Delaware | 94-3177549 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) |
and Registrant’s Telephone Number, including Area Code)
principal executive offices)
Page | |||||
Item 1. | |||||
a) Condensed Consolidated Statements of Income for the three | 3 | ||||
4 | |||||
5 | |||||
6 | |||||
30 | |||||
31 | |||||
| |||||
Item 1A. | |||||
46 | |||||
| |||||
(In thousands)
(Unaudited)
July 30, 2006 | January 29, 2006 | |||||||
(As Restated) (1) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 388,423 | $ | 551,756 | ||||
Marketable securities | 462,744 | 398,418 | ||||||
Accounts receivable, net | 459,636 | 318,186 | ||||||
Inventories | 378,661 | 254,870 | ||||||
Prepaid expenses and other current assets | 34,143 | 24,387 | ||||||
Deferred income taxes | 2,682 | 2,682 | ||||||
Total current assets | 1,726,289 | 1,550,299 | ||||||
Property and equipment, net | 177,144 | 178,152 | ||||||
Deposits and other assets | 37,527 | 27,477 | ||||||
Goodwill | 203,657 | 145,317 | ||||||
Intangible assets, net | 29,428 | 15,421 | ||||||
Deferred income taxes, non-current | 9,784 | 38,021 | ||||||
$ | 2,183,829 | $ | 1,954,687 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 230,916 | $ | 179,395 | ||||
Accrued liabilities | 274,128 | 259,264 | ||||||
Total current liabilities | 505,044 | 438,659 | ||||||
Other long-term liabilities | 24,237 | 20,036 | ||||||
Commitments and contingencies - see Note 12 and Note 14 | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock | — | — | ||||||
Common stock | 373 | 360 | ||||||
Additional paid-in capital | 1,117,121 | 965,604 | ||||||
Deferred compensation | — | (3,604 | ) | |||||
Treasury stock | (387,120 | ) | (212,142 | ) | ||||
Accumulated other comprehensive loss, net | (2,374 | ) | (1,957 | ) | ||||
Retained earnings | 926,548 | 747,731 | ||||||
Total stockholders’ equity | 1,654,548 | 1,495,992 | ||||||
$ | 2,183,829 | $ | 1,954,687 | |||||
See accompanying notes to condensed consolidated financial statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | |||||||
April 29, 2007 | April 30, 2006 | ||||||
Revenue | $ | 844,280 | $ | 681,807 | |||
Cost of revenue | 464,142 | 393,134 | |||||
Gross profit | 380,138 | 288,673 | |||||
Operating expenses: | |||||||
Research and development | 158,321 | 123,202 | |||||
Sales, general and administrative | 80,571 | 63,962 | |||||
Total operating expenses | 238,892 | 187,164 | |||||
Income from operations | 141,246 | 101,509 | |||||
Interest income | 13,208 | 8,808 | |||||
Other expense, net | (665 | ) | (245 | ) | |||
Income before income tax expense | 153,789 | 110,072 | |||||
Income tax expense | 21,530 | 18,712 | |||||
Income before change in accounting principle | 132,259 | 91,360 | |||||
Cumulative effect of change in accounting principle, net of tax | - | 704 | |||||
Net income | $ | 132,259 | $ | 92,064 | |||
Basic income per share: | |||||||
Income before change in accounting principle | $ | 0.37 | $ | 0.26 | |||
Cumulative effect of change in accounting principle | - | - | |||||
Basic net income per share | $ | 0.37 | $ | 0.26 | |||
Shares used in basic per share computation | 360,831 | 347,937 | |||||
Diluted income per share: | |||||||
Income before change in accounting principle | $ | 0.33 | $ | 0.23 | |||
Cumulative effect of change in accounting principle | - | 0.01 | |||||
Diluted net income per share | $ | 0.33 | $ | 0.24 | |||
Shares used in diluted per share computation | 398,866 | 389,428 | |||||
Three Months Ended | Six Months Ended | |||||||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||||||||||
(As Restated) (1) | (As Restated) (1) | |||||||||||||||
Revenue | $ | 687,519 | $ | 574,812 | $ | 1,369,326 | $ | 1,158,658 | ||||||||
Cost of revenue (A) | 395,391 | 357,437 | 788,525 | 731,422 | ||||||||||||
Gross profit | 292,128 | 217,375 | 580,801 | 427,236 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development (A) | 127,257 | 87,113 | 250,459 | 174,948 | ||||||||||||
Sales, general and administrative (A) | 69,055 | 52,669 | 133,017 | 95,886 | ||||||||||||
Total operating expenses | 196,312 | 139,782 | 383,476 | 270,834 | ||||||||||||
Operating income | 95,816 | 77,593 | 197,325 | 156,402 | ||||||||||||
Interest income | 8,818 | 4,867 | 17,626 | 8,762 | ||||||||||||
Interest expense | (6 | ) | (2 | ) | (7 | ) | (12 | ) | ||||||||
Other income (expense), net | (106 | ) | 354 | (350 | ) | 842 | ||||||||||
Income before income tax expense | 104,522 | 82,812 | 214,594 | 165,994 | ||||||||||||
Income tax expense | 17,769 | 8,979 | 36,481 | 26,639 | ||||||||||||
Income before change in accounting principle | 86,753 | 73,833 | 178,113 | 139,355 | ||||||||||||
Cumulative effect of change in accounting principle | — | — | 704 | — | ||||||||||||
Net income | $ | 86,753 | $ | 73,833 | $ | 178,817 | $ | 139,355 | ||||||||
Basic net income per share: | ||||||||||||||||
Prior to cumulative effect of change in accounting principle | $ | 0.25 | $ | 0.22 | $ | 0.51 | $ | 0.41 | ||||||||
Cumulative effect of change in accounting principle | — | — | — | — | ||||||||||||
Basic net income per share | $ | 0.25 | $ | 0.22 | $ | 0.51 | $ | 0.41 | ||||||||
Shares used in basic per share computation | 350,244 | 337,886 | 349,090 | 337,590 | ||||||||||||
Diluted net income per share: | ||||||||||||||||
Prior to cumulative effect of change in accounting principle | $ | 0.22 | $ | 0.20 | $ | 0.46 | $ | 0.39 | ||||||||
Cumulative effect of change in accounting principle | — | — | — | — | ||||||||||||
Diluted net income per share | $ | 0.22 | $ | 0.20 | $ | 0.46 | $ | 0.39 | ||||||||
Shares used in diluted per share computation | 385,589 | 361,674 | 387,485 | 361,287 | ||||||||||||
(A) Results for the three and six months ended July 30, 2006 and July 31, 2005 include stock-based compensation expense, net of associated payroll taxes, as follows (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | ||||||||||
(As Restated) | (As Restated) | ||||||||||||
Cost of revenue | $ | 1,746 | $ | 159 | $ | 2,973 | $ | 451 | |||||
Research and development | 16,588 | 1,299 | 31,014 | 3,221 | |||||||||
Sales, general and administrative | 10,532 | 986 | 17,104 | (3,855 | ) |
See accompanying notesNotes to condensed consolidated financial statements.
Condensed Consolidated Financial Statements.
April 29, 2007 | January 28, 2007 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 678,951 | $ | 544,414 | |||
Marketable securities | 628,073 | 573,436 | |||||
Accounts receivable, net | 471,519 | 518,680 | |||||
Inventories | 332,635 | 354,680 | |||||
Prepaid expenses and other current assets | 43,055 | 40,560 | |||||
Total current assets | 2,154,233 | 2,031,770 | |||||
Property and equipment, net | 271,190 | 260,828 | |||||
Goodwill | 291,077 | 301,425 | |||||
Intangible assets, net | 50,914 | 45,511 | |||||
Deposits and other assets | 33,454 | 35,729 | |||||
$ | 2,800,868 | $ | 2,675,263 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 334,046 | $ | 272,075 | |||
Accrued liabilities | 289,821 | 366,732 | |||||
Total current liabilities | 623,867 | 638,807 | |||||
Other long-term liabilities | 81,107 | 29,537 | |||||
Commitments and contingencies - see Note 13 | |||||||
Stockholders’ equity: | |||||||
Preferred stock | — | — | |||||
Common stock | 393 | 388 | |||||
Additional paid-in capital | 1,377,513 | 1,295,650 | |||||
Treasury stock, at cost | (612,120 | ) | (487,120 | ) | |||
Accumulated other comprehensive income, net | 1,284 | 1,436 | |||||
Retained earnings | 1,328,824 | 1,196,565 | |||||
Total stockholders' equity | 2,095,894 | 2,006,919 | |||||
$ | 2,800,868 | $ | 2,675,263 | ||||
Three Months Ended | ||||||
April 29, 2007 | April 30, 2006 | |||||
Cash flows from operating activities: | ||||||
Net income | $ | 132,259 | $ | 92,064 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Stock-based compensation expense | 37,405 | 24,111 | ||||
Depreciation and amortization | 31,334 | 24,031 | ||||
Gross tax benefit from stock-based compensation | - | (7,330 | ) | |||
Other | 60 | 153 | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | 47,847 | (64,135 | ) | |||
Inventories | 22,840 | (87,958 | ) | |||
Prepaid expenses and other current assets | (2,642 | ) | (3,332 | ) | ||
Deposits and other assets | 2,275 | (3,406 | ) | |||
Accounts payable | 61,344 | 107,729 | ||||
Accrued liabilities and other long-term liabilities | (26,233) | (32,391 | ) | |||
Net cash provided by operating activities | 306,489 | 49,536 | ||||
Cash flows from investing activities: | ||||||
Purchases of marketable securities | (268,211 | ) | (92,344 | ) | ||
Proceeds from sales and maturities of marketable securities | 214,775 | 22,523 | ||||
Purchases of property and equipment and intangible assets | (37,627 | ) | (67,026 | ) | ||
Acquisition of businesses, net of cash and cash equivalents | - | (20,667 | ) | |||
Net cash used in investing activities | (91,063 | ) | (157,514 | ) | ||
Cash flows from financing activities: | ||||||
Payments for stock repurchases | (125,000 | ) | (50,000 | ) | ||
Proceeds from issuance of common stock under employee stock plans | 44,111 | 86,655 | ||||
Gross tax benefit from stock-based compensation | - | 7,330 | ||||
Net cash provided by (used in) financing activities | (80,889 | ) | 43,985 | |||
Change in cash and cash equivalents | 134,537 | (63,993 | ) | |||
Cash and cash equivalents at beginning of period | 544,414 | 551,756 | ||||
Cash and cash equivalents at end of period | $ | 678,951 | $ | 487,763 | ||
Supplemental disclosures of cash flow information: | ||||||
Cash paid for income taxes, net | $ | 1,916 | $ | 24,645 | ||
Other non-cash activities: | ||||||
Unrealized gains/(losses) from marketable securities | $ | (213 | ) | $ | 824 | |
Deferred stock-based compensation | $ | - | $ | 3,604 |
Six Months Ended | ||||||||
July 30, 2006 | July 31, 2005 | |||||||
(As Restated) (1) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 178,817 | $ | 139,355 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Cumulative effect of change in accounting principle | (704 | ) | — | |||||
In-process research and development | 602 | — | ||||||
Depreciation and amortization | 48,239 | 49,667 | ||||||
Deferred income taxes | 28,237 | — | ||||||
Stock-based compensation | 51,953 | 5,105 | ||||||
Bad debt expense (recovery) | 15 | (477 | ) | |||||
Excess tax benefits from stock-based compensation | (14,362 | ) | — | |||||
Other | 36 | 85 | ||||||
Changes in operating assets and liabilities net of acquisitions: | ||||||||
Accounts receivable | (132,259 | ) | (48,637 | ) | ||||
Inventories | (118,315 | ) | 14,563 | |||||
Prepaid expenses and other current assets | (8,883 | ) | (4,937 | ) | ||||
Deposits and other assets | (4,399 | ) | (6,943 | ) | ||||
Accounts payable | 32,508 | (17,176 | ) | |||||
Accrued liabilities | 5,913 | 6,321 | ||||||
Net cash provided by operating activities | 67,398 | 136,926 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of marketable securities | (159,034 | ) | (133,214 | ) | ||||
Sales and maturities of marketable securities | 94,293 | 115,614 | ||||||
Purchases of property and equipment and intangible assets | (40,778 | ) | (42,689 | ) | ||||
Acquisition of businesses, net of cash and cash equivalents | (67,026 | ) | — | |||||
Net cash used in investing activities | (172,545 | ) | (60,289 | ) | ||||
Cash flows from financing activities: | ||||||||
Common stock issued under employee stock plans | 102,430 | 55,895 | ||||||
Stock repurchase | (174,978 | ) | (98,509 | ) | ||||
Excess tax benefits from stock-based compensation | 14,362 | — | ||||||
Other | — | (365 | ) | |||||
Net cash used in financing activities | (58,186 | ) | (42,979 | ) | ||||
Change in cash and cash equivalents | (163,333 | ) | 33,658 | |||||
Cash and cash equivalents at beginning of period | 551,756 | 208,512 | ||||||
Cash and cash equivalents at end of period | $ | 388,423 | $ | 242,170 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | — | $ | 12 | ||||
Cash paid for income taxes, net | $ | 24,645 | $ | 1,838 | ||||
Other non-cash activities: | ||||||||
Assets acquired by assuming related liabilities | $ | 13,506 | — | |||||
Application of customer advance to accounts receivable | $ | — | $ | 10,000 | ||||
Unrealized losses from marketable securities | $ | 697 | $ | 944 | ||||
Deferred compensation | $ | 3,604 | $ | 74 | ||||
See accompanying notesNotes to condensed consolidated financial statements.
Condensed Consolidated Financial Statements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, or SAB No. 108,Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We will be required to adopt the provisions of SAB No. 108 in our fiscal year 2008. We do not believe the adoption of SAB No. 108 will have a material impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We will be required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April 29, 2007. We do not believe the adoption of SFAS No. 157 will have a material impact on our consolidated financial position, results of operations or cash flows.
Note 2 - Restatement of Consolidated Financial Statements, Audit Committee and Company Findings
In May 2006, following media reports of stock option accounting investigations at other companies, the management of NVIDIA decided to conduct a review of stock option grants made by NVIDIA. Management advised our Board of Directors of the review at a regularly-scheduled meeting of the Board of Directors on May 25, 2006. The Board of Directors directed management to report its findings to the Audit Committee. Management presented its findings to the Audit Committee in late June 2006. Following that presentation, the Audit Committee determined that it should perform its own independent review of stock option grants made by NVIDIA. The Audit Committee, with the assistance of outside legal counsel, began its review on approximately June 29, 2006.
The Audit Committee’s review was completed on November 13, 2006 when the Audit Committee reported its findings to the full Board of Directors. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. As part of its review, the Audit Committee determined whether the correct measurement dates had been used under applicable accounting principles for these options. The measurement date means the date on which the option is deemed granted under applicable accounting principles, namely Accounting Principles Board Opinion No. 25, or APB 25,Accounting for Stock Issued to Employees and related interpretations, and is the first date on which all of the following are known: (1) the individual employee who is entitled to receive the option grant, (2) the number of options that an individual employee is entitled to receive, and (3) the option’s exercise price.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes. These errors resulted primarily from our use during our fiscal years 2000, 2001 and 2002, of certain date selection methods discussed below which resulted in employees receiving options with stated exercise prices lower than the market prices as measured based upon the actual grant dates. We ceased using such practices beginning in our fiscal year 2003. The Audit Committee found that, beginning in our fiscal year 2003, we improved our stock option grant processes and have generally granted and priced our employee stock options in an objective and consistent manner since that time. However, for one Company-wide annual stock option grant we made in fiscal 2004, weincome tax expense did not finalize the number of options allocated to each employee as of the stated grant date in May 2003, which resulted in stock-based compensation charges due to the change in the measurement date to the date the grants were finalized. The Audit Committee’s review did not identify any additional stock-based compensation charges from measurement date issues subsequent to that fiscal 2004 grant.
In accordance with APB 25, with respect to periods through January 29, 2006, we should have recorded stock-based compensation expense to the extent that the fair market value of our common stock on the correct measurement date exceeded the exercise price of each option granted. For periods commencing January 30, 2006 (the beginning of our fiscal year 2007), we record stock-based compensation expense in accordance with Statement of Financial Accounting Standards No. 123(R) (revised), or SFAS No. 123(R),Share-Based Payment. Changes in measurement dates have also contributed to incremental fair value of options under SFAS No. 123. As of the end of our fiscal year 2006, the unamortized incremental fair value charges resulting from the Audit Committee’s review were approximately $13.0 million, of which approximately $9.0 million are expected to be amortized in our fiscal year 2007.
As a result of the measurement date errors identified from the Audit Committee’s review, through January 29, 2006, we recorded aggregate non-cash stock-based compensation charges of $127.4 million, net of related tax effects. These charges were based primarily on APB 25 (intrinsic value-based) charges and associated payroll taxes of $199.6 million on a pre-tax basis, which are being amortized over the vesting term of the stock options in accordance with Financial Accounting Standards Board Interpretation No. 28, or FIN 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. We have amortized a substantial portion of these charges to expense during our fiscal years 2000 to 2006. If an option is forfeited prior to vesting, we reverse both the charges amortized to expense in prior periods as well as any remaining unamortized deferred stock-based compensation associated with the forfeited options. Accordingly, our net stock-based compensation charges amortized to our statement of income are lower than the aggregate stock-based compensation charges based on APB 25 (intrinsic-value based). As of January 29, 2006, the remaining APB 25 (intrinsic value-based) unamortized deferred stock-based compensation related to the errors identified during the review was approximately $3.0 million.
