Filed On 2/1/07 5:32pm ET · SEC File 333-137659 · Accession Number 891618-7-48
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
2/01/07 Mellanox Technologies/LTD S-1/A 6:303 Bowne of Palo Alto/FA
Pre-Effective Amendment to Registration Statement (General Form) · Form S-1
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2: EX-1.1 Underwriting Agreement HTML 122K
3: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 149K
4: EX-5.1 Opinion re: Legality HTML 12K
5: EX-23.3 Consent of Experts or Counsel HTML 4K
6: EX-23.4 Consent of Experts or Counsel HTML 5K
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 5
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MELLANOX TECHNOLOGIES,
LTD.
(Exact name of registrant as
specified in its charter)
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Israel
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3674
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98-0233400
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(State or other jurisdiction
of
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(Primary Standard
Industrial
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(I.R.S. Employer
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incorporation or
organization)
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Classification Code
Number)
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Identification Number)
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Mellanox Technologies, Ltd.
Hermon Building, Yokneam, Israel 20692
+972-4-909-7200
(Address, including zip code,
and telephone number,
including area code, of
registrant’s principal executive offices)
Michael Gray
Chief Financial Officer
Mellanox Technologies, Inc.
2900 Stender Way
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copies To:
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Alan C. Mendelson, Esq.
Mark V. Roeder, Esq.
Latham & Watkins LLP
140 Scott Drive
Menlo Park, California 94025
(650) 328-4600
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Barry P. Levenfeld, Adv.
Yigal Arnon & Co.
22 Rivlin Street
Jerusalem, Israel 94240
+972-2-623-9220
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Bruce A. Mann, Esq.
William W. Yeung, Esq.
Andrew D. Thorpe, Esq.
Theresa Ng, Esq.
Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
(415) 268-7000
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David S. Glatt, Adv.
Michael J. Rimon, Adv.
Meitar Liquornik Geva &
Leshem Brandwein
16 Abba Hillel Rd.
Ramat Gan, Israel 52506
+972-3-610-3100
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Approximate date of commencement of the proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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PRELIMINARY PROSPECTUS
6,000,000 Shares
Ordinary Shares
This is the initial public offering of our ordinary shares. We
are selling all of the ordinary shares being sold in this
offering. Prior to this offering, there has been no public
market for our ordinary shares. The initial public offering
price of our ordinary shares is expected to be between $12.00
and $14.00 per share. Our ordinary shares have been approved for
quotation on The Nasdaq Global Market under the symbol
“MLNX,” subject to official notice of issuance.
We have granted the underwriters an option to purchase up to
900,000 additional ordinary shares from us to cover the
over-allotment of shares.
Investing in our ordinary shares involves a high degree of
risk. See “Risk Factors” on page 7 of this
prospectus.
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Underwriting
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Proceeds, Before
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Price to
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Discounts and
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Expenses, to
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Public
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Commissions
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Mellanox
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Per Share
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$
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$
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$
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Total
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$
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$
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$
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The underwriters expect to deliver the ordinary shares on or
about ,
2007.
Neither the Securities and Exchange Commission nor any state
securities commission nor any other regulatory body has approved
or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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| Thomas
Weisel Partners LLC |
Jefferies &
Company, Inc. |
The date of this prospectus
is ,
2007.
| Mellanox Technologies is a fabless semiconductor company.
We are a leading supplier of semiconductor-based interconnect
products that facilitate high-performance data transmission.
Our customers include leading server, storage, communications
infrastructure equipment, and embedded systems vendors.
InfiniBand Adapters InfiniBand Switches
Blade
COMMUNICATIONS
Rack Optimized Servers
INFRASTRUCTURE EMBEDDED
SERVERS STORAGE EQUIPMENT SYSTEMS |
You should rely only on the information contained in this
prospectus or contained in any free writing prospectus filed
with the Securities and Exchange Commission. Neither we, nor the
underwriters, have authorized anyone to provide you with
additional information or information different from that
contained in this prospectus or in any free writing prospectus
filed with the Securities and Exchange Commission. We are
offering to sell, and seeking offers to buy, our ordinary shares
only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of our ordinary shares.
TABLE OF
CONTENTS
Unless the context requires otherwise, the words
“Mellanox,” “we,” “company,”
“us” and “our” refer to Mellanox
Technologies, Ltd. and our wholly-owned subsidiary, Mellanox
Technologies, Inc. For purposes of this prospectus, the term
“shareholders” shall refer to the holders of our
ordinary shares.
i
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. Before
investing in our ordinary shares, you should carefully read this
entire prospectus, including our financial statements and the
related notes included in this prospectus and the information
set forth under the headings “Risk Factors” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
MELLANOX
TECHNOLOGIES, LTD.
We are a leading supplier of semiconductor-based,
high-performance interconnect products that facilitate data
transmission between servers and storage systems through
communications infrastructure equipment. Our products are an
integral part of a total solution focused on computing, storage
and communication applications used in enterprise data centers,
high-performance computing and embedded systems. We are one of
the pioneers of InfiniBand, an industry standard architecture
that provides specifications for high-performance interconnects.
We believe that we are the leading merchant supplier of
field-proven InfiniBand-compliant semiconductor products that
deliver industry-leading performance and capabilities, which we
believe is demonstrated by the performance, efficiency and
scalability of clustered computing and storage systems that
incorporate our products. In addition to supporting InfiniBand,
our next generation of products also support the industry
standard Ethernet interconnect specification, which we believe
will expand our total addressable market.
We are a fabless semiconductor company that provides
high-performance interconnect solutions based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our ICs. These ICs are added to servers,
storage, communications infrastructure equipment and embedded
systems by either integrating them directly on circuit boards or
inserting adapter cards into slots on the circuit board. We have
established significant expertise with high-performance
interconnect solutions from successfully developing and
implementing multiple generations of our products. Our expertise
enables us to develop and deliver products that serve as
building blocks for creating reliable and scalable InfiniBand
and Ethernet solutions with leading performance at significantly
lower cost than products based on alternative interconnect
solutions. We compete with other providers of
semiconductor-based high performance interconnect products based
on InfiniBand, Ethernet, Fibre Channel and proprietary
technologies.
Our products are incorporated into servers produced by the five
largest server vendors: IBM, Hewlett-Packard, Dell, Sun
Microsystems and Fujitsu-Siemens. These server vendors
collectively shipped the majority of servers in 2005, according
to the industry research firm IDC. We also supply leading
storage and communications infrastructure equipment vendors such
as Cisco Systems, LSI Logic, Network Appliance, SilverStorm
Technologies, which was recently acquired by QLogic Corporation,
and Voltaire. Additionally, our products are used by GE Fanuc,
Mercury Computers, SeaChange International and other vendors of
embedded systems. Since we introduced our first product in 2001,
we have shipped products containing approximately
1.7 million InfiniBand ports, which we believe demonstrates
an established customer and end-user base for our products.
The increasing reliance of enterprises on information
technology, or IT, for their everyday operations is fueling the
demand for computing, storage and communications infrastructure
systems that can process, store and transmit large volumes of
data. High-performance interconnect solutions play a key role in
enabling high-speed transmission of data and sharing of
resources among systems. There are several trends and
technological advances driving demand for high-performance
interconnect solutions, including:
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Transition to clustered computing and storage using connections
among multiple standard components;
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Transition to multiple and multi-core processors in servers;
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Enterprise data center infrastructure consolidation; and
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Increasing deployments of mission critical, latency (response
time) sensitive applications.
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As a result of these trends and advances in computing, storage
and communications infrastructure technology, the requirements
on high-performance interconnect solutions have become more
demanding. High-performance interconnect solutions are
challenged to provide high bandwidth, low latency, reduced
complexity, increased interconnect efficiency, reliability,
stability and improved price/performance economics.
1
InfiniBand was developed to address these challenges. We believe
that InfiniBand has significant advantages compared to
alternative interconnect technologies. The InfiniBand standard
was developed under the auspices of the InfiniBand Trade
Association, or IBTA, which was founded in 1999 and is composed
of leading IT vendors and hardware and software solution
providers including Mellanox, Brocade, Cisco Systems, Fujitsu,
Hewlett-Packard, Hitachi, IBM, Intel, LSI Logic, NEC, Network
Appliance, QLogic Corporation, Sun Microsystems and Voltaire.
While InfiniBand currently represents a small portion of the
total interconnect market relative to established solutions such
as Fibre Channel and Ethernet, InfiniBand products have achieved
increasing market adoption, particularly in high-performance
computing applications, and are expanding into mainstream
financial, retail and other commercial enterprise data centers.
We apply our strengths to enhance our position as a leading
supplier of semiconductor-based, high-performance interconnect
products. We consider our key strengths to include the following:
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We have expertise in developing high-performance interconnect
solutions;
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We believe we are the leading merchant supplier of InfiniBand
ICs with a multi-year competitive advantage;
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We have a comprehensive set of technical capabilities to deliver
innovative and reliable products; and
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We have extensive relationships with our key OEM customers and
many end users.
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We have used these strengths, along with our knowledge of
InfiniBand, to design our innovative, next generation,
high-performance solutions that also support the Ethernet
interconnect standard.
Our goal is to be the leading supplier of semiconductor-based,
high-performance interconnect products for computing, storage
and communications applications. To accomplish this goal, we
intend to:
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Continue to develop leading, high-performance interconnect
solutions;
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Facilitate and increase the continued adoption of InfiniBand;
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Expand our presence with existing server OEM customers;
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Broaden our customer base with storage, communications
infrastructure and embedded systems OEMs; and
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Leverage our fabless business model to deliver strong financial
performance.
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We also face several risks as we grow our business, including
the need to generate and sustain higher revenues while
maintaining reasonable cost and expense levels, the rate and
extent of InfiniBand adoption, our reliance on a small number of
customers for a significant portion of our sales and the
cyclicality of the semiconductor industry in general. Our
success in growing our business also depends on our ability to
effectively compete, develop new products, enhance our existing
products and protect our intellectual property. We also face
risks associated with the outsourcing of our manufacturing and
with our Israeli operations. If we are unable to adequately
address these risks, our ability to grow our business will be
negatively impacted.
As of
September 30, 2006, we had 148 full-time and
23 part-time employees located in the United States
and Israel, including 94 in research and development, 25 in
sales and marketing, 15 in general and administrative, 6 in
operations and 8 in other administrative functions. The majority
of our employees, four of our executive officers and one of our
directors, who is also an executive officer, are located in
Israel.
We were incorporated under the laws of Israel in March 1999. Our
principal executive offices in the United States are
located at 2900 Stender Way,
Santa Clara,
California 95054,
and our principal executive offices in Israel are located at
Hermon Building, Yokneam, Israel 20692. Substantially all of our
assets are located in Israel. Our telephone number in
Santa Clara, California is
(408) 970-3400,
and our telephone number in Yokneam, Israel is +972-4-909-7200.
Michael Gray is our agent for service of process in the United
States, and is located at our principal executive offices in the
United States. Our
website address is
www.mellanox.com.
Information contained on our
website is not a part of this
prospectus and the inclusion of our
website address in this
prospectus is an inactive textual reference only.
Mellanox®,
InfiniBridge®,
InfiniHost®,
InfiniPCI®,
InfiniRISC®
and
InfiniScale®
are our registered trademarks. We have a trademark application
pending to register
ConnectX®.
Trade names, trademarks and service marks of other companies
appearing in this prospectus are the property of the respective
holders.
2
THE
OFFERING
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Ordinary shares offered by us |
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6,000,000 shares. |
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Over-allotment option |
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900,000 shares. |
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Ordinary shares outstanding after this offering |
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31,433,262 shares. |
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Use of proceeds |
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We expect the net proceeds to us from this offering, after
expenses, to be approximately $70 million. We intend to use
the net proceeds of this offering to fund development of our
products and for general corporate purposes, including working
capital, sales and marketing activities, general and
administrative matters and capital expenditures. We may also use
a portion of the net proceeds to acquire or invest in
complementary technologies, products or businesses or to obtain
rights to such complementary technologies, products or
businesses. There are no such transactions under consideration
at this time. |
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Nasdaq Global Market symbol |
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MLNX. |
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Risk factors |
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See “Risk Factors,” beginning on page 7 and the
other information included in this prospectus for a discussion
of factors you should carefully consider before deciding to
invest in our ordinary shares. |
The number of our ordinary shares outstanding after this
offering is based on 25,433,262 shares outstanding as of
December 31, 2006, and excludes:
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an aggregate of 5,114,239 ordinary shares issuable upon the
exercise of outstanding options to purchase our ordinary shares
granted pursuant to our 1999 United States Equity Incentive
Plan, 1999 Israeli Share Option Plan and 2003 Israeli Share
Option Plan as of December 31, 2006, at a weighted average
exercise price of $4.22 per share;
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an aggregate of 38,240 additional ordinary shares reserved for
future issuance under our 1999 United States Equity Incentive
Plan and our 2003 Israeli Share Option Plan;
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3,428,571 additional ordinary shares reserved for issuance under
our 2006 Global Share Incentive Plan, which we adopted in
connection with this offering;
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additional ordinary shares to be automatically reserved for
issuance on an annual basis on the first day of each fiscal
year, beginning in 2008, under our 2006 Global Share Incentive
Plan, such annual increase to be equal to the least of 2% of
ordinary shares outstanding on a fully diluted basis on the date
of the increase, 685,714 ordinary shares or a smaller number
determined by our board of directors, provided that the
aggregate number of ordinary shares reserved for issuance under
such plan may not exceed 15,474,018;
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571,428 additional ordinary shares reserved for issuance
pursuant to purchase rights under our Employee Share Purchase
Plan, which we adopted in connection with this offering;
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additional ordinary shares to be automatically reserved for
issuance on an annual basis on the first day of each fiscal
year, beginning in 2008, under our Employee Share Purchase Plan,
such annual increase to be equal to the least of 0.5% of
ordinary shares outstanding on a fully diluted basis on the date
of the increase, 171,428 ordinary shares or a smaller number
determined by our board of directors, provided that the
aggregate number of ordinary shares reserved for issuance under
such plan may not exceed 2,114,285; and
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an aggregate of 52,569 ordinary shares issuable upon the
exercise of outstanding options granted outside of our equity
incentive plans as of December 31, 2006, at a weighted
average exercise price of $1.20 per share.
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Except as otherwise indicated, information in this prospectus
reflects or assumes the following:
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that our amended and restated articles of association, which we
will file in connection with the completion of this offering,
are in effect;
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a 1.75-to-1 reverse split of our ordinary shares effected prior
to the completion of this offering;
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a 1.75-to-1 reverse split of our preferred shares;
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3
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the conversion of all of our outstanding convertible preferred
shares into an aggregate of 17,571,520 ordinary shares
immediately prior to the completion of this offering and
following the reverse split of our ordinary shares, assuming the
conversion of our Series A and B preferred shares into
ordinary shares at a rate of 1 to 1 (without giving
effect to the 1.75-to-1 reverse share split), the conversion of
our Series C preferred shares into ordinary shares at a rate of
1 to 1.0249 (without giving effect to the 1.75-to-1
reverse share split) and the conversion of our Series D
preferred shares into ordinary shares at a rate of 1 to 2.2245
(without giving effect to the 1.75-to-1 reverse share split, and
based on an assumed initial public offering price of
$13.00 per share); and
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no exercise of the underwriters’ over-allotment option to
purchase up to 900,000 additional shares of our ordinary shares.
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4
Summary
Consolidated Financial Data
The summary consolidated statements of operations data for each
of the three years in the period ended
December 31, 2005
and the nine months ended
September 30, 2006 have been
derived from our audited consolidated financial statements that
are included elsewhere in this prospectus. The summary
consolidated statements of operations data for the nine months
ended
September 30, 2005 have been derived from our
unaudited consolidated financial statements that are included
elsewhere in this prospectus. The following tables provide
summary consolidated financial data which you should read
together with our financial statements and related notes and the
sections of this prospectus entitled
“Selected Financial
Data” and
“Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” Our
historical results are not necessarily indicative of the results
to be expected in any future period.
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Year Ended December 31,
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Nine Months Ended September 30,
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2003
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2004
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2005
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2005
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2006
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(in thousands, except per share data)
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(unaudited)
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Consolidated Statement of
Operations Data:
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Total revenues
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$
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10,151
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$
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20,254
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$
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42,068
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$
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29,874
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$
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32,741
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Cost of revenues
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(4,535
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(8,736
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(15,203
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(11,253
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(9,601
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Gross profit
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5,616
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11,518
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26,865
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18,621
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23,140
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Operating expenses:
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Research and development
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14,457
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12,864
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13,081
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9,307
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11,064
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Sales and marketing
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5,298
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5,640
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7,395
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5,291
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6,080
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General and administrative
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1,720
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1,719
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3,094
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2,118
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2,544
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Total operating expenses
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21,475
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20,223
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23,570
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16,716
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19,688
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Income (loss) from operations
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(15,859
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)
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(8,705
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3,295
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1,905
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3,452
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Other income, net
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308
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123
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326
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281
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232
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Income (loss) before taxes on
income
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(15,551
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(8,582
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)
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3,621
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2,186
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3,684
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Provision for taxes on income
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(12
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)
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(306
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)
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(462
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)
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(329
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)
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(271
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)
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|
|
|
Net income (loss)
|
|
$
|
(15,563
|
)
|
|
$
|
(8,888
|
)
|
|
$
|
3,159
|
|
|
$
|
1,857
|
|
|
$
|
3,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series D
mandatorily redeemable convertible preferred shares
|
|
|
(144
|
)
|
|
|
(155
|
)
|
|
|
(166
|
)
|
|
|
(125
|
)
|
|
|
(132
|
)
|
|
Income allocable to preferred
shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,993
|
)
|
|
|
(1,732
|
)
|
|
|
(3,281
|
)
|
|
Net income (loss) attributable to
ordinary shareholders
|
|
|
(15,707
|
)
|
|
|
(9,043
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
attributable to ordinary shareholders — basic and
diluted
|
|
$
|
(2.32
|
)
|
|
$
|
(1.27
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net
income (loss) per share attributable to ordinary shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,764
|
|
|
|
7,117
|
|
|
|
7,520
|
|
|
|
7,492
|
|
|
|
7,673
|
|
|
Diluted
|
|
|
6,764
|
|
|
|
7,117
|
|
|
|
9,091
|
|
|
|
9,040
|
|
|
|
9,623
|
|
|
Pro forma net income per
share — basic and diluted
(unaudited)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
—
|
|
|
|
—
|
|
|
|
0.13
|
|
|
|
—
|
|
|
|
0.14
|
|
|
Diluted
|
|
|
—
|
|
|
|
—
|
|
|
|
0.11
|
|
|
|
—
|
|
|
|
0.12
|
|
|
Pro forma weighted average
ordinary shares outstanding
(unaudited)(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
—
|
|
|
|
—
|
|
|
|
25,092
|
|
|
|
—
|
|
|
|
25,245
|
|
|
Diluted
|
|
|
—
|
|
|
|
—
|
|
|
|
27,575
|
|
|
|
—
|
|
|
|
27,939
|
|
5
|
|
|
|
(1) |
|
For information regarding the computation of per share amounts,
refer to Note 1 of our consolidated financial statements.
Pro forma basic and diluted net income per share is presented
for the year ended December 31, 2005 and the nine months
ended September 30, 2006 to reflect per share data assuming
(a) the conversion of all of our preferred shares into
ordinary shares immediately prior to the completion of this
offering, as if the conversion had taken place at the beginning
of the fiscal year ended December 31, 2005 and (b) the
exercise of warrants and options exercisable at the respective
date. |
| |
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
Actual
|
|
|
as Adjusted
|
|
|
|
|
(in thousands of dollars)
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,800
|
|
|
$
|
85,840
|
|
|
Working capital
|
|
|
19,930
|
|
|
|
89,970
|
|
|
Total assets
|
|
|
37,145
|
|
|
|
107,185
|
|
|
Convertible preferred shares
|
|
|
92,053
|
|
|
|
—
|
|
|
Total shareholders’
(deficit)/equity
|
|
$
|
(70,117
|
)
|
|
$
|
91,976
|
|
The preceding table presents a summary of our consolidated
balance sheet data as of
September 30, 2006:
|
|
|
| |
•
|
on an actual basis; and
|
| |
| |
•
|
on a pro forma as adjusted basis to give effect to the
conversion of all of our outstanding convertible preferred
shares into 17,571,848 shares of ordinary shares
immediately prior to the completion of this offering, assuming
our initial public offering price of $13.00 per share, as
adjusted to reflect the 1.75-to-1 reverse split of our ordinary
shares and to give effect to the sale by us of
6,000,000 shares of ordinary shares in this offering at an
initial public offering price of $13.00 per share, after
deducting the underwriting discounts and commissions and
estimated offering expenses payable by us.
|
Recent
Developments
Although our financial statements for the year ended
December 31, 2006 are not yet complete, the following
information reflects our results based on currently available
information.
Fourth quarter 2006 revenues were $15.8 million for the
period ended
December 31, 2006, compared to
$13.4 million for the prior quarter ended
September 30, 2006. This 18% increase in sequential
revenues resulted primarily from increased unit sales of 7%, and
an increase in average selling prices of 10% due primarily to a
shift in product mix.
Gross profit was $11.9 million for the quarter ended
December 31, 2006, compared to $9.8 million for the
prior quarter ended
September 30, 2006. As a percentage of
revenues, fourth quarter gross margin increased sequentially to
75% compared to 73% in the prior quarter ended
September 30, 2006. This increase was primarily
attributable to a decrease in production costs associated with
outsourced labor, raw materials and volume discounts and a shift
in product mix.
The Company currently anticipates that its pre-tax net income as
a percentage of revenues for the quarter ended
December 31,
2006 will be comparable to its pre-tax net income as a
percentage of revenues for the quarter ended
September 30,
2006, which was 22.4%.
For the year ended
December 31, 2006,
the Company had four
customers who individually accounted for more than 10% of total
revenues, and no one customer accounted for more than 20% of
total revenues. For the year ended
December 31, 2005, the
Company had two customers who individually accounted for more
than 10% of total revenues, including one customer (Cisco) who
accounted for 44% of total revenues.
Our estimates for operating expenses and net income are not yet
final and are subject to further review. We are currently
performing our annual review procedures for the year ended
December 31, 2006.
6
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
prospectus, before purchasing our ordinary shares. Each of these
risk factors could harm our business, financial condition or
operating results, as well as decrease the value of an
investment in our ordinary shares.
Risks
Related to Our Business
We
have a history of losses, have only recently become profitable
and may not sustain or increase profitability in the
future.
We have only recently become profitable, and we first recorded a
profit in the year ended
December 31, 2005. We incurred net
losses prior to the quarter ended
June 30, 2005 and
incurred a net loss during the quarter ended
March 31,
2006. As of
September 30, 2006, we had an accumulated
deficit of approximately $73.1 million. In addition, we
recorded net losses of $15.6 million and $8.9 million
for the years ended
December 31, 2003 and
2004,
respectively. We may not be able to sustain or increase
profitability on a quarterly or an annual basis. This may, in
turn, cause the price of our ordinary shares to decline. To
sustain or increase our profitability, we will need to generate
and sustain substantially higher revenues while maintaining
reasonable cost and expense levels. We expect to increase
expense levels in each of the next several quarters to support
increased research and development, sales and marketing and
general and administrative efforts. These expenditures may not
result in increased revenues or customer growth, and we may not
remain profitable.
We do
not expect to sustain our recent revenue growth rate, which may
reduce our share price.
Our revenues have grown rapidly over the last four years,
approximately doubling in size from each of 2003 to 2004 and
2005, and increasing by 15% in 2006. Our revenues increased from
$10.2 million to $20.3 million, $42.1 million and
$48.5 million for the years ended
December 31, 2003,
2004,
2005 and
2006, respectively. We do not expect to sustain
our recent growth rate in future periods. You should not rely on
the revenue growth of any prior quarterly or annual periods as
an indication of our future performance. If we are unable to
maintain adequate revenue growth, we may not have adequate
resources to execute our business objectives and our share price
may decline.
