-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 28, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-23985
NVIDIA CORPORATION
(Exact name of registrant as specified in its charter)
3535 Monroe Street
Santa Clara, CA 95051
(408) 615-2500
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value per share
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 30, 2001 was approximately $2,549,920,749. Shares
of common stock held by each current executive officer and director and by
each person who is known by the registrant to own 5% or more of the
outstanding common stock have been excluded from this computation in that such
persons may be deemed to be affiliates of the Company. Share ownership
information of certain persons known by the Company to own greater than 5% of
the outstanding common stock for purposes of the preceding calculation is
based solely on information on Schedule 13G filed with the Commission and is
as of March 30, 2001. This determination of affiliate status is not a
conclusive determination for other purposes.
The number of shares of common stock outstanding as of March 30, 2001 was
69,921,327.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference portions of its Proxy
Statement for its 2001 Annual Meeting of Stockholders to be filed by May 29,
2001.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
NVIDIA CORPORATION
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are subject to the "safe harbor" created
by those sections. These forward-looking statements include but are not
limited to: statements related to industry trends and future growth in the
markets for 3D graphics processors; our product development efforts; the
timing of our introduction of new products; industry and consumer acceptance
of our products; and future profitability. Discussions containing these
forward-looking statements may be found in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
These forward-looking statements involve risks and uncertainties that could
cause our actual results to differ materially from those in the forward-
looking statements. We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances
after the date of this document. The "Certain Business Risks" section, among
other things, should be considered in evaluating our prospects and future
financial performance.
PART I
ITEM 1. BUSINESS
Overview
We were incorporated in California in 1993 and reincorporated in Delaware
in April 1998. We design, develop and market graphics processors and related
software for personal computers and digital entertainment platforms. We
provide a "top-to-bottom" family of award-winning performance 3D graphics
processors and graphics processing units, or GPUs, that set the standard for
performance, quality and features for a broad range of desktop PCs, from
professional workstations to low-cost PCs, and mobile PCs, from performance
laptops to thin-and-light notebooks. Our 3D graphics processors are used for a
wide variety of applications, including games, digital image editing, business
productivity, the Internet and industrial design. Our graphics processors were
the first to incorporate a 128-bit multi-texturing graphics architecture
designed to deliver to users of our products a highly immersive, interactive
3D experience with compelling visual quality, realistic imagery and motion,
stunning effects and complex object and scene interaction at real-time frame
rates. The NVIDIA TNT2, TNT2 M64 and Vanta graphics processors deliver high
performance 3D and 2D graphics at affordable prices, making them the graphics
hardware of choice for a wide range of applications for both consumer and
commercial use. Our graphics processors are designed to be architecturally
compatible backward and forward between generations, giving our original
equipment manufacturer, or OEM, customers and end users a low cost of
ownership. We are recognized for developing the world's first GPU, the GeForce
256, which incorporates independent hardware transform and lighting processing
units along with a complete rendering pipeline into a single-chip
architecture. Our GPUs, the GeForce3, the GeForce2 Ultra, the GeForce2 GTS,
the GeForce2 MX, the GeForce2 Go, the NVIDIA Quadro2 Pro and the Quadro2 MXR
process hundreds of billions of operations per second and increase the PC's
ability to render high-definition 3D scenes in real-time. Our GPU family
provides superior processing and rendering power at competitive prices and is
architected to deliver the maximum performance from industry standards such as
Microsoft Inc.'s Direct3D application programming interface, or API, and
Silicon Graphics Inc.'s OpenGL API on Window's operating systems and Linux
platforms.
Our products currently are designed into products offered by virtually
every leading branded PC OEM, including Acer Inc., Apple Computer, Inc.,
Compaq Computer Corporation, Dell Computer Corporation, eMachines Inc.,
Fujitsu-Siemens Computers, Gateway Inc., Hewlett Packard Company, IBM, Micron
Electronics Inc., NEC Corporation, Packard Bell NEC Inc., Silicon Graphics
Inc., and Sony Corporation, as well as leading contract equipment
manufacturers, or CEMs, including Celestica Hong Kong Ltd., Intel Corporation,
Mitac International Corporation, Micro-Star International Co. Ltd., Sanmina
Corporation, SCI Systems, Inc. and VisionTek Inc., and leading motherboard and
add-in board manufacturers, including Abit Computer Corporation, ASUSTeK
Computer Inc., Canopus Corporation, ELSA AG Corporation, Gainward Co. Ltd.,
Gigabyte Technology Co. Ltd, Guillemot Corporation, and LeadTek Research, Inc.
The benefits and performance of the
1
NVIDIA family of 3D graphics processors have received significant industry
validation and have enabled us and our customers to win more than 692 industry
awards, including over 25 "Editors' Choice" awards from PC Magazine during the
last four years, PC Magazine's 2000 Award for Technical Excellence (GeForce2
Family), ZD Net's Best of Fall Comdex 2000 (GeForce2 Go) and in the
workstation market, Cadence Magazine's Editors' Choice (Quadro2).
Interactive 3D graphics technology continues to emerge as one of the
significant new computing developments since the introduction of the graphical
user interface. Interactive 3D graphics is integral to various computing and
entertainment platforms such as workstations, consumer and commercial desktop
PCs, Internet appliances and home gaming consoles. 3D graphics is a powerful
broadband medium that enables the communication and visualization of
information, whether it is in professional applications like digital content
creation and computer assisted design and computer assisted manufacturing, or
CAD/CAM and commercial applications like financial analysis and business-to-
business collaboration or simply surfing the Internet or playing games. The
visually engaging and interactive nature of 3D graphics responds to consumers'
demands for a convincing simulation of reality beyond what is possible with
traditional 2D graphics. We expect that the fundamental interactive capability
and distributive nature of 3D graphics will make it the primary broadband
medium for a digitally connected world.
We believe that a PC's interactive 3D graphics capability represents one of
the primary means users differentiate among various systems. PC users today
can easily differentiate the quality of graphics and prefer personal computers
that provide a superior visual experience. These factors have dramatically
increased demand for 3D graphics processors. Mercury Research estimates that
3D graphics will be standard in every PC unit shipped by the end of 2001.
Mercury Research also estimates that 182 million 3D graphics processors were
sold worldwide in 2000 and that 356 million will be sold worldwide in 2005.
Continuing advancements in semiconductor process and manufacturing have
made available more powerful and affordable microprocessors and 3D graphics
processors, both of which are essential to deliver interactive 3D graphics to
the PC market. Additionally, the industry has broadly adopted Microsoft's
Direct3D API and SGI's OpenGL API, which serve as common and standard
languages between software applications and 3D graphics processors, allowing
the development of numerous 3D applications and resulting in increased
consumer demand.
We believe that a substantial market opportunity exists for providers of
performance 3D graphics processors, particularly as performance 3D graphics
have become an increasingly important requirement and point of differentiation
for PC OEMs. Consumer PC users demand a compelling visual experience and
compatibility with existing and next-generation 3D graphics applications at an
affordable price. Application developers require high-performance, standards-
based 3D architectures with broad market penetration. Since graphics is a key
point of differentiation, PC OEMs continually seek to incorporate leading-
edge, cost-effective 3D graphics solutions to build award-winning products. We
believe that providers of interactive 3D graphics solutions will compete based
on their ability to leverage their technology expertise to simultaneously meet
the needs of end users, application developers and OEMs.
Our Solution
We designed our GPUs and graphics processors to enable PC OEMs and add-in
board manufacturers to build award-winning products by delivering state-of-
the-art interactive 3D graphics capability while maintaining affordable
prices. We believe that by developing 3D graphics solutions that provide
superior performance and address the key requirements of the PC market, we
will accelerate the adoption of 3D graphics throughout this market. We combine
scalable architectural technology with mass market economies-of-scale to
deliver a complete family of products that span workstations to low-cost value
PCs.
Our objective is to ultimately be the leading supplier of performance
graphics communications processors for a broad range of PCs, laptops, Internet
appliances, handhelds and any future computing device with a display.
2
Our current focus is on the PC and laptop markets and we plan to expand into
other markets. Our strategy to achieve this objective includes the following
key elements:
Build Award-Winning, Architecturally-Compatible 3D Graphics Product
Families for the PC and Digital Entertainment Markets. Our strategy is to
achieve market share leadership in the PC and digital entertainment markets by
providing award-winning performance at every price point. By developing 3D
graphics solutions that provide superior performance and address the key
requirements of these markets, we believe that we will accelerate the adoption
of 3D graphics. As part of our strategy, we have closely aligned our product
development with Direct3D and OpenGL, which we believe maximizes third-party
software support.
Target Leading OEMs. Our strategy is to enable our leading OEM customers to
differentiate their products in a highly competitive marketplace by using our
3D graphics processors. We believe that design wins with these industry
leaders provide market validation of our products, increase brand awareness
and enhance our ability to penetrate additional leading customer accounts. In
addition, we believe that close relationships with OEMs will allow us to
better anticipate and address customer needs with our future generations of
products. Our products currently are designed into products offered by
virtually every leading branded PC OEM, including Acer, Apple, Compaq, Dell,
eMachines, Fujitsu-Siemens, Gateway, HP, IBM, micronpc.com, NEC, Packard Bell
NEC, SGI and Sony.
Sustain Technology and Roadmap Leadership in 3D Graphics. We are focused on
leveraging our advanced engineering capabilities to accelerate the quality and
performance of 3D graphics in PCs. A fundamental aspect of our strategy is to
actively recruit the best 3D graphics engineers in the industry, and we
believe that we have assembled an exceptionally experienced and talented
engineering team. We increased the number of our employees engaged in research
and development activities to 458 at January 28, 2001 from 214 at January 30,
2000. Our research and development strategy is to focus on concurrently
developing multiple generations of graphics processors using independent
design teams. As we have in the past, we intend to leverage this strategy to
achieve new levels of graphics features and performance, enabling our
customers to achieve award-winning performance in their products.
Increase Market Share. We believe that substantial market share will be
important to achieving success in the 3D graphics business. We intend to
achieve a leading share of the market by devoting substantial resources to
building award-winning families of products for a wide range of applications.
Leverage Our Expertise in Digital Multimedia. We believe the synergy
created by the combination of 3D graphics and the Internet will fundamentally
change the way people work, learn, communicate and play. We believe that our
expertise in 3D graphics and system architecture positions us to help drive
this transformation. We are leveraging our expertise in the processing and
transmission of high-bandwidth digital media to develop products designed to
address the requirements of high-bandwidth concurrent multimedia.
Current Products and Products Under Development
NVIDIA GeForce3 GPU
We began commercial shipment of the NVIDIA GeForce3 GPU in January 2001.
The GeForce3 is designed for the ultimate PC enthusiast and is the first
member of our third-generation GeForce family. The GeForce3 is our flagship
GPU.
The GeForce3 is the first GPU to offer full vertex and pixel shader
programmability as well as high-resolution full frame rate anti-aliasing. The
GeForce3 gives developers the ability to program a virtually infinite number
of special effects and custom looks. Fabricated on a .15 micron process
technology, the 57 million transistor GeForce3 delivers 33 million sustained
triangles per second. GeForce3 is the first NVIDIA GPU to incorporate a new
lightspeed memory architecture, which generates more than 800 billion
operations per second and delivers 3.2 billion anti-aliased samples per second
fill rate. The GeForce3 is the reference platform of choice
3
for the Microsoft DirectX8 application programming interface and the
technology foundation for the Microsoft next generation game console Xbox.
NVIDIA GeForce2 Ultra GPU
We began commercial shipment of the NVIDIA GeForce2 Ultra in August 2000.
The GeForce2 Ultra is designed for the PC enthusiast market and is a member of
our second-generation GeForce2 family. The GeForce2 Ultra replaced our first-
generation GPU, the GeForce 256, as our flagship processor.
The GeForce2 Ultra is the first GPU able to break the one billion pixels
per second barrier by providing two to three times the pixel processing power
of any competitors' graphics processor currently available. Fabricated on a
.18 micron process technology, the 25 million transistor GeForce2 Ultra
delivers 31 million sustained triangles per second. GeForce2 Ultra is the
world's first graphics product to ship with 230MHz (460MHz effective) double
data rate memory, producing 7.36GB per second bandwidth. The GeForce2 Ultra
includes the NVIDIA Shading Rasterizer technology that enables per-pixel
control of visual and material components, such as color, shadow, light and
reflectivity, used to create realistic scenes and objects.
NVIDIA GeForce2 GTS GPU
We began commercial shipment of the NVIDIA GeForce2 GTS in March 2000. The
NVIDIA GeForce2 GTS is designed for the PC performance market and is a member
of our second-generation GeForce2 family.
The GeForce2 GTS is the first per-pixel shading GPU and was the first to
incorporate NSR and a high-definition video processor, which provides a cost-
effective, high-quality high definition television playback solution when
combined with a digital television receiver. In addition, GeForce2 GTS enables
new applications like high-definition timeshifting and digital VCR
capabilities. Each of the four new rasterization pipelines processes two
textures per pixel, in photorealistic 32-bit color, at full speed. Fabricated
on an .18 micron process technology, the GeForce2 GTS second-generation
transform and lighting architecture delivers 25 million triangles per second.
NVIDIA GeForce2 MX GPU
We began commercial shipment of the NVIDIA GeForce2 MX in June 2000. The
NVIDIA GeForce2 MX is designed for the mid-range PC market and is a member of
our second-generation GeForce2 family.
The GeForce2 MX brings the power of a GPU to the mainstream computer
market. With its innovative TwinView architecture, GeForce2 MX is the only GPU
capable of driving two digital displays independently, while fully supporting
analog red, green, blue, known as RGB, a feature of video graphic array or VGA
and TV-out. In addition, the GeForce2 MX incorporates digital vibrance
control, which makes all images, including 2D, 3D and video, more colorful and
vibrant, even on digital flat panels. Utilizing a two-pipe form of the
GeForce2 GTS architecture, the GeForce2 MX is a powerful, versatile GPU at
mainstream price points. Fabricated on an .18 micron process technology, the
GeForce2 MX delivers 20 million triangles per second.
