Netgear 2004 Annual Report Download - page 37

Table of Contents
demand is lower than our forecasted demand we could be required to record additional inventory write-downs, which would have a
negative effect on our gross margin.
Income Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the
jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax
purposes. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation allowance.
Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. We recorded a full valuation allowance as of December31, 2002,
because, based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize all of
our deferred tax assets in the future. During the year ended December31, 2003 we reversed $9.8million from the valuation allowance
because in management’s judgment it is more likely than not that such assets will be realized in the future. Management reached the
same conclusion as of December31, 2004 and as such no valuation allowance has been recorded against our deferred tax assets.
Stock-based Compensation
Our stock-based employee compensation plans are described more fully in Note7 to the consolidated financial statements. We
account for those plans under the recognition and measurement principles of Accounting Principles Board, or APB, Opinion No.25 and
related interpretations. We amortize stock-based compensation using the straight-line method over the vesting periods of the related
options, which are generally four years.
We have recorded deferred stock-based compensation representing the difference between the deemed fair value of our common
stock for accounting purposes and the option exercise price. We determined the deemed fair value of our common stock based upon
several factors, including a valuation report from an independent appraiser, trends in the broad market for technology stocks and the
expected valuation we would obtain in an initial public offering. 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 amortized $1.7million, $1.8million and $1.7million of deferred stock-based compensation in the
years ended December31, 2002, 2003 and 2004, respectively. Had different assumptions or criteria been used to determine the deemed
fair value of our common stock, materially different amounts of stock-based compensation could have been reported.
Pro forma information regarding net income (loss) and net income (loss) per share is required in order to show our net income (loss) as
if we had accounted for employee stock options under the fair value method prescribed by SFASNo.123, as amended by SFASNo.148.
This information is contained in Note1 to our consolidated financial statements. The fair value of options and shares issued pursuant
to our option plans at the grant date were estimated using the Black-Scholes option-pricing model. This model was developed for use
in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions including the expected stock price volatility. We use projected volatility
rates, which are based upon historical volatility rates experienced by comparable public companies. Because our employee stock
options have characteristics significantly different from those of publicly traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of our stock options.
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2005. EDGAR Online, Inc.