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 30, 200528, 2007
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)
Delaware | 94-3177549 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification No.) |
2701 San Tomas Expressway
Santa Clara, California 95050
(408) 486-2000
(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
Title of each class | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | The NASDAQ Stock Market, LLC (NASDAQ Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value per shareNone
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes xNoo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’sregistrant’s knowledge, in definitiveindefinitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
x Large accelerated filer o Accelerated filer o Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Rule 12b-2) Act).
Yeso No xNoo
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 23, 200430, 2006 was approximately $1,958,779,998$7.03 billion (based on the closing sales price of the registrant’s common stock as reported by the NASDAQ Global Select Market, on July 23, 2004)30, 2006). 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 registrant. Share ownership information of certain persons known by the registrant 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 July 23, 2004.30, 2006. This determination of affiliate status is not a conclusive determination for other purposes.
The number of shares of common stock outstanding as of March 4, 20052, 2007 was 169,926,282.360,038,303.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference portions of its Proxy Statement for its 20052007 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission by May 31, 2005.
28, 2007.
NVIDIA CORPORATION
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Forward-Looking Statements
When used in this Annual Report on Form 10-K, (the “Report”), the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements relating to our corporate strategies,as to: the features, benefits, capabilities, performance, benefits,impact, production and availability of our productstechnologies and technologies,products; seasonality; acquisitions and the benefits and results of acquisitions; our license with Intel Corporation,strategies and objectives; product cycles; our gross margin; product mix; our inventories; average selling prices; our taxes; growth and factors contributing to growth; anticipated areas of growth; expensing of stock options; the impact of stock-based compensation expense; our critical accounting policies; mix and sources of revenue; anticipated daterevenue; changes in and reasons for our expenditures; capital expenditures; our cash flow and cash balances; our liquidity; uses of shipmentscash; dividends; investments and marketable securities; our stock repurchase program; our results of Intel Corporation-based MCP products, the importance of design wins, the importance and benefits of certain relationships,operations; Microsoft Windows Vista; our employees, market share,competitors' focuses; our research and development, our backlog, seasonality of our products, our expectations regarding competition and our competitive position, development of new products, entry into new product segments,position; our intellectual property, intellectual property litigation, payment of dividends, sufficiencyproperty; the importance of our facilities, revenue, revenue mix, taxes, evaluation of repatriation of foreign earnings, PCI Express, our gross margin, inventories, product life cycles, average selling prices, our WMP business, acceptance of our technology and products, our critical accounting policies, Xbox revenue, expenses, mix of expenses, capital expenditures, cash balances, results of operations, currency exchange rates, the impact of recent accounting pronouncements, business acquisitions, and ourstrategic relationships; customer demand; reliance on a limited number of customers.customers and suppliers; our internal control over financial reporting; our disclosure controls and procedures; recent accounting pronouncements; our international operations; our ability to attract and retain qualified personnel; our foreign currency risk strategy; compliance with environmental laws and regulations; litigation or regulatory action arising from the review of our stock option grant practices and financial restatements; the Department of Justice subpoena and investigation; litigation, including the class action lawsuits; and the Securities and Exchange Commission inquiry. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, thosethe risks discussed below and under Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations-Business Risks,” as well as difficulties associated with conducting international operations; slower than anticipated growth; unanticipated decreases in average selling prices of a particular product,product; increased sales of lower margin products; difficulty in collecting accounts receivable; our inability to decrease inventory purchase commitmentscommitments; difficulties in a meaningful time frame,entering new markets; the write-down of the value of inventory; entry of new competitors in our established markets; reduction in demand for orour products; market acceptance of our products or our customers’ products,competitors’ products; defects in our products,products; the impact of competitive pricing pressure, new product announcements or introductions by our competitors,pressures; disruptions in our relationships with Taiwan Semiconductor Manufacturing Company, United Microelectronics Corporation, International Business Machines Corporation, Chartered Semiconductor Manufacturing, and otherour key suppliers,suppliers; fluctuations in general economic conditions,conditions; failure to achieve design wins, the seasonality of the PC and our other product segments,wins; changes in customers’ purchasing behaviors; international and political conditions,conditions; the concentration of sales of our products to a limited number of customers, unforeseen reductionscustomers; decreases in demand for our products, our ability to safeguard our intellectual property,products; delays in the development of new products by us or our partners; delays in volume production of our products, andproducts; developments in and expenses related to litigation.litigation; our inability to realize the benefits of acquisitions; the outcome of litigation or regulatory actions; and the matters set forth under Item 1A. - Risk Factors. These forward-looking statements speak only as of the date hereof. WeExcept as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
In the sections of this Report entitled “Business ” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” allAll references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.
NVIDIA, GeForce, SLI, GoForce, NVIDIA Quadro, Quadro, NVIDIA nForce, TurboCache, PureVideo, CUDA, Quadro NVS, Quadro Plex and the NVIDIA logo are our trademarks or registered trademarks in the United States and other countries that are used in this document. We may also refer to trademarks of other corporations and organizations in this document.
Overview
Our Company
NVIDIA Corporation is athe worldwide leader in programmable graphics and digital media processors dedicatedprocessor technologies. Our products are designed to creating products that enhance the interactiveend-user experience on consumer and professional computing platforms.devices. We design, develop and markethave four major product-line operating segments: the graphics processing units, or GPUs,GPU Business, media and communications processors, or MCPs, wireless media processors, or WMPs,MCP Business, Handheld GPU Business, and related software.Consumer Electronics Business. Our GPU Business is composed of products are integral to a wide variety of visual computing platforms, including enterprisethat support desktop personal computers, or PCs, consumernotebook PCs, professional workstations notebook PCs,and other GPU-based products; our MCP Business is composed of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed storage and network communications, and perform these operations independently from the host central processing unit, or CPU; our Handheld GPU Business is composed of products that support handheld personal digital assistants, or PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital media centers.consumer electronics devices. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our objectiveheadquarter facilities are in Santa Clara, California. Our Internet address is to be one of the most important and influential technology companies in the world.www.nvidia.com.
Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize NVIDIA digital media processors as a core component of their entertainment and business solutions. Our award-winning GPUs are designed to deliver superior performance and crisp visual quality for PC-based applications such as manufacturing, science, e-business, entertainment and education. Our critically-acclaimed MCPs perform highly demanding multimedia processing for secure broadband connectivity, communications and breakthrough audio capabilities.storage. Our WMPshandheld GPUs deliver a greatquality visual experience by accelerating graphics and video applications while implementing design techniques that result in high performance and ultra-lowrelatively low power consumption.
Industry Environment and Our Business
GPU Business
Programmable DirectX 9 Shader Model 3.0 GPUs.TheThe combination of our GeForce 6, GeForce 7 and GeForce 8 series of GPUs and our Scalable Link Interface, or SLI, technology and NVIDIA Quadro professional solutions has created a new class of gaming PCs and professional workstations. SLI technology takes advantage of the programmableincreased bandwidth of the peripheral component interconnect, or PCI, Express bus architecture to allow up to four NVIDIA GPUs to operate in a single PC or up to two NVIDIA GPUs to operate in a notebook PC or professional workstation. In fiscal 2007, we announced PureVideo High-Definition, or HD technology, a combination of hardware acceleration from an NVIDIA GPU, withhigh definition movie player integration and High-Bandwidth Digital Content Protection or HDCP, feature support, to enable manufacturers and consumers to build PCs that can play High-Definition Digital Video Disc, or HD DVD, or Blu-ray movies. In November 2006, we launched the GeForce 8800, the industry’s first GPU to support the new Microsoft Corporation’s,DirectX 10 Application Programming Interface, or Microsoft’s,API. DirectX 9 high-level10 is a new API for the Microsoft Windows Vista operating system, or Vista, and includes many new features, such as a geometry shader. GeForce 8800 is the first DirectX 10 GPU based on Unified Shader architecture, which can adapt its computation resources to changing vertex and pixel shading language are known as DirectX 9 GPUs. The flexibility andworkload from scene to scene. We also announced Compute Unified Device Architecture, or CUDA, a new mode of operation on GPUs where the computational power of DirectX 9 GPUsthe GPU can enhance high-definition digital video, image processing and editingbe utilized for digital photographs, as well as bring a “cinematic look” to computer graphics. computation-intensive applications.
Technology and market leadership in this generation of GPUs iscontinues to be a key element of our corporate strategy. The combination of the programmable Unified Shader GPU with Microsoft Corporation’s, or Microsoft’s, DirectX 10 high-level shading language is known as DirectX 10 GPUs. Combined with the ability to directly access the GPU via the new Vista applications from Microsoft Office to Web 2.0 applications can now incorporate 3D effects. In fiscal 2005,2007, our strategy was to regainextend our architectural and technology advantage with our second-generation GPUs to support DirectX 9.0 Shader Model 3.0, the GeForce 7 Series GPUs. By extending our leadership position in the performance segment with the production release of the GeForce 7900 in June 2006, we grew our market share from 79% to 85%, according to the Mercury Research Fourth Quarter 2005 and 2006 PC Graphics Reports, respectively.
The NVIDIA Quadro brand has become the benchmark of performance and compatibility for the professional industry. NVIDIA Quadro is recognized by leadingmany as the standard for professional graphics solutions needed to solve many of the world’s most complex visual computing challenges in the manufacturing, entertainment, medical, science, and aerospace industries. In fiscal 2007, we introduced NVIDIA Quadro Plex, a new category of visual computing solutions that brings a level of graphics scalability and processing density. In November 2006, we began seeding the industry with our GeForce 8 GPU, enabled with CUDA, a technology and compiler that, for the first GPUtime, allows for programmers to support DirectX 9 Shader Model 3.0 - thewrite C language applications for GPUs. GeForce 6 Series8 and CUDA will enable a new class of GPUs. Beginning with the GeForce 6800 for the enthusiast desktop segment,high performance computing we introduced a complete family of GeForce 6call “GPU Computing.” With CUDA-enabled GPUs, including the GeForce 6600 for the performance segmentengineers and GeForce 6200 for the mainstream segment. Driven by next generation games such as id Software’s Doom 3 and Valve Software’s Half-Life 2, consumer awareness and demand grew for our GeForce 6 family throughout our fiscal year. The GeForce 6 architecture is also the foundation for our most current notebook and workstation GPU families.scientists will be able to harness programmable GPUs in PCs to solve mathematically-intensive problems that were previously cost prohibitive.
MCP Business
MCPs.The NVIDIA nForce family of products represents our MCPs for Advanced Micro Devices, Inc., or AMD, and Intel Corporation, or Intel,-based desktop, notebook, workstation PCsprofessional workstations and servers.Theservers. Our strategy for MCPs aligns with what we anticipate will drive growth in the MCP segment such as multi-core, ever-increasing-speed networking and storage technologies, and integration of complex features such as virtualization, security processing, network processing and more. The In-Stat Trendy Chipset for the x86 Processor Report projects strong growth for PC chipsets through the end of this decade from $7.6 billion in calendar 2006 to over $10 billion in calendar 2009.
In fiscal 2007, we began production shipments of our single-chip motherboard GPUs for AMD-based PCs. We are now the second largest core logic supplier in the world, according to the Mercury Research Fourth Quarter 2006 PC Graphics Report. We are the largest supplier of AMD 64 chipsets with 53% segment share. NVIDIA nForce architectureMCP unit shipments for AMD64-based CPUs increased over 113% calendar year-over-calendar year, based on the Mercury Research Fourth Quarter 2006 PC Processor Forecast Report.
Also during fiscal 2007, we launched our NVIDIA nForce 680i SLI MCP, which was designed for Intel Core 2 Quad and Core 2 Duo-based PCs. The NVIDIA nForce 680i SLI MCP is a motherboard solution with dual Gigabit Ethernet ports and advanced storage features that is targeted at the hard-core enthusiast and provides support for some of the latest technologies, including NVIDIA SLI multi-GPU technology. We also started to design and released production of our own line of enthusiast-class NVIDIA nForce 680i SLI-based motherboards, which are being offered as a turnkey solution for select channel partners. Our "Designed by NVIDIA" program allows NVIDIA partners to bring NVIDIA nForce 680i SLI-based motherboards to market faster than before, and lets consumers know that the foundation for our chipsetmotherboard they are purchasing supports all of the hardware and software features that we sell to Microsoft for the Microsoft Xbox gaming console. To date,are offered with the NVIDIA nForce family680i SLI MCP.
In fiscal 2007, we completed our acquisition of MCPs has received hundreds of editorial recommendations, including more than 50 prestigious Editors’ Choice Awards. NVIDIA nForce2 products are designed to offer best-in-class performance and feature rich media and communications supportULi Electronics, Inc., or ULi, a core logic developer for AMD Sempron platforms. NVIDIAnForce3 products, which consist of the NVIDIA nForce3, NVIDIA nForce3 Professional and NVIDIA nForce3 Go, are designed to complement the latest 64-bit CPUs while delivering innovative technologies for networking, storage and system performance.In October 2004, we introduced the NVIDIA nForce4 MCP, a new family of performance PCI Express MCPs for AMD64 computing environments. In January 2005, we introduced the NVIDIA nForce Professional MCP family, the industry’s only PCI-Express core-logic solutions for AMD Opteron processor-based server and workstation platforms. The NVIDIA nForce3, NVIDIA nForce4 and NVIDIA nForce Professional families are designed to provide high-speed system performance, unparalleled secure networking and advanced storage solutions for AMD64-based desktop, workstation and server platforms. On November 19, 2004, we announced a broad, multi-year cross-license agreement with Intel Corporation, or Intel. The agreement spans multiple product lines and product generations, and includes a multi-year chipset agreement that grants us a license to implement Intel’s front-side bus technology.We believe that this agreement opens a significant opportunity for us to bringPC industry. This acquisition represents our NVIDIA nForce brand to the Intel segment. We expect to commence shipments ofongoing investment in our first Intel-based MCP product during the first quarter of fiscal 2006.platform solution strategy.
WMPHandheld GPU Business
WMPs. SinceOur strategy in our acquisitionHandheld GPU business is to lead innovation and capitalize on the emergence of MediaQ in fiscal 2004, our NVIDIA GoForce WMP family has grown to include six new WMPs, including the GoForce3D 4800, GoForce3D 4500, GoForce 4000, GoForce 3000, GoForce 2150 and GoForce 2000. The goal of everycellular phone as a versatile consumer lifestyle device. Every device in the NVIDIA GoForce product family is designed to provide a high-performance, visually rich multimedia experience on cellular phones and handheld devices. These products deliver a greatan advanced visual experience by accelerating graphics and video applications, while supporting the most demanded featuresapplications. NVIDIA GoForce handheld GPUs and capabilities. GoForce mediaapplication processors implement innovative design techniques, both inside the chips and at the system level, resultingwhich result in high performance and long battery life. These technologies enhance visual display capabilities, improve connectivity, and minimize chip and system-level power consumption. NVIDIA GoForce products can be found in multimedia cellular phones, PDAs, and other handheld devices.
In March 2006, NVIDIA and Intel announced a collaboration to bring a high-performance 3D gaming and multimedia platform to handheld devices. In addition, in March 2006 we acquired Hybrid Graphics Ltd., or Hybrid Graphics, a developer of embedded 2D and 3D graphics software for handheld devices. In June 2006, we launched our MobileMedia Platform development kit for handheld devices running Windows Mobile 5.0.
In January 2007, we completed our acquisition of PortalPlayer, Inc., or PortalPlayer, a leading supplier of semiconductors, firmware, and software for personal media players, or PMPs, and secondary display-enabled computers. Until recently, our Handheld GPU strategy has been to focus on establishing ourselves in the market as the leader of multimedia technology by leveraging our expertise in graphics, video, and image processing. With innovative technologies,PortalPlayer’s expertise in building low power application processors for Personal Media Players, or PMPs, we are now focused on delivering Systems-On-A-Chip, or SOCs, that combine our application processors and GPUs. We expect SOCs such as ultra-lowthese to power next generation smart multimedia phone and PMP devices.
Consumer Electronics Business
Our Consumer Electronics product group is composed of our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3, sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and digital media processors, we believe future cellular phones will be ableprocessor products. SCE launched sales of its PlayStation 3 computer entertainment system in November 2006. We recognized revenue from the sale of our Xbox-related products to receive television programs, record digital video like a camcorder, enable video phone calls and be a portable game player. We see an exciting opportunity to use our resources and expertise in digital media processing to offer productsMicrosoft for the multimedia handset era.last time during the second quarter of fiscal 2006.
Our Products
We have threefour major product groups: GPUs, MCPs, Handheld GPUs, and WMPs. Our GPU and MCP product lines are primarily incorporated into traditional consumer and professional computing platforms, including consumer PCs, notebook PCs, workstations, servers and video game consoles. Our WMP product line is primarily incorporated into multimedia-rich cellular phones. Each of our product lines is designed to provide the advanced processing of a combination of graphics and high-definition video, audio, communications, networking security and storage.Consumer Electronics. Our products are designed to support and deliver the maximum performance for the most current standards as determined by each industry segment and to provide a comprehensive set of features that enhance the overall operation and compatibility of each platform they support.
GPUs. Our GPU products support desktop PCs, notebook PCs, professional workstations and professional workstations.other GPU-based products. We have three major families of GPUs: GeForce, Go and NVIDIA Quadro.
GeForce. The GeForce family represents our desktop GPUs and includes the GeForce 8, GeForce7, GeForce 6, and GeForce FX families. During the first quarter of fiscal 2007, we shipped eight new GeForce 7 series GPUs for desktop and GeForce4 families. Our most advancednotebook PCs, expanding our offering of products in the GeForce 7 GPU familyfamily. Also during the first quarter of fiscal 2007, we shipped our first Quad SLI system for desktop PCs, enabling the use of four GPUs per system. During the second quarter of fiscal 2007, we shipped the GeForce 7950 GX2, which provides the resolution of cinematic film and brought the 16:9 panoramic experience of cinema to gaming. We also announced PureVideo HD technology, a combination of hardware acceleration from an NVIDIA GPU, high definition movie player integration and HDCP feature support, to enable manufacturers and consumers to build PCs that can play HD DVD or Blu-ray movies. In the fourth quarter of fiscal 2007, we introduced our flagship GPU series, the GeForce 8800. The GeForce 8800 is the GeForce 6 series. Introduced in July 2004, the GeForce 6 architecture is our second generation fully programmable cinematic GPU and is ourindustry’s first unified shader GPU to support the new Microsoft DirectX 9 Shader Model 3.0 standard.10 API. The GeForce 8800 unified shader architecture can adapt its computation resources to changing vertex and pixel shading workload from scene to scene, which enables programmers to create more complex effects and imagery while simplifying the actual programming code. Our GeForce 6800 Ultra7 GPU is one of the semiconductor industry’s most complex application specific integrated circuits, or ASICs. The GeForce 6800 Ultra GPU contains over 230 million transistors and is the industry’s only mainstream GPU to incorporate 32-bit floating-point precision. The GeForce 6800 class of GPUs is designed for the enthusiast consumer segment. In August 2004, we introduced the GeForce 6600 GPU,family, which is designed forbased on the performance consumer segment, and in October 2004, we introduced the GeForce 6200 GPU, which is designed forprior Microsoft DirectX 9.0 API, continues to deliver high price-per-performance from the mainstream consumer segment.In December 2004, we launchedto enthusiast segments both in desktop and notebook PCs. We maintained our GeForce 6200leading share in the desktop standalone GPU with TurboCache technology. TurboCache technology is a new, patent pending hardware and software technology that we believe is redefining the price/performance metrics for mainstream PCs. TurboCache technology allows the GPU to render directly to system memory instead of using local frame buffer memory on the graphics card, thereby lowering on-board memory requirements and enabling OEMs and system builders to deliver entry-level PCs with advanced GPU features and performance levels far superior to those of integrated graphics.The GeForceFX and GeForce4 currently deliver a balance of performance and features for the mainstream accelerated graphics port-based, or AGP-based, PC segments.segment throughout fiscal 2007.
GeForce Go and NVIDIA Quadro Go. The GeForce Go and NVIDIA Quadro Go families represent our notebook GPUs and include the GeForce 67 Go, GeForce FX Go, GeForce4 Go, NVIDIA QuadroFX6 Go, and NVIDIA Quadro4QuadroFX Go GPUs. These GPUs are designed to deliver desktop graphics performance and features for multiple notebook configurations from desktop replacements, multimedia notebooks and thin-and-lights to mobilenotebook workstations. The GeForce Go products are designed to serve the needs of both corporateprofessional and consumer users. The NVIDIA Quadro Go products are designed to serve the needs of workstation professionals in the area of product design and digital content creation. In fiscal 2007, we introduced a complete family of notebook GPUs, the GeForce Go 7900, 7800, 7600 and 7400 families, all based on our second generation Shader Model 3.0 architecture and designed to deliver 3D, HD home theatre-quality video and power management to the notebook segment. In March 2006, we shipped the GeForce Go 7900 and GeForce 7800 GTX notebook products that feature SLI technology for notebook PCs. In early fiscal 2007, we launched our first notebook GPU, the NVIDIA Quadro NVS, targeted specifically for business use. NVIDIA Quadro NVS graphics solutions provide business customers with notebooks that are designed to be easy to deploy and maintain while minimizing total cost of ownership. We also launched the NVIDIA Quadro FX 3500M, a mobile workstation graphic solution for computer aided design, or CAD, Digital Content Creation, and Scientific Visualization. For the first time in our history, we captured the number one position in the notebook standalone GPU segment during the second half of fiscal 2007, according to the Mercury Research Second Quarter 2006 PC Graphics Report.
NVIDIA Quadro.The NVIDIA Quadro branded products are robust, high-performanceprofessional workstation solutions for the professional user that are available for the high-end, mid-range, entry-level and multi-display product lines. The NVIDIA Quadro family, which consists of the NVIDIA Quadro Plex VCS, NVIDIA Quadro FX, NVIDIA Quadro4 and the NVIDIA Quadro NVS professional workstation solutions areprocessors, is designed to meet the needs of a number of workstation applications such as industrial product design, digital content creation, non-linear video editing, scientific and medical visualization, general purpose business and financial trading. NVIDIA Quadro products are fully certified by several software developers for all professional workstation applications and are designed to deliver the graphics performance and precision required by professional applications. In August 2006, we introduced the NVIDIA Quadro Plex 1000, the world's first dedicated Visual Computing System, or VCS. The NVIDIA Quadro Plex 1000 offers scalability in a desktop or dense three unit rackmount configuration for professional applications such as those powering multiple streams of 4K high-definition video, 3D styling and design, scientific and medical visualization, oil and gas exploration, or visual simulation and training.
Other. In addition to the production launch of the GeForce 6 family during fiscal 2005, we also introduced a number of technology initiatives that are designed to extend the reach of our GPUs and expand the reach of the PC.We created the industry-standard mobile PCI-Express module, or MXM, notebook GPU module, which is designed to enable faster adoption of GPUs in notebooks. We invented scalable link interface, or SLI, which brought extreme multi-GPU graphics to enthusiasts and enabled a new class of PCs called Gaming Supercomputers. PureVideo technology is the PC industry’s first programmable video architecture and brings consumer electronics quality video to PCs. TurboCache technology introduced the first frame buffer-less GPU, making modern GPUs more affordable as they are burdened with less dynamic random-access memory cost. Each of these innovations are industry firsts andhave received industry-wide support and acclaim.
MCPs.Our MCP product family, known as NVIDIA nForce, supports desktop PCs, notebook PCs, professional workstations and servers. We also provide a derivative of the NVIDIA nForce2 chipset for the Microsoft Xbox video game console.
NVIDIA nForce.The NVIDIA nForce family represents our MCPs for AMD-basedAMD and Intel-based desktop PCs, notebook PCs, professional workstations and servers and includes the NVIDIA nForce2, NVIDIA nForce3, NVIDIA nForce4, and NVIDIA nForce Professional.Professional, NVIDIA nForce 500 series for AMD and Intel, NVIDIA nForce 600 series for AMD and Intel, and GeForce 6100 Series GPUs and nForce 400 Series MCP motherboard solutions. We define aan MCP as a single-chip or chipset that can off-loadprovides system functions, such as audio processinghigh speed storage and network communications, and performperforms these operations independently from the host central processing unit, or CPU. TheIn fiscal 2006, we introduced the GeForce 6100 Series GPU and NVIDIA nForce2 integrates a comprehensive set of multimedia capabilities, such as two-dimensional, or 2D, three-dimensional, or 3D, digital video disc, or DVD, high-definition television, or HDTV, Dolby Digital audio playbacknForce 400 Series MCP. We offer the industry’s first integrated core logic to feature DirectX 9.0 and fast broadband and networking communications.Shader Model 3.0 technology. In January 2006, we launched two new MCPs for the Intel platform, the NVIDIA nForce2 is a two-chip solution, which includes either a System Platform Processor, or SPP, or an Integrated Graphics Processor, or IGP, combined with a MCP. The NVIDIA nForce2 family is designed to be compatible with AMD’s Sempron microprocessors. The NVIDIA nForce2 configuration is determined by the OEM or system builder. The NVIDIA nForce3nForce4 SLI XE and NVIDIA nForce4 families areUltra, both of which provide the system-builder and do-it-yourself communities with lower cost discrete motherboard solutions for Intel PC platforms. In fiscal 2007, we began production shipments of our single-chip MCPs, designedmotherboard GPUs for AMD-based PCs. In March 2006, we shipped our first integrated graphics processor, or IGP, core-logic solution for AMD-based notebook PCs, the GeForce Go 6100 GPU and NVIDIA nForce Go 430 MCP. This core logic solution provides hardware accelerated H.264 high-definition video playback. In May 2006, we shipped our NVIDIA nForce 590 SLI, a motherboard solution for x86 PC platforms. SLI can utilize the power of up to be compatible with AMD64 and Opteron 64-bit CPUs. Theone, two, or even four NVIDIA nForce3 products which consist ofGeForce GPUs for HD gaming. In November 2006, we launched the NVIDIA nForce3, NVIDIA nForce3 Professional and NVIDIA nForce3 Go, are designed to complement the latest 64-bit CPUs while delivering innovative technologies for networking, storage and system performance. NVIDIA nForce4 products,nForce 680 SLI MCP, which consist of NVIDIA nForce4 and NVIDIA nForce4 Professional, are designed to provide SLI and PCI Express support for AMD64 and Opteron-based platforms.
Xbox.Our Xbox platform processor supports Microsoft’s Xbox video game console.The Xbox platform processor features dual-processing architecture, which includes our GPUis designed specifically for the Xbox, or XGPU,Intel Core 2 Quad and our MCP to power the Xbox’s standout graphics, audio and networking capabilities. The XGPU is a programmable 3D processor that contains more that 60 million transistors. The MCP is based on two powerful digital signal processors with 4 billion operations per second dedicated to 3D audio and network processing. The MCP performs the processing for the broadband networking functions and high-speed peripherals.Core 2 Duo processors.
WMPsHandheld GPUs.Our WMPHandheld GPU product family, known as GoForce, supports handheld personal digital assistants, or PDAs and multimedia cellular phones.
GoForce.The GoForce family represents our WMPshandheld GPUs for a wide range of multimedia cellular phones and handheld devices. The GoForce 2100 and 2150 are two of the first WMPshandheld GPUs to offer hardware acceleration engines for 2D graphics to manufacturers that support liquid crystal display, or LCD, screen resolutions up to 320 x 240 pixels. The GoForce 3000 and 4000 offer a host of advanced features for cellular phones and PDAs, including support for up to 3-megapixel image capture, accelerated graphics for gaming, and motion Joint Photographic Experts Group, or JPEG, capture and playback. Our GoForce 3D 4000, 4500 and 4800 WMPshandheld GPUs are the first to provide programmable 3D shaders, along with high-quality multi-megapixel still image and video processing in a single-chip package. Using dedicated hardware accelerator engines, the GoForce family delivers high performance multimedia applications and drives high-resolution displays, while extending handheld battery life through a variety of unique power management techniques. In the third quarter of fiscal 2007, Motorola Inc., or Motorola, and Sony Ericsson Mobile Communications AB, or Sony Ericsson, launched Third Generation, or 3G, models of their RAZR and Walkman portable phones, respectively, that are both powered by our GoForce GPUs. Our GoForce handheld GPUs are now shipping in the Motorola 3G RAZR V3X, SLVR L6i, SLVR L7i, MOTORAZR Maxx, and Sony Ericsson Walkman phones. Our newest handheld GPU, the NVIDIA GoForce 5500 GPU, has been designed into Digital Video Broadcast - Handheld, or DVB-H, phones in North America, Europe, and Integrated Services Digital Broadcasting - Terrestrial, or ISDB-T, in Japan.
In February 2007, we unveiled our strategy to target the applications processor market in order to meet the growing multimedia demands of today's mobile phone user by announcing the availability of the NVIDIA GoForce 6100. The NVIDIA GoForce 6100, our first application processor, is a low power consumption multimedia solution that supports computationally intensive multimedia codecs as well as a high quality audio subsystem, integrated WiFi, USB 2.0 and more.
Consumer Electronics. Our Consumer Electronics product group is concentrated in products that support video game consoles and other digital consumer electronics devices.
Playstation3. In April 2005, we finalized our initial agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation3. SCE launched sales of the PlayStation 3 computer entertainment system in November 2006. We record license and development revenue from our initial agreement with SCE, as well as from certain additional agreements with them. In addition, in fiscal 2007, we began to record royalty revenue from SCE based on per unit sales of the PlayStation 3.
Xbox. Our Xbox platform processor supported Microsoft’s initial Xbox video game console.The Xbox platform processor featured dual-processing architecture, which included our GPU designed specifically for the Xbox, or XGPU, and our MCP to power the Xbox’s graphics, audio and networking capabilities. We also have a license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices. We recognized revenue from the sale of our Xbox-related products to Microsoft for the last time during the second quarter of fiscal 2006.
Our Strategy
We design our GPUs, MCPs and WMPshandheld GPUs to enable our universe of PC OEMs, ODMs, system builders, motherboard and add-in board manufacturers, and cellular phone and consumer electronics OEMs, to build award-winning products by deliveringthat deliver state-of-the-art features, performance, compatibility and power efficiency while maintaining competitive prices.pricing and profitability. We believe that by developing 3D graphics, high-definitionHD video and media communications solutions that provide superior performance and address the key requirements of each of the product segments we serve, we will accelerate the adoption of high-definitionHD digital media platforms and devices throughout these segments. We combine scalable architectural technology with mass market economies-of-scale to deliver a complete family of products that spans performanceprofessional workstations, to consumer PCs, to mulitmedia-richmultimedia-rich cellular phones.
Our objective is to be the leading supplier of performance GPUs, MCPs and WMPs for a broad range of desktop PCs, workstations, notebooks, video game consoles, Internet appliances, handheldshandheld GPUs and any future computing device with a display.application processors. Our current focus is on the desktop PC, professional workstation, notebook PC, servers, mulitmedia-richapplication processor, server, multimedia-rich cellular phonesphone and video game console product lines, and we plan to expand into other product lines. Our strategy to achieve this objective includes the following key elements:
Build Award-Winning, Architecturally-Compatible 3D Graphics, High-DefinitionHD Video, Media Communications and Ultra-Low Power Product Families for the PC, Handheld and Digital Entertainment Platforms. Our strategy is to achieve market sharesegment leadership in these platforms by providing award-winning performance at every price point. By developing 3D graphics, high-definitionHD video and media communications solutions that provide superior performance and address the key requirements of these platforms, we believe that we will accelerate the adoption of 3D graphics and rich digital media.
Target Leading OEMs, ODMs and System Builders. Our strategy is to enable our leading PC, handheld and consumer electronics OEMs, ODMs and major system builder customers to differentiate their products in a highly competitive marketplace by using our digital media 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 and ODMs will allow us to better anticipate and address customer needs with future generations of our products.
Sustain Technology and Product Leadership in 3D Graphics and High-DefinitionHD Video, and Media Communications and Ultra-Low Power. We are focused on using our advanced engineering capabilities to accelerate the quality and performance of 3D graphics, and high-definitionHD video, media communications and ultra-low power processing in PCs and handheld devices. A fundamental aspect of our strategy is to actively recruit the best 3D graphics and high-definitionHD video, networking and communications engineers in the industry, and we believe that we have assembled an exceptionally experienced and talented engineering team. Our research and development strategy is to focus on concurrently developing multiple generations of GPUs, MCPs and WMPshandheld GPUs using independent design teams. As we have in the past, we intend to use this strategy to achieve new levels of graphics, networking and communications features and performance and ultra-low power designs, enabling our customers to achieve award-winningsuperior performance in their products.
Increase Market Share. We believe that substantial market share will be important to achieving success. We intend to achieve a leading share of the market in areas in which we don't have a leading market share by devoting substantial resources to building award-winning families of products for a wide range of applications.applications that offer significant improvement in performance over existing products.
Use Our Expertise in Digital Multimedia. We believe the synergy created by the combination of 3D graphics, and high-definitionHD video and the Internet will fundamentally change the way people work, learn, communicate and play. We believe that our expertise in high-definitionHD graphics and system architecture positions us to help drive this transformation. We are using 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.
Use our Intellectual Property and Resources to Enter into License and Development Contracts. In fiscal 2006, we entered into license arrangements that require significant customization of our intellectual property components and we anticipate that we will enter into additional agreements during fiscal 2008. For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue using the percentage-of-completion method of accounting over the period that services are performed. For example, in April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation3. Our collaboration with SCE includes license fees and royalties for the PlayStation3 and all derivatives, including next-generation digital consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE.
Sales and Marketing
Our worldwide sales and marketing strategy is a key part of our objective to become the leading supplier of performance GPUs, MCPs, and WMPshandheld GPUs for PCs, handheld devices and consumer electronics platforms. Our sales and marketing teams work closely with each industry’s respective OEMs, ODMs, system integrators, motherboard manufacturers, add-in board manufacturers and industry trendsetters, collectively our Channel, 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 athe competitive and complex design win process. We also employ a highly skilled team of application engineers to assist the Channel 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 the Channel’s time-to-market, maintaining a high level of customer satisfaction within the Channel and fostering relationships that encourage customers to use the next generation of our products.
In the GPU and MCP segments we serve, the sales process involves achieving key design wins with leading OEMs and major system integrators and supporting the product design into high volume production with key ODMs, motherboard manufacturers and add-in board manufacturers. 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 independent contract equipment manufacturers, or CEMs, ODMs, motherboard manufacturers, add-in board manufacturers and distributors each of which has relationships with a broad range of major OEMs and/or strong brand name recognition in the retail channel. In the WMPhandheld GPU segments we serve, the sales process primarily involves achieving key design wins directly with the leading handheld OEMs and supporting the product design into high-volume production. Currently, we sell a significant majorityportion of our digital media processors directly to distributors, CEMs, ODMs, motherboard manufacturers and add-in board manufacturers, which then sell boards and systems with our products to leading OEMs, retail outlets and to a large number of system integrators. Although a small number of our customers represent the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world.
As a result of our Channelchannel strategy, our sales are focused on a small number of customers. Sales to Edom Technology Co., Ltd.Asustek Computer Inc., or Edom,Asustek, a CEM, accounted for 18% and sales to Microsoft accounted for 13%12% of our total revenue for fiscal 2005. Edom is an independent distributor.2007.
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 developers prior to volume availability in order to encourage the development of software titles that are optimized for our products.
Backlog
Our sales are primarily made pursuant to standard purchase orders. The quantity of products purchased by our customers as well as shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability. The semiconductor industry is characterized by short lead time orders and quick delivery schedules. In light of industry practice and experience, we believe that only a small portion of our backlog is non-cancelable and that the dollar amount associated with the non-cancelable portion is not significant. We do not believe that a backlog as of any particular date is indicative of future results.
Seasonality
Our industry is largely focused on the consumer products market. Due to the seasonality in this market, we typically expect to see stronger revenue growthperformance in the second half of the calendar year related to the back-to-school and holiday seasons.
Manufacturing
We do not directly manufacture semiconductor wafers used for our products. Instead we utilize what is known as a “fabless”fabless manufacturing strategy for all product-line operating segments whereby we employ world-class suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing and packaging. This strategy uses the expertise of industry-leading suppliers that are certified by the International Organization for Standardization, or ISO, in such areas as fabrication, assembly, quality control and assurance, reliability and testing. In addition, this strategy allows us to avoid many of the significant costs and risks associated with owning and operating manufacturing operations. Our 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 our resources on product design, additional quality assurance, marketing and customer support.
We utilize industry-leading suppliers, such as Chartered Semiconductor Manufacturing, or Chartered, Semiconductor Manufacturing International Corporation, or SMIC, Taiwan Semiconductor Manufacturing Corporation, or TSMC,International Business Machines Corporation, orIBM, Chartered Semiconductor Manufacturing, or Chartered, and United Microelectronics Corporation, or UMC, and American MicroSemiconductor, or AMS, to produce our semiconductor wafers. We then utilize independent subcontractors, such as Advanced Semiconductor Engineering, or ASE, Amkor Technology, or Amkor, King Yuan Electronics Co., LTD, or KYEC, Siliconware Precision Industries Company Ltd., or SPIL, and STATS ChipPAC Incorporated, or ChipPAC, to perform assembly, testing and packaging of most of our products.
Our GPUs, MCPs and WMPs are assembled, tested and packaged by Advanced Semiconductor Engineering, Amkor Technology, STATS ChipPAC Incorporated and Siliconware Precision Industries Company Ltd. We typically receive semiconductor products from our subcontractors, perform incoming quality assurance and then ship themthe semiconductors to CEMs, distributors, motherboard and add-in board manufacturer customers from our Santa Clara, California warehouse and third-party warehouse in Hong Kong. Generally, these manufacturers assemble and test the boards based on our design kit and test specifications, and then ship the products to retailers, system integrators or OEMs as motherboard and add-in board solutions.
Inventory and Working Capital
Our management focuses considerable attention on managing our inventories and other working-capital-related items. We manage inventories by communicating with our customers and then using our industry experience to forecast demand on a product-by-product basis. We then place manufacturing orders for our products that are based on this forecasteddemand.Theforecasted demand. The quantity of products actually purchased by our customers as well as shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability.Weavailability. We generally maintain substantial inventories of our products because the semiconductor industry is characterized by short lead time orders and quick delivery schedules.
Research and Development
We believe that the continued introduction of new and enhanced products designed to deliver leading 3D graphics, high definitionHD video, audio, ultra-low power communications, storage, and secure networking performance and features is essential to our future success. Our research and development strategy is to focus on concurrently developing multiple generations of GPUs, MCPs and WMPsHandheld GPUs application 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, 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 computer aided design, or CAD industry. We invest significant resources in the development of relationships with industry leaders, including Cadence Design 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 that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of PC OEM and other manufacturers.
We have substantially increased our engineering and technical resources fromin fiscal 2004,2007, and have 1,2312,668 full-time employees engaged in research and development as of January 30, 2005,28, 2007, compared to 1,0571,654 employees as of January 25, 2004.29, 2006. The majority of the research and development employees added during fiscal 2007 are located in international locations, including India, China, Taiwan and various locations in Europe. During fiscal 2005, 2004years 2007, 2006 and 2003,2005, we incurred research and development expenditures of $335.1$553.5 million, $270.0$357.1 million and $224.9$348.2 million, respectively. Research and development expenses for fiscal 2007 included $70.1 million related to non-cash stock-based compensation, net of associated payroll taxes, which we began to record in fiscal 2007 as a result of our adoption of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment.
Competition
The market for GPUs, MCPs and WMPs for PCs, handhelds and consumer electronicshandheld GPUs application processors 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 digital media processors and total system costs of add-in boards or motherboards. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products. In addition, it is possible that new competitors or alliances among competitors could emerge and acquire significant market share.
An additional significant source of competition is from companies that provide or intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors may have greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes. Our current competitors include the following:
| · | suppliers of discrete MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI, Broadcom Corporation, or Broadcom, Silicon Integrated Systems, Inc., or SIS, and VIA Technologies, Inc., or VIA, and Intel; |
| · | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., XGI Technology, Inc., SIS, and VIA; |
| · | suppliers of GPUs or GPU intellectual property for handheld and embedded devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd, or Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and |
| · | suppliers of application processors for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics. |
We expect substantial competition from Intel’s publicized focus on moving to selling platform solutions dominated by Intel products, such as thewhen Intel achieved success with its Centrino platform. An additional significant source of competitionplatform solution. In addition to its current Centrino notebook platform initiative, and its announced upcoming desktop initiative branded as VIIV, we expect that Intel is from companies that provide or intend to provide GPU, MCPnow focused on developing and WMPselling platform solutions for the PC, consumer electronicsall segments including professional workstations and handheldservers. AMD has also begun to focus on selling platform solutions. If Intel and AMD continue to pursue these initiatives, we may not be able to successfully compete in these segments. Our competitors include the following:
| · | suppliers of MCPs that incorporate a combination of 3D graphics, networking, audio, communications and Input/Output, or I/O, functionality as part of their existing solutions, such as ATI Technologies, Inc., or ATI, Broadcom Corporation, or Broadcom, Intel, Silicon Integrated Systems, Inc. and VIA Technologies, Inc., or VIA; |
| · | suppliers of standalone desktop GPUs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, Creative Technology, Matrox Electronics Systems Ltd. and XGI Technology, Inc.; |
| · | suppliers of standalone notebook GPUs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, Silicon Motion Corporation, and the joint venture formed by SONICblue Incorporated (formerly S3 Incorporated) and VIA; and |
| · | suppliers of WMPs for handheld devices that incorporate advanced graphics functionality as part of their existing solutions, such as ATI, Renesas Technology, Broadcom and Seiko-Epson. |
If and to the extent we offer products outside of the consumer and enterprise PC, consumer electronicsnotebook, workstation, PDA, cellular phone, and handheld segments,video game console markets, 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 segmentsmarkets we may enter. If we are unable to compete in our current and any new markets, our financial results will suffer.
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 in the United States and internationally. Our issued patents have expiration dates from September 4, 2007 to December 11, 2022.8, 2024. We have numerous patents issued and pending in the United States and in foreign countries. Our patents and pending patent applications primarily relate to technology used by us in connection with our products, including our digital media processors.products. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as: the commercial significance of our operations and our competitors’ operations in particular countries and regions; the location in which our products are manufactured; our strategic technology or product directions in different countries; and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.
Our pending patent applications and any future applications may 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 some of our digital media processors,products and for defensive reasons, and expect to continue to enter into such license agreements for future products.agreements. 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.
Employees
As of January 30, 200528, 2007 we had 2,1014,083 employees, 1,2312,668 of whom were engaged in research and development and 8701,415 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 relationships with our employees are good.
Financial Information by Business Segment and Geographic Data
During the second quarter of fiscal 2005,Our Chief Executive Officer, who is considered to be our chief operating decision maker, the Chief Executive Officer, began reviewingor CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. During the first quarter of fiscal 2006, we reorganized our operating segments to bring all major product groups in line with our strategy to position ourselves as the worldwide leader in programmable graphics processor technologies. We now report threefinancial information for four product-line operating segments:segments to our CODM: the GPU business, whichBusiness is composed of products that support desktop PCs, notebook PCs, professional workstations and professional workstations;other GPU-based products; the MCP business, whichBusiness is composed of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed storage and network communications, and perform these operations independently from the host CPU; our Handheld GPU Business is composed of products that support handheld PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital consumer electronics devices and is composed of revenue from our contractual arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox products;gaming console, the Xbox360, and the WMP business, which supports handheld personalrelated devices, and digital assistants and cellular phones.media processor products. In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $242.3 million, $131.6 million and $118.0 million for fiscal years 2007, 2006 and 2005, respectively, that we do not allocate to our other operating segments. “All Other” also includes the results of operations of other miscellaneous operating segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of memory. Certain prior period amounts have been restated to conform to the presentation of our current fiscal quarter.
Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole. The information included in Note 1514 of the Notes to the Consolidated Financial Statements is hereby incorporated by reference.
Executive Officers of the Registrant
The following sets forth certain information regarding our executive officers, their ages and their positions as of January 30, 2005:28, 2007:
Name | Age | Position |
| Jen-Hsun Huang | 4143 | President, Chief Executive Officer and Director |
| Marvin D. Burkett | 6264 | Chief Financial Officer |
Jeffrey D. FisherAjay K. Puri | 4652 | ExecutiveSenior Vice President, Worldwide Sales |
| David M. Shannon | 4951 | Senior Vice President, General Counsel |
Di Ma | 52 | Vice President, Operations |
Daniel F. Vivoli | 44 | Executive Vice President, Marketing and Secretary |
Jen-Hsun Huangco-founded NVIDIA in April 1993 and has served as its President, Chief Executive Officer and a member of the Board of Directors since its inception. From 1985 to 1993, Mr. Huang was employed at LSI Logic Corporation, a computer chip manufacturer, where he held a variety of positions, most recently as Director of Coreware, the business unit responsible for LSI’s “system-on-a-chip” strategy. From 1983 to 1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices, Inc. a semiconductor company. Mr. Huang holds a B.S.E.E. degree from Oregon State University and an M.S.E.E. degree from Stanford University.
Marvin D. Burkettjoined NVIDIA as Chief Financial Officer in September 2002. From February 2000 until joining NVIDIA, Mr. Burkett was a financial consultant and served as Chief Financial Officer of Arcot Systems, a security software company. From 1998 to 1999, Mr. Burkett was the Executive Vice President and Chief Financial Officer of Packard Bell NEC. Mr. Burkett also previously spent 26 years at Advanced Micro Devices, Inc., or AMD, where he held a variety of positions including Chief Financial Officer, Senior Vice President and Corporate Controller. Mr. Burkett holds B.S. and M.B.A. degrees from the University of Arizona.
Jeffrey D. FisherAjay K. Purihas been the Executive joined NVIDIA in December 2005 as Senior Vice President, Worldwide SalesSales. Prior to NVIDIA, he held positions in sales, marketing, and general management over a 22-year career at Sun Microsystems, Inc. Mr. Puri previously held marketing, management consulting, and product development positions at Hewlett-Packard Company, Booz Allen Hamilton Inc., and Texas Instruments Incorporated. Mr. Puri holds an M.B.A. degree from Harvard University, an M.S.E.E. degree from the California Institute of NVIDIA since July 1994. He has over 20 years of salesTechnology and marketing experience in the semiconductor industry. Mr. Fisher holds a B.S.E.E. degree from Purduethe University and an M.B.A. degree from Santa Clara University.of Minnesota.
David M. Shannon joined NVIDIA in August 2002 as Vice President and General Counsel. Mr. Shannon became Secretary of NVIDIA in April 2005 and a Senior Vice President in December 2005. From 1993 to 2002, Mr. Shannon held various counsel positions at Intel, including the most recent position of Vice President and Assistant General Counsel. Mr. Shannon also practiced for eight years in the law firm of Gibson Dunn and Crutcher, focusing on complex commercial and high-technology related litigation. Mr. Shannon holds B.A. and J.D. degrees from Pepperdine University.
Di Ma was Vice President of Operations from July 2000 through January 30, 2005. On January 31, 2005, Dr. Ma concluded his employment at NVIDIA. From 1990 to 2000, Dr. Ma was with Standard Microsystems, most recently serving as the Senior Vice President of Operations. Previously, Dr. Ma held management positions in engineering at Motorola Inc., or Motorola, and was an adjunct professor at State University of New York. Dr. Ma holds a B.S. in Physics from the National Taiwan University and an M.S. degree and a Ph.D. in Electrical Engineering from the State University of New York.
Daniel F. Vivolihas been Executive Vice President of Marketing since December 1997. From 1988 to December 1997, Mr. Vivoli held management positions, most recently as Vice President of Product Marketing, at Silicon Graphics, Inc., a computing technology company. From 1983 to 1988, Mr. Vivoli held various marketing positions at Hewlett-Packard Company. Mr. Vivoli holds a B.S.E.E. degree from the University of Illinois at Champaign-Urbana.
Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, or the Exchange Act, are available free of charge on or through our Internet website,web site, http://www.nvidia.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.Commission, or the SEC. Our websiteweb site and the information contained therein as connected thereto is not intended to be incorporated into thethis Annual Report on Form 10-K.
In evaluating NVIDIA and our business, the following factors should be considered in addition to the other information in this Annual Report on Form 10-K. Before you buy our common stock, you should know that making such an investment involved some risks including, but not limited to, the risks described below. Additionally, any one of the following risks could seriously harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to Our Operations
The matters relating to the Audit Committee of the Board of Directors, or the Board, review of our historical stock option granting practices and the restatement of our consolidated financial statements have resulted in litigation, which could harm our financial results.
On August 10, 2006, NVIDIA announced that the Audit Committee of the Board, with the assistance of outside legal counsel, was conducting a review of our stock option practices covering the time from NVIDIA’s initial public offering in 1999, our fiscal year 2000, through June 2006. The Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, NVIDIA recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants.
The Audit Committee’s review of NVIDIA’s stock option practices identified a number of occasions on which the measurement date used for financial accounting and reporting purposes for stock options granted to certain of our employees was different from the actual grant date. To correct these accounting errors, we amended our Annual Report on Form 10-K for the year ended January 29, 2006 and our Quarterly Report on Form 10-Q for the three months ended April 30, 2006, to restate the consolidated financial statements contained in those reports.
