |
|
|
$ |
6,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and other: |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ |
1,371 |
|
|
$ |
1,433 |
|
Federal taxes recoverable |
|
|
597 |
|
|
|
1,390 |
|
Interest receivable |
|
|
86 |
|
|
|
93 |
|
Forward contract receivable |
|
|
85 |
|
|
|
|
|
Other |
|
|
382 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
$ |
2,521 |
|
|
$ |
2,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Computer equipment and software |
|
$ |
27,181 |
|
|
$ |
27,321 |
|
Furniture and fixtures |
|
|
1,785 |
|
|
|
1,689 |
|
Leasehold improvements |
|
|
2,117 |
|
|
|
2,005 |
|
|
|
|
|
|
|
|
|
|
|
31,083 |
|
|
|
31,015 |
|
Less: Accumulated depreciation and amortization |
|
|
(21,662 |
) |
|
|
(20,629 |
) |
|
|
|
|
|
|
|
|
|
$ |
9,421 |
|
|
$ |
10,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long term assets: |
|
|
|
|
|
|
|
|
Equity investments in private companies |
|
$ |
1,000 |
|
|
$ |
1,000 |
|
Other |
|
|
165 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
$ |
1,165 |
|
|
$ |
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accrued liabilities: |
|
|
|
|
|
|
|
|
Payroll and related expenses |
|
$ |
4,548 |
|
|
$ |
6,568 |
|
Professional services |
|
|
2,662 |
|
|
|
2,407 |
|
Royalties |
|
|
90 |
|
|
|
103 |
|
Warranty |
|
|
854 |
|
|
|
997 |
|
Income tax payable |
|
|
127 |
|
|
|
398 |
|
Sales commissions |
|
|
478 |
|
|
|
517 |
|
Vendor withholding tax |
|
|
|
|
|
|
516 |
|
Advance payment from a customer |
|
|
|
|
|
|
1,925 |
|
Forward contract payable |
|
|
|
|
|
|
260 |
|
Other |
|
|
297 |
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
$ |
9,056 |
|
|
$ |
14,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations: |
|
|
|
|
|
|
|
|
Federal income tax payable |
|
$ |
1,260 |
|
|
$ |
1,143 |
|
Other |
|
|
717 |
|
|
|
547 |
|
|
|
|
|
|
|
|
|
|
$ |
1,977 |
|
|
$ |
1,690 |
|
|
|
|
|
|
|
|
9
NOTE 3 INVESTMENTS AND FAIR VALUE MEASUREMENTS:
Fair value hierarchy:
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 June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
70,395 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
70,395 |
|
Certificates of deposit |
|
|
|
|
|
|
504 |
|
|
|
|
|
|
|
504 |
|
U.S. government agency discount notes |
|
|
|
|
|
|
83,422 |
|
|
|
|
|
|
|
83,422 |
|
U.S. Treasury bills |
|
|
|
|
|
|
24,135 |
|
|
|
|
|
|
|
24,135 |
|
Derivative assets |
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets |
|
$ |
70,395 |
|
|
$ |
108,146 |
|
|
$ |
|
|
|
$ |
178,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Companys financial assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
71,497 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
71,497 |
|
Commercial papers |
|
|
|
|
|
|
5,030 |
|
|
|
|
|
|
|
5,030 |
|
Corporate notes |
|
|
|
|
|
|
8,173 |
|
|
|
|
|
|
|
8,173 |
|
U.S. 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 June 30, 2009 and December 31, 2008, the Company held short-term investments classified as
available-for-sale securities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
70,395 |
|
|
$ |
|
|
|
$ |
70,395 |
|
Certificates of deposit |
|
|
504 |
|
|
|
|
|
|
|
504 |
|
U.S. government agency discount notes |
|
|
83,289 |
|
|
|
133 |
|
|
|
83,422 |
|
U.S. Treasury bills |
|
|
23,999 |
|
|
|
136 |
|
|
|
24,135 |
|
|
|
|
|
|
|
|
|
|
|
Total investments in marketable securities |
|
|
178,187 |
|
|
|
269 |
|
|
|
178,456 |
|
Less amounts classified as cash equivalents |
|
|
(70,899 |
) |
|
|
|
|
|
|
(70,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
107,288 |
|
|
$ |
269 |
|
|
$ |
107,557 |
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains (Losses) |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Money market funds |
|
$ |
71,497 |
|
|
$ |
|
|
|
$ |
71,497 |
|
Commercial paper |
|
|
5,014 |
|
|
|
16 |
|
|
|
5,030 |
|
U.S. 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 |
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of short-tem investments at June 30, 2009 and December 31, 2008,
are due in one year or less.
NOTE 4 DERIVATIVES AND HEDGING ACTIVITIES:
The Company uses derivative instruments primarily to manage exposures to foreign currency. The
Company enters into forward contracts to manage its exposure to changes in the exchange rate of the
New Israeli Shekel (NIS) against the U.S. dollar. The Companys primary objective in entering
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 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
six months ended June 30, 2009 and 2008. As of June 30, 2009, the Company had forward contracts in
place that hedged future operating expenses of approximately 41.0 million NIS, or approximately
$10.5 million based upon the exchange rate as of June 30, 2009. The forward contracts cover future
NIS denominated operating expenses expected to occur over the next twelve months.
The Company does not use derivative financial instruments for purposes other than as 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 |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Foreign exchange contracts designated as cash flow hedges |
|
$ |
85 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
85 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
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 June 30, 2009 and December 31, 2008, and their impact on OCI for
the six months ended June 30, 2009 (in thousands):
|
|
|
|
|
December 31, 2008 |
|
$ |
(260 |
) |
Amount of loss recognized in OCI (effective portion) |
|
|
(494 |
) |
Amount of loss reclassified from OCI to income (effective portion) |
|
|
839 |
|
|
|
|
|
June 30, 2009 |
|
$ |
85 |
|
|
|
|
|
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
reclassified out of OCI. The Company expects to realize the accumulated OCI balance related to
foreign exchange contracts within the next twelve months.
