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. |
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| For the quarterly period ended June 29, 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
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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 (Address of principal executive offices) |
95054 (Zip Code) |
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(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 o No þ
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 28,298,660 as of September 9, 2003.
TABLE OF CONTENTS
| PART I: FINANCIAL INFORMATION | ||||||
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Item 1.
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Financial Statements | 2 | ||||
| Condensed Consolidated Balance Sheets | 2 | |||||
| Condensed Consolidated Statements of Operations | 3 | |||||
| Condensed Consolidated Statements of Cash Flows | 4 | |||||
| Notes to Consolidated Financial Statements | 5 | |||||
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Item 2.
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Management’s Discussion and Analysis of Results of Operations and Financial Condition | 15 | ||||
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Item 3.
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Quantitative and Qualitative Disclosure 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 | 30 | ||||
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Item 2.
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Changes in Securities and Use of Proceeds | 31 | ||||
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Item 4.
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Submission of Matters to a Vote of Security Holders | 31 | ||||
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Item 6.
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Exhibits and Reports on Form 8-K | 32 | ||||
| Signatures | 33 | |||||
| Exhibit Index | ||||||
| Exhibit 31.1 | ||||||
| Exhibit 31.2 | ||||||
| Exhibit 32.1 | ||||||
| Exhibit 32.1 | ||||||
1
PART I: FINANCIAL INFORMATION
| Item 1. | Financial Statements |
NETGEAR, INC.
| Pro Forma | ||||||||||||||
| Stockholders’ | ||||||||||||||
| Equity at | ||||||||||||||
| June 29, | June 29, | December 31, | ||||||||||||
| 2003 | 2003 | 2002(1) | ||||||||||||
| (Unaudited) | ||||||||||||||
| ASSETS | ||||||||||||||
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Current assets:
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||||||||||||||
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Cash and cash equivalents
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$ | 21,376 | $ | 19,880 | ||||||||||
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Accounts receivable, net of allowance for
doubtful accounts of $869 at June 29, 2003 and $873 at
December 31, 2002
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52,328 | 42,492 | ||||||||||||
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Inventories
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40,236 | 24,774 | ||||||||||||
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Deferred income taxes
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9,772 | — | ||||||||||||
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Prepaid expenses and other current assets
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4,128 | 3,003 | ||||||||||||
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Total current assets
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127,840 | 90,149 | ||||||||||||
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Property and equipment, net
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3,617 | 3,144 | ||||||||||||
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Goodwill, net
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558 | 558 | ||||||||||||
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Total assets
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$ | 132,015 | $ | 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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$ | 30,228 | $ | 10,628 | ||||||||||
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Payable to related parties
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16,667 | 13,687 | ||||||||||||
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Accrued employee compensation
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2,473 | 3,375 | ||||||||||||
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Other accrued liabilities
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26,949 | 29,419 | ||||||||||||
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Deferred revenue
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1,168 | 5,059 | ||||||||||||
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Income taxes payable
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1,171 | 934 | ||||||||||||
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Borrowings under line of credit
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8,000 | — | ||||||||||||
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Note payable to Nortel Networks
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14,023 | 13,294 | ||||||||||||
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Total current liabilities
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100,679 | 76,396 | ||||||||||||
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Redeemable convertible preferred stock
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$ | — | $ | 48,039 | $ | 48,052 | ||||||||
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Stockholders’ equity (deficit)
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||||||||||||||
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Common stock
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20 | |||||||||||||
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Additional paid-in capital
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61,184 | 13,165 | 12,810 | |||||||||||
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Deferred stock-based compensation
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(4,573 | ) | (4,573 | ) | (4,997 | ) | ||||||||
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Accumulated deficit
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(25,295 | ) | (25,295 | ) | (38,410 | ) | ||||||||
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Total stockholders’ equity (deficit)
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$ | 31,336 | (16,703 | ) | (30,597 | ) | ||||||||
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Total liabilities, redeemable convertible
preferred stock and stockholders’ equity (deficit)
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$ | 132,015 | $ | 93,851 | ||||||||||
| (1) | Amounts as of December 31, 2002 are derived from audited financial statements as of this date |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
NETGEAR INC.
