<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1998
REGISTRATION NO. 333-47495
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
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
PROFESSIONAL CORPORATION
ONE MARITIME PLAZA
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 July 27, 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
$1,150,000.
(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
CIBC OPPENHEIMER
, 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 RIVA128 graphics processor is a highly integrated single-chip
solution that supports high performance interactive 3D graphics applications
while simultaneously optimizing 2D graphics and providing VGA compatibility
and DVD playback. The benefits and performance of the RIVA128 graphics
processor have received significant industry validation and have enabled the
Company's customers to win over 40 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 five of
the top ten PC OEMs in the United States--Compaq, Dell, Gateway 2000, Micron
and Packard Bell NEC--and by leading add-in board manufacturers such as
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 RIVA128 and RIVA128ZX graphics processors provide
superior processing power at competitive prices and are 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 2D/3D graphics subsystems.
NVIDIA designed the RIVA128 graphics processor 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 RIVA128 graphics
processor have received significant industry validation and have enabled the
Company's customers to win over 80 industry awards. NVIDIA's graphics
processors currently are designed into products offered by five of the top ten
PC OEMs in the United States--Compaq, Dell, Gateway 2000, Micron and Packard
Bell NEC--and by leading add-in board manufacturers such as 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>
YEAR ENDED DECEMBER 31, QUARTER ENDED
PERIOD FROM INCEPTION ---------------------------------- -------------------
(APRIL 5, 1993) TO MARCH 30, MARCH 29,
DECEMBER 31, 1993 1994 1995 1996 1997 1997 1998
--------------------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue........... $ -- $ -- $ 1,182 $ 3,912 $29,071 $ 65 $37,662
Gross profit (loss)..... -- -- (367) 874 7,845 (143) 10,103
Operating income (loss). (506) (1,351) (6,470) (2,993) (2,560) (1,144) 2,947
Net income (loss)....... (484) (1,361) (6,377) (3,077) (2,691) (1,176) 2,180
Basic net income (loss)
per share(2)........... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .15
Diluted net income
(loss) per share(2).... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .08
Shares used in basic per
share computation(2)... 6,784 7,048 11,365 11,383 12,677 11,578 14,142
Shares used in diluted
per share
computation(2)......... 6,784 7,048 11,365 11,383 12,677 11,578 25,729
</TABLE>
<TABLE>
<CAPTION>
MARCH 29, 1998
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 8,640 $
Total assets............................................. 36,738
Capital lease obligations, less current portion.......... 2,143
Total stockholders' equity............................... 9,257
</TABLE>
- -------
(1) Based on the number of shares outstanding as of March 29, 1998. Excludes
(i) 6,066,833 shares of Common Stock issuable upon the exercise of options
outstanding at a weighted average exercise price of $3.91 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)
3,911,457 shares of Common Stock reserved for future grants under the
Company's 1998 Equity Incentive Plan, (iv) 300,000 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 and (vi) 131,750 shares of
Common Stock issuable upon exercise of options granted after March 29,
1998. See "Management--Employee Benefit Plans" and Notes 3 and 8 of Notes
to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in per share computations.
(3) 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 , 1998 (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........................................................... 21
Dividend Policy........................................................... 21
Capitalization............................................................ 22
Dilution.................................................................. 23
Selected Financial Data................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 34
Management................................................................ 47
Certain Transactions...................................................... 56
Principal Stockholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Underwriters.............................................................. 63
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 65
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
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 reincorporation
of the Company from California to Delaware in April 1998, (ii) gives effect to
the conversion of all of the Company's outstanding shares of Preferred Stock
into shares of Common Stock, which will occur automatically upon the closing
of this offering, and (iii) 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 1, 1998, the Company changed its fiscal year end from
December 31 to a 52- or 53-week year ending on the last Sunday in December.
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 "fast-
and-wide" 100 megahertz, 128-bit graphics architecture that is designed to
deliver a highly immersive, interactive 3D experience with realistic imaging
and stunning effects. The Company's RIVA128 and RIVA128ZX graphics processors
provide superior processing power at competitive prices and are 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 RIVA128 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.
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 by
leveraging strategic alliances.
NVIDIA's products are used by five of the top ten PC OEMs in the United
States--Compaq Computer Corporation ("Compaq"), Dell Computer Corporation
("Dell"), Gateway 2000, Inc. ("Gateway 2000"), Micron Technology, Inc.
("Micron") and Packard Bell NEC, Inc. ("Packard Bell NEC")--and leading add-in
board manufacturers such as Diamond Multimedia Systems, Inc. ("Diamond") and
STB Systems, Inc. ("STB"). The RIVA128 graphics processor has received
significant industry validation and has enabled the Company's customers to
receive over 80 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 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 and sales, general and administrative functions of the
Company. For example, the Company began shipping the RIVA128ZX graphics
processor in March 1998 and experienced difficulties in achieving volume
production. The Company believes that these production issues have been
resolved, and it began volume production of the RIVA128ZX graphics processor
in the second quarter of 1998. However, 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; 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 March 29, 1998, the Company's accumulated deficit was
approximately $11.8 million. Although the Company generated net income in the
quarters ended March 29, 1998 and December 31, 1997, it incurred significant
losses in each other quarter 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 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."
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
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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.
Recently, large supplies of synchronous DRAMs ("SDRAMs") resulted in
significant price declines for such components. This price decrease has
lowered the total system cost to customers of competitive products that use
such SDRAMS, as compared to the Company's RIVA128 graphics processor, which is
designed to operate using only synchronous graphic DRAMS ("SGDRAMS"), which
are relatively more expensive than SDRAMs. The Company expects that such
unfavorable price competition may negatively impact sales of the Company's
products. The Company expects to release a version of its RIVA128ZX graphics
processor shortly that will operate either with SDRAMS or SGDRAMS. There can
be no assurance that the Company will be successful in designing the RIVA128ZX
graphics processor to operate with SDRAMS or that future fluctuations in 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 interactive entertainment market, such as Chromatic Research, Inc.
("Chromatic"), 3Dfx Interactive, Inc. ("3Dfx") and Rendition, Inc.
("Rendition").
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,
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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 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. For example, 3Dlabs markets the PERMEDIA 2, a graphics
accelerator designed for the mainstream PC market. 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 Chromatic, 3Dfx and Rendition. 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.
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
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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 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 ST, Taiwan
Semiconductor Manufacturing Co. ("TSMC") and any additional manufacturers to
effectively manufacture new products, the ability of the Company to design
products that effectively utilize the process technologies of ST, 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. 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 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 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 or introduction of such products. In particular,
the Company began shipping the RIVA128ZX graphics processor in March 1998 and
experienced difficulties in achieving volume production. The Company believes
that these production issues have been resolved, and the Company began volume
production of the RIVA128ZX graphics processor in the second quarter of 1998.
There can be no assurance, however, 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
the RIVA128ZX graphics processor or other future products. Failure to achieve
any of the foregoing with respect to the RIVA128ZX graphics processor, 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, 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
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the supply of such tools, there can be no assurance that all or any of such
tools will be readily available in the 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), preliminary and permanent
orders 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 both lawsuits.
S3 also has filed a motion for preliminary injunction to bar the Company's
manufacture or sale of the RIVA128 products pending a final determination of
the lawsuit. The Company believes that it has meritorious defenses to the
preliminary injunction motion and intends to defend itself vigorously.
The Company expects that the litigation with SGI and S3 will likely 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 or S3 for any infringing technology. Either 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 or S3, any 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 first quarter of 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.
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 49% and 39%, respectively, of the
Company's total revenue in the first quarter of 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 three quarters was attributable to products that ultimately were
incorporated into PCs sold by Compaq, Dell, Gateway 2000, 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 STB and
Diamond 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 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.
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 March 29, 1998, the Company had 119
employees as compared to 44 employees as of March 30, 1997, and the Company
expects
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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. In addition, the Company
relocated to significantly larger facilities in July 1998. An inability of the
Company to effectively manage the transition to larger facilities could have a
material adverse effect on the Company's business, financial condition or
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. Substantially all of the
Company's products currently are manufactured by ST in Crolles, France
pursuant to a strategic collaboration agreement (the "ST Agreement"), and the
Company has recently established a relationship with TSMC as a second
semiconductor manufacturer. The Company obtains manufacturing services from
both ST and TSMC on a purchase order basis, and neither ST nor TSMC has any
obligation to provide the Company with any specified minimum quantities of
product. 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. A
manufacturing disruption experienced by ST or TSMC would impact the production
of the Company's products for a substantial period of time, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, in December 1997, the Company experienced
low manufacturing yields at ST. The Company believes that long-term market
acceptance for the Company's products will depend on reliable relationships
with ST, TSMC and any other manufacturers used by the Company to ensure
adequate product supply to respond to customer demand. ST has only recently
begun to manufacture the Company's products in commercial quantities, and
there can be no assurance that ST will be able to meet the Company's near-term
or long-term manufacturing requirements. In addition, the Company's
relationship with TSMC has only recently been established, and there can be no
assurance that this relationship will meet the business objectives of the
Company. Both ST and TSMC fabricate wafers for other companies, including
certain competitors of the Company, and ST also manufactures wafers for its
own needs, and either could choose to prioritize capacity for other uses or
reduce or eliminate deliveries to the Company on short notice.
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; and potential misappropriation of the Company's intellectual
property. The Company is dependent primarily on ST and, to a lesser extent,
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 very
small portion of the total production capacity of ST. Although the Company's
products are designed using ST's process design rules, there can be no
assurance that ST 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
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that ST will continue to devote resources to the production of the Company's
products or 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. See "--Dependence on Third-Party Subcontractors for
Assembly and Testing," "--Risks Associated with International Operations" and
"Business--Manufacturing."
Dependence on ST Microelectronics. In addition to the Company's reliance on
ST to manufacture the Company's products, the Company licenses certain
technology on a non-exclusive basis from ST for use with the Company's
products. The inability of the Company to continue to license this technology
could result in delays or cancellations in product shipments until equivalent
technology can be identified, licensed or developed, and integrated with the
Company's products. The ST Agreement also grants ST a worldwide license to
sell the RIVA128 and RIVA128ZX graphics processors. Royalty revenue from sales
of the RIVA128 graphics processor by ST represented 6% and 12% of the
Company's total revenue in 1997 and the first quarter of 1998, respectively.
The Company expects royalty revenue from ST to decrease in the second quarter
of 1998 and subsequent quarters. In February 1998, ST and 3Dlabs established a
supply relationship for the manufacture by ST of 3Dlabs' PERMEDIA 2 3D
graphics accelerator. There can be no assurance that ST will not establish
similar relationships with other competitors of the Company or that sales of
the Company's products by ST will not be adversely affected by ST's
relationship with 3Dlabs or any other competitor of the Company. Sales by ST
of products similar to the Company's products could result in a decrease in
the Company's revenue, which would have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Dependence on Third-Party Manufacturers; Absence of Manufacturing Capacity;
Manufacturing Risks," "--Dependence on Third-Party Subcontractors for Assembly
and Testing" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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 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.
Dependence on Key Personnel. The Company's performance will be substantially
dependent on the performance of its executive officers and key employees, many
of whom have worked together for only a short period of time. In particular,
each of the Company's Chief Financial Officer, Vice President, Product
Marketing and Vice President, Corporate Marketing joined the Company in
December 1997. 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 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. The 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
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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 RIVA128ZX
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. 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. 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. This risk 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 ST, 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
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 future
success will depend in part upon its ability to develop products that utilize
new manufacturing process technologies. Manufacturing process 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.
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. 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.