Effect of Derivative Contracts on the Condensed Consolidated Statement of Operations
The impact of derivative contracts under SFAS 133 on total operating expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(In thousands) |
Loss on foreign exchange contracts designated as cash flow hedges |
|
$ |
312 |
|
|
$ |
|
|
|
$ |
839 |
|
|
$ |
|
|
NOTE 5 COMMITMENTS AND CONTINGENCIES:
Leases
As of June 30, 2009, future minimum lease payments under non-cancelable operating and capital
leases, and future minimum sublease rental receipts under non-cancelable operating leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
Year Ended December 31, |
|
Leases |
|
|
Leases |
|
|
|
(In thousands) |
|
2009 |
|
$ |
87 |
|
|
$ |
1,724 |
|
2010 |
|
|
528 |
|
|
|
2,906 |
|
2011 |
|
|
316 |
|
|
|
2,398 |
|
2012 |
|
|
158 |
|
|
|
1,318 |
|
2013 |
|
|
|
|
|
|
1,058 |
|
|
|
|
|
|
|
|
Total minimum lease payments and sublease income |
|
$ |
1,089 |
|
|
$ |
9,404 |
|
|
|
|
|
|
|
|
|
Less: Amount representing interest |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations |
|
|
1,082 |
|
|
|
|
|
Less: Current portion |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service commitments
At June 30, 2009, the Company had non-cancelable commitments of $1.6 million, $1.4 million of
which is expected to be paid within 2009 and $0.2 million in 2010 and beyond.
12
Purchase commitments
At June 30, 2009, the Company had non-cancelable purchase commitments of $10.4 million
expected to be paid within one year. As of June 30, 2009, the Company had no non-cancelable
purchase commitments with suppliers beyond one year.
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 6 SHAREHOLDERS EQUITY:
Comprehensive income
The components of comprehensive income, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net income |
|
$ |
1,744 |
|
|
$ |
4,590 |
|
|
$ |
3,860 |
|
|
$ |
9,227 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on available-for-sale securities |
|
|
13 |
|
|
|
(214 |
) |
|
|
(72 |
) |
|
|
(83 |
) |
Change in unrealized gains on derivative contracts |
|
|
1,166 |
|
|
|
|
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
2,923 |
|
|
$ |
4,376 |
|
|
$ |
4,133 |
|
|
$ |
9,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 SHARE INCENTIVE PLANS:
The Company has four share incentive plans: the 1999 United States Equity Incentive Plan, 1999
Israeli Share Option Plan and 2003 Israeli Share Option Plan (collectively, the Prior Plans) and
the 2006 Global Share Incentive Plan (the Global Plan). The Global Plan was adopted by our board of
directors in October 2006, approved by our shareholders in December 2006 and became effective on
February 6, 2007. Upon the effectiveness of the Global Plan, all Prior Plans were replaced by the
Global Plan and a total of 3,554,044 of the Companys ordinary shares were reserved for issuance
under this plan. The number of ordinary shares reserved for issuance under the Global Plan will
increase automatically on the first day of each fiscal year by a number of ordinary shares equal to
the least of: (i) 2% of ordinary shares outstanding on a fully diluted basis on such date, (ii)
685,714 ordinary shares or (iii) a smaller number determined by our board of directors. Pursuant to
this provision, effective as of January 1, 2009, the Companys board of directors approved an
increase of 685,714 ordinary shares reserved for issuance under the Global Plan. In any event, the
maximum aggregate number of ordinary shares that may be issued or transferred under the Global Plan
during the term of the Global Plan may in no event exceed 15,474,018 ordinary shares.
The following table summarizes the activity under the Global Plan during the six months ended
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Shares |
|
|
Number |
|
|
Average |
|
|
|
Available |
|
|
of |
|
|
Exercise |
|
|
|
for Grant |
|
|
Shares |
|
|
Price |
|
Outstanding at December 31, 2008 |
|
|
718,072 |
|
|
|
6,928,619 |
|
|
$ |
10.20 |
|
Ordinary shares added to plan |
|
|
685,714 |
|
|
|
|
|
|
|
|
|
Options granted (1) |
|
|
(2,408,389 |
) |
|
|
2,408,389 |
|
|
$ |
10.14 |
|
Options exercised |
|
|
|
|
|
|
(146,103 |
) |
|
$ |
2.43 |
|
Options canceled (1) |
|
|
2,481,604 |
|
|
|
(2,481,604 |
) |
|
$ |
17.28 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
1,477,001 |
|
|
|
6,709,301 |
|
|
$ |
7.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of options granted and canceled includes options granted and canceled in
connection with the share option exchange program (see below). |
13
The weighted average fair value of options granted was $7.83 and $8.84 for the three months
ended June 30, 2009 and 2008, respectively, and $7.58 and $8.76 for the six months ended June 30,
2009 and 2008, respectively.
The total pretax intrinsic value of options exercised in the six months ended June 30, 2009
and 2008 was $1.1 million and $5.7 million, respectively. 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. As of June 30, 2009, options to purchase 6,709,301 shares were
outstanding with a weighted-average exercise price of $7.70 per share and a weighted-average
remaining contractual term of 7.5 years. Based on the closing price of our ordinary shares of
$12.03 on June 30, 2009, the total pretax intrinsic value of all outstanding options was $30.1
million. As of June 30, 2009, options to purchase 2,779,595 shares were exercisable, out of which
options to purchase 2,709,145 shares were fully vested and options to purchase 70,450 shares were
unvested but exercisable. The total pretax intrinsic value of exercisable options at June 30, 2009
was $20.2 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, or offering periods, with
their accumulated payroll deductions. 571,428 shares were initially reserved for issuance pursuant
to purchase rights under the ESPP. A participant may contribute up to 15% of his or her
compensation through payroll deductions, and the accumulated deductions are 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 is 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. In addition, the number of ordinary shares reserved under our ESPP will
increase automatically on the first day of each fiscal year during the term, beginning in 2008, by
a number of ordinary shares equal to the least of (i) 0.5% of the total number of ordinary shares
outstanding on a fully diluted basis on the date of the increase, (ii) 171,428 shares, or (iii) a
smaller number of shares as determined by our board of directors. For fiscal year 2009, our board
of directors elected not to increase the number of shares reserved for issuance under our ESPP. The
maximum aggregate number of ordinary shares that may be issued over the term of the ESPP may not
exceed 2,114,285 ordinary 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 six months ended June 30, 2009, 100,763 shares were issued under this
plan at an average per share price of $7.01. At June 30, 2009, 248,180 shares were available for
future issuance under the ESPP.
Share option exchange program
In April 2009, we completed an offer to exchange certain employee share options issued under
the Global Plan. The option exchange program allowed eligible employees, contractors and employees
of Mellanox Technologies, Ltd and its majority-owned subsidiary to exchange their outstanding
options that had an exercise price greater than $13.65 per share for a lesser number of options
calculated in accordance with exchange ratios. The ratios were determined using the Black-Scholes
option pricing model based on, among other things, the closing price of our ordinary shares as
quoted on The Nasdaq Global Select Market on March 16, 2009 and the exercise prices of the options
eligible for exchange. The exchange ratios used were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Subject to |
|
|
|
|
Shares Subject to Option |
|
Replacement Option |
Exercise Price Range |
|
Surrendered |
|
Granted |
$ |
13.66 to $16.99 |
|
|
|
1.10 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
$17.00 and above |
|
|
1.21 |
|
|
|
1 |
|
Pursuant to the program, 255 eligible participants tendered, and we accepted for exchange,
options to purchase an aggregate of 2,340,334 ordinary shares, representing approximately 96% of
the total underlying shares subject to options that were eligible to be exchanged. Options granted
pursuant to the exchange program have an exercise price of $10.23 per share, which was the closing
price of Mellanoxs stock as reported by the Nasdaq Global Select Market on April 22, 2009.
