SECURITIES AND EXCHANGE COMMISSION ________________
FORM 10-Kx | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[x]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 26, 200330, 2005 OR¨ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-23985 (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 (Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: Common stock, $.001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yesþ Nox¨Noo Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þo
Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Rule 12b-2) Yesþx Noo No¨ The aggregate market value of the voting stock held by non-affiliates of the registrant as of July
26, 200223, 2004 was approximately
$1,974,616,679.$1,958,779,998 (based on the closing sales price of the registrant’s common stock on July 23, 2004). 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
26, 2002.23, 2004. This determination of affiliate status is not a conclusive determination for other purposes.
The number of shares of common stock outstanding as of March
31, 20034, 2005 was
159,036,369.169,926,282.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference portions of its Proxy Statement for its
20032005 Annual Meeting of Stockholders to be filed by May
27, 2003.31, 2005.
FORWARD-LOOKING STATEMENTSPART IThis report
ITEM 1. BUSINESS
Forward-Looking Statements
When used in this Annual Report on Form 10-K contains(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 withinthat relate to future periods and include statements relating to our corporate strategies, the meaningfeatures, capabilities, performance, benefits, production and availability of Section 27Aour products and technologies, our license with Intel Corporation, the anticipated date of shipments of Intel Corporation-based MCP products, the Securities Actimportance of 1933design wins, the importance and Section 21Ebenefits of certain relationships, our employees, market share, 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, intellectual property, intellectual property litigation, payment of dividends, sufficiency 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 Securities Exchange Actimpact of 1934, whichrecent accounting pronouncements, business acquisitions, and our reliance on a limited number of customers. Forward-looking statements are subject to the “safe harbor” created byrisks and uncertainties that could cause actual results to differ materially from those sections.projected. These forward-looking statementsrisks and uncertainties include, but are not limited to: statements related to, industry trendsthose risks discussed below and future growthunder Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations-Business Risks,” as well as unanticipated decreases in the marketsaverage selling prices of a particular product, our inability to decrease inventory purchase commitments in a meaningful time frame, reduction in demand for three dimensional, or 3D, graphics and media communication processors; our product development efforts; the timing of our introduction of new products; industry and consumermarket acceptance of our products;products or our customers’ products, defects in our products, the impact of competitive pricing pressure, new product announcements or introductions by our competitors, disruptions in our relationships with Taiwan Semiconductor Manufacturing Company, United Microelectronics Corporation, International Business Machines Corporation, Chartered Semiconductor Manufacturing, and future profitability. Discussions containing theseother key suppliers, fluctuations in general economic conditions, failure to achieve design wins, the seasonality of the PC and our other product segments, international and political conditions, the concentration of sales of our products to a limited number of customers, unforeseen reductions in demand for our products, our ability to safeguard our intellectual property, delays in the development of new products, delays in volume production of our products, and developments in and expenses related to litigation. These forward-looking statements may be foundspeak only as of the date hereof. 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 “Business”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 Operations.Operation” all references to “NVIDIA,” These forward-looking statements involve risks“we,” “us,” “our” or the “Company” mean NVIDIA Corporation and uncertaintiesits subsidiaries, except where it is made clear that could causethe term means only the parent company.
NVIDIA, GeForce, SLI, GoForce, NVIDIA Quadro, NVIDIA nForce, TurboCache, PureVideo and the NVIDIA logo are our actual results to differ materially from thosetrademarks or registered trademarks in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date ofUnited States and other countries that are used in this document. The “Business Risks” section, amongWe also refer to trademarks of other things, should be consideredcorporations and organizations in evaluating our prospects and future financial performance.this document.
PART IOverviewITEM 1. BUSINESS
Overview
We are one of the world’s largest “fabless” semiconductor companies, supplying
NVIDIA Corporation is a worldwide leader in graphics and
digital media
communications processors
dedicated to creating products that enhance the interactive experience on consumer and
related software that are integral to personal computers, or PCs, professional
workstations and digital entertainmentcomputing platforms. We
provide an architecturally compatible “top-to-bottom” family of award-winningdesign, develop and market graphics processing units, or GPUs,
which set the standard for performance, quality, compatibility and features for a broad range of personal computing platforms. Our graphicsmedia and communications processors,
or MCPs, wireless media processors, or WMPs, and related software. Our products are
used forintegral to a wide variety of
applications,visual computing platforms, including
games, digital content creation,enterprise personal computers, or PCs, consumer PCs, professional workstations, notebook PCs, personal digital
image editing, business productivityassistants, cellular phones, game consoles and
product and industrial design. Our mission is to be the most important visual computing company in the world.digital media centers. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998.
Interactive 3D graphics are integral Our objective is to various computing and entertainment platforms such as workstations, consumer and commercial desktop PCs, Internet appliances and video gaming consoles. 3D graphics is a powerful broadband medium that enables the communication and visualization of information, whether it is in professional applications like digital content creation and computer assisted design and computer assisted manufacturing, or CAD/CAM, or commercial applications like financial analysis and business-to-business collaboration or simply surfing the Internet or playing games. The visually engaging and interactive nature of 3D graphics responds to consumers’ demands for a convincing simulation of reality beyond what is possible with traditional 2D graphics. We expect that the fundamental interactive capability and distributive nature of 3D graphics will make it the primary broadband medium for a digitally connected world.
We believe that a PC’s interactive 3D graphics capability representsbe one of the primary means users differentiate among various systems. PC users todaymost important and influential technology companies in the world.
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 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. Our WMPs deliver a great visual experience by accelerating graphics and video applications while implementing design techniques that result in high performance and ultra-low power consumption.
Industry Environment and Our Business
GPU Business
Programmable DirectX 9 Shader Model 3.0 GPUs.The combination of the programmable GPU with Microsoft Corporation’s, or Microsoft’s, DirectX 9 high-level shading language are known as DirectX 9 GPUs. The flexibility and power of DirectX 9 GPUs can easily differentiateenhance high-definition digital video, image processing and editing for digital photographs, as well as bring a “cinematic look” to computer graphics. Technology and market leadership in this generation of GPUs is a key element of our corporate strategy. In fiscal 2005, our strategy was to regain architectural and technology leadership by leading the qualityindustry with the first GPU to support DirectX 9 Shader Model 3.0 - the GeForce 6 Series of GPUs. Beginning with the GeForce 6800 for the enthusiast desktop segment, we introduced a complete family of GeForce 6 GPUs, including the GeForce 6600 for the performance segment 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.
MCP Business
MCPs. The NVIDIA nForce family of products represents our MCPs for Advanced Micro Devices, Inc., or AMD,-based desktop, notebook, workstation PCs and servers.The NVIDIA nForce architecture is also the foundation for our chipset that we sell to Microsoft for the Microsoft Xbox gaming console. To date, the NVIDIA nForce family 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 support 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 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.
WMP Business
WMPs. Since our acquisition 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 every device in the NVIDIA GoForce product family is to provide a high-performance, visually rich multimedia experience on cellular phones and handheld devices. These products deliver a great visual experience by accelerating graphics and video applications, while supporting the most demanded features and capabilities. GoForce media processors implement innovative design techniques, both inside the chips and at the system level, resulting in high performance and long battery life. These technologies enhance visual display capabilities, improve connectivity and minimize chip and system-level power consumption. With innovative technologies, such as ultra-low power digital media processors, we believe future cellular phones will be able 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 products for the multimedia handset era.
Our Products
We have three major product groups: GPUs, MCPs 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
prefer PCs that provide a superior visual experience. These factors have dramatically increased demand for 3D graphics processors. Mercury Research estimates that 188.6 million 3D graphics processors were sold worldwide in 2002high-definition video, audio, communications, networking security and
that 275.3 million will be sold worldwide in 2006.Continuing advancements in semiconductor process and manufacturing have made available more powerful and affordable microprocessors and 3D graphics processors, both of whichstorage. Our products are essential to deliver interactive 3D graphics to the PC market. Additionally, the industry has broadly adopted Microsoft Corporation’s Direct3D Application Programming Interface, or API, and Silicon Graphics Inc.’s, or SGI’s, OpenGL API, which serve as common and standard languages between software applications and 3D graphics processors, allowing the development of numerous 3D applications and resulting in increased consumer demand.
We believe that a substantial market opportunity exists for providers of performance 3D graphics processors, particularly as performance 3D graphics have become an increasingly important requirement and point of differentiation for PC original equipment manufacturers, or OEMs. Consumer PC users demand a compelling visual experience and compatibility with existing and next-generation 3D graphics applications at an affordable price. Application developers require high-performance, standards-based 3D architectures with broad market penetration. Since graphics is a key point of differentiation, PC OEMs continually seek to incorporate leading-edge, cost-effective 3D graphics solutions to build award-winning products. We believe that providers of interactive 3D graphics solutions compete based on their ability to leverage their technology expertise to simultaneously meet the needs of end users, application developers and OEMs.
Our Products
We have five major product families: GeForce, nForce, GeForce Go, Quadro and TNT2. In addition, we sell a two-processor chipset for use in the Xbox video game console. Our entire product line provides superior
processing and rendering power at competitive prices and is designed to support and deliver the maximum performance fromfor the most current standards as determined by each industry standards such as Microsoft’s DirectX APIsegment, and SGI’s OpenGL API on Windows operating systemsto provide a comprehensive set of features that enhance the overall operation and Linux platforms.
compatibility of each platform they support.
GeForce.GPUs.Our GPU products support desktop PCs, notebook PCs and professional workstations. We have three major families of GPUs: GeForce, Go and NVIDIA Quadro.
GeForce. The GeForce family represents our desktop GPUs. In November 2002, we introduced our newest flagship GPU,GPUs and includes the GeForce FX. The6, GeForce FX and GeForce4 families. Our most advanced GPU family is the GeForce 6 series. Introduced in July 2004, the GeForce 6 architecture is our first,second generation fully programmable cinematic GPU and is also our first GPU to be manufactured using 0.13-micron process technology. Thesupport the Microsoft DirectX 9 Shader Model 3.0 standard. Our GeForce FX6800 Ultra GPU is one of the PCsemiconductor industry’s most complex application specific integrated circuits, or ASICs, containingASICs. The GeForce 6800 Ultra GPU contains over 125230 million transistors and is the firstindustry’s only mainstream GPU to reach processor clock speeds up to 500MHz and memory clock speeds up to 1 GHz.incorporate 32-bit floating-point precision. The GeForce FX6800 class of GPUs is designed for the enthusiast consumer product linesegment. In August 2004, we introduced the GeForce 6600 GPU, which is designed for the performance consumer segment, and in October 2004, we introduced the GeForce 6200 GPU, which is designed for the mainstream consumer segment.In December 2004, we launched our GeForce 6200 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 PC market. The GeForce family, which also includes the GeForce2, GeForce3graphics 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 is designed tocurrently deliver the highesta balance of performance and features for every price product line ranging fromthe mainstream to performance PCs.accelerated graphics port-based, or AGP-based, PC segments.
nForce. The nForce family represents our platform processors for desktop PCs. We define a platform processor as a chipset that can off-load system functions, such as audio processingGeForce Go and network communications, and perform these operations independently from the host central processing unit, or CPU. The nForce family is the industry’s first highly-integrated platform processor to incorporate a comprehensive set of multimedia capabilities, such as 2D, 3D, DVD, HDTV, Dolby Digital audio playback and fast broadband and networking communications. nForce is a two-chip solution, which includes either a System Platform Processor, or SPP, or Integrated Graphics Processor, or IGP, combined with a Media Communications Processor, or MCP. The nForce configuration is determined by the OEM or system builder. The nForce family is designed to be compatible with Advanced Micro Devices’ AthlonXP and Duron microprocessors. In July 2002, we introduced our second generation platform processor, the nForce2. The nForce2 was the industry’s first platform processor to support dual DDR400 memory, simultaneous local-area network, or LAN, and wide-area network, or WAN, up to six high-speed USB 2.0 and three FireWire (IEEE 1394a) ports and our GeForce4 MX graphics core with all processing done only in the IGP.NVIDIA Quadro Go.GeForce Go. The GeForce Go family representsand NVIDIA Quadro Go families represent our mobilenotebook GPUs which consists ofand include the GeForce 6 Go, GeForce FX Go, GeForce4 Go, GeForce2 Go, Quadro4 GLNVIDIA QuadroFX Go and Quadro2NVIDIA Quadro4 Go GPUs. These GPUs are designed to deliver desktop graphics performance and features for multiple notebook configurations from desktop replacements, performancemultimedia notebooks and thin-and-lights to mobile workstations. The GeForce Go products are designed to serve the needs of both corporate 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.
NVIDIA Quadro.The Quadro2 Go is the industry’s first Independent Software Vendor, or ISV, certified driver for notebooks. In November 2002, our GeForce2 Go mobile GPU was designed into HP’s Compaq Tablet PC TC1000, one of the industry’s first tablet notebook PCs. In January 2003, the GeForce4 Go was designed into Apple Computer’s new PowerBook notebooks, marking the first time NVIDIA’s mobile GPUs were incorporated into an Apple mobile platform.Quadro. NVIDIA’sNVIDIA Quadro branded products are robust, high-performance 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 FX, NVIDIA Quadro4 XGL and the NVIDIA Quadro NVS workstation solutions are 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 financialmedical 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.
TNT2.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 TNT2NVIDIA nForce family represents our MCPs for AMD-based desktop PCs, notebook PCs, workstations and servers includes the NVIDIA nForce2, NVIDIA nForce3, NVIDIA nForce4 and NVIDIA nForce Professional. We define a MCP as a single-chip or chipset that can off-load system functions, such as audio processing and network communications, and perform these operations independently from the host central processing unit, or CPU. The NVIDIA nForce2 integrates a comprehensive set of graphics processors deliversmultimedia capabilities, such as two-dimensional, or 2D, three-dimensional, or 3D, digital video disc, or DVD, high-definition television, or HDTV, Dolby Digital audio playback and 2D graphics at affordable prices, making themfast broadband and networking communications. 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 popular graphics hardwareOEM or system builder. The NVIDIA nForce3 and NVIDIA nForce4 families are single-chip MCPs, designed to be compatible with AMD64 and Opteron 64-bit CPUs. The NVIDIA nForce3 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 enterprisenetworking, storage and consumer value PCs. The TNT2 family has been in production since April 1999.system performance. NVIDIA nForce4 products, 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 processors feature theplatform processor features dual-processing architecture, of NVIDIA’swhich includes our GPU designed specifically for the Xbox, or XGPU, and our MCP to power the video game system’sXbox’s standout graphics, audio and networking capabilities. The XGPU is aprogrammable 3D processor that contains more that 60 million transistors. The amount of computing horsepower is dedicated to one goal—to create stunning, never-before-seen imagery. 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. In addition, it is
WMPs.Our WMP product family, known as GoForce, supports handheld personal digital assistants, or PDAs, and cellular phones.
GoForce.The GoForce family represents our WMPs for a wide range of cellular and handheld devices. The GoForce 2100 and 2150 are two of the most sophisticated audio processor ever built.first WMPs 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 productsGoForce 3D 4000, 4500 and 4800 WMPs are currently designed into products offered by virtually every leading branded PC OEM, including Acer Inc., Apple Computer, Inc., Dell Computer Corporation, eMachines Inc., Fujitsu-Siemens Computers, Gateway Inc., Hewlett Packard Company, IBM, Micron Electronics Inc., NEC Corporation, Packard Bell NEC Inc., Silicon Graphics Inc.,the first to provide programmable 3D shaders, along with high-quality multi-megapixel still image and Sony Corporation, as well as leading contract equipment manufacturers, or CEMs, including Celestica Hong Kong Ltd., Mitac International Corporation, Micro-Star International Co. Ltd.,video processing in a single-chip package. Using dedicated hardware accelerator engines, the GoForce family delivers high performance multimedia applications and Sanmina SCI Corporation, and leading motherboard and add-in board manufacturers, including Abit Computer Corporation, ASUSTeK Computer Inc., Canopus Corporation, Gainward Co. Ltd., Gigabyte Technology Co. Ltd., Guillemot Corporation, LeadTek Research, Inc. and PNY Technologies.
drives high-resolution displays, while extending handheld battery life through a variety of unique power management techniques.
We design our GPUs,
platform processorsMCPs and
graphics processorsWMPs 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 delivering state-of-the-art
interactive 3D graphics capability,features, performance, compatibility and power efficiency while maintaining
affordablecompetitive prices. We believe that by developing 3D graphics,
high-definition video and media communications solutions that provide superior performance and address the key requirements of
each of the
PC market,product segments we serve, we will accelerate the adoption of
3D graphicshigh-definition digital media platforms and devices throughout
this market.these segments. We combine scalable architectural technology with mass market economies-of-scale to deliver a complete family of products that spans
performance workstations to
low-cost value PCs.consumer PCs to mulitmedia-rich cellular phones.
Our objective is to be the leading supplier of performance GPUs,
platform processorsMCPs and
graphics processorsWMPs for a broad range of
desktop PCs, workstations,
laptops,notebooks, video game consoles, Internet appliances, handhelds and any future computing device with a display. Our current focus is on the
desktop PC, workstation,
mobile laptopnotebook PC, servers, mulitmedia-rich cellular phones 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-Definition Video, Media Communications and Ultra-Low Power Product Families for the PC, Handheld and Digital Entertainment Platforms. Our strategy is to achieve market share leadership in the PC and digital entertainmentthese platforms by providing award-winning performance at every price point. By developing 3D graphics, high-definition 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. As part of our strategy, we have closely aligned our product development with Direct3Dgraphics and OpenGL, which we believe maximizes third-party software support.rich digital media.
Target Leading OEMs, ODMs and System Builders. Our strategy is to enable our leading OEMPC, handheld and consumer electronics OEMs, ODMs and major system builder customers to differentiate their products in a highly competitive marketplace by using our 3D graphicsdigital 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. Our products are currently designed into products offered by virtually every leading branded PC OEM, including Acer, Apple, Dell, eMachines, Fujitsu-Siemens, Gateway, HP, IBM, micronpc.com, NEC, Packard Bell NEC, SGI and Sony.
Sustain Technology and RoadmapProduct Leadership in 3D Graphics and High-Definition Video, and Media Communications and Ultra-Low Power. We are focused on leveragingusing our advanced engineering capabilities to accelerate the quality and performance of 3D graphics and high-definition video, media communications and ultra-low power processing in PCs.PCs and handheld devices. A fundamental aspect of our strategy is to actively recruit the best 3D graphics and high-definition 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 graphics processorsGPUs, MCPs and WMPs using independent design teams. As we have in the past, we intend to leverageuse this strategy to achieve new levels ofgraphics, networking and communications features and performance and ultra-low power designs, enabling our customers to achieve award-winning performance in their products.
Increase Market Share. We believe that substantial market share will be important to achieving success in the 3D graphics business.success. We intend to achieve a leading share of the market by devoting substantial resources to building award-winning families of products for a wide range of applications.
LeverageUse Our Expertise in Digital Multimedia. We believe the synergy created by the combination of 3D graphics and high-definition video and the Internet will fundamentally change the way people work, learn, communicate and play. We believe that our expertise in 3Dhigh-definition graphics and system architecture positions us to help drive this transformation. We are leveragingusing 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.
Our worldwide sales and marketing strategy is a key part of our objective to become the leading supplier of performance
3D graphics processorsGPUs, MCPs and WMPs for
desktop PCs.PCs, handheld devices and consumer electronics platforms. Our sales and marketing teams work closely with
PCeach 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 a 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
Channels’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
3D graphics market,GPU and MCP segments we serve, the sales process involves achieving key design wins with leading
PC 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
stocking representatives,distributors each of which has relationships with a broad range of major
PC OEMs and/or strong brand name recognition in the retail channel.
In the WMP 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 majority of our
graphicsdigital media processors directly to
stocking representatives,distributors, CEMs,
ODMs, motherboard manufacturers and add-in board manufacturers, which then sell boards
and systems with our
graphics processorproducts to leading OEMs, retail outlets and to a large number of system integrators. Although a
limitedsmall number of our customers represent the majority of our revenue, their end customers include a large number of
PC OEMs
including Acer, Apple, Dell, eMachines, Fujitsu-Siemens, Gateway, HP, IBM, Legend Computer, Medion AG, Micron, NEC Packard Bell, Samsung, Sony and
Toshiba, as well as system integrators throughout the world.
As a result of our Channel strategy, our sales are focused on a
limitedsmall number of customers. Sales to
Microsoft accounted for 23%, sales to Edom Technology Co., Ltd.
, or Edom, accounted for
17%18% and sales to
Micro-StarMicrosoft accounted for
15%13% of our total revenue for fiscal
2003.2005. Edom is an independent
stocking representative and Micro-Star is a CEM, and each purchase our products and resell these products to PC OEMs and system integrators.distributor.
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
partnersdevelopers prior to volume availability
in order to encourage the development of software titles that are optimized for our products.
Our sales are primarily made pursuant to standard purchase orders. 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. 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 growth in the second half of the calendar year related to the back-to-school and holiday seasons.
We
havedo not directly manufacture semiconductor wafers used for our products. Instead we utilize what is known as a “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
testing.packaging. This strategy
leveragesuses 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,
we are ablethis strategy allows us to avoid
many of the significant costs and risks associated with owning and operating manufacturing operations.
TheseOur 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.
Our graphics processors have been primarily fabricated by
We utilize Taiwan Semiconductor Manufacturing Company,Corporation, or TSMC. However, on March 26, 2003, we announced that we have formed a multi-year strategic alliance under which IBM will manufactureTSMC,International Business Machines Corporation, orIBM, Chartered Semiconductor Manufacturing, or Chartered, and United Microelectronics Corporation, or UMC, to produce our next-generation GeForce GPUs. As partsemiconductor wafers. We then utilize independent subcontractors to perform assembly, testing and packaging of the agreement, we will gain access to IBM’s suite of foundry servicesour products.
Our GPUs, MCPs and
manufacturing technologies, including power-efficient copper wiring, and a roadmap that is designed to lead to 65nm (nanometer; a billionth of a meter) in the next several years, giving us valuable tools to advance our GPUs. IBM plans to begin manufacturing the next-generation GeForce graphics processor this summer at IBM’s plant in East Fishkill, New York.Our graphics processorsWMPs are assembled, tested and testedpackaged by Advanced Semiconductor Engineering, Amkor Technology, STATS ChipPAC Incorporated and Siliconware Precision Industries Company Ltd. We receive semiconductor products from our subcontractors, perform incoming quality assurance and then ship them to CEMs, stocking representatives,distributors, motherboard and add-in board manufacturer customers from our Santa Clara, California warehouse and third-party warehouseswarehouse in Singapore and 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
hardwaremanagement focuses considerable attention on managing our inventories and
software development teams work closelyother working-capital-related items. We manage inventories by communicating with
certification agencies, Microsoft Windows Hardware Quality Labsour customers and
then using our
OEMindustry experience to forecast demand on a product-by-product basis. We then place manufacturing orders for our products that are based on this forecasteddemand.The quantity of products actually purchased by our customers
as well as shipment schedules are subject to
ensurerevisions that
reflect changes in both
the customers’ requirements and in manufacturing availability.We generally maintain substantial inventories of our
boardsproducts because the semiconductor industry is characterized by short lead time orders and
software drivers are certified for inclusion in the OEMs’ products.quick delivery schedules.
We believe that the continued introduction of new and enhanced products designed to deliver leading 3D graphics,
high definition 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
graphics processorsGPUs, MCPs and WMPs using independent design teams. Our research and development efforts are performed within specialized groups consisting of software engineering, hardware engineering, very large scale integration, or VLSI, design engineering, process engineering,
and architecture and algorithms. These groups act as a pipeline designed to allow the efficient simultaneous development of multiple generations of products.
A critical component of our product development effort is our partnerships with leaders in the
computer aided design, or CAD, industry. We
have investedinvest significant resources
to developin the development of relationships with industry leaders, including Cadence Design Systems, Inc.,
IKOS Systems, Inc. and Synopsys, Inc., often assisting these companies in the product definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics market and develop products that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of PC manufacturers.
We have substantially increased our engineering and technical resources
from fiscal 2004, and have
8321,231 full-time employees engaged in research and development as of January
26, 2003,30, 2005, compared to
6191,057 employees as of January
27, 2002.25, 2004. During fiscal
years2005, 2004 and 2003,
2002 and 2001, we incurred research and development expenditures of
$335.1 million, $270.0 million and $224.9 million,
$154.8 million and $86.0 million, respectively.
The market for
3D graphics processorsGPUs, MCPs and WMPs for PCs,
handhelds and consumer electronics 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
graphicsdigital media processors and total system costs of add-in boards or motherboards. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than
our 3D graphics processorsours, or
that may provide better performance or additional features not provided by our products.
Our primary In addition, it is possible that new competitors or alliances among competitors could emerge and acquire significant market share.
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
3D graphicsGPU, MCP and WMP solutions for the PC,
market.consumer electronics and handheld segments. Our competitors include the following:
suppliers of integrated core logic chipsets that incorporate 3D graphics functionality as part of their existing solutions, such as Intel, Silicon Integrated Systems, ATI Technologies Inc. and VIA Technologies, Inc.;
suppliers of graphics add-in boards that utilize their internally developed graphics chips, such as ATI Technologies Inc., Creative Technology and Matrox Electronics Systems Ltd.; | · | 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 mobile graphics processors that incorporate 3D graphics functionality as part of their existing solutions, such as ATI Technologies Inc., Trident Microsystems, Inc. and the joint venture of a division of SONICblue Incorporated (formerly S3 Incorporated) and VIA Technologies, Inc.; and
companies that have traditionally focused on the professional market and provide high end 3D solutions for PCs and workstations, including 3Dlabs (a | · | 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, company) and ATI Technologies 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
3D graphics processor market,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
marketssegments we may enter.
Patents and Proprietary Rights
We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property. As of January 26, 2003, we owned 91 issuedproperty in the United States patents, 16 issued foreign patents, and have 203 United States patent applications pending and 19 foreign patent applications pending.internationally. Our issued patents have expiration dates from September 4, 2007 to October 16, 2020. As of January 26, 2003, ourDecember 11, 2022. We have numerous patents issued and pending in the United States and in foreign countries. Our patents and pending patent applications relatedrelate to technology used by us in connection with our products, including our graphicsdigital media processors. 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 our
graphicsdigital 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.
As of January
26, 200330, 2005 we had
1,5132,101 employees,
8321,231 of whom were engaged in research and development and
681870 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 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
operatenow report three product-line operating segments: the GPU business, which is composed of products that support desktop PCs, notebook PCs and professional workstations; the MCP business, which is composed of NVIDIA nForce and Xbox products; and the WMP business, which supports handheld personal digital assistants and cellular phones. In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses 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
a single industry segment: the
design, development and marketing“All Other” category is primarily derived from sales of
3D graphics and media communication processors and related software for PCs, workstations and digital entertainment platforms.memory. The information included in Note
1215 of the Notes to the Consolidated Financial Statements is hereby incorporated by reference.