Substantially all of the Company's products historically have been assembled
and tested by ST in Malta. The Company recently qualified Anam Semiconductor
("Anam"), which is located in Korea, to assemble and test the Company's
RIVA128ZX graphics processor. The Company does not have long-term agreements
with either of these suppliers. As a result of its dependence on third-party
subcontractors for assembly and testing of its products, the Company does not
directly
15
<PAGE>
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
operation. 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 19 patents
issued and 21 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 graphics processor. 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 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 and in May 1998,
S-3 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 and S3 lawsuits 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
16
<PAGE>
determination for the Company. In the event of an adverse result in the SGI,
S3 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 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 and S3
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 or S3 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 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 due
to a number of factors, including rapid technological change,
price/performance enhancements and
17
<PAGE>
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, 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. Although
currency fluctuations have been insignificant to date, 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 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 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
18
<PAGE>
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 debt financing, if available, may involve
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. Many existing computer systems and applications and
other control devices use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
As a result, in less than two years, computer systems and applications used by
many companies may need to be upgraded to comply with "Year 2000"
requirements. Significant uncertainty exists in the computer industry
concerning the potential effects associated with such compliance. The Company
relies on its systems in operating and monitoring many significant aspects of
its business, including financial systems (such as general ledger, accounts
payable, accounts receivable, inventory and order management), customer
services, infrastructure and network and telecommunications equipment. The
Company also relies directly and indirectly on the systems of external
business enterprises such as customers, suppliers, creditors, financial
organizations and domestic and international governments. The Company
currently estimates that its costs associated with Year 2000 compliance,
including any costs associated with the consequences of incomplete or untimely
resolution of Year 2000 compliance issues, will not have a material adverse
effect on the Company's business, financial condition or results of operations
in any given year. However, the Company has not extensively investigated and
does not believe that it has fully identified the impact of Year 2000
compliance and has not concluded that it can resolve any issues that may arise
in complying with Year 2000 without disruption of its business or without
incurring significant expense. In addition, even if the Company's internal
systems are not materially affected by Year 2000 compliance issues, the
Company could be affected through disruption in the operation of the
enterprises with which the Company interacts.
There can be no assurance that the Company's products will be Year 2000
compliant, that third-party products with which the Company's products
interface will be Year 2000 compliant or that any changes to third-party
products made in response to Year 2000 compliance issues will not render the
Company's products incompatible with such third-party products.
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 years 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
19
<PAGE>
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,
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 23,468,797 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) 47,500 shares
will be eligible for immediate sale on the date of this Prospectus; (ii)
4,952,500 shares will be eligible for sale 90 days after the date of this
Prospectus; (iii) 17,365,771 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."
20
<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 Company intends to use approximately $10-
12 million of the net proceeds to repay certain accounts payable. 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 million for capital expenditures in 1998, 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.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
29, 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 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>
MARCH 29, 1998
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, less current
portion....................................... $ 2,143 $ 2,143 $
-------- -------- -----
Stockholders' equity:
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--14,141,710 shares
issued and outstanding; pro forma--
23,468,797 shares issued and outstanding;
pro forma as adjusted-- shares issued
and outstanding(1).......................... 14 23
Additional paid-in capital................... 23,211 23,211
Deferred compensation........................ (2,166) (2,166)
Accumulated deficit.......................... (11,811) (11,811)
-------- -------- -----
Total stockholders' equity................. 9,257 9,257
-------- -------- -----
Total capitalization..................... $ 11,400 $ 11,400 $
======== ======== =====
</TABLE>
- --------
(1) Excludes (i) 6,066,833 shares of Common Stock issuable upon the exercise
of options outstanding at a weighted average exercise price of $3.91 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) 3,911,457 shares reserved for future grants under the
Company's 1998 Equity Incentive Plan, (iv) 300,000 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 and (vi) 131,750 shares of Common Stock
issuable upon exercise of options granted after March 29, 1998. See
"Management--Employee Benefit Plans" and Notes 3 and 8 of Notes to
Financial Statements.
22
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 29, 1998
was approximately $9.3 million or $.39 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
March 29, 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 March 29,
1998............................................................ $.39
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 March 29, 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............ 25,669,630 % $23,008,467 % $.90
New public investors.............
---------- ------ ----------- ------
Total.......................... 100.0% $ 100.0%
========== ====== =========== ======
</TABLE>
The immediately foregoing table includes 2,221,833 shares of Common Stock
issuable upon the exercise of outstanding stock options immediately
exercisable as of March 29, 1998 with a weighted average exercise price of
$1.05 per share. The foregoing excludes 3,845,000 shares issuable upon
exercise of outstanding options not immediately exercisable with a weighted
average exercise price of $5.56 per share and 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.
23
<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 and the balance sheet data as of December 31, 1996 and
1997 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 quarters ended March 30, 1997 and March 29, 1998 and the selected
balance sheet data as of March 29, 1998 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 quarter ended March 29, 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, QUARTER ENDED
INCEPTION ---------------------------------- -------------------
(APRIL 5, 1993) TO MARCH 30, MARCH 29,
DECEMBER 31, 1993 1994 1995 1996 1997 1997 1998
------------------ ------- ------- ------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue........................... $ -- $ -- $ 1,182 $ 3,912 $29,071 $ 65 $ 37,662
Cost of revenue......................... -- -- 1,549 3,038 21,226 208 27,559
------- ------- ------- ------- ------- ------- --------
Gross profit (loss)..................... -- -- (367) 874 7,845 (143) 10,103
Operating expenses:
Research and development................ 204 361 2,426 1,218 6,632 616 3,815
Sales, general and administrative....... 302 990 3,677 2,649 3,773 385 3,341
------- ------- ------- ------- ------- ------- --------
Total operating expenses................ 506 1,351 6,103 3,867 10,405 1,001 7,156
------- ------- ------- ------- ------- ------- --------
Operating income (loss)................. (506) (1,351) (6,470) (2,993) (2,560) (1,144) 2,947
Interest and other income (expense), net 22 (10) 93 (84) (131) (32) (39)
------- ------- ------- ------- ------- ------- --------
Income (loss) before income tax expense. (484) (1,361) (6,377) (3,077) (2,691) (1,176) 2,908
Income tax expense...................... -- -- -- -- -- -- 728
------- ------- ------- ------- ------- ------- --------
Net income (loss)....................... $ (484) $(1,361) $(6,377) $(3,077) $(2,691) $(1,176) $ 2,180
======= ======= ======= ======= ======= ======= ========
Basic net income (loss) per share(1).... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .15
======= ======= ======= ======= ======= ======= ========
Diluted net income (loss) per share..... $ (.07) $ (.19) $ (.56) $ (.27) $ (.21) $ (.10) $ .08
======= ======= ======= ======= ======= ======= ========
Shares used in basic and diluted per
share computation(1)................... 6,784 7,048 11,365 11,383 12,677 11,578 14,142
Shares used in diluted per share
computation(1)......................... 6,784 7,048 11,365 11,383 12,677 11,578 25,729
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- MARCH 29,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $1,605 $4,555 $3,872 $3,133 $ 6,551 $ 8,640
Total assets..................... 1,786 5,450 6,793 5,525 25,038 36,738
Capital lease obligations, less
current portion................. 76 249 1,137 617 1,891 2,143
Total stockholders' equity....... 1,659 4,629 4,013 1,037 6,896 9,257
</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.
24
<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.
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 quarter from inception through the third
quarter of 1997 and in each year. As of March 29, 1998, the Company had an
accumulated deficit of approximately $11.8 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. In August 1997, the Company introduced the RIVA128
graphics processor, which is designed to be compatible with Microsoft's
Direct3D and is the first in a family of high performance graphics products
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 first quarter of 1998 was derived from the sale and license of the RIVA128
graphics processor. 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 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. STB and Diamond accounted for
63% and 31%, respectively, of the Company's total revenue in 1997, and 49% and
39%, respectively, of the Company's total revenue in the first quarter of
1998. The number of potential customers for the Company's products is limited,
and the Company expects that sales to STB and Diamond 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
25
<PAGE>
gross margins for the Company's 3D graphics processors 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. The Company's
RIVA128 graphics processor was designed into products introduced in the fall
of 1997. While the Company expects to continue to sell the RIVA128 graphics
processor, as a result of increased competition from new products introduced
by both the Company and its competitors for the 1998 design cycles, the
Company expects revenues from the RIVA128 graphics processor in future periods
to decline substantially from the levels in the first quarter of 1998. Thus,
the Company will need to introduce new products and enhancements to existing
products to maintain overall average selling prices and gross margins.
Furthermore, 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. In
particular, the Company expects to begin volume shipments of the RIVA128ZX
graphics processor in the second quarter of 1998, and there can be no
assurance that the Company will be able to successfully manage the production
transition risks with respect to that product. Failure to achieve any of the
foregoing with respect to the RIVA128ZX graphics processor, 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, 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. Recently, large supplies of SDRAMs resulted in
significant price declines for such components. This price decrease has
lowered the total system cost to customers of competitive products that use
such SDRAMS, as compared to the Company's RIVA128 graphics processor, which is
designed to operate using only SGDRAMS, which are relatively more expensive
than SDRAMs. The Company expects that such unfavorable price competition may
negatively impact sales of the Company's products. The Company expects to
release a version of its RIVA128ZX graphics processor shortly that will
operate either with SDRAMS or SGDRAMS. There can be no assurance that the
Company will be successful in designing the RIVA128ZX graphics processor to
operate with SDRAMS or that future fluctuations in 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. 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 utilizes ST and TSMC to produce the Company's semiconductor
wafers and 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. ST currently
is capacity constrained with respect to the manufacture of the Company's
products. ST has only recently begun to manufacture the Company's products in
commercial quantities, and there can be no assurance that ST will be able to
meet the Company's near-term or long-term manufacturing requirements. In
addition, the Company's relationship with TSMC has only recently been
established, and there can be no assurance that this relationship will meet
the business objectives of the Company. As the Company's relationships with
ST, 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. A manufacturing
disruption experienced by either of 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 from both ST and TSMC
on a purchase order basis, and neither ST nor TSMC has any obligation to
provide the Company with any specified minimum quantities of product. Both ST
and TSMC fabricate wafers for other companies, including certain competitors
of the Company, and ST also manufactures wafers for its own needs, and either
could choose to prioritize capacity for other uses or
26
<PAGE>
reduce or eliminate deliveries to the Company on short notice. In addition,
the Company purchases wafers and dies and pays an agreed price for wafers
meeting certain acceptance criteria only after the production yields for a
product stabilize. Once production is stabilized, the Company will pay for
functional die only. Accordingly, because TSMC has only recently begun to
manufacture products for the Company, until the production yields of its
product at TSMC stabilize, the Company must pay an agreed price for wafers
regardless of yield. See "Risk Factors--Dependence on Third-Party
Manufacturers; Absence of Manufacturing Capacity; Manufacturing Risks" and "--
Manufacturing Yields."
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. The Company recorded reductions to
research and development expense based on the percentage-of-completion method,
limited by the amounts funded, 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. The Company recorded
$625,000 for continued development and support in the first quarter of 1998
and expects to record a similar amount in each of the remaining three quarters
of 1998. The Company does not have any plans to enter into contractual
development arrangements and does not expect contract funding in the future.
RESULTS OF OPERATIONS
The Company first generated revenue from sales of its current 3D graphics
processor product in the third quarter of 1997, when the Company began
commercial shipment of the RIVA128 graphics processor. Prior to that time, 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.
QUARTERS ENDED MARCH 30, 1997 AND MARCH 29, 1998
REVENUE
Product Revenue. Product revenue increased from $65,000 in the first quarter
of 1997 to $33.2 million in the first quarter of 1998, due to sales of the
RIVA128 graphics processor, which the Company introduced in August 1997.
