UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the quarterly period ended September 28, 2003. | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the transition period from to | ||
Commission file number
NETGEAR, Inc.
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Delaware
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77-0419172 | |
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(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
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4500 Great America Parkway, Santa Clara, California |
95054 (Zip Code) |
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| (Address of principal executive offices) | ||
(408) 907-8000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ
The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 28,541,316 as of November 7, 2003.
TABLE OF CONTENTS
| PART I: FINANCIAL INFORMATION | ||||||
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Item 1.
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Financial Statements | 2 | ||||
| Unaudited Condensed Consolidated Balance Sheets | 2 | |||||
| Unaudited Condensed Consolidated Statements of Operations | 3 | |||||
| Unaudited Condensed Consolidated Statements of Cash Flows | 4 | |||||
| Notes to Unaudited Condensed Consolidated Financial Statements | 5 | |||||
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||||
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk | 30 | ||||
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Item 4.
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Controls and Procedures | 30 | ||||
| PART II: OTHER INFORMATION | ||||||
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Item 1.
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Legal Proceedings | 31 | ||||
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Item 2.
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Changes in Securities and Use of Proceeds | 31 | ||||
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Item 6.
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Exhibits and Reports on Form 8-K | 31 | ||||
| Signatures | 32 | |||||
| Exhibit Index | ||||||
| Exhibit 31.1 | ||||||
| Exhibit 31.2 | ||||||
| Exhibit 32.1 | ||||||
| Exhibit 32.2 | ||||||
1
PART I: FINANCIAL INFORMATION
| Item 1. | Financial Statements |
NETGEAR, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| September 28, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| ASSETS | ||||||||||
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Current assets:
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Cash and cash equivalents
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$ | 75,673 | $ | 19,880 | ||||||
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Accounts receivable, net
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58,790 | 42,492 | ||||||||
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Inventories
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33,430 | 24,774 | ||||||||
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Deferred income taxes
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9,772 | — | ||||||||
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Prepaid expenses and other current assets
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5,598 | 3,003 | ||||||||
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Total current assets
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183,263 | 90,149 | ||||||||
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Property and equipment, net
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3,302 | 3,144 | ||||||||
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Goodwill, net
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558 | 558 | ||||||||
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Total assets
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$ | 187,123 | $ | 93,851 | ||||||
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LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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Current liabilities:
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Accounts payable
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$ | 20,673 | $ | 10,628 | ||||||
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Payable to related parties
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4,658 | 13,687 | ||||||||
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Accrued employee compensation
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2,955 | 3,375 | ||||||||
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Other accrued liabilities
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26,014 | 29,419 | ||||||||
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Deferred revenue
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2,216 | 5,059 | ||||||||
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Income taxes payable
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837 | 934 | ||||||||
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Note payable to Nortel Networks
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— | 13,294 | ||||||||
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Total current liabilities
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57,353 | 76,396 | ||||||||
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Commitments
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Redeemable convertible preferred stock
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— | 48,052 | ||||||||
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Stockholders’ equity (deficit):
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Common stock
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28 | — | ||||||||
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Additional paid-in capital
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163,839 | 12,810 | ||||||||
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Deferred stock-based compensation
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(4,852 | ) | (4,997 | ) | ||||||
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Accumulated deficit
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(29,245 | ) | $ | (38,410 | ) | |||||
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Total stockholders’ equity (deficit)
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129,770 | (30,597 | ) | |||||||
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Total liabilities, redeemable convertible
preferred stock and stockholders’ equity (deficit)
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$ | 187,123 | $ | 93,851 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
NETGEAR INC.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
| September 28, | September 29, | September 28, | September 29, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
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Net revenue
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$ | 75,785 | $ | 64,362 | $ | 212,494 | $ | 165,428 | |||||||||||