ManagementExecutive Officers of the Registrant
The following sets forth certain information regarding our executive officers, their ages and their positions as of January
26, 2003:30, 2005:
Name
| Age | AgePosition
| | Position
|
Jen-Hsun Huang | 41 | 39
| | President, Chief Executive Officer and Director |
Marvin D. Burkett | 62 | 60
| | Chief Financial Officer |
Jeffrey D. Fisher | 46 | 44
| | Executive Vice President, Worldwide Sales |
David M. Shannon | 49 | 47
| | Vice President, General Counsel |
Di Ma | 52 | 50
| | Vice President, Operations |
Daniel F. Vivoli | 44 | 42
| | Executive Vice President, Marketing |
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, 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 CFOChief Financial Officer of Arcot Systems, a security software company. From 1998 to 1999, Mr. Burkett was the executive vice presidentExecutive Vice President and CFOChief Financial Officer of Packard Bell NEC. A 34-year semiconductor veteran, Mr. Burkett also previously spent 26 years at Advanced Micro Devices, Inc., or AMD, where he held a variety of positions including CFO, senior vice presidentChief Financial Officer, Senior Vice President and corporate controller.Corporate Controller. Mr. Burkett holds B.S. and M.B.A. degrees from the University of Arizona.
Jeffrey D. Fisherhas been NVIDIA’sthe Executive Vice President, Worldwide Sales of NVIDIA since July 1994. He has 22over 20 years of sales and marketing experience in the semiconductor industry. Mr. Fisher holds a B.S.E.E. degree from Purdue University and an M.B.A. degree from Santa Clara University.
David M. Shannon joined NVIDIA in August 2002 as Vice President and General Counsel. From 1993 to 2002, Mr. Shannon held various counsel positions at Intel, Corporation 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-techhigh-technology related litigation. Mr. Shannon holds B.A. and J.D. degrees from Pepperdine University.
Di Ma has been was Vice President of Operations sincefrom July 2000.2000 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.
Our
annual reportAnnual 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 Exchange Act are available free of charge on or through our Internet website, 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.
Our website and the information contained therein as connected thereto is not intended to be incorporated into the Annual Report on Form 10-K.
Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of four buildings, representing approximately 500,000 total square feet. The leases related to our headquarters complex expire in 2012 and include two seven-year renewals at our option.five buildings. Additionally, we lease one buildingthree other buildings in Santa Clara with one used as warehouse space under a lease expiring in Novemberand the other two used as lab space. Outside of 2007. We alsoSanta Clara, we lease space for three design centers: one building in Austin, Texas; Berkeley, California; Beaverton, Oregon; Bedford, Massachusetts; Bellevue, Washington; Chandler, Arizona; Durham, North Carolina, under a lease that expires in December 2007; one building in Beaverton, Oregon, under a lease that expires in November 2004; and one building inCarolina; Greenville, South Carolina; Fort Collins, Colorado, under aColorado; Honolulu, Hawaii; and Redmond, Washington. These facilities are used as design centers and/or sales and administrative offices.
Outside of the United States, we lease that expiresspace in June 2004.Singapore; Taipei, Taiwan; Hsin Chu, Taiwan; Yokohama, Japan; Seoul, Korea; Beijing, China; Shanghai, China; Wanchai, Hong Kong; Bangalore, India; Paris, France; Moscow, Russia; Munich, Germany; and Theale, England. These facilities are used primarily to support our customers and operations and as sales and administrative offices. In addition, we lease space in Wurselen, Germany, which is used primarily as a design sales and administrative offices in Texas, Washington, Arizona, Massachusetts, South Carolina, France, Singapore, Taiwan, Japan, South Korea, Hong Kong, Germany and the United Kingdom to support our customers. 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 to the Consolidated Financial Statements under the subheading “Lease Obligations,” which information is hereby incorporated by reference.
ITEM 3. LEGAL PROCEEDINGS
3dfx
On February 19, 2002 anDecember 15, 2000, NVIDIA stockholder, Dominic Castaldo, on behalf of himselfCorporation and purportedly on behalf of a classone of our stockholders,indirect subsidiaries entered into an agreement to purchase certain graphics chip assets from 3dfx. The 3dfx asset purchase closed on April 18, 2001. In May 2002, we were served with a complaint filed anby the landlord of 3dfx’s San Jose, California commercial real estate lease. In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In December 2002, we were served with a complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease. The landlords’ complaints both assert claims for, among other things, interference with contract, successor liability and fraudulent transfer. The landlords’ are seeking to recover, among other things, amounts owed on their leases in the aggregate amount of approximately $10 million. 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 complaint seeks additional payments from us, the amount of which has not been quantified. The landlords’ actions have been removed to the Bankruptcy Court from the Superior Court of California and consolidated with the Trustee’s action 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 continue to defend ourselves vigorously.
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 NorthernEastern District of California (the “Northern District”) againstTexas. Opti asserts that unspecified NVIDIA chipsets infringe five United States patents held by Opti. Opti seeks unspecified damages for our conduct, attorneys fees and certain current and former NVIDIA officers, alleging violations of the federal securities laws arising out of our announcement on February 14, 2002 of an internal investigation of certain accounting matters. Approximately 13 similar actions were filed in the Northern District, one additional individual action was filed in the Southern District (together, the “Federal Class Actions”), along with three related derivative actions against us, certain of our current and former executive officers, directors and our independent auditors, KPMG LLP, in California Superior Court and in Delaware Chancery Court (collectively the “Actions”). The two related derivative actions filed in California Superior Court have been consolidated and are currently stayed pursuant to a voluntary stipulation agreement. The Actions allege claims in connection with varioustriple damages for alleged statements and omissions to the public and to the securities markets and seek damages together with interest and reimbursement of costs and expenses of the litigation. The derivative actions also seek disgorgement of alleged profits from insider tradingwillful infringement by officers and directors. The Actions are in the preliminary stages. The Federal Class Actions have been consolidated and lead plaintiffs appointed. Plaintiffs filed a consolidated amended complaint and, in response,NVIDIA. NVIDIA filed a motionresponse to dismiss. On March 28, 2003this complaint in December 2004. Discovery has not begun and no trial date has been set. We believe the courtclaims asserted against us are without merit and we will continue to defend ourselves vigorously.
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 motioncomplaint in intervention alleges both that the patents in suit are invalid and dismissed the consolidated amended complaint as to all claims and defendants with leave to amend. Plaintiffs must file their second consolidated amended complaint by May 12, 2003. NVIDIA has also filed a motion to dismiss the derivative action filed in Delaware. A hearing on this motion was held April 23, 2003 and a ruling is expected within the next month. We are obligated to indemnify our officers and directors,that, to the extent permittedAVG’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
law,various parties, in
connection withJanuary 2005, the
Actionsdistrict court judge entered Docket Control and
have insuranceDiscovery Orders in the three lawsuits. The PC Makers case now involves four separate patents and is currently scheduled for
such individuals,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
of the limits of the applicable insurance policiesAVG’s infringement allegations target functionality that may be performed by NVIDIA products, those claims are without merit, and
subject to potential reservations of rights. We intend to vigorously defend these Actions. We are unable, however, to predict the ultimate outcome of the Actions. There can be no assurance we will
be successful in defending the Actions, and if we are unsuccessful we may be subjectcontinue to
significant damages. Even if we are successful, defending the Actions is likely to be expensive and may divert management’s attention from other business concerns and harm our business.The staff of the Enforcement Division of the Securities & Exchange Commission (“SEC”) informed us in January 2002 that it had concerns relating to certain accounting matters and that the SEC along with the U.S. Attorney’s Office for the Northern District of California had authorized investigations into such matters. In accordance with the suggestion and advice of the SEC staff, we launched a review of these matters. On April 29, 2002, we announced that the Audit Committee of our Board of Directors had, with assistance from the law firm of Cooley Godward LLP and forensic auditors from the accounting firm of KPMG LLP, concluded its review and determined that it was appropriate to restate our financial statements for fiscal 2000, 2001 and the first three quarters of fiscal 2002. The Audit Committee has worked and continues to work in cooperation with the SEC. After receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be initiated, we reached an agreement in principle with the SEC staff in April 2003 that would resolve the SEC’s investigation of us in matters related to the restatement. The agreement is subject to final approval of the SEC. Under the terms of the agreement in principle, NVIDIA, without admitting or denying liability or wrongdoing, would agree to an administrative cease and desist order prohibiting any future violations of certain non-fraud financial reporting, books and records, and internal control provisions of the federal securities laws. We would not be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the agreement may take several weeks or months to complete. Further, there can be no assurance that the agreement will be approved by the SEC. Notwithstanding the above, actions by the SEC or other governmental or regulatory agencies with respect to us or our personnel arising out of the restatement of our financial statements or other matters may take significant time, may be expensive and may divert management’s attention from other business concerns and harm our business.
On April 18, 2001, we completed the purchase of certain assets of 3dfx, including patents and patent applications. 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 provides, subject to the other provisions thereof, that if 3dfx certifies to our satisfaction all its debts and other liabilities have been provided for, then we are obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx cannot make such a certification, but instead certifies to our satisfaction that its debts and liabilities can be satisfied for less than $25.0 million, then 3dfx can elect to receive a cash payment equal to the amount of such debts and liabilities and receive 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 cannot certify that all of its debts and liabilities have been provided for, or can be satisfied, for less than $25.0 million, we are not obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. We believe that the bankruptcy filing by 3dfx will allow a determination of the full number and scope of 3dfx’s debts and liabilities. NVIDIA may be obligated under the Asset Purchase Agreement to pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On March 12, 2003, we were served with a complaint by the Trustee for 3dfx seeking, among other things, additional payment for the purchased assets and the assumption by us of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suits against us seeking payment of the rents due by 3dfx.
We were engaged with Microsoft in discussions related to pricing and volumes of the Xbox chipset. These discussionsdefend ourselves and our agreement contemplated use of a third party to resolve matters and on April 23, 2002 Microsoft submitted the matter to binding arbitration. On February 6, 2003, NVIDIA and Microsoft announced that the companies had settled all issues related to pricing of the Microsoft Xbox GPU and MCP chipset and have ended the arbitration between them. In addition to resolving this pricing dispute, we have agreed to collaborate with Microsoft on future cost reductions for the Xbox.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNot applicable.
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal 2005.
PART IIITEM 5. MARKET | | FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq National 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
31, 2003,4, 2005, we had approximately
1,515452 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 National Market:
| | | High
| | Low
|
Year ended January 25, 2004 | | | | | | |
First Quarter (through March 31, 2003) | | $ | 14.83 | | $ | 9.33 |
|
Year ended January 26, 2003 | | | | | | |
Fourth Quarter | | $ | 18.27 | | $ | 9.99 |
Third Quarter | | $ | 16.98 | | $ | 7.20 |
Second Quarter | | $ | 40.65 | | $ | 14.30 |
First Quarter | | $ | 68.35 | | $ | 30.37 |
|
Year ended January 27, 2002 | | | | | | |
Fourth Quarter | | $ | 71.71 | | $ | 42.00 |
Third Quarter | | $ | 49.31 | | $ | 23.88 |
Second Quarter | | $ | 49.67 | | $ | 33.90 |
First Quarter | | $ | 43.48 | | $ | 21.57 |
| | High | Low |
Year ended January 29, 2006 | | |
| First Quarter (through March 4, 2005) | $29.60 | $22.60 |
| | | |
Year ended January 30, 2005 | | |
| Fourth Quarter | $24.96 | $13.14 |
| Third Quarter | $15.89 | $9.30 |
| Second Quarter | $24.11 | $14.40 |
| First Quarter | $27.35 | $20.63 |
| | | |
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 |
We have never paid
any cash dividends on our common stock 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"Compensation-Equity Compensation Plan Information,
”" and is incorporated by reference into this report.
Issuer Purchases of Equity Securities On August 9, 2004, we announced a stock repurchase program under which we may purchase up to $300.0 million of our common stock over a three year period through August 2007. The repurchases will be made in the open market or in privately negotiated transactions, from time to time, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, subject to market conditions, applicable legal requirements and other factors. Our stock repurchase program does not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion. The repurchases will be funded from our available working capital. During fiscal 2005, we repurchased 2.1 million shares for a total cost of approximately $24.6 million. We did not repurchase any shares during the fourth quarter of fiscal 2005.
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) Represents average price paid per share during the third quarter of fiscal 2005.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The consolidated statement of income data for the years ended January 26, 2003,30, 2005, January 27, 200225, 2004 and January 28, 200126, 2003 and the consolidated balance sheet data as of January 26, 200330, 2005 and January 27, 200225, 2004 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included herein. The consolidated statement of income data for the years ended January 30, 200027, 2002 and January 31, 199928, 2001 is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. The consolidated balance sheet data as of January 28, 2001,26, 2003, January 30, 200027, 2002 and January 31, 199928, 2001 is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.
| | | 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 | | | -- | | | -- | | | -- | | | -- | | | -- | |
| | | Year Ended
|
| | | January 26,
2003(A, B)
| | January 27,
2002(C, D)
| | January 28,
2001
| | January 30,
2000
| | January 31,
1999
|
| | | (In thousands, except per share data) |
Consolidated Statement of Income Data: | | | | | | | | | | | | | | | |
Revenue | | $ | 1,909,447 | | $ | 1,369,471 | | $ | 735,264 | | $ | 374,505 | | $ | 158,237 |
Gross profit | | | 576,012 | | | 519,238 | | | 272,879 | | | 141,843 | | | 48,491 |
Operating income | | | 143,986 | | | 241,732 | | | 128,135 | | | 58,617 | | | 4,516 |
Income before income tax expense | | | 150,557 | | | 252,749 | | | 144,808 | | | 60,371 | | | 4,487 |
Income tax expense | | | 59,758 | | | 75,825 | | | 46,339 | | | 19,412 | | | 357 |
Net income | | $ | 90,799 | | $ | 176,924 | | $ | 98,469 | | $ | 40,959 | | $ | 4,130 |
Basic net income per share | | $ | 0.59 | | $ | 1.24 | | $ | 0.75 | | $ | 0.34 | | $ | 0.07 |
Diluted net income per share | | $ | 0.54 | | $ | 1.03 | | $ | 0.62 | | $ | 0.28 | | $ | 0.04 |
Shares used in basic per share computation | | | 153,513 | | | 143,015 | | | 130,998 | | | 119,488 | | | 58,260 |
Shares used in diluted per share computation | | | 168,393 | | | 171,074 | | | 159,294 | | | 144,392 | | | 109,572 |
|
| | | January 26, 2003
| | January 27, 2002
| | January 28, 2001
| | January 30, 2000
| | January 31, 1999
|
| | | (In thousands) |
Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | |
Cash, cash equivalents and marketable securities | | $ | 1,028,413 | | $ | 791,377 | | $ | 674,275 | | $ | 61,560 | | $ | 50,257 |
Total assets | | | 1,617,015 | | | 1,503,174 | | | 1,016,902 | | | 203,085 | | | 113,332 |
Capital lease obligations, less current portion | | | 4,880 | | | 5,861 | | | 378 | | | 962 | | | 1,995 |
Deferred revenue | | | — | | | 70,193 | | | 200,000 | | | — | | | — |
Long-term debt | | | 300,000 | | | 300,000 | | | 300,000 | | | 500 | | | — |
Total stockholders’ equity | | | 932,687 | | | 763,819 | | | 407,107 | | | 127,424 | | | 64,209 |
Cash dividends declared per common share | | | — | | | — | | | — | | | — | | | — |
(A) Fiscal 2004 included a charge of $3.5 million related to the write-off of acquired research and development expense from the purchase of MediaQ, Inc. that had not yet reached technological feasibility and has no alternative future use.
(B) Fiscal 2004 included a charge of $13.1 million in connection with our convertible subordinated debenture redemption.
(C) Fiscal 2003 included $40.4 million in additional revenue related to our settlement of our arbitration with Microsoft regarding Xbox pricing.
(D) Fiscal 2003 included a charge for stock option exchange expenses of $61.8 million related to personnel associated with cost of revenue (for manufacturing 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.
14
(A) | | Fiscal 2003 included $40,365 in additional revenue related to our settlement of our arbitration with Microsoft regarding Xbox pricing. |
(B) | | Fiscal 2003 included a charge for stock option exchange expenses of $61,832 related 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. |
(C) | | Fiscal 2002 included $10,030 of acquisition charges attributable to expenses related to our acquisition of assets from 3dfx. |
(D) | | Fiscal 2002 included a charge of $3,687 related to our relocation from our previous headquarters. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with
“Selected Financial Data”, our consolidated financial statements and
related notes thereto,
includedand 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.Report, before deciding to purchase, hold or sell shares of our common stock.
Our Company
NVIDIA Corporation is a worldwide leader in graphics and digital media processors dedicated to creating products that enhance the interactive experience on consumer and professional computing platforms. We design, develop and market graphics processing units, or GPUs, media and communications processors, or MCPs, wireless media processors, or WMPs, and related software. Our products are integral to a wide variety of visual computing platforms, including enterprise personal computers, or PCs, consumer PCs, professional workstations, notebook PCs, personal digital assistants, cellular phones, game consoles and digital media centers. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998.
We are Our objective is to be one of the world’s largest “fabless” semiconductormost important and influential technology companies supplyingin the world.
Recent Developments
Sony Computer Entertainment Inc.
In December 2004, 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, we expect to recognize revenue of approximately $30 million from development 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
communications processors and related software that are integral to personal computers, professional workstations and digital entertainment platforms. We provide an architecturally compatible “top-to-bottom” family of award-winning graphics processing units, or GPUs, which set the standard for performance, quality, compatibility and features for a broad range personal computing platforms. Our graphics and communications processors are used for a wide variety of applications, including games, digital content creation, personal digital image editing, business productivity and product and industrial design. Our mission is to be the most important visual computing company in the world.servers.
Recent DevelopmentsIntel Cross-license AgreementMicrosoft Pricing Settlement
We were engaged with Microsoft in discussions related to pricing and volumes of the Xbox chipset. These discussions and our agreement contemplated use of a third party to resolve matters and on April 23, 2002 Microsoft submitted the matter to binding arbitration.
On February 6, 2003,November 19, 2004, NVIDIA and MicrosoftIntel announced that the companies had settled all issues relatedsigned 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 pricingimplement 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 Microsoft Xboxlatest 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 Express
The transition to PCI Express was central to our GPU and MCP chipsetobjectives during fiscal 2005. Industry adoption 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 family of GPUs into PCI Express compatible GPUs. In June 2004, we executed on 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 have ended the arbitration between them.GeForce 6600. In additionOctober 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
resolving this pricing dispute, we have agreed to collaborateaccelerate 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
Microsoft on future cost reductionsvarious graphics solutions. MXM also serves as the primary delivery vehicle for
the Xbox. As a resultour GeForce Go 6 series of
the settlement, we recognized $40.4 million in additional revenue in fiscal 2003.Strategic Alliance with IBM
On March 26, 2003,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 formed a multi-year strategic alliance under which IBM will manufacture our next-generation GeForce GPUs. As partdesign wins with three of the agreement,world's top five cellular phone OEMs - Motorola, Samsung and LG Electronics, Inc. In September 2004, we will gain accessunveiled 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 IBM’s suiteplay a critical role in the cellular phone industry.
Scalable Link Interface Technology
In June 2004, we unveiled a newscalable link interface, or SLI, technology that takes advantage of foundry servicesthe increased bandwidth of the PCI Express bus architecture to allow two NVIDIA-based graphics cards to operate in a single PC or workstation. PCI Express-based PCs and manufacturing technologies, including power-efficient copper wiring,workstations based on NVIDIA SLI technology became available in the second half of fiscal 2005 from PC and workstation manufacturers.
NVIDIA nForce
During the first quarter of fiscal 2005, we launched production of the NVIDIA nForce3 250Gb MCP, the 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 roadmapMCP 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 leadpower this year's fastest gaming, enthusiast, and digital media 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 65nm (nanometer;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.
Repatriation Legislation
The American Jobs Creation Act of 2004 was signed into law on October 22, 2004. This act creates a billionthtemporary 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 meter)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 next several years, giving us valuable toolsprocess of evaluating whether or not, and to advancewhat 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
GPUs. IBM plans to begin manufacturing the next-generationGPU business, while creating an architecture that is cost efficient.With our GeForce
graphics processor this summer at IBM’s plant in East Fishkill, New York.Beyond the chip manufacturing technology, IBM also offers an automated management system that not only controls production on the factory floor, but provides6 family, we captured a connection for customer and supplier systems and processes, allowing closer integration across the supply chain. IBM’s automated management system provides us with opportunities ranging from improved operation to greater efficiency and competitive advantage, while using e-business techniques to adapt to real-time, on-demand influences from the marketplace.
Securities & Exchange Commission
In April 2003, subsequent to receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be initiated, we reached an agreement in principle with the SEC staff that would resolve the SEC’s investigation of us in matters related to the restatement. The agreement is subject to final approvalsignificant share of the SEC. Underperformance GPU segment, and we are now focused on using that technology leadership position into the termsmainstream 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.
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
agreement in principle, NVIDIA, without admitting or denying liability or wrongdoing, would agreesecond quarter of fiscal 2005, we executed on our strategy to
an administrative ceasedeliver a full line of GPUs ready to support PCI Express chipsets. The transition to PCI Express was central to our GPU and
desist order prohibiting any future violationsMCP objectives during fiscal 2005. Industry adoption of certain non-fraud financial reporting, booksPCI Express was slower than expected during our fiscal 2005 and records, and internal control provisions of the federal securities laws. We would not be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the agreement may take several weeks or months to complete. Further, there can beis no assurance that the agreementadoption rate will increase during fiscal 2006. Our first PCI Express graphics solutions, the GeForce PCX series, was released for retail sale during the second quarter of fiscal 2005. 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 its 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.
Gross Margin Improvement
During the fourth quarter of fiscal 2005, our gross margin was 34.2%, an increase of 4.9% from our gross margin of 29.3% for the fourth quarter of fiscal 2004. Our gross margin was 32.3% for fiscal 2005, an increase of 3.3% from our gross margin of 29.0% for fiscal 2004. These improvements in our gross margin reflect our continuing focus on delivering cost effective product architectures, enhancing business processes and driving profitable growth. We expect gross margin to improve by approximately 0.5% to 1.0% during the first quarter of fiscal 2006 as our GeForce 6 product family becomes an increasing portion of our revenue and as our NVIDIA nForce3 and NVIDIA nForce4 product revenue continues to increase.
WMP Business
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
approved by the SEC.able to receive television programs, record digital video like a camcorder, enable video phone calls, and be portable game players.
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,
revenues andrevenue, cost of revenue, expenses and related disclosure of
contingent assets and liabilities.contingencies. On an on-going basis, we evaluate our estimates, including those related to
customer programs, revenue recognition,
sales returns, allowance for doubtful accounts
receivable, inventories,
investments, intangiblelong-lived assets,
goodwill, income taxes
financing operations and contingencies. 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 that are not readily apparent from other sources.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 committee of our board of directors and the
Audit Committeeaudit committee has reviewed our disclosures relating to
themour critical accounting policies and estimates in this
MD&A.report.
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.
Our policy on sales to distributors and stocking representatives is to defer recognition of revenue and related cost of revenue until the distributors and representatives resell the product. We record estimated reductions to revenue for customer programs at the time revenue is recognized. If market conditions decline, we may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. We also record a reduction to revenue for estimated product returns at the time revenue is recognized based on historical return rates.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. 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.
AllowanceWe record estimated reductions to revenue for Doubtful 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.
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.
We maintain an allowance for doubtful accounts
andreceivable for estimated losses resulting from the
financial 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.
As of January
26, 2003,30, 2005, our allowance for doubtful accounts
receivable was
$4.2$1.5 million and our gross
tradeaccounts receivable balance was
$175.1$336.2 million. Of the
$175.1$336.2 million,
$42.4$68.0 million was covered by credit insurance and
$4.2$22.4 million was covered by letters of credit. As a percentage of our gross
trade receivables, our allowance fordoubtful accounts has ranged between 1% and 2%. As of January 26, 2003,receivable balance, our allowance for doubtful accounts receivable has ranged between 0.4% and 1.5% during fiscal 2004 and 2005. As of January 30, 2005, our allowance for doubtful accounts receivable represented 2%0.4% of our gross trade receivables.accounts receivable balance. If our allowance for doubtful accounts receivable would have been recorded at 1% or 3%1.5% of our gross trade receivablesaccounts receivable balance, then our allowance for doubtful accounts receivable balance at January 26, 200330, 2005 would have been approximately $1.8$4.9 million, or $5.3 million, respectively, rather than the actual balance of $4.2$1.5 million.
Inventory cost is computed on an adjusted standard basis (which approximates actual cost on an average or first-in, first-out 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. No significant salesSales to date of such products have not had a significant impact on our gross margin. As of January 30, 2005, our inventory reserve was $33.7 million. As a percentage of our gross inventory balance, our inventory reserve has ranged between 8.8% and 13.4% during fiscal 2004 and 2005. As of January 30, 2005, our inventory reserve represented 9.6% of our gross inventory balance. If our inventory reserve would have been recorded at 13.4% of our gross inventory balance, then our inventory reserve balance at January 30, 2005 would have been approximately $46.8 million, rather than the actual balance of $33.7 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.
Statement of Financial Accounting Standards No. 109, “Accountingor SFAS No. 109,Accounting for Income Taxes” (“SFAS 109”), 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, or assetsas 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.
For the fiscal year ended January 26, 2003, we recorded net
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 $54.4 million that we believe will be recovered. However, should there be a change in our ability to recover any or partcomplex tax laws. Our estimates of thecurrent and deferred tax asset of $54.4 million, ourassets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax provision would increaselaws in the periodUnited 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 recoveryrecorded tax liability is not probable. less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements.
As of January
26, 2003,30, 2005, we
recordedhad a valuation allowance of
$106.7. The$190.6 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
realized,realization is sustained, will be accounted for as a credit to
shareholders’stockholders' equity.
Restatement
On April 29, 2002, Of the Company announced that it would be restating its previously reported resultsremaining valuation allowance at January 30, 2005, $19.9 million relates to federal and state tax attributes acquired in certain acquisitions for the first three quarters of fiscal 2002 and for fiscal years 2001 and 2000. This restatement was the result of an extensive review directed by the Company’s independent Audit Committee, with assistance from the law firm of Cooley Godward LLP and forensic accountants from KPMG LLP. The Company’s Audit Committee initiated its review at the request of, and in full cooperation with, the staffwhich realization of the Securities & Exchange Commission (SEC). The Company’s Audit Committee and its team conducted a thorough review of the Company’s records with respectrelated deferred tax assets was determined not more likely than not to all issues raised by the SEC staff for the periods mentioned. The Company’s Audit Committee workedbe realized due, in close cooperation with the SECpart, to provide it with extensive information and conclusions of the review.