NVIDIA GeForce2 Go Mobile GPU
We began commercial shipment of the NVIDIA GeForce2 Go mobile GPU in
January 2001. The GeForce2 Go is the first GPU for the mobile PC market and is
the first member of our mobile GPU family.
The GeForce2 Go is based on the same architecture that drives the award-
winning GeForce2 family of GPUs for the desktop. With its innovative static
and dynamic power management architecture, GeForce2 Go delivers similar
performance to that of its desktop counterparts, but at power levels suitable
for laptop-based computers. The GeForce2 Go enables new classes of
applications never before supported on a mobile system. Notebook users will be
able to run content creation, presentation, and the latest high-performance 3D
game
4
applications that were previously unavailable on mobile systems. The GeForce2
Go also incorporates Twin View and digital vibrance control. Fabricated on an
.18 micron process technology, the GeForce2 Go delivers 17 million triangles
per second.
NVIDIA TNT2 Graphics Processor
We began commercial shipment of the NVIDIA TNT2 graphics processor in April
1999. The TNT2 is designed for the mainstream PC market. The TNT2 features our
fourth-generation, 128-bit multi-texturing 3D architecture. The TNT2 extends
the performance and function of the original RIVA TNT graphics processor for
PC OEMs and graphics card manufacturers. Fabricated on a .22 micron process
technology, the TNT2 graphics processor delivers the highest performance of
its generation through the use of high frequency clock rates for the 3D
processor and memory. The TNT2 supports 32 megabytes of frame buffer memory.
NVIDIA TNT2 M64, Vanta and Vanta LT Graphics Processors
Our NVIDIA TNT2 M64, Vanta and Vanta LT graphics processors are designed
for the value and low-cost consumer and commercial desktop PC markets. Based
on our award-winning TNT2 architecture, these processors offer low-cost,
highly integrated choices for entry-level add-in card and motherboard
solutions. The TNT2 M64, Vanta and Vanta LT are manufactured on a .22 micron
process technology and offer good quality and performance at an affordable
price. The TNT2 M64, Vanta and Vanta LT support up to 32, 16 and 8 megabytes
of frame buffer memory, respectively.
Microsoft Xbox
On March 5, 2000, we entered into an agreement with Microsoft in which we
agreed to develop and sell graphics chips and to license certain technology to
Microsoft and its licensees for use in the Xbox video game console under
development by Microsoft. In April 2000, Microsoft paid us $200.0 million as
an advance against graphics chip purchases. Microsoft may terminate the
agreement at any time. If termination occurs prior to offset in full of the
advance payments, we would be required to return to Microsoft up to $100.0
million of the prepayment and to convert the remainder into our preferred
stock at a 30% premium to the 30-day average trading price of our common stock
preceding Microsoft's termination of the agreement. In addition, in the event
that an individual or corporation makes an offer to purchase shares equal to
or greater than thirty percent (30%) of the outstanding shares of our common
stock, Microsoft has first and last rights of refusal to purchase the stock.
The graphics chip contemplated by the agreement is highly complex, and the
development and release of the Microsoft Xbox video game console and its
commercial success are dependent upon a number of parties, such as hardware
and software developer, and a number of factors, many of which are outside of
our control. On February 14, 2001, we announced that the Xbox GPU and Xbox
media communications processor were released to Taiwan Semiconductor
Manufacturing Company or TSMC for prototype fabrication. We cannot guarantee
that we will be successful in developing the graphics chip for use by
Microsoft or that the product will be developed or released, or if released,
will be commercially successful.
Sales and Marketing
Our worldwide sales strategy is a key part of our objective to become the
leading supplier of performance 3D graphics processors for PCs. Our sales team
works closely with PC OEMs, system integrators, motherboard manufacturers,
add-in board manufacturers and industry trendsetters to define product
features, performance, price and timing of new products. Members of our sales
team have a high level of technical expertise and product and industry
knowledge to support a competitive and complex design win process. We also
employ a highly skilled team of application engineers to assist PC OEMs,
system integrators, motherboard manufacturers and add-in board manufacturers
in designing, testing and qualifying system designs that incorporate our
products. We believe that the depth and quality of our design support are key
to improving PC OEMs, system integrators, motherboard manufacturers and add-in
board manufacturers time-to-market, maintaining a high level of customer
satisfaction among PC OEMs, system integrators, motherboard manufacturers and
add-in board manufacturers and fostering relationships that encourage
customers to use the next generation of our products.
5
In the 3D graphics market, the sales process involves influencing leading
PC OEMs', motherboard manufacturers' and add-in board manufacturers' graphics
processor purchasing decisions, achieving key design wins and supporting the
product design into high volume production. These design wins in turn
influence the retail and system integrator channel that is serviced by add-in
board and motherboard manufacturers. Our distribution strategy is to work with
a number of leading CEMs, motherboard manufacturers, add-in board
manufacturers and distributors that have relationships with a broad range of
major PC OEMs and/or strong brand name recognition in the retail channel.
Currently, we sell a significant majority of our graphics processors directly
to CEMs, motherboard manufacturers and add-in board manufacturers, which then
sell boards with our graphics processor to leading OEMs, outlets and to a
large number of system integrators.
To encourage software title developers and publishers to develop games
optimized for platforms utilizing our products, we seek to establish and
maintain strong relationships in the software development community.
Engineering and marketing personnel interact with and visit key software
developers to promote and discuss our products, as well as to ascertain
product requirements and solve technical problems. Our developer program makes
products available to partners prior to volume availability to encourage the
development of software titles that are optimized for our products.
Customers
A majority of our sales have been to a limited number of customers and
sales are highly concentrated. Sales to Edom Technology Co., Ltd., an Asian
stocking representative, accounted for 25% and sales to Celestica accounted
for 11% of our total revenue for fiscal 2001.
Backlog
Our sales are primarily made pursuant to standard purchase orders that are
cancelable without significant penalties. The quantity of our products
actually purchased by the customer as well as shipment schedules are subject
to revisions to reflect changes in the customer's requirements and
manufacturing availability. The semiconductor industry is characterized by
short lead time orders and quick delivery schedules. In light of industry
practice and experience, we do not believe that backlog as of any particular
date is indicative of future results.
Manufacturing
We have a "fabless" manufacturing strategy whereby we employ world-class
suppliers for all phases of the manufacturing process, including fabrication,
assembly and testing. This strategy leverages the expertise of industry-
leading, ISO-certified suppliers in such areas as fabrication, assembly,
quality control and assurance, reliability and testing. In addition, we are
able to avoid most of the significant costs and risks associated with owning
and operating manufacturing operations. These suppliers are also responsible
for procurement of most of the raw materials used in the production of our
products. As a result, we can focus resources on product design, additional
quality assurance, marketing and customer support.
Our graphics processors are fabricated by TSMC and assembled and tested by
Advanced Semiconductor Engineering, ChipPAC Incorporated and Siliconware
Precision Industries Company Ltd. We receive semiconductor products from our
subcontractors, perform incoming quality assurance and then ship them to CEMs,
motherboard and add-in board manufacturer customers from our Santa Clara
location in the U.S. and a third-party warehouse in Singapore. Generally,
these manufacturers assemble and test the boards based on our design kit and
test specifications, then ship the products to the retail, system integrator
or OEM markets as add-in board solutions. Our hardware and software
development teams work closely with certification agencies, Microsoft Windows
Hardware Quality Labs and our OEM customers to ensure that both our boards and
software drivers are certified for inclusion in the OEMs' products.
6
Research and Development
We believe that the continued introduction of new and enhanced products
designed to deliver leading 3D graphics performance and features is essential
to our future success. Our research and development strategy is to focus on
concurrently developing multiple generations of graphics processors using
independent design teams. Our research and development efforts are performed
within specialized groups consisting of software engineering, hardware
engineering, very large scale integration or VLSI, design engineering, process
engineering, and architecture and algorithms. These groups act as a pipeline
designed to allow the efficient simultaneous development of multiple
generations of products.
A critical component of our product development effort is our partnerships
with leaders in the CAD industry. We have invested significant resources to
develop relationships with industry leaders, including Avant! Corporation,
Cadence Design Systems, Inc., IKOS Systems, Inc. and Synopsys, Inc., often
assisting these companies in the product definition of their new products. We
believe that forming these relationships and utilizing next-generation
development tools to design, simulate and verify our products will help us
remain at the forefront of the 3D graphics market and develop products on a
rapid basis that utilize leading-edge technology. We believe this approach
assists us in meeting the new design schedules of PC manufacturers.
We have substantially increased our engineering and technical resources and
have 458 full-time employees engaged in research and development as of January
28, 2001, compared to 214 employees as of January 30, 2000.
Competition
The market for 3D graphics processors for PCs is intensely competitive and
characterized by rapid technological change, evolving industry standards and
declining average selling prices. We believe that the principal competitive
factors in this market are performance, breadth of product offerings, access
to customers and distribution channels, backward-forward software support,
conformity to industry standard APIs, manufacturing capabilities, price of
graphics processors and total system costs of add-in boards or motherboards.
We expect competition to increase both from existing competitors and new
market entrants with products that may be less costly than our 3D graphics
processors or may provide better performance or additional features not
provided by our products.
Our primary source of competition is from companies that provide or intend
to provide 3D graphics solutions for the PC market. Our competitors include
the following:
. suppliers of graphics add-in boards that utilize their internally
developed graphics chips, such as ATI Technologies Inc. and Matrox
Electronics Systems Ltd.;
. suppliers of integrated core logic chipsets that incorporate 2D and 3D
graphics functionality as part of their existing solutions, such as
Intel, Silicon Integrated Systems and Via Technologies, Inc.;
. suppliers of mobile graphics processors that incorporate 2D or 3D
graphics functionality as part of their existing solutions, such as ATI,
Trident Microsystems, Inc. and the joint venture of a division of
SONICblue Incorporated (formerly S3 Incorporated) and Via Technologies;
. companies that have traditionally focused on the professional market and
provide high end 3D solutions for PCs and workstations, including 3Dlabs
Inc., SGI and SONICblue; and
. companies that focus on the video game market, such as Imagination
Technologies and ST Microelectronics.
If and to the extent we offer products outside of the 3D graphics processor
market, we may face competition from some of our existing competitors as well
as from companies with which we currently do not compete. We cannot accurately
predict if we will compete successfully in any new markets we may enter.
7
Patents and Proprietary Rights
We rely primarily on a combination of patents, trademarks, trade secrets,
employee and third-party nondisclosure agreements and licensing arrangements
to protect our intellectual property. As of January 28, 2001, we owned 37
issued United States patents and had 61 United States patent applications
pending and our issued patents had expiration dates from April 2015 to
December 2019. As of January 28, 2001, our issued patents and pending patent
applications related to technology developed by us in connection with the
development of our 3D graphics processors and we had no foreign patents. We
seek patents that have broad application in the semiconductor industry and
that we believe will provide us a competitive advantage. However, our pending
patent applications or any future applications may not be approved, and any
issued patents may not provide us with competitive advantages, or may be
challenged by third parties. We have licensed technology from third parties
for incorporation into our graphics processors and expect to continue to enter
into similar agreements for future products. These licenses may result in
royalty payments to third parties, the cross-licensing of technology by us or
payment of other consideration. If these arrangements are not concluded on
commercially reasonable terms, our business could suffer. We attempt to
protect our trade secrets and other proprietary information through
confidentiality agreements with manufacturers and other partners, proprietary
information agreements with employees and consultants and other security
measures. We also rely on trademarks and trade secret laws to protect our
intellectual property.
Employees
As of January 28, 2001 we had 796 employees, 458 of whom were engaged in
research and development and 338 of whom were engaged in sales, marketing,
operations and administrative positions. None of our employees are covered by
collective bargaining agreements, and we believe our relationship with our
employees is good.
Recent Developments
On December 15, 2000, we signed a definitive agreement pursuant to which
our subsidiary would acquire certain graphics related assets of 3dfx
Interactive, Inc. These graphics related assets included, but were not limited
to, patents, pending patent applications, trademarks, brand names and other
assets related to the graphics business of 3dfx. On April 18, 2001, our
subsidiary completed the purchase contemplated by the definitive agreement. We
have paid 3dfx approximately $70 million in total consideration. Subject to
the satisfaction of additional conditions, 3dfx may receive additional
consideration in the form of cash and/or shares of our common stock. Also, as
a result of the closing, we and 3dfx jointly filed to dismiss with prejudice
the patent litigation between us.
ITEM 2. PROPERTIES
We occupy approximately 117,000 square feet for our headquarters in Santa
Clara, California, under leases expiring in 2002. Additionally we lease 15,000
square feet in Santa Clara for use as a warehouse, under leases expiring in
November of 2007. We also lease a design center consisting of approximately
6,677 square feet in one building in Durham, North Carolina, under a lease
that expires in December 2005. In addition, we lease design, sales and
administrative offices in Texas, Washington, Arizona, Massachusetts, France,
Singapore, Taiwan, Japan, Germany and the United Kingdom to support our
customers. In April 2000, we entered into leases for our new headquarters
complex in Santa Clara, California. The new complex will comprise four
buildings totaling approximately 500,000 square feet. We expect the first
phase of two buildings consisting of approximately 250,000 square feet, to be
completed in May 2001; the second phase consisting of one building of
approximately 125,000 square feet to be completed in July 2001; and the last
phase consisting of one building of approximately 125,000 square feet to be
completed in March 2002. The leases expire in 2012 and include two seven-year
renewals at our option. We believe that we currently have sufficient
facilities to conduct our operations for the next twelve months, although we
expect to lease additional facilities throughout the world as our business
requires.
