<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1998
REGISTRATION NO. 333-47495
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
NVIDIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 3674 94-3177549
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
3535 MONROE DRIVE
SANTA CLARA, CA 95051
(408) 615-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
JEN-HSUN HUANG
CHIEF EXECUTIVE OFFICER
NVIDIA CORPORATION
3535 MONROE DRIVE
SANTA CLARA, CA 95051
(408) 615-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JAMES C. GAITHER LARRY W. SONSINI
ERIC C. JENSEN JAMES N. STRAWBRIDGE
KARYN R. SMITH JON C. GONZALES
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
ONE MARITIME PLAZA PROFESSIONAL CORPORATION
20TH FLOOR 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304
(415) 693-2000 (650) 493-9300
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued November 20, 1998
Shares
[LOGO OF NVIDIA]
COMMON STOCK
-----------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE SHARES OF COMMON STOCK
OFFERED HEREBY HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "NVDA" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 6 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------- --------------- -----------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total(3)................................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at
$1,200,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters. It is expected that delivery of the Shares will be made on or
about , 1998 at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER HAMBRECHT & QUIST
, 1998
<PAGE>
[Description of illustration: four computer monitors depicting 3D rendering of
a building exterior, a game image, an anatomy illustration and the eye of a
frog. The caption is "Awesome 3D graphics-mainstream". The NVIDIA name and
logo also are depicted.]
Text to accompany artwork:
NVIDIA designs, develops and markets 3D graphics processors and related
software that provide high performance interactive 3D graphics to the
mainstream PC market.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
<PAGE>
[Description of illustration: Two-page computer display 3D rendering of a frog
on a lilypad]
<PAGE>
MAKING FANTASY REALITY AND REALITY FANTASTIC.
ARTWORK TEXT:
FOCUS ON MAINSTREAM
PC users today can easily differentiate the quality of graphics and prefer PCs
that provide a superior visual experience. NVIDIA's strategy is to achieve
market leadership in the high volume mainstream PC market by providing
compelling 3D graphics performance at competitive prices.
AWARD-WINNING TECHNOLOGY
NVIDIA's graphics processors are highly integrated single-chip solutions that
support high performance interactive 3D graphics applications while
simultaneously optimizing 2D graphics and providing VGA compatibility and DVD
playback. The benefits and performance of the RIVA family of graphics
processors have received significant industry validation and have enabled the
Company's customers to win over 100 industry awards.
LEADING OEMS
NVIDIA's strategy is to enable leading OEM customers to differentiate their
products in a highly competitive marketplace by using NVIDIA's high
performance 3D graphics processors. The Company's products are used by six of
the top ten PC OEMs--Compaq, Dell, Gateway, IBM, Micron and Packard Bell NEC--
and by leading add-in board manufacturers such as Creative, Diamond and STB.
[OEM LOGOs]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
THE COMPANY
NVIDIA designs, develops and markets 3D graphics processors and related
software that provide high performance interactive 3D graphics to the
mainstream PC market. The Company's graphics processors are designed to deliver
a highly immersive, interactive 3D experience with realistic imagery and
stunning effects. The RIVA family of graphics processors, including the RIVA
TNT, provides superior processing power at competitive prices and is
architected to take advantage of mainstream industry standards such as
Microsoft's Direct3D API. The highly integrated design of the Company's
graphics processors combines high performance 3D and 2D graphics on a single
chip and provides a simpler and lower cost graphics solution relative to
competing solutions, including multi-chip or multi-board 3D/2D graphics
subsystems.
NVIDIA designed the RIVA family of graphics processors to enable PC OEMs and
add-in board manufacturers to build award-winning products by delivering state-
of-the-art interactive 3D graphics capability to end users while maintaining
affordable prices. The Company believes that by developing 3D graphics
solutions that provide superior performance and address the key requirements of
the mainstream PC market, it will accelerate the adoption of 3D graphics
throughout this market. The benefits and performance of the RIVA family of
graphics processors have received significant industry validation and have
enabled the Company's customers to win over 100 industry awards. NVIDIA's
graphics processors currently are designed into products offered by six of the
top ten PC OEMs--Compaq, Dell, Gateway, IBM, Micron and Packard Bell NEC--and
by leading add-in board manufacturers such as Creative, Diamond and STB.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered................. shares
Common Stock to be outstanding after
the offering........................ shares(1)
Use of proceeds...................... For general corporate purposes, including
capital expenditures and working capital.
See "Use of Proceeds."
Nasdaq National Market symbol........ NVDA
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
(APRIL 5, 1993) ---------------------------------- -------------------------
TO DECEMBER 31, SEPTEMBER 28, OCTOBER 25,
1993 1994 1995 1996 1997 1997 1998(2)
--------------- ------- ------- ------- ------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue........... $ -- $ -- $ 1,182 $ 3,912 $29,071 $ 5,537 $92,700
Gross profit (loss)..... -- -- (367) 874 7,827 631 25,300
Operating income (loss). (506) (1,351) (6,470) (2,993) (3,459) (4,911) (3,900)
Net income (loss)....... (484) (1,361) (6,377) (3,077) (3,589) (5,013) (3,532)
Basic net income (loss)
per share(3)........... $ (.07) $ (.19) $ (.56) $ (.27) $ (.28) $ (.41) $ (.25)
Diluted net income
(loss) per share(3).... $ (.07) $ (.19) $ (.56) $ (.27) $ (.28) $ (.41) $ (.25)
Shares used in basic per
share computation(3)... 6,784 7,048 11,365 11,383 12,677 12,123 14,152
Shares used in diluted
per share
computation(3)......... 6,784 7,048 11,365 11,383 12,677 12,123 14,152
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 25, 1998
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $12,461 $
Total assets............................................. 76,502
Capital lease obligations, less current portion.......... 2,032
Total stockholders' equity............................... 18,294
</TABLE>
- -------
(1) Based on the number of shares outstanding as of October 25, 1998. Excludes
(i) 7,461,208 shares of Common Stock issuable upon the exercise of options
outstanding at a weighted average exercise price of $4.46 per share, (ii)
158,806 shares of Common Stock issuable upon the exercise of warrants
outstanding at a weighted average exercise price of $2.10 per share, (iii)
2,585,832 shares of Common Stock reserved for future grants under the
Company's 1998 Equity Incentive Plan, (iv) 206,250 shares reserved for
future grants under the Company's 1998 Non-Employee Directors' Stock Option
Plan, (v) 500,000 shares of Common Stock reserved for issuance under the
Company's 1998 Employee Stock Purchase Plan, (vi) 1,571,429 shares of
Common Stock issuable upon the mandatory conversion of convertible
subordinated notes upon the closing of this offering and (vii) 300,000
shares of Common Stock issuable upon the exercise of warrants that the
Company has undertaken to issue at a per share exercise price equal to the
initial public offering price. See "Management--Employee Benefit Plans" and
Notes 3 and 8 of Notes to Financial Statements.
(2) Effective January 31, 1998, the Company changed its fiscal year-end
financial reporting period to a 52- or 53-week year ending on the last
Sunday in January. The Company elected not to restate its previous
reporting periods ending December 31.
(3) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in per share computations.
(4) Adjusted to reflect the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $ per share and
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company. See "Use of Proceeds"
and "Capitalization."
3
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
The Company............................................................... 5
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Financial Data................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 37
Management................................................................ 51
Certain Transactions...................................................... 60
Principal Stockholders.................................................... 61
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 65
Underwriters.............................................................. 67
Legal Matters............................................................. 68
Experts................................................................... 68
Additional Information.................................................... 69
Index to Financial Statements............................................. F-1
</TABLE>
----------------
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports for the first three quarters of each year containing
unaudited interim financial information.
----------------
NVIDIA is a registered trademark of the Company and the Company has filed
for trademark protection for the NVIDIA logo. The Company and ST
Microelectronics, Inc. have filed jointly for trademark protection for RIVA
and RIVA128. All other trademarks or service marks appearing in this
Prospectus are the property of their respective owners.
----------------
Except as set forth in the financial statements or as otherwise indicated
herein, information in this Prospectus (i) gives effect to the conversion of
all of the Company's outstanding shares of Preferred Stock and outstanding
convertible subordinated notes into shares of Common Stock, each of which will
occur automatically upon the closing of this offering, and (ii) assumes that
the Underwriters' over-allotment option is not exercised. See "Description of
Capital Stock" and "Underwriters." The Company's fiscal years ended on
December 31 from 1993 to 1997. Effective January 31, 1998, the Company changed
its fiscal year-end financial reporting period to a 52- or 53-week year ending
on the last Sunday in January. The Company elected not to restate its previous
reporting periods ending December 31. As a result, the first and fourth
quarters of fiscal 1999 are 12- and 14-week periods, respectively, with the
remaining quarters being 13-week periods. All general references to years
relate to the above fiscal years unless otherwise noted.
4
<PAGE>
THE COMPANY
NVIDIA designs, develops and markets 3D graphics processors and related
software that provide high performance interactive 3D graphics to the
mainstream PC market. The Company's graphics processors incorporate a 128-bit
graphics architecture that is designed to deliver a highly immersive,
interactive 3D experience with realistic imaging and stunning effects. The
Company's RIVA family of graphics processors including the RIVA TNT, provides
superior processing power at competitive prices and is architected to take
advantage of mainstream industry standards such as Microsoft Corporation's
("Microsoft") Direct3D application programming interface ("API"). The highly
integrated design of the Company's graphics processors combines high
performance 3D and 2D graphics on a single chip and provides a simpler and
lower cost graphics solution relative to competing solutions, including multi-
chip or multi-board 3D/2D graphics subsystems.
Interactive 3D graphics technology is emerging as one of the most
significant new computing developments since the introduction of the graphical
user interface. The visually engaging and interactive nature of 3D graphics
responds to consumers' demands for a convincing simulation of reality beyond
what is possible with traditional 2D graphics. The fundamental interactive
capability of 3D graphics is expected to make it a natural and compelling
medium for existing and emerging applications for entertainment, Internet,
business and education.
The Company believes that a PC's interactive 3D graphics capability
represents one of the primary means by which users differentiate among various
systems. PC users today can easily differentiate the quality of graphics and
prefer personal computers that provide a superior visual experience. These
factors have dramatically increased demand for 3D graphics processors; Mercury
Research estimates that 3D graphics will be standard in every PC unit shipped
by 2001. Mercury Research also estimates that 8.6 million 3D graphics
processors were sold in 1997 and 180 million will be sold in 2001.
The Company's products allow users to enjoy a highly immersive, interactive
3D experience with compelling visual quality, realistic motion and complex
object and scene interaction at real-time frame rates. By providing this level
of performance at an affordable price to OEMs and end users, the Company
believes that it will accelerate the adoption of interactive 3D graphics
throughout the mainstream PC market. The Company's objective is to be the
leading supplier of high performance 3D graphics processors for PCs. The
Company's strategy to achieve this objective includes focusing on the
mainstream PC market, targeting leading OEM customers, extending its
technological leadership in 3D graphics and increasing its market share.
NVIDIA's products are used by six of the top ten PC OEMs--Compaq Computer
Corporation ("Compaq"), Dell Computer Corporation ("Dell"), Gateway 2000, Inc.
("Gateway"), International Business Machines Corporation ("IBM"), Micron
Technology, Inc. ("Micron") and Packard Bell NEC, Inc. ("Packard Bell NEC")--
and leading add-in board manufacturers such as Creative Technology Ltd.
("Creative"), Diamond Multimedia Systems, Inc. ("Diamond") and STB Systems,
Inc. ("STB"). The RIVA family of graphics processors has received significant
industry validation and has enabled the Company's customers to receive over
100 awards from recognized industry publications, including PC Magazine, PC
Computing, PC World, Computer Gaming World, PC Games and CNET.
NVIDIA was incorporated in California in April 1993 and reincorporated in
Delaware in April 1998. The Company's executive offices are located at 3535
Monroe Drive, Santa Clara, California 95051, and its telephone number is (408)
615-2500.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered hereby. This Prospectus contains forward-
looking statements that involve risks and uncertainties. The Company's actual
results may differ materially from the results discussed in such forward-
looking statements. Factors that may cause such a difference include, but are
not limited to, those discussed below, in the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this Prospectus.
Unpredictable and Fluctuating Operating Results. Many of the Company's
revenue components fluctuate and are difficult to predict, and its operating
expenses are largely independent of revenue in any particular period. It is
therefore difficult for the Company to accurately forecast revenue and profits
or losses. The Company believes that, even if it does achieve significant
sales of its products, quarterly and annual results of operations will be
affected by a variety of factors that could materially adversely affect
revenue, gross profit and results of operations. Factors that have affected
the Company's results of operations in the past, and are likely to affect the
Company's results of operations in the future, include, among others, demand
and market acceptance for the Company's products; the successful development
of next-generation products; unanticipated delays or problems in the
introduction or performance of next-generation products; market acceptance of
the products of the Company's customers; new product announcements or product
introductions by the Company's competitors; the Company's ability to introduce
new products in accordance with OEM design requirements and design cycles;
changes in the timing of product orders due to unexpected delays in the
introduction of products of the Company's customers or due to the life cycles
of such customers' products ending earlier than anticipated; fluctuations in
the availability of manufacturing capacity or manufacturing yields;
competitive pressures resulting in lower than expected average selling prices;
the volume of orders that are received and that can be fulfilled in a quarter;
the rescheduling or cancellation of customer orders; the unanticipated
termination of strategic relationships; seasonal fluctuations associated with
the tendency of PC sales to decrease in the second quarter and increase in the
second half of each calendar year; and the level of expenditures for research
and development and sales, general and administrative functions of the
Company. The Company experienced difficulties commencing volume production of
the RIVA128ZX graphics processor in March 1998 and the RIVA TNT graphics
processor in July 1998. These difficulties were primarily due to yield
problems that resulted in lower than expected revenues and higher
manufacturing costs during the quarter ended July 28, 1998. While these yield
problems were subsequently resolved, there can be no assurance that the
Company will not experience difficulties related to the production of current
or future products or that other factors will not delay the introduction or
volume sale of new products developed by the Company. The Company believes
that quarterly and annual results of operations also could be affected in the
future by other factors, including changes in the relative volume of sales of
the Company's products; seasonality in the PC market; the ability of the
Company to reduce the process geometry of its products; supply constraints for
the other components incorporated into its customers' products; the loss of a
key customer; a reduction in the amount of royalties received from ST
Microelectronics, Inc. ("ST"); changes in the pricing of dynamic random access
memory devices ("DRAMs") or other components; legal and other costs related to
defending intellectual property litigation; costs associated with protecting
the Company's intellectual property; costs related to acquiring or licensing
intellectual property; inventory write-downs; and foreign exchange rate
fluctuations. Any one or more of these factors could result in the Company
failing to achieve its expectations as to future revenue or net income.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially
adversely affect quarterly results of operations. The Company will be required
to reduce prices in response to competition or to pursue new market
opportunities. If new competitors, technological advances by existing
competitors or other competitive factors require the Company to invest
significantly greater resources than anticipated in research and development
or sales and marketing efforts, the Company's business, financial condition
and results of operations could be materially adversely affected. Accordingly,
the Company believes that period-to-period comparisons of its results of
operations should not be relied upon as an indication of future
6
<PAGE>
performance. In addition, the results of any quarterly period are not
indicative of results to be expected for a full fiscal year. As a result of
fluctuating operating results or other factors discussed below, in certain
future quarters the Company's results of operations may be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's Common Stock would be materially adversely affected.
See "--Absence of Prior Trading Market; Potential Volatility of Stock Price"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Limited Operating History; History of Losses; No Assurance of
Profitability. The Company has a limited operating history upon which
investors may evaluate the Company and its prospects. The Company's recent
revenue growth may not be sustainable and should not be considered indicative
of future revenue growth, if any. As of October 25, 1998, the Company's
accumulated deficit was approximately $17.1 million. Although the Company
generated net income in the quarters ended October 25, 1998 and December 31,
1997, it incurred significant losses in the quarters ended April 28, 1998 and
July 26, 1998, in the first three quarters of fiscal 1997 and in each quarter
of its prior fiscal years. There can be no assurance that in the future the
Company will be profitable on a quarterly or annual basis. The Company's
prospects must be considered in light of the significant risks, challenges and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in intensely competitive and rapidly
evolving markets such as the 3D graphics processor market and semiconductor
industry. To address these risks, the Company must, among other things,
successfully increase the scope of its operations, respond to competitive and
technological developments, continue to attract, retain and motivate qualified
personnel and continue to commercialize products incorporating innovative
technologies. There can be no assurance that the Company will be successful in
addressing these risks and challenges. See "--Highly Competitive Environment;
Intel's Entry into the Market," "--Dependence on New Product Development; Need
to Manage Product Transitions," "--Management of Growth," "--Dependence on Key
Personnel" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence upon Acceptance of the Company's 3D Graphics Solution for the
Mainstream PC Market. The Company's success will depend in part upon broad
adoption of its 3D graphics processors for high performance 3D graphics in
mainstream PC applications. The market for 3D graphics processors has been
characterized by unpredictable and sometimes rapid shifts in the popularity of
products, often caused by the publication of competitive industry benchmark
results, changes in DRAM pricing and other changes in the total system cost of
add-in boards, as well as by severe price competition and by frequent new
technology and product introductions. Only a small number of products have
achieved broad market acceptance and such market acceptance, if achieved, is
difficult to sustain due to intense competition. Since the Company has no
other product line, the Company's business, financial condition and results of
operations would be materially adversely affected if for any reason its
current or future 3D graphics processors do not achieve widespread acceptance
in the mainstream PC market. If the Company is unable to complete the timely
development of or successfully and cost-effectively manufacture and deliver
products that meet the requirements of the mainstream PC market, the Company's
business, financial condition and results of operations would be materially
adversely affected. In addition, the PC industry is seasonal, and the Company
expects that its financial results in the future will be affected by such
seasonality.
Demand for the Company's products has been and will continue to be
significantly affected by actual and anticipated changes in the price and
supply of DRAM products or other components used with PC graphics processors.
In the spring of 1998, large supplies of synchronous DRAMs ("SDRAMs") resulted
in significant price declines for such components. This price decrease lowered
the total system cost to customers of competitive products that use such
SDRAMs, as compared to the Company's RIVA128 graphics processor, which was
initially designed to operate using only synchronous graphic DRAMS ("SGRAMs"),
which were and continue to be relatively more expensive than SDRAMs. While the
Company subsequently introduced a version of the RIVA128ZX graphics processor
that operates using SDRAMs or SGRAMs, and its current RIVA TNT also operates
using SDRAMs or SGRAMs, such unfavorable component price competition
negatively impacted sales of the Company's RIVA128ZX graphics processor
products during the quarter ended July 28, 1998. There can
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be no assurance that the Company will be able to design new products to use
components with the lowest cost at the time of commercial release or that
future fluctuations in the price of components used by customers of PC
graphics processors will not have a material adverse effect on the Company's
business, financial condition or results of operations.
The sub-$1,000 segment of the mainstream PC market has grown rapidly in
recent quarters. The Company currently does not have a product offering to
address this market segment. If the Company is unable to introduce a product
that addresses this market segment and the sub-$1,000 segment continues to
account for an increasing percentage of the units sold in the mainstream PC
market, the Company's business, financial condition or results of operations
could be materially adversely affected.
Highly Competitive Environment; Intel's Entry into the Market. The market
for 3D graphics processors for mainstream PCs in which the Company competes is
intensely competitive and is characterized by rapid technological change,
evolving industry standards and declining average selling prices. NVIDIA
believes that the principal factors of competition in this market are
performance, conformity to industry-standard APIs, software support, access to
customers and distribution channels, manufacturing capabilities, price of
graphics processors and total system costs of add-in boards. The Company
expects competition to increase both from existing competitors and new market
entrants with products that may be less costly than the Company's 3D graphics
processors or may provide better performance or additional features not
provided by the Company's products. There can be no assurance that the Company
will be able to compete successfully in the emerging mainstream PC 3D graphics
market.
NVIDIA's primary source of competition is from companies that provide or
intend to provide 3D graphics solutions for the mainstream PC market. These
include (i) new entrants in the 3D graphics processor market with existing
presence in the PC market, such as Intel Corporation ("Intel"), (ii) suppliers
of graphics add-in boards that utilize their internally developed graphics
chips, such as ATI Technologies, Inc. ("ATI") and Matrox Electronic Systems
Ltd. ("Matrox"), (iii) suppliers of 2D graphics chips that are introducing 3D
functionality as part of their existing solutions, such as S3 Incorporated
("S3") and Trident Microsystems, Inc. ("Trident"), (iv) companies that have
traditionally focused on the professional market and provide high end 3D
solutions for PCs and workstations, including 3Dlabs Inc., Ltd. ("3Dlabs"),
Real3D and Silicon Graphics, Inc. ("SGI"), and (v) companies with strength in
the video game market, such as 3Dfx Interactive, Inc. ("3Dfx").
In March 1998, Intel began shipping the i740, a 3D graphics accelerator that
is targeted at the mainstream PC market. Intel has significantly greater
resources than the Company, and there can be no assurance that the Company's
products will compete effectively against the i740 or any future products
introduced by Intel, that the Company will be able to compete effectively
against Intel or that Intel will not introduce additional products that are
competitive with the Company's products in either performance or price or
both. NVIDIA expects Intel to continue to invest heavily in research and
development and new manufacturing facilities, to maintain its position as the
largest manufacturer of PC microprocessors and one of the largest
manufacturers of motherboards, to increasingly dominate the PC platform and to
promote its product offerings through advertising campaigns designed to
engender brand loyalty among PC users. Intel may in the future develop
graphics add-in cards or graphics-enabled motherboards using its i740 3D
graphics accelerators or other graphics accelerators, which could directly
compete with graphics add-in cards or graphics-enabled motherboards that the
Company's customers may develop. In addition, due to the widespread industry
acceptance of Intel's microprocessor architecture and interface architecture,
including its Accelerated Graphics Port ("AGP"), Intel exercises significant
influence over the PC industry generally, and any significant modifications by
Intel to the AGP, the microprocessor or other aspects of the PC microprocessor
architecture could result in incompatibility with the Company's technology,
which would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any delay in the
public release of information relating to such modifications could have a
material adverse effect on the Company's business, financial condition or
results of operations.
In April 1998, SGI and Intel announced a strategic relationship, which
includes a broad patent cross-license agreement. The Company believes that
this agreement will provide SGI with access to Intel processors for the
development of SGI workstations. In addition, the Company believes that under
the cross-license agreement Intel
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will have access to SGI graphics patents, which may allow Intel to compete
more effectively with the Company. SGI also may compete directly with the
Company as a result of this relationship with Intel. There can be no assurance
that the Company will be able to compete successfully against SGI or Intel.
SGI filed a patent infringement lawsuit against the Company in April 1998. See
"--Legal Proceedings" and "Business--Legal Proceedings."
In addition to Intel, the Company competes with suppliers of graphics add-in
boards that utilize their internally developed graphics chips, such as ATI and
Matrox. NVIDIA also competes with companies that typically have operated in
the PC 2D graphics market and that now offer 3D graphics capability as an
enhancement to their 2D graphics solutions, such as S3 and Trident. Many of
these competitors have introduced 3D graphics functionality on new versions of
existing graphics chips. In addition, NVIDIA's competitors include companies
that traditionally have focused on the production of high end 3D graphics
systems targeted at the professional market, such as 3Dlabs and Real3D. While
these companies produce high performance 3D graphics systems, they
historically have done so at a significantly higher price point than the
Company and have focused on the professional and engineering market. Some of
these companies are developing lower cost versions of their 3D graphics
technology to bring workstation-like 3D graphics to mainstream PCs, and there
can be no assurance that the Company will be able to compete successfully
against them. NVIDIA also competes with companies that have recently entered
or are expected to enter the market with an integrated 3D/2D graphics
solution, but which have not traditionally manufactured 2D graphics solutions,
such as 3Dfx. In addition to the Company's known competitors, the Company
anticipates that there will be new entrants in the graphics processor market,
and there can be no assurance that the Company will compete effectively
against any such new competitors.
The market for 3D graphics processors is highly fragmented and undergoing a
period of consolidation. Several of the Company's competitors and customers
have merged with other industry participants in order to strengthen their
competitive position. For example, ATI recently acquired Chromatic Research
Inc., a 3D entertainment graphics company, and Micron, one of the Company's
OEM customers, acquired Rendition, Inc., a 3D graphics accelerator company, to
explore embedded DRAM applications in the graphics arena. In addition,
Creative, an add-in board manufacturer and a significant customer of the
Company, recently disclosed that it has acquired in excess of 5% of the
outstanding stock of 3Dfx, a competitor of the Company. NVIDIA expects that
consolidation in the 3D graphics market will continue and there can be no
assurance that such consolidation will not involve any more of the Company's
add-in-board manufacturers, OEM customers or competitors. The consolidation of
the Company's customers with other customers or with competitors of the
Company could result in a material decline in the Company's revenue, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Several of the Company's current and potential competitors have
substantially greater financial, technical, manufacturing, marketing,
distribution and other resources, greater name recognition and market
presence, broader product lines for the PC market, longer operating histories,
lower cost structures and larger customer bases than the Company. As a result,
they may be able to adapt more quickly to new or emerging technologies and
changes in customer requirements. Regardless of the relative qualities of the
Company's products, the market power, product breadth and customer
relationships of its larger competitors, particularly Intel, can be expected
to provide such competitors with substantial competitive advantages. The
Company does not seek to compete on the basis of price alone, but may be
forced to lower prices to compete effectively. There can be no assurance that
the Company will be able to compete successfully in the emerging mainstream PC
3D graphics market.
Dependence on New Product Development; Need to Manage Product
Transitions. The Company's business, financial condition and results of
operations will depend to a significant extent on its ability to successfully
develop new products for the 3D graphics market. The Company's add-in board
manufacturers and major OEM customers typically introduce new system
configurations as often as twice per year, typically based on spring and fall
design cycles. Accordingly, the Company's existing products must have
competitive performance levels or the Company must timely introduce new
products with such performance characteristics in order to be included in new
system configurations. The Company must anticipate the features and
functionality that consumers will demand, incorporate those features and
functionality into products that meet the exacting
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design requirements of PC OEMs and add-in board manufacturers, price its
products competitively and introduce the products to the market within the
limited window for PC OEM and add-in board manufacturer design cycles. As a
result, the Company believes that significant expenditures for research and
development will continue to be required in the future. The success of new
product introductions will depend on several factors, including proper new
product definition, timely completion and introduction of new product designs,
the ability of Taiwan Semiconductor Manufacturing Co. ("TSMC"), the Company's
primary manufacturer, and any additional third-party manufacturers to
effectively manufacture the Company's new products, the ability of the Company
to design products that effectively utilize the process technologies of TSMC
or any other third-party manufacturers, the quality of any new products,
differentiation of new products from those of the Company's competitors and
market acceptance of the Company's and its customers' products. The Company's
strategy is to utilize the most advanced process technology appropriate for
its products and available from commercial third-party foundries. Use of such
advanced processes has in the past resulted in initial yield problems, as
discussed below. There can be no assurance that any new products the Company
expects to introduce will incorporate the features and functionality demanded
by PC OEMs, add-in board manufacturers and consumers of 3D graphics, will be
successfully developed or will be introduced in sufficient volumes within the
appropriate time to meet both the PC OEMs' design cycles and market demand.
The Company has in the past experienced delays in the development of some new
products, as discussed below. The failure by the Company to successfully
develop, introduce or achieve market acceptance for new 3D graphics products
would have a material adverse effect on the Company's business, financial
condition and results of operations.
As markets for the Company's 3D graphics processors develop and competition
increases, the Company anticipates that product life cycles will remain short
and average selling prices ("ASPs") will continue to decline. In particular,
ASPs and gross margins for the Company's 3D graphics processors are expected
to decline as each product matures and as per order unit volumes increase. As
a result, the Company will need to introduce new products and enhancements to
existing products to maintain overall average selling prices and gross
margins. In order for the Company's 3D graphics processors to achieve high
volumes, leading PC OEMs and add-in board manufacturers must select the
Company's 3D graphics processor for design into their products, and then
successfully complete the designs of their products and sell them. There can
be no assurance that the Company will successfully identify new product
opportunities, develop and bring to market in a timely fashion such new
products, that any such new products will be selected for design into PC OEMs'
and add-in board manufacturers' products, that such designs will be
successfully completed or that such products will be sold. As the complexity
of its products and the manufacturing process for such products increases,
there is an increasing risk that the Company will experience problems with the
performance of such products and that there will be delays in the development,
introduction or volume shipment of such products. The Company experienced
difficulties commencing volume production of the RIVA128ZX graphics processor
in March 1998 and the RIVA TNT graphics processor in July 1998. These
difficulties were due primarily to yield problems that resulted in lower than
expected revenues and higher manufacturing costs during the quarter ended July
28, 1998. While these yield problems were subsequently resolved, there can be
no assurance that the Company will not experience difficulties related to the
production of current or future products or that other factors will not delay
the introduction or volume sale of new products developed by the Company.
There also can be no assurance that the Company will be able to successfully
manage the production transition risks with respect to future products.
Failure to achieve any of the foregoing with respect to future products or
product enhancements could result in rapidly declining ASPs, reduced margins,
reduced demand for products or loss of market share, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, there can be no assurance that
technologies developed by others will not render the Company's 3D graphics
products non-competitive or obsolete, or result in the Company holding excess
inventory, either of which would have a material adverse effect on the
Company's business, financial condition and results of operations.
In the design and development of new products and product enhancements, the
Company relies on certain third-party software development tools. While the
Company currently is not dependent on any one vendor for the supply of such
tools, there can be no assurance that all or any of such tools will be readily
available in the
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future. For example, the Company has experienced delays in the introduction of
products in the past as a result of the inability of then-available software
development tools to fully simulate the complex features and functionalities
of the Company's products. There can be no assurance that the design
requirements necessary to meet consumer demands for more features and greater
functionality from 3D graphics products in the future will not exceed the
capabilities of any such software development tools. If the software
development tools used by the Company become unavailable or fail to produce
designs that meet consumer demands, the Company's business, financial
condition or results of operations could be materially adversely affected.
Legal Proceedings. On April 9, 1998, the Company was notified that SGI had
filed a patent infringement lawsuit against the Company in the United States
District Court for the District of Delaware. The suit alleges that the sale
and use of the Company's RIVA family of 3D graphics processors infringes a
United States patent held by SGI. The suit seeks unspecified damages
(including treble damages), an order permanently enjoining further alleged
infringement and attorneys' fees. On May 11, 1998, the Company was notified
that S3 had filed a patent infringement lawsuit against the Company in the
United States District Court for the Northern District of California. The suit
alleges that the sale and use of the Company's RIVA family of 3D graphics
processors infringes three United States patents held by S3. The suit seeks
unspecified damages (including treble damages), an order permanently enjoining
further alleged infringement and attorneys' fees. On September 21, 1998, the
Company was notified that 3Dfx had filed a patent infringement lawsuit against
the Company in the United States District Court for the Northern District of
California. The suit alleges that the sale and use of the Company's RIVA TNT
graphics processor infringes a United States patent held by 3Dfx. The suit
seeks unspecified damages (including treble damages), an order permanently
enjoining further alleged infringement and attorneys' fees. The Company has
filed answers to each suit and has filed counter-claims asserting that the
patents in each suit are neither infringed nor valid. Based on its
investigation to date, the Company believes that it has meritorious defenses
to the claims brought and the Company intends to defend itself vigorously with
respect to all three lawsuits.
The litigation with SGI, S3 and 3Dfx has resulted, and the Company expects
that it will continue to result, in significant expense to the Company and
divert the efforts of the Company's technical and management personnel,
whether or not such litigation results in a favorable determination for the
Company. In the event of an adverse result in any suit, the Company could be
required to do one or more of the following: pay substantial damages
(including treble damages); permanently cease the manufacture, use and sale of
any infringing products; expend significant resources to develop non-
infringing technology; or obtain a license from SGI, S3 or 3Dfx for any
infringing technology. Any of these suits could result in limitations on the
Company's ability to market its products, delays and costs associated with
redesigning its products or payments of license fees or other payments to SGI,
S3 or 3Dfx, the occurrence of which would have a material adverse effect on
the Company's business, financial condition and results of operations.
Importance of Design Wins. The Company's future success will depend in large
part on achieving design wins, which entails having its existing and future
products chosen as the 3D graphics processors for hardware components or
subassemblies designed by PC OEMs and add-in board manufacturers. The
Company's add-in board manufacturers and major OEM customers typically
introduce new system configurations as often as twice per year, typically
based on spring and fall design cycles. Accordingly, the Company's existing
products must have competitive performance levels or the Company must timely
introduce new products with such performance characteristics in order to be
included in new system configurations. The failure to achieve one or more
design wins would have a material adverse effect on the Company's business,
financial condition and results of operations. The process of being qualified
for inclusion in a PC OEM's product can be lengthy and could cause the Company
to miss a cycle in the demand of end users for a particular product feature,
which also could materially adversely affect the Company's business, financial
condition or results of operations.
The Company's ability to achieve design wins will depend in part on its
ability to identify and ensure compliance with evolving industry standards.
Unanticipated changes in industry standards could render the Company's
products incompatible with products developed by major hardware manufacturers
and software developers, including Intel and Microsoft, which would require
the Company to invest significant time and resources to redesign its products
to ensure compliance with relevant standards. If the Company's products are
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not in compliance with prevailing industry standards for a significant period
of time, the Company's ability to achieve design wins could be materially
adversely affected. The failure to achieve design wins, due to any of the
foregoing factors or otherwise, would result in the loss of any potential
sales volume that could be generated by such newly designed PC hardware
component or board subassembly and would give a competitive advantage to the
3D graphics processor manufacturer that achieved such design win.
Dependence on the PC Market. In 1997 and the nine months ended October 25,
1998, the Company derived all of its revenue from the sale or license of
products for use in PCs, and the Company expects to continue to derive
substantially all of its revenue from the sale or license of products for use
in PCs. The PC market is characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions and
significant price competition, resulting in short product life cycles and
regular reductions of average selling prices over the life of a specific
product. Although the PC market has grown substantially in recent years, there
can be no assurance that such growth will continue. A reduction in sales of
PCs, or a reduction in the growth rate of such sales, would likely reduce
demand for the Company's products. Moreover, such changes in demand could be
large and sudden. Since PC manufacturers often build inventories during
periods of anticipated growth, they may be left with excess inventories if
growth slows or if they have incorrectly forecast product transitions. In such
cases, PC manufacturers may abruptly suspend substantially all purchases of
additional inventory from suppliers such as the Company until the excess
inventory has been absorbed. Any reduction in the demand for PCs generally, or
for a particular product that incorporates the Company's 3D graphic
processors, could have a material adverse effect on the Company's business,
financial condition or results of operations.
Dependence on Emerging Mainstream PC 3D Graphics Market. The Company's
success will depend in part upon the demand for 3D graphics for mainstream PC
applications. The market for 3D graphics on mainstream PCs has only recently
begun to emerge and is dependent on the future development of, and substantial
end-user and OEM demand for, 3D graphics functionality. As a result, there can
be no assurance that the market for mainstream PC 3D graphics computing will
continue to develop or grow at a rate sufficient to support the Company's
business. The development of the market for 3D graphics on mainstream PCs will
in turn depend on the development and availability of a large number of
mainstream PC software applications that support or take advantage of 3D
graphics capabilities. Currently there are only a limited number of such
software applications, most of which are games, and there can be no assurance
that a broader base of software applications will develop in the near term or
at all. Until very recently, the majority of multimedia PCs incorporated only
2D graphics acceleration technology, and as a result, the majority of graphics
applications currently available for mainstream PCs are written for 2D
acceleration technology. Consequently, there can be no assurance that a broad
market for full function 3D graphics on mainstream PCs will develop. If the
market for mainstream PC 3D graphics fails to develop or develops more slowly
than expected, the Company's business, financial condition and results of
operations would be materially adversely affected. See "--Dependence on the PC
Market."
Customer Concentration; Risks of Order and Shipment Uncertainties. The
Company has only a limited number of customers and its sales are highly
concentrated. The Company primarily sells its products to add-in board
manufacturers, which incorporate graphics products in the boards they sell to
PC OEMs. Sales to STB and Diamond accounted for 63% and 31%, respectively, of
the Company's total revenue in 1997, and sales to STB, Diamond, and Creative
accounted for 40%, 28% and 12%, respectively, of the Company's total revenue
in the nine months ended October 25, 1998. Sales to add-in board manufacturers
primarily are dependent on achieving design wins with leading PC OEMs, and the
Company believes that the large majority of its revenue in its most recent
five quarters was attributable to products that ultimately were incorporated
into PCs sold by Compaq, Dell, Gateway, IBM, Micron and Packard Bell NEC. The
number of add-in board manufacturers and leading PC OEMs is limited, and the
Company expects that a small number of add-in board manufacturers directly,
and a small number of PC OEMs indirectly, will continue to account for a
substantial portion of its revenue for the foreseeable future. In particular,
the Company expects that sales to Creative, Diamond and STB will continue to
account for a substantial portion of its revenue for the foreseeable future.
As a result, the Company's business, financial condition and results of
operations could be materially adversely affected by the decision of a single
PC OEM or add-in board manufacturer to cease using the Company's products or
by a decline in the number of
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products sold by a single PC OEM or add-in board manufacturer or by a small
number of customers. In addition, there can be no assurance that revenue from
add-in board manufacturers or PC OEMs that have directly or indirectly
accounted for significant revenue in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
future period. Creative recently disclosed that it has acquired in excess of
5% of the outstanding stock of 3Dfx, a competitor of the Company. In the event
the relationship between Creative and 3Dfx is further strengthened, whether by
virtue of consolidation or otherwise, Creative could significantly reduce or
eliminate altogether the amount of product it purchases from the Company.
Either such event would have a material adverse impact on the Company's
business, financial condition and results of operations.
Substantially all of the Company's sales are made on the basis of purchase
orders rather than long-term agreements. As a result, the Company may commit
resources to the production of products without having received advance
purchase commitments from customers. Any inability to sell products to which
the Company has devoted significant resources could have a material adverse
effect on the business, financial condition or results of operations of the
Company. In addition, cancellation or deferral of product orders could result
in the Company holding excess inventory, which could have a material adverse
effect on the Company's profit margins and restrict its ability to fund its
operations. The Company recognizes revenue upon shipment of products to the
customer. Refusal by customers to accept shipped products, or delays or
difficulties in collecting accounts receivable could result in significant
charges against income, which could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Management of Growth. The Company's rapid growth has placed, and is expected
to continue to place, a significant strain on the Company's managerial,
operational and financial resources. As of October 25, 1998, the Company had
184 employees as compared to 71 employees as of September 28, 1997, and the
Company expects that the number of its employees will increase substantially
over the next 12 months. The Company's financial and management controls,
reporting systems and procedures are very limited and will need to be upgraded
significantly. Although some new controls, systems and procedures have been
implemented, the Company's future growth, if any, will depend on its ability
to continue to implement and improve operational, financial and management
information and control systems on a timely basis, as well as its ability to
maintain effective cost controls, and any failure to do so effectively could
have a material adverse effect on the Company's business, financial condition
or results of operations. Further, the Company will be required to manage
multiple relationships with various customers and other third parties. There
can be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that the Company's management
will be able to achieve the rapid execution necessary to successfully
implement its strategy. The Company's inability to effectively manage any
future growth would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees," "--
Facilities" and "Management."
Dependence on Third-Party Manufacturers; Absence of Manufacturing Capacity;
Manufacturing Risks. The Company does not manufacture the semiconductor wafers
used for its products and does not own or operate a wafer fabrication
facility. The Company's products require wafers manufactured with state-of-
the-art fabrication equipment and techniques. The Company in the past utilized
ST and currently utilizes TSMC to produce the Company's semiconductor wafers
and utilizes independent contractors to perform assembly, test and packaging.
The Company depends on these suppliers to allocate to the Company a portion of
their manufacturing capacity sufficient to meet the Company's needs, to
produce products of acceptable quality and at acceptable manufacturing yields,
and to deliver those products to the Company on a timely basis. There can be
no assurance that these manufacturers will be able to meet the Company's near-
term or long-term manufacturing requirements. During 1998, the Company
experienced difficulties in achieving volume production at TSMC of the
Company's RIVA128ZX and RIVA TNT graphics processors. As the Company's
relationships with its manufacturing partners develop, yields or product
performance could be adversely affected due to difficulties associated with
adapting the Company's technology and product design to the proprietary
process technology and design rules
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of each manufacturer. A manufacturing disruption experienced by these
manufacturers would impact the production of the Company's products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company obtains manufacturing
services on a purchase order basis and these manufacturers have no obligation
to provide the Company with any specified minimum quantities of product. These
manufacturers fabricate wafers, assemble, test and package products for other
companies, including certain competitors of the Company, and could choose to
prioritize capacity for other users or reduce or eliminate deliveries to the
Company on short notice. Because the lead time needed to establish a strategic
relationship with a new manufacturing partner could be several months, there
is no readily available alternative source of supply for any specific product.
The Company believes that long-term market acceptance for the Company's
products will depend on reliable relationships with TSMC and any other
manufacturers used by the Company to ensure adequate product supply to respond
to customer demand.