InfiniBand
may not be adopted at the rate or extent that we anticipate, and
adoption of InfiniBand is largely dependent on third-party
vendors and end users.
While the usage of InfiniBand has increased since its first
specifications were completed in October 2000, continued
adoption of InfiniBand is dependent on continued collaboration
and cooperation among information technology, or IT, vendors. In
addition, the end users that purchase IT products and services
from vendors must find InfiniBand to be a compelling solution to
their IT system requirements. We cannot control third-party
participation in the development of InfiniBand as an industry
standard technology. We rely on server, storage, communications
infrastructure equipment and embedded systems vendors to
incorporate and deploy InfiniBand integrated circuits, or ICs,
in their systems. InfiniBand may fail to effectively compete
with other technologies, which may be adopted by vendors and
their customers in place of InfiniBand. The adoption of
InfiniBand is also impacted by the general replacement cycle of
IT equipment by end users, which is dependent on factors
unrelated to InfiniBand. These factors may reduce the rate at
which InfiniBand is incorporated by our current server vendor
customers and impede its adoption in the storage, communications
infrastructure and embedded systems markets, which in turn would
harm our ability to sell our InfiniBand products.
We
have limited visibility into end-user demand for our products,
which introduces uncertainty into our production forecasts and
business planning and could negatively impact our financial
results.
Our sales are made on the basis of purchase orders rather than
long-term purchase commitments. In addition, our customers may
defer purchase orders. We place orders with the manufacturers of
our products according to our estimates of customer demand. This
process requires us to make multiple demand forecast assumptions
with respect to both our customers’ and end users’
demands. It is more difficult for us to accurately forecast
end-user demand
7
because we do not sell our products directly to end users. In
addition, the majority of our adapter card business is conducted
on a short order fulfillment basis, introducing more uncertainty
into our forecasts. Because of the lead time associated with
fabrication of our semiconductors, forecasts of demand for our
products must be made in advance of customer orders. In
addition, we base business decisions regarding our growth on our
forecasts for customer demands. As we grow, anticipating
customer demand may become increasingly difficult. If we
overestimate customer demand, we may purchase products from our
manufacturers that we may not be able to sell and may
over-budget company operations. Conversely, if we underestimate
customer demand or if sufficient manufacturing capacity were
unavailable, we would forego revenue opportunities and could
lose market share or damage our customer relationships.
We
depend on a small number of customers for a significant portion
of our sales, and the loss of any of these customers will
adversely affect our revenues.
A small number of customers accounts for a significant portion
of our revenues. In the year ended
December 31, 2005, sales
to Cisco Systems and Topspin Communications (which was acquired
by Cisco Systems in May 2005) accounted for 44% of our
total revenues, and sales to Voltaire accounted for 12% of our
total revenues. In the year ended
December 31, 2004, sales
to Cisco Systems accounted for 34% of our total revenues, and
sales to Voltaire accounted for 18% of our total revenues.
Because the majority of servers, storage, communications
infrastructure equipment and embedded systems is sold by a
relatively small number of vendors, we expect that we will
continue to depend on a small number of customers to account for
a significant percentage of our revenues for the foreseeable
future. Our customers, including our most significant customers,
are not obligated by long-term
contracts to purchase our
products and may cancel orders with limited potential penalties.
If any of our large customers reduces or cancels its purchases
from us for any reason, it could have an adverse effect on our
revenues and results of operations. For example, one of our
largest customers — Cisco Systems — has
ordered fewer products from us in the nine months ended
September 30, 2006 as compared to its order history for the nine
months ended
September 30, 2005, which resulted in a
decrease to revenues from that customer by $9.8 million. A
portion of this percentage decline was attributable to an
accumulation of inventory in 2005 by Cisco following its
acquisition of Topspin Communications, which we believe has been
substantially sold in 2005 and 2006. In addition, our sales are
dependent on our customers’ sales, and the loss of end-user
customers by any of our OEM customers could have an adverse
effect on our revenues and results of operations.
We
face intense competition and may not be able to compete
effectively, which could reduce our market share, net revenues
and profit margin.
The markets in which we operate are extremely competitive and
are characterized by rapid technological change, continuously
evolving customer requirements and declining average selling
prices. We may not be able to compete successfully against
current or potential competitors. With respect to InfiniBand
products, we compete with QLogic Corporation, which recently
acquired SilverStorm Technologies. We also compete with
providers of alternative technologies, including Ethernet, Fibre
Channel and proprietary interconnects. The companies that
provide IC products for these alternative technologies include
Marvell Technology Group, Broadcom Corporation, Emulex
Corporation, QLogic Corporation and Myricom. Many of our current
and potential competitors have longer operating histories,
significantly greater resources, greater economies of scale,
stronger name recognition and larger customer bases than we
have. This may allow them to respond more quickly than we are
able to respond to new or emerging technologies or changes in
customer requirements. In addition, these competitors may have
greater credibility with our existing and potential customers.
If we do not compete successfully, our market share, revenues
and profit margin may decline, and, as a result, our business
may be adversely affected.
If we
fail to develop new products or enhance our existing products to
react to rapid technological change and market demands in a
timely and cost-effective manner, our business will
suffer.
We must develop new products or enhance our existing products
with improved technologies to meet rapidly evolving customer
requirements. We are currently engaged in the development
process for next generation products, and we need to
successfully design our next generation and other products
successfully for customers who continually require higher
performance and functionality at lower costs. The development
8
process for these advancements is lengthy and will require us to
anticipate accurately technological innovations and market
trends. Developing and enhancing these products can be
time-consuming, costly and complex. Our ability to fund product
development and enhancements partially depends on our ability to
generate revenues from our existing products. For example, we
recently introduced our next generation of products that also
support the industry standard Ethernet interconnect
specification.
There is a risk that these developments or enhancements, such as
migrating our next generation products from 130nm to 90nm
silicon process technology, will be late, fail to meet customer
or market specifications and will not be competitive with other
products using alternative technologies that offer comparable
performance and functionality. We may be unable to successfully
develop additional next generation products, new products or
product enhancements. Our next generation products that include
Ethernet support or any new products or product enhancements may
not be accepted in new or existing markets. Our business will
suffer if we fail to continue to develop and introduce new
products or product enhancements in a timely manner or on a
cost-effective basis.
We
rely on a limited number of subcontractors to manufacture,
assemble, package and production test our products, and the
failure of any of these third-party subcontractors to deliver
products or otherwise perform as requested could damage our
relationships with our customers, decrease our sales and limit
our growth.
While we design and market our products and conduct test
development in-house, we do not manufacture, assemble, package
and production test our products, and we must rely on
third-party subcontractors to perform these services. We
currently rely on Taiwan Semiconductor Manufacturing Company, or
TSMC, to produce our silicon wafers, and Flextronics
International Ltd. to manufacture and production test our
adapter cards. We also rely on Advanced Semiconductor
Engineering, or ASE, to assemble, package and production test
our ICs. We are currently arranging an additional manufacturing
line with one of our subcontractors, but we may not be able to
finalize this arrangement. If these subcontractors do not
provide us with high-quality products, services and production
and production test capacity in a timely manner, or if one or
more of these subcontractors terminates its relationship with
us, we may be unable to obtain satisfactory replacements to
fulfill customer orders on a timely basis, our relationships
with our customers could suffer, our sales could decrease and
our growth could be limited. In particular, there are
significant challenges associated with moving our IC production
from our existing manufacturer to another manufacturer with whom
we do not have a pre-existing relationship.
We currently do not have long-term supply
contracts with any of
our third-party subcontractors. Therefore, they are not
obligated to perform services or supply products to us for any
specific period, in any specific quantities or at any specific
price, except as may be provided in a particular purchase order.
None of our third-party subcontractors has provided contractual
assurances to us that adequate capacity will be available to us
to meet future demand for our products. Our subcontractors may
allocate capacity to the production of other companies’
products while reducing deliveries to us on short notice. Other
customers that are larger and better financed than we are or
that have long-term agreements with these subcontractors may
cause these subcontractors to reallocate capacity to those
customers, decreasing the capacity available to us.
Other significant risks associated with relying on these
third-party subcontractors include:
|
|
|
| |
•
|
reduced control over product cost, delivery schedules and
product quality;
|
| |
| |
•
|
potential price increases;
|
| |
| |
•
|
inability to achieve sufficient production, increase production
or test capacity and achieve acceptable yields on a timely basis;
|
| |
| |
•
|
increased exposure to potential misappropriation of our
intellectual property;
|
| |
| |
•
|
shortages of materials used to manufacture products;
|
| |
| |
•
|
capacity shortages;
|
| |
| |
•
|
labor shortages or labor strikes;
|
| |
| |
•
|
political instability in the regions where these subcontractors
are located; and
|
9
|
|
|
| |
•
|
natural disasters impacting these subcontractors.
|
Our
sales cycle can be lengthy, which could result in uncertainty
and delays in generating revenues.
We have occasionally experienced a lengthy sales cycle for some
of our products, due in part to the constantly evolving nature
of the technologies on which our products are based. Some of our
products must be custom designed to operate in our
customers’ products, resulting in a lengthy process between
the initial design stage and the ultimate sale. We also compete
for design wins prior to selling products, which may increase
the length of the sales process. We may experience a delay
between the time we increase expenditures for research and
development, sales and marketing efforts and inventory and the
time we generate revenues, if any, from these expenditures. In
addition, because we do not have long-term supply
contracts with
our customers and the majority of our sales are on a purchase
order basis, we must repeat our sales process on a continual
basis, including sales of new products to existing customers. As
a result, our business could be harmed if a customer reduces or
delays its orders.
The
average selling prices of our products have decreased in the
past and may do so in the future, which could harm our financial
results.
The products we develop and sell are subject to declines in
average selling prices. We have had to reduce our prices in the
past to meet market demand, and we may be required to reduce
prices in the future. Reductions in our average selling prices
to one customer could impact our average selling prices to other
customers. This would cause our gross margin to decline. Our
financial results will suffer if we are unable to offset any
reductions in our average selling prices by increasing our sales
volumes, reducing our costs or developing new or enhanced
products with higher selling prices or gross margin.
Fluctuations
in our revenues and operating results on a quarterly and annual
basis could cause the market price of our ordinary shares to
decline.
Our quarterly and annual revenues and operating results are
difficult to predict and have fluctuated in the past, and may
fluctuate in the future, from quarter to quarter and year to
year. It is possible that our operating results in some quarters
and years will be below market expectations. This would likely
cause the market price of our ordinary shares to decline. Our
quarterly and annual operating results are affected by a number
of factors, many of which are outside of our control, including:
|
|
|
| |
•
|
unpredictable volume and timing of customer orders, which are
not fixed by contract but vary on a purchase order basis;
|
| |
| |
•
|
the loss of one or more of our customers, or a significant
reduction or postponement of orders from our customers;
|
| |
| |
•
|
our customers’ sales outlooks, purchasing patterns and
inventory levels based on end-user demands and general economic
conditions;
|
| |
| |
•
|
seasonal buying trends;
|
| |
| |
•
|
the timing of new product announcements or introductions by us
or by our competitors;
|
| |
| |
•
|
our ability to successfully develop, introduce and sell new or
enhanced products in a timely manner;
|
| |
| |
•
|
product obsolescence and our ability to manage product
transitions;
|
| |
| |
•
|
changes in the relative sales mix of our products;
|
| |
| |
•
|
decreases in the overall average selling prices of our products;
|
| |
| |
•
|
changes in our cost of finished goods; and
|
| |
| |
•
|
the availability, pricing and timeliness of delivery of other
components used in our customers’ products.
|
We base our planned operating expenses in part on our
expectations of future revenues, and a significant portion of
our expenses is relatively fixed in the short-term. We have
limited visibility into customer demand from
10
which to predict future sales of our products. As a result, it
is difficult for us to forecast our future revenues and budget
our operating expenses accordingly. Our operating results would
be adversely affected to the extent customer orders are
cancelled or rescheduled. If revenues for a particular quarter
are lower than we expect, we likely would not proportionately be
able to reduce our operating expenses.
We
rely primarily upon trade secret, patent and copyright laws and
contractual restrictions to protect our proprietary rights, and,
if these rights are not sufficiently protected, our ability to
compete and generate revenues could suffer.
We seek to protect our proprietary manufacturing specifications,
documentation and other written materials primarily under trade
secret, patent and copyright laws. We also typically require
employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps
taken by us to protect our proprietary information may not be
adequate to prevent misappropriation of our technology. In
addition, our proprietary rights may not be adequately protected
because:
|
|
|
| |
•
|
people may not be deterred from misappropriating our
technologies despite the existence of laws or contracts
prohibiting it;
|
| |
| |
•
|
policing unauthorized use of our intellectual property may be
difficult, expensive and time-consuming, and we may be unable to
determine the extent of any unauthorized use; and
|
| |
| |
•
|
the laws of other countries in which we market our products,
such as some countries in the Asia/Pacific region, may offer
little or no protection for our proprietary technologies.
|
Reverse engineering, unauthorized copying or other
misappropriation of our proprietary technologies could enable
third parties to benefit from our technologies without paying us
for doing so. Any inability to adequately protect our
proprietary rights could harm our ability to compete, generate
revenues and grow our business.
We may
not obtain sufficient patent protection on the technology
embodied in our products, which could harm our competitive
position and increase our expenses.
Our success and ability to compete in the future may depend to a
significant degree upon obtaining sufficient patent protection
for our proprietary technology. As of
September 30, 2006,
we had 10 issued patents and 27 patent applications
pending in the United States, 5 issued patents in Taiwan
and 6 applications pending in Israel, each of which covers
aspects of the technology in our products. Patents that we
currently own do not cover all of the products that we presently
sell. Our patent applications may not result in issued patents,
and even if they result in issued patents, the patents may not
have claims of the scope we seek. Even in the event that these
patents are not issued, the applications may become publicly
available and proprietary information disclosed in the
applications will become available to others. In addition, any
issued patents may be challenged, invalidated or declared
unenforceable. The term of any issued patent in the United
States would be 20 years from its filing date, and if our
applications are pending for a long time period, we may have a
correspondingly shorter term for any patent that may be issued.
Our present and future patents may provide only limited
protection for our technology and may not be sufficient to
provide competitive advantages to us. For example, competitors
could be successful in challenging any issued patents or,
alternatively, could develop similar or more advantageous
technologies on their own or design around our patents. Also,
patent protection in certain foreign countries may not be
available or may be limited in scope and any patents obtained
may not be as readily enforceable as in the United States and
Israel, making it difficult for us to effectively protect our
intellectual property from misuse or infringement by other
companies in these countries. Our inability to obtain and
enforce our intellectual property rights in some countries may
harm our business. In addition, given the costs of obtaining
patent protection, we may choose not to protect certain
innovations that later turn out to be important.
Intellectual
property litigation, which is common in our industry, could be
costly, harm our reputation, limit our ability to sell our
products and divert the attention of management and technical
personnel.
The semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property
rights. We have indemnification obligations to most of our
customers with respect to infringement of third-
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party patents and intellectual property rights by our products.
If litigation were to be filed against these customers in
connection with our technology, we may be required to defend and
indemnify such customers.
Questions of infringement in the markets we serve involve highly
technical and subjective analyses. Although we have not been
involved in intellectual property litigation to date, litigation
may be necessary in the future to enforce any patents we may
receive and other intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
infringement or invalidity, and we may not prevail in any such
future litigation. Litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and
could divert the efforts and attention of our management and
technical personnel from normal business operations. In
addition, adverse determinations in litigation could result in
the loss of our proprietary rights, subject us to significant
liabilities, require us to seek licenses from third parties or
prevent us from licensing our technology or selling our
products, any of which could seriously harm our business.
We
depend on key and highly skilled personnel to operate our
business, and if we are unable to retain our current personnel
and hire additional personnel, our ability to develop and
successfully market our products could be harmed.
Our business is particularly dependent on the interdisciplinary
expertise of our personnel, and we believe our future success
will depend in large part upon our ability to attract and retain
highly skilled managerial, engineering, finance and sales and
marketing personnel. The loss of any key employees or the
inability to attract or retain qualified personnel could delay
the development and introduction of, and harm our ability to
sell, our products and harm the market’s perception of us.
Competition for qualified engineers in the markets in which we
operate, primarily in Israel where our engineering operations
are based, is intense and, accordingly, we may not be able to
retain or hire all of the engineers required to meet our ongoing
and future business needs. If we are unable to attract and
retain the highly skilled professionals we need, we may have to
forego projects for lack of resources or be unable to staff
projects optimally. We believe that our future success is highly
dependent on the contributions of Eyal Waldman, our president
and chief executive officer. We do not have long-term employment
contracts with Mr. Waldman or any other key personnel, and
their knowledge of our business and industry would be extremely
difficult to replace.
We may
not be able to manage our future growth effectively, and we may
need to incur significant expenditures to address the additional
operational and control requirements of our
growth.
We are experiencing a period of growth and expansion. This
expansion has placed, and any future expansion will continue to
place, a significant strain on our management, personnel,
systems and financial resources. We plan to hire additional
employees to support an increase in research and development as
well as increases in our sales and marketing and general and
administrative efforts. To successfully manage our growth and
handle the responsibilities of being a public company, we
believe we must effectively:
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continue to enhance our customer relationship and supply chain
management and supporting systems;
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implement additional and improve existing administrative,
financial and operations systems, procedures and controls;
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expand and upgrade our technological capabilities;
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manage multiple relationships with our customers, distributors,
suppliers, end users and other third parties;
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manage the mix of our U.S., Israeli and other foreign
operations; and
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hire, train, integrate and manage additional qualified engineers
for research and development activities, sales and marketing
personnel and financial and IT personnel.
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Our efforts may require substantial managerial and financial
resources and may increase our operating costs even though these
efforts may not be successful. If we are unable to manage our
growth effectively, we may not be able to take advantage of
market opportunities, develop new products, satisfy customer
requirements, execute our business plan or respond to
competitive pressures.
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We may
experience defects in our products, unforeseen delays, higher
than expected expenses or lower than expected manufacturing
yields of our products, which could result in increased customer
warranty claims, delay our product shipments and prevent us from
recognizing the benefits of new technologies we
develop.
Although we test our products, they are complex and may contain
defects and errors. In the past we have encountered defects and
errors in our products. Delivery of products with defects or
reliability, quality or compatibility problems may damage our
reputation and our ability to retain existing customers and
attract new customers. In addition, product defects and errors
could result in additional development costs, diversion of
technical resources, delayed product shipments, increased
product returns, warranty expenses and product liability claims
against us which may not be fully covered by insurance. Any of
these could harm our business.
In addition, our production of existing and development of new
products can involve multiple iterations and unforeseen
manufacturing difficulties, resulting in reduced manufacturing
yields, delays and increased expenses. The evolving nature of
our products requires us to modify our manufacturing
specifications, which may result in delays in manufacturing
output and product deliveries. We rely on third parties to
manufacture our products and currently rely on one manufacturer
for our ICs and one manufacturer for our cards. Our ability to
offer new products depends on our manufacturers’ ability to
implement our revised product specifications, which is costly,
time-consuming and complex.
If we
fail to maintain an effective system of internal controls, we
may not be able to report accurately our financial results or
prevent fraud. As a result, current and potential shareholders
could lose confidence in our financial reporting, which could
harm our business and the trading price of our ordinary
shares.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. We
have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement. In
addition, Section 404 of the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley, requires us to evaluate and report on our
internal control over financial reporting and have our
independent registered public accounting firm annually attest to
our evaluation, as well as issue its own opinion on our internal
control over financial reporting. The Section 404 internal
control reporting requirements will be implemented according to
the regulatory phase-in schedule of the Securities and Exchange
Commission. The SEC recently adopted rules to delay the
implementation of Section 404 compliance for new public
companies. Under the SEC’s new rules, we will be required
to provide a management report on internal control over
financial reporting for the first time in connection with our
Annual Report on
Form 10-K
for the year ending
December 31, 2007. We will be required
to provide both a management report and an independent
registered public accounting firm attestation report on internal
controls in connection with our Annual Report on
Form 10-K
for the year ending
December 31, 2008. We are preparing for
compliance with Section 404 by strengthening, assessing and
testing our system of internal controls to provide the basis for
our report. However, the continuous process of strengthening our
internal controls and complying with Section 404 is
expensive and time-consuming and requires significant management
attention. We cannot be certain that these measures will ensure
that we will maintain adequate control over our financial
processes and reporting. Furthermore, as we grow our business,
our internal controls will become more complex and will require
significantly more resources to ensure our internal controls
remain effective overall. Failure to implement new or improved
controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our
reporting obligations. If we or our independent registered
public accounting firm discover a material weakness, the
disclosure of that fact, even if quickly remedied, could reduce
the market’s confidence in our financial statements and
harm our share price. In addition, future non-compliance with
Section 404 could subject us to a variety of administrative
sanctions, including the suspension or delisting of our ordinary
shares from The Nasdaq Global Market, which could reduce our
share price.
We may
pursue acquisitions or investments in complementary products,
technologies and businesses, which could harm our operating
results and may disrupt our business.
In the future, we may pursue acquisitions of, or investments in,
complementary products, technologies and businesses.
Acquisitions present a number of potential risks and challenges
that could, if not met, disrupt our
13
business operations, increase our operating costs and reduce the
value to us of the acquisition. For example, if we identify an
acquisition candidate, we may not be able to successfully
negotiate or finance the acquisition on favorable terms. Even if
we are successful, we may not be able to integrate the acquired
businesses, products or technologies into our existing business
and products. Furthermore, potential acquisitions and
investments, whether or not consummated, may divert our
management’s attention and require considerable cash
outlays at the expense of our existing operations. In addition,
to complete future acquisitions, we may issue equity securities,
incur debt, assume contingent liabilities or have amortization
expenses and write-downs of acquired assets, which could
adversely affect our profitability.
Changes
to financial accounting standards may affect our results of
operations and cause us to change our business
practices.
We prepare our financial statements to conform with generally
accepted accounting principles, or GAAP, in the United States.
These accounting principles are subject to interpretation by the
Financial Accounting Standards Board, or FASB, the SEC and
various bodies formed to interpret and create appropriate
accounting policies. A change in those policies can have a
significant effect on our reported results and may affect our
reporting of transactions completed before a change is
announced. Changes to those rules or the questioning of current
practices may adversely affect our reported financial results or
the way we conduct our business. For example, accounting
policies affecting many aspects of our business, including rules
relating to employee share option grants, have recently been
revised. The FASB and other agencies have made changes to GAAP
that required us, as of our first quarter of 2006, to record a
charge to earnings for the estimated fair value of employee
share option grants and other equity incentives, whereas under
previous accounting rules charges were required only for the
intrinsic value, if any, of such awards to employees. We may
have significant and ongoing accounting charges under the new
rules resulting from option grants and other equity incentive
expensing that could reduce our net income. In addition, since
historically we have used equity-related compensation as a
component of our total employee compensation program, the
accounting change could make the use of equity-related
compensation less attractive to us and therefore make it more
difficult for us to attract and retain employees.
Our
business is subject to the risks of earthquakes, fires, floods
and other natural catastrophic events, and to interruption by
manmade problems such as computer viruses or
terrorism.
Our U.S. corporate offices are located in the
San Francisco Bay Area, a region known for seismic
activity. A significant natural disaster, such as an earthquake,
fire or flood, could have a material adverse impact on our
business, operating results and financial condition. In
addition, our servers are vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering
with our computer systems. In addition, acts of terrorism could
cause disruptions in our or our customers’ businesses or
the economy as a whole. To the extent that such disruptions
result in delays or cancellations of customer orders, or the
deployment of our products, our business, operating results and
financial condition would be adversely affected.
Risks
Related to Our Industry
Due to
the cyclical nature of the semiconductor industry, our operating
results may fluctuate significantly, which could adversely
affect the market price of our ordinary shares.
The semiconductor industry is highly cyclical and subject to
rapid change and evolving industry standards and, from time to
time, has experienced significant downturns. These downturns are
characterized by decreases in product demand, excess customer
inventories and accelerated erosion of prices. These factors
could cause substantial fluctuations in our net revenues and in
our operating results. Any downturns in the semiconductor
industry may be severe and prolonged, and any failure of this
industry to fully recover from downturns could harm our
business. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the industry, which could
cause our share price to decline.