For options originally granted in 2007, the replacement options granted in the option exchange
program will vest as follows: one-third (1/3) of the options replaced will vest and become
exercisable on the one-year anniversary of the replacement grant date, with the remaining shares
vesting and becoming exercisable in equal monthly increments over the 24 months following the first
anniversary of the replacement grant date. For options originally granted in 2008, the replacement
options will vest as follows: one-fourth (1/4) of the shares subject to each replacement option
will vest and become exercisable on the one-year anniversary of the replacement grant
14
date, with the remaining shares vesting and becoming exercisable in equal monthly increments over
the 36 months following the first year anniversary of the replacement grant date.
A modification charge resulting from the share option exchange program was immaterial and was
recognized in the three months ended June 30, 2009.
Share-based compensation
The following weighted average assumptions are used to value share options and ESPP shares
granted in connection with the Companys share incentive plans for the six months ended June 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Share |
|
Employee Share |
|
|
Options |
|
Purchase Plan |
|
|
Six Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Dividend yield, % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility, % |
|
|
63.0 |
|
|
|
59.0 |
|
|
|
60.7 |
|
|
|
52.9 |
|
Risk free interest rate, % |
|
|
2.68 |
|
|
|
3.17 |
|
|
|
0.10 |
|
|
|
2.68 |
|
Expected life, years |
|
|
6.08 |
|
|
|
6.25 |
|
|
|
0.53 |
|
|
|
0.50 |
|
Estimated forfeiture rate, % |
|
|
8.46 |
|
|
|
8.20 |
|
|
|
|
|
|
|
|
|
The Company estimates the fair value of the options as of the date of grant using the
Black-Scholes valuation model and applies the straight-line method to attribute share-based
compensation expense. For the three and six months ended June 30, 2009, the Company recorded
share-based compensation expense for employees and non-employees totaling approximately $2,229,000
and $4,553,000, respectively, compared to approximately $2,037,000 and $3,911,000, respectively,
for the three and six months ended June 30, 2008.
The following table summarizes the distribution of total share-based compensation expense in
the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
66 |
|
|
$ |
49 |
|
|
$ |
136 |
|
|
$ |
97 |
|
Research and development |
|
|
1,316 |
|
|
|
1,259 |
|
|
|
2,673 |
|
|
|
2,446 |
|
Sales and marketing |
|
|
434 |
|
|
|
457 |
|
|
|
904 |
|
|
|
835 |
|
General and administrative |
|
|
413 |
|
|
|
272 |
|
|
|
840 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,229 |
|
|
$ |
2,037 |
|
|
$ |
4,553 |
|
|
$ |
3,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009, there was $24.3 million of total unrecognized share-based compensation costs
related to non-vested share-based compensation arrangements. The costs are expected to be
recognized over a weighted average period of 3.02 years.
NOTE 8 INCOME TAXES:
As of June 30, 2009 and December 31, 2008, the Company had unrecognized tax benefits of
$1,976,000 and $1,714,000, respectively. It is the Companys policy to classify accrued interest
and penalties as part of the unrecognized tax benefits, or tax contingencies, and record the
expense in the provision for income taxes. As of June 30, 2009, the amount of accrued interest and
penalties totaled $95,000. As of June 30, 2009, calendar years 2004 through 2008 were open and
subject to potential examination in one or more jurisdictions. The Company is not currently under
federal, state or foreign income tax examination.
Our effective tax rate is highly dependent upon the geographic distribution of our worldwide
earnings or losses, the tax regulations and tax holiday benefits in Israel, and the effectiveness
of our tax planning strategies. Our effective tax rates were 37.9% and 36.0% for the three and six
months ended June 30, 2009, respectively, and 37.5% and 34.9% for the three and six months ended
June 30, 2008, respectively. The difference between our effective tax rates and the 35% federal
statutory rate resulted primarily from non-tax-deductible expenses such as stock-based compensation
expense and accrual of unrecognized tax benefits, interest and penalties associated with
unrecognized tax positions, offset by foreign earnings taxed at rates lower than the federal
statutory rate. The application of income tax law is inherently complex. Laws and regulations in
this area are voluminous and are often ambiguous and
15
the Company is required to make many subjective assumptions and judgments regarding its income
tax exposures. In addition, interpretations of and guidance surrounding income tax laws and
regulations are subject to change over time. Any changes in our subjective assumptions and
judgments could materially affect amounts recognized in the consolidated balance sheets and
statements of income.
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition as of June 30, 2009 and
results of operations for the three and six months ended June 30, 2009 and June 30, 2008 should be
read together with our financial statements and related notes included elsewhere in this report.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not limited to those set
forth under the section entitled Risk Factors in Part II, Item 1A of this report. We urge you not
to place undue reliance on these forward-looking statements, which speak only as of the date of
this report. All forward-looking statements included in this report are based on information
available to us on the date of this report, and we assume no obligation to update any
forward-looking statements contained in this report. Quarterly financial results may not be
indicative of the financial results of future periods.
Overview
General
We are a leading supplier of semiconductor-based, high-performance connectivity products that
facilitate efficient data transmission between servers, communications infrastructure equipment and
storage systems. Our products are an integral part of a total solution focused on computing,
storage and communication applications used in enterprise data centers, high-performance computing
and embedded systems. We are one of the pioneers of InfiniBand, an industry standard architecture
that provides specifications for high-performance interconnects. We believe we are the leading
supplier of field-proven InfiniBand-compliant semiconductor products that deliver industry-leading
performance and capabilities, which 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, as well as the evolving Fibre Channel over Ethernet and Converged Enhanced Ethernet
interconnect specifications, which we believe provide unique product differentiation and
flexibility in connectivity that expands our total addressable market.
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, switch
ICs and gateway ICs, all of which are silicon devices that provide high performance connectivity.
We also offer adapter cards, switch systems and gateway systems that incorporate our respective
ICs. These ICs are added to servers, storage, and communication infrastructure equipment and
embedded systems by either integrating them directly on circuit boards or inserting adapter cards
into slots on the circuit board. We have 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. Growth in our
target markets is being driven by the need to improve the efficiency and performance of clustered
systems, as well as the need to significantly reduce the total cost of ownership.