There are many other risks associated with the Company's dependence upon
third-party manufacturers, including reduced control over delivery schedules,
quality assurance, manufacturing yields and cost; risks associated with
international operations; the potential lack of adequate capacity during
periods of excess demand; limited warranties on wafers supplied to the
Company; availability of trade credit on favorable terms; and potential
misappropriation of the Company's intellectual property. The Company is
dependent primarily on TSMC and expects in the future to continue to be
dependent upon third-party manufacturers to produce wafers of acceptable
quality and with acceptable manufacturing yields, to deliver those wafers to
the Company and its independent assembly and testing subcontractors on a
timely basis and to allocate to the Company a portion of their manufacturing
capacity sufficient to meet the Company's needs. The Company's wafer
requirements represent a small portion of the total production capacity of
TSMC. Although the Company's products are designed using TSMC's process design
rules, there can be no assurance that TSMC will be able to achieve or maintain
acceptable yields or deliver sufficient quantities of wafers on a timely basis
or at an acceptable cost. Additionally, there can be no assurance that TSMC
will continue to devote resources to the production of the Company's products,
continue to advance the process design technologies on which the manufacturing
of the Company's products are based. Any such difficulties would have a
material adverse effect on the Company's business, financial condition and
results of operations.
ST has a worldwide license to incorporate the technology underlying the
RIVA128 and RIVA128ZX graphics processors (including the source code and
architecture) (the "RIVA Technology") in its own products, subject to certain
limitations on the modification of such technology, and a right to receive
software engineering and quality support from the Company for the RIVA
technology through December 31, 1998. There can be no assurance that ST will
not develop and market products competitive with those of the Company that
contain additional features, better functionality and lower pricing. Because
ST has substantially greater financial, technical, manufacturing, marketing,
distribution and other resources than the Company, there can be no assurance
that the Company will be able to compete successfully against any such ST
product. The failure of the Company to successfully compete against any such
ST product could have a material adverse effect on the Company's business,
financial condition or results of operations. ST also has a worldwide license
to sell the RIVA128 and RIVA128ZX graphics processors. Royalty revenue from
sales of the RIVA128 graphics processor by ST represented approximately 6% of
the Company's total revenue in the nine months ended September 30, 1997 and
royalty revenue from sales of the RIVA128 graphics processor and a derivative
of the RIVA128ZX graphics processor represented 7% of the Company's total
revenue in the nine months ended October 25, 1998. The Company expects royalty
revenue from ST to decrease as a percentage of total revenue. See "--
Dependence on Third-Party Subcontractors for Assembly and Testing," "--Risks
Associated with International Operations" and "Business--Manufacturing."
Dependence on Key Personnel. The Company's performance will be substantially
dependent on the performance of its executive officers and key employees. None
of the Company's officers or employees is bound by an employment agreement,
and the relationships of such officers and employees with the Company are,
therefore, at will. The Company does not have "key person" life insurance
policies on any of its employees. The loss of the services of any of its
executive officers, technical personnel or other key employees, particularly
Jen-Hsun Huang, the Company's President and Chief Executive Officer, would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's success will depend on
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its ability to identify, hire, train and retain highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to identify, attract, assimilate
or retain highly qualified technical and managerial personnel in the future.
During the quarter ended October 25, 1998, both the Chief Financial Officer of
the Company and the Vice President of Operations left the Company. Inability
to attract and retain the necessary technical and managerial personnel would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Employees" and "Management."
Manufacturing Yields. The fabrication of semiconductors is a complex
process. Contaminants, defects in masks used to print circuits on wafers,
difficulties in the fabrication process and other factors can cause a
substantial percentage of wafers to be rejected or a significant number of die
on each wafer to be nonfunctional. These problems are difficult to diagnose
and time-consuming and expensive to remedy. As a result, semiconductor
companies frequently encounter difficulties in achieving acceptable product
yields. When production of a new product begins, the Company typically pays
for wafers, which may or may not have any functional products. Accordingly,
the Company bears the financial risk until production is stabilized. Once
production is stabilized, the Company pays for functional die only. The
Company typically begins wafer production in advance of stabilized yields.
Failure to stabilize yields or failure to achieve acceptable yields would
materially adversely affect the Company's revenue, gross profit and results of
operations. For example, in December 1997, the Company experienced low
manufacturing yields at ST and in the six months ended October 25, 1998, the
Company experienced low manufacturing yields at TSMC. Any similar occurrences
in the future could have a material adverse effect on the Company's business,
financial condition or results of operations.
Semiconductor manufacturing yields are a function both of product design,
which is developed largely by the Company, and process technology, which is
typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be
analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process, and resolution of yield problems would
require cooperation by and communication between the Company and the
manufacturer. In the quarter ended July 26, 1998 and, to a lesser extent, the
quarter ended October 25, 1998, the Company experienced reduced yield with the
RIVA128ZX and the RIVA TNT graphics processors, which resulted in higher than
expected costs and lower revenues in the quarter ended July 26, 1998. The risk
of low yields is compounded by the offshore location of the Company's
manufacturers, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems. As the Company's
relationships with TSMC and any additional manufacturing partners develop,
yields or product performance could be adversely affected due to difficulties
associated with adapting the Company's technology and product design to the
proprietary process technology and design rules of each manufacturer. Because
of the Company's potentially limited access to wafer fabrication capacity from
its manufacturers, any decrease in manufacturing yields could result in an
increase in the Company's per unit costs and force the Company to allocate its
available product supply among its customers, thus potentially adversely
impacting customer relationships as well as revenue and gross profit. There
can be no assurance that the Company's wafer manufacturers will achieve or
maintain acceptable manufacturing yields in the future. The inability of the
Company to achieve planned yields from its wafer manufacturers could have a
material adverse effect on the Company's business, financial condition or
results of operations. The Company also faces the risk of product recalls or
product returns resulting from design or manufacturing defects that are not
discovered during the manufacturing and testing process. In the event of a
significant number of product returns due to a defect or recall, the Company's
business, financial condition or results of operations could be materially
adversely affected. See "--Risks Associated with International Operations."
Transition to New Manufacturing Process Technologies. The Company's strategy
is to utilize the most advanced process technology appropriate for its
products and available from commercial third-party foundries. Use of such
advanced processes may have greater risk of initial yield problems.
Manufacturing process
15
<PAGE>
technologies are subject to rapid change and require significant expenditures
for research and development. The Company continuously evaluates the benefits
of migrating to smaller geometry process technologies in order to improve
performance and reduce costs. The Company believes that the transition of its
products to increasingly smaller geometries will be important to its
competitive position, and the Company expects to migrate to .25 micron
technology with its next-generation graphics processor. Other companies in the
industry have experienced difficulty in migrating to new manufacturing
processes and, consequently, have suffered reduced yields, delays in product
deliveries and increased expense levels. There can be no assurance the Company
will not experience such difficulties and the corresponding adverse effects.
Moreover, the Company is dependent on its relationships with its third-party
manufacturers to migrate to smaller geometry processes successfully. No
assurance can be given that the Company will be able to migrate to new
manufacturing process technologies successfully or on a timely basis. Any such
failure by the Company could have a material adverse effect on its business,
financial condition or results of operations.
Dependence on Third-Party Subcontractors for Assembly and Testing. The
Company used ST in the past to assemble and test substantially all of the
Company's products. The Company's RIVA128ZX and RIVA TNT graphics processors
currently are assembled and tested by Amkor Technology Inc. ("Amkor"), which
has facilities in Korea and the Philippines. The Company also recently
qualified Siliconware Precision Industries Company Ltd. ("Siliconware"), which
is located in Taiwan, to assemble and test the Company's RIVA TNT graphics
processor. The Company does not have long-term agreements with either of these
subcontractors. As a result of its dependence on third-party subcontractors
for assembly and testing of its products, the Company does not directly
control product delivery schedules or product quality. Any product shortages
or quality assurance problems could increase the costs of manufacture,
assembly or testing of the Company's products and could have a material
adverse effect on the Company's business, financial condition or results of
operations. Due to the amount of time typically required to qualify assemblers
and testers, the Company could experience significant delays in the shipment
of its products if it is required to find alternative third parties to
assemble or test the Company's products or components. Any delays in delivery
of the Company's products could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Business--Manufacturing."
Risks Relating to Intellectual Property. The Company relies primarily on a
combination of patent, mask work protection, trademarks, copyrights, trade
secret laws, employee and third-party nondisclosure agreements and licensing
arrangements to protect its intellectual property. The Company has 22 patents
issued and 18 patent applications pending in the United States. Such issued
patents have expiration dates from May 2015 to November 2016. The issued
patents and pending patent applications relate to technology developed by the
Company in connection with the development of its 3D graphics processors,
including the RIVA family of graphics processors. The Company has no foreign
patents or patent applications. There can be no assurance that the Company's
pending patent applications or any future applications will be approved, or
that any issued patents will provide the Company with competitive advantages
or will not be challenged by third parties, or that the enforcement of patents
of others will not have an adverse effect on the Company's ability to do
business. In addition, there can be no assurance that others will not
independently develop substantially equivalent intellectual property or
otherwise gain access to the Company's trade secrets or intellectual property,
or disclose such intellectual property or trade secrets, or that the Company
can meaningfully protect its intellectual property. A failure by the Company
to effectively protect its intellectual property could have a material adverse
effect on the Company's business, financial condition or results of
operations. The Company has licensed technology from third parties for
incorporation in the Company's graphics processors, and it expects to continue
to enter into such agreements for future products. Such licenses may result in
royalty payments to third parties, the cross-license of technology by the
Company or payment of other consideration. If such arrangements are not
concluded on commercially reasonable terms, the Company's business, financial
condition or results of operations could be materially adversely affected.
The Company attempts to protect its trade secrets and other proprietary
information through confidentiality agreements with manufacturers and other
partners, proprietary information agreements with employees and
16
<PAGE>
consultants and other security measures. The Company also relies on trademarks
and trade secret laws to protect its intellectual property. Despite these
efforts, there can be no assurance that others will not gain access to the
Company's trade secrets, or that the Company can meaningfully protect its
intellectual property. In addition, effective trade secret protection may be
unavailable or limited in certain foreign countries. Although the Company
intends to protect its rights vigorously, there can be no assurance that such
measures will be successful.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which has resulted in
significant and often protracted and expensive litigation. The 3D graphics
market in particular has been characterized recently by the aggressive pursuit
of intellectual property positions, and the Company expects its competitors to
continue to pursue aggressive intellectual property positions. In April 1998,
SGI filed a patent infringement lawsuit against the Company, in May 1998, S3
filed a patent infringement lawsuit against the Company and in September 1998,
3Dfx filed a patent infringement lawsuit against the Company. See "--Legal
Proceedings." In addition, the Company from time to time has received notices
alleging that the Company has infringed patents or other intellectual property
rights owned by third parties. ST has certain patent licenses that in some
cases may allow ST to manufacture the Company's products without infringing
third-party patents. As the Company's products are manufactured by TSMC or
other manufacturers, such licenses will no longer benefit the Company and
therefore the risk of a third-party claim of patent infringement against the
Company will increase. In the event infringement claims are made against the
Company, the Company may seek licenses under such patents or other
intellectual property rights. However, there can be no assurance that licenses
will be offered or that the terms of any offered licenses will be acceptable
to the Company. The failure to obtain a license from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products. Furthermore, the
Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity
of the Company's proprietary rights. The Company has agreed to indemnify
certain customers for claims of infringement arising out of sale of the
Company's product. Litigation by or against the Company or such customers
concerning infringement would likely, and the SGI, S3 and 3Dfx lawsuits have
resulted, and will continue to result, in significant expense to the Company
and divert the efforts of the Company's technical and management personnel,
whether or not such litigation results in a favorable determination for the
Company. In the event of an adverse result in the SGI, S3, 3Dfx or other
litigation, the Company could be required to pay substantial damages (which
could include treble damages), cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses for
the infringing technology. There can be no assurance that the Company would be
successful in such development or that such licenses would be available on
reasonable terms, or at all, and any such development or license could require
expenditures by the Company of substantial time and other resources. Although
patent disputes in the semiconductor industry have often been settled through
cross-licensing arrangements, there can be no assurance that, in the event
that SGI, S3, 3Dfx or any other third party makes a successful claim against
the Company or its customers, a cross-licensing arrangement could be reached.
If such a license is not made available to the Company on commercially
reasonable terms, the Company's business, financial condition or results of
operations could be materially adversely affected.
There can be no assurance that infringement claims by third parties or
claims for indemnification by customers or end users of the Company's products
resulting from infringement claims will not be asserted in the future or that
such possible assertions or the assertions currently raised in the SGI, S3 and
3Dfx litigation, if proven to be true, will not materially adversely affect
the Company's business, financial condition or results of operations. Any
limitations on the Company's ability to market its products, or delays and
costs associated with redesigning its products or payments of license fees to
third parties, or any failure by the Company to develop or license a
substitute technology on commercially reasonable terms, any of which may
result from the SGI, S3 or 3Dfx litigation, could have a material adverse
effect on the Company's business, financial condition or results of
operations. See "Business--Patents and Proprietary Rights."
Risk of Product Defects and Incompatibilities; Product Liability. Products
as complex as those offered by the Company may contain defects or failures
when introduced or when new versions or enhancements to existing
17
<PAGE>
products are released. The Company has in the past discovered software defects
and incompatibilities with customers' hardware in certain of its products and
may experience delays or lost revenue to correct any new defects in the
future. Although the Company has not experienced material adverse effects
resulting from any such bugs, defects, failures or incompatibilities to date,
there can be no assurance that, despite testing by the Company, errors will
not be found in new products or releases after commencement of commercial
shipments in the future, which could result in loss of market share or failure
to achieve market acceptance. In addition, the Company's products typically go
through only one verification cycle prior to beginning volume production and
distribution of such products. As a result, the Company's products may contain
defects or flaws that are undetected prior to volume production and
distribution. The widespread production and distribution of defective products
could have a material adverse impact on the Company's business, financial
condition or results of operations. See "Business--NVIDIA Architecture,
Products and Products under Development."
The Company's products are an integrated component of both PCs and business
workstations. Although the Company has not experienced any product liability
claims to date, the sale and support of products by the Company may entail the
risk of such claims. In addition, any failure by the Company's products or
software to properly perform could result in claims against the Company by its
customers. The Company maintains insurance to protect against certain claims
associated with the use of its products, but there can be no assurance that
its insurance coverage would adequately cover any claim asserted against the
Company. A successful claim brought against the Company that is in excess of,
or excluded from, its insurance coverage, could have a material adverse effect
on the Company's business, financial condition or results of operations. In
addition, even claims that are ultimately unsuccessful could result in the
Company's expenditure of funds in litigation and management time and
resources. The Company has agreed to indemnify certain of its customers
against patent infringement, warranty and certain product defect claims. There
can be no assurance that the Company will not be subject to material claims in
the future, that such claims will not result in liability in excess of its
insurance coverage, that the Company's insurance will cover such claims or
that appropriate insurance will continue to be available to the Company in the
future at commercially reasonable rates.
Erosion of Average Selling Prices. The semiconductor industry, including the
3D graphics processor industry, has been characterized, and is likely to
continue to be characterized by, rapid erosion of average selling prices
("ASPs") due to a number of factors, including rapid technological change,
price/performance enhancements and product obsolescence. The Company
anticipates that ASPs and gross margins for its products will decrease over
product life cycles, due to competitive pressures and volume pricing
agreements. Decreasing ASPs could cause the Company to experience decreased
revenue even though the number of units sold is increasing. As a result, the
Company may experience substantial period-to-period fluctuations in future
operating results due to ASP erosion. Therefore, the Company must continue to
develop and introduce on a timely basis next-generation products and
enhancements to existing new products that incorporate additional or new
features and functionalities and that can be sold at higher ASPs. Failure to
achieve the foregoing could cause the Company's revenue and gross margins to
decline, which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Risks Associated with International Operations. The Company's reliance on
foreign third-party manufacturing, assembly and testing operations subjects it
to a number of risks associated with conducting business outside of the United
States. These risks include unexpected changes in, or impositions of,
legislative or regulatory requirements, delays resulting from difficulty in
obtaining export licenses for certain technology, tariffs, quotas and other
trade barriers and restrictions, longer payment cycles, potentially adverse
taxes, the burdens of complying with a variety of foreign laws and other
factors beyond the Company's control. The Company also is subject to general
political risks in connection with its international trade relationships.
Although the Company has not to date experienced any material adverse effect
on its business, financial condition or results of operations as a result of
such regulatory, political and other factors, there can be no assurance that
such factors will not have a material adverse effect on the Company's
business, financial condition or results of operations in the future or
require the Company to modify its current business practices. In addition, the
laws of certain foreign countries in which the Company's products are or may
be manufactured or sold,
18
<PAGE>
including various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely. Currently, all of the Company's arrangements with third-
party manufacturers provide for pricing and payment in U.S. dollars, and to
date the Company has not engaged in any currency hedging activities, although
it may do so in the future. There can be no assurance that fluctuations in
currency exchange rates will not have a material adverse effect on the
Company's business, financial condition or results of operations in the
future.
Cyclical Nature of the Semiconductor Industry. The semiconductor industry
historically has been characterized by rapid technological change, cyclical
market patterns, significant ASP erosion, fluctuating inventory levels,
alternating periods of overcapacity and capacity constraints, variations in
manufacturing costs and yields and significant expenditures for capital
equipment and product development. In addition, the industry has experienced
significant economic downturns at various times, characterized by diminished
product demand and accelerated erosion of ASPs. The Company may experience
substantial period-to-period fluctuations in results of operations due to
general semiconductor industry conditions.
Future Capital Needs; Uncertainty of Additional Funding. If the Company
continues to increase production of its products, it will be required to
invest significant working capital in inventory and accounts receivable. The
Company also intends to continue to invest heavily in research and development
for its existing products and for new product development. The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the costs and timing of expansion of research and product
development efforts and the success of these development efforts, the costs
and timing of expansion of sales and marketing activities, the ability to
collect receivables from its customers, the ability to obtain favorable credit
terms from its vendors, the extent to which the Company's existing and new
products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims
and other intellectual property rights, available borrowings under line of
credit arrangements and other factors. The Company believes that the proceeds
from this offering, together with the Company's current cash balances, bank
credit line and cash generated from operations, will be sufficient to meet the
Company's operating and capital requirements for at least the next 12 months.
However, there can be no assurance that the Company will not require
additional financing within this time frame. The Company may be required to
raise additional funds through public or private financing, strategic
relationships or other arrangements. There can be no assurance that such
additional funding, if needed, will be available on terms attractive to the
Company, or at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and additional debt financing, if available, may
involve additional restrictive covenants. Strategic arrangements, if necessary
to raise additional funds, may require the Company to relinquish its rights to
certain of its technologies or products. The failure of the Company to raise
capital when needed could have a material adverse effect on the Company's
business, financial condition or results of operations. See "--Unpredictable
and Fluctuating Operating Results," "--Limited Operating History; History of
Losses; No Assurance of Profitability," "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Year 2000 Compliance. The Year 2000 issue is the result of computer programs
written using two digits rather than four to define the applicable year (the
"Year 2000 Issue"). Computer programs that have such date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The Company is heavily dependent upon the proper functioning of its own
computer or data-dependent systems. This includes, but is not limited to, its
information systems in business, finance, operations and service. Any failure
or malfunctioning on the part of these or other systems could adversely affect
the Company in ways that are not currently known, discernible, quantifiable or
otherwise anticipated by the Company. In addition, the Company has
relationships with, and is to varying degrees dependent upon, a large number
of third parties that provide information, goods and services to the Company
and manufacture the Company's graphics processors.
19
<PAGE>
The Company's business and results of operations could be materially adversely
affected if its key suppliers were to experience Year 2000 Issues that caused
them to delay manufacturing or shipment of finished product to the Company. In
addition, the Company's results of operations could be materially adversely
affected if any of the Company's key customers encounter Year 2000 Issues that
cause them to delay or cancel substantial purchase orders or delivery of the
Company's product.
There can be no assurance that the Company will be able to adequately
address the Year 2000 Issue in a timely manner or to upgrade any or all of its
major systems in accordance with such plan. If the Company's modifications or
upgrades or modifications by key suppliers or customers are not completed in a
timely manner or are not successful, the Company may be unable to conduct its
business, which would have a material adverse effect on the operations and
financial position of the Company. In addition, there can be no assurance that
any such upgrades will effectively address the Year 2000 Issue. Furthermore,
there can be no guarantee that the systems of other companies on which the
Company relies for the manufacture of its products will be timely converted,
or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company cannot predict the extent of any such
impact.
There can be no assurance that the Company or any third party will not
encounter any unforeseen problems with respect to any of the Company's
systems, which unforeseen problems could have a material adverse effect on the
operations and financial position of the Company. The Company is currently
evaluating possible action to be taken in the event that the assessment of the
Year 2000 Issue is not successfully completed on a timely basis, but has not
yet established a formal contingency plan.
Control by Existing Stockholders. Upon completion of this offering, the
Company's executive officers and directors, together with entities affiliated
with such individuals, will beneficially own approximately % of the Company's
Common Stock (approximately % if the Underwriters' over-allotment option is
exercised in full). Accordingly, these stockholders will be able to exercise
control over matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. These
transactions include proxy contests, mergers involving the Company, tender
offers, open market purchase programs or other purchases of Common Stock that
could give stockholders of the Company the opportunity to realize a premium
over the then-prevailing market price for their shares of Common Stock. See
"Principal Stockholders."
Absence of Prior Trading Market; Potential Volatility of Stock Price. Prior
to this offering, there has been no public market for the Common Stock. There
can be no assurance that an active trading market will develop or, if one
develops, that it will be maintained. The initial public offering price of the
Common Stock will be established by negotiation among the Company and the
Underwriters. See "Underwriters" for factors to be considered in determining
the initial public offering price. The market price of the shares of Common
Stock could be subject to significant fluctuations in response to the
Company's operating results, announcements of new products by the Company or
its competitors, and other factors, including general economic and market
conditions. In addition, the stock market in recent months has experienced and
continues to experience extreme price and volume fluctuations, which have
affected the market price of the stock of many companies, and particularly
technology companies, and which have often been unrelated or disproportionate
to the operating performance of these companies. These fluctuations, as well
as a shortfall in sales or earnings compared to securities analysts
expectations, changes in analysts recommendations or projections or general
economic and market conditions, may adversely affect the market price of the
Common Stock. In the past, securities class action litigation has often been
instituted following periods of volatility in the market price for a company's
securities. Such litigation could result in substantial costs and a diversion
of management attention and resources, which could have a material adverse
effect on the Company's business, financial condition or results of
operations.
Anti-Takeover Provisions. The Company's Certificate of Incorporation (the
"Certificate") authorizes the Board of Directors to issue up to 2,000,000
shares of Preferred Stock and to determine the powers, designations,
preferences, rights, qualifications, limitations and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
20
<PAGE>
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The Certificate and Bylaws, among
other things, provide for a classified Board of Directors, require that
stockholder actions occur at duly called meetings of the stockholders, limit
who may call special meetings of stockholders and require advance notice of
stockholder proposals and director nominations. These and other provisions
could have the effect of making it more difficult for a third party to acquire
a majority of the outstanding voting stock of the Company, discourage a
hostile bid or delay, prevent or deter a merger, acquisition or tender offer
in which the Company's stockholders could receive a premium for their shares,
or a proxy contest for control of the Company or other change in the Company's
management. See "Management" and "Description of Capital Stock."
Shares Eligible for Future Sale. The sale of a substantial number of shares
of Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock. Upon the closing of this
offering, the Company will have outstanding an aggregate of shares of
Common Stock, (assuming no exercise of outstanding options and warrants), of
which 25,065,226 shares of Common Stock are "Restricted Shares" subject to
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k)
or 701 promulgated under the Securities Act. Holders of certain shares of the
Company's Common Stock, including all officers and directors, have agreed (the
"Lock-Up Agreements"), subject to certain exceptions, not to offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock (whether such shares or any such securities are then owned by
such person or are thereafter acquired directly from the Company), or to enter
into any swap or similar arrangement that transfers, in whole or in part, the
economic risks of ownership of the Common Stock (a "disposition"), without the
prior written consent of Morgan Stanley & Co. Incorporated for a period of 180
days after the date of this Prospectus. As a result of such contractual
restrictions and the provisions of Rule 144 and 701, the Restricted Shares
will be available for sale in the public market as follows: (i) 147,500 shares
will be eligible for immediate sale on the date of this Prospectus;
(ii) 4,852,500 shares will be eligible for sale 90 days after the date of this
Prospectus; (iii) 17,727,849 shares will be eligible for sale upon expiration
of lock-up agreements 180 days after the date of this Prospectus and (iv) the
remaining shares will be eligible for sale from time to time thereafter upon
expiration of the Company's right to repurchase such shares. In addition,
certain stockholders of the Company have the right to register shares of
Common Stock for sale in the public market, and the Company intends to
register shares of Common Stock authorized for issuance under the Company's
equity incentive plans shortly following the closing of this offering. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
Dilution; Absence of Cash Dividends. Purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
net tangible book value of their investment from the initial public offering
price. Additional dilution will occur upon exercise of outstanding options and
warrants. See "Dilution" and "Shares Eligible for Future Sale." The Company
has never paid any dividends and does not anticipate paying dividends in the
foreseeable future. See "Dividend Policy."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby are estimated to be approximately $
($ if the Underwriters' over-allotment option is exercised in full), at an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company. The balance of the net proceeds will be used
for general corporate purposes, including capital expenditures and working
capital. The Company expects to spend approximately $10.0 million for capital
expenditures in fiscal 2000, primarily for capital leases and the purchase of
computer and engineering workstations. Such capital expenditures are expected
to be funded by a portion of the net proceeds from this offering, together
with existing cash balances and anticipated cash flow from operations. The
amounts and timing of the Company's actual expenditures will depend upon
numerous factors, including the status of the Company's research and
development efforts, the amount of cash generated by the Company's operations,
the level of the Company's sales and marketing activities and the impact of
competition. Pending such uses, the Company intends to invest the net proceeds
of this offering in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock and does
not anticipate paying cash dividends for the foreseeable future.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 25, 1998 (i) on an actual basis, (ii) on a pro forma basis giving
effect to the conversion of all outstanding shares of Preferred Stock into
shares of Common Stock and the mandatory conversion of convertible notes upon
the closing of this offering and (iii) on a pro forma as adjusted basis to
reflect the receipt by the Company of the estimated net proceeds from the sale
of the shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
<TABLE>
<CAPTION>
OCTOBER 25, 1998
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, less current
portion....................................... $ 2,032 $ 2,032 $
-------- -------- -----
Stockholders' equity:
Mandatorily convertible notes................ 11,000 -- --
Preferred Stock, $.001 par value; actual--
10,000,000 shares authorized, 9,327,087
shares issued and outstanding; pro forma and
pro forma as adjusted-- 2,000,000 shares
authorized, no shares issued and
outstanding................................. 9 -- --
Common Stock, $.001 par value; 200,000,000
shares authorized; actual--14,166,710 shares
issued and outstanding; pro forma--
25,065,225 shares issued and outstanding;
pro forma as adjusted-- shares issued
and outstanding(1)(2)....................... 14 25
Additional paid-in capital................... 25,471 36,469
Deferred compensation........................ (1,126) (1,126)
Accumulated deficit.......................... (17,074) (17,074)
-------- -------- -----
Total stockholders' equity................. 18,294 18,294
-------- -------- -----
Total capitalization..................... $ 76,502 $ 76,502 $
======== ======== =====
</TABLE>
- --------
(1) Excludes (i) 7,461,208 shares of Common Stock issuable upon the exercise
of options outstanding at a weighted average exercise price of $4.46 per
share, (ii) 158,806 shares of Common Stock issuable upon the exercise of
warrants outstanding at a weighted average exercise price of $2.10 per
share, (iii) 2,585,832 shares reserved for future grants under the
Company's 1998 Equity Incentive Plan, (iv) 206,250 shares reserved for
future grants under the Company's 1998 Non-Employee Directors' Stock
Option Plan, (v) 500,000 shares reserved for issuance under the Company's
1998 Employee Stock Purchase Plan, (vi) 1,571,429 shares of Common Stock
issuable upon the mandatory conversion of convertible notes upon the
closing of this offering and (vii) 300,000 shares of Common Stock issuable
upon the exercise of warrants that the Company has undertaken to issue at
a per share exercise price equal to the initial public offering price. See
"Management--Employee Benefit Plans" and Notes 3 and 8 of Notes to
Financial Statements.
(2) Assumes conversion of mandatorily convertible notes at $7.00 per share.
See Note 3 of Notes to Financial Statements.
23
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of October 25, 1998
was approximately $ million or $.73 per share of Common Stock. Pro forma net
tangible book value per share is equal to the Company's total tangible assets
less its total liabilities divided by the number of shares of Common Stock
outstanding (assuming the conversion of all outstanding shares of Preferred
Stock into Common Stock). After giving effect to the sale by the Company of
the shares of Common Stock offered hereby (at an assumed initial public
offering price of $ per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company), the as adjusted net tangible book value of the Company as of October
25, 1998 would have been $ million, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new public
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share as of October 25,
1998............................................................ $.73
Increase in pro forma net tangible book value per share
attributable to new public investors............................
----
As adjusted net tangible book value per share after the offering...
---
Dilution per share to new public investors......................... $
===
</TABLE>
The following table summarizes, on a pro forma basis as of October 25, 1998,
the difference between the number of shares of Common Stock purchased from the
Company (assuming the conversion of all outstanding shares of Preferred Stock
into Common Stock), the total cash consideration paid and the average price
per share paid by the existing stockholders and by the new public investors
(at an assumed initial public offering price of $ per share and before
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
------------------ ------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 27,271,559 % $34,160,577 % $1.25
New public investors.............
---------- ------ ----------- ------
Total.......................... 100.0% $ 100.0%
========== ====== =========== ======
</TABLE>
The immediately foregoing table includes 2,070,708 shares of Common Stock
issuable upon the exercise of outstanding stock options immediately
exercisable as of October 25, 1998 with a weighted average exercise price of
$1.16 per share and 1,571,429 shares of Common Stock issuable upon conversion
of convertible subordinated notes. The foregoing excludes 5,390,500 shares
issuable upon exercise of outstanding options not immediately exercisable with
a weighted average exercise price of $5.74 per share, 158,806 shares of Common
Stock issuable upon the exercise of outstanding warrants with a weighted
average exercise price of $2.10 per share. To the extent that outstanding
options or warrants are exercised, there will be further dilution to new
investors. See "Management--Employee Benefit Plans" and Note 3 of Notes to
Financial Statements.
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein. The statement of operations data for the years ended December
31, 1995, 1996 and 1997, the one month ended January 31, 1998, and the nine
months ended October 25, 1998 and the balance sheet data as of December 31,
1996 and 1997, January 31, 1998, and October 25, 1998 have been derived from
and should be read in conjunction with the audited financial statements of the
Company and the notes thereto included elsewhere in this Prospectus that have
been audited by KPMG Peat Marwick LLP, independent auditors. The statement of
operations data for the period from inception (April 5, 1993) to December 31,
1993 and the year ended December 31, 1994 are derived from audited financial
statements and the notes thereto not included in this Prospectus. The balance
sheet data as of December 31, 1993, 1994 and 1995 are derived from audited
financial statements and the notes thereto not included in this Prospectus.
The selected statement of operations data for the one month ended January 26,
1997 and the nine months ended September 28, 1997 are derived from unaudited
financial statements included elsewhere in this Prospectus that have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation as of such date. The
operating results for the nine months ended October 25, 1998 are not
necessarily indicative of the results to be expected for any other interim
period or any future fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31, ONE MONTH ENDED NINE MONTHS ENDED
INCEPTION ---------------------------------- ----------------------- -------------------------
(APRIL 5, 1993) TO JANUARY 26, JANUARY 31, SEPTEMBER 28, OCTOBER 25,
DECEMBER 31, 1993 1994 1995 1996 1997 1997 1998 1997 1998
------------------ ------- ------- ------- ------- ----------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenue:
Product......... $ -- $ -- $ 1,103 $ 3,710 $27,280 $ 190 $11,420 $ 5,225 $86,755
Royalty......... -- -- 79 202 1,791 -- 1,911 312 5,945
------- ------- ------- ------- ------- ------ ------- ------- -------
Total revenue.... -- -- 1,182 3,912 29,071 190 13,331 5,537 92,700
Cost of revenue.. -- -- 1,549 3,038 21,244 127 10,071 4,906 67,400
------- ------- ------- ------- ------- ------ ------- ------- -------
Gross profit
(loss).......... -- -- (367) 874 7,827 63 3,260 631 25,300
------- ------- ------- ------- ------- ------ ------- ------- -------
Operating
expenses:
Research and
development..... 204 361 2,426 1,218 7,103 415 1,121 3,518 16,656
Sales, general
and
administrative.. 302 990 3,677 2,649 4,183 164 640 2,024 12,544
------- ------- ------- ------- ------- ------ ------- ------- -------
Total operating
expenses........ 506 1,351 6,103 3,867 11,286 579 1,761 5,542 29,200
------- ------- ------- ------- ------- ------ ------- ------- -------
Operating income
(loss).......... (506) (1,351) (6,470) (2,993) (3,459) (516) 1,499 (4,911) (3,900)
Interest and
other income
(expense), net.. 22 (10) 93 (84) (130) (6) (18) (102) 60
------- ------- ------- ------- ------- ------ ------- ------- -------
Income (loss)
before income
tax expense
(benefit)....... (484) (1,361) (6,377) (3,077) (3,589) (522) 1,481 (5,013) (3,840)
Income tax
expense
(benefit)....... -- -- -- -- -- -- 134 -- (308)
------- ------- ------- ------- ------- ------ ------- ------- -------
Net income
(loss).......... $ (484) $(1,361) $(6,377) $(3,077) $(3,589) $ (522) $ 1,347 $(5,013) $(3,532)
======= ======= ======= ======= ======= ====== ======= ======= =======
Basic net income
(loss) per
share(1)........ $ (.07) $ (.19) $ (.56) $ (.27) $ (.28) $ (.05) $ .10 $ (.41) $ (.25)
======= ======= ======= ======= ======= ====== ======= ======= =======
Diluted net
income (loss)
per share....... $ (.07) $ (.19) $ (.56) $ (.27) $ (.28) $ (.05) $ .05 $ (.41) $ (.25)
======= ======= ======= ======= ======= ====== ======= ======= =======
Shares used in
basic per share
computation(1).. 6,784 7,048 11,365 11,383 12,677 11,567 14,141 12,123 14,152
Shares used in
diluted per
share
computation(1).. 6,784 7,048 11,365 11,383 12,677 11,567 26,100 12,123 14,152
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- JANUARY 31, OCTOBER 25,
1993 1994 1995 1996 1997 1998 1998
------ ------ ------ ------ ------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $1,605 $4,555 $3,872 $3,133 $ 6,551 $ 7,984 $12,461
Total assets............ 1,786 5,450 6,793 5,525 25,039 30,172 76,502
Capital lease
obligations, less
current portion........ 76 249 1,137 617 1,891 1,756 2,032
Total stockholders'
equity................. 1,659 4,629 4,013 1,037 6,897 8,610 18,294
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in per share computations.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto and the other financial
information included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussions in this Prospectus contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the section entitled "Risk Factors,"
as well as those discussed elsewhere in this Prospectus. The Company's fiscal
years ended on December 31 from 1993 to 1997. Effective January 31, 1998, the
Company changed its fiscal year-end financial reporting period to a 52- or 53-
week year ending on the last Sunday in January. The Company elected not to
restate its previous reporting periods ending December 31. As a result, the
first and fourth quarters of fiscal 1999 are 12- and 14-week periods,
respectively, with the remaining quarters being 13-week periods.
OVERVIEW
NVIDIA designs, develops and markets 3D graphics processors that provide
high performance interactive 3D graphics to the mainstream PC market. The
Company incurred losses in each year from inception through the first three
quarters of 1997. The Company incurred a loss in the quarters ended April 26,
1998 and July 26, 1998 and realized profits in the quarters ended December 31,
1997 and October 25, 1998. As of October 25, 1998, the Company had an
accumulated deficit of approximately $17.1 million. Since its inception in
April 1993 through the end of 1994, NVIDIA was in the development stage and
was primarily engaged in product development and product testing. The Company
introduced its first product, the NV1, in May 1995. The NV1 was a multimedia
accelerator that provided 3D graphics, video and audio for interactive
multimedia, and was targeted primarily to the game console market. The NV1 was
developed in the absence of industry standards with the goal of establishing
the Company's proprietary NV technology as a 3D graphics standard. By the end
of 1996, the PC industry had broadly adopted Microsoft's Direct3D and SGI's
OpenGL 3D APIs. As a result, the Company experienced a significant reduction
in revenue from sales of the NV1 and stopped selling the NV1 in the first
quarter of 1996. The Company also ceased development of the NV2, a product
designed for a game console platform, and began developing the RIVA128
graphics processor. The Company began commercial shipment of its RIVA128,
RIVA128ZX and RIVA TNT graphics processors in August 1997, March 1998 and July
1998, respectively. These high performance graphics products are designed to
be compatible with Microsoft's Direct3D and are targeted at the mainstream PC
market.
All of the Company's revenue in 1995 and 1996 was derived from the sale and
license of the NV1, and substantially all of the Company's revenue in 1997 and
the nine months ended October 25, 1998 was derived from the sale and license
of the RIVA family of graphics processors. The Company expects that
substantially all of its revenue for the foreseeable future will be derived
from the sale and license of its 3D graphics processors in the mainstream PC
market. The Company recognizes product sales revenue upon shipment, net of
allowances and recognizes royalty revenue upon shipment of product to the
licensee's customers. Since the Company has no other product line, the
Company's business, financial condition and results of operations would be
materially adversely affected if for any reason its graphics processors do not
achieve widespread acceptance in the mainstream PC market.
A majority of the Company's sales have been to a limited number of customers
and its sales are highly concentrated. The Company sells its graphics
processors to add-in board manufacturers, primarily Creative, Diamond and STB,
which incorporate these processors in the boards they sell to PC OEMs, retail
outlets and systems integrators. The average selling prices for the Company's
products, as well as its customers' products, vary by distribution channel.
All of the Company's sales are made on the basis of purchase orders rather
than long-term agreements. Diamond accounted for 86% and 82% of the Company's
total revenue in 1995 and 1996, respectively. Sales to STB and Diamond
accounted for 63% and 31%, respectively, of the Company's total revenue in
1997, and sales to STB, Diamond, and Creative accounted for 40%, 28%, and 12%,
respectively, of
26
<PAGE>
the Company's total revenue in the nine months ended October 25, 1998. The
number of potential customers for the Company's products is limited, and the
Company expects that sales to Creative, Diamond and STB will continue to
account for a substantial portion of its revenue for the foreseeable future.
Currently, all of the Company's product sales and its arrangements with its
third-party manufacturers provide for pricing and payment in U.S. dollars, and
the Company has not engaged in any foreign currency hedging activities,
although it may do so in the future.
As markets for the Company's 3D graphics processors develop and competition
increases, the Company anticipates that product life cycles will remain short
and ASPs will continue to decline. In particular, ASPs and gross margins are
expected to decline as each product matures. The Company's add-in board
manufacturers and major OEM customers typically introduce new system
configurations as often as twice per year, typically based on spring and fall
design cycles. Accordingly, the Company's existing products must have
competitive performance levels in order to be included in new system
configurations, or the Company must timely introduce new products with such
performance characteristics in sufficient volumes to maintain overall average
selling prices and gross margins. As the complexity of its products and the
accompanying manufacturing process increases, there is an increasing risk that
the Company will experience problems with the performance of such products and
that there will be yield problems or other delays in the development or
introduction of such products. For example, the Company released its RIVA128ZX
graphics processor in March 1998 and experienced difficulties with volume
production of such product. To a lesser degree, the Company also experienced
difficulties with volume product of the RIVA TNT graphics processor in July
1998. The lower yields resulting from such difficulties resulted in higher
expenses and lower revenues and a negative gross margin for the quarter ended
July 26, 1998. Failure to achieve necessary volume shipments with respect to
future products or product enhancements could result in rapidly declining
ASPs, reduced margins, reduced demand for products or loss of market share,
any of which could have a material adverse effect on the Company's business,
financial condition or results of operations.
Demand for the Company's products has been and will continue to be
significantly affected by actual and anticipated changes in the price and
supply of DRAM products or other components used with PC graphics processors.
Large supplies of SDRAMs in the spring of 1998 resulted in significant price
declines for such components and lowered the total system cost to customers of
products that used such SDRAMs, as compared to SGRAMs. Such unfavorable
component price competition negatively impacted sales of the Company's
RIVA128ZX graphics processor during the quarter ended July 28, 1998, as such
product operated only using SGRAMs at that time. There can be no assurance
that future fluctuations in prices of components used by customers of 3D
graphics processors will not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk Factors--
Dependence upon Acceptance of the Company's 3D Graphics Solution for the
Mainstream PC Market," "--Dependence on New Product Development; Need to
Manage Product Transitions" and "--Importance of Design Wins."
