Netgear 2004 Annual Report Download - page 23

Table of Contents
ing and distribution logistics; and freight, warranty and write-downs for excess and obsolete inventory. We outsource our
manufacturing, warehousing and distribution logistics. We believe this outsourcing strategy allows us to better manage our product
costs and gross margin. Our gross margin is affected by other factors, including changes in net revenues due to average selling prices,
marketing expenses such as promotional activities and rebate redemptions, and changes in our cost of goods sold due to fluctuations
in warranty and overhead costs, prices paid for components, net of vendor rebates, freight and charges excess or obsolete inventory
caused by fluctuations in manufacturing volumes and transitions from older to newer products.
Research and development expenses consist primarily of personnel expenses, payments to suppliers for design services, tooling,
safety and regulatory testing, product certification expenditures to qualify our products for sale into specific markets, and other
consulting fees and product certification fees paid to third parties. Research and development expenses are recognized as they are
incurred. We have invested in building our research and development organization to allow us to introduce innovative and easy to use
products. We expect to continue to add additional employees in our research and development department. In the future we believe
that research and development expenses will increase in absolute dollars as we expand into new hardware and software networking
product technologies, enhance the ease-of-use of our products and broaden our core competencies.
Sales and marketing expenses consist primarily of advertising, trade shows, corporate communications and other marketing expenses,
personnel expenses for sales and marketing staff, product marketing expenses and technical support expenses. We believe that
maintaining and building brand awareness is key to both net revenue growth and maintaining our gross margin. We also believe that
maintaining widely available and high quality technical support is key to building and maintaining brand awareness. Accordingly, we
expect sales and marketing expenses to increase in absolute dollars in the future, related to the planned growth of our business.
General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, human resources
and management information systems personnel, professional fees, bad debt provision, and other corporate expenses. We expect
general and administrative expenses to increase in absolute dollars as we add personnel and incur additional expenses related to the
growth of our business and continued operations as a public company.
We recorded, as a component of stockholders’ equity on our balance sheet, deferred stock-based compensation of $6.7million and
$1.0million relating to certain stock options granted to employees during the years ended December31, 2002 and 2003, respectively.
During the year ended December31, 2004, we eliminated $678,000 of this deferred stock-based compensation as a result of forfeitures of
certain of the awards that gave rise to the deferred stock-based compensation in 2002 and 2003. We are amortizing this deferred
stock-based compensation over the four-year vesting period of the stock options and such amounts are allocated to the respective
operating expense categories based upon individual employee departments.
Interest income represents amounts earned on our cash, cash equivalents and short-term investments. Interest expense consists of
interest paid on loans, and beginning in February 2002, included imputed interest associated with a note payable to Nortel Networks.
The note had a principal amount of $20.0million, with principal and accrued but unpaid interest due on February7, 2009. Interest on the
note, at 7%per year, was due to start accruing on February7, 2005. The note was carried at its “then” present value and we were
accreting its carrying value to reflect its imputed interest. We used approximately $20.0million of the net proceeds from our initial public
offering in August 2003 to fully repay the note. As a result of this $20.0million cash payment, we incurred an extinguishment of debt
charge of approximately $5.9million in the quarter ended September28, 2003 when the note was repaid in full.
Other expense, net, primarily represents gains and losses on transactions denominated in foreign currencies and other miscellaneous
expenses.
We incurred net losses in each year from our inception in 1996 through 1999 as we invested in building our research and development
capabilities, our sales channels and staff, and our operations and financial infrastructure. We accumulated a deficit of $24.6million
during this time period. In 2000 we earned net income of $2.7million primarily due to growth in revenue of $64.8million. In 2001 we
incurred a net loss of
15

2005. EDGAR Online, Inc.