As discussed in the Form 8-K filed by NVIDIA on May 1, 2002, the adjustments that were reflected in our restated financial statements fell generally into four categories:
The first category involved mistakes that were foundpotential utilization limitations as a result of ownership changes; and $25.0 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 internal review process undertaken by our Audit Committee. An exampleextent realization of thisthe deferred tax assets related to certain acquisitions becomes probable, recognition of these tax benefits would first categoryreduce 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 accidental double-bookingpossibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an expense.
The second category involved adjustments relatingasset or the incurrence of a liability, as well as our ability to estimates madereasonably estimate the amount of loss in connection withdetermining 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 in which we concluded that there was not sufficient current evidence to support an estimate.
The third area related to past accounting judgments that, upon review, we concluded were incorrect, but we did not reach a conclusionshould be adjusted and whether they were made in good faith or bad faith.new accruals are required.
The fourth category related to waived audit adjustments for prior periods, which were items previously identified as part of the normal quarterly review and annual audit process, but for which we had concluded we were not required to make adjusting entries in order to prepare our financial statements under generally accepted accounting principles.
For additional information on the restatement, refer to Note 13 of the Notes to Consolidated Financial Statements.
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 26,
2003
| | | January 27,
2002
| | | January 28,
2001
| |
| | | | |
Revenue | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of revenue | | 69.5 | | | 62.1 | | | 62.9 | |
Cost of revenue related to stock option exchange | | 0.3 | | | — | | | — | |
| | |
|
| |
|
| |
|
|
Gross profit | | 30.2 | | | 37.9 | | | 37.1 | |
Operating expenses: | | | | | | | | | |
Research and development | | 11.8 | | | 11.3 | | | 11.7 | |
Sales, general and administrative | | 7.9 | | | 7.2 | | | 8.0 | |
Stock option exchange | | 2.9 | | | — | | | — | |
Amortization of goodwill | | 0.0 | | | 0.7 | | | — | |
Acquisition related charges | | 0.0 | | | 0.7 | | | — | |
Discontinued use of property | | 0.0 | | | 0.3 | | | — | |
| | |
|
| |
|
| |
|
|
Total operating expenses | | 22.6 | | | 20.2 | | | 19.7 | |
| | |
|
| |
|
| |
|
|
Operating income | | 7.6 | | | 17.7 | | | 17.4 | |
Interest and other income, net | | 0.3 | | | 0.8 | | | 2.3 | |
| | |
|
| |
|
| |
|
|
Income before income tax expense | | 7.9 | | | 18.5 | | | 19.7 | |
Income tax expense | | 3.1 | | | 5.5 | | | 6.3 | |
| | |
|
| |
|
| |
|
|
Net income | | 4.8 | % | | 13.0 | % | | 13.4 | % |
| | |
|
| |
|
| |
|
|
| | Year Ended |
| | January 30, | January 25, | January 26, |
| | 2005 | 2004 | 2003 |
| Revenue | 100.0% | 100.0% | 100.0% |
| Cost of revenue | 67.7 | 71.0 | 69.5 |
| Cost of revenue related to stock option exchange | -- | -- | 0.3 |
| Gross profit | 32.3 | 29.0 | 30.2 |
| Operating expenses: | | | |
| Research and development | 16.7 | 14.8 | 11.8 |
| Sales, general and administrative | 10.0 | 9.1 | 7.9 |
| In-process research and development | -- | 0.2 | -- |
| Stock option exchange | -- | -- | 2.9 |
| Total operating expenses | 26.7 | 24.1 | 22.6 |
| Income from operations | 5.6 | 4.9 | 7.6 |
| Interest and other income, net | 0.6 | 0.5 | 0.3 |
| Convertible debenture redemption expense | -- | (0.7) | -- |
| Income before income tax expense | 6.2 | 4.7 | 7.9 |
| Income tax expense | 1.2 | 0.6 | 3.1 |
| Net income | 5.0% | 4.1% | 4.8% |
Fiscal Years Ended January 26, 2003,30, 2005, January 27, 2002,25, 2004 and January 28, 200126, 2003
During the second quarter of fiscal 2005, we began reporting three product-line operating segments: the GPU business, which is composed of products that support desktop PCs, notebook PCs and professional workstations; the MCP business, which is composed of NVIDIA nForce products and Xbox related products; and the WMP business, which is comprised of GoForce products that support handheld personal digital assistants and cellular phones. Please refer to Note 15 of the Notes to the Consolidated Financial Statements for further information.
Revenue was $1.91$2.01 billion in fiscal 2003, $1.372005, compared to $1.82 billion in fiscal 2002, and $735.3 million in fiscal 2001,2004, which represented an increase of 39%10%. The revenue increase from fiscal 20022004 to 2003 and 86% from fiscal 2001 to 2002. The growth2005 was primarily the result of increased sales of our graphics processors drivenNVIDIA 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 shipmentsincrease 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 2004 which was a 52-week year, 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 revenue.
Revenue was $1.82 billion in fiscal 2004, compared to $1.91 billion in fiscal 2003, which represented a decrease of 5%. This revenue decrease was primarily the result of a significant decrease in sales of Xbox processors to Microsoft, offset by growth in addition to the strong overall demand for our products in the workstation, mobileGPU, MCP and platform processor product lines.WMP products.
Revenue from sales to customers outside of the United States and
North Americaother Americas accounted for
68%76%, 75% and
82%68% of total revenue for fiscal
20032005, 2004 and
2002,2003, respectively. Revenue by
geographicalgeographic region is allocated to individual countries based on the location to which the products are initially billed even if the foreign CEMs’ and add-in board and motherboard manufacturers’ revenue is attributable to end customers
located in
the United States.a different location. The
decreaseincrease in the percentage of revenue from sales to customers outside of the United States
and other Americas for fiscal 2005 as compared to fiscal 2004 and for fiscal 2004 as compared to fiscal 2003 is primarily
attributabledue to
increaseddecreased sales of
the graphicsXGPUs and
media communication processorsMCPs used in the Microsoft Xbox product,
which are billed to Microsoft in the United States.
Although we achieved substantial growth in revenue from fiscal 2002
Sales to
2003 and fiscal 2001 to 2002, we do not expect to sustain this rate of growth in future periods. In addition, we expect that the average selling pricesMicrosoft accounted for approximately 13% of our
products will decline over the livesrevenue for fiscal 2005. Our three other largest customers accounted for approximately 36% of
the products. The declines in average selling pricesour revenue for fiscal 2005. Sales to Microsoft accounted for approximately 15% of
3D graphics processors in general may accelerate as the market continuesour revenue for fiscal 2004. Our three other largest customers accounted for approximately 45% of our revenue for fiscal 2004. In fiscal 2003, sales to
develop and competition increases.Microsoft accounted for approximately 23% of our revenue. Our three other largest customers accounted for approximately 41% of our revenue for fiscal 2003.
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, (includingincluding wafer fabrication, assembly, testing and packaging),packaging, manufacturing support costs, (includingincluding labor and overhead associated with such purchases),purchases, final test yield fallout, inventory provisions and shipping costs. Gross margin is the ratio of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of graphics processorsproducts sold.
Our gross margin was 32%, 29% and 30% in fiscal 2005, 2004 and 2003, respectively. Gross margin is the ratioimproved during fiscal 2005 compared to fiscal 2004 as a result of gross profit to revenue. Ourthree primary factors. First, during fiscal 2004 our GeForce FX series of GPU products had experienced lower gross margins than previous series of GeForce GPU products, such as the GeForce 4 series. Company-wide efforts were 30%, 38%made to drive down cost and 37%improve gross margin and, as a result, during fiscal 2005, we were able to improve our gross margin. In addition, in fiscal 2003, 20022005, we realized increased sales of our performance GeForce FX desktop GPU products and 2001, respectively. began shipping our GeForce 6 series GPUs, which are among our highest gross margin products. Finally, revenue from our NVIDIA Quadro workstation products, which typically provide the highest gross margins of any of our products, increased as a percentage of our total revenue during fiscal 2005. This increase in our mix of revenue toward higher-margin products led to a positive impact on overall gross margin. These improvements in our gross margin reflect our continuing focus on delivering cost effective product architecture, enhancing business process and driving profitable growth. We expect gross margin to improve by approximately 0.5% to 1.0% 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.
Gross margin for fiscal 20032004 as compared to fiscal 20022003 decreased primarily due to thea shift in the mix of business andproduct 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 inventory write-down. During fiscal 2003,increase in gross margin on sales of Xbox processors in fiscal 2004, which generally have lower margins than our other products, comprised 23%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 | |
| | | (in thousands) | |
| | | | | | | | | | | | | | | | | | |
Research and Development: | | | | | | | | | | | | | | | | | |
| Salaries and related benefits | | $ | 171.6 | | $ | 137.6 | | $ | 34.0 | | | 25 | % | $ | 137.6 | | $ | 104.4 | | $ | 33.2 | | | 32 | % |
| Computer software and lab equipment | | | 41.1 | | | 36.9 | | | 4.2 | | | 11 | % | | 36.9 | | | 33.4 | | | 3.5 | | | 11 | % |
| New product development | | | 29.0 | | | 18.6 | | | 10.4 | | | 56 | % | | 18.6 | | | 29.0 | | | (10.4 | ) | | (36 | %) |
| 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 | % |
| Other | | | 5.9 | | | 4.0 | | | 1.9 | | | 48 | % | | 4.0 | | | 4.9 | | | (0.9 | ) | | (18 | %) |
| Total | | $ | 335.1 | | $ | 270.0 | | $ | 65.1 | | | 24 | % | $ | 270.0 | | $ | 224.9 | | $ | 45.1 | | | 20 | % |
| Research and development as a percentage of net revenue | | | 17 | % | | 15 | % | | | | | | | | 15 | % | | 12 | % | | | | | | |
Research and developments expenses increased by $65.1 million, or 24%, from fiscal 2004 to fiscal 2005 primarily due to a $34.0 million increase related to 174 additional personnel and a $10.4 million increase in new product developments costs related to an overall increase in the number of
our overall revenue asproduct tape-outs and in prototype materials. Depreciation and amortization increased $11.5 million due to emulation hardware and software programs that were purchased during fiscal 2004, resulting in a full year of depreciation in fiscal 2005 compared to
9%a partial year of depreciation in fiscal
2002. See Note 11 of our Notes to Consolidated Financial Statements for further description of our relationship with Microsoft. In addition, during the second quarter of fiscal 2003 we wrote down inventory of approximately $212004. Computer software and equipment increased $4.2 million
related to certain Xbox processors and nForce chipsets. Gross margin increased from fiscal 2001 to fiscal 2002primarily due to
an increase in unit shipmentsincreased allocation of information technology expenses and
the favorable impact of the higher margin GeForce graphics processors, partially offset byfacilities increased
sales of$3.1 million due to increased facilities expense allocation, both based on the
lower margin Xbox graphics and media communication processors.In the future, we could be subject to excess or obsolete inventories and be required to take additional write-downs if growth slows or if we incorrectly forecast product demand. A reduction in demand could negatively impact our gross margins. Although we achieved substantial growth in gross profit during fiscal 2003 from the same period a year ago, we do not expect to sustain this rate of growth in future periods.
Operating Expenses
Research and Development. Research and development expenses consist of salaries and benefits, cost of development tools and software, cost of new product prototypes and consultant costs. headcount.
Research and development expenses increased by
$70.1$45.1 million, or
45%20%, from fiscal
20022003 to
2003fiscal 2004 primarily due to a
$32.9 million increase related to additional personnel, a $22.2 million increase associated with lab equipment, software licenses, maintenance fees and depreciation charges, a $4.5 million increase related to engineering costs to develop our next generation products, and a $10.5 million increase in facilities costs due to the move into a new building at our headquarters and a full year of occupation in all headquarter buildings as well as other expenses during the year. Research and development expenses increased by $68.7 million, or 80%, from fiscal 2001 to 2002 primarily due to a $31.9$33.2 million increase related to additional personnel, including
certainapproximately 60 employees
that we hired
from 3dfx in connection withas a part of our acquisition of
certain of their assets as discussed below, a $14.3 million increase associated with lab equipment, software licenses, maintenance fees and depreciation charges, a $11.7 million increase related to engineering costs to develop our next generation products,MediaQ and a
$10.8$17.7 million increase in
facilities costs due to the move into several buildings at ourdepreciation and amortization, offset by a $10.4 million decrease in new
headquarters and other expenses during the year.product development costs.
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
revenues.revenue.
Sales, General and Administrative. Sales, general and administrative expenses consist primarily of salaries, commissions and bonuses, promotional tradeshow and advertising expenses, travel and entertainment expenses and legal and accounting expenses.
| | | Year Ended | | | | | | Year Ended | | | | | |
| | | Jan. 30, | | Jan. 25, | | $ | | % | | Jan. 25, | | Jan. 26, | | $ | | % | |
| | | 2005 | | 2004 | | Change | | Change | | 2004 | | 2003 | | Change | | Change | |
| | | (in thousands) | |
| | | | | | | | | | | | | | | | | | |
Sales, General and Administrative: | | | | | | | | | | | | | | | | | |
| Salaries and related benefits | | $ | 94.7 | | $ | 76.3 | | $ | 18.4 | | | 24 | % | $ | 76.3 | | $ | 63.4 | | $ | 12.9 | | | 20 | % |
| Advertising and promotions | | | 66.6 | | | 47.2 | | | 19.4 | | | 41 | % | | 47.2 | | | 39.6 | | | 7.6 | | | 19 | % |
| Legal and accounting fees | | | 12.6 | | | 12.6 | | | -- | | | -- | | | 12.6 | | | 20.0 | | | (7.4 | ) | | (37 | %) |
| Facility expense | | | 9.6 | | | 8.3 | | | 1.3 | | | 16 | % | | 8.3 | | | 6.8 | | | 1.5 | | | 22 | % |
| Depreciation and amortization | | | 13.0 | | | 14.6 | | | (1.6 | ) | | (11 | %) | | 14.6 | | | 11.4 | | | 3.2 | | | 28 | % |
| Other | | | 4.3 | | | 6.2 | | | (1.9 | ) | | (31 | %) | | 6.2 | | | 10.3 | | | (4.1 | ) | | (40 | %) |
| Total | | $ | 200.8 | | $ | 165.2 | | $ | 35.6 | | | 22 | % | $ | 165.2 | | $ | 151.5 | | $ | 13.7 | | | 9 | % |
| Sales, general and administrative as a percentage of net revenue | | | 10 | % | | 9 | % | | | | | | | | 9 | % | | 8 | % | | | | | | |
Sales, general and administrative expenses increased $52.5$35.6 million, or 53%22%, from fiscal 20022004 to fiscal 2005 primarily due to an $18.4 million increase related to 88 additional personnel and a $19.4 million increase in advertising and promotion costs for tradeshows and new product launches and other marketing costs, including travel and customer samples. These increases were offset by a decrease of $1.9 million in other expenses during the period, including a reduction in the allowance for doubtful accounts.
Sales, general and administrative expenses increased $13.7 million, or 9%, from fiscal 2003
to fiscal 2004 primarily due to a
$16.4$12.9 million increase
in salaries and related benefits related to additional personnel,
andcommissions, a $16.6$7.6 million increase in legaladvertising and accounting expenses associated with various legal proceedings,promotions costs for tradeshows and marketing development and a $9.0$3.2 million increase in equipmentcomputer software and software primarilyequipment related to the enhancement of our computer systems and the depreciation and amortization of new equipment. These increases were offset by a $7.9$7.4 million increasedecrease in tradeshowlegal fees related to higher legal fees incurred during fiscal 2003 for various issues that have since been resolved, including an inquiry by the Securities and product launch costs,Exchange Commission, the Microsoft arbitration and a $2.6shareholder lawsuits.
In-process research and development
In connection with our acquisition of MediaQ in August 2003, we wrote-off $3.5 million increase in facilities costsof in-process research and development expense, or IPR&D, that had not yet reached technological feasibility and has 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.
Interest Income and Interest Expense
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income decreased from $18.6 million to $11.4 million from fiscal 2004 to fiscal 2005 primarily due to the move into a new building at our headquartersresult of lower overall balances of cash, cash equivalents and a full year of occupation in all headquarter buildings as well as other increases associated with general administrative activitiesmarketable securities and travel and entertainment expenses. Sales, general and administrative expenses increased $40.2due to lower market interest rates. Interest income decreased from $23.2 million or 69%,to $18.6 million from fiscal 20012003 to 2002fiscal 2004 primarily due to lower overall balances of cash, cash equivalents and marketable securities in fiscal 2004 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 $21.5result of capital lease obligations and, prior to the redemption in October 2003, interest on the Notes. Interest expense decreased from $12.0 million increase related to additional personnel and commissions, a $6.2$0.2 million increase in tradeshow and product launch costs, and a $12.5from fiscal 2004 to fiscal 2005. Interest expense decreased from $16.5 million increase in facilities coststo $12.0 million from fiscal 2003 to fiscal 2004. These decreases were primarily due to the move into several buildings atredemption of the Notes.
Other Income (Expense), net
Other income and expense primarily consists of realized gains and losses on the sale of marketable securities. Other income decreased by $2.4 million from fiscal 2004 to fiscal 2005 primarily due to $2.5 million of realized gains on the sale of marketable securities during fiscal 2004 as a result of our
new headquartersliquidation of a significant portion of our marketable securities portfolio 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
other increases associated with general administrative activities,marketable securities as part of an
American Red Cross donation associated with the events of September 11, 2001, and travel and entertainment expenses.We expect sales, general and administrative expenses to continue to increase in absolute dollars as we continue to support our operations, expand our sales and protect our business interests.
investment exchange.
On September 26, 2002, we commenced an offer, (the “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”). 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.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 leaveleaves 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 exchange for the cancellation of Eligible Options, a fixed amount of consideration, represented by fully vested, non-forfeitable common stock
andless 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”"substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23
“Issues"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.
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”"look back" and
“look forward”"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
dodid not
intend to grant stock options to any participants in the Offer for at least six months following October 24, 2002. If any stock options
arewere granted to
participants in the Offer within the six months following October 24, 2002, those stock options will receivewould 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
$61,832,000,$61.8 million, consisting of
$39,906,000$39.9 million in fully vested, non-forfeitable shares of our common stock (approximately 3,815,000 shares) and
$21,926,000$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.
Amortization of GoodwillDuring fiscal 2002, amortization of goodwill was associated with goodwill from the asset purchase from 3dfx. The initial allocation of the purchase price included $57.4 million of goodwill, plus approximately $3.0 million of intangible assets previously allocated to workforce in place, which was reclassified into goodwill as of the beginning of fiscal 2003.
In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, we no longer amortize goodwill as of the beginning of fiscal 2003. We have elected to perform our annual impairment review during the fourth quarter of each fiscal year. We have completed our annual goodwill impairment test for fiscal 2003 and concluded that there was no impairment.
Acquisition Related Charges
Acquisition related charges are attributable to expenses related to the acquisition of assets from 3dfx in fiscal 2002. These charges primarily consisted of bonuses for former 3dfx employees.
Discontinued Use of Property
Discontinued use of property consists of write-offs of $3.7 million relating to our previous office space in Santa Clara, California. Since we relocated in June 2001, we have been unable to secure a subtenant for our previous office space due to the decrease in demand for commercial rental space in Silicon Valley. The write-offs consist of all remaining costs related to the preexisting lease, including rental payments, capitalized leasehold improvements, and furniture and fixtures.
Interest and Other Income, Net
Interest and other income, net decreased to $6.6 million in fiscal 2003 from $11.0 million in fiscal 2002 and $16.7 million in fiscal 2001. Interest income, which primarily consists of interest earned on cash, cash equivalents and marketable securities decreased $4.5 million from fiscal 2002 to 2003 due to the decline in market interest rates. Interest income increased $6.4 million from fiscal 2001 to fiscal 2002 due to higher average cash balances as a result of a $200.0 million advance received from Microsoft in connection with our agreement with Microsoft and the receipt of $387.5 million from our 4¾% convertible subordinated note and common stock offerings, which both closed in October 2000.
Interest expense, which primarily consists of interest incurred as a result of capital lease obligations and interest on our convertible debt was flat from fiscal 2002 to fiscal 2003. Interest expense increased in fiscal 2002
compared to fiscal 2001 due to the issuance of $300.0 million of 4¾% convertible subordinated notes in October 2000.
Income Taxes
We recognized income tax expense of $59.8$25.1 million, $75.8$12.3 million and $46.3$59.8 million in fiscal 2003, 20022005, 2004 and 20012003, respectively. Income taxestax expense as a percentage of pretax income werebefore taxes, or our annual effective tax rate, was 20% in fiscal 2005, 14.1% in fiscal 2004 and 39.7% in fiscal 2003, 30.0% in2003.
In the second quarter of fiscal
2002 and 32.0% in fiscal 2001. The increase in the2004, we revised our annual effective tax rate
for the year from
fiscal 200230% to
fiscal 200320%. The change in rate was primarily due to
not recording anyfederal 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 settlement of our federal income tax return exam by the Internal Revenue Service, or IRS, the $38.2 million income tax expense
orfor 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 this change in rate and the special items incurred during 2004, our annual effective tax rate for such year was 14.1%. In fiscal 2003, we did not record an income tax benefit for the third quarter
of fiscal 2003 as our loss before income tax expense
as such loss was primarily attributable to a stock compensation charge for which no
income tax benefit may
behave 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.
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
26, 2003,30, 2005, we had
$1.03 billion$670.0 million in cash, cash equivalents and marketable securities, an increase of
$237.0$66.0 million from the end of fiscal
2002. In August 2001, we began to invest in marketable securities.2004. 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
$265.0$132.2 million,
$160.8$49.7 million and
$267.9$265.0 million during fiscal
2003, 20022005, 2004 and
2001,2003, respectively. The increase in cash flows from operating activities in fiscal
20032005 when compared to fiscal
20022004 was
primarily related to the $25.9 million increase in net income and changes in operating assets and liabilities. On our consolidated balance sheet, accrued liabilities increased $37.3 million primarily due to
an increase in rebates payable, which resulted from increased OEM business. Accounts payable increased $52.9 million primarily due to purchases from subcontract manufacturers for inventory. Offsetting these increases, our accounts receivable increased $101.1 million primarily due to increased sales during the
decrease in inventories, prepaid expenses and other current assets and deferred tax assets offset byfourth quarter of fiscal 2005 as compared to the
decrease in accounts payable.Cash used in investingfourth quarter of fiscal 2004.
Investing activities
hashave consisted primarily of
investments inpurchases and sales of marketable securities,
the purchase of certain assets from various businesses and purchases of property and equipment, which include leasehold improvements for our
facilities.facilities and intangible assets. Investing activities used cash of $152.0 million and provided cash of $88.0 million during fiscal 2005 and 2004, respectively. Net cash used
inby investing activities
was $277.3 million induring fiscal
2003,2005 was primarily due to
$217.3$84.7 million of net purchases of marketable securities.
We incurred $63.1In addition, we used $67.3 million
infor capital expenditures
in fiscal 2003 primarily attributable to
purchases of leasehold improvements for our new
data center at our headquarters
facility, as well as for purchases of computercampus, new research and
development emulation equipment,
to support increased researchtechnology licenses, software and
development.intangible assets. We expect to spend approximately
$50.0$50 million to
$60.0$70 million for capital expenditures
induring fiscal
2004,2006, primarily for
purchases of software licenses, emulation equipment, computer and engineering
workstations and future phases of our enterprise resource planning system implementation.workstations. In addition, we may continue to use cash in connection with the acquisition of
new businesses or assets.
Financing activities provided cash of $26.3$13.8 million during fiscal 20032005 compared to $99.1cash used of $270.3 million during fiscal 2004. Cash provided in fiscal 2002. The decrease in2005 primarily resulted from $--42.5 million of common stock issued under employee stock plans, offset by $24.6 million related to our stock repurchase program. In fiscal 2003 when compared to fiscal 20022004, 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.
Stock Repurchase Program
On August 9, 2004, we announced a
decrease in employee stock
option exercises.Common Stock and Convertible Subordinated Debenture Offering
In October 2000,repurchase program under which we sold 2,800,000 sharesmay purchase up to $300.0 million of our common stock over a three year period through August 2007. The repurchases will be made in the open market or in privately negotiated transactions, from time to time, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, subject to market conditions, applicable legal requirements and $300.0 millionother factors. Our stock repurchase program does not obligate us to acquire any particular amount of convertible subordinated debentures due October 15, 2007 in a public offering. Proceeds from the offering were approximately $387.5 million after deducting underwriting discounts, commissionscommon stock and offering expenses. Issuance costs related to the offering are being amortized to interest expense on a straight-line basis over the term of the debentures. Interest on the convertible subordinated debentures accrues at the rate of 4 ¾% per annum and is payable semiannually in arrears on April 15 and October 15 of each year, commencing April 15, 2001. The convertible subordinated debentures are redeemable at our option on or after October 20, 2003. The debentures are convertible at the option of the holdermay be suspended at any time prior to the close of business on the maturity date, unless previously redeemed orat our discretion. The repurchases will be funded from our available working capital. During fiscal 2005, we repurchased into shares of common stock at a conversion price of $46.36 per share, subject to adjustment in certain circumstances.
3dfx Asset Purchase
On April 18, 2001, we completed the purchase of certain assets of 3dfx, including patents and patent applications. 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 provides, subject to the other provisions thereof, that if 3dfx certifies to our satisfaction all its debts and other liabilities have been provided for, then we are obligated to pay 3dfx two2.1 million shares for a total cost of NVIDIA common stock. If 3dfx cannot make such a certification, but instead certifies to our satisfaction that its debts and liabilities can be satisfied for less than $25.0 million, then 3dfx can elect to receive a cash payment equal toapproximately $24.6 million. We did not repurchase any shares during the amountfourth quarter of such debts and liabilities and receive 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 cannot certify that all of its debts and liabilities have been provided for, or can be satisfied, for less than $25.0 million, we are not obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. We believe that the bankruptcy filing by 3dfx will allow a determination of the full number and scope of 3dfx’s debts and liabilities. NVIDIA may be obligated under the Asset Purchase Agreement to pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On March 12, 2003, we were served with a complaint by the Trustee for 3dfx seeking, among other things, additional payment for the purchased assets and the assumption by us of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suits against us seeking payment of the rents due by 3dfx.
fiscal 2005.