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 change 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 relationships with these
customers. Conversely, our failure to forecast declining demand or shifts in product mix can result
in excess or obsolete inventory.
Recently, a decline in business and consumer confidence and increased unemployment have
contributed to increased volatility and diminished expectations for the global economy,
precipitated an economic slowdown and fears of a worldwide recession. If the economic climate in
the United States or abroad does not improve from its current condition or continues to
deteriorate, our customers
16
or potential customers could reduce or delay their purchases of our products, which would
adversely impact our revenues and our ability to manage inventory levels, the collection of
customer receivables and our profitability.
Revenues. We derive revenues from sales of our ICs, cards and switch systems. Revenues were
approximately $47.8 million for the six months ended June 30, 2009 compared to approximately $53.4
million for the six months ended June 30, 2008, representing a decrease of approximately 10%. To
date, we 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 39% and 36% of our
total revenues for the six months ended June 30, 2009 and 2008, respectively. The loss of one or
more of our principal customers or the reduction or deferral of purchases of our products by one of
these customers could cause our revenues to decline materially if we are unable to increase our
revenues from other customers.
Cost of revenues and gross profit. The cost of revenues consists primarily of the cost of
silicon wafers purchased from our foundry supplier, Taiwan Semiconductor Manufacturing Company, or
TSMC, costs associated with the assembly, packaging and production testing of our products by
Advanced Semiconductor Engineering, or ASE, outside processing costs associated with the
manufacture of our host channel adapters, or HCA cards, and switch systems by Flextronics,
royalties due to third parties, including the Office of the Chief Scientist of Israels Ministry of
Industry, Trade and Labor, or the OCS, and the Binational Industrial Research and Development
(BIRD) Foundation, warranty costs, excess and obsolete inventory costs and costs of personnel
associated with production management and quality assurance. In addition, after we purchase wafers
from our foundries, we also have the yield risk related with manufacturing these wafers into
semiconductor devices. Manufacturing yield is the percentage of acceptable product resulting from
the manufacturing process, as identified when the product is tested as a finished IC. If our
manufacturing yields decrease, our cost per unit increases, which could have a significant adverse
impact on our cost of revenues. We do not have long-term pricing agreements with TSMC and ASE.
Accordingly, our costs are subject to price fluctuations based on the cyclical demand for
semiconductors. As of December 31, 2008, we had concluded all our obligations in respect of
royalties payable to the OCS.
We purchase our inventory pursuant to standard purchase orders. We estimate that lead times
for delivery of our finished semiconductors from our foundry supplier and assembly, packaging and
production testing subcontractor are approximately three to four months, lead times for delivery
from our HCA card manufacturing subcontractors are approximately eight to ten weeks, and lead times
for delivery from our switch systems manufacturing subcontractor are approximately twelve weeks. We
build inventory based on forecasts of customer orders rather than the actual orders themselves. In
addition, as customers are increasingly seeking opportunities to reduce their lead times, we may be
required to increase our inventory to meet customer demand.
We expect our cost of revenues to increase over time as a result of the expected increase in
our sales volume. We expect our cost of revenues as a percentage of sales to increase in the future
as a result of a reduction in the average sale price of our products and a higher percentage of
revenue deriving from sales of HCA cards and switch systems, which generally yield lower gross
margins. This trend will depend on overall customer demand for our products, our product mix,
competitive product offerings and related pricing and our ability to reduce manufacturing costs.
Operational expenses
Research and development expenses. Our research and development expenses consist primarily of
salaries, share-based compensation and associated costs for employees engaged in research and
development, costs associated with computer aided design software tools, depreciation expense and
tape out costs. Tape out costs are expenses related to the manufacture of new products, including
charges for mask sets, prototype wafers, mask set revisions and testing incurred before releasing
new products. We anticipate these expenses will increase in future periods based on an increase in
personnel to support our product development activities and the introduction of new products. We
anticipate that our research and development expenses may fluctuate over the course of a year based
on the timing of our product tape outs.
We received grants from the OCS for several projects. Under the terms of these grants, if
products developed from an OCS-funded project generate revenue, we are required to pay a royalty of
4 to 4.5% of the net sales as soon as we begin to sell such products until 120% of the dollar value
of the grant plus interest at LIBOR is repaid. All of the grants we have received from the OCS have
resulted in IC products sold by us. We received no grants from the OCS during the years ended
December 31, 2008 and 2007, or the six months ended June 30, 2009. In total, we have received
grants from OCS in the amount of $2.8 million. In the six months ended June 30, 2008, we
recognized $261,000 of royalty expenses to the OCS. As of December 31, 2008, we had concluded all
our obligations in respect of royalties payable to the OCS.
17
The terms of OCS grants generally prohibit the manufacture of products developed with OCS
funding outside of Israel without the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel of our IC products, subject to an undertaking by us to pay the OCS
royalties on the sales of our OCS-supported products until such time as the total royalties paid
equal 120% of the amount of OCS grants.
Under applicable Israeli law, OCS consent is also required to transfer technologies developed
with OCS funding to third parties in Israel. Transfer of OCS-funded technologies outside of Israel
is permitted with the approval of the OCS and in accordance with the restrictions and payment
obligations set forth under Israeli law. Israeli law further specifies that both the transfer of
know-how as well as the transfer of intellectual property rights in such know-how is subject to the
same restrictions. These restrictions do not apply to exports of products from Israel or the sale
of products developed with these technologies.
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries,
share-based compensation and associated costs for employees engaged in sales, marketing and
customer support, commission payments to external, third party sales representatives, advertising,
and charges for tradeshows, 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. We expect the Approved Enterprise Tax Holiday associated with our Yokneam and Tel Aviv
operations to begin in 2011. The Yokneam Tax Holiday is expected to expire in 2020 and the Tel Aviv
Tax Holiday is expected to expire between 2015 and 2018.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and
assumptions on an ongoing basis. Our estimates are based on historical experience and various other
assumptions that we believe to be reasonable under the circumstances. Our actual results could
differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, allowance
for doubtful accounts, inventory valuation, warranty provision, income taxes and share-based
compensation have the greatest potential impact on our consolidated financial statements.
Therefore, we consider these to be our critical accounting policies and estimates. For further
information on all of our significant accounting policies, please see Note 1 of the accompanying
notes to our consolidated financial statements.
See our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on
March 12, 2009, for a discussion of additional critical accounting policies and estimates. We
believe there have been no significant changes in our critical accounting policies as compared to
what was previously disclosed in the annual report on Form 10-K for the year ended December 31,
2008.