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The
demand for semiconductors is affected by general economic
conditions, which could impact our business.
The semiconductor industry is affected by general economic
conditions, and a downturn may result in decreased demand for
our products and adversely affect our operating results. Our
business has been adversely affected by previous economic
downturns. For example, during the global economic downturn in
2002 to 2003, demand for many computer and consumer electronics
products suffered as consumers delayed purchasing decisions or
changed or reduced their discretionary spending. As a result,
demand for our products suffered and we had to implement
restructuring initiatives to align our corporate spending with a
slower than anticipated revenue growth during that timeframe.
The
semiconductor industry is highly competitive, and we cannot
assure you that we will be able to compete successfully against
our competitors.
The semiconductor industry is highly competitive. Increased
competition may result in price pressure, reduced profitability
and loss of market share, any of which could seriously harm our
revenues and results of operations. Competition principally
occurs at the design stage, where a customer evaluates
alternative design solutions. We continually face intense
competition from semiconductor interconnect solutions companies.
Some of our competitors have greater financial and other
resources than we have with which to pursue engineering,
manufacturing, marketing and distribution of their products. As
a result, they may be able to respond more quickly to changing
customer demands or devote greater resources to the development,
promotion and sales of their products than we can. We cannot
assure you that we will be able to increase or maintain our
revenues and market share, or compete successfully against our
current or future competitors in the semiconductor industry.
Risks
Related to Operations in Israel and Other Foreign
Countries
Regional
instability in Israel may adversely affect business conditions
and may disrupt our operations and negatively affect our
revenues and profitability.
We have engineering facilities and corporate and sales support
operations and, as of
September 30, 2006,
119 full-time and 22 part-time employees located in Israel.
Substantially all of our assets are located in Israel.
Accordingly, political, economic and military conditions in
Israel may directly affect our business. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors, as well as
incidents of civil unrest. During the summer of 2006, Israel was
engaged in an armed conflict with Hezbollah, a Lebanese Islamist
Shiite militia group and political party. This conflict involved
missile strikes against civilian targets in northern Israel, and
negatively affected business conditions in Israel. In addition,
Israel and companies doing business with Israel have, in the
past, been the subject of an economic boycott. Although Israel
has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, Israel has been and is subject to civil
unrest and terrorist activity, with varying levels of severity,
since September 2000. The election in early 2006 of
representatives of the Hamas movement to a majority of seats in
the Palestinian Legislative Council and the tension among the
different Palestinian factions may create additional unrest and
uncertainty. Any future armed conflicts or political instability
in the region may negatively affect business conditions and
adversely affect our results of operations. Parties with whom we
do business have sometimes declined to travel to Israel during
periods of heightened unrest or tension, forcing us to make
alternative arrangements when necessary. In addition, the
political and security situation in Israel may result in parties
with whom we have agreements involving performance in Israel
claiming that they are not obligated to perform their
commitments under those agreements pursuant to force majeure
provisions in the agreements.
We can give no assurance that security and political conditions
will have no impact on our business in the future. Hostilities
involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could adversely
affect our operations and could make it more difficult for us to
raise capital. While we did not sustain damages from the recent
conflict with Hezbollah referred to above, our Israeli
operations, which are located in northern Israel, are within
range of Hezbollah missiles and we or our immediate surroundings
may sustain damages in a missile attack, which could adversely
affect our operations.
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In addition, our business insurance does not cover losses that
may occur as a result of events associated with the security
situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that
are caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained. Any losses
or damages incurred by us could have a material adverse effect
on our business.
Our
operations may be negatively affected by the obligations of our
personnel to perform military service.
Generally, all non-exempt male adult citizens and permanent
residents of Israel under the age of 45 (or older, for citizens
with certain occupations), including some of our officers,
directors and employees, are obligated to perform military
reserve duty annually, and are subject to being called to active
duty at any time under emergency circumstances. In the event of
severe unrest or other conflict, individuals could be required
to serve in the military for extended periods of time. In
response to increases in terrorist activity, there have been
periods of significant call-ups of military reservists, and
recently some of our employees, including those in key
positions, have been called up in connection with armed
conflicts. It is possible that there will be additional call-ups
in the future. Our operations could be disrupted by the absence
for a significant period of one or more of our officers,
directors or key employees due to military service. Any such
disruption could adversely affect our operations.
Our
operations may be affected by negative economic conditions or
labor unrest in Israel.
Due to significant economic measures adopted by the Israeli
government, there were several general strikes and work
stoppages in Israel in 2003 and 2004, affecting all banks,
airports and ports. These strikes have had an adverse effect on
the Israeli economy and on business, including our ability to
deliver products to our customers and to receive raw materials
from our suppliers in a timely manner. From time to time, the
Israeli trade unions threaten strikes or work stoppages, which,
if carried out, may have a material adverse effect on the
Israeli economy and our business.
We are
susceptible to additional risks from our international
operations.
We derived 24% and 28% of our revenues in the years ended
December 31, 2004 and
2005, respectively, from sales
outside North America. As a result, we face additional risks
from doing business internationally, including:
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reduced protection of intellectual property rights in some
countries;
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licenses, tariffs and other trade barriers;
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difficulties in staffing and managing foreign operations;
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longer sales and payment cycles;
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greater difficulties in collecting accounts receivable;
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seasonal reductions in business activity;
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potentially adverse tax consequences;
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laws and business practices favoring local competition;
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costs and difficulties of customizing products for foreign
countries;
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compliance with a wide variety of complex foreign laws and
treaties;
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tariffs, trade barriers, transit restrictions and other
regulatory or contractual limitations on our ability to sell or
develop our products in certain foreign markets;
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fluctuations in freight rates and transportation disruptions;
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political and economic instability; and
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variance and unexpected changes in local laws and regulations.
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Our principal research and development facilities are located in
Israel, and our directors, executive officers and other key
employees are located primarily in Israel and the United States.
In addition, we engage sales representatives in various
countries throughout the world to market and sell our products
in those countries and surrounding regions. If we encounter
these challenges in our international operations, we could
experience slower than expected revenue growth and our business
could be harmed.
It may
be difficult to enforce a U.S. judgment against us, our
officers and directors and some of the experts named in this
prospectus or to assert U.S. securities law claims in
Israel.
We are incorporated in Israel. Four of our executive officers
and one of our directors, who is also an executive officer, and
some of our accountants and attorneys are non-residents of the
United States and are located in Israel, and substantially all
of our assets and the assets of these persons are located
outside the United States. Three of our executive officers and
five of our directors are located in the United States.
Therefore, it may be difficult to enforce a judgment obtained in
the United States against us or any of these persons in
U.S. or Israeli courts based on the civil liability
provisions of the U.S. federal securities laws.
Additionally, it may be difficult for a shareholder to enforce
civil liabilities under U.S. federal securities laws in
original actions instituted in Israel. Please see
“Enforceability of Civil Liabilities” for a further
discussion of this risk factor.
Provisions
of Israeli law may delay, prevent or make difficult an
acquisition of us, which could prevent a change of control and
therefore depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers
for acquisitions of shares above specified thresholds, requires
special approvals for transactions involving directors, officers
or significant shareholders and regulates other matters that may
be relevant to these types of transactions. For example, a
merger may not be completed unless at least 50 days have
passed from the date that a merger proposal was filed by each
merging company with the Israel Registrar of Companies and at
least 30 days from the date that the shareholders of both
merging companies approved the merger. In addition, the approval
of a majority of each class of securities of the target company
is required to approve a merger.
These provisions could delay, prevent or impede an acquisition
of us, even if such an acquisition would be considered
beneficial by some of our shareholders. See “Risk
Factors — Provisions of our charter documents or
Israeli law could delay or prevent an acquisition of our
company, even if the acquisition would be beneficial to our
shareholders, and could make it more difficult for shareholders
to change management,” “Management —
Approval of Specified Related Party Transactions under Israeli
Law,” “Description of Ordinary Shares —
Acquisitions under Israeli Law” and “Description of
Ordinary Shares — Anti-Takeover Measures under Israeli
Law” for a further discussion of this risk factor.
Exchange
rate fluctuations between the U.S. dollar and the NIS may
negatively affect our earnings.
Although most of our revenues and a majority of our expenses are
denominated in U.S. dollars, a significant portion of our
research and development expenses are incurred in new Israeli
shekels, or NIS. As a result, we are exposed to risk to the
extent that the inflation rate in Israel exceeds the rate of
devaluation of the NIS in relation to the U.S. dollar or if
the timing of these devaluations lags behind inflation in
Israel. In that event, the U.S. dollar cost of our research
and development operations in Israel will increase and our
U.S. dollar-measured results of operations will be
adversely affected. To the extent that the value of the NIS
increases against the U.S. dollar, our expenses on a
U.S. dollar cost basis increase. We cannot predict any
future trends in the rate of inflation in Israel or the rate of
devaluation of the NIS against the U.S. dollar. The Israeli
rate of inflation (deflation) amounted to (1.9)%, 1.2% and 2.4%
for the years ended
December 31, 2003,
2004 and
2005,
respectively, and 0.8% for the first nine months of 2006. 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. The NIS revaluation (devaluation) in
relation to the U.S. dollar amounted to (7.6)%, (1.6)% and
6.8% for the years ended
December 31, 2003,
2004 and
2005.
Further, because most of our international revenues are
denominated in U.S. dollars, a strengthening of the dollar
versus other currencies could make our products less competitive
in foreign markets and collection of receivables more difficult.
We do not currently engage in currency hedging activities but we
may choose to do so in the future. These
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measures, however, may not adequately protect us from material
adverse effects due to the impact of inflation in Israel.
The
government tax benefits that we currently receive require us to
meet several conditions and may be terminated or reduced in the
future, which would increase our costs.
Some of our operations in Israel have been granted
“Approved Enterprise” status by the Investment Center
in the Israeli Ministry of Industry Trade and Labor, which makes
us eligible for tax benefits under the Israeli Law for
Encouragement of Capital Investments, 1959. The availability of
these tax benefits is subject to certain requirements,
including, among other things, making specified investments in
fixed assets and equipment, financing a percentage of those
investments with our capital contributions, complying with our
marketing program which was submitted to the Investment Center,
filing of certain reports with the Investment Center and
complying with Israeli intellectual property laws. If we do not
meet these requirements in the future, these tax benefits may be
cancelled and we could be required to refund any tax benefits
that we have already received plus interest and penalties
thereon. The tax benefits that our current “Approved
Enterprise” program receives may not be continued in the
future at their current levels or at all. If these tax benefits
were reduced or eliminated, the amount of taxes that we pay
would likely increase, which could adversely affect our results
of operations. Additionally, if we increase our activities
outside of Israel, for example, by acquisitions, our increased
activities may not be eligible for inclusion in Israeli tax
benefit programs. See “Israeli Tax Considerations and
Government Programs — Taxation of Companies” for
additional information concerning these tax benefits.
The
Israeli government grants that we currently receive require us
to meet several conditions and may be reduced or eliminated due
to government budget cuts, and these grants restrict our ability
to manufacture and engineer products and transfer know-how
outside of Israel and require us to satisfy specified
conditions.
We have received, and may receive in the future, grants from the
government of Israel through the Office of the Chief Scientist
of Israel’s Ministry of Industry, Trade and Labor, or the
OCS, for the financing of a portion of our research and
development expenditures in Israel. When know-how or products
are developed using OCS grants, the terms of these grants
restrict the transfer of the know-how out of Israel. Transfer of
know-how abroad is subject to various conditions, including
payment of a percentage of the consideration paid to us or our
shareholders in the transaction in which the technology is
transferred. In addition, any decrease of the percentage of
manufacturing performed locally, as originally declared in the
application to the OCS, may require us to notify, or to obtain
the approval of the OCS, and may result in increased royalty
payments to the OCS. These restrictions may impair our ability
to enter into agreements for those products or technologies
without the approval of the OCS. We cannot be certain that any
approval of the OCS will be obtained on terms that are
acceptable to us, or at all. Furthermore, in the event that we
undertake a transaction involving the transfer to a non-Israeli
entity of technology developed with OCS funding pursuant to a
merger or similar transaction, the consideration available to
our shareholders may be reduced by the amounts we are required
to pay to the OCS. Any approval, if given, will generally be
subject to additional financial obligations. If we fail to
comply with the conditions imposed by the OCS, including the
payment of royalties with respect to grants received, we may be
required to refund any payments previously received, together
with interest and penalties. In the years ended
December 31, 2003,
2004 and
2005 the OCS approved grants
totaling $1.4 million, $1.3 million and $43,000,
respectively, of funding in support of some of our research and
development programs.
We may
be classified as a passive foreign investment company, which
could result in adverse U.S. federal income tax consequences to
U.S. holders of our ordinary shares.
We do not expect to be considered a
“passive foreign
investment company,” or PFIC, for U.S. federal income tax
purposes for our current taxable year ending
December 31,
2007. However, the application of the PFIC rules is subject to
ambiguity in several respects, and, in addition, we must make a
separate determination each taxable year as to whether we are a
PFIC (after the close of each taxable year). Accordingly, we
cannot assure you that we will not be a PFIC for our current
taxable year or any future taxable year. A non-U.S. corporation
will be considered a PFIC for any taxable year if either
(i) at least 75% of its gross income is passive income or
(ii) at least 50% of the
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value of its assets is attributable to assets that produce or
are held for the production of passive income. The market value
of our assets generally will be determined based on the market
price of our ordinary shares, which is likely to fluctuate after
this offering. In addition, the composition of our income and
assets will be affected by how, and how quickly, we spend the
cash we raise in this offering. If we were treated as a PFIC for
any taxable year during which a U.S. person held an ordinary
share, certain adverse U.S. federal income tax consequences
could apply to such U.S. person, including:
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having gains realized on the sale of our ordinary shares treated
as ordinary income, rather than capital gain;
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the loss of the preferential rate applicable to dividends
received on our ordinary shares by individuals who are U.S.
holders; and
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having interest charges apply to the proceeds of share sales.
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See “U.S. Federal Income Tax Considerations —
Passive Foreign Investment Company.”
Your
rights and responsibilities as a shareholder will be governed by
Israeli law and differ in some respects from the rights and
responsibilities of shareholders under
U.S. law.
We are incorporated under Israeli law. The rights and
responsibilities of holders of our ordinary shares are governed
by our amended and restated
articles of association and by
Israeli law. These rights and responsibilities differ in some
respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of
an Israeli company has a duty to act in good faith toward the
company and other shareholders and to refrain from abusing his,
her or its power in
the company, including, among other things,
in voting at the general meeting of shareholders on certain
matters. Please see
“Description of Authorized Share
Capital” for a further discussion of shareholder rights and
responsibilities under Israeli law.
Risks
Related to This Offering
The
price of our ordinary shares may be volatile, and you may not be
able to resell your shares at or above the initial public
offering price.
Prior to this offering, there has been no public market for our
ordinary shares. An active and liquid trading market for our
ordinary shares may not develop or be sustained after this
offering. You may be unable to resell your ordinary shares at or
above the initial public offering price due to fluctuations in
the market price of our ordinary shares resulting from changes
in our operating performance or prospects. 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;
|
| |
| |
•
|
geopolitical instability;
|
| |
| |
•
|
the emergence of new sales channels in which we are unable to
compete effectively;
|
| |
| |
•
|
any major change in our board of directors or management;
|
| |
| |
•
|
changes in financial estimates, including our ability to meet
our future revenue and operating profit or loss projections;
|
| |
| |
•
|
changes in governmental regulations or in the status of our
regulatory approvals;
|
| |
| |
•
|
general economic conditions and slow or negative growth of
related markets;
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| |
| |
•
|
commencement of, or our involvement in, litigation; and
|
19
|
|
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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 will continue to be highly
concentrated, and your interests may conflict with the interests
of our existing shareholders.
Our executive officers and directors and their affiliates,
together with our current significant shareholders, will
beneficially own approximately 30.91% of our outstanding
ordinary shares upon completion of this offering (excluding any
shares that may be purchased by our existing shareholders in
this offering). Moreover, four of our shareholders, Sequoia
Capital Partners, U.S. Venture Partners, Intel Atlantic,
Inc. and Bessemer Venture Partners, will beneficially own
approximately 27.45% of our outstanding ordinary shares upon
completion of this offering. In addition, individual partners of
U.S. Venture Partners and Bessemer Venture Partners serve
on our board of directors. Accordingly, these shareholders,
acting as a group, will continue to have significant influence
over the outcome of corporate actions requiring shareholder
approval, including the election of directors, any merger,
consolidation or sale of all or substantially all of our assets
or any other significant corporate transaction. These
shareholders could delay or prevent a change of control of our
company, even if such a change of control would benefit our
other shareholders. The significant concentration of share
ownership may adversely affect the trading price of our ordinary
shares due to investors’ perception that conflicts of
interest may exist or arise.
A
significant portion of our outstanding ordinary shares may be
sold into the market in the near future. Substantial sales of
our shares, or the perception such sales are likely to occur,
could cause the price of our ordinary shares to
decline.
If our existing shareholders sell a large number of our ordinary
shares or the public market perceives that existing shareholders
might sell our ordinary shares, the market price of our ordinary
shares could decline significantly. All of the shares offered
under this prospectus will be freely tradable without
restriction or further registration under the U.S. federal
securities laws, unless purchased by our “affiliates”
as that term is defined in Rule 144 under the Securities
Act of 1933, as amended. An aggregate of 25,329,854 of the
remaining 25,433,262 shares outstanding upon the closing of
this offering may be sold pursuant to Rule 144, 144(k) and
701 upon the expiration of
180-day
lock-up
agreements.
Existing shareholders holding an aggregate of
17,670,071 ordinary shares have rights with respect to the
registration of these ordinary shares with the SEC. If we
register their ordinary shares following the expiration of the
lock-up
agreements, they can sell those shares in the public market.
Promptly following this offering, we intend to register with the
SEC 8,633,619 ordinary shares that are authorized for
issuance under our share option plans and options granted
outside our share option plans. As of
December 31, 2006,
5,166,808 shares were subject to outstanding options, of
which 3,480,127 shares were vested. Once we register these
shares, they can be freely sold in the public market upon
issuance, subject to the
lock-up
agreements referred to above and the restrictions imposed on our
affiliates under Rule 144.
Investors
in this offering will suffer immediate and substantial dilution
of their investment.
If you purchase ordinary shares in this offering, you will pay
more for your shares than our pro forma as adjusted net tangible
book value per share. You will incur immediate and substantial
dilution of $10.07 per share, representing the difference
between our initial public offering price and our pro forma as
adjusted net tangible book value per share. In the past, we
issued options to acquire ordinary shares at prices
significantly below the initial public offering price. To the
extent these outstanding options are exercised, you will incur
further dilution.
20
If we
sell our ordinary shares in future financings, ordinary
shareholders will experience immediate dilution and, as a
result, our share price may go down.
We may from time to time issue additional ordinary shares at a
discount from the current trading price of our ordinary shares.
As a result, our ordinary shareholders would experience
immediate dilution upon the purchase of any ordinary shares sold
at such discount. In addition, as opportunities present
themselves, we may enter into equity financings or similar
arrangements in the future, including the issuance of debt
securities, preferred shares or ordinary shares. If we issue
ordinary shares or securities convertible into ordinary shares,
our ordinary shareholders could experience dilution.
Provisions
of our charter documents or Israeli law could delay or prevent
an acquisition of our company, even if the acquisition would be
beneficial to our shareholders, and could make it more difficult
for shareholders to change management.
Provisions of our amended and restated
articles of association
may discourage, delay or prevent a merger, acquisition or other
change in control that shareholders may consider favorable,
including transactions in which shareholders might otherwise
receive a premium for their shares. In addition, these
provisions may frustrate or prevent any attempt by our
shareholders to replace or remove our current management by
making it more difficult to replace or remove our board of
directors. These provisions include:
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•
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no cumulative voting; and
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•
|
an advance notice requirement for shareholder proposals and
nominations.
|
Furthermore, Israeli tax law treats some acquisitions,
particularly
stock-for-stock
swaps between an Israeli company and a foreign company, less
favorably than U.S. tax law. Israeli tax law generally provides
that a shareholder who exchanges our shares for shares in a
foreign corporation is treated as if the shareholder has sold
the shares. In such a case, the shareholder will generally be
subject to Israeli taxation on any capital gains from the sale
of shares (after two years, with respect to one half of the
shares, and after four years, with respect to the balance of the
shares, in each case unless the shareholder sells such shares at
an earlier date), unless a relevant tax treaty between Israel
and the country of the shareholder’s residence exempts the
shareholder from Israeli tax. Please see
“Risk
Factors — Provisions of Israeli law may delay, prevent
or make difficult an acquisition of us, which could prevent a
change of control and therefore depress the price of our
shares” for a further discussion of Israeli laws relating
to mergers and acquisitions. Please also see
“Description
of Authorized Share Capital” for a further discussion of
restrictions contained in our amended and restated articles of
association. These provisions in our amended and restated
articles of association and other provisions of Israeli law
could limit the price that investors are willing to pay in the
future for our ordinary shares.
We
have never paid cash dividends on our share capital, and we do
not anticipate paying any cash dividends in the foreseeable
future.
We have never declared or paid cash dividends on our share
capital, nor do we anticipate paying any cash dividends on our
share capital in the foreseeable future. We currently intend to
retain all available funds and any future earnings to fund the
development and growth of our business. As a result, capital
appreciation, if any, of our ordinary shares will be your sole
source of gain for the foreseeable future.
We may
apply the proceeds of this offering to uses that do not improve
our operating results or increase the value of
shareholders’ investment.
We intend to use a portion of the net proceeds from the ordinary
shares sold by us in this offering to fund development of our
products. We expect to use the remaining amount of the net
proceeds of this offering for general corporate purposes,
including working capital, sales and marketing activities,
research and development activities, general and administrative
matters and capital expenditures. We may also use a portion of
the net proceeds to acquire or invest in complementary
technologies, products or businesses or to obtain rights to such
complementary technologies, products or businesses. However, we
do not have more specific plans for the net proceeds from this
21
offering and will have broad discretion in how we use the net
proceeds of this offering. These proceeds could be applied in
ways that do not improve our operating results or increase the
value of shareholders’ investment.
We
will incur increased costs as a result of being a public
company, and may incur increased costs as a result of changes in
laws and regulations relating to corporate governance
matters.
As a public company, we will incur significant accounting, legal
and other expenses that we did not incur as a private company.
We will incur costs associated with our public company reporting
requirements. We also anticipate that we will incur costs
associated with corporate governance requirements, including
requirements under Sarbanes-Oxley, as well as rules implemented
by the SEC and The Nasdaq Stock Market. We expect these rules
and regulations to increase our legal and financial compliance
costs and to make some activities more time-consuming and
costly. We are currently evaluating and monitoring developments
with respect to these rules, and we cannot predict or estimate
the amount of additional costs we may incur or the timing of
such costs.
Changes in the laws and regulations affecting public companies,
including the provisions of Sarbanes-Oxley and rules adopted by
the SEC and by The Nasdaq Stock Market, will result in increased
costs to us as we respond to their requirements. These laws and
regulations could make it more difficult or more costly for us
to obtain certain types of insurance, including director and
officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The impact of
these requirements could also make it more difficult for us to
attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers. We
cannot predict or estimate the amount or timing of additional
costs we may incur to respond to these requirements.
22
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have
based these forward-looking statements largely on our current
expectations and projections about future events and financial
trends affecting the financial condition of our business.