Although the Company achieved substantial growth in product revenue from the
1997 period to the 1998 period, the Company does not expect to sustain this
rate of growth in future periods. In addition, the Company expects that the
average selling prices of its products will decline over the respective 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 to
$4.5 million in the first quarter of 1998 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 1997 to 1998, the Company expects
royalty revenue from ST to decrease in the second quarter of 1998 and beyond.
If ST were to stop selling the Company's products, if there continued to be a
material decline in the number of units sold by ST in the future or if there
were a greater than expected decline in the ASPs of the Company's products
sold by ST, the
27
<PAGE>
Company's business, financial condition and results of operations would be
materially adversely affected. See "Risk Factors--Dependence on ST
Microelectronics."
GROSS PROFIT (LOSS)
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
loss of $143,000 in the first quarter of 1997 compared to a gross profit of
$10.1 million in the first quarter of 1998. Excluding royalty revenue, gross
margin on product revenue improved from (219)% in the first quarter of 1997 to
17% in the first quarter of 1998 due to sales of the RIVA128 graphics
processor. Although the Company achieved substantial growth in gross profit
and gross margin from the 1997 period to the 1998 period, the Company does not
expect to sustain these rates of growth in future periods. 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.
OPERATING EXPENSES
Research and Development. Research and development expenses consist
primarily of salaries and benefits, cost of development tools and software,
and consultant costs, net of contract funding from ST. Research and
development expenses before adjustments for contract funding increased from
$616,000 in the first quarter of 1997 to $3.8 million in the first quarter of
1998, primarily due to additional personnel and related costs, such as
depreciation changes 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 $3.8 million, net of contract funding from ST, in each of the remaining
three quarters of 1998.
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, and travel and entertainment, net of contract funding received from
ST. Sales, general and administrative expenses increased from $385,000 in the
first quarter of 1997 to $3.3 million in the first quarter of 1998, primarily
due to increased promotional expenses, additional personnel and commissions
and bonuses on sales of the RIVA128 graphics processor. 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 related to the SGI and S3 patent lawsuits
until such lawsuits are resolved, expenses associated with being a public
company and the Company's expected move to a larger facility in the third
quarter of 1998.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest expense primarily consists of interest incurred as a result of
capital lease obligations. Interest expense increased from $54,000 in the
first quarter of 1997 to $83,000 in the first quarter of 1998, primarily as a
result of additional equipment leased in support of the Company's development
activities. Interest income primarily consists of interest earned on the
Company's cash and cash equivalents. Interest income was $22,000 and $44,000
in the first quarter of 1997 and 1998, respectively. Interest income was
higher in the first quarter of 1998 due to higher average cash balances as a
result of the Company's receipt of net proceeds from the sale of preferred
stock in August 1997 and net cash provided by operating activities in the two
quarters ended March 29, 1998.
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.
The Company expects to record a provision for income taxes in 1998, 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
28
<PAGE>
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 $7.9 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.
OPERATING EXPENSES
Research and Development. Research and development expenses before
adjustments for contract funding were $4.4 million, $5.8 million and $8.6
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 $3.8 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
Interest expense was $152,000, $216,000 and $267,000 in 1995, 1996 and 1997,
respectively. Interest expense increased each year as a result of additional
equipment leased in support of the Company's development activities. Interest
income was $245,000, $132,000 and $136,000 in 1995, 1996 and 1997,
respectively. Interest income was higher in 1995 due to higher average cash
balances during the year as a result of the Company's receipt of net proceeds
from the sale of preferred stock.
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.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain quarterly statement of operations data
for the five quarters ended March 29, 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, MARCH 29,
1997 1997 1997 1997 1998
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Product...................... $ 65 $ 6 $ 5,154 $22,055 $33,210
Royalty...................... -- -- 312 1,479 4,452
------- ------- ------- ------- -------
Total revenue.............. 65 6 5,466 23,534 37,662
------- ------- ------- ------- -------
Cost of revenue................ 208 150 4,546 16,322 27,559
Gross profit (loss)........ (143) (144) 920 7,212 10,103
Operating expenses:
Research and development..... 616 512 2,312 3,192 3,815
Sales, general and
administrative.............. 385 569 991 1,828 3,341
------- ------- ------- ------- -------
Total operating expenses... 1,001 1,081 3,303 5,020 7,156
------- ------- ------- ------- -------
Operating income (loss)........ (1,144) (1,225) (2,383) 2,192 2,947
Interest and other income
(expense), net................ (32) (40) (30) (29) (39)
------- ------- ------- ------- -------
Income (loss) before tax
expense....................... (1,176) (1,265) (2,413) 2,163 2,908
Income tax expense............. -- -- -- -- 728
------- ------- ------- ------- -------
Net income (loss).......... $(1,176) $(1,265) $(2,413) $ 2,163 $ 2,180
======= ======= ======= ======= =======
Basic net income (loss) per
share......................... $ (.10) $ (.11) $ (.18) $ .15 $ .15
======= ======= ======= ======= =======
Diluted net income (loss) per
share......................... $ (.10) $ (.11) $ (.18) $ .09 $ .08
======= ======= ======= ======= =======
Shares used in basic per share
computation................... 11,578 11,662 13,328 14,074 14,142
Shares used in diluted per
share computation............. 11,578 11,662 13,328 24,942 25,729
</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
30
<PAGE>
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 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 zeach calendar year; and the
level of expenditures for research and development of sales, general and
administrative functions of the Company. For example, the Company began
shipping the RIVA128ZX graphics processor in March 1998, and experienced
difficulties in achieving volume production. The Company believes that these
production issues have been resolved, and the Company began volume production
in the second quarter of 1998. However, 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 December 1997, the Company's sales of the RIVA128
graphics processor were negatively affected due to low manufacturing yields at
ST, the Company's sole manufacturer of the RIVA128 graphics processor. Any
similar manufacturing difficulties with ST or other third-party manufacturers
in the future could have a material adverse impact on the Company's business,
financial condition or results of operations.
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 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.
In 1997 and the first quarter of 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. As a result, failure of the demand for
3D graphics in the mainstream PC market to increase, or reductions or
fluctuations in the demand for PCs, would have a material adverse effect on
the Company's business, financial condition and results of operations. The PC
industry is seasonal, and the Company expects that its financial results in
the future will be affected by such seasonality.
LEGAL PROCEEDINGS
SGI filed a patent infringement lawsuit against the Company in April 1998
and S3 filed a patent infringement lawsuit against the Company in May 1998. In
the event of an adverse result in either the SGI suit or the S3 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
or S3 for any infringing technology. Either 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 or S3, any of which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Legal
Proceedings."
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STOCK-BASED COMPENSATION
With respect to certain stock options granted to employees, the Company
recorded deferred compensation of $2.1 million in 1997 and $305,000 in the
first quarter of 1998. The Company amortized approximately $62,000 of the
deferred compensation in the fourth quarter of 1997 and $177,000 in the first
quarter of 1998 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
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, in less than
two years, computer systems and applications used by many companies may need
to be upgraded to comply with "Year 2000" requirements. The Company relies on
its systems in operating and monitoring many significant aspects of its
business, including financial systems (such as general ledger, accounts
payable, accounts receivable, inventory and order management), customer
services, infrastructure and network and telecommunications equipment. The
Company also relies directly and indirectly on the systems of external
business enterprises such as customers, suppliers, creditors, financial
organizations and domestic and international governments. The Company
currently estimates that its costs associated with Year 2000 compliance,
including any costs associated with the consequences of incomplete or untimely
resolution of Year 2000 compliance issues, will not have a material adverse
effect on the Company's business, financial condition or results of
operations. However, the Company has not extensively investigated and does not
believe it has fully identified the impact of Year 2000 compliance and has not
concluded that it can resolve any issues that may arise in complying with Year
2000 without disruption of its business or without incurring significant
expense. In addition, even if the Company's internal systems are not
materially affected by Year 2000 compliance issues, the Company could be
affected through disruption in the operation of the enterprises with which the
Company interacts.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of convertible preferred stock totaling $19.7 million and, to a
lesser extent, equipment lease financing and proceeds received from the
exercise of employee stock options. As of March 29, 1998, the Company had $8.6
million in cash and cash equivalents and no 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.
Net cash used in operating activities was $6.1 million in 1995, $300,000 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 $4.4 million in the first quarter of
1998, consisting of net income for the quarter and changes in working capital.
The Company's accounts receivable are highly concentrated and three customers
accounted for all accounts receivable in 1997 and the first quarter of 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.
To date, the Company's investing activities have consisted primarily of
purchases of property and equipment. As of March 29, 1998, the Company did not
have any material commitments other than commitments under operating and
capital leases. 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
$2.8 million in capital
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expenditures in the first quarter of 1998, including capital leases primarily
on 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 million for capital expenditures in 1998, 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 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 maintaining 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 "fast-
and-wide" 100 megahertz, 128-bit graphics architecture that is designed to
deliver a highly immersive, interactive 3D experience with realistic imagery
and stunning effects. The Company's RIVA128 and RIVA128ZX graphics processors
provide superior processing power at competitive prices and are architected to
take advantage of mainstream industry standards such as Microsoft's Direct3D.
The highly integrated design of the RIVA128 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 RIVA128 graphics processor 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 RIVA128 graphics
processor have received significant industry validation and have enabled the
Company's customers to win over 80 industry awards. NVIDIA's products
currently are designed into products offered by five of the top ten PC OEMs in
the United States--Compaq, Dell, Gateway 2000, Micron and Packard Bell NEC--
and by leading add-in board manufacturers such as 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, and subsequently 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 the
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Pentium microprocessor. Yet despite recent advances, PC 3D graphics available
today cannot deliver in real time 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 2000, Micron and Packard
Bell NEC, and leading add-in board manufacturers, such as Diamond and STB. The
RIVA128 graphics processor has received significant industry validation and
has enabled the Company's customers to receive over 80 industry awards.
The key features and benefits of the Company's solution are as follows:
High Performance. The RIVA128 and RIVA128ZX graphics processors' 128-bit
architecture combined with a proprietary texture cache can process 1.5 million
polygons per second and maintain a fill rate of 100 million texture mapped
pixels per second. This performance is driven by the processing power of a 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 RIVA128 and RIVA128ZX graphics processors also
include 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
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enhanced in order to further improve the performance of the processors. 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 RIVA128 and RIVA128ZX 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 RIVA128 and RIVA128ZX 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 "fast-and-wide" 100
megahertz, 128-bit graphics architecture, the RIVA128 and RIVA128ZX 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 generation of products.
NVIDIA's products currently are designed into products offered by five of the
top ten PC OEMs in the United States--Compaq, Dell, Gateway 2000, Micron and
Packard Bell NEC--and by leading add-in board manufacturers such as 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 by Leveraging Strategic Alliances. 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. The Company has leveraged the
RIVA128 graphics processor architecture to achieve broader market penetration
by forming a strategic alliance with ST that gives ST the right to manufacture
products for sale.
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 PROCESSOR ARCHITECTURE
The RIVA128 and RIVA128ZX graphics processors are highly integrated and
deliver high frame rate 3D graphics, as well as 2D graphics, VGA and video
processing in a single processor. The primary functional units of the RIVA128
and RIVA128ZX graphics processors 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
RIVA128 graphics processor:
[GRAPHIC APPEARS HERE]
[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 RIVA128 3D Graphics Processor
3D Geometry Processing Unit. This engine performs the polygon setup
and lighting calculations and prepares data for pixel processing. This
5 GFLOPs floating point engine processes up to five 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
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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.