18
Results of Operations
The following table sets forth our consolidated statements of operations as a percentage of
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of revenues |
|
|
(26 |
) |
|
|
(20 |
) |
|
|
(25 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
74 |
|
|
|
80 |
|
|
|
75 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
40 |
|
|
|
36 |
|
|
|
39 |
|
|
|
34 |
|
Sales and marketing |
|
|
16 |
|
|
|
14 |
|
|
|
16 |
|
|
|
14 |
|
General and administrative |
|
|
8 |
|
|
|
7 |
|
|
|
9 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
64 |
|
|
|
57 |
|
|
|
64 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
10 |
|
|
|
23 |
|
|
|
11 |
|
|
|
23 |
|
Other income, net |
|
|
1 |
|
|
|
3 |
|
|
|
2 |
|
|
|
3 |
|
Provision for taxes on income |
|
|
(4 |
) |
|
|
(10 |
) |
|
|
(5 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
7 |
% |
|
|
16 |
% |
|
|
8 |
% |
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008
Revenues. Revenues were approximately $25.3 million for the three months ended June 30, 2009
compared to approximately $28.2 million for the three months ended June 30, 2008, representing a
decrease of approximately 10%. This decrease in revenues resulted from decreased unit sales of
approximately 22% offset by an increase in average selling prices of 14%. The increase in average
selling prices was due to a change in product mix. Current quarter revenues attributable to switch
systems, which have higher average selling prices, increased by 369% compared to the same period
last year, and were offset by a decrease of 60% in revenues attributable to ICs which have lower
average selling prices. Current quarter revenues are not necessarily indicative of the results to
be anticipated for the entire year ending December 31, 2009 or thereafter.
Gross Profit and Margin. Gross profit was $18.7 million for the three months ended June 30,
2009 compared to $22.5 million for the three months ended June 30, 2008, representing a decrease of
17%. The decrease in absolute dollars of gross profit for the three months ended June 30, 2009 as
compared to the three months ended June 30, 2008 resulted primarily from a decrease of
approximately 10% in the current quarters net revenue. As a percentage of revenues, gross margin
decreased to 74.1% in the three months ended June 30, 2009 from 79.8% in the three months ended
June 30, 2008 primarily due to changes in the product mix.
Research and Development. Research and development expenses were approximately $10.1 million
in the three months ended June 30, 2009 compared to approximately $10.0 million in the three months
ended June 30, 2008, representing an increase of 1%. The increase consisted of approximately
$567,000 in new product expenses primarily associated with tape out mask sets, an increase in
software expenses of approximately $267,000, and an increase in share-based compensation of
approximately $134,000 primarily due to new option grants which were offset by a decrease in
employee related expenses of approximately $1.0 million associated with salary reductions, changes
in severance payables and lower employee bonus accruals. 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 approximately $4.0 million for the
three months ended June 30, 2009 compared to approximately $4.0 million for the three months ended
June 30, 2008. While there was no material change in total quarterly expenses, there was a
decrease in external sales commissions of approximately $270,000 primarily due to lower sales which
were offset by higher facility related expenses of $114,000 and an increase in equipment expense of
$110,000 associated with customer evaluation equipment.
For a further discussion of share-based compensation included in sales and marketing expense,
see Share-based compensation expense below.
19
General and Administrative. General and administrative expenses were approximately $2.0
million for the three months ended June 30, 2009 compared to approximately $2.1 million for the
three months ended June 30, 2008, representing a decrease of 5%. The decrease was due to lower
employee related expenses of $197,000, partially offset by an increase in depreciation expense of
$88,000 associated with leasehold improvements at the companys new offices in Sunnyvale,
California, and an increase in share based compensation expense of approximately $84,000.
For a further discussion of share-based compensation included in general and administrative
expense, see Share-based compensation expense below.
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
approximately $197,000 for the three months ended June 30, 2009 compared to $941,000 for the three
months ended June 30, 2008, representing a decrease of 79%. Other income, net for the three months
ended June 30, 2009, consisted of interest income of approximately $310,000, partially offset by
foreign exchange losses of $113,000. Other income, net for the three months ended June 30, 2008
consisted of interest income of $941,000. The decrease in interest income resulted from lower
average interest rates paid on investments.
Provision for Taxes on Income. Provision for taxes on income was approximately $1.1 million
for the three months ended June 30, 2009 compared to $2.8 million for the three months ended June
30, 2008. The decrease was primarily the result of a lower utilization of certain deferred tax
assets related to net operating losses in Israel that are currently expected to be utilized before
the Approved Enterprise Tax Holiday begins in 2009. Our effective tax rates were 37.9% and 37.5%
for the three months ended June 30, 2009 and 2008, respectively. The difference between our
effective tax rates and the 35% federal statutory rate resulted primarily from non-tax-deductible
expenses such as stock-based compensation expense and accrual of unrecognized tax benefits,
interest and penalties associated with unrecognized tax positions.
Comparison of the Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008
Revenues. Revenues were approximately $47.8 million for the six months ended June 30, 2009
compared to approximately $53.4 million for the six months ended June 30, 2008, representing a
decrease of 10%. This decrease in revenues consisted of a decline in unit sales of approximately
14% and an increase in average sales prices of 5%. The increase in average selling prices was due
to a change in product mix. Year-to-date revenues attributable to switch systems, which have
higher average selling prices, increased by 334% compared to the same period last year, and were
partially offset by decreases of 35% and 18% in revenues attributable to ICs and HCAs,
respectively. Year-to-date revenues are not necessarily indicative of the results to be anticipated
for the entire year ending December 31, 2008 or thereafter.
Gross Profit and Margin. Gross profit was approximately $35.9 million for the six months ended
June 30, 2009 compared to approximately $41.7 million for the six months ended June 30, 2008,
representing a decrease of 13.8%. The decrease in absolute dollars of gross profit resulted
primarily from lower revenues of approximately 10% for the six months ended June 30, 2009 compared
to the six months ended June 30, 2008. As a percentage of revenues, gross margin decreased to
75.1% for the six months ended June 30, 2009 from 78.2% for the six months ended June 30, 2008
primarily due to changes in product mix.
Research and Development. Research and development expenses were approximately $18.7 million
in the six months ended June 30, 2009 compared to approximately $18.3 million in the six months
ended June 30, 2008, representing an increase of 3%. The increase consisted of higher new product
expenses of approximately $870,000 primarily due to tape out mask sets, an increase in share-based
compensation expense of approximately $376,000, an increase in software expenses of approximately
$342,000 and an increase in depreciation of approximately $154,000, partially offset by lower
employee related expenses of $1.2 million associated with salary reductions, related employee tax
and benefits and lower bonus accruals.