The types of errors we identified were as follows:
Improper Measurement Dates forCompany-Wide Annual or Retention Stock Option Grants. We determined that, in connection with certain annual or retention stock option grants that we made to employees during our fiscal years 2000, 2001, 2002, 2003 and 2004, the final number of shares that an individual employee was entitled to receive was not determined and/or the proper approval of the related stock option grant had not been given until after the stated grant date. Therefore, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Years 2001 and 2002. In connection with stock option grants that we made to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during fiscal years 2001 and 2002, our practice was to grant stock options with an exercise price based upon the lowest closing price of our common stock in the last few days of the month of hire or the last few days of any subsequent month in the quarter of hire. The selection of the grant date of the related option grants would be made at the end of the fiscal quarter and was based on achieving the lowest exercise price for the affected employees. As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Year 2000. In connection with certain stock option grants to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during a portion of fiscal year 2000, our practice was to delay the selection of the related grant dates until the end of a two-month period in the fiscal quarter during which the employees who received the grants began their employment with NVIDIA. As a result of this practice, the exercise price of the related option grants was not determined until subsequent to the stated grant date. We also determined that, during fiscal year 2000, we generally set the grant date and exercise price of employee option grants for new hires and promotions at the lowest price of the last few business days of the month of their hire or promotion (or of the following month in certain two-month periods that were chosen for an indeterminate reason). As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options. In addition, we also determined that the exercise price or the number of options to be granted had not been determined, or the proper approval had not been given, for various other miscellaneous option grants during fiscal year 2000 until after the stated grant date - resulting in new measurement dates for accounting purposes for the related options.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Other Issues Identified.We also identified instances where stock option grants did not comply with applicable terms and conditions of the stock plans from which the grants were issued. For example, two grants were made to officers of NVIDIA by the chief executive officer under delegated authority; however, under the terms of the applicable plan, the option grant should have been made by our Board or the Compensation Committee. There were also instances where (1) option grants were made to a small group of employees who joined NVIDIA pursuant to a business combination, and to a few other employees in certain instances, with stated exercise prices below the fair market value of our common stock on the actual measurement date of the related grants; and (2) option grants were made to a few individuals who were contractors rather than employees, without recording the appropriate accounting charges. The accounting impact of these items was cumulatively less than $6.0 million. In addition, the Audit Committee did not find any evidence that these violations were committed for improper purposes.
The Audit Committee carefully considered the involvement of current members of management in the option grant process and concluded that the evidence did not give rise to any concern about the integrity of any current officer or director of NVIDIA. The Audit Committee also found that the accounting errors and improper practices brought to light during their review were not motivated by any intent to mislead investors, improve NVIDIA’s reported financial results, or obtain any personal benefit. Based on its findings, the Audit Committee was unable to reach any conclusion regarding the integrity of former officers and employees.
As a result of the errors we identified, we have restated our historical financial statements from our fiscal year 2000 through our fiscal year 2006 to record $127.4 million of charges related to stock-based compensation and associated payroll tax expense, net of related income tax effects. These errors resulted in after-tax charges of $1.4 million, $11.7 million and $25.8 million for our fiscal years 2006, 2005 and 2004, respectively. Additionally, the cumulative effect of the related after-tax charges for periods prior to our fiscal year ended January 25, 2004 was $88.4 million. These additional stock-based compensation expense charges were non-cash and had no impact on our reported revenue, cash, cash equivalents or marketable securities for each of the restated periods.
As part of the restatement, for the three and six month period ended July 31, 2005, we recorded incremental stock-based compensation charges of $2.0 million and $4.5 million, a net (benefit)/charge for payroll taxes resulting from the expiration of statute of limitations of $0.4 million and $(4.7) million, and associated income tax (benefit)/charges of $(1.4) million and $0.1 million, respectively.
For all periods through the end of our fiscal year 2006, we have recorded aggregate non-cash stock-based compensation charges of $190.2 million, associated payroll tax charges of $9.4 million and a related income tax benefit of $72.2 million.
As part of this restatement, we also accrued liabilities and recorded charges to operating costs and expenses for certain payroll tax contingencies related to the incremental stock-based compensation expense in the amount of $18.8 million for all annual periods from our fiscal year 2000 through our fiscal year 2006. We recorded such charges in the amount of $3.1 million, $1.3 million, and $1.6 million for our fiscal years 2006, 2005 and 2004, respectively. Upon expiration of the related statute of limitations, we also recorded benefits from the reversal of previously-recorded payroll tax liabilities of $6.6 million and $2.8 million in our fiscal years 2006 and 2005, respectively. As a result, the net benefit to our statements of income was $3.5 million and $1.5 million for our fiscal years 2006 and 2005, respectively. The cumulative payroll tax expense for periods prior to our fiscal year 2004 was $12.8 million. For those stock option grants that we determined to have incorrect measurement dates for accounting purposes and that we had originally issued as incentive stock options, or ISOs, we recorded a liability for payroll tax contingencies in the event such grants would not be respected as ISOs under the principles of the Internal Revenue Code, or IRC, and the regulations thereunder. These liabilities were recorded with a charge to operating costs and expenses.
We also considered the application of Section 409A of the IRC to certain stock option grants where, under APB 25, intrinsic value existed at the time of grant. In the event such stock options grants are not respected as issued at fair market value at the original grant date under principles of the IRC and the regulations thereunder and are subject to Section 409A, we are considering potential remedial actions that may be available. We do not expect to incur a material charge as a result of any such potential remedial actions.
As a resultimplementing the FIN 48. Please refer to Note 3 of the findings of the Audit Committee, we concluded that we neededthese Notes to amend our Annual Report on Form 10-KCondensed Consolidated Financial Statements for the fiscal year ended January 29, 2006 to restate our consolidated financial statements for the years ended January 29, 2006, January 30, 2005, and January 25, 2004 and the related disclosures, and our Form 10-Q for the three months ended April 30, 2006.
The following table sets forth the impact of the additional non-cash charges for stock-based compensation expense and related tax effects on our historical financial statements for the three and six months ended July 31, 2005.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
July 31, 2005 | July 31, 2005 | |||||||||||||||||||||||
As Previously Reported | Adjustments | As Restated | As Previously Reported | Adjustments | As Restated | |||||||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||||||||||
Revenue | $ | 574,812 | $ | — | $ | 574,812 | $ | 1,158,658 | $ | — | $ | 1,158,658 | ||||||||||||
Cost of revenue (A) | 357,278 | 159 | 357,437 | 730,971 | 451 | 731,422 | ||||||||||||||||||
Gross profit | 217,534 | (159 | ) | 217,375 | 427,687 | (451 | ) | 427,236 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development (A) | 85,814 | 1,299 | 87,113 | 171,727 | 3,221 | 174,948 | ||||||||||||||||||
Sales, general and administrative (A) | 51,683 | 986 | 52,669 | 99,741 | (3,855 | ) | 95,886 | |||||||||||||||||
Settlement costs | — | — | — | — | — | — | ||||||||||||||||||
Total operating expenses | 137,497 | 2,285 | 139,782 | 271,468 | (634 | ) | 270,834 | |||||||||||||||||
Operating income | 80,037 | (2,444 | ) | 77,593 | 156,219 | 183 | 156,402 | |||||||||||||||||
Interest income | 4,867 | — | 4,867 | 8,762 | — | 8,762 | ||||||||||||||||||
Interest expense | (2 | ) | — | (2 | ) | (12 | ) | — | (12 | ) | ||||||||||||||
Other income (expense), net | 354 | — | 354 | 842 | — | 842 | ||||||||||||||||||
Income before income tax expense | 85,256 | (2,444 | ) | 82,812 | 165,811 | 183 | 165,994 | |||||||||||||||||
Income tax expense | 10,419 | (1,440 | ) | 8,979 | 26,530 | 109 | 26,639 | |||||||||||||||||
Net income | $ | 74,837 | $ | (1,004 | ) | $ | 73,833 | $ | 139,281 | $ | 74 | $ | 139,355 | |||||||||||
Basic net income per share: | $ | 0.22 | — | $ | 0.22 | $ | 0.41 | — | $ | 0.41 | ||||||||||||||
Diluted net income per share: | $ | 0.21 | (0.01 | ) | $ | 0.20 | $ | 0.39 | — | $ | 0.39 | |||||||||||||
Shares used in basic per share computation | 337,886 | — | 337,886 | 337,590 | — | 337,590 | ||||||||||||||||||
Shares used in diluted per share computation | 361,580 | 94 | 361,674 | 361,224 | 63 | 361,287 |
Three Months Ended July 31, 2005 | Six Months Ended July 31, 2005 | ||||||
(As Restated)(1) | (As Restated)(1) | ||||||
Cost of revenue | $ | 159 | $ | 451 | |||
Research and development | 1,299 | 3,221 | |||||
Sales, general and administrative | 986 | (3,855 | ) |
information.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 32 - Stock-Based Compensation
Prior toperiod, which is typically the adoptionvesting period of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion No. 25, or APB No. 25,Accounting for Stock Issued to Employees, and related interpretations to account for our stock-based employee compensation plans. As such, compensation expense was recorded if on the date of grant the current fair value per share of the underlying stock exceeded the exercise price per share. We provided the disclosures required under SFAS No. 123,Accounting for Stock-Based Compensation, as amended by SFAS No. 148,Accounting for Stock-Based Compensation - Transition and Disclosures, in our periodic reports.
The pro forma information required under SFAS No. 123(R) for periods prior to fiscal 2007 as if we had applied the fair value recognition provisions of SFAS No. 123 to awards granted under our equity incentive plans was as follows for the three and six months ended July 31, 2005:
Three Months Ended July 31, 2005 | Six Months Ended July 31, 2005 | |||||||
(As Restated) | (As Restated) | |||||||
(In thousands, except per share data) | (In thousands, except per share data) | |||||||
Net income, as reported | $ | 73,833 | $ | 139,355 | ||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 2,101 | 4,288 | ||||||
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (25,438 | ) | (44,589 | ) | ||||
Pro forma net income | $ | 50,496 | $ | 99,054 | ||||
Basic net income per share - as reported | $ | 0.22 | $ | 0.41 | ||||
Basic net income per share - pro forma | $ | 0.15 | $ | 0.29 | ||||
Diluted net income per share - as reported | $ | 0.20 | $ | 0.39 | ||||
Diluted net income per share - pro forma | $ | 0.14 | $ | 0.28 |
Impact of the adoption of SFAS No. 123(R)
each award. We elected to adopt the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R). Accordingly, duringOur estimates of the three and six months ended July 30, 2006,fair values of employee stock options are calculated using a binomial model.
NVIDIA CORPORATION AND SUBSIDIARIESAccounting Principle
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Three Months Ended July 30, 2006 | Six Months Ended July 30, 2006 | |||||||
(In thousands, except per share data) | (In thousands, except per share data) | |||||||
Stock-based compensation expense by type of award: | ||||||||
Employee stock options | $ | 27,786 | $ | 49,405 | ||||
Employee stock purchase plan | 1,539 | 3,140 | ||||||
Amount capitalized as inventory | (459 | ) | (1,454 | ) | ||||
Total stock-based compensation | 28,866 | 51,091 | ||||||
Tax effect of stock-based compensation | (3,009 | ) | (5,745 | ) | ||||
Net effect on net income | $ | 25,857 | $ | 45,346 | ||||
Effect on net income per share: | ||||||||
Basic | $ | 0.07 | $ | 0.13 | ||||
Diluted | $ | 0.07 | $ | 0.12 |
Prior to adopting SFAS No. 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in our Statement of Cash Flows. However, as required by our adoption of SFAS No. 123(R) during the three and six months ended July 30, 2006, we began classifying cash flows resulting from excess tax benefits as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock-based compensation for such options. The effect of this change in classification on our Statement of Cash Flows for the three and six months ended July 30, 2006 is as follows:
Three Months Ended July 30, 2006 | Six Months Ended July 30, 2006 | |||||||
(In thousands) | (In thousands) | |||||||
Cash flows from operations | $ | (7,032 | ) | $ | (14,362 | ) | ||
Cash flows from financing activities | $ | 7,032 | $ | 14,362 |
The
As of January 30, 2006, we had unearned stock-based compensation related to stock options of $167.9 million before the impact of estimated forfeitures. In our pro forma footnote disclosures prior to the adoption of SFAS No. 123(R), we accounted for forfeitures upon occurrence. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of January 30, 2006, we estimated that
net of amounts capitalized as inventory, as follows:
Three Months Ended | |||||
April 29, | April 30, | ||||
2007 | 2006 | ||||
(In thousands) | |||||
Cost of revenue | $ | 2,809 | $ | 1,227 | |
Research and development | 22,400 | 14,426 | |||
Sales, general and administrative | 12,196 | 6,572 | |||
Total | $ | 37,405 | $ | 22,225 |
Approximately $0.42.1 years and $1.4 million2.3 years, respectively.
impact of estimated forfeitures.
Stock-based compensation expense that would have been recorded under APB No. 25 during the three and six months ended July 30, 2006 was approximately $0.8 million and $2.5 million, respectively. Upon our adoption of SFAS No. 123(R), we reclassified the unearned stock-based compensation expense balance of approximately $3.6 million that would have been recorded under APB No. 25 to additional-paid-in-capital in our Condensed Consolidated Balance Sheet.
During the three months ended May 1, 2005,
Stock Options | Employee Stock Purchase Plan | |||||||
Three Months Ended | Three Months Ended | |||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||
(Using a binomial model) | (Using a binomial model) | (Using the Black- Scholes model) | (Using the Black- Scholes model) | |||||
Expected life (in years) | 3.6 - 5.1 | 3.6 - 5.1 | 0.5 – 2.0 | 0.5 - 2.0 | ||||
Risk free interest rate | 5.1% | 4.1% | 2.3% – 4.6% | 1.1% - 2.1% | ||||
Volatility | 41% - 51% | 40% - 46% | 30% - 41% | 41% | ||||
Dividend yield | — | — | — | — |
Three Months Ended | ||||||
April 29, 2007 | April 30, 2006 | |||||
(Using a binomial model) | (Using a binomial model) | |||||
Weighted average expected life of stock options (in years) | 3.9 - 5.8 | 3.6 - 5.1 | ||||
Risk free interest rate | 4.6 | % | 4.7 | % | ||
Volatility | 39% - 45 | % | 39% - 41 | % | ||
Dividend yield | — | — |
Three Months Ended | ||||||||||||
Black-Scholes Model) | ||||||||||||
model) |
|
|
| |||||||||
| 0.5 - 2.0 | 0.5 - 2.0 | ||||||||||
Risk free interest rate | 1.6% - | % | ||||||||||
Volatility | ||||||||||||
| 30% - | |||||||||||
Dividend yield | — | — |
Overview. We consider equity compensation to be long term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. We believe that properly structured equity compensation aligns the long-term interests of stockholders and employees by creating a strong, direct link between employee compensation and stock appreciation, as stock options are only valuable to our employees if the value of our common stock increases after the date of grant.
Options Available for Grant | Options Outstanding | Weighted Average Exercise Price Per Share | |||||||
Balances, January 28, 2007 | 21,780,284 | 73,994,662 | $ | 13.29 | |||||
Granted | (4,833,408 | ) | 4,833,408 | 28.79 | |||||
Exercised | - | (3,900,292 | ) | 7.75 | |||||
Cancelled | 739,335 | (739,335 | ) | 26.59 | |||||
Balances, April 29, 2007 | 17,686,211 | 74,188,443 | $ | 14.47 |
2000 Nonstatutory Equity Incentive Plan.On January 29, 2007, we adopted FIN 48. The 2000 Nonstatutory Equity Incentive Plan,cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. At the adoption date of January 29, 2007, we had $63.8 million of unrecognized tax benefits, $61.1 million of which would affect our effective tax rate if recognized. The recognition of the remaining unrecognized tax benefits would be reported as an adjustment to goodwill to the extent of pre-acquisition unrecognized tax benefits. There have been no significant changes to these amounts during the three months ended April, 29, 2007. We have historically classified certain unrecognized tax benefits as income taxes payable, which is included within the current liabilities section of our Condensed Consolidated Balance Sheet. As a result of our adoption of FIN 48, we reclassified unrecognized tax benefits of $33.1 million to income taxes payable and deferred tax liability, which is included within the long-term liabilities section of our Condensed Consolidated Balance Sheet.
1998 Equity Incentive Plan.United States and throughout the world. The Equity Incentive Plan, or the 1998 Plan, provides for the issuance of stock bonuses, restricted stock purchase rights, stock appreciation rights, incentive stock options or nonstatutory stock options. Option grants issued under the 1998 Plan generally expire in six to ten years. Vesting periodsmaterial tax jurisdictions that are determined by the Board of Directors, or Board, or the Compensation Committee of the Board. Initial option grants made after February 10, 2004 under the 1998 Plan to new employees generally vest over a three year period on a quarterly basis. Subsequent option grants to existing employees are generally granted for performance and generally vest as to 25% of the shares two years and three months after the date of grant and as to the remaining 75% of the shares subject to examination for our tax years beginning in fiscal year 2002 through fiscal year 2007 include the option vestUnited States, Hong Kong, Taiwan, and China, depending upon the statute of limitations applicable to such particular jurisdiction. As of April 29, 2007, we are under examination for U.S. federal tax purposes for fiscal years 2004, 2005 and 2006 and by tax authorities in equal quarterly installments over a nine month period.
1998 Non-Employee Directors’ Stock Option Plan. In February 1998, our Board of Directors adopted the 1998 Non-Employee Directors’ Stock Option Plan, or the Directors Plan, to provideCanada and Taiwan for the automatic grant of non-qualified options to purchase shares of our common stock to our directors who are not employees or consultants of, or of an affiliate of, NVIDIA.
In July 2000, the Board 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 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. In March 2006, the Board amended the Directors’ Plan, to reduce the number of shares issuable pursuant to each of the initial non-employee director stock option grant and the annual non-employee director stock option grant by 40%. The Directors’ Plan was also amended to eliminate the annual option grant made to members of our Nominating and Corporate Governance Committee. The terms of the amended Directors’ Plan are described below.
fiscal year 2003.
Employees are eligible to participate if they are employed by NVIDIA or an affiliate of NVIDIA as designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld pursuant to the Purchase Plan up to certain limitations and applied on specified dates determined by the Board to purchase shares of our common stock. The Board may increase this percentage at its discretion, up to 15%. The price of common stock purchased under the Purchase Plan will be equal to the lower of the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period at 85% at the fair market value of the common stock on the relevant purchase date. Employees may end their participation in the Purchase Plan at any time during the offering period, and participation ends automatically on termination of employment with us and in each case their contributions are refunded.