8
ITEM 3. LEGAL PROCEEDINGS
On September 21, 1998, 3dfx Interactive, Inc. filed a patent infringement
lawsuit against us in the United States District Court for the Northern
District of California alleging infringement of a 3dfx patent. The lawsuit was
amended in 1999 to add two additional 3dfx patents. On August 28, 2000, we
filed a patent infringement lawsuit against 3dfx in the United States District
Court for the Northern District of California alleging infringement by 3dfx of
five of our patents. The complaint by 3dfx alleged that our RIVA TNT, RIVA
TNT2 and RIVA TNT Ultra products infringed the patents in suit and sought
unspecified compensatory and trebled damages and attorney's fees, as well as
injunctive relief. Our current generation of products was not identified as
infringing any of the patents in suit. The lawsuit filed by us against 3dfx
alleged that 3dfx's graphics chips and card products, which were used to
accelerate 3D graphics on personal computers, infringed five of our patents
and sought an injunction restraining 3dfx from manufacturing, selling, or
importing infringing graphics chips and card products, including its Voodoo3,
Voodoo4, Voodoo5 and VSA-100 family of products, as well as monetary damages.
Following the closing of the definitive agreement entered into by us, our
wholly-owned subsidiary and 3dfx, we and 3dfx jointly filed to dismiss with
prejudice the above-described patent litigation between us.
On February 22, 2000, Graphiques Matrox, Inc. and Systemes Electroniques
Matrox Ltd. (collectively "Matrox") filed suit against us in the Superior
Court, Judicial District of Montreal, Province of Quebec, Canada. The suit
alleges that we improperly solicited and recruited Matrox employees and
encouraged Matrox employees to breach their Matrox confidentiality and/or non-
competition agreements. The suit by Matrox seeks, among other things, certain
injunctive relief. We believe that the claims asserted by Matrox are without
merit and we intend to vigorously defend this suit. The trial of this matter
started on April 4, 2001. On April 24, 2001, the trial ended and the court
took the case under submission. The court indicated that it would not likely
issue a final decision on the merits for approximately two months.
On May 19, 2000, we filed suit against Matrox in Santa Clara County
Superior Court alleging that Matrox's efforts to prevent its current and
former employees from pursuing employment opportunities with us constitute
interference with our ability to enter into certain contracts and unfair
competition. Our suit seeks, among other things, unspecified monetary damages,
a declaration that Matrox's confidentiality and/or non-competition agreements
are unenforceable under California law and a declaration that its use of those
agreements and other tactics constitutes unfair competition. On May 26, 2000,
the case was transferred to the San Jose Division of the United States
District Court for the Northern District of California. On June 14, 2000,
Matrox filed an answer denying our claims and a counterclaim alleging trade
secret misappropriation, intentional interference with contractual relations
and unfair competition. Matrox's California suit seeks unspecified monetary
damages and injunctive relief. We filed an answer to this counterclaim on July
7, 2000, denying all of Matrox's claims. As with the Montreal action, we
believe that the claims asserted by Matrox are without merit and we intend to
vigorously defend this suit.
In addition, we may be subject to litigation in the future. See "Risk
Factors--Litigation by or against us or our customers concerning infringement
would likely result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not the litigation results in a
favorable determination for us." From time to time, we are also subject to
claims in the ordinary course of business, none of which in our view would
have a material adverse impact on our business or financial position if
resolved unfavorably.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
NVDA. Public trading of our stock began on January 22, 1999. Prior to that,
there was no public market for our stock. As of January 28, 2001, we had
approximately 372 stockholders of record, not including those shares held in
street or nominee name.
The following table sets forth for the periods indicated the high and low
sales price for the common stock as quoted on the Nasdaq National Market:
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not expect
to pay cash dividends for the foreseeable future.
10
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and the notes thereto, and with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
consolidated statement of operations data for the years ended January 28,
2001, January 30, 2000 and January 31, 1999 and the consolidated balance sheet
data as of January 28, 2001 and January 30, 2000 have been derived from and
should be read in conjunction with our audited financial statements and the
notes included thereto. The consolidated statement of operations data for the
month ended January 31, 1998 and the years ended December 31, 1997 and 1996
are derived from audited consolidated financial statements and the notes
thereto not included in this filing. The balance sheet data as of the month
ended January 31, 1998 and the years ended December 31, 1997 and 1996 are
derived from audited consolidated financial statements and the notes thereto
not included in this filing.
--------
(1) Reflects a two-for-one stock split effected in June 2000.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes thereto. Effective January 31,
1998, we changed our fiscal year-end financial reporting period to a 52- or
53- week year ending on the last Sunday in January. We elected not to restate
the previous reporting periods ending December 31. As a result, the first and
fourth quarters of fiscal 1999 (year ended January 31, 1999) are 12- and 14-
week periods, respectively, with the remaining quarters being 13-week periods.
All four quarters of fiscal 2000 and 2001 (year ended January 28, 2001) are
13-week periods.
Overview
We design, develop and market graphics processors and related software for
personal computers and digital entertainment platforms. We provide a "top-to-
bottom" family of award-winning performance 3D graphics processors and GPUs,
that set the standard for performance, quality and features for a broad range
of desktop PCs, from professional workstations to low-cost PCs, and mobile
PCs, from performance laptops to thin-and-light notebooks. Our 3D graphics
processors are used for a wide variety of applications, including games,
digital image editing, business productivity, the Internet and industrial
design. Our graphics processors were the first to incorporate a 128-bit multi-
texturing graphics architecture designed to deliver to users of our products a
highly immersive, interactive 3D experience with compelling visual quality,
realistic imagery and motion, stunning effects and complex object and scene
interaction at real-time frame rates. The NVIDIA TNT2, TNT2 M64 and Vanta
graphics processors deliver high performance 3D and 2D graphics at affordable
prices, making them the graphics hardware of choice for a wide range of
applications for both consumer and commercial use. Our graphics processors are
designed to be architecturally compatible backward and forward between
generations, giving our OEM customers and end users a low cost of ownership.
We are recognized for developing the world's first GPU, the GeForce 256, which
incorporates independent hardware transform and lighting processing units
along with a complete rendering pipeline into a single-chip architecture. Our
GPUs the GeForce3, the GeForce2 Ultra, the GeForce2 GTS, the GeForce2 MX, the
GeForce2 Go, the NVIDIA Quadro2 Pro and the Quadro2 MXR process hundreds of
billions of operations per second and increase the PC's ability to render
high-definition 3D scenes in real-time. Our GPU family provides superior
processing and rendering power at competitive prices and is architected to
deliver the maximum performance from industry standards such as Microsoft's
Direct3D API and SGI's OpenGL API on Windows operating systems and Linux
platforms.
We recognize revenue from product sales to customers when a contract is in
place, the price is determined, shipment is made and collectability is
reasonably assured. Our policy on sales to distributors is to defer
recognition of sales and related cost of sales until the distributors resell
the product. Royalty revenue is recognized upon shipment of product by the
licensee to its customers. We believe that the software sold with our products
is incidental to the product as a whole.
During the fourth quarter of 2001, we adopted Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, ("SAB 101"). The adoption of
SAB 101 did not have a material effect on our consolidated statement of
financial position or results of operation.
Beginning in fiscal 2001, we entered into arrangements with vendors for the
purchase and resale of non-high speed double data rate and single data rate
memory to our customers. We recognize revenue from such arrangements on a net
basis in accordance with Emerging Issue Task Force Issue No. 99-19, Recording
Revenue as a Principal versus Net as an Agent. We are acting in the capacity
of an agent for this product.
Currently, all of our product sales and our arrangements with third-party
manufacturers provide for pricing and payment in U.S. dollars. We have not
engaged in any foreign currency hedging activities, although we may do so in
the future. Since we have no other product line, our business would suffer if
for any reason our graphics processors do not achieve widespread acceptance in
the PC market.
12
A majority of our sales have been to a limited number of customers and
sales are highly concentrated. We sell graphics processors to add-in board and
motherboard manufacturers, primarily ASUSteK, ELSA and Guillemot, and CEMs;
including Celestica, Mitac, Micro-Star, SCI, and VisionTek. These
manufacturers incorporate our processors in the boards they sell to PC OEMs,
retail outlets and systems integrators. The average selling prices for our
products, as well as our customers' products, vary by distribution channel.
Our two largest customers accounted for approximately 36% of revenues for
fiscal 2001. Sales to Edom accounted for 25% and sales to Celestica accounted
for 11% of our total revenue for fiscal 2001. For fiscal 2000, sales to
Creative Technology, Ltd. accounted for 17%, sales to Edom and sales to
Diamond Multimedia Systems, Inc. each accounted for 15% and sales to ASUSteK
accounted for 10% of our total revenue. Diamond is no longer one of our
significant customers following its acquisition by S3 Incorporated in October
1999. The number of potential customers for our products is limited, and we
expect sales to be concentrated to a few major customers for the foreseeable
future.
As markets for our 3D graphics processors develop and competition
increases, we anticipate that product life cycles in the high end will remain
short and average selling prices will continue to decline. In particular,
average selling prices and gross margins are expected to decline as each
product matures. Our add-in board manufacturers and major OEM customers
typically introduce new system configurations as often as twice per year for
the high end, typically based on spring and fall design cycles. In order to
maintain average selling prices and gross margins, our existing and new
products must achieve competitive performance levels to be designed into new
system configurations and must be produced at low costs, in sufficient volumes
and on a timely basis, especially with respect to our new products.
We currently utilize TSMC, our primary manufacturer, to produce
semiconductor wafers, and utilize independent contractors to perform assembly,
test and packaging. We depend on these suppliers to allocate to us a portion
of their manufacturing capacity sufficient to meet our needs, to produce
products of acceptable quality and at acceptable manufacturing yields, and to
deliver those products to us on a timely basis. These manufacturers may not
always be able to meet our near-term or long-term manufacturing requirements.
Yields or product performance could suffer due to difficulties associated with
adapting our technology and product design to the proprietary process
technology and design rules of a new manufacturer. The level of finished goods
inventory we maintain may fluctuate and therefore a manufacturing disruption
experienced by these manufacturers would impact the production of our
products, which could harm our business. In addition, as the complexity of our
products and the accompanying manufacturing process increases, there is an
increasing risk that we will experience problems with the performance of new
products and that there will be yield problems or other delays in the
development or introduction of these products.
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. As a result, we may commit resources to the
production of products without having received advance purchase commitments
from customers. Any inability to sell products to which we have devoted
significant resources could harm our business. In addition, cancellation or
deferral of product orders could result in our holding excess inventory, which
could adversely affect our profit margins and restrict our ability to fund
operations. We may build memory and component inventories during periods of
anticipated growth and in connection with selling workstation boards directly
to major OEMs. We could be subject to excess or obsolete inventories and be
required to take corresponding write-downs if growth slows or if we
incorrectly forecast product demand. A reduction in demand could negatively
impact our gross margins and financial results. Product returns or delays or
difficulties in collecting accounts receivable could result in significant
charges against income, which could harm our business.
On December 15, 2000, we signed a definitive agreement pursuant to which
our subsidiary would acquire certain graphics related assets of 3dfx. These
graphics related assets include, but are not limited to, patents, pending
patent applications, trademarks, brand names and other assets related to the
graphics business of 3dfx. On April 18, 2001, our subsidiary completed the
purchase contemplated by the definitive agreement. We have paid 3dfx
approximately $70 million in total consideration. Subject to the satisfaction
of additional conditions,
13
3dfx may receive additional consideration in the form of cash and/or shares of
our common stock. Also, as a result of the closing, we and 3dfx jointly filed
to dismiss with prejudice the patent litigation between us. The transaction
will be accounted for as a purchase.
Results of Operations
The following table sets forth, for the periods indicated, certain items in
our consolidated statements of income expressed as a percentage of total
revenue.
Fiscal Years Ended January 28, 2001, January 30, 2000, and January 31, 1999
Revenue
Product Revenue. Product revenue was $735.3 million in fiscal 2001, $374.5
million in fiscal 2000, and $151.4 million in fiscal 1999. Product revenues
increased by 96% from fiscal 2000 to 2001, and 147% from fiscal 1999 to 2000.
The growth in both periods was primarily the result of increased sales of our
graphics processors and the strong demand for new products at higher unit
average selling prices. We began bundling high-speed double data rate memories
with the GeForce products sold in the third quarter of fiscal 2000. Revenue
derived from the bundling of double data rate memories with the GeForce
products totaled $54.2 million in fiscal 2001 and $22.1 million in FY 2000.
Revenue from sales outside of the United States accounted for 89% and 72% of
total revenue for fiscal 2001 and 2000, respectively. Our international
revenue increased 142% to $656.4 million in fiscal 2001 from $270.9 million a
year ago. This increase in revenue from sales outside of the United States is
primarily attributable to (i) expanded use of CEMs, add-in board and
motherboard manufacturers located outside of the United States, and (ii)
increased demand for our products in the Asia Pacific and European regions.
Revenue by geographical region is allocated to individual countries based on
the location to which the products are initially shipped. The portion of
revenue derived from foreign CEMs and add-in board manufacturers that are
attributable to end customers in the United States is not separately
disclosed. Although we achieved substantial growth in product revenue from
fiscal 2000 to 2001 and fiscal 1999 to 2000, we do not expect to sustain this
rate of growth in future periods. In addition, we expect that the average
selling prices of our products will decline over the lives of the products.
The declines in average selling prices of 3D graphics processors generally may
also accelerate as the market develops and competition increases.
14
Gross Profit
Gross profit consists of total revenue net of allowances less cost of
revenue. Cost of revenue consists primarily of the costs of semiconductors
purchased from contract manufacturers (including assembly, test and
packaging), manufacturing support costs (labor and overhead associated with
such purchases), inventory provisions and shipping costs. Our gross profit
margin can vary in any period depending on the mix of types of graphics
processors sold. Our gross profit margin percentage of 37.4% and 37.1%
remained relatively consistent in fiscal 2001 and 2000, respectively. Absolute
dollar gross profit margin increased in fiscal 2001 as compared to fiscal 2000
due to an increase in unit shipments. We began the bundling of double data
rate memories with our GeForce processors in the second half of fiscal 2000.
The inclusion of the double data rate high speed memories has reduced the
gross margin percentage but has no incremental impact on absolute margin
dollars, as they are generally sold at cost. We expect to continue bundling
double data rate memories with some of our high-performance products for at
least the next twelve months. Gross profit increased 187% from fiscal 1999 to
2000, primarily due to significant increases in unit shipments and the
favorable impact of the higher margin NVIDIA TNT2 and GeForce graphics
processors, partially offset by declining profit margins in our older product
families. Although we achieved substantial growth in gross profit in fiscal
2001, 2000, and 1999, we do not expect to sustain these rates of growth in
future periods.