This review of our historical stock option granting practices required us to incur substantial expenses for legal, accounting, tax and other professional services, diverted our management’s attention from our business, and in the future could adversely affect our business, financial condition, results of operations and cash flows.
Our historical stock option granting practices and the restatement of our prior financial statements have exposed us to greater risks associated with litigation and regulatory proceedings. Ten derivative complaints have been filed in state and federal court pertaining to allegations relating to stock option grants. We cannot assure you that these or future similar complaints, or any future litigation or regulatory action will result in the same conclusions reached by the Audit Committee. The conduct and resolution of these matters will be time consuming, expensive and could distract our management’s attention from the conduct of our business which could negatively impact our business.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We plan to continue to cooperate with the SEC in its inquiry.
While we believe that we have made appropriate judgments in concluding the correct measurement dates for option grants, the SEC may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of past option grant measurement date errors, and there is a risk that its inquiry could lead to circumstances in which we may have to further restate our prior financial statements, amend prior filings made with the SEC, or otherwise take other actions not currently contemplated. Any such circumstance could also lead to future delays in filing our SEC reports. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.
Because our gross margin for any period depends on a number of factors, our failure to forecast any change in such factors could adversely affect our gross margin.
We continue to pursue improved gross margin. Our gross margin for any period depends on a number of factors, such as:
| · | the mix of our products sold; |
| · | average selling prices; |
| · | introduction of new products; |
| · | unexpected pricing actions by our competitors; |
| · | the cost of product components; and |
| · | the yield of wafers produced by the foundries that manufacture our products. |
If we incorrectly forecast the impact of any of the aforementioned factors on our business, we may be unable to take action in time to counteract any negative impact on our gross margin. In addition, if we are unable to meet our gross margin target for any period or the target set by analysts, the trading price of our common stock may decline.
We are dependent on key personnel and the loss of these employees could negatively impact our business.
Our performance is substantially dependent on the performance of our executive officers and key employees. None of our executive officers or employees is bound by an employment agreement, meaning our relationships with our executive officers and employees are 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 personnel. Our failure to attract and retain the necessary technical and managerial personnel would harm our business. The integration of new executives or personnel could disrupt our ongoing operations.
Failure to achieve expected manufacturing yields for existing and/or new products could reduce our gross margin and could adversely affect our ability to compete effectively.
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. Resolution of yield problems requires cooperation by and communication between us and the manufacturer.
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, our reputation, our revenue and our 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 reduce our gross margin. 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. A significant number of product returns due to a defect or recall could damage our reputation, result in our customers working with our competitors, and could adversely impact our financial results.
To stay competitive we may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. We have increased our engineering and technical resources and had 2,668 full-time employees engaged in research and development as of January 28, 2007, 1,654 full-time employees as of January 29, 2006 and 1,231 full-time employees as of January 30, 2005. Research and development expenditures were $553.5 million, $357.1 million and $348.2 million for fiscal 2007, 2006, and 2005, respectively. Research and development expenses for fiscal 2007 included $70.1 million related to non-cash stock-based compensation, net of associated payroll taxes, which we began to record in the first quarter of fiscal 2007 as a result of our adoption of SFAS No. 123(R). If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline. In order to remain competitive, 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 the increased complexity and the greater number of products under development as well as hiring additional employees. 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 revenue.
Our operating expenses are relatively fixed and we may not be able to reduce operating expenses quickly in response to any revenue shortfalls.
Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses, represented 27.6%, 24.1% and 27.5% of our total revenue during fiscal years ended 2007, 2006 and 2005, respectively. Operating expenses for fiscal 2007 included $108.5 million related to non-cash stock-based compensation, net of associated payroll taxes, which we began to record in fiscal 2007 as a result of our adoption of SFAS No. 123(R). Since we often recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any revenue shortfalls. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls, our financial results would be negatively impacted.
Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.
Our strategy is to utilize the most advanced manufacturing 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 and higher product cost. 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 currently use 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer and 65 nanometer process technologies for our families of GPUs, MCPs, Handheld GPUs and application processors.
We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. Moreover, we are dependent on our relationships with our third-party manufacturers to migrate to smaller geometry processes successfully. Additionally, we compete with companies that own their own manufacturing facilities. These competitors may be able to move to a new state of the art manufacturing process more quickly than our manufacturing partners. If our suppliers fall behind our competitors in the manufacturing processes, the development and customer demand for our products and the use of our products could be negatively impacted. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.
Our failure to estimate customer demand properly may result in excess or obsolete inventory or, conversely, may result in inadequate inventory levels, either of which could adversely affect our financial results.
Our inventory purchases are based upon future demand forecasts or orders from our customers, which may not accurately predict the quantity or type of our products that our customers will want in the future or ultimately end up purchasing. In forecasting demand, we must make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory and/or a reduction in average selling prices, and where our gross margin could be adversely affected include:
| · | if there were a sudden and significant decrease in demand for our products; |
| · | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
| · | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
| · | if our competition were to take unexpected competitive pricing actions. |
Conversely, if we underestimate our customers’ demand for either our older or newer products, we may have inadequate manufacturing capability and may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fill our customers’ orders on a timely basis could damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.
Because we order materials in advance of anticipated customer demand our ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls is limited.
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. We may build inventories during periods of anticipated growth which does not occur. 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 gross margin and restrict our ability to fund operations. Additionally, because we often sell a substantial portion of our products in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to any revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slows or does not materialize or if we incorrectly forecast product demand, which could negatively impact our gross margin and financial results.
Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.
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 or investors, which could cause the trading price of our common stock to decline. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, gross profit and results of operations.
Any one or more of the factors discussed in this Form 10-K or other factors could prevent us from achieving our expected future revenue or net income. 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 or full fiscal year period are not necessarily indicative of results to be expected for a subsequent quarter or a full fiscal year.
Risks Related to Our Products
If we are unable to achieve design wins, our products may not be adopted by our target markets or customers either of which could negatively impact our financial results.
The future success of our business depends to a significant extent on our ability to develop new competitive products for our target markets and customers. We believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by PC OEMs, ODMs, and add-in board and motherboard manufacturers, will aid our future success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles or in connection with trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products in order to be included in new system configurations. This requires that we do the following:
| · | anticipate the features and functionality that customers and consumers will demand; |
| · | incorporate those features and functionalities into products that meet the exacting design requirements of OEMs, ODMs, and add-in board and motherboard manufacturers; |
| · | price our products competitively; and |
| · | introduce products to the market within the limited design cycle for OEMs, ODMs, and add-in board and motherboard manufacturers. |
If OEMs, ODMs, and add-in board and motherboard manufacturers do not include our products in their systems, they will typically not use our products in their design systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs in an attempt to allow us to better anticipate and address customer needs in new products so that our products will achieve design wins.
Our ability to achieve design wins also depends in part on our ability to identify and be compliant 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 AMD, Intel and Microsoft. Such changes would require us to invest significant time and resources to redesign our products to be compliant 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. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.
Achievement of design wins may not result in the success of our products and could result in a loss of market share.
The process of being qualified for inclusion in an OEM or ODM 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 result in a loss of market share and harm our business. Even if we do have design wins for OEM and ODM products, we may not be able to successfully develop or introduce new products in sufficient volumes within the appropriate time to meet the OEM, ODM, add-in board and motherboard manufacturers’ design cycles as well as other market demand. Additionally, even if we achieve a significant number of design wins, there can be no assurance that our OEM and ODM customers will actually take the design to production or that the design will be commercially successful. Furthermore, there may be changes in the timing of product orders due to unexpected delays in the introduction of our customers’ products that could negatively impact the success of our products. Any of these factors could result in a loss of market share and could negatively impact our financial results.
Our business results could be adversely affected if our product development efforts are unsuccessful.
We have in the past experienced delays in the development of some new products. Any delay in the future or failure of our GPUs or other processors to meet or exceed specifications of competitive products could materially harm our business. The success of our new product introductions will depend on many factors, including the following:
| · | proper new product definition; |
| · | timely completion and introduction of new product designs; |
| · | the ability of third-party manufacturers to effectively manufacture our new products in a timely manner; |
| · | dependence on third-party subcontractors for assembly, testing and packaging of our products and in meeting product delivery schedules and maintaining product quality; |
| · | the quality of 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. |
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 Cadence Design 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, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of PC OEMs and other manufacturers. If these relationships are not successful, we may not be able to develop new products in a timely manner, which could result in a loss of market share, a decrease in revenue and a negative impact on our operating results. Our failure to successfully develop, introduce or achieve market acceptance for new processors would harm our business.
Our failure to identify new market or product opportunities, or develop new products could harm our business.
As our GPUs or other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, we expect average selling prices and gross margins for our 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 or improve overall average selling prices and gross margins. In order for our processors to achieve high volumes, leading PC OEMs, ODMs, and add-in board and motherboard manufacturers must select our 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 new products in a timely fashion. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs’, ODMs’, and add-in board and motherboard 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 our products increases, there is an increasing risk that we will experience problems with the performance of our 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 that may delay the introduction or volume sale of new products we develop. 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 processors non-competitive or obsolete or result in our holding excess inventory, any of which would harm our business.
We could suffer a loss of market share if our products contain significant defects.
Products as complex as those we offer may contain defects or experience failures when introduced or when new versions or enhancements to existing products are released. We have in the past discovered defects and incompatibilities with customers’ hardware in some of our products and may experience delays or loss of revenue to correct any defects or incompatibilities in the future. Errors in new products or releases after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. 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. We may also be required to incur additional research and development costs to find and correct the defect, which could divert the attention of our management and engineers from the development of new products. These costs could be significant and could adversely affect our business and operating results. We may also suffer a loss of reputation, loss of revenues and/or a loss in our market share, any of which could materially harm our financial results.
Risks Related to Our Partners and Customers
We may not be able to realize the potential financial or strategic benefits of business acquisitions, which could hurt our ability to grow our business, develop new products or sell our products.
In the past we have acquired and invested in other businesses that offered products, services and technologies that we believed would help expand or enhance our existing products and services or help expand our distribution channels. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business market. For example, in February 2006 we completed the acquisition of ULi, in March 2006 we completed the acquisition of Hybrid Graphics and in January 2007 we completed the acquisition of PortalPlayer. If we do consider other acquisitions, a strategic alliance or a joint venture, the negotiations could divert management’s attention as well as other resources. For any previous or future acquisition or investment, including the acquisitions of ULi, Hybrid Graphics and PortalPlayer, 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, which could negatively impact our growth or our financial results:
| · | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
| · | difficulty in operating in a new or multiple new locations; |
| · | disruption of our ongoing businesses; |
| · | disruption of the ongoing business of the company we acquire; |
| · | difficulty in realizing the potential financial or strategic benefits of the transaction; |
| · | difficulty in maintaining uniform standards, controls, procedures and policies; |
| · | disruption of or delays in ongoing research and development efforts; |
| · | diversion of capital and other resources; |
| · | assumption of liabilities; |
| · | diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; |
| · | difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and |
| · | impairment of relationships with employees and customers, or the loss of any of our key employees or of our target’s key employees, as a result of the 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, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we pay all or a portion of the purchase price in cash, our cash reserves would be reduced. We paid for the acquisitions of Hybrid Graphics, ULi and PortalPlayer with primarily cash. If the consideration is paid with shares of our common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operations or financial results.
We depend on foundries and independent contractors to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.
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 so we utilize industry-leading suppliers to produce our semiconductor wafers. 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 at acceptable prices. Currently, one foundry manufactures the majority of our products. These manufacturers may be unable to meet our near-term or long-term manufacturing or pricing requirements. We obtain manufacturing services on a purchase order basis. The foundries we use have no obligation to provide us with any specified minimum quantities of product. These suppliers, including the fabrication facility that produces a majority of our products, fabricate wafers for other companies, including some of our competitors, and could choose to prioritize capacity for other users, reduce or eliminate deliveries to us, or increase the prices that they charge us on short notice. If we are unable to meet customer demand due to reduced or eliminated deliveries, we could lose sales to customers, which would negatively impact our revenue and our reputation. 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. In addition, the time and effort to qualify a new foundry could result in additional expense, diversion of resources or lost sales any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with third-party manufacturers we may use to ensure adequate product supply and competitive pricing so that we are able to respond to customer demand.
We are dependent on third parties for assembly, testing and packaging of our products, which reduces our control over the delivery and quantity of our products.
Our processors are assembled, tested and packaged by independent subcontractors, such as ASE, Amkor, KYEC, SPIL, and ChipPAC. We do not have long-term agreements with any of these subcontractors. As a result of our dependence on third-party subcontractors for assembly, testing and packaging of our products, we do not directly control product delivery schedules or product quality. Demand for qualified independent subcontractors to assemble and test products is high. If demand for these subcontractors exceeds the number of qualified subcontractors, we may experience capacity constraints, which could result in product shortages, a decrease in the quality of our products or an increase in product cost. Any of our subcontractors may decide to prioritize the orders of one of our competitors over our orders. Any product shortages or quality assurance problems could increase the costs of manufacture, assembly or testing of our products, which could cause our gross margin to decline. 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, test or package our products or components. Any such delays could result in a loss of reputation or a decrease in sales to our customers.
There can be no assurance that the PlayStation3 will achieve long term commercial success.
In April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation3. Our collaboration with SCE includes license fees and royalties for the PlayStation3 and all derivatives, including next-generation digital consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE. During fiscal 2007, we recognized $92.9 million of revenue from our contractual arrangements with SCE. There can be no assurance that the PlayStation3 will achieve long term commercial success, given the intense competition in the game console market. If we do not receive royalties as we anticipate, our revenue and gross margin may be adversely affected.
As we continue to work directly with more foreign customers, any difficulties in collecting accounts receivable could harm our operating results and financial condition.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses and to downturns in the economy and the industry. In addition, difficulties in collecting accounts receivable or the loss of any significant customer could materially and adversely affect our financial condition and results of operations. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers and we may be required to pay higher credit insurance premiums, which could adversely affect our operating results. We may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions in the future, which could negatively impact our financial results.
We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
When we design and develop new products or product enhancements, we rely on third-party software development tools to assist us in the design, simulation and verification of new products or enhancements to existing products. Although 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. Additionally, the software development tools available at the time that we are designing, simulating or verifying a product may not be sophisticated enough or technologically advanced enough for our purposes. 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. Therefore, the design requirements necessary to meet consumer demands for more features and greater functionality from our processors in the future may exceed the capabilities of the software development tools that are available to us. If the software development tools we use become unavailable or fail to produce designs that meet consumer demands, we may miss design cycles or lose design wins either of which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
We sell our products to a small number of customers and our business could suffer by the loss of any of these customers.
We have only a limited number of customers and our sales are highly concentrated. Sales to one significant customer accounted for approximately 12% of our total revenue during fiscal 2007. Sales to two significant customers during fiscal 2006 accounted for approximately 26% of our total revenue. In addition, one customer has historically comprised a significant portion of our Handheld GPU business revenue. Although a small number of our other customers represents the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key CEMs, ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, add-in board and motherboard manufacturers and were unable to replace the lost sales with sales to different customers, or if they were to significantly reduce the number of products they order from us, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.
Risks Related to Our Competition
As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. In addition to the Centrino notebook platform solution, Intel has announced a desktop initiative branded as VIIV. Shortly after its acquisition of ATI, AMD also announced a platform solution. Such platform solutions do not require a discrete GPU from a third-party supplier such as NVIDIA. Prior to its acquisition of ATI, AMD did not sell their own GPUs but instead relied on companies such as ATI or NVIDIA to supply graphics technology. If AMD and Intel continue to pursue platform solutions in desktop and notebook PCs, we may be unable to sell GPUs to either company. Additionally, we expect that Intel and AMD will extend this strategy to other segments including professional workstations and servers. To the extent Intel and AMD are successful with the platform strategy, they would no longer need our discrete GPU solutions which would negatively impact our business.
The market for GPU, MCP, Handheld GPUs and application processors is highly competitive and we may be unable to compete.
The market for GPUs, MCPs and Handheld GPUs 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 application programming interfaces, manufacturing capabilities, price of processors and total system costs of add-in boards and motherboards. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products, which could harm our business.
For example, we are the largest supplier of AMD 64 chipsets with 53% segment share. NVIDIA nForce MCP unit shipments for AMD64-based CPUs increased over 113% calendar year-over-calendar year, based on the Mercury Research Fourth Quarter 2006 PC Processor Forecast Report. Decline in demand in the AMD segment would harm our business.
An additional significant source of competition is from companies that provide or intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors may have or be able to obtain greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes. Our current competitors include the following:
| · | suppliers of discrete MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as AMD, Broadcom, SIS, VIA, and Intel; |
| · | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., XGI Technology, Inc., SIS and VIA; |
| · | suppliers of GPUs or GPU intellectual property for handheld and embedded devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and |
| · | suppliers of application processors for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics. |
If and to the extent we offer products outside of the consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and video game console markets, 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. If we are unable to compete in our current or new markets, our financial results will suffer.
Risks Related to Market Conditions
We are subject to risks associated with international operations which may harm our business.
Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. Additionally, we generated 83.6% of our revenue for fiscal 2007 and 84.0% of our revenue for fiscal 2006 from sales to customers outside the United States and other Americas. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to customers outside of the United States and other Americas subjects us to a number of risks associated with conducting business outside of the United States and other Americas, including, but not limited to:
| · | international economic and political conditions; |
| · | unexpected changes in, or impositions of, legislative or regulatory requirements; |
| · | labor issues in foreign countries; |
| · | cultural differences in the conduct of business; |
| · | inadequate local infrastructure; |
| · | delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions; |
| · | difficulty in collecting accounts receivable; |
| · | fluctuations in currency exchange rates; |
| · | impact of currency exchange rate fluctuations on the price of our products to our customers, or on the supplies that we buy; |
| · | imposition of additional taxes and penalties; |
| · | different legal standards with respect to protection of intellectual property; |
| · | the burdens of complying with a variety of foreign laws; and |
| · | other factors beyond our control, including terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
We have offices outside of the United States, including offices in Taiwan, Japan, Korea, China, Hong Kong, India, France, Russia, Germany, Finland and England. During fiscal 2007, we added 934 international employees to our international operations. As a result of our acquisition of PortalPlayer, we acquired land and a building under construction in Hyderabad, India. Our operations in our international locations are subject to many of the risks contained in the above list. We intend to continue to expand our operations and expect to open other international offices. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
We are dependent on the PC market and the rate of its growth has and may in the future have a negative impact on our business.
We derive the majority of our revenue from the sale of products for use in the desktop PC and notebook PC markets, including professional workstations. We expect to continue to derive most of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets in the next several years. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, will 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 incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our business.
If our products do not continue to be adopted by the consumer and enterprise desktop PC, notebook PC, workstation, PDA, cellular phone, and video game console markets or if the demand in these markets for new and innovative products decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in consumer and enterprise PC, notebook PC, workstation, PDA, cellular phone, and video game console applications. The market for 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 pricing of dynamic random-access memory devices 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. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses comprised over 86.5% of fiscal 2007 revenue. As such, our financial results would suffer if for any reason our current or future GPUs or MCPs do not continue to achieve widespread adoption by the PC market. If we are unable to complete the timely development of products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the consumer and enterprise PC, notebook, workstation, PDA, cellular phone, and video game console markets, we may experience a decrease in revenue which could negatively impact our operating results. Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline.
Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations, and criminal and civil liabilities.
We may be subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. The European Union Directive on Restriction of Hazardous Substances Directive, or RoHS Directive, is European legislation that restricts the use of a number of substances, including lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union which became effective on July 1, 2006. Similarly, the State of California has adopted certain restrictions, which go into effect in 2007, that restrict the use of certain materials in electronic products, which are intended to harmonize with the RoHS directive and other states are contemplating similar legislation. China has adopted similar legislation to the RoHS directive which began to go into effect on March 1, 2007.
Also, we could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment, or WEEE. The WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005. Implementation in certain European Union member states has been delayed into 2007. Similar legislation has been or may be enacted in other jurisdictions, including the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant. We continue to evaluate the impact of specific registration and compliance activities required by WEEE.
It is possible that unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of such regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, criminal and civil liabilities and could impact our ability to conduct business in the countries that have adopted these types of regulations.
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
At the end of fiscal 2007, we had $1.12 billion in cash, cash equivalents and marketable securities. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity.
Our business is cyclical in nature and an industry downturn could harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capital equipment and product development and rapid technological change. If we are unable to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our manufacturing or operating costs to sufficiently offset declines in demand during a downturn, our revenue and earnings will suffer.
Political instability in Taiwan and in The People’s Republic of China or elsewhere could harm our business.
Because of our reliance on foundries and independent contractors located in Taiwan and The People’s Republic of China, and because we have offices in these locations, 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.
Risks Related to Government Action, Regulatory Action, Intellectual Property, and Litigation
The pending investigation by the United States Department of Justice regarding investigation into the market for Graphics Processors could adversely affect our business.
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units and cards. No specific allegations have been made against us. We plan to cooperate with the DOJ in its investigation. As of March 14, 2007, 42 civil complaints have been filed against us. The majority are pending in the Northern District of California, a number are pending in the Central District of California, and other cases are pending in several other Federal district courts. Although the complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert a variety of state law unfair competition or consumer protection claims on the same allegations and some cases assert unjust enrichment or other common law claims. The complaints are putative class actions alleging classes of direct and/or indirect purchasers of our graphic processing units and cards. The plaintiffs in a few of the Northern District of California actions have filed a motion with the Judicial Panel on Multidistrict Litigation asking that all pending and subsequent cases be consolidated in one court for all pre-trial discovery and motion practice. A hearing on this motion is set for March 29, 2007. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases.
Expensing employee stock options materially and aversely affects our reported operating results and could also adversely affect our competitive position.
Since inception, we have used stock options and our employee stock purchase program as fundamental components of our compensation packages. We believe that these incentives directly motivate our employees and, through the use of vesting, encourage our employees to remain with us. As a result of adjustments arising from our restatement related to stock option grant dates, our operating results for fiscal years prior to fiscal 2007 contain recorded amounts of stock-based compensation expense. For our fiscal 2000 through 2006, this stock-based compensation expense was calculated using primarily the intrinsic value-based method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees and related interpretations.
In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R) which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. During fiscal 2007, we recorded $116.7 million, related to stock-based compensation, net of the associated payroll tax impact resulting from our restatement, which negatively impacted our operating results. We believe that SFAS No. 123(R) will continue to negatively impact our operating results.
To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce stock-based compensation expense that may be more severe than any actions our competitors may implement may make it difficult to attract, retain and motivate employees, which could adversely affect our competitive position as well as our business and operating results.
We are a party to litigation, which, if determined adversely to us, could harm our business and financial condition.
We are a party to litigation. There can be no assurance that actions that have been brought against us or any brought by us will be resolved in our favor. Any claim that is successfully asserted against us may cause us to pay substantial damages and other related fees. Regardless of whether these lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are a party will likely be expensive and time consuming to defend or resolve. Such lawsuits could also harm our relationships with existing customers and result in the diversion of management’s time and attention away from business operations, which could harm our business. Costs of defense and any damages resulting from litigation a ruling against us or a settlement of the litigation could adversely affect our cash flow and financial results.
Our ability to compete will be harmed if we are 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 in the United States and internationally. We have numerous patents issued, allowed and pending in the United States and in foreign countries. Our patents and pending patent applications primarily relate to technology used by us in connection with our products. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. 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 the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as:
| · | the commercial significance of our operations and our competitors’ operations in particular countries and regions; |
| · | the location in which our products are manufactured; |
| · | our strategic technology or product directions in different countries; and |
| · | the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
Our pending patent applications and any future applications may 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 digital media processors and for defensive reasons, and expect to continue to enter into such license agreements. 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.
Litigation to defend against alleged infringement of intellectual property rights or to enforce our intellectual property rights and the outcome of such litigation could result in substantial costs to us.
We expect that as the number of issued hardware and software patents increases and as competition intensifies, the volume of intellectual property infringement claims and lawsuits may increase. We may become involved in lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or by our customers that we have agreed to indemnify them for certain claims of infringement arising out of the sale of our products to these customers. An unfavorable ruling could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.
In addition, we may need to commence litigation or other legal proceedings in order to:
| · | assert claims of infringement of our intellectual property; |
| · | protect our trade secrets or know-how; or |
| · | determine the enforceability, scope and validity of the propriety rights of others. |
If we have to initiate litigation in order to protect our intellectual property, our operating expenses may increase which could negatively impact our operating results. Our failure to effectively protect our intellectual property could harm our business.
If infringement claims are made against us or we are found to infringe a third parties’ patent, we may seek licenses under the third parties’ patents or other intellectual property rights. In addition, an indemnified customer may be required to obtain a license to a third parties’ patents or intellectual property. However, licenses may not be offered to us at all or on terms acceptable to us, particularly by competitors. If we fail to obtain a license from a third party for technology that we use or that is used in one of our products used by an indemnified customer, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture and sale of one or more of our products either of which could reduce our revenue and harm our business. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our operating results.
Our operating results may be adversely affected if we are subject to unexpected tax liabilities.
We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. Tax rates vary among the jurisdictions in which we operate. Significant judgment is required in determining our provision for our income taxes as there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any of the below could cause our effective tax rate to be materially different than that which is reflected in historical income tax provisions and accruals:
| · | the jurisdictions in which profits are determined to be earned and taxed; |
| · | adjustments to estimated taxes upon finalization of various tax returns; |
| · | changes in available tax credits; |
| · | changes in share-based compensation expense; |
| · | changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
| · | the resolution of issues arising from tax audits with various tax authorities. |
Should additional taxes be assessed as a result of any of the above, our operating results could be adversely affected. In addition, our future effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or changes in the interpretation of tax laws.
While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. However, the manner in which companies and their independent public accounting firms apply these requirements and testing companies’ internal controls, remains subject to some uncertainty. To date, we have incurred, and we expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. Despite our efforts, if we identify a material weakness in internal controls, there can be no assurance that we will be able to remediate such material weakness identified in a timely manner, or that we will be able to maintain all of the controls necessary to determine that our internal control over financial reporting is effective. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.
Changes in financial accounting standards or interpretations of existing standards could affect our reported results of operations.
We prepare our consolidated financial statements in conformity with United States generally accepted accounting principles. These principles are constantly subject to review and interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Risks Related to our Common Stock
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 to create and issue preferred stock without prior stockholder approval; |
| · | the prohibition of stockholder action by written consent; |
| · | a classified Board; and |
| · | advance notice requirements for director nominations and stockholder proposals. |
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. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
None.
Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of fivesix buildings. Additionally, we lease three other buildings in Santa Clara with one used as warehouse space and the other two used as lab space. Outside of Santa Clara, we lease space in Austin and Houston, Texas; Berkeley, California; Beaverton, Oregon; Bedford, Massachusetts; Bellevue and Kirkland, Washington; Chandler, Arizona;Madison, Alabama; Charlotte and Durham, North Carolina; Greenville, South Carolina; and Fort Collins, Colorado; Honolulu, Hawaii; and Redmond, Washington.Colorado. These facilities are used as design centers and/or sales and administrative offices.
Outside of the United States, we lease space in Singapore; Taipei and Neihu in Taiwan; Hsin Chu, Taiwan; Yokohama,Tokyo, Japan; Seoul, Korea; Beijing, China; Shanghai, and Shenzhen, China; Wanchai, and Shatin, New Territories, Hong Kong; Bangalore, Hyderabad and Pune, India; Paris, France; Moscow, Russia; Munich and Wurselen, Germany; Helsinki, Finland and Theale, England. These facilities are used primarily to support our customers and operations and as sales and administrative offices. In addition, weThe office lease spacespaces in Wurselen, Germany, Shenzhen, China and Bangalore, Pune and Hyderabad, India are used primarily as design centers. Additionally, as a result of our acquisition of PortalPlayer, we acquired a building under construction in Hyderabad, India, which iswill be used primarily as a design center.
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. For additional information regarding obligations under leases, see Note 12 of the Notes to the Consolidated Financial Statements under the subheading “Lease Obligations,” which information is hereby incorporated by reference.
3dfx
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement to purchase certain graphics chip assets from 3dfx. The 3dfx asset purchaseInteractive, Inc., or 3dfx, which closed on April 18, 2001.
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease.lease, CarrAmerica. In December 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease, Carlyle Fortran Trust. The landlords’ complaints both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer and seek to recover, among other things, amounts owed on their leases with 3dfx in the aggregate amount of approximately $15 million. In October 2002, 3dfx filed for Chapterchapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In December 2002, weThe landlords’ actions were servedsubsequently removed to the United States Bankruptcy Court for the Northern District of California and consolidated, for purposes of discovery, with a complaint filed by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA in 2005, the District Court withdrew the reference to the Bankruptcy Court and the landlord actions were removed to the United States District Court for the Northern District of 3dfx’s Austin, Texas commercial real estate lease.California. On November 10, 2005, the District Court granted our motion to dismiss the landlords’ respective amended complaints and allowed the landlords to have until February 4, 2006 to amend their complaints. The landlords’ complaintslandlords re-filed claims against NVIDIA in early February 2006, and NVIDIA again filed motions requesting the District Court to dismiss all such claims. The District Court took both assert claims for,motions under submission. On September 29, 2006, the court dismissed the CarrAmerica action in its entirety and without leave to amend. The court found, among other things, interference with contract, successor liabilitythat CarrAmerica lacks standing to bring the lawsuit and fraudulent transfer. The landlords’ are seekingthat such standing belongs exclusively to the bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle complaint in its entirety, finding that Carlyle lacked standing to pursue some of its claims, and that certain other claims were substantively unmeritorious. NVIDIA has filed motions to recover among other things, amounts owed on their leasesits litigation costs and attorneys fees against both Carlyle and Carr. Those motions are currently scheduled for hearing in the aggregate amount of approximately $10 million. early April, 2007.
In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer. The Trustee’s complainttransfer and seeks additional payments from us,us. On October 13, 2005, the amountCourt held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Court issued its ruling denying the Trustee’s Motion for Summary Adjudication in all material respects and holding that NVIDIA is prevented from disputing that the value of which has not been quantified.the 3dfx transaction to NVIDIA was less than $108.0 million. The landlords’ actions have been removedCourt expressly denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA were at least $108.0 million. In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached a conditional settlement of the Trustee’s claims against NVIDIA. This conditional settlement, presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The Trustee advised that he intended to object to the settlement, which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, the conditional settlement never progressed substantially through the confirmation process. On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the bankruptcy court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. In addition, while the conditional settlement agreement was awaiting the confirmation process, the Bankruptcy Court, over objection of the Creditors’ Committee and NVIDIA, ordered the discovery portion of the Trustee’s litigation to proceed. The expert discovery was completed, but the Bankruptcy Court also ruled on a Trustee discovery motion allowing additional discovery of NVIDIA. Because that order would have required NVIDIA to disclose privileged attorney-client communications, NVIDIA asked the District Court to review that order and to stay its execution while the District Court’s review is pending. The District Court did issue the requested stay order on August 3, 2006. Oral argument on that matter was held on November 15, 2006, and the District Court reversed the Bankruptcy Court’s order by order of its own dated December 15, 2006. The District Court permitted certain limited additional discovery, but concluded that on the record before it, there was no basis to set aside the attorney-client privilege.
Following the Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the proposed settlement agreement between NVIDIA and the Creditor’s Committee, certain shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. That petition was granted and an Equity Holders Committee was appointed. Since that appointment, the Equity Holders Committee has filed a competing plan of reorganization/liquidation. The Equity Holders plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. Upon the payment of that debt, the Equity Holders Committee contends that NVIDIA would be obliged to pay the stock consideration provided for in the asset purchase agreement. By virtue of stock splits since the execution of the asset purchase agreement, the stock consideration would now total four million shares of our common stock. The Equity Holders’ Committee filed a motion with the Bankruptcy Court for an order giving it standing to bring that lawsuit to enforce the Asset Purchase Agreement. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At the hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the Asset Purchase Agreement was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the Asset Purchase Agreement, and that the agreement is capable of being assumed by the bankruptcy estate. In addition, the Equity Holders Committee filed a motion seeking Bankruptcy court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the court approved the proposed protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.
Lawsuits related to our historical stock option granting practices and SEC inquiry
In June 2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We continue to cooperate with the SEC in its inquiry.
Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated withcomplaint in the Trustee’sUnited States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have been consolidated and plaintiffs are scheduled to file a consolidated complaint on or before March 22, 2007. All of the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. All allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, constructive fraud, and violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, or the Exchange Act. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief.for purposes of discovery. Discovery is currently proceeding and no trialdate has been set. We believe the claims asserted against us are without merit and we will continuein response to defend ourselves vigorously.these complaints.
Opti Incorporated
On October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent infringement against NVIDIA in the United States District Court for the Eastern District of Texas. In its complaint, Opti assertsasserted that unspecified NVIDIA chipsets infringe five United States patents held by Opti. Opti seekssought unspecified damages for our alleged conduct, attorneysattorneys’ fees and triple damages for alleged willful infringement by NVIDIA. In April 2006, the District Court issued a Markman ruling adopting Opti's proposed construction on 13 of the 15 terms at issue and Opti dropped from the lawsuit two of the five United States patents that Opti alleged NVIDIA infringes, and elected to pursue the three remaining patents at trial.
In August 2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA was obligated to pay to Opti $11.0 million dollars for past and present licenses to the patents in suit and NVIDIA agreed to make additional quarterly payments to Opti should NVIDIA use certain patented technology after January 31, 2007. The case has now been dismissed with prejudice. The agreements with Opti call for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue.
Department of Justice Subpoena and Investigation
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units and cards. No specific allegations have been made against us. We plan to cooperate with the DOJ in its investigation. As of March 14, 2007, 42 civil complaints have been filed against us. The majority are pending in the Northern District of California, a number are pending in the Central District of California, and other cases are pending in several other Federal district courts. Although the complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert a variety of state law unfair competition or consumer protection claims on the same allegations and some cases assert unjust enrichment or other common law claims. The complaints are putative class actions alleging classes of direct and/or indirect purchasers of our graphic processing units and cards. The plaintiffs in a few of the Northern District of California actions have filed a response tomotion with the Judicial Panel on Multidistrict Litigation asking that all pending and subsequent cases be consolidated in one court for all pre-trial discovery and motion practice. A hearing on this complaint in December 2004. Discovery has not begun and no trial date has been set.motion is set for March 29, 2007. We believe the claims asserted against usallegations in the complaints are without merit and we will continueintend to vigorously defend ourselves vigorously.the cases.
American Video Graphics
In August 2004, a Texas limited partnership named American Video Graphics, LP, or AVG, filed three separate complaints for patent infringement against various corporate defendants (not including NVIDIA) in the United States District Court for the Eastern District of Texas. AVG initially asserted that each of the approximately thirty defendants sells products that infringe one or more of seven separate patents that AVG claims relate generally to graphics processing functionality. Each of the three lawsuits targeted a different group of defendants; one case involves approximately twenty of the leading personal computer manufacturers, the PC Makers Case, one case involves the three leading video game console makers, the Game Console Case, and one case involves approximately ten of the leading video game publishers, the Game Publishers Case. In November 2004, NVIDIA sought and was granted permission to intervene in two of the three pending AVG lawsuits, the PC Makers Case and the Game Console Case. NVIDIA’s complaint in intervention alleges both that the patents in suit are invalid and that, to the extent AVG’s claims target NVIDIA products, the asserted patents are not infringed. Two other leading suppliers of graphics processing products, Intel and ATI, have also intervened in the cases, ATI in both the PC Makers and Game Console Case, and Intel in the PC Makers Case.
After some consensual reconfigurations proposed by the various parties, in January 2005, the district court judge entered Docket Control and Discovery Orders in the three lawsuits. The PC Makers case now involves four separate patents and is currently scheduled for trial beginning on September 11, 2006. The Game Console Case involves a single patent and is currently scheduled for trial beginning on December 4, 2006. We believe that, to the extent AVG’s infringement allegations target functionality that may be performed by NVIDIA products, those claims are without merit, and we will continue to defend ourselves and our products vigorously.
We are subject to other legal proceedings, but we do not believe that the ultimate outcome of any of these proceedings will have a material adverse effect on our financial position or overall trends in results of operations. However, if an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period.
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2005.
2007.
Our common stock is traded on the Nasdaq NationalNASDAQ Global Select Market under the symbol NVDA. Public trading of our common stock began on January 22, 1999. Prior to that, there was no public market for our common stock. As of March 4, 2005,2, 2007, we had approximately 452461 registered 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 our common stock as quoted on the Nasdaq NationalNASDAQ Global Select Market:
| | High | Low | | High | | Low | |
Year ended January 29, 2006 | | |
| First Quarter (through March 4, 2005) | $29.60 | $22.60 | |
Fiscal year ending January 27, 2008 | | | | | | | | |
| First Quarter (through March 2, 2007) | | | $ | 34.91 | | $ | 29.71 | |
| | | | | | | | | |
Year ended January 30, 2005 | | |
Fiscal year ended January 28, 2007 | | | | | | | | |
| Fourth Quarter | $24.96 | $13.14 | | $ | 38.96 | | $ | 30.90 | |
| Third Quarter | $15.89 | $9.30 | | $ | 34.59 | | $ | 20.85 | |
| Second Quarter | $24.11 | $14.40 | | $ | 31.88 | | $ | 17.17 | |
| First Quarter | $27.35 | $20.63 | |
First Quarter (1) | | | $ | 30.84 | | $ | 21.44 | |
| | | | | | | | | |
Year ended January 25, 2004 | | |
| Fourth Quarter | $25.88 | $17.08 | |
| Third Quarter | $21.47 | $15.26 | |
| Second Quarter | $27.75 | $13.55 | |
| First Quarter | $14.83 | $9.33 | |
Fiscal year ended January 29, 2006 | | | | | | | | |
Fourth Quarter (1) | | | $ | 23.38 | | $ | 16.28 | |
Third Quarter (1) | | | $ | 17.98 | | $ | 13.52 | |
Second Quarter (1) | | | $ | 14.70 | | $ | 10.76 | |
First Quarter (1) | | | $ | 14.80 | | $ | 10.46 | |
(1)Reflects a two-for-one stock split effective on April 6, 2006.
Dividend Policy
We have never paid and do not expect to pay cash dividends for the foreseeable future.
Equity Compensation Plan Information
Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders under the caption "Compensation-Equity"Equity Compensation Plan Information," and is incorporated by reference into this report.
Issuer Purchases of Equity Securities
On August 9, 2004 we announced that our Board had authorized a stock repurchase program under which we may purchase up to $300.0 millionrepurchase shares of our common stock, oversubject to certain specifications, up to an aggregate maximum amount of $300 million. Subsequently, on March 6, 2006, we announced that our Board had approved a three year period through August 2007.$400 million increase to the original stock repurchase program. As a result of this increase, the amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made in the open market or in privately negotiated transactions, from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with Rule 10b-18 under the Securities Exchange Act, of 1934,Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. Our stock repurchaseThe program does not obligate usNVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. The repurchases will be funded from
As part of our available working capital. Duringshare repurchase program, we have entered into and we may continue to enter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. Through the end of fiscal 2005,2007, we have repurchased 2.127.3 million shares under our stock repurchase program for a total cost of approximately $24.6$488.1 million. We did not repurchase any shares duringDuring the fourthfirst quarter of fiscal 2005.2008, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our first fiscal quarter.
Period | | Total Number of Shares Purchased | | | | Average Price Paid per Share | | | | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs | | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |
| October 30, 2006 - November 26, 2006 | | | - | | | | | $ | - | | | | | | - | | | | | | 311,869,417 | |
| November 27, 2006 - December 24, 2006 | | | - | | | | | $ | - | | | | | | - | | | | | | 311,869,417 | |
| December 25, 2006 - January 28, 2007 | | | 2,868,123 | | | (3) | | $ | 34.87 | | | (2) | | | 2,868,123 | | | (3) | | | 211,869,417 | |
| Total | | | 2,868,123 | | | | | $ | 34.87 | | | | | | 2,868,123 | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |
| | | | | | | | | | |
| July 26, 2004 through August 22, 2004 | | | 1,075,000 | | $ | 10.57 | | | 1,075,000 | | $ | 288,642,283 | |
| | | | | | | | | | | | | | |
| August 23, 2004 through September 19, 2004 | | | 819,253 | | $ | 12.83 | | | 819,253 | | $ | 278,133,053 | |
| | | | | | | | | | | | | | |
| September 20, 2004 through October 24, 2004 | | | 190,100 | | $ | 14.61 | | | 190,100 | | $ | 275,356,213 | |
| | | | | | | | | | | | | | |
| Total | | | 2,084,353 | | $ | 11.82 (1 | ) | | 2,084,353 | | | | |
(1) (2) Represents weighted average price paid per share during the thirdfourth quarter of fiscal 2005.2007.
(3) As part of our share repurchase program, we have entered into and we may continue to enter into structured share repurchase transactions with financial institutions. During the fourth quarter of fiscal 2007, we repurchased 2.9 million shares of our common stock for $100 million under a structured share repurchase transaction. This transaction required that we make an up-front payment.
Stock Performance Graph
The following graph compares the cumulative total stockholder return for our common stock, the S & P 500 Index and the S & P 500 Semiconductors Index for the five years ended January 28, 2007. The graph assumes that $100 was invested on January 25, 2002 in our common stock or on January 31, 2002 in each of the S & P 500 Index and the S & P Semiconductors Index. Total return assumes reinvestment of dividends in each of the indices indicated. We have never paid cash dividends on our common stock. Our results are calculated on fiscal year-end basis and each of the S & P 500 Index and the S & P Semiconductors Index are calculated on month-end basis. Total return is based on historical results and is not intended to indicate future performance.
| | | 1/25/2002 | | 1/24/2003 | | 1/25/2004 | | 1/30/2005 | | 1/29/2006 | | 1/28/2007 | |
| NVIDIA Corporation | | $ | 100 | | $ | 15.53 | | $ | 35.27 | | $ | 34.95 | | $ | 70.64 | | $ | 96.14 | |
| S & P 500 | | $ | 100 | | $ | 76.98 | | $ | 103.6 | | $ | 110.05 | | $ | 121.47 | | $ | 139.11 | |
| S & P Semiconductors | | $ | 100 | | $ | 44.26 | | $ | 88.1 | | $ | 66.21 | | $ | 76.56 | | $ | 72.09 | |
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 income data for the years ended January 30, 2005,28, 2007, January 25, 200429, 2006, and January 26, 200330, 2005 and the consolidated balance sheet data as of January 30, 200528, 2007 and January 25, 200429, 2006 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included herein.elsewhere in this Annual Report on Form 10-K. The consolidated statement of income data for the yearsyear ended January 27, 200225, 2004 and the consolidated balance sheet data as of January 28, 2001 is30, 2005, are derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. The consolidated statement of income data for the year ended January 26, 2003 and the consolidated balance sheet data as of January 25, 2004 and January 26, 2003 January 27, 2002 and January 28, 2001 isare derived from auditedunaudited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.
| | | Year Ended | |
| | | January 28, | | January 29, | | January 30, | | January 25, | | January 26, | |
| | | 2007 (B, C) | | 2006 (D) | | 2005 | | 2004 (E, F) | | 2003 (G, H) | |
| | | (In thousands, except per share data) | |
Consolidated Statement of Income Data: | | | | | | | | | | | |
| Revenue | | $ | 3,068,771 | | $ | 2,375,687 | | $ | 2,010,033 | | $ | 1,822,945 | | $ | 1,909,447 | |
| Income from operations | | $ | 453,452 | | $ | 336,664 | | $ | 95,176 | | $ | 49,788 | | $ | 82,201 | |
| Net income | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | | $ | 48,630 | | $ | 50,901 | |
| Basic net income per share | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | | $ | 0.15 | | $ | 0.17 | |
| Diluted net income per share | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | | $ | 0.14 | | $ | 0.15 | |
| Shares used in basic per share computation (A) | | | 352,404 | | | 339,380 | | | 332,124 | | | 321,848 | | | 307,026 | |
| Shares used in diluted per share computation (A) | | | 391,504 | | | 365,704 | | | 351,624 | | | 344,108 | | | 331,654 | |
| | | January 28, | | January 29, | | January 30, | | January 25, | | January 26, | |
| | | 2007 | | 2006 | | 2005 | | 2004 | | 2003 | |
| | | (In thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | |
| Cash, cash equivalents and marketable securities | | $ | 1,117,850 | | $ | 950,174 | | $ | 670,045 | | $ | 604,043 | | $ | 1,028,413 | |
| Total assets | | $ | 2,675,263 | | $ | 1,954,687 | | $ | 1,663,551 | | $ | 1,452,040 | | $ | 1,658,035 | |
| Capital lease obligations, less current portion | | $ | -- | | $ | -- | | $ | -- | | $ | 856 | | $ | 4,880 | |
| Other long-term debt | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | $ | 300,000 | |
| Total stockholders’ equity | | $ | 2,006,919 | | $ | 1,495,992 | | $ | 1,221,091 | | $ | 1,089,493 | | $ | 960,933 | |
| Cash dividends declared per common share | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | $ | -- | |
13(A) Reflects a two-for-one stock-split effective April 6, 2006.
(B) Fiscal 2007 included a charge of $17.5 million associated with a confidential patent licensing arrangement.
(D) Fiscal 2006 included a charge of $14.2 million related to settlement costs associated with two litigation matters, 3dfx and American Video Graphics, LP, or AVG.
| | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | | January 27, | | January 28, | |
| | | 2005 | | 2004 (A, B) | | 2003 (C, D) | | 2002 (E, F) | | 2001 | |
| | | (in thousands, except per share data) | |
Consolidated Statement of Income Data: | | | | | | | | | | | |
| Revenue | | $ | 2,010,033 | | $ | 1,822,945 | | $ | 1,909,447 | | $ | 1,369,471 | | $ | 735,264 | |
| Gross profit | | $ | 649,486 | | $ | 528,878 | | $ | 576,012 | | $ | 519,238 | | $ | 272,879 | |
| Income from operations | | $ | 113,593 | | $ | 90,157 | | $ | 143,986 | | $ | 241,732 | | $ | 128,135 | |
| Income before income tax expense | | $ | 125,445 | | $ | 86,673 | | $ | 150,557 | | $ | 252,749 | | $ | 144,808 | |
| Income tax expense | | $ | 25,089 | | $ | 12,254 | | $ | 59,758 | | $ | 75,825 | | $ | 46,339 | |
| Net income | | $ | 100,356 | | $ | 74,419 | | $ | 90,799 | | $ | 176,924 | | $ | 98,469 | |
| Basic net income per share | | $ | 0.60 | | $ | 0.46 | | $ | 0.59 | | $ | 1.24 | | $ | 0.75 | |
| Diluted net income per share | | $ | 0.57 | | $ | 0.43 | | $ | 0.54 | | $ | 1.03 | | $ | 0.62 | |
| Shares used in basic per share computation | | | 166,062 | | | 160,924 | | | 153,513 | | | 143,015 | | | 130,998 | |
| Shares used in diluted per share computation | | | 176,558 | | | 172,707 | | | 168,393 | | | 171,074 | | | 159,294 | |
| | | January 30, | | January 25, | | January 26, | | January 27, | | January 28, | |
| | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | |
| | | (in thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | |
| Cash, cash equivalents and marketable securities | | $ | 670,045 | | $ | 604,043 | | $ | 1,028,413 | | $ | 791,377 | | $ | 674,275 | |
| Total assets | | $ | 1,628,536 | | $ | 1,399,344 | | $ | 1,617,015 | | $ | 1,503,174 | | $ | 1,016,902 | |
| Capital lease obligations, less current portion | | | -- | | $ | 856 | | $ | 4,880 | | $ | 5,861 | | $ | 378 | |
| Deferred revenue | | $ | 11,500 | | | -- | | | -- | | $ | 70,193 | | $ | 200,000 | |
| Deferred income tax liability | | $ | 20,754 | | $ | 8,609 | | | -- | | | -- | | | -- | |
| Long-term debt | | | -- | | | -- | | $ | 300,000 | | $ | 300,000 | | $ | 300,000 | |
| Long-term liabilities | | $ | 8,358 | | $ | 4,582 | | | -- | | | -- | | | -- | |
| Total stockholders’ equity | | $ | 1,178,268 | | $ | 1,051,185 | | $ | 932,687 | | $ | 763,819 | | $ | 407,107 | |
| Cash dividends declared per common share | | | -- | | | -- | | | -- | | | -- | | | -- | |
(A)(E) Fiscal 2004 included a charge of $3.5 million related to the write-off of acquired research and development expense from theour purchase of MediaQ, Inc., or MediaQ that had not yet reached technological feasibility and has no alternative future use.
(B)(F) Fiscal 2004 included a charge of $13.1 million in connection with our convertible subordinated debenture redemption.
(C)(G) Fiscal 2003 included $40.4 million in additional revenue related to our settlement of our arbitration with Microsoft regarding Xbox pricing.
(D)(H) Fiscal 2003 included a charge for stock option exchange expenses of $61.8 million related to personnel associated with cost of revenue, (forfor manufacturing personnel),personnel, research and development and sales, general and administrative of $6.2 million, $35.4 million and $20.2 million, respectively.
(E) Fiscal 2002 included $10.0 million of acquisition charges attributable to expenses related to our acquisition of assets from 3dfx.