Contractual Cash ObligationsThe following summarizes our contractual cash obligations that are both on our balance sheet and off balance sheet as of January 26, 2003 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
Contractual Cash Obligations
| | Total
| | 1 Year
| | 2-3 Years
| | 4-5 Years
| | After 5 Years
|
| | | (in thousands) |
Convertible subordinated notes | | $ | 300,000 | | | — | | | — | | $ | 300,000 | | | — |
Interest on convertible subordinated notes(1) | | $ | 67,687 | | $ | 14,250 | | $ | 28,500 | | $ | 24,937 | | | — |
Capital lease obligations | | $ | 11,316 | | $ | 6,260 | | $ | 5,056 | | | — | | | — |
Operating leases | | $ | 219,096 | | $ | 22,995 | | $ | 46,180 | | $ | 47,201 | | $ | 102,720 |
Purchase obligations(2) | | $ | 210,270 | | $ | 210,270 | | | — | | | — | | | — |
Royalty and license commitments | | $ | 2,612 | | $ | 1,871 | | $ | 741 | | | — | | | — |
Other | | $ | 520 | | | — | | $ | 520 | | | — | | | — |
| | |
|
| |
|
| |
|
| |
|
| |
|
|
Total contractual cash obligations | | $ | 811,501 | | $ | 255,646 | | $ | 80,997 | | $ | 372,138 | | $ | 102,720 |
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(1) | | Our convertible subordinated notes due 2007 possess a fixed interest rate of 4¾%. The amount of interest obligation assumes that the notes are held until maturity and not redeemed or converted into shares of common stock at an earlier date. The convertible subordinated notes are redeemable at our option on or after October 20, 2003. The notes are convertible at the option of the holder at any time prior to the close of business on the maturity date. As such, actual future cash obligations may be significantly lower. |
(2) | | Represents our noncancelable inventory purchase commitments as of January 26, 2003. |
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;
inability to successfully develop and produce in volume production our next-generation | · | decreased demand and market acceptance for our products and/or our customers’ products; |
competitive pressures resulting in lower than expected average selling prices; and
new product announcements or product introductions by our competitors. | · | inability to successfully develop and produce in volume production our next-generation products; |
| · | competitive pressures resulting in lower than expected average selling prices; and |
| · | new product announcements or product introductions by our competitors. |
For additional factors see “Business
Risks—Risks - 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.”
Other InformationShelf Registration StatementConsistent
In December 2003, we filed a Form S-3 with Section 10A(i)(2)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 purchase closed on April 18, 2001. Under the terms of the Securities Exchange ActAsset 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 1934, as addedNVIDIA 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 Section 202dividing 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 to litigation relating to certain aspects of the Public Companyasset purchase and 3dfx’s subsequent bankruptcy in October 2002. Please refer to Item 3: Legal Proceedings for further information regarding this litigation.
Contractual Obligations
The following summarizes our contractual obligations that are both on our balance sheet and off balance sheet as of January 30, 2005 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 | |
| | | (in thousands) | |
| Capital lease obligations, including interest | | $ | 869 | | $ | 869 | | $ | -- | | $ | -- | | $ | -- | |
| Operating leases | | | 191,117 | | | 27,534 | | | 54,847 | | | 52,942 | | | 55,794 | |
| Purchase obligations (1) | | | 457,273 | | | 457,273 | | | -- | | | -- | | | -- | |
| Other liabilities reflected on our balance sheet under GAAP | | | 4,375 | | | 2,000 | | | 2,375 | | | -- | | | -- | |
| Total contractual obligations | | $ | 653,634 | | $ | 487,676 | | $ | 57,222 | | $ | 52,942 | | $ | 55,794 | |
_________________
(1) Represents our inventory purchase commitments as of January 30, 2005.
Recently Issued Accounting ReformPronouncements
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 Investor Protection ActIts 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 2002, NVIDIA is responsibleEITF 03-1. Quantitative and qualitative disclosures required by EITF 03-1 remain effective for disclosingfiscal 2005. We do not believe the natureimpact 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 non-audit services approved byproduction 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 Audit Committee during a quarter to be performed by KPMG LLP, our independent auditor. Non-audit services are services other than those provided by KPMG LLPconsolidated financial position, results of operations or cash flows.
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 connectionparagraph 21(b) of APB Opinion No. 29,Accounting for Nonmonetary Transactions, and replaces it with an auditexception 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 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 reviewsignificant impact on our reported results of NVIDIA’soperations, although it will have no impact on our overall financial statements. Duringposition. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because that will depend on the fourth quarterfair value and number of fiscal year 2003, our Audit Committee did approve newshare-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 recurring engagements performed by KPMG LLP for the following non-audit services (1)pro forma net income tax, transactional tax and payroll tax return preparation, (2) general tax consultation and advice, (3) international statutory audits, and (4) consultation regarding accounting standards and issues.Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is set forth in Note(loss) per share inNote 1 of the Notes to the Consolidated Financial Statements under the subheading “New Accounting Pronouncements,“Stock-Based Compensation.” which information is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 U.S. 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 (“SFAS No. 115”),Accounting for Certain Investments123(R) also requires the benefits of tax deductions in Debt and Equity Securities. Allexcess 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 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 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. 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 26, 2003, a sensitivity analysis was performed on our floating and fixed rate financial investments. Parallel shifts in the yield curve of both +/-50 basis points would result in changes in fair market values for these investments of approximately $3.5 million.
Our convertible subordinated notes due 2007 possess a fixed interest rate of 4¾% and are not subject to interest rate fluctuations.
Exchange Rate Risk
We consider our exposure to foreign exchange rate fluctuationscompensation cost to be minimal. Currently, salesreported 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 arrangements with third-party manufacturers provide for pricing and paymentincrease net financing cash flows in U.S. dollars, and therefore are not subject to exchange rate fluctuations. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.
periods after adoption.
In addition to the risks discussed in
“Management’s“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 operating resultsfailure 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
unpredictable andbased upon future demand forecasts, which may
fluctuate, and if our operating results are belownot accurately predict the
expectations of securities analystsquantity or
investors our stock price could decline.Manytype of our revenue components fluctuateproducts 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 are difficultsignificant 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 predict,write-down our inventory and our operating expenses are largely independentgross 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 revenueolder products, which could result in any particular period. It is therefore difficultwrite-downs of the value of our inventory and our gross margin could be adversely affected. During the second quarter of fiscal 2005, demand for usour non PCI Express mainstream desktop products declined significantly due in large part to accurately forecast revenue and profits or losses.unexpected competitive pricing actions taken by our competition. As a result it is possible that in some quarters our operating results could be belowof these competitive pricing actions, we were required to reduce the expectationsaverage selling prices of securities analysts or investors, which could cause the trading pricecertain of our common stockmainstream desktop products and our gross margin was adversely affected. If such competitive pricing actions were to decline, perhaps substantially. We believe that our quarterly and annual results of operations will 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 operationsrecur in the future, include the following:
demandwe could be forced to continue to reduce average selling prices or to write-down our inventory and market acceptanceour gross margin could be adversely affected. Conversely, if we underestimate our customers’ demand for our products, and/orwe may have inadequate manufacturing capability and may not be able to obtain sufficient inventory to fill our customers’ products;
the successful development and volumeorders on a timely basis. Even if we are able to increase production of next-generation products;
new product announcementslevels 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 product introductions bydamage our competitors;reputation.
our ability to introduce new products in accordance with OEM design requirements and design cycles;
changes in the timing of product orders due to unexpected delays in the introduction of our customers’ products;fluctuations in the availability of manufacturing capacity or manufacturing yields;30
declines in spending by corporations and consumers related to perceptions regarding an economic downturn in the U.S. 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 market;
substantial disruption in our suppliers’ operations, either as a result of a natural disaster, equipment failure, terrorism or other cause;
supply constraints for and changes in the cost of the other components incorporated into our customers’ products, including memory devices;
our ability to reduce the manufacturing costs of our products;
legal and other costs related to defending intellectual property and other types of lawsuits;
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.
Our operating expenses are relatively fixed, and weWe order materials in advance of anticipated customer demand. Therefore, we have limited ability to reduce expensesour inventory purchase commitments quickly in response to any revenue shortfalls.
Most of our operating expenses are relatively fixed in the short term, and we may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall.
Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to the production of products without having received advance purchase commitments from customers. Any inability to sell products to which we have devoted significant resources could harm our business. In addition, cancellation or deferral of product orders could result in our holding excess inventory, which could adversely affect our
profit marginsgross margin and restrict our ability to fund operations. We may build
memory and component inventories during periods of anticipated growth and in connection with selling workstation boards directly to major
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
marginsmargin and financial results.
We may be required to reduce prices in response to competitionare 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
to pursue new market opportunities. If new competitors, technological advancesemployees is bound by
existing competitorsan 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
competitive factors require us to invest significantly greater resources than anticipated in researchkey employees, particularly Jen-Hsun Huang, our President and
development or sales and marketing efforts,Chief Executive Officer, would harm our
business could suffer. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year.We need to develop new products and to manage product transitions in order to succeed.
business. Our business depends to a significant extentsuccess will depend on our ability to successfully develop new products for the 3D graphics market. Our add-in boardidentify, hire, train and motherboard manufacturersretain highly qualified technical and major OEM customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles. Accordingly, our existing products must have competitive performance levels or we must timely introduce new products with such performance characteristics in order to be included in new system configurations. This requires that we do the following:
anticipate the features and functionality that consumers will demand;
incorporate those features and functionality into products that meet the exacting design requirements of PC OEMs, CEMs and add-in board and motherboard manufacturers;
price our products competitively; and
introduce the products to the market within the limited window for PC OEMs and add-in board and motherboard manufacturers.
As a result, we believe that significant expenditures for research and development will continue to be required in the future. The success of new product introductions will depend on several factors, including the following:
proper new product definition;
timely completion and introduction of new product designs;
the ability of IBM, TSMC and any additional third-party manufacturers to effectively manufacture our new products in a timely manner;
the quality of any new products;
differentiation of new products from those of our competitors;
market acceptance of our products and our customers’ products; and
availability of adequate quantity and configurations of various types of memory products.
Our strategy is to utilize the most advanced semiconductor process technology appropriate for our products and available from commercial third-party foundries. Use of advanced processes has in the past resulted in initial yield problems. New products that we introduce may not incorporate the features and functionality demanded by PC OEMs, add-in board and motherboard manufacturers and consumers of 3D graphics. In addition, we may not successfully develop or introduce new products in sufficient volumes within the appropriate time to meet both the PC OEMs’ design cycles and market demand. We have in the past experienced delays in the development of some new products.managerial personnel. Our failure to successfully develop, introduce or achieve market acceptance for new 3D graphics productsattract and retain the necessary technical and managerial personnel would harm our business. In particular, we experienced delays in the introduction of graphics processors using our next generation technology during the second half of fiscal 2003 and any such delays in the future or failure of these or other processors to meet or exceed specifications of competitive products could materially harm our business.
Our failure to identify new product opportunities or develop new products could harm our business.
As our 3D graphics processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will continue to decline. In particular, we expect average selling prices and gross margins for our 3D graphics processors to decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain overall average selling prices and gross margins. In order for our 3D graphics processors to achieve high volumes, leading PC OEMs and add-in board and motherboard manufacturers must select our 3D graphics processor for design into their products, and then successfully complete the designs of their products and sell them. We may be unable to successfully identify new product opportunities or to develop and bring to market in a timely fashion new products. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs’ 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 products increases, there is an increasing risk that we will experience problems with the performance of products and that there will be delays in the development, introduction or volume shipment of our products. We may experience difficulties related to the production of current or future products or other factors may delay the introduction or volume saleThe integration of new products we developed. In addition, we may be unable to successfully manage the production transition risks with respect to future products. Failure to achieve any of the foregoing with respect to future productsexecutives or product enhancementspersonnel 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 renderdisrupt our 3D graphics products non-competitive or obsolete or result in our holding excess inventory, any of which would harm our business.
ongoing operations.
We could suffer a loss of market share if our products contain significant defects.Products as complex as those offered by us may contain defects or failures when introduced or when new versions or enhancements to existing products are released. We have in the past discovered defects and incompatibilities with customers’ hardware in certain of our products and may experience delays or loss of revenue to correct any new defects in the future. Errors in new products or releases after commencement of commercial shipments could result in loss of market share or failure to achieve market acceptance. Our products typically go through only one verification cycle prior to beginning volume production and distribution. As a result, our products may contain defects or flaws that are undetected prior to volume production and distribution.
If these defects or flaws exist and are not detected prior to volume production and distribution, we may be required to reimburse customers for costs to repair or replace the affected products in the field. These costs could be significant and could adversely affect our business and operating results.
Failure to achieve expected manufacturing yields for existing and/or new products would reduce our gross margins.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, and resolutionprocess. Resolution of yield problems would require cooperation by and communication between us and the manufacturer.
The risk of low yields is compounded by the offshore location of most of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems.
Because of our potentially limited access to wafer fabrication capacity from our manufacturers, any decrease in manufacturing yields could result in an increase in our per unit costs and force us to allocate our available product supply among our customers. This could potentially harm customer relationships,
as well asour 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.
In the event of aA significant number of product returns due to a defect or recall,
could damage our
business could suffer.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.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-micron0.15 micron, 0.14 micron, 0.13 micron and 0.11 micron process technologytechnologies for the GeForce4, Quadro4, GeForce3, Quadro DCC, Xboxour family of GPUs, MCPs and nForce families of graphics processors, and we believe that the transitionWMPs. The majority of our products to increasingly smaller geometries will be important to our competitive position. In November 2002, we introduced our newest flagship GPU,GPUs, the GeForce 6 series, GeForce FX and the GeForce FX 5800 Ultra, which is our first GPU to beGo products are manufactured in 0.13-micron0.13 micron and 0.11 micron process technology. Other companies in the industry
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 have experiencedmay face similar difficulties, delays and mayexpenses as we continue to experience similar difficulties and the corresponding negative effects.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
migratesuccessfully 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
technologies successfullyfor 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
on a timely basis.volume shipment of our products. We may be unableexperience difficulties related to manage our growth and, as a result,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 implementmanage 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 strategy.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.Our rapid growth has placed, and
PCI Express is expected to continueenable a new level of performance for high bandwidth applications like graphics and networking. The transition to place, a significant strainPCI 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 managerial, operationalstrategy 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 financial resources. Asramped up sales of January 26, 2003,the GeForce 6600 GT, GeForce 6600 and the GeForce 6200, our first native PCI Express GPUs. In May 2004, we had 1,513 employeesannounced 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 compared to 1,123 employees asthe primary delivery vehicle for our GeForce Go 6 series of January 27, 2002. We expectGPUs.
Industry adoption of PCI Express was slower than we expected during fiscal 2005 and there is no assurance that the numberadoption 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
employees will increase overproducts and may experience delays or loss of revenue to correct any new defects or incompatibilities in the
next 12 months.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
future growth, if any, will depend onproducts typically go through only one verification cycle prior to beginning volume production and distribution. As a result, our
abilityproducts may contain defects or flaws that are undetected prior to
continuevolume production and distribution. If these defects or flaws exist and are not detected prior to
implementvolume production and
improve operational, financial and management information and control systems on a timely basis, as well as our ability to maintain effective cost controls. Further,distribution, we
willmay be required to
manage multiple relationships with variousreimburse customers
for costs to repair or replace the affected products in the field. We may also be required to incur additional research and
other third parties. Our systems, procedures or controls may not be adequatedevelopment costs to
support our operationsfind and
correct the defect, which could divert the attention of our management
mayand engineers from the development of new products. These costs could be
unable to achieve the rapid execution necessary to successfully implement our strategy.We are dependent on key personnelsignificant and the loss of these employees could harm 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, and so our relationships with these 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.
We are subject to risks associated with international operations which may harm our business.
Our reliance on foreign third-party manufacturing, assembly, testing and packaging operations subjects us to a number of risks associated with conducting business outside of the United States, including the following:
unexpected changes in, or impositions of, legislative or regulatory requirements;
delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;
longer payment cycles;
imposition of additional taxes and penalties;
the burdens of complying with a variety of foreign laws; and
other factors beyond our control, including terrorism and war, which may delay the shipment of our products.
We also are subject to general political risks in connection with our international trade relationships. In addition, the laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States. This makes the possibility of piracy of our technology and products more likely.
Currently, all of our arrangements with third-party manufacturers provide for pricing and payment in U.S. dollars, and to date we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.
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 have led to a weakening of the global economy. Recent economic data, such as the United States unemployment rate and consumer confidence measures, appear to indicate that international hostilities involving the United States has further weakened the global economy. The reduction in business and investor confidence is also reflected in the weakening equity markets. Subsequent terrorist acts and/or the threat of future outbreak or continued escalation of hostilities involving the United States 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 adversely affect our business financial condition and operating results. We may also suffer a loss of reputation and/or resultsa loss in our market share, either of operations.
Failure in operation or future enhancement or implementation of our enterprise resource planning systemwhich could materially harm our operations.
During fiscal 2003, we initiated an examination of SAP A.G., our current enterprise resource planning, or ERP, system to enhance our information systems in business, finance, operations and service. During fiscal 2003, we implemented certain additional functionalities based upon the results of the ERP examination and we expect
to implement additional functionalities in fiscal 2004. If we are not able to implement additional functionalities to our current ERP system or there are delays or downtime as a result of the implementation, the efficiency of our business applications and business operations could be harmed. We are heavily dependent upon the proper functioning of our internal systems to conduct our business. System failure or malfunctioning may result in disruptions of operations and inability to process transactions. Our results of operations and financial position could be harmed if we encounter unforeseen problems with respect to system operations or future implementations.
results.
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 provision could also delay or prevent a change in control of NVIDIA.
We may not be able to realize the potential financial or strategic benefits of business acquisitions and that could hurt our ability to grow our business 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. 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:
difficulty in combining the technology, operations or workforce of the acquired business;
disruption of our ongoing businesses;
difficulty in realizing the potential financial or strategic benefits of the transaction;
difficulty in maintaining uniform standards, controls, procedures and policies; and
possible impairment of relationships with employees and customers as a result of any integration of new businesses and management personnel.
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, or a combination of cash and common stock. If the consideration is paid with our common stock, existing stockholders would be further diluted.
Risks Related to Our Partners
We are dependent onsell our products to a small number of customers and we are subject to order and shipment uncertainties.our business could suffer by the loss of these customers. We have only a limited number of customers and our sales are highly concentrated.
We primarily sellAlthough a small number of our
products to add-in board and motherboard manufacturers and CEMs, which incorporate graphics products incustomers represent the
boards they sell to PC majority of our revenue, their end customers include a large number of OEMs and system builders. Sales to add-in board and motherboard manufacturers and CEMs are primarily dependent onintegrators throughout the world. Our sales process involves achieving key design wins with leading PC OEMs. The number ofOEMs 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 manufacturers, CEMs and leading PC OEMsadd-in board manufacturers. Our distribution strategy is limited. We expect thatto work with a small number of leading independent CEMs, ODMs, motherboard manufacturers, add-in board and motherboard 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, directly,ODMs, motherboard and add-in board manufacturers, which then sell boards with our graphics processor to leading PC OEMs, retail outlets and to a smalllarge number of system builders. If we were to lose sales to our PC OEMs, indirectly, will continue to account for a substantial portion of our revenue for the foreseeable future. As a result, our business could be harmed by the loss of business from PC OEMs orCEMs, ODMs, motherboard and add-in board and motherboard manufacturers and CEMs. In addition,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 from add-in board and motherboard manufacturers, CEMs and PC OEMs that have directly or indirectly accounted for significant revenue in past periods, individually or as a group, may not continue, or may not reach or exceed historical levelsthe expected level in any future period.
Our business may be harmed by instability in Asia due to the concentration of customers who are located or have substantial operations in Asia, including Taiwan. The People’s Republic of China and Taiwan have in the past experienced strained relations. A worsening of these relationships or the development of hostilities between the two could result in disruptions in Taiwan and possibly other areas of Asia,period, which could harm our business. In addition, if relations between the U.S.financial condition and The People’s Republicour results of China become strained, our business could be harmed. While we believe political instability in Asia has not harmed our business, because of our reliance on companies with operations in Asia, continued economic and political instability in Asia might harm it.
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’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, excludingexposure. As of the amounts covered by credit insurance.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 or insurance carrier 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. Furthermore, there can be no assurance that we will be able to attain credit insurance in the future. 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 tools for the development of our new products and we may be unable to obtain the tools necessary to develop these products. In the design and development of new products and product enhancements, we rely on third-party software development tools. While we currently are not dependent on any one vendor for the supply of these tools, some or all of these tools may not be readily available in the future. For example, we have experienced delays in the introduction of products in the past as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. The design requirements necessary to meet consumer demands for more features and greater functionality from
3D graphics productsdigital 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.
There can be no assurance that the Xbox program will achieve long term commercial success.There can be no assurance that the Xbox program will achieve long term commercial success, given the high level of competition in the game console product line. During fiscal 2003, sales of Xbox processors comprised 23% of our overall revenue. If the Xbox program is not successful, our business may be harmed.
We depend on foreign foundries and independent contractors to manufacture our products and these third parties may not be able to satisfyrealize the potential financial or strategic benefits of business acquisitions, which could hurt our manufacturing requirements, whichability 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
harm our business.We do not manufacture the semiconductor wafers used forhelp 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 ownlead 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
operate a
wafer fabrication facility. Our products require wafers manufactured with state-of-the-art fabrication equipmentcombination of cash, convertible debt and
techniques. We primarily utilize TSMC to produce our semiconductor wafers and utilize independentsubcontractors to perform assembly, testing and packaging. We depend on these suppliers to allocate to uscommon stock. If we pay a portion of their manufacturing capacity sufficient to meetthe purchase price in cash, our needs, to produce productscash reserves would be reduced. If the consideration is paid with shares of acceptable quality and at acceptable manufacturing yields, and to deliver those products to usour 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 a timely basis. These manufacturers may be unable to meet our near-termoperations or long-term manufacturing requirements. We obtain manufacturing servicesfinancial results.
The impact on a purchase order basis and TSMCour future revenue by Microsoft’s announcement that it has no obligation to provide usentered into an agreement with any specified minimum quantities of product. TSMC fabricates wafers for other companies, including certainone of our competitors to develop technology for future Xbox products and could choose to prioritize capacity for other users or reduce or eliminate deliveries to us on short notice. Because the lead-time needed to establish a strategic relationshipservices is uncertain.
During fiscal 2004, Microsoft announced that it had entered into an agreement with
a new manufacturing partner could be several quarters, there is no readily available alternative source of supply for any specific product. We believe that long-term market acceptance for our products will depend on reliable relationships with TSMC and any other manufacturers used by us to ensure adequate product supply to respond to customer demand.Our wafer requirements represent a significant portion of the total production capacity of TSMC. Although our products are designed using TSMC’s process design rules, TSMC may be unable to achieve or maintain acceptable yields or deliver sufficient quantities of wafers on a timely basis and/or at an acceptable cost. Additionally, TSMC may not continue to devote resources to the productionone of our competitors to develop technology for future Xbox products or to advance the process design technologiesand services. The impact that this announcement may have on which the manufacturingour 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 products are based. Any difficulties like these would harmtotal revenue. If our business.
Because of our reliance on TSMC, our business may be harmed by political instabilityrevenue from Microsoft declines during fiscal 2006, we will need to increase revenue from other customers in Taiwan, including the worsening of the strained relations between The People’s Republic of China and Taiwan, or if relations between the U.S. and The People’s Republic of China are strained dueorder to foreign relations events. Furthermore, any substantial disruption in our suppliers’ operations, either 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.
There can be no assurance that IBM will be able to produce wafersmaintain 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 acceptable quality and with acceptable manufacturing yield and deliver those wafers to usincorporation, our bylaws and our independent assemblyagreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and
testing subcontractors onbylaws contain provisions that could make it more difficult for a
timely basis.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
26, 2003,5, 2000, we
announced thatentered into an agreement with Microsoft in which we
have formed a multi-year strategic alliance under which IBM will manufacture our next-generation GeForce GPUs. As part of the agreement, we will gain accessagreed to
IBM’s suite of foundry servicesdevelop and
manufacturing technologies, including power-efficient copper wiring,sell graphics chips and
a roadmap that is designed to
leadlicense certain technology to
65nm (nanometer; a billionth of a meter)Microsoft and its licensees for use in the
next several years, giving us valuable tools to advance our GPUs. IBM plans to begin manufacturing the next-generation GeForce graphics processor this summer at IBM’s plant in East Fishkill, New York.During the development of our relationship with IBM, our manufacturing yields and product performance could suffer due to difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of IBM. Any decrease in manufacturing yields could result in an increase in our per unit costs and force us to allocate our available product supply among our customers. This could potentially harm customer relationships as well as revenue and gross profit. 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.Xbox. In the event that an individual or corporation makes an offer to purchase shares equal to or greater than 30% of a significant number of product returns due to a defect or recall, our business could suffer.
We are dependent on third parties for assembly, testing and packagingthe outstanding shares of our products.
Our graphics processors are assembledcommon stock, Microsoft has first and tested by Siliconware Precision Industries Company Ltd., Amkor Technology, ChipPAC Incorporatedlast rights of refusal to purchase the stock. The Microsoft provision and Advanced Semiconductor Engineering. We do not have long-term agreements with anythe other factors listed above could also delay or prevent a change in control 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 or quality assurance problems could increase the costs of manufacture, assembly or testing of our products and could harm our business. Due to the amount of time
typically required to qualify assemblers and testers, we could experience significant delays in the shipment of our products if we are required to find alternative third parties to assemble or test our products or components. Any delays in delivery of our products could harm our business.
NVIDIA.
Risks Related to Our Competition The 3D graphics, industry isplatform processor and handheld industries are highly competitive and we may be unable to compete. The market for
3D graphics processorsGPUs, MCPs and WMPs for PCs
in which we competeand 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
graphicsdigital 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
our 3D graphics processors,ours, or may provide better performance or additional features not provided by our
products. We may be unableproducts, which could harm our business. Further, we expect substantial competition from Intel’s publicized focus on moving to
compete successfully inselling platform solutions dominated by Intel products, such as the
emerging PC graphics market.Our primaryCentrino platform.
An additional significant source of competition is from companies that provide or intend to provide
3D graphicsGPU and MCP solutions for the PC
market.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 integrated core logic chipsets that incorporate 3D graphics functionality as part of their existing solutions, such as Intel, Silicon Integrated Systems, ATI Technologies Inc. and VIA Technologies, Inc.;
suppliers of graphics add-in boards that utilize their internally developed graphics chips, such as ATI Technologies Inc., Creative Technology and Matrox Electronics Systems Ltd.; | · | 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 mobile graphics processors that incorporate 3D graphics functionality as part of their existing solutions, such as ATI Technologies Inc., Trident Microsystems, Inc. and the joint venture of a division of SONICblue Incorporated (formerly S3 Incorporated) and VIA Technologies, Inc.; and
companies that have traditionally focused on the professional market and provide high end 3D solutions for PCs and workstations, including 3Dlabs (a | · | 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, company) and ATI Technologies 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
3D graphics processor market,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.
We may not successfully If we are unable to compete with Intel in the integrated chipset product line.