Operating Expenses
Research and Development. Research and development expenses consist of
salaries and benefits, cost of development tools and software, costs of
prototypes of new products and consultant costs. Research and development
expenses increased by 82% from fiscal 2000 to 2001 and 89% from fiscal 1999 to
2000, primarily due to additional personnel and related engineering costs to
support our next generation's products, such as depreciation charges incurred
on capital expenditures and software license and maintenance fees. We
anticipate that we will continue to devote substantial resources to research
and development, and we expect these expenses to increase in absolute dollars
in the foreseeable future due to increased complexity and the number of
products under development. Research and development expenses are likely to
fluctuate from time to time to the extent we make periodic incremental
investments in research and development and these investments may be
independent of our level of revenues.
Sales, General and Administrative. Sales, general and administrative
expenses consist primarily of salaries, commissions and bonuses, promotional
tradeshow and advertising expenses, travel and entertainment expenses and
legal and accounting expenses. Sales, general and administrative expenses
increased 58% from fiscal 2000 to 2001 and 96% from fiscal 1999 to 2000,
primarily due to costs associated with additional personnel and commissions
and bonuses on sales of the NVIDIA TNT2 and GeForce families of graphic
processors. We expect sales and marketing expenses to continue to increase in
absolute dollars as we continue to expand our operations and our sales.
General and administrative expenses are also likely to increase in absolute
dollars as we continue to expand our operations. However, we do not expect
significant changes in these expenses as a percentage of revenue in future
periods.
Interest and Other Income (Expense), Net
Interest expense increased in fiscal 2001 compared to fiscal 2000 and
should increase in future periods due to the issuance of $300.0 million of
convertible debt in October 2000. Interest income increased 940% from fiscal
2000 to 2001 due to higher average cash balances as a result of a $200.0
million advance received from Microsoft in connection with our agreement with
Microsoft and the receipt of $387.4 million from our combined convertible debt
and common stock offerings which closed in October of fiscal 2001.
Interest income primarily consists of interest earned on cash and cash
equivalents. Interest expense primarily consists of interest incurred as a
result of capital lease obligations and interest on our convertible debt.
Interest income increased $1.8 million from fiscal 1999 to 2000 due to higher
average cash balances as a result of cash proceeds received from the initial
public offering of our common stock in January 1999.
15
Income Taxes
We had income tax expense of $47.0 million, $18.1 million, and $357,000 in
fiscal 2001, 2000 and 1999 respectively. Income taxes as a percentage of
pretax income was 32.2% in fiscal 2001 and 2000, respectively and 7.9% in
fiscal 1999. Income taxes as a percentage of pretax income remained constant
for fiscal 2001 and 2000. The lower percentage of income taxes to pretax
income for fiscal 1999 relative to fiscal 2000 was due primarily to the
recognition of deferred tax assets in fiscal 1999 which previously had a
valuation allowance. Foreign income taxed at rates different from United
States statutory rates contributed to the lower tax rates in fiscal 2001, 2000
and 1999.
Stock-Based Compensation
With respect to stock options granted to employees, we recorded deferred
compensation of $4.3 million in 1997 and $361,000 in the one month ended
January 31, 1998. These amounts are being amortized over the vesting period of
the individual options, generally four years. We amortized approximately
$112,000 in fiscal 2001, $662,000 in fiscal 2000, and $2.5 million in fiscal
1999.
Liquidity and Capital Resources
As of January 28, 2001, we had $674.3 million in cash and cash equivalents,
an increase of $612.7 million from the end of fiscal 2000. We historically
have held our cash balances in cash equivalents such as money market funds or
as cash. We place the money market funds with high-quality financial
institutions and limit the amount of exposure with any one financial
institution. We had $148.2 million of noncancelable manufacturing commitments
outstanding at January 28, 2001.
In July 1999, we entered into an amended loan and security agreement with a
bank, which included a $10.0 million revolving loan agreement. The agreement
expired on July 29, 2000.
Operating activities generated cash of $68.0 million and $15.9 million
during fiscal 2001 and 2000, respectively, and used cash of $1.9 million
during fiscal 1999. The increases from fiscal 2000 to fiscal 2001 and from
fiscal 1999 to fiscal 2000 were due to a substantial increase in net income,
offset by changes in operating assets and liabilities. Income tax benefit
derived from the difference between the exercise price and the fair value of
acquired stock in association with employees' exercise of stock options
totaled $63.2 million in fiscal 2001 compared to $10.6 million in fiscal 2000.
Our accounts receivable are highly concentrated. At January 28, 2001, the two
largest customers accounted for approximately 34% of accounts receivable.
During the second quarter of fiscal 2001, we recorded a bad debt provision
related to one customer that filed for bankruptcy. Significant bad debt write-
offs in the future could harm our business.
To date, our investing activities have consisted primarily of purchases of
property and equipment and leasehold improvements for our new facility under
construction. We incurred $36.3 million, $11.6 million and $7.9 million in
capital expenditures in fiscal 2001, 2000 and 1999, respectively, for
purchases of computer and emulation equipment to support increased research
and development activities and enterprise resource planning system
implementation. We expect capital expenditures to increase as we further
expand research and development initiatives and as our employee base grows.
The timing and amount of future capital expenditures will depend primarily on
our future growth. We expect to spend approximately $60.0 million to $70.0
million for capital expenditures in fiscal 2002, primarily for software
licenses, emulation equipment, purchase of computer and engineering
workstations, future phases of enterprise resource planning system
implementation and tenant and leasehold improvements in our new headquarters
facility.
The cash flow impact from income tax payments can be unpredictable and
significant due to tax strategies employed and tax benefits, or lack there-of,
arising from employee stock option exercises.
In April 2000, we entered into leases for our new headquarters complex in
Santa Clara, California. Our new complex will be comprised of four buildings,
representing approximately 500,000 total square feet. We expect
16
the first phase of two buildings consisting of approximately 250,000 square
feet to be completed in May 2001, the second phase of one building consisting
of approximately 125,000 square feet to be completed in July 2001 and the last
phase consisting of approximately 125,000 square feet to be completed in March
2002. We have $24.5 million of restricted cash related to the construction.
The leases expire in 2012 and include two seven-year renewals at our option.
Future minimum lease payments under these operating leases total approximately
$227.1 million over the terms of the leases.
Financing activities provided cash of $605.6 million during fiscal 2001
compared to $7.0 million in fiscal 2000 and $52.0 million in fiscal 1999. On
March 5, 2000, we entered into an agreement with Microsoft in which we agreed
to develop and sell graphics chips and to license certain technology to
Microsoft and its licensees for use in a product under development by
Microsoft. In April 2000, Microsoft advanced us $200.0 million as an advance
against graphics chip purchases. Microsoft may terminate the agreement at any
time. If termination occurs prior to offset in full of the advance payments,
we would be required to return to Microsoft up to $100.0 million of the
prepayment and to convert the remainder into shares of our preferred stock at
a 30% premium to the 30-day average trading price of our common stock
preceding Microsoft's termination of the agreement.
In October 2000, we sold 1,400,000 shares of our common stock and $300.0
million of convertible subordinated notes due October 15, 2007 in a public
offering. Proceeds from the offering were approximately $387.5 million after
deducting underwriting discounts, commissions and offering expenses. Issuance
costs related to the offering are being amortized to interest expense on a
straight-line basis over the term of the notes. Interest on the convertible
subordinated notes accrues at the rate of four and three-quarter percent per
annum and is payable semiannually in arrears on April 15 and October 15 of
each year, commencing April 15, 2001. The convertible subordinated notes are
redeemable at our option on and after October 20, 2003. The notes are
convertible at the option of the holder at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, into
shares of common stock at a conversion price of $92.71 per share, subject to
adjustment in certain circumstances.
On December 15, 2000, we signed a definitive agreement pursuant to which
our subsidiary would acquire certain graphics related assets of 3dfx. This
transaction closed on April 18, 2001. We have paid 3dfx a total consideration
of approximately $70 million in cash. Subject to the satisfaction of
additional conditions, 3dfx may receive additional consideration in the form
of cash and/or shares of our common stock. As a result of the closing, this
purchase transaction has impacted our working capital in fiscal year 2002 and
may have further impact if the additional conditions are met.
We believe that our existing cash balances and anticipated cash flows from
operations, will be sufficient to meet our operating and capital requirements
for at least the next 12 months. However, there is no assurance that we will
not need to raise additional equity or debt financing within this time frame.
Additional financing may not be available on favorable terms or at all and may
be dilutive to our then-current stockholders. We also may require additional
capital for other purposes not presently contemplated. If we are unable to
obtain sufficient capital, we could be required to curtail capital equipment
purchases or research and development expenditures, which could harm our
business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from the investments
without significantly increasing risk. To minimize potential loss arising from
adverse changes in interest rates, we maintain a portfolio of cash and cash
equivalents primarily in highly rated domestic money market funds. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate. Our convertible
subordinated notes are at a fixed interest rate of 4 3/4% and are not subject
to interest rate fluctuations.
17
Exchange Rate Risk
We consider our exposure to foreign exchange rate fluctuations to be
minimal. Currently, sales and arrangements with third-party manufacturers
provide for pricing and payment in U.S. dollars, and therefore are not subject
to exchange rate fluctuations. To date, we have not engaged in any currency
hedging activities, although we may do so in the future. Fluctuations in
currency exchange rates could harm our business in the future.
Certain Business Risks
In addition to the risks discussed in "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
business is subject to the risks set forth below.
Our operating results are unpredictable and may fluctuate.
Many of our revenue components fluctuate and are difficult to predict, and
our operating expenses are largely independent of revenue in any particular
period. It is therefore difficult for us to accurately forecast revenue and
profits or losses. As a result, it is possible that in some quarters our
operating results could be below the expectations of securities analysts and
investors, which could cause the trading price of our common stock to decline,
perhaps substantially. We believe that our quarterly and annual results of
operations will be affected by a variety of factors that could adversely
affect our revenue, gross profit and results of operations.
Factors that have affected our results of operations in the past, and could
affect our results of operations in the future, include the following:
. demand and market acceptance for our products and/or our customers'
products;
. the successful development and volume production of next-generation
products;
. new product announcements or product introductions by our competitors;
. our ability to introduce new products in accordance with OEM, design
requirements and design cycles;
. changes in the timing of product orders due to unexpected delays in the
introduction of our customers' products;
. fluctuations in the availability of manufacturing capacity or
manufacturing yields;
. declines in spending by corporations and consumers related to
perceptions regarding an economic downturn in the U.S.;
. competitive pressures resulting in lower than expected average selling
prices;
. rates of return in excess of that forecasted or expected due to quality
issues;
. the rescheduling or cancellation of customer orders;
. the loss of a key customer or the termination of a strategic
relationship;
. seasonal fluctuations associated with the PC market;
. substantial disruption in our suppliers' operations, either as a result
of a natural disaster, equipment failure or other cause;
. supply constraints for and changes in the cost of the other components
incorporated into our customers' products, including memory devices;
. our ability to reduce the manufacturing costs of our products;
. legal and other costs related to defending intellectual property;
. bad debt write-offs;
18
. costs associated with the repair and replacement of defective products;
. unexpected inventory write-downs; and
. introductions of enabling technologies to keep pace with faster
generations of processors and controllers.
Any one or more of the factors discussed above could prevent us from
achieving our expected future revenue or net income.
Because most operating expenses are relatively fixed in the short term, we
may be unable to adjust spending sufficiently in a timely manner to compensate
for any unexpected sales shortfall. We may be required to reduce prices in
response to competition or to pursue new market opportunities. If new
competitors, technological advances by existing competitors or other
competitive factors require us to invest significantly greater resources than
anticipated in research and development or sales and marketing efforts, our
business could suffer. Accordingly, we believe that period-to-period
comparisons of our results of operations should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year.
Our 3D graphics solution may not continue to be accepted by the PC market.
Our success will depend in part upon continued broad adoption of our 3D
graphics processors for high performance 3D graphics in PC applications. The
market for 3D graphics processors has been characterized by unpredictable and
sometimes rapid shifts in the popularity of products, often caused by the
publication of competitive industry benchmark results, changes in dynamic
random memory devices pricing and other changes in the total system cost of
add-in boards, as well as by severe price competition and by frequent new
technology and product introductions. Only a small number of products have
achieved broad market acceptance and such market acceptance, if achieved, is
difficult to sustain due to intense competition. Since we have no other
product line, our business would suffer if for any reason our current or
future 3D graphics processors do not continue to achieve widespread acceptance
in the PC market. If we are unable to complete the timely development of or
successfully and cost-effectively manufacture and deliver products that meet
the requirements of the PC market, our business would be harmed.
Our integrated graphics product may not be accepted by the PC market.
We expect that integrated graphics chipset products will become an
increasing part of the lower cost segment of the PC graphics market. We are
currently developing integrated chipset products. If these products are not
competitive in this segment and the integrated chipset segment continues to
account for an increasing percentage of the units sold in the PC market, our
business may suffer.
We need to develop new products and to manage product transitions in order
to succeed.
Our business will depend to a significant extent on our ability to
successfully develop new products for the 3D graphics market. Our add-in board
manufacturers and major OEM customers typically introduce new system
configurations as often as twice per year, typically based on spring and fall
design cycles. Accordingly, our existing products must have competitive
performance levels or we must timely introduce new products with such
performance characteristics in order to be included in new system
configurations. This requires that we do the following:
. anticipate the features and functionality that consumers will demand;
. incorporate those features and functionality into products that meet the
exacting design requirements of PC OEMs and add-in board manufacturers
or CEMs;
. price our products competitively; and
19
. introduce the products to the market within the limited window for PC
OEMs and add-in board manufacturers.