(F) Fiscal 2002 included a charge of $3.7 million related to our relocation from our previous headquarters.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected“Item 1A. Risk Factors”, “Item 6. Selected Financial Data”, our consolidated financial statementsConsolidated Financial Statements and related notesNotes thereto, and the “Business Risks” Section at the end of this Item 7, as well as other cautionary statements and risks described elsewhere in this Annual Report on Form 10-K, before deciding to purchase, hold or sell shares of our common stock.
Overview
Our Company
NVIDIA Corporation is athe worldwide leader in programmable graphics and digital media processors dedicatedprocessor technologies. Our products are designed to creating products that enhance the interactiveend-user experience on consumer and professional computing platforms.devices. We design, develop and markethave four major product-line operating segments: the graphics processing units, or GPUs,GPU Business, media and communications processors, or MCPs, wireless media processors, or WMPs,MCP Business, Handheld GPU Business, and related software.Consumer Electronics Business. Our GPU Business is composed of products are integral to a wide variety of visual computing platforms, including enterprisethat support desktop personal computers, or PCs, consumernotebook PCs, professional workstations notebook PCs,and other GPU-based products; our MCP Business is composed of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed storage and network communications, and perform these operations independently from the host central processing unit, or CPU; our Handheld GPU Business is composed of products that support handheld personal digital assistants, or PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital media centers. consumer electronics devices and is composed of our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3, sales of our Xbox-related products, revenue from our license agreement with Microsoft Corporation, or Microsoft, relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices.
Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize NVIDIA processors as a core component of their entertainment and business solutions. Our GPUs are designed to deliver superior performance and crisp visual quality for PC-based applications such as manufacturing, science, e-business, entertainment and education. Our MCPs perform highly demanding multimedia processing for secure broadband connectivity, communications and storage. Our handheld GPUs deliver an advanced visual experience by accelerating graphics and video applications while implementing design techniques that result in high performance and relatively low power consumption.
We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our objectiveheadquarter facilities are in Santa Clara, California. Our Internet address is to be one of the most important and influential technology companies in the world.
Recent Developmentswww.nvidia.com.
Sony Computer Entertainment Inc.Seasonality
In December 2004,Our industry is largely focused on the consumer products market. Due to the seasonality in this market, we announced that Sony Computer Entertainment Inc., or SCEI, and NVIDIA are jointly developing a custom GPU incorporating our next-generation GeForce GPU and SCEI’s system solutions for SCEI’s next generation PlayStation.The collaboration includes licensing and royalties for the next generation PlayStation as well as all derivatives, including next generation digital consumer electronics devices. In addition, we are licensing to SCEI software development tools for creating shaders and advanced graphics capabilities. For fiscal 2006, wetypically expect to recognizesee stronger revenue performance in the second half of approximately $30 million from developmentthe calendar year related to the back-to-school and software license fees associated with this collaboration. Depending on the ultimate success of this next generation platform, we expect to generate, starting in fiscal 2007, revenue ranging from $50 million to $100 million annually from technology license fees and royalties over a four year period, with the possibility of additional royalties for several years thereafter. The additional royalty stream will depend on the use and success of our technology in future digital consumer electronics devices such as digital televisions and media servers.holiday seasons.
Intel Cross-license AgreementFiscal 2007 Developments, Future Objectives and Challenges
On November 19, 2004, NVIDIA and Intel announced that the companies signed a broad, multi-year patent cross-license agreement spanning multiple product lines and product generations. Additionally, the companies signed a multi-year chipset agreement granting NVIDIA a license to implement Intel's front-side bus technology. We believe that this agreement opens a significant opportunity for us to bring our NVIDIA nForce brand to the Intel segment. We expect to commence shipments of our first Intel-based MCP product during the first quarter of fiscal 2006.
GeForce 6 Series
In April 2004, we announced our latest flagship GPU architecture, the GeForce 6 series. The GeForce 6 series offers a number of new features, including a faster architecture than our GeForce FX series, compliance with many of the latest software standards and on-chip video processors for high-definition encoding and decoding and direct-to-television playback. The GeForce 6 series offers more flexibility for game designers and graphic artists, while increasing performance over our previous top-end product, the GeForce FX 5950. During the second quarter of fiscal 2005, we launched the production shipment of the GeForce 6800 Ultra, 6800 GT and 6800, the industry’s first GPUs to support Microsoft’s DirectX 9 Shader Model 3.0. During the third quarter of fiscal 2005, we launched the production shipment of the GeForce 6600 GT and 6600, which are intended for the mainstream market, and the GeForce 6200, which delivers the GeForce 6 Series architecture and performance to the value PC segment. In December 2004, we introduced a version of the GeForce 6200 with TurboCache technology. NVIDIA TurboCache technology is a new, patent pending hardware and software technology, which allows a GPU to render directly to system memory instead of using local memory on the graphics card. Many of the world’s leading PC OEMs, system builders, and add-in card partners have announced plans to build systems and graphics cards utilizing the GeForce 6200 with TurboCache technology.
In December 2004, we announced NVIDIA PureVideo technology, which brings consumer electronics quality video to PCs. PureVideo technology eliminates the need for separate hardware or chipsets and takes the load off the PC’s multi-purpose CPU. New notebooks and media centers powered by GeForce 6 with PureVideo technology are expected to be introduced to the market soon.
Peripheral Component Interconnect Express, or PCI ExpressBusiness
The transition to PCI Express was central to our GPU and MCP objectives during fiscal 2005. Industry adoptioncombination of PCI Express was slower than expected during our fiscal 2005.
In February 2004, we announced a top-to-bottom family of PCI Express GPUs. By using a PCI Express high-speed interconnect, or HSI, which is a complex piece of networking technology that performs high-speed bi-directional interconnect protocol conversion, we were able to transform our GeForce family6, GeForce 7 and GeForce 8 series of GPUs into PCI Express compatible GPUs. In June 2004, we executed onand our strategy to deliver a full line of GPUs ready to support PCI Express chipsets. Our first PCI Express graphics solutions, the GeForce PCX series, were released for retail sale during the second quarter of fiscal 2005. In September 2004, we announced the GeForce 6600 GT and the GeForce 6600. In October 2004, we announced the GeForce 6200, our first native PCI Express GPUs. In November 2004, we announced the launch of GeForce Go 6800 GPU, our first native PCI Express GPU for notebook PCs.
In May 2004, we announced the Mobile PCI Express Module Specification, or MXM. MXM was jointly developed by NVIDIA and leading notebook PC manufacturers in an effort to accelerate the adoption of PCI Express-based notebooks in all market segments. MXM is an open design specification that supports a wide range of graphics solutions from any GPU manufacturer, allowing system integrators maximum flexibility for build-to-order with various graphics solutions. MXM also serves as the primary delivery vehicle for our GeForce Go 6 series of GPUs.
In August 2004, we announced that PCI-SIG, the Special Interest Group responsible for Conventional PCI, PCI-X and PCI Express industry-standard I/O technologies, had added our PCI Express technology-based products to the PCI-SIG Integrators List, including GPUs designed for workstations, desktop PCs and notebook PCs.
In February 2005, we announced the NVIDIA Quadro FX Go 1400 mobile GPU for PCI Express, which provides the performance, programmability, precision and quality that CAD, DCC and scientific applications require.
WMP Business
During the first quarter of fiscal 2005, Motorola, Inc. announced their decision to incorporate our GoForce 4000 in their upcoming new line of 3G multimedia phones. In July 2004, we announced that Samsung Electronics Co., or Samsung, had selected our GoForce 2100 media processor for the SCH-M500 Mobile Intelligent Terminal by Samsung, or MITS, phone. We now have design wins with three of the world's top five cellular phone OEMs - Motorola, Samsung and LG Electronics, Inc. In September 2004, we unveiled the GoForce 3D 4500, the world's first 3D WMP. In February 2005, we announced the GoForce 3D 4800. Over the next several years, we expect digital media processing technology to play a critical role in the cellular phone industry.
Scalable Link Interface, Technology
In June 2004, we unveiled a newscalable link interface, or SLI, technology thathas created a new class of gaming PCs and professional workstations. SLI technology takes advantage of the increased bandwidth of the peripheral component interconnect, or PCI, Express bus architecture to allow twoup to four NVIDIA-based graphics cards to operate in a single PC or workstation. PCI Express-based PCs and workstations based on NVIDIA SLI technology became availableup to two NVIDIA-based graphics cards to operate in the second half of fiscal 2005 froma notebook PC and workstation manufacturers.
NVIDIA nForceor professional workstation.
During the first quarter of fiscal 2005,2007, we launched productionshipped eight new GeForce 7 series GPUs for desktop and notebook PCs, expanding the offering of products in the NVIDIA nForce3 250Gb MCP, theGeForce 7 GPU family. In March 2006, we shipped our first single-chip MCP to offer gigabit Ethernet, dual independent Serial Advanced Technology Attachment, or SATA, controllers, industry leading Redundant Array of Independent Disks, or RAID, features and hardware security processing. In June 2004, we announced the release of the NVIDIA nForce3 Ultra MCP, a MCPQuad SLI system for motherboards and PC systems based on the AMD64 computing platform. In October 2004, we introduced the NVIDIA nForce4 MCPs, our new family of high-end PCI Express-based MCPs for AMD64 computing environments. NVIDIA nForce4 MCPs provide the platform technology that is designed to power this year's fastest gaming, enthusiast, and digital mediadesktop PCs, and motherboards, driving the PCI Express transition.
In January 2005, we introduced NVIDIA nForce Professional MCPs, which currently are the only PCI Express core-logic solutions for AMD Opteron processor-based server and workstation platforms. The NVIDIA nForce Professional MCP family includes the NVIDIA nForce Professional 2200 and the 2050 MCP.
Share-Based Payment
Since inception, we have used stock options and our employee stock purchase program as fundamental components of our compensation packages. To date we generally have not recognized compensation cost for employee stock options or shares sold pursuant to our employee stock purchase program. We believe that these incentives directly motivate our employees and, throughenabling the use of vesting, encourage our employees to remain with us. In December 2004,four GPUs per system. We also shipped the Financial Accounting Standards Board issued SFAS No. 123(R),Share-Based Payment, or SFAS No. 123(R). SFAS No. 123(R) is effectiveGeForce Go 7800 GTX notebook GPU featuring SLI technology for interim or annual periods beginning after June 15, 2005, and requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. Expensing these incentives in future periods will materially and adversely affect our reported operating results as the stock-based compensation expense would be charged directly against our reported earnings. To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs.
Repatriation Legislation
The American Jobs Creation Act of 2004 was signed into law on October 22, 2004. This act creates a temporary incentive for United States multinationals to repatriate accumulated income earned outside the United States at a federal effective tax rate of 5.25%. On December 21, 2004, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 109-2,Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, which allows an enterprise time beyond the financial reporting period of enactment to evaluate the effect of the act on its plan for reinvestment or repatriation of foreign earnings.We have started an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provide additional clarifying language on key elements of the provision. We have not provided for United States income taxes on a cumulative total of approximately $174.7 million of undistributed earnings as of January 30, 2005 for certain non-United States subsidiaries as we intended to reinvest these earnings indefinitely in operations outside of the United States. We are currently in the process of evaluating whether or not, and to what extent, if any, this provision may benefit us. We expect to complete such evaluation before the end of fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $500 million. The potential range of related income tax expense is between zero and $27 million.
Future Objectives and Challenges
GPU Business
During fiscal 2005, we committed ourselves to recapture technology leadership in our GPU business, while creating an architecture that is cost efficient.With our GeForce 6 family, we captured a significant share of the performance GPU segment, and we are now focused on using that technology leadership position into the mainstream and value GPU segments. By the end of fiscal 2005, we had a top-to-bottom product line that supports Shader Model 3.0 and with SLI, MXM, HSI, TurboCache technology and PureVideo technology. Now, we are focused on growing our GPU business.
notebook PCs.
PCI Express
PCI Express is expected to enable a new level of performance for high bandwidth applications like graphics and networking. The transition to PCI Express, which is extremely complex, is central to our GPU and MCP objectives this fiscal year. We initiated this transition by creating our GeForce PCX series of GPUs, using HSI technology. During the second quarter of fiscal 2005, we executed on2007, our strategy to deliver a fullNVIDIA GeForce Go notebook GPU product line of GPUs ready to support PCI Express chipsets. The transition to PCI Express was central toachieved record revenue for the second consecutive quarter. In addition, our GPU and MCP objectives during fiscal 2005. Industry adoption of PCI Express was slower than expected during our fiscal 2005 and there is no assurance that the adoption rate will increase during fiscal 2006. Our first PCI Express graphics solutions, the GeForce PCX series, was released for retail sale duringNVIDIA Quadro professional product line increased its revenue 27% from the second quarter of fiscal 2005.2006. We expectedtransitioned from our NVIDIA GeForce 6600 to ramp up sales of our PCI Express products during the second quarter of fiscal 2005, but asNVIDIA GeForce 7600, which delivers almost a result of Intel’s delayed PCI Express chipset production, followed by its product recall,100% performance increase at the performance desktop segment was impacted by stalling our customers’ production ramp of our GeForce PCX GPUs. same price point.
During the third quarter of fiscal 2005,2007, we announced and ramped upcontinued to experience growth in sales of our GeForce 7 series products, primarily in the mainstream and performance segments. Our NVIDIA GeForce 6600 GT, GeForce 6600 andGo notebook GPU product line achieved record revenue for the GeForce 6200, our first native PCI Express GPUs.third consecutive quarter, primarily through increased sales in the notebook standalone GPU segment.
Gross Margin ImprovementIn June 2006, we shipped the GeForce 7950 GX2, which provides 2500x1600 resolution. This is the resolution of cinematic film, and brings the 16:9 panoramic experience of cinema to gaming. We also announced PureVideo High-Definition, or HD technology, a combination of hardware acceleration from an NVIDIA GPU, high definition movie player integration and High-Bandwidth Digital Content Protection, or HDCP, feature support, to enable manufacturers and consumers to build PCs that can play High-Definition Digital Video Disc, or HD DVD or Blu-ray movies.
In August 2006, we introduced the NVIDIA Quadro Plex 1000, the world's first dedicated Visual Computing System. The NVIDIA Quadro Plex 1000 offers scalability in a desktop or dense 3U rackmount configuration for professional applications such as those powering multiple streams of 4K high-definition video, 3D styling and design, scientific and medical visualization, oil and gas exploration, or visual simulation and training.
In November 2006, we introduced our GeForce 8 series GPUs, which is based on a unified shader architecture. Instead of separate vertex and pixel shading processors, the GeForce 8800 has 128 stream processors, operating at 1.35GHz, that can process either vertex or pixel shader programs. GeForce 8800 is also the world’s first DX10 GPU. DX10 is a new Application Programming Interface, or API, for Microsoft Windows Vista, or Vista, and includes many new features. We also announced Compute Unified Device Architecture, or CUDA, a new mode of operation on GPUs where the computational power of the GPU can be utilized for computation-intensive applications.
During the fourth quarter of fiscal 2007, we extended our leadership share position in the notebook GPU segment to 58% share, according to the Mercury Research Fourth Quarter 2006 PC Graphics Report. Notebook GPU revenue grew over 120% year-over-year. Additionally, the NVIDIA Quadro professional product line achieved record revenue with a 24% revenue increase from the fourth quarter fiscal 2006.
MCP Business
In February 2006, we completed our acquisition of ULi Electronics, Inc., or ULi, a core logic developer for the PC industry. This acquisition represents our ongoing investment in our platform solution strategy and has strengthened our sales, marketing, and customer engineering presence in Taiwan and China.
In March 2006, we shipped our first integrated graphics processor, or IGP, core-logic solution for Advanced Micro Devices, Inc., or AMD, based notebook PCs - the GeForce Go 6100 GPU and NVIDIA nForce Go 430 MCP. This core logic solution is the industry’s first high-definition IGP to provide hardware accelerated H.264 high-definition video playback.
In May 2006, we shipped our NVIDIA nForce 590 SLI, a high-performance motherboard solution for x86 PC platforms, including those based on socket AM2 processors by AMD. The NVIDIA nForce 590 SLI can utilize the power of up to four NVIDIA GeForce GPUs for HD gaming.
In June 2006, we introduced the NVIDIA nForce 590 SLI for Intel Core2 Duo and Core 2 Extreme CPUs.
In November 2006, we introduced our new NVIDIA nForce 680i SLI MCPs, which deliver performance for Intel Corporation, or Intel, CPUs and are designed specifically for enthusiasts with features such as SLI, Dual Net Gigabit Ethernet, and MediaShield RAID. The introduction of our NVIDIA nForce 680i SLI MCPs extends our nForce products for Intel Corporation, or Intel’s, CPUs with a performance platform for Intel’s Core2 Duo and new Core 2 Quad CPUs.
During the fourth quarter of fiscal 2007, the NVIDIA nForce MCP product line achieved record revenue for its tenth consecutive quarter. NVIDIA nForce MCP revenue grew 16% sequentially from the third quarter fiscal 2007 and 89% year-over-year. Our MCP growth was driven in part by increased adoption of our NVIDIA nForce notebook solutions by large PC manufacturers.
For fiscal 2008, our key growth objectives for our MCP Business are to deliver new motherboard products for the Intel CPU segment and maintain our leadership positions on AMD platforms. We believe that Intel-based consumers will demand NVIDIA-branded graphics and system performance.
Handheld GPU Business
In March 2006, NVIDIA and Intel announced a collaboration to bring a 3D gaming and multimedia platform to handheld devices. The collaboration combines the NVIDIA GoForce family of handheld GPUs with Intel processors to deliver a development platform to content developers.
Our GoForce handheld GPUs ship in the Motorola 3G RAZR V3X, SLVR L6i, SLVR L7i, MOTORAZR Maxx, and Sony Ericsson Walkman phones. Our newest handheld GPU, the NVIDIA GoForce 5500 GPU, has been designed into Digital Video Broadcast - Handheld, or DVB-H, phones in North America, Europe, and Integrated Services Digital Broadcasting - Terrestrial, or ISDB-T, in Japan.
In March 2006, we acquired Hybrid Graphics Ltd., or Hybrid Graphics, a developer of embedded 2D and 3D graphics software for handheld devices.
In June 2006, we launched our MobileMedia Platform for handheld devices running Windows Mobile 5.0. The MobileMedia Platform is a development kit, containing both software and hardware components, that enables handheld manufacturers to design and release digital media-rich devices with Windows Mobile 5.0.
In January 2007, we completed our acquisition of PortalPlayer, Inc., or PortalPlayer. Until recently, our Handheld GPU strategy has been to focus on establishing ourselves in the market as the leader of multimedia technology by leveraging our expertise in graphics, video, and image processing. With the acquisition of PortalPlayer’s expertise in building low power application processors for personal media players, or PMPs, we are now focused on delivering Systems-On-A-Chip, or SOCs, that combine our application processors and GPUs. We expect SOCs such as these to power next generation smart phone and PMP devices.
Consumer Electronics Business
We record license revenue from our initial agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation 3 computer entertainment system, as well as from certain additional agreements with them. In addition, we record royalty revenue from SCE based on per unit sales of the PlayStation 3, which was launched by SCE in November 2006.
Gross Margin Improvement
We continue to remain focused on improving our gross margin. Beginning in fiscal 2005, we implemented profit improvement initiatives across our company which were designed to improve business and operational processes. During fiscal 2007, our gross margin was 34.2%42.4%, which represents an increase of 4.9%over 410 basis points from our gross margin of 29.3%38.3% for the fourth quarter of fiscal 2004.2006. Our gross margin was 32.3%38.3% for fiscal 2005,2006, which represents an increase of 3.3%610 basis points from our gross margin of 29.0%32.2% for fiscal 2004. These improvements in2005. We will continue to focus on improving our gross margin reflectduring fiscal 2008.
Restatement
On November 29, 2006, we restated our continuing focus on delivering cost effective product architectures, enhancing business processespreviously-issued financial statements for fiscal years 2004 through 2006, and driving profitable growth. We expect gross margin to improve by approximately 0.5% to 1.0% duringfor the first quarter of fiscal 2007, together with selected financial statement items for earlier years, to correct errors related to accounting for stock-based compensation expense. In June 2006, as our GeForce 6 product family becomes an increasing portionthe Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our revenuestock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our Board of Directors, or the Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes. These errors resulted primarily from our use during our fiscal years 2000, 2001 and 2002, of certain date selection methods discussed below which resulted in employees receiving options with stated exercise prices lower than the market prices as measured based upon the actual grant dates. We ceased using such practices beginning in our NVIDIA nForce3fiscal year 2003. The Audit Committee found that, beginning in our fiscal year 2003, we improved our stock option grant processes and NVIDIA nForce4 product revenue continueshave generally granted and priced our employee stock options in an objective and consistent manner since that time. However, for one Company-wide annual stock option grant we made in fiscal 2004, we did not finalize the number of options allocated to increase.each employee as of the stated grant date in May 2003, which resulted in stock-based compensation charges due to the change in the measurement date to the date the grants were finalized. The Audit Committee’s review did not identify any additional stock-based compensation charges from measurement date issues subsequent to that fiscal 2004 grant.
As a result of the measurement date errors identified from the Audit Committee’s review, through January 29, 2006, we recorded aggregate non-cash stock-based compensation charges of $127.4 million, net of related tax effects. The errors resulted in after-tax charges of $1.4 million and $11.7 million for our fiscal years 2006 and 2005, respectively. Additionally, the cumulative effect of the related after-tax charges for periods prior to our fiscal year ended January 30, 2005 was $114.2 million. These additional stock-based compensation expense charges were non-cash and had no impact on our reported revenue, cash, cash equivalents or marketable securities for each of the restated periods. These charges were based primarily on Accounting Principles Board Opinion No. 25, or APB No. 25, WMP BusinessAccounting for Stock Issued to Employees (intrinsic value-based) charges and associated payroll taxes of $199.6 million on a pre-tax basis, which were amortized over the vesting term of the stock options in accordance with Financial Accounting Standards Board Interpretation No. 28, or FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. We amortized a substantial portion of these charges to expense during our fiscal years 2000 to 2006.
The types of errors we identified generally fell into the following categories:
Improper Measurement Dates for Company-Wide Annual or Retention Stock Option Grants. We determined that, in connection with certain annual or retention stock option grants that we made to employees during our fiscal years 2000, 2001, 2002, 2003 and 2004, the final number of shares that an individual employee was entitled to receive was not determined and/or the proper approval of the related stock option grant had not been given until after the stated grant date. Therefore, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Years 2001 and 2002. In connection with stock option grants that we made to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during fiscal years 2001 and 2002, our practice was to grant stock options with an exercise price based upon the lowest closing price of our common stock in the last few days of the month of hire or the last few days of any subsequent month in the quarter of hire. The selection of the grant date of the related option grants would be made at the end of the fiscal quarter and was based on achieving the lowest exercise price for the affected employees. As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Year 2000. In connection with certain stock option grants to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during a portion of fiscal year 2000, our practice was to delay the selection of the related grant dates until the end of a two-month period in the fiscal quarter during which the employees who received the grants began their employment with NVIDIA. As a result of this practice, the exercise price of the related option grants was not determined until subsequent to the stated grant date. We also determined that, during fiscal year 2000, we generally set the grant date and exercise price of employee option grants for new hires and promotions at the lowest price of the last few business days of the month of their hire or promotion (or of the following month in certain two-month periods that were chosen for an indeterminate reason). As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options. In addition, we also determined that the exercise price or the number of options to be granted had not been determined, or the proper approval had not been given, for various other miscellaneous option grants during fiscal year 2000 until after the stated grant date - resulting in new measurement dates for accounting purposes for the related options.
Other Issues Identified. We also identified instances where stock option grants did not comply with applicable terms and conditions of the stock plans from which the grants were issued. For example, two grants were made to officers of NVIDIA by the chief executive officer under delegated authority; however, under the terms of the applicable plan, the option grant should have been made by our Board or the Compensation Committee. There were also instances where (1) option grants were made to a small group of employees who joined NVIDIA pursuant to a business combination, and to a few other employees in certain instances, with stated exercise prices below the fair market value of our common stock on the actual measurement date of the related grants; and (2) option grants were made to a few individuals who were contractors rather than employees, without recording the appropriate accounting charges. In addition, the Audit Committee did not find any evidence that these violations were committed for improper purposes.
The following table reconciles share-based compensation previously recorded, the impact of these errors, by type, to the total restated share-based compensation for all periods impacted:
| | | Three Months Ended | | For the Fiscal Years Ended | | | | Total Compensation | |
| | | April 30, 2006 | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | Expense | |
| | | (In thousands) | | | |
| Restatement adjustments: | | | | | | | | | | | | | | | | | | | |
| Improper measurement dates for company-wide annual or retention stock option grants | | $ | 1,860 | | $ | 5,719 | | $ | 17,468 | | $ | 31,387 | | $ | 27,051 | | $ | 21,390 | | $ | 9,230 | | $ | 1,177 | | $ | 115,282 | |
| Improper measurement dates for stock option grants during fiscal years 2001 and 2002 | | | 115 | | | 233 | | | 2,039 | | | 6,239 | | | 32,082 | | | 23,079 | | | 6,454 | | | - | | | 70,241 | |
| Improper measurement dates for stock option grants during fiscal year 2000 | | | (1,738 | ) | | (3,163 | ) | | (1,608 | ) | | 1,398 | | | 2,612 | | | 5,781 | | | 4,230 | | | 726 | | | 8,238 | |
| Other issues identified | | | (1,061 | ) | | 644 | | | 518 | | | 1,345 | | | 40 | | | 2,750 | | | 699 | | | 39 | | | 4,974 | |
| Additional compensation expense | | | (824 | ) | | 3,433 | | | 18,417 | | | 40,369 | | | 61,785 | | | 53,000 | | | 20,613 | | | 1,942 | | | 198,735 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax related effects | | | 140 | | | (2,023 | ) | | (6,676 | ) | | (14,580 | ) | | (21,887 | ) | | (18,477 | ) | | (7,824 | ) | | (723 | ) | | (72,050 | ) |
| Impact of restatement adjustments on income (loss) before change in accounting principle | | | (684 | ) | | 1,410 | | | 11,741 | | | 25,789 | | | 39,898 | | | 34,523 | | | 12,789 | | | 1,219 | | | 126,685 | |
| Cumulative effect of change in accounting principle, net of tax | | | (704 | ) | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (704 | ) |
| Impact of restatement adjustments on net income (loss) | | $ | (1,388 | ) | $ | 1,410 | | $ | 11,741 | | $ | 25,789 | | $ | 39,898 | | $ | 34,523 | | $ | 12,789 | | $ | 1,219 | | $ | 125,981 | |
Our WMP objective is to lead the multimedia handheld era by building exciting products that use our expertise, resources, and investments in digital media processing combined with our low power technology. Our WMP business achieved record revenue during the fourth quarter of fiscal 2005 and is expected to achieve substantial revenue levels in fiscal 2006. With the WMPs on our roadmap, we anticipate that future cellular phones will be able to receive television programs, record digital video like a camcorder, enable video phone calls, and be portable game players.
| Reconciliation: | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation, as originally recorded | | $ | 23,049 | | $ | 1,096 | | $ | 1,337 | | $ | 672 | | $ | (156 | ) | $ | 6 | | $ | 112 | | $ | 662 | | $ | 26,778 | |
| Restatement adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Additional compensation expense | | | (824 | ) | | 3,433 | | | 18,417 | | | 40,369 | | | 61,785 | | | 53,000 | | | 20,613 | | | 1,942 | | | 198,735 | |
| Stock-based compensation, as restated | | $ | 22,225 | | $ | 4,529 | | $ | 19,754 | | $ | 41,041 | | $ | 61,629 | | $ | 53,006 | | $ | 20,725 | | $ | 2,604 | | $ | 225,513 | |
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, long-lived assets, goodwill, income taxes, and contingencies.goodwill. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our consolidated financial statements. Our management has discussed the development and selection of these critical accounting policies and estimates with the audit committeeAudit Committee of our board of directors and the audit committeeBoard. The Audit Committee has reviewed our disclosures relating to our critical accounting policies and estimates in this report.Annual Report on Form 10-K.
Revenue Recognition
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured. For allmost sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.payment.
Our policy on sales to distributors is to defer recognition of revenue and related cost of revenue until the distributors resell the product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates in accordance with Emerging Issues Task Force Issue 01-9, or EITF 01-9,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Unclaimed rebates, which historically have not been significant, are reversed to revenue upon expiration of the rebate. Rebates typically expire six months from the date of the original sale.sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate.
Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense in accordance with EITF 01-9. MDFs represent monies paid to retailers, system builders, OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products. If market conditions decline, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service arrangements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount of revenue recognized exceeds the amounts billed to customers, the excess amount is recorded as unbilled accounts receivable. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.
Investment Impairments
We review all of our investments quarterly for indicators of impairment. For non-marketable equity securities, the impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects, factors related to the investee’s ability remain in business, such as the investee’s liquidity, and the investee’s receipt of additional funding at a lower valuation.
Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other than temporarily impaired, in which case we write the investment down to its impaired value. When an investee is not considered viable from a financial point of view, we write down the entire investment since we consider the estimated fair market value to be nominal. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other than temporarily impaired, unless specific facts and circumstances indicate otherwise. Impairments of investments in our portfolio, primarily impairments of non-marketable equity securities, were nil in fiscal 2005 and 2004.
Accounts Receivable
We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. Management determines this allowance, which consists of an amount identified for specific customer issues as well as an amount based on general estimated exposure. Our overall estimated exposure excludes significant amounts that are covered by credit insurance and letters of credit. If the financial condition of our customers, the financial institutions providing letters of credit, or our credit insurance carrier were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required that could adversely affect our operating results. Furthermore, there can be no assurance that we will be able to obtain credit insurance in the future. Our current credit insurance agreement expires on December 31, -----2005.2007.
As of January 30, 2005,28, 2007, our allowance for doubtful accounts receivable was $1.5$1.3 million and our gross accounts receivable balance was $336.2$534.4 million. Of the $336.2$534.4 million, $68.0$150.3 million was covered by credit insurance and $22.4$19.8 million was covered by letters of credit. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and we may have to record additional reserves or write-offs on certain sales transactions in the future. As a percentage of our gross accounts receivable balance, our allowance for doubtful accounts receivable has ranged between 0.4%0.2% and 1.5%0.4% during fiscal 2004years 2007 and 2005.2006. Factors impacting the allowance include the level of gross receivables, the financial condition of our customers and the extent to which balances are covered by credit insurance or letters of credit. As of January 30, 2005,28, 2007, our allowance for doubtful accounts receivable represented 0.4%0.2% of our gross accounts receivable balance. If our allowance for doubtful accounts receivable would havebalance had been recorded at 1.5%the high end of the range, at 0.4% of our gross accounts receivable balance, then our allowance for doubtful accounts receivable balance at January 30, 200528, 2007, would have been approximately $4.9$2.4 million, rather than the actual balance of $1.5$1.3 million.
Inventories
Inventory cost is computed on an adjusted standard basis (whichbasis; which approximates actual cost on an average or first-in, first-out basis).basis. We write down our inventory for estimated lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less favorable than those projected by management, or if our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when products are sold. Sales to date of such products have not had a significant impact on our gross margin. As of January 30, 2005,28, 2007, our inventory reserve was $33.7$39.7 million. As a percentage of our gross inventory balance, our inventory reserve has ranged between 8.8%8.9% and 13.4%15.9% during fiscal 2004years 2007 and 2005.2006. As of January 30, 2005,28, 2007, our inventory reserve represented 9.6%10.1% of our gross inventory balance. If our inventory reserve would havebalance had been recorded at 13.4%the high end of the range, at 15.9% of our gross inventory balance, then our inventory reserve balance at January 30, 200528, 2007, would have been approximately $46.8$62.8 million, rather than the actual balance of $33.7$39.7 million. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.
Valuation of Long-lived Assets
We review long-lived assets, such as property and equipment and intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates. No such impairment charges have occurred to date. However, future events or circumstances may result in a charge to earnings if we determine that the carrying value of a long-lived asset is not recoverable.
Goodwill
Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our operating segments for the purposes of completing our Statement of Financial Accounting Standards No. 142, or SFAS No. 142,Goodwill and Other Intangible Assets, impairment test. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. The second step, if necessary, measures the amount of such an impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal year. We completed our most recent annual impairment test during the fourth quarter of fiscal 2005 and concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings in future periods due to the potential for a write-down of goodwill in connection with such tests.
Income Taxes
Statement of Financial Accounting Standards No. 109, or SFAS No. 109,Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
United States income tax has not been provided on earnings of our non-U.S. subsidiaries to the extent that such earnings are considered to be permanently reinvested.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States, or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements.statements, accordingly.
As of January 30, 2005,28, 2007, we had a valuation allowance of $190.6$68.6 million. Of the total valuation allowance, $145.7 million is attributable to certain net operating loss and tax credit carryforwards resulting from the exercise of employee stock options. The tax benefit of these net operating loss and tax credit carryforwards, if and when realization is sustained, will be accounted for as a credit to stockholders' equity. Of the remaining valuation allowance at January 30, 2005, $19.9$3.7 million relates to federal and state tax attributes acquired in certain acquisitions for which realization of the related deferred tax assets was determined not more likely than not to be realized due, in part, to potential utilization limitations as a result of stock ownership changes;changes, and $25.0$64.9 million relates to certain state deferred tax assets that management determined are not more likely than not to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets related to certain acquisitions becomes probable, recognition of these acquired tax benefits would first reduce goodwill to zero, then reduce other non-current intangible assets related to the acquisition to zero with any remaining benefit reported as a reduction to income tax expense. To the extent realization of the deferred tax assets related to certain state tax benefits becomes probable, we would recognize an income tax benefit in the period such asset is more likely than not to be realized.
Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.
As of January 28, 2007, with the adoption of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share Based Payment, we have derecognized both deferred tax assets for the excess of tax benefit related to stock-based compensation, reflected in our federal and state net operating loss and research tax credit carryforwards, and the offsetting valuation allowance. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards, in the amount of $344.9 million as of January 28, 2007, will be accounted for as a credit to stockholders’ equity, if and when realized. In determining if and when excess tax benefits have been realized, we have elected to do so on a “with-and-without” approach with respect to such excess tax benefits. We have also elected to ignore the indirect tax effects of stock-based compensation deductions for financial and accounting reporting purposes, and specifically to recognize the full effect of the research tax credit in income from continuing operations.
Goodwill
Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our operating segments for the purposes of completing our Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets, impairment test. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such an impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal year. We completed our most recent annual impairment test during the fourth quarter of fiscal 2007 and concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings in future periods due to the potential for a write-down of goodwill in connection with such tests.
Stock-based Compensation
Effective January 30, 2006, we adopted the provisions of SFAS No. 123(R) which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the awards, and is recognized as expense over the requisite employee service period. Stock-based compensation expense recognized during fiscal 2007 was $116.7 million, which consisted of stock-based compensation expense related to stock options and our employee stock purchase plan. Please refer to Note 2 of the Notes to Consolidated Financial Statements for further information.
We elected to adopt the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R). We recognize stock-based compensation expense using the straight-line attribution method. We estimate the value of employee stock options on the date of grant using a lattice-binomial model. Prior to the adoption of SFAS No. 123(R), we recorded stock-based compensation expense equal to the amount that would have been recognized if the fair value method was used, for the purpose of the pro forma financial information provided in accordance with Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures.
At the beginning of fiscal 2006, we transitioned from a Black-Scholes model to a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our stock option plans. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, vesting schedules, death and disability probabilities, expected volatility and risk-free interest. Our management determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on the history and expectation of dividend payouts. We began segregating options into groups for employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model.
Using the lattice-binomial model, the fair value of the stock options granted under our stock option plans have been estimated using the following assumptions during the year ended January 28, 2007:
| Weighted average expected life of stock options (in years) | | | 3.6 - 5.1 | |
| Risk free interest rate | | | 4.7% - 5.1 | % |
| Volatility | | | 39% - 51 | % |
| Dividend yield | | | — | |
For our employee stock purchase plan we continue to use the Black-Scholes model. The fair value of the shares issued under the employee stock purchase plan has been estimated using the following assumptions during year ended January 28, 2007:
| Weighted average expected life of stock options (in years) | | | 0.5 - 2.0 | |
| Risk free interest rate | | | 1.6% - 5.2 | % |
| Volatility | | | 30% - 47 | % |
| Dividend yield | | | — | |
SFAS No. 123(R) also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that we record under SFAS No. 123(R) may differ significantly from what we have recorded in the current period.
Litigation, Investigation and Settlement Costs
From time to time, we are involved in legal actions and/or investigations by regulatory bodies. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation or investigations, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with accounting principles generally accepted in the United States. However, the actual liability in any such litigation or investigations may be materially different from our estimates, which could require us to record additional costs.
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 revenue.
| | Year Ended | |
| | January 30, | January 25, | January 26, | | Year Ended | |
| | 2005 | 2004 | 2003 | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| Revenue | 100.0% | | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenue | 67.7 | 71.0 | 69.5 | | | 57.6 | | | 61.7 | | | 67.8 | |
| Cost of revenue related to stock option exchange | -- | 0.3 | |
| Gross profit | 32.3 | 29.0 | 30.2 | | | 42.4 | | | 38.3 | | | 32.2 | |
| Operating expenses: | | | | | | | | | | | |
| Research and development | 16.7 | 14.8 | 11.8 | | | 18.0 | | | 15.0 | | | 17.3 | |
| Sales, general and administrative | 10.0 | 9.1 | 7.9 | | | 9.6 | | | 8.5 | | | 10.2 | |
| In-process research and development | -- | 0.2 | -- | |
| Stock option exchange | -- | 2.9 | |
| Settlement costs | | | | - | | | 0.6 | | | - | |
| Total operating expenses | 26.7 | 24.1 | 22.6 | | | 27.6 | | | 24.1 | | | 27.5 | |
| Income from operations | 5.6 | 4.9 | 7.6 | | | 14.8 | | | 14.2 | | | 4.7 | |
| Interest and other income, net | 0.6 | 0.5 | 0.3 | | | 1.3 | | | 0.8 | | | 0.6 | |
| Convertible debenture redemption expense | -- | (0.7) | -- | |
| Income before income tax expense | 6.2 | 4.7 | 7.9 | | | 16.1 | | | 15.0 | | | 5.3 | |
| Income tax expense | 1.2 | 0.6 | 3.1 | | | 1.5 | | | 2.3 | | | 0.9 | |
| Net income | 5.0% | 4.1% | 4.8% | | | 14.6 | % | | 12.7 | % | | 4.4 | % |
Fiscal Years Ended January 30, 2005,28, 2007, January 25, 200429, 2006, and January 26, 200330, 2005.
Revenue
During the second quarter of fiscal 2005, we began reporting threeRevenue
We report financial information for four product-line operating segments:segments to our Chief Executive Officer, who is considered to be our chief operating decision maker, as follows: the GPU business, which is composed of products that support desktop PCs, notebook PCs and professional workstations;Business, the MCP business, which is composed of NVIDIA nForce products and Xbox related products;Business, the Handheld GPU Business, and the WMP business, whichConsumer Electronics Business. Revenue in the "All Other" category is comprisedprimarily derived from sales of GoForce products that support handheld personal digital assistants and cellular phones.memory devices. Please refer to Note 1514 of theour Notes to the Consolidated Financial Statements for further information.
Revenue was $2.01 billion in fiscal 2005, compared to $1.82 billion in fiscal 2004, which represented an increase of 10%. The revenue increase from fiscal 2004 to fiscal 2005 was primarily the result of increased sales of our NVIDIA Quadro workstation products, increased memory sales, increased sales of our handheld products, increased sales of our notebook GPU products, and increased sales of our desktop products, offset by decreased sales of our Xbox products. The increase in sales of our NVIDIA Quadro workstation products in fiscal 2005 was due to unit sales volume increases, and an increase in average selling prices as a result of increased board sales. The increase in memory sales in fiscal 2005 was a result of the alignment of memory sales with the introduction of our GeForce 6 products during the period. The increase in handheld sales in fiscal 2005 was primarily due to our acquisition of MediaQ, Inc. in October 2003, which represented our initial entry into the handheld market and to sales of our GoForce 4000 product. The increase in notebook GPU sales in fiscal 2005 resulted from sales of our GeForce FX Go notebook GPU products outpacing the decline in our older notebook GPU product lines during the period. The increase in desktop products in fiscal 2005 was a result of a significant increase in sales of our high-end desktop products, offset by a slight decrease in mainstream desktop products. High-end desktop sales increased in fiscal 2005 primarily due to unit volume increases primarily related to our GeForce 6800 and 6600 products. The decrease in mainstream desktop sales in fiscal 2005 was mainly due to competitive pricing in the mainstream consumer segment offset by the ramp of product sales of our GeForce 6200 with TurboCache technology during the fourth quarter of fiscal 2005. Sales of our Xbox products have historically fluctuated based on the timing of orders from Microsoft. Revenue from sales to Microsoft in fiscal 2005 was slightly lower than fiscal 2004 due to unit sales volume increases offset by a lower average sales price. During fiscal 2004, Microsoft announced that it had entered into an agreement with one of our competitors to develop technology for future Xbox products and services. The impact that this announcement may have on our future revenue from Microsoft is uncertain, but we anticipate that we will not achieve historical levels of Xbox revenue in fiscal 2006.
Fiscal 2005 was a 53-week year, compared to fiscal 2004years 2007 and 2006 which was awere 52-week year,years, and we believe that this extra week may have had a positive impact on our revenue in fiscal 2005. However, we are not able to quantify the effect of the slightly longer year on our fiscal 2005 revenue.
Fiscal Year 2007 vs. Fiscal Year 2006
Revenue was $3.07 billion for fiscal 2007, compared to $2.38 billion for fiscal 2006, which represents an increase of 29.2%. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU Business revenue increased by 20.3% to $1.99 billion for fiscal 2007, compared to $1.66 billion for fiscal 2006. The increase was a result of increased sales of our desktop GPU products, notebook products and our NVIDIA professional workstation products. The increase in sales of our desktop GPU products was led by our GeForce 7-based and GeForce 8-based products that serve the high-end segment. Sales of our NVIDIA notebook products improved due to an increased mix of GeForce 7-based products, shipping for notebook PC design wins based on Intel’s Napa platform. This increase in sales was slightly offset by a decrease in average selling prices. Our NVIDIA professional workstation product sales increased due to an increase in unit shipments, offset by a slight decrease in average selling prices.
MCP Business. MCP Business revenue was $661.5 million for fiscal 2007, compared to $352.3 million for fiscal 2006, which represents an increase of 87.8%. The overall increase in MCP business revenue is primarily due to sales of newer NVIDIA nForce4 products, NVIDIA nForce5 products, integrated AMD-based desktop products, and integrated Intel-based desktop products, which began shipping after the second quarter of fiscal 2007. In addition, revenue also increased as a result of our acquisition of ULi in February 2006.
Handheld GPU Business. Handheld GPU Business revenue was $108.5 million for fiscal 2007, compared to $58.7 million for fiscal 2006, which represents an increase of 84.7%. The overall increase in Handheld GPU Business revenue is due to an increase in unit sales of high-end feature cellular phone and PDA products.
RevenueConsumer Electronics Business. Consumer Electronics Business revenue was $1.82 billion in$96.3 million for fiscal 2004,2007, compared to $1.91 billion in$167.4 million for fiscal 2003,2006, which representedrepresents a decrease of 5%42.5%. This decrease is a result of discontinued sales of our Xbox-related products to Microsoft, partially offset by revenue decreaserecognized from our contractual development arrangements. We recognized revenue from the sale of our Xbox-related products to Microsoft for the last time during the second quarter of fiscal 2006. During fiscal 2007, we recognized $92.9 million of revenue from our contractual arrangements with SCE for its PlayStation3, compared to $49.0 million of revenue recognized during fiscal 2006.
For the first quarter of fiscal 2008, we expect a seasonal decline associated with the PC business. Although we believe our market and competitive position in each of our business units continues to be strong, there are no significant industry growth drivers to offset seasonality. Microsoft’s next generation operating system, Microsoft Windows Vista, or Vista, has shipped. We believe that Vista is the first operating system to present, as a standard, the power of the GPU to all applications and that, in the future, a significant percentage of PCs will have Vista. With Vista, DX10, and HD/Blu-ray DVD as the technologies for PCs for the coming year, we believe that 3D graphics will become a central part of the computing experience and that the GPU will be more important than ever. However, to date we have not seen a significant impact from the launch of Vista.
Fiscal Year 2006 vs. Fiscal Year 2005
Revenue was primarily$2.38 billion for fiscal 2006, compared to $2.01 billion for fiscal 2005, which represents an increase of 18.2%. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU Business revenue increased by 22.9% to $1.66 billion for fiscal 2006 compared to $1.35 billion for fiscal 2005. The increase was the result of increased sales of our GeForce 6 and GeForce 7 families of desktop GPUs that serve the high-end GPU segment, offset by a significantslight decline in sales of our mainstream GPU products. In addition, sales of our NVIDIA Quadro professional workstation products and notebook products continued to improve due to an increased mix of GeForce 6-based and GeForce 7-based products, which resulted in an increase in average selling prices.
MCP Business. MCP Business revenue was $352.3 million for fiscal 2006, compared to $175.7 million for fiscal 2005, which represents an increase of 100.6%. The overall increase in MCP Business revenue is primarily due to increased sales of NVIDIA nForce4 products, which we began selling during the fourth quarter of fiscal 2005, and an increase in average selling prices. The overall increase was offset by a decrease in sales of Xbox processorsNVIDIA nForce3 and NVIDIA nForce2 products.
Handheld GPU Business. Handheld GPU Business revenue was $58.7 million for fiscal 2006, compared to $45.9 million for fiscal 2005, which represents an increase of 27.9%. The overall increase in Handheld GPU Business revenue is due to an increase in average selling prices of high-end feature phone products and revenue recognized as a result of a development contract.
Consumer Electronics Business. Consumer Electronics Business revenue was $167.4 million for fiscal 2006, compared to $260.0 million for fiscal 2005, which represents a decrease of 35.6%. The decrease in our Consumer Electronics Business is a result of decreased and discontinued sales of our Xbox-related products to Microsoft, partially offset by growth inrevenue recognized from our contractual arrangement with SCE. During the first quarter of fiscal 2006, Microsoft indicated that it would not order any more Xbox-related products from us after our second fiscal quarter. As a result, we recognized revenue from the sale of our Xbox-related products to Microsoft for the last time during the second quarter of fiscal 2006. During fiscal 2006, we recognized $49.0 million of revenue from our contractual arrangements with SCE to jointly develop a custom GPU MCP and WMP products.for SCE’s PlayStation3. No such revenue was recognized during our fiscal 2005 as our definitive agreement with SCE was not executed until the first quarter of fiscal 2006.
Concentration of Revenue
Revenue from sales to customers outside of the United States and other Americas accounted for 76%83.6%, 75%84.0% and 68%75.9% of total revenue for fiscal 2005, 20042007, 2006, and 2003,2005, respectively. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the foreign contract equipment manufacturers, or CEMs’ and, add-in board and motherboard manufacturers’ revenue is attributable to end customers in a different location. The increase in the percentage of revenue from sales to customers outside of the United States and other Americas for fiscal 20052006 as compared to fiscal 2004 and for fiscal 2004 as compared to fiscal 2003 is2005 was primarily due to decreaseddiscontinued sales of XGPUs and MCPs used in the Microsoft Xbox product during fiscal 2006, which arewere billed to Microsoft in the United States.
Sales to Microsoft accounted for approximately 13% of our revenue for fiscal 2005. Our three other largestsignificant customers accounted for approximately 36%12% of our total revenue forfrom one customer during fiscal 2005. Sales to Microsoft accounted for approximately 15%year 2007, 26% of our total revenue forfrom two customers during fiscal 2004. Our three other largest customers accounted for approximately 45%year 2006, and 31% of our total revenue forfrom two customers during fiscal 2004. In fiscal 2003, sales to Microsoft accounted for approximately 23% of our revenue. Our three other largest customers accounted for approximately 41% of our revenue for fiscal 2003.year 2005.
Gross Profit
Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. Cost of revenue also includes development costs for license and service arrangements. Gross margin is the ratiopercentage of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of products sold.
Our gross margin was 32%42.4%, 29%38.3%, and 30% in32.2% for fiscal years 2007, 2006 and 2005, 2004 and 2003, respectively. GrossA discussion of our gross margin improvedresults for each of our operating segments is as follows:
Fiscal Year 2007 vs. Fiscal Year 2006
GPU Business. The gross margin of our GPU Business increased during fiscal 20052007 as compared to fiscal 2004 as a result2006, primarily due to the sale of three primary factors. First,our GeForce 8 series GPUs and increased sales of our GeForce 7 series GPUs, which collectively accounted for approximately 70% of our GPU Business revenue. Our GeForce 8 and our GeForce 7 series GPUs generally have higher gross margins than our previous generations of GPUs.
MCP Business. The gross margin of our MCP Business decreased during fiscal 2004 our GeForce FX series2007 as compared to fiscal 2006, primarily due to a shift in product mix to higher volumes of GPUintegrated AMD-based desktop products hadwhich have experienced lower gross margins than previous seriesour discrete MCP products, and inventory reserves that we recorded as a charge to cost of GeForcerevenue that primarily related to purchase commitments that we believed had exceeded future demand.