The Company in the past utilized ST and currently utilizes TSMC to produce
the Company's semiconductor wafers and utilizes independent contractors to
perform assembly, test and packaging. The Company depends on these suppliers
to allocate to the Company a portion of their manufacturing capacity
sufficient to meet the Company's needs, to produce products of acceptable
quality and at acceptable manufacturing yields, and to deliver those products
to the Company on a timely basis. There can be no assurance that these
manufacturers will be able to meet the Company's near-term or long-term
manufacturing requirements. As the Company's relationships with its
manufacturing partners develop, yields or product performance could be
adversely affected due to difficulties associated with adapting the Company's
technology and product design to the proprietary process technology and design
rules of each manufacturer. A manufacturing disruption experienced by these
manufacturers would impact the production of the Company's products, which
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company experienced difficulty in
achieving volume production at TSMC of its RIVA128ZX graphics processor in the
quarter ended July 26, 1998 and, to a lesser degree, the RIVA TNT graphics
processor in the quarter ended October 25, 1998. The Company obtains
manufacturing services on a purchase order basis and its manufacturers have no
27
<PAGE>
obligation to provide the Company with any specified minimum quantities of
product. In addition, the Company's third-party manufacturers fabricate
wafers, assemble, test and package products for other companies, including
certain competitors of the Company, and could choose to prioritize capacity
for other uses or reduce or eliminate deliveries to the Company on short
notice. See "Risk Factors--Dependence on Third-Party Manufacturers; Absence of
Manufacturing Capacity; Manufacturing Risks" and "--Manufacturing Yields."
Substantially all of the Company's sales are made on the basis of purchase
orders rather than long-term agreements. As a result, the Company may commit
resources to the production of products without having received advance
purchase commitments from customers. Any inability to sell products to which
the Company has devoted significant resources could have a material adverse
effect on the business, financial condition or results of operations of the
Company. In addition, cancellation or deferral of product orders could result
in the Company holding excess inventory, which could have a material adverse
effect on the Company's profit margins and restrict its ability to fund its
operations. The Company recognizes revenue upon shipment of products to the
customer. Refusal by customers to accept shipped products, or delays or
difficulties in collecting accounts receivable could result in significant
charges against income, which could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has in the past entered into contractual agreements with third
parties to provide design, development and support services on a best efforts
basis. All amounts funded to the Company under these agreements were non-
refundable once paid and recorded primarily as a reduction to research and
development expenses. The Company developed the NV2 under contract with a
third party and recorded a credit to research and development of $2.0 million
in 1995 and $3.0 million in 1996. Also, as part of a strategic collaboration
agreement with ST, the Company received contract funding in support of
research and development and marketing efforts for the RIVA128 and RIVA128ZX
graphics processors. Accordingly, the Company recorded $2.0 million in 1996
and approximately $2.3 million in 1997 as a reduction primarily to research
and development, and, to a lesser extent to sales, general and administrative
expenses. The Company is obligated to provide continued development and
support to ST through the end of 1998. As a result, the Company recorded $1.9
million for continued development and support in the nine months ended October
25, 1998 and expects to record $417,000 in the quarter ending January 31,
1999. The Company does not currently have any plans to enter into contractual
development arrangements and does not expect contract funding in the future.
RESULTS OF OPERATIONS
The Company generated revenue from sales of its first 3D graphics processor
product in the third quarter of 1997, when the Company began commercial
shipment of the RIVA128 graphics processor. The Company began commercial
shipment of its RIVA128ZX graphics processor in March 1998, and began
commercial shipment of its RIVA TNT graphics processor in July 1998. Prior to
the introduction and sale of the RIVA128 graphics processor, the Company's
revenue was derived from the sale of products that were targeted at the game
console market. These products were discontinued in 1996 due to their
proprietary standards and market changes. Moreover, expenses prior to the
third quarter of 1997 related primarily to product development and product
testing.
NINE MONTHS ENDED SEPTEMBER 28, 1997 AND OCTOBER 25, 1998
REVENUE
Product Revenue. Product revenue increased from $5.2 million in the nine
months ended September 30, 1997 to $86.8 million in the nine months ended
October 25, 1998, due to sales of the RIVA 128, RIVA128ZX and RIVA TNT
graphics processors, which the Company began shipping commercially in August
1997, March 1998 and July 1998, respectively. Although the Company achieved
substantial growth in product revenue from the nine months ended September 30,
1997 to the nine months ended October 25, 1998, the Company does not expect to
sustain this rate of growth in future periods. In addition, the Company
expects that the average selling
28
<PAGE>
prices of its products will decline over the lives of such products, and there
can be no assurance that declines in average selling prices of 3D graphics
processors will not accelerate as the market develops and competition
increases. See "Risk Factors--Erosion of Average Selling Prices."
Royalty Revenue. ST has a license from the Company to sell the NV1
multimedia accelerator and the RIVA128 and RIVA128ZX graphics processors.
Royalty revenue from ST's sales of the RIVA128 graphics processor increased
from $312,000 in the nine months ended September 30, 1997 to $5.9 million in
the nine months ended October 25, 1998, as a result of increased sales of the
RIVA128 graphics processor and a derivative of the RIVA128ZX graphics
processor by ST. Royalty revenues from sales of the RIVA128 graphics processor
by ST represented approximately 6% of the Company's total revenue in 1997 and
royalty revenue from sales of the RIVA128 graphics processor and a derivative
of the RIVA128ZX graphics processor represented 7% of the Company's total
revenue in the nine months ended September 30, 1997 and the nine months ended
October 25, 1998, respectively. The Company expects royalty revenue from ST to
decrease as a percentage of total revenue in the quarter ending January 31,
1999 and beyond.
GROSS PROFIT
Gross profit consists of total revenue less cost of revenue. Cost of revenue
consists primarily of the costs of semiconductors purchased from the Company's
contract manufacturers, manufacturing support costs (labor and overhead
associated with such purchases) and shipping costs. The Company had a gross
profit of $631,000 in the nine months ended September 30, 1997 compared to a
gross profit of $25.3 million in the nine months ended October 25, 1998.
Excluding royalty revenue, gross margin on product revenue improved from 6% in
the nine months ended September 30, 1997 to 22% in the nine months ended
October 25, 1998 due to sales of the higher margin RIVA TNT graphics processor
and lower costs of the RIVA128 graphics processor in the nine months ended
October 25, 1998. Although the Company achieved substantial growth in gross
profit and gross margin from the 1997 period to the nine months ended October
25, 1998, the Company does not expect to sustain these rates of growth in
future periods. The Company developed the NV2 under contract with a third
party and recorded a credit to research and development of $2.0 million in
1995 and $3.0 million in 1996. Also, as part of a strategic collaboration
agreement with ST, the Company received contract funding in support of
research and development and marketing efforts for the RIVA128 and RIVA128ZX
graphics processors. Accordingly, the Company recorded $2.0 million in 1996
and approximately $2.3 million in 1997 as a reduction primarily to research
and development, and, to a lesser extent to sales, general and administrative
expenses. The Company is obligated to provide continued development and
support to ST through the end of calendar 1998. As a result, the Company
recorded $1.9 million for continued development and support in the nine months
ended October 25, 1998 and expects to record $417,000 in the quarter ending
January 31, 1999. The Company does not currently have any plans to enter into
contractual development arrangements and does not expect contract funding in
the future.
OPERATING EXPENSES
Research and development. Research and development expenses consist of
salaries and benefits, cost of development tools and software, and consultant
costs, net of contract funding and support payments from ST. Research and
development expenses before adjustments for contract funding and support
payments increased from $5.0 million in the nine months ended September 30,
1997 to $18.6 million in the nine months ended October 25, 1998, primarily due
to additional personnel and related costs, such as depreciation charges
incurred on capital expenditures and software license and maintenance fees.
The Company anticipates that it will continue to devote substantial resources
to research and development and that these expenses will exceed $7.0 million,
net of support payments from ST, in the quarter of ending January 31, 1999.
Sales, General and Administrative. Sales, general and administrative
expenses consist primarily of salaries, commissions and bonuses earned by
sales, marketing and administrative personnel, promotional and advertising
expenses, travel and entertainment expenses and legal expenses, net of
contract funding received from ST. Sales, general and administrative expenses
increased from $2.0 million in the nine months ended September 30, 1997 to
$12.5 million in the nine months ended October 25, 1998, primarily due to
increased promotional expenses, additional personnel and commissions and
bonuses on sales of the RIVA128 and RIVA
29
<PAGE>
TNT graphics processors. The Company expects that sales and marketing expenses
will continue to increase in absolute dollars as the Company expands its sales
and marketing efforts and increases promotional activities, and that general
and administrative expenses will increase in connection with expenses
associated with being a public company and expenses related to the SGI, S3 and
3Dfx patent lawsuits, until such lawsuits are resolved.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest income primarily consists of interest earned on the Company's cash
and cash equivalents. Net interest income for the nine months ended October
25, 1998 was $60,000. An increase in interest income due to higher average
cash balances was partially offset by an increase in lease interest expense.
Interest expense primarily consists of interest incurred as a result of
capital lease obligations. Net interest expense for the nine months ended
September 28, 1997 was $102,000.
PROVISION FOR INCOME TAXES
The Company recorded no provision for federal or state income taxes through
1997 because the Company experienced net losses from inception through 1997.
Through October 25, 1998, the Company had recorded an aggregate benefit of
$308,000 for income taxes. The Company expects to record increasing provisions
for income taxes in fiscal 1999 and 2000, the amount of which will depend on
several factors, including the availability of net operating loss
carryforwards and research and development carryforwards. Future equity
offerings combined with sales of the Company's equity during the preceding
three years may constitute changes in ownership under the Internal Revenue
Code of 1986, and could limit the use of the Company's net operating loss
carryforwards existing as of the date of the ownership change. Realization of
the deferred tax assets also will depend on future taxable income.
FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUE
Product Revenue. Product revenue was $1.1 million, $3.7 million and $27.3
million in 1995, 1996 and 1997, respectively. Prior to 1997, product revenue
was derived from sales of the Company's NV1 processor. The substantial
increase in product revenue from 1996 to 1997 was due to sales of the RIVA128
graphics processor, which the Company introduced in August 1997. Although the
Company achieved substantial growth in product revenue in 1996 and 1997, the
Company does not expect to sustain this rate of sequential annual growth in
future periods.
Royalty Revenue. Royalty revenue was $79,000, $202,000 and $1.8 million in
1995, 1996 and 1997, respectively. Royalty revenue increased in 1997 as a
result of the Company's introduction of the RIVA128 graphics processor in
August 1997 and subsequent sales of the RIVA128 graphics processor by ST.
Although the Company achieved substantial growth in royalty revenue from 1996
to 1997, the Company does not expect to sustain this rate of sequential annual
growth in future periods.
GROSS PROFIT (LOSS)
The gross loss of $367,000 in 1995 was attributable to fixed manufacturing
support costs in a period of low product sales. Increased sales and slightly
lower fixed manufacturing costs contributed to a gross profit of $874,000 in
1996. The introduction of the RIVA128 graphics processor in August 1997 and
subsequent sales contributed to a gross profit of $7.8 million in 1997.
Excluding royalty revenue, gross margin on product revenue was (40)%, 18% and
22% in 1995, 1996 and 1997, respectively. The increase in gross margin on
product revenue in 1997 was primarily due to sales of the RIVA128 graphics
processor. Although the Company achieved substantial growth in gross profit
and moderate growth in gross margin from 1996 to 1997, the Company does not
expect to sustain these rates of sequential annual growth in future periods.
30
<PAGE>
OPERATING EXPENSES
Research and Development. Research and development expenses before
adjustments for contract funding were $4.4 million, $5.8 million and $8.4
million in 1995, 1996 and 1997, respectively. Research and development
expenses increased each year primarily due to additional personnel and related
costs.
Sales, General and Administrative. Sales, general and administrative
expenses decreased from $3.7 million in 1995 to $2.6 million in 1996 as the
Company curtailed promotional activities associated with the NV1. Sales,
general and administrative expenses increased to $4.2 million in 1997
primarily due to incremental promotional expenses, additional personnel and
commissions and bonuses on sales of the RIVA128 graphics processor.
INTEREST AND OTHER INCOME (EXPENSE), NET
Net interest income was $93,000 in 1995, primarily due to interest earned on
net proceeds from the sale of preferred stock. Net interest expense was
$84,000 and $130,000 in 1996 and 1997, respectively, as a result of additional
equipment leased in support of the Company's development activities.
PROVISION FOR INCOME TAXES
No provision for federal or state income tax was recorded because the
Company experienced net losses from inception through 1997. As of December 31,
1997, the Company had deferred tax assets for federal tax purposes of
approximately $6.3 million, primarily consisting of net operating loss
carryforwards that can be used to offset taxable income in future years. The
deferred tax assets are fully offset by a valuation allowance.
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QUARTERLY RESULTS OF OPERATIONS
Selected quarterly financial data included in this table has been derived
from the internal quarterly financial reports for the periods shown. Fiscal
quarters for fiscal 1997 ended March 31, June 30, September 30 and
December 31; fiscal quarters for fiscal 1999 ended April 26, 1998, July 26,
1998 and October 25, 1998. This quarterly information is unaudited, but has
been prepared on the same basis as the audited annual financial statements,
and in the opinion of the Company's management includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented. The unaudited
quarterly information should be read in conjunction with the Company's audited
financial statements and the notes thereto included elsewhere herein. The
growth in revenue and improvement in results of operations experienced by the
Company in recent quarters are not necessarily indicative of future results.
In addition, in light of its significant growth in recent quarters, the
Company believes that period-to-period comparisons of its financial results
should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MARCH 30, JUNE 29, SEPT. 28, DEC. 31, APRIL 26, JULY 26, OCT. 25,
1997 1997 1997 1997 1998 1998 1998
---------- -------- ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Product............... $ 65 $ 6 $ 5,154 $22,055 $24,642 $ 10,963 $51,150
Royalty............... -- -- 312 1,479 3,621 1,171 1,153
------- ------- ------- ------- ------- -------- -------
Total revenue....... 65 6 5,466 23,534 $28,263 $ 12,134 $52,303
------- ------- ------- ------- ------- -------- -------
Cost of revenue......... 208 150 4,548 16,338 20,873 12,961 33,566
Gross profit (loss). (143) (144) 918 7,196 7,390 (827) 18,737
Operating expenses:
Research and
development.......... 616 512 2,390 3,585 4,642 5,724 6,290
Sales, general and
administrative....... 385 569 1,070 2,159 3,885 3,962 4,697
------- ------- ------- ------- ------- -------- -------
Total operating
expenses........... 1,001 1,081 3,460 5,744 8,527 9,686 10,987
------- ------- ------- ------- ------- -------- -------
Operating income (loss). (1,144) (1,225) (2,542) 1,452 (1,137) (10,513) 7,750
Interest and other
income (expense), net.. (32) (40) (30) (28) 27 22 11
------- ------- ------- ------- ------- -------- -------
Income (loss) before tax
expense................ (1,176) (1,265) (2,572) 1,424 (1,110) (10,491) 7,761
Income tax expense
(benefit).............. -- -- -- -- (89) (839) 620
------- ------- ------- ------- ------- -------- -------
Net income (loss)... $(1,176) $(1,265) $(2,572) $ 1,424 $(1,021) $ (9,652) $ 7,141
======= ======= ======= ======= ======= ======== =======
Basic net income (loss)
per share.............. $ (.10) $ (.11) $ (.19) $ .10 (.07) (.68) .50
======= ======= ======= ======= ======= ======== =======
Diluted net income
(loss) per share....... $ (.10) $ (.11) $ (.19) $ .06 (.07) (.68) .26
======= ======= ======= ======= ======= ======== =======
Shares used in basic per
share computation...... 11,578 11,662 13,328 14,074 14,141 14,148 14,165
======= ======= ======= ======= ======= ======== =======
Shares used in diluted
per share computation.. 11,578 11,662 13,328 24,942 14,141 14,148 27,774
======= ======= ======= ======= ======= ======== =======
</TABLE>
FACTORS AFFECTING OPERATING RESULTS
The Company's quarterly and annual results of operations will be affected by
a variety of factors that could materially adversely affect revenue, gross
profit and results of operations. Factors that have affected the Company's
results of operations in the past, and are likely to affect the Company's
results of operations in the future, include, among others, demand and market
acceptance of the Company's products; the successful development of next-
generation products; unanticipated delays or problems in the introduction or
performance of next-generation products; market acceptance of the products of
the Company's customers; new product announcements or product introductions by
the Company's competitors; the Company's ability to introduce new products in
accordance with OEM design requirements and design cycles; changes in the
timing of product orders due to unexpected delays in the introduction of
products of the Company's customers or due to the life cycles of such
customers' products ending earlier than anticipated; fluctuations in the
availability of manufacturing capacity or manufacturing yields; competitive
pressures resulting in lower than expected average selling prices; the volume
of orders that are received and that can be fulfilled in a quarter; the
rescheduling or
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cancellation of customer orders; the unanticipated termination of a strategic
relationship; seasonal fluctuations associated with the tendency of PC sales
to decrease in the second quarter and increase in the second half of each
calendar year; and the level of expenditures for research and development of
sales, general and administrative functions of the Company.
The Company in the past utilized ST and currently utilizes TSMC to produce
the Company's semiconductor wafers and utilizes independent contractors to
perform assembly, test and packaging. The Company depends on these suppliers
to allocate to the Company a portion of their manufacturing capacity
sufficient to meet the Company's needs, to produce products of acceptable
quality and at acceptable manufacturing yields, and to deliver those products
to the Company on a timely basis. There can be no assurance that these
manufacturers will be able to meet the Company's near-term or long-term
manufacturing requirements. During 1998, the Company experienced difficulties
in achieving volume production at TSMC of the Company's RIVA128ZX and RIVA TNT
graphics processors. As the Company's relationships with its manufacturing
partners develop, yields or product performance could be adversely affected
due to difficulties associated with adapting the Company's technology and
product design to the proprietary process technology and design rules of each
manufacturer. A manufacturing disruption experienced by these manufacturers
would impact the production of the Company's products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company obtains manufacturing services on a
purchase order basis and these manufacturers have no obligation to provide the
Company with any specified minimum quantities of product. These manufacturers
fabricate wafers, assemble, test and package products for other companies,
including certain competitors of the Company, and could choose to prioritize
capacity for other users or reduce or eliminate deliveries to the Company on
short notice. While these issues were resolved, there can be no assurance that
the Company will not experience difficulties related to the production of
current or future products or that other factors will not delay the
introduction or volume sale of new products developed by the Company.
The Company believes that quarterly and annual results of operations also
could be affected in the future by other factors, including changes in the
relative volume of sales of the Company's products; seasonality in the PC
market; the ability of the Company to reduce the process geometry of its
products; supply constraints for the other components incorporated into its
customers' products; the loss of a key customer; a reduction in the amount of
royalties received from ST; changes in the pricing of DRAMs or other
components; legal and other costs related to defending intellectual property
litigation; costs associated with protecting the Company's intellectual
property; inventory write-downs and foreign exchange rate fluctuations. Any
one or more of these factors could result in the Company failing to achieve
its expectations as to future revenue or net income. For example, in the
quarter ended July 26, 1998, the Company experienced substantial declines in
gross margin from the previous quarter due to increased competition from new
products introduced by both the Company and its competitors for the 1998
design cycles. Additionally, the Company experienced difficulties with volume
production of the RIVA128ZX graphics processor. The lower yields resulting
from such difficulties resulted in higher expenses and lower revenues, and
combined with declining sales of the RIVA128 graphics processor resulted in a
negative gross margin for the quarter ended July 26, 1998. The production
issues related to the RIVA128ZX and RIVA TNT graphics processor were resolved
in the quarter ended October 25, 1998 and the Company experienced higher
sales, lower manufacturing costs and higher gross profits and margins in such
quarter as compared to the prior quarter. Gross profit or gross margin could
be affected in the future by various factors, including changes in the volume
of the Company's products, competitive pressures resulting in lower than
expected ASPs, reduction in the amount of royalty revenue received from ST and
inventory write-downs.
Because most operating expenses are relatively fixed in the short term, the
Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected sales shortfall, which could materially
adversely affect quarterly results of operations. The Company will be required
to reduce prices in response to competition or to pursue new market
opportunities. If new competitors, technological advances by existing
competitors or other competitive factors require the Company to invest
significantly greater resources than anticipated in research and development
or sales and marketing efforts, the Company's business, financial condition
and results of operations could be materially adversely affected. Accordingly,
the Company believes that period-to-period comparisons of its results of
operations should not be relied upon as an indication of future
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performance. In addition, the results of any quarterly period are not
indicative of results to be expected for a full fiscal year. As a result of
fluctuating operating results or other factors discussed above, in certain
future quarters the Company's results of operations may be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's Common Stock would be materially adversely affected.
LEGAL PROCEEDINGS
SGI filed a patent infringement lawsuit against the Company in April 1998,
S3 filed a patent infringement lawsuit against the Company in May 1998 and
3Dfx filed a patent infringement lawsuit against the Company in September
1998. In the event of an adverse result in the SGI suit, the S3 suit or the
3Dfx suit, the Company could be required to do one or more of the following:
pay substantial damages (including treble damages); preliminarily and/or
permanently cease the manufacture, use and sale of any infringing products;
expend significant resources to develop non-infringing technology; or obtain a
license from SGI, S3 or 3Dfx for any infringing technology. Any suit could
result in limitations on the Company's ability to market its products, delays
and costs associated with redesigning its products or payments of license fees
or other payments to SGI, S3 or 3Dfx, any of which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Legal Proceedings."
STOCK-BASED COMPENSATION
With respect to certain stock options granted to employees, the Company
recorded deferred compensation of $4.3 million and $361,000 in 1997 and the
one month ended January 31, 1998, respectively. The Company amortized
approximately $961,000, $361,000 and $2.2 million of the deferred compensation
in 1997, the one month ended January 31, 1998 and the nine months ended
October 25, 1998, respectively, and will amortize the remainder over the four-
year vesting periods of the options. See Note 3 of Notes to Financial
Statements.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year (the "Year 2000 Issue").
Computer programs that have such date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The Company is heavily dependent upon the proper functioning of its own
computer or data-dependent systems. This includes, but is not limited to, its
information systems in business, finance, operations and service. Any failure
or malfunctioning on the part of these or other systems could adversely affect
the Company in ways that are not currently known, discernible, quantifiable or
otherwise anticipated by the Company.
The Company has conducted and completed an initial audit of its critical
internal financial, informational and operational systems and its electronic
design tools to identify and evaluate those areas of the Company that may be
affected by the Year 2000 Issue. The Company is currently devising a plan to
implement and test any necessary modifications to these key areas to ensure
that they are Year 2000 compliant. The Company anticipates that this plan will
include (i) independent validation of the Company's Year 2000 assessment
procedures, (ii) initiation of formal communications with all of its
significant suppliers, large customers and development partners to determine
the extent to which the Company is vulnerable to those third parties' failure
to remedy their own Year 2000 Issues and (iii) the development of contingency
plans to address situations that may result if the Company is unable to
achieve Year 2000 readiness of its critical operations. The Company
anticipates that any required remediation programs will be completed by the
third quarter of calendar 1999.
To date, the Company has not incurred incremental material costs associated
with its efforts to become Year 2000 compliant, as the majority of the costs
have occurred as a result of normal upgrade procedures. Furthermore, the
Company believes that future costs associated with its Year 2000 compliance
efforts will not be material.
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<PAGE>
In addition to the risks associated with the Company's own systems, the
Company has relationships with, and is to varying degrees dependent upon, a
large number of third parties that provide information, goods and services to
the Company and manufacture the Company's graphics processors. The Company's
business and results of operations could experience material adverse effects
if its key suppliers were to experience Year 2000 Issues that caused them to
delay manufacturing or shipment of finished product to the Company. In
addition, the Company's results of operations could be materially adversely
affected if any of the Company's key customers encounter Year 2000 Issues that
cause them to delay or cancel substantial purchase orders or delivery of the
Company's product. The Company has begun to initiate formal communications to
ascertain the Year 2000 compliance of its key suppliers and determine the
extent to which the Company may be vulnerable to those third parties' failure
to remedy their own Year 2000 Issues.
While the Company plans to complete modifications or upgrades of its
business-critical systems prior to the Year 2000, there can be no assurance
that the Company will be able to develop a plan to address the Year 2000 Issue
in a timely manner or to upgrade any or all of its major systems in accordance
with such plan. If such modifications or upgrades or modifications by key
suppliers or customers are not completed in a timely manner or are not
successful, the Company may be unable to conduct its business, which would
have a material adverse effect on the operations and financial position of the
Company. In addition, there can be no assurance that any such upgrades will
effectively address the Year 2000 Issue. Furthermore, there can be no
guarantee that the systems of other companies on which the Company relies for
the manufacture of its products will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The Company cannot predict the extent of any such impact.
There can be no assurance that the Company or any third party will not
encounter any unforeseen problems with respect to any of the Company's
systems, which unforeseen problems could have a material adverse effect on the
operations and financial position of the Company. The Company is currently
evaluating possible action, including accumulating excess inventory of its
finished products, to be taken in the event that the assessment of the Year
2000 Issue is not successfully completed on a timely basis, but has not yet
established a formal contingency plan.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of convertible securities totaling $30.7 million and, to a
lesser extent, equipment lease financing and proceeds received from the
exercise of employee stock options. As of October 25, 1998, the Company had
$12.5 million in cash and cash equivalents and $5.0 million in outstanding
bank indebtedness. The Company has historically held its cash balances in cash
equivalents such as money market funds or as cash. The Company places its
money market funds with high credit quality financial institutions and limits
the amount of exposure with any one financial institution.
The Company has a $5.0 million credit facility. Borrowings under the line of
credit carry interest at prime rate plus 1% and are due in March 1999. As of
October 25, 1998, the Company had borrowed $5.0 million against the line of
credit.
Net cash used in operating activities was $6.1 million in 1995, $279,000 in
1996 and $1.2 million in 1997. The decrease from 1995 to 1996 was a result of
a smaller operating loss and higher deferred contract funding in 1996, and the
increase from 1996 to 1997 was a result of substantial increases in accounts
receivable in 1997, partially offset by an increase in accounts payable. Net
cash provided by operating activities was $4.1 million in the nine months
ended October 25, 1998, consisting of net income for the quarter and changes
in working capital. The Company's accounts receivable are highly concentrated.
Two customers accounted for substantially all of the accounts receivable in
1997 and four customers accounted for substantially all of the accounts
receivable in the nine months ended October 25, 1998. Although the Company has
not experienced any bad debt write-offs to date, there can be no assurance
that the Company will not be required to write off bad debt in the future,
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE>
To date, the Company's investing activities have consisted primarily of
purchases of property and equipment. As of October 25, 1998, in addition to
commitments under operating and capital leases, the Company had manufacturing
commitments of $48.0 million. See Note 4 of Notes to Financial Statements. The
Company's capital expenditures, including capital leases, increased from $1.4
million in 1995 to $5.8 million in 1997, due to additional capital leases and
purchases of computer equipment, including workstations and servers to support
the Company's increased research and development activities. The Company
invested $6.5 million in capital expenditures in the nine months ended October
25, 1998, including capital leases primarily for computer equipment and
software, including workstations and servers, in support of the Company's
increased research and development activities. The Company expects its capital
expenditures to increase as the Company further expands its research and
development initiatives and as its employee base grows. The timing and amount
of future capital expenditures will depend primarily on the Company's future
growth. The Company expects to spend approximately $10.0 million for capital
expenditures in fiscal 2000, primarily for capital leases and the purchase of
computer and engineering workstations.
The Company believes that the net proceeds from this offering, together with
its existing cash balances, anticipated cash flows from operations and credit
line and capital lease financing, will be sufficient to meet the Company's
operating and capital requirements for at least the next 12 months, although
the Company could be required, or could elect, to raise additional funds
during such period. The Company's future liquidity and capital requirements
will depend upon numerous factors, including the costs and timing of expansion
of research and product development efforts and the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which the Company's existing and new products gain
market acceptance, competing technological and market developments, the costs
involved in defending and enforcing patent claims and other intellectual
property rights, available borrowings under line of credit arrangements and
other factors. The Company expects that it may need to raise additional equity
or debt financing in the future. There can be no assurance that such
additional financing will be available at all, or that such financing, if
available will be obtainable on terms favorable to the Company and will not be
dilutive to the Company's then-current stockholders.
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BUSINESS
OVERVIEW
NVIDIA designs, develops and markets 3D graphics processors and related
software that provide high performance interactive 3D graphics to the
mainstream PC market. The Company's graphics processors incorporate a 128-bit
graphics architecture that is designed to deliver a highly immersive,
interactive 3D experience with realistic imagery and stunning effects. The
RIVA family of graphics processors, including the RIVA TNT, provides superior
processing power at competitive prices and is architected to take advantage of
mainstream industry standards such as Microsoft's Direct3D. The highly
integrated design of the RIVA TNT and RIVA128ZX graphics processors combines
high performance 3D and 2D graphics on a single chip and provides a simpler
and lower cost graphics solution relative to competing solutions, including
multi-chip or multi-board 2D/3D graphics subsystems.
NVIDIA designed the RIVA TNT, RIVA128ZX and RIVA128 graphics processors to
enable PC OEMs and add-in board manufacturers to build award-winning products
by delivering state-of-the-art interactive 3D graphics capability to end users
while maintaining affordable prices. The Company believes that by developing
3D graphics solutions that provide superior performance and address the key
requirements of the mainstream PC market, it will accelerate the adoption of
3D graphics throughout this market. The benefits and performance of the RIVA
family of 3D graphics processors have received significant industry validation
and have enabled the Company's customers to win over 100 industry awards.
NVIDIA's products currently are designed into products offered by six of the
top ten PC OEMs--Compaq, Dell, Gateway, IBM, Micron and Packard Bell NEC--and
by leading add-in board manufacturers such as Creative, Diamond and STB.
INDUSTRY BACKGROUND
Interactive 3D graphics technology is emerging as one of the most
significant new computing developments since the introduction of the graphical
user interface. The visually engaging and interactive nature of 3D graphics
responds to consumers' demands for a convincing simulation of reality beyond
what is possible with traditional 2D graphics. The fundamental interactive
capability of 3D graphics is expected to make it a natural and compelling
medium for existing and emerging applications for entertainment, Internet,
business and education.
Interactive 3D graphics is required across various computing and
entertainment platforms, such as workstations, specialized arcade systems and
home gaming consoles. However, the mainstream PC market has only recently
begun to transition from traditional 2D graphics to high-quality, interactive
3D graphics. Continuing advancements in semiconductor manufacturing have made
available more powerful and affordable microprocessors and 3D graphics
processors, both of which are essential to deliver interactive 3D graphics to
the mainstream PC market. Additionally, the industry has broadly adopted
Microsoft's 3D API, Direct3D, which serves as a common and standard language
between software applications and 3D graphics processors. This has spurred the
development of numerous compelling 3D titles, which has, in turn, spurred
strong consumer demand.
The Company believes that a PC's interactive 3D graphics capability
represents one of the primary means by which users differentiate among various
systems. PC users today can easily differentiate the quality of graphics and
prefer personal computers that provide a superior visual experience. These
factors have dramatically increased demand for 3D graphics processors. Mercury
Research estimates that 3D graphics will be standard in every PC unit shipped
by 2001. Mercury Research also estimates 8.6 million 3D graphics processors
were sold in 1997 and 180 million will be sold in 2001.
The technology required to create interactive and visually engaging 3D
graphics is algorithmically complex and computationally intensive. To deliver
high-quality interactive 3D graphics, advanced 3D graphics processors require
millions of transistors to process billions of arithmetic operations per
second. Current 3D graphics processors are over ten times more complex than 2D
accelerators and comparable to the complexity of Intel's Pentium
microprocessor. Yet despite recent advances, PC 3D graphics available today
cannot deliver in real time
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the quality of graphics seen in the film "Toy Story." Such 3D graphics
required over 100 powerful workstations and over 800,000 computer hours to
render the film's 114,000 frames, with each frame requiring an average of
seven hours to render. For mainstream PCs to provide this level of 3D graphics
capability, the performance of 3D graphics processors will need to be improved
by several more orders of magnitude. To approach "real world" graphics
performance even beyond that seen in "Toy Story," graphics processors would
require significant further improvement in performance.
The demanding requirements of high-performance 3D graphics present
significant new challenges for semiconductor graphics companies in the
mainstream PC market. Certain suppliers offer 3D graphics solutions that only
address specific niches of the market, such as the gaming or CAD/CAM markets.
These solutions typically have been relatively expensive, in some cases
involving multiple chips on an add-in card, with separate chips for 2D
graphics and 3D graphics processing. Furthermore, these niche 3D solutions
often require content providers to develop to proprietary APIs other than
Microsoft's Direct3D in order to achieve the necessary performance. The higher
product costs and API limitations have made it difficult for such targeted 3D
graphics solutions to achieve widespread acceptance in the mainstream PC
market. On the other end of the spectrum, traditional 2D graphics suppliers
have attempted to leverage their installed base by adding 3D graphics
functionality to their 2D graphics architectures. However, 3D graphics
algorithms and architectures are significantly more complex than those of 2D
graphics, and the traditional 2D graphics suppliers face many challenges to
develop and provide cost-effective high-performance 3D graphics.
The Company believes that a substantial market opportunity exists for
providers of high performance 3D graphics products for the mainstream PC
market, particularly as high-performance 3D graphics have become an
increasingly important requirement and point of differentiation for PC OEMs.
Consumer PC users demand a compelling visual experience and compatibility with
existing and next-generation 3D graphics applications at an affordable price.
Application developers require high-performance, standards-based 3D
architectures with broad market penetration. Since graphics is a key point of
differentiation, PC OEMs continually seek to incorporate leading-edge cost-
effective 3D graphics solutions to build award-winning products. The Company
believes that providers of interactive 3D graphics solutions will compete
based on their ability to leverage their technology expertise to
simultaneously meet the needs of end users, application developers and OEMs.
THE NVIDIA SOLUTION
NVIDIA has developed a family of 3D graphics processors and related software
that provides high-performance interactive 3D graphics to the mainstream PC
market. The Company's products allow users to enjoy a highly immersive,
interactive 3D experience with compelling visual quality, realistic motion and
complex object and scene interaction at real-time frame rates. By providing
this level of performance at an affordable price to OEMs and end users, the
Company believes that it will accelerate the adoption of interactive 3D
graphics throughout the mainstream PC market. The Company's products are used
by leading PC OEMs, such as Compaq, Dell, Gateway, IBM, Micron and Packard
Bell NEC, and leading add-in board manufacturers, such as Creative, Diamond
and STB. The RIVA TNT, RIVA128ZX and RIVA128 graphics processors have received
significant industry validation and has enabled the Company's customers to
receive over 100 industry awards.
The key features and benefits of the Company's solution are as follows:
High Performance. The RIVA TNT graphics processor's 128-bit architecture
combined with a proprietary texture and vertex caches that feed the RIVA TNT's
dual-pipeline architecture can process up to six million polygons per second
and maintain a fill rate of 190 million texture mapped pixels per second. This
performance is driven by the processing power of dual 5 GFLOPS (billions of
floating point operations per second) floating point polygon setup engine and
a 15 BOPS (billions of operations per second) integer pixel processing engine.
The RIVA TNT graphics processor also includes an extensive set of reference
drivers that translate between the software API and hardware. The software
driver is designed to maximize performance of the graphics processor and to
maintain compatibility with each successive generation of the Company's
products. The software drivers have the flexibility to be continually enhanced
in order to further improve the performance of the processors.
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The Company believes that the high performance of its graphics processors
provides a competitive advantage to the Company's OEM customers, enabling them
to differentiate their systems from those of other PC vendors.
Standards-Based. The RIVA TNT, RIVA128ZX and RIVA128 products are
architected to take full advantage of industry standards such as Microsoft's
Direct3D. The standards-compliant design of the Company's graphics processors
provides OEMs maximum flexibility in the design and use of the systems. In
particular, the Company believes that its focus on the Microsoft Direct3D API
positions it well in the mainstream PC market as this standard proliferates
and supports more advanced 3D visuals. Microsoft's Direct3D API has gained
broad developer support, with numerous 3D titles currently using this API.
Integrated Design. The RIVA TNT, RIVA128ZX and RIVA128 graphics processors'
highly integrated single-chip design supports high-performance interactive 3D
graphics applications while simultaneously optimizing 2D graphics and
providing VGA compatibility and DVD playback. By integrating 2D graphics and
3D graphics on one chip, the Company believes that it has standardized the
platform for developers and provided a graphics solution that is simpler and
lower cost relative to competing solutions, including multi-chip or multi-
board 2D/3D graphics subsystems.
128-bit Architecture. The Company's 128-bit product architecture and leading
technology enable it to provide products with state-of-the-art interactive 3D
graphics performance and superior processing power. With a 128-bit graphics
architecture, the RIVA TNT, RIVA128ZX and RIVA128 graphics processors deliver
3D graphics with great detail, smooth shading, high frame rates and overall
stunning effects, while maintaining volume pricing for multimedia and
entertainment applications.
STRATEGY
The Company's objective is to be the leading supplier of high performance 3D
graphics processors for PCs. The Company's strategy to achieve this objective
includes the following key elements:
Focus on the Mainstream PC Market. The Company's strategy is to achieve
market leadership in the high-volume mainstream PC market by providing award-
winning performance at competitive prices. By developing 3D graphics solutions
that provide superior performance and address the key requirements of the
mainstream PC market, NVIDIA believes that it will accelerate the adoption of
3D graphics throughout the mainstream PC market. As part of its strategy to
address the broadest segment of the PC market, the Company has closely aligned
its product development with Microsoft's Direct3D API, rather than creating
and promoting a proprietary API. The Company believes this alignment with
Direct3D maximizes third-party software support.
Target Leading OEMs. The Company's strategy is to enable its leading OEM
customers to differentiate their products in a highly competitive marketplace
by using NVIDIA's high-performance 3D graphics processors. NVIDIA believes
that design wins with these industry leaders provide market validation of its
products, increase brand awareness and enhance the Company's ability to
penetrate additional leading customer accounts. In addition, the Company
believes that close relationships with OEMs will allow the Company to better
anticipate and address customer needs with its future generations of products.
NVIDIA's products currently are designed into products offered by six of the
top ten PC OEMs--Compaq, Dell, Gateway, IBM, Micron and Packard Bell NEC--and
by leading add-in board manufacturers such as Creative, Diamond and STB.
Extend Technological Leadership in 3D Graphics. NVIDIA believes that its
products provide superior interactive 3D graphics to the mainstream PC market.
The Company is focused on leveraging its advanced engineering capabilities to
accelerate the quality and performance of 3D graphics in PCs. A fundamental
aspect of NVIDIA's strategy is to actively recruit the best 3D graphics
engineers in the industry, and NVIDIA believes that it has assembled an
exceptionally experienced and talented engineering team. The Company intends
to leverage this advantage to achieve new levels of graphics features and
performance, enabling customers to achieve award-winning performance in their
products.
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Increase Market Share. The Company believes that substantial market share
will be important to achieving success in the 3D graphics business. The
Company intends to achieve a leading share of the market by devoting
substantial resources towards establishing NVIDIA's brand and leading product
capabilities as the de facto graphics standard for end users, application
developers and OEMs.
NVIDIA ARCHITECTURE, PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
3D PROCESSING TECHNOLOGY BACKGROUND
3D graphics processors create two-dimensional images, which can be displayed
on computer monitors or other output devices, from computer specifications of
three-dimensional objects or "models." These two-dimensional images are
typically the perspective view of the objects from an eye-point that changes
with time, and as such are computationally very intensive. The 3D effect
arises from a variety of visual cues, such as perspective, occlusion, surface
shading, shadows, focus and motion. Convincing realism arises from precise
calculation of these and other effects, and these calculations require
dedicated processors, which provide far more power and bandwidth than
microprocessors can deliver.
The 3D graphics process is a series of specialized steps, often referred to
as the 3D graphics pipeline. Typically, the microprocessor chooses an eye-
point and decides which objects should be displayed. These are commonly
communicated to the graphics subsystem via a software interface, such as
Microsoft's Direct3D or SGI's OpenGL. The processing itself occurs in several
steps, as depicted and described below:
GEOMETRY POLYGON
MODEL -- PROCESSING -- SETUP -- RASTERIZATION -- DISPLAY
Model. The model typically is expressed as a set of polygons, such as
triangles, that form the basic shape of a three-dimensional object and
have attributes such as position and color at each vertex.
Geometry processing. Geometry processing transforms the original
position and orientation of the polygons to their new position on the
screen. Based on their position and orientation, some aspects of their
surface color and lighting can be computed. The 3D visual cues of
perspective and motion are handled during this stage. These
calculations require very high floating-point computation power and are
performed by the host microprocessor.
Polygon setup. Polygon setup calculates the slopes of the polygon
sides and various other derivatives that greatly accelerate the
rasterization process. Although early graphics devices performed these
calculations in the host microprocessor, today's 3D graphics processor
perform these calculations, permitting significantly higher
performance.
Rasterization. Rasterization computes the color and other information
for every pixel (dot on the screen) that a transformed polygon touches.
A number of complex algorithms compute the color uniquely for each
pixel, as well as perform the remaining visual cues, such as shading,
shadows, focus and occlusion. This is the most computationally
intensive step of the graphics pipeline and the processors are required
to perform up to 1,000 calculations per pixel, with this number
increasing rapidly.