As a result, we believe that significant expenditures for research and
development will continue to be required in the future. The success of new
product introductions will depend on several factors, including the following:
. proper new product definition;
. timely completion and introduction of new product designs;
. the ability of TSMC, our primary manufacturer, and any additional third-
party manufacturers to effectively manufacture our new products in a
timely manner;
. the quality of any new products;
. differentiation of new products from those of our competitors;
. market acceptance of our products and our customers' products; and
. availability of adequate quantity and configurations of various types of
memory products.
Our strategy is to utilize the most advanced semiconductor process
technology appropriate for our products and available from commercial third-
party foundries. Use of advanced processes has in the past resulted in initial
yield problems. New products that we introduce may not incorporate the
features and functionality demanded by PC OEMs, add-in board manufacturers and
consumers of 3D graphics. In addition, we may not successfully develop or
introduce new products in sufficient volumes within the appropriate time to
meet both the PC OEMs' design cycles and market demand. We have in the past
experienced delays in the development of some new products. Our failure to
successfully develop, introduce or achieve market acceptance for new 3D
graphics products would harm our business.
Our failure to identify new product opportunities or develop new products
could harm our business.
As markets for our 3D graphics processors develop and competition
increases, we anticipate that product life cycles at the high end will remain
short and average selling prices will continue to decline. In particular, we
expect average selling prices and gross margins for our 3D graphics processors
to decline as each product matures and as unit volume increases. As a result,
we will need to introduce new products and enhancements to existing products
to maintain overall average selling prices and gross margins. In order for our
3D graphics processors to achieve high volumes, leading PC OEMs and add-in
board manufacturers must select our 3D graphics processor for design into
their products, and then successfully complete the designs of their products
and sell them. We may be unable to successfully identify new product
opportunities or to develop and bring to market in a timely fashion any new
products. In addition, we cannot guarantee that any new products we develop
will be selected for design into PC OEMs' and add-in board manufacturers'
products, that any new designs will be successfully completed or that any new
products will be sold. As the complexity of our products and the manufacturing
process for products increases, there is an increasing risk that we will
experience problems with the performance of products and that there will be
delays in the development, introduction or volume shipment of our products. We
may experience difficulties related to the production of current or future
products or other factors may delay the introduction or volume sale of new
products we developed. In addition, we may be unable to successfully manage
the production transition risks with respect to future products. Failure to
achieve any of the foregoing with respect to future products or product
enhancements could result in rapidly declining average selling prices, reduced
margins, and reduced demand for products or loss of market share. In addition,
technologies developed by others may render our 3D graphics products non-
competitive or obsolete or result in our holding excess inventory, either of
which would harm our business.
20
We rely on third-party vendors to supply us tools for the development of
our new products and we may be unable to obtain the tools necessary to
develop these products.
In the design and development of new products and product enhancements, we
rely on third-party software development tools. While we currently are not
dependent on any one vendor for the supply of these tools, some or all of
these tools may not be readily available in the future. For example, we have
experienced delays in the introduction of products in the past as a result of
the inability of then available software development tools to fully simulate
the complex features and functionalities of our products. The design
requirements necessary to meet consumer demands for more features and greater
functionality from 3D graphics products in the future may exceed the
capabilities of the software development tools available to us. If the
software development tools we use become unavailable or fail to produce
designs that meet consumer demands, our business could suffer.
Our industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions that could result in substantial
costs to us.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which has resulted in
protracted and expensive litigation. The 3D graphics market in particular has
been characterized recently by the aggressive pursuit of intellectual property
positions, and we expect our competitors to continue to pursue aggressive
intellectual property positions. In addition, from time to time we receive
notices alleging that we have infringed patents or other intellectual property
rights owned by third parties. We expect that, as the number of issued
hardware and software patents increases, and as competition in our markets
intensifies, the volume of intellectual property infringement claims will
increase. If infringement claims are made against us, we may seek licenses
under the claimant's patents or other intellectual property rights. However,
licenses may not be offered at all or on terms acceptable to us. The failure
to obtain a license from a third party for technology used by us could cause
us to incur substantial liabilities and to suspend the manufacture of
products. Furthermore, we may initiate claims or litigation against third
parties for infringement of our proprietary rights or to establish the
validity of our proprietary rights. We have agreed to indemnify certain
customers for claims of infringement arising out of sale of our products.
Litigation by or against us or our customers concerning infringement would
likely result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not the litigation results
in a favorable determination for us.
We have in the past been subject to patent infringement suits, and we may
be subject to patent infringement suits brought by other parties in the
future. These patent lawsuits could divert the attention of our technical and
management employees and could result in significant expenses to us, whether
or not the outcome is favorable. For example, we have been advised by Rambus
Inc. that it believes our products infringe certain patents owned by Rambus
and Rambus has requested that we agree to certain licensing terms, including
royalty payments. We believe that Rambus patents are invalid, not infringed
and unenforceable. Although we currently are having discussions with Rambus
regarding potential business alternatives to Rambus' proposed licensing terms,
we cannot guarantee that we will be able to reach a satisfactory agreement
with Rambus. If we are unable to do so, Rambus may sue us or our customers for
patent infringement at any time. If we are subject to patent infringement
lawsuits, and the outcome of those lawsuits are unfavorable, we may have to
pay substantial damages.
We could be subject to future lawsuits that could divert our resources and
result in the payment of substantial damages.
We may be unable to adequately protect our intellectual property.
We rely primarily on a combination of patents, trademarks, trade secrets,
employee and third-party nondisclosure agreements and licensing arrangements
to protect our intellectual property. As of January 28, 2001, we owned 37
issued United States patents, and had 61 United States patent applications
pending and our issued patents had expiration dates from April 2015 to June
2019. As of January 28, 2001, our issued patents and pending patent
applications related to technology developed by us in connection with the
development of our products, including our 3D graphics processors. Our pending
patent applications and any future applications may
21
not be approved. In addition, any issued patents may not provide us with
competitive advantages or may be challenged by third parties. The enforcement
of patents by others may harm our ability to conduct our business. Others may
independently develop substantially equivalent intellectual property or
otherwise gain access to our trade secrets or intellectual property. Our
failure to effectively protect our intellectual property could harm our
business. We have licensed technology from third parties for incorporation in
our graphics processors, and expect to continue to enter into license
agreements for future products. These licenses may result in royalty payments
to third parties, the cross-licensing of technology by us or payment of other
consideration. If these arrangements are not concluded on commercially
reasonable terms, our business could suffer.
Our failure to achieve one or more design wins would harm our business.
Our future success will depend in large part on achieving design wins,
which entails having our existing and future products chosen as the 3D
graphics processors for hardware components or subassemblies designed by PC
OEMs and add-in board manufacturers. Our add-in board manufacturers and major
OEM customers typically introduce new system configurations as often as twice
per year, generally based on spring and fall design cycles. Accordingly, our
existing products must have competitive performance levels or we must timely
introduce new products with such performance characteristics in order to be
included in new system configurations. Our failure to achieve one or more
design wins would harm our business. The process of being qualified for
inclusion in a PC OEM's product can be lengthy and could cause us to miss a
cycle in the demand of end users for a particular product feature, which also
could harm our business.
Our ability to achieve design wins also depends in part on our ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render our products incompatible with
products developed by major hardware manufacturers and software developers,
including Intel and Microsoft. This would require us to invest significant
time and resources to redesign our products to ensure compliance with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design wins
could suffer.
We are dependent on the PC market, which may not continue to grow.
In fiscal 2000, we derived all of our revenue from the sale of products for
use in PCs. During fiscal 2001, we derived most of our revenue from the sale
of products for use in the entire desktop PC market, from professional
workstations to low-cost PCs. We expect to continue to derive substantially
most of our revenue from the sale or license of products for use in PCs in the
next several years. The PC market is characterized by rapidly changing
technology, evolving industry standards, frequent new product introductions
and significant price competition. These factors result in short product life
cycles and regular reductions of average selling prices over the life of a
specific product. Although the PC market has grown substantially in recent
years, this growth may not continue. A reduction in sales of PCs, or a
reduction in the growth rate of PC sales, would likely reduce demand for our
products. Moreover, changes in demand could be large and sudden. Since PC
manufacturers often build inventories during periods of anticipated growth,
they may be left with excess inventories if growth slows or if they have
incorrectly forecast product transitions. In these cases, PC manufacturers may
abruptly suspend substantially all purchases of additional inventory from
suppliers like us until the excess inventory has been absorbed. It is possible
that the recent slowing of the economy in the U.S., which has negatively
impacted some PC manufacturers and led to some reductions in the demand for
PCs, could lead to reductions in inventory purchases by PC manufacturers. Any
reduction in the demand for PCs generally, or for a particular product that
incorporates our 3D graphic processors, could harm our business.
The acceptance of next generation products in business PC 3D graphics may
not continue to develop.
Our success will depend in part upon the demand for performance 3D graphics
for business PC applications. The market for performance 3D graphics on
business PCs has only recently begun to emerge and is dependent on the future
development of, and substantial end-user and OEM demand for, 3D graphics
functionality. As a result, the market for business PC 3D graphics computing
may not continue to develop or may not grow at a rate
22
sufficient to support our business. The development of the market for
performance 3D graphics on business PCs will in turn depend on the development
and availability of a large number of business PC software applications that
support or take advantage of performance 3D graphics capabilities. Currently
there are only a limited number of software applications like this, most of
which are games, and a broader base of software applications may not develop
in the near term or at all. Consequently, a broad market for full function
performance 3D graphics on business PCs may not develop. Our business
prospects will suffer if the market for business PC 3D graphics fails to
develop or develops more slowly than expected.
We are dependent on a small number of customers and we are subject to order
and shipment uncertainties.
We have only a limited number of customers and our sales are highly
concentrated. We primarily sell our products to add-in board and motherboard
manufacturers and CEMs, which incorporate graphics products in the boards they
sell to PC OEMs. Sales to add-in board manufacturers and CEMs are primarily
dependent on achieving design wins with leading PC OEMs. The number of add-in
board manufacturers, CEMs and leading PC OEMs is limited. We expect that a
small number of add-in board manufacturers and CEMs directly, and a small
number of PC OEMs indirectly, will continue to account for a substantial
portion of our revenue for the foreseeable future. As a result, our business
could be harmed by the loss of business from PC OEMs or add-in board
manufacturers and CEMs. In addition, revenue from add-in board manufacturers,
motherboard manufacturers, CEMs and PC OEMs that have directly or indirectly
accounted for significant revenue in past periods, individually or as a group,
may not continue, or may not reach or exceed historical levels in any future
period.
Our business may be harmed by instability in Asia due to the concentration
of customers who are located or have substantial operations in Asia, including
Taiwan. The People's Republic of China and Taiwan have in the past experienced
and currently are experiencing strained relations. A worsening of these
relations or the development of hostilities between the two could result in
disruptions in Taiwan and possibly other areas of Asia, which could harm our
business. In addition, it is possible that recent foreign relations matters
between the U.S. and The People's Republic of China could further strain
relations in Asia. While we believe political instability in Asia has not
adversely affected our business, because of our reliance on companies with
operations in Asia, continued economic and political instability in Asia might
harm it.
We may be unable to manage our growth and, as a result, may be unable to
successfully implement our strategy.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. As
of January 28, 2001, we had 796 employees as compared to 392 employees as of
January 30, 2000. We expect that the number of our employees will increase
substantially over the next 12 months. Our future growth, if any, will depend
on our ability to continue to implement and improve operational, financial and
management information and control systems on a timely basis, as well as our
ability to maintain effective cost controls. Further, we will be required to
manage multiple relationships with various customers and other third parties.
Our systems, procedures or controls may not be adequate to support our
operations and our management may be unable to achieve the rapid execution
necessary to successfully implement our strategy.
We are dependent on key personnel and the loss of these employees could
harm our business.
Our performance will be substantially dependent on the performance of our
executive officers and key employees. None of our officers or employees is
bound by an employment agreement, and our relationships with these officers
and employees are, therefore, at will. We do not have "key person" life
insurance policies on any of our employees. The loss of the services of any of
our executive officers, technical personnel or other key employees,
particularly Jen-Hsun Huang, our President and Chief Executive Officer, would
harm our business. Our success will depend on our ability to identify, hire,
train and retain highly qualified technical and managerial
23
personnel. Our failure to attract and retain the necessary technical and
managerial personnel would harm our business.
We depend on third-party fabrications to produce our products.
We do not manufacture the semiconductor wafers used for our products and do
not own or operate a wafer fabrication facility. Our products require wafers
manufactured with state-of-the-art fabrication equipment and techniques. We
utilize TSMC to produce our semiconductor wafers and utilize independent
contractors to perform assembly, test and packaging. We depend on these
suppliers to allocate to us a portion of their manufacturing capacity
sufficient to meet our needs, to produce products of acceptable quality and at
acceptable manufacturing yields, and to deliver those products to us on a
timely basis. These manufacturers may be unable to meet our near-term or long-
term manufacturing requirements. We obtain manufacturing services on a
purchase order basis and TSMC has no obligation to provide us with any
specified minimum quantities of product. TSMC fabricates wafers for other
companies, including certain of our competitors, and could choose to
prioritize capacity for other users or reduce or eliminate deliveries to us on
short notice. Because the lead time needed to establish a strategic
relationship with a new manufacturing partner could be several quarters, there
is no readily available alternative source of supply for any specific product.
We believe that long-term market acceptance for our products will depend on
reliable relationships with TSMC and any other manufacturers used by us to
ensure adequate product supply to respond to customer demand.
In September 1999, the earthquake in Taiwan contributed to a temporary
shortage of graphics processors in the third and fourth quarters of fiscal
2000. Because of our reliance on TSMC, our business may be harmed by political
instability in Taiwan, including the worsening of the strained relations
between The People's Republic of China and Taiwan, and if relations between
the U.S. and The People's Republic of China are strained due to recent foreign
relations events. Furthermore, any substantial disruption in our suppliers'
operations, either as a result of a natural disaster, political unrest,
economic instability, equipment failure or other cause, could harm our
business.