Handheld GPU products, such as the GeForce 4 series. Company-wide efforts were made to drive down cost and improveBusiness. The gross margin and, as a result,of our Handheld GPU Business increased during fiscal 2005, we were able2007 as compared to improvefiscal 2006, primarily due to an increase in unit sales of high-end feature cellular phone and PDA products which generally have higher gross margins than our previous Handheld GPU products.
Consumer Electronics Business. The gross margin. In addition,margin of our Consumer Electronics Business increased during fiscal 2007 as compared to fiscal 2006, primarily due to license and royalty revenue from our contractual development arrangements that have higher gross margins compared to the gross margin of Xbox products shipped in fiscal 2006.
Fiscal Year 2006 vs. Fiscal Year 2005
GPU Business. The gross margin of our GPU Business increased during fiscal 2006 as compared to fiscal 2005, we realizedprimarily due to the sale of our GeForce 7 series GPUs and increased sales of our performance GeForce FX desktop GPU products and began shipping our GeForce 6 series GPUs, which are amongcollectively accounted for approximately 78% of our highestfiscal 2006 GPU Business revenue. Our GeForce 7 and our GeForce 6 series GPUs generally have higher gross margin products. Finally, revenuemargins than our GeForce FX series GPUs which comprised 53% of our fiscal 2005 GPU Business revenue. In addition, average selling prices from our NVIDIA Quadro workstation products, which typically provide the highest gross margins of any of ournotebook GeForce 7 and GeForce 6 series GPU products increased as a larger percentage of our total notebook revenue during fiscal 2006 as compared to fiscal 2005. This
MCP Business. The gross margin of our MCP Business increased during fiscal 2006 as compared to fiscal 2005, primarily due to the increase in revenue from sales of our mixNVIDIA nForce3 and NVIDIA nForce4 products, which to date have experienced higher gross margins than previous generations of NVIDIA nForce products.
Handheld GPU Business. The gross margin of our Handheld GPU Business increased during fiscal 2006 as compared to fiscal 2005, primarily due to the inventory write-off of certain handheld products in the third quarter of fiscal 2005.
Consumer Electronics Business. The gross margin of our Consumer Electronics Business increased during fiscal 2006 as compared to fiscal 2005, primarily due to the reduction of die costs for Xbox-related products, and the recognition of revenue toward higher-margin products ledfrom our contractual arrangements with SCE to jointly develop a positive impact on overall gross margin. These improvementscustom GPU for SCE’s PlayStation3.
Consolidated Gross Margin
The improvement in our gross margin reflectreflects our continuing focus on delivering cost effective product architecture,architectures, enhancing business processprocesses and drivingdelivering profitable growth. We expect gross margin to remain flat or improve by approximately 0.5% to 1.0%slightly during the first quarter of fiscal 2006 as our GeForce 6 product family comprises an increasing portion of our revenue and as NVIDIA nForce product revenue continues to increase.2008.
Gross margin for fiscal 2004 as compared to fiscal 2003 decreased primarily due to a shift in the mix of product sales to our GeForce FX products. Our GeForce FX products generally experienced lower gross margins than previous GeForce products. This decrease was offset by an increase in gross margin on sales of Xbox processors in fiscal 2004, which resulted from the pricing settlement with Microsoft that we announced on February 6, 2003.
Operating Expenses
Research and Development
| | | Year Ended | | | | | | Year Ended | | | | | | |
| | | Jan. 30, | | Jan. 25, | | $ | | % | | Jan. 25, | | Jan. 26, | | $ | | % | | |
| | | 2005 | | 2004 | | Change | | Change | | 2004 | | 2003 | | Change | | Change | | | Year Ended | | | | | | Year Ended | | | | | |
| | | (in thousands) | | | Jan. 28, 2007 | | Jan. 29, 2006 | | $ Change | | % Change | | Jan. 29, 2006 | | Jan. 30, 2005 | | $ Change | | % Change | |
| | | | | | | | | | | | | | | | | | | | (In millions) | | | | (In millions) | | | |
Research and Development: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Salaries and related benefits | | $ | 171.6 | | $ | 137.6 | | $ | 34.0 | | 25 | % | $ | 137.6 | | $ | 104.4 | | $ | 33.2 | | 32 | % | |
| Salaries and benefits | | | $ | 280.3 | | $ | 205.1 | | $ | 75.2 | | 37 | % | $ | 205.1 | | $ | 172.6 | | $ | 32.5 | | 19 | % |
Stock-based compensation (1) | | | | 70.1 | | 5.9 | | 64.2 | | 1,088 | % | | 5.9 | | 14.1 | | (8.2 | ) | | (58 | )% |
| Depreciation and amortization | | | | 59.8 | | 58.2 | | 1.6 | | 3 | % | | 58.2 | | 56.1 | | 2.1 | | 4 | % |
| Computer software and lab equipment | | | 41.1 | | 36.9 | | 4.2 | | 11 | % | | 36.9 | | 33.4 | | 3.5 | | 11 | % | | | 57.6 | | 46.4 | | 11.2 | | 24 | % | | 46.4 | | 41.1 | | 5.3 | | 13 | % |
| Facility expense | | | | 38.4 | | 32.0 | | 6.4 | | 20 | % | | 32.0 | | 31.4 | | 0.6 | | 2 | % |
| New product development | | | 29.0 | | 18.6 | | 10.4 | | 56 | % | | 18.6 | | 29.0 | | (10.4 | ) | | (36 | %) | | | 35.7 | | 28.6 | | 7.1 | | 25 | % | | 28.6 | | 29.0 | | (0.4 | ) | | (1 | )% |
| Facility expense | | | 31.4 | | 28.3 | | 3.1 | | 11 | % | | 28.3 | | 26.3 | | 2.0 | | 8 | % | |
| Depreciation and amortization | | | 56.1 | | 44.6 | | 11.5 | | 26 | % | | 44.6 | | 26.9 | | 17.7 | | 66 | % | |
| In-process research and development | | | | 14.0 | | - | | 14.0 | | - | | - | | - | | - | | - | |
| License and development project costs | | | | (18.4 | ) | | (28.9 | ) | | 10.5 | | 36 | % | | (28.9 | ) | | (2.0 | ) | | (26.9 | ) | | (1,345 | )% |
| Other | | | 5.9 | | | 4.0 | | | 1.9 | | | 48 | % | | 4.0 | | | 4.9 | | | (0.9 | ) | | (18 | %) | | | 16.0 | | | 9.8 | | | 6.2 | | | 63 | % | | 9.8 | | | 5.9 | | | 3.9 | | | 66 | % |
| Total | | $ | 335.1 | | $ | 270.0 | | $ | 65.1 | | 24 | % | $ | 270.0 | | $ | 224.9 | | $ | 45.1 | | 20 | % | | $ | 553.5 | | $ | 357.1 | | $ | 196.4 | | | 55 | % | $ | 357.1 | | $ | 348.2 | | $ | 8.9 | | | 3 | % |
| | | | | | | | | | | | | | | | | | | | |
| Research and development as a percentage of net revenue | | | 17 | % | | 15 | % | | | | | | 15 | % | | 12 | % | | | | | | | | 18 | % | | 15 | % | | | | | | 15 | % | | 17 | % | | | | | |
(1)Stock-based compensation includes charges/credits relating to payroll taxes accrued for as part of the restatement.
Research and developmentsdevelopment expenses increased by $65.1$196.4 million, or 24%55%, from fiscal 20042006 to fiscal 20052007 primarily due to a $34.0$75.2 million increase in salaries and benefits related to 1741,014 additional personnel and a $10.4$64.2 million increase in newstock-based compensation due to our adoption of SFAS No. 123(R) during the first quarter of fiscal 2007. In-process research and development expense, or IPR&D, increased by $14.0 million as a result of our acquisitions of PortalPlayer and Hybrid Graphics during fiscal 2007. Depreciation and amortization increased $1.6 million due to emulation hardware and software programs that were purchased during fiscal 2006, resulting in a full year of depreciation in fiscal 2007 compared to a partial year of depreciation in fiscal 2006. Computer software and equipment increased $11.2 million primarily due to increased allocation of information technology expenses and facilities increased $6.4 million due to increased facilities expense allocation, both of which were based on the growth in headcount. New product developmentsdevelopment increased by $7.1 million as a result of costs related to an overall increase in the number of product tape-outs and in prototype materials. DepreciationLicense and amortization increased $11.5development project costs decreased by $10.5 million primarily due to emulation hardwarethe inversed impact of decreased development costs related to our collaboration with SCE and software programs that were purchased duringother engineering costs related to a different development contract. Certain of our personnel who usually devote their time to research and development efforts have spent time working on these development projects. The cost associated with the time these individuals spend working on development projects is allocated from research and development to cost of revenue or is capitalized on our balance sheet. During fiscal 2004, resulting2007, less time was spent working on development projects so less cost was allocated to cost of revenue or capitalized and, therefore, more cost remained in a full yearresearch and development. Other expenses increased $6.2 million primarily due to travel and other employee related expenses associated with the expansion of depreciation inour international sites including our acquisitions of ULi and Hybrid Graphics.
Research and development expenses increased by $8.9 million, or 3%, from fiscal 2005 comparedto fiscal 2006 primarily due to a partial year of depreciation$32.5 million increase in fiscal 2004. Computersalaries and benefits related to 423 additional personnel and a $5.3 million increase in computer software and equipment increased $4.2 million primarily due to increased allocation of information technology expensesexpenses. Depreciation and amortization increased $2.1 million due to increased purchases of hardware and software equipment and facilities increased $3.1$0.6 million due to increased facilities expense allocation, both of which were based on the growth in headcount.
Research and development Other expenses increased by $45.1$3.9 million or 20%, from fiscal 2003 to fiscal 2004 primarily due to a $33.2 million increasetravel and other employee related to additional personnel, including approximately 60 employees that we hired as a partexpenses associated with the expansion of our acquisition of MediaQ and a $17.7 million increase in depreciation and amortization,international sites. These increases were offset by a $10.4 million decrease in new productstock-based compensation expense of $8.2 million and an increase of $26.9 million in license and development costs.project costs, primarily related to increased development costs related to our collaboration with SCE and other engineering costs related to a different development contract. Certain of our personnel who usually devote their time to research and development efforts have spent time working on these development projects. The cost associated with the time these individuals spend working on development projects is allocated from research and development to cost of revenue or is capitalized on our balance sheet. During fiscal 2006, more time was spent working on development projects so more cost was allocated to cost of revenue or capitalized and, therefore, less cost remained in research and development.
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 the increased complexity and the greater 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 revenue.
Sales, General and Administrative
| | | Year Ended | | | | | | Year Ended | | | | | | |
| | | Jan. 30, | | Jan. 25, | | $ | | % | | Jan. 25, | | Jan. 26, | | $ | | % | | |
| | | 2005 | | 2004 | | Change | | Change | | 2004 | | 2003 | | Change | | Change | | | Year Ended | | | | | | Year Ended | | | | | |
| | | (in thousands) | | | Jan. 28, 2007 | | Jan. 29, 2006 | | $ Change | | % Change | | Jan. 29, 2006 | | Jan. 30, 2005 | | $ Change | | % Change | |
| | | | | | | | | | | | | | | | | | | | (In millions) | | | | (In millions) | | | |
Sales, General and Administrative: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Salaries and related benefits | | $ | 94.7 | | $ | 76.3 | | $ | 18.4 | | 24 | % | $ | 76.3 | | $ | 63.4 | | $ | 12.9 | | 20 | % | |
| Salaries and benefits | | | $ | 139.0 | | $ | 108.3 | | $ | 30.7 | | 28 | % | $ | 108.3 | | $ | 94.4 | | $ | 13.9 | | 15 | % |
| Advertising and promotions | | | 66.6 | | 47.2 | | 19.4 | | 41 | % | | 47.2 | | 39.6 | | 7.6 | | 19 | % | | | 63.5 | | 49.4 | | 14.1 | | 29 | % | | 49.4 | | 66.6 | | (17.2 | ) | | (26 | )% |
Stock-based compensation (1) | | | | 38.5 | | (2.2 | ) | | 40.7 | | 1,850 | % | | (2.2 | ) | | 3.7 | | (5.9 | ) | | (159 | )% |
| Legal and accounting fees | | | 12.6 | | 12.6 | | -- | | -- | | 12.6 | | 20.0 | | (7.4 | ) | | (37 | %) | | | 25.9 | | 18.7 | | 7.2 | | 39 | % | | 18.7 | | 12.6 | | 6.1 | | 48 | % |
| Facility expense | | | 9.6 | | 8.3 | | 1.3 | | 16 | % | | 8.3 | | 6.8 | | 1.5 | | 22 | % | | | 14.0 | | 12.5 | | 1.5 | | 12 | % | | 12.5 | | 9.6 | | 2.9 | | 30 | % |
| Depreciation and amortization | | | 13.0 | | 14.6 | | (1.6 | ) | | (11 | %) | | 14.6 | | 11.4 | | 3.2 | | 28 | % | | | 8.6 | | 8.5 | | 0.1 | | 1 | % | | 8.5 | | 13.0 | | (4.5 | ) | | (35 | )% |
| Other | | | 4.3 | | | 6.2 | | | (1.9 | ) | | (31 | %) | | 6.2 | | | 10.3 | | | (4.1 | ) | | (40 | %) | | | 4.0 | | | 6.9 | | | (2.9 | ) | | (42 | )% | | 6.9 | | | 4.3 | | | 2.6 | | | 60 | % |
| Total | | $ | 200.8 | | $ | 165.2 | | $ | 35.6 | | 22 | % | $ | 165.2 | | $ | 151.5 | | $ | 13.7 | | 9 | % | | $ | 293.5 | | $ | 202.1 | | $ | 91.4 | | | 45 | % | $ | 202.1 | | $ | 204.2 | | $ | (2.1 | ) | | (1 | )% |
| Sales, general and administrative as a percentage of net revenue | | | 10 | % | | 9 | % | | | | | | 9 | % | | 8 | % | | | | | | | | 10 | % | | 9 | % | | | | | | 9 | % | | 10 | % | | | | | |
(1)Stock-based compensation includes charges/credits relating to payroll taxes accrued for as part of the restatement.
Sales, general and administrative expenses increased $35.6$91.4 million, or 22%45%, from fiscal 20042006 to fiscal 20052007 primarily due to an $18.4 million increase related to 88 additional personnel and a $19.4$40.7 million increase in advertisingstock-based compensation resulting from our adoption of SFAS No. 123(R) during the first quarter of fiscal 2007 and promotion costs for tradeshowsa $30.7 million increase in salaries and new product launchesbenefits related to 201 additional personnel. Legal and accounting fees increased by $7.2 million primarily due to our internal review of historical stock option granting practices and the restatement of prior year financial results. Advertising and promotions increased by $14.1 million due to travel and other marketingemployee costs including travel and customer samples.associated with our international expansion. These increases were offset by a decrease of $1.9$2.9 million in other expenses during the period, including a reduction in the allowance for doubtful accounts.related to reimbursement from collection settlements.
Sales, general and administrative expenses increased $13.7decreased $2.1 million, or 9%1%, from fiscal 20032005 to fiscal 20042006 primarily due to a $12.9a $17.2 million decrease in advertising and promotion costs, primarily associated with a reduction in certain marketing programs, tradeshow expenses, new product launches and customer samples, other marketing costs, travel related and employee recruitment expenses. In addition, stock-based compensation expense decreased by $5.9 million and depreciation and amortization decreased by $4.5 million. These decreases were offset by a $13.9 million increase in salaries and related benefits related to 122 additional personnel and a $7.6$6.1 million increase in advertisinglegal expenses primarily due to certain insurance reimbursements that we received during fiscal 2005 that reduced this expense, and promotions costs for tradeshows and marketing development and a $3.2 million increase in computer software and equipmentincreased litigation activity during fiscal 2006 related to 3dfx Interactive, Inc., or 3dfx, and American Video Graphics, LP, or AVG. In addition there were increases of $2.9 million in facility expense due primarily to the enhancementexpansion of our computer systemsinternational sites and the depreciation$2.6 million in other general and amortization of new equipment. These increases wereadministrative expenses, offset by a $7.4 million decreasereduction in legal fees relatedbad debt expense.
Operating Expenses
We anticipate that our operating expenses will be relatively flat in the first quarter of fiscal 2008. We believe that even with the additional expense from our acquisition of PortalPlayer, we may be able to higher legal fees incurred duringkeep operating expenses flat as we focus on expense controls and restrict headcount additions in the first quarter of fiscal 2003 for various issues that have since been resolved, including an inquiry by2008 as compared to the Securities and Exchange Commission, the Microsoft arbitration and shareholder lawsuits.fourth quarter of fiscal 2007.
In-process research and development
In connection with our acquisition of MediaQHybrid Graphics in August 2003,March 2006 and PortalPlayer in January 2007, we wrote-off $3.5$0.6 million of in-process research and development expense, or$13.4 million, respectively, of IPR&D, that had not yet reached technological feasibility and hashad no alternative future use. In accordance with SFAS No. 2,Accounting for Research and Development Costs, as clarified by FIN 4,Applicability of SFAS No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of SFAS No. 2, amounts assigned to IPR&D meeting the above-stated criteria must be charged to expense as part of the allocation of the purchase price.
Settlement Costs
Settlement costs were $14.2 million for fiscal 2006. The settlement costs are associated with two litigation matters, 3dfx and AVG. AVG is settled. For further information about the 3dfx matter, please refer to Note 12 of the Notes to Consolidated Financial Statements.
Interest Income and Interest Expense
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income decreasedincreased from $18.6$20.7 million to $11.4$41.8 million from fiscal 20042006 to fiscal 20052007 primarily due to the result of lower overallhigher average balances of cash, cash equivalents and marketable securities and duehigher interest rates in fiscal 2007 when compared to lower market interest rates.fiscal 2006. Interest income decreasedincreased from $23.2$11.4 million to $18.6$20.7 million from fiscal 20032005 to fiscal 20042006 primarily due to lower overallthe result of higher average balances of cash, cash equivalents and marketable securities and higher interest rates in fiscal 20042006 when compared to fiscal 2003. This overall decrease was caused by the redemption of our $300.0 million 4¾% convertible subordinated debentures due 2007, or the Notes, in October 2003.
Interest expense primarily consists of interest incurred as a result of capital lease obligations and, prior to the redemption in October 2003, interest on the Notes. Interest expense decreased from $12.0 million to $0.2 million from fiscal 2004 to fiscal 2005. Interest expense decreased from $16.5 million to $12.0 million from fiscal 2003 to fiscal 2004. These decreases were primarily due to the redemption of the Notes.
Other Income (Expense), net
Other income and expense primarily consists of realized gains and losses on the sale of marketable securities. OtherThere were no significant changes in other income from fiscal 2006 to fiscal 2007. However, other income decreased by $2.4$1.1 million from fiscal 20042005 to fiscal 20052006 primarily due to $2.5 million of realized gains on the saleliquidation of marketable securities during fiscal 2004 as a result of our liquidation of a significant portion of our marketable securities portfolio2006 in order to obtain the cash required to redeem the Notes in October 2003. This decrease was offset by a $1.0 million realized gain during fiscal 2005 related to the receipt of cash and marketable securities as part of an investment exchange.
Stock Option Exchange
On September 26, 2002, we commenced an offer, or the Offer, to our employees to exchange outstanding stock options with exercise prices equal to or greater than $27.00 per share, or Eligible Options. The Offer was implemented in order to improve employee morale by realigning the cash and equity components of our compensation programs, eliminate significant out-of-the-money options and reduce the number of outstanding stock options relative to the number of shares outstanding, or "options overhang", thereby reducing future potential dilution to existing stockholders. Stock options to purchase an aggregate of approximately 20,615,000 shares were eligible for tender at the commencement of the Offer, representing approximately 39% of our outstanding stock options as of the commencement date of the offer. Only employees of NVIDIA or one of our subsidiaries as of September 26, 2002 who continued to be employees through the Offer termination date of October 24, 2002 were eligible to participate in the Offer. Employees who were on medical, maternity, worker’s compensation, military or other statutorily protected leaves of absence, or a personal leave of absence, were also eligible to participate in the Offer. Employees who were terminated on or before the Offer termination date of October 24, 2002, were not eligible to participate in the Offer. In addition, our Chief Executive Officer and Chief Financial Officer and members of our Board of Directors were not eligible to participate in this Offer.
Eligible employees who participated in the Offer received, in exchangeneeded for the cancellationrepatriation of Eligible Options, a fixed amountcertain foreign earnings under the American Jobs Creation Act of consideration, represented by fully vested, non-forfeitable common stock less applicable withholding taxes, equal to the number of shares underlying such Eligible Options, multiplied by $3.20, less the amount of applicable tax withholdings, divided by $10.46, the closing price of our common stock as reported on the Nasdaq National Market on October 24, 2002. We concluded that the consideration paid for the Eligible Options represented "substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23 "Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44," as the $3.20 per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, we used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which was approximately 7.8 years; (ii) a volatility of 50.0% during the expected life; (iii) a risk-free interest rate of 3.71%; and (iv) no dividends. The amount of $3.20 per Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.2004.
Variable accounting is not required under Issue 39(a) of EITF Issue No. 00-23 for Eligible Options subject to the Offer that were not surrendered for cancellation, because: (i) the shares of our common stock offered as consideration for the surrendered options were fully vested and non-forfeitable; and (ii) the number of shares to be received by an employee who accepted the Offer was based on the number of surrendered Eligible Options multiplied by $3.20, divided by the fair value of the stock at the date of exchange. We further concluded that the "look back" and "look forward" provisions of FASB Interpretation No. 44, paragraph 45 did apply to the stock options surrendered for cancellation. Based on the terms of the Offer, variable accounting is not required for any of our outstanding stock options existing at the time of the Offer. We did not grant stock options to any participants in the Offer for at least six months following October 24, 2002. If any stock options were granted to participants in the Offer within the six months following October 24, 2002, those stock options would have received variable accounting.
On October 24, 2002, the offer period ended and we were obligated to exchange approximately 18,843,000 Eligible Options for total consideration of $61.8 million, consisting of $39.9 million in fully vested, non-forfeitable shares of our common stock (approximately 3,815,000 shares) and $21.9 million in employer and employee related taxes. The number of fully vested, non-forfeitable shares of our common stock to be issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of our common stock on October 24, 2002, of $10.46 per share.
The shares of our common stock issued in exchange for Eligible Options were fully vested. However, a portion of the shares equal to 25% of the total consideration, based on the closing price of our common stock on the offer termination date, have a six month holding period, and a portion of the shares equal to 25% of such total consideration have a one year holding period. Withholding taxes and other charges were deducted from the remaining 50% of the total consideration, and the shares issued after such withholding did not have a holding restriction.
Income Taxes
We recognized income tax expense of $25.1$46.4 million, $12.3$55.6 million and $59.8$18.4 million induring fiscal 2005, 2004years 2007, 2006 and 2003,2005, respectively. Income tax expense as a percentage of income before taxes, or our annual effective tax rate, was 20%9.4% in fiscal 2005, 14.1%2007, 15.6% in fiscal 20042006, and 39.7%17.2% in fiscal 2003.2005.
InThe difference in the second quarter of fiscal 2004, we revised our annual effective tax rate forrates amongst the year from 30% to 20%. The change in ratethree years was primarily due to federal and state tax credits and foreign tax rate differentials. In the third and fourth quarters of fiscal 2004, we had significant items impacting our annual effective tax rate which included the $3.5 million MediaQ IPR&D write-off for which no tax benefit was recognized, the $75.0 million income tax benefit of certain tax contingencies as a result of settlementchanges in our geographic mix of our federal income subject to tax, return exam bywith the Internal Revenue Service, or IRS, the $38.2 million income tax expense for the accrual of United States deferred income taxes on previous permanently reinvested foreign earnings and the $33.6 million income tax expense for the establishment of a valuation allowance on certain previously recognized state deferred tax assets determined not more likely than not the be realized due, in part, to projections of future taxable income. As a result of thisadditional change in ratemix in fiscal 2007 due to certain stock-based compensation expensed for financial accounting purposes under SFAS No. 123(R) and an increase in the special items incurred during 2004, our annual effectiveresearch tax rate for such year was 14.1%. Incredit benefit in fiscal 2003, we did not record an income tax benefit for the third quarter loss before income tax expense as such loss was primarily attributable to a stock compensation charge for which no income tax benefit may have been available. As a result, our annual effective tax rate for fiscal 2003 was 39.7%.
As of January 25, 2004, the IRS closed our federal income tax return exam for our fiscal 2001 and fiscal 2002. During fiscal 2005, the Joint Committee on Taxation, or the Joint Committee, completed its review of our IRS exam for these fiscal years and closed such exam with no exception to the conclusions reached by the IRS. Accordingly, the results of our exam as recorded in our financial statements for fiscal 2004 accurately reflected our final settlement reached with the IRS that was subsequently closed, without exception, by the Joint Committee during fiscal 2005.2007.
Please refer to Note 13 of the Notes to the Consolidated Financial Statements for further information regarding the components of our income tax expense.
Convertible Debenture Redemption Expense
On October 24, 2003, we fully redeemed the Notes. The aggregate principal amount of the Notes outstanding was $300.0 million, which included $18.6 million of Notes that we had purchased in the open market during the three months ended October 26, 2003. The redemption price was equal to approximately 102.7% of the outstanding principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In connection with the redemption of the Notes, we recorded a one-time charge in fiscal 2004 of approximately $13.1 million, which included a $7.6 million redemption premium and $5.5 million of unamortized issuance costs.
Liquidity and Capital Resources
| | | As of January 28, 2007 | | As of January 29, 2006 | |
| | | (In millions) | |
| Cash and cash equivalents | | $ | 544.4 | | $ | 551.8 | |
| Marketable securities | | | 573.4 | | | 398.4 | |
| Cash, cash equivalents, and marketable securities | | $ | 1,117.8 | | $ | 950.2 | |
| | | Year Ended | |
| | | January 28, | | January 29, | | January 30, | |
| | | 2007 | | 2006 | | 2005 | |
| | | (in millions) | |
| Net cash provided by operating activities | | $ | 587.1 | | $ | 446.4 | | $ | 132.2 | |
| Net cash used in investing activities | | | (540.8 | ) | | (41.8 | ) | | (152.0 | ) |
| Net cash provided by (used in) financing activities | | | (53.6 | ) | | (61.4 | ) | | 13.8 | |
As of January 30, 2005,28, 2007, we had $670.0 million$1.12 billion in cash, cash equivalents and marketable securities, an increase of $66.0$167.6 million from the end of fiscal 2004.2006. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.
Operating activities generated cash of $132.2$587.1 million, $49.7$446.4 million, and $265.0$132.2 million during fiscal years 2007, 2006 and 2005, 2004respectively. The annual cash provided by operating activities in amounts greater than net income is due primarily to non-cash charges to earnings and 2003, respectively.the tax benefit on the exercise of stock options. Non-cash charges to earnings included stock-based compensation and depreciation and amortization on our long-term assets. Upon adoption of SFAS No. 123(R) in fiscal 2007, non-cash charges to earnings included $116.7 million of stock-based compensation expense and related deferred income tax impact. The increase in cash flows from operating activities in fiscal 20052006 when compared to fiscal 20042005 was primarily related to the $25.9$212.6 million increase in net income and changes in operating assets and liabilities. On our consolidated balance sheet, accrued liabilities increased $37.3$77.2 million from fiscal 2005 to fiscal 2006 primarily due to the recording of income taxes payable for fiscal 2006, the increase in accruals related to customer programs and the recording of $30.6 million in relation to 3dfx, of which $25.0 million was recorded as an adjustment to goodwill. Accounts payable decreased $58.8 million and inventories decreased $60.9 million from fiscal 2005 to fiscal 2006 primarily as a result of significant reductions in older products, offset by an increase in rebates payable, which resulted from increased OEM business.new products. Accounts payable increased $52.9 million primarily due to purchases from subcontract manufacturers for inventory. Offsetting these increases, our accounts receivable increased $101.1$21.9 million primarily due to increased sales and improved linearity of sales, and cash collections during the fourth quarter of fiscal 20052006 as compared to the fourth quarter of fiscal 2004.2005.
Investing activities have consisted primarily of purchases and sales of marketable securities, acquisition of businesses and purchases of property and equipment, which include leasehold improvements for our facilities, and intangible assets. Investing activities used cash of $152.0$540.8 million, $41.8 million and provided cash of $88.0$152.0 million during fiscal years 2007, 2006 and 2005, respectively. Net cash used by investing activities during fiscal 2007 was primarily due to $401.8 million of cash used for our acquisitions of PortalPlayer, ULi and 2004, respectively. Hybrid Graphics during the fiscal year. Additionally, net cash used in investing activities included capital expenditures of $145.3 million attributable to purchases of new research and development equipment, hardware equipment, technology licenses, software, intangible assets and leasehold improvements at our various facilities. These uses of cash were offset by $6.2 million of net proceeds from sales of marketable securities. Net cash used by investing activities during fiscal 2006 was primarily due to $79.6 million for capital expenditures primarily attributable to purchases of new research and development equipment, hardware equipment, technology licenses, software, intangible assets and leasehold improvements at our headquarters facility in Santa Clara, California and at our international sites. In addition, we used cash of $12.1 million for our acquisition of a private company and $9.7 million for the investments we made during fiscal 2006 in non-affiliated companies. These uses of cash were offset by $59.6 million of net proceeds from sales of marketable securities. Net cash used by investing activities during fiscal 2005 was primarily due to $84.7 million of net purchases of marketable securities. In addition, we used $67.3 million for capital expenditures primarily attributable to purchases of leasehold improvements for our new data center at our headquarters campus, new research and development emulation equipment, technology licenses, software and intangible assets. We expect to spend approximately $50$120 million to $70$140 million for capital expenditures during fiscal 2006,2008, primarily for purchases of software licenses, emulation equipment, computercomputers and engineering workstations. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets.
Financing activities used cash of $53.6 million, $61.4 million and provided cash of $13.8 million during fiscal years 2007, 2006 and fiscal 2005, compared torespectively. Net cash used of $270.3 million during fiscal 2004. Cash providedby financing activities in fiscal 20052007 was primarily due to $275.0 million paid towards our stock repurchase program, offset by cash proceeds of $221.2 million from common stock issued under employee stock plans. Cash used in fiscal 2006 resulted primarily from $--42.5$188.5 million related to our stock repurchase program, offset by $127.5 million of common stock issued under employee stock plans, offset by $24.6 million related to our stock repurchase program. In fiscal 2004, the cash used was primarily due to the $300.0 million redemption of the Notes, which included $18.6 million of Notes that we had purchased during the three months ended October 26, 2003.plans.
Stock Repurchase Program
On August 9, 2004 we announced that our Board had authorized a stock repurchase program under which we may purchase up to $300.0 millionrepurchase shares of our common stock, oversubject to certain specifications, up to an aggregate maximum amount of $300 million. Subsequently, on March 6, 2006, we announced that our Board had approved a three year period through August 2007.$400 million increase to the original stock repurchase program. As a result of this increase, the amount of common stock the Board has authorized to be repurchased has now been increased to a total of $700 million. The repurchases will be made in the open market or in privately negotiated transactions, from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. Our stock repurchaseThe program does not obligate usNVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. The repurchases will be funded from
As part of our available working capital.share repurchase program, we have entered into and we may continue to enter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement. During fiscal 2005,2007, we repurchased 2.110.3 million shares of our common stock for $275.0 million under structured share repurchase transactions, which we recorded on the trade date of the transaction. Through the end of fiscal 2007, we have repurchased 27.3 million shares under our stock repurchase program for a total cost of approximately $24.6$488.1 million. We did not repurchase any shares duringDuring the fourthfirst quarter of fiscal 2005.2008, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our first fiscal quarter.
Operating Capital and Capital Expenditure Requirements
We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition 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. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:
| · | decreased demand and market acceptance for our products and/or our customers’ products; |
·decreased demand and market acceptance for our products and/or our customers’ products;
·inability to successfully develop and produce in volume production our next-generation products;
| · | inability to successfully develop and produce in volume production our next-generation products; |
·competitive pressures resulting in lower than expected average selling prices; and
| · | competitive pressures resulting in lower than expected average selling prices; and |
| · | new product announcements or product introductions by our competitors. |
·new product announcements or product introductions by our competitors.
For additional factors see “Business Risks“Item 1A. Risk Factors - Risks Related to Our Operations - Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, our stock price could decline.”
Shelf Registration Statement
In December 2003, we filed a Form S-3 with the SEC under its "shelf" registration process. This shelf registration was declared effective by the SEC on March 25, 2004. Under this shelf registration statement, we may sell common stock, preferred stock, debt securities, warrants, stock purchase contracts and/or stock purchase units in one or more offerings up to a total dollar amount of $500.0 million. Unless otherwise indicated in the applicable prospectus supplement, we intend to use the proceeds for working capital and general corporate purposes.
3dfx Asset Purchase
The 3dfx asset purchaseOn December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement, which closed on April 18, 2001.2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the Asset Purchase Agreement, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets. We are currently party
In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court which sought, among other things, payments from us as additional purchase price related to litigation relating toour purchase of certain aspectsassets of 3dfx. In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached a conditional settlement of the assetTrustee’s claims against NVIDIA. This conditional settlement, presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The Trustee advised that he intended to object to the settlement, which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, the conditional settlement never progressed substantially through the confirmation process. On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the bankruptcy court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. Beginning on March 21, 2007, NVIDIA and 3dfx’s subsequent bankruptcythe Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in October 2002. particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.
Please refer to Item 3: Legal ProceedingsNote 12 of the Notes to Consolidated Financial Statements for further information regarding this litigation.
Contractual Obligations
The following summarizes our contractual obligations that are bothnot on our balance sheet and off balance sheet as of January 30, 200528, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
Contractual Obligations | | Total | | Within 1 Year | | 2-3 Years | | 4-5 Years | | After 5 Years | | | Total | | Within 1 Year | | 2-3 Years | | 4-5 Years | | After 5 Years | |
| | | (in thousands) | | | (In thousands) | |
| Capital lease obligations, including interest | | $ | 869 | | $ | 869 | | $ | -- | | $ | -- | | $ | -- | | |
| Operating leases | | | 191,117 | | 27,534 | | 54,847 | | 52,942 | | 55,794 | | | $ | 167,765 | | $ | 33,890 | | $ | 65,432 | | $ | 61,998 | | $ | 6,445 | |
| Purchase obligations (1) | | | 457,273 | | 457,273 | | -- | | -- | | -- | | | | 364,486 | | | 364,486 | | -- | | -- | | | -- | |
| Other liabilities reflected on our balance sheet under GAAP | | | 4,375 | | | 2,000 | | | 2,375 | | | -- | | | -- | | |
| Capital purchase obligations | | | | 4,829 | | | 4,829 | | | | | | | | | | |
| Total contractual obligations | | $ | 653,634 | | $ | 487,676 | | $ | 57,222 | | $ | 52,942 | | $ | 55,794 | | | $ | 537,080 | | $ | 403,205 | | $ | 65,432 | | $ | 61,998 | | $ | 6,445 | |
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(1)Represents our inventory purchase commitments as of January 30, 2005.28, 2007.
During the fiscal year 2007, we entered into a confidential patent licensing arrangement. Our commitment for future license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay under this arrangement may be reduced by the occurrence of certain events covered by the arrangement.
Off-Balance Sheet Arrangements
As of January 28, 2007, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).
Recently Issued Accounting Pronouncements
In March 2004,July 2006, the Financial Accounting Standards Board, or FASB, approvedissued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, Accounting for Income Taxes. Under FIN 48 a company would recognize the consensus reachedbenefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the Emerging Issues Task Force Issue No. 03-1, or EITF 03-1,The Meaningtechnical merits of Other-Than-Temporary Impairment and Its Application to Certain Investments.EITF 03-1the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits, and describes the methods for identifying impaired investmentsclassifying and new disclosure requirementsdisclosing the liabilities within the financial statements for investmentsany unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the financial statements. Any differences between tax liability amounts recognized in the statements of operations as a result of adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 will be effective as of first quarter of fiscal 2008. We believe that are deemedthe cumulative effect of adoption of FIN 48 will not result in any material change to be temporarily impaired. Onthe beginning balance of our retained earnings.
In September 30, 2004,2006, the FASB issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a final staff position EITF Issue 03-1-1 that delaysframework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the effective date forapplication of this Statement relate to the measurementdefinition of fair value, the methods used to measure fair value, and recognition guidance included in paragraphs 10 through 20the expanded disclosures about fair value measurements. We are required to adopt the provisions of EITF 03-1. Quantitative and qualitative disclosures required by EITF 03-1 remain effective forSFAS No. 157 beginning with our fiscal 2005.quarter ending April 29, 2007. We do not believe the impact of adoption of this EITF consensus willhave a material impact on our consolidated financial position, results of operations or cash flows. In November 2004, the FASB issued No. 151, or SFAS No. 151,Inventory Costs,an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The provision of SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to157 will have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2004,September 2006, the FASBSEC issued SFASStaff Accounting Bulletin No. 153,108, or SFASSAB No. 153,108, ExchangesConsidering the Effects of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assetsPrior Year Misstatements When Quantifying Misstatements in paragraph 21(b) of APB Opinion No. 29,Accounting for Nonmonetary TransactionsCurrent Year Financial Statements, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance ifwhich provides interpretive guidance on how the future cash flowseffects of the entity are expected to change significantly ascarryover or reversal of prior year misstatements should be considered in quantifying a resultcurrent year misstatement. We adopted the provisions of the exchange. SFASSAB No. 153 is effective for108 in our fiscal periods beginning after June 15, 2005. We do not expect theyear 2007. The adoption of SFAS 153 toSAB No. 108 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2004,February 2007, the FASB issued Statement of Financial Accounting Standards No. 123(R),159, or SFAS No. 123(R),159, Share-Based PaymentThe Fair Value Option for Financial Assets and Financial Liabilities, which requires the measurement and recognition of compensation expense for all stock-based compensation payments.. SFAS No. 123(R)159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We are required to adopt the provisions of SFAS No. 159 beginning with our fiscal quarter ending April 27, 2008, although earlier adoption is effective for all interim and annual periods beginning after June 15, 2005.permitted. We are currently evaluating the impact ofthat SFAS No. 123(R)159 will have on our operating results andconsolidated financial condition.The adoption of the SFAS No. 123(R) fair value method will have a significant impact on our reportedposition, results of operations although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because that will depend on the fair value and number of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the magnitude of the impact of that standard would have approximated the impact ofStatement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation, assuming the application of the Black-Scholes model as described in the disclosure of pro forma net income (loss) and pro forma net income (loss) per share inNote 1 of the Notes to the Consolidated Financial Statements under the subheading “Stock-Based Compensation.” SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financingor cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.flows.
Business Risks
In addition to the risks discussed in “Item 1. Business” and "Management's Discussion and Analysis of Financial Condition and Results of Operations," our business is subject to the risks set forth below.
Risks Related to Our Operations
Our failure to estimate customer demand properly may result in excess or obsolete inventory or, conversely, may result in inadequate inventory levels, either of which could adversely affect our financial results.
Inventory purchases are based upon future demand forecasts, which may not accurately predict the quantity or type of our products that our customers will want in the future. In forecasting demand, we must make multiple assumptions which may prove to be incorrect. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to write-down our inventory and our gross margin could be adversely affected. Additionally, if we fail to estimate customer demand properly before a new product is introduced, we may end up with excess inventory levels of older products, which could result in write-downs of the value of our inventory and our gross margin could be adversely affected. During the second quarter of fiscal 2005, demand for our non PCI Express mainstream desktop products declined significantly due in large part to unexpected competitive pricing actions taken by our competition. As a result of these competitive pricing actions, we were required to reduce the average selling prices of certain of our mainstream desktop products and our gross margin was adversely affected. If such competitive pricing actions were to recur in the future, we could be forced to continue to reduce average selling prices or to write-down our inventory and our gross margin could be adversely affected. Conversely, if we underestimate our customers’ demand for our products, we may have inadequate manufacturing capability and may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective manner. Inability to fill our customers' orders on a timely basis could damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.
We order materials in advance of anticipated customer demand. Therefore, we have limited ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls.
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 gross margin and restrict our ability to fund operations. We may build inventories during periods of anticipated growth and in connection with selling workstation boards directly to major original equipment manufacturers, or OEMs. Additionally, because we typically recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to any revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slows or if we incorrectly forecast product demand. A reduction in demand could negatively impact our gross margin and financial results.
We are dependent on key personnel and the loss of these employees could negatively impact our business.
Our performance is substantially dependent on the performance of our executive officers and key employees. None of our officers or employees is bound by an employment agreement, meaning our relationships with our officers and employees are 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 personnel. Our failure to attract and retain the necessary technical and managerial personnel would harm our business. The integration of new executives or personnel could disrupt our ongoing operations.
Failure to achieve expected manufacturing yields for existing and/or new products would reduce our gross margin.
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. Resolution of yield problems would require cooperation by and communication between us and the manufacturer.
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, our reputation, our revenue and our 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. A significant number of product returns due to a defect or recall, could damage our reputation and result in customers working with our competitors.
To stay competitive, we may have to invest more resources in research and development.
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 efforts, our operating expenses would increase. We have substantially increased our engineering and technical resources and have 1,231 full-time employees engaged in research and development as of January 30, 2005, compared to 1,057 employees as of January 25, 2004. During fiscal 2005, 2004 and 2003, research and development expenditures represented 17%, 15% and 12% as a percentage of revenue, respectively. If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results would decline. 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 the increased complexity and the greater 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 revenue.
Our operating expenses are relatively fixed and we may have limited ability to reduce operating expenses quickly in response to any revenue shortfalls.
During fiscal 2005 and 2004, our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses, represented 27% and 24% of our total revenue, respectively. Since we typically recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any revenue shortfalls. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls it would negatively impact our financial results.
Failure to transition to new manufacturing process technologies could affect our ability to compete effectively.
Our strategy is to utilize the most advanced manufacturing 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 and higher product cost. 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 currently use 0.15 micron, 0.14 micron, 0.13 micron and 0.11 micron process technologies for our family of GPUs, MCPs and WMPs. The majority of our newest GPUs, the GeForce 6 series, GeForce FX and the GeForce FX Go products are manufactured in 0.13 micron and 0.11 micron process technology.
We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. Moreover, we are dependent on our relationships with our third-party manufacturers to migrate to smaller geometry processes successfully. The inability by us or our third-party manufacturers to transition to new manufacturing process technologies may adversely affect our operating results and negatively impact our gross margin.
Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, our stock price could decline.
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 or investors, which could cause the trading price of our common stock to decline, perhaps substantially. For example, on August 5, 2004, we announced that the operating results for our second quarter of fiscal 2005 included significantly lower amounts of revenue and earnings per share than had been expected by securities analysts. Our announcement was followed by a decline in the trading price of our common stock. Conversely, on February 17, 2005, we announced better than expected financial results for the fourth quarter of fiscal 2005. This announcement was followed by an increase in the price of our common stock. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm 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 our next-generation products; |
· | new product announcements or product introductions by our competitors; |
· | our ability to introduce new products in accordance with OEMs’ design requirements and design cycles; |
· | changes in the timing of product orders due to unexpected delays in the introduction of our customers’ products; |
· | the level of growth or decline of the PC industry in general; |
· | slower than expected growth of demand for new technologies; |
· | 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 United States and international economies; |
· | competitive pressures resulting in lower than expected average selling prices; |
· | product 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 and consumer products market; |
· | substantial disruption in our suppliers’ operations, as a result of a natural disaster, equipment failure, terrorism or other causes; |
· | supply constraints for and changes in the cost of the other components incorporated into our customers’ products, including memory devices; |
· | our inability to reduce the manufacturing costs of our products; |
· | legal and other costs related to defending intellectual property and other types of lawsuits; |
· | availability of licenses at commercially reasonable terms for the continued sale or development of new products; |
· | customer receivable bad debt write-offs; |
· | 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. 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 necessarily indicative of results to be expected for a full fiscal year.
Risks Related to Our Products
We need to develop new products and to manage product transitions in order to succeed.
Our business depends to a significant extent on our ability to successfully develop new products for our target segments. Our add-in board and motherboard manufacturers, original design manufacturers, or ODMs, and major OEM customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products 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 functionalities into products that meet the exacting design requirements of OEMs, ODMs, CEMs and add-in board and motherboard manufacturers; |
· | price our products competitively; and |
· | introduce the products to the market within the limited window for OEMs, ODMs and add-in board and motherboard manufacturers. |
If ODMs and OEMs do not include our products in their systems, they will typically not use our products in their design systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs in an attempt to allow us to better anticipate and address customer needs in new products.
As a result, we believe that significant expenditures for research and development will continue to be required in the future. We make these expenditures independent of the level of purchase commitments from our customers. If our new products are not adopted by our customers, our business results may be adversely affected. The success of new product introductions will depend on many factors, including the following:
· | proper new product definition; |
· | timely completion and introduction of new product designs; |
· | the ability of IBM, TSMC, UMC, Chartered and any additional third-party manufacturers to effectively manufacture our new products in a timely manner; |
· | dependence on third-party subcontractors for assembly, testing and packaging of our products and in meeting product delivery schedules and maintaining product quality; |
· | 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. |
A critical component of our product development effort is our partnerships with leaders in the computer aided design, or CAD, industry. We have invested significant resources to develop relationships with industry leaders, including Cadence Design 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, communications and networking markets and develop products that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of PC OEMs and cellular phone manufacturers. If these relationships are not successful, we may not be able to develop new products in a timely manner, which could result in a loss of market share, a decrease in revenue and a negative impact on our operating results.
In addition, our strategy includes utilizing 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 OEMs, ODMs, add-in board and motherboard manufacturers and consumers of PCs and consumer electronics. Even if we are able to provide the demanded features and functionality, we may not be able to successfully develop or introduce new products in sufficient volumes within the appropriate time to meet both the 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 digital media processors would harm our business. In particular, during the first half of fiscal 2004, we experienced delays in the introduction of digital media processors using our next generation technology. In addition, we expected to ramp up sales of our PCI Express products during the second quarter of fiscal 2005, but as a result of Intel’s delayed PCI Express chipset production, followed by their product recall, the performance desktop segment was impacted by stalling our customers’ production ramp of our GeForce PCX GPUs. Any such delay in the future or failure of our digital media processors or other processors to meet or exceed specifications of competitive products could materially harm our business.
Our failure to identify new market or product opportunities or develop new products could harm our business.
As our digital media 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 digital media 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 digital media processors to achieve high volumes, leading PC OEMs, ODMs, and add-in board and motherboard manufacturers must select our digital media 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 new products in a timely fashion. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs’, ODMs’, and add-in board and motherboard 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 our products increases, there is an increasing risk that we will experience problems with the performance of our 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 that may delay the introduction or volume sale of new products we develop. 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 digital media processors non-competitive or obsolete or result in our holding excess inventory, any of which would harm our business.
PCI Express is central to our GPU as well as MCP strategies and the outcome of this strategy will impact our business.
PCI Express is expected to enable a new level of performance for high bandwidth applications like graphics and networking. The transition to PCI Express, which is extremely complex, is central to our GPU and MCP objectives this fiscal year. We initiated this transition by creating our GeForce PCX series of GPUs, using HSI technology. During the second quarter of fiscal 2005, we executed on our strategy to deliver a full line of GPUs ready to support PCI Express chipsets. We expected to ramp up sales of our PCI Express products during the second quarter of fiscal 2005, but as a result of Intel’s delayed PCI Express chipset production, followed by their product recall, the performance desktop segment was impacted by stalling our customers’ production ramp of our GeForce PCX GPUs. During the third quarter of fiscal 2005, we announced and ramped up sales of the GeForce 6600 GT, GeForce 6600 and the GeForce 6200, our first native PCI Express GPUs. In May 2004, we announced the Mobile PCI Express Module Specification, or MXM. MXM was jointly developed by NVIDIA and leading notebook PC manufacturers in an effort to accelerate the adoption of PCI Express-based notebooks in all market segments. MXM is an open design specification that supports a wide range of graphics solutions from most GPU manufacturers, allowing system integrators maximum flexibility for build-to-order with various graphics solutions. MXM also serves as the primary delivery vehicle for our GeForce Go 6 series of GPUs.
Industry adoption of PCI Express was slower than we expected during fiscal 2005 and there is no assurance that the adoption rate will increase during fiscal 2006. If our PCI Express compatible products do not meet consumer and/or customer demand or expectations, our business results could suffer.
We could suffer a loss of market share if our products contain significant defects.
Products as complex as those we offer may contain defects or experience failures when introduced or when new versions or enhancements to existing products are released. We have in the past discovered defects and incompatibilities with customers’ hardware in certain of our products and may experience delays or loss of revenue to correct any new defects or incompatibilities in the future. Errors in new products or releases after commencement of commercial shipments could result in loss of market share, failure to achieve market acceptance, or loss of design wins. 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. We may also be required to incur additional research and development costs to find and correct the defect, which could divert the attention of our management and engineers from the development of new products. These costs could be significant and could adversely affect our business and operating results. We may also suffer a loss of reputation and/or a loss in our market share, either of which could materially harm our financial results.