Display. Display consists of sequentially reading out the color of
each pixel at a rate matched to the monitor. Unlike the other stages in
the 3D graphics pipeline, which are purely digital, the signals to the
monitor are analog, and the frequencies are far higher.
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The complexity of the different steps in the 3D graphics pipeline requires
billions of floating-point and integer operations in real time to deliver a
realistic and interactive experience. Image quality determines whether 3D
computer representation looks realistic, and 3D performance determines whether
a 3D system conveys a sense of fluid motion in real time. If the performance
is below a certain threshold, a 3D system can in fact reduce the productivity
or the enjoyment of the user, even if the image quality is high. The challenge
with high-quality 3D is to deliver the processing power required to perform
these computations without creating bottlenecks in the 3D graphics pipeline.
NVIDIA PRODUCTS
RIVA TNT Graphics Processor
The RIVA TNT graphics processor enables PC OEMs and add-in board
manufacturers to satisfy end-user performance requirements by providing visual
realism and real-time interactivity. The RIVA TNT graphics processor, the
Company's second-generation product, is highly integrated and delivers high
frame rate 3D graphics, as well as 2D graphics, VGA and video processing in a
single processor. The RIVA TNT graphics processor also includes a rich set of
reference drivers and tools that translate between software API and hardware.
These drivers provide the ability to connect to and process data from external
video devices. The software driver is designed to maximize performance of the
graphics processor and to maintain compatibility with each successive
generation of the Company's products. The software drivers have the
flexibility to be continually enhanced in order to further improve the
performance of the processors.
The RIVA TNT graphics processor incorporates 7 million transistors and can
perform in excess of 20 billion operations per second. This processor includes
several new features designed to maximize user experience in modern
applications, including the following key features:
Twin Texel Pipeline. Through the use of parallel texel engines, the RIVA
TNT graphics processor can process two texels per clock cycle. This results
in richer visuals at high frame rate, which provides a heightened user
experience. For example, multiple textures can be applied to an object in
one cycle, whereas competing processors would require multiple cycles.
High Pixel Fill Rate. The RIVA TNT graphics processor can fill up to 190
million pixels per second, which is significantly higher than most
competing graphics processors. The high pixel fill rate provides a user
with rich scenes at smooth frame rates.
32-bit (true) color. The RIVA TNT graphics processor supports 8 bits of
precision for the red, green, blue and alpha channels associated with pixel
color. By supporting more bits of precision, the RIVA TNT graphics
processor provides brilliant colors and more accurate representations of
models and scenes.
24-bit Z buffer. Used in calculating relative position along the "Z"
axis, a 24-bit Z buffer provides more accurate object placement in scene
representation. This eliminates "flashing" often associated with polygons
that have the same Z value.
8-bit stencil. Special effects like cutouts, mirrors or water puddles are
possible with high frame rates through the use of an 8-bit stencil buffer.
250MHz Integrated RAMDAC. The 250MHz integrated RAMDAC allows for high
resolution and high refresh rate output to computer monitors.
16MB Frame Buffer Support. A wide variety of memory types can be
configured in up to 16MB frame buffer memory. This frame buffer is 128 bits
wide and is required for high-speed, high-resolution support of
applications with large textures.
The RIVA TNT graphics processor is produced using a .35 micron technology
and began shipping in volume in August 1998. It has been adopted by several
top OEMs and received PC Magazine's 1998 Editors Choice award for graphics
processors.
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The primary functional units of the RIVA TNT graphics processor are the 3D
geometry processing unit, the 2D engine, the 3D pixel processor, the texture
cache and the Palette-DAC and video processor. The following illustrates the
primary components of the RIVA TNT graphics processor:
[DIAGRAM OF TNT PROCESSOR]
[Description of illustration: Depiction of RIVA128 3D graphics processor, with
the following functional areas labelled: 3D Geometry Processing Unit, Texture
Cache, Video Port, 2D Engine, 3D Pixel Processor, Palette-DAC and Video
Processor, VGA, Internal Bus, Memory Controller, PCI/AGP Interface.]
The RIVA TNT 3D Graphics Processor
Twin Texel 3D Geometry Processing Units. These engines perform the
polygon setup and lighting calculations and prepares data for pixel
processing. The 6 GFLOPS floating point engines process up to six
million triangles per second.
2D Engine. The 2D rendering engine provides high performance for 2D
applications. The 2D engine is necessary for applications such as those
used in a business environment where 2D objects are drawn to and moved
around on the computer monitor. Examples include Windows-based
applications such as Microsoft Word, Powerpoint or Excel. The presence
of high-performance 2D graphics is a critical function for 3D graphics
processors targeted for the mainstream PC market.
Twin Texel 3D Pixel Processors. The 32-bit twin texel 3D pixel
processors calculate pixel colors and other attributes to be rendered
to the computer screen. They include advanced rendering capabilities,
such as 32-bit RGB Gouraud shading, alpha blending, perspective correct
per pixel fog, perspective correct specular highlights, and support for
single-pass multitexturing.
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Texture Cache. The texture cache provides high performance, local
texture storage for the pixel processing engine.
Palette-DAC and Video Processor. The Palette-DAC pipeline accelerates
full-motion video playback, sustaining 30 frames per second while
retaining high quality color resolution, implementing true bilinear
filtering for scaled video, and compensating for filtering losses using
edge enhancement algorithms.
RIVA128ZX Graphics Processor
The RIVA128ZX graphics processor extends the functionality and performance
of the RIVA128 graphics processor and includes two additional design features,
AGP 2X and an 8MB (megabyte) frame buffer. The AGP 2X, Intel's newest graphics
bus, doubles the available bandwidth between the microprocessor and the
graphics engine. With AGP 2X support, the RIVA128ZX graphics processor is
designed to process more complex 3D computer representations more efficiently.
Doubling the size of the frame buffer to 8MB provides the RIVA128ZX graphics
processor with the ability to support higher resolution displays with more
colors, resulting in a richer real-time experience.
The RIVA128ZX graphics processor is produced using a .35 micron
manufacturing process and began shipping in volume in July 1998.
RIVA128 Graphics Processor
The RIVA128 graphics processor incorporates 3.5 million transistors and
operates on 100 MHz clock speed, enabling it to perform 20 billion operations
per second. The RIVA128 graphics processor breaks through bottlenecks created
by the computationally intensive requirements of 3D graphics by providing
superior processing power. The RIVA128 graphics processor has received
significant industry validation and has enabled the Company's customers to
receive over 100 industry awards.
The RIVA128 graphics processor is produced using a .35 micron manufacturing
process. The Company introduced the RIVA128 graphics processor in April 1997
and began shipping in volume in August 1997.
NVIDIA PRODUCTS UNDER DEVELOPMENT
The Company has announced its intention to deliver a new generation of 3D
graphics processors in calendar 1999 that will be based on a .25 micron
manufacturing process.
SALES AND MARKETING
NVIDIA's sales strategy is a key part of its objective to become the leading
supplier of high performance 3D graphics processors for PCs. In order to meet
customer and end-user requirements and achieve design wins, the Company's
sales team works closely with PC OEMs, add-in board manufacturers and industry
trend setters to define product features, performance, price and timing of new
products. Members of the Company's sales team have a high level of technical
expertise and product and industry knowledge to support a competitive and
complex design win process. NVIDIA also employs a highly skilled team of
application engineers to assist PC OEMs and add-in board manufacturers in
designing, testing and qualifying system designs that incorporate NVIDIA
products. The Company believes that the depth and quality of this design
support are key to improving PC OEMs' and add-in board manufacturers' time-to-
market, maintaining a high level of customer satisfaction among PC OEMs and
add-in board manufacturers and fostering relationships that encourage its
customers to use the next-generation of NVIDIA's products.
In the 3D graphics market, the sales process involves influencing leading PC
OEMs' and add-in board manufacturers' graphics processor purchasing decisions,
achieving key design wins and supporting the product design into high volume
production. These design wins in turn influence the retail and system
integrator channel
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that is serviced by add-in board manufacturers. The Company's distribution
strategy is to work with a relatively small number of leading add-in board
manufacturers that have relationships with a broad range of major PC OEMs
and/or strong brand name recognition in the retail channel. Currently, the
Company sells the RIVA128 graphics processor directly to add-in board
manufacturers, Creative, Diamond and STB, which in turn sell boards with the
RIVA128 graphics processor to leading OEMs, such as Compaq, Dell, Gateway,
IBM, Micron and Packard Bell NEC, to retail outlets, such as BestBuy and
CompUSA, and to a large number of system integrators. Sales to STB and Diamond
accounted for 63% and 31%, respectively, of the Company's total revenue in
1997, and sales to STB, Diamond and Creative accounted for 40%, 28% and 12%,
respectively, of the Company's total revenue in the nine months ended October
25, 1998.
The Company also has a strategic collaboration agreement with ST (the "ST
Agreement"), pursuant to which ST is entitled to manufacture the RIVA128ZX
graphics processor and to sell the RIVA128 and RIVA128ZX graphics processors
in consideration for a royalty payment to the Company. Under the ST Agreement,
ST also has a worldwide license to incorporate the technology underlying the
RIVA128 and RIVA128ZX graphics processors (including the source code and
architecture) (the "RIVA Technology") in its own products, subject to certain
limitations on the modification of such technology, and a right to receive
software engineering and quality assurance support from the Company for the
RIVA Technology through December 31, 1998. The Company believes that its
relationship with ST allows it to realize broad market penetration, increase
sales leverage and achieve greater brand awareness. Royalty revenue received
from ST pursuant to the ST Agreement represented 6% and 7% of the Company's
total revenue in 1997 and the nine months ended October 25, 1998,
respectively. The Company expects royalty revenue from ST to decrease in the
quarter ending January 31, 1999 and subsequent quarters.
The NVIDIA sales effort is accompanied by a variety of product and corporate
marketing activities, including technical support and product launches. As
part of the product launch effort, the Company demonstrates new products to
highlight their capabilities. NVIDIA believes these demonstrations help
position its products favorably relative to products of its competitors. The
Company also maintains close relationships with key industry analysts and
trade press, conducts frequent press tours and participates, with its add-in
board manufacturers and OEM customers, in benchmark tests executed by key
trade publications. In addition, the Company sponsors and participates in
industry tradeshows, marketing communications and market development
activities designed to generate awareness of the Company and its products. The
Company intends to continue to devote significant resources toward
establishing brand recognition, including advertising in key newspapers and
trade magazines and participation in graphics newsgroups and web sites. The
Company also uses its corporate web site to promote the Company and its
products.
To encourage software title developers and publishers to develop games
optimized for platforms utilizing the Company's products, the Company seeks to
establish and maintain strong relationships in the software development
community. Engineering and marketing personnel interact with and visit key
software developers to promote and discuss the Company's products, seeking
product requirements and solving technical problems. The Company's developer
program makes products available to partners prior to volume availability to
encourage the development of software titles that are optimized for the
Company's products.
MANUFACTURING
The Company has a "fabless" manufacturing strategy whereby the Company
employs world class suppliers for all phases of the manufacturing process,
including fabrication, assembly and testing. This strategy leverages the
expertise of industry-leading, ISO-certified suppliers in such areas as
fabrication, assembly, quality control and assurance, reliability and testing,
and allows the Company to avoid the significant costs and risks associated
with owning and operating such manufacturing operations. These suppliers also
are responsible for procurement of raw materials used in the production of the
Company's products. As a result, the Company can focus its resources on
product design, quality assurance, marketing and customer support.
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The fabrication of semiconductors is a complex process. Contaminants,
defects in masks used to print circuits on wafers, difficulties in the
fabrication process and other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. These problems are difficult to diagnose and time-consuming and
expensive to remedy. As a result, semiconductor companies frequently encounter
difficulties in achieving acceptable product yields. When production of a new
product begins, as with the RIVA TNT graphics processor, the Company typically
pays for wafers, which may or may not have any functional products.
Accordingly, the Company bears the financial risk until production is
stabilized. Once production is stabilized, the Company pays for functional die
only. Failure to achieve acceptable yields from any current or future third-
party manufacturer has in the past and would in the future materially
adversely affect the Company's business, financial condition and results of
operations. For example, the Company released its RIVA128ZX graphics processor
in March 1998 and experienced difficulty with volume production of such
product. The lower yields resulting from such difficulties resulted in higher
expenses and lower revenues in the quarter ended July 26, 1998, as the Company
was not able to timely supply such product to its customers.
The RIVA TNT and RIVA128ZX graphics processors are manufactured by TSMC and
assembled and tested by Amkor. The Company also recently qualified Siliconware
to assemble and test the RIVA TNT graphics processor. The Company receives
semiconductor products from its subcontractors, performs incoming quality
assurance and ships them to its add-in board manufacturer customers, such as
Creative, Diamond and STB, from its location in Santa Clara. The add-in board
manufacturers then produce boards, combine NVIDIA software with their own
software and ship the product to the retail and system integrator market as
add-in boards or to OEMs, such as Compaq, Dell, Gateway, IBM, Micron and
Packard Bell NEC, for inclusion in the OEMs' products.
In the event of production difficulties, shortages or delays experienced by
any one of its suppliers, the Company's business, financial condition or
results of operation may be adversely impacted. Furthermore, although quality
assurance measures have been taken, there can be no guarantee against defects
affecting the quality, performance or reliability of the Company's products.
Any such defects could require costly product recalls or cessation of
shipments, adversely affecting the Company's business, financial condition and
results of operations, and resulting in a decline of revenues, increased costs
(associated with return, repair, replacement and shrinkage associated with
such defects), cancellations or rescheduling of customer orders and shipments.
See "Risk Factors--Dependence on Third-Party Manufacturers; Absence of
Manufacturing Capacity; Manufacturing Risks," "--Dependence on ST
Microelectronics," "--Manufacturing Yields," "--Transition to New
Manufacturing Process Technologies," "--Dependence on Third-Party
Subcontractors for Assembly and Testing" and "--Risks of Product Defects and
Incompatibilities; Product Liability."
RESEARCH AND DEVELOPMENT
The Company believes that the continued introduction of new and enhanced
products designed to deliver leading 3D graphics performance will be essential
to its future success. NVIDIA's research and development strategy is to focus
on concurrently developing multiple generations of devices using independent
design teams. The Company's research and development team has enabled NVIDIA
to deliver award-winning products to its OEM customers. The RIVA family of
graphics processors has enabled its customers to win over 100 awards from
recognized industry publications, including PC Magazine, PC Computing, PC
World, Computer Gaming World, PC Games and CNET.
NVIDIA's research and development efforts are performed within specialized
groups consisting of software engineering, hardware engineering, VLSI design
engineering, process engineering, and architecture and algorithms. These
groups act as a pipeline designed to allow the efficient simultaneous
development of new products. The software engineering group is responsible for
the development of drivers for the various software APIs. The hardware
engineering group designs and develops new product hardware. The VLSI design
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engineering group maps the Company's design ideas to specific silicon
structures, and the process engineering group determines how these devices
will be fabricated and communicates with the Company's manufacturers. The
architecture and algorithms group is responsible for maintaining and further
developing what the Company believes is an extensible product architecture,
allowing the Company to continually add features to its products without
sacrificing compatibility or incurring significant redesign costs.
A critical component of the Company's product development effort is its
partnerships with leaders in the CAD industry. The Company has invested
significant resources to develop relationships with industry leaders,
including Avant! Corporation, Cadence Design Systems, Inc. and Synopsys, Inc.
The Company believes that by forming these relationships, and utilizing next-
generation development tools to design, simulate and verify its products,
NVIDIA will be able to remain at the forefront of the 3D graphics market and
to continue to develop products on a rapid basis that utilize leading-edge
technology.
The Company has substantially increased its engineering and technical
resources and has 97 full-time employees engaged in research and development.
Expenditures for research and development after adjustments for contract
funding were $2.4 million, $1.2 million and $7.1 million in 1995, 1996 and
1997, respectively.
COMPETITION
The market for 3D graphics processors for mainstream PCs in which the
Company competes is intensely competitive and is characterized by rapid
technological change, evolving industry standards and declining average
selling prices. NVIDIA believes that the principal factors of competition in
this market are performance, conformity to industry-standard APIs, software
support, access to customers and distribution channels, manufacturing
capabilities, price of graphics processors and total system costs of add-in
boards. The Company expects competition to increase both from existing
competitors and new market entrants with products that may be less costly than
the Company's 3D graphics processors or may provide better performance or
additional features not provided by the Company's products. There can be no
assurance that the Company will be able to compete successfully in the
emerging mainstream PC graphics market.
NVIDIA's primary source of competition is from companies that provide or
intend to provide 3D graphics solutions for the mainstream PC market. These
include (i) new entrants in the 3D graphics processor market with existing
presence in the PC market, such as Intel, (ii) suppliers of graphics add-in
boards that utilize their internally developed graphics chips, such as ATI and
Matrox, (iii) suppliers of 2D graphics chips that are introducing 3D
functionality as part of their existing solutions, such as S3 and Trident,
(iv) companies that have traditionally focused on the professional market and
provide high end 3D solutions for PCs and workstations, including 3Dlabs,
Real3D and SGI, and (v) companies with strength in the video game market, such
as 3Dfx.
In March 1998, Intel began shipping the i740, a 3D graphics accelerator that
is targeted at the mainstream PC market. Intel has significantly greater
resources than the Company, and there can be no assurance that the Company's
products will compete effectively against the i740 or any future products
introduced by Intel, that the Company will be able to compete effectively
against Intel or that Intel will not introduce additional products that are
competitive with the Company's products in either performance or price or
both. NVIDIA expects Intel to continue to invest heavily in research and
development and new manufacturing facilities, to maintain its position as the
largest manufacturer of PC microprocessors and one of the largest
manufacturers of motherboards, to increasingly dominate the PC platform and to
promote its product offerings through advertising campaigns designed to
engender brand loyalty among PC users. Intel may in the future develop
graphics add-in cards or graphics-enabled motherboards using its i740 3D
graphics accelerators or other graphics accelerators, which could directly
compete with graphics add-in cards or graphics-enabled motherboards that the
Company's customers may develop. In addition, due to the widespread industry
acceptance of Intel's microprocessor architecture and interface architecture,
including its AGP, Intel exercises significant influence over the PC industry
generally, and any significant modifications by Intel to the AGP, the
microprocessor or other aspects of the PC microprocessor architecture could
result in incompatibility with the Company's technology, which would
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have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, any delay in the public release of
information relating to such modifications could have a material adverse
effect on the Company's business, financial condition or results of
operations.
In April 1998, SGI and Intel announced a strategic relationship, which
includes a broad patent cross-license agreement. The Company believes that
this agreement will provide SGI with access to Intel processors for the
development of SGI workstations. In addition, the Company believes that under
the cross-license agreement Intel will have access to SGI graphics patents,
which may allow Intel to compete more effectively with the Company. SGI also
may compete directly with the Company as a result of this relationship with
Intel. There can be no assurance that the Company will be able to compete
successfully against SGI or Intel. SGI filed a patent infringement lawsuit
against the Company in April 1998. See "--Legal Proceedings".
In addition to Intel, the Company competes with suppliers of graphics add-in
boards that utilize their internally developed graphics chips, such as ATI and
Matrox. NVIDIA also competes with companies that typically have operated in
the PC 2D graphics market and that now offer 3D graphics capability as an
enhancement to their 2D graphics solutions, such as S3 and Trident. Many of
these competitors have introduced 3D graphics functionality on new versions of
existing graphics chips. In addition, the Company's competitors include
companies that traditionally have focused on the production of high-end 3D
graphics systems targeted at the professional market, such as 3Dlabs,
Intergraph, Real3D and SGI. While these companies produce high performance 3D
graphics systems, they historically have done so at a significantly higher
price point than the Company and have focused on the professional and
engineering market. Some of these companies are developing lower cost versions
of their 3D graphics technology to bring workstation-like 3D graphics to
mainstream PCs, and there can be no assurance that the Company will be able to
compete successfully against them. NVIDIA also competes with companies that
have recently entered or are expected to enter the market with an integrated
3D/2D graphics solution, but which have not traditionally manufactured 2D
graphics solutions, such as 3Dfx. In addition to the Company's known
competitors, the Company anticipates that there will be new entrants in the
graphics processor market, and there can be no assurance that the Company will
compete effectively against any such new competitors.
The market for 3D graphic processors is highly fragmented and undergoing a
period of consolidation. Several of the Company's competitors and customers
have merged with other industry participants in order to strengthen their
competitive position. For example, ATI acquired Chromatic Research Inc., a 3D
entertainment graphics company; Micron, one of the Company's OEM customers,
acquired Rendition, Inc., a 3D graphics accelerator company, to explore
embedded DRAM applications in the graphics arena; and Creative, an add-in
board manufacturer and a significant customer of the Company recently
disclosed that it has acquired in excess of 5% of the outstanding stock of
3Dfx, a competitor of the Company. NVIDIA expects that consolidation in the 3D
graphics market will continue and there can be no assurance that such
consolidation will not involve any more of the Company's add-in board
manufacturers, OEM customers, or competitors. The consolidation of the
Company's customers with other customers or with competitors of the Company
could result in a material decline in the Company's revenue, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. Consolidation of the Company's competitors would have
the effect of strengthening the competitive position of such competitors,
which could result in pressure on the pricing of the Company's products.
Longer than expected decreases in the average selling price of the Company's
products could have a material adverse effect on the Company's business,
financial condition or results of operations.
Several of the Company's current and potential competitors have
substantially greater financial, technical, manufacturing, marketing,
distribution and other resources, greater name recognition and market
presence, broader product lines for the PC market, longer operating histories,
lower cost structures and larger customer bases than the Company. As a result,
they may be able to adapt more quickly to new or emerging technologies and
changes in customer requirements. Regardless of the relative qualities of the
Company's products, the market power, product breadth and customer
relationships of its larger competitors, particularly Intel, can be expected
to provide such competitors with substantial competitive advantages. The
Company does not seek to compete on
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the basis of price alone, but may be forced to lower prices to compete
effectively. There can be no assurance that the Company will be able to
compete successfully in the emerging mainstream PC 3D graphics market.
PATENTS AND PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent, mask-work
protection, trademarks, copyrights, trade secret laws, employee and third-
party nondisclosure agreements and licensing arrangements to protect its
intellectual property. The Company has 22 issued patents and 18 patent
applications pending in the United States. Such issued patents have expiration
dates from May 2015 to November 2016. The issued patents and pending patent
applications relate to technology developed by the Company in connection with
the development of its 3D graphics processors, including the RIVA128,
RIVA128ZX and RIVA TNT graphics processors. The Company has no foreign patents
or patent applications. The Company seeks to file for patents that have broad
application in the semiconductor industry and that would provide a competitive
advantage. However, there can be no assurance that the Company's pending
patent application or any future applications will be approved, that any
issued patents will provide the Company with competitive advantages or will
not be challenged by third parties, or that the patents of others will not
have an adverse effect on the Company's ability to do business. In addition,
there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such
intellectual property or trade secrets, or that the Company can effectively
protect its intellectual property. The Company has licensed technology from
third parties for incorporation in the Company's graphics processors and it
expects to continue to enter into such agreements for future products. Such
licenses may result in royalty payments to third parties, the cross-license of
technology by the Company or payment of other consideration. If such
arrangements are not concluded on commercially reasonable terms, the Company's
business, financial condition or results of operations could be materially
adversely affected. A failure by the Company to meaningfully protect its
intellectual property could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company attempts to protect its trade secrets and other proprietary
information through confidentiality agreements with manufacturers and other
partners, proprietary information agreements with employees and consultants
and other security measures. The Company also relies on trademarks and trade
secret laws to protect its intellectual property. Despite these efforts, there
can be no assurance that others will not gain access to the Company's trade
secrets, or that the Company can meaningfully protect its intellectual
property. In addition, effective trade secret protection may be unavailable or
limited in certain foreign countries. Although the Company intends to protect
its rights vigorously, there can be no assurance that such measures will be
successful.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which has resulted in
significant and often protracted and expensive litigation. The 3D graphics
market in particular has been characterized recently by the aggressive pursuit
of intellectual property positions, and the Company expects its competitors to
continue to pursue aggressive intellectual property positions. In April 1998,
SGI filed a patent infringement lawsuit against the Company, in May 1998, S3
filed a patent infringement lawsuit against the Company and in September 1998,
3Dfx filed a patent infringement lawsuit against the Company. See "--Legal
Proceedings." In addition, the Company from time to time has received notices
alleging that the Company has infringed patents or other intellectual property
rights owned by third parties. ST has certain patent licenses that in some
cases may allow ST to manufacture the Company's products without infringing
third-party patents. As the Company's products are manufactured by TSMC or
other manufacturers, such licenses will no longer benefit the Company and
therefore the risk of a third-party claim of patent infringement against the
Company will increase. In the event infringement claims are made against the
Company, the Company may seek licenses under such patents or other
intellectual property rights. However, there can be no assurance that licenses
will be offered or that the terms of any offered licenses will be acceptable
to the Company. The failure to obtain a license from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products. Furthermore, the
Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity
of the Company's proprietary rights. The Company has agreed to indemnify
48
<PAGE>
certain customers for claims of infringement arising out of sale of the
Company's product. Litigation by or against the Company or such customers
concerning infringement would likely, and the SGI, S3 and 3Dfx litigation
will, result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such
litigation results in a favorable determination for the Company. In the event
of an adverse result in the SGI, S3, 3Dfx or other litigation, the Company
could be required to pay substantial damages, (which could include treble
damages) cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the
use of certain processes or obtain licenses for the infringing technology.
There can be no assurance that the Company would be successful in such
development or that such licenses would be available on reasonable terms, or
at all, and any such development or license could require expenditures by the
Company of substantial time and other resources. Although patent disputes in
the semiconductor industry have often been settled through cross-licensing
arrangements, there can be no assurance that, in the event that SGI, S3, 3Dfx
or any other third party makes a successful claim against the Company or its
customers, a cross-licensing arrangement could be reached. If such a license
is not made available to the Company on commercially reasonable terms, the
Company's business, financial condition or results of operations would be
materially adversely affected.
There can be no assurance that infringement claims by third parties or
claims for indemnification by other customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such possible assertions or the assertions currently raised in the
SGI, S3 and 3Dfx litigation, if proven to be true, will not materially
adversely affect the Company's business, financial condition or results of
operations. Any limitations on the Company's ability to market its products,
or delays and costs associated with redesigning its products or payments of
license fees to third parties, or any failure by the Company to develop or
license a substitute technology on commercially reasonable terms, any of which
may result from the SGI, S3 or 3Dfx litigation, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
EMPLOYEES
As of October 25, 1998, the Company had 184 employees, 97 of whom were
engaged in engineering and 87 of whom were engaged in sales, marketing,
operations and administrative positions. No employee of the Company is covered
by collective bargaining agreements, and the Company believes that its
relationship with its employees is good.
The Company's ability to operate successfully will depend in significant
part upon the continued service of certain key technical and managerial
personnel, and its continuing ability to attract and retain additional highly
qualified technical and managerial personnel. Competition for such personnel
is intense, and there can be no assurance that the Company can retain such
personnel or that it can attract or retain other highly qualified technical
and managerial personnel in the future, including key sales and marketing
personnel. The loss of key personnel or the inability to hire and retain
qualified personnel could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk Factors--
Dependence on Key Personnel."
FACILITIES
The Company leases approximately 89,000 square feet in one building in Santa
Clara, California, pursuant to a lease that expires in December 2002. The
Company believes that its existing facilities are adequate to meet its needs
for the foreseeable future.
LEGAL PROCEEDINGS
On April 9, 1998, the Company was notified that SGI had filed a patent
infringement lawsuit against the Company in the United States District Court
for the District of Delaware. The suit alleges that the sale and use of the
Company's RIVA family of 3D graphics processors infringes a United States
patent held by SGI. The suit seeks unspecified damages (including treble
damages), an order permanently enjoining further alleged infringement and
attorneys' fees. On May 11, 1998, the Company was notified that S3 had filed a
patent infringement lawsuit against the Company in the United States District
Court for the Northern District of
49
<PAGE>
California. The suit alleges that the sale and use of the Company's RIVA
family of 3D graphics processors infringes three United States patents held by
S3. The suit seeks unspecified damages (including treble damages), an order
permanently enjoining further alleged infringement and attorneys' fees. On
September 21, 1998, the Company was notified that 3Dfx had filed a patent
infringement lawsuit against the Company in the United States District Court
for the Northern District of California. The suit alleges that the sale and
use of the Company's RIVA TNT product infringes a United States patent held by
3Dfx. The suit seeks unspecified damages (including treble damages), an order
permanently enjoining further alleged infringement and attorneys' fees. The
Company has filed answers to each suit and has filed counterclaims asserting
that the patents in each suit are neither infringed nor valid. Based on its
investigation to date, the Company believes that it has meritorious defenses
to the claims brought and intends to defend itself vigorously with respect to
all three lawsuits.
The litigation with SGI, S3 and 3Dfx has resulted, and the Company expects
that it will continue to result, in significant expense to the Company and
divert the efforts of the Company's technical and management personnel,
whether or not such litigation results in a favorable determination for the
Company. In the event of an adverse result in either suit, the Company could
be required to do one or more of the following: pay substantial damages
(including treble damages); preliminarily or permanently cease the
manufacture, use and sale of any infringing products; expend significant
resources to develop non-infringing technology; or obtain a license from SGI,
S3 or 3Dfx for any infringing technology. Any of these suits could result in
limitations on the Company's ability to market its products, delays and costs
associated with redesigning its products or payments of license fees or other
payments to SGI, S3 or 3Dfx, any of which would have a material adverse effect
on the Company's business, financial condition and results of operations.
50
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Certain information regarding the Company's executive officers, key
employees and directors as of October 25, 1998 is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jen-Hsun Huang.............. 35 President, Chief Executive Officer and Director
Mark K. Allen............... 43 Vice President, Operations
Jeffrey D. Fisher........... 40 Vice President, Sales
David B. Kirk............... 38 Chief Scientist
Chris A. Malachowsky........ 39 Vice President, Engineering
Lewis R. Paceley............ 42 Vice President, Corporate Marketing
Curtis R. Priem............. 39 Chief Technical Officer
Daniel F. Vivoli............ 38 Vice President, Product Marketing
Tench Coxe (1).............. 40 Director
Harvey C. Jones, Jr.(1)..... 45 Director
William J. Miller........... 53 Director
A. Brooke Seawell(2)........ 50 Director
Mark A. Stevens(2).......... 38 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Jen-Hsun Huang co-founded the Company in April 1993 and has served as
President, Chief Executive Officer and a member of the Board of Directors of
the Company since its inception. From 1985 to 1993, Mr. Huang was employed at
LSI Logic Corporation, a computer chip manufacturer, where he held a variety
of positions, most recently as Director of Coreware business unit responsible
for LSI's "system-on-a-chip" strategy. From 1983 to 1985, Mr. Huang was a
microprocessor designer for Advanced Micro Devices, a semiconductor company.
Mr. Huang holds a B.S.E.E. degree from Oregon State University and an M.S.E.E.
degree from Stanford University.
Mark K. Allen has been Vice President, Operations for the Company since
October 1998. From February 1995 to September 1998, Mr. Allen was Senior Vice
President of Operations for C-Cube Microsystems, a digital video technology
company. From March 1987 to February 1993, Mr. Allen was Vice President of
Worldwide Manufacturing Operations for Cypress Semiconductor Corp., a
manufacturer and supplier of integrated circuits. Mr. Allen holds a B.S.E.E.
degree from Purdue University.
Jeffrey D. Fisher has been Vice President, Sales for the Company since July
1994. From September 1988 to July 1994, Mr. Fisher held various positions at
Weitek Corporation, a semiconductor technology company, where his last
position was as Director of World Wide Sales. Mr. Fisher holds a B.S.E.E.
degree from Purdue University and an M.B.A. degree from Santa Clara
University.
David B. Kirk has been Chief Scientist for the Company since January 1997.
From June 1996 to January 1997, Dr. Kirk was a software and technical
management consultant. From 1993 to 1996, Dr. Kirk was Chief Scientist, Head
of Technology for Crystal Dynamics, a video game manufacturing company. From
1989 to 1991, Dr. Kirk was an engineer for Apollo Systems Division of Hewlett-
Packard Company. Dr. Kirk has authored seven patents relating to graphics
design and has authored more than 50 articles on graphics technology. Dr. Kirk
holds B.S. and M.S. degrees in Mechanical Engineering from the Massachusetts
Institute of Technology and M.S. and Ph.D. degrees in Computer Science from
the California Institute of Technology.
51
<PAGE>
Chris A. Malachowsky co-founded the Company in April 1993 and has been Vice
President, Engineering for the Company since that time. From 1987 until April
1993, Mr. Malachowsky was a Senior Staff Engineer for Sun Microsystems, Inc.,
a supplier of enterprise network computing products. From 1980 to 1986,
Mr. Malachowsky was a manufacturing design engineer at Hewlett-Packard
Company. Mr. Malachowsky was a co-inventor of Sun Microsystems' GX graphics
architecture and has authored 39 patents, most of which relate to graphics.
Mr. Malachowsky holds a B.S.E.E. degree from the University of Florida and an
M.S.C.S. degree from Santa Clara University.
Lewis R. Paceley has been Vice President, Corporate Marketing for the
Company since December 1997. From January 1996 until September 1997, Mr.
Paceley was Vice President, Marketing for Cyrix Corporation, a computer
processor manufacturer. From 1982 until December 1995, Mr. Paceley held
various positions at Intel, where his last position was as Marketing Director,
Pentium Pro. Mr. Paceley holds a B.E. degree from Vanderbilt University and an
M.S.E. degree from the University of Michigan.
Curtis R. Priem co-founded the Company in April 1993 and has been Chief
Technical Officer for the Company since that time. From 1986 to January 1993,
Mr. Priem was Senior Staff Engineer at Sun Microsystems where he architected
the GX graphics products, including the world's first single chip GUI
accelerator. From 1984 to 1986, Mr. Priem was a hardware engineer at GenRad,
Inc., a supplier of diagnostic equipment for electronic products. From 1982 to
1984, Mr. Priem was a staff engineer for Vermont Microsystems, Inc., a
personal computer company, where he architected IBM's Professional Graphics
Adapter, the PC industry's first graphics processor. Mr. Priem has authored 70
patents, all of which relate to graphics and I/O. Mr. Priem holds a B.S.E.E.
degree from Rensselaer Polytechnic Institute.
Daniel F. Vivoli has been Vice President, Product Marketing for the Company
since December 1997. From October 1988 to December 1997, Mr. Vivoli held
various positions at Silicon Graphics, Inc., a computing technology company,
including Product Marketing Director, Director of Marketing--Advanced Graphics
Division and --Interactive Systems Division, and finally Vice President of
Marketing. From 1983 to 1988, Mr. Vivoli held various marketing positions at
Hewlett-Packard Company. Mr. Vivoli holds a B.S.E.E. degree from the
University of Illinois at Champaign-Urbana.
Tench Coxe has been a director of the Company since June 1993. Mr. Coxe is a
general partner of Sutter Hill Ventures, a venture capital investment firm.
Prior to joining Sutter Hill Ventures in 1987, Mr. Coxe was Director of
Marketing and MIS at Digital Communication Associates. Mr. Coxe holds a B.A.
degree in Economics from Dartmouth College and an M.B.A. degree from the
Harvard Business School. Mr. Coxe also serves on the Board of Directors of
Avant! Corporation, Edify Corporation and SQL Financials International, Inc.
Harvey C. Jones, Jr. has served as a director of the Company since November
1993. Since December 1987, Mr. Jones has held various positions at Synopsys,
Inc., a developer of electronic design automation products, where he served as
President through December 1992, as Chief Executive Officer until January 1994
and as Chairman of the Board until February 1998. Prior to joining Synopsys,
Mr. Jones served as President and Chief Executive Officer of Daisy Systems
Corporation, an electronic design automation company that Mr. Jones co-founded
in 1981. Mr. Jones currently serves on the Board of Directors of Synopsys and
Remedy Corporation, a client/server applications software company. Mr. Jones
holds a B.S. degree in Mathematics and Computer Sciences from Georgetown
University and an M.S. degree in Management from the Massachusetts Institute
of Technology.
William J. Miller has served as a director of the Company since November
1994. Mr. Miller has been Chief Executive Officer and Chairman of the Board of
Avid Technology, Inc., a provider of digital tools for multimedia, since April
1996 and has served as President of Avid Technology since September 1996. From
March 1992 to October 1995, Mr. Miller served as Chief Executive Officer of
Quantum Corporation, a developer of information storage products. He was a
member of the Board of Directors, and Chairman thereof, from, respectively,
May 1992 and September 1993 to August 1995. From 1981 to March 1992, he served
in various positions at Control Data Corporation, a supplier of computer
hardware, software and services, most recently as Executive Vice President and
President, Information Services. Mr. Miller holds a B.A. and a J.D. degree
from
52
<PAGE>
the University of Minnesota. Mr. Miller serves on the Board of Directors of
Innovex, Inc. and Waters Corporation.
A. Brooke Seawell has served as a director of the Company since December
1997. From January 1997 to August 1998, Mr. Seawell was Executive Vice
President of NetDynamics, Inc., an Internet applications server company. From
March 1991 to January 1997, Mr. Seawell was Senior Vice President and Chief
Financial Officer of Synopsys. Mr. Seawell holds a B.A. degree in Economics
and an M.B.A. degree in Finance and Accounting from Stanford University. Mr.
Seawell serves on the Board of Directors of several privately held companies.
Mark A. Stevens has served as a director of the Company since June 1993. Mr.
Stevens has been a general partner of Sequoia Capital, a venture capital
investment firm, since March 1993. Prior to that time, beginning in July 1989,
he was an associate at Sequoia Capital. Prior to joining Sequoia, he held
technical sales and marketing positions at Intel. Mr. Stevens holds a B.S.E.E.
degree, a B.A. degree in Economics and an M.S. degree in Computer Engineering
from the University of Southern California and an M.B.A. degree from Harvard
Business School. Mr. Stevens currently serves on the Board of Directors of
Aspect Development, Inc., a client/server applications software company, and
several privately held companies.
The Company's Board of Directors (the "Board") is currently comprised of six
directors. Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. The Company's Certificate of
Incorporation, which will become effective upon the completion of this
offering, provide that the Board will be divided into two classes, Class I and
Class II, with each class serving staggered two-year terms. The Class I
directors, initially Messrs. Coxe, Huang and Jones, will stand for reelection
or election at the 1999 annual meeting of stockholders. The Class II
directors, initially Messrs. Miller, Seawell and Stevens, will stand for
reelection or election at the 2000 annual meeting of stockholders.
BOARD COMMITTEES
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, which currently consists of Messrs. Seawell and Stevens,
reviews the internal accounting procedures of the Company and consults with
and reviews the services provided by the Company's independent auditors. The
Compensation Committee, which currently consists of Messrs. Coxe and Jones,
reviews and recommends to the Board the compensation and benefits of the
Company. The Compensation Committee also administers the issuance of stock
options and other awards under the Company's 1998 Equity Incentive Plan, 1998
Employee Stock Purchase Plan and 1998 Non-Employee Directors' Stock Option
Plan. See "--Employee Benefit Plans."
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation for their services
as members of the Board of Directors, although they are reimbursed for certain
expenses in connection with attendance at Board and Committee meetings. In
July 1996, each of Messrs. Coxe and Stevens were granted an option to purchase
50,000 shares of the Company's Common Stock at an exercise price of $.36 per
share. In November 1993 and August 1996, Mr. Jones was granted options to
purchase 75,000 and 70,000 shares of the Company's Common Stock at exercise
prices of $.05 and $.36 per share, respectively. In November 1994 and June
1996, Mr. Miller was granted options to purchase 75,000 and 50,000 shares of
the Company's Common Stock at exercise prices of $.05 and $.36 per share,
respectively. In December 1997, Mr. Seawell was granted an option to purchase
50,000 shares of the Company's Common Stock at an exercise price of $3.15 per
share. Non-employee directors also are eligible to participate in the
Company's 1998 Non-Employee Directors' Stock Option Plan (the "Director's
Plan").
On March 30, 1998, each of Messrs. Coxe, Jones, Miller and Stevens was
automatically granted an option to purchase 20,000 shares of the Company's
Common Stock; Mr. Seawell was automatically granted an option
53
<PAGE>
to purchase 5,000 shares of the Company's Common Stock; each of Messrs. Coxe
and Jones was automatically granted an option to purchase 2,500 shares of the
Company's Common Stock; and each of Messrs. Miller, Seawell and Stevens was
automatically granted an option to purchase 1,250 shares of the Company's
Common Stock. Each of the foregoing options was granted under the Directors'
Plan at fair market value on the date of grant. See "--Employee Benefit
Plans--1998 Non-Employee Directors' Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to October 1997, the Company did not have a Compensation Committee of
the Board of Directors, and the entire Board participated in all compensation
decisions, except that Mr. Huang did not participate in decisions relating to
his compensation. In October 1997, the Board formed the Company's Compensation
Committee to review and recommend to the Board the compensation and benefits
for the Company's executive officers and administer the Company's stock
purchase and stock option plans. Certain of the Company's directors, or their
affiliated entities, have purchased securities of the Company. See "Certain
Transactions" and "Principal Stockholders."