We are dependent primarily on TSMC and we expect in the future to continue
to be dependent upon third-party manufacturers to do the following:
. produce wafers of acceptable quality and with acceptable manufacturing
yields;
. deliver those wafers to us and our independent assembly and testing
subcontractors on a timely basis; and
. allocate to us a portion of their manufacturing capacity sufficient to
meet our needs.
Our wafer requirements represent a significant portion of the total
production capacity of TSMC. Although our products are designed using TSMC's
process design rules, TSMC may be unable to achieve or maintain acceptable
yields or deliver sufficient quantities of wafers on a timely basis and/or at
an acceptable cost. Additionally, TSMC may not continue to devote resources to
the production of our products, or to advance the process design technologies
on which the manufacturing of our products are based. Any difficulties like
these would harm our business.
Failure to achieve expected manufacturing yields would reduce our product
supply and harm our business.
Semiconductor manufacturing yields are a function both of product design,
which is developed largely by us, and process technology, which typically is
proprietary to the manufacturer. Since low yields may result from either
design or process technology failures, yield problems may not be effectively
determined or resolved until an actual product exists that can be analyzed and
tested to identify process sensitivities relating to the design rules that are
used. As a result, yield problems may not be identified until well into the
production process, and resolution of yield problems would require cooperation
by and communication between us and the manufacturer.
24
The risk of low yields is compounded by the offshore location of most of
our manufacturers, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems. Because of our
potentially limited access to wafer fabrication capacity from our
manufacturers, any decrease in manufacturing yields could result in an
increase in our per unit costs and force us to allocate our available product
supply among our customers. This could potentially harm customer relationships
as well as revenue and gross profit. Our wafer manufacturers may be unable to
achieve or maintain acceptable manufacturing yields in the future. Our
inability to achieve planned yields from our wafer manufacturers could harm
our business. We also face the risk of product recalls or product returns
resulting from design or manufacturing defects that are not discovered during
the manufacturing and testing process. In the event of a significant number of
product returns due to a defect or recall, our business could suffer.
Failure to transition to new manufacturing process technologies could
affect our ability to compete effectively.
Our strategy is to utilize the most advanced process technology appropriate
for our products and available from commercial third-party foundries. Use of
advanced processes may have greater risk of initial yield problems.
Manufacturing process technologies are subject to rapid change and require
significant expenditures for research and development. We continuously
evaluate the benefits of migrating to smaller geometry process technologies in
order to improve performance and reduce costs. We have migrated to the .15
micron technology with the GeForce3 family of graphics processors, and we
believe that the transition of our products to increasingly smaller geometries
will be important to our competitive position. Other companies in the industry
have experienced difficulty in migrating to new manufacturing processes and,
consequently, have suffered reduced yields, delays in product deliveries and
increased expense levels. We may experience similar difficulties and the
corresponding negative effects. Moreover, we are dependent on our
relationships with our third-party manufacturers to migrate to smaller
geometry processes successfully. We may be unable to migrate to new
manufacturing process technologies successfully or on a timely basis.
The 3D graphics industry is highly competitive and we may be unable to
compete.
The market for 3D graphics processors for PCs in which we compete is
intensely competitive and is characterized by rapid technological change,
evolving industry standards and declining average selling prices. We believe
that the principal competitive factors in this market are performance, breadth
of product offerings, access to customers and distribution channels, backward-
forward software support, conformity to industry standard APIs, manufacturing
capabilities, price of graphics processors and total system costs of add-in
boards and motherboards. We expect competition to increase both from existing
competitors and new market entrants with products that may be less costly than
our 3D graphics processors or may provide better performance or additional
features not provided by our products. We may be unable to compete
successfully in the emerging PC graphics market.
Our primary source of competition is from companies that provide or intend
to provide 3D graphics solutions for the PC market. Our competitors include
the following:
. suppliers of graphics add-in boards that utilize their internally
developed graphics chips, such as ATI Technologies Inc. and Matrox
Electronics Systems Ltd.;
. suppliers of integrated core logic chipsets that incorporate 2D and 3D
graphics functionality as part of their existing solutions, such as
Intel, Silicon Integrated Systems and Via Technologies, Inc.;
. suppliers of mobile graphics processors that incorporate 2D or 3D
graphics functionality as part of their existing solutions, such as ATI,
Trident Microsystems, and the joint venture of a division of SONICblue
Incorporated (formerly S3 Incorporated) and Via Technologies.;
. companies that have traditionally focused on the professional market and
provide high end 3D solutions for PCs and workstations, including
3Dlabs, SGI and SONICblue; and
25
. companies that focus on the video game market, such as Imagination
Technologies and ST Microelectronics.
If and to the extent we offer products outside of the 3D graphics processor
market, we may face competition from some of our existing competitors as well
as from companies with which we currently do not compete. We cannot accurately
predict if we will compete successfully in any new markets we may enter.
We may compete with Intel in the integrated low-cost chipset market.
In June 2000, Intel began shipping the Intel 815 and 815e, 3D graphics
chipset that is targeted at the low-cost PC market. Intel has significantly
greater resources than we do, and our products may not compete effectively
against future products introduced by Intel. In addition, we may be unable to
compete effectively against Intel or Intel may introduce additional products
that are competitive with our products in either performance or price or both.
We expect Intel to continue to do the following:
. invest heavily in research and development and new manufacturing
facilities;
. maintain our position as the largest manufacturer of PC microprocessors;
. increasingly dominate the PC platform; and
. promote our product offerings through advertising campaigns designed to
engender brand loyalty among PC users.
Intel may in the future develop graphics add-in cards or graphics-enabled
motherboards that could directly compete with graphics add-in cards or
graphics-enabled motherboards that our customers may develop. In addition, due
to the widespread industry acceptance of Intel's microprocessor architecture
and interface architecture, including its AGP, and Intel's intellectual
property position with respect to such architecture, Intel exercises
significant influence over the PC industry generally. Any significant
modifications by Intel to the AGP, the microprocessor or core logic components
or other aspects of the PC microprocessor architecture could result in
incompatibility with our technology, which would harm our business. In
addition, any delay in the public release of information relating to
modifications like this could harm our business.
We are dependent on third parties for assembly and testing of our products.
Our graphics processors are assembled and tested by Siliconware, ChipPAC
and ASE. We do not have long-term agreements with any of these subcontractors.
As a result of our dependence on third-party subcontractors for assembly and
testing of our products, we do not directly control product delivery schedules
or product quality. Any product shortages or quality assurance problems could
increase the costs of manufacture, assembly or testing of our products and
could harm our business. Due to the amount of time typically required to
qualify assemblers and testers, we could experience significant delays in the
shipment of our products if we are required to find alternative third parties
to assemble or test our products or components. Any delays in delivery of our
products could harm our business.
We are subject to risks associated with product defects and
incompatibilities.
Products as complex as those offered by us may contain defects or failures
when introduced or when new versions or enhancements to existing products are
released. We have in the past discovered software defects and
incompatibilities with customers' hardware in certain of our products and may
experience delays or lost revenue to correct any new defects in the future.
Errors in new products or releases after commencement of commercial shipments
could result in loss of market share or failure to achieve market acceptance.
Our products typically go through only one verification cycle prior to
beginning volume production and distribution. As a result, our products may
contain defects or flaws that are undetected prior to volume production and
distribution. If these defects or flaws exist and are not detected prior to
volume production and distribution, we may be required to reimburse customers
for costs to repair or replace the affected products in the field. These costs
could be
26
significant and could adversely affect our business and operating results. The
production and distribution of defective products could harm our business.
We are subject to risks associated with international operations.
Our reliance on foreign third-party manufacturing, assembly and testing
operations subjects us to a number of risks associated with conducting
business outside of the United States, including the following:
. unexpected changes in, or impositions of, legislative or regulatory
requirements;
. delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs, quotas and other trade barriers and
restrictions;
. longer payment cycles;
. imposition of additional taxes and penalties;
. the burdens of complying with a variety of foreign laws; and
. other factors beyond our control.
We also are subject to general political risks in connection with our
international trade relationships. In addition, the laws of certain foreign
countries in which our products are or may be manufactured or sold, including
various countries in Asia, may not protect our products or intellectual
property rights to the same extent as do the laws of the United States. This
makes the possibility of piracy of our technology and products more likely.
Currently, all of our arrangements with third-party manufacturers provide for
pricing and payment in U.S. dollars, and to date we have not engaged in any
currency hedging activities, although we may do so in the future. Fluctuations
in currency exchange rates could harm our business in the future.
The semiconductor industry is cyclical in nature.
The semiconductor industry historically has been characterized by the
following factors:
. rapid technological change;
. cyclical market patterns;
. significant average selling price erosion;
. fluctuating inventory levels;
. alternating periods of overcapacity and capacity constraints; and
. variations in manufacturing costs and yields and significant
expenditures for capital equipment and product development.
In addition, the industry has experienced significant economic downturns at
various times, characterized by diminished product demand and accelerated
erosion of average selling prices. We may experience substantial period-to-
period fluctuations in results of operations due to general semiconductor
industry conditions.
Failure in implementation of our enterprise resource planning system could
adversely affect our operations.
In December 1999, we began the implementation of an SAP A.G. system as our
enterprise resource planning or ERP system to replace our information systems
in business, finance, operations and service. The first phase of the
implementation was successfully completed in June 2000 and our operations are
fully functioning under the new ERP system. Future phases of the
implementation are expected to occur throughout fiscal 2002. We are heavily
dependent upon the proper functioning of our internal systems to conduct our
business. System failure or malfunctioning may result in disruptions of
operations and inability to process transactions. Our results of
27
operations and financial position could be adversely affected if we encounter
unforeseen problems with respect to system operations or future
implementation.
Some provisions in our certificate of incorporation, our bylaws and our
agreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and bylaws contain provisions that could
make it more difficult for a third party to acquire a majority of our
outstanding voting stock. These provisions include the following:
. the ability of the board of directors to create and issue preferred
stock without prior shareholder approval;
. the prohibition of shareholder action by written consent;
. a classified board of directors; and
. advance notice requirements for director nominations and shareholder
proposals.
On March 5, 2000, we entered into a licensing and development agreement
with Microsoft that included a grant to Microsoft of first and last rights of
refusal over any offer we receive to purchase 30% or more of the outstanding
shares of our common stock. The provision could also delay or prevent a change
in control of our company.
Rising energy costs and power system shortages in California may result in
increased operating expenses and reduced net income.
California is currently experiencing an energy crisis and has recently
experienced significant power shortages. As a result, energy costs in
California, including natural gas and electricity, may rise significantly over
the next year. Because our principal operating facilities are located in
California, our operating expenses may increase significantly if this trend
continues. In addition, California has on some occasions implemented, and may
in the future continue to implement, rolling blackouts throughout the state,
including the county where we have our principal offices. If blackouts
interrupt our power supply, we may be temporarily unable to operate and any
such interruption could harm our business.
Our stock price may continue to experience large short-term fluctuations.
The price of our common stock has fluctuated greatly. These price
fluctuations have been rapid and severe. The price of our common stock may
continue to fluctuate greatly in the future due to factors, such as the recent
decline in some economic indicators in the U.S., related to the general
volatility that currently exists in the market or due to a variety of company
specific factors, including quarter to quarter variations in our operating
results, shortfalls in revenue or earnings from levels expected by securities
analysts and the other factors discussed above in these risk factors. In the
past, following periods of volatility in the market price of a company's
stock, securities class action litigation has been initiated against the
issuing company. This type of litigation could result in substantial cost and
a diversion of management's attention and resources, which could have an
adverse effect on our revenues and earnings. Any adverse determination in this
type of litigation could also subject us to significant liabilities. See "Risk
Factors--Our operating results are unpredictable and may fluctuate."
We may not be able to realize the potential financial or strategic benefits
of future business acquisitions which could hurt our ability to grow our
business and sell our products.
In the future we may acquire or invest in other businesses that offer
products, services and technologies that we believe would help expand or
enhance our products and services or help expand our distribution channels. If
we were to make such an acquisition or investment, the following risks could
impair our ability to grow our business and develop new products and,
ultimately, could impair our ability to sell our products:
. difficulty in combining the technology, operations or work force of the
acquired business;
. disruption of our on-going businesses;
28
. difficulty in realizing the potential financial or strategic benefits of
the transaction;
. difficulty in maintaining uniform standards, controls, procedures and
policies; and
. possible impairment of relationships with employees and customers as a
result of any integration of new businesses and management personnel.
In addition, the consideration for any future acquisition could be paid in
cash, shares of our common stock, or a combination of cash and common stock.
If the consideration is paid with our common stock, existing stockholders
would be further diluted. Any amortization of goodwill or other assets
resulting from any acquisition could materially adversely affect our operating
results and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information regarding directors and executive
officers appearing under the heading "Directors and Executive Officers" in the
2001 Proxy Statement, which information is hereby incorporated by reference.
Identification of Directors
Reference is made to the information regarding directors appearing under
the heading "Election of Directors" in the 2001 Proxy Statement, which
information is hereby incorporated by reference.
Identification of Executive Officers
Reference is made to the information regarding executive officers appearing
under the heading "Election of Directors" in the 2001 Proxy Statement, which
information is hereby incorporated by reference.
Compliance with Section 16(a) of the Exchange Act
Reference is made to the information appearing under the heading
"Compliance with Section 16(a) of the Securities and Exchange Act of 1934" in
the 2001 Proxy Statement, which information is hereby incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information appearing under the heading "Executive
Compensation," in the 2001 Proxy Statement, which information is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to information appearing in the 2001 Proxy Statement,
under the heading "Security Ownership of Certain Beneficial Owners and
Management," which information is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information appearing in the 2001 Proxy Statement,
under the heading "Certain Transactions," which information is hereby
incorporated by reference.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
31
EXHIBIT INDEX
32
--------
(1) Filed as an exhibit to our Registration Statement on Form S-8 filed on
March 23, 1999 (Registration No. 333-74905) and incorporated herein by
reference.
(2) Filed as an exhibit to our Registration Statement on Form S-1 filed on
March 6, 1998 (Registration No. 333-47495) and incorporated herein by
reference.