Risks Related to Our Partners
We sell our products to a small number of customers and our business could suffer by the loss of these customers.
We have only a limited number of customers and our sales are highly concentrated. Although a small number of our customers represent the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key CEMs, ODMs, motherboard and add-in board manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, motherboard and add-in board manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, motherboard manufacturers, add-in board manufacturers and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. Currently, we sell a significant majority of our digital media processors directly to distributors, CEMs, ODMs, motherboard and add-in board manufacturers, which then sell boards with our graphics processor to leading PC OEMs, retail outlets and to a large number of system builders. If we were to lose sales to our PC OEMs, CEMs, ODMs, motherboard and add-in board manufacturers and were unable to replace the lost sales with sales to different customers, or if they were to significantly reduce the number of products they order from us, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.
Difficulties in collecting accounts receivable could result in significant charges against income, which could harm our business.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses and to downturns in the economy and the industry. In addition, difficulties in collecting accounts receivable or the loss of any significant customer could materially and adversely affect our financial condition and results of operations. Accounts receivable owed by foreign customers may be difficult to collect. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. As of the end of fiscal 2005, fiscal 2004 and fiscal 2003 our allowance for doubtful accounts represented 0.1%, 0.1% and 0.2% of revenue for each fiscal quarter, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which could adversely affect our operating results. We may have to record additional reserves or write-offs in the future, which could negatively impact our financial results.
We depend on foundries and independent contractors to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.
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, IBM, UMC and Chartered to produce our semiconductor wafers and utilize independent subcontractors to perform assembly, testing and packaging. Our wafer requirements represent a significant portion of the total production capacity at IBM. 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 at acceptable prices. These manufacturers may be unable to meet our near-term or long-term manufacturing or pricing requirements. We obtain manufacturing services on a purchase order basis. The foundries we use have no obligation to provide us with any specified minimum quantities of product. TSMC, IBM, UMC and Chartered fabricate wafers for other companies, including certain of our competitors, and could choose to prioritize capacity for other users, reduce or eliminate deliveries to us, or increase the prices that they charge us on short notice. If we are unable to meet customer demand due to reduced or eliminated deliveries, we could lose sales to customers, which would negatively impact our revenue and our reputation. 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. In addition, the time and expense to qualify a new foundry could result in additional expense, diversion of resources or lost sales any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with TSMC, IBM, UMC, Chartered and any other manufacturers we may use to ensure adequate product supply and competitive pricing to respond to customer demand. Any difficulties like these would harm our business.
We are dependent on third parties located outside of the United States for assembly, testing and packaging of our products, which reduces our control over the delivery and quantity of our products.
Our digital media processors are assembled and tested by Siliconware Precision Industries Company Ltd., Amkor Technology Inc., STATS ChipPAC Incorporated and Advanced Semiconductor Engineering, Inc., all of which are located outside of the United States. We do not have long-term agreements with any of these subcontractors. As a result of our dependence on third-party subcontractors for assembly, testing and packaging of our products, we do not directly control product delivery schedules or product quality. Any product shortages, quality assurance problems or political instability outside of the United States could increase the costs of manufacture, assembly or testing of our products, which could cause our gross margin to decline. 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 such delays could result in a loss of reputation or a decrease in sales to our customers.
We rely on third-party vendors to supply tools to us 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 digital media processors in the future may exceed the capabilities of the software development tools that are 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.
We may not be able to realize the potential financial or strategic benefits of business acquisitions, which could hurt our ability to grow our business, develop new products and sell our products.
In the past we have acquired and invested in other businesses that offered products, services and technologies that we believed would help expand or enhance our products and services or help expand our distribution channels. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business segment. If we do consider an acquisition, strategic alliance or joint venture, the negotiations could divert management’s attention as well as other resources. For any previous or future 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 and may not lead to any improvements in our financial results:
· | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
· | disruption of our ongoing businesses; |
· | difficulty in realizing the potential financial or strategic benefits of the transaction; |
· | diversion of management’s attention from our business; |
· | difficulty in maintaining uniform standards, controls, procedures and policies; |
· | disruption of or delays in ongoing research and development efforts; |
· | diversion of capital and other resources; |
· | assumption of liabilities; |
· | difficulties in entering into new markets in which we have limited or no experience and where competitors in such market segments have stronger positions; and |
· | impairment of relationships with employees and customers, or the loss of key employees 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, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we pay a portion of the purchase price in cash, our cash reserves would be reduced. If the consideration is paid with shares of our common stock, or convertible debentures, the holdings of existing stockholders would be further diluted. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operations or financial results.
The impact on our future revenue by Microsoft’s announcement that it has entered into an agreement with one of our competitors to develop technology for future Xbox products and services is uncertain.
During fiscal 2004, Microsoft announced that it had entered into an agreement with one of our competitors to develop technology for future Xbox products and services. The impact that this announcement may have on our future revenue from Microsoft is uncertain, but we anticipate that we will not achieve historical levels of Xbox revenue in fiscal 2006. Revenue from Microsoft during fiscal 2005, fiscal 2004 and fiscal 2003 accounted for 13%, 15% and 23% respectively, of our total revenue. If our revenue from Microsoft declines during fiscal 2006, we will need to increase revenue from other customers in order to be able to maintain our current revenue level and operating results. If we do not replace any reduction in revenue from Microsoft with revenue from other customers, our operating results would be adversely affected.
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 stockholder approval; |
· | the prohibition of stockholder action by written consent; |
· | a classified board of directors; and |
· | advance notice requirements for director nominations and stockholder proposals. |
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. In the event that an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft has first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
Risks Related to Our Competition
The 3D graphics, platform processor and handheld industries are highly competitive and we may be unable to compete.
The market for GPUs, MCPs and WMPs for PCs and handhelds 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 Application Programming Interfaces, or APIs, manufacturing capabilities, price of digital media processors and total system costs of add-in boards and motherboards. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products, which could harm our business. Further, we expect substantial competition from Intel’s publicized focus on moving to selling platform solutions dominated by Intel products, such as the Centrino platform.
An additional significant source of competition is from companies that provide or intend to provide GPU and MCP solutions for the PC and WMP segments. Some of our competitors may have greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes. Our current competitors include the following:
| · | suppliers of MCPs that incorporate a combination of 3D graphics, networking, audio, communications and Input/Output, or I/O, functionality as part of their existing solutions, such as ATI, Broadcom, Intel, Silicon Integrated Systems, Inc. and VIA; |
| · | suppliers of standalone desktop GPUs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, Creative Technology, Matrox Electronics Systems Ltd. and XGI Technology, Inc.; |
| · | suppliers of standalone notebook GPUs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, Silicon Motion Corporation and the joint venture of a division of SONICblue Incorporated (formerly S3 Incorporated) and VIA; and |
| · | suppliers of WMPs for handheld devices that incorporate advanced graphics functionality as part of their existing solutions, such as ATI, Renesas Technology, Broadcom and Seiko-Epson. |
If and to the extent we offer products outside of the PC, consumer electronics and handheld segments, 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. If we are unable to compete in our current and any new markets, our financial results will 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 for hardware components or subassemblies designed by PC OEMs, ODMs, and add-in board and motherboard manufacturers. Our add-in board and motherboard manufacturers and major OEM and ODM customers typically introduce new system configurations as often as twice per year, generally based on spring and fall design cycles. Accordingly, at the time our OEM and ODM customers are making their decisions, our existing products must have competitive performance levels or we must timely introduce new products with such performance characteristics, consistent quality, correct price and an adequate feature-set 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 an 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. Even if we achieve a significant number of design wins, there can be no assurance that our OEM and ODM customers will actually take the design to production or that the design will be commercially successful.
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. Such changes 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. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.
Risks Related to Market Conditions
We are dependent on the PC market and the rate of its growth has and may in the future have a negative impact on our business.
We derive the majority of our revenue from the sale of products for use in the desktop PC and notebook PC segments, including professional workstations. We expect to continue to derive most of our revenue from the sale or license of products for use in the desktop PC and notebook PC segments in the next several years. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, will 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.
If our products do not continue to be accepted by the PC and consumer electronics segments or if demand by the PC and consumer electronics segments for new and innovative products decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our digital media processors for 3D graphics in PC and consumer electronics applications. The market for digital media 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-access 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 and frequent new technology and product introductions. Since the PC segment is our core business, our business would suffer if for any reason our current or future digital media processors do not continue to achieve widespread acceptance in the PC segment. If we are unable to complete the timely development of products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the PC segment, we may experience a decrease in revenue which could negatively impact our operating results. Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers and the market do not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline and our business and operating results could suffer.
We are subject to risks associated with international operations which may harm our business.
A significant portion of our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. Additionally, we generated 76% of our total revenue from sales to customers outside of the United States and other Americas for the fiscal 2005. Revenue from sales to customers outside of the United States and other Americas for fiscal 2004 and 2003 accounted for 75% and 68% of total revenue, respectively. The manufacture, assembly, test and packaging of our products outside of the United States and sales to these customers outside of the United States and other Americas subjects us to a number of risks associated with conducting business outside of the United States and other Americas, including, but not limited to:
· | international economic and political conditions; |
· | unexpected changes in, or impositions of, legislative or regulatory requirements; |
· | labor issues in foreign countries; |
· | cultural differences in the conduct of business; |
· | inadequate local infrastructure; |
· | delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions; |
· | difficulty in collecting accounts receivable; |
· | fluctuations in currency exchange rates; |
· | imposition of additional taxes and penalties; |
· | different legal standards with respect to protection of intellectual property; |
· | the burdens of complying with a variety of foreign laws; and |
· | other factors beyond our control, including terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome, or SARS and Bird flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
We also have sales offices in several international locations including Taiwan, Russia, Japan, China, Hong Kong, Germany, France and the United Kingdom. We have a design center in Germany and recently opened a design center in India. Our international operations are subject to the many of the risks contained in the above list. Difficulties with our international operations, including finding appropriate staffing, may divert management’s attention and other resources all of which could negatively impact our operating results.
Currently, all of our arrangements with third-party manufacturers and subcontractors provide for pricing and payment in United States dollars as are sales to our customers located outside of the United States and other Americas. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which would negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. 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.
Hostilities involving the United States and/or terrorist attacks could harm our business.
The financial, political, economic and other uncertainties following the terrorist attacks upon the United States led to a weakening of the global economy. Subsequent terrorist acts and/or the threat of future outbreak or continued escalation of hostilities involving the United States and Iraq or other countries could adversely affect the growth rate of our revenue and have an adverse effect on our business, financial condition or results of operations. In addition, any escalation in these events or similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could also adversely affect our business, financial condition or results of operations.
Our business is cyclical in nature and an industry downturn could harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capital equipment and product development and rapid technological change. If we are unable to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our costs to sufficiently offset declines in demand during a downturn, our revenue and earnings will suffer during downturns.
Political instability in Taiwan and in The People’s Republic of China or elsewhere could harm our business.
Because of our reliance on TSMC and UMC, 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, or if relations between the United States and The People’s Republic of China are strained due to foreign relations events. If any of our suppliers experienced a substantial disruption in their operations, as a result of a natural disaster, political unrest, economic instability, acts of terrorism or war, equipment failure or other cause, could harm our business.
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars.
We account for our investment instruments in accordance with SFAS No. 115. All of the cash equivalents and marketable securities are treated as "available-for-sale" under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Part of our portfolio includes equity investments in publicly traded companies, the value of which are subject to market price volatility. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments is judged to be other-than-temporary. We may suffer losses in principal if forced to sell securities that decline in market value due to changes in interest rates. However, because our debt securities are classified as "available-for-sale", no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity.
Our stock price may continue to experience significant short-term fluctuations.
The price of our common stock has fluctuated greatly. These price fluctuations have been rapid and severe. For example, on August 5, 2004, we announced that the operating results for our second quarter of fiscal 2005 included significantly lower amounts of revenue and earnings per share than had been expected by securities analysts. Our announcement was followed by a decline in the trading price of our common stock. Conversely, on February 17, 2005, we announced better than expected financial results for the fourth quarter of fiscal 2005. This announcement was followed by an increase in the price of our common stock. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, gross profit and results of operations. The price of our common stock may continue to fluctuate greatly in the future due to factors that are non-company specific, such as the decline in the United States economy, acts of terror against the United States, war 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 in these risk factors.
Risks Related to Intellectual Property, Litigation and Government Action
While we believe that we currently have adequate internal controls over financial reporting, we are exposed to risks from recent legislation requiring companies to evaluate those internal controls.
Section 404 of the Sarbanes-Oxley Act of 2004 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. This legislation is relatively new and neither companies nor accounting firms have significant experience in complying with its requirements. As a result, we have incurred, and expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal controls over financial reporting are not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.
Expensing employee stock options in future periods will materially and aversely affect our reported operating results.
Since inception, we have used stock options and our employee stock purchase program as fundamental components of our compensation packages. To date we generally have not recognized compensation cost for employee stock options or shares sold pursuant to our employee stock purchase program. We believe that these incentives directly motivate our employees and, through the use of vesting, encourage our employees to remain with us. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),Share-Based Payment, or SFAS No. 123(R). SFAS No. 123(R) is effective for interim or annual periods beginning after June 15, 2005, and requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. Expensing these incentives in future periods will materially and adversely affect our reported operating results as the stock-based compensation expense would be charged directly against our reported earnings. To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce the non-cash expense may make it difficult to attract, retain and motivate employees any of which could adversely affect our competitive position as well as our business and operating results.
We are currently involved in patent litigation, which, if not resolved favorably, could require us to pay damages.
We are currently involved in patent litigation. On October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent infringement against us in the United States District Court for the Eastern District of Texas. Opti asserts that unspecified NVIDIA chipsets infringe five United States patents held by Opti. Opti seeks unspecified damages for our conduct, attorneys fees and triple damages because of our alleged willful infringement of these patents. Discovery has not begun and no trial date has been set. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.
In August 2004, a Texas limited partnership named American Video Graphics, LP, or AVG, filed three separate complaints for patent infringement against various corporate defendants (not including NVIDIA) in the United States District Court for the Eastern District of Texas. AVG initially asserted that each of the approximately thirty defendants sells products that infringe one or more of seven separate patents that AVG claims relate generally to graphics processing functionality. Each of the three lawsuits targeted a different group of defendants; one case involves approximately twenty of the leading personal computer manufacturers, the PC Makers Case, one case involves the three leading video game console makers, the Game Console Case, and one case involves approximately ten of the leading video game publishers, the Game Publishers Case. In November 2004, NVIDIA sought and was granted permission to intervene in two of the three pending AVG lawsuits, the PC Makers Case and the Game Console Case. NVIDIA’s complaint in intervention alleges both that the patents in suit are invalid and that, to the extent AVG’s claims target NVIDIA products, the asserted patents are not infringed. Two other leading suppliers of graphics processing products, Intel and ATI, have also intervened in the cases, ATI in both the PC Makers and Game Console Case, and Intel in the PC Makers Case.
After some consensual reconfigurations proposed by the various parties, in January 2005, the district court judge entered Docket Control and Discovery Orders in the three lawsuits. The PC Makers case now involves four separate patents and is currently scheduled for trial beginning on September 11, 2006. The Game Console Case involves a single patent and is currently scheduled for trial beginning on December 4, 2006. We believe that, to the extent AVG’s infringement allegations target functionality that may be performed by NVIDIA products, those claims are without merit, and we will continue to defend ourselves and our products vigorously.
Our defenses against these suits may be unsuccessful. At this time, we cannot reasonably estimate the range of any loss or damages resulting from these suits due to uncertainty regarding the ultimate outcome. If these cases go forward, we expect that they will result additional legal and other costs, regardless of the outcome, which could be substantial.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights or positions that could result in litigation and substantial costs to us.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which have resulted in protracted and expensive litigation. The digital media processor industry 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. The technology that we use to design and develop our products and that is incorporated into our products may be subject to claims that it infringes the patents or intellectual property rights of others. Our success is dependent on our ability to develop new products without infringing or misappropriating the intellectual property rights of others. From time to time we receive notices or are included in legal actions 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 product lines intensifies, the volume of intellectual property infringement claims may increase. If infringement claims are made against us, we may seek licenses under the claimants’ patents or other intellectual property rights. However, licenses may not be offered to us at all or on terms acceptable to us, particularly by competitors. 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 and sale of one or more products, which could reduce our revenue and harm our business. 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, which could be costly.
If we have to initiate a claim, our operating expenses may increase which could negatively impact our operating results. In order to develop products, we have licensed technology from third parties for incorporation in our digital media processors, and expect to continue to enter into license agreements with third parties 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 or at all, our competitive position and our business could suffer.
We have agreed to indemnify certain customers for certain claims of infringement arising out of sale of our products. We may be involved in future lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or customers that we have agreed to indemnify for certain claims of infringement arising out of the sale of our products to these customers. In addition, litigation or other legal proceedings may be necessary to:
· | assert claims of infringement; |
· | protect our trade secrets or know-how; or |
· | determine the enforceability, scope and validity of the propriety rights of others. |
Regardless of the outcome, litigation can be very costly and can divert management’s attention from other matters. We may be unsuccessful in defending or pursuing these lawsuits or claims. An unfavorable ruling could include significant damages, invalidation of a patent or group of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief. If one of our patents in invalidated or found to be unenforceable, we would be unable to license the patent which could result in a loss of revenue. We or our customers may be required to obtain a license to the other parties’ patents or intellectual property. If we fail to obtain a license from a third party for technology we use or that is used by an indemnified customer, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture of and sale of one or more of our products either of which could reduce our revenue and harm our business. Initiation of claims or indemnification of a customer may increase our operating expenses which could negatively impact our operating results.
Our ability to compete will be harmed if we are 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 in the United States and internationally. We have numerous patents issued, allowed and pending in the United States and in foreign countries. Our patents and pending patent applications relate to technology used by us in connection with our products, including our digital media processors. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. 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 by the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as: the commercial significance of our operations and our competitors’ operations in particular countries and regions; the location in which our products are manufactured; our strategic technology or product directions in different countries; and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.
Our pending patent applications and any future applications may 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 digital media 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.
Interest Rate Risk
We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as "available-for-sale"“available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as "available-for-sale,"“available-for-sale”, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity.maturity or declines in fair value are determined to be other than temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.
As of January 30, 2005,28, 2007, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both +/-50 basis points- 0.5% would result in changes in fair market values for these investments of approximately $2.9$3.0 million.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. 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 information required by this itemItem is set forth in our consolidated financial statementsConsolidated Financial Statements and notesNotes thereto included in this Annual Report.Report on Form 10-K.
Not applicable.
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of January 30, 2005,28, 2007, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act) were effective to ensure that the material information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and instructions for Form 10-K.effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 30, 200528, 2007 based on the criteria set forth inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth inInternal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 30, 2005.28, 2007.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of January 30, 200528, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our CompanyNVIDIA have been detected.
None.
Identification of Directors
Reference is made to the information regarding directors appearing under the heading “Election“Proposal 1- Election of Directors” in our 20052007 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 “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K, which information is hereby incorporated by reference.
Identification of Audit Committee and Financial Expert
Reference is made to the information regarding directors appearing under the heading “Report of the Audit Committee of the Board of Directors” and “Information about the Board of Directors and Corporate Governance” in our 20052007 Proxy Statement, which information is hereby incorporated by reference.
Material Changes to Procedures for Recommending Directors
Reference is made to the information regarding directors appearing under the heading “Election“Information about the Board of Directors”Directors and Corporate Governance” in our 20052007 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 “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2005 Proxy Statement, which information is hereby incorporated by reference.
Code of Ethics
Reference is made to the information appearing under the heading “Code of Ethics” in our 2005 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 our 20052007 Proxy Statement, which information is hereby incorporated by reference.
Code of Conduct
Reference is made to the information appearing under the heading “Information about the Board of Directors and Corporate Governance - Code of Conduct” in our 2007 Proxy Statement, which information is hereby incorporated by reference. The full text of our “Worldwide Code of Conduct” and “Financial Team Code of Conduct” are published on the Investor Relations portion of our web site, under Corporate Governance, at www.nvidia.com.
The information required by this item is hereby incorporated by reference from the section entitled “Executive Compensation” in our 2007 Proxy Statement.
ReferenceOwnership of NVIDIA Securities
The information required by this item is made to information appearing in our 2005 Proxy Statement underhereby incorporated by reference from the headingsection entitled “Security Ownership of Certain Beneficial Owners and Management” and “Equityin our 2007 Proxy Statement.
Equity Compensation Plan Information” which information
Information concerning our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, is hereby incorporated by reference.reference from the section entitled “Equity Compensation Plan Information” in our 2007 Proxy Statement.
Reference is made toThe information appearing in our 2005 Proxy Statement under the heading “Certain Transactions,” which informationrequired by this item is hereby incorporated by reference.reference from the sections entitled “Transactions with Related Persons” and “Information about the Board of Directors and Corporate Governance - Independence of the Members of the Board of Directors” in our 2007 Proxy Statement.
Reference is made toThe information appearing in our 2005 Proxy Statement, which informationrequired by this item is hereby incorporated by reference.reference from the section entitled “Fees Billed by the Independent Registered Public Accounting Firm” in our 2007 Proxy Statement.
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(a) | 1. | Consolidated Financial Statements | |
| | | | |
| | | 49
53 |
| | | |
| | | Report of Independent Registered Public Accounting Firm, KPMG LLP
| 51
|
| | Consolidated Balance Sheets as of January 30, 2005 and January 25, 2004
| 52
|
| | | 53
55 |
| | | |
| | | | 56 |
| | | |
| | Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended January 30, 2005,28, 2007, January 25, 200429, 2006, and January 26, 200330, 2005 | 54
57 |
| | | | |
| | Consolidated Statements of Cash Flows for the years ended January 30, 2005,28, 2007, January 25, 200429, 2006, and January 26, 200330, 2005 | 55
58 |
| | | | |
| | Notes to Consolidated Financial Statements | 57
60 |
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(a) | 2. | Financial Statement Schedules | |
| | | | |
| | Schedule II Valuation and Qualifying Accounts | 84
93 |
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(a) | 3. | Exhibits | |
| | | Report on Form 10-K. | 94 |
| | | |
Tothe Stockholders and Board of Directors
NVIDIA Corporation:
We have completed an integrated auditaudits of NVIDIA Corporation’s fiscal 2005 consolidated financial statements and of its internal control over financial reporting as of January 30, 200528, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audit,audits, are presented below.
Consolidated ffinainancialncial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1)(2) present fairly, in all material respects, the financial position of NVIDIA Corporation and its subsidiaries at January 30, 2005,28, 2007 and January 29, 2006, and the results of their operations and their cash flows for each of the year thenthree years in the period ended January 28, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement scheduleschedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedulebased on our audit.audits. We conducted our auditaudits of these statements in accordance with the standards of thePublicthe Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
As discussed in Note 2 of the Notes to Consolidated Financial Statements, the Company changed the manner in which it accounts for stock-based compensation in fiscal 2007.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control over Financial Reportingappearing under Item 9A, that the Company maintained effective internal control over financial reporting as ofJanuary 30, 2005basedof January 28, 2007 based on criteria established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofJanuary 30, 2005,of January 28, 2007, based oncriteriaon criteria established inInternal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose, CaliforniaCA
March 22, 2005
15, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
NVIDIA Corporation:
We have audited the accompanying consolidated balance sheet of NVIDIA Corporation and subsidiaries (the “Company”), as of January 25, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended January 25, 2004. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule for the two years ended January 25, 2004 as listed in the index of Item 15. 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 financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated 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 25, 2004, and the results of its operations and their cash flows for each of the years in the two-year period ended January 25, 2004, 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 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 12, 2004
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | January 30, | | January 25, | |
| | | 2005 | | 2004 | |
ASSETS | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 208,512 | | $ | 214,422 | |
| Marketable securities | | | 461,533 | | | 389,621 | |
| Accounts receivable, less allowances of $13,153 and $11,731 in 2005 and 2004, respectively | | | 296,279 | | | 196,631 | |
| Inventories | | | 315,518 | | | 234,238 | |
| Prepaid expenses and other current assets | | | 19,819 | | | 14,539 | |
| Deferred income taxes | | | 3,265 | | | 3,261 | |
| Total current assets | | | 1,304,926 | | | 1,052,712 | |
| | | | | | | | |
| Property and equipment, net | | | 178,955 | | | 190,029 | |
| Deposits and other assets | | | 9,034 | | | 7,731 | |
| Goodwill | | | 108,107 | | | 108,909 | |
| Intangible assets, net | | | 27,514 | | | 39,963 | |
| | | $ | 1,628,536 | | $ | 1,399,344 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 238,223 | | $ | 185,342 | |
| Accrued liabilities | | | 182,077 | | | 144,755 | |
| Current portion of capital lease obligations | | | 856 | | | 4,015 | |
| Total current liabilities | | | 421,156 | | | 334,112 | |
| | | | | | | | |
| Deferred income tax liabilities | | | 20,754 | | | 8,609 | |
| Capital lease obligations, less current portion | | | -- | | | 856 | |
| Long-term liabilities | | | 8,358 | | | 4,582 | |
| Commitments and contingent liabilities - see Note 12 | | | | | | | |
| | | | | | | | |
| Stockholders’ equity: | | | | | | | |
| Common stock, $.001 par value; 1,000,000,000 shares authorized; 169,173,898 shares issued and 167,089,545 outstanding in 2005; and 164,145,787 shares issued and outstanding in 2004 | | | 169 | | | 164 | |
| Additional paid-in capital | | | 636,618 | | | 583,481 | |
| Deferred compensation | | | (2,926 | ) | | (5,468 | ) |
| Treasury stock | | | (24,644 | ) | | -- | |
| Accumulated other comprehensive income (loss), net | | | (3,463 | ) | | 850 | |
| Retained earnings | | | 572,514 | | | 472,158 | |
| Total stockholders' equity | | $ | 1,178,268 | | | 1,051,185 | |
| | | $ | 1,628,536 | | $ | 1,399,344 | |
| | | | | | | | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | | Year Ended | | Year Ended | | Year Ended | | |
| | | January 30, | | January 25, | | January 26, | | |
| | | 2005 | | 2004 | | 2003 | | |
| | | | | | | | | |
| | | | | | | | | | Year Ended January 28, 2007 | | Year Ended January 29, 2006 | | Year Ended January 30, 2005 | |
| Revenue | | $ | 2,010,033 | | $ | 1,822,945 | | $ | 1,909,447 | | | $ | 3,068,771 | | $ | 2,375,687 | | $ | 2,010,033 | |
| Cost of revenue | | | 1,360,547 | | | 1,294,067 | | | 1,327,271 | | | | 1,768,322 | | | 1,465,654 | | | 1,362,478 | |
| Cost of revenue related to stock option exchange (1) | | | -- | | | -- | | | 6,164 | | |
| Gross profit | | | 649,486 | | | 528,878 | | | 576,012 | | | | 1,300,449 | | | 910,033 | | | 647,555 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Research and development | | | 335,104 | | | 269,972 | | | 224,873 | | | | 553,467 | | | 357,123 | | | 348,220 | |
| Sales, general and administrative | | | 200,789 | | | 165,249 | | | 151,485 | | | | 293,530 | | | 202,088 | | | 204,159 | |
| In-process research and development | | | -- | | | 3,500 | | | -- | | |
| Stock option exchange (1) | | | -- | | | -- | | | 55,668 | | |
| Settlement costs | | | | - | | | 14,158 | | | — | |
| Total operating expenses | | | 535,893 | | | 438,721 | | | 432,026 | | | | 846,997 | | | 573,369 | | | 552,379 | |
| Income from operations | | | 113,593 | | | 90,157 | | | 143,986 | | | | 453,452 | | | 336,664 | | | 95,176 | |
| Interest income | | | 11,422 | | | 18,561 | | | 23,246 | | | | 41,820 | | | 20,698 | | | 11,422 | |
| Interest expense | | | (164 | ) | | (12,010 | ) | | (16,467 | ) | | | (21 | ) | | (72 | ) | | (164 | ) |
| Other income (expense), net | | | 594 | | | 3,033 | | | (208 | ) | | | (771 | ) | | (502 | ) | | 594 | |
| Convertible debenture redemption expense | | | -- | | | (13,068 | ) | | -- | | |
| Income before income tax expense | | | 125,445 | | | 86,673 | | | 150,557 | | | | 494,480 | | | 356,788 | | | 107,028 | |
| Income tax expense | | | 25,089 | | | 12,254 | | | 59,758 | | | | 46,350 | | | 55,612 | | | 18,413 | |
| Income before change in accounting principle | | | | 448,130 | | | 301,176 | | | 88,615 | |
| Cumulative effect of change in accounting principle, net of tax | | | | 704 | | | - | | | - | |
| Net income | | | 100,356 | | $ | 74,419 | | $ | 90,799 | | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | |
| | | | | | | | | | | | |
| Basic income per share | | | | | | | | | | | |
| Income before change in accounting principle | | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | |
| Cumulative effect of change in accounting principle | | | | - | | | - | | | - | |
| Basic net income per share | | $ | 0.60 | | $ | 0.46 | | $ | 0.59 | | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | |
| | | | | | | | | | | | |
Shares used in basic per share computation (1) | | | | 352,404 | | | 339,380 | | | 332,124 | |
| | | | | | | | | | | | |
| Diluted income per share: | | | | | | | | | | | |
| Income before change in accounting principle | | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | |
| Cumulative effect of change in accounting principle | | | | - | | | - | | | - | |
| Diluted net income per share | | $ | 0.57 | | $ | 0.43 | | $ | 0.54 | | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | |
| Shares used in basic per share computation | | | 166,062 | | | 160,924 | | | 153,513 | | |
| Shares used in diluted per share computation | | | 176,558 | | | 172,707 | | | 168,393 | | |
| | | | | | | | | | | | | | | | | | | | | |
Shares used in diluted per share computation (1) | | | | 391,504 | | | 365,704 | | | 351,624 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
(1)Reflects a two-for-one stock split effective on April 6, 2006.
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | January 28, 2007 | | January 29, 2006 | |
ASSETS | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 544,414 | | $ | 551,756 | |
| Marketable securities | | | 573,436 | | | 398,418 | |
| Accounts receivable, less allowances of $15,749 and $10,837 in 2007 and 2006, respectively | | | 518,680 | | | 318,186 | |
| Inventories | | | 354,680 | | | 254,870 | |
| Prepaid expenses and other current assets | | | 31,141 | | | 24,387 | |
| Deferred income taxes | | | 9,419 | | | 2,682 | |
| Total current assets | | | 2,031,770 | | | 1,550,299 | |
| Property and equipment, net | | | 260,828 | | | 178,152 | |
| Goodwill | | | 301,425 | | | 145,317 | |
| Intangible assets, net | | | 45,511 | | | 15,421 | |
| Deposits and other assets | | | 28,349 | | | 27,477 | |
| Deferred income taxes | | | 7,380 | | | 38,021 | |
| | | $ | 2,675,263 | | $ | 1,954,687 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 272,075 | | $ | 179,395 | |
| Accrued liabilities | | | 366,732 | | | 259,264 | |
| Total current liabilities | | | 638,807 | | | 438,659 | |
| Other long-term liabilities | | | 29,537 | | | 20,036 | |
| Commitments and contingencies - see Note 12 | | | | | | | |
| Stockholders’ equity: | | | | | | | |
| Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued | | | — | | | — | |
Common stock, $.001 par value; 1,000,000,000 shares authorized; 388,308,979 shares issued and 360,988,504 outstanding in 2007; and 359,927,958 shares issued and 342,954,912 outstanding in 2006 (1) | | | 388 | | | 360 | |
| Additional paid-in capital | | | 1,295,650 | | | 965,604 | |
| Deferred compensation | | | - | | | (3,604 | ) |
| Treasury stock, at cost (27,227,145 shares in 2007 and 16,889,716 shares in 2006) | | | (487,120 | ) | | (212,142 | ) |
| Accumulated other comprehensive income (loss), net | | | 1,436 | | | (1,957 | ) |
| Retained earnings | | | 1,196,565 | | | 747,731 | |
| Total stockholders' equity | | | 2,006,919 | | | 1,495,992 | |
| | | $ | 2,675,263 | | $ | 1,954,687 | |
| | | | | | | | |
(1) The $61,832Reflects a two-for-one stock option exchange expense for the year ended January 26, 2003 relates to personnel associated with cost of revenue (for manufacturing personnel), research and development and sales, general and administrative of $6,164, $35,417 and $20,251, respectively.split effective on April 6, 2006.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
AND COMPREHENSIVE INCOME
(In thousands, except share data)
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | Other | | | | | | Total | |
| | | | | Additional | | Deferred | | | | Compre- | | | | Total Stock- | | Compre- | |
| | | Common Stock | | Paid in | | Compen- | | Treasury | | hensive | | Retained | | holders’ | | hensive | |
| | | Shares | | Amount | | Capital | | sation | | Stock | | Income (Loss) | | Earnings | | Equity | | Income | |
| | | | | | | | | | | | | | | | | | | | |
| Balances, January 27, 2002 | | | 149,553,130 | | $ | 150 | | $ | 456,621 | | | -- | | | -- | | $ | 108 | | $ | 306,940 | | $ | 763,819 | | | | |
| Issuance of common stock from stock plans | | | 4,421,823 | | | 4 | | | 25,483 | | | -- | | | -- | | | -- | | | -- | | | 25,487 | | | | |
| Stock option exchange offer | | | 3,815,069 | | | 4 | | | 39,902 | | | -- | | | -- | | | -- | | | -- | | | 39,906 | | | | |
| Tax benefit from stock plans | | | -- | | | -- | | | 9,180 | | | -- | | | -- | | | -- | | | -- | | | 9,180 | | | | |
| Deferred compensation | | | -- | | | -- | | | -- | | | (156 | ) | | -- | | | -- | | | -- | | | (156 | ) | | | |
| Unrealized gain | | | -- | | | -- | | | -- | | | -- | | | -- | | | 5,742 | | | -- | | | 5,742 | | | 5,742 | |
| Tax effect of unrealized gain | | | -- | | | -- | | | -- | | | -- | | | -- | | | (2,297 | ) | | -- | | | (2,297 | ) | | (2,297 | ) |
| Cumulative translation adjustments | | | -- | | | -- | | | -- | | | -- | | | -- | | | 207 | | | -- | | | 207 | | | 207 | |
| Net income | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | 90,799 | | | 90,799 | | | 90,799 | |
| Balances, January 26, 2003 | | | 157,790,022 | | | 158 | | | 531,186 | | | (156 | ) | | -- | | | 3,760 | | | 397,739 | | | 932,687 | | | 94,451 | |
| Issuance of common stock from stock plans | | | 6,355,765 | | | 6 | | | 37,667 | | | -- | | | -- | | | -- | | | -- | | | 37,673 | | | | |
| Tax benefit from stock plans | | | -- | | | -- | | | 8,488 | | | -- | | | -- | | | -- | | | -- | | | 8,488 | | | | |
| Deferred compensation | | | -- | | | -- | | | 6,140 | | | (5,984 | ) | | -- | | | -- | | | -- | | | 156 | | | | |
| Amortization of deferred compensation | | | -- | | | -- | | | -- | | | 672 | | | -- | | | -- | | | -- | | | 672 | | | | |
| Unrealized loss | | | -- | | | -- | | | -- | | | -- | | | -- | | | (4,850 | ) | | -- | | | (4,850 | ) | | (4,850 | ) |
| Tax effect of unrealized loss | | | -- | | | -- | | | -- | | | -- | | | -- | | | 1,940 | | | -- | | | 1,940 | | | 1,940 | |
| Reclassification adjustment for net gains included in net income | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | (3,159 | ) |
| Tax effect of reclassification adjustment for net gains included in net income | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | 632 | |
| Net income | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | 74,419 | | | 74,419 | | | 74,419 | |
| Balances, January 25, 2004 | | | 164,145,787 | | | 164 | | | 583,481 | | | (5,468 | ) | | -- | | | 850 | | | 472,158 | | | 1,051,185 | | | 68,982 | |
| Issuance of common stock from stock plans | | | 5,028,111 | | | 5 | | | 42,497 | | | -- | | | -- | | | -- | | | -- | | | 42,502 | | | | |
| Stock repurchase | | | (2,084,353 | ) | | -- | | | -- | | | -- | | | (24,644 | ) | | -- | | | -- | | | (24,644 | ) | | | |
| Tax benefit from stock plans | | | -- | | | -- | | | 11,845 | | | -- | | | -- | | | -- | | | -- | | | 11,845 | | | | |
| Deferred compensation | | | -- | | | -- | | | (1,205 | ) | | 1,205 | | | -- | | | -- | | | -- | | | -- | | | | |
| Amortization of deferred compensation | | | -- | | | -- | | | -- | | | 1,337 | | | -- | | | -- | | | -- | | | 1,337 | | | | |
| Unrealized loss | | | -- | | | -- | | | -- | | | -- | | | -- | | | (5,938 | ) | | -- | | | (5,938 | ) | | (5,938 | ) |
| Tax effect of unrealized loss | | | -- | | | -- | | | -- | | | -- | | | -- | | | 1,470 | | | -- | | | 1,470 | | | 1,470 | |
| Reclassification adjustment for net losses included in net income | | | -- | | | -- | | | -- | | | -- | | | -- | | | 193 | | | -- | | | 193 | | | 193 | |
| Tax effect of reclassification adjustment for net losses included in net income | | | -- | | | -- | | | -- | | | -- | | | -- | | | (38 | ) | | -- | | | (38 | ) | | (38 | ) |
| Net income | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | 100,356 | | | 100,356 | | | 100,356 | |
| Balances, January 30, 2005 | | | 167,089,545 | | $ | 169 | | $ | 636,618 | | $ | (2,926 | ) | $ | (24,644 | ) | $ | (3,463 | ) | $ | 572,514 | | $ | 1,178,268 | | $ | 96,043 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital (1) | | | Deferred Compensation | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity | | Total Comprehensive Income | |
| | | Outstanding Shares (1) | | Amount | | | | | | | | |
Balances, January 25, 2004 | | | 328,291,574 | | $ | 328 | | $ | 770,278 | | $ | (39,903 | ) | $ | — | | $ | 850 | | $ | 357,940 | | $ | 1,089,493 | | $ | 45,720 | |
| Issuance of common stock from stock plans | | | 10,056,222 | | | 10 | | | 42,492 | | | — | | | — | | | — | | | — | | | 42,502 | | | | |
| Stock repurchase | | | (4,168,706 | ) | | — | | | — | | | — | | | (24,644 | ) | | — | | | — | | | (24,644 | ) | | | |
| Tax benefit from stock-based compensation | | | — | | | — | | | 8,616 | | | — | | | — | | | — | | | — | | | 8,616 | | | | |
| Reversal of deferred compensation | | | — | | | — | | | (5,359 | ) | | 5,359 | | | — | | | — | | | — | | | — | | | | |
| Amortization of deferred compensation | | | — | | | — | | | (145 | ) | | 20,967 | | | — | | | — | | | — | | | 20,822 | | | | |
| Unrealized loss, net of $1,470 tax effect | | | — | | | — | | | — | | | — | | | — | | | (4,468 | ) | | — | | | (4,468 | ) | | (4,468 | ) |
| Reclassification adjustment for net losses included in net income, net of ($38) tax effect | | | — | | | — | | | — | | | — | | | — | | | 155 | | | — | | | 155 | | | 155 | |
| Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 88,615 | | | 88,615 | | | 88,615 | |
| Balances, January 30, 2005 | | | 334,179,090 | | | 338 | | | 815,882 | | | (13,577 | ) | | (24,644 | ) | | (3,463 | ) | | 446,555 | | | 1,221,091 | | | 84,302 | |
| Issuance of common stock from stock plans | | | 21,663,492 | | | 22 | | | 127,475 | | | — | | | — | | | — | | | — | | | 127,497 | | | | |
| Stock repurchase | | | (12,804,340 | ) | | — | | | — | | | — | | | (188,509 | ) | | — | | | — | | | (188,509 | ) | | | |
| Tax benefit from stock-based compensation | | | — | | | — | | | 24,868 | | | — | | | — | | | — | | | — | | | 24,868 | | | | |
| Cancellation of shares | | | (83,330 | ) | | — | | | (520 | ) | | — | | | 1,011 | | | — | | | — | | | 491 | | | | |
| Reversal of deferred compensation | | | — | | | — | | | (2,101 | ) | | 2,101 | | | — | | | — | | | — | | | — | | | | |
| Amortization of deferred compensation | | | — | | | — | | | — | | | 7,872 | | | — | | | — | | | — | | | 7,872 | | | | |
| Unrealized loss, net of $845 tax effect | | | — | | | — | | | — | | | — | | | — | | | (120 | ) | | — | | | (120 | ) | | (120 | ) |
| Reclassification adjustment for net losses included in net income, net of ($407) tax effect | | | — | | | — | | | — | | | — | | | — | | | 1,626 | | | — | | | 1,626 | | | 1,626 | |
| Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 301,176 | | | 301,176 | | | 301,176 | |
| Balances, January 29, 2006 | | | 342,954,912 | | | 360 | | | 965,604 | | | (3,604 | ) | | (212,142 | ) | | (1,957 | ) | | 747,731 | | | 1,495,992 | | | 302,682 | |
| Issuance of common stock from stock plans | | | 28,381,021 | | | 28 | | | 221,132 | | | — | | | — | | | — | | | — | | | 221,160 | | | | |
| Stock repurchase | | | (10,337,429 | ) | | — | | | — | | | — | | | (274,978 | ) | | — | | | — | | | (274,978 | ) | | | |
| Tax deficit from stock-based compensation | | | — | | | — | | | (8,482 | ) | | — | | | — | | | — | | | — | | | (8,482 | ) | | | |
| Reversal of deferred compensation | | | — | | | — | | | (3,604 | ) | | 3,604 | | | — | | | — | | | — | | | — | | | | |
| Stock-based compensation expense related to acquisitions | | | — | | | — | | | 2,914 | | | — | | | — | | | — | | | — | | | 2,914 | | | | |
| Stock-based compensation related to employees | | | — | | | — | | | 118,790 | | | — | | | — | | | — | | | — | | | 118,790 | | | | |
| Unrealized gain, net of $1,223 tax effect | | | — | | | — | | | — | | | — | | | — | | | 3,509 | | | — | | | 3,509 | | | 3,509 | |
| Reclassification adjustment for net gains included in net income, net of $78 tax effect | | | — | | | — | | | — | | | — | | | — | | | (116 | ) | | — | | | (116 | ) | | (116 | ) |
| Impact of change in accounting principle, net of ($379) tax effect | | | — | | | — | | | (704 | ) | | — | | | — | | | — | | | — | | | (704 | ) | | | |
| Net income | | | — | | | — | | | — | | | — | | | — | | | — | | | 448,834 | | | 448,834 | | | 448,834 | |
| Balances, January 28, 2007 | | | 360,988,504 | | $ | 388 | | $ | 1,295,650 | | $ | - | | $ | (487,120 | ) | $ | 1,436 | | $ | 1,196,565 | | $ | 2,006,919 | | $ | 452,227 | |
(1)Reflects a two-for-one stock split effective on April 6, 2006.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| Cash flows from operating activities: | | | | | | | |
| Net income | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Cumulative effect of change in accounting principle | | | (704 | ) | | — | | | — | |
| Bad debt expense (benefit) | | | 205 | | | (492 | ) | | (844 | ) |
| In-process research and development | | | 14,002 | | | — | | | — | |
| Depreciation and amortization | | | 107,562 | | | 97,977 | | | 102,597 | |
| Stock-based compensation expense related to employees | | | 116,735 | | | 7,872 | | | 20,822 | |
| Gross tax benefit from stock-based compensation | | | (188 | ) | | — | | | — | |
| Tax benefit (deficit) from stock-based compensation | | | (8,482 | ) | | 24,868 | | | 8,616 | |
| Deferred income taxes | | | 41,766 | | | (2,691 | ) | | 8,694 | |
| Net loss on retirements of property and equipment | | | 251 | | | 1,005 | | | 412 | |
| Non-cash realized gain on investment exchange | | | — | | | (96 | ) | | (533 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Accounts receivable | | | (175,261 | ) | | (21,415 | ) | | (110,312 | ) |
| Inventories | | | (91,395 | ) | | 60,916 | | | (80,906 | ) |
| Prepaid expenses and other current assets | | | (5,294 | ) | | (4,568 | ) | | (5,569 | ) |
| Deposits and other assets | | | 7,314 | | | (8,073 | ) | | (1,458 | ) |
| Accounts payable | | | 38,613 | | | (58,828 | ) | | 52,941 | |
| Accrued liabilities and other long-term liabilities | | | 93,153 | | | 48,757 | | | 49,125 | |
| Net cash provided by operating activities | | | 587,111 | | | 446,408 | | | 132,200 | |
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of marketable securities | | | (220,834 | ) | | (338,058 | ) | | (313,760 | ) |
| Proceeds from sales and maturities of marketable securities | | | 227,067 | | | 397,686 | | | 229,068 | |
| Acquisition of businesses, net of cash and cash equivalents | | | (401,800 | ) | | (12,131 | ) | | — | |
| Purchases of property and equipment and intangible assets | | | (145,256 | ) | | (79,600 | ) | | (67,261 | ) |
| Investments in affiliates | | | | | | (9,684 | ) | | - | |
| Net cash used in investing activities | | | (540,823 | ) | | (41,787 | ) | | (151,953 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from issuance of common stock under employee stock plans | | | 221,160 | | | 127,497 | | | 42,502 | |
| Payments for stock repurchases | | | (274,978 | ) | | (188,509 | ) | | (24,644 | ) |
| Gross tax benefit from stock-based compensation | | | 188 | | | — | | | — | |
| Other | | | — | | | (365 | ) | | (4,015 | ) |
| Net cash provided by (used in) financing activities | | | (53,630 | ) | | (61,377 | ) | | 13,843 | |
| Change in cash and cash equivalents | | | (7,342 | ) | | 343,244 | | | (5,910 | ) |
| Cash and cash equivalents at beginning of period | | | 551,756 | | | 208,512 | | | 214,422 | |
| Cash and cash equivalents at end of period | | $ | 544,414 | | $ | 551,756 | | $ | 208,512 | |
| | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | |
| Cash paid for interest | | $ | — | | $ | 12 | | $ | 163 | |
| Cash paid for income taxes, net | | $ | 26,628 | | $ | 3,368 | | $ | 763 | |
NVIDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In thousands)
| | Year Ended | Year Ended | Year Ended |
| | January 30, | January 25, | January 26, |
| | 2005 | 2004 | 2003 |
| Cash flows from operating activities: | | | |
| Net income | $100,356 | $74,419 | $90,799 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| In-process research and development | -- | 3,500 | -- |
| Non-cash realized gain on investment exchange | (533) | -- | -- |
| Depreciation and amortization | 102,597 | 82,016 | 58,216 |
| Net loss on retirements of property and equipment | 412 | -- | -- |
| Write-off of convertible debenture issuance costs | -- | 5,485 | -- |
| Deferred income taxes | 12,141 | 55,135 | 29,768 |
| Stock-based compensation | 1,337 | 672 | (156) |
| Issuance of common stock in exchange for stock options | -- | -- | 39,906 |
| Bad debt expense | (844) | 731 | 1,917 |
| Tax benefit from employee stock plans | 11,845 | 8,488 | 9,180 |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (110,312) | (88,222) | (20,867) |
| Inventories | (81,280) | (85,126) | 68,831 |
| Prepaid income taxes | -- | -- | 38,016 |
| Prepaid expenses and other current assets | (5,569) | (2,698) | (4,315) |
| Deposits and other assets | (1,458) | (3,482) | 63 |
| Accounts payable | 52,941 | 43,506 | (72,890) |
| Accrued liabilities | 50,567 | (44,746) | 26,564 |
| Net cash provided by operating activities | 132,200 | 49,678 | 265,032 |
| Cash flows from investing activities: | | | |
| Purchases of marketable securities | (313,760) | (734,642) | (639,500) |
| Sales and maturities of marketable securities | 229,068 | 1,021,590 | 422,200 |
| Acquisition of businesses | -- | (71,303) | (3,901) |
| Purchases of property and equipment and intangible assets | (67,261) | (127,604) | (63,123) |
| Release of restricted cash | -- | -- | 7,000 |
| Net cash provided by (used in) investing activities | (151,953) | 88,041 | (277,324) |
| Cash flows from financing activities: | | | |
| Redemption of convertible debenture | -- | (300,000) | -- |
| Common stock issued under employee stock plans | 42,502 | 37,757 | 25,487 |
| Stock repurchase | (24,644) | -- | -- |
| Sale lease back financing | -- | -- | 5,734 |
| Principal payments on capital leases | (4,015) | (8,048) | (4,935) |
| Net cash provided by (used in) financing activities | 13,843 | (270,291) | 26,286 |
| Change in cash and cash equivalents | (5,910) | (132,572) | 13,994 |
| Cash and cash equivalents at beginning of period | 214,422 | 346,994 | 333,000 |
| Cash and cash equivalents at end of period | $208,512 | $214,422 | $346,994 |
| | | | |
| Supplemental disclosures of cash flow information: | | | |
| Cash paid for interest | $163 | $15,167 | $15,100 |
| Cash paid (refund) for income taxes, net | $763 | $(211) | $(35,101) |
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| Other non-cash activities: | | | | | | | |
| Unrealized gains/losses from marketable securities | | $ | 4,492 | | $ | 1,068 | | $ | 5,745 | |
| Deferred stock-based compensation | | $ | 3,604 | | $ | (2,101 | ) | $ | (5,359 | ) |
| Acquisition of business - goodwill adjustment | | $ | 17,862 | | $ | 25,765 | | $ | 1,091 | |
| Assets acquired by assuming related liabilities | | $ | 37,251 | | $ | — | | $ | — | |
| Acquisition of business - stock option conversion | | $ | 2,914 | | $ | — | | $ | — | |
| Application of customer advance to accounts receivable | | $ | — | | $ | — | | $ | 11,508 | |
| Marketable security received from investment exchange | | $ | — | | $ | 96 | | $ | 688 | |
| Asset retirement obligation | | $ | — | | $ | 1,835 | | $ | 4,483 | |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
| Other non-cash activities: | | | | | | | |
| Acquisition of business - goodwill adjustment | | | ($1,091 | ) | $ | -- | | $ | -- | |
| Assets recorded under capital lease arrangements | | $ | -- | | $ | 2,528 | | $ | -- | |
| Application of customer advance to accounts receivable | | $ | (11,508 | ) | $ | (46,866 | ) | $ | (11,797 | ) |
| Marketable security received from investment exchange | | $ | 688 | | $ | -- | | $ | -- | |
| Asset retirement obligation | | $ | 4,483 | | $ | -- | | $ | -- | |
| Unrealized gains (losses) from marketable securities | | $ | (5,745 | ) | $ | (4,850 | ) | $ | 5,742 | |
| Deferred stock-based compensation | | $ | (1,205 | ) | $ | 6,140 | | $ | -- | |
| | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Significant Accounting Policies
Our Company
NVIDIA Corporation is athe worldwide leader in programmable graphics and digital media processors dedicatedprocessor technologies. Our products are designed to creating products that enhance the interactiveend-user experience on consumer and professional computing platforms.devices. We design, develop and markethave four major product-line operating segments: graphics processing units, or GPUs, media and communications processors, or MCPs, wireless media processors, or WMPsHandheld GPUs, and related software.Consumer Electronics. Our GPU Business is composed of products are integral to a wide variety of visual computing platforms, including enterprisethat support desktop personal computers, or PCs, consumernotebook PCs, professional workstations notebook PCs,and other GPU-based products; our MCP Business is composed of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed storage and network communications, and perform these operations independently from the host central processing unit, or CPU; our Handheld GPU Business is composed of products that support handheld personal digital assistants, or PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital media centers.consumer electronics devices and is composed of our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3, sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our objective is to be one of the most important and influential technology companiesheadquarter facilities are in the world.Santa Clara, California.