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid by the
Company during the fiscal year ended December 31, 1997 to (i) the Company's
Chief Executive Officer and (ii) the four other most highly compensated
officers receiving compensation in excess of $100,000 in fiscal 1997
hereinafter (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(2) AWARDS
--------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) OPTIONS (#)
--------------------------- --------------- ------------
<S> <C> <C>
Jen-Hsun Huang.................................... $149,134 0
President and Chief Executive Officer
Jeffrey D. Fisher................................. 202,122 75,000
Vice President, Sales
Richard J. Whitacre............................... 138,750 175,000
Vice President, Operations and Corporate
Engineering
Chris A. Malachowsky.............................. 135,721 0
Vice President, Engineering
Curtis R. Priem................................... 133,125 0
Chief Technical Officer
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), the compensation described in this table does not
include medical, group life insurance or other benefits received by the
Named Executive Officers which are available generally to all salaried
employees of the Company and certain perquisites and other personal
benefits received by the Named Executive Officers, which do not exceed the
lesser of $50,000 or 10% of any such officers salary and bonus disclosed
in this table.
(2) During fiscal 1999, the planned annual salaries of the Named Executive
Officers will be: Mr. Huang--$250,000; Mr. Fisher--$100,000; Mr.
Malachowsky--$180,000; and Mr. Priem--$180,000. Mr. Whitacre resigned from
the Company on October 1, 1998.
54
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL RATES
OF STOCK PRICE
NUMBER OF APPRECIATION FOR
SECURITIES PERCENTAGE OF OPTION TERM
UNDERLYING TOTAL OPTIONS ($)(4)
OPTIONS GRANTED IN EXERCISE PRICE EXPIRATION ------------------
NAME GRANTED(1) FISCAL 1997(2) ($/SHARE)(3) DATE 5% 10%
---- ---------- -------------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Jen-Hsun Huang.......... 0 --% $ -- -- --% --%
Jeffrey D. Fisher....... 50,000 1.0 .36 3/23/07
25,000 .5 .36 5/12/07
Richard J. Whitacre..... 175,000 3.5 .36 3/23/07
Chris A. Malachowsky.... 0 -- -- -- -- --
Curtis R. Priem......... 0 -- -- -- -- --
</TABLE>
- --------
(1) Options generally vest at a rate of 25% on the first anniversary of the
vesting commencement date and 6.25% each quarter thereafter and have a
term of 10 years. Options are immediately exercisable; however, the shares
purchasable under such options are subject to repurchase by the Company at
the original exercise price paid per share upon the optionee's cessation
of service prior to the vesting of such shares.
(2) Based on an aggregate of 4,841,232 shares subject to options granted to
persons who were employees of the Company in the fiscal year ended
December 31, 1997, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at the time of grant (10 years) and an assumed initial public
offering price of $ per share. Stock price appreciation of 5% and 10%
is assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent the Company's prediction of its stock
price performance. The potential realizable value is calculated based on
the deemed value at the date of grant and assumes that the deemed value
appreciates from the date of grant at the indicated annual rate compounded
annually for the entire term of the option and that the option is
exercised at the exercise price and sold on the last day of its term at
the appreciated price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1997 YEAR-END OPTION
VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the
Named Executive Officers at December 31, 1997:
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED ON UNEXERCISED OPTIONS AT DECEMBER IN-THE-MONEY OPTIONS AT
EXERCISE VALUE 31, 1997 (#) DECEMBER 31, 1997 ($)(2)
NAME (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE
- ---- ----------- ------------ ------------------------------- -------------------------
<S> <C> <C> <C> <C>
Jen-Hsun Huang.......... 0 $ -- -- $ --
Jeffrey D. Fisher....... 0 0 135,000/0 376,650/0
Richard J. Whitacre..... 30,000 0 205,000/0 571,950/0
Chris A. Malachowsky.... 0 -- -- --
Curtis R. Priem......... 0 -- -- --
</TABLE>
- --------
(1) Options are immediately exercisable; however, the shares purchasable under
such options are subject to repurchase by the Company at the original
exercise price paid per share upon the optionee's cessation of service
prior to the vesting of such shares.
(2) Based on the difference between the fair market value of the Common Stock
at December 31, 1997 as determined by the Board of Directors and the
exercise price.
55
<PAGE>
EMPLOYEE BENEFIT PLANS
1998 EQUITY INCENTIVE PLAN
The Company's 1998 Equity Incentive Plan (the "Incentive Plan") was adopted
in February 1998 and amended in March 1998 and replaces the Company's Equity
Incentive Plan adopted in May 1993 (as amended in March 1995, January 1996 and
December 1997). An aggregate of 15,000,000 shares of Common Stock currently
are authorized for issuance under the Incentive Plan. However, each year on
January 1, starting with January 1, 1999, the aggregate number of shares of
Common Stock that are available for issuance under the Incentive Plan will
automatically be increased to that number of shares of Common Stock that is
equal to 5% of the Company's outstanding shares of Common Stock on such date.
The Incentive Plan provides for the grant of incentive stock options, as
defined under the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors) and nonstatutory stock
options, restricted stock purchase awards and stock bonuses to employees
(including officers and employee directors), directors and consultants of the
Company and its affiliates. The Incentive Plan is administered by the
Compensation Committee, which determines the recipients and types of awards to
be granted, including the exercise price, number of shares subject to the
award and the exercisability thereof.
The terms of options granted under the Incentive Plan may not exceed ten
years. The Compensation Committee determines the exercise price of options
granted under the Incentive Plan. However, the exercise price for an incentive
stock option cannot be less than 100% of the fair market value of the Common
Stock on the date of the option grant, and the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Incentive Plan vest at the rate specified in the option agreement. Generally,
the optionee may not transfer a stock option other than by will or the laws of
descent or distribution. However, an optionee may designate a beneficiary who
may exercise the option following the optionee's death. An optionee whose
service relationship with the Company or any affiliate ceases for any reason
may exercise vested options for the term provided in the option agreement.
No incentive stock option (and prior to the Company's stock being publicly
traded, no nonstatutory stock option) may be granted to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10%
of the total combined voting power of the Company or any affiliate of the
Company, unless the option exercise price is at least 110% of the fair market
value of the stock subject to the option on the date of grant and the term of
the option does not exceed five years from the date of grant. In addition, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under the Incentive
Plan and all other stock plans of the Company and its affiliates) may not
exceed $100,000.
When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the Incentive Plan
covering more than 1,000,000 shares of Common Stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the Incentive Plan. The Compensation Committee has the authority
to reprice outstanding options or to offer optionees the opportunity to
replace outstanding options with new options for the same or a different
number of shares. Both the original and new options will count toward the Code
Section 162(m) limitation set forth above.
Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Compensation
Committee. Stock bonuses may be awarded in consideration of past services
without a purchase payment. Rights under a stock bonus or restricted stock
bonus agreement generally may not be transferred other than by will or the
laws of descent and distribution during such period as the stock awarded
pursuant to such an agreement remains subject to the agreement.
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<PAGE>
If there is any sale of substantially all of the Company's assets, any
merger or any consolidation in which the Company is not the surviving
corporation, all outstanding awards under the Incentive Plan either will be
assumed or substituted for by any surviving entity. If the surviving entity
determines not to assume or substitute for such awards, the time during which
awards held by persons still serving the Company or an affiliate may be
exercised will be accelerated and the awards terminated if not exercised prior
to the sale of assets, merger or consolidation.
As of October 25, 1998, 4,707,110 shares of Common Stock had been issued
upon the exercise of options granted under the Incentive Plan, options to
purchase 7,297,458 shares of Common Stock were outstanding and 2,792,082
shares remained available for future grant. The Incentive Plan will terminate
in February 2008 unless terminated by the Board before then. As of October 25,
1998, stock awards or restricted stock covering 647,932 shares of the
Company's Common Stock had been granted under the Incentive Plan. Of such
shares, 238,332 shares have been repurchased by the Company and returned to
the Incentive Plan.
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Directors' Plan was adopted in February 1998 and amended in March 1998
and provides for the automatic grant of options to purchase shares of Common
Stock to non-employee directors of the Company who are not employees of or
consultants to the Company or an affiliate of the Company (a "Non-Employee
Director"). The Compensation Committee administers the Directors' Plan. The
aggregate number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 300,000 shares.
Pursuant to the terms of the Directors' Plan, after the effective date of
the initial public offering of the Company's Common Stock, each person who is
elected or appointed for the first time to be a Non-Employee Director
automatically shall, upon the date of his or her initial election or
appointment to be a Non-Employee Director by the Board or stockholders of the
Company, be granted an option to purchase 50,000 shares of Common Stock (an
"Initial Grant").
On March 30, 1998 and on the day following each Annual Meeting of
Stockholders of the Company ("Annual Meeting") commencing with the Annual
Meeting in 1999, each person who is then a Non-Employee Director automatically
shall be granted one or more options to purchase shares of Common Stock as
follows: (i) Each Non-Employee Director shall be granted an option to purchase
20,000 shares of Common Stock of the Company (an "Annual Grant"); provided,
however, that if the person has not been serving as a Non-Employee Director
for the entire period since the prior Annual Meeting (or since March 30, 1997
for the grant on March 30, 1998), then the number of shares granted shall be
reduced pro rata for each full quarter prior to the date of grant during which
such person did not serve as a Non-Employee Director; and (ii) each Non-
Employee Director who is a member of a committee of the Board shall be granted
an option to purchase 5,000 shares of Common Stock of the Company for each
such committee (a "Committee Grant"); provided, however, that if the person
has not been serving on such committee since the prior Annual Meeting (or
since March 30, 1997 for the grant on March 30, 1998), then the number of
shares granted shall be reduced pro rata for each full quarter prior to the
date of grant during which such person did not serve as a Non-Employee
Director.
Initial Grants will vest monthly over the four-year period following the
date of grant such that the entire Initial Grant shall become exercisable on
the fourth anniversary of the date of grant. With respect to Annual Grants and
Committee Grants, if the optionee has attended at least 75% of the regularly
scheduled meetings of the Board or the committee, as applicable, held between
the date of grant of the option and the one-year anniversary of the date of
grant of the option, then such option shall vest and become exercisable in
full on the one-year anniversary of the date of grant. If the optionee's
service as a director or committee member, as the case may be, terminates
between the date of grant of the option and the one-year anniversary of the
date of grant of the option due to the disability or death of the optionee,
then the option shall immediately vest and become exercisable on a monthly pro
rata basis. If the director fails to attend at least 75% of the regularly
scheduled meetings of the Board or the committee, as applicable, then such
optionee's option shall vest annually over the
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four-year period following the date of grant at the rate of 10% per year for
the first three years and 70% for the fourth year, such that the entire option
shall become exercisable on the four-year anniversary of the date of grant of
the option.
The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the Common Stock on the date of grant. No
option granted under the Directors' Plan may be exercised after the expiration
of ten years from the date it was granted. Options granted under the
Directors' Plan generally are non-transferable except to family members, a
family trust, a family partnership or a family limited liability company.
However, an optionee may designate a beneficiary who may exercise the option
following the optionee's death. An optionee whose service relationship with
the Company or any affiliate (whether as a Non-Employee Director of the
Company or subsequently as an employee, director or consultant of either the
Company or an affiliate) ceases for any reason may exercise vested options for
the term provided in the option agreement (12 months generally, 18 months in
the event of death).
If there is any sale of substantially all of the Company's assets, any
merger or any consolidation in which the Company is not the surviving
corporation or other change in control of the Company, all outstanding awards
under the Directors' Plan either will be assumed or substituted for by any
surviving entity. If the surviving entity determines not to assume or
substitute for such awards, the awards shall terminate if not exercised prior
to such sale of assets, merger or consolidation.
As of October 25, 1998, options to purchase 93,750 shares of Common Stock
were outstanding and 206,250 shares remained available for future grant under
the Directors' Plan. Unless terminated sooner, the Directors' Plan will
terminate in February 2008.
EMPLOYEE STOCK PURCHASE PLAN
In February 1998, the Board approved the Employee Stock Purchase Plan (the
"Purchase Plan"), covering an aggregate of 500,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an "employee stock purchase plan"
within the meaning of Section 423 of the Code. Under the Purchase Plan, the
Board may authorize participation by eligible employees, including officers,
in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no longer than 27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board. Employees who participate
in an offering generally can have up to 10% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by
the Board, to the purchase of shares of Common Stock. The Board may increase
this percentage in its discretion, up to 15%. The price of Common Stock
purchased under the Purchase Plan will be equal to 85% of the lower of the
fair market value of the Common Stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company.
In the event of certain changes of control, the Board has discretion to
provide that each right to purchase Common Stock will be assumed or an
equivalent right substituted by the successor corporation, or the Board may
shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to the change in
control. The Purchase Plan will terminate at the Board's direction or when all
of the shares reserved for issuance under the Purchase Plan have been issued.
401(K) PLAN
The Company maintains the NVIDIA Corporation 401(k) Retirement Plan (the
"401(k) Plan") for eligible employees ("Participants"). A Participant may
contribute up to 20% of his or her total annual compensation to the 401(k)
Plan, up to a statutorily prescribed annual limit. The annual limit for
calendar 1998 is $10,000. Each Participant is fully vested in his or her
deferred salary contributions. Participant contributions are held and invested
by the 401(k) Plan's trustee. The Company may make discretionary contributions
as a percentage of
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Participant contributions, subject to established limits. To date, the Company
has made no contributions to the 401(k) Plan on behalf of the Participants.
The 401(k) Plan is intended to qualify under Section 401 of the Code, so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on the 401(k) Plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made.
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CERTAIN TRANSACTIONS
In August 1997, Harvey C. Jones, Jr., a director of the Company, purchased
24,334 shares of the Company's Series D Preferred Stock for an aggregate
purchase price of $127,997. The Company sold these securities pursuant to a
preferred stock purchase agreement and an investors' rights agreement on
substantially the same terms as the other investors of Series D Preferred
Stock, including registration rights, information rights and a right of first
refusal, among other provisions standard in venture capital financings.
Pursuant to an agreement between the Company and certain stockholders of the
Company, in August 1997, the Company granted certain rights with respect to
the registration of shares held by Messrs. Coxe, Jones and Miller, each of
whom is a director of the Company, and shares held by and Sequoia Capital VI
and its related entities and Sutter Hill Ventures and its related entities,
both of which are holders of more than 5% of the Company's Common Stock. Mr.
Stevens, a director of the Company, is a general partner of Sequoia Capital,
and Mr. Coxe is a general partner of Sutter Hill Ventures. See "Description of
Capital Stock--Registration Rights."
In July and August 1998, the Company's three largest customers, Creative,
Diamond, and STB, purchased an aggregate of $11.0 million of the Company's
convertible subordinated non-interest bearing notes.
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
In February 1998, the Board authorized the Company to enter into indemnity
agreements with each of the Company's directors and executive officers. The
form of indemnity agreement provides that the Company will indemnify against
any and all expenses of the director or executive officer who incurred such
expenses because of his or her status as a director or executive officer, to
the fullest extent permitted by the Company's Bylaws and Delaware law.
The Company's Certificate of Incorporation (the "Certificate") and Bylaws
contain certain provisions relating to the limitation of liability and
indemnification of directors and officers. The Certificate provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the directors' duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derives any improper personal benefit. The Certificate also provides that if
the Delaware General Corporation Law is amended after the approval by the
Company's stockholders of the Certificate to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of the Company's directors shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law. The
foregoing provisions of the Certificate are not intended to limit the
liability of directors or officers for any violation of applicable federal
securities laws. In addition, as permitted by Section 145 of the Delaware
General Corporation Law, the Bylaws of the Company provide that (i) the
Company is required to indemnify its directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law, (ii) the
Company may, in its discretion, indemnify other officers, employees and agents
as set forth in the Delaware General Corporation Law, (iii) to the fullest
extent permitted by the Delaware General Corporation Law, the Company is
required to advance all expenses incurred by its directors and executive
officers in connection with a legal proceeding (subject to certain
exceptions), (iv) the rights conferred in the Bylaws are not exclusive, (v)
the Company is authorized to enter into indemnification agreements with its
directors, officers, employees and agents and (vi) the Company may not
retroactively amend the Bylaws provisions relating to indemnity.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 25, 1998, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby
by (i) each of the Company's Named Executive Officers, (ii) each of the
Company's directors, (iii) each holder of more than 5% of the Company's Common
Stock and (iv) all current directors and executive officers as a group. Except
as otherwise noted below, the address of each person listed below is c/o the
Company, 3535 Monroe Drive, Santa Clara, California 95051.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES -------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNERS OWNED(1) OFFERING OFFERING
- ----------------- ------------ ----------- ----------
<S> <C> <C> <C>
Entities associated with Sequoia
Capital VI(2)........................ 3,095,902 13.2% %
3000 Sand Hill Road
Suite 280, Building 4
Menlo Park, California 94025
Jen-Hsun Huang(3)(4).................. 3,000,000 12.8
Chris A. Malachowsky(3)(5)............ 3,000,000 12.8
Curtis R. Priem(3).................... 3,000,000 12.8
Entities associated with Sutter Hill
Ventures(6)(9)....................... 2,786,090 11.9
755 Page Mill Road, Suite A-200
Palo Alto, California 94304
Jeffrey D. Fisher(7).................. 359,800 1.5
Richard J. Whitacre(8)................ 252,175 1.1
Tench Coxe(6)(9)...................... 2,786,090 12.1
Harvey C. Jones, Jr.(10).............. 269,334 1.1
William J. Miller(11)................. 181,844 *
A. Brooke Seawell(12) ................ 12,500 *
Mark A. Stevens(2)(13)................ 3,145,902 13.4
All current directors and executive
officers as a group(10 persons)(14).. 15,755,740 67.05
</TABLE>
- --------
*Less than 1%.
(1) Percentage of beneficial ownership is based on 23,493,797 shares of
Common Stock outstanding on an as-converted basis as of October 25, 1998
and on shares of Common Stock outstanding after the completion of
this offering. Shares of Common Stock subject to options currently
exercisable or exercisable within 60 days of October 25, 1998 are deemed
outstanding for the purpose of computing the percentage ownership of the
person holding such options but are not deemed outstanding for computing
the percentage ownership of any other person. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
(2) Includes (i) 2,566,589 shares held by Sequoia Capital VI, (ii) 258,947
shares held by Sequoia Capital Growth Fund, (iii) 141,021 shares held by
Sequoia Technology Partners VI, (iv) 81,237 shares held by Sequoia XXIII,
(v) 27,778 shares held by Sequoia XXIV, (vi) 16,528 shares held by
Sequoia Technology Partners III, (vii) 2,433 shares held by SQP 1997 and
(viii) 1,369 shares held by Sequoia 1997. Mr. Stevens, a director of the
Company, is a general partner of Sequoia Capital VI and a general partner
of Sequoia Technology Partners VI, and therefore may be deemed to
beneficially own the shares currently owned by such entities. Mr. Stevens
disclaims beneficial ownership of the shares held by such entities,
except to the extent of his pecuniary interest therein.
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(3) The address for Messrs. Huang, Malachowsky and Priem is: c/o NVIDIA
Corporation, 3535 Monroe Drive, Santa Clara, California 95051.
(4) Includes 2,308,900 shares held by The Jen-Hsun and Lori Huang Living
Trust dated May 1, 1995, of which Mr. Huang is the trustee and 250,600
shares held by J. and L. Huang Investments, L.P., of which Mr. Huang and
his wife are general partners. Also includes 220,000 shares held by Karen
Mills Gambee, as Trustee of The Jen-Hsun Huang and Lori Lynn Huang 1995
Irrevocable Children's Trust and 220,500 shares held by various family
members, as to which Mr. Huang does not have voting or dispositive power
or beneficial ownership thereof.
(5) Includes 2,052,000 shares held by The Chris and Melody Malachowsky Living
Trust dated October 20, 1994, of which Mr. Malachowsky is the trustee and
238,500 shares held by Malachowsky Investments L.P., of which Mr.
Malachowsky and his wife are general partners. Also includes 660,000
shares held by John M. Scott, as Trustee of The Chris Malachowsky and
Melody Malachowsky 1994 Irrevocable Trust and 49,500 shares held by
various family members, as to which Mr. Malachowsky does not have voting
or dispositive power thereof.
(6) Includes 1,813,275 shares held by Sutter Hill Ventures, a California
Limited Partnership ("Sutter Hill"). Mr. Coxe, a director of the Company,
shares voting and investing power with four other managing directors of
Sutter Hill Ventures LLC, the general partner of Sutter Hill. Includes
972,815 shares held of record by the five managing directors of Sutter
Hill Ventures LLC and their related family entities. Mr. Coxe disclaims
beneficial ownership of the shares held by the other persons and entities
associated with Sutter Hill, except to the extent of his pecuniary
interest therein.
(7) Includes 135,000 shares of Common Stock issuable upon the early exercise
of options vesting through May 2001.
(8) Includes 69,375 shares of Common Stock issuable upon exercise of vested
options within 60 days of October 25, 1998. Mr. Whitacre resigned as an
executive officer on October 1, 1998.
(9) Includes 50,000 shares subject to a right of repurchase that expires
ratably through July 2000.
(10) Includes 70,000 shares subject to a right of repurchase that expires
ratably through August 2000.
(11) Includes 50,000 shares subject to a right of repurchase that expires
ratably through June 2000.
(12) Includes 12,500 shares of Common Stock issuable upon exercise of vested
options within 60 days of October 25, 1998.
(13) Includes 50,000 shares subject to a right of repurchase that expires
ratably through July 2000.
(14) Includes shares issuable upon exercise of options held by all directors
and executive officers within 60 days of October 25, 1998. See footnotes
(7) and (12).
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 200,000,000 shares of Common Stock, par value $.001
per share, and 2,000,000 shares of Preferred Stock, par value $.001 per share
("Preferred Stock").
COMMON STOCK
As of October 25, 1998, there were 23,493,797 shares of Common Stock
(including shares of Preferred Stock that will be converted into Common Stock
upon completion of this offering) outstanding held of record by 198
stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution, or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon the
completion of this offering will be, fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Restated Certificate the Board of Directors has the
authority, without further action by the stockholders, to issue up to
2,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges, and relative participating,
optional, or special rights and the qualifications, limitations, or
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which
may be greater than the rights of the Common Stock. The Board of Directors,
without stockholder approval, can issue Preferred Stock with voting,
conversion, or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control
of the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of
the holders of Common Stock. Upon the completion of this offering, there will
be no shares of Preferred Stock outstanding and the Company has no current
plans to issue any of the authorized Preferred Stock.
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the holders (or their
permitted transferees) ("Holders") of (i) approximately 9,327,087 shares of
Common Stock (assuming the conversion of all outstanding Preferred Stock upon
the completion of this offering), (ii) warrants to purchase 29,706 shares of
Common Stock, and (iii) notes convertible into 1,571,429 shares of Common
Stock upon the completion of this offering, the Holders are entitled to
certain rights with respect to the registration of such shares under the
Securities Act. If the Company proposes to register its Common Stock, subject
to certain exceptions, under the Securities Act, the Holders are entitled to
notice of the registration and are entitled at the Company's expense to
include such shares therein, provided that the managing underwriters have the
right to limit the number of such shares included in the registration. The
registration rights with respect to this offering have been waived. In
addition, certain of the Holders may require the Company, at its expense, on
no more than one occasion, to file a registration statement under the
Securities Act with respect to their shares of Common Stock. Such rights may
not be exercised until 60 days after the completion of this offering. Further,
certain Holders may require the Company, once every 12 months and, on no more
than two occasions, at the Company's expense to register the
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<PAGE>
shares on Form S-3 when such form becomes available to the Company, subject to
certain conditions and limitations. Such right expires on the fifth
anniversary of completion of this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW
CHARTER DOCUMENTS
The Company's Certificate of Incorporation (the "Certificate") and Bylaws
include a number of provisions that may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of the
Company. First, the Certificate provides that all stockholder action must be
effected at a duly called meeting of holders and not by a consent in writing.
Second, the Bylaws provide that special meetings of the holders may be called
only by (i) the Chairman of the Board of Directors, (ii) the Chief Executive
Officer, or (iii) the Board of Directors pursuant to a resolution adopted by
the Board of Directors. Third, the Certificate and the Bylaws provide for a
classified Board of Directors. The Certificate includes a provision requiring
cumulative voting for directors only if required by applicable California law.
Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one or
more directors. As a result of the provisions of the Certificate and
applicable California and Delaware law, at any annual meeting whereby the
Company had at least 800 stockholders as of the end of the fiscal year prior
to the record date for such annual meeting, stockholders will not be able to
cumulate votes for directors. Finally, the Bylaws establish procedures,
including advance notice procedures with regard to the nomination of
candidates for election as directors and stockholder proposals. These
provisions of the Certificate and Bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control or
management of the Company. Such provisions also may have the effect of
preventing changes in the management of the Company. See "Risk Factors--
Effects of Certain Charter and Bylaw Provisions" and "Management."
DELAWARE TAKEOVER STATUTE
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). In general, Section 203 prohibits a
publicly held Delaware corporation, such as the Company shall become upon the
completion of this offering from engaging in a "business combination" with a
person characterized as an "interested stockholder" for a period of three
years after the date of the transaction pursuant to which such person became
an interested stockholder, unless the business combination is approved in a
manner prescribed by Delaware law. For purposes of Section 203, a business
combination includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns
(or within three years prior, did own) 15% or more of the Company's voting
stock.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer
agent and registrar for the Company's Common Stock.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to
time. Furthermore, since only a limited number of shares will be available for
sale following this offering as a result of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after these restrictions
lapse could adversely affect the prevailing market price and the ability of
the Company to raise equity capital in the future.
Upon the completion of this offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
warrants. Of these shares, all of the shares sold in this offering will be
freely tradable without restrictions or further registration under the
Securities Act, unless such shares are purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act (the
"Affiliates"). The remaining 25,065,226 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration pursuant to Rules 144, 144(k) or 701 promulgated
under the Securities Act, which are summarized below. All officers and
directors and certain stockholders holding an aggregate of shares
of the Company's Common Stock have agreed, subject to certain exceptions, not
to offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly of
indirectly (or enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership
of), any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 180
days after the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may in
its sole discretion choose to release a certain number of these shares from
such restrictions prior to the expiration of such 180-day period.
Approximately 5,000,000 shares of Common Stock of the Company (less shares
available for sale within 90 days following the date of this Prospectus),
which does not include any shares held by officers and directors, will be
released from such contractual restrictions following 90 days after the date
of this Prospectus. As a result of such contractual restrictions and the
provisions of Rule 144 and 701, the Restricted Shares will be available for
sale in the public market as follows: (i) 147,500 shares will be eligible for
immediate sale on the date of this Prospectus; (ii) 4,852,500 shares will be
eligible for sale 90 days after the date of this Prospectus; (iii) 17,727,849
shares will be eligible for sale upon expiration of lock-up agreements 180
days after the date of this Prospectus and (iv) the remaining shares will be
eligible for sale from time to time thereafter upon expiration of the
Company's right to repurchase such shares.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions and notice requirements and
to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise contractually restricted, shares which qualify as "144(k)
shares" on the date of this Prospectus may be sold immediately upon the
completion of this offering. Subject to certain limitations on the aggregate
offering price of a transaction and other conditions, employees, directors,
officers, consultants or advisors may rely on Rule 701 with respect to the
resale of securities originally
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purchased from the Company prior to the date the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired
upon exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold by persons
other than Affiliates subject only to the manner of sale provisions of Rule
144, and by Affiliates under Rule 144 without compliance with its holding
period requirements.
Upon completion of this offering, (i) the holders of approximately 9,327,087
shares of Common Stock currently outstanding or issuable upon conversion of
Preferred Stock and (ii) 1,571,429 shares of Common Stock issuable upon
conversion of the convertible notes, or their transferees, will be entitled to
certain rights with respect to the registration of such shares under the
Securities Act. See "Description of Capital Stock--Registration Rights."
Registration of such shares under the Securities Act would result in such
shares becoming freely tradable without restriction under the Securities Act
(except for share purchases by affiliates) immediately upon the effectiveness
of such registration.
The Company intends to file a registration statement under the Securities
Act covering 10,683,290 shares of Common Stock reserved or to be reserved for
issuance under the Equity Incentive Plan, the Purchase Plan and the Directors'
Plan. See "Management--Employee Benefit Plans." Such registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market, beginning 180 days
after the date of the Prospectus, unless such shares are subject to vesting
restrictions with the Company.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement (the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters"), for whom Morgan Stanley & Co. Incorporated and Hambrecht &
Quist LLC are acting as representatives (the "Representatives"), have agreed
severally to purchase, and the Company has agreed to sell to them, severally,
the respective number of shares of Common Stock set forth opposite their
respective names below:
<TABLE>
<CAPTION>
NUMBER
OF
NAME SHARES
- ---- ------
<S> <C>
Morgan Stanley & Co. Incorporated........................................
Hambrecht & Quist LLC....................................................
----
Total................................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the over-allotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per share under the public offering price.
Any Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ per share to other Underwriters or to certain dealers. After
the initial offering of the shares of Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price set
forth on the cover page hereof, less underwriting discounts and commissions.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to the total number of shares of Common Stock set forth next to the
names of all Underwriters in the preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.
Each of the Company and the directors, executive officers, certain other
stockholders and option holders of the Company has agreed, subject to certain
exceptions that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not during the period
ending 180 days after the date of this Prospectus (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer, lend or dispose
67
<PAGE>
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise, except under certain limited circumstances. The restrictions
described in this paragraph do not apply to (a) the sale of Shares to the
Underwriters, (b) the issuance by the Company of shares of Common Stock upon
exercise of an option or a warrant outstanding on the date of this Prospectus
and described as such in the Prospectus, (c) the issuance by the Company of
shares of Common Stock under the Equity Incentive Plan, the Directors' Plan
and the Purchase Plan or (d) transactions by any person other than the Company
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the offering of the Shares. See "Shares
Eligible for Future Sale."
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common Stock
or any other securities of the Company. The initial public offering price for
the Common Stock will be determined by negotiations among the Company and the
Representatives. Among the factors to be considered in determining the initial
public offering price will be the future prospects of the Company and its
industry in general, sales, earnings and certain other financial and operating
information of the Company in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of
the Company. The estimated initial public offering price range set forth on
the cover page of this Preliminary Prospectus is subject to change as a result
of market conditions and other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward LLP ("Cooley Godward"), San Francisco, California.
Certain legal matters related to the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. As of the date of this Prospectus, certain partners and
associates of Cooley Godward own through investment partnerships an aggregate
of 124,591 shares of Common Stock of the Company. James C. Gaither, a partner
of Cooley Godward, owns 44,289 shares of Common Stock of the Company and has
an option to purchase 50,000 shares of the Company's Common Stock.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997,
January 31, 1998 and October 25, 1998 and for each of the years in the three-
year period ended December 31, 1997, the one-month period ended January 31,
1998, and the nine-month period ended October 25, 1998 have been included in
the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent auditors, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
68
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon payment of
the fees prescribed by the Commission. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
69
<PAGE>
NVIDIA CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors..................... F-2
Balance Sheets as of December 31, 1996 and 1997, January 31, 1998, and
October 25, 1998......................................................... F-3
Statements of Operations for the years ended December 31, 1995, 1996 and
1997, one month ended January 26, 1997 (unaudited), one month ended
January 31, 1998, nine months ended September 28, 1997 (unaudited), and
nine months ended October 25, 1998....................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1995,
1996 and 1997, one month ended January 31, 1998, and nine months ended
October 25, 1998......................................................... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997, one month ended January 26, 1997 (unaudited), one month ended
January 31, 1998, nine months ended September 28, 1997 (unaudited), and
nine months ended October 25, 1998....................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
NVIDIA Corporation:
We have audited the accompanying balance sheets of NVIDIA Corporation (the
Company) as of December 31, 1996 and 1997, January 31, 1998, and October 25,
1998 and the related statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
the one-month period ended January 31, 1998, and the nine-month period ended
October 25, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NVIDIA Corporation as of
December 31, 1996 and 1997, January 31, 1998, and October 25, 1998 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1997, the one-month period ended January
31, 1998, and the nine-month period ended October 25, 1998, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
November 16, 1998
F-2
<PAGE>
NVIDIA CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JANUARY 31, OCTOBER 25,
1996 1997 1998 1998
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents....... $ 3,133 $ 6,551 $ 7,984 $ 12,461
Accounts receivable, less
allowances of $100, $349 and
$3,506, at December 31, 1997,
January 31, 1998 and October
25, 1998, respectively......... 1,041 12,487 15,399 35,918
Inventory....................... 63 25 521 17,193
Prepaid expenses and other
current assets................. 41 278 594 1,163
-------- -------- -------- --------
Total current assets........ 4,278 19,341 24,498 66,735
Property and equipment, net....... 1,144 5,536 5,512 9,218
Deposits and other assets......... 103 162 162 549
-------- -------- -------- --------
$ 5,525 $ 25,039 $ 30,172 $ 76,502
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
Current liabilities:
Accounts payable................ $ 277 $ 11,572 $ 15,312 $ 46,370
Line of credit.................. -- -- -- 5,000
Accrued liabilities............. 2,872 3,245 3,266 2,963
Current portion of capital lease
obligations.................... 722 1,434 1,228 1,843
-------- -------- -------- --------
Total current liabilities... 3,871 16,251 19,806 56,176
Capital lease obligations, less
current portion.................. 617 1,891 1,756 2,032
Commitments and contingencies
Stockholders' equity:
Mandatorily convertible notes... -- -- -- 11,000
Convertible preferred stock,
$.001 par value; 10,000,000
shares authorized; 7,888,275
and 9,327,087 shares issued and
outstanding in 1996, 1997,
January 31, 1998 and October
25, 1998; aggregate liquidation
preference of $19,827 in 1997,
January 31, 1998, and October
25, 1998....................... 8 9 9 9
Common stock, $.001 par value;
200,000,000 shares authorized;
11,567,374, 14,140,585,
14,141,710 and 14,166,710
shares issued and outstanding
in 1996, 1997, January 31, 1998
and October 25, 1998,
respectively................... 12 14 14 14
Additional paid-in capital...... 12,317 25,079 25,446 25,471
Deferred compensation........... -- (3,316) (3,317) (1,126)
Accumulated deficit............. (11,300) (14,889) (13,542) (17,074)
-------- -------- -------- --------
Total stockholders' equity.. 1,037 6,897 8,610 18,294
-------- -------- -------- --------
$ 5,525 $ 25,039 $ 30,172 $ 76,502
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NVIDIA CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, ONE MONTH ENDED NINE MONTHS ENDED
------------------------- ----------------------- -------------------------
JANUARY 26, JANUARY 31, SEPTEMBER 28, OCTOBER 25,
1995 1996 1997 1997 1998 1997 1998
------- ------- ------- ----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product............... $ 1,103 $ 3,710 $27,280 $ 190 $11,420 $ 5,225 $86,755
Royalty............... 79 202 1,791 -- 1,911 312 5,945
------- ------- ------- ------ ------- ------- -------
Total revenue....... 1,182 3,912 29,071 190 13,331 5,537 92,700
Cost of revenue......... 1,549 3,038 21,244 127 10,071 4,906 67,400
------- ------- ------- ------ ------- ------- -------
Gross profit (loss)..... (367) 874 7,827 63 3,260 631 25,300
------- ------- ------- ------ ------- ------- -------
Operating expenses:
Research and
development.......... 2,426 1,218 7,103 415 1,121 3,518 16,656
Sales, general and
administrative....... 3,677 2,649 4,183 164 640 2,024 12,544
------- ------- ------- ------ ------- ------- -------
Total operating
expenses........... 6,103 3,867 11,286 579 1,761 5,542 29,200
------- ------- ------- ------ ------- ------- -------
Operating income
(loss)............. (6,470) (2,993) (3,459) (516) 1,499 (4,911) (3,900)
Interest and other
income (expense), net.. 93 (84) (130) (6) (18) (102) 60
------- ------- ------- ------ ------- ------- -------
Income (loss) before tax
expense (benefit)...... (6,377) (3,077) (3,589) (522) 1,481 (5,013) (3,840)
Income tax expense...... -- -- -- -- 134 -- (308)
------- ------- ------- ------ ------- ------- -------
Net income (loss)... (6,377) (3,077) (3,589) $(522) $ 1,347 $(5,013) $(3,532)
======= ======= ======= ====== ======= ======= =======
Basic net income (loss)
per share.............. $ (.56) $ (.27) $ (.28) $ (.05) $ .10 $ (.41) $ (.25)
======= ======= ======= ====== ======= ======= =======
Diluted net income
(loss) per share....... $ (.56) $ (.27) $ (.28) $ (.05) $ .05 $ (.41) $ (.25)
======= ======= ======= ====== ======= ======= =======
Shares used in basic per
share computation...... 11,365 11,383 12,677 11,567 14,141 12,123 14,152
Shares used in diluted
per share computation.. 11,365 11,383 12,677 11,567 26,100 12,123 14,152
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NVIDIA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
MANDATORILY PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED ACCUMU- STOCK-
CONVERTIBLE ---------------- ----------------- PAID-IN COMPEN- LATED HOLDERS'
NOTES SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT EQUITY
----------- --------- ------ ---------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1994................... $ -- 6,693,831 $ 7 11,365,300 $11 $ 6,456 $ -- $ (1,846) $ 4,628
Issuance of Series B
preferred stock........ -- 416,667 -- -- -- 750 -- -- 750
Exercise of Series B
warrants............... -- 13,888 -- -- -- 25 -- -- 25
Issuance of Series C
preferred stock, net of
issuance costs of $14.. -- 750,000 1 -- -- 4,985 -- -- 4,986
Net loss................ -- -- -- -- -- -- -- (6,377) (6,377)
------- --------- --- ---------- --- ------- ------- -------- -------
Balances, December 31,
1995................... -- 7,874,386 8 11,365,300 11 12,216 -- (8,223) 4,012
Exercise of Series B
warrants............... -- 13,889 -- -- -- 25 -- -- 25
Issuance of common stock
and stock options for
services............... -- -- -- 2,200 -- 25 -- -- 25
Issuance of common stock
upon exercise of stock
options................ -- -- -- 199,874 1 51 -- -- 52
Net loss................ -- -- -- -- -- -- -- (3,077) (3,077)
------- --------- --- ---------- --- ------- ------- -------- -------
Balances, December 31,
1996................... -- 7,888,275 8 11,567,374 12 12,317 -- (11,300) 1,037
Issuance of Series D
preferred stock, net of
issuance costs of $30.. -- 1,438,812 1 -- -- 7,537 -- -- 7,538
Grant of common stock
options for lease
financing and
consulting services.... -- -- -- -- -- 120 -- -- 120
Issuance of common stock
upon exercise of stock
options................ -- -- -- 2,573,211 2 828 -- -- 830
Deferred compensation
related to grant of
common stock options... -- -- -- -- -- 4,277 (4,277) -- --
Amortization of deferred
compensation........... -- -- -- -- -- -- 961 -- 961
Net loss................ -- -- -- -- -- -- -- (3,589) (3,589)
------- --------- --- ---------- --- ------- ------- -------- -------
Balances, December 31,
1997................... -- 9,327,087 9 14,140,585 14 25,079 (3,316) (14,889) 6,897
Exercise of common
stock.................. -- -- -- 1,125 -- 6 -- -- 6
Deferred compensation
related to grant of
common stock options... -- -- -- -- -- 361 (361) -- --
Amortization of deferred
compensation........... -- -- -- -- -- -- 360 -- 360
Net income.............. -- -- -- -- -- -- -- 1,347 1,347
------- --------- --- ---------- --- ------- ------- -------- -------
Balances, January 31,
1998 .................. -- 9,327,087 9 14,141,710 14 25,446 (3,317) (13,542) 8,610
Exercise of common
stock.................. -- -- -- 25,000 -- 25 -- -- 25
Issuance of mandatorily
convertible notes...... 11,000 -- -- -- -- -- -- -- 11,000
Amortization of deferred
compensation........... -- -- -- -- -- -- 2,191 -- 2,191
Net loss................ -- -- -- -- -- -- -- (3,532) (3,532)
------- --------- --- ---------- --- ------- ------- -------- -------
Balances, October 25,
1998................... $11,000 9,327,087 $ 9 14,166,710 $14 $25,471 $(1,126) $(17,074) $18,294
======= ========= === ========== === ======= ======= ======== =======
</TABLE>
- --------
See accompanying notes to financial statements.