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 approximately $7.7 million for the six
months ended June 30, 2009 compared to approximately $7.4 million for the six months ended June 30,
2008, representing an increase of approximately 5%. The
20
increase was attributable to higher facility related expenses of approximately $236,000, an
increase in equipment related expenses of approximately $203,000 primarily associated with customer
evaluation equipment, an increase in other expenses of approximately $120,000 primarily associated
with funded educational research and marketing design work and an increase in employee related
expenses of $101,000 primarily due to additional headcount, partially offset by a decrease in
external sales commission expenses of $313,000 associated with lower sales.
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 approximately $4.2
million for the six months ended June 30, 2009 compared to approximately $3.9 million for the six
months ended June 30, 2008, representing an increase of 7%. The increase was due to higher facility
related expenses of approximately $190,000 associated with higher rent, an increase in legal
expenses of approximately $188,000 primarily due to the option exchange program and an increase in
share-based compensation of approximately $185,000, partially offset by a decrease in other
expenses of approximately $304,000 primarily associated with lower employees related and bad debt
expense.
For a further discussion of share-based compensation included in general and administrative
expense, see Share-based compensation expense below.
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 operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Cost of goods sold |
|
$ |
66 |
|
|
$ |
49 |
|
|
$ |
136 |
|
|
$ |
97 |
|
Research and development |
|
|
1,316 |
|
|
|
1,259 |
|
|
|
2,673 |
|
|
|
2,446 |
|
Sales and marketing |
|
|
434 |
|
|
|
457 |
|
|
|
904 |
|
|
|
835 |
|
General and administrative |
|
|
413 |
|
|
|
272 |
|
|
|
840 |
|
|
|
533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,229 |
|
|
$ |
2,037 |
|
|
$ |
4,553 |
|
|
$ |
3,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009, there was $24.3 million of total unrecognized share-based compensation costs
related to non-vested share-based compensation arrangements. The costs are expected to be
recognized over a weighted average period of 3.02 years.
Other Income, net. Other income, net consists of interest earned on cash and cash equivalents
and foreign currency exchange gains and losses. Other income, net was approximately $739,000 for
the six months ended June 30, 2009 compared to approximately $1,984,000 for the six months ended
June 30, 2008, representing a decrease of 63%. Other income, net for the six months ended June 30,
2009, consisted of interest income of approximately $705,000 and foreign exchange gains of $34,000.
Other income, net for the six months ended June 30, 2008, consisted of interest income of
$2,345,000, partially offset by foreign exchange losses of $361,000. The decrease in interest
income of approximately $1,640,000 resulted fromlower average interest rates paid on
investments.
Provision for Taxes on Income. Provision for taxes on income was approximately $2.2 million
for the six months ended June 30, 2009 compared to approximately $4.9 million for the six months
ended June 30, 2008. The decrease was primarily the result of a lower utilization of certain
deferred tax assets related to net operating losses in Israel that are currently expected to be
utilized before the Approved Enterprise Tax Holiday begins in 2009. Our effective tax rates were
36.0% and 34.9% for the six months ended June 30, 2009 and 2008, respectively. The difference
between our effective tax rates and the 35% federal statutory rate resulted primarily from
non-tax-deductible expenses such as stock-based compensation expense and accrual of unrecognized
tax benefits, interest and penalties associated with unrecognized tax positions, offset by foreign
earnings taxed at rates lower than the federal statutory rate.
21
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 June 30, 2009, our principal source of
liquidity consisted of cash and cash equivalents of approximately $83.1 million and short-term
investments of approximately $107.6 million. We expect that our current cash and cash equivalents
and short-term investments and our cash flows from operating activities will be sufficient to fund
our operations over the next twelve 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 provided by operating activities was approximately $11.3 million and $13.5 million in
the six months ended June 30, 2009 and 2008, respectively. Net cash provided by operating
activities in the six months ended June 30, 2009 was primarily attributable to net income of
approximately $3.9 million adjusted for non-cash items including $4.6 million for share based
compensation, $2.2 million for depreciation and amortization and $1.5 million for the utilization
of deferred taxes. Furthermore, net cash provided by operating activities was increased by a
reduction in accounts receivable of approximately $3.9 million due to better collections, offset by
a decrease of approximately $4.2 million in accrued liabilities and other payables due to a
reduction in payroll related accrued liabilities and refund of a customer credit balance.
Net cash provided by operating activities in the six months ended June 30, 2008 was primarily
attributable to net income of approximately $9.2 million adjusted for non-cash items including $5.1
million for the utilization of deferred taxes, $3.9 million for share-based compensation and $1.8
million for depreciation and amortization, partially offset by gains on sale of investments of $1.5
million. Furthermore, net cash provided by operating activities was reduced by an increase in
accounts receivables, net of approximately $4.4 million due to an increase in the percentage of
sales shipped later in the quarter and a decrease of approximately $1.1 million in accounts
payable, and was partially offset by a decrease of approximately $1.8 million in accrued
liabilities primarily associated with payroll related items.
Investing Activities
Net cash used in investing activities was approximately $38.9 million in the six months ended
June 30, 2009 and approximately $40.9 million in the six months ended June 30, 2008. Net cash used
in investing activities in the six months ended June 30, 2009 was primarily attributable to
purchases of short term investments of $107.4 million and purchases of property and equipment of
$1.2 million, and was partially offset by the maturities and sales of short term investments of
$70.9 million.
Net cash used in investing activities in the six months ended June 30, 2008 of approximately
$40.9 million was primarily attributable to purchases of short-term investments of approximately
$136.6 million, purchases of property and equipment of $1.6 million and an investment in preferred
stock of a private company of $1.5 million, partially offset by maturities and sales of short-term
investments of approximately $99.8 million.
Financing Activities
Our financing activities provided approximately $679,000 in the six months ended June 30,
2009, primarily due to proceeds from share option exercises and ESPP purchases of $1.1 million
partially offset by principal payments on capital lease obligations of $385,000. Our financing
activities provided approximately $596,000 in the six months ended June 30, 2008, primarily due to
proceeds from share option exercises of $2.1 million, partially offset by principal payments on
capital lease obligations of $1.5 million.
Off-Balance Sheet Arrangements
As of June 30, 2009, we did not have any off-balance sheet arrangements.