Fiscal year
We operate on a 52 or 53-week year, ending on the Sunday nearest January 31. Fiscal years 2007 and 2006 were 52-week years, compared to fiscal 2005 which was a 53-week year, comparedyear.
Stock Split
In March 2006, our Board of Directors, or the Board, approved a two-for-one stock split of our outstanding shares of common stock to fiscal 2004 whichbe effected in the form of a 100% stock dividend. The stock split was a 52-week year. The fourth quartereffective on Thursday, April 6, 2006 for stockholders of fiscal 2005 was a 14-week quarter, comparedrecord at the close of business on Friday, March 17, 2006. All share and per-share numbers contained herein have been retroactively adjusted to the fourth quarter of fiscal 2004 which was a 13-week quarter.
reflect this stock split.
Reclassifications
Certain prior fiscal year balances werehave been reclassified to conform to the current fiscal year presentation.
Principles of Consolidation
Our 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, income taxes and contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue Recognition
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured. For most sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.
Our policy on sales to distributors is to defer recognition of revenue and related cost of revenue until the distributors resell the product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates in accordance with Emerging Issues Task Force Issue 01-9, or EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate,
Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense in accordance with EITF 01-09. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, or OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products. If market conditions decline, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service arrangements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Advertising Expenses
We expense advertising costs in the period in which they are incurred. Advertising expenses for fiscal years 2007, 2006, and 2005 were $14.8 million, $9.2 million, and $15.2 million, respectively.
Rent Expense
We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred, but not paid.
Product Warranties
We generally offer limited warranty to end-users that range from one to three years for products in order to repair or replace products for any manufacturing defects or hardware component failures. Cost of revenue includes the estimated cost of product warranties that are calculated at the point of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to customers for certain products.
Foreign Currency Translation
We use the United States dollar as our functional currency for all of our subsidiaries. Foreign currency monetary assets and liabilities are remeasured into United States dollars at end-of-period exchange rates. Non-monetary assets and liabilities, including inventories, prepaid expenses and other current assets, property and equipment, deposits and other assets and equity, are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in “Other income (expense), net” and to date have not been significant. The aggregate exchange gain (loss) included in determining net income was $(0.5) million in fiscal 2007, $0.01 million in fiscal 2006 and $0.04 million in fiscal 2005.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. As of January 30, 2005,28, 2007, our cash and cash equivalents were $208.5$544.4 million, which includes $164.4$467.2 million invested in money market funds.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three monthsormonths or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased. Part of our portfolio includespurchased and some equity investments in publicly traded companies.investments. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. We follow the guidance provided by Emerging Issues Task Force Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, in order to assess whether our investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories
Inventory cost is computed on an adjusted standard basis, (whichwhich approximates actual cost on an average or first-in, first-out basis).basis. Inventory costs consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory for estimated amounts related to lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less favorable than those projected by management, or if our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when products are sold. Sales to date of such products have not had a significant impact on our gross margin. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped.
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.
Debt Financing CostsGoodwill
In connection with the Notes, see Note 12, we incurred certain direct issuance costs from third parties who performed services that assisted in the closing of the transaction. These issuance costs were included in our consolidated balance sheet under “deposits and other assets” and were amortized on a straight line basis over the term of the financing. On October 24, 2003, we fully redeemed the Notes. In connection with the redemption, we recorded a $13.1 million charge in fiscal 2004, which included the write-off of $5.5 million of unamortized issuance costs.
Advertising Expenses
We expense advertising costsaccount for goodwill in accordance with Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets. Goodwill is subject to our annual impairment test during our fourth quarter of our fiscal year, or earlier if indicators of potential impairment exist, using a fair value-based approach. Our impairment review process compares the periodfair value of the reporting unit in which they are incurred. Advertising expensesthe goodwill resides to its carrying value. For the purposes of completing our SFAS No. 142 impairment test, we perform our analysis on a reporting unit basis. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The second step, if necessary, measures the amount of such impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal 2005, 2004year. We completed our most recent annual impairment test during the fourth quarter of fiscal 2007 and 2003 were approximately $15.2 million, $11.3 million and $6.8 million, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings due to the potential for a write-down of goodwill in connection with such tests.
Revenue Recognition
Product Revenue
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured. For all sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Our policy on sales to distributors is to defer recognition of revenue and related cost of revenue until the distributors resell the product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates in accordance with Emerging Issues Task Force Issue 01-9, or EITF 01-9,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Unclaimed rebates, which historically have not been significant, are reversed to revenue upon expiration of the rebate. Rebates typically expire six months from the date of the original sale.
Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense in accordance with EITF 01-9. MDFs represent monies paid to retailers, system builders, OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products.
If market conditions decline, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
License and Development Revenue
For license arrangements that require significant customization of our intellectual property components, we generally recognize license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service arrangements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount of revenue recognized exceeds the amounts billed to customers, the excess amount is recorded as unbilled accounts receivable. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade accounts receivable. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration. All marketable securities are held in our name, managed by several investment managers and held by one major financial institution under a custodial arrangement. Two customersOne customer accounted for approximately --27%18% of our accounts receivable balance at January 30, 2005.28, 2007. We perform ongoing credit evaluations of our customers’ financial condition and maintain an allowance for potential credit losses. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144, or SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. Assets and liabilities to be disposed of would be separately presented in the consolidated balance sheet and the assets would be reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated.
Rent ExpenseFair Value of Financial Instruments
We recognize rent expenseThe carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 28, 2007 and January 29, 2006. Marketable securities are comprised of available-for-sale securities that are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Fair value of the marketable securities is determined based on a straight-line basis over the lease period and have accrued for rent expense incurred, but not paid.quoted market prices.
Accounting for Asset Retirement Obligations
In fiscal 2004, we adoptedWe account for asset retirement obligations in accordance with Statement of Financial Accounting Standards No. 143, or SFAS No. 143,Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. During fiscal 2005,years 2006 and 2007, we completedrecorded asset retirement obligations to return the leasehold improvements to their original condition upon lease termination at our headquarters facility in Santa Clara, California and recorded a liability of $4.5our leasehold improvements at our international sites. At January 28, 2007 and January 29, 2006, our net asset retirement obligations were $6.4 million to return the property to its original condition upon lease termination in fiscal year 2013.and $6.5 million, respectively.
Income Taxes
Statement of Financial Accounting Standards No. 109, or SFAS No. 109,Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as appropriate, for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)United States income tax has not been provided on earnings of our non-United States subsidiaries to the extent that such earnings are considered to be permanently reinvested.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting standards or tax laws in the United States or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential United States and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements, accordingly.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Fair Value of Financial Instruments Litigation, Investigation and Settlement Costs
The carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 30, 2005 and January 25, 2004. Marketable securities are comprised of available-for-sale securities that are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Fair value of the marketable securities is determined based on quoted market prices.
Foreign Currency Translation
From time to time, we are involved in legal actions and/or investigations by regulatory bodies. We useare aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation or investigation, and we cannot be certain that these actions or other third-party claims against us will be resolved without costly litigation, fines and/or substantial settlement payments. If that occurs, our business, financial condition and results of operations could be materially and adversely affected. If information becomes available that causes us to determine that a loss in any of our pending litigation, investigations or settlements is probable, and we can reasonably estimate the loss associated with such events, we will record the loss in accordance with accounting principles generally accepted in the United States dollar asStates. However, the actual liability in any such litigation or investigations may be materially different from our functional currency. Foreign currency monetary assets and liabilities are remeasured into United States dollars at end-of-period exchange rates. Non-monetary assets and liabilities, including inventories, prepaid expenses and other current assets, property and equipment, deposits and other assets and equity, are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses relatedestimates, which could require us to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in “Other income (expense), net” and to date have not been significant.record additional costs.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax.
Goodwill
Effective fiscal 2003, we completed the adoption of Statement of Financial Accounting Standards No. 142, or SFAS No. 142,Goodwill and Other Intangible Assets. As required by SFAS No. 142, we discontinued amortizing the remaining balances of goodwill as of the beginning of fiscal 2003. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our operating segments for the purposes of completing our SFAS No. 142 impairment test. We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. The second step, if necessary, measures the amount of such an impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal year. We completed our most recent annual impairment test during the fourth quarter of fiscal 2005 and concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings due to the potential for a write-down of goodwill in connection with such tests.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock-Based Compensation
Statement of Financial Accounting Standards No. 148, or SFAS No. 148,Accounting for Stock-Based Compensation - Transition and Disclosure, amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, or SFAS No. 123,Accounting for Stock-Based Compensation,to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results.
We use the intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, to account for our stock-based employee compensation plans. 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. Compensation cost for our stock-based compensation plans as determined consistent with SFAS No. 123, would have decreased net income to the pro forma amounts indicated below:
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | (In thousands, except per share data) | |
| Net income, as reported | | $ | 100,356 | | $ | 74,419 | | $ | 90,799 | |
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | | | 1,070 | | | 537 | | | -- | |
| Add: Stock option exchange expense included in reported net income, net of related tax effects | | | -- | | | -- | | | 37,285 | |
| Deduct: Compensation expense determined under fair value based method for stock options exchanged on October 25, 2002, net of related tax effects | | | -- | | | -- | | | (167,714 | ) |
| Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (87,071 | ) | | (74,513 | ) | | (37,698 | ) |
| Pro forma net income (loss) | | $ | 14,355 | | $ | 443 | | $ | (77,328 | ) |
| Basic net income per share - as reported | | $ | 0.60 | | $ | 0.46 | | $ | 0.59 | |
| Basic net income (loss) per share - pro forma | | $ | 0.09 | | $ | 0.00 | | $ | (0.50 | ) |
| Diluted net income per share - as reported | | $ | 0.57 | | $ | 0.43 | | $ | 0.54 | |
| Diluted net income (loss) per share - pro forma | | $ | 0.08 | | $ | 0.00 | | $ | (0.50 | ) |
For the purpose of the pro forma calculation, the fair value of options granted under the our stock option plans has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | Year Ended | Year Ended | Year Ended |
| | January 30, | January 25, | January 26, |
| | 2005 | 2004 | 2003 |
| Weighted average expected life of stock options (in years) | 4 | 4 | 4 |
| Risk free interest rate | 3.0% | 2.4% | 3.8% |
| Volatility | 75% - 80% | 80% | 88% |
| Dividend yield | -- | -- | -- |
For the first three quarters of fiscal 2005, we used a volatility factor of 80%. During the fourth quarter of fiscal 2005, we used a volatility factor of 75%. For the purpose of the pro forma calculation, the weighted-average per share fair value of options granted during the years ended January 30, 2005, January 25, 2004 and January 26, 2003 was approximately $14.10, $9.43 and $18.29, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the purpose of the pro forma calculation the fair value of shares purchased under our Employee Stock Purchase Plan, or the Purchase Plan, has been estimated at the date of purchase using the Black-Scholes option pricing model with the following assumptions:
| | Year Ended | Year Ended | Year Ended |
| | January 30, | January 25, | January 26, |
| | 2005 | 2004 | 2003 |
| Weighted average expected life (in months) | 20 | 9 | 10 |
| Risk free interest rate | 1.9% | 1.7% | 3.7% |
| Volatility | 80% | 80% | 88% |
| Dividend yield | -- | -- | -- |
For the purpose of the pro forma calculation, the weighted-average fair value of shares purchased under the Purchase Plan during the year ended January 30, 2005, January 25, 2004 and January 26, 2003 was approximately $5.28, $3.76 and $14.27, respectively.
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 the treasury stock method. Under the treasury stock method, the effect of stock options outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented:
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands, except per share data) | |
| Numerator: | | | | | | | |
| Net income | | $ | 448,834 | | $ | 301,176 | | $ | 88,615 | |
| Denominator: | | | | | | | | | | |
| Denominator for basic net income per share, weighted average shares | | | 352,404 | | | 339,380 | | | 332,124 | |
| Effect of dilutive securities: | | | | | | | | | | |
| Stock options outstanding | | | 39,100 | | | 26,324 | | | 19,500 | |
| Denominator for diluted net income per share, weighted average shares | | | 391,504 | | | 365,704 | | | 351,624 | |
| | | | | | | | | | | |
| Net income per share: | | | | | | | | | | |
| Basic net income per share | | $ | 1.27 | | $ | 0.89 | | $ | 0.27 | |
| Diluted net income per share | | $ | 1.15 | | $ | 0.82 | | $ | 0.25 | |
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | (In thousands, except per share data) | |
| Numerator: | | | | | | | |
| Numerator for basic and diluted net income per share | | $ | 100,356 | | $ | 74,419 | | $ | 90,799 | |
| | | | | | | | | | | |
| Denominator: | | | | | | | | | | |
| Denominator for basic net income per share, weighted average shares | | | 166,062 | | | 160,924 | | | 153,513 | |
| Effect of dilutive securities: | | | | | | | | | | |
| Stock options outstanding | | | 10,496 | | | 11,783 | | | 14,880 | |
| Denominator for diluted net income per share, weighted average shares | | | 176,558 | | | 172,707 | | | 168,393 | |
| | | | | | | | | | | |
| Net income per share: | | | | | | | | | | |
| Basic net income per share | | $ | 0.60 | | $ | 0.46 | | $ | 0.59 | |
| Diluted net income per share | | $ | 0.57 | | $ | 0.43 | | $ | 0.54 | |
Diluted net income per share does not include the effect of the following anti-dilutive common equivalent shares:
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | (In thousands) | |
| Stock options outstanding | | | 13,740 | | | 7,906 | | | 5,892 | |
| Convertible subordinated debentures (equivalent common shares upon assumed conversion) | | | -- | | | -- | | | 6,472 | |
| | | | 13,740 | | | 7,906 | | | 12,364 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
shares from stock options outstanding of 8.9 million, 11.6 million and 27.4 million for fiscal years 2007, 2006 and 2005, respectively. The weighted-averageweighted average exercise price of stock options excluded from the computation of diluted earnings per share was $27.86, $29.63$30.14, $17.79 and $32.45 for the years ended January 30, 2005, January 25, 2004 and January 26, 2003, respectively. The convertible subordinated debentures were convertible into shares of common stock at a conversion price of $46.36 per share and were anti-dilutive for the year ended January 26, 2003. The convertible subordinated debentures were redeemed on October 24, 2003.
Recently Issued Accounting Pronouncements
In March 2004, the FASB approved the consensus reached on the Emerging Issues Task Force Issue No. 03-1, or EITF 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.EITF 03-1 provides guidance for identifying impaired investments and new disclosure requirements for investments that are deemed to be temporarily impaired. On September 30, 2004, the FASB issued a final staff position EITF Issue 03-1-1 that delays the effective date for the measurement and recognition guidance included in paragraphs 10 through 20 of EITF 03-1. Quantitative and qualitative disclosures required by EITF 03-1 remain effective$13.93 for fiscal 2005. We do not believe the impact of adoption of this EITF consensus willhave a material impact on our consolidated financial position, results of operations or cash flows.
In November 2004, the FASB issued No. 151, or SFAS No. 151,Inventory Costs,an amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costsyears 2007, 2006 and wasted material (spoilage) should be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. The provision of SFAS No. 151 shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS No. 151 to have a material impact on our consolidated financial position, results of operations or cash flows.2005, respectively.
In December 2004, the FASB issued SFAS No. 153, or SFAS No. 153,Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS 153 to have a material impact on our consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R),Share-Based Payment, which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) is effective for all interim and annual periods beginning after June 15, 2005. We are currently evaluating the impact of SFAS No. 123(R) on our operating results and financial condition.The adoption of the SFAS No. 123(R) fair value method will have a material and adverse impact on our reported results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because that will depend on the fair value and number of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the magnitude of the impact of that standard would have approximated the impact ofStatement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation, assuming the application of the Black-Scholes model as described in the disclosure of pro forma net income (loss) and pro forma net income (loss) per share inNote 1 of the Notes to the Consolidated Financial Statements under the subheading “Stock-Based Compensation.” SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2 - Acquisition of MediaQ, Inc.
On August 19, 2003, we completed the acquisition of MediaQ, Inc., or MediaQ, a leading provider of graphics and multimedia technology for wireless mobile devices. Our primary reasons for the acquisition of MediaQ, Inc. were to accelerate our entry into the handheld devices market, use MediaQ’s two-dimensional, or 2D, and low power capabilities, allowing us to continue to focus on three-dimensional, or 3D, and advanced video efforts, use existing MediaQ channel and design wins, and enhance MediaQ’s PDA business through our existing OEM and ODM channels.
The aggregate purchase price consisted of cash consideration of approximately $71.3 million, including $1.3 million of direct acquisition costs. Following is a summary of estimated fair values of the assets acquired and liabilities assumed:
| | Fair Market Value
| | Straight-LineDepreciation/Amortization Period
| |
| | (In thousands)
| | | |
Accounts receivable | | $ | 1,505 | | | -- | |
Inventories | | | 4,066 | | | -- | |
Other assets | | | 323 | | | -- | |
Property and equipment | | | 1,460 | | | 9 months - 3 years | |
Deferred income tax assets | | | 1,601 | | | -- | |
In-process research and development | | | 3,500 | | | -- | |
Goodwill | | | 52,913 | | | -- | |
Intangible assets: | | | | | | | |
Existing technology | | | 13,100 | | | 1 - 3 years | |
Customer relationships | | | 2,100 | | | 18 months | |
Backlog | | | 600 | | | 3 months | |
Non-compete agreement | | | 150 | | | 18 months | |
Total assets acquired | | $ | 81,318 | | | | |
| | | | | | | |
Current liabilities | | $ | (1,767 | ) | | -- | |
Current liabilities recognized in connection with the business combination | | | (1,868 | ) | | -- | |
Long-term deferred income tax liabilities | | | (6,380 | ) | | -- | |
Total liabilities assumed | | $ | (10,015 | ) | | | |
| | | | | | | |
Net assets acquired | | $ | 71,303 | | | | |
The amount of the purchase price allocated to purchased in-process research and development, or IPR&D, represents the value assigned to research and development projects of MediaQ that had commenced but had not yet reached technological feasibility and have no alternative future use. In accordance with SFAS No. 2,Accounting for Research and Development Costs, as clarified by FIN 4,Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of FASB Statement No. 2,amounts assigned to IPR&D meeting the above-stated criteria were charged to expense as part of the allocation of the purchase price.
The pro forma results of operations have not been presented for the acquisition of MediaQ because the effect of this acquisition was not considered material.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, Accounting for Income Taxes. Under FIN 48 a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits, and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the financial statements. Any differences between tax liability amounts recognized in the statements of operations as a result of adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 will be effective as of first quarter of fiscal 2008. We believe that the cumulative effect of adoption of FIN 48 will not result in any material change to the beginning balance of our retained earnings.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We are required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April 29, 2007. We do not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 108, or SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We adopted the provisions of SAB No. 108 in our fiscal year 2007. The adoption of SAB No. 108 did not have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We are required to adopt the provisions of SFAS No. 159 beginning with our fiscal quarter ending April 27, 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial position, results of operations or cash flows.
Note 2 - Stock-Based Compensation
Effective January 30, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the awards, and is recognized as expense over the requisite employee service period.
Prior to the adoption of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion No. 25, or APB No. 25, Accounting for Stock Issued to Employees, and related interpretations to account for our stock-based employee compensation plans. As such, compensation expense was recorded if on the date of grant the current fair value per share of the underlying stock exceeded the exercise price per share. We provided the disclosures required under Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures, in our periodic reports.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The pro forma information required under SFAS No. 123(R) for periods prior to fiscal 2007 as if we had applied the fair value recognition provisions of SFAS No. 123 to awards granted under our equity incentive plans was as follows for the periods presented:
| | | Year Ended | |
| | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands, except per share data) | |
| Net income, as reported | | $ | 301,176 | | $ | 88,615 | |
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | | | 6,644 | | | 17,241 | |
Deduct: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects | | | (90,405 | ) | | (108,430 | ) |
| Pro forma net income (loss) | | $ | 217,415 | | $ | (2,574 | ) |
| | | | | | | | |
| Basic net income per share - as reported | | $ | 0.89 | | $ | 0.27 | |
| Basic net income (loss) per share - pro forma | | $ | 0.64 | | $ | (0.01 | ) |
| Diluted net income per share - as reported | | $ | 0.82 | | $ | 0.25 | |
| Diluted net income (loss) per share - pro forma | | $ | 0.60 | | $ | (0.01 | ) |
Impact of the adoption of SFAS No. 123(R)
We elected to adopt the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R). Accordingly, during fiscal 2007, we recorded stock-based compensation expense for awards granted prior to, but not yet vested, as of January 29, 2006, equal to the amount that would have been recognized if the fair value method required for pro forma disclosure under SFAS No. 123 had been in effect for expense recognition purposes, adjusted for estimated forfeitures. For options granted in fiscal 2007, we measured compensation expense under the provisions of SFAS No. 123(R). We recognized stock-based compensation expense using the straight-line attribution method. Previously reported amounts have not been restated. The effect of stock-based compensation expense, net of associated payroll taxes, for the year ended January 28, 2007 on net income was as follows:
| | | Year Ended | |
| | | January 28, 2007 | |
| | | (In thousands) | |
| Stock-based compensation expense by type of award: | | | |
| Employee stock options | | $ | 108,654 | |
| Employee stock purchase plan | | | 9,717 | |
| Amount capitalized as inventory | | | (1,636 | ) |
| Total stock-based compensation | | | 116,735 | |
| Tax effect of stock-based compensation | | | (13,995 | ) |
| Net effect on net income | | $ | 102,740 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Cumulative Effect of Change in Accounting Principle
The adoption of SFAS No. 123(R) resulted in a cumulative benefit from accounting change of $0.7 million for the three months ended April 30, 2006, which reflects the net cumulative impact of estimating forfeitures in the determination of period expense by reversing the previously recognized cumulative compensation expense related to those forfeitures, rather than recording forfeitures when they occur as previously permitted.
The income statement includes stock-based compensation expense, net of associated payroll taxes, and amounts capitalized as inventory, as follows:
| | | | Year Ended | |
| | | | January 28, | | January 29, | | January 30, | |
| | | | 2007 | | 2006 | | 2005 | |
| | | | (In thousands) | |
| Cost of revenue | | | $ | 8,200 | | $ | 829 | | $ | 1,998 | |
| Research and development | | | | 70,077 | | | 5,943 | | | 14,074 | |
| Sales, general and administrative | | | | 38,458 | | | (2,243) | | | 3,682 | |
| Total | | | $ | 116,735 | | $ | 4,529 | | $ | 19,754 | |
Prior to adopting SFAS No. 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in our Statement of Cash Flows. However, as required by our adoption of SFAS No. 123(R) during the twelve months ended January 28, 2007, we began classifying cash flows resulting from gross tax benefits as a part of cash flows from financing activities. Gross tax benefits are realized tax benefits from tax deductions for exercised options in excess of cumulative compensation cost for those instruments recognized in our consolidated financial statements. The effect of this change in classification on our Consolidated Statement of Cash Flows resulted in cash used from operations of $0.2 million and cash provided from financing activities of $0.2 million for the year ended January 28, 2007.
As of January 29, 2006, we had unearned stock-based compensation related to stock options of $167.9 million before the impact of estimated forfeitures. In our pro forma footnote disclosures prior to the adoption of SFAS No. 123(R), we accounted for forfeitures upon occurrence. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of January 30, 2006, we estimated that stock-based compensation expense for the awards that are not expected to vest was $32.4 million, and, therefore, the unearned stock-based compensation expense related to stock options was adjusted to $135.5 million after estimated forfeitures.
During the twelve months ended January 28, 2007, we granted approximately 11.9 million stock options with an estimated total grant-date fair value of $138.4 million, and a weighted average grant-date fair value of $11.78 per option. Of this amount, we estimated that the stock-based compensation expense related to the awards that are not expected to vest was $26.7 million.
As of January 28, 2007, the aggregate amount of unearned stock-based compensation expense related to our stock options was $167.6 million, adjusted for estimated forfeitures, which we will recognize over an estimated weighted average amortization period of 2.0 years.
Approximately $1.6 million of stock-based compensation was capitalized as inventory for the twelve months ending January 28, 2007.
Stock-based compensation expense that would have been recorded under APB No. 25 during the twelve months ended January 28, 2007 was approximately $3.0 million. Upon our adoption of SFAS No. 123(R), we reclassified the unearned stock-based compensation expense balance of approximately $3.6 million that would have been recorded under APB No. 25 to additional paid-in capital in our Consolidated Balance Sheet. The adoption of SFAS No. 123(R) reduced our basic and diluted earnings per share by $0.28 and $0.25, respectively, for the year ended January 28, 2007.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Valuation Assumptions
At the beginning of fiscal 2006, we transitioned from a Black-Scholes model to a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our stock option plans. As a result of regulatory guidance, including SEC Staff Accounting Bulletin No. 107, or SAB No. 107, Share-Based Payment, and in anticipation of the impending effective date of SFAS No. 123(R), we reevaluated the assumptions we used to estimate the value of employee stock options and shares issued under our employee stock purchase plan, beginning with stock options granted and shares issued under our employee stock purchase plan in the first quarter of fiscal 2006. At that time, our management also determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility.
Additionally, in the first quarter of fiscal 2006, we began segregating options into groups for employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. Our management believes the resulting binomial calculation provides a more refined estimate of the fair value of our employee stock options. For our employee stock purchase plan we continued to use the Black-Scholes model. The fair value of stock options granted under our stock option plans, and shares issued under our employee stock purchase plan have been estimated at the date of grant using a straight-line attribution method with the following assumptions:
| | Stock Options | |
| | Year Ended January 28, 2007 | | Year Ended January 29, 2006 | | Year Ended January 30, 2005 | |
| | (Using a binomial model) | | (Using a binomial model) | | (Using the Black-Scholes model) | |
| Weighted average expected life of stock options (in years) | | | 3.6 - 5.1 | | | 3.6 - 5.1 | | | 4.0 | |
| Risk free interest rate | | | 4.7% - 5.1 | % | | 4.0% - 4.4 | % | | 3.0 | % |
| Volatility | | | 39% - 51 | % | | 34% - 48 | % | | 75% - 80 | % |
| Dividend yield | | | — | | | — | | | — | |
| | Employee Stock Purchase Plan |
| | | Year Ended January 28, 2007 | | | Year Ended January 29, 2006 | | | Year Ended January 30, 2005 | |
| | | (Using the Black-Scholes model) | | | (Using the Black-Scholes model) | | | (Using the Black-Scholes model) | |
| Weighted average expected life of stock options (in years) | | | 0.5 - 2.0 | | | 0.5 - 2.0 | | | 0.5 - 2.0 | |
| Risk free interest rate | | | 1.6% - 5.2 | % | | 0.9% - 3.7 | % | | 1.1% - 2.1 | % |
| Volatility | | | 30% - 47 | % | | 30% - 45 | % | | 80 | % |
| Dividend yield | | | — | | | — | | | — | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Equity Incentive Program
Overview. We consider equity compensation to be long term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. We believe that properly structured equity compensation aligns the long-term interests of stockholders and employees by creating a strong, direct link between employee compensation and stock appreciation, as stock options are only valuable to our employees if the value of our common stock increases after the date of grant.
PortalPlayer, Inc. 2004 Stock Incentive Plan
We assumed the PortalPlayer, Inc. 2004 stock incentive plan, or the 2004 Plan, and all related outstanding options in connection with our acquisition of PortalPlayer, Inc., or PortalPlayer, on January 5, 2007. The 2004 Plan was adopted by the PortalPlayer stockholders in 2004 and as of January 28, 2007, 1,017,644 shares of NVIDIA common stock were authorized for issuance under the 2004 Plan. In addition, any shares subject to outstanding options under the PortalPlayer 1999 stock option plan that expire unexercised or any unvested shares that are forfeited will be available for issuance under the 2004 Plan. The number of shares authorized for issuance under the 2004 Plan will be increased on January 1 from 2007 through 2009 by 460,033 shares and on January 1 from 2010 through 2014 by 276,000 or a number of shares determined by the Board.
Each option we assumed in connection with our acquisition of PortalPlayer has been converted into the right to purchase that number of shares of NVIDIA common stock determined by multiplying the number of shares of PortalPlayer common stock underlying such option by 0.3601 and then rounding down to the nearest whole number of shares. The exercise price per share for each assumed option has been similarly adjusted by dividing the exercise price by 0.3601 and then rounding up to the nearest whole cent. Vesting schedules and expiration dates for the assumed options did not change.
Under the 2004 Plan, options generally vest as to 25% of the shares one year after the date of grant and as to 1/48th of the shares each month thereafter and expire ten years from the date of grant.
PortalPlayer, Inc. 1999 Stock Option Plan
We assumed options issued under the PortalPlayer, Inc. 1999 Stock Option Plan, or the 1999 Plan, when we completed our acquisition of PortalPlayer on January 5, 2007. The 1999 Plan was terminated upon completion of PortalPlayer’s initial public offering of common stock in calendar 2004. No shares of common stock are available for issuance under the 1999 Plan other than to satisfy exercises of stock options granted under the 1999 Plan prior to its termination and any shares that become available for issuance as a result of expiration or cancellation of an option that was issued pursuant to the 1999 Plan shall become available for issuance under the 2004 Plan. Previously authorized yet unissued shares under the 1999 Plan were cancelled upon completion of PortalPlayer’s initial public offering.
Each option we assumed in connection with our acquisition of PortalPlayer has been converted into the right to purchase that number of shares of NVIDIA common stock determined by multiplying the number of shares of PortalPlayer common stock underlying such option by 0.3601 and then rounding down to the nearest whole number of shares. The exercise price per share for each assumed option has been similarly adjusted by dividing the exercise price by 0.3601 and then rounding up to the nearest whole cent. Vesting schedules and expiration dates did not change.
Under the 1999 Plan, incentive stock options were granted at a price that was not less than 100% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant. Non-statutory stock options were granted at a price that was not less than 85% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant.
Generally, options granted under the 1999 Plan are exercisable for a period of ten years from the date of grant, and shares vest at a rate of 25% on the first anniversary of the grant date of the option, and an additional 1/48th of the shares upon completion of each succeeding full month of continuous employment thereafter.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2000 Nonstatutory Equity Incentive Plan
On August 1, 2000, our Board approved the 2000 Nonstatutory Equity Incentive Plan, or the 2000 Plan, to provide for the issuance of our common stock to employees and affiliates who are not directors, executive officers or 10% stockholders. The 2000 Plan provides for the issuance of nonstatutory stock options, stock bonuses, restricted stock purchase rights, restricted stock unit awards and stock appreciation rights. Options granted under the 2000 plan generally expire in six to 10 years from the date of grant. The Compensation Committee appointed by the Board, or the Compensation Committee, has the authority to amend the 2000 Plan and to determine the option term, exercise price and vesting period of each grant. Options granted to new employees prior to February 10, 2004, 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. From February 10, 2004, initial options granted to new employees generally vest ratably quarterly over a three-year period. Grants to existing employees in recognition of performance generally vest as to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to the option in equal quarterly installments over a nine month period. We amended our 2000 Plan in October 2006 to add the ability to issue restricted stock unit awards and stock appreciation rights and make certain other modifications. There were a total of 21,939,202 shares authorized for issuance and 18,776,119 shares available for future issuance under the 2000 Plan as of January 28, 2007.
1998 Equity Incentive Plan
The 1998 Equity Incentive Plan, or the 1998 Plan, was adopted by our Board on February 17, 1998 and was approved by our stockholders on April 6, 1998 as an amendment and restatement of our then existing Equity Incentive Plan which had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of our 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. There were a total of 110,094,385 shares authorized for issuance and 2,570,982 shares available for future issuance under the 1998 Plan as of January 28, 2007.
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 must be no less than 85% of the fair market value on the date of grant.
Option grants issued under the 1998 Plan generally expire in six to ten years from the date of grant. Vesting periods are determined by the Board or the Compensation Committee. Initial option grants to new employees made after February 10, 2004 under the 1998 Plan generally vest ratably quarterly over a three year period. Subsequent option grants generally vest up to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to the option in quarterly installments over a nine month period.
1998 Non-Employee Directors’ Stock Option Plan
In February 1998, our Board adopted the 1998 Non-Employee Directors’ Stock Option Plan, or the Directors’ Plan, to provide for the automatic grant of non-qualified options to purchase shares of our common stock to our directors who are not employees or consultants of us or of an affiliate of us.
In July 2000, the Board amended the 1998 Plan to incorporate the automatic grant provisions of the Directors’ Plan into the 1998 Plan. Future automatic grants to non-employee directors will be made according to the terms of the Directors’ Plan, but will be made out of the 1998 Plan until such time as shares may become available for issuance under the amended Directors’ Plan. In May 2002, and subsequently in March 2006, the Directors’ Plan was amended further to reduce the number of shares granted to our non-employee directors. The altered automatic grant provisions of the Directors’ Plan are also incorporated into the 1998 Plan. The terms of the amended Directors’ Plan are described below.
Under the amended Directors’ Plan, each non-employee director who is elected or appointed to our Board for the first time is automatically granted an option to purchase 90,000 shares, which vests quarterly over a three-year period, or Initial Grant.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On August 1 each year, each non-employee director is automatically granted an option to purchase 30,000 shares, or Annual Grant. These Annual Grants will begin vesting on the second anniversary of the date of the grant and vest quarterly during the next year. The Annual Grants will be fully vested on the third anniversary of the date of the grant, provided that the director attended at least 75% of the meetings during the year following the date of the grant.
On August 1 of each year, each non-employee director who is a member of a committee of the Board, except for the Nominating and Corporate Governance Committee, will automatically be granted an option to purchase 10,000 shares, or the Committee Grant. The Committee Grants vests in full on the first anniversary of the date of the grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant. Directors who were members of two committees, Messrs. Cox, Gaither and Jones, waived their grant of an additional 10,000 shares for being a member of a second committee in fiscal 2005 and 2006.
If a non-employee director fails to attend at least 75% of the regularly scheduled meetings during the year following the grant of an option, rather than vesting as described previously, the Committee Grants 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, and the Annual Grants will vest 30% upon the three-year anniversary of the grant date and 70% for the fourth year, such that in each case the entire option will become fully vested on the four-year anniversary of the date of the grant. For Annual Grants and Committee Grants, if the person has not been serving on the Board or committee since a prior year’s annual meeting, 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 in such capacity.
The Compensation Committee administers the amended Directors’ Plan. A total of 1,200,000 shares have been authorized and issued under the amended Directors’ Plan of which none is available for future issuance as of January 28, 2007. As described above, future grants to non-employee directors will be made out of the 1998 Plan.
1998 Employee Stock Purchase Plan
In February 1998, our Board approved the 1998 Employee Stock Purchase Plan, or 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 our 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 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 from the Purchase Plan could not exceed 52,000,000 shares. The number of shares will no longer be increased annually as we reached the maximum permissible number of shares at the end of fiscal 2006. There are a total of 52,000,000 shares authorized for issuance. At January 28, 2007, 18,857,690 shares have been issued under the Purchase Plan and 33,142,310 shares are available for future issuance.
The Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board has authorized participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. Under the Purchase Plan, separate offering periods shall be no longer than 27 months. Under the current offering adopted pursuant to the Purchase Plan, each offering period is 24 months, which is divided into four purchase periods of 6 months.
Employees are eligible to participate if they are employed by us or an affiliate of us as designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld pursuant to the Purchase Plan up to certain limitations 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 the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period at 85% at the fair market value of the common stock on the relevant purchase date. During fiscal 2007, 2006 and 2005, employees purchased approximately 3.8 million, 3.6 million, and 4.0 million shares with weighted-average prices of $6.42, $5.59, and $4.36 per share, respectively, and grant-date fair values of $3.64, $1.70, and $1.57 per share, respectively. Employees may end their participation in the Purchase Plan at any time during the offering period, and participation ends automatically on termination of employment with us and in each case their contributions are refunded.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following summarizes the transactions under the 1998 Plan, 2000 Plan, 1999 Plan, 2004 Plan and Directors’ Plan:
| | Options Available for Grant | | Options Outstanding | | Weighted Average Exercise Price Per Share | |
| Balances, January 25, 2004 | | 57,914,062 | | | 85,533,410 | | $ | 7.10 | |
| Authorized | | - | | | - | | | - | |
| Granted | | (17,029,852 | ) | | 17,029,852 | | | 11.74 | |
| Exercised | | - | | | (6,103,750 | ) | | 4.10 | |
| Cancelled | | 4,139,198 | | | (4,139,198 | ) | | 9.41 | |
| Balances, January 30, 2005 | | 45,023,408 | | | 92,320,314 | | $ | 8.05 | |
| Authorized | | - | | | - | | | | |
| Granted | | (16,417,786 | ) | | 16,417,786 | | | 13.87 | |
| Exercised | | - | | | (18,074,266 | ) | | 5.95 | |
| Cancelled | | 2,705,354 | | | (2,705,354 | ) | | 10.29 | |
| Balances, January 29, 2006 | | 31,310,976 | | | 87,958,480 | | $ | 9.50 | |
| Authorized | | 1,091,383 | | | - | | | - | |
| Granted and assumed | | (12,539,612 | ) | | 12,539,612 | | | 29.60 | |
| Exercised | | - | | | (24,585,893 | ) | | 8.01 | |
| Cancelled | | 1,917,537 | | | (1,917,537 | ) | | 13.42 | |
| Balances, January 28, 2007 | | 21,780,284 | | | 73,994,662 | | $ | 13.29 | |
The following table summarizes the options outstanding, options vested and expected to vest and options exercisable as of January 28, 2007:
| | | Options Outstanding | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) | |
| Options outstanding | | | 73,994,662 | | $ | 13.29 | | | 3.77 | | $ | 1,363,448,818 | |
| Options vested and expected to vest | | | 66,365,198 | | $ | 12.40 | | | 3.70 | | $ | 1,282,391,307 | |
| Options exercisable | | | 42,212,234 | | $ | 9.30 | | | 3.25 | | $ | 943,461,713 | |
(1) The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at January 28, 2007, based on the $31.47 closing stock price of our common stock on the NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of January 28, 2007 was 72.2 million shares and 41.9 million shares, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about stock options outstanding as of January 28, 2007:
| | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable | |
Range of Exercise Prices | | Number Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Number Exercisable | | Weighted Average Exercise Price | |
| $0.16 - $0.17 | | | 105,000 | | | 0.6 | | $ | 0.16 | | | 105,000 | | $ | 0.16 | |
| 0.33 - 0.40 | | | 290,537 | | | 0.9 | | $ | 0.38 | | | 290,537 | | $ | 0.38 | |
| 0.69 - 0.97 | | | 3,740,783 | | | 1.3 | | $ | 0.87 | | | 3,740,783 | | $ | 0.87 | |
| 1.13 - 1.25 | | | 112,327 | | | 2.8 | | $ | 1.15 | | | 97,409 | | $ | 1.13 | |
| 2.05 - 2.94 | | | 3,006,036 | | | 2.5 | | $ | 2.35 | | | 3,004,052 | | $ | 2.35 | |
| 3.83 - 5.54 | | | 4,970,417 | | | 3.6 | | $ | 4.70 | | | 4,830,338 | | $ | 4.73 | |
| 5.76 - 8.59 | | | 13,470,438 | | | 3.0 | | $ | 7.27 | | | 10,562,463 | | $ | 7.30 | |
| 8.77 - 13.13 | | | 23,143,952 | | | 3.7 | | $ | 11.76 | | | 11,881,607 | | $ | 11.40 | |
| 13.19 - 19.77 | | | 11,958,889 | | | 4.4 | | $ | 16.30 | | | 5,980,184 | | $ | 16.29 | |
| 20.63 - 30.90 | | | 11,498,508 | | | 5.3 | | $ | 27.10 | | | 1,449,430 | | $ | 22.73 | |
| 31.97 - 46.94 | | | 1,380,007 | | | 6.1 | | $ | 37.06 | | | 123,646 | | $ | 44.65 | |
| 48.99 - 73.01 | | | 251,356 | | | 7.2 | | $ | 61.62 | | | 111,935 | | $ | 60.50 | |
| 73.87 - 86.40 | | | 65,361 | | | 6.2 | | $ | 79.04 | | | 33,799 | | $ | 79.75 | |
| 312.42 - 312.42 | | | 200 | | | 1.0 | | $ | 312.42 | | | 200 | | $ | 312.42 | |
| 1,249.66 and above | | | 851 | | | 3.0 | | $ | 1,324.55 | | | 851 | | $ | 1,324.55 | |
| | | | 73,994,662 | | | 3.8 | | $ | 13.29 | | | 42,212,234 | | $ | 9.30 | |
| | Year Ended | |
| | January 28, 2007 | |
| Total intrinsic value of options exercised | | $ | 530.7 million | |
| Total cash received from employees as a result of employee stock option exercises | | $ | 196.2 million | |
We settle employee stock option exercises with newly issued common shares. We do not have any equity instruments outstanding other than the options described above as of January 28, 2007.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3 - 3dfx
TheDuring fiscal year 2002, we completed the purchase of certain assets from 3dfx assetInteractive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement, which closed on April 18, 2001.2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the Asset Purchase Agreement, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets. We are currently party
In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court which sought, among other things, payments from us as additional purchase price related to litigation relating toour purchase of certain aspectsassets of 3dfx. In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached a conditional settlement of the asset purchaseTrustee’s claims against NVIDIA. This conditional settlement, presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and 3dfx’s subsequent bankruptcy in October 2002. Please refer to Note 12the review and approval of the NotesBankruptcy Court after notice and hearing. The Trustee advised that he intended to object to the Consolidated Financial Statementssettlement, which would have called for further information regarding this litigation.a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, the conditional settlement never progressed substantially through the confirmation process. On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the bankruptcy court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.
The 3dfx asset purchase price of $70.0$95.0 million and $4.2 million of direct transaction costs of $4.2 million were allocated based on fair values presented below. Upon the adoption of Statement of Financial Accounting Standards No. 142, or SFAS No. 142, approximately $3.0 million of intangible assets previously allocated to workforce in place were reclassified into goodwill in fiscal 2003. In addition, amortization of goodwill ceased in accordance with SFAS No. 142.
| | | Fair Market Value | | Straight-Line Amortization Period | |
| | | (In thousands) | | (Years) | |
| | | | | | |
| Property and equipment | | $ | 2,433 | | | 1-2 | |
| Trademarks | | | 11,310 | | | 5 | |
| Goodwill | | | 60,418 | | | -- | |
| Total | | $ | 74,161 | | | | |
The final allocation of the purchase price of the 3dfx assets is contingent upon the amountoutcome of and circumstances surrounding additional consideration, if any, that we may pay related toall of the 3dfx asset purchase.
litigation. Please see Note 4 - Goodwill
The carrying amount of goodwill is as follows:
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | (In thousands) | |
| 3dfx | | $ | 50,326 | | $ | 50,326 | | $ | 50,326 | |
| MediaQ | | | 52,913 | | | 53,695 | | | -- | |
| Other | | | 4,868 | | | 4,888 | | | 3,901 | |
| Total goodwill | | $ | 108,107 | | $ | 108,909 | | $ | 54,227 | |
In fiscal 2005, the amount allocated to MediaQ goodwill changed to $52,913 as a result of additional information that became available. This information was primarily related to liabilities that were less than originally estimated at the time of acquisition.
During the second quarter of fiscal 2005, our chief operating decision maker, the Chief Executive Officer, began reviewing financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. We reassigned goodwill to the affected reporting units by using a "relative fair value" allocation approach. The amount of goodwill allocated to our GPU, MCP, WMP and All Other segments as of January 30, 2005, was $78.1 million, $11.4 million, $11.6 million and $7.0 million, respectively. Please refer to Note 1512 for further segment information.information regarding this litigation.
| | | Fair Market Value | | Straight-Line Amortization Period | |
| | | (In thousands) | | (Years) | |
| Property and equipment | | $ | 2,433 | | | 1-2 | |
| Trademarks | | | 11,310 | | | 5 | |
| Goodwill | | | 85,418 | | | -- | |
| Total | | $ | 99,161 | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4 - (Continued)Business Combinations
On February 20, 2006, we completed our acquisition of ULi Electronics, Inc., or ULi, a core logic developer for the personal computer, or PC, industry. The acquisition represents our ongoing investment in our platform solution strategy and has strengthened our sales, marketing, and customer engineering presence in Taiwan and China. The aggregate purchase price consisted of cash consideration of approximately $53.1 million.
On March 29, 2006, we completed our acquisition of Hybrid Graphics Ltd., or Hybrid Graphics, a developer of embedded 2D and 3D graphics software for handheld devices. The aggregate purchase price consisted of cash consideration of approximately $36.7 million.
On January 5, 2007, we completed our acquisition of PortalPlayer, a leading supplier of semiconductors, firmware, and software for personal media players, or PMPs, and secondary display-enabled computers. We believe that the acquisition will accelerate our ongoing investment in our handheld product strategy. Pursuant to the terms of the acquisition, we paid cash consideration of approximately $344.9 million in exchange for common stock in PortalPlayer and recognized an additional purchase price of $2.9 million, the value of approximately 658,000 options of NVIDIA common stock issued upon conversion of outstanding PortalPlayer stock options.
We allocated the purchase price of each of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired, as well as in-process research and development, or IPR&D, if identified, based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions determined by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives. The allocation of the purchase price has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available.