(3) Filed as an exhibit to our Form 10-Q for the quarter ended May 2, 1999 as
filed on June 15, 1999 and incorporated herein by reference.
(4) Filed as an exhibit to our Form 10-Q for the quarter ended August 1, 1999
as filed on September 10, 1999 and incorporated herein by reference.
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NVIDIA Corporation:
We have audited the consolidated financial statements of NVIDIA Corporation
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NVIDIA
Corporation and subsidiaries as of January 30, 2000 and January 28, 2001 and
the results of their operations and cash flows for each of the years in the
three-year period ended January 28, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Mountain View, California
February 14, 2001 except as to Note 12
which is as of April 18, 2001
34
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
35
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
See accompanying notes to consolidated financial statements.
36
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
See accompanying notes to consolidated financial statements.
37
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to consolidated financial statements.
38
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Significant Accounting Policies
Organization
NVIDIA Corporation and subsidiaries (the "Company") designs, develops and
markets 3D graphics processors for the PC market. The Company operates
primarily in one industry segment in the United States, Asia and Europe. In
April 1998, the Company was reincorporated as a Delaware corporation.
Fiscal Year
Effective January 1, 1998, the Company changed its fiscal year-end
financial reporting period to January 31. The Company elected not to restate
its previous reporting periods ending December 31. In addition, effective
February 1, 1998, the Company changed its fiscal year end from January 31 to a
52- or 53- week year ending on the last Sunday in January. As a result, the
first and fourth quarters of fiscal 1999 are 12- and 14-week periods,
respectively, with the remaining quarters being 13-week periods. All four
quarters of fiscal 2000 and 2001 are 13-week periods.
Principles of Consolidation
The consolidated financial statements include the accounts of NVIDIA
Corporation and its wholly owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the time of purchase to be cash
equivalents. Total cash at January 28, 2001 includes $24.5 million of
restricted cash relating to letters of credit in connection with the
development of the Company's new facility to be completed in fiscal 2001 and
2002. (See Note 5 Financial Arrangements, Commitments and Contingencies).
Currently, the Company's cash equivalents consist of $589.9 million invested
in money market funds.
Inventories
Inventories are stated at the lower of cost (first-in first-out) or market.
Write-downs to reduce the carrying value of obsolete, slow moving and non-
usable inventory to net realizable value are charged to cost of revenues.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives, generally three to
five years. Depreciation expense includes the amortization of assets recorded
under capital leases. Leasehold improvements and assets recorded under capital
leases are amortized over the shorter of the lease term or the estimated
useful life of the asset.
Software Development Costs
Software development costs are expensed as incurred until the technological
feasibility of the related product is established. After technological
feasibility is established, any additional software development costs are
capitalized in accordance with Financial Accounting Standards Board Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed". Through
January 28, 2001, the Company's process for developing software was completed
concurrently with the establishment of technological feasibility, and,
accordingly, no software costs have been
39
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
capitalized to date. Software development costs incurred prior to achieving
technological feasibility are charged to research and development expense as
incurred.
Debt Financing Costs
In connection with its financing arrangements, (see Note 5 Financial
Arrangements, Commitments and Contingencies) the Company incurred certain
direct costs from third parties who performed services that assisted in the
closing of the related transaction. These costs are included in other assets
on the balance sheet and are amortized on a straight line basis over the term
of the financing.
Stock Split
In May 2000, the Company's Board of Directors approved a two-for-one stock
split of the Company's common stock for stockholders of record on June 12,
2000, effected in the form of a 100% stock dividend. The transfer agent
distributed the shares resulting from the split on June 26, 2000. All share
and per-share numbers contained herein reflect this stock split.
Revenue Recognition
The Company recognizes revenue from product sales to customers when a
contract is in place, the price is determined, shipment is made and
collectibility is reasonably assured. The Company's policy on sales to
distributors is to defer recognition of sales and related cost of sales until
the distributors resell the product. Royalty revenue is recognized upon
shipment of product by the licensee to its customers. The Company believes
that the software sold with its products is incidental to the product as a
whole.
During the fourth quarter of 2001, the Company adopted Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, ("SAB 101").
The adoption of SAB 101 did not have a material effect on the Company's
consolidated statement of financial position or results of operation.
Beginning in fiscal 2001, the Company entered into arrangements with
vendors for the purchase and resale of non-high speed double data rate and
single data rate memory to the Company's customers. The Company recognizes
revenue from such arrangements on a net basis in accordance with Emerging
Issue Task Force Issue No. 99-19, Recording Revenue as a Principal versus Net
as an Agent. The Company is acting in the capacity of an agent for this
product.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and trade
accounts receivable. The Company invests primarily in money market funds and
limits the amount of exposure to any one financial institution. Two customers
accounted for approximately 34% of the Company's accounts receivable balance
at January 28, 2001. The Company performs ongoing credit evaluations of its
customers' financial condition and maintains an allowance for potential credit
losses.
Accounting for Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock-based
employee compensation plans. Deferred compensation arising from stock-based
awards is amortized in accordance with Financial Accounting Standards Board
Interpretation No. 28.
40
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recorded or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short
maturity of those instruments. The carrying value of the Company's convertible
notes approximated fair value as of January 28, 2001. The fair value of the
Company's convertible notes based on quoted market prices as of January 28,
2001 was $245,250,000.
Comprehensive Income
The Company had no other components of comprehensive income other than the
reported amounts of net income in all periods presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
New Accounting Pronouncements
In March 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-
02, "Accounting for Web Site Development Costs." EITF No. 00-2 establishes
accounting and reporting standards for capitalization of web site development
costs in accordance with Statement of Position No. 98-1. The adoption of EITF
No. 00-2 during the fourth quarter of fiscal 2001 did not have a material
impact on the Company's financial position, results of operations or cash
flows.
The "EITF" issued EITF No. 00-10, "Accounting for Shipping and Handling
Fees and Costs." EITF 00-10 establishes accounting and reporting standards for
the classification of shipping and handling costs, as well as costs incurred
related to shipping and handling. The adoption of EITF 00-10 during the fourth
quarter of fiscal 2001 had no material impact on the Company's financial
position, results of operations or cash flows.
41
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Income Per Share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either the as-if-
converted method for mandatorily convertible notes and convertible preferred
stock or the treasury stock method for options and warrants. The following is
a reconciliation of the numerators and denominators of the basic and diluted
net income per share computations for the periods presented:
For fiscal 2001, instruments excluded from the computation of diluted
earnings per share were options to acquire 2,238,250 shares of common stock
with a weighted average exercise price of $60.82 and the assumed conversion of
convertible debt into 3,235,897 at a conversion price of $92.71. There were no
antidilutive instruments outstanding in fiscal 2000. For fiscal 1999,
instruments excluded from the computation of diluted earnings per share were
options to acquire 642,750 shares of common stock with a weighted average
exercise price of $8.86. These instruments were excluded from the computation
of diluted earnings per share because the effect would be antidilutive.
42
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Balance Sheet Components
Certain balance sheet components are as follows:
At January 28, 2001, the Company had noncancelable inventory purchase
commitments totaling $148.2 million.
Assets recorded under capital leases included in property and equipment
were $6,892,000 and $4,905,000 as of January 30, 2000 and January 28, 2001,
respectively. Accumulated amortization thereon was $5,285,000 and $3,979,000
as of January 30, 2000 and January 28, 2001, respectively.
(3) Stockholders' Equity
Common Stock Offering
In October 2000, the Company sold an additional 1,400,000 shares of its
common stock to the public for net proceeds of approximately $96.7 million,
after deducting underwriting discounts, commissions and expenses of the
offering.
43
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mandatorily Convertible Notes
Convertible subordinated non-interest bearing notes were issued to three
major customers in July and August 1998 for a total of $11.0 million. The
notes were subordinated to certain senior indebtedness. On January 15, 1999,
the outstanding principal balance of these notes automatically converted into
3,142,858 shares of common stock of the Company at a conversion price equal to
$3.50 per share.
Convertible Preferred Stock
On January 22, 1999, 18,654,174 shares of preferred stock were
automatically converted into common stock upon the completion of the initial
public offering of common stock. As of January 28, 2001, there are no shares
of preferred stock outstanding and the Company has no current plans to issue
any of the authorized preferred stock except in reference to the agreement
with Microsoft entered into on March 5, 2000. (See Note 7 Development
Agreements).
2000 Nonstatutory Equity Incentive Plan
On August 1, 2000, the Company's Board of Directors adopted the 2000
Nonstatutory Equity Incentive Plan (the "2000 Plan") to provide for the
issuance of the Company's common stock to employees and affiliates who are not
directors, officers or 10% stockholders. The 2000 Plan provides for the
issuance of nonstatutory stock options, stock bonuses and restricted stock
purchase rights. Options generally expire in 10 years. The Compensation
Committee appointed by the Board of Directors has the authority to amend the
2000 Plan and to determine the option term, exercise price and vesting period
of each grant. Options generally vest ratably over a four-year period, with
25% becoming vested approximately one year from the date of grant and the
remaining 75% vesting on a quarterly basis over the next three years. A total
of 8,094,601 shares are authorized for issuance under the 2000 Plan. There
were 2,362,497 shares reserved for future issuance as of January 28, 2001.
1998 Equity Incentive Plan
The 1998 Equity Incentive Plan (the "1998 Plan") was adopted by the
Company's Board of Directors on February 17, 1998 and was approved by the
Company's stockholders on April 6, 1998 as an amendment and restatement of the
Company's then existing Equity Incentive Plan which had been adopted on May
21, 1993. The 1998 Plan provides for the issuance of the Company's common
stock to directors, employees and consultants. The 1998 Plan provides for the
issuance of stock bonuses, restricted stock purchase rights, incentive stock
options or nonstatutory stock options. Additionally, the 1998 Plan provides
that on the last day of each fiscal year, starting with the year ending
January 31, 1999, the aggregate number of shares of common stock that are
available for issuance are automatically to be increased by a number of shares
equal to five percent (5%) of the Company's outstanding common stock on such
date, including on an as-if-converted basis preferred stock and convertible
notes, and outstanding options and warrants, calculated using the treasury
stock method. There are a total of 41,568,491 shares authorized for issuance
and 4,167,725 shares are reserved for future issuance as of January 28, 2001.
Pursuant to the 1998 Plan, the exercise price for incentive stock options
is at least 100% of the fair market value on the date of grant or for
employees owning in excess of 10% of the voting power of all classes of stock,
110% of the fair market value on the date of grant. For nonstatutory stock
options, the exercise price is no less than 85% of the fair market value on
the date of grant.
Options generally expire in 10 years. Vesting periods are determined by the
Board of Directors. However, the initial options granted generally vest
ratably over a four year period, with 25% becoming vested
44
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately one year from the date of grant and the remaining 75% vesting on
a quarterly basis over the next three years. Subsequent grants vest quarterly
over a four year period. Options granted prior to December 1997 could be
exercised prior to full vesting. Any unvested shares so purchased were subject
to a repurchase right in favor of the Company at a repurchase price per share
that was equal to the original per share purchase price. The right to
repurchase at the original price would lapse at the rate of 25% per year over
the four-year period from the date of grant. As of January 28, 2001, there
were 175,875 shares subject to repurchase.
1998 Non-Employee Directors' Stock Option Plan
In February 1998, the Board adopted the 1998 Non-employee Directors' Stock
Option Plan (the "Directors Plan") to provide for the automatic grant of
options to purchase shares of the Company's common stock to directors of the
Company who are not employees or consultants of the Company or of an affiliate
of the Company. Under the Directors Plan, whereby non-employee directors who
are elected or appointed for the first time are automatically granted 100,000
non-qualified stock options ("Initial Grant"). On the day following each
annual meeting, non-employee directors shall be granted an option to purchase
40,000 shares of common stock and each non-employee director who is a member
of a Committee shall be granted an option to purchase 10,000 shares of common
stock ("Annual Grant"); however, if the person has not been serving on the
Board or committee since the prior year annual meeting, then the number of
shares granted will be reduced pro rata for each full quarter prior to the
date of grant during which such person did not serve as an non-employee
director.
Initial Grants vest monthly over a four-year period and become exercisable
on the fourth anniversary of the date of grant. Options under the Annual Grant
vest monthly over a one year period and become exercisable on the one-year
anniversary of the date of grant if the director has attended at least 75% of
the regularly scheduled meetings. If the director fails to attend at least 75%
of the regularly scheduled meetings, then options will vest annually over four
years following the date of grant at the rate of 10% per year for the first
three years and 70% for the fourth year such that the entire option will
become exercisable on the four-year anniversary of the date of grant. The
exercise price for such options is at least 100% of the fair market value on
the date of grant. No option granted under the Directors Plan may be exercised
after the expiration of 10 years from the date it was granted.
The Compensation Committee administers the Directors Plan. A total of
600,000 shares have been authorized and issued under the Directors Plan and
there are no more available as of January 28, 2001. In July 2000, the Board of
Directors amended the 1998 Plan to incorporate the automatic grant provisions
of the Directors Plan. Future grants will be made out of the 1998 Plan.
Employee Stock Purchase Plan
In February 1998, the Board adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan"). In June 1999, the Purchase Plan was amended to increase
the number of shares reserved for issuance automatically each year at the end
of the Company's fiscal year for the next 10 years (commencing at the end of
fiscal 2000 and ending 10 years later in 2009) by an amount equal to 2% of the
outstanding shares of the Company on each such date, including on an as-if-
converted basis preferred stock and convertible notes, and outstanding options
and warrants, calculated using the treasury stock method; provided that the
maximum number of shares of common stock available for issuance on the
Purchase Plan could not exceed 13,000,000 shares. At January 28, 2001, 572,302
shares have been issued under the Purchase Plan and 3,636,125 shares have been
reserved for further issuance.
The Purchase Plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. Under the Purchase
Plan, offerings period of an offering will be no longer than 27 months. Under
the current offering adopted pursuant to the Purchase Plan, each offering
period has been set at one year; each offering period is divided into two
shorter purchase periods of approximately six months in duration.