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Cost of revenue:
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Cost of revenue
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54,691 | 48,188 | 153,826 | 124,199 | |||||||||||||||
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Amortization of deferred stock-based compensation
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46 | 22 | 77 | 108 | |||||||||||||||
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Total cost of revenue
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54,737 | 48,210 | 153,903 | 124,307 | |||||||||||||||
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Gross profit
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21,048 | 16,152 | 58,591 | 41,121 | |||||||||||||||
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Operating expenses:
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Research and development
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2,079 | 2,378 | 5,977 | 4,878 | |||||||||||||||
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Sales and marketing
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12,419 | 8,456 | 35,086 | 23,445 | |||||||||||||||
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General and administrative
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2,356 | 2,113 | 6,037 | 5,665 | |||||||||||||||
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Amortization of deferred stock-based compensation:
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Research and development
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135 | 51 | 334 | 231 | |||||||||||||||
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Sales and marketing
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227 | 59 | 515 | 247 | |||||||||||||||
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General and administrative
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108 | 130 | 357 | 497 | |||||||||||||||
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Total operating expenses
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17,324 | 13,187 | 48,306 | 34,963 | |||||||||||||||
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Income from operations
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3,724 | 2,965 | 10,285 | 6,158 | |||||||||||||||
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Interest income
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123 | 32 | 176 | 98 | |||||||||||||||
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Interest expense
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(170 | ) | (339 | ) | (901 | ) | (883 | ) | |||||||||||
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Extinguishment of debt
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(5,868 | ) | — | (5,868 | ) | — | |||||||||||||
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Other income (expense), net
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(95 | ) | 73 | (44 | ) | 113 | |||||||||||||
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Income (loss) before income taxes
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(2,286 | ) | 2,731 | 3,648 | 5,486 | ||||||||||||||
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Provision (benefit) for income taxes
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1,664 | 385 | (5,517 | ) | 771 | ||||||||||||||
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Net income (loss)
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(3,950 | ) | 2,346 | 9,165 | 4,715 | ||||||||||||||
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Deemed dividend on Preferred Stock
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— | — | — | (17,881 | ) | ||||||||||||||
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Net income (loss) attributable to common
stockholders
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$ | (3,950 | ) | $ | 2,346 | $ | 9,165 | $ | (13,166 | ) | |||||||||
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Net income (loss) per share attributable to
common stockholders:
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Basic
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$ | (0.15 | ) | $ | 0.12 | $ | 0.42 | $ | (0.61 | ) | |||||||||
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Diluted
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$ | (0.15 | ) | $ | 0.10 | $ | 0.35 | $ | (0.61 | ) | |||||||||
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Weighted average shares outstanding for net
income (loss) per share:
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Basic
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25,684 | 20,234 | 21,957 | 21,504 | |||||||||||||||
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Diluted
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25,684 | 22,519 | 25,851 | 21,504 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
NETGEAR, INC.
| Nine Months Ended | ||||||||||||
| September 28, | September 29, | |||||||||||
| 2003 | 2002 | |||||||||||
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Cash flows from operating
activities:
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Net income
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$ | 9,165 | $ | 4,715 | ||||||||
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Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
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Depreciation and amortization
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1,447 | 998 | ||||||||||
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Amortization of deferred stock-based compensation
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1,283 | 1,084 | ||||||||||
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Deferred income taxes
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(9,772 | ) | — | |||||||||
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Accretion of note payable to Nortel Networks
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838 | 864 | ||||||||||
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Extinguishment of debt
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5,868 | — | ||||||||||
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Changes in assets and liabilities:
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Accounts receivable
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(16,298 | ) | (22,080 | ) | ||||||||
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Inventories
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(8,656 | ) | (11,445 | ) | ||||||||
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Prepaid expenses and other current assets
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(2,595 | ) | (1,869 | ) | ||||||||
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Accounts payable
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10,045 | 5,976 | ||||||||||
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Payable to related parties
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(9,029 | ) | 10,067 | |||||||||