The following table summarizes the combined activity under the 2000 Plan, 1998 Plan, and the Directors Plan as of and for the six months ended July 30, 2006:
Options Available for Grant | Options Outstanding | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | ||||||||||
Balances, January 29, 2006 | 31,310,976 | 87,958,480 | $ | 9.50 | ||||||||||
Authorized | — | — | — | |||||||||||
Granted | (6,807,088 | ) | 6,807,088 | 27.01 | ||||||||||
Exercised | — | (11,544,368 | ) | 7.86 | ||||||||||
Cancelled | 1,090,344 | (1,090,344 | ) | 12.19 | ||||||||||
Balances, July 30, 2006 | 25,594,222 | 82,130,866 | $ | 11.14 | 4.1 | $ | 978,467,916 | |||||||
Vested and expected to vest at July 30, 2006 | 79,509,041 | $ | 11.02 | 4.0 | $ | 927,026,941 | ||||||||
Options exercisable at July 30, 2006 | 47,268,849 | $ | 8.30 | 3.7 | $ | 679,744,670 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at July 30, 2006, based on the $22.67 closing stock price of our common stock on The NASDAQ Global Select Market, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of July 30, 2006 was 76.7 million and 47.2 million, respectively.
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We settle employee stock option exercises with newly issued common shares. We do not have any equity instruments outstanding other than options described above as of July 30, 2006.
Three Months Ended | ||||||
April 29, 2007 | April 30, 2006 | |||||
(In thousands, except per share data) | ||||||
Numerator: | ||||||
Net income | $ | 132,259 | $ | 92,064 | ||
Denominator: | ||||||
Denominator for basic net income per share, weighted average shares | 360,831 | 347,937 | ||||
Effect of dilutive securities: | ||||||
Weighted average effect of equity incentive plans | 38,035 | 41,491 | ||||
Denominator for diluted net income per share, weighted average shares | 398,866 | 389,428 | ||||
Net income per share: | ||||||
Basic net income per share | $ | 0.37 | $ | 0.26 | ||
Diluted net income per share | $ | 0.33 | $ | 0.24 |
Three Months Ended | Six Months Ended | |||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||||||
(As Restated) | (As Restated) | |||||||||||
(In thousands, except per share data) | ||||||||||||
Numerator: | ||||||||||||
Net income | $ | 86,753 | $ | 73,833 | $ | 178,817 | $ | 139,355 | ||||
Denominator: | ||||||||||||
Denominator for basic net income per share, weighted average shares | 350,244 | 337,886 | 349,090 | 337,590 | ||||||||
Effect of dilutive securities: | ||||||||||||
Stock options outstanding | 35,345 | 23,788 | 38,395 | 23,697 | ||||||||
Denominator for diluted net income per share, weighted average shares | 385,589 | 361,674 | 387,485 | 361,287 | ||||||||
Net income per share: | ||||||||||||
Basic net income per share | $ | 0.25 | $ | 0.22 | $ | 0.51 | $ | 0.41 | ||||
Diluted net income per share | $ | 0.22 | $ | 0.20 | $ | 0.46 | $ | 0.39 | ||||
Diluted net income per share
further information regarding this litigation.
Fair Market Value | Straight-Line Amortization Period | |||||
(In thousands) | (Years) | |||||
Property and equipment | $ | 2,433 | 1-2 | |||
Trademarks | 11,310 | 5 | ||||
Goodwill | 85,418 | -- | ||||
Total | $ | 99,161 |
Fair Market Value | Straight-Line Depreciation/ Amortization Period | |||||
(In thousands) | ||||||
Cash | $ | 21,551 | ||||
Accounts receivable | 8,148 | — | ||||
Inventories | 4,023 | — | ||||
Other assets | 935 | — | ||||
Property and equipment | 1,013 | 4 - 49 months | ||||
Goodwill | 30,864 | — | ||||
Intangible assets: | ||||||
Existing technology | 2,490 | 3 years | ||||
Customer relationships | 653 | 3 years | ||||
Total assets acquired | 69,677 | |||||
Current liabilities | (15,721 | ) | — | |||
Acquisition related costs | (881 | ) | — | |||
Total liabilities assumed | (16,602 | ) | ||||
Net assets acquired | $ | 53,075 | ||||
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The pro forma results of operations have not been presented for the acquisition of ULi because the effect of this acquisition was not considered material.
Note 6 - Acquisition of Hybrid Graphics Ltd.
On March 29, 2006, we completed our acquisition of Hybrid Graphics Ltd., or Hybrid Graphics. Hybrid Graphics is a developer of embedded 2D and 3D graphics software for handheld devices. We believe that the acquisition will enable the customers of both companies to deploy rich graphics solutions for the worldwide handheld market. The aggregate purchase price consisted of cash consideration of approximately $36.7 million.
We allocated the purchase price to tangible assets, liabilities and identifiable intangible assets acquired, as well as IPR&D, if identified, based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions determined by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives. The allocation of the purchase price has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available. The following is a summary of estimated fair values of the assets we acquired and liabilities we assumed as of July 30, 2006:
Fair Market Value | Straight-Line Depreciation/ Amortization Period | |||||
(In thousands) | ||||||
Cash | $ | 1,180 | ||||
Accounts receivable | 1,056 | — | ||||
Other assets | 74 | — | ||||
Property and equipment | 238 | 1-36 months | ||||
In-process research and development | 602 | — | ||||
Goodwill | 27,460 | — | ||||
Intangible assets: | ||||||
Existing technology | 5,179 | 3 years | ||||
Customer relationships | 2,650 | 3 years | ||||
Trademark | 482 | 3 years | ||||
Non-compete agreements | 72 | 3 years | ||||
Total assets acquired | 38,993 | |||||
Current liabilities | (1,301 | ) | — | |||
Acquisition related costs | (719 | ) | — | |||
Long-term liabilities | (301 | ) | — | |||
Total liabilities assumed | (2,321 | ) | ||||
Net assets acquired | $ | 36,672 | ||||
follows:
ULi | Hybrid Graphics | PortalPlayer | |||||||
(In thousands) | |||||||||
Fair Market Values | |||||||||
Cash and cash equivalents | $ | 21,551 | $ | 1,180 | $ | 10,174 | |||
Marketable Securities | - | - | 176,492 | ||||||
Accounts receivable | 8,148 | 808 | 16,850 | ||||||
Inventories | 4,896 | - | �� | 2,326 | |||||
Other assets | 935 | 73 | 12,798 | ||||||
Property and equipment | 1,010 | 134 | 19,991 | ||||||
In-process research and development | - | 602 | 13,400 | ||||||
Goodwill | 31,051 | 27,906 | 104,468 | ||||||
Intangible assets: | |||||||||
Existing technology | 2,490 | 5,179 | 6,700 | ||||||
Backlog | - | - | 2,200 | ||||||
Patents | - | - | 600 | ||||||
Customer relationships | 653 | 2,650 | 2,700 | ||||||
Trademark | - | 482 | - | ||||||
Non-compete agreements | - | 72 | - | ||||||
Total assets acquired | 70,734 | 39,086 | 368,699 | ||||||
Current liabilities | (16,878 | ) | (1,373 | ) | (12,766 | ) | |||
Acquisition related costs | (781 | ) | (740 | ) | (8,043 | ) | |||
Long-term liabilities | - | (301 | ) | (46 | ) | ||||
Total liabilities assumed | (17,659 | ) | (2,414 | ) | (20,855 | ) | |||
Net assets acquired | $ | 53,075 | $ | 36,672 | $ | 347,844 |
ULi | Hybrid Graphics | PortalPlayer | |||||||
Straight-line depreciation / amortization period | |||||||||
Property and equipment | 4 - 49 months | 1 - 36 months | 3 - 60 months | ||||||
Intangible assets: | |||||||||
Existing technology | 3 years | 3 years | 3 years | ||||||
Customer relationships | 3 years | 3 years | 1-3 years | ||||||
Backlog | - | - | 2 months | ||||||
Patents | - | - | 3 years | ||||||
Trademark | - | 3 years | - | ||||||
Non-compete agreements | - | 3 years | - |
material to our results.
April 29, 2007 | January 28, 2007 | ||||||
(In thousands) | |||||||
3dfx | $ | 75,326 | $ | 75,326 | |||
MediaQ | 35,342 | 35,342 | |||||
ULi | 31,051 | 31,051 | |||||
Hybrid Graphics | 27,906 | 27,906 | |||||
PortalPlayer | 104,468 | 114,816 | |||||
Other | 16,984 | 16,984 | |||||
Total goodwill | $ | 291,077 | $ | 301,425 |
April 29, 2007 | January 28, 2007 | |||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Technology licenses | $ | 49,368 | $ | (23,437 | ) | $ | 25,931 | $ | 37,516 | $ | (20,480 | ) | $ | 17,036 | ||||||
Patents | 34,539 | (25,489 | ) | 9,050 | 34,623 | (24,569 | ) | 10,054 | ||||||||||||
Acquired intellectual property | 50,812 | (34,899 | ) | 15,913 | 50,212 | (31,894 | ) | 18,318 | ||||||||||||
Trademarks | 11,310 | (11,310 | ) | - | 11,310 | (11,310 | ) | - | ||||||||||||
Other | 1,494 | (1,474 | ) | 20 | 1,494 | (1,391 | ) | 103 | ||||||||||||
Total intangible assets | $ | 147,523 | $ | (96,609 | ) | $ | 50,914 | $ | 135,155 | $ | (89,644 | ) | $ | 45,511 |
April 29, 2007 | January 28, 2007 | |||||
(In thousands) | ||||||
Inventories: | ||||||
Raw materials | $ | 44,343 | $ | 56,261 | ||
Work in-process | 121,930 | 111,058 | ||||
Finished goods | 166,362 | 187,361 | ||||
Total inventories | $ | 332,635 | $ | 354,680 |
April 29, 2007 | January 28, 2007 | |||||
(In thousands) | ||||||
Accrued Liabilities: | ||||||
Accrued customer programs | $ | 153,521 | $ | 181,182 | ||
Deferred revenue | 4,386 | 1,180 | ||||
Income and other taxes payable | 5,607 | 37,903 | ||||
Accrued payroll and related expenses | 64,520 | 81,352 | ||||
Deferred rent | 12,024 | 12,551 | ||||
Accrued legal settlement | 30,600 | 30,600 | ||||
Other | 19,163 | 21,964 | ||||
Total accrued liabilities | $ | 289,821 | $ | 366,732 |
April 29, 2007 | January 28, 2007 | |||||
(In thousands) | ||||||
Other Long-term Liabilities: | ||||||
Asset retirement obligation | $ | 6,411 | $ | 6,362 | ||
Accrued payroll taxes related to stock options | 8,995 | 8,995 | ||||
Income taxes payable and deferred tax liability | 51,929 | - | ||||
Other long-term liabilities | 13,772 | 14,180 | ||||
Total other long-term liabilities | $ | 81,107 | $ | 29,537 |
Three Months Ended | ||||||
April 29, 2007 | April 30, 2006 | |||||
(In thousands) | ||||||
Net income | $ | 132,259 | $ | 92,064 | ||
Net change in unrealized (gains) / losses on available-for-sale securities, net of tax | (79 | ) | (486 | ) | ||
Reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax | (73 | ) | (8 | ) | ||
Total comprehensive income | $ | 132,107 | $ | 91,570 | ||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
We record a reduction to revenue forThe following table summarizes the changes in the estimated product warranty liabilities for the three months ended April 29, 2007 and April 30, 2006:
Description | Balance at Beginning of Period | Additions (1) | Deductions (2) | Balance at End of Period (3) | ||||||||
(In thousands) | ||||||||||||
Three months ended April 29, 2007 | $ | 17,958 | $ | 4,980 | $ | (3,875 | ) | $ | 19,063 | |||
Three months ended April 30, 2006 | $ | 10,239 | $ | 11,775 | $ | (10,448 | ) | $ | 11,566 |
Description | Balance at Beginning of Period | Additions (1) | Deductions (2) | Balance at End of Period | |||||||||
(In thousands) | |||||||||||||
Three months ended July 30, 2006 | |||||||||||||
Allowance for sales returns | $ | 11,566 | $ | 12,417 | $ | (11,602 | ) | $ | 12,381 | ||||
Three months ended July 31, 2005 | |||||||||||||
Allowance for sales returns | $ | 10,805 | $ | 8,213 | $ | (8,331 | ) | $ | 10,687 | ||||
Six months ended July 30, 2006 | |||||||||||||
Allowance for sales returns | $ | 10,239 | $ | 24,192 | $ | (22,050 | ) | $ | 12,381 | ||||
Six months ended July 31, 2005 | |||||||||||||
Allowance for sales returns | $ | 11,687 | $ | 14,144 | $ | (15,144 | ) | $ | 10,687 | ||||
$11,566 at April 29, 2007 and April 30, 2006, respectively, relating to allowance for sales returns.
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax. The components of comprehensive income, net of tax, were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||||||||||
(As Restated) | (As Restated) | |||||||||||||||
(In thousands) | ||||||||||||||||
Net income | $ | 86,753 | $ | 73,833 | $ | 178,817 | $ | 139,355 | ||||||||
Net change in unrealized losses on available-for-sale securities | 156 | (526 | ) | (656 | ) | (1,245 | ) | |||||||||
Tax effect of unrealized losses on available-for-sale securities | (63 | ) | 105 | 262 | 249 | |||||||||||
Reclassification adjustments for net realized losses on available-for-sale securities included in net income | (28 | ) | 138 | (41 | ) | 301 | ||||||||||
Tax effect of reclassification adjustments for net realized losses on available-for-sale securities included in net income | 11 | (27 | ) | 17 | (60 | ) | ||||||||||
Total comprehensive income | $ | 86,829 | $ | 73,523 | $ | 178,399 | $ | 138,600 | ||||||||
Note 9 - 3dfx Asset Purchase
During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. The 3dfx asset purchase was accounted for under the purchase method of accounting and closed on April 18, 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 provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million,
then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets.
In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court which sought, among other things, payments from us as additional purchase price related to our purchase of certain assets of 3dfx. In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors of 3dfx reached a conditional settlement of the Trustee’s claims against NVIDIA. This conditional settlement, which will be subject to the review and approval of the Bankruptcy Court, calls for a payment of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million relates to various administrative expenses and Trustee fees, and $25.0 million relates to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. As such, during the three months ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. Please see Note 14 for further information regarding this litigation.
The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below.
Fair Market Value | Straight-Line Amortization Period | ||||
(In thousands) | (Years) | ||||
Property and equipment | $ | 2,433 | 1-2 | ||
Trademarks | 11,310 | 5 | |||
Goodwill | 85,418 | — | |||
Total | $ | 99,161 | |||
The final allocation of the purchase price of the 3dfx assets is contingent upon the amount of and circumstances surrounding additional consideration, if any, that we may pay related to the 3dfx asset purchase.
Note 10 - Goodwill and Intangible Assets
We are currently amortizing our intangible assets with definitive lives over periods ranging from 1 to 5 years on a straight-line basis. The components of our amortizable intangible assets are as follows:
July 30, 2006 | January 29, 2006 | |||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Technology licenses | $ | 23,086 | $ | (15,549 | ) | $ | 7,537 | $ | 21,586 | $ | (13,595 | ) | $ | 7,991 | ||||||
Patents | 32,750 | (21,967 | ) | 10,783 | 23,750 | (19,911 | ) | 3,839 | ||||||||||||
Acquisition-related | 38,612 | (27,815 | ) | 10,797 | 27,086 | (24,516 | ) | 2,570 | ||||||||||||
Trademarks | 11,310 | (11,310 | ) | — | 11,310 | (10,807 | ) | 503 | ||||||||||||
Other | 1,494 | (1,183 | ) | 311 | 1,494 | (976 | ) | 518 | ||||||||||||
Total intangible assets | $ | 107,252 | $ | (77,824 | ) | $ | 29,428 | $ | 85,226 | $ | (69,805 | ) | $ | 15,421 | ||||||
The $11.5 million increase in the gross carrying amount of acquisition-related intangible assets is related to $3.1 million and $8.4 million of intangible assets that resulted from our acquisitions of ULi and Hybrid Graphics, respectively, during the three months ended April 30, 2006. Please refer to Note 5 and Note 6 of our Notes to Condensed Consolidated Financial Statements for further information. In addition, the $9.0 million increase in the gross carrying amount of patents is related primarily to patents licensed from Opti Incorporated as a result of the license and settlement agreements described in Note 17 of our Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Amortization expense associated with intangible assets for the three and six months ended July 30, 2006 was $4.0 million and $8.1 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 31, 2005 was $4.4 million and $8.7 million, respectively. Amortization expense for the net carrying amount of intangible assets at July 30, 2006 is estimated to be $7.3 million for the remainder of fiscal 2007, $11.1 million in fiscal 2008, $8.9 million in fiscal 2009, and $2.1 million in fiscal 2010 and thereafter.
As of July 30, 2006 and January 29, 2006, the carrying amount of goodwill is as follows:
July 30, 2006 | January 29, 2006 | |||||
(In thousands) | ||||||
3dfx | $ | 75,326 | $ | 75,326 | ||
MediaQ | 52,913 | 52,913 | ||||
ULi | 30,864 | — | ||||
Hybrid Graphics | 27,460 | — | ||||
Other | 17,094 | 17,078 | ||||
Total goodwill | $ | 203,657 | $ | 145,317 | ||
During the six months ended July 30, 2006, we recorded $30.9 million and $27.5 million as goodwill related to our acquisitions of ULi and Hybrid Graphics, respectively. These acquisitions were accounted for under the purchase method of accounting. We intend to assign the goodwill related to our acquisition of ULi to our media and communications processor, or MCP, Business and the goodwill related to our acquisition of Hybrid Graphics to our Handheld graphics processing unit, or GPU, Business.