3D Pixel Processor. The 3D pixel processor calculates pixel colors
and other attributes to be rendered to the computer screen. It includes
advanced rendering capabilities, such as 32-bit RGB Gouraud shading,
alpha blending, perspective correct per pixel fog and perspective
correct specular highlights.
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.
NVIDIA PRODUCTS
RIVA128 Graphics Processor
The RIVA128 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 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 highly integrated RIVA128 graphics processor delivers high frame rate 3D
graphics, as well as 2D graphics, VGA and video processing in a single
processor. The RIVA128 graphics processor also includes a rich set of
reference drivers and tools that translate between software API and hardware.
These drivers also 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 RIVA128 graphics processor has received
significant industry validation and has enabled the Company's customers to
receive over 80 industry awards. Key features of the RIVA128 graphics
processor include the following:
Standard API Compatibility. The RIVA128 graphics processor supports
applications written for the two most widely accepted industry standard
graphics APIs, Microsoft's Direct3D and SGI's OpenGL.
5 GFLOPs Polygon Setup Engine. Polygon setup minimizes the number of
format conversions and other calculations performed by the host
microprocessor. The polygon setup engine can operate at a sustained
rate of 1.5 million triangles per second or a peak rate of five million
triangles per second.
Full 3D Feature Set. The full 3D feature set includes perspective
correct texturing, bi-linear filtering, Z-buffer, LOD MIP-mapping,
lighting and alpha blending.
128-bit Graphics Engine and Memory Interface. The "fast and wide"
128-bit memory interface provides 1.6 gigabytes per second bandwidth to
local frame buffer memory, which results in industry-leading
performance and graphics realism.
230 MHz Integrated RAMDAC. The 230 MHz integrated RAMDAC allows for
high resolution, high refresh rate output to computer monitors.
NTSC/PAL TV Output. NTSC/PAL television output allows connections to
television monitors.
Media Port. The media port allows direct input from television
signals and MPEG2/DVD devices.
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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.
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, began shipping in March 1998 and is scheduled for
volume shipment in the second quarter of 1998.
NVIDIA PRODUCTS UNDER DEVELOPMENT
RIVA TNT
The Company announced its second-generation product, the RIVA TNT, in March
1998. The RIVA TNT is currently under development. The Company believes the
RIVA TNT will supplant the RIVA128ZX graphics processor as NVIDIA's
"performance offering" during the second half of 1998. The RIVA TNT will be
designed to include a 16MB frame buffer, two pixels per clock to enable faster
and higher quality rendering, AGP 2X support, greater than 200 million pixel
per second fill rate and 8 million triangle peak set up.
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 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, Diamond and STB, which in turn sell boards with the
RIVA128 graphics processor to leading OEMs, such as Compaq, Dell, Gateway
2000, 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 49% and 39%, respectively, of the Company's total revenue in the
first quarter of 1998.
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The Company also has a strategic collaboration agreement with ST (the "ST
Agreement"), pursuant to which ST manufactures the RIVA128 graphics processor,
sells it to the Company and distributes the RIVA128 graphics processor on the
Company's behalf. ST is entitled under the ST Agreement to sell the RIVA128
and RIVA128ZX graphics processors in consideration for a royalty payment to
the Company. ST also is entitled under this agreement to manufacture the
RIVA128ZX graphics processor. 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 12% of the Company's total revenue in 1997 and
the first quarter of 1998, respectively. The Company expects royalty revenue
from ST to decrease in the second quarter of 1998 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.
The RIVA128 graphics processor is fabricated for the Company by ST, which is
one of the ten largest semiconductor manufacturers in the world. ST currently
produces the semiconductor die for the Company using a .35 micron
Complementary Metal-Oxide Semiconductor (CMOS) process technology. ST then
assembles and packages the semiconductor die, tests the finished product, and
ships the finished product to the Company. ST has fabrication operations
located in Crolles, France and assembly and testing operations located in
Malta. The Company has recently begun using TSMC to manufacture the RIVA128ZX
graphics processor, although it has not yet received volume quantities of any
products from TSMC. The Company recently qualified Anam for assembly and
testing and intends to have volume testing performed by Anam in the future.
The Company currently is seeking an additional source of supply for both
assembly and test.
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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 RIVA128ZX 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. Because TSMC has only recently begun to manufacture products for the
Company, until the production yields of its product at TSMC stabilize, the
Company must pay an agreed price for wafers regardless of yield. Failure to
stabilize yields or failure to achieve acceptable yields from any current or
future third-party manufacturer would materially adversely affect the
Company's business, financial condition and results of operations. For
example, in December 1997, the Company experienced low manufacturing yields at
ST.
The Company receives semiconductor products from its subcontractors,
performs incoming quality assurance and ships them to its add-in board
manufacturer customers, such as Diamond and STB, from its location in
Sunnyvale. The add-in board manufacturers then produce boards, combine NVIDIA
software with their own software and ship the product to the retail market as
add-in boards or to OEMs, such as Compaq, Dell Gateway 2000, 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 RIVA128 graphics
processor has enabled its customers to win over 80 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
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.
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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 77 full-time employees engaged in research and development.
Expenditures for research and development before adjustments for contract
funding were $2.4 million, $1.2 million and $6.6 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 interactive
entertainment market, such as Chromatic, 3Dfx and Rendition.
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 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
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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. For example, 3Dlabs markets the PERMEDIA 2,
a graphics accelerator designed for the mainstream PC market. 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 Chromatic, 3Dfx and
Rendition. 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.
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.
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 19 issued patents and 21 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 graphics
processor. 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. 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.
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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, and in May 1998,
S3 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 and S3 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 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 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 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
and S3 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 or S3 litigation, could have a material adverse effect on
the Company's business, financial condition and results of operations.
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EMPLOYEES
As of March 29, 1998, the Company had 119 employees, 77 of whom were engaged
in engineering and 42 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 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), preliminary and permanent orders 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 both lawsuits.
S3 also has filed a motion for preliminary injunction to bar the Company's
manufacture or sale of the RIVA128 products pending a final determination of
the lawsuit. The Company believes that it has meritorious defenses to the
preliminary injunction motion and intends to defend itself vigorously.
The Company expects that the litigation with SGI and S3 will likely 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 or S3 for any infringing technology. Either 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 or S3, any of which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Certain information regarding the Company's executive officers, key
employees and directors as of March 29, 1998 is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jen-Hsun Huang.......... 35 President, Chief Executive Officer and Director
Jeffrey D. Fisher....... 39 Vice President, Sales
David B. Kirk........... 37 Chief Scientist
Chris A. Malachowsky.... 38 Vice President, Engineering
Lewis R. Paceley........ 42 Vice President, Corporate Marketing
Curtis R. Priem......... 38 Chief Technical Officer
Geoffrey G. Ribar....... 39 Chief Financial Officer
Daniel F. Vivoli........ 37 Vice President, Product Marketing
Richard J. Whitacre..... 42 Vice President, Operations and Corporate Engineering
Tench Coxe (1).......... 40 Director
Harvey C. Jones, Jr.(1). 45 Director
William J. Miller....... 52 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.
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.
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.
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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.
Geoffrey G. Ribar joined the Company as Chief Financial Officer in December
1997. From 1982 to December 1997, Mr. Ribar served in various positions at
AMD, where his last position was Vice President and Corporate Controller. Mr.
Ribar holds a B.S. degree in Chemistry and an M.B.A. degree from the
University of Michigan.
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.
Richard J. Whitacre has been Vice President, Operations and Corporate
Engineering for the Company since July 1994. From 1990 to July 1994, Mr.
Whitacre was Director of Engineering and then Vice President of Operations for
SEEQ Technology Incorporated, a semiconductor company. From 1977 to 1990, Mr.
Whitacre held various engineer and management positions at National
Semiconductor Corporation, a semiconductor company. Mr. Whitacre holds a
B.S.E.E. degree from the University of Illinois.
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
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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 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. Since January 1997, Mr. Seawell has been Executive Vice President and
Chief Financial Officer for NetDynamics, Inc., an Internet applications server
company. From 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
49
<PAGE>
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 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
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 $100,000 in fiscal 1997
hereinafter (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE(/1/)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) 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 $50,000 or 10% of any such officers salary and bonus disclosed
in this table.
50
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
----------------------------------------------------------------- OF STOCK PRICE
NUMBER OF APPRECIATION FOR
SECURITIES PERCENTAGE OF OPTION TERM
UNDERLYING TOTAL OPTIONS ($)(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 3.6 .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.
51
<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 10
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
52
<PAGE>
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.
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 March 29, 1998, 4,682,110 shares of Common Stock had been issued upon
the exercise of options granted under the Incentive Plan, options to purchase
5,996,833 shares of Common Stock were outstanding and 3,911,457 shares
remained available for future grant. The Incentive Plan will terminate in
February 2008 unless terminated by the Board before then. As of March 29,
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 Fifty Thousand (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
Twenty Thousand (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 Five Thousand (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
53
<PAGE>
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 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 March 31, 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
54
<PAGE>
the 401(k) Plan, up to a statutorily prescribed annual limit. The annual limit
for 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 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.
55
<PAGE>
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."
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.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 29, 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.
<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).................. 360,200 1.5
Richard J. Whitacre(8)................ 387,800 1.6
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..................... -- *
Mark A. Stevens(2)(12)................ 3,145,902 13.4
All directors and executive officers
as a group(10 persons)(13)........... 16,131,170 68.0
</TABLE>
- --------
*Less than 1%.
(1) Percentage of beneficial ownership is based on 23,468,797 shares of
Common Stock outstanding on an as-converted basis as of March 29, 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 March 29, 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.
57
<PAGE>
(3) The address for Messrs. Huang, Malachowsky and Priem is: c/o NVIDIA
Corporation, 1226 Tiros Way, Sunnyvale, California 94086.
(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 225,200 shares subject to a right of repurchase that expires
ratably through July 1998. Includes 135,000 shares of Common Stock
issuable upon the early exercise of options vesting through May 2001.
(8) Includes 152,800 and 30,000 shares subject to rights of repurchase that
expire ratably through July 1998 and August 2000, respectively. Includes
205,000 shares of Common Stock issuable upon the early exercise of
options vesting through May 2001.
(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 75,000 and 50,000 shares subject to rights of repurchase that
expire ratably through November 1998 and June 2000, respectively.
(12) Includes 50,000 shares subject to a right of repurchase that expires
ratably through July 2000.
(13) Includes 340,000 shares issuable upon exercise of options held by all
directors and executive officers within 60 days of March 29, 1998. See
footnotes (7) and (8).
58
<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 March 29, 1998, there were 23,468,797 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 196
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 approximately 9,327,087 shares of Common
Stock (assuming the conversion of all outstanding Preferred Stock upon the
completion of this offering) and warrants to purchase 29,706 shares of Common
Stock, 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
59
<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.
60
<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 23,468,797 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 23,352,560 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) 47,500 shares will be eligible for
immediate sale on the date of this Prospectus; (ii) 4,952,500 shares will be
eligible for sale 90 days after the date of this Prospectus; (iii) 17,365,771
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
61
<PAGE>
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, the holders of approximately 9,356,793
shares of Common Stock currently outstanding or issuable upon conversion of
Preferred Stock, 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 10,708,290 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.
62
<PAGE>
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, Hambrecht & Quist
LLC and CIBC Oppenheimer Corp. 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....................................................
CIBC Oppenheimer Corp....................................................
----
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
63
<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,
and for each of the years in the three-year period ended December 31, 1997,
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.
64
<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.