F-5
<PAGE>
NVIDIA CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, ONE MONTH ENDED NINE MONTHS ENDED
-------------------------- ----------------------- -------------------------
JANUARY 28, JANUARY 31, SEPTEMBER 28, OCTOBER 25,
1995 1996 1997 1997 1998 1997 1998
------- ------- -------- ----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $(6,377) $(3,077) $ (3,589) $(1,177) $ 1,347 $(5,014) $ (3,532)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 524 802 1,363 144 219 598 2,796
Stock options granted
in exchange for lease
financing and
services.............. 25 50 120 -- -- -- --
Amortization of
deferred compensation. -- -- 961 -- 360 159 2,191
Changes in operating
assets and
liabilities:
Accounts receivable... (458) (24) (11,446) (1,067) (2,912) (4,463) (20,519)
Inventory............. -- -- 38 63 (496) 60 (16,672)
Prepaid expenses and
other current assets. (592) 44 (237) (104) (316) (245) (569)
Deposits and other
assets............... (65) (19) (59) -- -- (35) (387)
Accounts payable...... 510 (506) 11,295 (436) 3,740 4,045 31,058
Accrued liabilities... 300 2,451 373 1,552 21 726 (303)
------- ------- -------- ------- ------- ------- --------
Net cash provided by
(used in) operating
activities.......... (6,133) (279) (1,181) (1,025) 1,963 (4,169) (5,937)
------- ------- -------- ------- ------- ------- --------
Cash flows used in
investing activities--
purchases of property
and equipment.......... (5) (9) (2,732) 2 (163) (1,721) (4,305)
------- ------- -------- ------- ------- ------- --------
Cash flows from
financing activities:
Borrowings under line
of credit............. -- -- -- -- -- -- 5,000
Issuance of mandatorily
convertible notes..... -- -- -- -- -- -- 11,000
Net proceeds from sale
of common stock....... -- 51 830 6 6 744 25
Net proceeds from sale
of preferred stock.... 5,762 -- 7,538 -- -- 7,538 --
Payments under capital
leases................ (307) (502) (1,037) (182) (373) (55) (1,306)
------- ------- -------- ------- ------- ------- --------
Net cash provided by
(used in) financing
activities.......... 5,455 (451) 7,331 (176) (367) 8,227 14,719
------- ------- -------- ------- ------- ------- --------
Change in cash and cash
equivalents............ (683) (739) 3,418 (1,199) 1,433 2,337 4,477
Cash and cash
equivalents at
beginning of period.... 4,555 3,872 3,133 3,133 6,551 3,133 7,984
------- ------- -------- ------- ------- ------- --------
Cash and cash
equivalents at end of
period................. $ 3,872 $ 3,133 $ 6,551 $ 1,934 $ 7,984 $ 5,470 $ 12,461
======= ======= ======== ======= ======= ======= ========
Cash paid for interest.. $ 152 $ 215 $ 267 $ 16 $ 31 $ 194 $ 390
======= ======= ======== ======= ======= ======= ========
Noncash financing and
investing activity--
Assets recorded under
capital lease.......... $ 1,430 $ 265 $ 3,023 $ 516 $ 32 $ 1,306 $ 2,197
======= ======= ======== ======= ======= ======= ========
Deferred compensation
related to grant of
common stock options.. -- -- $ 4,277 -- $ 361 $ 1,525 --
======= ======= ======== ======= ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
NVIDIA Corporation (the "Company") designs, develops and markets 3D
interactive graphics processors and related software for the mainstream PC
market. The Company operates primarily in one business segment in the United
States. In April 1998, the Company was reincorporated as a Delaware
corporation.
Interim Financial Information
The financial information presented as of and for the one month ended
January 26, 1997 and the nine months ended September 28, 1997 is unaudited. In
the opinion of management, this unaudited financial information contains all
adjustments (which consist only of normal, recurring adjustments) necessary
for a fair presentation. Operating results for the nine months ended October
25, 1998 are not necessarily indicative of results that may be expected for
the full year.
Fiscal Year
Effective January 1, 1998, the Company changed its fiscal year-end financial
reporting period to January 31. The Company elected not to restate its
previous reporting periods ending December 31. In addition, effective February
1, 1998 the Company changed its fiscal year end from January 31 to a 52- or
53-week year ending on the last Sunday in January. As a result, the first and
fourth quarters of fiscal 1999 are 12- and 14-week periods, respectively, with
the remaining quarters being 13-week periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the time of purchase to be cash
equivalents.
Inventories
Inventories are stated at the lower of first-in first-out, cost or market.
Write-downs to reduce the carrying value of obsolete, slow moving and non-
usable inventory to net realizable value are charged to operations.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on estimated useful lives, generally three to
four years. Depreciation expense includes the amortization of assets recorded
under capital leases. Leasehold improvements and assets recorded under capital
leases are amortized over the shorter of the lease term or the estimated
useful life of the asset.
Software Development Costs
Software development costs are expensed as incurred until the technological
feasibility of the related product has been established. After technological
feasibility is established, any additional software development costs would be
capitalized in accordance with Financial Accounting Standards Board Statement
of Financial Accounting Standards ("SFAS") No. 86, Capitalization of Software
Development Costs. Through October 25,
F-7
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
1998, the Company's process for developing software was essentially completed
concurrently with the establishment of technological feasibility, and,
accordingly, no software costs have been capitalized to date. Software
development costs incurred prior to achieving technological feasibility are
charged to research and development expense as incurred.
Revenue Recognition
Revenue from product sales to original equipment manufacturers is recognized
after receipt of a signed purchase order and upon shipment, if acceptance of
the product is assured and collectibility of the resulting receivable is
probable. An allowance for any anticipated returns is recorded at the time of
sale. While the Company has not yet sold products through distributors, the
Company's policy on sales to distributors will be to defer recognition of
sales and related gross profit until the distributors resell the product.
Royalty revenue is recognized upon shipment of product by the licensee to its
customers. The Company believes that the software sold with its products is
incidental to the product as a whole.
Research and Development Arrangements
The Company enters into contractual agreements to provide design,
development and support services on a best efforts basis. All amounts funded
to the Company under these agreements are non-refundable once paid. The
Company recorded reductions to research and development expense after the
services were performed based on the achievement of contractually specified
milestones and the collectability of amounts was assured.
Accounting for Stock-Based Compensation
The Company uses the intrinsic value method to account for its stock-based
employee compensation plans. Deferred compensation arising from stock-based
awards is amortized in accordance with Financial Accounting Standards Board
Interpretation No. 28.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recorded or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period, using either
the as-if-converted method for mandatorily convertible notes and convertible
preferred stock or the treasury stock method for options and warrants. The
effect of including mandatorily convertible notes, convertible preferred
stock, options and warrants would have been antidilutive during all periods
presented, except for the one-month period ended January 31, 1998, and, as a
result, such effect has been excluded from the computation of diluted net loss
per share during those anti-dilutive periods. See Note 3 for information
regarding potentially dilutive outstanding shares of, and warrants to purchase
common stock, convertible preferred stock and outstanding options to purchase
common stock. Pursuant to SEC Staff Accounting Bulletin No. 98, common stock
and convertible preferred stock issued for nominal consideration and options
and warrants granted for nominal consideration prior to the anticipated
effective date of the initial public offering (IPO) are included in the
calculation of basic
F-8
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
and diluted net income (loss) per share, as if they were outstanding for all
periods presented. To date, the Company has not had any issuances or grants
for nominal consideration. The following is a reconciliation of the numerators
and denominators of the basic and diluted earnings per share (EPS)
computations for the periods presented:
<TABLE>
<CAPTION>
PER
INCOME/(LOSS) SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Basic and diluted EPS...................... $(6,377) 11,365 $(0.56)
======= ====== ======
YEAR ENDED DECEMBER 31, 1996
Basic and diluted EPS...................... $(3,077) 11,383 $(0.27)
======= ====== ======
YEAR ENDED DECEMBER 31, 1997
Basic and diluted EPS...................... $(3,589) 12,677 $(0.28)
======= ====== ======
ONE MONTH ENDED JANUARY 28, 1997
Basic and diluted EPS...................... $ (522) 11,567 $(0.05)
======= ====== ======
ONE MONTH ENDED JANUARY 26, 1998
Basic EPS.................................. $ 1,347 14,141 $ 0.10
Effect of dilutive securities:
Stock options outstanding................ 2,531
Warrants................................. 101
Convertible preferred stock.............. 9,327
------- ------
Diluted EPS................................ $ 1,347 26,100 $ 0.05
======= ====== ======
NINE MONTHS ENDED SEPTEMBER 28, 1997
Basic and diluted EPS...................... $(5,013) 12,123 (0.41)
======= ====== ======
NINE MONTHS ENDED OCTOBER 25, 1998
Basic and diluted EPS...................... $(3,532) 14,152 $ (.25)
======= ====== ======
</TABLE>
As of October 25, 1998, there were 7,461,208 options to acquire shares of
common stock with a weighted-average exercise price of $4.46, 9,327,087 shares
of convertible preferred stock, $11,000,000 convertible notes with an
conversion price equal to 90% of the initial public offering price or $7.00
per share (See note 3) that could potentially dilute basic earnings per share
in the future but which were not included in diluted earnings per share for
the nine months ended October 25, 1998 as the effect was anti-dilutive in the
period. In addition, the Company has undertaken to issue warrants to acquire
300,000 shares of Common Stock at a per share exercise price equal to the
initial public offering price.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short
maturity of those instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities and
F-9
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
(2) BALANCE SHEET COMPONENTS
Certain balance sheet components are as follows:
Inventory
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 31, OCTOBER 25,
1997 1998 1998
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Work in-process....................... -- -- 15,679
Finished goods........................ 25 521 1,514
--- --- ------
Total inventory..................... 25 521 17,193
=== === ======
</TABLE>
At October 25, 1998, the Company had noncancelable inventory purchase
commitments totaling $48 million.
Property and Equipment
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JANUARY 31, OCTOBER 25,
1996 1997 1998 1998
------- ------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchased engineering software.. $ -- $ 3,158 $3,181 $3,482
Test equipment.................. 187 1,467 1,478 3,221
Computer equipment.............. 2,209 3,264 3,402 7,191
Leasehold improvements.......... 69 74 74 403
Office furniture and equipment.. 159 259 272 668
Assets held for lease........... -- 157 166 --
------- ------- ------ ------
2,624 8,379 8,573 14,965
Accumulated depreciation and
amortization................... (1,480) (2,843) (3,061) (5,747)
------- ------- ------ ------
Property and equipment, net... $ 1,144 $ 5,536 $5,512 $9,218
======= ======= ====== ======
</TABLE>
Assets recorded under capital leases included in property and equipment were
$2,314,000, $4,765,000, $5,215,000 and $6,744,000 as of December 31, 1996 and
1997, January 31, 1998 and October 25, 1998, respectively. Accumulated
amortization thereon was $1,233,000, $2,137,000 $2,265,000 and $3,868,000 as
of December 31, 1996 and 1997, January 31, 1998 and October 25, 1998,
respectively.
Accrued Liabilities
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JANUARY 31, OCTOBER 25,
1996 1997 1998 1998
------ ------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Advances on development agreement... $2,500 $2,500 $2,292 $ 417
Other............................... 372 745 974 2,546
------ ------ ------ ------
$2,872 $3,245 $3,266 $2,963
====== ====== ====== ======
</TABLE>
F-10
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
(3) STOCKHOLDERS' EQUITY
Mandatorily Convertible Notes
Convertible subordinated non-interest bearing notes were issued to three
major customers in July and August 1998 for a total of $11.0 million. The
notes are subordinated to certain senior indebtedness. In the event that the
Company issues and sells shares of its common stock in a firm commitment
underwritten initial public offering pursuant to an effective registration
statement yielding gross proceeds to the Company of at least $10.0 million
prior to December 31, 1998, then upon the closing of such initial public
offering the outstanding principal balance of the note automatically converts
to common stock of the Company at a conversion price equal to 90% of the price
at which the common stock is sold to the public. In the event that a
qualifying initial public offering is not completed by December 31, 1998,
then, on January 15, 1999, the outstanding principal balance of these notes
automatically converts into common stock of the Company at a conversion price
equal to $7.00 per share of common stock. In the event of a merger,
consolidation, acquisition or similar corporate event prior to January 15,
1999 whereby greater than 50% of the voting securities of the Company becomes
acquired by a third party, then the outstanding principal automatically
converts into common stock of the Company at a conversion price equal to 90%
of the price at which the common stock (on an as-converted basis) is acquired
by such third party.
Convertible Preferred Stock
In 1993, the Company sold 4,303,000 shares of Series A preferred stock at
$0.50 per share, net of $22,000 of issuance costs. In 1994, the Company sold
2,390,831 shares of Series B preferred stock at $1.80 per share, net of
$57,000 of issuance costs. In 1995, the Company sold 416,667 shares of Series
B preferred stock at $1.80 per share. In 1995, the Company sold 750,000 shares
of Series C preferred stock at $6.67 per share, net of $14,000 of issuance
costs. On August 19 and September 12, 1997, the Company sold an aggregate of
1,438,812 shares of Series D preferred stock at $5.26 per share, net of
$30,000 of issuance costs.
The rights, preferences, and privileges of the holders of Series A, B, C and
D convertible preferred stock are as follows:
. Dividends are noncumulative and payable only upon declaration by the
Board of Directors at a rate of $.04, $.144, $.533 and $.42 per share
for Series A, B, C and D preferred stock, respectively.
. Holders of Series A, B, C and D preferred stock have a liquidation
preference of $.50, $1.80, $6.67, and $5.26 per share, respectively,
plus any declared but unpaid dividends over holders of common stock.
. Each holder of preferred stock has voting rights equal to common stock
on an "as-if-converted" basis.
. Each share of preferred stock may be converted into common stock at the
option of the holder on a one-for-one basis, subject to adjustment to
protect against dilution. Automatic conversion will occur upon the
earlier of a vote of holders of at least two-thirds of the shares of
preferred stock then outstanding or upon the closing of an initial
public offering of common stock in which the aggregate proceeds exceed
$15,000,000 and the offering price equals or exceeds $10.00 per share.
Warrants
During the period 1993 through 1997, the Company granted warrants to
purchase 80,000; 66,877; 10,000 and 29,706 shares of Series A, B, C and D
preferred stock, respectively, in connection with lease financing and
services. These warrants are exercisable at $.50, $1.80, $6.67 and $5.26 for
shares of Series A, B, C and D
F-11
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
preferred stock, respectively, and expire from 2003 to 2007. At October 25,
1998, warrants to purchase 80,000, 39,100, 10,000 and 29,706 shares of Series
A, B, C and D preferred stock, respectively, were outstanding.
In October 1998, in connection with a manufacturing agreement, the Company
undertook to grant warrants to purchase 300,000 shares of common stock at an
exercise price per share equal to the initial public offering price.
The fair value of all warrant issuances calculated using the Black-Scholes
option pricing model was not material, using the following assumptions:
dividend yield - none; expected life - contractual term; risk free interest
rates - 6.0% to 6.5%; volatility - 60%.
1998 Equity Incentive Plan
The Equity Incentive Plan (the "Plan"), as amended and restated on February
17, 1998, provides for the issuance of up to 15,000,000 shares of the
Company's common stock to directors, employees and consultants. The Plan
provides for the issuance of stock bonuses, restricted stock purchase rights,
incentive stock options or nonstatutory stock options.
Pursuant to the Plan, the exercise price for incentive stock options is at
least 100% of the fair market value on the date of grant or for employees
owning in excess of 10% of the voting power of all classes of stock, 110% of
the fair market value on the date of grant. For nonstatutory stock options,
the exercise price is no less than 85% of the fair market value on the date of
grant.
Options generally expire in 10 years. Vesting periods are determined by the
Board of Directors; however, options generally vest ratably over four years
beginning one year after the date of grant. Options may be exercised prior to
full vesting. Any unvested shares so purchased are subject to a repurchase
right in favor of the Company with the repurchase price to be equal to the
original purchase price of the stock. The right to repurchase at the original
price shall lapse at a minimum rate of 20% per year over five years from the
date the option was granted. As of October 25, 1998, there were 1,123,734 such
shares subject to repurchase.
The Company accounts for the plan using the intrinsic value method. As such,
compensation expense is recorded if on the date of grant the current fair
value per share of the underlying stock exceeds the exercise price per share.
With respect to certain options granted during 1997, the one month ended
January 31, 1998, and the nine months ended October 25, 1998, the Company has
recorded deferred compensation of $4,277,000, $361,000, and $0, respectively,
for the difference at the grant date between the exercise price per share and
the fair value per share, based upon independent valuations and management's
estimate of the fair value of the Company's stock on the various grant dates
of the common stock underlying the options. This amount is being amortized
over the vesting period of the individual options, generally four years.
Non-Employee Directors' Stock Option Plan
In February 1998, the Board adopted the 1998 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company who are not employees of or consultants to the Company or an affiliate
of the Company (a "Non-Employee Director"). The Compensation Committee
administers the Directors' Plan. The aggregate number of shares of Common
Stock that may be issued pursuant to options granted under the Directors' Plan
is 300,000 shares.
F-12
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net loss would have
increased and net income would have decreased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
ONE NINE
MONTH MONTHS
ENDED ENDED
JANUARY 31, OCTOBER 25,
1995 1996 1997 1998 1998
------- ------- ------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net loss as reported........ $(6,377) $(3,077) $(3,589) $1,347 $(3,532)
Additional stock-based
compensation under SFAS
No. 123.................... (12) (32) (105) (301) (3,011)
------- ------- ------- ------ -------
Pro forma net loss under
SFAS No. 123............... $(6,389) $(3,109) $(3,694) $1,046 $(6,543)
======= ======= ======= ====== =======
Pro forma basic net loss per
share as reported.......... $ (0.56) $ (0.27) $ (0.28) $ 0.10 $ (0.25)
======= ======= ======= ====== =======
Pro forma basic net loss per
share under SFAS No. 123... $ (0.56) $ (0.27) $ (0.29) $ 0.07 $ (0.46)
======= ======= ======= ====== =======
Pro forma diluted net loss
per share as reported...... $ (0.56) $ (0.27) $ (0.28) $ 0.05 $ (0.25)
======= ======= ======= ====== =======
Pro forma diluted net loss
per share under SFAS
No. 123.................... $ (0.56) $ (0.27) $ (0.29) $ 0.04 $ (0.46)
======= ======= ======= ====== =======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividend yield; risk free interest rate of 5.0% to 6.5%; and expected life for
the option of five years.
The weighted-average fair value of options granted during the years ended
1995, 1996, 1997, the one month ended January 31, 1998 and the nine months
ended October 25, 1998 was approximately $.05, $.08, $1.43, $1.74 and $1.41,
respectively.
F-13
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
The following summarizes the transactions under the equity incentive and
non-employee director plans:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
AVAILABLE SHARES UNDER PRICE PER
FOR GRANT OPTION SHARE
---------- ------------ ---------
<S> <C> <C> <C>
Balances, December 31, 1995............. 260,700 1,695,875 $0.16
Authorized............................ 4,000,000 -- --
Granted............................... (1,755,935) 1,755,935 0.31
Exercised............................. -- (409,781) 0.20
Cancelled............................. 1,001,841 (866,009) 0.17
---------- ----------
Balances, December 31, 1996............. 3,506,606 2,176,020 0.27
Authorized............................ 2,000,000 -- --
Granted............................... (4,950,857) 5,000,857 1.43
Exercised............................. -- (2,603,836) 0.32
Cancelled............................. 868,208 (837,583) 0.29
---------- ----------
Balances, December 31, 1997............. 1,423,957 3,735,458 1.78
Authorized............................ -- -- --
Granted............................... (605,000) 605,000 5.01
Exercised............................. -- (1,125) 3.15
Cancelled............................. -- -- --
---------- ----------
Balances, January 31, 1998.............. 818,957 4,339,333 2.23
Authorized............................ 5,100,000 -- --
Granted............................... (4,767,500) 4,787,500 7.12
Exercised............................. -- (25,000) 1.08
Cancelled............................. 1,640,625 (1,640,625) 6.36
---------- ----------
Balances, October 25, 1998.............. 2,792,082 7,461,208 4.46
========== ==========
</TABLE>
In July 1998, the Board of Directors adopted a resolution allowing employees
to exchange some or all of their existing unvested options to purchase common
stock of the Company for options having an exercise price of $6.30 per share.
The repriced options retain the same vesting schedule as the originally issued
options, but the repriced options will not become exercisable until July 1999.
Options to purchase approximately 1,253,500 shares of common stock were
repriced under this program. Stock options held by executive officers and
directors were not eligible for such repricing.
During 1997, the Company granted Common Stock options within the Plan to
consultants for services rendered. The fair value of all option grants to non-
employees calculated using the Black-Scholes option pricing model was
$120,000, using the following assumptions: dividend yield--none; expected life
contractual term; risk free interest rates--6.0% to 6.5%; volatility--60%.
In 1997, options to purchase 50,000 shares of Common Stock were granted to
an outside investor during the Series D preferred stock offering. In 1998,
options to purchase 20,000 shares of common stock were granted to an outside
investor.
F-14
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
The following table summarizes information about stock options outstanding
as of October 25, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------
WEIGHTED-
AVERAGE
REMAINING NUMBER
EXERCISE NUMBER CONTRACTUAL OF SHARES
PRICES OF SHARES LIFE EXERCISABLE
-------- --------- ----------- -----------
<S> <C> <C> <C>
$0.05.................................... 3,000 5.26 3,000
0.18.................................... 45,000 6.34 39,375
0.36.................................... 899,208 8.24 342,276
1.30.................................... 740,500 8.88 170,251
2.64.................................... 1,155,500 9.09 25,001
3.15.................................... 425,000 9.16 12,500
4.15.................................... 155,000 9.19 --
5.50.................................... 200,000 9.24 --
6.30.................................... 2,489,250 9.72 --
6.65.................................... 950,000 9.27 --
7.70.................................... 240,000 9.31 --
8.85.................................... 65,000 9.35 --
9.00.................................... 93,750 9.43 --
--------- -------
$0.05 - $9.00............................ 7,461,208 9.20 592,403
========= =======
</TABLE>
Employee Stock Purchase Plan
In February 1998, the Board approved the 1998 Employee Stock Purchase Plan
(the "Purchase Plan"), covering an aggregate of 500,000 shares of Common
Stock. The Purchase Plan is intended to qualify as an "employee stock purchase
plan" within the meaning of Section 423 of the Code. Under the Purchase Plan,
the Board may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan.
The offering period for any offering will be no longer than 27 months.
Employees are eligible to participate if they are employed by the Company or
an affiliate of the Company designated by the Board. Employees who participate
in an offering generally can have up to 10% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by
the Board, to the purchase of shares of Common Stock. The Board may increase
this percentage in its discretion, up to 15%. The price of Common Stock
purchased under the Purchase Plan will be equal to 85% of the lower of the
fair market value of the Common Stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company.
F-15
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
(4) FINANCIAL ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES
Short-term Borrowings
In September 1998, the Company entered into a loan and security agreement
with a bank which includes a $5.0 million revolving credit facility with a
borrowing base equal to 75% of eligible accounts. The line of credit has a
non-refundable facility fee equal to $10,000 due on the closing date.
Borrowings under the line of credit carry interest at prime rate plus 1% and
are due in March 1999. As of October 25, 1998, the Company had borrowed $5.0
million against the line of credit. The weighted average interest rate for the
period the loan was outstanding was 9%. Outstanding balances are
collateralized primarily with equipment, intellectual property, accounts
receivable, and inventory.
Lease Obligations
In July 1998, the Company entered into a noncancelable operating lease for
its facilities that extends through 2002. Future minimum lease payments under
the Company's noncancelable capital and operating leases as of October 25,
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JANUARY OPERATING CAPITAL
------------------- --------- -------
<S> <C> <C>
1999.................................................. 334 569
2000.................................................. 1,614 2,133
2001.................................................. 1,845 1,566
2002.................................................. 1,899 247
2003.................................................. 1,788 --
-----
Total payments...................................... 4,515
Less amount representing interest, at rates ranging from
8% to 10%.............................................. 640
-----
Present value of minimum debt payments.................. 3,875
Less current portion.................................... 1,843
-----
Long term portion................................... 2,032
=====
</TABLE>
Rent expense for 1995, 1996, 1997, one month ended January 31, 1998 and the
nine months ended October 25, 1998 was approximately $325,000 $408,000,
$425,000, $52,000 and $1,052,000, respectively.
Litigation
On April 9, 1998, the Company was notified that SGI had filed a patent
infringement lawsuit against the Company in the United States District Court
for the District of Delaware. The suit alleges that the sale and use of the
Company's RIVA family of 3D graphics processors infringes a United States
patent held by SGI. The suit seeks unspecified damages (including treble
damages), an order permanently enjoining further alleged infringement and
attorneys' fees. On May 11, 1998, the Company was notified that S3 had filed a
patent infringement lawsuit against the Company in the United States District
Court for the Northern District of California. The suit alleges that the sale
and use of the Company's RIVA family of 3D graphics processors infringes three
United States patents held by S3. The suit seeks unspecified damages
(including treble damages), an order permanently enjoining further alleged
infringement and attorneys' fees. On September 21, 1998, the Company was
notified that 3Dfx had filed a patent infringement lawsuit against the Company
in the United States District Court for the Northern District of California.
The suit alleges that the sale and use of the Company's RIVA TNT graphics
processor infringes a United States patent held by 3Dfx. The suit seeks
unspecified damages (including treble damages), an order permanently enjoining
further alleged infringement and attorneys' fees. The Company has filed
answers to each suit and has filed counterclaims asserting that the patents in
each suit are
F-16
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
neither infringed nor valid. Based on its investigation to date, the Company
believes that it has meritorious defenses to the claims brought and intends to
defend itself vigorously with respect to all three lawsuits.
The litigation with SGI, S3 and 3Dfx has resulted, and the Company expects
that it will continue to result, in significant expense to the Company and
divert the efforts of the Company's technical and management personnel,
whether or not such litigation results in a favorable determination for the
Company. In the event of an adverse result in either suit, the Company could
be required to do one or more of the following: pay substantial damages
(including treble damages); permanently cease the manufacture, use and sale of
any infringing products; expend significant resources to develop non-
infringing technology; or obtain a license from SGI, S3 or 3Dfx for any
infringing technology. Any of these suits could result in limitations on the
Company's ability to market its products, delays and costs associated with
redesigning its products or payments of license fees or other payments to SGI,
S3 or 3Dfx, any of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
(5) INCOME TAXES
The Company recorded no provision or benefit for income taxes in 1995, 1996,
1997, the one month ended January 26, 1997, and the nine months ended
September 28, 1997. The provision (benefit) for the one month ended January
31, 1998 and the nine months ended October 25, 1998, consisted entirely of
current federal tax expense (benefit).
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, ONE MONTH ENDED NINE MONTHS ENDED
------------------ ----------------------- -------------------------
JANUARY 26, JANUARY 31, SEPTEMBER 28, OCTOBER 25,
1995 1996 1997 1997 1998 1997 1998
---- ---- ---- ----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Tax computed at federal
statutory rate......... (34)% (34)% (34)% (34)% (34)% (34)% (34)%
Loss carryforward for
which no tax benefit is
recognized............. 34 34 34 34 34 34 34
Alternate Minimum Tax... -- -- -- -- 9 -- (8)
--- --- --- --- --- --- ---
Total.................. -- % -- % -- % -- % 9 % -- % (8)%
=== === === === === === ===
</TABLE>
The tax effect of temporary differences that gives rise to significant
portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JANUARY 31, OCTOBER 25,
1996 1997 1998 1998
------ ------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net operating loss carryforwards....... 3,374 3,743 3,380 4,225
Plant and equipment--depreciation
differences........................... 127 173 177 211
Advances on development contract....... 996 996 996 160
Research credit carryforwards.......... 617 1,058 1,095 1,426
Stock options.......................... -- 72 72 72
Alternate Minimum Tax.................. -- -- 134 --
Other reserves and accruals............ 107 229 228 2,166
------ ------ ------ ------
Total gross deferred tax assets...... 5,221 6,271 6,082 8,260
Less valuation allowance............... (5,221) (6,271) (6,082) (8,260)
------ ------ ------ ------
Net deferred tax assets.............. -- -- -- --
====== ====== ====== ======
</TABLE>
F-17
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
The net increase in the valuation allowance was approximately $1,800,000 and
$1,050,000 for the years ended December 31, 1996 and 1997, respectively, a
decrease of $189,000 for the period ended January 31, 1998 and an increase of
$2,178,000 for the period ended October 25, 1998. The Company believes that
considerable uncertainty exists with respect to future realization of these
deferred tax assets; therefore, it has established a valuation allowance
against all net deferred tax assets.
As of December 31, 1997 the Company had net operating loss carryforwards for
federal income tax return purposes of approximately $10,000,000, which can be
used to reduce future taxable income. These carryforwards expire in 2008
through 2012. As of December 31, 1997, the Company had California operating
loss carryforwards of approximately $5,000,000 available to offset future
income subject to California franchise tax. The difference between the federal
loss carryforwards and California loss carryforwards results primarily from a
50% limitation on California loss carryforwards, and certain research and
development costs that were deferred for California tax purposes. The
California net operating loss carryforwards expire in various amounts from
1998 though 2002. The Company also has federal and California tax credit
carryforwards of approximately $600,000 and $500,000, respectively, as of
December 31, 1997. The federal tax credits expire through 2012 and the
California tax credits may be carried over indefinitely.
Under the Tax Reform Act of 1988, the amounts of any benefit from net
operating losses and credits that can be carried forward may be limited in the
event of an ownership change as defined in the Internal Revenue Code, Section
382.
(6) DEVELOPMENT AGREEMENTS
The Company has a strategic collaboration agreement with ST
Microelectronics, Inc. ("ST") for the manufacture, marketing, and sale of
certain of the Company's products. In 1996, ST paid the Company $2,500,000 for
advanced royalty payments and agreed to partially support the research and
development and marketing efforts for certain of the Company's products. In
connection with this agreement the Company recorded royalty income of $79,000,
$202,000, $1,791,000, $1,911,000, and $5,945,000, in 1995, 1996, 1997, the one
month ended January 31, 1998, and the nine months ended October 25, 1998,
respectively; a reduction to research and development cost of $1,580,000 and
$1,936,000 in 1996 and 1997, respectively, and a reduction to sales, general
and administrative expense of $420,000 and $314,000 in 1996 and 1997,
respectively. In January of 1998, ST agreed to forgive the $2,500,000 in
advanced royalty payments in exchange for the Company's obligation to provide
ST continued development and support on certain products developed through the
end of 1998. Accordingly, $2,500,000 is included in accrued liabilities at
December 31, 1996 and 1997 and $417,000 is included in accrued liabilities at
October 25, 1998.
In May 1995, the Company entered into a five year strategic alliance
agreement (the "Agreement") with a third party to develop a product, the NV2,
using the Company's technology with the purpose of incorporating the NV2 into
such third party's products. The third party made nonrefundable payments to
the Company to develop the NV2. The Company recorded a reduction to research
and development of $2,000,000 in 1995 and $3,000,000 in 1996. As part of this
agreement, the third party also purchased in July 1995, 750,000 shares of
Series C convertible preferred stock for $5,000,000. The third party revised
its product development plans, and the Company terminated the development of
this particular technology in 1996.
The costs incurred under the development agreements approximated the amounts
recorded as reduction to expenses.
(7) RISK AND UNCERTAINTIES
Product Concentration. The Company designs, develops and markets 3D graphics
processors for the mainstream PC market. Substantially all of the Company's
revenue from product sales in 1997 and 1998 was
F-18
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
derived from sales of 3D graphics processor. Since the Company has no other
product line, the Company's business, financial condition and results of
operations would be materially adversely affected if for any reason its
current or future 3D graphics processors do not achieve widespread acceptance
in the mainstream PC market.
Customer Concentration. The Company has only a limited number of customers
and its sales are highly concentrated. The Company primarily sells its
products to add-in board manufacturers, which incorporate graphics products in
the boards they sell to PC OEMs. Sales to add-in board manufacturers are
primarily dependent on achieving design wins with leading PC OEMs, and the
Company believes that the large majority of its revenue in the nine months
ended October 25, 1998 was attributable to products that ultimately were
incorporated into PCs sold by Compaq, Dell, Gateway, Micron and Packard Bell
NEC. As a result, the Company's business, financial condition and results of
operations could be materially adversely affected by the decision of a single
PC OEM or add-in board manufacturer to cease using the Company's products or
by a decline in the number of PCs or boards sold by a single PC OEM or add-in
board manufacturers or by a small number of customers.
The following table summarizes geographic information on net sales:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, ONE MONTH ENDED NINE MONTHS ENDED
------------------ JANUARY 31, OCTOBER 25,
1995 1996 1997 1998 1998
----- ----- ------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
U.S. ...................... 1,178 3,863 29,071 13,331 72,354
Europe..................... -- -- -- -- 1,986
Asia Pacific............... 4 49 -- -- 18,360
----- ----- ------ ------ ------
Total net sales.......... 1,182 3,912 29,071 13,331 92,700
===== ===== ====== ====== ======
</TABLE>
Revenues to significant customers, those representing approximately 10% or
more of total revenue for the respective periods, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, ONE MONTH ENDED NINE MONTHS ENDED
---------------- JANUARY 31, OCTOBER 25,
1995 1996 1997 1998 1998
---- ---- ---- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Sales
Customer A................... -- -- 63% 59% 40%
Customer B................... 86% 82% 31% 39% 28%
Customer C................... -- -- -- -- 12%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, JANUARY 31, OCTOBER 25,
1997 1998 1998
------------ ----------- -----------
<S> <C> <C> <C>
Accounts Receivable
Customer A............................... 52% 57% 27%
Customer B............................... 48% 43% 33%
Customer C............................... -- -- 19%
Customer D............................... -- -- 12%
</TABLE>
No customers accounted for more than 10% of accounts receivable as of
December 31, 1995 and 1996.
Markets. In the nine months ended October 25, 1998, the Company derived all
of its revenue from the sale or license of products for use in PCs. The PC
market is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and significant price
competition, resulting in short product life cycles and regular reductions in
average selling prices over the life of a specific product. In addition,
F-19
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) [/R]
(UNAUDITED AS TO JANUARY 26, 1997 AND SEPTEMBER 28, 1997 DATA)
the Company's success will depend in part upon the emerging mainstream PC 3D
graphics market. This market has only recently begun to emerge and is
dependent on future development of a substantial customer and computer
manufacturer demand for 3D graphics functionality. If the market for
mainstream PC 3D graphics fails to develop or develops more slowly than
expected, the Company's business, financial condition and results of
operations could be materially adversely affected.
Intellectual Property. The Company relies primarily on a combination of
patent, mask work protection, trademarks, copyrights, trade secret laws,
employee and third-party nondisclosure agreements and licensing arrangements
to protect its intellectual property. Vigorous protection and pursuit of
intellectual property rights or positions characterize the semiconductor
industry, which in turn has resulted in significant and often protracted and
expensive litigation. The 3D graphics market in particular has been
characterized recently by the aggressive pursuit of intellectual property
positions. Infringement claims by third parties or claims for indemnification
by customers or end users of the Company's products resulting from
infringement claims could be asserted in the future and such assertions, of
proven to be true, could materially adversely affect the Company's business,
financial condition and results of operations. Any limitations on the
Company's ability to market its products, or delays and costs associated with
redesigning its products or payments of license fees to third parties, or any
failure by the Company to develop or license a substitute technology on
commercially reasonable terms, could have a material adverse effect on the
Company's business, financial condition and results of operations.
F-20
<PAGE>
INSIDE BACK COVER
[Description of illustrations: Depiction of a bee on a computer screen in the
following phases of graphic rendering--wire frame, Gouraud shading, texture
mapping and bump mapping with lighting and reflections.]
<PAGE>
[LOGO OF NVIDIA]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the shares of Common Stock being registered. All the amounts shown are
estimates except for the SEC registration fee, the NASD filing fee and the
Nasdaq National Market application fee.
<TABLE>
<S> <C>
SEC Registration fee.......................................... $ 11,800
NASD filing fee............................................... 4,500
Nasdaq National Market listing fee............................ 95,000
Blue sky qualification fees and expenses...................... 5,000
Printing and engraving expenses............................... 150,000
Legal fees and expenses....................................... 450,000
Accounting fees and expenses.................................. 175,000
Transfer agent and registrar fees............................. 10,000
Miscellaneous................................................. 298,700
----------
Total..................................................... $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify
its directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) the Company may, in its discretion,
indemnify other officers, employees and agents as set forth in the Delaware
General Corporation Law, (iii) to the fullest extent not prohibited by the
Delaware General Corporation Law, the Company is required to advance all
expenses incurred by its directors and executive officers in connection with a
legal proceeding (subject to certain exceptions), (iv) the rights conferred in
the Bylaws are not exclusive, (v) the Company is authorized to enter into
indemnification agreements with its directors, officers, employees and agents
and (vi) the Company may not retroactively amend the Bylaws provisions
relating to indemnity.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts that such person becomes
legally obligated to pay (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any
such person may be made a party by reason of the fact that such person is or
was a director or officer of the Company or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Company. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since November 1, 1995, the Registrant has sold and issued the following
unregistered securities:
(1) In October 1996, the Company issued, in connection with equipment
leases, a warrant to purchase 200 shares of Series B Preferred Stock at an
exercise price of $1.80 per share and a warrant to purchase 4,600 shares of
Series C Preferred Stock at an exercise price of $6.67.
II-1
<PAGE>
(2) In August and September 1997, the Company sold an aggregate of
1,438,812 shares of Series D Preferred Stock to certain investors for an
aggregate purchase price of $7,568,151.
(3) In August 1997, the Company issued, in connection with an equipment
lease, a warrant to purchase 7,843 shares of Series D Preferred Stock at an
exercise price of $5.26 per share.
(4) In October 1997, the Company issued, in connection with an equipment
leases, warrants to purchase an aggregate of 21,863 shares of Series D
Preferred Stock at an exercise price of $5.26 per share.
(5) In October 1997, the Company issued an option to purchase 50,000
shares of Common Stock at an exercise price of $2.64 per share.
(6) On July 22, 1998 and August 14, 1998, the Company sold Convertible
Subordinated Notes to three investors for an aggregate purchase price of
$11,000,000.
(7) From November 1, 1995 to November 10, 1998, the Company granted stock
options to employees, directors and consultants covering an aggregate of
12,288,360 shares of the Company's Common Stock, at exercise prices varying
from $.18 to $9.00. Of such shares, 3,021,810 shares have been issued and
sold pursuant to the exercise of such options. Options to purchase
3,272,342 shares of Common Stock have been canceled or have lapsed without
being exercised or otherwise been canceled. Stock awards for an aggregate
of 17,932 shares were issued at purchase prices varying from $.18 to $.36.
The Company claimed exemptions under the Securities Act from registration
under the Securities Act for the sale and issuance of securities in the
transaction described in paragraphs (1) through (6) by virtue of Section 4(2)
or Regulation D promulgated thereunder as transactions not involving public
offering. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof. Appropriate legends are affixed to the stock certificates issued in
such transactions. All recipients either received adequate information about
the Registrant or had access, through employment or other relationships, to
such information. In addition, the purchasers of the Notes described in
paragraph (6) above were "accredited investors" (as that term is defined in
Rule 501(a)(3) promulgated under the Securities Act). Each purchaser of such
Notes is a large corporation with pre-existing business relationships with the
Company.
The sales and issuances in the transactions described in paragraph (7) above
were deemed to be exempt from registration under the Securities Act by virtue
of Rule 701 promulgated thereunder, in that they were issued pursuant to a
written compensatory benefit plan, as provided by Rule 701.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
3.3+ Form of Amended and Restated Certificate of Incorporation to be
filed upon completion of this offering.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Stock Certificate.
4.3 Second Amended and Restated Investors' Rights Agreement, dated
August 19, 1997 between the Company and the parties indicated
thereto and First Amendment to Second Amended and Restated
Investors' Rights Agreement, dated July 22, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
5.1* Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement between Registrant and each of
its directors and officers.
10.2+ 1998 Equity Incentive Plan.
10.3+ Form of Incentive Stock Option Agreement under the 1998
Equity Incentive Plan.
10.4+ Form of Nonstatutory Stock Option Agreement under the 1998
Equity Incentive Plan.
10.5+ 1998 Employee Stock Purchase Plan.
10.6+ Form of Employee Stock Purchase Plan Offering.
10.7+ 1998 Non-Employee Directors' Stock Option Plan.
10.8+ Form of Nonstatutory Stock Option Agreement under the 1998
Non-Employee Directors' Stock Option Plan (Initial Grant).
10.9+ Form of Nonstatutory Stock Option Agreement under the 1998
Non-Employee Directors' Stock Option Plan (Annual Grant).
10.10+** Strategic Collaboration Agreement dated November 10, 1993
between the Company and ST Microelectronics, Inc., as
amended on June 3, 1996 and January 27, 1998.
10.11+ Sublease Agreement, dated February 16, 1995, between Amdahl
Corporation and the Company, as amended on March 1, 1995 and
September 1, 1995.
10.12+ Form of Nonstatutory Stock Option Agreement under the 1998
Non-Employee Directors' Stock Option Plan (Committee Grant).
10.13+ Sublease dated April 2, 1998 between Apple Computer, Inc. and
the Company.
10.14 Loan and Security Agreement, dated September 3, 1998, between
Registrant and Imperial Bank, as amended by letter agreement
dated November 12, 1998.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (reference is made to Exhibit
5.1).
24.1+ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed
** Confidential treatment has been requested for portions of this document.
The information omitted pursuant to such request has been filed separately
with the Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
Schedule II. Accounts Receivable Allowances.