Note 11 - Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three 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. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized gains for the three months ended July 30, 2006 were not material, and net realized gains for the six months ended July 30, 2006 were $0.1 million. Net realized losses for the three and six months ended July 31, 2005 were $0.1 million and $0.3 million, respectively.
Note 12 - Balance Sheet Components
Certain balance sheet components are as follows:
July 30, 2006 | January 29, 2006 | |||||
(As Restated) | ||||||
(In thousands) | ||||||
Inventories: | ||||||
Raw materials | $ | 29,087 | $ | 25,743 | ||
Work in-process | 146,566 | 107,847 | ||||
Finished goods | 203,008 | 121,280 | ||||
Total inventories | $ | 378,661 | $ | 254,870 | ||
The significant increase in finished goods inventories primarily relates to our build-up of inventory levels of several of our new GeForce 7 products in the second quarter of fiscal 2007.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
At July 30, 2006, we had outstanding inventory purchase obligations totaling $449 million.
July 30, 2006 | January 29, 2006 | |||||
(In thousands) | ||||||
Prepaid Expenses and Other Current Assets: | ||||||
Prepaid expenses | $ | 25,327 | $ | 19,265 | ||
Other current assets | 8,816 | 5,122 | ||||
Total deposits and other assets | $ | 34,143 | $ | 24,387 | ||
�� |
July 30, 2006 | January 29, 2006 | |||||
(In thousands) | ||||||
Deposits and Other Assets: | ||||||
Investments in non-affiliates | $ | 11,684 | $ | 11,684 | ||
Long-term prepayments | 15,686 | 7,504 | ||||
Other | 10,157 | 8,289 | ||||
Total deposits and other assets | $ | 37,527 | $ | 27,477 | ||
July 30, 2006 | January 29, 2006 | |||||
(In thousands) | ||||||
Accrued Liabilities: | ||||||
Accrued customer programs | $ | 115,396 | $ | 90,056 | ||
Deferred revenue | 1,229 | 217 | ||||
Taxes payable | 42,191 | 58,355 | ||||
Accrued payroll and related expenses | 59,828 | 53,080 | ||||
Deferred rent | 12,092 | 11,879 | ||||
Accrued legal settlement | 30,600 | 30,600 | ||||
Other | 12,792 | 15,077 | ||||
Total accrued liabilities | $ | 274,128 | $ | 259,264 | ||
July 30, 2006 | January 29, 2006 | |||||
(As Restated) | ||||||
(In thousands) | ||||||
Other Long-term Liabilities: | ||||||
Asset retirement obligations | $ | 6,515 | $ | 6,440 | ||
Other long-term liabilities | 17,722 | 13,596 | ||||
Total other long-term liabilities | $ | 24,237 | $ | 20,036 | ||
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisionsCommitments and assessing financial performance. Our operating segments are organized to bring all of our major product groups in line with our strategy to be the worldwide leader in programmable graphics processor technologies. We report financial information for four product-line operating segments to our CODM: the GPU Business is composed of products that support desktop PCs, notebook PCs and professional workstations; the MCP Business is composed of NVIDIA nForce products that operate 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 Handheld GPU Business is composed of products that support handheld personal digital assistants, cellular phones and other handheld devices; and the Consumer Electronics Business is concentrated in products that support video game consoles and other digital consumer electronics devices and is composed of revenue from our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3, revenue from sales of our Xbox-related products, revenue from our license agreement with Microsoft relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and embedded graphics processor products. In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration, corporate marketing expenses, and stock-based compensation, which total $58.4 million for the second quarter of fiscal 2007, $30.0 million for the second quarter of fiscal 2006, $108.5 million for the first half of fiscal 2007, and $51.0 million for the first half of fiscal 2006, 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 devices. Certain prior period amounts have been restated to conform to the presentation of our current fiscal quarter.
Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole.
Contingencies
(Unaudited)
GPU | MCP | Handheld GPU | Consumer Electronics | All Other | Consolidated | |||||||||||||||
(As Restated) | ||||||||||||||||||||
(In thousands) | ||||||||||||||||||||
Three Months Ended July 31, 2005: | ||||||||||||||||||||
Revenue | $ | 385,826 | $ | 75,872 | $ | 2,135 | $ | 81,543 | $ | 29,436 | $ | 574,812 | ||||||||
Depreciation expense | $ | 8,219 | $ | 3,080 | $ | 2,882 | $ | 337 | $ | 8,062 | $ | 22,580 | ||||||||
Operating income (loss) | $ | 72,737 | $ | 5,340 | $ | (10,115 | ) | $ | 40,787 | $ | (31,156 | ) (A) | $ | 77,593 | ||||||
Six Months Ended July 31, 2005: | ||||||||||||||||||||
Revenue | $ | 795,752 | $ | 147,677 | $ | 9,897 | $ | 139,621 | $ | 65,711 | $ | 1,158,658 | ||||||||
Depreciation expense | $ | 16,279 | $ | 6,190 | $ | 6,040 | $ | 697 | $ | 15,702 | $ | 44,908 | ||||||||
Operating income (loss) | $ | 150,868 | $ | 12,263 | $ | (25,975 | ) | $ | 69,727 | $ | (50,481 | ) (A) | $ | 156,402 |
GPU | MCP | Handheld GPU | Consumer Electronics | All Other | Consolidated | |||||||||||||||
(In thousands) | ||||||||||||||||||||
Three Months Ended July 30, 2006: | ||||||||||||||||||||
Revenue | $ | 459,077 | $ | 139,141 | $ | 27,344 | $ | 27,821 | $ | 34,136 | $ | 687,519 | ||||||||
Depreciation expense | $ | 7,052 | $ | 4,278 | $ | 5,561 | $ | 67 | $ | 7,661 | $ | 24,619 | ||||||||
Operating income (loss) | $ | 128,166 | $ | 7,863 | $ | (4,311 | ) | $ | 21,129 | $ | (57,031 | ) | $ | 95,816 | ||||||
Six Months Ended July 30, 2006: | ||||||||||||||||||||
Revenue | $ | 911,508 | $ | 257,525 | $ | 58,065 | $ | 53,983 | $ | 88,245 | $ | 1,369,326 | ||||||||
Depreciation expense | $ | 15,508 | $ | 8,431 | $ | 9,150 | $ | 151 | $ | 15,280 | $ | 48,520 | ||||||||
Operating income (loss) | $ | 257,024 | $ | 10,846 | $ | (5,735 | ) | $ | 40,501 | $ | (105,311 | ) | $ | 197,325 |
Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following tables summarize information pertaining to our revenue from customers based on invoicing address in different geographic regions:
Three Months Ended | Six Months Ended | |||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||||||
(In thousands) | ||||||||||||
Revenue: | ||||||||||||
United States | $ | 79,155 | $ | 133,406 | $ | 156,527 | $ | 231,211 | ||||
Other Americas | 36,910 | 6,043 | 64,500 | 6,965 | ||||||||
China | 91,459 | 110,407 | 271,179 | 179,150 | ||||||||
Taiwan | 289,406 | 241,582 | 516,980 | 539,281 | ||||||||
Other Asia Pacific | 113,738 | 44,809 | 224,956 | 99,640 | ||||||||
Europe | 76,851 | 38,565 | 135,184 | 102,411 | ||||||||
Total revenue | $ | 687,519 | $ | 574,812 | $ | 1,369,326 | $ | 1,158,658 | ||||
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods, is summarized as follows:
Three Months Ended | Six Months Ended | |||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||||||
Revenue: | ||||||||||||
Customer A | 5 | % | 10 | % | 5 | % | 14 | % | ||||
Customer B | — | 13 | % | — | 10 | % | ||||||
Customer C | 15 | % | 8 | % | 12 | % | 11 | % |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Note 14 - Litigation
3dfx
early August 2007.
The
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Equity Holders’ Committee filed a motion with the Bankruptcy Court for an order giving it standing to bring that lawsuit to enforce the Asset Purchase Agreement.APA. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy Court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA has moved to dismiss that amended complaint as well. TheAt the hearing on that motion is scheduled for December 21, 2006.2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the APA was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the APA, and that the APA is capable of being assumed by the bankruptcy estate. In addition, the Equity Holders Committee has filed a motion seeking Bankruptcy Court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion is now scheduled for December 20, 2006. Thewas held on January 18, 2007, and the Bankruptcy Court still has not set a schedule for presentation of eitherapproved the proposed protections.
Opti Incorporated
On October 19, 2004, Opti Incorporated, or Opti,the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated complaint for patent infringement against NVIDIA in the United States District Court for the EasternNorthern District of Texas. In itsCalifornia on February 28, 2007. The California Superior Court cases have been consolidated and plaintiffs filed a consolidated complaint Opti asserted thaton April 23, 2007. All of the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. Plaintiffs in these actions allege claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud. The Northern District of California action also alleges violations of federal provisions, including Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief. We intend to take all appropriate action in response to these complaints. Between May 14, 2007 and May 17, 2007, we filed several motions to dismiss the federal, Delaware and Santa Clara actions. All of the motions are yet to be fully briefed, and remain pending.
In August 2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA was obligated to pay to Opti $11.0 million dollars for past and present licenses to the patents in suit and NVIDIA agreed to make additional quarterly payments to Opti should NVIDIA use certain patented technology after January 31, 2007. The case has now been dismissed with prejudice.
cases.
On August 9, 2004,
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
repurchased has now been increased to a total of $700.0 million. suspended at any time at our discretion. As part of our stockshare repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.
In MarchApril 30, 2006, our Board of Directors approved a two-for-one stock split of our outstandingno shares of commonpreferred stock to be effected in the form of a 100% stock dividend. The stock split was effective on Thursday, April 6, 2006 for stockholders of record at the close of business on Friday, March 17, 2006. Each stockholder of record received one additional share for every outstanding share of common stock held. The transfer agent distributed the shares resulting from the split on April 6, 2006. All share and per-share numbers contained herein, for all periods presented, reflect this stock split.
were outstanding.
Opti Incorporated
In early August 2006, we entered into settlement and license agreements associated with a litigation matter involving Opti. The agreements with Opti call for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. The agreements also provide for us to pay additional quarterly royalty payments in future periods commencing in February 2007 under certain circumstances. As a result of the settlement, during the three months ended July 30, 2006, we accrued a liability of $11.0 million in our consolidated balance sheet. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue. Please refer to Note 14 of our Notes to Condensed Consolidated Financial Statements for further information.
PortalPlayer, Inc.
On November 6, 2006, we entered into a definitive Agreement and Plan of Merger, or the Merger Agreement, with PortalPlayer, Inc., or PortalPlayer. PortalPlayer is a leading supplier of semiconductors, firmware, and software for personal media players, or PMPs, and secondary display-enabled computers.
Under terms of the Merger Agreement, we will pay $13.50 in cash for each outstanding share of PortalPlayer common stock, which represents a total purchase price of approximately $357 million, plus direct acquisition costs incurred. This acquisition has been approved by the Board of Directors of each company and is subject to regulatory approvals and other customary closing conditions. The consummation of the acquisition is subject to certain customary closing conditions, including antitrust approvals and adoption of the Merger Agreement by the stockholders of PortalPlayer. The acquisition is expected to close during our fourth quarter of fiscal 2007 and may not be completed if any of the closing conditions are not satisfied or waived.
Note 1815 - Subsequent Events Related to the Review of Stock Option Practices (Discussed in Note 2 of the Notes to Condensed Consolidated Financial Statements)Segment Information
Listing on The NASDAQ Stock Market
On September 11, 2006, NVIDIA filed a Form 12b-25 with the SEC to report that we would not timely file our Quarterly Report on Form 10-Q for the quarter ended July 30, 2006. On September 12, 2006 NVIDIA announced that we would request a hearing before the NASDAQ Listing Qualifications Panel, or the Panel, in response to the receipt of a NASDAQ Staff Determination letter on September 11, 2006 indicating that NVIDIA was not in compliance with the filing requirements for continued listing as set forth in Marketplace Rule 4310(c)(14). As anticipated, the letter was issued in accordance with NASDAQ procedures due to the delayed filing of our Form 10-Q for the quarter ended July 30, 2006. Pending a decision by the Panel, NVIDIA shares will remain listed on the NASDAQ Global Select Market. On October 19, 2006, we appeared for an oral hearing before the Panel. The Panel confirmed that our appeal had stayed the delisting action pending a final written decision by the Panel. The Panel’s decision is still pending. There can be no assurances that the Panel will grant our request for continued listing; however, by filing all of our required periodic reports with the SEC, we believe that we will have remedied our non-compliance with Marketplace Rule 4310(c)(14).
Lawsuits related to our historical stock option granting practices
Since September 29, 2006, nine derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. All cases purport to be brought derivatively on behalf of NVIDIA against members of our board of directors and several of our current and former officers. The cases are not currently consolidated, although all allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, constructive fraud, and violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief. We intend to take all appropriate action in response to these complaints.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-Q, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We plan to continue to cooperate with the SEC in its inquiry.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by those sections. When used in this report, the words “expects,” “believes,” “intends,” “anticipates,” “estimates,” “plans,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements relate to future periods and include, but are not limited to, statements as to the features, benefits, capabilities, performance, production and availability of our technologies and products, seasonality, possible acquisitions and the results of acquisitions, product cycles, our gross margin, product mix, our inventories, average selling prices, our strategies as to our primary businesses, growth of and factors contributing to the growth of our primary businesses, our competitors’ focuses, expensing of stock options, the impact of stock based compensation expense, use of the binomial model, our critical accounting policies, mix and sources of revenue, anticipated revenue, our relationship with SCE, our expectations regarding increases in and reasons for our expenditures, capital expenditures, our cash flow and cash balances, our liquidity, uses of cash, investments and marketable securities, our stock repurchase program, our results of operations, our competition and our competitive position, our intellectual property, the importance of our strategic relationships, customer demand, reliance on a limited number of customers, our internal control over financial reporting, our disclosure controls and procedures, our taxes, our international operations, our ability to attract and retain qualified personnel, our foreign currency risk strategy, compliance with environmental laws and regulations, charges we may take, the filings we amended in connection with our restatements, the periods we restated, our continued listing on the NASDAQ Global Select Market, litigation or regulatory action arising from the Audit Committee’s review and our restatements, Section 409A of the IRC and possible remedial measures, and the adoption of best practices in connection with the Audit Committee’s review. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks discussed below as well as unanticipated decreases in average selling prices of a particular product, difficulties associated with conducting international operations, increased sales of lower margin products, difficulty in collecting accounts receivable, our inability to decrease inventory purchase commitments, our inability to compete in new markets, the write-down of the value of inventory, entry of new competitors in our established markets, reduction in demand for or market acceptance of our 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 our key suppliers, fluctuations in general economic conditions, failure to achieve design wins, the seasonality of the PC and in the markets of our other primary businesses, international and political conditions, the concentration of sales of our products to a limited number of customers, decreases in demand for our products, delays in the development of new products by us or our partners, delays in volume production of our products, developments in and expenses related to litigation, the outcome of litigation or regulatory actions, determination by the NASDAQ Listing Panel to delist our stock and the matters set forth under Item 1A. - Risk Factors. These forward-looking statements speak only as of the date hereof. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
In this report, all references to “NVIDIA,” “we,” “us,” or “our,” mean NVIDIA Corporation and our subsidiaries.
NVIDIA, GeForce, SLI, NVIDIA GoForce, NVIDIA Quadro, and NVIDIA nForce are our trademarks or registered trademarks in the United States and other countries. We also refer to trademarks of other corporations and organizations in this document.
Restatement of Consolidated Financial Statements, Audit Committee and Company Findings
In May 2006, following media reports of stock option accounting investigations at other companies, the management of NVIDIA decided to conduct a review of stock option grants made by NVIDIA. Management advised our Board of Directors of the review at a regularly-scheduled meeting of the Board of Directors on May 25, 2006. The Board of Directors directed management to report its findings to the Audit Committee. Management presented its findings to the Audit Committee in late June 2006. Following that presentation, the Audit Committee determined that it should perform its own independent review of stock option grants made by NVIDIA. The Audit Committee, with the assistance of outside legal counsel, began its review on approximately June 29, 2006.
The Audit Committee’s review was completed on November 13, 2006 when the Audit Committee reported its findings to the full Board of Directors. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. As part of its review, the Audit Committee determined whether the correct measurement dates had been used under applicable accounting principles for these options. The measurement date means the date on which the option is deemed granted under applicable accounting principles, namely Accounting Principles Board Opinion No. 25, or APB 25,Accounting for Stock Issued to Employees and related interpretations, and is the first date on which all of the following are known: (1) the individual employee who is entitled to receive the option grant, (2) the number of options that an individual employee is entitled to receive, and (3) the option’s exercise price.
Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes. These errors resulted primarily from our use during our fiscal year 2000, 2001 and 2002, of certain date selection methods discussed below which resulted in employees receiving options with stated exercise prices lower than the market prices as measured based upon the actual grant dates. We ceased using such practices beginning in our fiscal year 2003. The Audit Committee found that, beginning in our fiscal year 2003, we improved our stock option grant processes and have generally granted and priced our employee stock options in an objective and consistent manner since that time. However, for one Company-wide annual stock option grant we made in fiscal 2004, we did not finalize the number of options allocated to each employee as of the stated grant date in May 2003, which resulted in stock-based compensation charges due to the change in the measurement date to the date the grants were finalized. The Audit Committee’s review did not identify any additional stock-based compensation charges from measurement date issues subsequent to that fiscal 2004 grant.
In accordance with APB 25, with respect to periods through January 29, 2006, we should have recorded stock-based compensation expense to the extent that the fair market value of our common stock on the correct measurement date exceeded the exercise price of each option granted. For periods commencing January 30, 2006 (the beginning of our fiscal year 2007), we record stock-based compensation expense in accordance with Statement of Financial Accounting Standards No. 123(R) (revised), or SFAS No. 123(R),Share-Based Payment. Changes in measurement dates have also contributed to incremental fair value of options under SFAS No. 123. As of the end of our fiscal year 2006, the unamortized incremental fair value charges resulting from the Audit Committee’s review were approximately $13.0 million, of which approximately $9.0 million are expected to be amortized in our fiscal year 2007.