Forward-looking statements should not be read as a guarantee of
future performance or results, and will not necessarily be
accurate indications of the times at, or by, which such
performance or results will be achieved. Forward-looking
statements are based on information available at the time those
statements are made
and/or
management’s good faith belief as of that time with respect
to future events, and are subject to risks and uncertainties
that could cause actual performance or results to differ
materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause
such differences include, but are not limited to:
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•
|
levels of capital spending in the semiconductor industry, in
general, and of the market for high-performance interconnect
products, specifically;
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•
|
our ability to achieve new design wins;
|
| |
| |
•
|
our ability to successfully introduce new products;
|
| |
| |
•
|
competition and competitive factors;
|
| |
| |
•
|
our dependence on a relatively small number of customers;
|
| |
| |
•
|
our ability to expand our presence with existing customers;
|
| |
| |
•
|
our ability to protect our intellectual property;
|
| |
| |
•
|
future costs and expenses; and
|
| |
| |
•
|
other risk factors included under “Risk Factors” in
this prospectus.
|
In addition, in this prospectus, the words “believe,”
“may,” “will,” “estimate,”
“continue,” “anticipate,”
“intend,” “expect,” “predict,”
“potential” and similar expressions, as they relate to
Mellanox, our business and our management, are intended to
identify forward-looking statements. In light of these risks and
uncertainties, the forward-looking events and circumstances
discussed in this prospectus may not occur and actual results
could differ materially from those anticipated or implied in the
forward-looking statements.
Forward-looking statements speak only as of the date of this
prospectus. You should not put undue reliance on any
forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting
forward-looking information, except to the extent required by
applicable laws. If we update one or more forward-looking
statements, no inference should be drawn that we will make
additional updates with respect to those or other
forward-looking statements.
23
USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale of the
ordinary shares offered by us will be approximately
$70 million, or approximately $80.9 million if the
underwriters’ over-allotment option is exercised in full,
based on an assumed initial public offering price of
$13.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses.
A $1.00 increase (decrease) in the assumed initial public
offering price of $13.00 per share would increase (decrease) the
net proceeds to us from this offering by approximately
$5.6 million, or approximately $6.4 million if the
underwriters’ over-allotment option is exercised in full,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting underwriting discounts and commissions and estimated
offering expenses.
We currently intend to use the net proceeds from this offering
primarily to fund the development of our products and for
general corporate purposes, including working capital, sales and
marketing activities, research and development activities,
general and administrative matters and capital expenditures. We
intend to increase our research and development and sales and
marketing staff to develop and introduce new products, and we
intend to increase our general and administrative staff to
manage our expanding operations as a public company. We may use
a portion of the net proceeds for the acquisition of, or
investment in, companies, technologies or products that
complement our business. We have no present understandings,
commitments or agreements to enter into any acquisitions or
investments. Our management will have broad discretion over the
use of the net proceeds in this offering. Pending these uses, we
intend to invest the net proceeds of this offering in
short-term, investment-grade interest-bearing securities or
guaranteed obligations of the U.S. government.
By establishing a public market for our ordinary shares, this
offering is also intended to facilitate our future access to
public markets.
DIVIDEND
POLICY
We have never declared or paid, and do not anticipate declaring
or paying, any cash dividends on our ordinary shares. Any future
determination as to the declaration and payment of dividends, if
any, will be at the discretion of our board of directors and
will depend on then existing conditions, including our financial
condition, operating results, contractual restrictions, capital
requirements, business prospects and other factors our board of
directors may deem relevant.
The Israel Companies Law, 1999, or the Companies Law, also
restricts our ability to declare dividends. We can only
distribute dividends from profits (as defined in the Companies
Law), or if we do not meet the profit test, with court approval,
provided in each case that there is no reasonable concern that
the dividend distribution will prevent us from meeting our
existing and foreseeable obligations as they come due.
24
CAPITALIZATION
The following table shows:
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•
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our capitalization as of September 30, 2006;
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•
|
our capitalization as of September 30, 2006, on a pro forma
basis, giving effect to the assumed conversion of all
outstanding preferred shares into an aggregate of
17,571,848 ordinary shares, as adjusted to reflect the
1.75-to-1 reverse split of our ordinary shares and assuming an
initial public offering price of $13.00 per share, as if such
conversions had occurred on September 30, 2006; and
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•
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our capitalization as of September 30, 2006, on a pro forma
as adjusted basis, giving effect to the sale by us of
6,000,000 ordinary shares in this offering, assuming an
initial public offering price of $13.00 per share or
greater, after deducting underwriting discounts and commissions
and estimated offering expenses and adjusting for antidilution.
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|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006
|
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|
|
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|
|
|
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|
Pro Forma,
|
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
|
(in thousands of dollars, except share data)
|
|
|
|
|
Mandatorily redeemable convertible
preferred shares
|
|
$
|
55,715
|
|
|
|
—
|
|
|
|
—
|
|
|
Convertible preferred shares
|
|
|
36,338
|
|
|
|
—
|
|
|
|
—
|
|
|
Shareholders’ (deficit)/equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
31
|
|
|
|
104
|
|
|
|
129
|
|
|
Additional paid-in capital
|
|
|
2,958
|
|
|
|
94,938
|
|
|
|
164,953
|
|
|
Accumulated deficit
|
|
|
(73,106
|
)
|
|
|
(73,106
|
)
|
|
|
(73,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’
(deficit)/equity
|
|
|
(70,117
|
)
|
|
|
21,936
|
|
|
|
91,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
21,936
|
|
|
$
|
21,936
|
|
|
$
|
91,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding share information set forth above is as of
September 30, 2006, and excludes:
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•
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an aggregate of 4,263,057 ordinary shares issuable upon the
exercise of outstanding options to purchase our ordinary shares
granted pursuant to our 1999 United States Equity Incentive
Plan, 1999 Israeli Share Option Plan and 2003 Israeli Share
Option Plan as of September 30, 2006, at a weighted average
exercise price of $3.10 per share;
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•
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an aggregate of 597,175 additional ordinary shares reserved for
future issuance under our 1999 United States Equity
Incentive Plan and our 2003 Israeli Share Option Plan;
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•
|
3,428,571 additional ordinary shares reserved for issuance under
our 2006 Global Share Incentive Plan, which we adopted in
connection with this offering;
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•
|
additional ordinary shares to be automatically reserved for
issuance on an annual basis on the first day of each fiscal
year, beginning in 2008, under our 2006 Global Share Incentive
Plan, such annual increase to be equal to the least of 2% of
ordinary shares outstanding on a fully diluted basis on the date
of the increase, 685,714 ordinary shares or a smaller number
determined by our board of directors, provided that the
aggregate number of ordinary shares reserved for issuance under
such plan may not exceed 15,474,018;
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•
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571,428 additional ordinary shares reserved for issuance
pursuant to purchase rights under our Employee Share Purchase
Plan, which we adopted in connection with this offering;
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•
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additional ordinary shares to be automatically reserved for
issuance on an annual basis on the first day of each fiscal
year, beginning in 2008, under our Employee Share Purchase Plan,
such annual increase to be equal to the least of 0.5% of
ordinary shares outstanding on a fully diluted basis on the date
of the increase, 171,428 ordinary shares or a smaller number
determined by our board of directors, provided that the
aggregate number of ordinary shares reserved for issuance under
such plan may not exceed 2,114,285;
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•
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an aggregate of 58,283 ordinary shares issuable upon the
exercise of outstanding options granted outside of our equity
incentive plans as of September 30, 2006, at a weighted
average exercise price of $1.22 per share; and
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25
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•
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699,866 ordinary shares issuable upon the exercise of warrants
outstanding as of September 30, 2006, with an exercise
price of $11.57 per share. 72,690 ordinary shares were issued
subsequent to September 30, 2006 pursuant to the exercise
of warrants that expired on October 9, 2006 and
November 19, 2006; all warrants that were not exercised
have expired.
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A $1.00 increase (decrease) in the assumed initial public
offering price of $13.00 per share would increase (decrease)
each of total shareholders’ equity and total capitalization
by $5.6 million, or $6.4 million if the
underwriters’ over-allotment option is exercised in full,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting underwriting discounts and commissions and our
estimated offering expenses.
26
DILUTION
If you invest in our ordinary shares, your interest will be
diluted to the extent of the difference between the public
offering price per share of our ordinary shares and the pro
forma net tangible book value per share of our ordinary shares
immediately after the offering.
Investors participating in the offering will incur immediate,
substantial dilution. On
September 30, 2006, our pro forma
net tangible book value was $21.6 million, or
$0.85 per ordinary share, after giving effect to
(1) the assumed conversion of all outstanding convertible
preferred shares as of
September 30, 2006 into 11,643,764
ordinary shares; (2) the issuance of 5,928,084 additional
ordinary shares to our Series D preferred shareholders
pursuant to an existing antidilution provision effective upon a
qualifying initial public offering and the issuance of such
shares upon the closing of the offering. Assuming the sale of
6,000,000 ordinary shares in the offering at an assumed initial
public offering price of $13.00 per share, which is the
mid-point of the range set forth on the cover of this
prospectus, and after deducting estimated underwriting discounts
and commissions and estimated offering expenses, our pro forma
as adjusted net tangible book value as of
September 30,
2006 would have been $91.6 million, or $2.93 per ordinary
share. This represents an immediate increase in pro forma net
tangible book value of $2.08 per ordinary share to our
existing shareholders and an immediate dilution of $10.07 per
share to the new investors purchasing shares in the offering.
The following table illustrates this dilution on a per share
basis to new investors:
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|
|
|
|
|
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|
Assumed IPO price
|
|
|
|
|
|
$
|
13.00
|
|
|
|
|
$
|
0.85
|
|
|
|
|
|
|
Increase per share attributable to
this offering
|
|
$
|
2.08
|
|
|
|
|
|
|
Pro forma net tangible book
values, as adjusted to give effect to this offering
|
|
|
|
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution to new investors
|
|
|
|
|
|
$
|
10.07
|
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, the pro forma net tangible book value per share after
giving effect to this offering would be $3.18 per ordinary
share, the increase in net tangible book value per share to our
existing shareholders after giving effect to this offering would
be $2.33 per ordinary share, and the dilution in pro forma net
tangible book value per share to investors in this offering
would be $9.82 per ordinary share.
The table below summarizes as of
September 30, 2006, on a
pro forma as adjusted basis described above, the number of our
ordinary shares, the total consideration and the average price
per share (i) paid to us by existing shareholders and
(ii) to be paid by new investors purchasing our ordinary
shares in this offering at an assumed initial public offering
price of $13.00.
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|
Shares purchased
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|
|
Total consideration
|
|
|
Average price
|
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|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per share
|
|
|
|
|
Existing shareholders
|
|
|
25,304,587
|
|
|
|
81
|
%
|
|
$
|
96,953,026
|
|
|
|
55
|
%
|
|
$
|
3.83
|
|
|
New investors
|
|
|
6,000,000
|
|
|
|
19
|
%
|
|
|
78,000,000
|
|
|
|
45
|
%
|
|
$
|
13.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
31,304,587
|
|
|
|
100
|
%
|
|
$
|
174,953,026
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above discussion and tables are based on
25,304,587 ordinary shares outstanding as of
September 30, 2006, and exclude:
|
|
|
| |
•
|
an aggregate of 4,263,057 ordinary shares issuable upon the
exercise of outstanding options to purchase our ordinary shares
granted pursuant to our 1999 United States Equity Incentive
Plan, 1999 Israeli Share Option Plan and 2003 Israeli Share
Option Plan as of September 30, 2006, at a weighted average
exercise price of $3.10 per share;
|
27
|
|
|
| |
•
|
an aggregate of 597,175 additional ordinary shares reserved for
future issuance under our 1999 United States Equity Incentive
Plan and our 2003 Israeli Share Option Plan;
|
| |
| |
•
|
3,428,571 additional ordinary shares reserved for issuance under
our 2006 Global Share Incentive Plan, which we adopted in
connection with this offering;
|
| |
| |
•
|
additional ordinary shares to be automatically reserved for
issuance on an annual basis on the first day of each fiscal
year, beginning in 2008, under our 2006 Global Share Incentive
Plan, such annual increase to be equal to the least of 2% of
ordinary shares outstanding on a fully diluted basis on the date
of the increase, 685,714 ordinary shares or a smaller number
determined by our board of directors, provided that the
aggregate number of ordinary shares reserved for issuance under
such plan may not exceed 15,474,018;
|
| |
| |
•
|
an aggregate of 58,283 ordinary shares issuable upon the
exercise of outstanding options granted outside of our equity
incentive plans as of September 30, 2006, at a weighted
average exercise price of $1.22 per share;
|
|
|
|
| |
•
|
571,428 additional ordinary shares reserved for issuance
pursuant to purchase rights under our Employee Share Purchase
Plan, which we adopted in connection with this offering; and
|
|
|
|
| |
•
|
additional ordinary shares to be automatically reserved for
issuance on an annual basis on the first day of each fiscal
year, beginning in 2008, under our Employee Share Purchase Plan,
such annual increase to be equal to the least of 0.5% of
ordinary shares outstanding on a fully diluted basis on the date
of the increase, 171,428 ordinary shares or a smaller number
determined by our board of directors, provided that the
aggregate number of ordinary shares reserved for issuance under
such plan may not exceed 2,114,285.
|
To the extent that any outstanding options or warrants are
exercised, new investors will experience further dilution. The
table below assumes the exercise of all options and warrants to
purchase our ordinary shares outstanding as of
September 30, 2006 and the conversion of our Series A
and B preferred shares into ordinary shares at a rate of 1 to 1
(without giving effect to the 1.75-to-1 reverse share split),
the conversion of our Series C preferred shares into ordinary
shares at a rate of 1 to 1.0249 (without giving effect to the
1.75-to-1 reverse share split) and the conversion of our Series
D preferred shares into ordinary shares at a rate of 1 to 2.2245
(without giving effect to the 1.75-to-1 reverse share split and
based on an assumed initial public offering price of $13.00 per
share), as adjusted to reflect the 1.75-to-1 reverse split of
our ordinary shares and assuming an initial public offering
price of $13.00 per share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares purchased
|
|
|
Total consideration
|
|
|
Average price
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per share
|
|
|
|
|
Existing shareholders
|
|
|
25,304,587
|
|
|
|
70
|
%
|
|
$
|
96,953,026
|
|
|
|
51
|
%
|
|
$
|
3.83
|
|
|
Shares subject to options
|
|
|
4,321,340
|
|
|
|
12
|
|
|
|
13,309,727
|
|
|
|
7
|
|
|
|
3.08
|
|
|
Shares subject to warrants
|
|
|
699,866
|
|
|
|
2
|
|
|
|
4,626,114
|
|
|
|
2
|
|
|
|
6.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
30,325,793
|
|
|
|
—
|
|
|
|
114,888,867
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investors
|
|
|
6,000,000
|
|
|
|
16
|
|
|
|
78,000,000
|
|
|
|
40
|
|
|
|
13.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36,325,793
|
|
|
|
100.0
|
%
|
|
$
|
192,888,867
|
|
|
|
100.0
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $13.00 per share would increase
(decrease) the dilution to new investors by $0.74 per
share, or $0.72 per share if the underwriters’
over-allotment option is exercised in full, assuming the number
of shares offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting underwriting
discounts and commissions and our estimated offering expenses.
28
CONVERSION
OF SERIES D PREFERRED SHARES
In connection with the closing of this offering, all of our
outstanding preferred shares will convert into ordinary shares.
Due to the antidilution provisions of our amended and restated
articles of association, the conversion ratio of our
Series D preferred shares may be adjusted in connection
with the conversion of our outstanding preferred shares into
ordinary shares. The per share conversion rate of our
Series D preferred shares will be determined by multiplying
$6.61, as adjusted for splits of our ordinary shares, by 2.5,
and dividing by the price per share paid in this offering.
Therefore, depending on the price of the shares sold in this
offering, the holders of the Series D preferred shares may
receive more than one ordinary share for each share of
Series D preferred shares converted in connection with this
offering. Under the provisions of our amended and restated
articles of association, we will not know the conversion rate of
our Series D preferred shares until the public offering
price is determined.
In this prospectus, we have estimated the number of ordinary
shares issuable upon conversion of the Series D preferred
shares assuming an initial public offering price of
$13.00 per share (as adjusted for any share dividends,
combinations, splits, recapitalizations and the like with
respect to such shares). Assuming an initial public offering
price of $13.00, 10,766,566 ordinary shares would be issued
upon conversion of the Series D preferred shares as further
described in “Note 9 — Redeemable
Convertible Preferred Shares and Redeemable Convertible
Preferred Shares — Anti-dilution adjustments,” of
the accompanying notes to our consolidated financial statements.
A $1.00 increase in the assumed initial public offering price of
$13.00 per share would decrease the number of ordinary
shares issuable upon conversion of the Series D preferred
shares by 769,039 ordinary shares, which would result in
30,664,223 total shares outstanding upon completion of this
offering. Conversely, a $1.00 decrease in the assumed initial
public offering price of $13.00 per share would increase
the number of ordinary shares issuable upon conversion of the
Series D preferred shares by 897,228 ordinary shares,
which would result in 32,330,490 total shares outstanding
upon completion of this offering.
Upon completion of this offering, our existing shareholders will
continue to 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. As only some of our shareholders own
Series D preferred shares, changes in our valuation in
connection with this offering will impact the conversion ratio
of our Series D preferred shares and thus the relative
ownership of our ordinary shares upon completion of this
offering among our existing shareholders.
29
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be
read in conjunction with
“Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and our consolidated financial statements and related notes
included elsewhere in this prospectus. We derived the
consolidated balance sheet data for the years ended
December 31, 2001,
2002 and
2003 and our consolidated
statements of operations data for the years ended
December 31, 2001 and
2002, from our audited consolidated
financial statements not included in this prospectus. We derived
the consolidated statements of operations data for each of the
three years in the period ended
December 31, 2005 and the
nine months ended
September 30, 2006, as well the
consolidated balance sheet data as of
December 31, 2004 and
2005, from our audited consolidated financial statements
included elsewhere in this prospectus. We derived the
consolidated statements of operations data for the nine months
ended
September 30, 2005 from our unaudited interim
consolidated financial statements included elsewhere in this
prospectus. The unaudited interim consolidated financial
statements have been prepared on the same basis as the annual
consolidated financial statements and, in the opinion of our
management, reflect all adjustments, which include only normal
recurring adjustments necessary to state fairly our consolidated
financial position as of
September 30, 2005 and the results
of our operations and our cash flows for the periods presented.
Our historical results are not necessarily indicative of results
to be expected in any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
(in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,741
|
|
|
$
|
4,002
|
|
|
$
|
10,151
|
|
|
$
|
20,254
|
|
|
$
|
42,068
|
|
|
$
|
29,874
|
|
|
$
|
32,741
|
|
|
Cost of revenues
|
|
|
(700
|
)
|
|
|
(1,514
|
)
|
|
|
(4,535
|
)
|
|
|
(8,736
|
)
|
|
|
(15,203
|
)
|
|
|
(11,253
|
)
|
|
|
(9,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profits
|
|
|
1,041
|
|
|
|
2,488
|
|
|
|
5,616
|
|
|
|
11,518
|
|
|
|
26,865
|
|
|
|
18,621
|
|
|
|
23,140
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
16,743
|
|
|
|
17,297
|
|
|
|
14,457
|
|
|
|
12,864
|
|
|
|
13,081
|
|
|
|
9,307
|
|
|
|
11,064
|
|
|
Sales and marketing
|
|
|
4,474
|
|
|
|
4,749
|
|
|
|
5,298
|
|
|
|
5,640
|
|
|
|
7,395
|
|
|
|
5,291
|
|
|
|
6,080
|
|
|
General and administrative
|
|
|
2,033
|
|
|
|
2,141
|
|
|
|
1,720
|
|
|
|
1,719
|
|
|
|
3,094
|
|
|
|
2,118
|
|
|
|
2,544
|
|
|
Restructuring
|
|
|
0
|
|
|
|
2,327
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,250
|
|
|
|
26,514
|
|
|
|
21,475
|
|
|
|
20,223
|
|
|
|
23,570
|
|
|
|
16,716
|
|
|
|
19,688
|
|
|
Income (loss) from operations
|
|
|
(22,209
|
)
|
|
|
(24,026
|
)
|
|
|
(15,859
|
)
|
|
|
(8,705
|
)
|
|
|
3,295
|
|
|
|
1,905
|
|
|
|
3,452
|
|
|
Other income, net
|
|
|
750
|
|
|
|
993
|
|
|
|
308
|
|
|
|
123
|
|
|
|
326
|
|
|
|
281
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes on income
|
|
|
(21,459
|
)
|
|
|
(23,033
|
)
|
|
|
(15,551
|
)
|
|
|
(8,582
|
)
|
|
|
3,621
|
|
|
|
2,186
|
|
|
|
3,684
|
|
|
Provision for taxes on income
|
|
|
—
|
|
|
|
—
|
|
|
|
(12
|
)
|
|
|
(306
|
)
|
|
|
(462
|
)
|
|
|
(329
|
)
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(21,459
|
)
|
|
$
|
(23,033
|
)
|
|
$
|
(15,563
|
)
|
|
$
|
(8,888
|
)
|
|
$
|
3,159
|
|
|
$
|
1,857
|
|
|
$
|
3,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
attributable to ordinary shareholders — basic and
diluted
|
|
|
(3.23
|
)
|
|
|
(3.42
|
)
|
|
|
(2.32
|
)
|
|
|
(1.27
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
Shares used to compute net income
(loss) per share
|
|
|
6,650
|
|
|
|
6,729
|
|
|
|
6,764
|
|
|
|
7,117
|
|
|
|
7,520
|
|
|
|
7,492
|
|
|
|
7,673
|
|
|
Shares used to compute diluted net
income (loss) per share
|
|
|
6,650
|
|
|
|
6,729
|
|
|
|
6,764
|
|
|
|
7,117
|
|
|
|
9,091
|
|
|
|
9,040
|
|
|
|
9,623
|
|
See Note 1 to our consolidated financial statements for a
description of the method used to compute shares used in
computing basic and diluted net loss per share and shares used
in computing pro forma basic and diluted net loss per share.
30
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,933
|
|
|
$
|
4,945
|
|
|
$
|
12,883
|
|
|
$
|
10,944
|
|
|
$
|
12,350
|
|
|
$
|
15,800
|
|
|
Working capital
|
|
|
29,742
|
|
|
|
29,980
|
|
|
|
19,978
|
|
|
|
13,391
|
|
|
|
17,240
|
|
|
|
19,930
|
|
|
Total assets
|
|
|
50,187
|
|
|
|
44,362
|
|
|
|
32,239
|
|
|
|
25,822
|
|
|
|
31,154
|
|
|
|
37,145
|
|
|
Total liabilities
|
|
|
5,531
|
|
|
|
7,574
|
|
|
|
10,439
|
|
|
|
11,473
|
|
|
|
13,270
|
|
|
|
15,209
|
|
|
Mandatorily redeemable convertible
preferred shares
|
|
|
39,922
|
|
|
|
55,118
|
|
|
|
55,262
|
|
|
|
55,417
|
|
|
|
55,583
|
|
|
|
55,715
|
|
|
Convertible preferred shares
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
|
36,338
|
|
|
Total shareholders’ deficit
|
|
$
|
(31,604
|
)
|
|
$
|
(54,668
|
)
|
|
$
|
(69,800
|
)
|
|
$
|
(77,406
|
)
|
|
$
|
(74,037
|
)
|
|
$
|
(70,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations in conjunction with the
financial statements and the notes thereto included elsewhere in
this prospectus. The following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this prospectus, particularly in the
“Risk Factors.”
Overview
General
We are a leading supplier of semiconductor-based,
high-performance interconnect products that facilitate data
transmission between servers and storage systems through
communications infrastructure equipment. Our products are an
integral part of a total solution focused on computing, storage
and communication applications used in enterprise data center,
high-performance computing and embedded systems.
We are a fabless semiconductor company that provides
high-performance interconnect solutions based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our ICs. Since we introduced our first
product in 2001, we have shipped products containing
approximately 1.7 million InfiniBand ports, which we
believe demonstrates an established customer and end-user base
for our products. Growth in our target markets is being driven
by the need to improve the efficiency and performance of
clustered systems, as well as the need to significantly reduce
the total cost of ownership. In addition, we believe that demand
for our products will largely depend upon the magnitude and
timing of capital spending by end users.