65
<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 and March 29, 1998
(unaudited).............................................................. F-3
Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 and Three Months Ended March 30, 1997 (unaudited) and March 29, 1998
(unaudited).............................................................. F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1995,
1996 and 1997 and Three Months Ended March 29, 1998 (unaudited).......... F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and Three Months Ended March 30, 1997 (unaudited) and March 29, 1998
(unaudited).............................................................. 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, 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. 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, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
February 17, 1998 Except as to
Note 8 which is as of April 16, 1998
F-2
<PAGE>
NVIDIA CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 29,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................... $ 3,133 $ 6,551 $ 8,640
Accounts receivable.......................... 1,041 12,487 16,665
Inventory.................................... -- -- 2,523
Prepaid expenses and other current assets.... 104 303 1,101
-------- -------- --------
Total current assets..................... 4,278 19,341 28,929
Property and equipment, net.................... 1,144 5,536 7,648
Deposits and other assets...................... 103 161 161
-------- -------- --------
$ 5,525 $ 25,038 $ 36,738
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................. $ 277 $ 11,572 $ 19,331
Accrued liabilities.......................... 2,872 3,245 3,654
Income taxes payable......................... -- -- 728
Current portion of capital lease obligations. 722 1,434 1,625
-------- -------- --------
Total current liabilities................ 3,871 16,251 25,338
-------- -------- --------
Capital lease obligations, less current
portion....................................... 617 1,891 2,143
-------- -------- --------
Commitments.................................... -- -- --
Stockholders' equity:
Convertible preferred stock, $.001 par value;
10,000,000 shares authorized;
Shares issued and outstanding 7,888,275 in
1996, 9,327,087 in 1997 and 9,327,087 on
March 29, 1998; aggregate liquidation
preference of $19,827 in 1997 and 1998..... 8 9 9
Common stock, $.001 par value; 200,000,000
shares authorized; 11,567,374, 14,140,585
and 14,141,710 shares issued and outstanding
in 1996, 1997 and March 29, 1998,
respectively................................ 12 14 14
Additional paid-in capital................... 12,317 22,902 23,211
Deferred compensation........................ -- (2,038) (2,166)
Accumulated deficit.......................... (11,300) (13,991) (11,811)
-------- -------- --------
Total stockholders' equity............... 1,037 6,896 9,257
-------- -------- --------
$ 5,525 $ 25,038 $ 36,738
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NVIDIA CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------
------------------------- MARCH 30, MARCH 29,
1995 1996 1997 1997 1998
------- ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product....................... $ 1,103 $ 3,710 $27,280 $ 65 $33,210
Royalty....................... 79 202 1,791 -- 4,452
------- ------- ------- ------- -------
Total revenue............... 1,182 3,912 29,071 65 37,662
Cost of revenue................. 1,549 3,038 21,226 208 27,559
------- ------- ------- ------- -------
Gross profit (loss)............. (367) 874 7,845 (143) 10,103
------- ------- ------- ------- -------
Operating expenses:
Research and development...... 2,426 1,218 6,632 616 3,815
Sales, general and
administrative............... 3,677 2,649 3,773 385 3,341
------- ------- ------- ------- -------
Total operating expenses.... 6,103 3,867 10,405 1,001 7,156
------- ------- ------- ------- -------
Operating income (loss)..... (6,470) (2,993) (2,560) (1,144) 2,947
Interest and other income
(expense), net................. 93 (84) (131) (32) (39)
------- ------- ------- ------- -------
Income (loss) before tax
expense........................ (6,377) (3,077) (2,691) (1,176) 2,908
Income tax expense.............. -- -- -- -- 728
------- ------- ------- ------- -------
Net income (loss)........... (6,377) (3,077) (2,691) (1,176) 2,180
======= ======= ======= ======= =======
Basic net income (loss) per
share.......................... $ (.56) $ (.27) $ (.21) $ (.10) $ .15
======= ======= ======= ======= =======
Diluted net income (loss) per
share.......................... $ (.56) $ (.27) $ (.21) $ (.10) $ .08
======= ======= ======= ======= =======
Shares used in basic per share
computation.................... 11,365 11,383 12,677 11,578 14,142
Shares used in diluted per share
computation.................... 11,365 11,383 12,677 11,578 25,729
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
NVIDIA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED ACCUMU- STOCK-
---------------- ----------------- PAID-IN COMPEN- LATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION DEFICIT EQUITY
--------- ------ ---------- ------ ---------- -------- -------- --------
<S> <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... -- -- -- -- 2,100 (2,100) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 62 -- 62
Net loss................ -- -- -- -- -- -- (2,691) (2,691)
--------- --- ---------- --- ------- ------- -------- -------
Balances, December 31,
1997................... 9,327,087 9 14,140,585 14 22,902 (2,038) (13,991) 6,896
Issuance of common stock
upon exercise of stock
options(1)............. -- -- 1,125 -- 4 -- -- 4
Deferred compensation
related to grant of
common stock
options (1) ........... -- -- -- -- 305 (305) -- --
Amortization of deferred
compensation (1)....... -- -- -- -- -- 177 -- 177
Net income (1).......... -- -- -- -- -- -- 2,180 2,180
--------- --- ---------- --- ------- ------- -------- -------
Balances, March 29, 1998 9,327,087 $ 9 14,141,710 $14 $23,211 $(2,166) $(11,811) $ 9,257
========= === ========== === ======= ======= ======== =======
</TABLE>
- --------
(1) Unaudited
See accompanying notes to financial statements.
F-5
<PAGE>
NVIDIA CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
-------------------------- -------------------
MARCH 30, MARCH 29,
1995 1996 1997 1997 1998
------- ------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............ $(6,377) $(3,077) $ (2,691) $(1,176) $ 2,180
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.............. 524 802 1,363 235 677
Stock options granted in
exchange for lease
financing and services.... 25 50 120 -- --
Amortization of deferred
compensation.............. -- -- 62 -- 177
Changes in operating assets
and liabilities:
Accounts receivable...... (458) (24) (11,446) (1,067) (4,178)
Inventory................ -- -- -- -- (2,523)
Prepaid expenses and
other current assets.... (592) 44 (199) (41) (798)
Deposits and other
assets.................. (65) (19) (58) -- --
Accounts payable......... 510 (506) 11,295 (18) 7,759
Accrued liabilities...... 300 2,451 373 1,132 409
Income taxes payable..... -- -- -- -- 728
------- ------- -------- ------- -------
Net cash provided by
(used in) operating
activities............ (6,133) (279) (1,181) (935) 4,431
------- ------- -------- ------- -------
Cash flows used in investing
activities--purchases of
property and equipment........ (5) (9) (2,732) (60) (2,024)
------- ------- -------- ------- -------
Cash flows from financing
activities:
Net proceeds from sale of
common stock................ -- 51 830 6 4
Net proceeds from sale of
preferred stock............. 5,762 -- 7,538 -- --
Payments under capital
leases...................... (307) (502) (1,037) (210) (322)
------- ------- -------- ------- -------
Net cash provided by
(used in) financing
activities............ 5,455 (451) 7,331 (204) (318)
------- ------- -------- ------- -------
Change in cash and cash
equivalents................... (683) (739) 3,418 (1,199) 2,089
Cash and cash equivalents at
beginning of period........... 4,555 3,872 3,133 3,133 6,551
------- ------- -------- ------- -------
Cash and cash equivalents at
end of period................. $ 3,872 $ 3,133 $ 6,551 $ 1,934 $ 8,640
======= ======= ======== ======= =======
Cash paid for interest......... $ 152 $ 215 $ 267 $ 54 $ 84
======= ======= ======== ======= =======
Noncash financing and investing
activity--assets recorded
under capital lease........... $ 1,430 $ 265 $ 3,023 $ 544 $ 765
======= ======= ======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED AS TO MARCH 29, 1998 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.
Interim Financial Information
The financial information presented as of and for the three months ended
March 30, 1997 and March 29, 1998 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 three months ended March 29, 1998 are not
necessarily indicative of results that may be expected for the full year.
Fiscal Year
The Company's fiscal years ended on December 31 prior to December 31, 1997.
Effective January 1, 1998, the Company changed its fiscal year end from
December 31 to a 52- or 53-week year ending on the last Sunday in December.
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.
Inventories at March 29, 1998 primarily consisted of finished goods.
Inventories were immaterial as of December 31, 1996 and 1997.
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 December 31, 1997, 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.
F-7
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 convertible preferred stock or the treasury
stock method for options and warrants. The effect of including convertible
preferred stock, options and warrants would have been antidilutive during all
periods presented and, as a result, such effect has been excluded from the
computation of diluted net loss per share. See Note 3 for information
regarding potentially dilutive outstanding shares of, and warrants to
purchase, 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 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:
F-8
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Basic and Diluted EPS:
Net loss..................................... $(6,377) 11,365 $(0.56)
======= ====== ======
YEAR ENDED DECEMBER 31, 1996
Basic and Diluted EPS:
Net loss..................................... $(3,077) 11,383 $(0.27)
======= ====== ======
YEAR ENDED DECEMBER 31, 1997
Basic and Diluted EPS:
Net loss..................................... $(2,691) 12,677 $(0.21)
======= ====== ======
THREE MONTHS ENDED MARCH 30, 1998
Basic EPS:
Net income................................... $22,108 14,142 $ 0.15
Effect of dilutive securities:
Stock options outstanding.................. -- 2,260 (0.02)
Convertible................................ -- 9,327 (0.05)
------- ------ ------
Diluted EPS:
Net income................................... $22,108 25,729 $ 0.08
======= ====== ======
</TABLE>
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
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:
Property and Equipment
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
MARCH 29,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Purchased engineering software............... $ -- $ 3,158 $ 3,313
Test equipment............................... 187 1,467 1,484
Computer equipment........................... 2,209 3,264 5,750
Leasehold improvements....................... 69 74 74
Office furniture and equipment............... 159 259 358
Assets held for lease........................ -- 157 188
------- ------- -------
2,624 8,379 11,167
Accumulated depreciation and amortization.... (1,480) (2,843) (3,519)
------- ------- -------
Property and equipment, net................ $ 1,144 $ 5,536 $ 7,648
======= ======= =======
</TABLE>
F-9
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accrued Liabilities
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 29,
1996 1997 1998
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Advances on development agreement................ $2,500 $2,500 $1,875
Other............................................ 372 745 1,779
------ ------ ------
$2,872 $3,245 $3,654
====== ====== ======
</TABLE>
(3) STOCKHOLDERS' EQUITY
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 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 preferred stock, respectively, and expire from 2003 to 2007. At
December 31, 1997, 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.
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%.
F-10
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Options
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 December 31, 1997, there were 1,942,897
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 Company has recorded
deferred compensation of $2,100,000 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 on a straight line basis over the
vesting period of the individual options, generally four years.
Had compensation cost for the Company's stock-based compensation plan 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>
THREE MONTHS ENDED
1995 1996 1997 MARCH 29, 1998
------- ------- ------- ------------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss):
As reported.................... $(6,377) $(3,077) $(2,691) $2,180
Pro forma...................... (6,389) (3,109) (2,796) 2,140
Net income (loss) per share:
As reported and pro forma basic
net income (loss) per share... $ (.56) $ (.27) $ (.21) $ .15
As reported and pro forma
diluted net income (loss) per
share......................... (.56) (.27) (.21) .08
Shares used in computing
reported and pro forma basic
net income (loss) per share... 11,365 11,383 12,677 14,142
Shares used in computing
reported and pro forma diluted
net income (loss) per share... 11,365 11,383 12,677 25,729
</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 6.5%; and expected life for the
option of five years.