As a result of the measurement date errors identified from the Audit Committee’s review, through January 29, 2006, we recorded aggregate non-cash stock-based compensation charges of $127.4 million, net of related tax effects. These charges were based primarily on APB 25 (intrinsic value-based) charges of $199.6 million on a pre-tax basis, which are being amortized over the vesting term of the stock options in accordance with Financial Accounting Standards Board Interpretation No. 28, or FIN 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. We have amortized a substantial portion of these charges to expense during our fiscal years 2000 to 2006. If an option is forfeited prior to vesting, we reverse both the charges amortized to expense in prior periods as well as any remaining unamortized deferred stock-based compensation associated with the forfeited options. Accordingly, our net stock-based compensation charges amortized to our statement of income are lower than the aggregate stock-based compensation charges based on APB 25 (intrinsic-value based). As of January 29, 2006, the remaining APB 25 (intrinsic value-based) unamortized deferred stock-based compensation related to the errors identified during the review was approximately $3.0 million.
The types of errors we identified were as follows:
Improper Measurement Dates forCompany-Wide Annual or Retention Stock Option Grants. We determined that, in connection with certain annual or retention stock option grants that we made to employees during our fiscal years 2000, 2001, 2002, 2003 and 2004, the final number of shares that an individual employee was entitled to receive was not determined and/or the proper approval of the related stock option grant had not been given until after the stated grant date. Therefore, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Years 2001 and 2002. In connection with stock option grants that we made to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during fiscal years 2001 and 2002, our practice was to grant stock options with an exercise price based upon the lowest closing price of our common stock in the last few days of the month of hire or the last few days of any subsequent month in the quarter of hire. The selection of the grant date of the related option grants would be made at the end of the fiscal quarter and was based on achieving the lowest exercise price for the affected employees. As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Year 2000. In connection with certain stock option grants to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during a portion of fiscal year 2000, our practice was to delay the selection of the related grant dates until the end of a two-month period in the fiscal quarter during which the employees who received the grants began their employment with NVIDIA. As a result of this practice, the exercise price of the related option grants was not determined until subsequent to the stated grant date. We also determined that, during fiscal year 2000, we generally set the grant date and exercise price of employee option grants for new hires and promotions at the lowest price of the last few business days of the month of their hire or promotion (or of the following month in certain two-month periods that were chosen for an indeterminate reason). As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options. In addition, we also determined that the exercise price or the number of options to be granted had not been determined, or the proper approval had not been given, for various other miscellaneous option grants during fiscal year 2000 until after the stated grant date - resulting in new measurement dates for accounting purposes for the related options.
Other Issues Identified.We also identified instances where stock option grants did not comply with applicable terms and conditions of the stock plans from which the grants were issued. For example, two grants were made to officers of NVIDIA by the chief executive officer under delegated authority; however, under the terms of the applicable plan, the option grant should have been made by our Board or the Compensation Committee. There were also instances where (1) option grants were made to a small group of employees who joined NVIDIA pursuant to a business combination, and to a few other employees in certain instances, with stated exercise prices below the fair market value of our common stock on the actual measurement date of the related grants; and (2) option grants were made to a few individuals who were contractors rather than employees, without recording the appropriate accounting charges. The accounting impact of these items was cumulatively less than $6.0 million. In addition, the Audit Committee did not find any evidence that these violations were committed for improper purposes.
The Audit Committee carefully considered the involvement of current members of management in the option grant process and concluded that the evidence did not give rise to any concern about the integrity of any current officer or director of NVIDIA. The Audit Committee also found that the accounting errors and improper practices brought to light during their review were not motivated by any intent to mislead investors, improve NVIDIA’s reported financial results, or obtain any personal benefit. Based on its findings, the Audit Committee was unable to reach any conclusion regarding the integrity of former officers and employees.
As a result of the errors we identified, we have restated our historical financial statements from our fiscal year 2000 through our fiscal year 2006 to record $127.4 million of charges related to stock-based compensation and associated payroll tax expense, net of related income tax effects. These errors resulted in after-tax charges of $1.4 million, $11.7 million and $25.8 million for our fiscal years 2006, 2005 and 2004, respectively. Additionally, the cumulative effect of the related after-tax charges for periods prior to our fiscal year ended January 25, 2004 was $88.4 million. These additional stock-based compensation expense charges were non-cash and had no impact on our reported revenue, cash, cash equivalents or marketable securities for each of the restated periods.
As part of the restatement, for the three and six month periods ended July 31, 2005, we recorded incremental stock-based compensation charges of $2.0 million and $4.5 million, a net (benefit)/charge for payroll taxes resulting from the expiration of statute of limitations of $0.4 million and $(4.7) million, and associated income tax (benefit)/charges of $(1.4) million, and $0.1 million, respectively.
For all periods through the end of our fiscal year 2006, we have recorded aggregate non-cash stock-based compensation charges of $190.2 million, associated payroll tax charges of $9.4 million and a related income tax benefit of $72.2 million.
As part of this restatement, we also accrued liabilities and recorded charges to operating costs and expenses for certain payroll tax contingencies related to the incremental stock-based compensation expense in the amount of $18.8 million for all annual periods from our fiscal year 2000 through our fiscal year 2006. We recorded such charges in the amount of $3.1 million, $1.3 million, and $1.6 million for our fiscal years 2006, 2005 and 2004, respectively. Upon expiration of the related statute of limitations, we also recorded benefits from the reversal of previously-recorded payroll tax liabilities of $6.6 million and $2.8 million in our fiscal years 2006 and 2005, respectively. As a result, the net benefit to our statements of income was $3.5 million and $1.5 million for our fiscal years 2006 and 2005, respectively. The cumulative payroll tax expense for periods prior to our fiscal year 2004 was $12.8 million. For those stock option grants that we determined to have incorrect measurement dates for accounting purposes and that we had originally issued as incentive stock options, or ISOs, we recorded a liability for payroll tax contingencies in the event such grants would not be respected as ISOs under the principles of the Internal Revenue Code, or IRC, and the regulations thereunder. These liabilities were recorded with a charge to operating costs and expenses.
We also considered the application of Section 409A of the IRC to certain stock option grants where, under APB 25, intrinsic value existed at the time of grant. In the event such stock options grants are not respected as issued at fair market value at the original grant date under principles of the IRC and the regulations thereunder and are subject to Section 409A, we are considering potential remedial actions that may be available. We do not expect to incur a material charge as a result of any such potential remedial actions.
As a result of the findings of the Audit Committee, we concluded that we needed to amend our Annual Report on Form 10-K for the fiscal year ended January 29, 2006 to restate our consolidated financial statements for the years ended January 29, 2006, January 30, 2005, and January 25, 2004 and the related disclosures, and our Form 10-Q for the three months ended April 30, 2006.
The following table sets forth the impact of the additional non-cash charges for stock-based compensation expense and related tax effects on our historical financial statements for the three and six months ended July 31, 2005.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
July 31, 2005 | July 31, 2005 | |||||||||||||||||||||||
As Previously Reported | Adjustments | As Restated(1) | As Previously Reported | Adjustments | As Restated(1) | |||||||||||||||||||
(In thousands, except share and per share data) | ||||||||||||||||||||||||
Revenue | $ | 574,812 | $ | — | $ | 574,812 | $ | 1,158,658 | $ | — | $ | 1,158,658 | ||||||||||||
Cost of revenue (A) | 357,278 | 159 | 357,437 | 730,971 | 451 | 731,422 | ||||||||||||||||||
Gross profit | 217,534 | (159 | ) | 217,375 | 427,687 | (451 | ) | 427,236 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Research and development (A) | 85,814 | 1,299 | 87,113 | 171,727 | 3,221 | 174,948 | ||||||||||||||||||
Sales, general and administrative (A) | 51,683 | 986 | 52,669 | 99,741 | (3,855 | ) | 95,886 | |||||||||||||||||
Settlement costs | — | — | — | — | — | — | ||||||||||||||||||
Total operating expenses | 137,497 | 2,285 | 139,782 | 271,468 | (634 | ) | 270,834 | |||||||||||||||||
Operating income | 80,037 | (2,444 | ) | 77,593 | 156,219 | 183 | 156,402 | |||||||||||||||||
Interest income | 4,867 | — | 4,867 | 8,762 | — | 8,762 | ||||||||||||||||||
Interest expense | (2 | ) | — | (2 | ) | (12 | ) | — | (12 | ) | ||||||||||||||
Other income (expense), net | 354 | — | 354 | 842 | — | 842 | ||||||||||||||||||
Income before income tax expense | 85,256 | (2,444 | ) | 82,812 | 165,811 | 183 | 165,994 | |||||||||||||||||
Income tax expense | 10,419 | (1,440 | ) | 8,979 | 26,530 | 109 | 26,639 | |||||||||||||||||
Net income | $ | 74,837 | $ | (1,004 | ) | $ | 73,833 | $ | 139,281 | $ | 74 | $ | 139,355 | |||||||||||
Basic net income per share: | $ | 0.22 | — | $ | 0.22 | $ | 0.41 | — | $ | 0.41 | ||||||||||||||
Diluted net income per share: | $ | 0.21 | (0.01 | ) | $ | 0.20 | $ | 0.39 | — | $ | 0.39 | |||||||||||||
Shares used in basic per share computation | 337,886 | — | 337,886 | 337,590 | — | 337,590 | ||||||||||||||||||
Shares used in diluted per share computation | 361,580 | 94 | 361,674 | 361,224 | 63 | 361,287 |
Three Months Ended July 31, 2005 | Six Months Ended July 31, 2005 | ||||||
(As Restated)(1) | (As Restated)(1) | ||||||
Cost of revenue | $ | 159 | $ | 451 | |||
Research and development | 1,299 | 3,221 | |||||
Sales, general and administrative | 986 | (3,855 | ) |
Overview
NVIDIA Corporation is the worldwide leader in programmable graphics processor technologies. Our products are designed to enhance the end-user experience on consumer and professional computing devices. We have four major product-line operating segments: the graphics processing unit, or GPU, Business; the media and communications processor, or MCP, Business; the Handheld GPU Business, and the Consumer Electronics Business. Our GPU Business is composed of products that support desktop personal computers, or PCs, notebook PCs and professional workstations; our MCP Business is composed of NVIDIA nForce products that operate 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; our Handheld GPU Business is composed of products that support handheld personal digital assistants, cellular phones and other handheld devices; and our Consumer Electronics Business is concentrated in products that support video game consoles and other digital consumer electronics devices and is composed of our contractual arrangements with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3, sales of our Xbox-related products, revenue from our license agreement with Microsoft Corporation, or Microsoft, relating to the successor product to their initial Xbox gaming console, the Xbox360, and related devices, and embedded graphics processor products. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internet address iswww.nvidia.com.
Original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize NVIDIA embedded graphics processors as a core component of their entertainment and business solutions. Our GPUs deliver superior performance and crisp visual quality for PC-based applications such as manufacturing, science, e-business, entertainment and education. Our MCPs perform highly demanding multimedia processing for secure broadband connectivity, communications and breakthrough audio functions. Our handheld GPUs deliver an advanced visual experience by accelerating graphics and video applications while implementing design techniques that are designed to result in high performance and low power consumption.
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 performance in the second half of the calendar year related to the back-to-school and holiday seasons.
Recent Developments, Future Objectives and Challenges
GPU Business
The combination of our GeForce 7 and GeForce 6 series of GPUs and our Scalable Link Interface, or SLI, technology has created a new class of gaming PCs and professional workstations. SLI technology takes advantage of the increased bandwidth of the peripheral component interconnect, or PCI, Express bus architecture to allow up to four NVIDIA-based graphics cards to operate in a single PC or up to two NVIDIA-based graphics cards to operate in a notebook PC or professional workstation.
During the first quarter of fiscal 2007, we shipped eight new GeForce 7 series GPUs for desktop and notebook PCs, and now offer a top-to-bottom family of GeForce 7 GPUs. In March 2006, we shipped our first Quad SLI system for desktop PCs, enabling the use of four GPUs per system. We also shipped the GeForce Go 7800 GTX notebook GPU featuring SLI technology for notebook PCs.
During the second quarter of fiscal 2007, our NVIDIA GeForce Go notebook GPU product line achieved record revenue for the second consecutive quarter. In addition, our NVIDIA Quadro professional product line increased its revenue 27% from the second quarter of fiscal 2006 and achieved record revenue. In the performance segment, where the price/performance ratio is critical, we continue to gain momentum. We transitioned from our highly popular NVIDIA GeForce 6600 to the NVIDIA GeForce 7600, which delivers almost a 100% performance increase at the same price points.
In June 2006, we shipped the GeForce 7950 GX2, which provides 2500x1600 resolution. This is the resolution of cinematic film, thirteen times the resolution of television, and brings the 16:9 panoramic experience of cinema to gaming. We also announced PureVideo HD technology – a combination of hardware acceleration from an NVIDIA GPU, high definition movie player integration and HDCP feature support, to enable manufacturers and consumers to build PCs that can play HD DVD or Blu-ray movies.
In August 2006, we introduced the NVIDIA Quadro Plex 1000, the world’s first dedicated Visual Computing System. The NVIDIA Quadro Plex 1000 offers advanced scalability in a desktop or dense 3U rackmount configuration for demanding professional applications such as those powering multiple streams of 4K high-definition video, 3D styling and design, scientific and medical visualization, oil and gas exploration, or visual simulation and training.
We expect additional growth in our GPU Business during the remainder of fiscal 2007. We believe that sales of our desktop and notebook GPU products will be increased by share gains from our anticipated position in the market, the release of Microsoft’s next generation operating system, Microsoft Windows Vista, or Vista, the introduction of high-definition, or HD, and Blu-ray video. The GeForce 7 and GeForce 6 series of desktop and notebook GPUs are designed to be compatible with Vista. We believe that in the upcoming year there will be increased demand for HD and Blu-ray video, and that SCE’s PlayStation3 will be a key driver of demand for HD. We expect HD and Blu-ray video to promote increased demand for the video processing capabilities of our next generation GPUs.
MCP Business
In February 2006, we completed our acquisition of ULi Electronics, Inc., or ULi, a core logic developer for the PC industry. This acquisition represents our ongoing investment in our platform solution strategy and is expected to strengthen our sales, marketing, and customer engineering presence in Taiwan and China.
In March 2006, we shipped our first integrated graphics processor, or IGP, core-logic solution for Advanced Micro Devices, or AMD,-based notebook PCs - the GeForce Go 6100 GPU and NVIDIA nForce Go 430 MCP. This core logic solution is the industry’s first high-definition IGP to provide hardware accelerated H.264 high-definition video playback.
In May 2006, we shipped our new NVIDIA nForce 590 SLI, a high-performance motherboard solution for the latest and upcoming x86 PC platforms, including those based on socket AM2 processors by AMD. The NVIDIA nForce 590 SLI can utilize the power of up to one, two, or even four NVIDIA GeForce GPUs for extreme HD gaming.
In June 2006, we introduced the NVIDIA nForce 590 SLI for Intel Core2 Duo and Core 2 Extreme CPUs.
Our NVIDIA nForce product line has achieved record revenue for eight consecutive quarters. We believe that the transition by AMD to K8, our extension into new segments, and our entry into the Intel market with our first ever mainstream Intel nForce4 MCPs will make our MCP Business one of our fastest growing businesses. Furthermore, we believe that our ability to simultaneously innovate using our GPU, MCP, and software knowledge base will allow us to make additional platform innovations in the future.
Handheld GPU Business
In March 2006, NVIDIA and Intel Corporation, or Intel, announced a collaboration to bring a high-performance 3D gaming and multimedia platform to handheld devices. The collaboration combines the NVIDIA GoForce family of handheld GPUs with Intel’s newest processor family, which is based on the third-generation Intel XScale architecture, to deliver a powerful development platform to content developers.
Our GoForce handheld GPUs are now shipping in the Motorola 3G RAZR V3X, SLVR L6i, SLVR L7i, MOTORAZR Maxx, and Sony Ericsson Walkman phones. Our newest handheld GPU, the NVIDIA GoForce 5500 GPU, has been designed into Digital Video Broadcast - Handheld, or DVB-H, phones in North America, Europe, and Integrated Services Digital Broadcasting - Terrestrial, or ISDB-T, in Japan. Two out of the first three DVB-H television service launches in the world are based on phones powered by our handheld GPU.
In addition, in March 2006 we acquired Hybrid Graphics Ltd., a developer of embedded 2D and 3D graphics software for handheld devices. We believe that this acquisition will enable the customers of both companies to deploy rich graphics solutions for the worldwide handheld market.
In June 2006, we launched our MobileMedia Platform for handheld devices running Windows Mobile 5.0. The MobileMedia Platform is a development kit, containing both software and hardware components, that enables handheld manufacturers to design and release digital media-rich devices with Windows Mobile 5.0.
Our strategy in the Handheld GPU Business is to lead innovation and capitalize on the emergence of the cellular phone as a versatile consumer lifestyle device and to build a new class of low power GPUs for multimedia rich devices like 3G cell phones, smart phones, and portable media players. The increasing availability of digital media content for 3G has increased demand for our handheld GPUs. We believe that the graphics and multimedia capability of our handheld GPUs has put us in the position to benefit from the increasing multimedia demands of smart phones. We believe that there will be an increase in demand for mobile video products that deliver compelling and tangible improvements to the overall end user experience of these new services, and we believe that we are well positioned to increase our share of the handheld segment.
Gross Margin Improvement
We continue to remain intensely focused on improving our gross margin. Beginning in fiscal 2005, we implemented profit improvement initiatives across our company, which were designed to improve business and operational processes. During the second quarter of fiscal 2007, our gross margin was 42.5%, which represents an increase of 470 basis points from our gross margin of 37.8% for the second quarter of fiscal 2006. In addition to the positive impact on our gross margin of our implementation of profit improvement measures, we realized a significant contribution from our GeForce 7 products, which have experienced higher average gross margins than previous generations of our products.