It is projected by analysts that integrated chipsets are likely to become a majority share of the PC graphics market. We have recently introducedour current and begun shipment of the nForce2 platform processor,any new markets, our second generation integrated 3D graphics chipset. The nForce platform processor is initially designed to support microprocessors produced by AMD. Intel is the dominant supplier of integrated 3D graphics chipsets. Intel has significantly greater resources than we do, and the nForce platform processor, or other 3D graphics products that we may introduce, may not compete effectively against Intel’s current chipset products or its future products, either in terms of price or performance.
In addition, due to the widespread industry acceptance of Intel’s microprocessor architecture and interface architecture, including its accelerated graphics port architecture, or AGP, Intel exercises significant influence over the PC industry and over companies developing products for such architecture. Any significant modifications by Intel to the AGP, the microprocessor or core logic components or other aspects of the PC microprocessor architecture could result in incompatibility with our technology, which would harm our business.
In addition, any delay in the public release of information relating to modifications like this could harm our business.
In addition to its influence over the PC architecture, Intel has asserted intellectual property rights in various PC architecture interfaces. For example, as a result of patents held by Intel, it has asserted that companies wishing to develop a chipset compatible with the Pentium 4 microprocessor or similar microprocessors obtain a license from Intel. We believe that the principal competitive factors in the market are performance, breadth of product offerings, access to customers and distribution channels, backward-forward software support, conformity to industry standard APIs, manufacturing capabilities, price of graphics processors and total system costs of add-in boards and motherboards. In September 2001 Intel filed a patent infringement suit against VIA Technologies, Inc. with respect to a VIA Technologies, Inc. chipset for the Pentium 4. We do not have a license from Intel for such a chipset.
We expect Intel to continue to do the following:
financial results will suffer.invest heavily in research and development and continue development of integrated 3D graphics products;
maintain its position as the largest manufacturer of PC microprocessors;
use its intellectual property position with respect to the PC microprocessor and architecture to defend its position in 3D graphics, including the filing of patent infringement suits against competitors;
follow business practices in its PC business, which strongly encourage use of Intel integrated chipsets;
increasingly dominate the PC platform; and
promote its product offerings through advertising campaigns designed to engender brand loyalty among PC users.
Our failure to achieve one or more design wins would harm our business.
Our future success will depend in large part on achieving design wins, which entails having our existing and future products chosen
as the 3D graphics processors for hardware components or subassemblies designed by PC OEMs,
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
a PCan 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.
ThisSuch 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 Financial and Market Conditions We are dependent on the PC market and the slowdown inrate of its growth has and may in the future have a negative impact on our business.During fiscal 2003, we derived most
We derive the majority of our revenue from the sale of products for use in the desktop PC
market, fromand notebook PC segments, including professional
workstations to low-cost PCs.workstations. We expect to continue to derive most of our revenue from the sale or license of products for use in the desktop PC
marketand notebook PC segments in the next several years.
The PC market ischaracterized by rapidly changing technology, evolving industry standards, frequent new product introductions and significant price competition. These factors result in short product life cycles and regular reductions of average selling prices over the life of a specific product. 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. The slowing of both the domestic and international economy has led to a reduction in the demand for PCs and to a reduction in inventory purchases by PC manufacturers, which adversely impacted
If our revenue during fiscal 2003. Any continued reduction in the demand for PCs generally, or for a particular product that incorporates our 3D graphic processors, could harm our business.The acceptance of next generation products in business PC 3D graphics may not continue to develop.
Our success will depend in part upon the demand for performance 3D graphics for business PC applications. The market for performance 3D graphics on business PCs has only recently begun to emerge and is dependent on the future development of, and substantial end-user and OEM demand for, 3D graphics functionality. As a result, the market for business PC 3D graphics computing may not continue to develop or may not grow at a rate sufficient to support our business. The development of the market for performance 3D graphics in business PCs will in turn depend on the development and availability of a large number of business PC software applications that support or take advantage of performance 3D graphics capabilities. Currently, there are only a limited number of software applications like this, most of which are games, and a broader base of software applications may not develop in the near term or at all. Consequently, a broad market for full function performance 3D graphics on business PCs may not develop. Our business prospects will suffer if the market for business PC 3D graphics fails to develop or develops more slowly than expected.
Our 3D graphics solution maydo not continue to be accepted by the PC market.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 will dependdepends in part upon continued broad adoption of our 3D graphicsdigital media processors for high performance 3D graphics in PC and consumer electronics applications. The market for 3D graphicsdigital 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 randomrandom-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.competition and frequent new technology and product introductions. Since the PC marketsegment is our core business, our business would suffer if for any reason our current or future 3D graphicsdigital media processors do not continue to achieve widespread acceptance in the PC market.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
be harmed.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 semiconductor industryfinancial, 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 business.financial results.The
Our business is directly affected by market conditions in the highly cyclical semiconductor industry,
historically has been characterized by the following factors:rapid technological change;
cyclical market patterns;
significant average selling price erosion;
fluctuating inventory levels;
including alternating periods of overcapacity and capacity constraints; and
constraints, variations in manufacturing costs and yields, and significant expenditures for capital equipment and product development.
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 addition,particular, from time to time, the semiconductor industry has experienced significant economicand sometimes prolonged downturns at various times, 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
experience substantial period-to-period fluctuationssuffer losses in
results of operationsprincipal if forced to sell securities that decline in market value due to
general semiconductor industry conditions.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
U.S.United States economy, acts of terror against the
U.S.,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
above in these risk factors.
In the past, following periods of volatility in the market price of a company’s stock, securities class action litigation has been initiated against the issuing company. Since February 2002, multiple securities class action lawsuits and several derivative suits have been filed against us. We expect that this litigation, whether or not resolved favorably, may result in substantial cost and a diversion of management’s attention and resources, which could harm our revenues and earnings. Any adverse determination in this litigation could also subject us to significant liabilities. See “Legal Proceedings” and Note 9 of the Notes to Consolidated Financial Statements for a description of this litigation.We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.For additional information regarding risks associated with the market value of portfolio investments and interest rates, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”
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 hashave resulted in protracted and expensive litigation. The 3D graphics marketdigital 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. In addition, fromThe 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 revenuesrevenue 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. 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.
Litigation against 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
concerning infringement would likely result in significant expensemay be required to
us and divertobtain a license to the
efforts of our technical and management personnel.We are currently subjectother parties’ patents or intellectual property. If we fail to claims of patent infringement, andobtain a license from a third party for technology we mayuse or that is used by an indemnified customer, we could be subject to patent infringementsubstantial 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 suits brought by other parties in the future. We do not believe that current actions will haveindemnification of a materialcustomer may increase our operating expenses which could negatively impact on our business or financial condition. However, these claims and any future lawsuits could divert our resources and result in the payment of substantial damages.
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
graphicsdigital 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-licensingcross licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.
Future actions byITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 SECUnited 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 other governmental or regulatory agenciesSFAS No. 115,Accounting for Certain Investments in Debt and resolution of related litigation arising outEquity Securities. All of the restatementcash 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 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 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," no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity. 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, we performed a sensitivity analysis on our floating and fixed rate financial statements or other mattersinvestments. According to our analysis, parallel shifts in the yield curve of both +/-50 basis points would result in changes in fair market values for these investments of approximately $2.9 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. 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.The staff ofbusiness in the Enforcement Division of the Securities & Exchange Commission (“SEC”) informed us in January 2002 that it had concerns relating to certain accounting matters and that the SEC along with the U.S. Attorney’s Office for the Northern District of California had authorized investigations into such matters. In accordance with the suggestion and advice of the SEC staff, we launched a review of these matters. On April 29, 2002, we announced that the Audit Committee of our Board of Directors had, with assistance from the law firm of Cooley Godward LLP and forensic auditors from the accounting firm of KPMG LLP, concluded its review and determined that it was appropriate to restate our financial statements for fiscal 2000, 2001 and the first three quarters of fiscal 2002. The Audit Committee has worked and continues to work in cooperation with the SEC. After receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be initiated, we reached an agreement in principle with the SEC staff in April 2003 that would resolve the SEC’s investigation of us in matters related to the restatement. The agreement is subject to final approval of the SEC. Under the terms of the agreement in principle, NVIDIA, without admitting or denying liability or wrongdoing, would agree to an administrative cease and desist order prohibiting any future violations of certain non-fraud financial reporting, books and records, and internal control provisions of the federal securities laws. We would not be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the agreement may take several weeks or months to complete. Further, there can be no assurance that the agreement will be approved by the SEC. Notwithstanding the above, actions by the SEC or other governmental or regulatory agencies with respect to us or our personnel arising out of the restatement of our financial statements or other matters may take significant time, may be expensive and may divert management’s attention from other business concerns and harm our business.
future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in our consolidated financial statements and notes thereto included in this Annual Report.
ITEM 9. CHANGES | | IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
PART IIIITEM 10. DIRECTORS9. CHANGES IN AND EXECUTIVE OFFICERS OF THE REGISTRANTDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
IdentificationITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Based on their evaluation as of
DirectorsReference is made to the information regarding directors appearingJanuary 30, 2005, 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 heading “ElectionSecurities Exchange Act of Directors”1934, or the Exchange Act) were effective to ensure that the material information required to be disclosed by us in our 2003 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 “Management” in Part I of this Annual Report on Form 10-K which informationwas recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and instructions for Form 10-K.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is hereby incorporated by reference.Complianceresponsible 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 Section 16(a)the participation of the Exchange Act
Reference is made to the information appearing under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2003 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” inmanagement, including our 2003 Proxy Statement, which information is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Reference is made to information appearing in our 2003 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” which information is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information appearing in our 2003 Proxy Statement under the heading “Certain Transactions,” which information is hereby incorporated by reference.
ITEM 14. CONTROLS AND PROCEDURES
Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluatingwe conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))internal control over financial reporting as of a date (the “Evaluation Date”) within 90 days beforeJanuary 30, 2005 based on the filing datecriteria set forth in
Internal Control - Integrated Frameworkissued by the Committee of this annual report, haveSponsoring 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. Our management’s assessment of the
Evaluation Date,effectiveness of our
disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to theminternal control over financial reporting as of January 30, 2005 has been audited by
others within those entities.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
significant changes in our internal controls
over financial reporting during our last fiscal quarter that have materially affected, or
are reasonably likely to
our knowledge, in other factors that could significantlymaterially affect, our
disclosure controls and procedures subsequent to the Evaluation Date.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 NVIDIAour Company have been detected. These inherent limitations include
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
Reference is made to the realities that judgmentsinformation regarding directors appearing under the heading “Election of Directors” in decision-making can be faulty, and that breakdowns can occur becauseour 2005 Proxy Statement, which information is hereby incorporated by reference.
Identification of simple error or mistake. Additionally, controls can be circumvented byExecutive Officers
Reference is made to the individual acts of some persons, by collusion of two or more people, or by management overrideinformation regarding executive officers appearing under the heading “Executive Officers of the control. The designRegistrant” in Part I of any systemthis Annual Report on Form 10-K, which information is hereby incorporated by reference.
Identification of controls alsoAudit Committee and Financial Expert
Reference is based in part upon certain assumptions aboutmade to the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goalsinformation regarding directors appearing under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Becauseheading “Report of the inherent limitationsAudit Committee of the Board of Directors” in a cost-effective control system, misstatements dueour 2005 Proxy Statement, which information is hereby incorporated by reference.
Material Changes to error or fraud may occurProcedures for Recommending Directors
Reference is made to the information regarding directors appearing under the heading “Election of Directors” in our 2005 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 2005 Proxy Statement, which information is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Reference is made to information appearing in our 2005 Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and
not be detected.Management” and “Equity Compensation Plan Information,” which information is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to information appearing in our 2005 Proxy Statement under the heading “Certain Transactions,” which information is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Reference is made to information appearing in our 2005 Proxy Statement, which information is hereby incorporated by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
| | | | | | | Page
|
(a)
| | 1.
| | Consolidated Financial Statements
| | |
| | | | |
Report of KPMG LLP, Independent Auditors
(a) | 1. | Consolidated Financial Statements | | 39
|
| | | Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP | 49 |
| | | Report of Independent Registered Public Accounting Firm, KPMG LLP | 51 |
| | Consolidated Balance Sheets as of January 26, 200330, 2005 and January 27, 200225, 2004 | | 40
52 |
| | | | | Consolidated Statements of Income for the years ended January 26, 2003,30, 2005, January 27, 200225, 2004 and January 28, 200126, 2003 | | 41
53 |
| | | | | Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended January 30, 2005, January 25, 2004 and January 26, 2003 January 27, 2002 and January 28, 2001 | | 42
54 |
| | | | | Consolidated Statements of Cash Flows for the years ended January 26, 2003,30, 2005, January 27, 200225, 2004 and January 28, 2001 26, 2003 | 55 |
| | 43
Notes to Consolidated Financial Statements | 57 |
| | | | |
Notes to Consolidated
(a) | 2. | Financial StatementsStatement Schedules | |
| | 44
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|
(a)
Schedule II Valuation and Qualifying Accounts | | 2.
| | Financial Statement Schedules
| | 84 |
| | | | | Schedule II Valuation and Qualifying Accounts
| | 69
|
|
(a) | 3. | 3.Exhibits
| | Exhibits
| | |
| | | | | The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as a part of this annual report. | | |
|
(b)
| | | | Reports on Form 8-K
| | |
| | | | None filed in the fourth quarter of fiscal 2003.
| Annual Report. | |
REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRMThe
To the Stockholders and Board of Directors
and Stockholders
We have auditedcompleted an integrated audit of NVIDIA Corporation’s fiscal 2005 consolidated financial statements and of its internal control over financial reporting as of January 30, 2005 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audit, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements
listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NVIDIA Corporation and
its subsidiaries
(the “Company”) as listedat January 30, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the
accompanying index.United States of America. In
connection withaddition, in our
audits of the consolidated financial statements, we have also auditedopinion, the financial statement schedule
as listed in the
accompanying index. Theseindex 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 schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements
and financial statement schedule based on our
audits.audit. We conducted our auditsaudit of these statements in accordance with auditingthe standards generally accepted in the United States of America.thePublic 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 provides a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as ofJanuary 30, 2005based 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, based oncriteria 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, California
March 22, 2005
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
26, 2003 and January 27, 200225, 2004, and the results of
theirits operations and their cash flows for each of the years in the
three-yeartwo-year period ended January
26, 2003,25, 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.
As discussed in Note 1 of the accompanying notes to consolidated financial statements, effective January 28, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets.
/s/
Mountain View, California
February
13, 200312, 2004
NVIDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (inIn thousands, except share and per share data)| | | January 26, 2003
| | January 27, 2002
|
ASSETS | | | | | | |
|
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 346,994 | | $ | 333,000 |
Restricted cash | | | — | | | 7,000 |
Marketable securities | | | 681,419 | | | 458,377 |
Accounts receivable, less allowances of $17,468 and $18,079 in 2003 and 2002, respectively | | | 154,501 | | | 147,348 |
Inventories | | | 145,046 | | | 213,877 |
Prepaid expenses and other current assets | | | 12,393 | | | 8,078 |
Prepaid and deferred taxes | | | 11,249 | | | 66,429 |
| | |
|
| |
|
|
Total current assets | | | 1,351,602 | | | 1,234,109 |
Property and equipment, net | | | 135,152 | | | 120,128 |
Deposits and other assets | | | 10,473 | | | 11,897 |
Prepaid and deferred taxes | | | 43,317 | | | 55,921 |
Goodwill | | | 54,227 | | | 50,326 |
Intangible assets, net | | | 22,244 | | | 30,793 |
| | |
|
| |
|
|
| | | $ | 1,617,015 | | $ | 1,503,174 |
| | |
|
| |
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
|
Current liabilities: | | | | | | |
Accounts payable | | $ | 141,129 | | $ | 214,019 |
Accrued liabilities | | | 228,467 | | | 141,210 |
Current portion of note and capital lease obligations | | | 5,676 | | | 3,896 |
Interest payable on convertible debenture | | | 4,176 | | | 4,176 |
Deferred revenue | | | — | | | 70,193 |
| | |
|
| |
|
|
Total current liabilities | | | 379,448 | | | 433,494 |
Capital lease obligations, less current portion | | | 4,880 | | | 5,861 |
Long-term convertible debenture | | | 300,000 | | | 300,000 |
Stockholders’ equity: | | | | | | |
Common stock, $.001 par value; 1,000,000,000 shares authorized; 157,790,022 and 149,553,130 shares issued and outstanding in 2003 and 2002, respectively | | | 158 | | | 150 |
Additional paid-in capital | | | 531,030 | | | 456,621 |
Accumulated other comprehensive income, net | | | 3,760 | | | 108 |
Retained earnings | | | 397,739 | | | 306,940 |
| | |
|
| |
|
|
Total stockholders’ equity | | | 932,687 | | | 763,819 |
| | |
|
| |
|
|
| | | $ | 1,617,015 | | $ | 1,503,174 |
| | |
|
| |
|
|
| | | 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 (inIn thousands, except per share data)
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | | | | | | |
| | | | | | | | |
| Revenue | | $ | 2,010,033 | | $ | 1,822,945 | | $ | 1,909,447 | |
| Cost of revenue | | | 1,360,547 | | | 1,294,067 | | | 1,327,271 | |
| Cost of revenue related to stock option exchange (1) | | | -- | | | -- | | | 6,164 | |
| Gross profit | | | 649,486 | | | 528,878 | | | 576,012 | |
| Operating expenses: | | | | | | | | | | |
| Research and development | | | 335,104 | | | 269,972 | | | 224,873 | |
| Sales, general and administrative | | | 200,789 | | | 165,249 | | | 151,485 | |
| In-process research and development | | | -- | | | 3,500 | | | -- | |
| Stock option exchange (1) | | | -- | | | -- | | | 55,668 | |
| Total operating expenses | | | 535,893 | | | 438,721 | | | 432,026 | |
| Income from operations | | | 113,593 | | | 90,157 | | | 143,986 | |
| Interest income | | | 11,422 | | | 18,561 | | | 23,246 | |
| Interest expense | | | (164 | ) | | (12,010 | ) | | (16,467 | ) |
| Other income (expense), net | | | 594 | | | 3,033 | | | (208 | ) |
| Convertible debenture redemption expense | | | -- | | | (13,068 | ) | | -- | |
| Income before income tax expense | | | 125,445 | | | 86,673 | | | 150,557 | |
| Income tax expense | | | 25,089 | | | 12,254 | | | 59,758 | |
| Net income | | | 100,356 | | $ | 74,419 | | $ | 90,799 | |
| Basic net income per share | | $ | 0.60 | | $ | 0.46 | | $ | 0.59 | |
| Diluted net income per share | | $ | 0.57 | | $ | 0.43 | | $ | 0.54 | |
| 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 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | Year Ended January 26, 2003
| | Year Ended January 27, 2002
| | Year Ended January 28, 2001
|
Revenue | | $ | 1,909,447 | | $ | 1,369,471 | | $ | 735,264 |
Cost of revenue | | | 1,327,271 | | | 850,233 | | | 462,385 |
Cost of revenue related to stock option exchange (1) | | | 6,164 | | | — | | | — |
| | |
|
| |
|
| |
|
|
Gross profit | | | 576,012 | | | 519,238 | | | 272,879 |
| | |
|
| |
|
| |
|
|
Operating expenses: | | | | | | | | | |
Research and development | | | 224,873 | | | 154,752 | | | 86,047 |
Sales, general and administrative | | | 151,485 | | | 98,944 | | | 58,697 |
Stock option exchange (1) | | | 55,668 | | | — | | | — |
Amortization of goodwill | | | — | | | 10,093 | | | — |
Acquisition related charges | | | — | | | 10,030 | | | — |
Discontinued use of property | | | — | | | 3,687 | | | — |
| | |
|
| |
|
| |
|
|
Total operating expenses | | | 432,026 | | | 277,506 | | | 144,744 |
| | |
|
| |
|
| |
|
|
Operating income | | | 143,986 | | | 241,732 | | | 128,135 |
Interest and other income, net | | | 6,571 | | | 11,017 | | | 16,673 |
| | |
|
| |
|
| |
|
|
Income before income tax expense | | | 150,557 | | | 252,749 | | | 144,808 |
Income tax expense | | | 59,758 | | | 75,825 | | | 46,339 |
| | |
|
| |
|
| |
|
|
Net income | | $ | 90,799 | | $ | 176,924 | | $ | 98,469 |
| | |
|
| |
|
| |
|
|
Basic net income per share | | $ | 0.59 | | $ | 1.24 | | $ | 0.75 |
| | |
|
| |
|
| |
|
|
Diluted net income per share | | $ | 0.54 | | $ | 1.03 | | $ | 0.62 |
| | |
|
| |
|
| |
|
|
Shares used in basic per share computation | | | 153,513 | | | 143,015 | | | 130,998 |
Shares used in diluted per share computation | | | 168,393 | | | 171,074 | | | 159,294 |
(1) | | The $61,832 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. |
(1) The $61,832 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.
See accompanying notes to consolidated financial statements.
NVIDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND (inIn thousands, except share data)| | | Common Stock
| | | | | | | | | | | | | | | | | |
| | | Shares
| | Amount
| | Additional Paid in Capital
| | | Deferred Compen- sation
| | | Retained Earnings
| | Accumulated Other Comprehensive Income
| | | Total Stockholders’ Equity
| | | Total Comprehensive Income
| |
Balances, January 30, 2000 | | 124,400,628 | | $ | 124 | | $ | 95,871 | | | $ | (118 | ) | | $ | 31,547 | | $ | — | | | $ | 127,424 | | | | | |
Issuance of common stock from stock plans | | 9,664,606 | | | 10 | | | 19,900 | | | | — | | | | — | | | — | | | | 19,910 | | | | | |
Sale of common stock under public offering, net of issuance costs of $9.6 million | | 2,800,000 | | | 3 | | | 96,666 | | | | — | | | | — | | | — | | | | 96,669 | | | | | |
Tax benefit from stock plans | | — | | | — | | | 63,199 | | | | — | | | | — | | | — | | | | 63,199 | | | | | |
Stock granted in exchange for intangibles and services | | 50,000 | | | — | | | 1,324 | | | | — | | | | — | | | — | | | | 1,324 | | | | | |
Amortization of deferred compensation | | — | | | — | | | — | | | | 112 | | | | — | | | — | | | | 112 | | | | | |
Net income | | — | | | — | | | — | | | | — | | | | 98,469 | | | — | | | | 98,469 | | | | 98,469 | |
| | |
| |
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Balances, January 28, 2001 | | 136,915,234 | | | 137 | | | 276,960 | | | | (6 | ) | | | 130,016 | | | — | | | | 407,107 | | | | | |
Issuance of common stock from stock plans | | 12,637,896 | | | 13 | | | 90,830 | | | | — | | | | — | | | — | | | | 90,843 | | | | | |
Tax benefit from stock plans | | — | | | — | | | 88,932 | | | | — | | | | — | | | — | | | | 88,932 | | | | | |
Amortization of deferred compensation | | — | | | — | | | — | | | | 6 | | | | — | | | — | | | | 6 | | | | | |
Issuance cost | | — | | | — | | | (101 | ) | | | — | | | | — | | | — | | | | (101 | ) | | | | |
Unrealized gain | | — | | | — | | | — | | | | — | | | | — | | | 528 | | | | 528 | | | | 528 | |
Tax effect of unrealized gain | | — | | | — | | | — | | | | — | | | | — | | | (213 | ) | | | (213 | ) | | | (213 | ) |
Cumulative translation adjustments | | — | | | — | | | — | | | | — | | | | — | | | (207 | ) | | | (207 | ) | | | (207 | ) |
Net income | | — | | | — | | | — | | | | — | | | | 176,924 | | | — | | | | 176,924 | | | | 176,924 | |
| | |
| |
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
Balances, January 27, 2002 | | 149,553,130 | | | 150 | | | 456,621 | | | | — | | | | 306,940 | | | 108 | | | | 763,819 | | | | 177,032 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
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 | ) | | $ | 397,739 | | $ | 3,760 | | | $ | 932,687 | | | $ | 94,451 | |
| | |
| |
|
| |
|
|
| |
|
|
| |
|
| |
|
|
| |
|
|
| |
|
|
|
| | | | | | | | | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
NVIDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (inIn thousands)| | | Year Ended January 26, 2003
| | | Year Ended January 27, 2002
| | | Year Ended January 28, 2001
| |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 90,799 | | | $ | 176,924 | | | $ | 98,469 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 58,216 | | | | 43,491 | | | | 15,724 | |
Deferred income taxes | | | 29,768 | | | | (51,914 | ) | | | (27,201 | ) |
Stock-based compensation | | | (156 | ) | | | 364 | | | | 5 | |
Amortization of deferred compensation | | | — | | | | 6 | | | | 112 | |
Issuance of common stock in exchange for stock options | | | 39,906 | | | | — | | | | — | |
Bad debt expense | | | 1,917 | | | | 1,446 | | | | 909 | |
Tax benefit from employee stock plans | | | 9,180 | | | | 88,932 | | | | 63,199 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (9,070 | ) | | | (43,806 | ) | | | (38,673 | ) |
Inventories | | | 68,831 | | | | (123,497 | ) | | | (51,914 | ) |
Prepaid income taxes | | | 38,016 | | | | (38,016 | ) | | | (23,167 | ) |
Prepaid expenses and other current assets | | | (4,315 | ) | | | 277 | | | | (6,814 | ) |
Deposits and other assets | | | 63 | | | | (13,957 | ) | | | 1,344 | |
Accounts payable | | | (72,890 | ) | | | 141,717 | | | | 13,789 | |
Accrued liabilities | | | 26,564 | | | | 108,646 | | | | 22,127 | |
Deferred revenue | | | (11,797 | ) | | | (129,807 | ) | | | 200,000 | |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by operating activities | | | 265,032 | | | | 160,806 | | | | 267,909 | |
| | |
|
|
| |
|
|
| |
|
|
|
|
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of marketable securities | | | (639,500 | ) | | | (472,917 | ) | | | — | |
Sales and maturities of marketable securities | | | 422,200 | | | | 15,320 | | | | — | |
Purchase of certain assets from various businesses | | | — | | | | (64,109 | ) | | | — | |
Business acquisition | | | (3,901 | ) | | | — | | | | — | |
Purchases of property and equipment | | | (63,123 | ) | | | (96,966 | ) | | | (36,329 | ) |
Release of restricted cash | | | 7,000 | | | | 17,500 | | | | (24,500 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash used in investing activities | | | (277,324 | ) | | | (601,172 | ) | | | (60,829 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
|
Cash flows from financing activities: | | | | | | | | | | | | |
Convertible debenture, net of issuance costs | | | — | | | | (75 | ) | | | 290,838 | |
Sale of common stock under public offering, net of issuance costs | | | — | | | | (101 | ) | | | 96,669 | |
Common stock issued under employee stock plans | | | 25,487 | | | | 90,476 | | | | 19,910 | |
Sale lease back financing | | | 5,734 | | | | 11,246 | | | | — | |
Principal payments on capital leases | | | (4,935 | ) | | | (2,455 | ) | | | (1,782 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Net cash provided by financing activities | | | 26,286 | | | | 99,091 | | | | 405,635 | |
| | |
|
|
| |
|
|
| |
|
|
|
Change in cash and cash equivalents | | | 13,994 | | | | (341,275 | ) | | | 612,715 | |
Cash and cash equivalents at beginning of period | | | 333,000 | | | | 674,275 | | | | 61,560 | |
| | |
|
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Cash and cash equivalents at end of period | | $ | 346,994 | | | $ | 333,000 | | | $ | 674,275 | |
| | |
|
|
| |
|
|
| |
|
|
|
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Cash paid for interest | | $ | 15,100 | | | $ | 14,830 | | | $ | 160 | |
| | |
|
|
| |
|
|
| |
|
|
|
Cash paid (refund) for taxes | | $ | (35,101 | ) | | $ | 26,429 | | | $ | 235 | |
| | |
|
|
| |
|
|
| |
|
|
|
|
Non cash financing and investing activities: | | | | | | | | | | | | |
Issuance of common stock in exchange for an intangible asset | | $ | — | | | $ | — | | | $ | 1,319 | |
| | |
|
|
| |
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|
| |
|
|
|
| | 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) |
NVIDIA CORPORATION AND SUBSIDIARIES
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—1 - Organization and Summary of Significant Accounting Policies
NVIDIA Corporation and subsidiaries (the “Company”) designs, develops and markets 3Dis a worldwide leader in graphics and digital media communication processors dedicated to creating products that enhance the interactive experience on consumer and professional computing platforms. We design, develop and market graphics processing units, or GPUs, media and communications processors, or MCPs, wireless media processors, or WMPs and related software forsoftware. Our products are integral to a wide variety of visual computing platforms, including enterprise personal computers, or PCs, consumer PCs, professional workstations, notebook PCs, personal digital assistants, cellular phones, game consoles and digital entertainment platforms. The Company operatesmedia centers. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our objective is to be one industry segmentof the most important and influential technology companies in the United States, Asia and Europe. In April 1998,world.