</TABLE>
Schedules not listed above are omitted because they are not required, they
are not applicable or the information is already included in the financial
statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 14, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Act, the information omitted from the form
of prospectus as filed as part of the registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to
be part of the registration statement as of the time it was declared
effective, (2) for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof, and (3) to remove from registration
by means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SUNNYVALE, STATE OF
CALIFORNIA, ON THE 20TH DAY OF NOVEMBER 1998.
NVIDIA Corporation
/s/ Jen-Hsun Huang
By: _________________________________
Jen-Hsun Huang
President, Chief Executive Officer
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jen-Hsun Huang President, Chief Executive November 20, 1998
____________________________________ Officer and Director
Jen-Hsun Huang (Principal Executive and
Financial Officer)
/s/ Meera Rao Controller November 20, 1998
____________________________________
Meera Rao
Tench Coxe* Director November 20, 1998
____________________________________
Tench Coxe
Harvey C. Jones, Jr.* Director November 20, 1998
____________________________________
Harvey C. Jones, Jr.
William J. Miller* Director November 20, 1998
____________________________________
William J. Miller
A. Brooke Seawell* Director November 20, 1998
____________________________________
A. Brooke Seawell
Mark A. Stevens* Director November 20, 1998
____________________________________
Mark A. Stevens
/s/ Jen-Hsun Huang
*By: _______________________________
Jen-Hsun Huang
As Attorney-In-Fact
</TABLE>
II-5
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) OF PERIOD
----------- --------- ---------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Nine months ended
October 25, 1998
Allowance for sales
return and
doubtful accounts.... 349 5,822 -- (2,665) 3,506
=== ===== === ====== =====
One month ended January
31, 1998
Allowance for sales
return and
doubtful accounts.... 100 249 -- -- 349
=== ===== === ====== =====
Year ended December 31,
1997
Allowance for sales
return and
doubtful accounts.... -- 100 -- -- 100
=== ===== === ====== =====
</TABLE>
- --------
(1) Represents amounts written off against the allowance
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of the Company.
3.2+ Bylaws of the Company.
3.3+ Form of Amended and Restated Certificate of Incorporation to be
filed upon completion of this offering.
4.1+ Reference is made to Exhibits 3.1 and 3.2.
4.2+ Specimen Stock Certificate.
4.3 Second Amended and Restated Investors' Rights Agreement, dated
August 19, 1997 between the Company and the parties indicated
thereto and First Amendment to Second Amended and Restated
Investors' Rights Agreement, dated July 22, 1998.
5.1* Opinion of Cooley Godward LLP.
10.1+ Form of Indemnity Agreement between Registrant and each of its
directors and officers.
10.2+ 1998 Equity Incentive Plan.
10.3+ Form of Incentive Stock Option Agreement under the 1998 Equity
Incentive Plan.
10.4+ Form of Nonstatutory Stock Option Agreement under the 1998
Equity Incentive Plan.
10.5+ 1998 Employee Stock Purchase Plan.
10.6+ Form of Employee Stock Purchase Plan Offering.
10.7+ 1998 Non-Employee Directors' Stock Option Plan.
10.8+ Form of Nonstatutory Stock Option Agreement under the 1998 Non-
Employee Directors' Stock Option Plan (Initial Grant).
10.9+ Form of Nonstatutory Stock Option Agreement under the 1998 Non-
Employee Directors' Stock Option Plan (Annual Grant).
10.10+** Strategic Collaboration Agreement dated November 10, 1993
between the Company and ST Microelectronics, Inc., as amended
on June 3, 1996 and January 27, 1998.
10.11+ Sublease Agreement, dated February 16, 1995, between Amdahl
Corporation and the Company, as amended on March 1, 1995 and
September 1, 1995.
10.12+ Form of Nonstatutory Stock Option Agreement under the 1998 Non-
Employee Directors' Stock Option Plan (Committee Grant).
10.13+ Sublease dated April 2, 1998 between Apple Computer, Inc. and
the Company.
10.14 Loan and Security Agreement, dated September 3, 1998, between
Registrant and Imperial Bank, as amended by letter agreement
dated November 12, 1998.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2* Consent of Cooley Godward LLP (reference is made to Exhibit
5.1).
24.1+ Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed
** Confidential treatment has been requested for portions of this document.
The information omitted pursuant to such request has been filed separately
with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 4.3
NVIDIA CORPORATION
SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the
"Agreement") is made and entered into as of August 19, 1997, by and among NVIDIA
CORPORATION, a California corporation (the "Company"), and the persons
identified on Exhibit A attached hereto (the "Shareholders").
In consideration of the mutual promises and covenants set forth
herein, the Shareholders who are parties to that certain First Restated
Investors' Rights Agreement dated as of December 19, 1994 (the "Original Date")
and amended by Amendment Number One as of January 23, 1995 and by Amendment
Number Two as of July 5, 1995 (the "Prior Agreement") hereby agree that all
provisions of, rights granted and covenants made in the Prior Agreement are
extinguished by the execution hereof and that such Prior Agreement shall be
superseded and replaced in its entirety by this Agreement, and the parties
hereto further agree as follows:
1. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS.
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the respective meanings set forth below:
(a) "COMMISSION" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
(b) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(c) "FORM S-3" shall mean such form under the Securities Act as in
effect on the date hereof or any registration form under the Securities Act
subsequently adopted by the Commission which permits inclusion or incorporation
of substantial information by reference to other documents filed by the Company
with the Commission.
(d) "HOLDER" shall mean any Shareholder who holds Registrable
Securities and any holder of Registrable Securities to whom the registration
rights conferred by this Agreement have been transferred in compliance with
Section 1.10 hereof.
(e) "INITIATING HOLDERS" shall mean any Holder or Holders who in the
aggregate hold more than fifty percent (50%) of the outstanding Registrable
Securities.
1.
<PAGE>
(f) "OTHER SHAREHOLDERS" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their securities
in certain registrations hereunder.
(g) "REGISTRABLE SECURITIES" shall mean (i) shares of Common Stock
issued or issuable pursuant to the conversion of the Shares and (ii) any Common
Stock of the Company issued or issuable as a dividend or other distribution with
respect to or in exchange for or in replacement of the shares referenced in (i)
above, provided, however, that Registrable Securities shall not include any
shares of Common Stock which have previously been registered or which have been
sold to the public.
(h) The terms "REGISTER," "REGISTERED" and "REGISTRATION" shall refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(i) "REGISTRATION EXPENSES" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, and expenses of any regular or special audits incident to or
required by any such registration, but shall not include Selling Expenses and
fees and disbursements of counsel for the Holders (but excluding the
compensation of regular employees of the Company, which shall be paid in any
event by the Company).
(j) "RESTRICTED SECURITIES" shall mean any security of the Company
required to bear a legend the same or similar to the legend set forth in Section
3.8 of the Series D Preferred Stock Purchase Agreement of even date herewith.
(k) "RULE 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(l) "RULE 145" shall mean Rule 145 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(m) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(n) "SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for any Holder (other than the fees and
disbursements of counsel included in Registration Expenses).
(o) "SHARES" shall mean the Company's Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock.
2.
<PAGE>
1.2 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. If the Company shall receive from the
Initiating Holders at any time not earlier than the earlier of (i) three (3)
years after the Original Date or (ii) one (1) year after the effective date of
the first registration statement filed by the Company covering an underwritten
offering of any of its securities to the general public, a written request that
the Company effect any registration with respect to the lesser of at least
twenty-five percent (25%) of the Registrable Securities or all or a part of the
Registrable Securities having an aggregate offering price, net of underwriting
discounts and expenses related to the issuance, exceeding Five Million Dollars
($5,000,000) (as adjusted for any stock dividends, combinations or splits with
respect to such shares), then the Company will:
(i) within ten (10) days after its receipt thereof, give written
notice of the proposed registration to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration (including, without limitation, filing post-effective amendments,
appropriate qualifications under applicable blue sky or other state securities
laws, and appropriate compliance with the Securities Act) as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request received by the Company within twenty (20)
days after such written notice from the Company is effective.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.2:
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification, or compliance, unless the Company is already
subject to service in such jurisdiction and except as may be required by the
Securities Act;
(B) After the Company has initiated one such registration
pursuant to this Section 1.2(a) counting for these purposes only (i)
registrations which have been declared or ordered effective and pursuant to
which securities have been sold, and (ii) registrations which have been
withdrawn by the Holders as to which the Holders have not elected to bear the
Registration Expenses pursuant to Section 1.4 hereof;
(C) During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of, and ending
on a date sixty (60) days after the effective date of, a Company-initiated
registration; provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective;
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(D) If the Initiating Holders propose to dispose of shares of
Registrable Securities which may be immediately registered on Form S-3 pursuant
to a request made under Section 1.5 hereof;
(E) If the Initiating Holders do not request that such offering
be firmly underwritten by underwriters of nationally recognized standing
selected by the Initiating Holders (subject to the consent of the Company, which
consent shall not be unreasonably withheld);
(F) If the Company and the Initiating Holders are unable to
obtain the commitment of the underwriter described in clause (E) above to firmly
underwrite the offer; or
(G) With respect to any Registrable Securities which, in the
opinion of counsel to the Company, may be sold under Rule 144.
(b) DELAYS IN REGISTRATION. Subject to the foregoing clauses (A)
through (G), the Company shall file a registration statement covering the
Registrable Securities so requested to be registered as soon as practicable
after receipt of the request or requests of the Initiating Holders; provided,
however, that if (i) in the good faith judgment of the Board of Directors of the
Company, such registration would be seriously detrimental to the Company and the
Board of Directors of the Company concludes, as a result, that it is necessary
to defer the filing of such registration statement at such time, and (ii) the
Company shall furnish to such Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company for such
registration statement to be filed in the near future and that it is, therefore,
necessary to defer the filing of such registration statement, then the Company
shall have the right to defer such filing for the period during which such
disclosure would be seriously detrimental, provided (except as provided in
clause (C) above) that the Company may not defer the filing for a period of more
than six (6) months after receipt of the request of the Initiating Holders, and,
provided further, that the Company shall not defer its obligation in this manner
more than once in any twelve (12) month period.
The registration statement filed pursuant to the request of the Initiating
Holders may, subject to the provisions of Section 1.2(b) and 1.12 hereof,
include other securities of the Company with respect to which registration
rights have been granted, and may include securities of the Company being sold
for the account of the Company.
(c) UNDERWRITING. The right of any Holder to registration pursuant to
Section 1.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder with respect to such participation and
inclusion) to the extent provided herein. A Holder may elect to include in such
underwriting all or a part of the Registrable Securities he or it holds.
(d) PROCEDURES. If the Company shall request inclusion in any
registration pursuant to Section 1.2 of securities being sold for its own
account, or if other persons shall request inclusion in any
4.
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registration pursuant to Section 1.2, the Initiating Holders shall, on behalf of
all Holders, offer to include such securities in the underwriting and may
condition such offer on their acceptance of the further applicable provisions of
this Section 1 (including Section 1.11). The Company shall (together with all
Holders and other persons proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for such underwriting
by a majority in interest of the Initiating Holders, which underwriters are
reasonably acceptable to the Company. Notwithstanding any other provision of
this Section 1.2, if the representative of the underwriters advises the
Initiating Holders in writing that marketing factors require a limitation on the
number of shares to be underwritten, the number of shares to be included in the
underwriting or registration shall be allocated as set forth in Section 1.12
hereof. If a person who has requested inclusion in such registration as provided
above does not agree to the terms of any such underwriting, such person shall be
excluded therefrom by written notice from the Company, the underwriter or the
Initiating Holders. The securities so excluded shall also be withdrawn from the
registration and if the number of shares to be included in such registration was
previously reduced as a result of marketing factors pursuant to this Section
1.2(d), then the Company shall offer to all holders who have retained rights to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number of
shares so withdrawn, with such shares to be allocated among such Holders
requesting additional inclusion in accordance with Section 1.12.
1.3 COMPANY REGISTRATION.
(a) NOTICE. If the Company shall determine to register any of its
securities either for its own account or the account of a security holder or
holders exercising their respective demand registration rights (other than
pursuant to Section 1.2 or 1.5 hereof), other than (i) a registration on SEC
Form S-1, S-2, S-3 or SB-2 or similar forms that may be promulgated in the
future relating solely to employee benefit plans, (ii) a registration on SEC
Form S-4 or similar form that may be promulgated in the future relating solely
to a Rule 145 transaction, or (iii) a registration on any registration form that
does not permit secondary sales, the Company will: (I) promptly give to each
Holder written notice thereof, and (II) use its best efforts to include in such
registration, except as set forth in Section 1.3(b) below, and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made by any Holder within ten (10) days after the
written notice from the Company described in clause (I) above is given. Such
written request may specify all or a part of a Holder's Registrable Securities.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.3(a). In such event, the right of any Holder to
registration pursuant to this Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders of securities of the Company
with registration rights to participate therein distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by the
Company.
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Notwithstanding any other provision of this Section 1.3, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) limit the number
of Registrable Securities to be included in the registration and underwriting.
The Company shall so advise all holders of securities requesting registration,
and the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set forth in Section
1.12 hereof. If any person does not agree to the terms of any such
underwriting, he or it shall be excluded therefrom by written notice from the
Company or the underwriter. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
If shares are so withdrawn from the registration or if the number of shares
of Registrable Securities to be included in such registration was previously
reduced as a result of marketing factors, the Company shall then offer to all
persons who have retained the right to include securities in the registration
the right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among the persons requesting additional inclusion in accordance with
Section 1.12 hereof.
1.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 1.3, and all Registration Expenses incurred in connection with two
registrations, qualifications, or compliances pursuant to Section 1.5 hereof and
the one registration pursuant to Section 1.2 hereof, and reasonable fees of one
counsel for the selling Shareholders in the case of registration pursuant to
Section 1.2 hereof, shall be borne by the Company; provided, however, that if
the Holders bear the Registration Expenses for any registration proceeding begun
pursuant to Section 1.2 and subsequently withdrawn by the Holders registering
shares therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 1.2 hereof. All Selling Expenses relating to
securities so registered shall be borne by the holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf.
1.5 REGISTRATION ON FORM S-3.
(a) After its initial public offering, the Company shall use its best
efforts to qualify for registration on Form S-3 or any comparable or successor
form or forms. After the Company has qualified for the use of Form S-3, in
addition to the rights contained in the foregoing provisions of this Section 1,
the Holders of Registrable Securities shall have the right to request
registrations on Form S-3 (such requests shall be in writing and shall state the
number of shares of Registrable Securities to be disposed of and the intended
methods of disposition of such shares by such Holder or Holders), provided,
however, that the Company shall not be obligated to effect any such registration
if (i) the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) on Form S-3 at an aggregate price
to the public of less than One Million Dollars ($1,000,000), or (ii) in the
event that the Company shall furnish the certification described in Section
1.2(b) or (iii) in a given twelve (12) month period, after the Company has
6.
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effected one (1) such registration in any such period or (iv) it is to be
effected more than five (5) years after the Company's initial public offering.
(b) If a request complying with the requirements of Section 1.5(a)
hereof is delivered to the Company, the provisions of Sections 1.2(a)(i) and
(ii) and Section 1.2(b) hereof shall apply to such registration. If the
registration is for an underwritten offering, the provisions of Sections 1.2(c)
and 1.2(d) hereof shall apply to such registration.
1.6 REGISTRATION PROCEDURES. In the case of each registration effected by
the Company pursuant to Section 1 hereof, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred
twenty (120) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that (i) such 120-day period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 145, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment that (I) includes any prospectus required by Section
10(a)(3) of the Securities Act or (II) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (I) and (II) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Exchange Act in the registration statement;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions
7.
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(e) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
(f) Furnish, at the request of a majority of the Holders participating
in the registration, on the date that such Registrable Securities are delivered
to the underwriters for sale, if such securities are being sold through
underwriters, or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such securities becomes
effective, (i) an opinion, dated as of such date, of the counsel representing
the Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities, and (ii) a letter dated as of
such date, customarily given by independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
(g) Cause all such Registrable Securities registered pursuant
thereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration; and
(i) In connection with any underwritten public offering pursuant to a
registration statement filed pursuant to Section 1.2 hereof, the Company will
enter into an underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions. Each Holder participating in such underwriting shall also enter
into and perform its obligations under such an agreement.
1.7 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers,
directors and partners and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification, or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls within the meaning of
Section 15 of the Securities Act any underwriter, against all expenses, claims,
losses, damages, and liabilities (or actions, proceedings, or settlements in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement,
notification, or the like) incident to any such registration,
8.
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qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners and each
person controlling such Holder, each such underwriter, and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or settling any such
claim, loss, damage, liability, or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such Holder
or underwriter and stated to be specifically for use therein. It is agreed that
the indemnity agreement contained in this Section 1.7(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
has not been unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification, or
compliance is being effected, indemnify the Company, each of its directors,
officers, partners and each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the Securities Act, each
other such Holder and Other Shareholder, and each of their officers, directors,
and partners, and each person controlling such Holder or Other Shareholder,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular, or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and such Holders, Other Shareholders, directors, officers, partners,
persons, underwriters, or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability, or action, in each case to the extent, but only
to the extent that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder and
stated to be specifically for use therein; provided, however, that the
obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld).
(c) Each party entitled to indemnification under this Section 1.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's
9.
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expense, and provided further that the failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 1.7, to the extent such failure is not
prejudicial. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with defense of
such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.7 is held by
a court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
1.8 INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder, if any, as the Company may reasonably
request in writing and as shall be reasonably required in connection with any
registration, qualification, or compliance referred to in this Section 1.
1.9 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information regarding the Company available
as those terms are understood and defined in Rule 144 under the Securities Act,
at all times from and after ninety (90) days following the effective date of the
first registration under the Securities Act filed by the Company for an offering
of its securities to the general public;
10.
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(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
(c) So long as a Shareholder owns any Restricted Securities to furnish
to such Shareholder forthwith upon request a written statement by the Company as
to its compliance with the reporting requirements of said Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public) and of
the Securities Act and the Exchange Act (at any time after it has become subject
to such reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of the Company as a
Shareholder may reasonably request in availing itself of any rule or regulation
of the Commission allowing a Shareholder to sell any such securities without
registration.
1.10 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register securities granted to a Holder by the Company under this
Section 1 may be transferred or assigned by a Holder only to a transferee or
assignee of not less than one hundred thousand (100,000) shares of Registrable
Securities (as presently constituted and subject to subsequent adjustments for
stock splits, stock dividends, reverse stock splits, and the like), provided
that the Company is given written notice at the time of or within a reasonable
time after said transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which such
registration rights are being transferred or assigned, and, provided further,
that the transferee or assignee of such rights assumes the obligations of such
Holder under this Section 1.
1.11 "MARKET STAND-OFF" AGREEMENT. If requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, a Shareholder
shall not sell, make any short sale of, loan, grant any option for the purchase
of, or otherwise transfer or dispose of any Common Stock (or other securities)
of the Company held by such Shareholder (other than those included in the
registration) during the one hundred eighty (180) day period following the
effective date of a registration statement of the Company filed under the
Securities Act, provided that:
(a) such agreement shall only apply to the first such registration
statement of the Company, including securities to be sold on its behalf to the
public in an underwritten offering; and
(b) all Holders of one percent (1%) or more of the Company's
outstanding equity securities and officers and directors of the Company enter
into similar agreements.
The obligations described in this Section 1.11 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company may impose stop-
transfer instructions with respect to the shares (or securities) subject to the
foregoing restriction until the end of said 180-day period.
11.
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1.12 ALLOCATION OF REGISTRATION OPPORTUNITIES. In any circumstance in
which all of the Registrable Securities and other shares of Common Stock of the
Company (including shares of Common Stock issued or issuable upon conversion of
shares of any currently unissued series of Preferred Stock of the Company) with
registration rights (the "Other Shares") requested to be included in a
registration on behalf of the Holders or other selling shareholders cannot be so
included as a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, the number of
shares of Registrable Securities and Other Shares that may be so included shall
be allocated among the Holders and other selling shareholders requesting
inclusion of shares pro rata on the basis of the number of shares of Registrable
Securities and Other Shares that would be held by such Holders and other selling
shareholders, assuming conversion; provided, however, that in no event shall the
amount of Registrable Securities and Other Shares included in such registration
be reduced below twenty percent (20%) of the total amount of securities included
in such registration, unless such registration is the initial public offering of
the Company's securities, in which case the Registrable Securities and Other
Shares may be excluded if the underwriters make the determination described in
subsection 1.3(b) above and no other shareholders' securities are included. If
any Holder or other selling shareholder does not request inclusion of the
maximum number of shares of Registrable Securities and Other Shares allocated to
it pursuant to the above-described procedure, the remaining portion of its
allocation shall be reallocated among those requesting Holders and other selling
shareholders whose allocations did not satisfy their requests pro rata on the
basis of the number of shares of Registrable Securities and Other Shares which
would be held by such Holders and other selling shareholders, assuming
conversion, and this procedure shall be repeated until all of the shares of
Registrable Securities and Other Shares which may be included in the
registration on behalf of the Holders and other selling shareholders have been
so allocated. The Company shall not limit the number of Registrable Securities
to be included in a registration pursuant to this Agreement in order to include
shares held by shareholders with no registration rights or to include stock
issued to founders of the Company or any other shares of stock issued to
employees, officers, directors, or consultants pursuant to the Company's Equity
Incentive Plan, or with respect to registration under Section 1.5 hereof, in
order to include in such registration securities registered for the Company's
own account.
1.13 DELAY OF REGISTRATION. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.14 TERMINATION OF REGISTRATION RIGHTS. The right of any Holder to
request registration or inclusion in any registration pursuant to Section 1.2,
1.3 or 1.5 shall terminate on the closing of the first Company-initiated
registered public offering of Common Stock of the Company, provided that all
shares of Registrable Securities held or entitled to be held upon conversion by
such Holder may immediately be sold under Rule 144 during any ninety (90) day
period, or on such date after the closing of the first Company-initiated
registered public offering of Common Stock of the Company as all shares of
Registrable Securities held or entitled to be held upon conversion by such
Holder may immediately be sold under Rule 144 during any ninety (90) day period;
provided, however, that the provisions of this Section 1.14 shall not apply to
any Holder who owns more than one percent (1%) of the Company's outstanding
stock until the earlier of (i) such time as such Holder owns less than one
percent (1%) of the outstanding stock
12.
<PAGE>
of the Company, or (ii) the expiration of two (2) years after the closing of the
first registered public offering of Common Stock of the Company.
2. COVENANTS OF THE COMPANY.
2.1 FINANCIAL INFORMATION. The Company will furnish the following reports
(i) to Sega Enterprises, Ltd., (ii) to Itochu Corporation and Itochu Technology,
Inc., collectively, (iii) to Worldview Technology Partners I, L.P. and its
affiliates (collectively, "Worldview"), so long as Worldview owns at least four
hundred thousand (400,000) shares of Preferred Stock or Common Stock issued upon
conversion of the Preferred Stock, or any combination thereof, (iv) to any other
Holder, so long as such Holder (and its affiliates) owns at least one million
(1,000,000) shares of Preferred Stock or Common Stock issued upon conversion of
the Preferred Stock, or any combination thereof (as presently constituted and
subject to subsequent adjustment for stock splits, stock dividends, reverse
stock splits, recapitalizations and the like):
(a) As soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, and consolidated statements of income and cash flows of the Company
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles consistently applied and setting forth
in each case in comparative form the figures for the previous fiscal year, all
in reasonable detail and certified by independent public accountants of
recognized national standing selected by the Company.
(b) As soon as practicable after the end of the first, second, and
third quarterly accounting periods in each fiscal year of the Company, and in
any event within forty-five (45) days thereafter, a consolidated balance sheet
of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of income and cash flows of the
Company and its subsidiaries for such period and for the current fiscal year to
date, prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in comparative form the figures for the
corresponding periods of the previous fiscal year, subject to changes resulting
from normal year-end audit adjustments, all in reasonable detail and certified
by the principal financial or accounting officer of the Company, except that
such financial statements need not contain the notes required by generally
accepted accounting principles.
(c) From the date the Company becomes subject to the reporting
requirements of the Exchange Act (which shall include any successor federal
statute), and in lieu of the financial information required pursuant to Sections
2.1(a) and (b), copies of its annual reports on Form 10-K and it quarterly
reports on Form 10-Q, respectively.
2.2 INSPECTION. The Company shall permit (i) Sega Enterprises, Ltd. and
(ii) any other Holder, so long as such Holder (and its affiliates) owns at least
one million (1,000,000) shares of Preferred Stock or Common Stock issued upon
conversion of the Preferred Stock, or any combination thereof (as presently
constituted and subject to subsequent adjustment for stock splits, stock
dividends, reverse stock splits,
13.
<PAGE>
recapitalizations and the like), at such Holder's expense, to visit and inspect
the Company's properties, to examine its books of account and records and to
discuss the Company's affairs, finances and accounts with its officers, all at
such reasonable times as may be requested by such Holder; provided, however,
that the Company shall not be obligated pursuant to this Section 2.2 to provide
access to any information that it reasonably considers to be a trade secret or
similar confidential information.
2.3 TERMINATION OF COVENANTS. The covenants set forth in this Section 2
shall terminate and be of no further force and effect after the time of
effectiveness of the Company's first firm commitment underwritten public
offering registered under the Securities Act, and such covenants shall terminate
and be of no further force and effect as to any particular Holder is or becomes,
or is or becomes controlled by, a competitor of the Company. Each Shareholder
agrees that any and all information obtained pursuant to Sections 2.1 and 2.2
shall be deemed proprietary and confidential to the Company and will not be
disclosed to any person or entity without the prior written consent of the
Company, which consent shall not be unreasonably withheld, except as required by
law or judicial process; provided, however, that, notwithstanding the foregoing,
a Shareholder may disclose such information without the prior consent of the
Company to its partners, associates or employees on an as-needed basis in order
to evaluate this investment and as may be reasonably necessary to continue to
evaluate the Company.
3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties and no party shall be liable or bound to any other party in
any manner by any warranties, representations, or covenants except as
specifically set forth herein.
3.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties.
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
3.3 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within the State
of California.
3.4 NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and, except as otherwise noted herein, shall be
deemed effectively given upon personal delivery, delivery by nationally
recognized courier or upon deposit with the United States Post Office, (by first
class mail, postage prepaid) addressed: (a) if to the Company, at 1226 Tiros
Way, Sunnyvale, CA 94086 (or at such other address as the Company shall have
furnished to the Holders in writing), to the attention of the President and (b)
if to a Holder, at the latest address of such person shown on the Company's
records.
3.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.
<PAGE>
3.6 ATTORNEYS' FEES. In the event that any dispute among the parties to
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing rights of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
3.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance, either retroactively or prospectively, and either for
a specified period of time or indefinitely), with the written consent of the
Company and the holders of not less than fifty percent (50%) of the Registrable
Securities of the Company (treated as if converted at the conversion rate then
in effect and including, for such purposes, on a proportional basis, any shares
of Common Stock into which any Registrable Securities have been converted that
has not been sold to the public). Any amendment or waiver effected in
accordance with this Section shall be binding upon each Holder of Registrable
Securities then outstanding (including securities into which such securities
have been converted), each future holder of all such securities, and the
Company. Upon the effectuation of each such amendment or waiver, the Company
shall promptly give written notice thereof to the record holders of Registrable
Securities who have not previously consented thereto in writing.
3.8 FUTURE SHAREHOLDERS. Any person who acquires securities of the
Company which are, or are convertible into or exercisable for, Registrable
Securities may automatically become a party to this Agreement (without the
consent of the Holders) by execution and delivery to the Company of a
counterpart of this Agreement. Upon delivery of such counterpart, (a) the
signature pages and Exhibit hereto shall be amended to reflect the name of such
new party, and (b) such new party shall thereafter be deemed a "Holder" for
purposes of this Agreement.
3.9 SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
3.10 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power, or remedy accruing to any Holder upon any breach, default or
noncompliance of the Company under this Agreement shall impair any such right,
power, or remedy, nor shall it be construed to be a waiver of any such breach,
default or noncompliance, or any acquiescence therein, or of any similar breach,
default or noncompliance thereafter occurring. It is further agreed that any
waiver, permit, consent, or approval of any kind or character on the Holders'
part of any breach, default or noncompliance under this Agreement or any waiver
on the Holders' part of any provisions or conditions of this Agreement must be
in writing and shall be effective only to the extent specifically set forth in
such writing, and that all remedies, either under this Agreement, the Company's
Amended and Restated Articles of Incorporation, the Company's Bylaws, or
otherwise afforded to any Holder shall be cumulative and not alternative.
15.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second Amended
and Restated Investors' Rights Agreement effective as of the date first above
written.
THE COMPANY:
NVIDIA CORPORATION
By:
---------------------------------
Jen-Hsun Huang, President
[SHAREHOLDER SIGNATURES BEGIN ON THE FOLLOWING PAGE]
<PAGE>
THE SHAREHOLDERS:
JAPAN ASSOCIATED FINANCE CO., LTD.
By:
---------------------------------
Masaki Yoshida
President
JAFCO G-5 INVESTMENT ENTERPRISE PARTNERSHIP
By:
-----------------------------------
Japan Associated Finance Co., Ltd.,
Its Executive Partner
By:
-----------------------------------
Masaki Yoshida
President
U.S. INFORMATION TECHNOLOGY
INVESTMENT ENTERPRISE PARTNERSHIP
By:
-----------------------------------
Japan Associated Finance Co., Ltd.,
Its Executive Partner
By:
-----------------------------------
Masaki Yoshida
President
<PAGE>
SEQUOIA CAPITAL VI,
a California Limited Partnership
SEQUOIA TECHNOLOGY PARTNERS VI,
a California Limited Partnership
SEQUOIA XXIII,
a California Limited Partnership
SEQUOIA XXIV,
a California Limited Partnership
SEQUOIA TECHNOLOGY PARTNERS III
SEQUOIA GROWTH FUND
SQP 1997
SEQUOIA 1997
By:
-----------------------------------
General Partner, on behalf of each
of the above entities
JONES LIVING TRUST, DTD 7/27/90
By:
-----------------------------------
Title:
--------------------------------
- --------------------------------------
HARRIS BARTON
- --------------------------------------
THOMAS VARDELL
<PAGE>
SUTTER HILL VENTURES,
a California Limited Partnership
By:
--------------------------------------
Sutter Hill Management Company, L.P.
By:
--------------------------------------
General Partner
PAUL M. & MARSHA R. WYTHES,
TRUSTEES, THE WYTHES LIVING TRUST
By:
--------------------------------------
Title:
-----------------------------------
TOW PARTNERS,
a California Limited Partnership
By:
--------------------------------------
General Partner
- --------------------------------------
DAVID L. ANDERSON
ANVEST, L.P.
a California Limited Partnership
By:
--------------------------------------
General Partner
<PAGE>
- --------------------------------------
G. LEONARD BAKER
- --------------------------------------
DAVID R. GOLOB
- --------------------------------------
JAMES C. GAITHER
- --------------------------------------
RONALD L. PERKINS
- --------------------------------------
TENCH COXE
GENSTAR INVESTMENT CORPORATION
By:
--------------------------------------
Title:
-----------------------------------
<PAGE>
WELLS FARGO BANK, TRUSTEE
SHV M/P/T FBO TENCH COXE
By:
--------------------------------------
Title:
-----------------------------------
WELLS FARGO BANK, TRUSTEE
SHV M/P/T FBO DAVID L. ANDERSON
By:
--------------------------------------
Title:
-----------------------------------
WELLS FARGO BANK, TRUSTEE
SHV M/P/T FBO WILLIAM H. YOUNGER, JR.
By:
--------------------------------------
Title:
-----------------------------------
WELLS FARGO BANK, TRUSTEE
SHV M/P/T FBO SHERRYL W. HOSSACK
By:
--------------------------------------
Title:
-----------------------------------
<PAGE>
- --------------------------------------
HARVEY C. JONES, JR.
- --------------------------------------
WILLIAM J. MILLER
THE BOARD OF TRUSTEES OF THE
LELAND STANFORD JUNIOR UNIVERSITY
By:
--------------------------------------
Title:
-----------------------------------
GC&H INVESTMENTS,
a California general partnership
By:
--------------------------------------
John L. Cardoza, Executive Partner
COOLEY GODWARD LLP
By:
--------------------------------------
Lee Benton, Managing Partner
<PAGE>
- --------------------------------------
MARSHALL A. SMITH III
MARSHALL A. AND CLAUDIA L. SMITH
- --------------------------------------
Marshall A. Smith III
- --------------------------------------
Claudia L. Smith
- --------------------------------------
JOANNE C. KNIGHT
ITOCHU CORPORATION
By:
--------------------------------------
Title:
-----------------------------------
ITOCHU TECHNOLOGY, INC.
By:
--------------------------------------
Title:
-----------------------------------
SEGA ENTERPRISES, LTD.
By:
--------------------------------------
Title:
-----------------------------------
<PAGE>
WORLDVIEW TECHNOLOGY PARTNERS I, L.P.
By:
--------------------------------------
Title:
-----------------------------------
WORLDVIEW TECHNOLOGY INTERNATIONAL I, L.P.
By:
--------------------------------------
Title:
-----------------------------------
WORLDVIEW STRATEGIC PARTNERS I, L.P.
By:
--------------------------------------
Title:
-----------------------------------
<PAGE>
WILLIAM H. YOUNGER, JR., TRUSTEE OF
THE YOUNGER LIVING TRUST
By:
--------------------------------------
Title:
-----------------------------------
<PAGE>
- --------------------------------------
Y. ERIC CHO
- --------------------------------------
GERALD HSU
<PAGE>
EXHIBIT A
LIST OF SHAREHOLDERS
U.S. Information Technology Investment
Enterprise Partnership
Toshiba Building, 10th Floor, 1-1-1
Shibaura Minato-ku
Tokyo, Japan 105
Attention: Mr. James Wei
JAFCO G-5 Investment Enterprise Partnership
Toshiba Building, 10th Floor, 1-1-1
Shibaura Minato-ku
Tokyo, Japan 105
Attention: Mr. James Wei
Japan Associated Finance Co., Ltd.
Toshiba Building, 10th Floor, 1-1-1
Shibaura Minato-ku
Tokyo, Japan 105
Attention: Mr. James Wei
Sequoia Capital VI,
a California limited partnership
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attention: Barbara Russell
Sequoia Technology Partners VI,
a California limited partnership
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attention: Barbara Russell
Sequoia XXIII,
a California limited partnership
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attention: Barbara Russell
A-1
<PAGE>
Sequoia XXIV,
a California limited partnership
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attention: Barbara Russell
Sequoia Growth Fund
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attention: Barbara Russell
Sequoia Technology Partners III
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Barbara Russell
SQP 1997
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Barbara Russell
Sequoia 1997
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Barbara Russell
Jones Living Trust, DTD 7/27/90
c/o Sequoia Technology Partners
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Barbara Russell
A-2
<PAGE>
Harris Barton
c/o Sequoia Technology Partners
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Barbara Russell
Thomas Vardell
c/o Sequoia Technology Partners
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Attn: Barbara Russell
Sutter Hill Ventures,
a California limited partnership
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attention: Sherryl W. Hossack
Tow Partners,
a California limited partnership
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attention: Sherryl W. Hossack
Genstar Investment Corporation
Metro Tower, Suite 1170
Foster City, CA 94404
Attention: R. D. Paterson
Ronald L. Perkins
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Tench Coxe
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Wells Fargo Bank, Trustee
SHV M/P/T FBO Tench Coxe
Attention: Annick Prasad
P.O. Box 63050 MAC 0188-161
San Francisco, CA 94163
Wells Fargo Bank, Trustee
SHV M/P/T FBO David L. Anderson
Attention: Annick Prasad
P.O. Box 63050 MAC 0188-161
San Francisco, CA 94163
A-3
<PAGE>
Wells Fargo Bank, Trustee
SHV M/P/T FBO William H. Younger, Jr.
Attention: Annick Prasad
P.O. Box 63050 MAC 0188-161
San Francisco, CA 94163
The Board of Trustees of The
Leland Stanford Junior University
c/o Stanford Management Company
2770 Sand Hill Road
Menlo Park, CA 94025
Attention: Carol Gilmer
Harvey C. Jones, Jr.
Synopsys, Inc.
700 East Middlefield Road
Mountain View, CA 94043
William J. Miller
Avid Technology
Metropolitan Technology Park
One Park West
Tewksbury, MA 01876
GC&H Investments,
a California general partnership
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: John Cardoza
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Lee Benton
A-4
<PAGE>
Marshall A. Smith III
26535 Weston Drive
Los Altos Hills, CA 94022
Marshall A. and Claudia L. Smith
26535 Weston Drive
Los Altos Hills, CA 94022
Joanne C. Knight
793 View Street
Mountain View, CA 94041
ITOCHU Corporation
2-5-1 Kita Aoyama, Minato-ku
Tokyo, Japan 107-77
Attn: Mr. Toshihisa Adachi
Deputy Manager of
Information Technology Section #1
in Information Technology & Engineering Dept.
ITOCHU Technology, Inc.
3100 Patrick Henry Drive
Santa Clara, CA 95054
Attn: Mr. Shinzo Nakano
Sega Enterprises, Ltd.
2-12, Haneda, 1 Chome
Ohta-ku, Tokyo 144
Japan
Attn: Mr. Tsuneo Naito
Managing Director
David Anderson
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attn: Sherryl W. Hossack
Paul M. & Marsha R. Wythes, Trustees,
The Wythes Living Trust
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attn: Sherryl W. Hossack
A-5
<PAGE>
Anvest, L.P.
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attn: Sherryl W. Hossack
G. Leonard Baker
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attn: Sherryl W. Hossack
David R. Golob
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attn: Sherryl W. Hossack
James C. Gaither
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attn: Sherryl W. Hossack
Wells Fargo Bank, Trustee
SHV M/P/T FBO Sherryl W. Hossack
Attention: Annick Prasad
P.O. Box 63050 MAC 0188-161
San Francisco, CA 94163
Worldview Technology Partners I, L.P.
435 Tasso Street, Suite 120
Palo Alto, CA 94301
Attn: Mike Orsak
Worldview Technology International I, L.P.
435 Tasso Street, Suite 120
Palo Alto, CA 94301
Attn: Mike Orsak
Worldview Strategic Technology Partners I, L.P.
435 Tasso Street, Suite 120
Palo Alto, CA 94301
Attn: Mike Orsak
A-6
<PAGE>
William H. Younger, Jr., Trustee
of the Younger Living Trust
755 Page Mill Road Suite A-200
Palo Alto, CA 94304
Attn: Sherryl W. Hossack
Y. Eric Cho
20401 Kirkmont Drive
Saratoga, CA 95070
Gerald Hsu
c/o Avanti Corp.
46871 Bayside Parkway
Fremont, CA 9458
A-7
<PAGE>
NVIDIA CORPORATION
FIRST AMENDMENT
TO
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
July 22, 1998
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
(this "Amendment") is made and entered into as of the date first written above,
by and among NVIDIA CORPORATION, a California corporation (the "Company"), the
undersigned security holders of the Company (the "Existing Parties") who are
parties to that certain Second Amended and Restated Investors' Rights Agreement
dated August 19, 1997 (the "Rights Agreement") and the undersigned investors
(the "Investors") of the Company listed on Schedule 1 attached hereto.
----------
RECITALS
A. The Existing Parties possess certain registration rights under the
Rights Agreement.
B. In connection with the Convertible Subordinated Note Purchase Agreement
dated as of July 22, 1998 between the Company and the Investors, the Investors
will purchase convertible subordinated notes of the Company.
C. In order to effect the sale of the notes, the parties to this
Amendment, including the Existing Parties, desire to amend the Rights Agreement
to provide the Investors with certain rights pursuant to the terms of the Rights
Agreement.
AGREEMENT
THEREFORE, the parties to this Amendment agree as follows:
1. AMENDMENT TO RIGHTS AGREEMENT.
(a) For purposes of Section 1 of the Rights Agreement only, each
----
Investor shall be deemed a "Holder" as such term is defined in Section 1(d) of
the Rights Agreement, and each Investor shall have all the rights granted to
each Holder pursuant to Section 1 of the Rights Agreement.
(b) The Rights Agreement shall have the following definition of "Notes"
added as Section 1.1 (p):
""NOTES" shall mean the Company's Convertible Subordinated
Promissory Notes."
<PAGE>
(c) The definition of "Registrable Securities" in Section 1(g) of the
Rights Agreement is hereby amended and restated to read as follows (additions
are double-underlined):
""REGISTRABLE SECURITIES" shall mean (i) shares of Common Stock
issued or issuable pursuant to the conversion of the Shares or Notes,
========
and (ii) any Common Stock of the Company issued or issuable as a
dividend or other distribution with respect to or in exchange for or
in replacement of the shares referenced in (i) above, provided,
however, that Registrable Securities shall not include any shares of
Common Stock which have previously been registered or which have been
sold to the public.
2. EFFECT OF AMENDMENT.
(a) It is an express condition to this Amendment that the parties to
it include the Company and Existing Parties who hold more than fifty percent
(50%) of the Registrable Securities, as defined in the Rights Agreement. The
Company and the Existing Parties agree that the execution of this Amendment
constitutes a written amendment of the Rights Agreement effected in compliance
with Section 3.7 thereof. This Amendment shall be binding on each party to the
Rights Agreement, whether or not such party has signed it. Except as expressly
provided in this Amendment, the provisions, terms and conditions of the Rights
Agreement shall remain in full force and effect.