F-11
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of option transactions under the Plan follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
AVAILABLE SHARES UNDER PRICE PER
FOR GRANT OPTION SHARE
----------- ------------ ---------
<S> <C> <C> <C>
Balances, December 31, 1994............ 459,707 143,000 $ .09
Authorized........................... 1,500,000 -- --
Granted.............................. (1,490,375) 1,490,375 .18
Exercised............................ -- (12,500) .18
----------- ----------
Balances, December 31, 1995............ 469,332 1,620,875 .17
Authorized........................... 4,000,000 -- --
Granted.............................. (1,756,860) 1,756,860 .31
Exercised............................ -- (407,581) .20
Canceled............................. 794,134 (794,134) .19
----------- ----------
Balances, December 31, 1996............ 3,506,606 2,176,020 .27
Authorized........................... 2,000,000 -- --
Granted.............................. (4,950,857) 4,950,857 1.43
Exercised............................ -- (2,573,211) .32
Canceled............................. 868,208 (868,208) .29
----------- ----------
Balances, December 31, 1997............ 1,423,957 3,685,458 .28
Authorized (unaudited)............... 4,800,000 -- --
Granted (unaudited).................. (2,327,500) 2,327,500 6.93
Exercised (unaudited)................ -- (1,125) 3.15
Canceled (unaudited)................. 15,000 (15,000) 5.67
----------- ----------
Balances, March 29, 1998 (unaudited)... 3,911,457 5,996,833 $3.90
=========== ==========
</TABLE>
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%. Options to purchase 50,000 shares of Common Stock were granted to an
outside investor during the Series D preferred stock offering.
The weighted-average fair value of options granted during 1995, 1996 and
1997 was $.05, $.08 and $.79, respectively. At December 31, 1997, 2,230,458
shares were exercisable.
The following table summarizes information about stock options outstanding
as of December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------
WEIGHTED-
AVERAGE
REMAINING NUMBER
EXERCISE NUMBER CONTRACTUAL OF SHARES
PRICES OF SHARES LIFE EXERCISABLE
-------- --------- ----------- -----------
<S> <C> <C> <C>
$ .05.................................... 3,000 6.50 3,000
.18.................................... 50,000 7.08 50,000
.36.................................... 1,034,833 9.07 1,034,833
1.30.................................... 796,000 9.70 781,000
2.64.................................... 1,155,500 9.91 345,500
3.15.................................... 696,125 9.98 16,125
--------- ---- ---------
$ .05 - $3.15............................ 3,735,458 9.60 2,230,458
========= =========
</TABLE>
F-12
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) COMMITMENTS
The Company leases a facility in Sunnyvale, California under operating lease
agreements that expire in August 1998. The Company is committed to pay
approximately $499,000 of future minimum lease payments under this agreement
during 1998. Rent expense for 1995, 1996 and 1997 was approximately $325,000,
$408,000 and $426,000, respectively.
In addition to the facility lease, the Company also leases certain computers
and equipment under capital leases with the option to purchase the assets upon
termination of the leases. As of December 31, 1997, future minimum lease
payments, including costs to exercise buyout options under capital leases,
were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31:
1998.......................................................... $1,589
1999.......................................................... 1,442
2000.......................................................... 934
2001.......................................................... 7
------
Total lease payments........................................ 3,972
Less amount representing interest, at rates ranging from 9% to
12%............................................................ 647
------
Present value of minimum lease payments......................... 3,325
Less current portion............................................ 1,434
------
Long-term portion........................................... $1,891
======
</TABLE>
Assets recorded under capital leases included in property and equipment were
$2,314,000 and $4,765,000 as of December 31, 1996 and 1997, respectively.
Accumulated amortization thereon was $1,233,000 and $2,137,000 as of December
31, 1996 and 1997, respectively.
(5) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 3,374 $ 3,743
Plant and equipment--depreciation differences.......... 127 173
Advances on development contract....................... 996 996
Research credit carryforwards.......................... 617 1,058
Stock options.......................................... -- 72
Other reserves and accruals............................ 107 229
------- -------
Total gross deferred tax assets...................... 5,221 6,271
Less valuation allowance............................... (5,221) (6,271)
------- -------
Net deferred tax assets.............................. $ -- $ --
======= =======
</TABLE>
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. The
Company believes that sufficient uncertainty exists with
F-13
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
respect to future realization of these deferred tax assets; therefore, it has
established a valuation allowance against all net deferred tax assets.
The Company has 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 the 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 through 2002. The Company also has federal and California tax credit
carryforwards of approximately $600,000 and $450,000, respectively, as of
December 31, 1997. These tax credits expire through 2012.
Under the Tax Reform Act of 1986, 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 and $1,791,000 in 1995, 1996 and 1997, 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
$495,000 and $420,000 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.
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 was derived from sales of one product, the
RIVA128 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.
F-14
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. Product revenue from STB Systems, Inc.
("STB") and Diamond Multimedia Systems, Inc. ("Diamond") accounted for 63% and
31%, respectively, of the Company's 1997 revenue and in 1996 and 1995 Diamond
accounted for 82% and 86%, respectively, of revenue. 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 1997 revenue 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.
Accounts receivable as of December 31, 1997 were $6,261,000 and $5,768,000
from STB and Diamond, respectively.
Markets. In 1997, 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, 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.
(8) SUBSEQUENT EVENTS
Reincorporation
On April 16, 1998, the Company was reincorporated in the state of Delaware.
The Certificate of Incorporation of the Delaware corporation authorizes
200,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of preferred stock, $.001 par value per share. The accompanying
financial statements have been retroactively restated to give effect to the
reincorporation.
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
F-15
<PAGE>
NVIDIA CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
"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.
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.
LEGAL PROCEEDINGS
Silicon Graphics, Inc. ("SGI") filed a patent infringement lawsuit against
the Company in April 1998, and in May 1998, S3 Incorporated ("S3") filed a
patent infringement lawsuit against the Company. In the event of an adverse
result in either the SGI or the S3 suit, the Company could be required to do
one or more of the following: pay substantial damages (including treble
damages), cease the manufacture, use and sale of any infringing products,
expend significant resources to develop non-infringing technology, or obtain a
license from SGI or S3 for any infringing technology. Either 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 or S3, any of which would have a material adverse effect
on the Company's business, financial condition and results of operations.
F-16
<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....................................... 400,000
Accounting fees and expenses.................................. 175,000
Transfer agent and registrar fees............................. 10,000
Miscellaneous................................................. 298,700
----------
Total..................................................... $1,150,000
==========
</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 July 1, 1995, the Registrant has sold and issued the following
unregistered securities:
(1) In July 1995, the Company sold 750,000 shares of the Company's Series
C Preferred Stock for an aggregate purchase price of $5,000,000.
II-1
<PAGE>
(2) In October 1995, the Company issued, in connection with an equipment
lease, a warrant to purchase 5,400 shares of Series C Preferred Stock at an
exercise price of $6.67 per share.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) From July 1, 1995 to July 21, 1998, the Company granted stock options
to employees, directors and consultants covering an aggregate of 10,721,860
shares of the Company's Common Stock, at exercise prices varying from $0.18
to $9.00. Of such shares, 3,016,810 shares have been issued and sold
pursuant to the exercise of such options. Options to purchase 1,960,717
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 $0.18 to $0.36.
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 (7) 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.
The sales and issuances in the transactions described in paragraph (8) 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.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
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.
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.
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.
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.
II-3
<PAGE>
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 24TH DAY OF JULY 1998.
NVIDIA Corporation
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>
Jen-Hsun Huang* President, Chief Executive July 24, 1998
____________________________________ Officer and Director
Jen-Hsun Huang (Principal Executive
Officer)
/s/ Geoffrey G. Ribar Chief Financial Officer July 24, 1998
____________________________________ (Principal Financial and
Geoffrey G. Ribar Accounting Officer)
Tench Coxe* Director July 24, 1998
____________________________________
Tench Coxe
Harvey C. Jones, Jr.* Director July 24, 1998
____________________________________
Harvey C. Jones, Jr.
William J. Miller* Director July 24, 1998
____________________________________
William J. Miller
A. Brooke Seawell* Director July 24, 1998
____________________________________
A. Brooke Seawell
Mark A. Stevens* Director July 24, 1998
____________________________________
Mark A. Stevens
/s/ Geoffrey G. Ribar
*By: _______________________________
Geoffrey G. Ribar
As Attorney-In-Fact
</TABLE>
II-5
<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.
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.
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 10.13
SUBLEASE
This Sublease, dated April 2, 1998, for reference purposes only, is made by
and between Apple Computer, Inc., a California corporation (the "Sublessor"),
and NVidia, a Delaware corporation, (the "Sublessee"), with respect to the
following facts:
A. Sublessor is the tenant under that certain Lease (the "Master Lease")
dated June 1, 1988, amended by that certain Memorandum of Lease dated June 1,
1988, First Amendment to Lease dated May 31, 1989, that certain Second Amendment
to Lease dated November 9, 1989, that certain Third Amendment to Lease dated
February 8, 1995, that certain Fourth Amendment to Lease dated March 29, 1995,
that certain Fifth Amendment to Lease dated June 20, 1995, and that certain
Sixth Amendment to Lease dated December 22, 1995, of approximately 218,816
square feet of space located at 3515, 3535 and 3585 Monroe Drive, Santa Clara,
Santa Clara County, State of California (the "Premises"), which Master Lease was
executed by MPJ, a California general partnership, as Landlord (hereinafter the
"Master Lessor"), and Sublessor as Tenant. The Master Lease is attached hereto
as Exhibit A and, subject to the terms hereof, is incorporated herein.
B. Sublessee desires to sublease a portion of the Premises, consisting of
approximately eighty-eight thousand nine hundred thirty-six (88,936) square
feet, commonly known as 3535 Monroe Drive, Santa Clara, California, and shown
hatched on the floor plan attached as Exhibit B (the "Sublease Premises"), on
the terms and conditions set forth below.
NOW, THEREFORE, for good and valuable consideration, the parties agree
as follows:
1. Premises Sublessor hereby subleases the Sublease Premises to
--------
Sublessee, and Sublessee hereby subleases the Sublease Premises from Sublessor,
for the term, at the rental and upon all the conditions set forth herein.
2. Term.
----
2.1 Term. The term of this Sublease shall be for a period commencing
----
on the later of (a) June 1, 1998 or (b) the date that the written consent of
Master Lessor to this Sublease has been obtained (the "Commencement Date").
Subject to the terms hereof, this Sublease shall expire on December 31, 2002,
unless the Master Lease is sooner terminated, which termination shall occur
without liability on the part of Sublessor unless such termination resulted
solely from a default of Sublessor thereunder.
2.2 Delay in Commencement. Notwithstanding the provisions of
---------------------
paragraph 2.1, above, if for any reason Sublessor cannot deliver possession of
the Demised Premises to Sublessee on the Commencement Date, Sublessor shall not
be subject to any liability on account of said failure to deliver, nor shall
such failure affect the validity of this Sublease or the obligations of
Sublessee hereunder or extend the term hereof, but in such event, Sublessee
shall not be obligated to pay rent for the Sublease Premises until possession of
the Sublease Premises is tendered to Sublessee, provided the delay is not
attributable to Sublessee. If the Commencement Date is delayed as a result of
any act or omission of Sublessee, its agents, employees or contractors, the
Commencement Date shall be deemed to be the date the Commencement Date would
have occurred if no Sublessee delay or delays had occurred.