Our gross margin is significantly impacted by product mix, which is often difficult to estimate with accuracy and thus if we achieve significant revenue growth in our lower margin businesses, it may negatively impact our gross margin. We believe that we can continue to improve our gross margin during the second half of fiscal 2007.
Stock-Based Compensation
Effective January 30, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R),Share-Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the awards, and is recognized as expense over the requisite employee service period. As such, our stock-based compensation expense, net of associated payroll taxes, totaled $28.9 and $51.1 million during the second quarter and first half of fiscal 2007, respectively.
Subsequent Events
Opti Incorporated. In early August 2006, we entered into settlement and license agreements associated with a litigation matter involving Opti. The agreements with Opti call for us to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us and for certain patent license rights. The agreements also provide for us to pay additional quarterly royalty payments in future periods commencing in February 2007 under certain circumstances. As a result of the settlement, during the three months ended July 30, 2006, we accrued a liability of $11.0 million in our consolidated balance sheet. Of this $11.0 million, we recorded $8.0 million as a patent-related intangible asset and $3.0 million as a charge to cost of revenue. Please refer to Note 14 of our Notes to Condensed Consolidated Financial Statements for further information.
Listing on the NASDAQ Stock Market. On September 11, 2006, NVIDIA filed a Form 12b-25 with the SEC to report that we would not timely file our Quarterly Report on Form 10-Q for the quarter ended July 30, 2006. On September 12, 2006 NVIDIA announced that we would request a hearing before the NASDAQ Listing Qualifications Panel, or the Panel, in response to the receipt of a NASDAQ Staff Determination letter on September 11, 2006 indicating that NVIDIA was not in compliance with the filing requirements for continued listing as set forth in Marketplace Rule 4310(c)(14). As anticipated, the letter was issued in accordance with NASDAQ procedures due to the delayed filing of our Form 10-Q for the quarter ended July 30, 2006. Pending a decision by the Panel, NVIDIA common stock will remain listed on the NASDAQ Global Select Market. On October 19, 2006, we appeared for an oral hearing before the Panel and the Panel confirmed that our appeal had stayed the delisting action pending a final written decision by the Panel. The Panel’s decision is still pending. There can be no assurances that the Panel will grant our request for continued listing; however, by filing all of our required periodic reports with the SEC, we believe that we will have remedied our non-compliance with Marketplace Rule 4310(c)(14).
Lawsuits related to our historical stock option granting practices. Since September 29, 2006, nine derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. All cases purport to be brought derivatively on behalf of NVIDIA against members of our board of directors and several of our current and former officers. The cases are not currently consolidated, although all allege in substantially similar fashion claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, constructive fraud, and violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief. We intend to take all appropriate action in response to these complaints.
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the date of the filing of this Form 10-Q, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We plan to continue to cooperate with the SEC in its inquiry.
PortalPlayer, Inc. On November 6, 2006, we entered into a definitive Agreement and Plan of Merger, or the Merger Agreement, with PortalPlayer, Inc., or PortalPlayer. PortalPlayer is a leading supplier of semiconductors, firmware, and software for personal media players (PMPs) and secondary display-enabled computers.
Under terms of the Merger Agreement, we will pay $13.50 in cash for each outstanding share of PortalPlayer common stock, which represents a total purchase price of approximately $357 million, plus direct acquisition costs incurred. This acquisition has been approved by the Board of Directors of each company and is subject to regulatory approvals and other customary closing conditions. The consummation of the acquisition is subject to certain customary closing conditions, including antitrust approvals and adoption of the Merger Agreement by the stockholders of PortalPlayer. The acquisition is expected to close during our fourth quarter of fiscal 2007 and may not be completed if any of the closing conditions are not satisfied or waived.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, stock-based compensation, income taxes, and goodwill. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Stock-Based Compensation. Effective January 30, 2006, we adopted the provisions of SFAS No. 123(R). We estimate the fair value of stock options using a binomial model, consistent with the provisions of SFAS No. 123(R) and SEC Staff Accounting Bulletin No. 107,Share-Based Payment. Option-pricing models require the input of highly subjective assumptions, including the price volatility of the underlying stock. During the first quarter of fiscal 2006, we determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. Additionally, during the first quarter of fiscal 2006 we began segregating options into groups for employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees’ exercise behavior, vesting schedules, and death and disability probabilities. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised and cancelled. We believe the resulting binomial calculation provides a more refined estimate of the fair value of our employee stock options. For our employee stock purchase plan, we decided to continue to use the Black-Scholes model to calculate the estimated fair value.
Other than related to our implementation of SFAS No. 123(R) during the six months ended July 30, 2006, as described above, there were no other material changes in our critical accounting policies and estimates during the first six months of fiscal 2007 from those disclosed in our Annual Report on Form 10-K/A, or Form 10-K/A, for the year ended January 29, 2006. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Form 10-K/A for a discussion of our critical accounting policies and estimates.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our condensed consolidated income statements expressed as a percentage of revenue.
Three Months Ended | Six Months Ended | |||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||||||
(As Restated) | (As Restated) | |||||||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of revenue | 57.5 | 62.2 | 57.6 | 63.1 | ||||||||
Gross profit | 42.5 | 37.8 | 42.4 | 36.9 | ||||||||
Operating expenses: | ||||||||||||
Research and development | 18.6 | 15.1 | 18.3 | 15.1 | ||||||||
Sales, general and administrative | 10.0 | 9.2 | 9.7 | 8.3 | ||||||||
Total operating expenses | 28.6 | 24.3 | 28.0 | 23.4 | ||||||||
Operating income | 13.9 | 13.5 | 14.4 | 13.5 | ||||||||
Interest and other income, net | 1.3 | 0.9 | 1.3 | 0.8 | ||||||||
Income before income tax expense | 15.2 | 14.4 | 15.7 | 14.3 | ||||||||
Income tax expense | 2.6 | 1.6 | 2.7 | 2.3 | ||||||||
Cumulative effect of change in accounting principle, net of income tax | — | — | 0.1 | — | ||||||||
Net income | 12.6 | % | 12.8 | % | 13.1 | % | 12.0 | % | ||||
Three and Six Months Ended July 30, 2006 and July 31, 2005
Revenue
Our operating segments are organized to bring all of our major product groups in line with our strategy to position ourselves as the worldwide leader in programmable graphics processor technologies. We report financial information for four product-line operating segments to our Chief Executive Officer, who is considered to be our chief operating decision maker, as follows:or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.
Revenue was $687.5 millionsegment reporting are the same as for the second quarter of fiscal 2007 and $574.8 million for the second quarter of fiscal 2006, which represented an increase of 19.6%. Revenue was $1.37 billion for the first half of fiscal 2007 and $1.16 billion for the first half of fiscal 2006, which represented an increase of 18.2%. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business.GPU Business revenue increased by 19.0% to $459.1 million for the second quarter of fiscal 2007 compared to $385.8 million for the second quarter of fiscal 2006. The $73.3 million increase was a result of increased sales of our desktop products, led by our GeForce 7-based products, which we began selling in the second quarter of fiscal 2006. In addition, sales of our NVIDIA professional workstation products and notebook products also continued to improve due to an increased mix of GeForce 7-based products.
GPU Business revenue increased by 14.5% to $911.5 million for the first half of fiscal 2007 compared to $795.8 million for the first half of fiscal 2006. The $115.7 million increase was primarily the result of increased sales of our GeForce 7 families of desktop GPUs that serve the high-end segment. Sales of our NVIDIA Quadro workstation and notebook products continued to improve, offset by lower average selling prices.
MCP Business.MCP Business revenue increased by 83.4% to $139.1 million for the second quarter of fiscal 2007 compared to $75.9 million for the second quarter of fiscal 2006. MCP Business revenue increased by 74.4% to $257.5 million for the first half of fiscal 2007 compared to $147.7 million for the first half of fiscal 2006. The overall increase in MCP business revenue is primarily due to sales of newer NVIDIA nForce4 products, NVIDIA nForce5 products, and integrated AMD-based desktop products, all of which we first began shipping during fiscal periods subsequent to the second quarter of fiscal 2006. In addition, revenue also increased as a result of our acquisition of ULi in February 2006.
Handheld GPU Business.Handheld GPU Business revenue increased by $25.2 million to $27.3 million for the second quarter of fiscal 2007 compared to $2.1 million for the second quarter of fiscal 2006. Handheld GPU Business revenue increased by $48.2 million to $58.1 million for the first half of fiscal 2007 compared to $9.9 million for the first half of fiscal 2006. The overall increase in Handheld GPU Business revenue is due to increased product sales related to high-end feature phone products and revenue recognized as a result of a development contract.
Consumer Electronics Business.Consumer Electronics Business revenue decreased by 65.9% to $27.8 million for the second quarter of fiscal 2007 compared to $81.5 million for the second quarter of fiscal 2006. Consumer Electronics Business revenue decreased by 61.3% to $54.0 million for the first half of fiscal 2007 compared to $139.6 million for the first half of fiscal 2006. The decrease in our Consumer Electronics Business is a result of discontinued sales of our Xbox-related products to Microsoft, partially offset by revenue recognized from our contractual arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3. The second quarter of fiscal 2006 was the last quarter during which we recognized revenue from the sale of our Xbox-related products to Microsoft.
Concentration of Revenue
Revenue from sales to customers outside of the United States and other Americas accounted for 83% and 76% of revenue for the second quarter of fiscal 2007 and 2006, respectively. Revenue from sales to customers outside of the United States and other Americas accounted for 84% and 79% of revenue for the first half of fiscal 2007 and 2006, respectively. whole.
GPU | PSB | MCP | CPB | All Other | Consolidated | ||||||||||||||
(In thousands) | |||||||||||||||||||
Three Months Ended April 29, 2007: | |||||||||||||||||||
Revenue | $ | 483,495 | $ | 140,873 | $ | 148,750 | $ | 67,226 | $ | 3,936 | $ | 844,280 | |||||||
Depreciation and amortization expense | $ | 8,285 | $ | 2,187 | $ | 6,593 | $ | 6,095 | $ | 9,162 | $ | 32,322 | |||||||
Operating income (loss) | $ | 124,417 | $ | 69,307 | $ | 7,839 | $ | 10,168 | $ | (70,485 | ) | $ | 141,246 | ||||||
Three Months Ended April 30, 2006: | |||||||||||||||||||
Revenue | $ | 404,807 | $ | 100,042 | $ | 118,384 | $ | 57,385 | $ | 1,189 | $ | 681,807 | |||||||
Depreciation and amortization expense | $ | 6,870 | $ | 1,828 | $ | 4,278 | $ | 3,786 | $ | 8,109 | $ | 24,871 | |||||||
Operating income (loss) | $ | 87,239 | $ | 45,064 | $ | 2,983 | $ | 17,165 | $ | (50,942) | $ | 101,509 |
April 29, 2007 | April 30, 2006 | |||||
(In thousands) | ||||||
Revenue: | ||||||
United States | $ | 101,866 | $ | 77,372 | ||
Other Americas | 54,544 | 27,590 | ||||
China | 238,285 | 179,720 | ||||
Taiwan | 272,983 | 227,574 | ||||
Other Asia Pacific | 95,052 | 111,218 | ||||
Europe | 81,550 | 58,333 | ||||
Total revenue | $ | 844,280 | $ | 681,807 |
Sales to our largest customers accounted for approximately 15% and approximately 23% of ourtotal revenue for the second quarterthree months ended April 29, 2007. One customer represented approximately 14% of fiscal 2007 and 2006, respectively. Sales to our largest customers accounted for approximately 17% and approximately 35% of our revenue for the first half of fiscal 2007 and 2006, respectively.
Gross Profitthree months ended April 30, 2006.
Gross profit consists
GPU Business.The gross marginan additional $1.0 billion of our GPU Business increased during the second quarter of fiscal 2007 as compared to the second quarter of 2006, as well as during the first half of fiscal 2007 as compared to the first half of fiscal 2006 primarily due to the success of our GeForce 7 series GPUs, which have experienced higher gross margins than our previous generations of GPUs.
MCP Business.The gross margin of our MCP Business decreased during the second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006, as well as during the first half of fiscal 2007 as compared to the first half of fiscal 2006 primarily due tocommon stock over a shift in product mix to higher volumes of integrated AMD-based desktop products which have experienced lower gross margins than our discrete MCP products, and inventory reserves that we recorded as a charge to cost of revenue during the first quarter of fiscal 2007 of approximately $4.1 million related to certain NVIDIA nForce purchase commitments that we believed had exceeded future demand.
Handheld GPU Business.The gross margin of our Handheld GPU Business increased during the second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006, as well as during the first half of fiscal 2007 as compared to the first half of fiscal 2006. This increase is primarily due to the write-off in the first quarter of fiscal 2006 of certain handheld products that we believed exceeded the demand of our handheld customers, which at that time was heavily concentrated at one OEM.
Consumer Electronics Business.The gross margin of our Consumer Electronics Business increased during the second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006, as well as during the first half of fiscal 2007 as compared to the first half of fiscal 2006 primarily due to development, software and license revenue from our contractual arrangements with SCE for the development of its PlayStation3 computer entertainment system.
Consolidated Gross Margin
The improvement in our gross margin reflects our continuing focus on delivering cost effective product architectures, enhancing business processes and delivering profitable growth. However, our gross margin is significantly impacted by product mix, which is often difficult to estimate with accuracy and thus if we achieve significant revenue growth in our lower margin businesses, it may negatively impact our gross margin. We believe that we can continue to improve our gross margin during the second half of fiscal 2007.
Operating Expenses
Research and Development
Three Months Ended | $ Change | % Change | Six Months Ended | $ Change | % Change | |||||||||||||||||||||||||
July 30, 2006 | July 31, 2005 | July 30, 2006 | July 31, 2005 | |||||||||||||||||||||||||||
(As Restated) | (As Restated) | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||
Research and Development: | ||||||||||||||||||||||||||||||
Salaries and benefits | $ | 67.0 | $ | 50.1 | $ | 16.9 | 34 | % | $ | 135.0 | $ | 99.0 | $ | 36.0 | 36 | % | ||||||||||||||
Computer software and lab equipment | 13.4 | 11.5 | 1.9 | 17 | % | 26.3 | 22.4 | 3.9 | 17 | % | ||||||||||||||||||||
New product development | 7.3 | 8.5 | (1.2 | ) | (14 | )% | 14.8 | 15.3 | (0.5 | ) | (3 | )% | ||||||||||||||||||
Facility expense | 8.8 | 8.3 | 0.5 | 6 | % | 16.9 | 16.1 | 0.8 | 5 | % | ||||||||||||||||||||
Depreciation and amortization | 15.1 | 14.3 | 0.8 | 6 | % | 30.1 | 28.6 | 1.5 | 5 | % | ||||||||||||||||||||
Stock-based compensation | 16.6 | 1.3 | 15.3 | 1,177 | % | 31.0 | 3.2 | 27.8 | 869 | % | ||||||||||||||||||||
License and development project costs | (4.9 | ) | (9.6 | ) | 4.7 | (49 | )% | (10.7 | ) | (14.3 | ) | 3.6 | (25 | )% | ||||||||||||||||
Other | 4.0 | 2.7 | 1.3 | 48 | % | 7.1 | 4.6 | 2.5 | 54 | % | ||||||||||||||||||||
Total | $ | 127.3 | $ | 87.1 | $ | 40.2 | 46 | % | $ | 250.5 | $ | 174.9 | $ | 75.6 | 43 | % | ||||||||||||||
Research and development as a percentage of net revenue | 19 | % | 15 | % | 18 | % | 15 | % |
Research and development expenses were $127.3 million and $87.1 million in the second quarter of fiscal 2007 and fiscal 2006, respectively, an increase of $40.2 million, or 46%. This increase was primarily due to a $16.9 million increase in salaries and benefits related to 772 additional personnel, which includes employees from our acquisitions of ULi and Hybrid Graphics in the first quarter of fiscal 2007. In addition, during the second quarter of fiscal 2007, non-cash stock-based compensation expense related to research and development employees increased by $15.3 million asthree year period through May 2010. As a result of our adoption of SFAS No. 123(R) inthis increase, we have an ongoing authorization from the first quarter of fiscal 2007. License and development project costs decreased by $4.7 million primarily due to a decrease in development costs related to our collaboration with SCE and other engineering costs that are classified as cost of revenue in our condensed consolidated income statement, or were capitalized on our condensed consolidated balance sheet and will be expensed on a percentage of completion basis under a development contract. Computer software and lab equipment increased by $1.9 million, and other expense increased by $1.4 million primarily due to travel and training costs associated with international expansion.
Research and development expenses were $250.5 million and $174.9 million for the first half of fiscal 2007 and fiscal 2006, respectively, an increase of $75.6 million, or 43%. This increase was primarily due to a $36.0 million increase in salaries and benefits related to 772 additional personnel, which includes employees from our acquisitions of ULi and Hybrid Graphics in the first quarter of fiscal 2007. In addition, for the first half of fiscal 2007 non-cash stock-based compensation expense related to research and development employees increased by $27.8 million as a result of our adoption of SFAS No. 123(R) in the first quarter of fiscal 2007. License and development project costs decreased by $3.6 million primarily due to a decrease in development costs related to our collaboration with SCE, and other engineering costs that are classified as cost of revenue in our condensed consolidated income statement or were capitalized on our condensed consolidated balance sheet and will be expensed on a percentage of completion basis under a development contract. Computer software and lab equipment increased by $3.9 million, and other expense increased by $2.6 million primarily due to travel and training costs associated with international expansion. Depreciation and amortization expense increased by $1.5 million associated with growth from additional personnel.
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 current level of revenue.