We outsource our manufacturing, assembly, packaging and
production test functions, which enables us to focus on the
design, development, sales and marketing of our products. As a
result, our business has relatively low capital requirements.
However, our ability to bring new products to market, fulfill
customer orders and achieve long-term growth depends on our
ability to maintain sufficient technical personnel and obtain
sufficient external subcontractor capacity.
We have experienced rapid growth in our total revenues in each
of the last two years. Our revenues increased from
$10.2 million to $20.3 million to $42.1 million
for the years ended
December 31, 2003,
2004 and
2005,
respectively. In order to continue to increase our revenues, we
must continue to achieve design wins over other InfiniBand
providers and providers of competing interconnect technologies.
We consider a design win to occur when an OEM or
contract
manufacturer notifies us that it has selected our products to be
incorporated into a product or system under development. Because
the life cycles for our customers’ products can last for
several years if these products have successful commercial
introductions, we expect to continue to generate revenues over
an extended period of time for each successful design win.
It is difficult for us to forecast the demand for our products,
in part because of the highly complex supply chain between us
and the end-user markets that incorporate our products. Demand
for new features changes rapidly. Due to our lengthy product
development cycle, it is critical for us to anticipate changes
in demand for our various product features and the applications
they serve to allow sufficient time for product design. Our
failure to accurately forecast demand can lead to product
shortages that can impede production by our customers and harm
our relationship with these customers. Conversely, our failure
to forecast declining demand or shifts in product mix can result
in excess or obsolete inventory.
Revenues. We derive revenues from sales of our
ICs and cards. To date, we have derived a substantial portion of
our revenues from a relatively small number of customers. Total
sales to customers representing more than 10% of revenues
accounted for 54%, 52% and 56% of our total revenues for the
years ended
December 31, 2003,
2004 and
2005, respectively.
The loss of one or more of our principal customers or the
reduction or deferral of purchases of our products by one of
these customers could cause our revenues to decline materially
if we are unable to increase our revenues from other customers.
We expect sales to customers representing more than 10% of
revenues to account for a decreasing but significant portion of
our revenues for at least the remainder of 2006.
32
Cost of revenues and gross profit. The cost of
revenues consists primarily of the cost of silicon wafers
purchased from our foundry supplier, Taiwan Semiconductor
Manufacturing Company, or TSMC, costs associated with the
assembly, packaging and production testing of our products by
Advanced Semiconductor Engineering, or ASE, outside processing
costs associated with the manufacture of our HCA cards by
Flextronics, royalties due to third parties, including the
Office of the Chief Scientist of Israel’s Ministry of
Industry, Trade and Labor, or the OCS, the Binational Industrial
Research and Development (BIRD) Foundation and a third-party
licensor, warranty costs, excess and obsolete inventory costs
and costs of personnel associated with production management and
quality assurance. In addition, after we purchase wafers from
our foundries, we also have the yield risk related to
manufacturing these wafers into semiconductor devices.
Manufacturing yield is the percentage of acceptable product
resulting from the manufacturing process, as identified when the
product is tested as a finished IC. If our manufacturing yields
decrease, our cost per unit increases, which could have a
significant adverse impact on our cost of revenues. We do not
have long-term pricing agreements with TSMC and ASE.
Accordingly, our costs are subject to price fluctuations based
on the cyclical demand for semiconductors.
We purchase our inventory pursuant to standard purchase orders.
We estimate that lead times for delivery of our finished
semiconductors from our foundry supplier and assembly, packaging
and production testing subcontractor are approximately three to
four months and that lead times for delivery from our HCA card
manufacturing subcontractors are approximately eight to ten
weeks. We build inventory based on forecasts of customer orders
rather than the actual orders themselves. In addition, as
customers are increasingly seeking opportunities to reduce their
lead times, we may be required to increase our inventory to meet
customer demand.
We expect our cost of revenues to increase over time as a result
of the expected increase in our sales volume. Generally, our
cost of revenues as a percentage of sales revenues has decreased
over time, primarily due to manufacturing cost reductions,
economies of scale related to higher unit volumes and our
decision to discontinue sales of our lower margin switch systems
products in 2005. This trend may not continue in the future, and
will depend on overall customer demand for our products, our
product mix, competitive product offerings and related pricing
and our ability to reduce manufacturing costs.
Operational
expenses
Research and development expenses. Our
research and development expenses consist primarily of salaries
and associated costs for employees engaged in research and
development, costs associated with computer aided design
software tools, depreciation expense and tape out costs. Tape
out costs are expenses related to the manufacture of new
products, including charges for mask sets, prototype wafers,
mask set revisions and testing incurred before releasing new
products. We anticipate these expenses will increase in future
periods based on an increase in personnel to support our product
development activities and the introduction of new products. We
anticipate that our research and development expenses may
fluctuate over the course of a year based on the timing of our
product tape outs.
We received grants from the OCS for several projects. Under the
terms of these grants, if products developed from an OCS-funded
project generate revenue we are required to pay a royalty of 4%
of the net sales as soon as we begin to sell such products until
120% of the dollar value of the grant plus interest at LIBOR is
repaid. All of the grants we have received from the OCS have
resulted in IC products sold by us. In 2003, 2004 and 2005, we
received an aggregate of $1.4 million, $1.3 million
and $43,000, respectively, of approved grants in support of some
of our research and development programs. As of
September 30, 2006, our contingent obligation in respect of
royalties payable to the OCS totaled approximately
$2.5 million, payable out of future net sales, if any, of
products that were developed under projects funded by the OCS.
The continued repayment of OCS grants is contingent on future
sales of products developed with the support of such grants, and
we have no obligation to refund these grants if future sales are
not generated. All reported research and development expenses
are net of OCS and other government grants.
The terms of OCS grants generally prohibit the manufacture of
products developed with OCS funding outside of Israel without
the prior consent of the OCS. The OCS has approved the
manufacture outside of Israel of our IC products, subject to an
undertaking by us to pay the OCS royalties on the sales of our
OCS-supported products until such time as the total royalties
paid equal 120% of the amount of OCS grants.
33
Under applicable Israeli law, OCS consent is also required to
transfer technologies developed with OCS funding to third
parties in Israel. Transfer of OCS-funded technologies outside
of Israel is permitted with the approval of the OCS and in
accordance with the restrictions and payment obligations set
forth under Israeli law. Israeli law further specifies that both
the transfer of know-how as well as the transfer of intellectual
property rights in such know-how are subject to the same
restrictions. These restrictions do not apply to exports of
products from Israel or the sale of products developed with
these technologies. We do not anticipate the need to transfer
any of our intellectual property rights outside of Israel at
this time.
Sales and marketing expenses. Sales and
marketing expenses consist primarily of salaries and associated
costs for employees engaged in sales, marketing and customer
support, commission payments to external, third party sales
representatives and charges for trade shows, promotions and
travel. We expect these expenses will increase in absolute
dollars in future periods based on an increase in sales and
marketing personnel and increased commission payments on higher
sales volumes.
General and administrative expenses. General
and administrative expenses consist primarily of salaries and
associated costs for employees engaged in finance, human
resources and administrative activities and charges for
accounting and legal fees. We expect these expenses will
increase in absolute dollars in future periods based on an
increase in personnel to meet the requirements associated with
our anticipated growth and being a public company.
Taxes on
Income
Our operations in Israel have been granted
“Approved
Enterprise” status by the Investment Center of the Israeli
Ministry of Industry, Trade and Labor, which makes us eligible
for tax benefits under the Israeli Law for Encouragement of
Capital Investments, 1959. Under the terms of the Approved
Enterprise program, income that is attributable to our
operations in Yokneam, Israel will be exempt from income tax for
a period of ten years commencing when we first generate taxable
income (after setting off our losses from prior years). Income
that is attributable to our operations in Tel Aviv, Israel will
be exempt from income tax for a period of two years commencing
when we first generate taxable income (after setting off our
losses from prior years), and will be subject to a reduced
income tax rate (generally 10-25%, depending on the percentage
of foreign investment in
our company) for the following five to
eight years. See
“Israeli Tax Considerations and Government
Programs — Taxation of Companies” for a more
detailed discussion.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles. The preparation
of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures.
We evaluate our estimates and assumptions on an ongoing basis.
Our estimates are based on historical experience and various
other assumptions that we believe to be reasonable under the
circumstances. Our actual results could differ from these
estimates.
We believe that the assumptions and estimates associated with
revenue recognition, allowance for doubtful accounts, inventory
valuation, warranty provision, income taxes and share-based
compensation have the greatest potential impact on our
consolidated financial statements. Therefore, we consider these
to be our critical accounting policies and estimates. For
further information on all of our significant accounting
policies, please see Note 1 of the accompanying notes to
our consolidated financial statements.
Revenue
recognition
We account for our revenue under the provisions of Staff
Accounting Bulletin No. 104, “Revenue Recognition in
Financial Statements” (SAB 104). Under
SAB 104, revenues from sales of products are recognized
when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable and collection is
reasonably assured. Our standard arrangement with our customers
typically includes freight-on-board shipping point, 30-day
payment terms, no right of return and no customer acceptance
provisions. We generally rely upon a purchase order as
persuasive evidence of an arrangement.
34
We determine whether collectibility is probable on a
customer-by-customer basis. When assessing the probability of
collection, we consider the number of years the customer has
been in business and the history of our collections. Customers
are subject to a credit review process that evaluates the
customers’ financial positions and ultimately their ability
to pay. If it is determined at the outset of an arrangement that
collection is not probable, no product is shipped and no revenue
is recognized unless cash is received in advance.
Allowance
for doubtful accounts
We estimate the allowance for doubtful accounts based on an
assessment of the collectibility of specific customer accounts.
If we determine that a specific customer is unable to meet its
financial obligations, we provide a specific allowance for
credit losses to reduce the net recognized receivable to the
amount we reasonably believe will be collected. Probability of
collection is assessed on a
customer-by-customer
basis and our historical experience with each customer.
Customers are subject to an ongoing credit review process that
evaluates the customers’ financial positions. We review and
update our estimates for allowance for doubtful accounts on a
quarterly basis. Our allowance for doubtful accounts totaled
approximately $0, $50,000 and $95,000 at
December 31, 2003,
2004 and
2005, respectively. Our bad debt expense totaled
approximately $47,000, $72,000 and $70,000 for the years ended
December 31, 2003,
2004 and
2005, respectively.
Inventory
valuation
We value our inventory at the lower of cost or market. Market is
determined based on net realizable value. Cost is determined for
raw materials on a
“first-in,
first-out” basis, for work in process based on actual costs
and for finished goods based on standard cost, which
approximates actual cost on a
first-in,
first-out basis. We reserve for excess and obsolete inventory
based on forecasted demand generally over a nine-month period
and market conditions. Inventory reserves are not reversed and
permanently reduce the cost basis of the affected inventory
until it is either sold or scrapped.
Warranty
provision
We provide a standard 12-month warranty from the date of
delivery against defects in materials and workmanship. If a
customer has a defective product, we will either repair the
goods or provide replacement products at no charge. We record
estimated warranty expenses at the time we recognize the
associated product revenues based on our historical rates of
return and costs of repair over the preceding 12-month period.
In addition, we recognize estimated warranty expenses for
specific defects at the time those defects are identified.
Share-based
compensation
Through
December 31, 2005, we elected to account for
share-based compensation in accordance with the intrinsic value
method described in Accounting Principles Board Opinion
No. 25, “
Accounting for Stock Issued to
Employees” (APB 25) and related
interpretations rather than adopting the fair value method
provided under SFAS No. 123, “
Accounting for
Stock Based Compensation” (SFAS 123). We have
generally not recognized any compensation expense for share
options we granted to our employees where the exercise price
equals the fair market value of the shares on the date of grant
and the exercise price, number of shares eligible for issuance
under the options and vesting period are fixed.
Effective
January 1, 2006, we adopted
SFAS No. 123 (revised 2004), “
Share-Based
Payment” (SFAS 123(R)), which requires that we
measure compensation expense for all share-based payment awards
made to employees and directors, including employee share
options, based on estimated fair values and recognize that
expense over the required service period.
We adopted SFAS 123(R) using the prospective transition
method. Under this method, SFAS 123(R) is applied to new
awards and to awards modified, repurchased or cancelled after
January 1, 2006. Compensation cost previously recorded
under APB 25 for unvested options will continue to be recognized
as the required services are rendered. Accordingly, for the
nine-month period ended
September 30, 2006, share-based
compensation expense includes compensation costs related to
estimated fair values of awards granted after the date of
adoption of
35
SFAS 123(R) and compensation costs related to unvested
awards at the date of adoption based on the intrinsic values as
previously recorded under APB 25.
For options granted after
January 1, 2006, and valued in
accordance with SFAS 123(R), we use the straight-line
method for expense attribution. For options granted prior to
January 1, 2006, we use the multiple grant approach for
expense attribution, which results in substantially higher
amounts of amortization in earlier years as opposed to the
straight-line method, which results in equal amortization over
the vesting period of the options.
Upon adoption of SFAS 123(R), we were required to estimate
the number of outstanding options that are not expected to vest.
In subsequent periods, if actual forfeitures differ from these
estimates, we will revise our estimates. No compensation cost is
recognized for options that do not vest. Under the multiple
grant approach, forfeitures of unvested options resulting from
employee terminations result in the reversal during the period
in which the termination occurred of previously expensed share
compensation associated with the unvested options with
maturities similar to the expected terms of the respective
options. Share compensation from vested options, whether
forfeited or not, is not reversed.
We estimated the fair value of options granted after
January 1, 2006 using the Black-Scholes option valuation
model. This valuation model requires us to make assumptions and
judgments about the variables used in the calculation. These
variables and assumptions include the weighted average period of
time that the options granted are expected to be outstanding,
the volatility of our ordinary shares, the risk-free interest
rate and the estimated rate of forfeitures of unvested share
options. If actual results differ from our estimates, we will
record the difference as a cumulative adjustment in the period
we revise our estimates. Since our ordinary shares have not been
actively traded in the past, we used the simplified calculation
of expected life described in the SEC Staff Accounting
Bulletin 107 and we estimated our ordinary shares’
volatility based on an average of the historical volatilities of
the company’s peer group in the industry in which it does
business. The risk-free rate is based on U.S. Treasury
securities with maturities similar to the expected terms of the
respective options. We estimated expected forfeitures based on
our historical experience.
Significant
factors, assumptions and methodologies used in determining fair
value
The estimated fair value of our ordinary shares was determined
by our board of directors using a model based on a fixed
multiple of net income for a trailing 12-month period. If a
valuation model using different input variables had been used,
our ordinary share valuation may have been different. During the
third quarter of 2005, we obtained a contemporaneous valuation
from an unrelated
third-party
valuation specialist. An update to this original valuation was
obtained in October 2006. A number of objective and subjective
factors were considered in determining the fair value of our
ordinary shares, including important operational events, such as
the release of new products, the risk and non-liquid nature of
the ordinary shares and underlying market conditions. The
estimated fair values determined by the valuation specialist
were not significantly different from our estimated fair values.
Therefore, we have not adjusted our consolidated financial
statements based upon the valuations.
During the
12-month
period ended
December 31, 2006, we granted share options
with the following exercise prices:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Number of Options
|
|
|
Exercise Price per
|
|
|
Weighted Average
|
|
|
Date of Grant
|
|
Granted
|
|
|
Share
|
|
|
Fair Value Per Share
|
|
|
|
|
|
|
|
|
|
26,399
|
|
|
$
|
9.19
|
|
|
$
|
9.19
|
|
|
|
|
|
930,272
|
|
|
|
9.19
|
|
|
|
9.19
|
|
|
|
|
|
47,998
|
|
|
|
9.19
|
|
|
|
9.19
|
|
|
|
|
|
26,285
|
|
|
|
8.93
|
|
|
|
8.93
|
|
|
|
|
|
51,712
|
|
|
|
8.58
|
|
|
|
8.58
|
|
|
|
|
|
6,857
|
|
|
|
7.44
|
|
|
|
7.44
|
|
|
|
|
|
16,570
|
|
|
|
7.44
|
|
|
|
7.44
|
|
36
Accounting
for income taxes
Income taxes are accounted for using an asset and liability
approach, which requires the recognition of taxes payable or
refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been
recognized in our financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets
are based on the provisions of enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to affect taxable
income. Valuation allowances are provided if, based on the
weight of available evidence, it is considered more likely than
not that some or all of the deferred tax assets will not be
realized.
Results
of Operations
The following table sets forth our consolidated statements of
operations as a percentage of revenues for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
Years ended December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
|
|
Total Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Cost of revenues
|
|
|
45
|
|
|
|
43
|
|
|
|
36
|
|
|
|
38
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
55
|
|
|
|
57
|
|
|
|
64
|
|
|
|
62
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
142
|
|
|
|
64
|
|
|
|
31
|
|
|
|
31
|
|
|
|
34
|
|
|
Sales and marketing
|
|
|
52
|
|
|
|
28
|
|
|
|
18
|
|
|
|
18
|
|
|
|
19
|
|
|
General and administrative
|
|
|
17
|
|
|
|
8
|
|
|
|
7
|
|
|
|
7
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
211
|
|
|
|
100
|
|
|
|
56
|
|
|
|
56
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(156
|
)
|
|
|
(43
|
)
|
|
|
8
|
|
|
|
6
|
|
|
|
10
|
|
|
Other income, net
|
|
|
3
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
Provision for taxes on income
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(153
|
)
|
|
|
(44
|
)
|
|
|
8
|
|
|
|
6
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues were approximately
$32.7 million for the nine months ended
September 30,
2006 compared to approximately $29.9 million for the nine
months ended
September 30, 2005, representing an increase
of approximately 9%. This increase in revenues resulted
primarily from increased unit sales of approximately 28%, driven
by broader adoption of InfiniBand and our products, offset by a
decrease in average sales prices of 14%. A portion of the
decrease in average sales prices was due to the decline from 9%
to 2% in the percentage of revenues attributable to switch
systems, which have significantly higher sales prices. In
addition, Cisco, one of our largest customers that represented
approximately 15% of our revenues in the nine months ended
September 30, 2006, represented approximately 49% of our
revenues in the nine months ended
September 30, 2005. A
portion of this percentage decline was attributable to an
accumulation of inventory in 2005 by Cisco following its
acquisition of Topspin Communications, which we believe has been
substantially sold in 2005 and 2006. We expect Cisco to remain
one of our largest customers for the year ended
December 31, 2006.
Gross Profit and Gross Margin. Gross profit
was approximately $23.1 million for the nine months ended
September 30, 2006 compared to approximate
$18.6 million for the nine months ended
September 30,
2005, representing an increase of 24%. As a percentage of
revenues, gross margin increased to 71% in the nine months
37
ended
September 30, 2006 from approximately 62% in the nine
months ended
September 30, 2005. This increase in gross
margin was primarily due to a reduction in production costs
associated with outsourced labor, raw materials and volume
discounts and reduced warranty expenses related to selected
product introductions. In addition, part of the gross margin
improvement was due to increased sales of next generation
products for which we receive higher margins.
Research and Development. Research and
development expenses were approximately $11.1 million for
the nine months ended
September 30, 2006 compared to
approximately $9.3 million for the nine months ended
September 30, 2005, representing an increase of
approximately 19%. The increase was attributable to higher
salary related expenses associated with increased headcount of
approximately $1.3 million, increased depreciation and
amortization of equipment, software and intellectual property of
approximately $197,000, and increases in non-recurring
engineering and product qualification (outside testing and
validation) expenses of approximately $262,000.
Sales and Marketing. Sales and marketing
expenses were approximately $6.1 million for the nine
months ended
September 30, 2006 compared to approximately
$5.3 million for the nine months ended
September 30,
2005, representing an increase of approximately 15%. The
increase was primarily attributable to higher salary related
expenses associated with increased headcount of approximately
$647,000, and an increase in tradeshow and advertising expenses
of approximately $168,000.
General and Administrative. General and
administrative expenses were approximately $2.5 million for
the nine months ended
September 30, 2006 compared to
approximately $2.1 million for the nine months ended
September 30, 2005, representing an increase of
approximately 19%. The increase was primarily due to higher
salary related expenses associated with increased headcount of
approximately $322,000 and an increase in legal and accounting
fees of approximately $222,000, offset by a decrease in travel
related expenses of $69,000.
Other Income, net. Other income, net consists
of interest earned on cash equivalents and marketable securities
and foreign currency exchange gains and losses. Other income,
net was approximately $232,000 for the nine months ended
September 30, 2006 compared to approximately $281,000 for
the nine months ended
September 30, 2005, representing a
decrease of approximately 17%. The decrease was primarily due to
higher foreign exchange losses of $341,000 offset by higher net
interest income of $291,000.
Provision for Taxes on Income. Provision for
taxes on income was approximately $271,000 for the nine months
ended
September 30, 2006 compared to approximately $329,000
for the nine months ended
September 30, 2005, representing
a decrease of approximately 18%. The decrease was related to
lower taxes attributable to Mellanox Technologies, Inc., our
wholly-owned U.S. subsidiary.
Revenues. Revenues were approximately
$42.1 million for the year ended
December 31, 2005
compared to approximately $20.3 million for the year ended
December 31, 2004, representing an increase of 107%. This
significant increase in revenues resulted primarily from
increased unit sales of approximately 103%, driven by broader
adoption of InfiniBand and our products, and an increase in
average sales prices of 2%.
Gross Profit and Margin. Gross profit was
approximately $26.9 million for the year ended
December 31, 2005 compared to approximately
$11.5 million for the year ended
December 31, 2004,
representing an increase of approximately 133%. As a percentage
of revenues, gross profit increased to approximately 64% in 2005
from 57% in 2004. This increase in gross profit margin was
primarily due to an approximate 5% reduction in production costs
coupled with an approximate 2% increase in average sales prices.
Part of the gross margin improvement was also due to a decline
in the percentage of revenues attributable to switch systems,
historically a lower margin business, which declined to
approximately 6% from approximately 14% of total revenues during
the year.
Research and Development. Research and
development expenses were approximately $13.1 million for
the year ended
December 31, 2005 compared to approximately
$12.9 million for the year ended
December 31, 2004,
representing an increase of approximately 2%. The change in
spending consisted of a reduction in tape out costs in 2005 of
approximately $1.2 million offset by $43,000 in OCS funding
in 2005, compared to $1.3 million of OCS funding received
in 2004, which was recorded as a reduction to research and
development.
38
Sales and Marketing. Sales and marketing
expenses were approximately $7.4 million for the year ended
December 31, 2005 compared to approximately
$5.6 million for the year ended
December 31, 2004,
representing an increase of approximately 32%. The increase was
primarily attributable to approximately $1.1 million of
higher external sales representative commissions associated with
increased revenues, higher salary and travel related expenses
due to staff additions of approximately $828,000, higher
marketing related expenses and enterprise resource planning, or
ERP, related expenses of approximately $291,000 and $121,000,
respectively, offset by approximately $488,000 of lower
share-based compensation expense.
General and Administrative. General and
administrative expenses were approximately $3.1 million for
the year ended
December 31, 2005 compared to approximately
$1.7 million for the year ended
December 31, 2004,
representing an increase of approximately 82%. The increase in
2005 was due to higher salary related expenses associated with
headcount additions of approximately $788,000, increased
facilities related expenses of approximately $326,000, increased
legal and accounting costs of approximately $251,000 and ERP
system implementation related consulting expenses of
approximately $149,000, partially offset by approximately
$176,000 of lower share-based compensation expense.
Other Income, net. Other income, net was
approximately $326,000 for the year ended
December 31, 2005
compared to approximately $123,000 for the year ended
December 31, 2004, representing an increase of
approximately 165%. The increase was primarily attributable to
gains of $217,000 from foreign currency exchange fluctuations.
Provision for Taxes on Income. Provision for
taxes on income was approximately $462,000 for the year ended
December 31, 2005 compared to approximately $306,000 for
the year ended
December 31, 2004, representing an increase
of approximately 51%. The increase was related to higher income
attributable to Mellanox Technologies, Inc.
