3Ware 2003 Annual Report Download - page 29

Net Interest Income. Net interest income reflects interest earned on average cash and cash equivalents and
short-term investment balances, as well as realized gains and losses from the sale of short-term investments, less
interest accrued on our debt and capital lease obligations. Net interest income was $47.7 million for the year
ended March 31, 2003, consistent with $47.5 million for the year ended March 31, 2002, due to the realization of
gains on sales of short-term investments offset by lower interest income due to lower yields and cash balances in
fiscal 2003.
Income Taxes. We recorded no income taxes for the year ended March 31, 2003, compared to a tax benefit
of $80.9 million in the year ended March 31, 2002. The difference between our effective tax rate and the federal
statutory rate for the year ended March 31, 2003 resulted from the fact that we established valuation allowances
for our deferred tax assets generated during the fiscal year, as it is more likely than not that our net operating loss
and other credit carryforwards will expire unused. The difference between our effective tax rate and the federal
statutory rate for the year ended March 31, 2002 resulted primarily from the nondeductibility of certain
acquisition-related expenses from our purchase transactions completed during fiscal 2001. At March 31, 2003,
we provided a valuation allowance against our net deferred tax assets in the amount of $309.7 million.
Cumulative Effect of Accounting Change. As a result of our initial goodwill impairment review performed
as of April 1, 2002 as required by the adoption of SFAS 142, we recorded a non-cash charge of $102.2 million.
See “Impact of Adoption of Accounting Standard.”
Comparison of the Year Ended March 31, 2002 to the Year Ended March 31, 2001
Net Revenues. Net revenues for the year ended March 31, 2002 were approximately $152.8 million,
representing a decrease of 65% from the net revenues of approximately $435.5 million for the year ended
March 31, 2001. Revenues from sales of communications products decreased 67% to $128.3 million, or 84% of
net revenues, for the year ended March 31, 2002 from $388.8 million, or 89% of net revenues, for the year ended
March 31, 2001.
Revenues based on direct shipments outside of North America accounted for 36% for the year ended
March 31, 2002, compared to 23% for the year ended March 31, 2001.
Gross Margin. Gross margin was 1.3% for the year ended March 31, 2002, as compared to 61.9% for the
year ended March 31, 2001. The decrease in gross margin was primarily attributable to the decrease in the
volume of our product shipments, a special excess inventory charge of $15.9 million in the first quarter of fiscal
2002 and a $12.2 million increase in non-cash acquisition-related charges. Approximately $58.3 million and
$52.2 million of non-cash purchased intangible charges were included in cost of revenues in fiscal 2002 and
2001, respectively.
Research and Development. R&D expenses increased 47% to approximately $154.6 million, or 101% of
net revenues, for the year ended March 31, 2002, from approximately $105.2 million, or 24% of net revenues, for
the year ended March 31, 2001. The increase is a result of new product and process development efforts,
investments made in new design tools for the development of new products, and increases in personnel costs as a
result of our acquisition in fiscal 2001 and internal hiring of R&D personnel.
Selling, General and Administrative. SG&A expenses were approximately $75.7 million, or 50% of net
revenues, for the year ended March 31, 2002, as compared to approximately $69.2 million, or 16% of net
revenues, for the year ended March 31, 2001. The increase in SG&A expenses for the year ended March 31, 2002
was primarily attributable to investments made in our corporate infrastructure, increases in professional and legal
fees and additional marketing and advertising investments associated with the introduction of new products.
Stock-Based Compensation. Stock-based compensation charges, including amounts charged to cost of
revenues, were $147.1 million and $79.8 million for the years ended March 31, 2002 and 2001, respectively. The
increase is directly related to our acquisitions in fiscal 2001.
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