45
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employees are eligible to participate if they are employed by the Company
or an affiliate of the Company designated by the Board. Employees who
participate in an offering generally can have up to 10% of their earnings
withheld pursuant to the Purchase Plan and applied, on specified dates
determined by the Board, to the purchase of shares of common stock. The Board
may increase this percentage at its discretion, up to 15%. The price of common
stock purchased under the Purchase Plan will be equal to the lower of 85% of
the fair market value of the common stock on the commencement date of each
offering period or 85% of the fair market value of the common stock on the
relevant purchase date. Employees may end their participation in the offering
at any time during the offering period, and participation ends automatically
on termination of employment with the Company.
Stock-Based Compensation
The Company accounts for the 1998 and 2000 plans using the intrinsic value
method. As such, compensation expense is recorded if on the date of grant the
current fair value per share of the underlying stock exceeds the exercise
price per share. With respect to certain options granted during 1997 and the
one month ended January 31, 1998, the Company recorded deferred compensation
of $4,277,000 and $361,000, respectively, for the difference at the grant date
between the exercise price per share and the fair value per share, based upon
independent valuations and management's estimate of the fair value of the
Company's stock on the various grant dates of the common stock underlying the
options. This amount is being amortized over the vesting period of the
individual options, generally four years.
As permitted under Statement of Financial Accounting Standards No. 123,
("SFAS 123"), the Company has elected to follow Accounting Principles Board
Opinion No. 25 ("APB 25") and related Interpretations in accounting for stock-
based awards to employees. Compensation cost for the Company's stock-based
compensation plans as determined consistent with SFAS 123, would have
decreased net income to the pro forma amounts indicated below:
The fair value of options granted under the Purchase Plan has been
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
The weighted-average fair value of shares granted under the Purchase Plan
during the year ended January 28, 2001, January 30, 2000 and January 31, 1999
was approximately $14.08, $4.41 and $2.31, respectively. .
46
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of options granted has been estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions:
The weighted-average per share fair value of options granted during the
years ended January 28, 2001, January 30, 2000 and January 31, 1999 was
approximately $26.03, $13.53 and $1.45, respectively.
The following summarizes the transactions under the equity incentive and
non-employee director plans:
In July 1998, the Board of Directors adopted a resolution allowing
employees to exchange some or all of their existing unexercised options to
purchase common stock of the Company for options having an exercise price of
$3.15 per share. The repriced options retain the same vesting schedule as the
originally issued options, but the repriced options did not become exercisable
until July 1999. Options to purchase approximately 2,507,000 shares of common
stock were repriced under this program. Stock options held by executive
officers and directors were not eligible for such repricing.
During fiscal 2000, the Company granted common stock options within the
Plan to consultants for services rendered. The fair value of all option grants
to non-employees has been estimated using the Black-Scholes option pricing
model using the following assumptions: dividend yield--none; expected life--
contractual term; risk free interest rates--6.0% to 6.5%; volatility-- 60%.
The estimated fair value of these options was $22,000 in fiscal 2000.
47
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, options to purchase 40,000 shares of common stock were granted to
an outside investor. As of January 28, 2001, options to purchase 12,500 shares
of common stock were outstanding, of which zero shares were vested.
The following table summarizes information about stock options outstanding
as of January 28, 2001:
(4) 401(K) Plan
The Company has a 401(K) Plan (the "Plan") covering substantially all of
its United States employees. Under the Plan, participating employees may defer
up to 20 percent of their pre-tax earnings, subject to the Internal Revenue
Service annual contribution limits.
(5) Financial Arrangements, Commitments and Contingencies
Convertible Subordinated Notes
In October 2000, the Company sold $300 million of Convertible Subordinated
Notes (the "Notes") due October 15, 2007. Proceeds net of issuance costs were
$290.8 million. Issuance costs are being amortized to interest expense on a
straight-line basis over the term of the notes. Interest on the Notes accrues
at the rate of 4 3/4% per annum and is payable semiannually in arrears on
April 15 and October 15 of each year, commencing April 15, 2001. The Notes are
redeemable at the Company's option on and after October 20, 2003. The Notes
are convertible at the option of the holder at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, into
shares of common stock at a conversion price of $92.71 per share, subject to
adjustment in certain circumstances. In the event of a fundamental change, as
defined in the Notes indenture, each holder of the Notes has the right,
subject to certain conditions and restrictions, to require the Company to
repurchase the Notes, in whole or in part, at a repurchase price of 100% of
the principal amount, plus accrued interest to the repurchase date. In
connection with its debt financing arrangement, the Company incurs certain
direct, incremental costs from third parties who perform services that assist
in the closing of the related transactions. These costs are included in
deposits and other assets on the balance sheet and amortized using the
straight line method over the term of the financing.
48
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Short-term Borrowings
In July 1999, the Company entered into an amended loan and security
agreement with a bank, which included a $10.0 million revolving loan agreement
with a borrowing base equal to 80% of eligible accounts. Borrowings under the
line of credit bore interest at the prime rate, which was 8.5% at January 30,
2000, and was due in July 2000. Covenants governing the loan agreement require
the maintenance of certain financial ratios. The agreement expired on July 29,
2000.
Lease Obligations
In April 2000, the Company entered into leases for its new headquarters
complex in Santa Clara, California. The Company expects the first phase is to
be completed in May 2001, the second phase of is to be completed in July 2001
and the last phase to be completed in March 2002. The leases expire in 2012
and includes two seven-year renewals at the Company's option. In addition,
there is $24.5 million in restricted cash relating to letters of credit in
place for the developer of the new facility. Future minimum lease payments
under these operating leases total approximately $227.1 million over the terms
of the leases and are included in the future minimum lease schedule below.
In addition to the commitment of the new headquarters, the Company has the
current office facilities under operating leases expiring through 2003. Future
minimum lease payments under the Company's noncancelable capital and operating
leases as of January 28, 2001, are as follows (in thousands):
The following is an analysis of the property and equipment under capital
leases by major classes:
49
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the years ended January 28, 2001, January 30, 2000 and
January 31, 1999 was approximately $3,127,000, $2,501,000 and $1,555,000,
respectively.
Litigation
On September 21, 1998, 3dfx Interactive, Inc. filed a patent infringement
lawsuit against the Company in the United States District Court for the
Northern District of California alleging infringement of a 3dfx patent. The
lawsuit was amended in 1999 to add two additional 3dfx patents. On August 28,
2000, the Company filed a patent infringement lawsuit against 3dfx in the
United States District Court for the Northern District of California alleging
infringement by 3dfx of five of our patents. The complaint by 3dfx alleges
that our RIVA TNT, RIVA TNT2 and RIVA TNT Ultra products infringed the patents
in suit and sought unspecified compensatory and trebled damages and attorney's
fees, as well as injunctive relief. The Company's current generation of
products was not identified as infringing any of the patents in suit. The
lawsuit filed by the Company against 3dfx alleges that 3dfx's graphics chips
and card products, which were used to accelerate 3D graphics on personal
computers, infringed five of the Company's patents and sought an injunction
restraining 3dfx from manufacturing, selling, or importing infringing graphics
chips and card products, including its Voodoo3, Voodoo4, Voodoo5 and VSA-100
family of products, as well as monetary damages. Following the closing of the
definitive agreement entered into by the Company and 3dfx, the Company and
3dfx jointly filed to dismiss with prejudice the above described patent
litigation.
On February 22, 2000, Graphiques Matrox, Inc. and Systemes Electroniques
Matrox Ltd. (collectively "Matrox") filed suit against the Company in the
Superior Court, Judicial District of Montreal, Province of Quebec, Canada. The
suit alleges that the Company improperly solicited and recruited Matrox
employees and encouraged Matrox employees to breach their Matrox
confidentiality and/or non-competition agreements. The suit by Matrox seeks,
among other things, certain injunctive relief. The Company believes that the
claims asserted by Matrox are without merit and intends to vigorously defend
this suit. The trial of this matter started on April 4, 2001 and ended on
April 24, 2001. The court took the case under submission and indicated that it
would not likely issue a final decision on the merits for approximately two
months.
On May 19, 2000, the Company filed suit against Matrox in Santa Clara
County Superior Court alleging that Matrox's efforts to prevent its current
and former employees from pursuing employment opportunities with the Company
constitute interference with the Company's ability to enter into certain
contracts and unfair competition. The Company's suit seeks, among other
things, unspecified monetary damages, a declaration that Matrox's
confidentiality and/or non-competition agreements are unenforceable under
California law and a declaration that its use of those agreements and other
tactics constitutes unfair competition. On May 26, 2000, the case was
transferred to the San Jose Division of the United States District Court for
the Northern District of California. On June 14, 2000, Matrox filed an answer
denying the Company's claims and a counterclaim alleging trade secret
misappropriate, intentional interference with contractual relations and unfair
competition. Matrox's California suit seeks unspecified monetary damages and
injunctive relief. The Company filed an answer to this counterclaim on July 7,
2000, denying all of Matrox's claims. As with the Montreal action, the Company
believes that the claims asserted by Matrox are without merit and intends to
vigorously defend this suit.
In addition to the above litigation, from time to time the Company is
subject to claims in the ordinary course of business, none of which is viewed
to have a material adverse impact on the Company's business or financial
position if resolved unfavorably.
50
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Income Taxes
The components of income tax expense are as follows:
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate of 35% to income before taxes as
follows:
The tax effect of temporary differences that gives rise to significant
portions of the deferred tax assets are presented below:
51
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The valuation allowance decreased by $4,784,000 for the year ended January
30, 2000. A valuation allowance was not established for the years ended
January 30, 2000 and January 28, 2001 as management believes that it is more
likely than not that future operations will generate sufficient taxable income
to realize the deferred tax assets.
As of January 28, 2001, the Company had a federal net operating loss
carryforward of approximately $9,188,000, which will expire in 2021. The
Company has federal and California research and experimentation tax credit
carryforwards of approximately $7,707,000 and $1,669,000, respectively, as of
January 28, 2001. The federal tax credits expire in 2021, and the California
tax credits may be carried over indefinitely. Utilization of net operating
loss and tax credit carryforwards may be subject to limitations due to
ownership change and other limitations provided by the Internal Revenue Code
and similar state provisions. If such a limitation applies, the net operating
loss and tax credit carryforwards may expire before full utilization.
(7) Development Agreements
On March 5, 2000, the Company entered into an agreement with Microsoft
pursuant to which the Company agreed to develop and sell graphics chips and to
license certain technology to Microsoft and its licensees for use in the Xbox
video game console under development by Microsoft. In April 2000, Microsoft
paid the Company $200 million as an advance against graphics chip purchases.
Microsoft may terminate the agreement at any time. If termination occurs prior
to offset in full of the advance payments, the Company would be required to
return to Microsoft up to $100 million of the prepayment and to convert the
remainder into preferred stock of the Company at a 30% premium to the 30-day
average trading price of the common stock preceding Microsoft's termination of
the agreement. In addition, in the event that an individual or corporation
makes an offer to purchase shares equal to or greater than thirty percent
(30%) of the outstanding shares of the Company's common stock, Microsoft has
first and last rights of refusal to purchase the stock. The graphics chip
contemplated by the agreement is highly complex, and the development and
release of the Microsoft Xbox video game console and its commercial success
are dependent upon a number of factors, many of which the Company cannot
control. The Company cannot guarantee that it will be successful in developing
the graphics chip for use by Microsoft or that the product will be developed
or released, or if released, will be commercially successful.
The Company had a strategic collaboration agreement with ST for the
manufacture, marketing, and sale of certain of the Company's products. In
connection with this agreement, the Company recorded royalty revenue of
$6,824,000, in January 31, 1999. Royalty revenue decreased to zero in fiscal
2000 due primarily to reduced sales of RIVA 128 graphics processor and
derivative products and disputes with ST regarding payment. The Company does
not expect to record or receive royalty revenue from ST in the future.
(8) Long-term Software Licensing Agreement
On April 12, 1999, the Company entered into a $10.0 million five-year
software licensing agreement with a supplier in the electronic design
automation industry. Under this agreement, the $10.0 million was due in two
installments. The first installment was settled in June 1999 for 487,804
shares of the Company's common stock valued at $5.0 million. The second
installment was settled in cash on March 31, 2000.
(9) Stock Repurchase Agreement
In June 1999, the Company repurchased 857,144 shares of the Company's
common stock from a major customer in settlement for a portion of then
outstanding accounts receivable, in the amount of $7.5 million.
52
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Segment Information
The Company operates in a single industry segment: the design, development
and marketing of 3D graphics processors for the PC market. The Company's chief
operating decision maker, the Chief Executive Officer, reviews financial
information presented on a consolidated basis for purposes of making operating
decisions and assessing financial performance. Enterprise-wide information
provided on geographic sales is based upon the shipping location of the
customer. Long-lived assets include all long-term assets except those
specifically excluded under SFAS No. 131, such as deferred income taxes and
financial instruments. The following tables summarize information on the
Company's operations in different geographic areas as follows:
Revenues to significant customers, those representing approximately 10% or
more of total revenue for the respective periods, are summarized as follows:
53
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Quarterly Summary (Unaudited)
(in thousands, except per share data)
(12) Definitive Agreement
On December 15, 2000, the Company signed a definitive agreement pursuant to
which the Company would acquire certain graphics related assets of 3dfx. These
graphics related assets include, but are not limited to, patents, pending
patent applications, trademarks, brand names and other assets related to the
graphics business of 3dfx. On April 18, 2001, the Company completed the
purchase contemplated by the definitive agreement. The Company has paid 3dfx
approximately $70 million in total consideration. Subject to the satisfaction
of additional conditions, 3dfx may receive additional consideration in the
form of cash and/or shares of our common stock. Also, as a result of the
closing, the Company and 3dfx jointly filed to dismiss with prejudice the
patent litigation between us. The transaction will be accounted for as a
purchase.
54
NVIDIA CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
--------
(1) Represents amounts written off against the allowance for sales returns.
(2) Uncollectible accounts written off.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on April 27, 2001.
NVIDIA Corporation
/s/ Jen-Hsun Huang
By: _________________________________
Jen-Hsun Huang
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
56