22
Contractual Obligations
The following table summarizes our contractual obligations at June 30, 2009, and the effect
those obligations are expected to have on our liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
Beyond |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3 Years |
|
|
|
(In thousands) |
|
Commitments under capital lease |
|
$ |
1,089 |
|
|
$ |
457 |
|
|
$ |
632 |
|
|
$ |
|
|
Non-cancelable operating lease commitments |
|
|
9,404 |
|
|
|
3,147 |
|
|
|
4,506 |
|
|
|
1,751 |
|
Service commitments |
|
|
1,630 |
|
|
|
1,414 |
|
|
|
215 |
|
|
|
|
|
Purchase commitments |
|
|
10,446 |
|
|
|
10,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,569 |
|
|
$ |
15,464 |
|
|
$ |
5,353 |
|
|
$ |
1,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of this table, purchase obligations for the purchase of goods or services are
defined as agreements that are enforceable and legally binding and that specify all significant
terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Our purchase orders are based on our
current manufacturing needs and are fulfilled by our vendors within short time horizons. In
addition, we have purchase orders that represent authorizations to purchase rather 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 June 30, 2009, our unrecognized tax
benefits totaled approximately $1,976,000, which would reduce our income tax expense and effective
tax rate, if recognized.
Recent Accounting Standards
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets, or FSP 142-3. FSP 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, or SFAS 142. The
intent of FSP 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. We adopted FSP
142-3 effective January 1, 2009. The adoption of FSP 142-3 did not have a material impact on our
consolidated financial statements.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, or
SFAS 157, with respect to its financial assets and liabilities. In February 2008, the FASB issued
Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, or FSP 157-2, which
provided a one year deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore, the Company adopted the provisions of SFAS
157 for non-financial assets and non-financial liabilities effective January 1, 2009. The Adoption
of SFAS 157 for non-financial assets and non-financial liabilities did not have an impact on the
Companys consolidated results of operations or financial condition.
In April 2009, the FASB issued three related Staff Positions: (i) FSP 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased
and Identifying Transactions That Are Not Orderly, or FSP 157-4, (ii) SFAS 115-2 and SFAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments, or FSP 115-2 and FSP 124-2, and
(iii) SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or
FSP 107 and APB 28-1, which will be effective for interim and annual periods ending after June 15,
2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities
under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair
value measurement remains an exit price. If we were to conclude that there has been a significant
decrease in the volume and level of activity of the asset or liability in relation to normal market
activities, quoted market values may not be representative of fair value and we may conclude that a
change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP
115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt
securities and revise the existing impairment model for such securities, by modifying the current
intent and ability indicator in determining whether a debt security is other-than-temporarily
impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157
for both interim and annual periods. We are currently evaluating these Staff Positions.
23
Effective April 1, 2009, the Company adopted FSP FAS 115-2, Recognition and Presentation of
Other-Than-Temporary Impairments, or FSP FAS 115-2. FSP FAS 115-2 amends the other-than-temporary
impairment (OTTI) guidance in U.S. GAAP to make the guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements. Prior to FSP FAS
115-2, if OTTI was determined to exist, the Company recognized an OTTI charge into earnings in an
amount equal to the difference between the investments amortized cost basis and its fair value as
of the balance sheet date of the reporting period. Under FSP 115-2, if OTTI has been incurred, and
it is more-likely-than-not that the Company will not sell the investment security before the
recovery of its amortized cost basis, then the OTTI is separated into (a) the amount representing
the credit loss and (b) the amount related to all other factors. The amount of the total OTTI
related to the credit loss is recognized in earnings. The amount of the total OTTI related to other
factors is recognized in accumulated other comprehensive income (AOCI). The adoption of FSP FAS
115-2 did not have an impact on the Companys consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, or SFAS 168. SFAS 168 represents the
last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and
amends the GAAP hierarchy established under SFAS 162. On July 1, 2009, the FASB launched FASBs new
Codification entitled The FASB Accounting Standards Codification. The Codification will supersede
all existing non-SEC accounting and reporting standards. SFAS 168 is effective in the first interim
and annual periods ending after September 15, 2009. This pronouncement will have no effect on our
unaudited condensed consolidated financial statements upon adoption other than current references
to GAAP which will be replaced with references to the applicable codification paragraphs.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate fluctuation risk
We do not have any long-term borrowings. Our investments consist of cash and cash equivalents,
short-term deposits 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% increase in the
U.S. dollar exchange rates against NIS, the impact on assets and liabilities
24
denominated in currencies other than the U.S. dollar, after taking into account hedges and
offsetting positions, would result in a gain before taxes of approximately $35,000 at June 30,
2009. There would also be an impact on future operating expenses denominated in currencies other
than the U.S. dollar. At June 30, 2009, approximately $2.0 million of our monthly operating
expenses were denominated in NIS. As of June 30, 2009, the Company had forward contracts in place
that hedged future operating expenses of approximately 41.0 million NIS, or approximately $10.5
million based upon the exchange rate as of June 30, 2009. The forward contracts cover a percentage
of our 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.
ITEM 4 CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and that such information
is accumulated and communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of the end of the period covered by this quarterly report on Form 10-Q. Based on the foregoing,
our chief executive officer and chief financial officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.
There has been no change in our internal control over financial reporting during our most
recent quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings.
ITEM 1A RISK FACTORS
Investing in our ordinary shares involves a high degree of risk. You should carefully consider
the following risk factors, in addition to the other information set forth in this report, before
purchasing our ordinary shares. Each of these risk factors could harm our business, financial
condition or operating results, as well as decrease the value of an investment in our ordinary
shares.
There have been no material changes from risk factors previously disclosed in our annual
report on Form 10-K for the year ended December 31, 2008, except for the following:
Risks Related to Our Business
We may not sustain or increase profitability in the future.
Although we recorded a profit in the years ended December 31, 2006, 2007, 2008 and the six
months ended June 30, 2009, we had an accumulated deficit of approximately $7.5 million as of June
30, 2009. 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
25
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 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. For the
three months ended June 30, 2009, sales to Hewlett-Packard, Dell, T-Platforms, and Super Micro
Computers accounted for 18%, 14%, 13% and 11%, respectively, of our total revenues. For the year
ended December 31, 2008, sales to Hewlett-Packard, Sun Microsystems and QLogic Corporation
accounted for 19%, 17% and 11%, respectively, of our total revenues. Because the majority of
servers, storage, communications infrastructure equipment and embedded systems are sold by a
relatively small number of vendors, we expect that we will continue to depend on a small number of
customers to account for a significant percentage of our revenues for the foreseeable future. Our
customers, including our most significant customers, are not obligated by long-term contracts to
purchase our products and may cancel orders with limited potential penalties. If any of our large
customers reduces or cancels its purchases from us for any reason, it could have an adverse effect
on our revenues and results of operations.
We 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 June 30, 2009, we had
18 issued patents and 29 patent applications pending in the United States, 5 issued patents in
Taiwan, and 4 patent applications pending and 2 patents issued 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.
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, corporate and sales support operations and, as of June 30,
2009, we had 238 full-time and 36 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
26
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, the majority of 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.
We are susceptible to additional risks from our international operations.