Revenues. Revenues were approximately
$20.3 million for the year ended
December 31, 2004
compared to approximately $10.2 million for the year ended
December 31, 2003, representing an increase of 99%. This
increase in revenues resulted primarily from an increase in unit
sales of approximately 130%, offset by a decrease in average
sales prices of approximately 13%.
Gross Profit and Margin. Gross profit was
approximately $11.5 million for the year ended
December 31, 2004 compared to approximately
$5.6 million for the year ended
December 31, 2003,
representing an increase of approximately 105%. As a percentage
of revenues, gross profit increased to approximately 57% in 2004
from approximately 55% in 2003. This increase in gross margin
was primarily due to a reduction in production costs coupled
with a decline in the percentage of revenues attributable to
switch systems, historically a lower margin business, which
declined to approximately 14% in 2004 from approximately 30% in
2003 of total revenues during the year.
Research and Development. Research and
development expenses were approximately $12.9 million for
the year ended
December 31, 2004 compared to approximately
$14.5 million for the year ended
December 31, 2003,
representing a decrease of approximately 11%. The decrease was
primarily due to a decline of approximately $902,000 in salary
related expenses associated with lower headcount as part of
restructuring activities in May 2004, approximately
$1.7 million of lower depreciation and amortization
expenses on technology equipment and software and approximately
$459,000 of lower software maintenance fees. This was partially
offset by an increase of approximately $494,000 in tape out
costs, $329,000 of share-based compensation expense and
approximately $664,000 of third-party license rights.
Sales and Marketing. Sales and marketing
expenses were approximately $5.6 million for the year ended
December 31, 2004 compared to approximately
$5.3 million for the year ended
December 31, 2003,
representing an increase of approximately 6%. The increase was
primarily attributable to an increase in outside sales
representative commissions of approximately $216,000 associated
with higher revenues and an increase in salary and travel
related expenses of approximately $367,000 associated with
staffing additions, offset by approximately $209,000 of lower
marketing related expenses.
39
General and Administrative. General and
administrative expenses were approximately $1.7 million for
each of the years ended
December 31, 2004 and
December 31, 2003. Lower salary related and travel expenses
of approximately $280,000 in 2004 were offset by approximately
$158,000 of share-based compensation expense and approximately
$128,000 of recruiting fees.
Other Income, net. Other income, net was
approximately $123,000 for the year ended
December 31, 2004
compared to approximately $308,000 for the year ended
December 31, 2003, representing a decrease of approximately
60%. The decrease was attributable primarily to a decline in
interest income of approximately $308,000 associated with lower
levels of marketable securities and net interest earning
instruments, offset by approximately $92,000 of gains from
foreign currency exchange fluctuations and other interest
expense.
Provision for Taxes on Income. Provision for
taxes on income was approximately $306,000 for the year ended
December 31, 2004 compared to approximately $12,000 for the
year ended
December 31, 2003, representing an increase of
approximately $294,000. The increase was associated with tax
expenses on income from Mellanox Technologies, Inc.
Liquidity
and Capital Resources
Since our inception, we have financed our operations primarily
through private placements of our convertible preferred shares
totaling approximately $89.3 million. We incurred net
losses from operations since inception until the second quarter
of 2005 and had an accumulated deficit of approximately
$73.1 million as of
September 30, 2006. As of
September 30, 2006, our principal source of liquidity
consisted of cash and cash equivalents of approximately
$15.8 million. In August 2005, we entered into an agreement
with a financial institution to provide us with a line of credit
of up to approximately $5.0 million for general working
capital requirements. As of
September 30, 2006, we have not
drawn down on this line of credit.
Over the next 12 months, we expect cash flows from
operating activities, along with net proceeds from this
offering, and our existing cash and cash equivalents to be
sufficient to fund our operations, taking into account expected
increases in research and development expenses, including tape
out costs, sales and marketing expenses, general and
administrative expenses, primarily for increased headcount, and
capital expenditures to support our infrastructure and growth.
In addition, as of
September 30, 2006, we are required to
make total remaining payments of approximately $1.3 million
to Vitesse Semiconductor Corporation pursuant to a license
agreement dated
December 16, 2002. This agreement
terminated on
December 31, 2006, and provides that the
$1.3 million payment shall occur on or before
January 31,
2007.
Operating
Activities
Net cash generated by our operating activities amounted to
approximately $4.3 million in the nine months ended
September 30, 2006. Net cash generated by operating
activities was primarily attributable to net income of
approximately $3.4 million, a decrease in inventory of
approximately $0.9 million, and a decrease in accounts payable
of approximately $0.8 million, offset by an increase in accounts
receivable of approximately $1.8 million.
Net cash used in operating activities amounted to approximately
$12.3 million for the year ended
December 31, 2003 and
approximately $5.7 million for the year ended
December 31, 2004 and generated net cash of approximately
$770,000 for the year ended
December 31, 2005.
Net cash used in operating activities in 2003 was approximately
$12.3 million. Our net losses of approximately
$15.6 million were offset by non-cash charges of
approximately $3.3 million for depreciation and
amortization and approximately $545,000 for share-based
compensation expense. Cash used for operating activities in 2003
included an increase in inventories of approximately
$1.1 million resulting from increased projected product
demand and an increase in accounts receivable of $957,000
resulting from increased product sales partially offset by
increases in accounts payable of approximately
$1.7 million.
Net cash used in operating activities in 2004 was approximately
$5.7 million. Our net losses of approximately
$8.9 million were offset by non-cash charges of
approximately $2.5 million for depreciation and
amortization and approximately $1.0 million for share-based
compensation expense. Cash used for operating activities in 2004
40
included increases in accounts receivable of approximately
$2.9 million, partially offset by a decrease in prepaid
expenses of approximately $1.3 million and an increase in
accounts payable of approximately $1.4 million.
Net cash generated by operating activities in 2005 was
approximately $770,000. Our net income of approximately
$3.2 million was impacted by a non-cash charge of
approximately $1.7 million for depreciation and
amortization. Cash generated by operating activities in 2005
included increases in accounts receivable resulting from
increased product sales and inventories resulting from increased
projected product demand of approximately $3.2 million and
$2.3 million, respectively, and an increase in accrued
liabilities and other payables of approximately
$1.0 million.
In the years ended
December 31, 2003,
2004 and
2005, we
received from the OCS an aggregate of $1.4 million,
$1.3 million and $43,000, respectively, of approved grants
in support of some of our research and development programs.
Investing
Activities
Net cash used in investing activities was approximately $951,000
in the nine months ended
September 30, 2006. Cash used in
investment activities was attributable to purchases of property
and equipment and severance-related insurance policies.
Net cash generated by investment activities was approximately
$21.0 million in the year ended
December 31, 2003,
approximately $3.9 million in the year ended
December 31, 2004 and approximately $462,000 in the year
ended
December 31, 2005 and was primarily attributable to
net sales and maturities of marketable securities (net of
purchases) offset by purchases of property and equipment and
severance-related insurance policies.
Financing
Activities
Net cash provided by financing activities was approximately
$92,000 in the nine months ended
September 30, 2006. Cash
generated by financing activities was attributable to proceeds
from the exercise of share options, offset by principal payments
on capital lease obligations and payments on deferred public
offering costs.
Our financing activities used approximately $800,000 and $65,000
in the years ended
December 31, 2003 and
2004,
respectively, and were primarily attributable to principal
payments on capital lease obligations partially offset by
proceeds from share option exercises. Our financing activities
generated approximately $174,000 in 2005 and were
attributable to proceeds from the exercise of share options,
partially offset by principal payments on capital lease
obligations.
Contractual
Obligations
The following table summarizes our contractual obligations at
September 30, 2006 and the effect those obligations are
expected to have on our liquidity and cash flow in future
periods:
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|
|
|
|
|
|
|
|
|
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Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
Beyond
|
|
|
Contractual Obligations:
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3 Years
|
|
|
|
|
Commitments under capital lease
|
|
$
|
1,278,385
|
|
|
$
|
535,715
|
|
|
$
|
742,670
|
|
|
$
|
—
|
|
|
Non-cancelable operating lease
commitments
|
|
|
6,332,139
|
|
|
|
1,798,632
|
|
|
|
2,832,507
|
|
|
|
1,701,000
|
|
|
Purchase commitments
|
|
|
4,142,854
|
|
|
|
4,142,854
|
|
|
|
—
|
|
|
|
—
|
|
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Obligation on purchase of
intangible assets
|
|
|
1,306,000
|
|
|
|
1,306,000
|
|
|
|
—
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|
|
|
—
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
|
13,059,378
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|
|
$
|
7,783,201
|
|
|
$
|
3,575,177
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|
|
$
|
1,701,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
41
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.
Recent
Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections”
(SFAS 154), which replaces Accounting Principles Board
Opinions No. 20,
“Accounting Changes” and
SFAS No. 3,
“Reporting Accounting Changes in
Interim Financial Statements — An Amendment of APB
Opinion No. 28.” SFAS 154 provides guidance
on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or
the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of
a correction of an error. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after
December 15, 2005 and is required to
be adopted by us in the first quarter of 2006. The adoption of
SFAS 154 did not have an impact on our consolidated results
of operations or financial condition.
In September 2005, the Emerging Issues Task Force, or EITF,
issued Statement 05-6,
“Determining the
Amortization Period for Leasehold Improvements Purchased after
Lease Inception or Acquired in a Business Combination,”
or EITF 05-6. EITF reached a consensus that leasehold
improvements acquired in a business combination or that are
placed in service significantly after, and not contemplated at
or near the beginning of the lease term should be amortized over
the shorter of the useful life of the assets or a term that
includes required lease periods and renewal periods that are
deemed to be reasonably assured at the date the leasehold
improvements are purchased. EITF 05-6 applies to leasehold
improvements that are purchased or acquired in reporting periods
beginning after
June 29, 2005. The adoption of the
provisions of EITF 05-6 did not have a material impact on
our financial position and results of operations.
In June 2006, the FASB ratified Emerging Issues Task Force, or
EITF, issued Issue
06-3,
“How Sales Taxes Collected From Customers and Remitted
to Governmental Authorities Should be Presented in the Income
Statement.” EITF
06-3
requires a company to disclose its accounting policy (i.e.,
gross or net presentation) regarding the presentation of taxes
within the scope of EITF
06-3. If
taxes are significant, a company should disclose the amount of
such taxes for each period for which an income statement is
presented. The guidance is effective for periods beginning after
December 15, 2006. We are currently evaluating the effect
that the adoption of EITF
06-3 will
have on our financial position and results of operations.
In July 2006, the FASB issued Financial Accounting Standards
Interpretation No. 48,
“Accounting for Uncertainty
in Income Taxes” (FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
SFAS 109. FIN 48 prescribes a recognition and
measurement method of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. We are currently analyzing the effects
of FIN 48 on our consolidated financial position and
results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin
No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Current Year
Misstatements,” or SAB No. 108.
SAB No. 108 requires analysis of misstatements using
both an income statement, or ‘rollover,’ approach and
a balance sheet, or ‘iron curtain,’ approach in
assessing materiality and provides for a one-time cumulative
effect transition adjustment. SAB No. 108 is effective
commencing with our fiscal year 2007 annual financial
statements. We are currently assessing the potential impact that
the adoption of SAB No. 108 will have on our financial
statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157,
“Fair Value
Measurements,” or SFAS No. 157, which defines
fair value, establishes a framework for measuring fair value
under generally accepted accounting principles, and expands
disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source
of the information. SFAS No. 157 is effective for the
company as of
January 1, 2008. We are currently assessing
the potential impact that the adoption of SFAS No. 157
will have on our financial statements.
42
Quantitative
and Qualitative Disclosure About Market Risk
Market risk is the risk of loss related to changes in market
prices of financial instruments that may adversely impact our
consolidated financial position, results of operations or cash
flows.
Interest
rate fluctuation risk
We do not have any long-term borrowings. Our investments consist
of cash and cash equivalents, short-term deposits and interest
bearing investments in marketable securities with maturities of
one year or less, consisting of commercial paper, government and
non-government debt securities. The primary objective of our
investment activities is to preserve principal while maximizing
income without significantly increasing risk. We do not enter
into investments for trading or speculative purposes. Our
investments are exposed to market risk due to a fluctuation in
interest rates, which may affect our interest income and the
fair market value of our investments. Due to the short-term
nature of our investment portfolio, we do not believe an
immediate 10% increase in interest rates would have a material
effect on the fair market value of our portfolio, and therefore
we do not expect our operating results or cash flows to be
materially affected to any degree by a sudden change in market
interest rates.
Foreign
currency exchange risk
We derive all of our revenues in U.S. dollars. The
U.S. dollar is our functional and reporting currency.
However, a significant portion of our headcount related
expenses, consisting principally of salaries and related
personnel expenses, are denominated in new Israeli shekels, or
NIS. This foreign currency exposure gives rise to market risk
associated with exchange rate movements of the U.S. dollar
against the NIS. Furthermore, we anticipate that a material
portion of our expenses will continue to be denominated in NIS.
To the extent the U.S. dollar weakens against the NIS, we
will experience a negative impact on our profit margins. To
manage this risk, we have on occasion converted
U.S. dollars into NIS within two to three weeks of monthly
pay dates in Israel to lock in the related salary expense given
the different currencies. We do not currently engage in currency
hedging activities but we may choose to do so in the future.
These measures, however, may not adequately protect us from
material adverse effects due to the impact of inflation in
Israel.
Inflation
related risk
We believe that the rate of inflation in Israel has not had a
material impact on our business to date. However, 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.
Off-Balance
Sheet Arrangements
43
BUSINESS
Overview
We are a leading supplier of semiconductor-based,
high-performance interconnect products that facilitate data
transmission between servers and storage systems through
communications infrastructure equipment. Our products are an
integral part of a total solution focused on computing, storage
and communication applications used in enterprise data centers,
high-performance computing and embedded systems. We are one of
the pioneers of InfiniBand, an industry standard architecture
that provides specifications for high-performance interconnects.
We believe that we are the leading merchant supplier of
field-proven InfiniBand-compliant semiconductor products that
deliver industry-leading performance and capabilities, which we
believe is demonstrated by the performance, efficiency and
scalability of clustered computing and storage systems that
incorporate our products. In addition to supporting InfiniBand,
our next generation of products also supports the industry
standard Ethernet interconnect specification, which we believe
will expand our total addressable market.
We are a fabless semiconductor company that provides
high-performance interconnect solutions based on semiconductor
integrated circuits, or ICs. We design, develop and market
adapter and switch ICs, both of which are silicon devices that
provide high performance connectivity. We also offer adapter
cards that incorporate our ICs. These ICs are added to servers,
storage, communications infrastructure equipment and embedded
systems by either integrating them directly on circuit boards or
inserting adapter cards into slots on the circuit board. Since
we introduced our first product in 2001, we have shipped
products containing approximately 1.7 million InfiniBand
ports, which we believe demonstrates an established customer and
end-user base for our products. We have established significant
expertise with high-performance interconnect solutions from
successfully developing and implementing multiple generations of
our products. Our expertise enables us to develop and deliver
products that serve as building blocks for creating reliable and
scalable InfiniBand and Ethernet solutions with leading
performance at significantly lower cost than products based on
alternative interconnect solutions.
As the leading merchant supplier of InfiniBand ICs, we play a
significant role in enabling the providers of computing, storage
and communications applications to deliver high-performance
interconnect solutions. We have developed strong relationships
with our customers, many of which are leaders in their
respective markets. Our products are included in servers from
the five largest vendors, IBM, Hewlett-Packard, Dell, Sun
Microsystems and Fujitsu-Siemens, which collectively shipped the
majority of servers in 2005, according to the industry research
firm IDC. We also supply leading storage and communications
infrastructure equipment vendors such as Cisco Systems, LSI
Logic, Network Appliance, SilverStorm Technologies, which was
recently acquired by QLogic Corporation, and Voltaire.
Additionally, our products are used by GE Fanuc, Mercury
Computers, SeaChange International and other vendors of embedded
systems.
In order to accelerate adoption of our high-performance
interconnect solutions and our products, we work with leading
vendors across related industries, including:
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•
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processor vendors such as Intel, AMD, IBM and Sun Microsystems;
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•
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operating system vendors such as Microsoft, Novell and Red
Hat; and
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•
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software applications vendors such as Oracle, IBM and VMWare, an
EMC company.
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We are a Steering Committee member of the InfiniBand Trade
Association, or IBTA, and the OpenFabrics Alliance, or OFA, both
of which are industry trade organizations that maintain and
promote InfiniBand technology. Additionally, OFA recently
expanded its charter to support and promote high-performance
Ethernet solutions.
Our business headquarters are in Santa Clara, California,
and our engineering headquarters are in Yokneam, Israel. During
the year ended
December 31, 2005 and nine months ended
September 30, 2006, we generated approximately
$42.1 million and $32.7 million in revenues,
respectively, and approximately $3.2 million and
$3.4 million in net income, respectively.
44
Industry
Background
High-Performance
Interconnect Market Overview
Computing and storage systems such as servers, supercomputers
and storage arrays handling large volumes of data require
high-performance interconnect solutions which enable fast
transfer of data and efficient sharing of resources.
Interconnect solutions are based on ICs that handle data
transfer and associated processing which are added to server,
storage, communications infrastructure equipment and embedded
systems by either integrating the ICs on circuit boards or by
inserting adapter cards that contain these ICs into slots on the
circuit board.
Interconnect solution requirements, such as high bandwidth, low
latency (response time), reliability, scalability and
price/performance, generally depend on the systems and the
applications they support. High-performance interconnect
solutions are used in the following markets:
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•
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Enterprise Data Center, or EDC. EDCs are
facilities that house servers, storage, communications
infrastructure equipment and embedded systems that enable
deployment of commercial applications such as customer
relationship management, financial trading and risk management
applications, enterprise resource planning and
E-commerce
and web service applications. EDCs typically provide multiple
data processing and storage resources to one or many
organizations and are capable of supporting several applications
at the same time.
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High-Performance Computing, or HPC. HPC
encompasses applications that utilize the computing power of
advanced parallel processing over multiple servers, commonly
called a supercomputer. The expanding list of HPC applications
includes financial modeling, government research, computer
automated engineering, geoscience and bioscience research and
digital content creation. HPC systems typically focus data
processing and storage resources on one application at a time.
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•
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Embedded. Embedded applications encompass
computing, storage and communication functions that use
interconnect solutions contained in a chassis which has been
optimized for a particular environment. Examples of embedded
applications include storage and data acquisition equipment,
military operations, industrial and medical equipment and
telecommunications and data communications infrastructure
equipment.
|
A number of semiconductor-based interconnect solutions have been
developed to address different applications. These solutions
include Myrinet, Fibre Channel, Ethernet and most recently
InfiniBand, which was specifically created for high-performance
computing, storage and embedded applications.
Trends
Affecting High-Performance Interconnect
Demand for computing power and data storage capacity is rising
at a high rate, fueled by the increasing reliance of enterprises
on information technology, or IT, for everyday operations.
Because enterprises rely on compute- and data-intensive
applications that create greater amounts of information to be
processed, stored and retrieved, they need high-performance
computing and high-capacity storage systems that optimize
price/performance, minimize total cost of ownership and simplify
management. We believe that several IT trends impact the demand
for interconnect solutions and the performance required from
these solutions. These trends include:
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Transition to clustered computing and storage using
connections among multiple standard
components. Historically, enterprises addressed
the requirements for high-end computing and storage using
monolithic systems, which are based on proprietary components.
These systems typically require significant upfront capital
expenditures as well as high ongoing operating and maintenance
expense. More recently, enterprises have deployed systems with
multiple
off-the-shelf
standardized servers and storage systems linked by high-speed
interconnects, also known as clusters. Clustering enables
significant improvements in performance, reliability,
scalability and cost.
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•
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Transition to multiple and multi-core processors in
servers. In order to increase processing
capabilities, processor vendors have integrated multiple
computing cores into a single processor device. In addition,
server OEMs are incorporating several multi-core processors into
a single server. While this significantly
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increases the computing capabilities of an individual server,
the total performance of a cluster of these servers is impacted
by the total input/output, or I/O, bandwidth. Inadequate cluster
I/O bandwidth results in processor underutilization, thereby
reducing the overall capability and performance of the cluster.
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Enterprise data center infrastructure
consolidation. IT managers are increasingly faced
with the need to optimize total cost of ownership associated
with the EDCs they manage. They are focused on reducing the
costs associated with running multiple networks, such as power
consumption and cabling, increasing flexibility and scalability,
and improving the utilization of existing resources in the EDC.
This has led to a widespread trend of consolidating the EDC
infrastructure to reduce costs and generate a higher return on
IT investments. The need for better utilization of floor space
has helped drive the adoption of compact form factor (size and
shape) blade servers. Additionally, enterprises are turning to
virtualization software, which allows multiple applications to
run on a single server, thereby improving resource utilization
and requiring increased
I/O
bandwidth in the EDC.
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Increasing deployments of mission-critical, latency sensitive
applications. There is an increasing number of
applications that require extremely fast response times in order
to deliver an optimal result or user experience. Reducing
latency, the absolute time it takes for information to be sent
from one resource to another over a high-performance
interconnect, is critical to enhancing application performance
in clustered environments. Some examples of applications that
benefit from low-latency interconnect include financial trading,
clustered databases and parallel processing solutions used in
HPC.
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Challenges
Faced by High-Performance Interconnect
The trends described above indicate that high-performance
interconnect solutions will play an increasingly important role
in IT infrastructures and will drive strong growth in unit
demand. However, performance requirements for interconnect
solutions continue to evolve and lead to high demand for
solutions that are capable of resolving the following challenges
to facilitate broad adoption:
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Performance limitations. In clustered
computing and storage environments, high bandwidth and low
latency are key requirements to capture the full performance
capabilities of a cluster. With the usage of multiple multi-core
processors in server, storage and embedded systems, I/O
bandwidth has not been able to keep pace with processor
advances, creating performance bottlenecks. Fast data access has
become a critical requirement to accommodate
microprocessors’ increased compute power. In addition,
interconnect latency has become a limiting factor in a
cluster’s overall performance.
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Increasing complexity. The increasing usage of
clustered servers and storage systems as a critical IT tool has
led to an increase in complexity of interconnect configurations.
The number of configurations and connections have also
proliferated in EDCs, making them increasingly complicated to
manage and expensive to operate. Additionally, managing multiple
software applications utilizing disparate interconnect
infrastructures has become increasingly complex.
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Interconnect inefficiency. The deployment of
clustered computing and storage has created additional
interconnect implementation challenges. As additional computing
and storage systems, or nodes, are added to a cluster, the
interconnect must be able to scale in order to provide the
expected increase in cluster performance. Additionally, recent
government attention on data center energy efficiency is causing
IT managers to look for ways to adopt more energy-efficient
implementations.
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Limited reliability and stability of
connections. Most interconnect solutions are not
designed to provide reliable connections when utilized in a
large clustered environment, which can cause data transmission
interruption. As more applications in EDCs share the same
interconnect, advanced traffic management and application
partitioning become necessary to maintain stability and reduce
system down time. Such capabilities are not offered by most
interconnect solutions.
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Poor price/performance economics. In order to
provide the required system bandwidth and efficiency, most
high-performance interconnects are implemented with complex,
multi-chip semiconductor solutions. These implementations have
traditionally been extremely expensive.
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In addition to InfiniBand, proprietary and other
standards-based, high-performance interconnect solutions,
including Myrinet, Fibre Channel and Ethernet, are currently
used in EDC, HPC and embedded markets. However, performance and
usage requirements continue to evolve and are now challenging
the capabilities of these interconnect solutions:
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Myrinet is a proprietary interconnect solution that has been
designed for use in supercomputer applications by supporting low
latency and increased reliability. The majority of Myrinet
deployments support 2 gigabits per second, or Gb/s (a unit of
data transfer rate), while recently announced solutions support
10Gb/s in addition to providing connectivity to 10Gb/s Ethernet
switch equipment, although still requiring proprietary software
solutions. The number of supercomputers that use Myrinet has
been declining largely due to the availability of industry
standards-based interconnects that offer superior
price/performance, a lack of compatible storage systems, and the
required use of proprietary software solutions.