The following is a summary of estimated fair values of the assets we acquired and liabilities we assumed as of January 28, 2007 for acquisitions we completed in fiscal 2007:
| | | ULi | | Hybrid Graphics | | PortalPlayer | |
| | | (In thousands) | |
Fair Market Values | | | | | | | |
| Cash and cash equivalents | | $ | 21,551 | | $ | 1,180 | | $ | 10,174 | |
| Marketable Securities | | | - | | | - | | | 176,492 | |
| Accounts receivable | | | 8,148 | | | 808 | | | 16,480 | |
| Inventories | | | 4,896 | | | - | | | 1,883 | |
| Other assets | | | 935 | | | 73 | | | 12,945 | |
| Property and equipment | | | 1,010 | | | 134 | | | 9,755 | |
| In-process research and development | | | - | | | 602 | | | 13,400 | |
| Goodwill | | | 31,051 | | | 27,906 | | | 114,816 | |
| Intangible assets: | | | | | | | | | | |
| Existing technology | | | 2,490 | | | 5,179 | | | 8,900 | |
| Customer relationships | | | 653 | | | 2,650 | | | 2,700 | |
| Trademark | | | - | | | 482 | | | - | |
| Non-compete agreements | | | - | | | 72 | | | - | |
| Total assets acquired | | | 70,734 | | | 39,086 | | | 367,545 | |
| Current liabilities | | | (16,878 | ) | | (1,373 | ) | | (12,139 | ) |
| Acquisition related costs | | | (781 | ) | | (740 | ) | | (7,516 | ) |
| Long-term liabilities | | | - | | | (301 | ) | | (46 | ) |
| Total liabilities assumed | | | (17,659 | ) | | (2,414 | ) | | (19,701 | ) |
| Net assets acquired | | $ | 53,075 | | $ | 36,672 | | $ | 347,844 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
| | ULi | | Hybrid Graphics | | PortalPlayer | |
| | Straight-line depreciation / amortization period | |
| Property and equipment | | | 4 - 49 months | | | 1 month - 36 months | | | 3 months - 60 months | |
| Intangible assets: | | | | | | | | | | |
| Existing technology | | | 3 years | | | 3 years | | | 3 years | |
| Customer relationships | | | 3 years | | | 3 years | | | 3 years | |
| Trademark | | | - | | | 3 years | | | - | |
| Non-compete agreements | | | - | | | 3 years | | | - | |
The amount of the IPR&D represents the value assigned to research and development projects of Hybrid Graphics and PortalPlayer that had commenced but had not yet reached technological feasibility and had no alternative future use. In accordance with Statement of Financial Accounting Standards No. 2, or SFAS No. 2, Accounting for Research and Development Costs, as clarified by FASB issued Interpretation No. 4, or FIN 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of FASB Statement No. 2, amounts assigned to IPR&D meeting the above-stated criteria were charged to research and development expenses as part of the allocation of the purchase price.
The pro forma results of operations for these acquisitions have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to our results.
Note 5 - Goodwill
The carrying amount of goodwill is as follows:
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
| 3dfx | | $ | 75,326 | | $ | 75,326 | |
| MediaQ | | | 35,342 | | | 52,913 | |
| ULi | | | 31,051 | | | — | |
| Hybrid Graphics | | | 27,906 | | | — | |
| PortalPlayer | | | 114,816 | | | — | |
| Other | | | 16,984 | | | 17,078 | |
| Total goodwill | | $ | 301,425 | | $ | 145,317 | |
During fiscal 2007, we recorded $31.1 million, $27.9 million and $114.8 million as goodwill related to our acquisitions accounted for under the purchase method of accounting of ULi, Hybrid Graphics and PortalPlayer, respectively. Please refer to Note 4 of the Notes to Consolidated Financial Statements for further information. In addition, during fiscal 2007, the amount allocated to MediaQ Inc., or MediaQ, goodwill was adjusted to $35.3 million as a result of the reversal of the valuation allowance of deferred tax assets related to our acquisition of MediaQ.
During fiscal 2006, we recorded $12.2 million as goodwill for the acquisition of a small international company accounted for under the purchase method of accounting. In addition, during fiscal 2006, we recorded $25.0 million as goodwill related to the purchase of certain assets of 3dfx. Please refer to Note 3 of the Notes to Consolidated Financial Statements for further information.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In computing fair value of our reporting units, we use estimates of future revenues, costs and cash flows from such units. The amount of goodwill allocated to our GPU, MCP, Handheld GPU, Consumer Electronics, and All Other segments as of January 28, 2007, was $99.3 million, $46.2 million, $137.7 million, $11.9 million, and $6.3 million, respectively. As of January 29, 2006, the amount of goodwill allocated to our GPU, MCP, Handheld GPU, Consumer Electronics, and All Other segments, was $99.3 million, $15.1 million, $12.7 million, $11.9 million, and $6.3 million, respectively. Please refer to Note 14 of the Notes to Consolidated Financial Statements for further segment information.
Note 6 - Amortizable Intangible Assets
We are currently amortizing our intangible assets with definitive lives over periods ranging from 1 to 5 years.years on a straight-line basis. The components of our amortizable intangible assets are as follows:
| | | January 28, 2007 | | January 29, 2006 | |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
| | | (In thousands) | |
| Technology licenses | | $ | 37,516 | | $ | (20,480 | ) | $ | 17,036 | | $ | 21,586 | | $ | (13,595 | ) | $ | 7,991 | |
| Patents | | | 34,623 | | | (24,569 | ) | | 10,054 | | | 23,750 | | | (19,911 | ) | | 3,839 | |
| Acquired intellectual property | | | 50,212 | | | (31,894 | ) | | 18,318 | | | 27,086 | | | (24,516 | ) | | 2,570 | |
| Trademarks | | | 11,310 | | | (11,310 | ) | | - | | | 11,310 | | | (10,807 | ) | | 503 | |
| Other | | | 1,494 | | | (1,391 | ) | | 103 | | | 1,494 | | | (976 | ) | | 518 | |
| Total intangible assets | | $ | 135,155 | | $ | (89,644 | ) | $ | 45,511 | | $ | 85,226 | | $ | (69,805 | ) | $ | 15,421 | |
| | | Year Ended | | Year Ended | |
| | | January 30, 2005 | | January 25, 2004 | |
| | | Gross CarryingAmount | | AccumulatedAmortization | | Net CarryingAmount | | Gross CarryingAmount | | AccumulatedAmortization | | Net CarryingAmount | |
| | | (In thousands) | |
| | | | | | | | | | | | | | |
| Technology licenses | | $ | 17,236 | | $ | (9,841 | ) | $ | 7,395 | | $ | 15,178 | | $ | (7,161 | ) | $ | 8,017 | |
| Patents | | | 23,260 | | | (15,400 | ) | | 7,860 | | | 19,319 | | | (8,992 | ) | | 10,327 | |
| Acquired intellectual property | | | 27,086 | | | (18,578 | ) | | 8,508 | | | 27,067 | | | (10,590 | ) | | 16,477 | |
| Trademarks | | | 11,310 | | | (8,544 | ) | | 2,766 | | | 11,310 | | | (6,283 | ) | | 5,027 | |
| Other | | | 1,494 | | | (509 | ) | | 985 | | | 250 | | | (135 | ) | | 115 | |
| Total intangible assets | | $ | 80,386 | | $ | (52,872 | ) | $ | 27,514 | | $ | 73,124 | | $ | (33,161 | ) | $ | 39,963 | |
During fiscal 2007, we entered into a confidential patent licensing arrangement. As part of this arrangement, we recorded a charge of $16.0 million to the cost of revenue category in our statement of income related to past usage of certain patents subject to the arrangement. Our commitment for future license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay under this arrangement may be reduced by the occurrence of certain events covered by the arrangement. The increase in the gross carrying amount of technology licenses as of January 28, 2007 when compared to January 29, 2006 is primarily related to approximately $14.4 million committed by us during fiscal 2007 under this arrangement.
Amortization expense associated with intangible assets for thefiscal years ended January 30,2007, 2006 and 2005 January 25, 2004 and January 26, 2003 was $19.7$19.8 million, $16.2$16.9 million and $9.6$19.7 million, respectively. Future amortization expense for the net carrying amount of intangible assets at January 30, 200528, 2007 is estimated to be $15.8 million in fiscal 2006, $8.9 million in fiscal 2007, $2.6$17.1 million in fiscal 2008, and the remaining amortization expense of $0.2$11.1 million in fiscal 2009.2009, $6.9 million in fiscal 2010, $2.8 million in fiscal 2011, $2.0 million in fiscal 2012, and $5.6 million in fiscal 2013 and thereafter.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 67 - Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting StandardsSFAS No. 115, or SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities.Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized losses for fiscal 2005years 2007 and 2006 were $0.4 million. Net realized gains for fiscal 2004 and 2003 were $2.9$0.2 million and $0.3$2.8 million, respectively.
The following is a summary of cash equivalents and marketable securities at January 28, 2007 and January 29, 2006:
| | | January 28, 2007 | |
| | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 153,471 | | $ | 92 | | $ | (450 | ) | $ | 153,113 | |
| Commercial paper | | | 113,576 | | | | | | (2 | ) | | 113,574 | |
| Obligations of the United States government & its agencies | | | 59,729 | | | | | | (627 | ) | | 59,102 | |
| United States corporate notes, bonds and obligations | | | 277,641 | | | 26 | | | (1,099 | ) | | 276,568 | |
| Equity Securities | | | 2,491 | | | 3,338 | | | | | | 5,829 | |
| Money market | | | 467,198 | | | — | | | — | | | 467,198 | |
| Total | | $ | 1,074,106 | | $ | 3,456 | | $ | (2,178 | ) | $ | 1,075,384 | |
| Classified as: | | | | | | | | | | | | | |
| Cash equivalents | | | | | | | | | | | $ | 501,948 | |
| Marketable securities | | | | | | | | | | | | 573,436 | |
| Total | | | | | | | | | | | $ | 1,075,384 | |
| | | January 29, 2006 | |
| | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 224,649 | | $ | 1 | | $ | (983 | ) | $ | 223,667 | |
| Commercial paper | | | 138,091 | | | 13 | | | (7 | ) | | 138,097 | |
| Obligations of the United States government & its agencies | | | 72,753 | | | 8 | | | (834 | ) | | 71,927 | |
| United States corporate notes, bonds and obligations | | | 179,930 | | | 5 | | | (1,467 | ) | | 178,468 | |
| Money market | | | 256,593 | | | — | | | — | | | 256,593 | |
| Total | | $ | 872,016 | | $ | 27 | | $ | (3,291 | ) | $ | 868,752 | |
| Classified as: | | | | | | | | | | | | | |
| Cash equivalents | | | | | | | | | | | $ | 470,334 | |
| Marketable securities | | | | | | | | | | | | 398,418 | |
| Total | | | | | | | | | | | $ | 868,752 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of cash equivalents and marketable securities at January 30, 2005 and January 25, 2004:
| | | January 30, 2005 | |
| | | Amortized Cost | | Unrealized Gain | | Unrealized (Loss) | | Estimated Fair Value | |
| | | (In thousands) | |
| Publicly traded equity securities | | $ | 687 | | $ | 220 | | | -- | | $ | 907 | |
| Asset-backed securities | | | 177,771 | | | 1 | | | (1,786 | ) | | 175,986 | |
| Commercial paper | | | 7,854 | | | -- | | | -- | | | 7,854 | |
| Obligations of the United States government & its agencies | | | 104,768 | | | -- | | | (895 | ) | | 103,873 | |
| United States corporate notes, bonds and obligations | | | 182,688 | | | 6 | | | (1,874 | ) | | 180,820 | |
| Money market | | | 164,377 | | | -- | | | -- | | | 164,377 | |
| Total | | $ | 638,145 | | $ | 227 | | $ | (4,555 | ) | $ | 633,817 | |
| | | | | | | | | | | | | | |
| Classified as: | | | | | | | | | | | | | |
| Cash equivalents | | | | | | | | | | | $ | 172,284 | |
| Marketable securities | | | | | | | | | | | | 461,533 | |
| Total | | | | | | | | | | | $ | 633,817 | |
| | | January 25, 2004 | |
| | | Amortized Cost | | Unrealized Gain | | Unrealized (Loss) (1) | | Estimated Fair Value | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 65,147 | | $ | 214 | | $ | (127 | ) | $ | 65,234 | |
| Commercial paper | | | 15,592 | | | -- | | | -- | | | 15,592 | |
| Obligations of the United States government & its agencies | | | 198,084 | | | 574 | | | (111 | ) | | 198,547 | |
| United States corporate notes, bonds and obligations | | | 175,678 | | | 957 | | | (90 | ) | | 176,545 | |
| Money market | | | 143,661 | | | -- | | | -- | | | 143,661 | |
| Total | | $ | 598,162 | | $ | 1,745 | | $ | (328 | ) | $ | 599,579 | |
| | | | | | | | | | | | | | |
| Classified as: | | | | | | | | | | | | | |
| Cash equivalents | | | | | | | | | | | $ | 209,958 | |
| Marketable securities | | | | | | | | | | | | 389,621 | |
| Total | | | | | | | | | | | $ | 599,579 | |
(1) The fair value of investments with loss positions is $96.9 million at January 25, 2004. We evaluated the nature of these investments, which are primarily obligations of the United States government and its agencies and United States corporate notes, the duration of the impairments, and the amount of the impairments relative to the underlying portfolio and concluded that such amounts were not “other-than-temporary” as defined by SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table provides the breakdown of the investments with unrealized losses at January 30, 2005:
| | | Less than 12 months | | 12 months or greater | | Total | |
| | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 167,468 | | $ | (1,661 | ) | $ | 7,015 | | $ | (125 | ) | $ | 174,483 | | $ | (1,786 | ) |
| Commercial paper | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
| Obligations of the United States government & its agencies | | | 102,864 | | | (895 | ) | | -- | | | -- | | | 102,864 | | | (895 | ) |
| United States corporate notes, bonds and obligations | | | 165,884 | | | (1,862 | ) | | 4,127 | | | (12 | ) | | 170,011 | | | (1,874 | ) |
| Money market | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | |
| Total | | $ | 436,216 | | $ | (4,418 | ) | $ | 11,142 | | $ | (137 | ) | $ | 447,358 | | $ | (4,555 | ) |
28, 2007:
| | | Less than 12 months | | 12 months or greater | | Total | |
| | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | |
| | | (In thousands) | |
| Asset-backed securities | | $ | 56,663 | | $ | (144 | ) | $ | 64,872 | | $ | (307 | ) | $ | 121,535 | | $ | (451 | ) |
| Commercial paper | | | 37,528 | | | (2 | ) | | — | | | — | | | 37,528 | | | (2 | ) |
| Obligations of the United States government & its agencies | | | 28,058 | | | (217 | ) | | 31,044 | | | (410 | ) | | 59,102 | | | (627 | ) |
| United States corporate notes, bonds and obligations | | | 103,118 | | | (318 | ) | | 110,700 | | | (780 | ) | | 213,818 | | | (1,098 | ) |
| Total | | $ | 225,367 | | $ | (681 | ) | $ | 206,616 | | $ | (1,497 | ) | $ | 431,983 | | $ | (2,178 | ) |
As of January 28, 2007, we had 87 investments that were in an unrealized loss position with an average unrealized loss duration of less than one year. The gross unrealized losses related to fixed income securities were due to changes in interest rates. We have determined that the gross unrealized losses on investment securities at January 30, 200528, 2007 are temporary in nature. We review our investments to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.
The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at January 30, 200528, 2007 and at January 25, 200429, 2006 by expectedcontractual maturity are shown below.
All of our marketable securities are debt instruments with the exception of $0.9$5.8 million of publicly traded equity securities in fiscal 2005.at January 28, 2007.
| | | January 30, 2005 | | January 25, 2004 | | | January 28, 2007 | | January 29, 2006 | |
| | | AmortizedCost | | EstimatedFair Value | | AmortizedCost | | EstimatedFair Value | | | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | |
| | | (In thousands) | | | (In thousands) | |
| Less than one year | | $ | 198,242 | | $ | 197,844 | | $ | 282,762 | | $ | 283,123 | | | $ | 810,754 | | $ | 810,081 | | $ | 491,259 | | $ | 491,246 | |
| Due in 1 - 5 years | | | 416,085 | | | 412,141 | | | 315,400 | | | 316,456 | | | | 257,623 | | | 256,274 | | | 364,065 | | | 361,047 | |
| Due in 6-7 years | | | 23,132 | | | 22,925 | | | -- | | | -- | | | | 3,238 | | | 3,201 | | | 16,692 | | | 16,459 | |
| Total | | $ | 637,459 | | $ | 632,910 | | $ | 598,162 | | $ | 599,579 | | | $ | 1,071,615 | | $ | 1,069,556 | | $ | 872,016 | | $ | 868,752 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Note 78 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | | January 28, 2007 | | January 29, 2006 | |
| | | January 30, | | January 25, | | | (In thousands) | |
Inventories: | | 2005 | | 2004 | | | | | | | | |
| | | (In thousands) | | |
| Raw materials | | $ | 23,225 | | $ | 22,131 | | | $ | 56,261 | | $ | 25,743 | |
| Work in-process | | | 130,211 | | | 44,523 | | | | 111,058 | | | 107,847 | |
| Finished goods | | | 162,082 | | | 167,584 | | | | 187,361 | | | 121,280 | |
| Total inventories | | $ | 315,518 | | $ | 234,238 | | | $ | 354,680 | | $ | 254,870 | �� |
The significant increase in finished goods inventories primarily relates to our build-up of inventory levels of several of our MCP and memory products to meet forecasted sales demand.
| | | January 30, | | January 25, | |
| | | 2005 | | 2004 | |
Property and Equipment: | | (In thousands) | |
| Software | | $ | 125,310 | | $ | 116,150 | |
| Test equipment | | | 86,883 | | | 73,287 | |
| Computer equipment | | | 82,428 | | | 70,173 | |
| Leasehold improvements | | | 79,160 | | | 58,649 | |
| Construction in process | | | 3,264 | | | 1,620 | |
| Office furniture and equipment | | | 18,777 | | | 17,996 | |
| | | | 395,822 | | | 337,875 | |
| Accumulated depreciation and amortization | | | (216,867 | ) | | (147,846 | ) |
| Property and equipment, net | | $ | 178,955 | | $ | 190,029 | |
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Deposits and other assets: | | | | | |
| Investments in non-affiliates | | $ | 11,684 | | $ | 11,684 | |
| Long-term prepayments | | | 8,245 | | | 7,504 | |
| Other | | | 8,420 | | | 8,289 | |
| Total deposits and other assets | | $ | 28,349 | | $ | 27,477 | |
Depreciation expense for fiscal 2005, 2004 and 2003 was $71.3 million, $59.3 million and $42.6 million, respectively. Assets recorded under capital leases included
| | | January 28, 2007 | | January 29, 2006 | | Estimated Useful Life | |
| | | (In thousands) | | (Years) | |
Property and Equipment: | | | | | | | |
| Land | | $ | 1,230 | | $ | - | | | (A | ) |
| Software and licenses | | | 195,556 | | | 153,618 | | | 3 - 5 | |
| Test equipment | | | 135,607 | | | 88,468 | | | 3 | |
| Computer equipment | | | 113,538 | | | 106,061 | | | 3 | |
| Office furniture and equipment | | | 24,203 | | | 21,618 | | | 5 | |
| Leasehold improvements | | | 92,784 | | | 88,376 | | | (B | ) |
| Construction in process | | | 6,580 | | | 2,260 | | | (C | ) |
| | | | 569,498 | | | 460,401 | | | | |
| Accumulated depreciation and amortization | | | (308,670 | ) | | (282,249 | ) | | | |
| Total property and equipment, net | | $ | 260,828 | | $ | 178,152 | | | | |
(A) Land is a non-depreciable asset.
(B) Leasehold improvements are amortized based on the lesser of either the asset’s estimated useful life or the remaining lease term.
(C) Construction in property and equipment were $19.3 million and $19.5 millionprocess represents assets that are not in service as of January 30, 2005 and January 25, 2004, respectively. Related accumulated amortization was $17.8 million and $14.0 million as of January 30, 2005 and January 25, 2004, respectively. Amortization expense for fiscal 2005, 2004 and 2003 related to capital leases was $3.8 million, $5.4 million and $4.4 million, respectively
| | | January 30, | | January 25, | |
| | | 2005 | | 2004 | |
Accrued Liabilities: | | (In thousands) | |
| Accrued customer programs | | $ | 83,013 | | $ | 54,875 | |
| Deferred revenue | | | 11,500 | | | -- | |
| Customer advances | | | 1,457 | | | 11,530 | |
| Taxes payable | | | 28,826 | | | 29,609 | |
| Accrued payroll and related expenses | | | 37,016 | | | 30,270 | |
| Deferred rent | | | 10,844 | | | 8,151 | |
| Other | | | 9,421 | | | 10,320 | |
| Total accrued liabilities | | $ | 182,077 | | $ | 144,755 | |
| | | January 30, | | January 25, | |
| | | 2005 | | 2004 | |
Long-term Liabilities: | | (In thousands) | |
| Asset retirement obligation | | $ | 4,483 | | $ | -- | |
| Technology licenses | | | 3,875 | | | 4,582 | |
| Total long-term liabilities | | $ | 8,358 | | $ | 4,582 | |
the balance sheet date.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Depreciation expense for fiscal years 2007, 2006 and 2005 was $88.0 million, $76.4 million, and $71.3 million, respectively. Assets recorded under capital leases included in property and equipment were $17.1 million as of January 28, 2007 and January 29, 2006. Related accumulated amortization was $17.1 million as of January 28, 2007 and January 29, 2006. Amortization expense for fiscal 2006 and 2005 related to capital leases was $1.2 million, and $3.8 million, respectively. As of January 28, 2007, all assets recorded under capital leases have been fully amortized.
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Accrued Liabilities: | | | | | |
| Accrued customer programs | | $ | 181,182 | | $ | 90,056 | |
| Deferred revenue | | | 1,180 | | | 217 | |
| Customer advances | | | 239 | | | 1,556 | |
| Taxes payable | | | 37,903 | | | 58,355 | |
| Accrued payroll and related expenses | | | 81,352 | | | 53,080 | |
| Deferred rent | | | 12,551 | | | 11,879 | |
| Accrued legal settlement | | | 30,600 | | | 30,600 | |
| Other | | | 21,725 | | | 13,521 | |
| Total accrued liabilities | | $ | 366,732 | | $ | 259,264 | |
The increase in accrued customer programs as of January 28, 2007 when compared to January 29, 2006 primarily relates to an increase in rebates payable to OEMs as a result of our increased sales to OEMs during fiscal 2007 when compared to fiscal 2006. The increase in accrued payroll and related expenses as of January 28, 2007 when compared to January 29, 2006 primarily relates to the significant increase in the number of employees during fiscal 2007.
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Other Long-term Liabilities: | | | | | |
| Asset retirement obligation | | $ | 6,362 | | $ | 6,440 | |
| Accrued payroll taxes related to stock options | | | 8,995 | | | 9,412 | |
| Other long-term liabilities | | | 14,180 | | | 4,184 | |
| Total other long-term liabilities | | $ | 29,537 | | $ | 20,036 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 89 - Guarantees
FASB Interpretation No. 45, or FIN 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. The reductions to revenue for estimated product returns for fiscal 2005, fiscal 2004years 2007, 2006 and fiscal 20032005 are as follows:
Description | | Balance at Beginning of Period | | Additions (1) | | Deductions (2) | | Balance at End of Period | |
| | | (In thousands) | |
| Year ended January 30, 2005 | | | | | | | | | | | | | |
| Allowance for sales returns | | $ | 9,421 | | $ | 22,463 | | $ | (20,197 | ) | $ | 11,687 | |
| Year ended January 25, 2004 | | | | | | | | | | | | | |
| Allowance for sales returns | | $ | 13,228 | | $ | 23,796 | | $ | (27,603 | ) | $ | 9,421 | |
| Year ended January 26, 2003 | | | | | | | | | | | | | |
| Allowance for sales returns | | $ | 15,586 | | $ | 20,147 | | $ | (22,505 | ) | $ | 13,228 | |
Description | | Balance at Beginning of Period | | Additions (1) | | Deductions (2) | | Balance at End of Period | |
| | | (In thousands) | |
| | | | | | | | | | | | | | |
| Year ended January 28, 2007 Allowance for sales returns | | $ | 10,239 | | $ | 37,033 | | $ | (32,795 | ) | $ | 14,477 | |
| | | | | | | | | | | | | | |
| Year ended January 29, 2006 Allowance for sales returns | | $ | 11,687 | | $ | 35,127 | | $ | (36,575 | ) | $ | 10,239 | |
| | | | | | | | | | | | | | |
| Year ended January 30, 2005 Allowance for sales returns | | $ | 9,421 | | $ | 22,463 | | $ | (20,197 | ) | $ | 11,687 | |
(1)(1) Allowances for sales returns are charged as a reduction to revenue.
(2)Represents amounts written off against the allowance for sales returns.
In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. However, historically costs related to these indemnification provisions have not been significant. As such, we have not recorded any liability in our consolidated financial statements for such indemnifications.
Note 910 - Stockholders’ Equity
Stock Repurchase Program
On August 9, 2004 we announced that our Board of Directors had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300.0$300 million. During fiscal 2005,Subsequently, on March 6, 2006, we announced that our Board had approved a $400 million increase to the original stock repurchase program. As a result of this increase, the amount of common stock the Board has authorized to be repurchased 2.1 million shares forhas now been increased to a total cost of approximately $24.6$700 million.
Convertible Preferred Stock
As The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with the Securities Exchange Act of January 30, 2005, there were no shares1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of preferredcommon stock outstanding.
and the program may be suspended at any time at our discretion.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
2000 Nonstatutory Equity Incentive Plan
On August 1, 2000,As part of our Board of Directors approved the 2000 Nonstatutory Equity Incentive Plan, or the 2000 Plan,share repurchase program, we have entered into and we may continue to provideenter into structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the issuanceright to receive a fixed number of our 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. Option grants issued under the 2000 plan generally expire in six to 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. Initial option grants 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. Subsequent option grants generally vest quarterly over a four-year period. There were a total of 21,939,202 shares authorized for issuance and 10,505,378 shares available for future issuance under the 2000 Plan as of January 30, 2005.
1998 Equity Incentive Plan
The Equity Incentive Plan, or the 1998 Plan, was adopted by our Board of Directors on February 17, 1998 and was approved by our stockholders on April 6, 1998 as an amendment and restatement of our then existing Equity Incentive Plan which had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of our 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. There were a total of 110,094,385 shares authorized for issuance and 12,006,326 shares available for future issuance under the 1998 Plan as of January 30, 2005.
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.
Option grants issued under the 1998 Plan generally expire in six to 10 years. Vesting periods are determined by the Board of Directors, or the Compensation Committee of the Board of Directors. Initial option grants made after February 10, 2004 under the 1998 Plan generally vest ratably each quarter over a three year period. Subsequent option grants are generally granted for performance and generally vest quarterly over a four year period.
1998 Non-Employee Directors’ Stock Option Plan
In February 1998, our Board of Directors adopted the 1998 Non-Employee Directors’ Stock Option Plan, or the Directors Plan, to provide for the automatic grant of non-qualified options to purchase shares of our common stock to our directors who are not employees or consultants of us or of an affiliate of us.
In July 2000, the Board of Directors amended the 1998 Plan to incorporate the automatic grant provisionsupon execution of the Directors’ Plan into the 1998 Plan. Future automatic grants to non-employee directors will be made according to the terms of the Directors’ Plan, but will be made out of the 1998 Plan until such time as shares may become available for issuance under the amended Directors’ Plan. In May 2002, the Directors’ Plan was amended further to reduce theagreement, and a potential incremental number of shares granted toof our non-employee directors. The altered automatic grant provisions of the Directors’ Plan are also incorporated into the 1998 Plan. The terms of the amended Directors’ Plan are described below.
Under the amended Directors Plan, each non-employee director who is elected or appointed to our Board of Directors for the first time is automatically granted an option to purchase 75,000 shares, which vests quarterly overcommon stock, within a three-year period, or Initial Grant. Previously, such a director was entitled to a grant of 200,000 shares, vesting monthly over a four-year period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Under the amended Directors Plan, on August 1, 2002, each non-employee director was automatically granted an option to purchase 75,000 shares, which will vest 33% on the first anniversary of the grant date, with the remaining 66% vesting quarterly over the second and third years after the date of grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant, or 2002 Grants. Previously, such a director was entitled to an annual grant of 80,000 shares, vesting 100% on the first anniversary of the date of the grant.
On August 1, 2003 and on each August 1 thereafter, each non-employee director will be automatically granted an option to purchase 25,000 shares, or Annual Grant. These Annual Grants will begin vesting on the second anniversary of the date of the grant and vest quarterly during the next year. The Annual Grants will be fully vested on the third anniversary of the date of the grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant.
On August 1, 2002 and each August 1 of each year thereafter, each non-employee director who is a member of a committee of the Board of Directors will automatically be granted an option to purchase 5,000 shares, or Committee Grant. The Committee Grants vest in full on the first anniversary of the date of the grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant. Previously, such a director was entitled to a grant of 20,000 shares, vesting in full on the first anniversary of the date of the grant. Directors who were members of two committees, Messrs. Cox, Gaither and Jones, waived their grant of an additional 5,000 shares for being a member of a second committee in fiscal 2003 and 2004.
If a non-employee director fails to attend at least 75% of the regularly scheduled meetings during the year following the grant of an option, rather than vesting as described previously, the 2002 Grants and Committee Grants 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, and the Annual Grants will vest 30% upon the three-year anniversary of the grant date and 70% for the fourth year, such that in each case the entire option will become fully vested on the four-year anniversary of the date of the grant. For the 2002 Grants, Annual Grants and Committee Grants, if the person has not been serving on the Board of Directors or committee since a prior year’s annual meeting, 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 in such capacity.
The Compensation Committee administers the amended Directors Plan. A total of 1,200,000 shares have been authorized and issued under the amended Directors Plan of which none is available for future issuance as of January 30, 2005. As described above, future grants to non-employee directors will be made out of the 1998 Plan.
Employee Stock Purchase Plan
In February 1998, our Board of Directors approved the 1998 Employee Stock Purchase Plan, or the Purchase Plan. In June 1999, the Purchase Plan was amended to increase the number of shares reserved for issuance automatically each yearpre-determined range, at the end of the term of the agreement. During fiscal 2007, we repurchased 10.3 million shares of our fiscal yearcommon stock for $275.0 million under structured share repurchase transactions, which we recorded on the next 10 years (commencing attrade date of the transaction. Through the end of fiscal 2000 and ending 10 years later in 2009) by an amount equal2007, we have repurchased 27.3 million shares under our stock repurchase program for a total cost of $488.1 million. During the first quarter of fiscal 2008, we entered into a structured share repurchase transaction to 2% of the outstanding shares 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 ofrepurchase shares of our common stock available for issuance from the Purchase Plan could not exceed 26,000,000 shares. There are a total of 22,751,516 shares authorized for issuance. At January 30, 2005, 5,737,168 shares have been issued under the Purchase Plan and 17,014,348 shares are available for future issuance. At January 25, 2004, 3,760,932 shares had been issued under the Purchase Plan and 15,438,882 shares were available for future issuance. At January 26, 2003, 2,104,670 shares had been issued under the Purchase Plan and 13,576,682 shares were available for future issuance.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Purchase Plan is intended$125.0 million that we expect to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board has authorized participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. Under the Purchase Plan, separate offering periods shall be no longer than 27 months. Under the current offering adopted pursuantsettle prior to the Purchase Plan, each offering period is 24 months, which is divided into four purchase periodsend of 6 months.
Employees are eligible to participate if they are employed by us or an affiliate of us designated by the Board. Employees who participate in an offering may 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 the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period at 85% at 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 us and in each case their contributions are refunded.
The following summarizes the transactions under the 1998 Plan, 2000 Plan and Directors Plan:
| | | Options Available forGrant | | OptionsOutstanding | | Weighted Average Price Per Share | |
| Balances, January 27, 2002 | | | 9,416,255 | | | 51,879,729 | | $ | 19.14 | |
| Authorized | | | 13,957,063 | | | -- | | | -- | |
| Granted | | | (8,522,650 | ) | | 8,522,650 | | | 28.09 | |
| Shares of common stock issued in exchange for stock Options | | | (3,815,069 | ) | | -- | | | -- | |
| Exercised | | | -- | | | (3,816,695 | ) | | 4.62 | |
| Cancelled - unvested (1) | | | 18,067,604 | | | (18,067,604 | ) | | 36.53 | |
| Cancelled - vested (2) | | | 2,882,376 | | | (2,882,376 | ) | | 32.51 | |
| Balances, January 26, 2003 | | | 31,985,579 | | | 35,635,704 | | $ | 12.93 | |
| Authorized | | | 8,796,156 | | | -- | | | -- | |
| Granted | | | (12,680,144 | ) | | 12,675,144 | | | 14.77 | |
| Exercised | | | -- | | | (4,688,703 | ) | | 5.17 | |
| Cancelled | | | 855,440 | | | (855,440 | ) | | 19.26 | |
| Balances, January 25, 2004 | | | 28,957,031 | | | 42,766,705 | | $ | 14.20 | |
| Authorized | | | -- | | | -- | | | -- | |
| Granted | | | (8,514,926 | ) | | 8,514,926 | | | 23.48 | |
| Exercised | | | -- | | | (3,051,875 | ) | | 8.29 | |
| Cancelled | | | 2,069,599 | | | (2,069,599 | ) | | 18.82 | |
| Balances, January 30, 2005 | | | 22,511,704 | | | 46,160,157 | | $ | 16.10 | |
| (1) | Includes 16,193,886 unvested stock options cancelled in exchange for shares of common stock. |
| (2) | Includes 2,649,607 vested stock options cancelled in exchange for shares of common stock. |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about stock options outstanding as of January 30, 2005:
| | | Options Outstanding | | Options Exercisable | |
Range of Exercise Prices | | NumberOutstanding | | Weighted Average Remaining Contractual Life | | Weighted Average ExercisePrice | | NumberExercisable | | Weighted Average ExercisePrice | |
| $0.09 - $0.09 | | | 2,000 | | | 1.9 | | $ | 0.09 | | | 2,000 | | $ | 0.09 | |
| 0.33 - 0.33 | | | 123,300 | | | 2.6 | | $ | 0.33 | | | 123,300 | | $ | 0.33 | |
| 0.66 - 0.79 | | | 567,960 | | | 2.9 | | $ | 0.75 | | | 567,960 | | $ | 0.75 | |
| 1.04 - 1.38 | | | 174,668 | | | 3.0 | | $ | 1.29 | | | 174,668 | | $ | 1.29 | |
| 1.58 - 2.25 | | | 4,465,078 | | | 3.3 | | $ | 1.78 | | | 4,465,078 | | $ | 1.78 | |
| 4 .09 - 5.88 | | | 3,609,167 | | | 4.5 | | $ | 4.80 | | | 3,585,022 | | $ | 4.80 | |
| 7.65 - 11.07 | | | 4,387,246 | | | 6.0 | | $ | 9.45 | | | 3,274,188 | | $ | 9.49 | |
| 11.51 - 17.18 | | | 14,133,223 | | | 5.0 | | $ | 14.49 | | | 6,857,542 | | $ | 14.81 | |
| 17.53 - 26.25 | | | 13,953,002 | | | 5.4 | | $ | 22.38 | | | 6,210,995 | | $ | 19.79 | |
| 26.38 - 39.54 | | | 4,120,013 | | | 5.9 | | $ | 31.90 | | | 3,182,306 | | $ | 31.44 | |
| 42.98 - 53.61 | | | 624,000 | | | 6.6 | | $ | 43.35 | | | 617,750 | | $ | 43.26 | |
| 65.47 - 65.47 | | | 500 | | | 7.0 | | $ | 65.47 | | | 375 | | $ | 65.47 | |
| $0.09 - $65.47 | | | 46,160,157 | | | 5.1 | | $ | 16.10 | | | 29,061,184 | | $ | 14.05 | |
Convertible Preferred Stock
As of January 28, 2007 and January 29, 2006, there were no shares of preferred stock outstanding.
Note 1011 - 401(k) Retirement Plan
We have a 401(k) Retirement Plan, or the 401(k) Plan, covering substantially all of our United States employees. Under the Plan, participating employees may defer up to 100 percent100% of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits. We do not make employer contributions to the 401(k) Plan.
Note 1112 - Stock Option ExchangeFinancial Arrangements, Commitments and Contingencies
Inventory Purchase Obligations
At January 28, 2007, we had outstanding inventory purchase obligations totaling $364.5 million.
Capital Purchase Obligations
At January 28, 2007, we had outstanding capital purchase obligations totaling $4.8 million.
Lease Obligations
Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of six buildings. The related leases expire in fiscal 2013 and include two seven-year renewals at our option for five buildings and a three-year renewal option for one building. Future minimum lease payments under these operating leases total $130.0 million over the remaining terms of the leases, including predetermined rent escalations, and are included in the future minimum lease payment schedule below.
On September 26, 2002, we commenced an offer, orIn addition to the Offer, to our employees to exchange outstanding stock options with exercise prices equal to or greater than $27.00 per share, or Eligible Options. The Offer was implemented in order to improve employee morale by realigning the cash and equity componentscommitment of our compensation programs, eliminate significant out-of-the-money optionsheadquarters, we have other domestic and reduce the number of outstanding stock options relative to the number of shares outstanding, or "options overhang", thereby reducing future potential dilution to existing stockholders. Stock options to purchase an aggregate of approximately 20,615,000 shares were eligible for tender at the commencement of the Offer, representing approximately 39% ofinternational office facilities under operating leases expiring through fiscal 2015. Future minimum lease payments under our outstanding stock optionsnoncancelable operating leases as of the commencement date. Only employees of NVIDIA or one of our subsidiariesJanuary 28, 2007, are as of September 26, 2002 who continued to be employees through the Offer termination date of October 24, 2002 were eligible to participate in the Offer. Employees who were on medical, maternity, worker’s compensation, military or other statutorily protected leaves of absence, or a personal leave of absence, were also eligible to participate in the Offer. Employees who were terminated on or before the Offer termination date of October 24, 2002, were not eligible to participate in the Offer. In addition, our Chief Executive Officer and Chief Financial Officer and members of our Board of Directors were not eligible to participate in this Offer.follows:
Eligible employees who participated in the Offer received, in exchange for the cancellation of Eligible Options, a fixed amount of consideration, represented by fully vested, non-forfeitable common stock less applicable withholding taxes, equal to the number of shares underlying such Eligible Options, multiplied by $3.20, less the amount of applicable tax withholdings, divided by $10.46, the closing price of our common stock as reported on the Nasdaq National Market on October 24, 2002. We concluded that the consideration paid for the Eligible Options represented "substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23 "Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44," as the $3.20 per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, we used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which was approximately 7.8 years; (ii) a volatility of 50.0% during the expected life; (iii) a risk-free interest rate of 3.71%; and (iv) no dividends. The amount of $3.20 per Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.| | | Future Minimum Lease Obligations | |
| | | (In thousands) | |
Year ending January: | | | |
| 2008 | | $ | 33,890 | |
| 2009 | | | 33,480 | |
| 2010 | | | 31,952 | |
| 2011 | | | 31,549 | |
| 2012 | | | 30,449 | |
| 2013 and thereafter | | | 6,445 | |
| Total | | $ | 167,765 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Variable accounting is not required under Issue 39(a) of EITF Issue No. 00-23 for Eligible Options subject to the Offer that were not surrendered for cancellation, because: (i) the shares of our common stock offered as consideration for the surrendered options were fully vested and non-forfeitable; and (ii) the number of shares to be received by an employee who accepted the Offer was based on the number of surrendered Eligible Options multiplied by $3.20, divided by the fair value of the stock at the date of exchange. We further concluded that the "look back" and "look forward" provisions of FASB Interpretation No. 44, paragraph 45 did apply to the stock options surrendered for cancellation. Based on the terms of the Offer, variable accounting is not required for any of our outstanding stock options existing at the time of the Offer. We did not grant stock options to any participants in the Offer for at least six months following October 24, 2002. If any stock options were granted to participants in the Offer within the six months following October 24, 2002, those stock options would have received variable accounting.
On October 24, 2002, the offer period ended and we were obligated to exchange approximately 18,843,000 Eligible Options for total consideration of $61.8 million, consisting of $39.9 million in fully vested, non-forfeitable shares of our common stock (approximately 3,815,000 shares) and $21.9 million in employer and employee related taxes. The number of fully vested, non-forfeitable shares of our common stock to be issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of our common stock on October 24, 2002 of $10.46 per share.
The shares of our common stock issued in exchange for Eligible Options were fully vested. However, a portion of the shares equal to 25% of the total consideration, based on the closing price of our common stock on the offer termination date, have a six month holding period, and a portion of the shares equal to 25% of such total consideration have a one year holding period. Withholding taxes and other charges were deducted from the remaining 50% of the total consideration, and the shares issued after such withholding did not have a holding restriction.
Note 12 - Financial Arrangements, Commitments and Contingencies
Inventory Purchase Obligations
At January 30, 2005, we had outstanding inventory purchase obligations totaling $457.3 million.
Convertible Subordinated Debentures
In October 2000, we sold $300.0 million 4¾% convertible subordinated debentures due 2007, or the Notes, due October 15, 2007 in a public offering. Proceeds from the offering were approximately $290.8 million after deducting underwriting discounts, commissions and offering expenses. Issuance costs related to the offering totaled $9.2 million and were amortized to interest expense over the term of the Notes. Interest on the Notes accrued at the rate of 4¾% per annum and was payable semiannually in arrears on April 15 and October 15 of each year, commencing April 15, 2001. Interest expense, excluding the amortization of issuance costs, related to the Notes for fiscal 2004 and 2003 was $10.4 million and $14.2 million, respectively. The Notes were redeemable at our option on or after October 20, 2003 and were also 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 $46.36 per share, subject to adjustment in certain circumstances.
On October 24, 2003, we fully redeemed the Notes. The aggregate principal amount of the Notes outstanding was $300.0 million, which included $18.6 million of Notes that we had purchased in the open market during the three months ended October 26, 2003. The redemption price was equal to approximately 102.7% of the outstanding principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In connection with the redemption of the Notes, we recorded a charge in our consolidated income statement of approximately $13.1 million, which included a $7.6 million redemption premium and $5.5 million for the write-off of unamortized issuance costs.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Lease Obligations
Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of five buildings. The related leases expire in 2012 and each includes two seven-year renewals at our option. Future minimum lease payments under these operating leases total approximately $172.9 million over the remaining terms of the leases and are included in the future minimum lease payment schedule below.
In addition to the commitment of our headquarters, we have other office facilities under operating leases expiring through fiscal 2013. Future minimum lease payments under our noncancelable capital and operating leases as of January 30, 2005, are as follows:
Year ending January: | | Operating | | Capital | |
| | | (In thousands) | |
| | | | | | |
| 2006 | | $ | 27,534 | | $ | 869 | |
| 2007 | | | 27,425 | | | -- | |
| 2008 | | | 27,422 | | | -- | |
| 2009 | | | 26,615 | | | -- | |
| 2010 | | | 26,327 | | | -- | |
| 2011 and thereafter | | | 55,794 | | | -- | |
| Total | | $ | 191,117 | | $ | 869 | |
| Less amount representing interest at rates ranging from 5% - 10% | | | | | | (13 | ) |
| Present value of minimum lease payments | | | | | | 856 | |
| Less current portion | | | | | | 856 | |
| Long term portion | | | | | $ | 0 | |
Rent expense for the years ended January 28, 2007, January 29, 2006 and January 30, 2005 January 25, 2004was $32.6 million, $29.5 million, and January 26, 2003 was approximately $28.0 million, $26.4 million and $25.6 million, respectively.
The following is an analysis of the property and equipment under capital leases by major classes:
| | | January 30, | | January 25, | |
| | | 2005 | | 2004 | |
| | | (In thousands) | |
Property and Equipment: | | | | | |
| Software and other | | $ | 634 | | $ | 634 | |
| Test equipment | | | 9,125 | | | 9,309 | |
| Computer equipment | | | 4,331 | | | 4,331 | |
| Office equipment and furniture | | | 5,232 | | | 5,232 | |
| | | $ | 19,322 | | $ | 19,506 | |
| Accumulated amortization | | | (17,835 | ) | | (14,016 | ) |
| Property and equipment, net | | $ | 1,487 | | $ | 5,490 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Litigation
3dfx
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement to purchase certain graphics chip assets from 3dfx. The 3dfx asset purchasewhich closed on April 18, 2001.
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease.lease, CarrAmerica. In December 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease, Carlyle Fortran Trust. The landlords’ complaints both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer and seek to recover, among other things, amounts owed on their leases with 3dfx in the aggregate amount of approximately $15 million. In October 2002, 3dfx filed for Chapterchapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In December 2002, weThe landlords’ actions were servedsubsequently removed to the United States Bankruptcy Court for the Northern District of California and consolidated, for purposes of discovery, with a complaint filed by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA in 2005, the District Court withdrew the reference to the Bankruptcy Court and the landlord actions were removed to the United States District Court for the Northern District of 3dfx’s Austin, Texas commercial real estate lease.California. On November 10, 2005, the District Court granted our motion to dismiss the landlords’ respective amended complaints and allowed the landlords to have until February 4, 2006 to amend their complaints. The landlords’ complaintslandlords re-filed claims against NVIDIA in early February 2006, and NVIDIA again filed motions requesting the District Court to dismiss all such claims. The District Court took both assert claims for,motions under submission. On September 29, 2006, the court dismissed the CarrAmerica action in its entirety and without leave to amend. The court found, among other things, interference with contract, successor liabilitythat CarrAmerica lacks standing to bring the lawsuit and fraudulent transfer. The landlords’ are seekingthat such standing belongs exclusively to the bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle complaint in its entirety, finding that Carlyle lacked standing to pursue some of its claims, and that certain other claims were substantively unmeritorious. NVIDIA has filed motions to recover among other things, amounts owed on their leasesits litigation costs and attorneys fees against both Carlyle and Carr. Those motions are currently scheduled for hearing in the aggregate amount of approximately $10 million. early April, 2007.
In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer. The Trustee’s complainttransfer and seeks additional payments from us,us. On October 13, 2005, the amountCourt held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Court issued its ruling denying the Trustee’s Motion for Summary Adjudication in all material respects and holding that NVIDIA is prevented from disputing that the value of which has not been quantified.the 3dfx transaction to NVIDIA was less than $108.0 million. The landlords’ actions have been removedCourt expressly denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA were at least $108.0 million. In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached a conditional settlement of the Trustee’s claims against NVIDIA. This conditional settlement, presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The Trustee advised that he intended to object to the settlement, which would have called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.
However, the conditional settlement never progressed substantially through the confirmation process. On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the bankruptcy court had failed to proceed toward confirmation of the Creditors’ Committee’s plan.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition, while the conditional settlement agreement was awaiting the confirmation process, the Bankruptcy Court, over objection of the Creditors’ Committee and NVIDIA, ordered the discovery portion of the Trustee’s litigation to proceed. The expert discovery was completed, but the Bankruptcy Court also ruled on a Trustee discovery motion allowing additional discovery of NVIDIA. Because that order would have required NVIDIA to disclose privileged attorney-client communications, NVIDIA asked the District Court to review that order and to stay its execution while the District Court’s review is pending. The District Court did issue the requested stay order on August 3, 2006. Oral argument on that matter was held on November 15, 2006, and the District Court reversed the Bankruptcy Court’s order by order of its own dated December 15, 2006. The District Court permitted certain limited additional discovery, but concluded that on the record before it, there was no basis to set aside the attorney-client privilege.
Following the Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the proposed settlement agreement between NVIDIA and the Creditor’s Committee, certain shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. That petition was granted and an Equity Holders Committee was appointed. Since that appointment, the Equity Holders Committee has filed a competing plan of reorganization/liquidation. The Equity Holders plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. Upon the payment of that debt, the Equity Holders Committee contends that NVIDIA would be obliged to pay the stock consideration provided for in the asset purchase agreement. By virtue of stock splits since the execution of the asset purchase agreement, the stock consideration would now total four million shares of our common stock. The Equity Holders’ Committee filed a motion with the Bankruptcy Court for an order giving it standing to bring that lawsuit to enforce the Asset Purchase Agreement. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At the hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the Asset Purchase Agreement was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the Asset Purchase Agreement, and that the agreement is capable of being assumed by the bankruptcy estate. In addition, the Equity Holders Committee filed a motion seeking Bankruptcy court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the court approved the proposed protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled to try the question of the value of the assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA paid for those assets was reasonably equivalent to the value of the assets 3dfx sold to NVIDIA.
Lawsuits related to our historical stock option granting practices and SEC inquiry
In June 2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-K, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We continue to cooperate with the SEC in its inquiry.
Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated withcomplaint in the Trustee’sUnited States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have been consolidated and plaintiffs are scheduled to file a consolidated complaint on or before March 22, 2007. All of the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. All allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, constructive fraud, and violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, or the Exchange Act. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief.for purposes of discovery. Discovery is currently proceeding and no trialin response to these complaints.
NVIDIA CORPORATION AND SUBSIDIARIES
date has been set. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Opti Incorporated
On October 19, 2004 Opti Incorporated, or Opti filed a complaint for patent infringement against NVIDIA in the United States District Court for the Eastern District of Texas. In its complaint, Opti assertsasserted that unspecified NVIDIA chipsets infringe five United States patents held by Opti. Opti seekssought unspecified damages for our alleged conduct, attorneysattorneys’ fees and triple damages for alleged willful infringement by NVIDIA. In April 2006, the District Court issued a Markman ruling adopting Opti's proposed construction on 13 of the 15 terms at issue and Opti dropped from the lawsuit two of the five United States patents that Opti alleged NVIDIA infringes, and elected to pursue the three remaining patents at trial.
In August 2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA was obligated to pay to Opti $11.0 million dollars for past and present licenses to the patents in suit and NVIDIA agreed to make additional quarterly payments to Opti should NVIDIA use certain patented technology after January 31, 2007. The case has now been dismissed with prejudice. The agreements with Opti call for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue.