We derived 63% and 43% of our revenues in the six months ended June 30, 2009 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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variances and unexpected changes in local laws and regulations. |
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
27
throughout the world to market and sell our products in those countries and surrounding
regions. If we encounter any of the above risks in our international operations, we could
experience slower than expected revenue growth and our business could be harmed.
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) was 3.8%, 3.4% and (0.1)% for the years ended
December 31, 2008, 2007 and 2006, respectively, and was 2.1% and 2.4% in the six months ended June
30, 2009 and 2008, respectively. The increase in value of the NIS against the U.S. dollar amounted
to 1.1%, 8.9% and 8.2% in the years ended December 31, 2008, 2007 and 2006, respectively. In the
six months ended June 30, 2009 the decrease in the value of the NIS against the U.S. dollar
amounted to 3.1%, and in the six months ended June 30, 2008 the increase in value of NIS against
the U.S. dollar amounted to 12.8%. 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 collection of receivables more difficult. To help
manage this risk, we have been engaged in foreign currency hedging activities. These measures,
however, may not adequately protect us from material adverse effects due to the impact of inflation
in Israel and changes in value of NIS against the U.S. dollar.
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 and slow or negative growth of related markets;
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28
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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. 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 is highly concentrated, and your interests may conflict with
the interests of our existing shareholders.
Our executive officers and directors and their affiliates, together with our current
significant shareholders, beneficially owned approximately 44% of our outstanding ordinary shares
as of June 30, 2009. Moreover, Fred Alger Management and Fidelity Management and Research
beneficially owned approximately 24% of our outstanding ordinary shares as of June 30, 2009.
Accordingly, these shareholders, acting as a group, have significant influence over the outcome of
corporate actions requiring shareholder approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets or any other significant corporate
transaction. These shareholders could delay or prevent a change of control of our company, even if
such a change of control would benefit our other shareholders. The significant concentration of
share ownership may adversely affect the trading price of our ordinary shares due to investors
perception that conflicts of interest may exist or arise.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
In June 2009, certain sales representatives exercised options to purchase 17,714 of
our ordinary shares pursuant to options that we had granted to each of them outside of our equity
incentive plans. As a result, we issued to these representatives 17,714 unregistered ordinary
shares and received proceeds of $20,584. The issuances of these securities were effected in
reliance on the exemption from the registration requirements of the Securities Act of 1933 afforded
by Section 4(2) thereof for the institutions residing in the United States and Regulation S thereof
for institutions residing outside of the United States. No underwriters were involved in the
foregoing issuance of securities.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2009 annual general meeting of shareholders on May 18, 2009. The following
summarizes the matters submitted to a vote of our shareholders at the meeting:
1. The election of each of the following nominees to serve on our Board of Directors until the
next annual general meeting of shareholders, or until their respective successors have been elected
and qualified, or until their earlier resignation or removal.
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For |
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Against |
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Abstain |
Eyal Waldman |
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26,784,861 |
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130,829 |
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4,590 |
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Irwin Federman |
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26,764,231 |
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151,410 |
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4,636 |
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Thomas Weatherford |
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26,786,822 |
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124,122 |
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9,334 |
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As of June 30, 2009, the Companys board of directors consisted of five members. Rob S.
Chandra retired from our board of directors effective May 18, 2009. A successor had not yet been
selected as of June 30, 2009. The other members of our board of directors, Amal M. Johnson and
Thomas J. Riordan, were elected at the 2007 annual general meeting of shareholders to serve as
outside directors, each for a three-year term until our annual general meeting of shareholders in
2010, or until their respective
29
successors have been elected and qualified, or until their earlier resignation or removal,
subject to and in accordance with the provisions of the Israel Companies Law, 1999. As a result,
neither Ms. Johnson nor Mr. Riordan were subject to re-election by our shareholders at this years
annual general meeting of shareholders, and continue in the office.
2. The approval of the cash bonus paid to Mr. Waldman on March 1, 2009 in the amount of
$162,500 for services rendered for the fiscal year ended December 31, 2008, pursuant to the
Companys annual discretionary cash bonus compensation program.
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For |
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Against |
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Abstain |
26,408,766
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217,308
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294,204 |
3. The approval of the amendment to the indemnification undertaking by and among the Company
and all of the Company office holders whom the Company has resolved to indemnify. The amendment to
the indemnification undertaking agreement limits the total amount of the Companys indemnification
obligation, jointly and in the aggregate, during the course of the Companys existence to 50% of
the Companys net assets, measured by the company last published balance sheet of the company prior
to the time that notice is provided to the Company of an indemnification event.
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For |
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Against |
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Abstain |
26,780,486
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38,020
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101,770 |
4. The approval of the amendment and restatement of the Mellanox Technologies, Ltd. Global Share
Incentive Plan (2006) to increase the number by which the ordinary shares reserved for issuance
under the 2006 Plan automatically increases on the first day of each fiscal year to the least of
(i) 3.75% of the ordinary shares outstanding on a fully diluted basis on the date of the
increase, (ii) 1,400,000, or (iii) a lesser amount determined by the board of directors, on or
before the date of increase.
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For |
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Against |
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Abstain |
9,127,258
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15,072,336
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18,701 |
5. The approval of the appointment of PricewaterhouseCoopers LLP as the independent registered
public accounting firm of Mellanox Technologies, Ltd. for the fiscal year ending December 31,
2009 and the authorization of the audit committee to determine the remuneration of
PricewaterhouseCoopers LLP.
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For |
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Against |
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Abstain |
26,857,125
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59,869
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3,285 |
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS
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3.1(1)
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Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008). |
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4.1(2)
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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. |
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4.2(3)
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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
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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
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Amended Form made by and between Mellanox Technologies, Ltd. and each of its directors and executive officers. |
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31.1
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Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of the Companys Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of the Companys Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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(1) |
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Incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K (SEC File No.001-33299)
filed on March 12, 2009. |
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(2) |
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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. |
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(3) |
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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. |
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 as of
the 5th day of August, 2009.
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Mellanox Technologies, Ltd.
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/s/ Michael Gray
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Michael Gray |
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Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) |
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31
Exhibit Index
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3.1 (1)
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Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008). |
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4.1 (2)
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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. |
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4.2 (3)
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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. |
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10.1
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Amended Form made by and between Mellanox Technologies, Ltd. and each of its directors and executive officers. |
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31.1
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Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of the Companys Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Companys Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K (SEC
File No.001-33299) filed on March 12, 2009. |
|
(2) |
|
Incorporated by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-1
(SEC File No.333-137659) filed on September 28, 2006. |
|
(3) |
|
Incorporated by reference to Exhibit 4.3 to the Companys Annual Report on Form 10-K (SEC
File No.001-33299) filed on March 26, 2007. |
32