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Accrued employee compensation
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(420 | ) | 1,620 | |||||||||
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Other accrued liabilities
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(3,405 | ) | 8,349 | |||||||||
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Deferred revenue
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(2,843 | ) | 10,353 | |||||||||
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Income tax payable
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(97 | ) | 752 | |||||||||
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Net cash provided by (used in) operating
activities
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(24,469 | ) | 9,384 | |||||||||
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Cash flows from investing
activities:
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Purchase of property and equipment
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(1,605 | ) | (2,596 | ) | ||||||||
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Net cash used in investing activities
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(1,605 | ) | (2,596 | ) | ||||||||
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Cash flows from financing
activities:
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Borrowings under line of credit
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17,000 | 47,473 | ||||||||||
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Repayments under line of credit
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(17,000 | ) | (47,473 | ) | ||||||||
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Repayment of note payable to Nortel Networks
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(20,000 | ) | — | |||||||||
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Proceeds from issuance of common stock, net of
issuance costs
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101,809 | — | ||||||||||
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Proceeds from issuance of Series C Preferred
Stock
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— | 4,700 | ||||||||||
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Series C Preferred Stock issuance costs
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— | (1,211 | ) | |||||||||
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Proceeds from exercise of options
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71 | — | ||||||||||
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Repurchase of Preferred Stock
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(13 | ) | (4,700 | ) | ||||||||
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Net cash provided by (used in) financing
activities
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81,867 | (1,211 | ) | |||||||||
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Net increase in cash and cash equivalents
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55,793 | 5,577 | ||||||||||
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Cash and cash equivalents, at beginning of period
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19,880 | 9,152 | ||||||||||
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Cash and cash equivalents, at end of period
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$ | 75,673 | $ | 14,729 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Basis of Presentation |
NETGEAR, Inc. (“NETGEAR” or the “Company”) was incorporated in Delaware in January 1996. The Company designs, develops and markets networking products that address the specific needs of small businesses and homes, enabling customers to share Internet access, peripherals, files and digital content and applications among multiple personal computers. The Company’s products include Ethernet networking products, broadband products, and wireless networking products that are sold through traditional retailers, on-line retailers, direct marketing resellers, or DMRs, value added resellers, or VARs, and broadband service providers.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are normal recurring adjustments. These financial statements have been prepared in accordance with generally accepted accounting principles related to interim financial statements and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the three years ended December 31, 2002 contained in the Company’s Amendment No. 6 of the Registration Statement on Form S-1, declared effective by the Securities and Exchange Commission on July 30, 2003.
Operating results for the three and nine months ended September 28, 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003 or for any future period. Further, the preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimates could result in a change to the estimates and impact future operating results.
The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its interim results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters is 13 weeks long, ending on Sundays closest to the calendar quarter end, with the fourth fiscal quarter covering the remaining part of the fiscal year.
| 2. | Initial Public Offering |
In July 2003, we completed an initial public offering whereby we sold 8,050,000 shares of common stock (which included underwriters’ overallotment) and received net proceeds of $101.8 million (after underwriters’ discount of $7.9 million and related offering expenses of $3.0 million). As described in Note 8, during the third quarter of fiscal 2003 we used $20.0 million of the proceeds to repay debt to Nortel Networks that had a carrying value of $14.1 million. The repayment of debt resulted in recognition of a extinguishment of debt charge of $5.9 million in the third quarter of 2003 due to the acceleration of interest expense equal to the unamortized discount balance at the date of repayment. The Company also used an additional $17.0 million of the proceeds to repay debt on amounts drawn on the Company’s line of credit. Immediately prior to the offering, the Company effected a split of its outstanding common stock of 1.75 shares for each share outstanding. All shares and per share calculations included in the accompanying unaudited condensed consolidated financial statements of NETGEAR have been adjusted to reflect this split.
5
| 3. | Significant Accounting Policies: |
The Company’s significant accounting policies are disclosed in the Company’s final prospectus dated July 30, 2003 for the year ended December 31, 2002. The Company’s significant accounting policies have not materially changed during the three and nine months ended September 28, 2003.
| Stock-based Compensation |
Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company accounts for employee stock options under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and follows the disclosure-only provisions of SFAS No. 123. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the estimated fair value of the Company’s common stock and the exercise price of options