Fiscal year
We operate on a 52 or 53-week year, ending on the CompanySunday nearest January 31. Fiscal 2005 was reincorporated as a Delaware corporation.53-week year, compared to fiscal 2004 which was a 52-week year. The fourth quarter of fiscal 2005 was a 14-week quarter, compared to the fourth quarter of fiscal 2004 which was a 13-week quarter.
Certain prior year
balance sheet and income statement balances were reclassified to conform to the current
periodyear presentation.
Principles of ConsolidationThe
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.
The preparation of financial statements in conformity with
accounting principles generally accepted
accounting principlesin the United States requires management to make estimates and assumptions that affect the
recordedreported amounts of assets and liabilities
the disclosureand disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenuesrevenue and expenses during the reporting period. Actual results could differ from
thesethose 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.
Cash and Cash EquivalentsThe Company considers
We consider all highly liquid investments purchased with
aan original maturity of three months or less at the time of purchase to be cash equivalents. As of January
26, 2003, the Company’s30, 2005, our cash and cash equivalents were
$347.0$208.5 million, which
consists of $192.8includes $164.4 million invested in money market funds.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 monthsor less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased. In accordance with StatementPart of Financial Accounting Standards No. 115 (“SFAS No. 115”),Accounting for Certain Investmentsour portfolio includes equity investments in Debt and Equity Securities, the Company has classified allpublicly traded companies. We classify our marketable securities at the date of acquisition in the available-for-sale category as available-for-sale, as the Company’sour intention is to convert them into cash for operations. SuchThese securities are reported at fair value with the related unrealized gains and losses net of taxes, excluded from earnings and shown separately as a component ofincluded in accumulated other comprehensive income within(loss), a component of stockholders’ equity. Interest earned on marketable securities is included in interest income.equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method.
InventoriesInventories
Inventories are stated at the
Inventory cost is computed on an adjusted standard basis (which approximates actual cost on an average or first-in, first-out basis). We write down our inventory for estimated lower of cost
on a weighted average basis, or
market. Write-downsmarket, obsolescence or unmarketable inventory equal to
reduce the
carrying value of obsolete, slow moving and non-usable inventory to net realizable value are charged todifference between the cost of
revenues.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.
NVIDIA CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
In connection with
its financing arrangements,the Notes, see Note
9, the Company12, we incurred certain direct
issuance costs from third parties who performed services that assisted in the closing of the
related transaction. These
issuance costs
arewere included in
other assets on theour consolidated balance sheet
under “deposits and
areother 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 ExpensesThe Company accounts for
We expense advertising costs as expense in the period in which they are incurred. Advertising expenses for fiscal 2003, 20022005, 2004 and 20012003 were approximately $15.2 million, $11.3 million and $6.8 million, $4.6 million and $4.0 million, respectively. Stock SplitNVIDIA CORPORATION AND SUBSIDIARIESIn August 2001, the Company’s Board of Directors approved a two-for-one stock split of the Company’s common stock for stockholders of record on August 28, 2001, effected in the form of a 100% stock dividend. The transfer agent distributed the shares resulting from the split on September 17, 2001. All share and per-share numbers contained herein reflect this stock split.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue RecognitionThe Company recognizes
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.
The Company’s policy on sales to distributors and stocking representatives is to defer recognition of revenue and related cost of revenue until the distributors and representatives resell the product. The Company records estimated reductions to revenue for customer programs at the time revenue is recognized. The Company also records a reduction to revenue for estimated product returns at the time revenue is recognized based on historical return rates.For all sales, the Company useswe use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. The Company considersWe consider delivery to occur upon shipment provided title and risk of loss have passed to the customer.customer based on the shipping terms. At the point of sale, the Company assesseswe assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If the Company determineswe determine that collection of a fee is not reasonably assured, the Company deferswe defer the fee and recognizesrecognize 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
the Companyus to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade accounts receivable. All marketable securities are held in
the Company’sour name,
managed by several investment managers and held
primarily withby one major financial
institution. Threeinstitution under a custodial arrangement. Two customers accounted for
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
approximately 47%--27% of the Company’sour accounts receivable balance at January 26, 2003. The Company performs30, 2005. We perform ongoing credit evaluations of itsour customers’ financial condition and maintainsmaintain 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 excluding theexcludes amounts covered by credit insurance.
insurance and letters of credit.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144, (“or SFAS No. 144”),144,Accounting for the Impairment or Disposal of Long-Lived Assets,long-lived assets, such as property plant and equipment and purchased 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 byfor 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. The
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.
Accounting for Asset Retirement Obligations
In fiscal 2004, we adopted 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 liabilitiesthe 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 disposed group classified as heldliability for sale wouldan asset retirement obligation be presented separatelyrecognized in the appropriate asset and liability sectionsperiod in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the consolidated balance sheet.Goodwill and intangible assets not subjectliability is added to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceedsof the asset’s fair value.
associated asset and this additional carrying amount is depreciated over the life of the asset. PriorDuring fiscal 2005, we completed leasehold improvements at our headquarters facility in Santa Clara, California and recorded a liability of $4.5 million to return the adoptionproperty to its original condition upon lease termination in fiscal year 2013.
Income Taxes
Statement of Financial Accounting Standards No. 109, or SFAS No. 144,109,Accounting for Income Taxes, establishes financial accounting and reporting standards for the Company accounted for long-lived assets ineffect of income taxes. In accordance with SFAS No. 121,Accounting for Impairment109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of Long-Lived Assetstaxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and for Long-Lived Assets to be Disposed Of.Income Taxes
The Company records income taxes using the asset and liability method. Deferredforeign deferred tax assets andor liabilities, are recognizedas appropriate, for the estimatedour estimate of future tax consequenceseffects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilitiescarryforwards; and their respective tax bases. Deferredwe record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and liabilitiesjudgment, are measured using enacted tax rates in effect for the year in which those temporary differences arenot expected to be recorded or settled. The effect onrealized.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our calculation of current and deferred tax assets and liabilities
of a change in tax rates is
recognized in incomebased on certain estimates and judgments and involves dealing with uncertainties in the
periodapplication 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 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
includespayment of these amounts is unnecessary or if the
enactment date.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.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents,
marketable securities, accounts receivable, accounts payable and accrued liabilities approximate their fair values
due to their relatively short maturities as of January
26, 200330, 2005 and January
27, 2002. The25, 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
Company’s convertible subordinated notesmarketable securities is determined based on quoted market
prices as of January 26, 2003 was $260.2 million.prices.
Foreign Currency TranslationThe Company uses
We use the
U.S.United States dollar as
itsour functional currency. Foreign currency
monetary assets and liabilities are remeasured into
U.S.United States dollars at end-of-period exchange
rates, except forrates. Non-monetary assets and liabilities, including inventories, prepaid expenses and other current assets, property
plant and equipment, deposits and other assets and equity,
which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 “Interest and other“Other income (expense), net” and to date have not been significant.
Comprehensive income consists of net
earningsincome and
other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains
andor losses on available-for-sale securities,
recorded net of tax.
Goodwill and Intangible Assets
Effective fiscal 2003, the Companywe completed the adoption of Statement of Financial Accounting Standards No. 142, (“or SFAS No. 142”),142,Goodwill and Other Intangible Assets. As required by SFAS No. 142, the Companywe 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. All other intangible assets will continueOur impairment review process compares the fair value of the reporting unit in which the goodwill resides to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144,Accountingits carrying value. We determined that our reporting units are equivalent to our operating segments for the Impairment or Disposalpurposes of Long-Lived Assets.In conjunction with the implementation of completing our SFAS No. 142 duringimpairment 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 first quarteramount of fiscal 2003 the Company completed a transitional goodwillsuch an impairment testby applying fair value-based tests to individual assets and concluded that no impairment was indicated. Upon adoption of the new business combination rules, acquired workforce no longer met the definition of an identified intangible asset. As a result, the net balance of $1.8 million was reclassified to goodwill in fiscal 2003. The adoption of SFAS No. 142 ceased the amortization of goodwill, which otherwise would have been approximately $13.0 million for the year ended January 26, 2003. In accordance with SFAS No. 142, the Company hasliabilities. We elected to perform itsour annual goodwill impairment review during the fourth quarter. The Company hasquarter of each fiscal year. We completed itsour most recent annual goodwill impairment test during the fourth quarter of fiscal 2005 and concluded that there was no impairment. The effects ofHowever, future events or circumstances may result in a charge to earnings due to the adoption of SFAS No. 142 are as follows:
| | | Year Ended
January 26,
2003
| | Year Ended
January 27,
2002
| | Year Ended
January 28,
2001
|
| | | (in thousands, except per share data) |
Net income | | $ | 90,799 | | $ | 176,924 | | $ | 98,469 |
Goodwill and workforce amortization, tax effected | | $ | — | | $ | 7,065 | | $ | — |
Adjusted net income | | $ | 90,799 | | $ | 183,989 | | $ | 98,469 |
Reported basic earnings per share | | $ | 0.59 | | $ | 1.24 | | $ | 0.75 |
Reported diluted earnings per share | | $ | 0.54 | | $ | 1.03 | | $ | 0.62 |
Adjusted basic earnings per share | | $ | 0.59 | | $ | 1.29 | | $ | 0.75 |
Adjusted diluted earnings per share | | $ | 0.54 | | $ | 1.08 | | $ | 0.62 |
The carrying amountpotential for a write-down of goodwill is as follows:
| | | January 26, 2003
| | January 27, 2002
|
| | | (in thousands) |
3dfx | | $ | 50,326 | | $ | 50,326 |
Other | | | 3,901 | | | — |
| | |
|
| |
|
|
Total goodwill | | $ | 54,227 | | $ | 50,326 |
| | |
|
| |
|
|
in connection with such tests.
NVIDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS - (Continued)The components of our amortizable intangible assets are as follows:
| | | January 26, 2003
| | | January 27, 2002
| |
| | | Gross Carrying Amount
| | Accumulated Amortization
| | | Gross Carrying Amount
| | Accumulated Amortization
| |
| | | (in thousands) | |
Technology licenses | | $ | 7,028 | | $ | (3,972 | ) | | $ | 6,115 | | $ | (2,317 | ) |
Patents | | | 10,319 | | | (4,478 | ) | | | 10,319 | | | (1,215 | ) |
Acquired intellectual property | | | 11,117 | | | (5,236 | ) | | | 11,013 | | | (2,913 | ) |
Trademarks | | | 11,310 | | | (4,021 | ) | | | 11,310 | | | (1,759 | ) |
Other | | | 250 | | | (73 | ) | | | 250 | | | (10 | ) |
| | |
|
| |
|
|
| |
|
| |
|
|
|
Total intangible assets | | $ | 40,024 | | $ | (17,780 | ) | | $ | 39,007 | | $ | (8,214 | ) |
| | |
|
| |
|
|
| |
|
| |
|
|
|
Amortization expense for the net carrying amount of intangible assets at January 26, 2003 is estimated to be $9.7 million in fiscal 2004, $7.8 million in fiscal 2005, $4.3 million in fiscal 2006, $0.5 million in fiscal 2007 and $14,000 in fiscal 2008.
New Accounting PronouncementsStock-Based Compensation
In October 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 as it relates to the disposal of a segment of a business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 effective fiscal 2003. The adoption of SFAS 144 has not had an impact on the Company’s consolidated financial position or results of operations.In June 2002, the FASB issued Statement of Financial Account Standards No. 146 (“SFAS No. 146”),Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that the liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Adopting SFAS 146 did not have a material effect on the Company’s financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”),Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 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 rollforward of the entity’s product warranty liabilities. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted FIN 45 effective fiscal 2003.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company records a reduction to revenue for estimated product returns and warranty obligations at the time revenue is recognized based on historical return rates.
Description
| | Balance at Beginning of Period
| | Additions
| | Deductions
| | Balance at End of Period
|
| | | (In thousands) |
Year ended January 26, 2003 | | | | | | | | | | | | |
Allowance for sales returns and allowances | | $ | 15,586 | | $ | 20,147 | | $ | 22,505 | | $ | 13,228 |
| | |
|
| |
|
| |
|
| |
|
|
Year ended January 27, 2002 | | | | | | | | | | | | |
Allowance for sales returns and allowances | | $ | 7,092 | | $ | 17,171 | | $ | 8,677 | | $ | 15,586 |
| | |
|
| |
|
| |
|
| |
|
|
Year ended January 28, 2001 | | | | | | | | | | | | |
Allowance for sales returns and allowances | | $ | 4,092 | | $ | 12,436 | | $ | 9,436 | | $ | 7,092 |
| | |
|
| |
|
| |
|
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In connection with certain agreements that the Company has executed in the past, the Company has at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. The Company has also on occasion included intellectual property indemnification provisions in the terms of its 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. The Company has not recorded any liability in its consolidated financial statements for such indemnifications.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, (“or SFAS No. 148”),148,Accounting for Stock-Based Compensation - Transition and Disclosure.Disclosure, amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, or SFAS No. 148 provides alternative methods of transition123,Accounting for a voluntary change Stock-Based Compensation,to require more prominent disclosures in both annual and interim financial statements regarding the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosurescompensation and the effect of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company adopted SFAS No. 148 effective fiscal 2003.used on reported results.
Stock-Based CompensationThe Company usesWe use the intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees,to account for itsour stock-based employee compensation plans. Deferred compensation arising from stock-based awards is amortized in accordance with Financial Accounting Standards Board Interpretation No. 28, which generally accelerates the compensation expense as compared to the straight-line method. As such, compensation expense is recorded if on the date of grant the current fair value per share of the underlying stock exceeds the exercise price per share.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As permitted under Statement of Financial Accounting Standards No. 123 (“SFAS No.123”),Accounting for Stock-Based Compensation,the Company has elected to follow Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for stock-based awards to employees. Compensation cost for the Company’sour 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 January 26, 2003
| | | Year Ended January 27, 2002
| | | Year Ended January 28, 2001
| |
| | | (in thousands, except per share data) | |
Net income, as reported | | $ | 90,799 | | | $ | 176,924 | | | $ | 98,469 | |
Add: Stock option exchange expense included in reported net income, net of related tax effects | | | 37,285 | | | | — | | | | — | |
Less: Compensation expense determined under fair value based method for stock options exchanged on October 25, 2002, net of related tax effects | | | (167,714 | ) | | | — | | | | — | |
Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (37,698 | ) | | | (89,274 | ) | | | (30,735 | ) |
| | |
|
|
| |
|
|
| |
|
|
|
Pro forma net income (loss) | | $ | (77,328 | ) | | $ | 87,650 | | | $ | 67,734 | |
| | |
|
|
| |
|
|
| |
|
|
|
Basic net income per share | | $ | 0.59 | | | $ | 1.24 | | | $ | 0.75 | |
Basic net income (loss) per share—pro forma | | $ | (0.50 | ) | | $ | 0.61 | | | $ | 0.52 | |
Diluted net income per share | | $ | 0.54 | | | $ | 1.03 | | | $ | 0.62 | |
Diluted net income (loss) per share—pro forma | | $ | (0.50 | ) | | $ | 0.51 | | | $ | 0.43 | |
| | | 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
the Company’sour Employee Stock Purchase Plan,
(the “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 January 26, 2003
| | | Year Ended January 27, 2002
| | | Year Ended January 28, 2001
| |
Weighted average expected life (in months) | | 10 | | | 6 | | | 8 | |
Risk free interest rate | | 3.7 | % | | 4.7 | % | | 6.2 | % |
Volatility | | 88 | % | | 83 | % | | 85 | % |
Dividend yield | | — | | | — | | | — | |
| | 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
26, 2003,30, 2005, January
27, 200225, 2004 and
January 28, 2001 was approximately $14.27, $8.79 and $7.04, respectively.NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the purpose of the pro forma calculation, the fair value of options granted under the Company’s stock option plans has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
| | | Year Ended January 26, 2003
| | | Year Ended January 27, 2002
| | | Year Ended January 28, 2001
| |
Weighted average expected life (in years) | | 4 | | | 4 | | | 4 | |
Risk free interest rate | | 3.8 | % | | 4.3 | % | | 5.7 | % |
Volatility | | 88 | % | | 83 | % | | 85 | % |
Dividend yield | | — | | | — | | | — | |
For the purpose of the pro forma calculation, the weighted-average per share fair value of options granted during the years ended January 26, 2003 January 27, 2002 and January 28, 2001 was approximately $28.09, $23.94$5.28, $3.76 and $13.02,$14.27, respectively.
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
as-if-converted method for the convertible debentures andtreasury stock method. Under the treasury stock method,
for stock options. Under the as-if-converted method and the treasury stock method, the convertible debentures and the effect of stock options outstanding
respectively, areis 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 26, 2003
| | Year Ended January 27, 2002
| | Year Ended January 28, 2001
|
| | | (in thousands, except per share data) |
Numerator: | | | | | | | | | |
Numerator for basic net income per share | | $ | 90,799 | | $ | 176,924 | | $ | 98,469 |
Numerator for diluted net income per share | | $ | 90,799 | | $ | 176,924 | | $ | 98,469 |
Denominator: | | | | | | | | | |
Denominator for basic net income per share, weighted average shares | | | 153,513 | | | 143,015 | | | 130,998 |
Effect of dilutive securities: | | | | | | | | | |
Stock options outstanding | | | 14,880 | | | 28,059 | | | 28,296 |
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|
Denominator for diluted net income per share, weighted average shares | | | 168,393 | | | 171,074 | | | 159,294 |
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|
|
Net income per share: | | | | | | | | | |
Basic net income per share | | $ | 0.59 | | $ | 1.24 | | $ | 0.75 |
Diluted net income per share | | $ | 0.54 | | $ | 1.03 | | $ | 0.62 |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
presented:
| | | 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 January 26,
2003
| | Year Ended January 27,
2002
| | Year Ended January 28, 2001
|
| | | (in thousands) |
Stock options outstanding | | 5,892 | | 2,504 | | 4,476 |
Convertible debentures | | 6,472 | | 6,472 | | 6,472 |
| | |
| |
| |
|
| | | 12,364 | | 8,976 | | 10,948 |
| | |
| |
| |
|
| | | 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)
The weighted-average price of stock options excluded from the computation of diluted earnings per share was $32.45, $54.62$27.86, $29.63 and $30.41$32.45 for the years ended January 26, 2003,30, 2005, January 27, 200225, 2004 and January 28, 2001,26, 2003, respectively. The convertible subordinated debentures arewere 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 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 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 to have a material impact on our consolidated financial position, results of operations or cash flows.
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 shown.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—Asset Purchases2 - Acquisition of MediaQ, Inc.During fiscal year 2002, the Company
On August 19, 2003, we completed the purchaseacquisition of certain assets from various businesses, including 3dfx Interactive,MediaQ, Inc. (“3dfx”), or MediaQ, a leading provider of graphics and other asset purchases,multimedia technology for anwireless 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 $79.1 million. These purchases have been accounted for under$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 methodprice allocated to purchased in-process research and development, or IPR&D, represents the value assigned to research and development projects of accounting. ExcludingMediaQ 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 3dfx transaction,Purchase Method an interpretation of FASB Statement No. 2,amounts assigned to IPR&D meeting the aggregate purchase price for all other purchases is immaterialabove-stated criteria were charged to the consolidated financial statementsexpense as part of the Company.Onallocation 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)
Note 3 - 3dfx
The 3dfx asset purchase closed on April 18,
2001, the Company completed the purchase of certain assets of 3dfx, including patents and patent applications.2001. 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
provides,provided, subject to the other provisions thereof, that if 3dfx
certifies to the Company’s satisfactionproperly certified that all its debts and other liabilities
havehad been provided for, then
the Company iswe would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx
cannotcould not make such
a certification, but instead
certifies to the Company’s satisfactionproperly certified that its debts and liabilities
cancould be satisfied for less than $25.0 million, then 3dfx
can electcould have elected to receive a cash payment equal to the amount of such debts and liabilities and
receive a reduced number of shares of
NVIDIAour common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx
cannotcould not certify that all of its debts and liabilities
havehad been provided for, or
cancould not be satisfied, for less than $25.0 million,
NVIDIA iswe would not
be obligated under the agreement to pay any additional consideration for the assets.
On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. The Company believes that the bankruptcy filing by 3dfx will allow a determinationWe are currently party to litigation relating to certain aspects of the
full numberasset purchase and
scope of 3dfx’s
debts and liabilities. NVIDIA may be obligated under the Asset Purchase Agreementsubsequent bankruptcy in October 2002. Please refer to
pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On MarchNote 12
2003, the Company was served with a complaint by the Trustee for 3dfx seeking, among other things, additional payment for the purchased assets and the assumption by the Company of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suits against the Company seeking payment of the
rents due by 3dfx.As of January 26, 2003,Notes to the Consolidated Financial Statements for further information regarding this litigation.
The 3dfx asset purchase price of $70.0 million and 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
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
goodwill in fiscal 2003. In addition, amortization of goodwill ceased in accordance with the new accounting rules.
| | | 3dfx
| | Straight-Line Amortization Period
|
| | | (in thousands) | | (years) |
Property and equipment | | $ | 2,433 | | 1-2 |
Trademarks | | | 11,310 | | 5 |
Goodwill | | | 60,418 | | — |
| | |
|
| | |
Total | | $ | 74,161 | | |
| | |
|
| | |
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 amount of and circumstances surrounding additional consideration, if any, paidthat we may pay related to the 3dfx uponasset purchase.
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
final satisfactionamount allocated to MediaQ goodwill changed to $52,913 as a result of
their liabilities.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 3—15 for further segment information.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Amortizable Intangible Assets
We are currently amortizing our intangible assets with definitive lives over periods ranging from 1 to 5 years. The components of our amortizable intangible assets are as follows:
| | | 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 | |
Amortization expense associated with intangible assets for the years ended January 30, 2005, January 25, 2004 and January 26, 2003 was $19.7 million, $16.2 million and $9.6 million, respectively. Future amortization expense for the net carrying amount of intangible assets at January 30, 2005 is estimated to be $15.8 million in fiscal 2006, $8.9 million in fiscal 2007, $2.6 million in fiscal 2008, and the remaining amortization expense of $0.2 million in fiscal 2009.
Note 6 - Marketable Securities
The Company accountsWe account for itsour 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 Company’sour 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. The Company classifies itspurchased and some equity investments. We classify our marketable debt securities at the date of acquisition in the available-for-sale category as the Company’sour 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 2005 were $0.4 million. Net realized gains for fiscal 2004 and 2003 were $2.9 million and fiscal 2002 were $576,000 and $168,000,$0.3 million, respectively.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of cash equivalents and marketable securities at January 26, 200330, 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 27, 2002:| | | January 26, 2003
| | January 27, 2002
|
| | | Amortized Cost
| | Unrealized Gain/(Loss)
| | | Estimated Fair Value
| | Amortized Cost
| | Unrealized Gain/(Loss)
| | Estimated Fair Value
|
| | | (in thousands) |
Asset-backed securities | | $ | 92,286 | | $ | (100 | ) | | $ | 92,186 | | $ | 121,614 | | $ | 193 | | $ | 121,807 |
Commercial paper | | | 109,465 | | | — | | | | 109,465 | | | 53,238 | | | — | | | 53,238 |
Obligations of the U.S. government & its agencies | | | 359,003 | | | 2,836 | | | | 361,839 | | | 179,709 | | | 303 | | | 180,012 |
U.S. corporate notes, bonds, and obligations | | | 262,914 | | | 3,530 | | | | 266,444 | | | 282,886 | | | 28 | | | 282,914 |
Certificate of deposit | | | — | | | — | | | | — | | | 15,060 | | | 1 | | | 15,061 |
Money market | | | 192,754 | | | — | | | | 192,754 | | | 145,503 | | | — | | | 145,503 |
| | |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
|
Total | | $ | 1,016,422 | | $ | 6,266 | | | $ | 1,022,688 | | $ | 798,010 | | $ | 525 | | $ | 798,535 |
| | |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
|
Classified as: | | | | | | | | | | | | | | | | | | | |
Cash equivalents | | | | | | | | | $ | 341,269 | | | | | | | | $ | 340,158 |
Marketable securities | | | | | | | | | | 681,419 | | | | | | | | | 458,377 |
| | | | | | | | | |
|
| | | | | | | |
|
|
Total | | | | | | | | | $ | 1,022,688 | | | | | | | | $ | 798,535 |
| | | | | | | | | |
|
| | | | | | | |
|
|
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—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 | ) |
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, 2005 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
26, 200330, 2005 and at January
27, 200225, 2004 by expected maturity are shown below.
| | | January 26, 2003
| | January 27, 2002
|
| | | Amortized Cost
| | Estimated Fair Value
| | Amortized Cost
| | Estimated Fair Value
|
| | | (in thousands) |
Less than one year | | $ | 592,025 | | $ | 593,714 | | $ | 415,910 | | $ | 415,969 |
Due in 1 – 5 years | | | 424,397 | | | 428,974 | | | 382,100 | | | 382,566 |
| | |
|
| |
|
| |
|
| |
|
|
Total | | $ | 1,016,422 | | $ | 1,022,688 | | $ | 798,010 | | $ | 798,535 |
| | |
|
| |
|
| |
|
| |
|
|
All of our marketable securities are debt instruments with the exception of $0.9 million of publicly traded equity securities in fiscal 2005.
| | | January 30, 2005 | | January 25, 2004 | |
| | | AmortizedCost | | EstimatedFair Value | | AmortizedCost | | EstimatedFair Value | |
| | | (In thousands) | |
| Less than one year | | $ | 198,242 | | $ | 197,844 | | $ | 282,762 | | $ | 283,123 | |
| Due in 1 - 5 years | | | 416,085 | | | 412,141 | | | 315,400 | | | 316,456 | |
| Due in 6-7 years | | | 23,132 | | | 22,925 | | | -- | | | -- | |
| Total | | $ | 637,459 | | $ | 632,910 | | $ | 598,162 | | $ | 599,579 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4—Discontinued Use of PropertyThe Company moved into its new headquarters in June 2001 and was still obligated to pay rent for a portion of its previous office space. Since relocating, the Company has been unable to secure a subtenant for its previous office space due to the decrease in demand for commercial rental space as a result of the declining economy. The Company recorded a loss of approximately $3.7 million during fiscal 2002 for the remaining costs related to the preexisting lease, including rental payments, capitalized leasehold improvements, and furniture and fixtures, as the leased property or improvements have no substantive future use or benefit. In December 2001, we filed a complaint against Extreme Networks Inc., the sublessor of the property, seeking payment of lease payments and other property charges for the period of July 2001 through December 2001 and seeking a declaration that the Company is not liable for any future payments under the lease. No trial date has been set and there is no assurance that the Company will be successful in this matter.