(b) The Rights Agreement shall be binding upon and inure to the
benefit of each Investor who signs this Amendment, as if each such Investor had
been a party to the Rights Agreement upon its original execution and delivery
among the parties thereto.
3. AMENDMENT. This Amendment and any term hereof may be amended, waived,
discharged or terminated by a written instrument signed (in one or more
counterparts) by the Company, a majority of Existing Parties, and by Investors
holding at least 66 2/3% in interest of the aggregate amount represented by the
Notes held by all such Investors. Any amendment or waiver effected in
accordance with this Section 3 shall be binding upon each Existing Party and
Investor whether or not such Existing Party or Investor consented in writing to
the amendment or waiver.
4. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
5. GOVERNING LAW. This Amendment shall be governed and construed in
accordance with the laws of the State of California.
<PAGE>
6. ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS. This Amendment constitutes
the full and entire understanding and agreement among the parties hereto
regarding the subject matter hereof. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7. SEVERABILITY. If one or more provisions of this Amendment are held to
be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be excluded from
this Amendment, and the balance of this Amendment shall be interpreted as if
such provision were so excluded, and shall be enforceable in accordance with its
terms.
8. DELAYS OR OMISSIONS. No delay or omission to exercise any right, power
or remedy accruing to any party to this Amendment, upon any breach or default by
another party, shall impair any such right, power or remedy of such non-
breaching party nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Amendment, or any waiver on the part
of any party of any provisions or conditions of this Amendment, must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Amendment, the Company's Certificate of
Incorporation or Bylaws, statute, or otherwise afforded to any party, shall be
cumulative and not alternative.
9. ATTORNEY'S FEES. If any action at law or in equity (including any
arbitration proceeding) is necessary to enforce or interpret the terms of this
Amendment, the prevailing party in such litigation shall be entitled to recover
from the losing party all fees, costs and expenses of enforcing the rights of
such prevailing party under or with respect to this Amendment, including,
without limitation, such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs, and
expenses of appeals.
[Remainder of Page Intentionally Left Blank]
<PAGE>
The foregoing FIRST AMENDMENT TO SECOND AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT is hereby executed as of the date first above
written.
"COMPANY"
NVIDIA CORPORATION
By: ________________________
Its: ________________________
<PAGE>
"EXISTING PARTIES"
SUTTER HILL VENTURES,
a California Limited Partnership
By: Sutter Hill Management Company, L.P.
By: ________________________
General Partner of the General Partner
SEQUOIA CAPITAL VI,
a California Limited Partnership
SEQUOIA TECHNOLOGY PARTNERS VI,
a California Limited Partnership
SEQUOIA XXIII,
a California Limited Partnership
SEQUOIA XXIV,
a California Limited Partnership
SEQUOIA TECHNOLOGY PARTNERS III
SEQUOIA GROWTH FUND
SQP 1997
SEQUOIA 1997
By: ________________________
General Partner, on behalf of the above-named entities
<PAGE>
WORLDVIEW TECHNOLOGY PARTNERS I, L.P.
By: Worldview Capital I, L.P., its General Partner
By: Worldview Equity I, L.L.C., its General Partner
By: ________________________
General Partner
WORLDVIEW TECHNOLOGY INTERNATIONAL I, L.P.
By: Worldview Capital I, L.P., its General Partner
By: Worldview Equity I, L.L.C., its General Partner
By: ________________________
General Partner
WORLDVIEW STRATEGIC PARTNERS I, L.P.
By: Worldview Capital I, L.P., its General Partner
By: Worldview Equity I, L.L.C., its General Partner
By: ________________________
General Partner
<PAGE>
"INVESTORS"
______________________________
By: ________________________
Its: ________________________
<PAGE>
SCHEDULE 1
LIST OF INVESTORS
INVESTOR NAME AND ADDRESS DATE OF PURCHASE
Diamond Multimedia Systems Inc. July 22, 1998
2880 Junction Avenue
San Jose, CA 95134
STB Systems, Inc. July 22, 1998
1651 North Lindville Drive
Richardson, Texas 75081
CTI Limited August 14, 1998
31 International Business Park
Creative Resource
Singapore 609921
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Exhibit 10.14
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement ("Agreement") is entered into as of
September 3, 1998 by and between IMPERIAL BANK ("Bank") and NVIDIA CORPORATION
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRICTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"ACCOUNTS" means all presently existing and hereafter arising
accounts, contract rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" or "ADVANCES" means a cash advance under the Revolving
Facility.
"AFFILIATE" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"BANK EXPENSES" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents (including fees and expenses of
appeal), whether or not suit is brought.
"BORROWER'S BOOKS" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
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"BORROWING BASE" means an amount equal to seventy-five percent (75%)
of Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.
"BUSINESS DAY" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"CLOSING DATE" means the date of this Agreement.
"CODE" means the California Uniform Commercial Code.
"COLLATERAL" means the property described on EXHIBIT A attached
hereto.
"COMMITTED REVOLVING LINE" means a credit extension of Five Million
Dollars ($5,000,000).
"CONTINGENT OBLIGATION" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
"CREDIT EXTENSION" means each Advance or any other extension of credit
by Bank for the benefit of Borrower hereunder.
"CURRENT ASSETS" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"CURRENT LIABILITIES" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Advances made
under this Agreement, including all Indebtedness that is payable upon demand or
within one year from the date of determination thereof unless such Indebtedness
is renewable or extendable at the option of Borrower or any Subsidiary to a date
more than one year from the date of determination, but excluding any
Subordinated Debt.
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"DAILY BALANCE" means the amount of the Obligations owed at the end of
a given day.
"ELIGIBLE ACCOUNTS" means those Accounts that arise in the ordinary
course of Borrower's business that comply with all of Borrower's representations
and warranties to Bank set forth in Section 5.4; provided, that standards of
eligibility may be fixed and revised from time to time by Bank in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts
shall not include the following:
(A) Accounts that the account debtor has failed to pay within ninety
(90) days of invoice date;
(B) Accounts with respect to an account debtor, fifty percent (50%) of
whose Accounts the account debtor has failed to pay within ninety (90) days
of invoice date;
(C) Accounts with respect to which the account debtor is an officer,
employee, or agent of Borrower;
(D) Accounts with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the account debtor may be conditional;
(E) Accounts with respect to which the account debtor is an Affiliate
of Borrower;
(F) Accounts with respect to which the account debtor does not have
its principal place of business in the United States, except for Eligible
Foreign Accounts;
(G) Accounts with respect to which the account debtor is the United
States or any department, agency, or instrumentality of the United States;
(H) Accounts with respect to which Borrower is liable to the account
debtor for goods sold or services rendered by the account debtor to Borrower,
but only to the extent of any amounts owing to the account debtor against
amounts owed to Borrower;
(I) Accounts with respect to an account debtor, including Subsidiaries
and Affiliates, whose total obligations to Borrower exceed twenty percent (20%)
of all Accounts, to the extent such obligations exceed the aforementioned
percentage, except that the concentration limit for Accounts owing from each of
STB Systems, Inc., Diamond Multimedia Systems, Inc., Intel, and CLI Limited
shall be forty percent (40%). Increases to the concentration limit will be
considered for approval by Bank on a case by case basis;
(J) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
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(K) Accounts the collection of which Bank reasonably determines to be
doubtful.
"ELIGIBLE FOREIGN ACCOUNTS" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States and that (i) are supported by one or more letters of credit in an amount
and of a tenor, and issued by a financial institution, acceptable to Bank, or
(ii) that Bank approves on a case by case basis.
"EQUIPMENT" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"EVENT OF DEFAULT" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles as in effect
from time to time.
"INDEBTEDNESS" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or against
any person or entity under any provision of the United States Bankruptcy Code,
as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"INTELLECTUAL PROPERTY COLLATERAL" means:
(A) Copyrights, Trademarks and Patents;
(B) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(C) Any and all design rights which may be available to Borrower now
or hereafter existing, created, acquired or held;
(D) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
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(E) All licenses or other rights to use any of the Copyrights, Patents
or Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights;
(F) All amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and
(G) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
"INVENTORY" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products intended for sale
or lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such inventory as is
temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and Borrower's Books relating to any of
the foregoing.
"INVESTMENT" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"LIEN" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"LOAN DOCUMENTS" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"NEGOTIABLE COLLATERAL" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper, and Borrower's Books relating
to any of the foregoing.
"OBLIGATIONS" means all loans, advances, debts, liabilities and
obligations for monetary amounts owing by Borrower to Bank, whether due or to
become due, matured or unmatured, liquidated or unliquidated, contingent or non-
contingent, and all covenants and duties regarding such amounts, of any kind or
nature, present or future, whether or not evidenced by
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any note, agreement or other instrument, arising under any of the Loan
Documents. This term includes, without limitation, all principal, interest
(including interest that accrues after the commencement against Borrower or any
Subsidiary of Borrowers under the Bankruptcy Code), fees, including, without
limitation, any and all closing fees, prepayment fees, commitment fees, advisory
fees, and attorneys' fees and any and all other fees, expenses, costs or other
amounts chargeable to Borrower under any of the Loan Documents.
"PERIODIC PAYMENTS" means all interest payments and other recurring
payments that Borrower may now or hereafter become obligated to pay to Bank.
"PERMITTED INDEBTEDNESS" means:
(A) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(B) Indebtedness existing on the Closing Date and disclosed in the
Schedule;
(C) Indebtedness secured by a lien described in clause (c) of the
defined term "Permitted Liens," provided such Indebtedness does not exceed the
lesser of the cost or fair market value of the equipment financed with such
Indebtedness;
(D) Subordinated Debt; and
(E) Indebtedness to trade creditors incurred in the ordinary course of
business;
(F) Prepaid royalties and deferred revenue in connection with prepaid
support services;
(G) Contingent obligations of Borrower consisting of guarantees (and
other credit support) of the obligations of vendors and suppliers of Borrower in
respect of transactions entered into the ordinary course of business;
(H) Indebtedness with respect to capital lease obligations (including
leases of real property) or other obligations for equipment purchases;
(I) Other Indebtedness of Borrower, not exceeding $100,000 in the
aggregate outstanding at any time; and
(J) Extensions, renewals, refundings, refinancings, modifications,
amendments and restatements of any of the items of permitted Indebtedness (a)
through (i) above, provided that the principal amount thereof is not increased
or the terms thereof are not modified to impose more burdensome terms upon
Borrower.
"PERMITTED INVESTMENT" means:
(A) Investments existing on the Closing Date disclosed in the
Schedule;
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(B) marketable direct obligation's issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the daft of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having rating of at least A-2 or P-2 from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of
deposit maturing no more than one (1) year from the date of investment therein
issued by Bank, (iv) Bank's money market accounts and (v) Investments made in
connection with transactions permitted under Section 7.3;
(C) Extensions of credit in the nature of accounts receivable or notes
receivable arising from the sale or lease of goods or services in the ordinary
course of business;
(D) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business;
(E) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of customers or suppliers and in
settlement of delinquent obligations of, and other disputes with, customers or
suppliers arising in the ordinary course of business;
(F) Investments up to $150,000 outstanding in aggregate consisting of
(i) compensation of employees, officers and directors of Borrower so long as the
Board of Directors of Borrower determines that such compensation is in the best
interests of Borrower, (ii) travel advances, employee relocation loans and other
employee loans and advances in the ordinary course of business, (iii) loans to
employees, officers or directors relating to the purchase of equity securities
of Borrower, (iv) other loans to officers and employees approved by the Board of
Directors; and
(G) other Investments aggregating not in excess of $200,000 at any
time.
"PERMITTED LIENS" means the following;
(A) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(B) Liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Bank's security
interests;
(C) Liens (i) upon or in any equipment acquired or held by Borrower or
any of its Subsidiaries to secure the purchase price or lease of such equipment
or indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, or (ii) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(D) Liens arising from judgments, decrees or attachments to the extent
and only so long as such judgment, decree or attachment has not caused or
resulted in an Event of Default under Section 8.4;
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(e) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation or exportation of goods in the ordinary course of business;
(f) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of setoff or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution;
(g) Liens, not otherwise permitted, which Liens do not in the
aggregate exceed $100,000 at any time; and
(h) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Lions of the type described in
clauses (a) through (g) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"PERSON" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"PRIME RATE" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"QUICK ASSETS" means, at any due as of which the amount thereof shall
be determined, the consolidated cash, cash-equivalents, and accounts receivable
of Borrower determined in accordance with GAAP.
"RESPONSIBLE OFFICER" means each of the Chief Executive Officer, the
Chief Operating Officer, the Chief Financial Officer and the Controller of
Borrower.
"REVOLVING MATURITY DATE" means March 31, 1999.
"REVOLVING FACILITY" means the facility under which Borrower may
request Bank to issue Advances, as specified in Section 2.1 hereof
"SCHEDULE" means the schedule of exceptions attached hereto, if any.
"SUBORDINATED DEBT" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank), including that certain
promissory note dated July 22, 1998, in favor of Diamond Multimedia Systems,
Inc., in the original principal amount of Five Million Dollars ($5,000,000),
that certain promissory note dated July 22, 1998, in favor of STB Systems, Inc.
in the original principal amount of Three Million Dollars ($3,000,000), and that
certain promissory note dated July 22, 1998, in favor of CLI Limited in the
original principal amount of Five Million Dollars ($5,000,000).
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"SUBSIDIARY" means any corporation or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock of which by the
terms thereof ordinary voting power to elect the Board of Directors, managers or
trustees of the entity shall, at the time as of which any determination is being
made, be owned by Borrower, either directly or through an Affiliate.
"TANGIBLE NET WORTH" means at any date as of which the amount thereof
shall be determined, the financial statement net worth of Borrower and its
Subsidiaries minus intangible assets, plus Subordinated Debt, on a consolidated
basis determined in accordance with GAAP.
"TOTAL LIABILITIES" means at any date as of which the amount thereof
shall be determined, all obligations that should, in accordance with GAAP be
classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but excluding Subordinated Debt and/or
any deferred revenues derived from non-refundable maintenance contracts.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to and upon the terms and conditions of this Agreement,
Borrower may request Advances in an aggregate outstanding amount not to exceed
the lesser of (i) $2,500,000 or (ii) the Borrowing Base. Notwithstanding the
foregoing, upon Borrower's achievement of a Borrowing Base the value of which is
equal to or exceeds Ten Million Dollars ($10,000,000), Borrower may request
Advances in an aggregate outstanding amount not to exceed the lesser of (A)
$5,000,000 or (B) the Borrowing Base. Subject to the terms and conditions of
this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time prior to the Revolving Maturity Date, at which time all
Advances under this Section 2.1 shall be immediately due and payable. Borrower
may prepay any Advances without penalty or premium.
(b) Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer or a designee of a
Responsible Officer, or without instructions if in Bank's discretion such
Advances are necessary to meet Obligations which have become due and remain
unpaid. Bank shall be entitled to rely on any telephonic notice given by a
person who Bank reasonably believes to be a Responsible Officer or a designee
thereof, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank will credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
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2.2 OVERADVANCES. If the amount of Advances owed by Borrower to Bank
pursuant to Sections 2.1 and 2.1.1 of this Agreement is greater than the lesser
of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall
immediately pay to Bank, in cash, the amount of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATES. Except as set forth in Section 2.3(b), any Advances
shall bear interest, on the average daily balance thereof, at a rate equal to
one percent (1.00%) above the Prime Rate.
(b) LATE FEE; DEFAULT RATE. Borrower shall pay Bank a late fee equal to
five percent (5%) of any payment that is not made within ten days after the date
such payment is due. All Obligations shall bear interest, from and after the
occurrence and during the continuance of an Event of Default, at a rate equal to
five (5) percentage points above the interest rate applicable immediately prior
to the occurrence of an Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable on the first
calendar day of each month during the term hereof. Bank shall, at its option,
charge such interest, all Bank Expenses, and all Periodic Payments against any
of Borrower's deposit accounts or against the Committed Revolving Line, in which
case those amounts shall thereafter accrue interest at the rate then applicable
hereunder. Any interest not paid when due shall be compounded by becoming a part
of the obligations, and such interest shall thereafter accrue interest at the
rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased effective as of the day the Prime Rate is changed, by an amount equal
to such change in the Prime Rate. All interest chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty (360) day year
for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment shall be immediately applied to conditionally
reduce Obligations, but shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon California time shall be deemed to have been received
by Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees, or
interest, as the case may be, shall accrue and be payable for the period of such
extension.
2.5 FEES. Borrower shall pay to Bank the following:
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(a) FACILITY FEE. On the Closing Date, a Facility Fee equal to Ten
Thousand Dollars ($10,000), which shall be nonrefundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's customary fees
and out-of-pocket expenses for Bank's audits of Borrower's Accounts not to
exceed $2,000 unless an Event of Default has occurred and is continuing and for
each appraisal of Collateral and financial analysis and examination of Borrower
performed from time to time by Bank or its agents; and
(c) BANK EXPENSES. On the Closing Date, all Bank Expenses incurred
through the Closing Date, including reasonable attorneys' fees and expenses and,
after the date hereof, all Bank Expenses, including reasonable attorneys' fees
and expenses, as and when they become due.
(d) TERM. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for a term
ending on the Revolving Maturity Due. Notwithstanding the foregoing, Bank shall
have the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS.
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The obligation of
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) financing statement (Form UCC-1);
(d) an intellectual property security agreement;
(e) insurance certificate;
(f) an audit of the Collateral, the results of which shall be
satisfactory to Bank; and
(g) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The obligation of Bank
to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
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(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and
(b) the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Credit Extension. The
making of each Credit Extension shall be deemed to be a representation and
warranty by Borrower on the date of such Credit Extension as to the accuracy of
the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank a
continuing security interest in all presontly existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees, or
agents) shall have the right at its own expense (unless an Event of Default has
occurred and is continuing), upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test and appraise the Collateral in order to verify
Borrower's financial condition or the amount, condition of, or any other matters
relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary is a
corporation duly existing under the laws of its state of incorporation and
qualified and licensed to do business in any state in which the conduct of its
business or its ownership of property requires that it be so qualified, except
where failure to so qualify would not have a Material Adverse Effect.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in
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default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations. The property giving rise to such Eligible Accounts has
been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material respects of
good and marketable quality, free from all material defects, except for
Inventory for which adequate reserves have been made.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in the
Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there are no actions
or proceedings pending by or against Borrower or any Subsidiary before any court
or administrative agency in which an adverse decision could have a Material
Adverse Effect or a material adverse effect on Borrower's interest or Bank's
security interest in the Collateral. Except as set forth in the Schedule,
Borrower does not have knowledge of any such pending or threatened actions or
proceedings.
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated
financial statements related to Borrower and any Subsidiary that are delivered
by Borrower to Bank fairly present in all material respects Borrower's
consolidated financial condition as of the date thereof and Borrower's
consolidated results of operations for the period then ended. There has not
been a material adverse change in the consolidated financial condition of
Borrower since the date of the most recent of such financial statements
submitted to Bank, other than as described in writing to Bank.
5.9 SOLVENCY, PAYMENT OF DEBTS. Borrower will be solvent and able to pay
its debts (including trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the minimum
funding requirements of ERISA with respect to any employee benefit plans subject
to ERISA. No event has occurred resulting from Borrower's failure to comply with
ERISA that is reasonably likely to result in Borrower's incurring any liability
that could have a Material Adverse Effect. Borrower is not an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940. Borrower is not engaged principally, or
as one of the important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulations
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G, T and U of the Board of Governors of the Federal Reserve System). Borrower
has complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. Except as disclosed in the Schedule, none of
Borrower's or any Subsidiary's properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous
owners or operators, in the disposal of, or to produce, store, handle, treat,
release, or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be filed
all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted, the
failure to obtain which could have a Material Adverse Effect.
5.15 FULL DISCLOSURE. No representation, warranty or other statement made
by Borrower in any certificate or written statement furnished to Bank contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained in such certificates or
statements not misleading, as of the date made or as of the due of each
Payment/Advance Date as required under Section 3.2(b) herein.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a Material Adverse Effect. Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain, to the extent consistent with
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prudent management of Borrower's business, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plus subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver to
Bank: (a) as soon as available, but in any event within twenty-five (25) days
after the end of each calendar month, a company prepared consolidated balance
sheet and income statement covering Borrower's consolidated operations during
such period, in a form and certified by a Responsible Officer; (b) as soon as
available, but in any event within ninety (90) days after the end of Borrower's
fiscal year, beginning with the fiscal year ending 12/31/98, audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied; (c) within five (5) days of filing, copies of all
financial statements and reports sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt and all reports on
Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (d)
promptly upon receipt of notice thereof, a report of any legal actions pending
or threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000)
or more; and (e) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.
When there are outstanding Obligations, within five (5) days after the last
day of each week, and at least one week prior to requesting an Advance, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of EXHIBIT C hereto, together with aged
listings of accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of EXHIBIT D hereto.
Bank shall have a right to an initial audit, and an audit in accordance
with Section 6.9 below, of Borrower's Accounts and to appraise Collateral at
Borrower's expense.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement. Borrower shall promptly
notify Bank of all returns and recoveries and of all disputes and claims, where
the return, recovery, dispute or claim involves more than One Hundred Thousand
Dollars ($100,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to make, due
and timely payment or deposit of all material federal, state, and local taxes,
assessments, or
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contributions required of it by law, and will execute and deliver to Bank, on
demand, appropriate certificates attesting to the payment or deposit thereof;
and Borrower will make, and will cause each Subsidiary to make, timely payment
or deposit of all material tax payments and withholding taxes required of it by
applicable laws, including, but not limited to, those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Bank with proof satisfactory to Bank indicating that
Borrower or a Subsidiary has made such payments or deposits; provided that
Borrower or a Subsidiary need not make any payment if the amount or validity of
such payment is contested in good faith by appropriate proceedings and is
reserved against (to the extent required by GAAP) by Borrower.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. After the
occurrence and during the continuance of an Event of Default all proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository, investment, and operating accounts with Bank.
6.8 QUICK RATIO. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities, excluding
deferred revenue derived from non-refundable maintenance contracts, of at least
0.75 to 1.00; provided that beginning on September 30, 1998, Borrower shall
maintain, as of the last day of each month, a ratio of Quick Assets to Current
Liabilities, excluding deferred revenue derived from non-refundable maintenance
contracts, of at least l.00 to 1.00, and beginning on December 31, 1998,
Borrower shall maintain, as of the last day of each month, a ratio of Quick
Assets to Current Liabilities, excluding deferred revenue derived from non-
refundable maintenance contracts, of at least 1.25 to 1.00.
6.9 PROFITABILITY. Borrower shall not suffer a loss for the combined
months of July and August of 1998 in excess of Three Million Dollars
($3,000,000). Subject to audit in accordance with section 6.3, as of the quarter
ended September 30, 1998, Borrower shall have profits of at least One Dollar
($1.00), and be profitable for each month thereafter.
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6.10 TOTAL LIABILITIES-TANGIBLE NET WORTH. Borrower shall maintain, as of
the last day of each month, a ratio of Total Liabilities to Tangible Net Worth
of not more than 2.50 to 1.00; provided that beginning on December 31, 1998,
Borrower shall maintain as of the last day of each month, a ratio of Total
Liabilities to Tangible Net Worth of not more than 2.00 to 1.00.
6.11 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of
each month, a Tangible Net Worth of not less than Ten Million Dollars
($10,000,000); provided that beginning September 30, 1998, Borrower shall
maintain a Tangible Net Worth of not less than Fifteen Million Dollars
($15,000,000).
6.12 Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be registered on an expedited
basis (to the extent not already registered) with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable, those
intellectual property rights listed on Exhibits A, B and C to the Intellectual
Property Security Agreement delivered to Bank by Borrower in connection with
this Agreement within ninety (90) days of the date of this Agreement. Borrower
shall register or cause to be registered with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable, those
additional intellectual property rights developed or acquired by Borrower from
time to time in connection with any product prior to the sale or licensing of
such product to any third party, including without limitation major revisions or
additions to the intellectual property rights listed on such Exhibits A, B and
C.
(b) Borrower shall execute and deliver such additional instruments and
documents from time to time as Bank shall reasonably request to perfect Bank's
security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Bank in writing of material infringements detected and (iii) not
allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited
or dedicated to the public without the written consent of Bank, which shall not
be unreasonably withheld.
(d) Bank may audit Borrower's Intellectual Property Collateral to
confirm compliance with this Section, provided such audit may not occur more
often than once per year, unless an Event of Default has occurred and is
continuing, Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section to take but which Borrower fails to take, after fifteen (15) days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section.
6.13 FURTHER ASSURANCES. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS.
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Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Credit Extensions,
Borrower will not do any of the following:
7.1 DISPOSITIONS. Without Bank's consent, which will not be unreasonably
withheld, convey, sell, loan, transfer or otherwise dispose of (collectively, a
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property including exclusive licenses, or sales of, intellectual
property at market value and similar licenses, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment, (iv)
Transfers in connection with Permitted Investments or (v) Transfers of Equipment
in connection with the sale and leaseback of such Equipment provided that an
Event of Default is not continuing before such Transfer, and would not exist
after giving effect to such Transfer.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Other than a merger for the purpose of
effecting a change in domicile of which Bank receives thirty (30) days' prior
written notice, merge or consolidate, or permit any of its Subsidiaries to merge
or consolidate, with or into any other business organization, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien with
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any cash dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, except that Borrower may repurchase the stock of former employees
pursuant to stock repurchase agreements.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of
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such Subordinated Debt, or amend any provision contained in any documentation
relating to the Subordinated Debt without Bank's prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" or be controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of, or any
interest on, any Advances when due and payable, or fails to pay any of the other
Obligations not constituting principal or interest, (including without
limitation, Bank Expenses in accordance with the terms hereof) within thirty
(30) days of receipt by Borrower of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation under
Article 6 or violates any of the covenants contained in Article 7 of this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this Agreement,
in any of the Loan Documents, or in any other present or future agreement
between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after Borrower receives notice thereof or
any officer of Borrower becomes aware thereof; provided, however, that if the
default cannot by its nature be cured within the ten (10) day period or cannot
after diligent attempts by Borrower be cured within such ten (10) day period,
and such default is likely to be cured within a reasonable time, then Borrower
shall have an additional reasonable period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an Event
of Default (provided that no Credit Extensions will be required to be made
during such cure period);
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8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse change in
Borrower's business or financial condition, or if there is a material impairment
of the prospect of repayment of any portion of the Obligations or a material
impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is attached
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty (30) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within thirty (30)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within sixty (60) days (provided
that no Credit Extensions will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any indebtedness in an amount in excess of Two Hundred Fifty Thousand Dollars
($250,000) or that could have a Material Adverse Effect and Bank has not
received a letter from such third party stating that it does not intend to
accelerate the maturity of such Indebtedness;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand
Dollars ($250,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank as of the data such
representation or warranty was made by any Responsible Officer pursuant to this
Agreement or to induce Bank to enter into this Agreement or any other Loan
Document.
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9. BANK'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(A) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in Section
8.5 all Obligations shall become immediately due and payable without any action
by Bank);
(B) Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement or under any other agreement between Borrower and
Bank;
(C) Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably considers
advisable;
(D) Without notice to or demand upon Borrower, make such payments and
do such acts as Bank considers necessary or reasonable to protect its security
interest in the Collateral. Borrower agrees to assemble the Collateral if Bank
so requires, and to make the Collateral available to Bank as Bank may designate.
Borrower authorizes Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(E) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Bank;
(F) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Bank is hereby granted a license or other right, solely pursuant to
the provisions of this Section 9.1, to use, without charge, Borrower's labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank's
exercise of its rights under this Section 9.1, Borrower's rights under all
licenses and all franchise agreements shall inure to Bank's benefit except to
the extent such license would result in a breach of such agreement;
(G) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Bank determines is
commercially reasonable, and apply any proceeds to the Obligations in whatever
manner or order Bank deems appropriate;
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(H) Bank may credit bid and purchase at any public sale; and
(I) Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims
under and decisions with respect to Borrower's policies of insurance; and (f)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3 ACCOUNTS COLLECTION. At any time from the date of this Agreement,
Bank may notify any Person owing funds to Borrower of Bank's security interest
in such funds and verify the amount of such Account. After the occurrence and
during the continuance of an Event of Default, Borrower shall collect all
amounts owing to Borrower for Bank, receive in trust all payments as Bank's
trustee, and immediately deliver such payments to Bank in their original form as
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under
the Revolving Facility as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action
with respect to such policies as Bank deems prudent. Any amounts so paid or
deposited shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
22
<PAGE>
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement,
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not inconsistent herewith as provided under
the Code, by law, or in equity. No exercise by Bank of one right or remedy shall
be deemed an election, and no waiver by Bank of any Event of Default an
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, acquiescence by it. No waiver by Bank shall be
effective unless made in a written document signed on behalf of Bank and then
shall be effective only in the specific instance and for the specific purpose
for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time hold by Bank on which Borrower may in any way be liable.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: NVIDIA Corporation
3535 Monroe Street
Santa Clara, CA 95051
Attn: Mr. Geoff Ribar
FAX: (408) 615-2800
If to Bank. Imperial Bank
226 Airport Parkway
San Jose, CA 95110-1024
Attn: Corporate Banking Center
FAX: (408) 451-8523
with a copy to: Imperial Bank
2460 Sand Hill Road, Suite 102
Menlo Park, CA 94025
Attn: Mr. Matt McFall
FAX: (650) 233-3020
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
23
<PAGE>
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS.
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless
Bank and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement; and (b) all
losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of all
obligation set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be amended
or terminated orally. All prior agreements, understandings, representations,
warranties, and negotiations between the parties hereto with respect to the
subject matter of this Agreement, if any, are merged into this Agreement and the
Loan Documents.
24
<PAGE>
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding. The obligations of Borrower to indemnify Bank with respect
to the expenses, damages, losses, costs and liabilities described in Section
12.2 shall survive until all applicable statute of limitations periods with
respect to actions that may be brought against Bank have run.
13. JUDICIAL REFERENCE.
(A) Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Agreement, which controversy, dispute or claim is not settled
in writing within thirty (30) days after the "CLAIM DATE" (defined as the date
on which a party subject to this Agreement gives written notice to all other
parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 et seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property, if any, is
located or Santa Clara County if none (the "COURT"). The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of the Court (or any subsequently enacted
Rule). Each party shall have one peremptory challenge pursuant to CCP (S) 170.6.
The referee shall (a) be requested to set the matter for hearing within sixty
(60) days after the date of selection of the referee and (b) try any and all
issues of law or fact and report a statement of decision upon them, if possible,
within ninety (90) days of the Claim Date. Any decision rendered by the referee
will be final, binding and conclusive and judgment shall be entered pursuant to
CCP (S) 644 in any court in the State of California having jurisdiction. Any
party may apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy, dispute or
claim, by filing a petition for a healing and/or trial. All discovery permitted
by this Agreement shall be completed no later than fifteen (15) days before the
first hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents which cannot be resolved by the parties shall
25
<PAGE>
be submitted to the referee as provided herein. The Superior Court is empowered
to issue temporary and/or provisional remedies, as appropriate.
(B) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(C) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of laws, a written
statement of decision, and the right to move for a now trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provisions.
(D) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired Judge of the Court, in accordance
with the California Arbitration Act, (S) 1280 through (S) 1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery as set
forth hereinabove shall apply to any such arbitration proceeding.
14. CONFIDENTIALITY.
In handling any confidential information Bank shall exercise the same
degree of care that it exercises with respect to its own proprietary information
of the same types to maintain the confidentiality of any non-public information
thereby received or received pursuant to this Agreement except that disclosure
of such information may be made (i) to the subsidiaries or affiliates of Bank in
connection with their present or prospective business relations with Borrower,
(ii) to prospective transferees or purchasers of any interest in the Advances,
provided that they have entered into a comparable confidentiality agreement in
favor of Borrower and have delivered a copy to Borrower, (iii) as required by
law, regulations, rule or order, subpoena, judicial order or similar order, (iv)
as may be required in connection with the examination, audit or similar
investigation of Bank and (v) as Bank may determine in connection with the
enforcement of any remedies hereunder. Confidential information hereunder shall
not include information that either: (a) is in the public domain or in the
knowledge or possession of Bank
26
<PAGE>
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party,
provided Bank does not have actual knowledge that such third party is prohibited
from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
NVIDIA CORPORATION
By: /s/ Jen-Hsun Huang
Title: CEO
IMPERIAL BANK
By:
-------------------------------
Title:
----------------------------
27
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrower
in and to the following, now owned or hereafter acquired:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, copyrights, copyright applications,
trade secrets, mask works, goodwill, trademarks, servicemarks, trade styles,
trade names, patents, patent applications, leases, license agreements, franchise
agreements, blueprints, drawings, purchase orders, customer lists, route lists,
infringements, claims, computer programs, computer discs, computer tapes,
literature, reports, catalogs, design rights, income tax refunds, infringement
claims, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, securities,
securities entitlements, instruments, cash, deposit accounts, certificates of
deposit, letters of credit, chattel paper, contract rights, royalties, license
rights and all other forms of obligations owing to Borrower arising out of the
sale or 1ease of goods, the licensing of technology or the rendering of services
by Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
(e) Any and all substitutions therefor, additions and accessions
thereto and proceeds thereof.
<PAGE>
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., PACIFIC TIME
<TABLE>
TO: EMERGING GROWTH INDUSTRIES DATE:
---------------------
FAX#: (650) 233-3020 TIME:
---------------------
_______________________________________________________________________________________________________________________
<S> <C>
FROM:
----------------------------------------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
--------------------------------------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
------------------------------------------------------------------------------------------
PHONE NUMBER:
--------------------------------------------------------------------------------------------------
FROM ACCOUNT# TO ACCOUNT #
------------------------------- -----------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $
--------------------------------------------------
PRINCIPAL PAYMENT (ONLY) $
--------------------------------------------------
INTEREST PAYMENT (ONLY) $
--------------------------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
--------------------------------------------------
OTHER INSTRUCTIONS:
--------------------------------------------------------------------------------------------
_______________________________________________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all
material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate;
provided, however, that those representations and warranties expressly referring to another date shall be true, correct
and complete in all material respects as of such date.
_______________________________________________________________________________________________________________________
</TABLE>
<TABLE>
_______________________________________________________________________________________________________________________
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan advance on the advance designated account
and is known to me.
<S> <C>
___________________________________________ _____________________________________
Authorized Requester Phone #
___________________________________________ _____________________________________
Received By (Bank) Phone #
____________________________________________________________
Authorized Signature (Bank)
_______________________________________________________________________________________________________________________
</TABLE>
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________________________
Borrower: NVIDIA Corporation Lender: Imperial Bank
Commitment Amount: $5,000,000
Advances limited to $2,500,000 until and eligible borrowing base of at least $10,000,000 is achieved.
_________________________________________________________________________________________________________________________
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. TOTAL ACCOUNTS RECEIVABLE $__________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
2. Amounts over 90 days from invoice date $___________
3. Credit Balances over 90 days from invoice date $___________
4. Balance of 50% over 90 days from invoice date $___________
5. Concentration Limits 20% $___________
6. Foreign Accounts (unless approved by Bank in writing) $___________
7. Governmental Accounts $___________
8. Contra Accounts $___________
9. Promotion or Demo Accounts $___________
10. Intercompany/Employee Accounts $___________
11. Other (please explain below) $___________
12. TOTAL ACCOUNTS RECEIVAVLE DEDUCTIONS $___________
13. Eligible Accounts (#1 - #12) $___________
14. LOAN VALUE OF ACCOUNTS RECEIVABLE (75% of #13 ) $___________
BALANCES
15. Maximum Loan Amount $___________
16. Total Funds Available [Lesser of #14 or #15] $___________
17. Outstanding under Sublimits( ) $___________
18. Present balance owing on Line of Credit $___________
19. RESERVE POSITION (#16 minus #17 and #18) $___________
</TABLE>
The undersigned represents and warrants that the foregoing is true,
complete and correct, and that the information reflected in this Borrowing Base
Certificate complies with the representation and warranties set forth in the
Loan and Security Agreement between the undersigned and Imperial Bank.
-------------------------------
NVIDIA CORPORATION BANK USE ONLY
By: Rec'd by:____________________
---------------------------------------
Authorized Signer Date:________________________
Reviewed by:_________________
Date:________________________
-------------------------------
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: IMPERIAL BANK
FROM: NVIDIA CORPORATION
The undersigned authorized officer of NVIDIA Corporation hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending ________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
<TABLE>
<CAPTION>
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<S> <C> <C> <C>
REPORTING COVENANT REQUIRED Complies
Company prepared financial statements Monthly within 25 days Yes No
Compliance Certificate Monthly within 25 days Yes No
CPA Audited, Unqualified financial statements Annually within 90 days of FYE Yes No
AT LEAST ONE WEEK PRIOR TO BORROWING:
A/R & A/P Agings/3/ Weekly within one week Yes No
Borrowing Base Certificate Weekly within one week Yes No
Audits Initial and for the quarter ended Yes No
September 30, 1998
If there are zero outstanding on the line of credit or under any existing sub-facilities, A/R, A/P and BBC and any other
required collateral reporting will not be required; provided that A/R, A/P, and BBC and all other required collateral
reporting are provided one week prior to borrowing.
FINANCIAL COVENANT REQUIRED Actual COMPLIES
Maintain on a Monthly/3/ Basis: 0.75:1.00 _______:1.00 Yes No
Minimum Quick Ratio 1.00:1.00/1/ _______:1.00 Yes No
1.25:1.00/2/ _______:1.00 Yes No
Minimum TNW $10,000,000 $__________ Yes No
$15,000,000/1/ $__________ Yes No
Maximum Total Liabilities -- TNW 2.50:1.00 $__________ Yes No
2.00:1.00/2/ $__________ Yes No
Maximum Losses ($30,000,000)/3/ $__________ Yes No
Profitability of at least $1.00 required for the quarter ended
September 30, 1998, and for each month thereafter.
/1/ Beginning 9/30/98
/2/ Beginning 12/31/98
/3/ For the combined months of July and August of 1998
COMMENTS REGARDING EXCEPTIONS: SEE ATTACHED. -----------------------------------------------
BANK USE ONLY
Very truly yours,
Received by:______________________________
__________________________________________________________ Authorized Signer
Signature Date:_____________________________________
Verified:_________________________________
__________________________________________________________ Authorized Signer
Title Date:_____________________________________
__________________________________________________________ Compliance Status: Yes No
Date -----------------------------------------------
</TABLE>
<PAGE>
IMPERIAL BANK
Special Markets Group . 2460 Sand Hill Road . Suite 102 . Menlo Park, CA . 94015
. (415) 233-3000
November 12, 1998
Nvidia Corporation
1226 Tiros Way
Sunnyvale, CA 94086
Attn: Meera Rao, Corporate Controller
RE: IMPERIAL BANK LOAN NO. 700005699
Dear Ms. Rao:
With reference to the Loan and Security Agreement dated September 3, 1998
between Imperial Bank ("Bank") and Nvidia Corporation ("Borrower") in connection
with the above-referenced loan ("Loan"), the Bank and Borrower hereby modify the
following numbered terms and conditions of the Loan and Security Agreement
(hereinafter referred to as the "Agreement"):
1. Paragraph 6.8 of the Loan and Security Agreement is deleted in its entirety
and is replaced with the following:
"Borrower shall maintain, as of the last day of each calendar month, a
ratio of Quick Assets to Current Liabilities, excluding deferred revenue
derived from non-refundable maintenance contracts, of at least .80 to 1.0;
provided that beginning on the month ending January 31, 1999, Borrower
shall maintain, as of the last day of each month, a ratio of Quick Assets
to Current Liabilities, excluding deferred revenue derived from non-
refundable maintenance contracts, of at least .90 to 1.0."
Except for the above-described modifications, the Agreement shall remain
unaltered and in full force and effect.
Please acknowledge your approval by signing and returning the original of this
letter to me.
Sincerely,
/s/ Matt McFall
Matt McFall
Commercial Loan Officer
Emerging Growth Industries
Accepted and agreed to:
By: /s/ Jen-Hsun Huang
Title: President & CEO
Date: 11-16-98
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
NVIDIA Corporation:
We consent to the use of our report included herein and to the reference of
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Mountain View, California
November 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-25-1998
<CASH> 12,461
<SECURITIES> 0
<RECEIVABLES> 39,424
<ALLOWANCES> (3,506)
<INVENTORY> 17,193
<CURRENT-ASSETS> 66,735
<PP&E> 14,965
<DEPRECIATION> (5,747)
<TOTAL-ASSETS> 76,502
<CURRENT-LIABILITIES> (56,176)
<BONDS> 0
0
(9)
<COMMON> (14)
<OTHER-SE> (35,345)
<TOTAL-LIABILITY-AND-EQUITY> (76,502)
<SALES> (86,755)
<TOTAL-REVENUES> (92,700)
<CGS> 67,400
<TOTAL-COSTS> 67,400
<OTHER-EXPENSES> 29,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (60)
<INCOME-PRETAX> (3,840)
<INCOME-TAX> (308)
<INCOME-CONTINUING> (3,532)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,532)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