| Three Months Ended | Six Months Ended | ||||||||||||||||||
| June 29, | June 30, | June 29, | June 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
| (Unaudited) | |||||||||||||||||||
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Net revenue
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$ | 69,003 | $ | 55,538 | $ | 136,709 | $ | 101,066 | |||||||||||
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Cost of revenue:
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Cost of revenue
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49,889 | 41,326 | 99,135 | 76,011 | |||||||||||||||
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Amortization of deferred stock-based compensation
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42 | 20 | 31 | 86 | |||||||||||||||
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Total cost of revenue
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49,931 | 41,346 | 99,166 | 76,097 | |||||||||||||||
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Gross profit
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19,072 | 14,192 | 37,543 | 24,969 | |||||||||||||||
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Operating expenses:
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Research and development
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1,882 | 1,606 | 3,898 | 2,500 | |||||||||||||||
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Sales and marketing
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11,706 | 7,809 | 22,667 | 14,989 | |||||||||||||||
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General and administrative
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1,779 | 2,024 | 3,681 | 3,552 | |||||||||||||||
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Amortization of deferred stock-based compensation:
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Research and development
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103 | 37 | 199 | 180 | |||||||||||||||
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Sales and marketing
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179 | 45 | 288 | 188 | |||||||||||||||
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General and administrative
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98 | 167 | 249 | 367 | |||||||||||||||
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Total operating expenses
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15,747 | 11,688 | 30,982 | 21,776 | |||||||||||||||
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Income from operations
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3,325 | 2,504 | 6,561 | 3,193 | |||||||||||||||
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Interest income
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25 | 45 | 53 | 66 | |||||||||||||||
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Interest expense
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(370 | ) | (526 | ) | (731 | ) | (544 | ) | |||||||||||
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Other income, net
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128 | 108 | 50 | 40 | |||||||||||||||
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Income before income taxes
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3,108 | 2,131 | 5,933 | 2,755 | |||||||||||||||
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Provision (benefit) for income taxes
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(8,395 | ) | 299 | (7,182 | ) | 386 | |||||||||||||
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Net income
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11,503 | 1,832 | 13,115 | 2,369 | |||||||||||||||
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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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$ | 11,503 | $ | 1,832 | $ | 13,115 | $ | (15,512 | ) | ||||||||||
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Net income (loss) per share attributable to
common stockholders
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Basic
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$ | 0.57 | $ | 0.09 | $ | 0.65 | $ | (0.70 | ) | ||||||||||
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Diluted
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$ | 0.48 | $ | 0.09 | $ | 0.55 | $ | (0.70 | ) | ||||||||||
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Pro forma net income per share
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Basic
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$ | 0.57 | $ | 0.09 | $ | 0.65 | $ | 0.11 | |||||||||||
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Diluted
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$ | 0.48 | $ | 0.09 | $ | 0.55 | $ | 0.11 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NETGEAR, INC.
| Six Months Ended | ||||||||||||
| June 29, | June 30, | |||||||||||
| 2003 | 2002 | |||||||||||
| (Unaudited) | ||||||||||||
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Cash flows from operating
activities:
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Net Income
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$ | 13,115 | $ | 2,369 | ||||||||
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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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900 | 687 | ||||||||||
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Amortization of deferred stock-based compensation
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767 | 821 | ||||||||||
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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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729 | 526 | ||||||||||
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Changes in assets and liabilities:
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Accounts receivable
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(9,836 | ) | (19,368 | ) | ||||||||
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Inventories
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(15,462 | ) | 5,299 | |||||||||
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Prepaid expenses and other current assets
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(1,125 | ) | (954 | ) | ||||||||
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Accounts payable
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19,763 | (788 | ) | |||||||||
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Payable to related parties
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2,818 | 7,668 | ||||||||||
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Accrued employee compensation
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(902 | ) | 962 | |||||||||
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Other accrued liabilities
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(2,471 | ) | 6,280 | |||||||||
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Deferred revenue
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(3,891 | ) | 8,041 | |||||||||
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Income tax payable
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237 | 500 | ||||||||||
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Net cash provided by (used in) operating
activities
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(5,130 | ) | 12,043 | |||||||||
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Cash flows from investing
activities:
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Purchase of property and equipment
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(1,373 | ) | (1,557 | ) | ||||||||
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Net cash used in investing activities
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(1,373 | ) | (1,557 | ) | ||||||||
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Cash flows from financing
activities:
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Borrowings under line of credit
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8,000 | 47,473 | ||||||||||
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Repayments under line of credit
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— | (47,473 | ) | |||||||||
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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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12 | — | ||||||||||
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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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7,999 | (1,211 | ) | |||||||||
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Net increase in cash and cash equivalents
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1,496 | 9,275 | ||||||||||
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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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$ | 21,376 | $ | 18,427 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NOTES TO 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, recently, broadband service providers.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of the Company, are necessary for a fair presentation of the results for the interim periods presented. All such adjustments are normal recurring adjustments other than the recording of a deferred tax asset. These financial statements have been prepared in accordance with genera