Note 5—7 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | January 26, 2003
| | January 27, 2002
|
| | | (in thousands) |
Inventories: | | |
Raw materials | | $ | 17,510 | | $ | 13,367 |
Work in-process | | | 13,179 | | | 77,130 |
Finished goods | | | 114,357 | | | 123,380 |
| | |
|
| |
|
|
Total inventories | | $ | 145,046 | | $ | 213,877 |
| | |
|
| |
|
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At January 26, 2003, the Company had outstanding inventory purchase obligations totaling $210.3 million.
| | | January 26, 2003
| | | January 27, 2002
| |
| | | (in thousands) | |
Property and Equipment: | | | |
Software | | $ | 48,006 | | | $ | 33,717 | |
Test equipment | | | 49,961 | | | | 32,330 | |
Computer equipment | | | 54,479 | | | | 40,169 | |
Leasehold improvements | | | 54,416 | | | | 36,728 | |
Construction in process | | | 4,862 | | | | 14,745 | |
Office furniture and equipment | | | 17,359 | | | | 12,880 | |
| | |
|
|
| |
|
|
|
| | | | 229,083 | | | | 170,569 | |
Accumulated depreciation and amortization | | | (93,931 | ) | | | (50,441 | ) |
| | |
|
|
| |
|
|
|
Property and equipment, net | | $ | 135,152 | | | $ | 120,128 | |
| | |
|
|
| |
|
|
|
| | | January 30, | | January 25, | |
Inventories: | | 2005 | | 2004 | |
| | | (In thousands) | |
| Raw materials | | $ | 23,225 | | $ | 22,131 | |
| Work in-process | | | 130,211 | | | 44,523 | |
| Finished goods | | | 162,082 | | | 167,584 | |
| Total inventories | | $ | 315,518 | | $ | 234,238 | |
| | | 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 | |
Depreciation expense for fiscal
2005, 2004 and 2003
2002 and 2001 was
$42.6$71.3 million,
$24.3$59.3 million and
$9.6$42.6 million, respectively. Assets recorded under capital leases included in property and equipment were
$17.1$19.3 million and
$12.5$19.5 million as of January
26, 200330, 2005 and January
27, 2002,25, 2004, respectively. Related accumulated amortization was
$8.7$17.8 million and
$4.2$14.0 million as of January
26, 200330, 2005 and January
27, 2002,25, 2004, respectively.
| | | January 26, 2003
| | January 27, 2002
|
| | | (in thousands) |
Accrued Liabilities: | | |
Accrued customer programs | | $ | 50,018 | | $ | 55,627 |
Customer advances | | | 58,396 | | | — |
Taxes payable | | | 82,952 | | | 62,922 |
Accrued payroll and related expenses | | | 20,575 | | | 16,389 |
Other | | | 16,526 | | | 6,272 |
| | |
|
| |
|
|
Total accrued liabilities | | $ | 228,467 | | $ | 141,210 |
| | |
|
| |
|
|
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 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6—8 - 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 2004 and fiscal 2003 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 | |
(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 9 - Stockholders’ Equity
Common Stock OfferingRepurchase ProgramIn October 2000, the Company sold an additional 2,800,000
On August 9, 2004 we announced that our Board of Directors had authorized a stock repurchase program to repurchase shares of
itsour common stock,
subject to
the publiccertain specifications, up to an aggregate maximum amount of $300.0 million. During fiscal 2005, we repurchased 2.1 million shares for
net proceedsa total cost of approximately
$96.7 million, after deducting underwriting discounts, commissions and expenses of the offering.$24.6 million.
Convertible Preferred Stock
As of January
26, 2003,30, 2005, there
arewere no shares of preferred stock
outstanding and the Company has no current plans to issue any of the authorized preferred stock.outstanding.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2000 Nonstatutory Equity Incentive Plan
On August 1, 2000,
the Company’sour Board of Directors approved the 2000 Nonstatutory Equity Incentive Plan,
(the “2000 Plan”)or the 2000 Plan, to provide for the issuance of
the Company’sour common stock to employees and affiliates
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. OptionsOption 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. OptionsInitial 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. AThere were a total of 21,939,202 shares were authorized for issuance under the 2000 Plan. There were 10,720,060and 10,505,378 shares available for future issuance under the 2000 Plan as of January 26, 2003.
30, 2005.
1998 Equity Incentive Plan
The Equity Incentive Plan,
(the “1998 Plan”)or the 1998 Plan, was adopted by
the Company’sour Board of Directors on February 17, 1998 and was approved by
the Company’sour stockholders on April 6, 1998 as an amendment and restatement of
the Company’sour then existing Equity Incentive Plan which had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of
the Company’sour 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.
On the last day of each fiscal year, starting with the year ending January 31, 1999, the aggregate number of shares of common stock that are available for issuance are automatically increased by a number of shares equal to five percent (5%) of the Company’s outstanding common stock on such date, including on an as-if-converted basis preferred stock and convertible notes, and outstanding options and warrants, calculated using the treasury stock method. There
arewere a total of
101,298,229110,094,385 shares authorized for issuance and
21,265,51912,006,326 shares
are available for future issuance
under the 1998 Plan as of January
26, 2003.30, 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.
Options
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.
However,Initial option grants made after February 10, 2004 under the
initial options granted1998 Plan generally vest ratably
each quarter over a
fourthree year
period, with 25% becoming vested approximately one year from the date of grantperiod. Subsequent option grants are generally granted for performance and
the remaining 75% vesting on a quarterly basis over the next three years. Subsequent grants generally vest quarterly over a four year period.
Options granted prior to December 1997 could be exercised prior to full vesting. Any unvested shares so purchased were subject to a repurchase right in favor of the Company at a repurchase price per share that was equal to the original per share purchase price. The right to repurchase at the original price would lapse at the rate of 25% per year over the four-year period from the date of grant. As of January 26, 2003, there were no shares subject to repurchase.
1998 Non-Employee Directors’ Stock Option Plan
In February 1998, the Company’sour Board of Directors adopted the 1998 Non-Employee Directors’ Stock Option Plan, (the “Directors Plan”)or the Directors Plan, to provide for the automatic grant of non-qualified options to purchase shares of the Company’sour common stock to our directors of the Company who are not employees or consultants of the Companyus or of an affiliate of us.
In July 2000, the
Company. TheBoard of Directors
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, the Directors’ Plan was amended
on May 22, 2002.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
the Company’sour Board of Directors for the first time is automatically granted an option to purchase 75,000 shares, which vests quarterly over a three-year period,
(“or Initial
Grant”).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—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”).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”).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”).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
26, 2003. In July 2000, the Company’s Board of Directors amended the 1998 Plan to incorporate the automatic grant provisions of the Directors Plan. Future30, 2005. As described above, future grants to non-employee directors will be made out of the 1998
Plan until such time as shares may become available under the Directors Plan.
Employee Stock Purchase Plan
In February 1998,
the Company’sour Board of Directors approved the 1998 Employee Stock Purchase Plan,
(the “Purchase Plan”).or the Purchase Plan. In June 1999, the
planPurchase Plan was amended to increase the number of shares reserved for issuance automatically each year at the end of
the Company’sour fiscal year for the next 10 years (commencing at the end of fiscal 2000 and ending 10 years later in 2009) by an amount equal to 2% of the outstanding shares
of the Company on each such date, including on an as-if-converted basis preferred stock and convertible notes, and outstanding options and warrants, calculated using the treasury stock method; provided that the maximum number of shares of common stock available for issuance from the Purchase Plan could not exceed 26,000,000 shares. There are a total of
15,681,35222,751,516 shares authorized for issuance. At January
26, 2003, 2,104,67030, 2005, 5,737,168 shares have been issued under the Purchase Plan and
13,576,68217,014,348 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—STATEMENTS - (Continued)
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
the Companyus or an affiliate of
the Companyus 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
orand 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
the Companyus and in each case their contributions are refunded.
The following summarizes the transactions under the 1998 Plan, 2000 Plan and Directors Plan:
| | | Options
Available for Grant
| | | Options Outstanding
| | | Weighted Average
Price Per Share
|
Balances, January 30, 2000 | | 8,779,656 | | | 39,382,800 | | | $ | 2.75 |
Authorized | | 24,487,914 | | | — | | | | — |
Granted | | (21,854,750 | ) | | 21,854,750 | | | | 20.20 |
Exercised | | — | | | (9,020,610 | ) | | | 1.85 |
Cancelled | | 1,667,584 | | | (1,667,584 | ) | | | 7.37 |
| | |
|
| |
|
| | | |
Balances, January 28, 2001 | | 13,080,404 | | | 50,549,356 | | | | 10.30 |
Authorized | | 9,954,182 | | | — | | | | — |
Granted | | (15,159,700 | ) | | 15,154,700 | | | | 38.14 |
Exercised | | — | | | (12,282,958 | ) | | | 6.87 |
Cancelled | | 1,541,369 | | | (1,541,369 | ) | | | 13.90 |
| | |
|
| |
|
| | | |
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 |
| | |
|
| |
|
| | | |
| | | 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) | (1) | Includes 16,193,886 unvested stock options cancelled in exchange for shares of common stock. |
(2) | (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—STATEMENTS - (Continued)
The following table summarizes information about stock options outstanding as of January
26, 2003:| | | 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
|
$ 0.09 — $ 0.09 | | 312,000 | | 4.1 | | $ | 0.09 | | 312,000 | | $ | 0.09 |
0.33 — 0.33 | | 178,900 | | 4.6 | | $ | 0.33 | | 178,900 | | $ | 0.33 |
0.66 — 0.79 | | 629,460 | | 4.9 | | $ | 0.75 | | 629,460 | | $ | 0.75 |
1.04 — 1.38 | | 378,419 | | 5.0 | | $ | 1.32 | | 378,419 | | $ | 1.32 |
1.58 — 2.25 | | 6,973,921 | | 5.3 | | $ | 1.79 | | 6,684,921 | | $ | 1.79 |
4.09 — 5.88 | | 5,944,418 | | 6.6 | | $ | 4.82 | | 3,802,501 | | $ | 4.69 |
8.56 — 11.90 | | 4,961,273 | | 8.4 | | $ | 9.94 | | 1,220,428 | | $ | 9.13 |
14.97 — 22.34 | | 9,924,425 | | 7.8 | | $ | 16.86 | | 4,027,208 | | $ | 16.80 |
24.63 — 36.88 | | 5,409,388 | | 8.1 | | $ | 30.27 | | 2,221,609 | | $ | 29.36 |
37.17 — 53.61 | | 923,000 | | 8.8 | | $ | 41.51 | | 617,125 | | $ | 42.97 |
65.47 — 65.47 | | 500 | | 9.0 | | $ | 65.47 | | 125 | | $ | 65.47 |
| | |
| | | | | | |
| | | |
$ 0.09 — $65.47 | | 35,635,704 | | 7.1 | | $ | 12.93 | | 20,072,696 | | $ | 10.03 |
| | |
| | | | | | |
| | | |
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 | |
Note 7—10 - Retirement PlanThe Company has
We have a 401(k)
Retirement Plan,
(the “Plan”)or the Plan, covering substantially all of
itsour United States employees. Under the Plan, participating employees may defer up to 100 percent of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits.
Note 8—11 - Stock Option Exchange
On September 26, 2002, the Companywe commenced an offer, (the “Offer”)or the Offer, to itsour employees to exchange outstanding stock options with exercise prices equal to or greater than $27.00 per share, (“or Eligible Options”). 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 the Company’sour outstanding stock options as of the commencement date. Only employees of NVIDIA or one of itsour 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 leaveleaves 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, the Company’sour Chief Executive Officer and Chief Financial Officer and members of the Company’sour Board of Directors were not eligible to participate in this Offer.
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
andless 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
the Company’sour common stock as reported on the Nasdaq National Market on October 24, 2002.
The CompanyWe concluded that the consideration paid for the Eligible Options represented
“substantial consideration”"substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23
“Issues"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
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, the Companywe 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.
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
the Company’sour 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.
The CompanyWe further concluded that the
“look back”"look back" and
“look forward”"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
the Company’sour outstanding stock options existing at the time of the Offer.
The Company doesWe did not
intend to grant stock options to any participants in the Offer for at least six months following October 24, 2002. If any stock options
arewere granted to participants in the Offer within the six months following October 24, 2002, those stock options
will receivewould have received variable accounting.
On October 24, 2002, the offer period ended and
the Company waswe were obligated to exchange approximately 18,843,000 Eligible Options for total consideration of
$61,832,000,$61.8 million, consisting of
$39,906,000$39.9 million in fully vested, non-forfeitable shares of
the Company’sour common stock (approximately 3,815,000 shares) and
$21,926,000$21.9 million in employer and employee related taxes. The number of fully vested, non-forfeitable shares of
the Company’sour 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
the Company’sour common stock on October 24, 2002 of $10.46 per share.
The shares of
the Company’sour 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
the Company’sour 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
dodid not have a holding restriction.
Note 9—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 NotesDebentures
In October 2000, the Companywe sold $300$300.0 million of 4¾% convertible subordinated notes (the “Notes”)debentures due 2007, or the Notes, due October 15, 2007.2007 in a public offering. Proceeds net of issuance costsfrom the offering were approximately $290.8 million.million after deducting underwriting discounts, commissions and offering expenses. Issuance costs are beingrelated to the offering totaled $9.2 million and were amortized to interest expense on a straight-line basis, which approximates the interest rate method over the term of the notes.Notes. Interest on the Notes accruesaccrued at the rate of 4¾% per annum and iswas 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 2002 and 2001 was $14.2 million, $14.2$10.4 million and $4.3$14.2 million, respectively. The Notes arewere redeemable at the Company’sour option on or after October 20, 2003. The Notes are2003 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. In
On October 24, 2003, we fully redeemed the
event of a fundamental change, as defined in the Notes indenture, each holderNotes. The aggregate principal amount of the Notes
hasoutstanding was $300.0 million, which included $18.6 million of Notes that we had purchased in the
right, subjectopen market during the three months ended October 26, 2003. The redemption price was equal to
certain conditions and restrictions, to requireapproximately 102.7% of the
Company to repurchaseoutstanding 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
whole or in part, atour 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—STATEMENTS - (Continued)repurchase price of 100% of the principal amount, plus accrued interest to the repurchase date. In connection with its debt financing arrangement, the Company incurred certain direct, incremental costs from third parties who performed services that assisted in the closing of the related transactions. These costs totaling $9.2 million are included in deposits and other assets
Lease Obligations
Our headquarters complex is located on
the Company’s consolidated balance sheet and are amortized using the straight line method over the term of the financing.Lease Obligations
In April 2000, the Company entered into leases for its new headquarters complexa leased site in Santa Clara, California.California and is comprised of five buildings. The first phase of two buildings was completed in June 2001, the second phase of one building was completed in July 2001 and the last phase consisting of one building was completed in February 2002. Therelated leases expire in 2012 and each includes two seven-year renewals at the Company’sour option. Future minimum lease payments under these operating leases total approximately $205.5$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
the newour headquarters,
the Company haswe have other office facilities under operating leases expiring through
2016.fiscal 2013. Future minimum lease payments under
the Company’sour noncancelable capital and operating leases as of January
26, 2003,30, 2005, are as follows:
Year ending January:
| | Operating
| | Capital
| |
| | | (in thousands) | |
2004 | | $ | 22,995 | | $ | 6,260 | |
2005 | | | 23,210 | | | 4,188 | |
2006 | | | 22,970 | | | 868 | |
2007 | | | 23,299 | | | — | |
2008 | | | 23,902 | | | — | |
2009 and thereafter | | | 102,720 | | | — | |
| | |
|
| |
|
|
|
Total | | $ | 219,096 | | | 11,316 | |
| | |
|
| |
|
|
|
Less amount representing interest, at rates ranging from 8% to 10% | | | | | | (760 | ) |
| | | | | |
|
|
|
Present value of minimum lease payments | | | | | | 10,556 | |
Less current portion | | | | | | 5,676 | |
| | | | | |
|
|
|
Long term portion | | | | | $ | 4,880 | |
| | | | | |
|
|
|
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 30, 2005, January 25, 2004 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 26, 2003
| | | January 27, 2002
| |
| | | (in thousands) | |
Classes of Property and Equipment: | | | | | | | | |
Computer equipment | | $ | 4,347 | | | $ | 4,348 | |
Test equipment | | | 6,895 | | | | 6,894 | |
Office equipment and furniture | | | 5,261 | | | | 596 | |
Software and other | | | 634 | | | | 629 | |
| | |
|
|
| |
|
|
|
| | | | 17,137 | | | | 12,467 | |
Accumulated amortization | | | (8,683 | ) | | | (4,249 | ) |
| | |
|
|
| |
|
|
|
Leased property and equipment, net | | $ | 8,454 | | | $ | 8,218 | |
| | |
|
|
| |
|
|
|
| | | 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—STATEMENTS - (Continued)Rent expense
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 purchase closed on April 18, 2001. In May 2002, we were served with a complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease. In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the years ended January 26,Northern District of California. In December 2002, we were served with a complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease. The landlords’ complaints both assert claims for, among other things, interference with contract, successor liability and fraudulent transfer. The landlords’ are seeking to recover, among other things, amounts owed on their leases in the aggregate amount of approximately $10 million. In March 2003, January 27, 2002we 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 January 28, 2001 was approximately $25.6 million, $13.8 millionfraudulent transfer. The Trustee’s complaint seeks additional payments from us, the amount of which has not been quantified. The landlords’ actions have been removed to the Bankruptcy Court from the Superior Court of California and $3.1 million, respectively.consolidated with the Trustee’s action for purposes of discovery. Discovery is currently proceeding and no trial
Litigationdate has been set. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.
Opti Incorporated
On FebruaryOctober 19, 2002 an2004, Opti Incorporated, or Opti, filed a complaint for patent infringement against NVIDIA stockholder, Dominic Castaldo, on behalf of himself and purportedly on behalf of a class of Company stockholders, filed an action in the United States District Court for the NorthernEastern District of California (the “Northern District”) against the CompanyTexas. Opti asserts that unspecified NVIDIA chipsets infringe five United States patents held by Opti. Opti seeks unspecified damages for our conduct, attorneys fees and certain current and former officers of the Company, alleging violations of the federal securities laws arising out of the Company’s announcement on February 14, 2002 of an internal investigation of certain accounting matters. Approximately 13 similar actions were filed in the Northern District, one additional individual action was filed in the Southern District (together, the “Federal Class Actions”), along with three related derivative actions against the Company, certain of its current and former executive officers, directors and its independent auditors, KPMG LLP, in California Superior Court and in Delaware Chancery Court (collectively the “Actions”). The two related derivative actions filed in California Superior Court have been consolidated and are currently stayed pursuant to a voluntary stipulation agreement. The Actions allege claims in connection with varioustriple damages for alleged statements and omissions to the public and to the securities markets and seek damages together with interest and reimbursement of costs and expenses of the litigation. The derivative actions also seek disgorgement of alleged profits from insider tradingwillful infringement by officers and directors. The Actions are in the preliminary stages. The Federal Class Actions have been consolidated and lead plaintiffs appointed. Plaintiffs filed a consolidated amended complaint and, in response,NVIDIA. NVIDIA filed a motionresponse to dismiss. On March 28, 2003this complaint in December 2004. Discovery has not begun and no trial date has been set. We believe the courtclaims asserted against us are without merit and we will continue to defend ourselves vigorously.
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 motioncomplaint in intervention alleges both that the patents in suit are invalid and dismissed the consolidated amended complaint as to all claims and defendants with leave to amend. Plaintiffs must file their second consolidated amended complaint by May 12, 2003. NVIDIA has also filed a motion to dismiss the derivative action filed in Delaware. A hearing on this motion was held April 23, 2003 and a ruling is expected within the next month. The Company is obligated to indemnify its officers and directors in connection with the Actionsthat, to the extent permittedAVG’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.
After some consensual reconfigurations proposed by the
law,various parties, in January 2005, the district court judge entered Docket Control and
has insuranceDiscovery Orders in the three lawsuits. The PC Makers case now involves four separate patents and is currently scheduled for
such individuals,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
of the limits of the applicable insurance policies and subject to potential reservations of rights. The Company intends to vigorously defend these Actions. The Company is unable, however, to predict the ultimate outcome of the Actions. There can be no assurance the Company will be successful in defending the Actions, and if the Company is unsuccessful the CompanyAVG’s infringement allegations target functionality that may be
subjectperformed by NVIDIA products, those claims are without merit, and we will continue to
significant damages. Even if the Company is successful, defending the Actions is likely to be expensivedefend ourselves and
may divert management’s attention from other business concerns and harm the Company’s business.The staff of the Enforcement Division of the Securities & Exchange Commission (“SEC”) informed the Company in January 2002 that it had concerns relating to certain accounting matters and that the SEC along with the U.S. Attorney’s Office for the Northern District of California had authorized investigations into such matters. In accordance with the suggestion and advice of the SEC staff, the Company launched a review of these matters. On April 29, 2002, the Company announced that the Audit Committee of its Board of Directors had, with assistance from the law firm of Cooley Godward LLP and forensic auditors from the accounting firm of KPMG LLP, concluded its review and determined that it was appropriate to restate the Company’s financial statements for fiscal 2000, 2001 and the first three quarters of fiscal 2002. The Audit Committee has worked and continues to work in cooperation with the SEC. See Note 14 for recent developments regarding this matter.
On April 18, 2001, the Company completed the purchase of certain assets of 3dfx, including patents and patent applications. 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 provides, subject to the other provisions thereof, that if 3dfx certifies to the Company’s satisfaction that all its debts and other liabilities have been provided for, then the
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company is obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx cannot make such certification, but instead certifies to the Company’s satisfaction that its debts and liabilities can be satisfied for less than $25.0 million, then 3dfx can elect to receive a cash payment equal to the amount of such debts and liabilities and receive a reduced number of shares of NVIDIA common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx cannot certify that all of its debts and liabilities have been provided for, or can be satisfied for less than $25.0 million, NVIDIA is not obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002, 3dfx filed for Chapter 11 bankruptcy protection. The Company believes that the bankruptcy filing by 3dfx will allow a determination of the full number and scope of 3dfx’s debts and liabilities. NVIDIA may be obligated under the Asset Purchase Agreement to pay 3dfx the contingent consideration following this determination, subject to offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On March 12, 2003, the Company was served with a complaint by the Trustee for 3dfx seeking, among other things, additional payment for the purchased assets and the assumption by the Company of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and CarrAmerica, former landlords of 3dfx, have filed suits against the Company seeking payment of the rents due by 3dfx.
The Company was engaged with Microsoft in discussions related to pricing and volumes of the Xbox chipset. These discussions and the Company’s agreement contemplated use of a third party to resolve matters and on April 23, 2002 Microsoft submitted the matter to binding arbitration. On February 6, 2003, the Company and Microsoft announced that the companies had settled all issues related to pricing of the Microsoft Xbox GPU and MCP chipset and have ended the arbitration between them. In addition to resolving this pricing dispute, the Company has agreed to collaborate with Microsoft on future cost reductions for the Xbox.
The Company isour products vigorously.