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Fibre Channel is an industry standard interconnect solution
limited to storage applications. The majority of Fibre Channel
deployments support 2Gb/s while recently announced solutions
support 4Gb/s. Fibre Channel lacks a standard software
interface, does not provide server cluster capabilities and
remains more expensive relative to other standards-based
interconnects.
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Ethernet is an industry-standard interconnect solution that was
initially designed to enable basic connectivity between a local
area network of computers or over a wide area network, where
latency, connection reliability and performance limitations due
to communication processing are non-critical. While Ethernet has
a broad installed base at 1 Gb/s and lower data rates, its
overall efficiency, scalability and reliability have been less
optimal than certain alternative interconnect solutions in
high-performance computing, storage and communication
applications. A recent increase to 10Gb/s, a significant
reduction in application latency and more efficient software
solutions have improved Ethernet’s capabilities to address
specific high-performance applications that do not demand the
highest scalability.
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In the HPC, EDC and embedded markets, the predominant
interconnects are 1Gb/s Ethernet and 2Gb/s or
4Gb/s Fibre
Channel. Based on our knowledge of the industry, we believe
there is significant demand for interconnect products that
provide higher bandwidth in these markets.
Overview
of the InfiniBand Standard and OpenFabrics
InfiniBand is an industry standard, high-performance
interconnect architecture that effectively addresses the
challenges faced by the IT industry by enabling cost-effective,
high-speed data communications. We believe that InfiniBand has
significant advantages compared to alternative interconnect
technologies. InfiniBand defines specifications for designing
host channel adapters, or HCAs, that fit into standard,
off-the-shelf
servers and storage systems, and switch solutions that connect
all the systems together. The physical connection of multiple
HCAs and switches is commonly known as an InfiniBand fabric.
The InfiniBand standard was developed under the auspices of
InfiniBand Trade Association, or IBTA, which was founded in 1999
and is composed of leading IT vendors and hardware and software
solution providers including Mellanox, Brocade, Cisco Systems,
Fujitsu, Hewlett-Packard, Hitachi, IBM, Intel, LSI Logic, NEC,
Network Appliance, QLogic Corporation, SilverStorm Technologies,
Sun Microsystems and Voltaire. The IBTA tests and certifies
vendor products and solutions for interoperability and
compliance. Our products meet the specifications of the
InfiniBand standard and have been tested and certified by
the IBTA.
The OpenFabrics Alliance, or OFA, is an organization responsible
for the development and distribution of open-source,
industry-standard software solutions that are compatible with
InfiniBand hardware solutions. Founded in June 2004 as the
OpenIB Alliance and a partner organization to IBTA, OFA’s
initial sole charter was to develop InfiniBand software
solutions that are interoperable among multiple vendors. As a
result of its success at developing standard InfiniBand software
solutions, the organization expanded its charter in March 2006
to leverage its software development capabilities over other
interconnect solutions including Ethernet, and changed its name
from OpenIB to OpenFabrics. OFA’s members include leading
enterprise IT vendors, hardware and software solution providers
including Mellanox, AMD, Cisco Systems, Dell, IBM, Intel,
Network Appliance and Sun Microsystems in addition to end users
such as Sandia, Los Alamos and Lawrence Livermore National
Laboratories.
47
InfiniBand solutions may be perceived to have disadvantages to
products based on other existing interconnect standards that
have been available for longer periods of time with larger
installed bases. These perceived disadvantages include the
requirement for additional software support, new cabling and
equipment infrastructure, and a limited number of
enterprise-class storage solutions, which impacted early
adoption rates of InfiniBand. In addition, a continuing
challenge is educating the IT community about the advantages of
InfiniBand and increasing familiarity with InfiniBand relative
to other interconnect standards. With the solutions now offered
by OFA in addition to key industry software providers,
InfiniBand software support has recently become widely available
and is included in leading server operating systems,
contributing to increased adoption rates. In addition, we
believe superior price performance of InfiniBand has justified
the costs of new cabling and equipment infrastructure. Last,
InfiniBand-based enterprise-class storage solutions have
recently been introduced and deployed.
As a result, InfiniBand has gained significant share of the HPC
market, including clustered computing deployments for
government, academic, scientific and research oriented
applications. According to IDC, InfiniBand’s share of the
HPC cluster interconnect revenue has grown from 1.7% in 2003 to
17.2% in 2005, while Ethernet’s share of the HPC cluster
interconnect revenue has declined from 64.1% in 2003 to 55.3% in
2005.
In addition to growth within the HPC market, InfiniBand usage is
expanding in the EDC market. This growth is facilitated by the
availability of production released software solutions for
mainstream financial, retail and other commercial applications.
We believe the primary driver of InfiniBand product shipments in
the near future is the increasing usage of InfiniBand in
servers. Based on data provided to us by IDC in a report that we
sponsored, we believe that of the 7.7 million servers that
will ship to the entire server market in 2006, approximately 4%
will integrate InfiniBand products. Further, based on the same
IDC data, we estimate that from 2006 to 2010, usage of
InfiniBand in servers will increase at a 40% compound annual
growth rate, resulting in over 1.1 million InfiniBand
servers in 2010, or approximately 10% of the projected total
number of servers that are expected to ship in that year.
Because there currently is significant capacity for growth of
InfiniBand products in servers regardless of the growth of the
overall server market, we believe that fluctuations in volumes
of the overall server market will not impact InfiniBand’s
rate of adoption in the near future. Ethernet at 1Gb/s has
significant market share in the server market, and Ethernet at
10Gb/s targets this market but is not widely deployed.
In addition to servers, storage systems represent another
significant opportunity for InfiniBand products. According to
IDC, total port shipments of Fibre Channel adapters is expected
to increase from 1.8 million in 2005 to 4.7 million in
2010, and we believe that this is representative of the market
opportunity for InfiniBand in storage applications assuming
sales of Fibre Channel adapters are converted to products based
on the InfiniBand standard. Fibre Channel-based storage systems
represented 72% of the total networked storage system revenues
in 2005 according to IDC. Ethernet at both 1Gb/s and 10Gb/s also
target the storage system market in addition to InfiniBand and
Fibre Channel.
Advantages
of InfiniBand
We believe that InfiniBand-based solutions have significant
advantages compared to solutions based on alternative
interconnect architectures. InfiniBand addresses the significant
challenges within IT infrastructures created by more demanding
requirements of the high-performance interconnect market. More
specifically, we believe that InfiniBand has the following
advantages:
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Superior performance. In comparison to other
interconnect technologies that were architected to have a heavy
reliance on communication processing, InfiniBand was designed
for implementation in an IC that relieves the central processing
unit, or CPU, of communication processing functions. InfiniBand
is able to provide superior bandwidth and latency relative to
other existing interconnect technologies and has maintained this
advantage with each successive generation of products. For
example, our current InfiniBand adapters provide bandwidth up to
20Gb/s, and our current switch ICs support bandwidth up to
60Gb/s, which is significantly higher than the 10Gb/s or less
supported by competing technologies. InfiniBand specification
supports the design of interconnect products with up to 120Gb/s
bandwidth, which
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is the highest performance industry-standard interconnect
specification. In addition, InfiniBand fully leverages the I/O
capabilities of PCI Express, a high-speed bus interface standard.
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The following table provides a bandwidth comparison of the
various high performance interconnect solutions.
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Myrinet
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Fibre Channel
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Ethernet
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InfiniBand
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Supported bandwidth of available
solutions
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2Gb/s—10Gb/s
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2Gb/s—4Gb/s
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1Gb/s—10Gb/s
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10Gb/s — 20Gb/s
server-to-server
30Gb/s — 60Gb/s switch-to-switch
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Highest bandwidth supported by
specification
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10Gb/s
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8Gb/s
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10Gb/s
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120Gb/s
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Performance in terms of latency varies depending on system
configurations and applications. According to recent independent
benchmark reports, latency of InfiniBand solutions was
approximately half of that of tested 10Gb/s Ethernet solutions
and comparable to the latency of tested Myrinet solutions. Fibre
Channel, which is used only as a storage interconnect, is
typically not benchmarked on latency performance. HPC typically
demands low latency interconnect solutions. In addition, there
is an increasing number of latency-sensitive applications in the
EDC and embedded markets, and, therefore, there is a trend
towards using industry-standard InfiniBand and 10Gb/s Ethernet
solutions that deliver lower latency than Gigabit Ethernet,
which is predominantly used today.
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•
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Reduced complexity. While other interconnects
require use of individual cables to connect servers, storage and
communications infrastructure equipment, InfiniBand allows for
the consolidation of multiple I/Os on a single cable or
backplane interconnect, which is critical for blade servers and
embedded systems. InfiniBand also consolidates the transmission
of clustering, communications, storage and management data types
over a single connection. Competing interconnect technologies
are not well suited to be unified fabrics because their
fundamental architectures are not designed to support multiple
traffic types. Additionally, InfiniBand was designed to enable
distributed, clustered systems to be centrally managed and
controlled for more efficient and simplified overall system
management.
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Highest interconnect efficiency. InfiniBand
was developed to provide efficient scalability of multiple
systems. InfiniBand provides communication processing functions
in hardware, relieving the CPU of this task, and enables the
full resource utilization of each node added to the cluster. In
addition, InfiniBand incorporates Remote Direct Memory
Access which is an optimized data transfer protocol that further
enables the server processor to focus on application processing.
This contributes to optimal application processing performance.
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Reliable and stable connections. InfiniBand is
the only industry standard high-performance interconnect
solution which provides reliable
end-to-end
data connections. In addition, InfiniBand facilitates the
deployment of virtualization solutions, which allow multiple
applications to run on the same interconnect with dedicated
application partitions. As a result, multiple applications run
concurrently over stable connections, thereby minimizing down
time.
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Superior price/performance economics. In
addition to providing superior performance and capabilities,
standards-based InfiniBand solutions are generally available at
a lower cost than other high-performance interconnects. By
facilitating clustering and reducing complexity, InfiniBand
offers further opportunity for cost reduction.
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Our
Solution
We provide comprehensive solutions based on InfiniBand,
including HCA and switch ICs, adapter cards and software.
InfiniBand enables us to provide products that we believe offer
superior performance and meet the needs of the most demanding
applications, while also offering significant improvements in
total cost of ownership compared to alternative interconnect
technologies. For example, our current InfiniBand HCAs provide
bandwidth up to 20Gb/s and our switch ICs provide bandwidth up
to 60Gb/s per interface, which is significantly higher than the
10Gb/s or less supported by competing technologies. As part of
our comprehensive solution, we perform validation
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and interoperability testing from the physical interface to the
applications software. Our expertise in performing validation
and testing reduces time to market for our customers and
improves the reliability of the fabric solution.
Data provided in the most recent list of the World’s
Fastest Supercomputers published by TOP500.org in November 2006
illustrates the benefits of our solution. TOP500.org is an
independent organization that was founded in 1993 to provide a
reliable basis for reporting trends in high-performance
computing by publishing a list of the most powerful computers
twice a year. The number of listed InfiniBand-based
supercomputers has grown from 30 as of November 2005 to 40 in
June 2006, and most recently to 82 as of November 2006, which
represents a 105% increase in six months and a 173% increase in
one year. The November 2006 TOP500 list also illustrates that
InfiniBand interconnects have continued to replace interconnects
in supercomputers based on proprietary Myrinet, which had a 10%
decline since the June 2006 list, and lower-performing Gigabit
Ethernet, which had a 16% decline since the June 2006 list. We
believe that the majority of these InfiniBand-based
supercomputers incorporate our HCA products and that all of them
use our switch silicon products. Additionally, we believe the
current cluster implementations that incorporate both our HCA
and switch silicon products in the November 2006 TOP500 list of
the World’s Fastest Supercomputers compare favorably to
clusters based on other high-performance interconnect
technologies.
Specifically, clusters that incorporate our products compare as
follows:
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Performance. Performance of clusters is
measured in GFLOPS, where one GFLOPS represents one billion
mathematical calculations per second. Clusters that utilize our
products average approximately 8,900 GFLOPS, while clusters
based on Myrinet technology average 5,400 GFLOPS and
clusters based on Gigabit Ethernet technology average 3,600
GFLOPS. According to the November 2006 TOP500 list of
World’s Fastest Supercomputers, there were no clusters
reported using 10 Gigabit Ethernet technology.
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Efficiency. Efficiency is measured by the
actual performance achieved divided by the theoretical maximum
performance. Clusters that utilize our products average 69%
efficiency, compared to 66% and 51% for clusters that utilize
Myrinet and Gigabit Ethernet, respectively.
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Scalability. Clusters that utilize our
products average approximately 1,800 CPUs per cluster, compared
to approximately 1,400 and 1,150 average CPUs per cluster for
clusters that utilize Myrinet and Gigabit Ethernet,
respectively. There is a strong dependency on the reliability
and fault tolerance capabilities of a high performance
interconnect when determining the scalability of a cluster.
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In addition to supporting InfiniBand, our next generation
adapter products also support the industry standard Ethernet
interconnect specification at both 1Gb/s and 10Gb/s. These
products extend certain InfiniBand advantages to Ethernet
fabrics, such as reduced complexity and superior
price/performance, by utilizing existing, field-proven
InfiniBand software solutions. These software solutions include
applications, operating systems and virtualization and
management packages used in EDC, HPC and embedded markets.
Integrating InfiniBand and Ethernet in the same product provides
our OEM customers and partners the ability to support both
interconnect standards with a single development effort and
provides end-users the flexibility to choose between fabrics or
simultaneously connect to both depending on the environment and
performance requirements.
We believe that InfiniBand solutions will continue to deliver
superior price/performance when compared to any other high
performance interconnect technology because of its base
architecture, proven scalability, reliability and feature set.
At the same time, as Ethernet is a widely deployed interconnect
technology, we expect there will be an increasing number of
high-performance deployments at 10Gb/s in EDCs. The ability of
our next generation adapter product to support high-performance
connectivity to both InfiniBand and Ethernet allows us to
provide products to an expanding number of high-performance
applications and environments.
Our
Strengths
We apply our strengths to enhance our position as a leading
supplier of semiconductor-based, high-performance interconnect
products. We consider our key strengths to include the following:
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We have expertise in developing high-performance interconnect
solutions. Mellanox was founded by a team with an
extensive background in designing and marketing semiconductor
solutions. Since our
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founding, we have been focused on high-performance interconnect
and have successfully launched several generations of InfiniBand
products. We believe we have developed strong competencies in
integrating mixed-signal design, including industry-leading data
transmission technology such as Serializer/Deserializer, or
SerDes, and developing complex ICs. We have used these
competencies along with our knowledge of InfiniBand to design
our innovative, next generation, high-performance solutions that
also support the Ethernet interconnect standard. We also
consider our software development capability as a key strength,
and we believe that our software allows us to offer complete
solutions. We have developed a significant portfolio of
intellectual property, or IP, and have 15 approved patents. We
believe our experience, competencies and IP will enable us to
remain a leading supplier of high-performance interconnect
solutions.
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We believe we are the leading merchant supplier of InfiniBand
ICs with a multi-year competitive advantage. We
have developed in-depth knowledge of the InfiniBand standard
through active participation in its development. We were first
to market with InfiniBand products in 2001 and InfiniBand
products that support the standard PCI Express interface in
2004. We have sustained our leadership position through the
introduction of several generations of products. Because of our
market leadership, vendors have developed and continue to
optimize their software products based on our semiconductor
solutions. We believe that this places us in an advantageous
position to benefit from continuing market adoption of
InfiniBand interconnect products.
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We have a comprehensive set of technical capabilities to
deliver innovative and reliable products. In
addition to designing our ICs, we design standard adapter card
products and custom adapter card and switch products, providing
us a deep understanding of the associated circuitry and
component characteristics. We believe this knowledge enables us
to develop solutions that are innovative and can be efficiently
implemented in target applications. We have devoted significant
resources to develop our in-house test development capabilities,
which enables us to rapidly finalize our mass production test
programs, thus reducing time to market. We have synchronized our
test platform with our outsourced testing provider and are able
to conduct quality control tests with minimal disruption. We
believe that because our capabilities extend from product
definition, through IC design, and ultimately management of our
high-volume manufacturing partners, we have better control over
our production cycle and are able to improve the quality,
availability and reliability of our products.
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We have extensive relationships with our key OEM customers
and many end users. Since our inception we have
worked closely with major OEMs, including leading server,
storage, communications infrastructure equipment and embedded
systems vendors, to develop products that accelerate market
adoption of InfiniBand. During this process we have obtained
valuable insight into the challenges and objectives of our
customers, and gained visibility into their product development
plans. We also have established end-user relationships with
influential IT executives which allow us access to firsthand
information about evolving EDC, HPC and embedded market trends.
We believe that our OEM customer and end-user relationships
allow us to stay at the forefront of developments and improve
our ability to provide compelling solutions to address their
needs.
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Our
Strategy
Our goal is to be the leading supplier of semiconductor-based,
high-performance interconnect products for computing, storage
and communications applications. To accomplish this goal, we
intend to:
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Continue to develop leading, high-performance interconnect
products. We will continue to expand our
technical expertise and customer relationships to develop
leading interconnect products. We are focused on extending our
leadership position in high-performance interconnect technology
and pursuing a product development plan that addresses emerging
customer and end-user demands and industry standards. In order
to expand our market opportunity, we are adding products that
are compatible with the Ethernet interconnect standard in
addition to InfiniBand. These products will allow our customers
to capture certain advantages of InfiniBand while providing
connectivity to Ethernet-based infrastructure equipment.
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•
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Facilitate and increase the continued adoption of
InfiniBand. We will facilitate and increase the
continued adoption of InfiniBand in the high-performance
interconnect marketplace by expanding our partnerships
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with key vendors that drive high-performance interconnect
adoption, such as suppliers of processors, operating systems and
other associated software. In conjunction with our OEM
customers, we will continue to promote the benefits of
InfiniBand directly to end users to increase demand for
InfiniBand-based solutions.
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Expand our presence with existing server OEM
customers. We believe the leading server vendors
are influential drivers of high-performance interconnect
technologies to end users. We plan to continue working with and
building our relationships with server OEMs to increase our
presence in their current and future product platforms.
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Broaden our customer base with storage, communications
infrastructure and embedded systems OEMs. We
believe there is a significant opportunity to expand our global
customer base with storage, communications infrastructure and
embedded systems OEMs. In storage solutions specifically, we
believe our products are well suited to replace existing
technologies such as Fibre Channel. We believe our products are
the basis of superior interconnect fabrics for unifying
disparate storage interconnects, including back-end, clustering
and front-end connections, primarily due to its ability to be a
unified fabric and superior price/performance economics.
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Leverage our fabless business model to deliver strong
financial performance. We intend to continue
operating as a fabless semiconductor company and consider
outsourced manufacturing of our ICs and adapter cards to be a
key element of our strategy. Our fabless business model offers
flexibility to meet market demand and allows us to focus on
delivering innovative solutions to our customers. We plan to
continue to leverage the flexibility and efficiency offered by
our business model to deliver strong financial results.
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Our
Products
We provide complete solutions which are based on and meet the
specifications of the InfiniBand standard, including HCA and
switch ICs, adapter cards and software. Our next generation
adapter IC and card products also support the Ethernet
interconnect standard in addition to InfiniBand. Our available
product families include:
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InfiniHosttm
InfiniBand HCA ICs and standard cards. We provide
InfiniBand HCAs to server, storage, communications
infrastructure and embedded systems OEMs as ICs or standard card
form factors with PCI-X or PCI Express interfaces. HCAs are
incorporated into OEM server and storage systems to provide
InfiniBand connectivity. We are currently in production with our
third generation of HCA products. Our HCAs interoperate with
standard programming interfaces and are compatible with previous
generations, providing broad industry support. We also support
server operating systems including Linux, Windows, AIX, HPUX,
OSX, Solaris and VxWorks.
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InfiniScaletm
InfiniBand switch ICs. Our InfiniBand switch ICs
are used by server, storage, communications infrastructure and
embedded systems OEMs to create switching equipment that is at
the core of InfiniBand fabrics. To deploy an InfiniBand fabric,
any number of server or storage systems that contain an HCA can
be connected to an InfiniBand-based communications
infrastructure system such as an InfiniBand switch. We are
currently in production with our third generation of switch ICs.
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The figure below illustrates the components of servers and
storage equipment clustered with a high-performance interconnect
and how our products are incorporated into the total solution.
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Our products generally vary by the number and performance of
InfiniBand ports supported. The tables below summarize the
available HCA and switch ICs that Mellanox provides.
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Uni-directional InfiniBand
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HCA ICs and Cards
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Interface
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# InfiniBand Ports
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Bandwidth per Port
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Total
Bandwidth(3)
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InfiniBridge(1)
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PCI(2)
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8
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2.5Gb/s
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40Gb/s
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2
|
|
|
|
10Gb/s
|
|
|
|
40Gb/s
|
|
|
InfiniHost
|
|
PCI-X(2)
|
|
|
2
|
|
|
|
10Gb/s
|
|
|
|
40Gb/s
|
|
|
InfiniHost III Lx
|
|
PCI Express
|
|
|
1
|
|
|
|
20Gb/s
|
|
|
|
40Gb/s
|
|
|
InfiniHost III Ex
|
|
PCI Express
|
|
|
2
|
|
|
|
20Gb/s
|
|
|
|
80Gb/s
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uni-directional InfiniBand
|
|
|
|
|
|
Switch ICs
|
|
# InfiniBand Ports
|
|
|
Bandwidth per Port
|
|
|
Total
Bandwidth(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
InfiniBridge(1)
|
|
|
8
|
|
|
|
2.5Gb/s
|
|
|
|
40Gb/s
|
|
|
|
|
|
2
|
|
|
|
10Gb/s
|
|
|
|
40Gb/s
|
|
|
InfiniScale
|
|
|
8
|
|
|
|
10Gb/s
|
|
|
|
160Gb/s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
InfiniScale III
|
|
|
24
|
|
|
|
20Gb/s
|
|
|
|
960Gb/s
|
|
|
|
|
|
8
|
|
|
|
60Gb/s
|
|
|
|
960Gb/s
|
|
|
|
|
|
(1) |
|
InfiniBridgetm
functions as both a HCA and switch and is our first generation
device. |
| |
|
(2) |
|
PCI and PCI-X are the predecessor interface standards to PCI
Express. |
| |
|
(3) |
|
Total bandwidth is the aggregate bandwidth of all input and
output ports operating simultaneously. |
We also offer custom products that incorporate our ICs to select
server and storage OEMs that meet their special system
requirements. Through these custom product engagements we gain
insight into the OEMs’ technologies and product strategies.
We also provide our OEM customers software and tools that
facilitate the use and management of our products. Developed in
conjunction with the OFA, our Linux- and Windows-based software
enables applications to utilize the features of the interconnect
efficiently. We have expertise in optimizing the performance of
software that spans the entire range of upper layer protocols
down through the lower level drivers that interface to our
products. We also provide basic software tools for managing,
testing and verifying the operation of InfiniBand fabrics.
Technology
We have technological core competencies in the design of
high-performance interconnect ICs that enable us to provide a
high level of integration, efficiency, flexibility and
performance for our adapter and switch ICs. Our products
integrate multiple complex components onto a single IC,
including high-performance mixed-signal design, specialized
communication processing functions and advanced interfaces.
High-performance
mixed-signal design
One of the key technology differentiators of our ICs is our
mixed-signal SerDes technology. SerDes I/O directly drives the
interconnect interface, which provides signaling and
transmission of data over copper connects and cables, or fiber
optic interfaces for longer distance connections. We are the
only company that has shipped field-proven ICs that operate with
a 5Gb/s SerDes over a ten meter InfiniBand copper cable (up to
60Gb/s connections with 12 SerDes working in parallel on
our switch IC). Additionally, we are able to integrate several
of these high-performance SerDes onto a single, low-power IC,
enabling us to provide the highest bandwidth, merchant switch
ICs based on an industry-standard specification. We are
currently developing a 10Gb/s SerDes I/O that is intended for
use in future generation InfiniBand and Ethernet devices. This
SerDes capability will enable up to 120Gb/s bandwidth on
InfiniBand devices.