Department of Justice Subpoena and Investigation
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units and cards. No specific allegations have been made against us. We plan to cooperate with the DOJ in its investigation. As of March 14, 2007, 42 civil complaints have been filed against us. The majority are pending in the Northern District of California, a number are pending in the Central District of California, and other cases are pending in several other Federal district courts. Although the complaints differ, they generally purport to assert federal and state antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert a variety of state law unfair competition or consumer protection claims on the same allegations and some cases assert unjust enrichment or other common law claims. The complaints are putative class actions alleging classes of direct and/or indirect purchasers of our graphic processing units and cards. The plaintiffs in a few of the Northern District of California actions have filed a response tomotion with the Judicial Panel on Multidistrict Litigation asking that all pending and subsequent cases be consolidated in one court for all pre-trial discovery and motion practice. A hearing on this complaint in December 2004. Discovery has not begun and no trial date has been set.motion is set for March 29, 2007. We believe the claims asserted against usallegations in the complaints are without merit and we will continueintend to vigorously defend ourselves vigorously.the cases.
American Video GraphicsNote 13 - Income Taxes
In August 2004, a Texas limited partnership named American Video Graphics, LP , or AVG, filed three separate complaintsThe provision for patent infringement against various corporate defendants (not including NVIDIA) in the United States District Court for the Eastern District of Texas. AVG initially asserted that eachincome taxes applicable to income before income taxes consists of the approximately thirty defendants sells products that infringe one or more of seven separate patents that AVG claims relate generally to graphics processing functionality. Each of the three lawsuits targeted a different group of defendants; one case involves approximately twenty of the leading personal computer manufacturers, the PC Makers Case, one case involves the three leading video game console makers, the Game Console Case, and one case involves approximately ten of the leading video game publishers, the Game Publishers Case. In November 2004, NVIDIA sought and was granted permission to intervene in two of the three pending AVG lawsuits, the PC Makers Case and the Game Console Case. NVIDIA’s complaint in intervention alleges both that the patents in suit are invalid and that, to the extent AVG’s claims target NVIDIA products, the asserted patents are not infringed. Two other leading suppliers of graphics processing products, Intel Corporation, or Intel, and ATI Technologies, Inc., or ATI, have also intervened in the cases, ATI in both the PC Makers and Game Console Case, and Intel in the PC Makers Case.following:
After some consensual reconfigurations proposed by the various parties, in January 2005, the district court judge entered Docket Control and Discovery Orders in the three lawsuits. The PC Makers case now involves four separate patents and is currently scheduled for trial beginning on September 11, 2006. The Game Console Case involves a single patent and is currently scheduled for trial beginning on December 4, 2006. We believe that, to the extent AVG’s infringement allegations target functionality that may be performed by NVIDIA products, those claims are without merit, and we will continue to defend ourselves and our products vigorously.| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands) | |
| Current: | | | | | | | |
| Federal | | $ | (17 | ) | $ | 22,050 | | $ | — | |
| State | | | (2,401 | ) | | 375 | | | 355 | |
| Foreign | | | 6,758 | | | 11,012 | | | 8,826 | |
| Total current | | | 4,340 | | | 33,437 | | | 9,181 | |
| Deferred: | | | | | | | | | | |
| Federal | | | 41,721 | | | (2,692 | ) | | 1,237 | |
| State | | | — | | | — | | | (620 | ) |
| Total deferred | | | 41,721 | | | (2,692 | ) | | 617 | |
| Charge in lieu of taxes attributable to employer stock option plans | | | 289 | | | 24,867 | | | 8,615 | |
| Provision for income taxes | | $ | 46,350 | | $ | 55,612 | | $ | 18,413 | |
We are subject to other legal proceedings, but we do not believe that the ultimate outcome of any of these proceedings will have a material adverse effect on our financial position or overall trends in results of operations. However, if an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
Note 13 - Income Taxes
The provision for income taxes applicable to income before income taxes consists of the following:
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | (In thousands) | |
| Current: | | | | | | | |
| Federal | | $ | -- | | $ | -- | | $ | -- | |
| State | | | 355 | | | 221 | | | 135 | |
| Foreign | | | 8,826 | | | (51,590 | ) | | 20,555 | |
| Total current | | | 9,181 | | | (51,369 | ) | | 20,690 | |
| Deferred: | | | | | | | | | | |
| Federal | | | 4,683 | | | 19,861 | | | 20,569 | |
| State | | | (620 | ) | | 35,274 | | | 9,319 | |
| Foreign | | | -- | | | -- | | | -- | |
| Total deferred | | | 4,063 | | | 55,135 | | | 29,888 | |
| Charge in lieu of taxes attributable to employer stock option plans | | | 11,845 | | | 8,488 | | | 9,180 | |
| Provision for income taxes | | $ | 25,089 | | $ | 12,254 | | $ | 59,758 | |
Income before income taxes consists of the following:
| | | Year Ended | | Year Ended | | Year Ended | | |
| | | January 30, | | January 25, | | January 26, | | |
| | | 2005 | | 2004 | | 2003 | | | Year Ended | |
| | | | | | | | | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands) | | | (In thousands) | |
| Domestic | | $ | 9,556 | | $ | (17,816 | ) | $ | 20,764 | | | $ | (19,617 | ) | $ | 52,112 | | $ | (7,537 | ) |
| Foreign | | | 115,889 | | | 104,489 | | | 129,793 | | | | 514,097 | | | 304,676 | | | 114,565 | |
| | | $ | 125,445 | | $ | 86,673 | | $ | 150,557 | | | $ | 494,480 | | $ | 356,788 | | $ | 107,028 | |
The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate of 35% to income before income taxes as follows:
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | | | | | | |
| | | (In thousands) | |
| Tax expense computed at Federal Statutory Rate | | $ | 43,906 | | $ | 30,336 | | $ | 52,695 | |
| State income taxes (benefit), net of federal tax effect | | | 230 | | | 544 | | | (4,241 | ) |
| Foreign tax rate differential | | | (8,462 | ) | | (11,671 | ) | | 23,222 | |
| Research and experimental credit | | | (10,710 | ) | | (5,230 | ) | | (12,048 | ) |
| In-process research and development | | | -- | | | 1,225 | | | -- | |
| Change in estimates | | | -- | | | (36,766 | ) | | -- | |
| Increase in beginning of year valuation allowance | | | -- | | | 33,599 | | | -- | |
| Other | | | 125 | | | 217 | | | 130 | |
| Provision for income taxes | | $ | 25,089 | | $ | 12,254 | | $ | 59,758 | |
| | | Year Ended | |
| | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | (In thousands) | |
| Tax expense computed at federal statutory rate | | $ | 173,068 | | $ | 124,876 | | $ | 37,460 | |
| State income taxes, net of federal tax effect | | | (1,372 | ) | | 847 | | | 219 | |
| Foreign tax rate differential | | | (97,390 | ) | | (57,286 | ) | | (8,462 | ) |
| Research tax credit | | | (35,359 | ) | | (13,175 | ) | | (10,935 | ) |
| In-process research and development | | | 4,690 | | | — | | | — | |
| Stock-based compensation | | | 3,564 | | | — | | | — | |
| Other | �� | | (851 | ) | | 350 | | | 131 | |
| Provision for income taxes | | $ | 46,350 | | $ | 55,612 | | $ | 18,413 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below:
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Deferred tax assets: | | | |
| Net operating loss carryforwards | | $ | 23,272 | | $ | 134,385 | |
| Accruals and reserves, not currently deductible for tax purposes | | | 17,702 | | | 16,109 | |
| Property, equipment and intangible assets | | | 16,436 | | | 16,928 | |
| Research and other tax credit carryforwards | | | 145,393 | | | 146,089 | |
| Stock-based compensation | | | 31,835 | | | 45,924 | |
| Gross deferred tax assets | | | 234,638 | | | 359,435 | |
| Less valuation allowance | | | (68,563 | ) | | (233,016 | ) |
| Deferred tax assets | | | 166,075 | | | 126,419 | |
Deferred tax liabilities: | | | | | | | |
| Unremitted earnings of foreign subsidiaries | | | (149,276 | ) | | (85,716 | ) |
Net deferred tax asset | | $ | 16,799 | | $ | 40,703 | |
| | | January 30, | | January 25, | |
| | | 2005 | | 2004 | |
Deferred tax assets: | | (In thousands) | |
| Net operating loss carryforwards | | $ | 101,238 | | $ | 105,503 | |
| Accruals and reserves, not currently deductible for tax purposes | | | 13,373 | | | 10,286 | |
| Property, equipment and intangible assets | | | 17,182 | | | 19,194 | |
| Research and other tax credit carryforwards | | | 113,856 | | | 99,806 | |
| Gross deferred tax assets | | | 245,649 | | | 234,789 | |
| Less valuation allowance | | | (190,563 | ) | | (182,669 | ) |
| Net deferred tax assets | | | 55,086 | | | 52,120 | |
Deferred tax liabilities: | | | | | | | |
| Unremitted earnings of foreign subsidiaries | | | (72,575 | ) | | (57,468 | ) |
Net deferred tax liability | | $ | (17,489 | ) | $ | (5,348 | ) |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income tax expense as a percentage of income before taxes, or our annual effective tax rate, was 9.4% in fiscal 2007, 15.6% in fiscal 2006, and 17.2% in fiscal 2005. The difference in the effective tax rates amongst the three years was primarily a result of changes in our geographic mix of income subject to tax, with the additional change in mix in fiscal 2007 due to certain stock-based compensation expensed for financial accounting purposes under SFAS No. 123(R), and an increase in the amount of research tax credit benefit in fiscal 2007.
As of January 30, 2005,28, 2007, we had a valuation allowance of $190.6$68.6 million. Of the total valuation allowance, $145.7 million is attributable to certain net operating loss and tax credit carryforwards resulting from the exercise of employee stock options. The tax benefit of these net operating loss and tax credit carryforwards, if and when realization is sustained, would be accounted for as a credit to stockholders' equity. Of the remaining valuation allowance as of January 30, 2005, $19.9$3.7 million relates to federal and state tax attributes acquired in certain acquisitions for which realization of the related deferred tax assets was determined not more likely than not to be realized due, in part, to potential utilization limitations as a result of stock ownership changes, and $25.0$64.9 million relates to certain state deferred tax assets that management determined not more likely than not to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets related to certain acquisitions becomes probable, recognition of these acquired tax benefits would first reduce goodwill to zero, then reduce other non-current intangible assets related to the acquisition to zero with any remaining benefit reported as a reduction to income tax expense. To the extent realization of the deferred tax assets related to certain state tax benefits becomes probable, we would recognize an income tax benefit in the period such asset is more likely than not to be realized.
As of January 28, 2007, with the adoption of SFAS No. 123(R), we have derecognized both deferred tax assets for the excess of tax benefit related to stock-based compensation, reflected in our federal and state net operating loss and research tax credit carryforwards, and the offsetting valuation allowance. Consistent with prior years, the excess tax benefit reflected in our net operating loss and research tax credit carryforwards, in the amount of $344.9 million as of January 28, 2007, will be accounted for as a credit to stockholders’ equity, if and when realized. In determining if and when excess tax benefits have been realized, we have elected to do so on a “with-and-without” approach with respect to such excess tax benefits. We have also elected to ignore the indirect tax effects of stock-based compensation deductions for financial and accounting reporting purposes, and specifically to recognize the full effect of the research tax credit in income from continuing operations.
As of January 30, 2005,28 2007, we had a federal net operating loss carryforward of approximately $274.4$770.5 million and cumulative state net operating loss carryforwards of approximately $144.4$584.1 million. The federal net operating loss carryforward will expire beginning in fiscal 2012 and the state net operating loss carryforwards will begin to expire in fiscal 20072008 according to the rules of each particular state. As of January 30, 2005,28, 2007 we had federal research and experimentation tax credit carryforwards of approximately $72.6$129.0 million that will begin to expire in fiscal 2008; and2008. We have other federal foreign tax credit carryforwards of approximately $0.2$1.2 million that will begin to expire in fiscal 2011. The research and experimentation tax credit carryforwardcarryforwards attributable to states is approximately $57.8$125.6 million, of which approximately $55.6$121.3 million is attributable to the State of California and may be carried over indefinitely, and approximately $2.2$4.3 million is attributable to various other states and will expire beginning in fiscal 2016 according to the rules of each particular state. We have other California state tax credit carryforwards of approximately $4.9$4.8 million that will begin to expire in fiscal 2006.2009. Utilization of net operating losses and tax credit carryforwards may be subject to limitations due to ownership changes 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.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The American Jobs Creation ActAs of 2004 was signed into law on October 22, 2004. This act creates a temporary incentive forJanuary 28, 2007, United States multinationals to repatriate accumulatedfederal and state income earned outside the United States at a federal effective tax rate of 5.25%. On December 21, 2004, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 109-2,Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, which allows an enterprise time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earningsWe have started an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provide additional clarifying language on key elements of the provision. Wetaxes have not been provided for United States income taxes on a cumulative total of approximately $174.7$304.0 million of undistributed earnings as of January 30, 2005 for certain non-United States subsidiaries as we intendedsuch earnings are considered to reinvest these earnings indefinitely in operations outside of the United States. We are currently in the process of evaluating whether or not, and to what extent, if any, this provision may benefit us. We expect to complete such evaluation before the end of our fiscal 2006. The range of possible amounts that we are considering for repatriation under this provision is between zero and $500 million. The potential range of related income tax expense is between zero and $27 million.be permanently reinvested.
Note 14 - Microsoft Agreement
On March 5, 2000, we entered into an agreement with Microsoft Corporation, or the Microsoft Agreement, in which we agreed, under certain terms and conditions, to develop and sell processors for use in the Xbox video game console. The terms of the Microsoft Agreement also state that 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.
We were engaged with Microsoft Corporation, or Microsoft, in discussions related to pricing and volumes of the Xbox platform processors. The Microsoft Agreement contemplated the use of a third party to resolve disputed matters, and on April 23, 2002 Microsoft submitted the pricing dispute to binding arbitration. On February 6, 2003, NVIDIA and Microsoft announced that arbitration was over and the companies had settled all issues related to pricing of the Microsoft Xbox platform processors. In addition to resolving this pricing dispute, we have agreed to collaborate with Microsoft on future cost reductions for the Xbox, together the Microsoft Settlement. As a result of the Microsoft Settlement, we recorded $40.4 million in additional revenue in the fourth quarter of fiscal 2003.
Note 15 - Segment Information
During the second quarter of fiscal 2005,Our Chief Executive Officer, who is considered to be our chief operating decision maker, the Chief Executive Officer, began reviewingor CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. During the first quarter of fiscal 2006, we reorganized our operating segments to bring all major product groups in line with our strategy to position ourselves as the worldwide leader in programmable graphics processor technologies. We now report threefinancial information for four product-line operating segments:segments to our CODM: the GPU business, whichBusiness is composed of products that support desktop PCs, notebook PCs, professional workstations and professional workstations;other GPU-based products; the MCP business, whichBusiness is composed of NVIDIA nForce products that operate as a single-chip or chipset that provide system functions, such as high speed processing and network communications, and perform these operations independently from the host CPU; our Handheld GPU Business is composed of products that support handheld PDAs, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital consumer electronics devices and is composed of revenue from our contractual arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft Corporation, or Microsoft, relating to the successor product to their initial Xbox products;gaming console, the Xbox360, and the WMP business, which supports handheld personalrelated devices, and digital assistants and cellular phones.media processor products. In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $101.4$242.3 million, $131.6 million and $118.0 million for fiscal years 2007, 2006 and 2005, respectively, that we do not allocate to our other operating segments. “All Other” also includes the results of operations of other miscellaneous operating segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of memory. Certain prior period amounts have been restated to conform to the presentation of our current fiscal quarter.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Our CODM does not identify or allocatereview any information regarding total assets byon an operating segment.segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for our companyNVIDIA as a whole.
| | | GPU | | MCP | | Handheld GPU | | Consumer Electronics | | All Other | | Consolidated | |
| | | (In thousands) | |
Twelve Months Ended January 28, 2007: | | | | | | | | | | | | | |
| Revenue | | $ | 1,994,334 | | $ | 661,483 | | $ | 108,496 | | $ | 96,314 | | $ | 208,144 | | $ | 3,068,771 | |
| Depreciation and amortization expense | | $ | 35,785 | | $ | 20,751 | | $ | 17,322 | | $ | 176 | | $ | 33,798 | | $ | 107,832 | |
| Operating income (loss) | | $ | 583,873 | | $ | 77,952 | | $ | (41,399 | ) | $ | 84,327 | | $ | (251,301 | ) | $ | 453,452 | |
Twelve Months Ended January 29, 2006: | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 1,657,221 | | $ | 352,319 | | $ | 58,745 | | $ | 167,398 | | $ | 140,004 | | $ | 2,375,687 | |
| Depreciation and amortization expense | | $ | 33,080 | | $ | 12,092 | | $ | 12,480 | | $ | 1,552 | | $ | 30,817 | | $ | 90,021 | |
| Operating income (loss) | | $ | 359,821 | | $ | 32,865 | | $ | (34,922 | ) | $ | 94,696 | | $ | (115,796 | ) | $ | 336,664 | |
Twelve Months Ended January 30, 2005: | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 1,348,968 | | $ | 175,663 | | $ | 45,921 | | $ | 259,968 | | $ | 179,513 | | $ | 2,010,033 | |
| Depreciation and amortization expense | | $ | 32,849 | | $ | 12,824 | | $ | 11,620 | | $ | 880 | | $ | 32,643 | | $ | 90,816 | |
| Operating income (loss) | | $ | 178,597 | | $ | (39,912 | ) | $ | (37,532 | ) | $ | 107,901 | | $ | (113,878 | ) | $ | 95,176 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For periods prior to the first quarter of fiscal 2005, product-line operating segment information other than revenue is impracticable to obtain primarily due to changes in our enterprise resource system structure that we implemented during the first quarter of fiscal 2005.
| | | GPU | | MCP | | WMP | | All Other | | Consolidated | |
| | | (In thousands) | |
Twelve Months Ended January 30, 2005: | | | | | | | | | | | |
| Revenue | | $ | 1,360,351 | | $ | 424,052 | | $ | 45,921 | | $ | 179,709 | | $ | 2,010,033 | |
| Operating income (loss) | | $ | 182,045 | | $ | 66,454 | | $ | (37,532 | ) | $ | (97,374 | ) | $ | 113,593 | |
Twelve Months Ended January 25, 2004: | | | | | | | | | | | | | | | | |
| Revenue | | $ | 1,259,803 | | $ | 442,500 | | $ | 9,009 | | $ | 111,633 | | $ | 1,822,945 | |
Twelve Months EndedJanuary 26, 2003: | | | | | | | | | | | | | | | | |
| Revenue | | $ | 1,303,719 | | $ | 498,270 | | $ | -- | | $ | 107,458 | | $ | 1,909,447 | |
Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following tables summarize information pertaining to our revenue from customers based on invoicing address in different geographic regions:
| | | Year Ended | | Year Ended | | Year Ended | | |
| | | January 30, | | January 25, | | January 26, | | | Year Ended | |
| | | 2005 | | 2004 | | 2003 | | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
| | | | | (In thousands) | | | | | (In thousands) | |
Revenue: | | | | | | | | | | |
| United States | | $ | 473,721 | | $ | 444,510 | | $ | 601,952 | | | $ | 332,268 | | $ | 340,598 | | $ | 473,721 | |
| Other Americas | | | 11,045 | | | 6,359 | | | 1,798 | | | | 171,851 | | | 38,572 | | | 11,045 | |
| China | | | 269,306 | | | 280,975 | | | 242,908 | | | | 659,711 | | | 401,612 | | | 269,306 | |
| Taiwan | | | 883,346 | | | 834,511 | | | 862,238 | | | | 1,118,989 | | | 1,131,784 | | | 883,346 | |
| Other Asia Pacific | | | 169,888 | | | 149,843 | | | 127,796 | | | | 483,872 | | | 250,844 | | | 169,888 | |
| Europe | | | 202,727 | | | 106,747 | | | 72,755 | | | | 302,080 | | | 212,277 | | | 202,727 | |
| Total revenue | | $ | 2,010,033 | | $ | 1,822,945 | | $ | 1,909,447 | | | $ | 3,068,771 | | $ | 2,375,687 | | $ | 2,010,033 | |
| | | As of | | As of | |
| | | January 30, | | January 25, | |
| | | 2005 | | 2004 | |
| | | (In thousands) | |
Long-lived assets | | | |
| United States | | $ | 169,872 | | $ | 186,280 | |
| Other Americas | | | -- | | | 15 | |
| Asia Pacific | | | 5,104 | | | 1,653 | |
| Europe | | | 3,979 | | | 2,081 | |
| Total long-lived assets | | $ | 178,955 | | $ | 190,029 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
| | | January 28, 2007 | | January 29, 2006 | |
| | | (In thousands) | |
Long-lived assets: | | | | | |
| United States | | $ | 241,795 | | $ | 177,568 | |
| Other Americas | | | 20,197 | | | 9,957 | |
| China | | | 5,589 | | | 4,645 | |
| Taiwan | | | 3,278 | | | 1,185 | |
| India | | | 13,263 | | | 7,332 | |
| Other Asia Pacific | | | 1,822 | | | 1,905 | |
| Europe | | | 3,233 | | | 3,037 | |
| Total long-lived assets | | $ | 289,177 | | $ | 205,629 | |
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods,dates, is summarized as follows:
| | Year Ended | |
| | January 30, | January 25, | January 26, | | Year Ended | |
| | 2005 | 2004 | 2003 | | January 28, 2007 | | January 29, 2006 | | January 30, 2005 | |
Revenue: | | | | | | | | |
| Customer A | 9% | 12% | 15% | | | 12 | % | | 12 | % | | 7 | % |
| Customer B | 13% | 15% | 23% | | | 5 | % | | 14 | % | | 18 | % |
| Customer C | 8% | 12% | 9% | | | - | % | | 5 | % | | 13 | % |
| Customer D | 18% | 21% | 17% | |
Accounts receivable from significant customers, those representing approximately 10% or more of total accounts receivable for the respective periods, is summarized as follows:
| | As of | |
| | January 30, | January 25, | |
| | 2005 | 2004 | | January 28, 2007 | | January 29, 2006 | |
Accounts Receivable: | | | | | | |
| Customer A | 13% | 15% | | | 18 | % | | 8 | % |
| Customer B | 5% | -- | | | 5 | % | | 11 | % |
| Customer C | 9% | 18% | |
| Customer D | 14% | 21% | |
Note 15 - Settlement Costs
Settlement costs were $14.2 million for fiscal 2006. The settlement costs are associated with two litigation matters, 3dfx and American Video Graphics, LP, or AVG. AVG is settled. For further information about the 3dfx matter, please refer to Note 12 of the Notes to Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 16 - Quarterly Summary (Unaudited)
| | | Fiscal 2005 Quarters Ended | |
| | | Jan. 30, 2005 | | Oct. 24, 2004 | | July 25, 2004 | | April 25, 2004 | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | |
| Revenue | | $ | 566,476 | | $ | 515,591 | | $ | 456,061 | | $ | 471,905 | |
| Cost of revenue | | $ | 372,661 | | $ | 348,849 | | $ | 315,968 | | $ | 323,069 | |
| Gross profit | | $ | 193,815 | | $ | 166,742 | | $ | 140,093 | | $ | 148,836 | |
| Net income | | $ | 48,009 | | $ | 25,879 | | $ | 5,119 | | $ | 21,349 | |
| Basic net income per share | | $ | 0.29 | | $ | 0.16 | | $ | 0.03 | | $ | 0.13 | |
| Diluted net income per share | | $ | 0.27 | | $ | 0.15 | | $ | 0.03 | | $ | 0.12 | |
| | | | | | | | | | | | | | |
The following table sets forth our unaudited consolidated financial, for the last eight fiscal quarters ended January 28, 2007.
| | | Fiscal 2004 Quarters Ended | |
| | | Jan. 25, 2004 | | Oct. 26, 2003 | | July 27, 2003 | | April 27, 2003 | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | |
| Revenue | | $ | 472,119 | | $ | 486,069 | | $ | 459,774 | | $ | 404,983 | |
| Cost of revenue | | $ | 333,914 | | $ | 351,938 | | $ | 329,800 | | $ | 278,415 | |
| Gross profit | | $ | 138,205 | | $ | 134,131 | | $ | 129,974 | | $ | 126,568 | |
| Net income | | $ | 24,166 | | $ | 6,356 | | $ | 24,150 | | $ | 19,747 | |
| Basic net income per share | | $ | 0.15 | | $ | 0.04 | | $ | 0.15 | | $ | 0.12 | |
| Diluted net income per share | | $ | 0.14 | | $ | 0.04 | | $ | 0.14 | | $ | 0.12 | |
| | | Fiscal 2007 Quarters Ended | |
| | | Jan. 28, 2007 (B) | | Oct. 29, 2006 (C) | July 30, 2006 | | April 30, 2006 | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | |
| Revenue | | $ | 878,873 | | $ | 820,572 | | $ | 687,519 | | $ | 681,807 | |
| Cost of revenue | | $ | 493,167 | | $ | 486,630 | | $ | 395,391 | | $ | 393,134 | |
| Gross profit | | $ | 385,706 | | $ | 333,942 | | $ | 292,128 | | $ | 288,673 | |
| Income before change in accounting principle | | $ | 163,506 | | $ | 106,511 | | $ | 86,753 | | $ | 91,360 | |
| Net income | | $ | 163,506 | | $ | 106,511 | | $ | 86,753 | | $ | 92,064 | |
Basic income per share before change in accounting principle (A) | | $ | 0.46 | | $ | 0.30 | | $ | 0.25 | | $ | 0.26 | |
Basic net income per share (A) | | $ | 0.46 | | $ | 0.30 | | $ | 0.25 | | $ | 0.26 | |
Diluted income per share before change in accounting principle (A) | | $ | 0.41 | | $ | 0.27 | | $ | 0.22 | | $ | 0.23 | |
Diluted net income per share (A) | | $ | 0.41 | | $ | 0.27 | | $ | 0.22 | | $ | 0.24 | |
| | Fiscal 2006 Quarters Ended | |
| | | Jan. 29, 2006 | | Oct. 29, 2005 (D) | | July 30, 2005 | | April 30, 2005 | |
| | | (In thousands, except per share data) | |
Statement of Operations Data: | | | | | | | | | |
| Revenue | | $ | 633,614 | | $ | 583,415 | | $ | 574,812 | | $ | 583,846 | |
| Cost of revenue | | $ | 378,812 | | $ | 355,420 | | $ | 357,437 | | $ | 373,985 | |
| Gross profit | | $ | 254,802 | | $ | 227,995 | | $ | 217,375 | | $ | 209,861 | |
| Net income | | $ | 97,374 | | $ | 64,447 | | $ | 73,833 | | $ | 65,522 | |
Basic net income per share (A) | | $ | 0.28 | | $ | 0.19 | | $ | 0.22 | | $ | 0.19 | |
Diluted net income per share (A) | | $ | 0.26 | | $ | 0.18 | | $ | 0.20 | | $ | 0.18 | |
(A) Reflects a two-for-one stock-split effective April 6, 2006.
(B) Included a charge of $13.4 million related to the write-off of acquired research and development expense from our purchase of PortalPlayer that had not yet reached technological feasibility and has no alternative future use.
(C) Included a charge of $17.5 million associated with a confidential patent licensing arrangement.
(D) Included a charge of $14.2 million related to settlement costs associated with two litigation matters, 3dfx and AVG.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Description | | Balance at Beginning of Period | | Additions (3) | | Deductions | | Balance at End of Period | | | Balance at Beginning of Period | | Additions (3) | | Deductions (2) | | Balance at End of Period | |
| | | | (In thousands) | |
| Year ended January 28, 2007 | | | | | | | | | | |
| Allowance for sales returns and allowances | | | $ | 10,239 | | $ | 37,033 | | $ | (32,795) | (1) | $ | 14,477 | |
| Allowance for doubtful accounts | | | $ | 598 | | $ | 676 | (4) | $ | (3) | (2) | $ | 1,271 | |
| | | | | | | | | | | | | | |
| Year ended January 29, 2006 | | | | | | | | | | | | | |
| Allowance for sales returns and allowances | | | $ | 11,687 | | $ | 35,127 | | $ | (36,575) | (1) | $ | 10,239 | |
| Allowance for doubtful accounts | | | $ | 1,466 | | $ | (492 | ) | $ | (376) | (2) | $ | 598 | |
| | | (In thousands) | | | | | | | | | | | | | |
| Year ended January 30, 2005 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for sales returns and allowances | | $ | 9,421 | | $ | 22,463 | | $ | (20,197) (1 | ) | $ | 11,687 | | | $ | 9,421 | | $ | 22,463 | | $ | (20,197) | (1) | $ | 11,687 | |
| Allowance for doubtful accounts | | $ | 2,310 | | $ | (844 | ) | $ | -- | | $ | 1,466 | | | $ | 2,310 | | $ | (844 | ) | $ | — | | $ | 1,466 | |
| Year ended January 25, 2004 | | | | | | | | | | | | | | |
| Allowance for sales returns and allowances | | $ | 13,228 | | $ | 23,796 | | $ | (27,603) (1 | ) | $ | 9,421 | | |
| Allowance for doubtful accounts | | $ | 4,240 | | $ | 731 | | $ | (2,661) (2 | ) | $ | 2,310 | | |
| Year ended January 26, 2003 | | | | | | | | | | | | | | |
| Allowance for sales returns and allowances | | $ | 15,586 | | $ | 20,147 | | $ | (22,505) (1 | ) | $ | 13,228 | | |
| Allowance for doubtful accounts | | $ | 2,493 | | $ | 2,413 | | $ | (666) (2 | ) | $ | 4,240 | | |
______________________________(1)
(1) Represents amounts written off against the allowance for sales returns.
(2)Represents uncollectible accounts written off against the allowance for doubtful accounts.
(3)Allowances for sales returns are charged as a reduction to revenue. Allowances for doubtful accounts are charged to expenses.
(4) Additions to allowance for doubtful accounts includes $471 related to our acquisitions of ULi Electronics, Inc., Hybrid Graphics Ltd. and PortalPlayer, Inc.
Exhibit Number
| Description of Document
|
| |
2.1 | Asset Purchase Agreement, dated as of December 15, 2000, by and among NVIDIA Corporation, NVIDIA US Investment Company and 3dfx Interactive, Inc. (filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the year ended January 28, 2001 and incorporated herein by reference).
|
3.1 | Amended and Restated Certificate of Incorporation (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-74905) and incorporated herein by reference).
|
3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation (filed as Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2002 and incorporated herein by reference).
|
3.3 | Bylaws, as amended (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 29, 2001 and incorporated herein by reference).
|
4.1 | Reference is made to Exhibits 3.1 and 3.2.
|
4.2 | Specimen Stock Certificate (filed as Exhibit 4.2 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-47495) and incorporated herein by reference).
|
4.3 | Second Amended and Restated Investors’ Rights Agreement, dated August 19, 1997 between the Company and the parties indicated thereto and First Amendment to Second Amended and Restated Investors’ Rights Agreement, dated July 22, 1998 (filed as Exhibit 4.3 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-47495) and incorporated herein by reference).
|
4.4 | Second Amendment to Second Amended and Restated Investors’ Rights Agreement, dated April 12, 1999 (filed as Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 2, 1999 and incorporated herein by reference).
|
10.1 | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1 File No. 333-47495) and incorporated herein by reference).
|
10.2*+ | 1998 Equity Incentive Plan, as amended.
|
10.3 + | 1998 Equity Incentive Plan ISO, as amended (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.4+ | 1998 Equity Incentive Plan NSO, as amended (filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.5 + | Certificate of Stock Option Grant (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.6+ | 1998 Employee Stock Purchase Plan, as amended (filed as Exhibit 99.4 to the Company’s Registration Statement on Form S-8 (File No. 333-51520) and incorporated herein by reference).
|
10.7+ | Form of Employee Stock Purchase Plan Offering, as amended (filed as Exhibit 99.5 to the Company’s Registration Statement on Form S-8 (File No. 333-100010) and incorporated herein by reference).
|
10.8+ | 1998 Non-Employee Directors’ Stock Option Plan, as amended (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q/A for the quarterly period ended April 28, 2002 and incorporated herein by reference).
|
10.9 + | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
| | | Incorporated by Reference |
Exhibit No. | Exhibit Description | Schedule/Form | File Number | Exhibit | Filing Date |
| | | | | | |
| 2.1 | Agreement and Plan of Merger by and among NVIDIA Corporation, Partridge Acquisition, Inc. and PortalPlayer, Inc. dated 11/6/06 | 8-K | 0-23985 | 2.1 | 11/9/2006 |
| | | | | | |
| 3.1 | Amended and Restated Certificate of Incorporation | S-8 | 333-74905 | 4.1 | 3/23/1999 |
| | | | | | |
| 3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation | 10-Q | 0-23985 | 3.4 | 9/10/2002 |
| | | | | | |
| 3.3 | Bylaws of NVIDIA Corporation, Amended and Restated as of March 7, 2006 | 10-K | 0-23985 | 3.3 | 3/16/2006 |
| | | | | | |
| 4.1 | Reference is made to Exhibits 3.1, 3.2 and 3.3 | | | | |
| | | | | | |
| 4.2 | Specimen Stock Certificate | S-1/A | 333-47495 | 4.2 | 4/24/1998 |
| | | | | | |
| 10.1 | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers | 8-K | 0-23985 | 10.1 | 3/7/2006 |
| | | | | | |
| 10.2+ | 1998 Equity Incentive Plan, as amended | 8-K | 0-23985 | 10.2 | 3/13/2006 |
| | | | | | |
| 10.3+ | 1998 Equity Incentive Plan ISO, as amended | 10-Q | 0-23985 | 10.5 | 11/22/2004 |
| | | | | | |
| 10.4+ | 1998 Equity Incentive Plan NSO, as amended | 10-Q | 0-23985 | 10.6 | 11/22/2004 |
| | | | | | |
| 10.5+ | Certificate of Stock Option Grant | 10-Q | 0-23985 | 10.7 | 11/22/2004 |
| | | | | | |
| 10.6+ | 1998 Employee Stock Purchase Plan Offering, as amended | S-8 | 333-51520 | 99.4 | 12/8/2000 |
| | | | | | |
| 10.7+ | Form of Employee Stock Purchase Plan Offering, as amended | S-8 | 333-100010 | 99.5 | 9/23/2002 |
| | | | | | |
| 10.8+ | Form of Employee Stock Purchase Plan Offering, as amended - International Employees | S-8 | 333-100010 | 99.6 | 9/23/2002 |
| | | | | | |
| 10.9+ | 1998 Non-Employee Directors’ Stock Option Plan, as amended | 8-K | 0-23985 | 10.1 | 4/3/2006 |
| | | | | | |
| 10.10+ | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended | 10-Q | 0-23985 | 10.1 | 11/22/2004 |
| | | | | | |
| 10.11+ | 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended | 10-Q | 0-23985 | 10.2 | 11/22/2004 |
| | | | | | |
| 10.12+ | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) | 10-Q | 0-23985 | 10.3 | 11/22/2004 |
| | | | | | |
| 10.13+ | 2000 Nonstatutory Equity Incentive Plan, as amended | SC TO-1 | 005-56649 | 99(d)(1)(A) | 11/29/2006 |
| | | | | | |
| 10.14 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A | S-3/A | 333-33560 | 10.1 | 4/20/2000 |
| | | | | | |
| 10.15 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B | S-3/A | 333-33560 | 10.2 | 4/20/2000 |
Exhibit Number | Description of Document |
10.10+ | EXHIBIT INDEX (Continued) 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.11+ | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.12+ | 2000 Nonstatutory Equity Incentive Plan, as amended (filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended January 26, 2003 and incorporated herein by reference).
|
10.13 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A (filed as Exhibit 10.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
10.14 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B (filed as Exhibit 10.2 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
10.15 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C (filed as Exhibit 10.3 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
10.16 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C (filed as Exhibit 10.4 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
21.1* | List of Registrant’s Subsidiaries.
|
23.1* | Consent of PricewaterhouseCoopers LLP.
|
23.2* | Consent of KPMG LLP.
|
24.1* | Power of Attorney (included in signature page).
|
31.1* | Certification of the Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
31.2* | Certification of the Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
32.1*# | Certification of the Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934.
|
32.2*# | Certification of the Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934. |
* Filed herewith.| | | Incorporated by Reference |
Exhibit No. | Exhibit Description | Schedule /Form | File Number | Exhibit | Filing Date |
| | | | | | |
| 10.16 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C | S-3/A | 333-33560 | 10.3 | 4/20/2000 |
| | | | | | |
| 10.17 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D | S-3/A | 333-33560 | 10.4 | 4/20/2000 |
| | | | | | |
| 10.18+ | NVIDIA Corporation Fiscal Year 2007 Variable Compensation Plan | 8-K | 0-23985 | 10.2 | 4/3/2006 |
| | | | | | |
| 10.19+ | NVIDIA Corporation 2000 NonStatutory Equity Incentive Plan NSO | SC TO-1 | 005-56649 | 99.1(d)(1)(B) | 11/29/2006 |
| | | | | | |
| 10.20+ | PortalPlayer, Inc. 1999 Stock Option Plan and Form of Agreements thereunder | S-8 | 333-140021 | 99.1 | 1/16/2007 |
| | | | | | |
| 10.21+ | PortalPlayer, Inc. Amended and Restated 2004 Stock Incentive Plan | S-8 | 333-140021 | 99.2 | 1/16/2007 |
| | | | | | |
| 21.1* | List of Registrant’s Subsidiaries | | | | |
| | | | | | |
| 23.1* | Consent of PricewaterhouseCoopers LLP | | | | |
| | | | | | |
| 24.1* | Power of Attorney (included in signature page) | | | | |
| | | | | | |
| 31.1* | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 31.2* | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.1#* | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.2#* | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
* Filed herewith
+ Management contract or compensatory plan or arrangement.
# The In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications attached as Exhibitfurnished in Exhibits 32.1 and Exhibit 32.2 hereto are deemed to accompany this Annual Report on Form 10-K areand will not be deemed filed with“filed” for purpose of Section 18 of the Securities and Exchange Commission and areAct. Such certifications will not be deemed to be incorporated by reference into any filing of NVIDIA Corporation under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of 1934 whether made before or after the date of this Form 10-K, irrespective ofabove exhibits not contained herein are available to any general incorporation language contained in such filing.stockholder upon written request to: Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
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 March 22, 2005.15, 2007.
NVIDIA Corporation
By /s/ JEN-HSUN HUANG_______ | |
| NVIDIA Corporation |
| By: | /s/ JEN-HSUN HUANG |
| Jen-Hsun Huang |
| President and Chief Executive Officer |
Jen-Hsun Huang
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jen-Hsun Huang and Marvin D. Burkett, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including posting effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-facts and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitutes, may lawfully do or cause to be done by virtue hereof.
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.
Signature | Title | Date |
/s/ JEN-HSUN HUANG Jen-Hsun Huang | President, Chief Executive Officer and Director (Principal Executive Officer) | March 15, 2007 |
| | | |
| President, Chief Executive Officer | |
/s/ JEN-HSUN HUANGMARVIN D. BURKETT Marvin D. Burkett | Chief Financial Officer (Principal Financial and Director (Principal Executive | |
Jen-Hsun Huang | Accounting Officer) | March 22, 200515, 2007 |
| | | |
| | |
/s/ MARVIN D. BURKETTTENCH COXE Tench Coxe | Chief Financial Officer (Principal | |
Marvin D. Burkett | Financial and Accounting Officer)Director | March 22, 200515, 2007 |
| | | |
| | |
/s/ TENCH COXE | | |
Tench CoxeSTEVEN CHU Steven Chu | Director | March 22, 200514, 2007 |
| | | |
| | |
/s/ STEVEN CHU | | |
Steven ChuJAMES C. GAITHERJames C. Gaither | Director | March 17, 200513, 2007 |
| | | |
| | |
/s/ JAMESHARVEY C. GAITHER | | |
JamesJONESHarvey C. GaitherJones | Director | March 22, 200512, 2007 |
| | | |
| | |
/s/ HARVEY C. JONES | | March 21, 2005 |
Harvey C. JonesMARK L. PERRY Mark L. Perry | Director | |
Signature | Title | Date March 15, 2007 |
| | | |
| | |
/s/ WILLIAM J. MILLER | | |
William J. Miller | Director | March 21, 200515, 2007 |
| | | |
| | |
/s/ A. BROOKE SEAWELL | | |
A. Brooke Seawell | Director | March 22, 2005 |
| | |
| | |
/s/ MARK A. STEVENS | | |
Mark A. Stevens | Director | March 22, 2005 |
| | 15, 2007 |
EXHIBIT INDEX
Exhibit Number| | | Incorporated by Reference | Exhibit No. | Exhibit Description | Schedule/Form | File Number | Exhibit | Filing Date | | | | | | | | | 2.1 | Agreement and Plan of Merger by and among NVIDIA Corporation, Partridge Acquisition, Inc. and PortalPlayer, Inc. dated 11/6/06 | 8-K | 0-23985 | 2.1 | 11/9/2006 | | | | | | | | | 3.1 | Amended and Restated Certificate of Incorporation | S-8 | 333-74905 | 4.1 | 3/23/1999 | | | | | | | | | 3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation | 10-Q | 0-23985 | 3.4 | 9/10/2002 | | | | | | | | | 3.3 | Bylaws of NVIDIA Corporation, Amended and Restated as of March 7, 2006 | 10-K | 0-23985 | 3.3 | 3/16/2006 | | | | | | | | | 4.1 | Reference is made to Exhibits 3.1, 3.2 and 3.3 | | | | | | | | | | | | | 4.2 | Specimen Stock Certificate | S-1/A | 333-47495 | 4.2 | 4/24/1998 | | | | | | | | | 10.1 | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers | 8-K | 0-23985 | 10.1 | 3/7/2006 | | | | | | | | | 10.2+ | 1998 Equity Incentive Plan, as amended | 8-K | 0-23985 | 10.2 | 3/13/2006 | | | | | | | | | 10.3+ | 1998 Equity Incentive Plan ISO, as amended | 10-Q | 0-23985 | 10.5 | 11/22/2004 | | | | | | | | | 10.4+ | 1998 Equity Incentive Plan NSO, as amended | 10-Q | 0-23985 | 10.6 | 11/22/2004 | | | | | | | | | 10.5+ | Certificate of Stock Option Grant | 10-Q | 0-23985 | 10.7 | 11/22/2004 | | | | | | | | | 10.6+ | 1998 Employee Stock Purchase Plan Offering, as amended | S-8 | 333-51520 | 99.4 | 12/8/2000 | | | | | | | | | 10.7+ | Form of Employee Stock Purchase Plan Offering, as amended | S-8 | 333-100010 | 99.5 | 9/23/2002 | | | | | | | | | 10.8+ | Form of Employee Stock Purchase Plan Offering, as amended - International Employees | S-8 | 333-100010 | 99.6 | 9/23/2002 | | | | | | | | | 10.9+ | 1998 Non-Employee Directors’ Stock Option Plan, as amended | 8-K | 0-23985 | 10.1 | 4/3/2006 | | | | | | | | | 10.10+ | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended | 10-Q | 0-23985 | 10.1 | 11/22/2004 | | | | | | | | | 10.11+ | 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended | 10-Q | 0-23985 | 10.2 | 11/22/2004 | | | | | | | | | 10.12+ | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) | 10-Q | 0-23985 | 10.3 | 11/22/2004 | | | | | | | | | 10.13+ | 2000 Nonstatutory Equity Incentive Plan, as amended | SC TO-1 | 005-56649 | 99(d)(1)(A) | 11/29/2006 | | | | | | | | | 10.14 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A | S-3/A | 333-33560 | 10.1 | 4/20/2000 | | | | | | | | | 10.15 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B | S-3/A | 333-33560 | 10.2 | 4/20/2000 |
| Description of Document
|
| |
2.1 | Asset Purchase Agreement, dated as of December 15, 2000, by and among NVIDIA Corporation, NVIDIA US Investment Company and 3dfx Interactive, Inc. (filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-K for the year ended January 28, 2001 and incorporated herein by reference).
|
3.1 | Amended and Restated Certificate of Incorporation (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-74905) and incorporated herein by reference).
|
3.2 | Certificate of Amendment of Amended and Restated Certificate of Incorporation (filed as Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2002 and incorporated herein by reference).
|
3.3 | Bylaws, as amended (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 29, 2001 and incorporated herein by reference).
|
4.1 | Reference is made to Exhibits 3.1 and 3.2.
|
4.2 | Specimen Stock Certificate (filed as Exhibit 4.2 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-47495) and incorporated herein by reference).
|
4.3 | Second Amended and Restated Investors’ Rights Agreement, dated August 19, 1997 between the Company and the parties indicated thereto and First Amendment to Second Amended and Restated Investors’ Rights Agreement, dated July 22, 1998 (filed as Exhibit 4.3 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-47495) and incorporated herein by reference).
|
4.4 | Second Amendment to Second Amended and Restated Investors’ Rights Agreement, dated April 12, 1999 (filed as Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 2, 1999 and incorporated herein by reference).
|
10.1 | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1 File No. 333-47495) and incorporated herein by reference).
|
10.2*+ | 1998 Equity Incentive Plan, as amended.
|
10.3 + | 1998 Equity Incentive Plan ISO, as amended (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.4+ | 1998 Equity Incentive Plan NSO, as amended (filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.5 + | Certificate of Stock Option Grant (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.6+ | 1998 Employee Stock Purchase Plan, as amended (filed as Exhibit 99.4 to the Company’s Registration Statement on Form S-8 (File No. 333-51520) and incorporated herein by reference).
|
10.7+ | Form of Employee Stock Purchase Plan Offering, as amended (filed as Exhibit 99.5 to the Company’s Registration Statement on Form S-8 (File No. 333-100010) and incorporated herein by reference).
|
10.8+ | 1998 Non-Employee Directors’ Stock Option Plan, as amended (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q/A for the quarterly period ended April 28, 2002 and incorporated herein by reference).
|
10.9 + | 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service), as amended (filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
EXHIBIT INDEX
(Continued)
Exhibit Number | Description of Document |
10.10+ | 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.11+ | 1998 Non-Employee Directors’ Stock Option Plan (Initial Grant) (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 23, 2004 and incorporated herein by reference).
|
10.12+ | 2000 Nonstatutory Equity Incentive Plan, as amended (filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended January 26, 2003 and incorporated herein by reference).
|
10.13 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A (filed as Exhibit 10.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
10.14 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B (filed as Exhibit 10.2 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
10.15 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C (filed as Exhibit 10.3 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
10.16 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C (filed as Exhibit 10.4 to Amendment No. 1 to the Company’s Registration Statement on Form S-3 (File No. 333-33560) and incorporated herein by reference).
|
21.1* | List of Registrant’s Subsidiaries.
|
23.1* | Consent of PricewaterhouseCoopers LLP.
|
23.2* | Consent of KPMG LLP.
|
24.1* | Power of Attorney (included in signature page).
|
31.1* | Certification of the Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
31.2* | Certification of the Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
32.1*# | Certification of the Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934.
|
32.2*# | Certification of the Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934. |
* Filed herewith.| | | Incorporated by Reference |
Exhibit No. | Exhibit Description | Schedule /Form | File Number | Exhibit | Filing Date |
| | | | | | |
| 10.16 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C | S-3/A | 333-33560 | 10.3 | 4/20/2000 |
| | | | | | |
| 10.17 | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D | S-3/A | 333-33560 | 10.4 | 4/20/2000 |
| | | | | | |
| 10.18+ | NVIDIA Corporation Fiscal Year 2007 Variable Compensation Plan | 8-K | 0-23985 | 10.2 | 4/3/2006 |
| | | | | | |
| 10.19+ | NVIDIA Corporation 2000 NonStatutory Equity Incentive Plan NSO | SC TO-1 | 005-56649 | 99.1(d)(1)(B) | 11/29/2006 |
| | | | | | |
| 10.20+ | PortalPlayer, Inc. 1999 Stock Option Plan and Form of Agreements thereunder | S-8 | 333-140021 | 99.1 | 1/16/2007 |
| | | | | | |
| 10.21+ | PortalPlayer, Inc. Amended and Restated 2004 Stock Incentive Plan | S-8 | 333-140021 | 99.2 | 1/16/2007 |
| | | | | | |
| 21.1* | List of Registrant’s Subsidiaries | | | | |
| | | | | | |
| 23.1* | Consent of PricewaterhouseCoopers LLP | | | | |
| | | | | | |
| 24.1* | Power of Attorney (included in signature page) | | | | |
| | | | | | |
| 31.1* | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 31.2* | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.1#* | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
| | | | | | |
| 32.2#* | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | |
* Filed herewith
+ Management contract or compensatory plan or arrangement.
# TheIn accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications attached as Exhibitfurnished in Exhibits 32.1 and Exhibit 32.2 hereto are deemed to accompany this Annual Report on Form 10-K areand will not be deemed filed with“filed” for purpose of Section 18 of the Securities and Exchange Commission and areAct. Such certifications will not be deemed to be incorporated by reference into any filing of NVIDIA Corporation under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of 1934 whether made before or after the date of this Form 10-K, irrespective ofabove exhibits not contained herein are available to any general incorporation language contained in such filing.stockholder upon written request to: Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