Sales, General and Administrative
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
July 30, 2006 | July 31, 2005 | $ Change | % Change | July 30, 2006 | July 31, 2005 | $ Change | % Change | |||||||||||||||||||||||
(As Restated) | (As Restated) | |||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||
Sales, General and Administrative: | ||||||||||||||||||||||||||||||
Salaries and benefits | $ | 32.4 | $ | 28.0 | $ | 4.4 | 16 | % | $ | 65.2 | $ | 54.2 | $ | 11.0 | 20 | % | ||||||||||||||
Advertising and promotions | 9.3 | 6.9 | 2.4 | 35 | % | 18.0 | 13.8 | 4.2 | 30 | % | ||||||||||||||||||||
Legal and accounting fees | 3.8 | 4.6 | (0.8 | ) | (17 | )% | 6.6 | 8.6 | (2.0 | ) | (23 | )% | ||||||||||||||||||
Facility expense | 4.3 | 3.0 | 1.3 | 43 | % | 8.3 | 6.1 | 2.2 | 36 | % | ||||||||||||||||||||
Depreciation and amortization | 8.2 | 8.3 | (0.1 | ) | (1 | )% | 16.2 | 16.3 | (0.1 | ) | (1 | )% | ||||||||||||||||||
Stock-based compensation (1) | 10.5 | 1.0 | 9.5 | 950 | % | 17.1 | (3.8 | ) | 20.9 | 550 | % | |||||||||||||||||||
Other | 0.6 | 0.9 | (0.3 | ) | (33 | )% | 1.6 | 0.7 | 0.9 | 129 | % | |||||||||||||||||||
Total | $ | 69.1 | $ | 52.7 | $ | 16.4 | 31 | % | $ | 133.0 | $ | 95.9 | $ | 37.1 | 39 | % | ||||||||||||||
Sales, general and administrative as a percentage of net revenue | 10 | % | 9 | % | 10 | % | 8 | % |
(1) Stock-based compensation includes charges/credits relating to payroll taxes accrued for as part of the restatement. See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information.
Sales, general and administrative expenses were $69.1 million and $52.7 million in the second quarter of fiscal 2007 and fiscal 2006, respectively, an increase of $16.4 million, or 31%. During the second quarter of fiscal 2007, non-cash stock-based compensation expense related to sales, general and administrative employees increased by $9.5 million as a result of our adoption of SFAS No. 123(R) in the first quarter of fiscal 2007. Salaries and benefits increased $4.4 million as a result of having 169 additional personnel within sales, general and administrative functions. Advertising and promotions increased $2.4 million primarily related to an increase in certain advertising programs. Facility expense increased $1.3 million primarily due to our ongoing international expansion.
Sales, general and administrative expenses were $133.0 million and $95.9 million for the first half of fiscal 2007 and fiscal 2006, respectively, an increase of $37.1 million, or 39%. During the first half of fiscal 2007, non-cash stock-based compensation expense related to sales, general and administrative employees increased by $20.9 million as a result of our adoption of SFAS No. 123(R) in the first quarter of fiscal 2007. Salaries and benefits increased $11.0 million as a result of having 169 additional personnel. Advertising and promotions increased $4.2 million primarily related to an increase in marketing development fund programs and
certain advertising programs. Facility expense increased $2.2 million primarily due to our ongoing international expansion. These increases were offset by a decrease of $2.0 million in legal and accounting fees primarily related to insurance reimbursements for legal fees that we received during the first half of fiscal 2007.
We expect sales, general and administrative expenses to continue to increase in absolute dollars as we continue to support our operations and global business expansion efforts, expand our sales, launch our new products, and protect our business interests.
Stock-Based Compensation
Stock-based compensation expense totaled $28.9 million during the second quarter of fiscal 2007 as compared to $2.4 million during the second quarter of fiscal 2006. Stock-based compensation expense totaled $51.1 million during the first half of fiscal 2007 as compared to $(0.2) million during the first half of fiscal 2006. Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board, Opinion No. 25, or APB No. 25,Accounting for Stock Issued to Employees, and related interpretations to account for our stock-based employee compensation plans. As such, compensation expense was recorded if on the date of grant the current fair value per share of the underlying stock exceeded the exercise price per share. Please see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restatement of Consolidated Financial Statements, Audit Committee and Company Findings” for further discussion of our stock-based compensation recorded under APB No. 25.
We elected to adopt the modified prospective application method beginning January 30, 2006 as provided by SFAS No. 123(R). Accordingly, during the three and six months ended July 30, 2006, we recorded stock-based compensation expense equal to the amount that would have been recognized if the fair value method required for pro forma disclosure under SFAS No. 123 had been in effect for expense recognition purposes, adjusted for estimated forfeitures. We recognize SFAS No. 123 stock-based compensation expense using the straight-line attribution method. As of July 30, 2006, the unearned stock-based compensation balance was $176.3 million and will be recognized over an estimated weighted average amortization period of 2.0 years. We anticipate that our stock-based compensation expense will increase during the third quarter of fiscal 2007. Stock-based compensation charges are included in the “all other” category for segment reporting purposes.
Interest Income
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $8.8 million and $4.9 million in the second quarter of fiscal 2007 and fiscal 2006, respectively, an increase of $3.9 million. Interest income was $17.6 million and $8.8 million for the first half of fiscal 2007 and fiscal 2006, respectively, an increase of $8.8 million. These increases were primarily the result of higher average balances of cash, cash equivalents, and marketable securities and higher yields during the first half of fiscal 2007 when compared to the first half of fiscal 2006.
Income Taxes
We recognized income tax expense of $17.8 million and $9.0 million in the second quarter of fiscal 2007 and fiscal 2006, respectively. Income tax expense as a percentage of income before taxes, or our annual effective tax rate, was 17% for the second quarter of fiscal 2007 and 10.8% for the second quarter of fiscal 2006. During the second quarter of fiscal 2006, we reduced our effective tax rate to 16% for the year due primarily to changes in our geographical mix of income subject to tax, resulting in an effective tax rate of 10.8% for the second quarter of fiscal 2006. We recognized income tax expense of $36.5 million and $26.7 million for the first half of fiscal 2007 and fiscal 2006, respectively. Our annual effective tax rate was 17% for the first half of fiscal 2007 and 16.0% for the first half of fiscal 2006. Our effective tax rate is lower than the United States Federal Statutory rate of 35% due primarily to income earned in lower tax jurisdictions.
Liquidity and Capital Resources
As of July 30, 2006 | As of January 29, 2006 | |||||
(In millions) | ||||||
Cash and cash equivalents | $ | 388.4 | $ | 551.8 | ||
Marketable securities | 462.7 | 398.4 | ||||
Cash, cash equivalents, and marketable securities | $ | 851.1 | $ | 950.2 | ||
As of July 30, 2006, we had $851.1 million in cash, cash equivalents and marketable securities, a decrease of $99.1 million from $950.2 million at the end of fiscal 2006. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.
Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Six Months Ended July 30, 2006 July 31, 2005 (In millions) $ 67.4 $ 136.9 $ (172.5 ) $ (60.3 ) $ (58.2 ) $ (43.0 )
We generated cash from operating activities for the first half of fiscal 2007 primarily from our net income of $178.8 million. Offsetting cash from net income was an increase in accounts receivable primarily driven by decreased linearity of sales and decreased cash collections during the second quarter of 2007. In addition, we used cash to purchase inventories related to many of our recently introduced GeForce 7 products in anticipation of future sales of such products.
Cash used in investing activities has consisted primarily of investments in marketable securities and purchases of property and equipment, which include leasehold improvements for our facilities, and the purchase of intangible assets and businesses. Net cash used by investing activities of $172.5 million during the first half of fiscal 2007 was primarily due to $67.0 million of cash used for business acquisitions, $64.7 million of net purchases of marketable securities, and $40.8 million for capital expenditures, including purchases of new research and development equipment, hardware equipment, technology licenses, software and intangible assets. We expect to spend approximately $40 million to $60 million for capital expenditures during the remainder of fiscal 2007, primarily for purchases of software licenses, emulation equipment, computers and engineering workstations. In addition, we may use cash in connection with the acquisition of new businesses or assets.
Financing activities used cash of $58.2 million during the first half of fiscal 2007, primarily as a result of $175.0 million of cash used in our stock repurchase program, offset by $102.4 million of common stock issued under employee stock plans.
Stock Repurchase Program
On August 9, 2004, we announced that our Board of Directors, or the Board, had authorized a stock repurchase programspecifications, to repurchase shares of our common stock subject to certain specifications, up to an aggregate maximum amount of $300.0 million. On March 6, 2006, we announced that$1.7 billion.
· | our GeForce product was the market leader in the Total Desktop, Standalone Desktop and Standalone Notebook segments in the first quarter of calendar year 2007, based on the latest PC Graphics 2007 Report from Mercury Research. |
· | in April 2007, we launched several new DirectX10 GPUs, adding the GeForce 8600, GeForce 8500, and GeForce 8300 to our GeForce 8 series of GPUs, which previously included the NVIDIA GeForce 8800 GTX and GeForce 8800 GTS. |
· | we launched the NVIDIA Quadro FX 4600 and NVIDIA Quadro FX 5600 products, which are professional solutions based on our G80 unified architecture. |
· | we expanded our NVIDIA Quadro Plex family with the introduction of the NVIDIA Quadro Plex VCS IV, a new version of the NVIDIA Quadro Plex visual computing system, or VCS, which provides enhanced performance for a wide range of high-performance, graphics-intensive styling and design, oil and gas, and scientific applications. |
· | our NVIDIA nForce products held the leadership position for the AMD segment based on the latest PC Processor and Chipsets report from Mercury Research. |
· | we shipped the GeForce 7050 motherboard GPU, which targets the lowest cost segments of the market. |
· | we expanded the reach of Scalable Link Interface, or SLI, technology into the performance segments with the launch of the our NVIDIA nForce 650i SLI MCP product for Intel. |
April 29, 2007 | April 30, 2006 | |||||
Revenue | 100.0 | % | 100.0 | % | ||
Cost of revenue | 55.0 | 57.7 | ||||
Gross profit | 45.0 | 42.3 | ||||
Operating expenses: | ||||||
Research and development | 18.8 | 18.1 | ||||
Sales, general and administrative | 9.5 | 9.4 | ||||
Total operating expenses | 28.3 | 27.5 | ||||
Income from operations | 16.7 | 14.8 | ||||
Interest and other income, net | 1.5 | 1.3 | ||||
Income before income tax expense | 18.2 | 16.1 | ||||
Income tax expense | 2.6 | 2.7 | ||||
Cumulative effect of change in accounting principle, net of tax | - | 0.1 | ||||
Net income | 15.6 | % | 13.5 | % |
· | a positive impact from our new GeForce 8 series products; |
· | a reduction of revenue from our MCP Business, which historically has had a gross margin that is lower than our overall gross margin; |
· | the increase in NVIDIA Quadro workstation product revenue, which historically has been higher than our overall gross margin; and |
· | a reduction of revenue from the sale of memory products, which historically have been lower than our overall gross margin |
Three Months Ended | Change | |||||||||
April 29, 2007 | April 30, 2006 | $ | % | |||||||
(In millions) | ||||||||||
Research and Development: | ||||||||||
Salaries and benefits | $ | 87.7 | $ | 68.0 | $ | 19.7 | 29% | |||
Stock-based compensation | 22.4 | 14.4 | 8.0 | 56% | ||||||
Depreciation and amortization | 16.5 | 15.0 | 1.5 | 10% | ||||||
Computer software and lab equipment | 14.9 | 12.9 | 2.0 | 16% | ||||||
Facility expense | 11.6 | 8.1 | 3.5 | 43% | ||||||
New product development | 4.2 | 7.5 | (3.3) | (44)% | ||||||
In-process research and development | ||||||||||
License and development project costs | (2.4) | (5.8 | ) | 3.4 | (59)% | |||||
Other | 3.4 | 3.1 | 0.3 | 10% | ||||||
Total | $ | 158.3 | $ | 123.2 | $ | 35.1 | 29% | |||
Research and development as a percentage of net revenue | 19 | % | 18 | % |
Three Months Ended | Change | |||||||||||
April 29, 2007 | April 30, 2006 | $ | % | |||||||||
(In millions) | ||||||||||||
Sales, General and Administrative: | ||||||||||||
Salaries and benefits | $ | 41.9 | $ | 32.8 | $ | 9.1 | 28% | |||||
Advertising and promotions | 13.7 | 14.5 | (0.8) | (6)% | ||||||||
Stock-based compensation | 12.2 | 6.6 | 5.6 | 85% | ||||||||
Legal and accounting fees | 6.0 | 2.9 | 3.1 | 107% | ||||||||
Facility expense | 2.8 | 4.0 | (1.2) | (30)% | ||||||||
Depreciation and amortization | 2.7 | 2.1 | 0.6 | 29% | ||||||||
Other | 1.3 | 1.1 | 0.2 | 18% | ||||||||
Total | $ | 80.6 | $ | 64.0 | $ | 16.6 | 26% | |||||
Sales, general and administrative as a percentage of net revenue | 10% | 9 | % |
As of April 29, 2007 | As of January 28, 2007 | |||||
(In millions) | ||||||
Cash and cash equivalents | $ | 678.9 | $ | 544.4 | ||
Marketable securities | 628.1 | 573.4 | ||||
Cash, cash equivalents, and marketable securities | $ | 1,307.0 | $ | 1,117.8 |
Three Months Ended | ||||||
April 29, 2007 | April 30, 2006 | |||||
(In millions) | ||||||
Net cash provided by operating activities | $ | 306.5 | $ | 49.5 | ||
Net cash used in investing activities | $ | (91.1 | ) | $ | (157.5 | ) |
Net cash provided by (used in) financing activities | $ | (80.9 | ) | $ | 44.0 |
§ | decreased demand and market acceptance for our products and/or our customers’ products; |
§ | inability to successfully develop and produce in volume production our next-generation products; |
§ | competitive pressures resulting in lower than expected average selling prices; and |
§ | new product announcements or product introductions by our competitors. |
not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, or SAB No. 108,Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current YearNotes to Condensed Consolidated Financial Statements, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. We will be required to adopt the provisions of SAB No. 108 in our fiscal year 2008. We do not believe the adoption of SAB No. 108 will have a material impact on our consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157,Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We will be required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April additional information.
In May 2006, following media reports of stock option accounting investigations at other companies, the management of NVIDIA decided to conduct a review of stock option grants made by NVIDIA. Management advised our Board of Directors of the review at a regularly-scheduled meeting of the Board of Directors on May 25, 2006. The Board of Directors directed management to report its findings to the Audit Committee. Management presented its findings to the Audit Committee in late June 2006. Following that presentation, the Audit Committee determined that it should perform its own independent review of stock option grants made by NVIDIA. The Audit Committee, with the assistance of outside legal counsel, began its review on approximately June 29, 2006.
The Audit Committee’s review was completed on November 13, 2006 when the Audit Committee reported its findings to the full Board of Directors. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. As part of its review, the Audit Committee determined whether the correct measurement dates had been used under applicable accounting principles for these options. The measurement date means the date on which the option is deemed granted under applicable accounting principles, namely Accounting Principles Board Opinion No. 25, or APB 25,Accounting for Stock Issued to Employees and related interpretations, and is the first date on which all of the following are known: (1) the individual employee who is entitled to receive the option grant, (2) the number of options that an individual employee is entitled to receive, and (3) the option’s exercise price.
Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes. These errors resulted primarily from our use during our fiscal year 2000, 2001 and 2002, of certain date selection methods discussed below which resulted in employees receiving options with stated exercise prices lower than the market prices as measured based upon the actual grant dates. We ceased using such practices beginning in our fiscal year 2003. The Audit Committee found that, beginning in our fiscal year 2003, we improved our stock option grant processes and have generally granted and priced our employee stock options in an objective and consistent manner since that time. However, for one Company-wide annual stock option grant we made in fiscal 2004, we did not finalize the number of options allocated to each employee as of the stated grant date in May 2003, which resulted in stock-based compensation charges due to the change in the measurement date to the date the grants were finalized. The Audit Committee’s review did not identify any additional stock-based compensation charges from measurement date issues subsequent to that fiscal 2004 grant.
In accordance with APB 25, with respect to periods through January 29, 2006, we should have recorded stock-based compensation expense to the extent that the fair market value of our common stock on the correct measurement date exceeded the exercise price of each option granted. For periods commencing January 30, 2006 (the beginning of our fiscal year 2007), we record stock-based compensation expense in accordance with Statement of Financial Accounting Standards No. 123(R) (revised), or SFAS No. 123(R),Share-Based Payment. Changes in measurement dates have also contributed to incremental fair value of options under SFAS No. 123. As of the end of our fiscal year 2006, the unamortized incremental fair value charges resulting from the Audit Committee’s review were approximately $13.0 million, of which approximately $9.0 million are expected to be amortized in our fiscal year 2007.
As a result of the measurement date errors identified from the Audit Committee’s review, through January 29, 2006, we recorded aggregate non-cash stock-based compensation charges of $127.4 million, net of related tax effects. These charges were based primarily on APB 25 (intrinsic value-based) charges and associated payroll taxes of $199.6 million on a pre-tax basis, which are being amortized over the vesting term of the stock options in accordance with Financial Accounting Standards Board Interpretation No. 28, or FIN 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. We have amortized a substantial portion of these charges to expense during our fiscal years 2000 to 2006. If an option is forfeited prior to vesting, we reverse both the charges amortized to expense in prior periods as well as any remaining unamortized deferred stock-based compensation associated with the forfeited options. Accordingly, our net stock-based compensation charges amortized to our statement of income are lower than the aggregate stock-based compensation charges based on APB 25 (intrinsic-value based). As of January 29, 2006, the remaining APB 25 (intrinsic value-based) unamortized deferred stock-based compensation related to the errors identified during the review was approximately $3.0 million.
The types of errors we identified were as follows:
Improper Measurement Dates forCompany-Wide Annual or Retention Stock Option Grants. We determined that, in connection with certain annual or retention stock option grants that we made to employees during our fiscal years 2000, 2001, 2002, 2003 and 2004, the final number of shares that an individual employee was entitled to receive was not determined and/or the proper approval of the related stock option grant had not been given until after the stated grant date. Therefore, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Years 2001 and 2002. In connection with stock option grants that we made to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during fiscal years 2001 and 2002, our practice was to grant stock options with an exercise price based upon the lowest closing price of our common stock in the last few days of the month of hire or the last few days of any subsequent month in the quarter of hire. The selection of the grant date of the related option grants would be made at the end of the fiscal quarter and was based on achieving the lowest exercise price for the affected employees. As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options.