54
Specialized
communication processing and switching functions
We also specialize in high-performance, low-latency design
architectures that incorporate significant memory and logic
areas requiring proficient synthesis and verification. Our
adapter ICs are specifically designed to perform communication
processing, effectively offloading this very intensive task from
server and storage processors in a cost-effective manner. Our
switch ICs are specifically designed to switch cluster
interconnect data transmissions from one port to another with
high bandwidth and low latency, and we have developed a packet
switching engine and non-blocking crossbar switch fabric to
address this.
We have developed a custom embedded Reduced Instruction Set
Computer processor called
InfiniRISCtm
that specializes in offloading network processing from
the host server or storage system and adds flexibility, product
differentiation and customization. We integrate a different
number of these processors in a device depending on the
application and feature targets of the particular product.
Integration of these processors also shortens development cycles
as additional features can be added by providing new programming
packages after the ICs are manufactured, and even after they are
deployed in the field.
Advanced
interfaces
In addition to InfiniBand interfaces (and Ethernet interfaces in
our next generation adapter products), we also provide other
industry-standard, high-performance advanced interfaces such as
PCI Express which also utilize our mixed-signal SerDes I/O
technology. PCI Express is a high-speed
chip-to-chip
interface which provides a high-performance interface between
the adapter and processor in server and storage systems. PCI
Express and our high-performance interconnect interfaces are
complementary technologies that facilitate optimal bandwidth for
data transmissions along the entire connection starting from a
processor of one system in the cluster to another processor in a
different system. We were among the first to market with an IC
solution that integrates the PCI Express interface in 2004, and
we believe this demonstrates an example of the technical
proficiency of our development team.
Not only has PCI Express increased the performance of our
products, but it has lowered cost, reduced power consumption,
minimized board area requirements and increased the overall
reliability of card and system products using our adapter ICs by
enabling a technology we call MemFree. Typically, memory is
designed onto high-performance adapter cards in addition to the
controller in order to store fabric connection information that
is required for cluster data transmission. With the introduction
of the high bandwidth PCI Express interface, the server’s
or storage system’s main memory can be used for this
purpose instead, and we have designed MemFree adapter card
solutions that are completely free of additional memory
components. We believe that we are the only company that
provides high-performance interconnect products with MemFree or
equivalent technology.
55
The below diagrams depict our adapter and switch IC architecture.
Customers
EDC, HPC and embedded end-user markets for systems utilizing our
products are mainly served by leading server, storage and
communications infrastructure OEMs. In addition, our customer
base includes leading embedded systems OEMs that integrate
computing, storage and communication functions that use
high-performance interconnect solutions contained in a chassis
which has been optimized for a particular environment.
Representative OEM customers in these areas include:
| |
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
|
Server
|
|
Storage
|
|
Infrastructure Equipment
|
|
Embedded Systems
|
|
|
|
Dell
|
|
Isilon Systems
|
|
Cisco Systems
|
|
GE Fanuc
|
|
Hewlett-Packard
|
|
LSI Logic
|
|
SilverStorm Technologies
|
|
Mercury Computer Systems
|
|
IBM
|
|
Network Appliance
|
|
Voltaire
|
|
SeaChange International
|
|
Sun Microsystems
|
|
|
|
|
|
|
We sold products to more than 100 customers worldwide in the
year ended
December 31, 2005, many of whom are at the
evaluation stage of their product development. We currently
anticipate that several of these evaluations will result in
increased orders for our products as they move into the
production stage.
For the year ended
December 31, 2005, Cisco Systems
(including its acquisition of Topspin Communications) accounted
for approximately 44%, Voltaire accounted for approximately 12%,
SilverStorm Technologies, which was recently acquired by QLogic
Corporation, accounted for approximately 9% and Network
Appliance accounted
56
for approximately 7% of our net revenues. In the nine months
ended
September 30, 2006, Voltaire accounted for
approximately 16%, Cisco accounted for approximately 15%,
SilverStorm Technologies accounted for approximately 11% and
Hewlett-Packard accounted for approximately 10% of our net
revenues.
Sales and
Marketing
We sell our products worldwide through multiple channels,
including our direct sales force and our network of domestic and
international sales representatives. We have strategically
located our direct sales personnel in the United States, Europe,
China and Taiwan. Our sales directors focus their efforts on
leading OEMs and target key decision makers. We are also in
frequent communication with our customers’ and
partners’ sales organizations to jointly promote our
products and partner solutions into end-user markets. We have
dedicated specific resources to promote the benefits of our
products to end users, which we believe creates additional
demand for our customers’ products that incorporate our
products.
Our sales support organization is responsible for supporting our
sales channels and managing the logistics from order entry to
delivery of products to our customers. In addition, our sales
support organization is responsible for customer and revenue
forecasts, customer agreements and program management for our
large, multi-national customers. Customers within the United
States are supported by our sales staff in California and
customers outside of the United States are supported by our
sales staff in Israel.
To accelerate design and qualification of our products into our
OEM customers’ systems, and ultimately the deployment of
our technology by our customers to end users, we have a field
applications engineering, or FAE, team and an internal support
engineering team that provide direct technical support. In
certain situations, our OEM customers will also utilize our
expertise to support their end-user customers jointly. Our
technical support personnel have expertise in hardware and
software, and have access to our development team to ensure
proper service and support for our OEM customers. Our FAE team
provides OEM customers with design and review capabilities of
their systems in addition to technical training on the
technology we have implemented in our products.
Our marketing team is responsible for product strategy and
management, future product plans and positioning, pricing,
product introductions and transitions, competitive analysis,
marketing communications and raising the overall visibility of
our company. The marketing team works closely with both the
sales and research and development organizations to properly
align development programs and product launches with market
demands.
Our marketing team leads our efforts to promote InfiniBand
technology and our products to the entire industry by:
|
|
|
| |
•
|
assuming leadership roles within IBTA, OFA and other industry
trade organizations;
|
| |
| |
•
|
participating in trade shows, press and analyst briefings,
conference presentations and seminars for end-user
education; and
|
| |
| |
•
|
building and maintaining active partnerships with industry
leaders whose products are important in driving InfiniBand
adoption, including vendors of processors, operating systems and
software applications.
|
Research
and Development
Our research and development team is composed of experienced
semiconductor designers, software developers and system
designers. Our semiconductor design team has extensive
experience in all phases of complex, high-volume design,
including product definition and architecture specification,
hardware code development and mixed-signal design and
verification. Our software team has extensive experience in
development, verification, interoperability testing and
performance optimization of software for use in computing and
storage applications. Their efforts are focused on standard,
open-source software stacks, drivers, management software and
tools that work together with our IC and card products. Our
systems design team has extensive experience is all phases of
high-volume adapter card and custom switch designs including
product definition and architectural specification, product
design and design verification.
We design our products with careful attention to quality,
reliability, cost and performance requirements. We utilize a
methodology called Customer Owned Tooling, or COT, where we
control and manage a significant portion of timing
57
and layout design and verification in-house, before sending the
semiconductor design to our third-party manufacturer. Although
COT requires a significant up-front investment in tools and
personnel, it provides us with greater control over the quality
and reliability of our IC products as opposed to relying on
third-party verification services.
We choose first tier technology vendors for our
state-of-the-art
design tools and continue to maintain long-term relationships
with our vendors to ensure timely support and updates. We also
select a mainstream silicon manufacturing process only after it
has proven its production worthiness for at least one year. We
verify that actual silicon characterization and performance
measurements strongly correlate to models that were used to
simulate the device while in design, and that our products meet
frequency, power and thermal targets with good margins.
Furthermore, we insert Design-for-Test circuitry into our IC
products which increases product quality, provides expanded
debugging capabilities and ultimately enhances system-level
testing and characterization capabilities once the device is
integrated into our customers’ products. In addition, we
use an internally developed tool that examines IC designs before
sending them for manufacturing that is proven to increase the
yield (and consequently reduce device cost) by increasing the
performance margin on critical design areas.
Frequent interaction between our silicon, software and systems
design teams gives us a comprehensive view of the requirements
necessary to deliver quality, high-performance products to our
OEM customers. For the years ended
December 31, 2004 and
2005, our research and development expenses were approximately
$12.9 million and $13.1 million, respectively. For the
nine months ended
September 30, 2006, our research and
development expenses were approximately $11.1 million.
Manufacturing
We depend on third-party vendors to manufacture, package and
production test our products as we do not own or operate a
semiconductor fabrication, packaging or production testing
facility. By outsourcing manufacturing, we are able to avoid the
high cost associated with owning and operating our own
facilities. This allows us to focus our efforts on the design
and marketing of our products.
Manufacturing and Testing. We use Taiwan
Semiconductor Manufacturing Company, or TSMC, to manufacture and
Advanced Semiconductor Engineering, or ASE, to assemble, package
and production test our IC products. We use Flextronics to
manufacture our standard adapter card products and custom
adapter cards and switch systems. We maintain close
relationships with our suppliers, which improves the efficiency
of our supply chain. We focus on mainstream processes,
materials, packaging and testing platforms, and have a
continuous technology assessment program in place to choose the
appropriate technologies to use for future products. We provide
all of our suppliers a 12-month rolling forecast, and receive
their confirmation that they are able to accommodate our needs
on a monthly basis. We have access to on-line production reports
that provide
up-to-date
status information of our products as they flow through the
manufacturing process. On a quarterly basis, we review
lead-time, yield enhancements and pricing with all of our
suppliers to obtain the optimal cost for our products.
Quality Assurance. We maintain an ongoing
review of product manufacturing and testing processes. Our IC
products are subjected to extensive testing to assess whether
their performance exceeds the design specifications. We own an
in-house Teradyne Tiger IC tester which provides us with
immediate test data and generation of characterization reports
that we make available to our customers. Our adapter cards and
custom switch system products are subject to similar levels of
testing and characterization, and are additionally tested for
regulatory agency certifications such as Safety and EMC
(radiation test) which are made available to our customers. We
only use components on these products that are qualified to be
on our approved vendor list.
Requirements Associated with OCS. Israeli law
requires that we manufacture our products developed with
government grants in Israel unless we otherwise obtain approval
from the Office of the Chief Scientist of Israel’s Ministry
of Industry Trade and Labor, or the OCS. This approval, if
provided, is generally conditioned on an increase in the total
amount to be repaid to the OCS, ranging from 120% to 300% of the
amount of funds granted. The specific increase would depend on
the extent of the manufacturing to be conducted outside of
Israel. The restriction on manufacturing outside of Israel does
not apply to the extent that we disclosed our plans to
manufacture outside of Israel when we filed the application for
funding (and provided the application was approved based on the
information disclosed in the application). We have indicated our
intent to manufacture outside of Israel on some of our grant
applications, and the OCS has approved the manufacture of our IC
products outside of Israel, subject to our
58
undertaking to pay the OCS royalties from the sales of these
products up to 120% of the amount of OCS funds granted. The
manufacturing of our IC products outside of Israel, including
those products manufactured by TSMC and ASE, is in compliance
with the terms of our grant applications and applicable
provisions of Israeli law. Under applicable Israeli law, Israeli
government consent is required to transfer to Israeli third
parties technologies developed under projects funded by the
government. Transfer of OCS-funded technologies outside of
Israel is permitted with the approval of the OCS and in
accordance with the restrictions and payment obligations set
forth under Israeli law. Israeli law further specifies that both
the transfer of know-how as well as the transfer of IP rights in
such know-how are subject to the same restrictions. These
restrictions do not apply to exports from Israel or the sale of
products developed with these technologies.
Employees
As of
September 30, 2006, we had 148 full-time
employees and 23 part time employees located in the United
States and Israel, including 94 in research and development, 25
in sales and marketing, 15 in general and administrative, 6 in
operations and 8 in other administrative functions. Of our
148 full-time employees, 119 are located in Israel.
Certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel)
and the Coordination Bureau of Economic Organizations (including
the Industrialists’ Associations) are applicable to our
employees in Israel by order of the Israeli Ministry of Labor.
These provisions primarily concern the length of the workday,
minimum daily wages for professional workers, pension fund
benefits for all employees, insurance for work-related
accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. We generally
provide our employees with benefits and working conditions
beyond the required minimums. Further, in addition to salary and
other benefits, certain of our sales personnel are paid
commissions based on our performance in certain territories
worldwide.
Israeli law generally requires severance pay equal to one
month’s salary for each year of employment upon the
retirement, death or termination without cause (as defined in
the Israel Severance Pay Law) of an employee. To satisfy this
requirement, we make contributions on behalf of most of our
employees to a fund known as Managers’ Insurance. This fund
provides a combination of retirement plan, insurance and
severance pay benefits to the employee, giving the employee or
his or her estate payments upon retirement or death and securing
the severance pay, if legally entitled, upon termination of
employment. Each full-time employee is entitled to participate
in the plan, and each employee who participates contributes an
amount equal to 5% of his or her salary to the retirement plan
and we contribute between 13.33% and 15.83% of his or her salary
(consisting of 5% to the retirement plan, 8.33% for severance
payments and up to 2.5% for insurance).
Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. Such
amounts also include payments by the employee for national
health insurance. The total payments to the National Insurance
Institute are equal to approximately 14.5% of the wages (up to a
specified amount), of which the employee contributes
approximately 66% and the employer contributes approximately 34%.
We have never experienced any employment-related work stoppages
and believe our relationship with our employees is good.
Intellectual
Property
One of the key values and drivers for future growth of our
high-performance interconnect IC products is the IP we develop
and use to improve them. We believe that the main value
proposition of our high-performance interconnect products and
success of our future growth will depend on our ability to
protect our IP. We rely on a combination of patent, copyright,
trademark, mask work, trade secret and other IP laws, both in
the United States and internationally, as well as
confidentiality, non-disclosure and inventions assignment
agreements with our employees, customers, partners, suppliers
and consultants to protect and otherwise seek to control access
to, and distribution of, our proprietary information and
processes. In addition, we have developed technical knowledge,
which, although not patented, we consider to be significant in
enabling us to compete. The proprietary nature of
59
such knowledge, however, may be difficult to protect and we may
be exposed to competitors who independently develop the same or
similar technology or gain access to our knowledge.
The semiconductor industry is characterized by frequent claims
of infringement and litigation regarding patent and other IP
rights. We, like other companies in the semiconductor industry,
believe it is important to aggressively protect and pursue our
IP rights. Accordingly, to protect our rights, we may file suit
against parties whom we believe are infringing or
misappropriating our IP rights. These measures may not be
adequate to protect our technology from third party infringement
or misappropriation, and may be costly and may divert
management’s attention away from
day-to-day
operations. We may not prevail in these lawsuits. If any party
infringes or misappropriates our IP rights, this infringement or
misappropriation could materially adversely affect our business
and competitive position.
As of
September 30, 2006, we had 10 issued patents and
27 patent applications pending in the U.S., 5 issued
patents in Taiwan and 6 applications pending in Israel, each of
which covers aspects of the technology in our products. The term
of any issued patent in the United States is 20 years
from its filing date and if our applications are pending for a
long time period, we may have a correspondingly shorter term for
any patent that may issue. Our present and future patents may
provide only limited protection for our technology and may not
be sufficient to provide competitive advantages to us.
Furthermore, we cannot assure you that any patents will be
issued to us as a result of our patent applications.
In addition to our own IP, we also rely on third-party
technologies for the development of our interconnect IC
products. Pursuant to a license agreement dated
September 10, 2001, Vitesse Semiconductor Corporation, or
Vitesse, a provider of high-speed physical layer semiconductor
products for the communications market, has granted us a
non-exclusive, worldwide, perpetual right and license to use and
incorporate into our Infiniband products Vitesse’s 2.5Gb/s
SerDes macro cell implemented in TSMC’s 0.18 micron
Complementary Metal-Oxide Semiconductor, or CMOS, processes. We
have agreed only to use Vitesse’s technology licensed under
the agreement for integrated SerDes applications. In exchange
for this license, we have agreed to pay a royalty to Vitesse
based on the total number of devices sold by us that use
Vitesse’s technology.
Pursuant to a separate license agreement dated
December 16,
2002, Vitesse has also granted us a non-exclusive, worldwide,
perpetual right and license to use and incorporate into our
Infiniband products Vitesse’s 3.1Gb/s SerDes macro cell
implemented in TSMC’s 0.13 micron CMOS processes. In
exchange for this license, we have agreed to make interim
payments to Vitesse based on the total number of devices sold by
us that use Vitesse’s technology, subject to certain caps
and limitations. We have guaranteed a $2 million payment
pursuant to this agreement, $1.3 million of which remained
to be paid as of
September 30, 2006. We are obligated to
pay this remaining amount on or before
January 31, 2007.
We have registered “Mellanox,”
“InfiniBridge,” “InfiniHost,”
“InfiniPCI,” “InfiniRISC” and
“InfiniScale” as trademarks in the United States. We
have a trademark application pending to register
“ConnectX.”
Competition
The markets in which we compete are highly competitive and are
characterized by rapid technological change, evolving industry
standards and new demands on features and performance of
interconnect solutions. We compete primarily on the basis of:
|
|
|
| |
•
|
price/performance;
|
| |
| |
•
|
time to market;
|
| |
| |
•
|
features and capabilities;
|
| |
| |
•
|
wide availability of complementary software solutions;
|
| |
| |
•
|
reliability;
|
| |
| |
•
|
power consumption;
|
60
|
|
|
| |
•
|
customer support; and
|
| |
| |
•
|
product roadmap.
|
We believe that we compete favorably with respect to each of
these criteria. Many of our current and potential competitors,
however, have longer operating histories, significantly greater
resources, greater economies of scale, stronger name recognition
and a larger base of customers than we do. This may allow them
to respond more quickly than we are able to respond to new or
emerging technologies or changes in customer requirements. In
addition, these competitors may have greater credibility with
our existing and potential customers. They may be able to
introduce new technologies, respond more quickly to changing
customer requirements or devote greater resources to the
development, marketing and sales of their products than we can.
Furthermore, in the event of a manufacturing capacity shortage,
these competitors may be able to manufacture products when we
are unable to do so.
We compete with other providers of semiconductor-based high
performance interconnect products based on InfiniBand, Ethernet,
Fibre Channel and proprietary technologies. With respect to
InfiniBand products, we compete with QLogic Corporation. In
EDCs, products based on the InfiniBand standard primarily
compete with two different industry-standard interconnect
technologies, namely Ethernet and Fibre Channel. For Ethernet
technology, the leading IC vendors include Marvell Technology
Group and Broadcom Corporation. The leading IC vendors that
provide Ethernet and Fibre Channel products to the market
include Emulex Corporation and QLogic Corporation. In HPC,
products based on the InfiniBand standard primarily compete with
the industry-standard interconnect technologies used in EDCs
mentioned above, in addition to proprietary technologies
including Myrinet, while ICs are developed only by Myricom. In
embedded markets, we typically compete with interconnect
technologies that are developed in-house by system OEM vendors
and created for specific applications.
Facilities
We currently lease office space in Yokneam and Tel Aviv, Israel
and in Santa Clara, California pursuant to leases that
expire on
December 31, 2011,
December 31, 2008 and
March 31, 2009, respectively. We believe that our space is
adequate for our current needs and that suitable additional or
substitute space will be available on acceptable terms to
accommodate our foreseeable needs.
Legal
Proceedings
From time to time, we may be involved in litigation relations to
claims arising out of our operations. We are not currently
involved in any material legal proceedings.
61
MANAGEMENT
The following table provides information regarding our executive
officers, significant employees and directors as of
December 31, 2006:
| |
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
|
|
Eyal Waldman
|
|
|
46
|
|
|
Chief Executive Officer,
President, Chairman of the Board and Director
|
|
Roni Ashuri
|
|
|
46
|
|
|
Vice President of Engineering
|
|
Shai Cohen
|
|
|
43
|
|
|
Vice President of Operations and
Engineering
|
|
Michael Gray
|
|
|
50
|
|
|
Chief Financial Officer
|
|
Michael Kagan
|
|
|
49
|
|
|
Vice President of Architecture
|
|
Thad Omura
|
|
|
32
|
|
|
Vice President of Product Marketing
|
|
David Sheffler
|
|
|
51
|
|
|
Vice President of Worldwide Sales
|
|
Rob S.
Chandra(1)
|
|
|
40
|
|
|
Director
|
|
Irwin
Federman(1)(2)
|
|
|
71
|
|
|
Director
|
|
Amal M.
Johnson(2)(3)
|
|
|
53
|
|
|
Director
|
|
S. Atiq Raza
|
|
|
57
|
|
|
Director
|
|
C. Thomas
Weatherford(2)(3)
|
|
|
60
|
|
|
Director
|
|
|
|
|
(1) |
|
Member of the compensation committee |
| |
|
(2) |
|
Member of the audit committee |
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(3) |
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Member of the nominating and corporate governance committee |
Executive
Officers and Significant Employees
Eyal Waldman is a co-founder of Mellanox, and has served
as our chief executive officer, president and chairman of our
board of directors since March 1999. From March 1993 to February
1999, Mr. Waldman served as vice president of engineering
and was a co-founder of Galileo Technology Ltd., or Galileo, a
semiconductor company, which was acquired by Marvell Technology
Group Ltd. in January 2001. From August 1989 to March 1993,
Mr. Waldman held a number of design and architecture
related positions at Intel Corporation, a semiconductor chip
maker. Mr. Waldman holds a Bachelor of Science in
Electrical Engineering and a Master of Science in Electrical
Engineering from the Technion — Israel Institute of
Technology. Mr. Waldman is located in Israel.
Roni Ashuri is a co-founder of Mellanox and has served as
our vice president of engineering since June 1999. From March
1998 to May 1999, Mr. Ashuri served as product line
director of system controllers at Galileo. From May 1987 to
February 1998, Mr. Ashuri worked at Intel Corporation,
where he was a senior staff member in the Pentium processors
department and a cache controller group staff member.
Mr. Ashuri holds a Bachelor of Science in Electrical
Engineering from the Technion — Israel Institute of
Technology. Mr. Ashuri is located in Israel.
Shai Cohen is a co-founder of Mellanox and has served as
our vice president of operations and engineering since June
1999. From September 1989 to May 1999, Mr. Cohen worked at
Intel Corporation, where he was a senior staff member in the
Pentium processors department and a circuit design manager at
the cache controllers group. Mr. Cohen holds a Bachelor of
Science in Electrical Engineering from the Technion —
Israel Institute of Technology. Mr. Cohen is located in Israel.
Michael Gray has served as our chief financial officer
since December 2004. Prior to joining Mellanox, from March 1995
until July 2004, Mr. Gray served in various capacities at
SanDisk Corporation, a data storage company, including director
of finance from March 1995 to July 1999, vice president of
finance from August 1999 to February 2002 and as senior vice
president of finance and administration and chief finance
officer from March 2002 to July 2004. From July 1990 to February
1995, Mr. Gray served as controller of Consilium, Inc., a
systems software development company which was acquired by
Applied Materials, Inc. in December 1998. From October 1981 to
June 1990, Mr. Gray served in various capacities at ASK
Computer Systems, Inc., an enterprise resource planning
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solutions provider, including as treasury manager. Mr. Gray
holds a Bachelor of Science in Finance from the University of
Illinois and a Master of Business Administration from
Santa Clara University, and is an alumnus of the
Stanford/AEA Executive Institute Program. Mr. Gray is located in
the United States.
Michael Kagan is a co-founder of Mellanox and has served
as our vice president of architecture since May 1999. From
August 1983 to April 1999, Mr. Kagan held a number of
architecture and design positions at Intel Corporation. While at
Intel Corporation, between March 1993 and June 1996,
Mr. Kagan managed Pentium MMX design, and from July 1996 to
April 1999, he managed the architecture team of the Basic PC
product group. Mr. Kagan holds a Bachelor of Science in
Electrical Engineering from the Technion — Israel
Institute of Technology. Mr. Kagan is located in Israel.
Thad Omura has served as our vice president of product
marketing since October 2005, and served as director of product
marketing from May 2004 to October 2005. Prior to joining
Mellanox, from January 2003 to April 2004, Mr. Omura served
as a market development manager in the semiconductor product
sector (now