We are subject to other legal proceedings, but
doeswe do not believe that the ultimate outcome of any of these proceedings will have a material adverse effect on
itsour 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—STATEMENTS - (Continued)
Note 10—13 - Income Taxes
The provision for income taxes applicable to income before income taxes consists of the following:
| | | Year Ended January 26, 2003
| | Year Ended January 27, 2002
| | | Year Ended January 28, 2001
| |
| | | (in thousands) | |
Current: | | | | | | | | | | | |
Federal | | $ | — | | $ | — | | | $ | — | |
State | | | 135 | | | 134 | | | | 205 | |
Foreign | | | 20,555 | | | 38,673 | | | | 10,136 | |
| | |
|
| |
|
|
| |
|
|
|
Total current | | | 20,690 | | | 38,807 | | | | 10,341 | |
Deferred: | | | | | | | | | | | |
Federal | | | 20,569 | | | (43,738 | ) | | | (15,866 | ) |
State | | | 9,319 | | | (8,176 | ) | | | (11,335 | ) |
Foreign | | | — | | | — | | | | — | |
| | |
|
| |
|
|
| |
|
|
|
Total deferred | | | 29,888 | | | (51,914 | ) | | | (27,201 | ) |
Charge in lieu of taxes attributable to employer stock option plans | | | 9,180 | | | 88,932 | | | | 63,199 | |
| | |
|
| |
|
|
| |
|
|
|
Provision for income taxes | | $ | 59,758 | | $ | 75,825 | | | $ | 46,339 | |
| | |
|
| |
|
|
| |
|
|
|
| | | 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
consistconsists of the following:
| | | Year Ended January 26, 2003
| | Year Ended January 27, 2002
| | Year Ended January 28, 2001
|
| | | (in thousands) |
Domestic | | $ | 20,764 | | $ | 39,613 | | $ | 105,147 |
Foreign | | | 129,793 | | | 213,136 | | | 39,661 |
| | |
|
| |
|
| |
|
|
| | | $ | 150,557 | | $ | 252,749 | | $ | 144,808 |
| | |
|
| |
|
| |
|
|
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | | | | | | |
| | | (In thousands) | |
| Domestic | | $ | 9,556 | | $ | (17,816 | ) | $ | 20,764 | |
| Foreign | | | 115,889 | | | 104,489 | | | 129,793 | |
| | | $ | 125,445 | | $ | 86,673 | | $ | 150,557 | |
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 January 26, 2003
| | | Year Ended January 27, 2002
| | | Year Ended January 28, 2001
| |
| | | (in thousands) | |
Tax expense computed at Federal Statutory Rate | | $ | 52,695 | | | $ | 88,462 | | | $ | 50,683 | |
State income taxes (benefit), net of federal tax effect | | | (4,241 | ) | | | (531 | ) | | | 2,547 | |
Foreign tax rate differential | | | 23,222 | | | | (7,489 | ) | | | (3,747 | ) |
Research and experimental credit | | | (12,048 | ) | | | (4,736 | ) | | | (3,274 | ) |
Other | | | 130 | | | | 119 | | | | 130 | |
| | |
|
|
| |
|
|
| |
|
|
|
Provision for income taxes | | $ | 59,758 | | | $ | 75,825 | | | $ | 46,339 | |
| | |
|
|
| |
|
|
| |
|
|
|
| | | 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 | |
NVIDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—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 26, 2003
| | | January 27, 2002
| |
| | | (in thousands) | |
Net operating loss carryforwards | | $ | 57,868 | | | $ | 141,882 | |
Accruals and reserves, not currently deductible for tax purposes | | | 10,243 | | | | 202 | |
Property, equipment and intangible assets | | | 5,733 | | | | 226 | |
Research and other tax credit carryforwards | | | 87,265 | | | | 46,060 | |
| | |
|
|
| |
|
|
|
Total gross deferred tax assets | | | 161,109 | | | | 188,370 | |
Less valuation allowance | | | (106,663 | ) | | | (104,036 | ) |
| | |
|
|
| |
|
|
|
Net deferred tax assets | | $ | 54,446 | | | $ | 84,334 | |
| | |
|
|
| |
|
|
|
For the fiscal year ended
| | | 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 | ) |
As of January
27, 2002, the Company established30, 2005, we had a valuation allowance
on deferred tax assets of
$104.0 million, which was increased to $106.7 million for$190.6 million. Of the
fiscal year ended January 26, 2003. Thetotal valuation allowance,
for both fiscal years 2002 and 2003$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
realized, willrealization is sustained, would be accounted for as a credit to
stockholders’stockholders' equity.
The Company has not established a deferred tax liability on a cumulative total of approximately $344.6 million of undistributed earnings as of Of the remaining valuation allowance as of January 26, 200330, 2005, $19.9 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 million relates to certain non-U.S. subsidiariesstate 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 Company intendsextent realization of the deferred tax assets related to reinvest these earnings indefinitelycertain state tax benefits becomes probable, we would recognize an income tax benefit in operations outside the United States.
period such asset is more likely than not to be realized.
As of January
26, 2003, the Company30, 2005, we had a federal net operating loss carryforward of approximately
$157.1$274.4 million and cumulative state net operating loss carryforwards of approximately
$90.0$144.4 million. The federal net operating loss carryforward will expire beginning in fiscal
year 20232012 and the state net operating loss carryforwards will begin to expire in fiscal
year 20082007 according to the rules of
theeach particular state. As of January
26, 2003, the Company30, 2005, we had federal research and experimentation tax credit carryforwards of approximately
$49.0$72.6 million that will begin to expire in fiscal
year 2019.2008; and federal foreign tax credit carryforwards of approximately $0.2 million that will begin to expire in fiscal 2011. The research and experimentation tax credit carryforward attributable to states is approximately
$42.1$57.8 million, of which approximately
$40.0$55.6 million is attributable to the State of California and may be carried over indefinitely, and approximately
$2.1$2.2 million is attributable to various other states and will expire beginning in fiscal
year 20182016 according to the rules of
theeach particular state.
The Company hasWe have other California state tax credit carryforwards of approximately
$3.6$4.9 million that will begin to expire in fiscal
year 2010.2006. 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 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 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. 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 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.
Note 11—14 - Microsoft Agreement
On March 5, 2000, we entered into an agreement with Microsoft (the “Microsoft Agreement”)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 the Company’sour common stock, Microsoft has first and last rights of refusal to purchase the stock. In April 2000,
We were engaged with Microsoft
paid us $200.0 million under the Microsoft Agreement as an advance against processor purchases and for licensing our technology. This advance was fully utilized by purchases made by Microsoft through the quarter ended April 28, 2002 and Microsoft is currently paying in advance for processor chipsets sold to it.NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company was engaged withCorporation, or Microsoft, in discussions related to pricing and volumes of the Xbox chipset. These discussions and our agreementplatform processors. The Microsoft Agreement contemplated the use of a third party to resolve disputed matters, and on April 23, 2002 Microsoft submitted the matterpricing dispute to binding arbitration. On February 6, 2003, the CompanyNVIDIA and Microsoft announced that arbitration was over and the companies had settled all issues related to pricing of the Microsoft Xbox GPU and MCP chipset and have ended the arbitration between them.platform processors. In addition to resolving this pricing dispute, the Company haswe have agreed to collaborate with Microsoft on future cost reductions for the Xbox, (together “thetogether the Microsoft Settlement”).Settlement. As a result of the Microsoft Settlement, the balance of $35.1we recorded $40.4 million in payments that the Company had received from Microsoft in excess ofadditional revenue recognized on sales to Microsoft as of January 26, 2003 was not required to be returned to Microsoft and rather was left with the Company to credit towards future purchases. This amount is classified as “Customer Advances” within the balance of Accrued Liabilities in the Company’s consolidated balance sheet asfourth quarter of January 26,fiscal 2003.
Note 12—15 - Segment InformationThe Company operates in a single industry segment:
During the design, development and marketingsecond quarter of 3D graphics and media communication processors and related software for personal computers, or PCs, workstations and digital entertainment platforms. The Company’sfiscal 2005, our chief operating decision maker, the Chief Executive Officer, reviewsbegan reviewing financial information presented on a consolidatedan operating segment basis for purposes of making operating decisions and assessing financial performance. We now report three product-line operating segments: the GPU business, which is composed of products that support desktop PCs, notebook PCs and professional workstations; the MCP business, which is composed of NVIDIA nForce and Xbox products; and the WMP business, which supports handheld personal digital assistants and cellular phones. 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 million for fiscal 2005, 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.
We do not identify or allocate assets by operating segment. 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 company as a whole.
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
geographicalgeographic 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’our customers’ revenue is attributable to end customers
that are located in
the United States.a different location. The following
table summarizestables summarize information pertaining to
the Company’s operationsour revenue from customers based on invoicing address in different geographic
areas:| | | Year Ended January 26, 2003
| | Year Ended January 27, 2002
| | Year Ended January 28, 2001
|
| | | (in thousands) |
Revenue: | | |
U.S. and North America | | $ | 603,750 | | $ | 243,697 | | $ | 77,809 |
Asia Pacific | | | 1,232,942 | | | 1,071,726 | | | 556,088 |
Europe | | | 72,755 | | | 54,048 | | | 101,367 |
| | |
|
| |
|
| |
|
|
Total revenue | | $ | 1,909,447 | | $ | 1,369,471 | | $ | 735,264 |
| | |
|
| |
|
| |
|
|
| | | As of January 26, 2003
| | As of January 27, 2002
|
| | | (in thousands) |
Long-lived assets: | | |
U.S. and North America | | $ | 319,494 | | $ | 268,272 |
Asia Pacific | | | 1,658 | | | 462 |
Europe | | | 2,182 | | | 1,259 |
| | |
|
| |
|
|
Total long-lived assets | | $ | 323,334 | | $ | 269,993 |
| | |
|
| |
|
|
regions:
| | | Year Ended | | Year Ended | | Year Ended | |
| | | January 30, | | January 25, | | January 26, | |
| | | 2005 | | 2004 | | 2003 | |
| | | | | (In thousands) | | | |
Revenue: | | | |
| United States | | $ | 473,721 | | $ | 444,510 | | $ | 601,952 | |
| Other Americas | | | 11,045 | | | 6,359 | | | 1,798 | |
| China | | | 269,306 | | | 280,975 | | | 242,908 | |
| Taiwan | | | 883,346 | | | 834,511 | | | 862,238 | |
| Other Asia Pacific | | | 169,888 | | | 149,843 | | | 127,796 | |
| Europe | | | 202,727 | | | 106,747 | | | 72,755 | |
| Total revenue | | $ | 2,010,033 | | $ | 1,822,945 | | $ | 1,909,447 | |
| | | 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—STATEMENTS - (Continued)
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods, is summarized as follows:
| | | Year Ended January 26, 2003
| | | Year Ended January 27, 2002
| | | Year Ended January 28, 2001
| |
Revenue: | | | | | | | | | |
Customer A | | 15 | % | | 14 | % | | 4 | % |
Customer B | | 23 | % | | 9 | % | | — | |
Customer C | | 9 | % | | 10 | % | | 5 | % |
Customer D | | 17 | % | | 20 | % | | 25 | % |
Customer E | | 1 | % | | 7 | % | | 10 | % |
| | | As of January 26, 2003
| | | As of January 27, 2002
| |
Accounts Receivable: | | | | | | |
Customer A | | 12 | % | | 16 | % |
Customer B | | — | | | — | |
Customer C | | 17 | % | | 9 | % |
Customer D | | 18 | % | | 14 | % |
Customer E | | 1 | % | | 6 | % |
| | Year Ended | Year Ended | Year Ended |
| | January 30, | January 25, | January 26, |
| | 2005 | 2004 | 2003 |
Revenue: | | | |
| Customer A | 9% | 12% | 15% |
| Customer B | 13% | 15% | 23% |
| Customer C | 8% | 12% | 9% |
| 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 | As of |
| | January 30, | January 25, |
| | 2005 | 2004 |
Accounts Receivable: | | |
| Customer A | 13% | 15% |
| Customer B | 5% | -- |
| Customer C | 9% | 18% |
| Customer D | 14% | 21% |
Note 13—16 - Quarterly Summary (Unaudited)| | | Fiscal 2003 Quarters Ended
|
| | | Jan. 26, 2003
| | Oct. 27, 2002
| | | July 28, 2002
| | April 28, 2002
|
| | | (in thousands, except per share data) |
Statement of Operations Data: | | | | | | | | | | | | | |
Revenue | | $ | 468,953 | | $ | 430,304 | | | $ | 427,285 | | $ | 582,905 |
Cost of revenue | | | 301,442 | | | 322,106 | | | | 327,983 | | | 375,740 |
Cost of revenue related to stock option exchange | | | — | | | 6,164 | | | | — | | | — |
Gross profit | | | 167,511 | | | 102,034 | | | | 99,302 | | | 207,165 |
Net income (loss) | | | 50,936 | | | (48,636 | ) | | | 5,254 | | | 83,245 |
Basic net income (loss) per share | | $ | .32 | | $ | (.32 | ) | | $ | .03 | | $ | .55 |
Diluted net income (loss) per share | | $ | .30 | | $ | (.32 | ) | | $ | .03 | | $ | .47 |
| | | Fiscal 2002
Quarters Ended
|
| | | Jan. 27, 2002
| | Oct. 28, 2001
| | July 29, 2001
| | April 29, 2001
|
| | | | | As Restated
| | As Reported
| | As Restated
| | As Reported
| | As Restated
| | As Reported
|
| | | (in thousands, except per share data) |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 503,688 | | $ | 364,976 | | $ | 370,241 | | $ | 259,875 | | $ | 260,259 | | $ | 240,932 | | $ | 240,932 |
Cost of revenue | | | 314,377 | | | 231,508 | | | 231,698 | | | 157,636 | | | 156,571 | | | 146,712 | | | 149,295 |
Gross profit | | | 189,311 | | | 133,468 | | | 138,543 | | | 102,239 | | | 103,688 | | | 94,220 | | | 91,637 |
Net income | | | 76,033 | | | 41,315 | | | 44,661 | | | 32,926 | | | 33,576 | | | 26,650 | | | 25,867 |
Basic net income per share | | $ | .52 | | $ | .29 | | $ | .31 | | $ | .23 | | $ | .24 | | $ | .19 | | $ | .19 |
Diluted net income per share | | $ | .43 | | $ | .24 | | $ | .26 | | $ | .19 | | $ | .20 | | $ | .16 | | $ | .16 |
| | | 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 | |
| | | | | | | | | | | | | | |
| | | 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 | |
NVIDIA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)In January 2002, the Audit Committee of the Company’s Board of Directors initiated a review of certain financial matters at the request of, and in cooperation with, the staff of the Securities & Exchange Commission. Based on the findings of the review, the Company’s consolidated financial statements for the first three quarters of fiscal 2002 and for the fiscal years 2001 and 2000 were restated. In addition, the financial results announced by the Company on February 14, 2002, for the fourth quarter of fiscal 2002 were also impacted (together, the “Restatement”). As a result of the Restatement, total net income for the three year period increased by approximately $1.3 million.
As a result of the Restatement, for fiscal 2002 total revenue decreased $1.9 million, cost of revenue decreased $3.3 million, operating expenses increased by $1.6 million, resulting in a decrease in net income of less than $0.2 million. The quarterly financial statements below reflect the following adjustments made to fiscal 2002 as a result of the Restatement:
Of the $1.9 million in adjustments to revenue in fiscal 2002, $0.4 million, $0.3 million and $1.2 million related to adjustments to increase the accrual for a customer rebate program in the second quarter, third quarter and fourth quarter, respectively. In addition, the Restatement included a $5.0 million adjustment that deferred revenue related to sales to Microsoft of our Xbox media communications processor from the third quarter to the fourth quarter, which had no impact on total fiscal 2002 revenue.
Of the $3.3 million in adjustments to cost of revenue in fiscal 2002, $2.5 million, $0.2 million and $2.3 million primarily related to adjustments to decrease the work-in-process inventory scrap reserve in the first quarter, third quarter and fourth quarter, respectively, offset by $1.2 million primarily related to an adjustment to increase the work-in-process inventory scrap reserve in the second quarter as well as other miscellaneous adjustments in various quarters that totaled approximately $0.5 million.
Of the $1.6 million in adjustments to operating expenses in fiscal 2002, $0.8 million and $1.7 million primarily related to adjustments to increase our payroll accrual in the first quarter and fourth quarter, respectively, offset by $0.5 million and $0.4 million to decrease our payroll accrual in the second quarter and third quarter, respectively. In addition, the Restatement included a reclassification of approximately $0.6 million from the fourth quarter to the first quarter to correct the amortization of a support contract as well as other miscellaneous offsetting adjustments in various quarters, none of which had a significant impact on total fiscal 2002 operating expenses.
Note 14—Subsequent Events (Unaudited)
On March 26, 2003, the Company announced that it has formed a multi-year strategic alliance under which IBM will manufacture the Company’s next-generation GeForce GPUs. As part of the agreement, the Company will gain access to IBM’s suite of foundry services and manufacturing technologies, including power-efficient copper wiring, and a roadmap that is designed to lead to 65nm (nanometer; a billionth of a meter) in the next several years, giving the Company valuable tools to advance its GPUs. IBM plans to begin manufacturing the next-generation GeForce graphics processor this summer at IBM’s plant in East Fishkill, New York.
In April 2003, subsequent to receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be initiated, the Company reached an agreement in principle with the SEC staff that would resolve the SEC’s investigation of the Company in matters related to the restatement. The agreement is subject to final approval of the SEC. Under the terms of the agreement in principle, the Company, without admitting or denying liability or wrongdoing, would agree to an administrative cease and desist order prohibiting any future violations of certain non-fraud financial reporting, books and records, and internal control provisions of the federal securities laws. The Company would not be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the agreement may take several weeks or months to complete. Further, there can be no assurance that the agreement will be approved by the SEC.
NVIDIA CORPORATION AND SUBSIDIARIES
SCHEDULE II—II - VALUATION AND QUALIFYING ACCOUNTS
Description
| | Balance at Beginning of Period
| | Additions(3)
| | Deductions
| | | Balance at End of Period
|
| | | (in thousands) |
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 |
| | |
|
| |
|
| |
|
|
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|
Year ended January 27, 2002 | | | | | | | | | | | | | |
Allowance for sales returns and allowances | | $ | 7,092 | | $ | 17,171 | | $ | 8,677 | (1) | | $ | 15,586 |
| | |
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|
|
| |
|
|
Allowance for doubtful accounts | | $ | 1,311 | | $ | 2,628 | | $ | 1,446 | (2) | | $ | 2,493 |
| | |
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|
Year ended January 28, 2001 | | | | | | | | | | | | | |
Allowance for sales returns and allowances | | $ | 4,092 | | $ | 12,436 | | $ | 9,436 | (1) | | $ | 7,092 |
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|
|
| |
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|
Allowance for doubtful accounts | | $ | 2,351 | | $ | 1,985 | | $ | 3,025 | (2) | | $ | 1,311 |
| | |
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| |
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| |
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|
| |
|
|
Description | | Balance at Beginning of Period | | Additions (3) | | Deductions | | Balance at End of Period | |
| | | (In thousands) | |
| Year ended January 30, 2005 | | | | | | | | | | | | | |
| Allowance for sales returns and allowances | | $ | 9,421 | | $ | 22,463 | | $ | (20,197) (1 | ) | $ | 11,687 | |
| Allowance for doubtful accounts | | $ | 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) 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.
EXHIBIT INDEX
(1)Exhibit Number | Description of Document |
| |
Represents amounts written off against2.1 | 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 allowanceCompany’s Annual Report on Form 10-K for sales returns.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). |
(2) Exhibit Number | Description of Document |
| 10.10+ | Represents uncollectible accounts written off against1998 Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee Service), as amended (filed as Exhibit 10.2 to the allowanceCompany’s Quarterly Report on Form 10-Q for doubtful accounts.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. |
(3) | | Allowances for sales returns are charged as a reduction to revenue. Allowances for doubtful accounts are charged to expenses. |
* Filed herewith.
+ Management contract, compensatory plan or arrangement.
# The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of NVIDIA Corporation under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 25, 2003.March 22, 2005. NVIDIA Corporation
|
|
By:
| | /s/ JEN-HSUN HUANG
|
| | Jen-Hsun Huang
President and Chief Executive Officer
|
NVIDIA Corporation
By /s/ JEN-HSUN HUANG_______
Jen-Hsun Huang
President and Chief Executive Officer
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-factattorneys-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 substitute,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 |
| | Title
|
| | Date
|
|
/s/ JEN-HSUN HUANG
Jen-Hsun Huang
| | President, Chief Executive Officer | |
| /s/ JEN-HSUN HUANG | and Director (Principal
Executive | |
| Jen-Hsun Huang | Officer) | March 22, 2005 |
| | April 25, 2003
|
|
/s/ MARVIN D. BURKETT
Marvin D. Burkett
| | |
| /s/ MARVIN D. BURKETT | Chief Financial Officer (Principal | |
| Marvin D. Burkett | Financial and Accounting Officer) | March 22, 2005 |
| | April 25, 2003
|
|
/s/ TENCH COXE
Tench Coxe
| | Director
|
| /s/ TENCH COXE | | April 25, 2003
|
| Tench Coxe | Director | March 22, 2005 |
| | |
| | |
/s/ JAMESSTEVEN CHU | | |
| Steven Chu | Director | March 17, 2005 |
| | |
| | |
/s/ JAMES C. GAITHER
GAITHER | | |
| James C. Gaither | Director | March 22, 2005 |
| | Director
|
| | April 25, 2003
|
| /s/ HARVEY C. JONES | | March 21, 2005 |
/s/ HARVEY C. JONES
Harvey C. Jones | Director | |
| Signature | Title | Date |
| | Director
|
| | April 25, 2003
|
| /s/ WILLIAM J. MILLER | | |
/s/ WILLIAM J. MILLER
William J. Miller | Director | March 21, 2005 |
| | Director
|
| | April 25, 2003
|
|
/s/ A. BROOKE SEAWELL
BROOKE SEAWELL | | |
| A. Brooke Seawell | Director | March 22, 2005 |
| | Director
|
| | April 25, 2003
|
| /s/ MARK A. STEVENS | | |
/s/ MARK A. STEVENS
Mark A. Stevens | Director | March 22, 2005 |
| | Director
| | April 25, 2003
|
CertificationsEXHIBIT INDEXI, Jen-Hsun Huang, certify that:
Exhibit Number | Description of Document |
| | 1. | | I have reviewed this annual report on Form 10-K of NVIDIA Corporation; |
| 2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. | | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: April 25, 2003
|
/s/ JEN-HSUN HUANG
|
Jen-Hsun Huang
President and Chief Executive Officer
|
I, Marvin D. Burkett, certify that:
| 2.1 | 1. | | I have reviewed this annual report on Form 10-K of NVIDIA Corporation; |
| 2. | | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4. | | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: April 25, 2003
|
/s/ MARVIN D. BURKETT
|
Marvin D. Burkett
Chief Financial Officer
|
EXHIBIT INDEX
Exhibit
Number
| | Description of Document
|
|
2.1(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(2)
3.1 | | Amended and Restated Certificate of Incorporation.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). |
|
3.3(3)
3.2 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation.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). |
3.3(4)
4.1 | | Bylaws, as amended.
|
|
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). |
4.2(5)
4.3 | | Specimen Stock Certificate.
|
|
4.3(6)
| | 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, 1998.1998 (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(7)
4.4 | | Second Amendment to Second Amended and Restated Investors’ Rights Agreement, dated
April 12, 1999.1999 (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). |
|
4.5(8)
10.1 | | Indenture dated October 12, 2000 between NVIDIA Corporation and Chase Manhattan Bank and Trust Company, National Association, as Trustee.
|
|
4.6(9)
| | Supplemental Indenture No. 1, dated as of October 12, 2000 between NVIDIA Corporation and Chase Manhattan Bank and Trust Company, National Association as Trustee.
|
|
10.1(10)
| | Form of Indemnity Agreement between NVIDIA Corporation and each of its directors
and officers.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
10.2*+ | | 1998 Equity Incentive Plan, as amended. |
|
10.3(11)
10.3 + | | Form of Incentive Stock Option Agreement under the
1998 Equity Incentive Plan.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(12)
10.4+ | | Form of Nonstatutory Stock Option Agreement under the
1998 Equity Incentive Plan.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). |
10.5(13)
10.6+ | | 1998 Employee Stock Purchase Plan, as amended.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). |
|
10.6(14)
10.7+ | | Form of Employee Stock Purchase Plan Offering, as amended.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). |
|
10.7(15)
10.8+ | | 1998 Non-Employee Directors’ Stock Option Plan.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 Number | Description of Document |
10.8(16)
10.10+ | | Form of Nonstatutory
1998 Non-Employee Directors’ Stock Option Agreement underPlan (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). |
|
10.9(17)
10.12+ | | Form of Nonstatutory Stock Option Agreement under the 1998 Non-Employee Directors’ Stock Option Plan (Annual Grant).
|
|
10.10(18)
| | Form of Nonstatutory Stock Option Agreement under the 1998 Non-Employee Directors’ Stock Option Plan (Committee Grant).
|
|
10.11
| | 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). |
|
10.12(19)
10.13 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A.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). |
|
10.13(20)
10.14 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B.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). |
|
10.14(21)
10.15 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C.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). |
|
10.15(22)
10.16 | | Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D. |
|
10.16(23)
| | Employment Agreement between NVIDIA Corporation and David Shannon, dated July 12, 2002.
|
|
10.17(24)
| | Employment Agreement between NVIDIA Corporation and Marvin Burkett, dated
August 12, 2002.
|
|
21.1
| | List of Registrant’s Subsidiaries.
|
|
23.1
| | Consent of KPMG LLP.
|
|
99.1
| | Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.
|
|
99.2
| | Certification of Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.
|
(1) | | Previously filedC (filed as Exhibit 2.110.4 to our Annual Report on Form 10-K405, forAmendment No. 1 to the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein. |
(2) | | Previously filed as Exhibit 4.1 to ourCompany’s Registration Statement on Form S-8 filed on March 23, 1999 (No. 333-74905)S-3 (File No. 333-33560) and incorporated herein by reference herein.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. |
(3) | | Previously filed as Exhibit 3.4 to our Quarterly Report on Form 10-Q, for the quarter ended July 28, 2002 filed on September 10, 2002 (No. 000-23985) and incorporated by reference herein. |
(4) | | Previously filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q, for the quarter ended July 29, 2001 filed on September 10, 2001 (No. 000-23985) and incorporated by reference herein. |
(5) | | Previously filed as Exhibit 4.2 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(6) | | Previously filed as Exhibit 4.3 to our Registration Statement on Form S-1/A filed on Nov. 20, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(7) | | Previously filed as Exhibit 4.4 to our Quarterly Report on Form 10-Q, for the quarter ended May 2, 1999 filed on June 15, 1999 (No. 000-23985) and incorporated by reference herein. |
(8) | | Previously filed as Exhibit 4.5 to our Annual Report on Form 10-K405, for the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein. |
(9) | | Previously filed as Exhibit 4.6 to our Annual Report on Form 10-K405, for the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein. |
(10) | | Previously filed as Exhibit 10.1 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(11) | | Previously filed as Exhibit 10.3 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(12) | | Previously filed as Exhibit 10.4 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(13) | | Previously filed as Exhibit 99.4 to our Registration Statement on Form S-8 filed on December 8, 2000 (No. 333-51520), and incorporated by reference herein. |
(14) | | Previously filed as Exhibit 99.5 to our Registration Statement on Form S-8 filed on September 3, 2002 (No. 333-100010), and incorporated by reference herein. |
(15) | | Previously filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q/A, for the quarter ended April 28, 2002 filed on July 3, 2002 (No. 000-23985) and incorporated by reference herein. |
(16) | | Previously filed as Exhibit 10.8 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(17) | | Previously filed as Exhibit 10.9 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(18) | | Previously filed as Exhibit 10.12 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(19) | | Previously filed as Exhibit 10.1 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(20) | | Previously filed as Exhibit 10.2 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(21) | | Previously filed as Exhibit 10.3 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(22) | | Previously filed as Exhibit 10.4 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(23) | | Previously filed as Exhibit 10.19 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein. |
(24) | | Previously filed as Exhibit 10.20 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein. |
* Filed herewith.
+ Management contract, compensatory plan or arrangement.
# The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of NVIDIA Corporation under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