Notwithstanding the provisions of paragraph 2.2, if Sublessor has not
delivered the Sublease Premises to Sublessee in the condition required
hereunder, free of occupants and tenants, on or before July 1, 1998, Sublessee
shall have the right thereafter, until such possession is
1.
<PAGE>
delivered to Sublessee to cancel this Sublease on not less than ten (10) days
prior written notice to Sublessor; if Sublessor delivers the Premises to
Sublessee within period, Sublessee shall accept possession of the Premises. Upon
such cancellation, Sublessor shall return to Sublessee all sums theretofore
deposited by Sublessee with Sublessor and neither party shall have any further
liability or obligation to the other.
3. Rent.
----
3.1 Base Monthly Rent. Beginning on the Commencement Date,
-----------------
Sublessee shall pay to Sublessor during the term of this Sublease the following
amounts as "Base Monthly Rent":
Months Rent/SF/Mo Rent/Mo
------ ---------- --------
Months 1 through 12 $1.25 NNN $111,170
Months 13 through 24 $1.70 NNN $151,191
Months 25 through 36 $1.75 NNN $155,638
Months 37 through 48 $1.80 NNN $160,085
Months 49 through 55 $1.85 NNN $164,532
Full Base Monthly Rent is due and shall be paid in advance in equal
installments on or before the first day of each calendar month in lawful money
of the United States without notice or demand and without any set off,
deduction, abatement or offset whatsoever except as otherwise provided herein.
Base Monthly Rent for any partial month during the Sublease term shall be
prorated based on the actual number of days in the partial month. Sublessor and
Sublessee agree to execute a Confirmation of Commencement Date Agreement in the
form attached as Exhibit C, confirming the date this Sublease commences and the
dates on which Base Monthly Rent increases during the Sublease term.
3.2 Payment of First Month's Base Monthly Rent. Concurrently
------------------------------------------
with Sublessee's execution of this Sublease, Sublessee shall deposit with
Sublessor the sum of One Hundred Eleven Thousand One Hundred Seventy and 00/100
Dollars ($111,170.00) as payment of the first month's Base Monthly Rent.
3.3 Additional Rent. All monies other than Base Monthly Rent
----------------
required to be paid by Sublessee under this Sublease, including, without
limitation, the furniture price (as defined in paragraph 14 and Exhibit F), all
operating expenses, taxes, insurance, maintenance and other expenses and charges
of every kind and nature arising in connection with the Sublease Premises, this
Sublease or the Master Lease (including, without limitation, all amounts payable
under the Master Lease as described in Sections 3.4, 4, 6, 7, and 11) shall be
deemed "Additional Rent" payable by Sublessee to Sublessor in accordance with
the terms of this Sublease and the Master Lease. Base Monthly Rent and
Additional Rent shall be referred to collectively herein as "Rent." For
purposes of this Sublease, Sublessee's Pro Rata Share, as defined in Section 3.4
of the Master Lease, shall be 88,936/275,264 or 32.31%. Rent shall be paid by
Sublessee to Sublessor at the address stated herein or at such other address as
may be designated by Sublessor. Notwithstanding the foregoing, Sublessor shall
have the right to direct Sublessee to pay Rent directly to Master Lessor, and
Master Lessor shall credit such amounts to the Rent due for the Sublease
Premises pursuant to the Master Lease.
3.4 No Rental Adjustment. The parties agree that any statement
--------------------
of square footage set forth in the Sublease is an approximation which Sublessor
and Sublessee agree is reasonable and the rental based thereon and Tenant's Pro
Rata Share as set forth in paragraph 3.3. is not subject to revisions if the
actual square footage is more or less.
Sublessor agrees to make timely payments of rent and any other sums
due
2.
<PAGE>
thereunder and to faithfully and fully perform all of its obligations under the
Master Lease to the end that the Master Lease shall not be terminated to the
default of Sublessor thereunder.
Notwithstanding anything herein to the contrary, Sublessor shall
promptly provide Sublessee with a copy of any written notice received by
Sublessor of any default of Sublessor under the Master Lease, which default is
continuing after the expiration of any applicable grace period provided therefor
in the Master Lease ("Sublessor's Default"). From and after Sublessor's
Default, Sublessee shall have the right, but not the obligation, to pay any and
all Base Rent and Additional Rent accruing from and after the date of such
Default, and perform all its obligations hereunder to Master Lessor without
being liable to Lessor for such payments or performance. If Master Lease
terminates due to Sublessor's default of its obligations thereunder, Sublessee
may request Master Lessor to execute and deliver to Sublessee a nondisturbance
agreement. Upon receipt thereof, Sublessee shall attorn to Master Lessor and
recognize Master Lessor as Lessor under this Lease, and Master Lessor shall
agree in writing to be bound by the terms of this Sublease.
4. Security Deposit.
----------------
4.1 Concurrently with Sublessee's execution of this Sublease,
Sublessee shall deposit with Sublessor the sum of Two Hundred Twenty-Two
Thousand Three Hundred Forty and 00/100 Dollars ($222,340.00) which shall be
held by Sublessor as security for the faithful performance of all of the terms
of this Sublease. If Sublessee fails to pay Rent or otherwise defaults with
respect to any provision of this Sublease, then Sublessor may draw upon, use,
apply or retain all or any portion of the security deposit after applicable
notice and cure periods for the payment of any Rent or other charge in default,
for the payment of any other sum which Sublessor has become obligated to pay by
reason of Sublessess's default, or to compensate Sublessor for any loss or
damage which Sublessor has suffered thereby. If Sublessor so uses or applies all
or any portion of the security deposit, then Sublessee, within fifteen (15) days
after demand therefore, shall deposit cash with Sublessor in the amount required
to restore to the full amount stated above. Upon the expiration of this
Sublease, if Sublessee is not in default, Sublessor shall return to Sublessee so
much of the security deposit as has not been applied by Sublessor pursuant to
this Paragraph 4, or which is not otherwise required to cure Sublessee's
defaults.
5. Use of Premises. The Demised Premises shall be used and occupied
---------------
solely for the purposes set forth in Section 5.1 of the Master Lease.
5.1. Condition of Demised Premises; Repairs. Subject to the
--------------------------------------
provisions of Paragraph 5.2 below, Sublessor has not agreed to make any
alterations, repairs or improvements to the Sublease Premises, and by taking
possession of the Sublease Premises, Sublessee shall conclusively be deemed to
have accepted the Sublease Premises in their "as-is" then existing condition
excluding latent defects, subject to all applicable zoning, municipal, county
and state laws, ordinances and regulations governing or regulating the use or
occupancy of the Sublease Premises. Sublessee acknowledges that neither
Sublessor nor its agents has made any representations or warranties with respect
to the condition of the Sublease Premises or as to the suitability of the
Sublease Premises for the conduct of Sublessee's business. In particular,
Sublessor makes no representation with respect to compliance of the Sublease
Premises or the Complex with the Americans With Disabilities Act of 1990
("ADA"), compliance with which shall be the sole responsibility of Sublessee.
5.2 Repairs. Sublessor shall have no obligation whatsoever to make
-------
or pay the cost of any alterations, improvements or repairs to the Sublease
Premises, including, without limitation, any improvement or repair required to
comply with any law, regulation, building code or ordinance (including the ADA).
Notwithstanding the foregoing, if Master Lessor shall fail to perform its
obligations in accordance with the terms of the Master Lease, Sublessor, upon
receipt
3.
<PAGE>
of written notice from Sublessee, shall diligently attempt to enforce all
obligations of Master Lessor under the Master Lease (without requiring Sublessor
to spend more than a nominal sum, which nominal sum shall be limited to all
costs associated with the preparation of and transmittal to Master Lessor of
documentation from Sublessor or Sublessor's attorneys detailing the obligations
to be performed by Master Lessor under the Master Lease). If, after receipt of
written request from Sublessee, Sublessor shall fail or refuse to take action
for the enforcement of Sublessor's rights against Master Lessor with respect to
the Sublease Premises ("Action"), and provided that Sublessor as Tenant under
the Master Lease shall be conferred upon and assigned to Sublessee, and
Sublessee shall be subrogated to such rights to the extent that the same shall
apply to the Sublease Premises. If any such Action against Master Lessor in
Sublessee's name shall be barred by reason of lack of privity, nonassignability
or otherwise, Sublessee may take such Action in Sublessor's name; provided that
Sublessee has obtained the prior written consent of Sublessor, which consent
shall not be unreasonably withheld, and, provided further, that Sublessee shall
indemnify, protect, defend by counsel reasonably satisfactory to Sublessor and
hold Sublessor harmless from and against any and all liability, loss, claims,
demands, suits, penalties or damage (including, without being limited to,
reasonable attorneys' fees and expenses) which Sublessor may incur or suffer by
reason of such Action, except for any such liability, loss, claims, demands,
suits, penalties or damage which Sublessor may incur or suffer by reason of
Sublessor's negligent acts or omissions.
5.3 Alterations. Sublessee's rights to make alterations to the
-----------
Sublease Premises is subject to the provisions of Section 7.3 of the Master
Lease. Unless otherwise agreed to in writing by Master Lessor, at the
expiration or earlier termination of this Sublease, Sublessee shall (i) remove
all alterations, additions and improvements to the Sublease Premises made by
Sublessee or its contractors, (ii) restore the Sublease Premises to their
original condition prior to making such alterations, additions and improvements,
and (iii) repair all damage caused in removing such alterations, additions and
improvements. Sublessee agrees that the indemnification provisions of Section
10 of the Master Lease shall be deemed to include all claims, damages, costs,
expenses and the like therein described which arise out of any alterations,
additions or other improvements to the Sublease Premises made by Sublessee or
its contractors.
6. Master Lease Provisions.
-----------------------
6.1 Performance of Master Lease Provisions. Sublessee acknowledges
--------------------------------------
and agrees that this Sublease shall be subject and subordinate to the Master
Lease, and neither Sublessee nor Sublessor shall not cause or permit any
violation of any term thereof. Sublessee hereby expressly assumes and agrees to
perform and comply with, for the benefit of Sublessor and Master Lessor, each
and every obligation of Sublessor as Tenant under the Master Lease which relates
to the Demised Premises to the extent incorporated herein. Sublessor agrees
that it shall perform all of its obligations under the Master Lease which have
not been assumed by Sublessee, such that the Master Lease shall not be
terminated due to the default of Sublessor during the term of this Sublease.
Sublessor shall indemnify, defend, and hold Sublessee harmless from and against
any liability, less, damages, actions, proceedings or expenses (including but
not limited to attorney's fees and consultant's fees) arising or resulting from
or in connection with a breach of this obligation.
6.2 Incorporation By Reference. The terms and conditions of this
--------------------------
Sublease shall include all of the provisions of the Master Lease, which are
incorporated into this Sublease as if fully set forth, except that:
(i) each reference in such incorporated Sections to "Lease"
shall be deemed a reference to "Sublease."
(ii) each reference to "Landlord" and "Tenant" shall be deemed
4.
<PAGE>
a reference to "Sublessor" and "Sublessee," respectively, except as otherwise
provided herein.
(iii) with respect to work, services, repairs, provision of
insurance, restoration, or the performance of any other obligation of Master
Lessor under the Master Lease including, without limitation, Section 7.1
(Maintenance and Repairs); Section 7.2G and Section 7.3D (Capital Improvements);
Section 10.1 (Landlord's Indemnification); Section 11.2 (Landlord's Insurance);
Section 12 (Damage or Destruction); Section 13 (Condemnation); Section 18.1
(Outside Area); and Section 18.2 (Outside Area Expenses); the sole obligation of
Sublessor shall be as set forth in paragraph 5.2 above. Sublessor shall provide
to Sublessee copies of all notices given to Sublessor by Master Lessor which are
relevant to this Sublease promptly following receipt thereof, including but not
limited to any notice of Sublessor's default or breach of its obligations under
the Master Lease.