Improper Measurement Dates for Stock Option Grants during Fiscal Year 2000. In connection with certain stock option grants to newly-hired employees (and, to a much lesser degree, retention grants to existing employees) during a portion of fiscal year 2000, our practice was to delay the selection of the related grant dates until the end of a two-month period in the fiscal quarter during which the employees who received the grants began their employment with NVIDIA. As a result of this practice, the exercise price of the related option grants was not determined until subsequent to the stated grant date. We also determined that, during fiscal year 2000, we generally set the grant date and exercise price of employee option grants for new hires and promotions at the lowest price of the last few business days of the month of their hire or promotion (or of the following month in certain two-month periods that were chosen for an indeterminate reason). As a result of these practices, the measurement date for such options for accounting purposes was actually subsequent to the stated grant date, resulting in new measurement dates for the related options. In addition, we also determined that the exercise price or the number of options to be granted had not been determined, or the proper approval had not been given, for various other miscellaneous option grants during fiscal year 2000 until after the stated grant date - resulting in new measurement dates for accounting purposes for the related options.
Other Issues Identified.We also identified instances where stock option grants did not comply with applicable terms and conditions of the stock plans from which the grants were issued. For example, two grants were made to officers of NVIDIA by the chief executive officer under delegated authority; however, under the terms of the applicable plan, the option grant should have been made by our Board or the Compensation Committee. There were also instances where (1) option grants were made to a small group of employees who joined NVIDIA pursuant to a business combination, and to a few other employees in certain instances, with stated exercise prices below the fair market value of our common stock on the actual measurement date of the related grants; and (2) option grants were made to a few individuals who were contractors rather than employees, without recording the appropriate accounting charges. The accounting impact of these items was cumulatively less than $6.0 million. In addition, the Audit Committee did not find any evidence that these violations were committed for improper purposes.
The Audit Committee carefully considered the involvement of current members of management in the option grant process and concluded that the evidence did not give rise to any concern about the integrity of any current officer or director of NVIDIA. The Audit Committee also found that the accounting errors and improper practices brought to light during their review were not motivated by any intent to mislead investors, improve NVIDIA’s reported financial results, or obtain any personal benefit. Based on its findings, the Audit Committee was unable to reach any conclusion regarding the integrity of former officers and employees.
As a result of the errors we identified, we have restated our historical financial statements from our fiscal year 2000 through our fiscal year 2006 to record $127.4 million of charges related to stock-based compensation and associated payroll tax expense, net of related income tax effects. These errors resulted in after-tax charges of $1.4 million, $11.7 million and $25.8 million for our fiscal years 2006, 2005 and 2004, respectively. Additionally, the cumulative effect of the related after-tax charges for periods prior to our fiscal year ended January 25, 2004 was $88.4 million. These additional stock-based compensation expense charges were non-cash and had no impact on our reported revenue, cash, cash equivalents or marketable securities for each of the restated periods.
As part of the restatement, for the three and six month periods ended July 31, 2005, we recorded incremental stock-based compensation charges of $2.0 million and $4.5 million, a net (benefit)/charge for payroll taxes resulting from the expiration of statute of limitations of $0.4 million and $(4.7) million, and associated income tax (benefit)/charges of $(1.4) million and $0.1 million, respectively.
For all periods through the end of our fiscal year 2006, we have recorded aggregate non-cash stock-based compensation charges of $190.2 million, associated payroll tax charges of $9.4 million and a related income tax benefit of $72.2 million.
As part of this restatement, we also accrued liabilities and recorded charges to operating costs and expenses for certain payroll tax contingencies related to the incremental stock-based compensation expense in the amount of $18.8 million for all annual periods from our fiscal year 2000 through our fiscal year 2006. We recorded such charges in the amount of $3.1 million, $1.3 million, and $1.6 million for our fiscal years 2006, 2005 and 2004, respectively. Upon expiration of the related statute of limitations, we also recorded benefits from the reversal of previously-recorded payroll tax liabilities of $6.6 million and $2.8 million in our fiscal years 2006 and 2005, respectively. As a result, the net benefit to our statements of income was $3.5 million and $1.5 million for our fiscal years 2006 and 2005, respectively. The cumulative payroll tax expense for periods prior to our fiscal year 2004 was $12.8 million. For those stock option grants that we determined to have incorrect measurement dates for accounting purposes and that we had originally issued as incentive stock options, or ISOs, we recorded a liability for payroll tax contingencies in the event such grants would not be respected as ISOs under the principles of the Internal Revenue Code, or IRC, and the regulations thereunder. These liabilities were recorded with a charge to operating costs and expenses.
We also considered the application of Section 409A of the IRC to certain stock option grants where, under APB 25, intrinsic value existed at the time of grant. In the event such stock options grants are not respected as issued at fair market value at the original grant date under principles of the IRC and the regulations thereunder and are subject to Section 409A, we are considering potential remedial actions that may be available. We do not expect to incur a material charge as a result of any such potential remedial actions.
As a result of the findings of the Audit Committee, we concluded that we needed to amend our Annual Report on Form 10-K for the fiscal year ended January 29, 2006 to restate our consolidated financial statements for the years ended January 29, 2006, January 30, 2005, and January 25, 2004 and the related disclosures, and our Form 10-Q for the three months ended April 30, 2006.
Management’s Conclusion Regarding the Effectiveness of Internal Control over Stock Option Grant Practices
In assessing whether our disclosure controls and procedures and our internal control over financial reporting were effective as of July 30, 2006, management considered, among other things, the impact of the restatement of our financial statements, the nature of the restatement as disclosed in Note 2 to the Condensed Consolidated Financial Statements, and the effectiveness of internal control in this area as of July 30, 2006.
Management’s Consideration of the Restatement
In coming to the conclusion that our disclosure controls and procedures and our internal control over financial reporting were effective as of January 29, 2006, management considered, among other things, the control deficiencies related to accounting for stock based compensation and the control environment. Management also considered the conclusions of the Audit Committee, following an extensive review of our past and current stock option grants and practices, that: (a) while NVIDIA used incorrect accounting measurement dates for certain stock option grants, as more fully discussed above, those errors were not a result of fraud; and (b) our option grant practices had improved significantly since May 2003. These control deficiencies resulted in the need to restate our previously-issued financial statements as disclosed in Note 2, “Restatement of Consolidated Financial Statements, Audit Committee and Company Findings”, of the Notes to our Consolidated Financial Statements. Management has concluded that the control deficiencies that resulted in the restatement of the previously-issued financial statements did not constitute a material weakness as of January 29, 2006 because management determined that as of January 29, 2006 there were effective controls designed and in place to prevent or detect a material misstatement and, therefore, the likelihood of our financial statements being materially misstated is remote.
Specifically, during our fiscal years 2003 through 2006, NVIDIA implemented new policies and processes to provide greater internal controls over our stock option grant approvals, including:
Management has concluded, therefore, that the control deficiencies that resulted in the restatement of the previously issued financial statements did not constitute a material weakness as of January 29, 2006.
Audit Committee’s Recommended Further Measures Regarding Stock Option Grants
The Audit Committee noted that management had significantly improved our stock option grant practices since May 2003. However, the Audit Committee recommended, and the Board of Directors approved, the following best practices, which we intend to adopt, for consideration in light of its review into our past stock option grant processes:
Controls and Procedures
28, 2007.
In evaluating NVIDIA and our business, the following factors should be considered in addition to the other information in this Quarterly Report on Form 10-Q, or Form 10-Q. Any one of the following risks could seriously harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Related to Our Operations
· | the mix of our products sold; |
· | average selling prices; |
· | introduction of new products; |
· | sales discounts; |
· | unexpected pricing actions by our competitors; |
· | the cost of product components; and |
· | the yield of wafers produced by the foundries that manufacture our products. |
Our inventory purchases are based upon future demand forecasts, which may not accurately predict the quantity or type of our products that our customers will want in the future. In forecasting demand, we must make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory and/or a forced reduction in average selling prices, and where our gross margin could be adversely affected include:
Conversely, if we underestimate our customers’ demand for either our older or newer products, we may have inadequate manufacturing capability and may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis, which could adversely affect our revenue results. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fill our customers’ orders on a timely basis could damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation.
Because we order materials in advance of anticipated customer demand our ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls is limited.
Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to the production of products without having received advance purchase commitments from customers. Any inability to sell products to which we have devoted significant resources could harm our business. In addition, cancellation or deferral of product orders could result in our holding excess inventory, which could adversely affect our gross margin and restrict our ability to fund operations. We may build inventories during periods of anticipated growth. Additionally, because we often sell a substantial portion of our products in the last month of each quarter and, therefore, we 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, which could negatively impact our gross margin and financial results.
We are dependent on key personnel and the loss of these employees could negatively impact our business.
increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development as well as hiring additional employees. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.
In order to remain competitive which may include entering new markets, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development as well as hiring additional employees.
During the second quarter of fiscal 2007, our
communications processor, or MCP, and the consumer products business, or CPB.
· | if there were a sudden and significant decrease in demand for our products; |
· | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
· | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
· | if our competition were to take unexpected competitive pricing actions. |
· | anticipate the features and functionality that customers and consumers will demand; |
· | incorporate those features and functionalities into products that meet the exacting design requirements of OEMs, ODMs, and add-in board and motherboard manufacturers; |
· | price our products competitively; and |
· | introduce products to the market within the limited design cycle for OEMs, ODMs, and add-in board and motherboard manufacturers. |
We have in
· | proper new product definition; |
· | timely completion and introduction of new product designs; |
· | the ability of third-party manufacturers to effectively manufacture our new products in a timely manner; |
· | dependence on third-party subcontractors for assembly, testing and packaging of our products and in meeting product delivery schedules and maintaining product quality; |
· | the quality of new products; |
· | differentiation of new products from those of our competitors; |
· | market acceptance of our products and our customers' products; and |
· | availability of adequate quantity and configurations of various types of memory products. |
Risks Related |
There can be no assurance that the PlayStation3 will achieve long term commercial success.
In April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU for SCE’s PlayStation3. Our collaboration with SCE includes license feesPartners and royalties for the PlayStation3 and all derivatives, including next-generation digital consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE. During the second quarter of fiscal 2007, we recognized $18.1 million of revenue from our contractual arrangements with SCE. Depending on the ultimate success of this next-generation platform, we expect to generate up to $100 million in revenue annually from license fees and royalties over the next five years, with the possibility of additional royalties for several years thereafter. There can be no assurance that the PlayStation3 will achieve long term commercial success, given the intense competition in the game console market. If we do not receive royalties as we anticipate, our revenue and gross margin may be adversely affected.
Customers
In the past we
acquisitions of ULi and Hybrid Graphics, the following risksinvestments could impair our ability to grow our business, and develop new products, and ultimately, could impair our ability to sell our products, whichand ultimately could negativelyhave a negative impact on our growth or our financial results:
· | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
· | difficulty in operating in a new or multiple new locations; |
· | disruption of our ongoing businesses; |
· | disruption of the ongoing business of the company we invest in or acquire; |
· | difficulty in realizing the potential financial or strategic benefits of the transaction; |
· | difficulty in maintaining uniform standards, controls, procedures and policies; |
· | disruption of or delays in ongoing research and development efforts; |
· | diversion of capital and other resources; |
· | assumption of liabilities; |
· | diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; |
· | difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and |
· | impairment of relationships with employees and customers, or the loss of any of our key employees or customers of our target’s key employees or customers, as a result of our acquisition or investment. |
We have only a limited number of customers and our sales are highly concentrated. Sales to our largest customer accounted for approximately 15% of our revenue during the second quarter of fiscal 2007, and sales to our two largest customers accounted for approximately 23% of revenue for the first half of fiscal 2007. Although a small number of our other customers represents the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key CEMs, ODMs, motherboard and add-in board manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, motherboard and add-in board manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, motherboard and add-in board manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, motherboard and add-in board manufacturers and were unable to replace the lost sales with sales to different customers, or if they were to significantly reduce the number of products they order from us, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.
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.
any specific product. In addition, the time and effort to qualify a new foundry could result in additional expense, diversion of resources or lost sales any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with third-party manufacturers we may use to ensure adequate product supply and competitive pricing so that we are able to respond to customer demand.
conformity to industry standard application programming interfaces, manufacturing capabilities, price of processors and total system costs of add-in boards and motherboards. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products, which could harm our business.
· | suppliers of discrete MCPs that incorporate a combination of networking, audio, communications |
· | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., XGI Technology, |
· | suppliers of GPUs or GPU intellectual property for handheld and embedded devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd., or Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and |
· | suppliers of application processors for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics. |
We expect substantial competition from Intel’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. In addition to the Centrino notebook platform solution, it has announced a desktop initiative branded as VIIV, and we expect that Intel will extend this strategy to other segments including professional workstations and servers. To the extent Intel is successful with this strategy, we may not be able to successfully compete in these segments.
Risks Related to Market Conditions
A significant portion of our
· | 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; |
· | transportation delays; |
· | longer payment cycles; |
· | difficulty in collecting accounts receivable; |
· | fluctuations in currency exchange rates; |
· | impact of currency exchange rate fluctuations on the price of our products to our customers, or on the supplies that we buy; |
· | imposition of additional taxes and penalties; |
· | different legal standards with respect to protection of intellectual property; |
· | the burdens of complying with a variety of foreign laws; and |
· | other factors beyond our control, including terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
Currently, all of our arrangements with third-party manufacturers and subcontractors provide for pricing and payment in United States dollars as are sales to our customers located outside of the United States and other Americas. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which would negatively impact our ability to compete and could impact our financial results. 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.
which began to go into effect on March 1, 2007.
that have adopted these types of regulations.
· | 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 failure to effectively protect our intellectual property could harm our business. We have licensed technology from third parties for incorporation in our digital media processors and for defensive reasons, and expect to continue to enter into such license agreements. These licenses may result in royalty payments to third parties, the cross licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.
· | assert claims of infringement of our intellectual property; |
· | enforce our patents; |
· | protect our trade secrets or know-how; or |
· | determine the enforceability, scope and validity of the propriety rights of others. |
· | the jurisdictions in which profits are determined to be earned and taxed; |
· | adjustments to estimated taxes upon finalization of various tax returns; |
· | changes in available tax credits; |
· | changes in share-based compensation expense; |
· | changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
· | the resolution of issues arising from tax audits with various tax authorities. |
public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.
· | the ability of the Board to create and issue preferred stock without prior stockholder approval; |
· | the prohibition of stockholder action by written consent; |
· | a classified Board; and |
· | advance notice requirements for director nominations and stockholder proposals. |
Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||||
January 29, 2007 - February 25, 2007 | - | $ | - | - | 211,869,417 | ||||||||||||
February 26, 2007 - March 25, 2007 | - | $ | - | - | 211,869,417 | ||||||||||||
March 26, 2006 - April 29, 2007 | 3,958,555 | (3 | ) | $ | 31.58 | (2 | ) | 3,958,555 | (3 | ) | 86,869,417 | ||||||
Total | 3,958,555 | $ | 31.58 | 3,958,555 |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||||||
May 1, 2006 through May 28, 2006 | — | $ | — | — | $ | 436,846,554 | |||||||
May 29, 2006 through June 25, 2006 | 2,174,223 | $ | 22.99 | 2,174,223 | $ | 386,869,417 | |||||||
July 26, 2006 through July 30, 2006 | 3,215,643 | (3) | $ | 23.32 | 3,215,643 | (3) | $ | 311,869,417 | |||||
Total | 5,389,866 | $ | 23.19 | (2) | 5,389,866 | ||||||||
On August 9, 2004, we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300.0 million. On March 6, 2006, we announced that the Board had approved a $400.0 million increase to the original stock repurchase program. Subsequently, on May 21, 2007, we announced a stock repurhase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $1.7 billion on the open market, in negotiated transactions or through structured stock repurchase agreements that may be made in one or more larger repurchases.
At the Annual Meeting of Stockholders held on June 22, 2006, the following proposals were adopted by the margin indicated. Proxies for the Annual Meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition of management’s solicitation.
1. The election of two (2) directors to serve for a three-year term until the 2009 Annual Meeting of Stockholders. The results of the voting were as follows:
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The other directors whose term of office as a director continued after the Annual Meeting of Stockholders are James D. Gaither, A. Brooke Seawell, Jen-Hsun Huang, Steven Chu, Harvey C. Jones and William J. Miller.
2. Ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered accounting firm for our fiscal year ending January 28, 2007. The results of the voting were as follows:
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Incorporated by Reference | |||||
Exhibit No. | Exhibit Description | Schedule/Form | File Number | Exhibit | Filing Date |
10.22 | Fiscal Year 2008 Variable Compensation Plan | 8-K | 0-23985 | 10.1 | 4/5/2007 |
10.23 | 2007 Equity Incentive Plan | 8-K | 0-23985 | 10.1 | 4/30/2007 |
31.1* | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | ||||
31.2* | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | ||||
32.1#* | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | ||||
32.2#* | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 |
Date: May 24, 2007 | ||
NVIDIA Corporation | ||
By: | ||
/s/ MARVIN D. BURKETT | ||
Marvin D. Burkett | ||
(Duly Authorized Officer and Principal Financial and Accounting Officer) |
EXHIBIT INDEX
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53
Incorporated by Reference | |||||
Exhibit No. | Exhibit Description | Schedule/Form | File Number | Exhibit | Filing Date |
10.22 | Fiscal Year 2008 Variable Compensation Plan | 8-K | 0-23985 | 10.1 | 4/5/2007 |
10.23 | 2007 Equity Incentive Plan | 8-K | 0-23985 | 10.1 | 4/30/2007 |
31.1* | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | ||||
31.2* | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | ||||
32.1#* | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | ||||
32.2#* | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 |