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Table of Contents
NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)
Accordingly, the Company fully reversed the valuation allowance of $9,772,000 in the second quarter of the year ended December31,
2003 to reflect the anticipated net deferred tax asset utilization.
The effective tax rate differs from the applicable U.S.statutory federal income tax rate as follows:
Year Ended December31,
2002
2003
2004
Tax at federal statutory rate
34.0
%
35.0
%
35.0
%
State, net of federal benefit
9.6
4.3
3.9
Stock-based compensation
2.7
7.3
(2.3
)
Non-deductible interest charges
2.2
27.1
0.0
Tax credits
0.0
(6.4
)
(3.9
)
Other
6.0
(2.0
)
2.8
Change in valuation allowance
(40.4
)
(102.1
)
0.0
Provision (Benefit) for taxes
14.1
%
(36.8
)%
35.5
%
Income tax benefits in the amount of $11,773,000 related to the exercise of stock options were credited to additional paid in capital
during the year ended December31, 2004.
Note5—
Commitments:
Litigation and Other Legal Matters
In June 2004, a lawsuit, entitled
Zilberman v. NETGEAR
, Civil Action CV021230, was filed against the Company in the Superior Court
of California, County of SantaClara. The complaint purports to be a class action on behalf of all persons or entities in the United States
who purchased the Company’s wireless products other than for resale. Plaintiff alleges that the Company made false representations
concerning the data transfer speeds of its wireless products when used in typical operating circumstances, and is requesting
injunctive relief, payment of restitution and reasonable attorney fees. Similar lawsuits have been filed against other companies within
the industry. The Company has filed an answer to the complaint denying the allegations. Limited discovery is currently under way and
no trial date has been set.
In February 2005, a lawsuit, entitled
McGrew v. NETGEAR
, Civil Action CV035191, was filed against the Company in the Superior
Court of California, County of SantaClara. The complaint makes the same allegations and purports to represent the same class of
persons and entities as the Zilberman suit. The Company has not yet responded to the complaint, and no trial date has been set.
These claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant
amounts of management time, and result in the diversion of significant operational resources. Were an unfavorable outcome to occur,
there exists the possibility it would have a material adverse impact on the Company’s financial position and results of operations for
the period in which the unfavorable outcome becomes probable.
In June 2004, a lawsuit, entitled
Weaver v.NETGEAR
, Civil Action RG04161382, was filed against the Company in the Superior Court of
California, County of Alameda. The complaint purported to be a class action on behalf of persons who obtained any consumer product
manufactured by us and sold in California on or after January1, 2004. Plaintiff alleged that the Company violated California law because
the Company did not disclose on its website that the failure to register a product does not diminish the product’s warranty. In the
2005. EDGAR Online, Inc.