(iv) except as expressly provided herein, with respect to any
obligation of Sublessee to be performed under this Sublease, wherever the Master
Lease grants to Sublessee a specified number of days to perform its obligations
under the Master Lease, Sublessee shall have one-half of the number of days
granted in the Master Lease (rounded up) to perform the obligation, including,
without limitation, curing any defaults. In addition, the reference in Section
4.1(b) to ten days shall be twenty (20) days; the reference in Section 4.2(b) to
ten (10) days shall be twenty (20) days; the reference in Section 4.4 to ten
(10) days shall be twenty (20) days; the reference in Section 7.3A to five (5)
days shall be ten (10) days, the reference to thirty (30) days shall be forty-
five (45) days, the reference to one hundred twenty (120) days shall be one
hundred thirty-five (135) days, and the reference to ten (10 business days shall
be twenty (20) business days; the reference in Section 9 to ten (10 business
days shall be twenty (20) business days; the references in Section 14.1B and
14.1C to fifteen (15) days shall be thirty (30) days; and the references in
Section 16.3 to thirty (30) days shall be forty-five (45) days.
(v) with respect to any approval required to be obtained from
the "Landlord" under the Master Lease, such consent must be obtained from both
Master Lessor and Sublessor and the approval of Sublessor may be withheld if
Master Lessor's consent is not obtained.
(vi) the following provisions are not incorporated into this
Sublease, or are incorporated as modified herein: Sections 1, 2, 3.1, 3.2, 3.3;
the last full paragraph of Section 3.4; the second paragraph of Section 5.1; the
second sentence of Section 7.2F; the proviso in the first sentence of Section
7.3A; the reference to "Landlord" in the first sentence of Section 6.3 shall
apply only to the Master Lessor; the word "negligence" in the last sentence of
Section 10.2 is replaced with the phrase "gross negligence;" the termination
rights of Tenant set forth in Section 12 shall apply only with respect to the
Sublease Premises; the proviso in the first sentence of Section 15.1; the
reference to "one percent (1%)" in Section 16.2B shall be "five percent (5%);"
Section 17; the first sentence of the second paragraph of Section 18.1; the
reference to "Landlord" in the third sentence of Section 18.2 shall apply only
to the Master Lessor; Section 19; the fourth sentence in Section 20.3C; the
proviso in the second sentence of Section 20.11; the addresses set forth in
Section 20.16 are replaced with the addresses set forth below in Paragraph 13.4
of this Sublease; Section 20.18; Section 21; Sections 22B through 22F; Exhibits
A and B; and all amendments to the Master Lease described in Recital A above.
7. Right to Cure. If Sublessee fails to pay any sum of money to Sublessor
-------------
or to Master Lessor, or fails, within any applicable grace periods provided for
therein, or to perform any other act on its part to be performed hereunder, then
Sublessor may, but shall not be obligated to make such payment or perform such
act. All such sums paid and all costs and expenses of performing any such act
shall be deemed additional rent payable by Sublessee to Sublessor upon demand,
together with interest thereon at the interest rate described in Section 20.14
of the Master Lease.
5.
<PAGE>
8. Insurance, Sublessee agrees to carry the insurance coverage described
---------
in Section 11.1 of the Master Lease during the term of this Sublease. Sublessee
shall name Sublessor as an additional insured under the required insurance
policies. Prior to occupancy of the Sublease Premises, Sublessee shall deliver
a certificate of insurance evidencing the above to Sublessor and Master Lessor.
9. Assignment and Subletting.
-------------------------
9.1 Restriction on Assignment and Subletting. Sublessee shall not
----------------------------------------
assign, sublease, transfer or encumber this Sublease or any interest therein or
grant any license, concession or other right of occupancy of the Sublease
Premises or any portion thereof or otherwise permit the use of the Sublease
Premises or any portion thereof by any party other than Sublessee (any of which
events is hereinafter called a "Transfer") without the prior written consent of
the Master Lessor pursuant to Section 14 of the Master Lease and the Sublessor,
which consent of Sublessor shall not be unreasonably withheld or delayed.
Sublessor's consent shall be considered reasonably withheld if (i) the proposed
transferee is determined by Sublessor to not be financially sound applying
generally accepted accounting principles in making such determination; (ii)
Sublessee is in default; or (iii) any portion of the Sublease Premises would
become subject to additional or different governmental laws or regulations as a
consequence of the proposed Transfer and/or the proposed transferee's use and
occupancy of the Sublease Premises and or which impose significant financial
burden on Sublessor as a result thereof. Sublessee acknowledges that the
foregoing is not intended to be an exclusive list of the reasons for which
Sublessor may reasonably withhold its consent to a proposed Transfer. Any
attempted Transfer in violation of the terms of this Paragraph 9 shall, at
Sublessor's option, be void. Consent by Sublessor to one or more Transfers
shall not operate as a waiver of Sublessor's rights as to any subsequent
Transfers. Notwithstanding the foregoing, Sublessee shall be permitted the
rights of assignment or subletting described in Section 14.1E of the Master
Lease provided that (i) Sublessee gives written notice to Sublessor at least
thirty (30) days prior to such proposed transfer together with such information
as shall establish that the proposed Transfer qualifies for the exemption set
forth in Section 14.1E; (ii) the proposed transferee delivers to Sublessor
concurrent with any such assignment or subletting an assumption agreement
whereby the proposed transferee assumes and agrees to perform, observe and abide
by the terms, conditions, obligations and provisions of the Sublease; and (iii)
in the case of a proposed Transfer to an affiliate, the entity status is not
established as a subterfuge in an attempt to avoid the provisions of this
Sublease respecting assignment and subletting.
9.2 Required Notice. If Sublessee requests Sublessor's consent to a
---------------
Transfer, Sublessee, together with such request, shall provide Sublessor with
the name of the proposed transferee and the nature of the business of the
proposed transferee, the term, use, rental rate and all other material terms and
conditions of the proposed Transfer, including, without limitation, a copy of
the proposed assignment, sublease or other contractual documents and evidence
satisfactory to Sublessor that the proposed transferee is financially sound.
Notwithstanding Sublessor's agreement to act reasonably under subparagraph 9.1
above, Sublessor may, within thirty (30) days after its receipt of all
information and documentation required herein consent to or reasonably refuse to
consent to such Transfer in writing. In the event Sublessor consents to any
such Transfer, the Transfer and consent thereto shall be in a form reasonably
approved by Sublessor, and Sublessee shall bear all actual costs and expenses
incurred by Sublessor in connection with the review and approval of such
assignment or sublease documentation.
9.3 Bonus Rent. If Sublessor consents to any Transfer pursuant to
----------
this Paragraph 9, Sublessee may, within one hundred twenty (120) days
thereafter, enter into such assignment or sublease of the Sublease Premises or
portion thereof upon the terms and conditions set forth in the notice furnished
to Sublessee pursuant to subparagraph 9.2 above. However, one
6.
<PAGE>
hundred percent (100%) of any rent or other consideration for the first year of
the Sublease and fifty percent (50%) of any rent or other consideration for the
remainder of the Sublease realized by Sublessee under any such assignment or
sublease (the "Transfer Consideration") in excess of the Base Monthly Rent and
Additional Rent payable hereunder (or the amount thereof proportionate to the
portion of the Sublease Premises subject to such sublease or assignment) shall
be paid to Sublessor, after deducting therefrom all actual costs and reasonable
expenses incurred by Sublessee to effect the transfer including but not limited
to rent concessions, advertising costs any customary brokers' commissions and
reasonable attorneys' fees in connection with such assignment or sublease
amortized on a straight line basis (without interest) over the term of the
sublease or assignment. Sublessee hereby covenants and agrees to promptly pay to
Sublessor the Transfer Consideration as and when received by Sublessee, but in
no event more than ten (10) days after receipt thereof.
9.4 Effect of Transfer. Any Transfer consented to by Sublessor in
------------------
accordance with this Paragraph 9 shall be only for the use permitted by Section
5.1 of the Master Lease and for no other purpose. In no event shall any
Transfer release or relieve Sublessee or any Guarantor from any obligations
under this Sublease.
10. Sublessor's Representations, Warranties and Covenants. Sublessor
-----------------------------------------------------
hereby represents and warrants to Sublessee that as of the commencement of the
Sublease (i) that the document attached as Exhibit A to this Agreement is a
true, correct and complete copy of the Master Lease, and that the Master Lease
represents the entire agreement between Sublessor and Master Lessor with respect
to the lease of the Sublease Premises, (ii) that, to the best knowledge Of
Sublessor, there is no default, or any condition which with the passage of time
or the giving of notice, or both, would constitute a default, on the part of
either party to the Master Lease, (iii) Sublessor has not assigned, encumbered
or otherwise transferred any interest of Tenant under the Master Lease with
respect to the Sublease Premises, (iv) the Expiration Date of the Master Lease
is December 31, 2002, and (v) there are no third party consents required with
respect to this lease transaction other than the consent of Master Lessor; and
Sublessor has duly authorized this lease transaction.
11. Amendments to Master Lease. Sublessor agrees that it shall not,
--------------------------
without the prior written consent of Sublessee, which consent shall not be
unreasonably withheld or delayed, enter into any amendment to the Master Lease
which prevents or materially adversely affects the use by Sublessee of the
Sublease Premises in accordance with the terms of this Sublease, materially
increases the obligations of Sublessee under this Sublease or materially
decreases Sublessee's rights under this Sublease.
12. Miscellaneous
-------------
12.1 Attorney's Fees. If either Sublessor or Sublessee brings any
---------------
action or proceeding, whether legal, equitable or administrative, to enforce
rights and obligations under this Sublease, or to declare rights hereunder, the
prevailing party in any such action or proceeding shall be entitled to recover
from the other party reasonable attorneys' fees and costs of suit, in addition
to any other relief allowed by the court.
12.2 Brokers. The parties agree that they have dealt with no real
-------
estate broker in connection with this Sublease other than Cornish and Carey, and
they agree to indemnify and hold each other harmless from and against any damage
or expense incurred by reason of any other broker claiming a right to any
commission or compensation as a result of its dealings with the indemnifying
party.
12.3 Authority to Execute. Sublessee and Sublessor each represent
--------------------
and warrant to the other that the person(s) executing this Sublease on behalf of
each party is (are) duly
7.
<PAGE>
authorized to execute and deliver this Sublease on that party's behalf.
12.4 Notices. Any notice required or permitted to be given under
-------
this Sublease, including any change of address for purpose of giving notice,
shall be in writing, and shall be given as provided in Section 20.16 of the
Master Lease. For purposes of this Sublease, the addresses of the parties are
set forth below:
Sublessor
---------
Apple Computer, Inc.
One Infinite Loop
Mail Stop 35-AOK
Cupertino, CA 95014
Attention: Real Estate Department
With copies of default notices only to:
------------------------
Apple Computer, Inc.
One Infinite Loop
Cupertino, CA 95014
Attention: General Counsel/esm
Sublessee
---------
NVidia
3535 Monroe Street
Santa Clara, CA 95051
12.5 Incorporation of Prior Agreements. This Sublease incorporates
---------------------------------
all agreements of the parties with respect to the subject matter hereof, and
supersedes all prior agreements and understandings of the parties, whether oral
or written.
12.6 Modifications, This Sublease may be modified or amended only by
-------------
an instrument in writing, executed by both parties in interest hereunder.
12.7 Governing Law; Severability. This Sublease shall be governed by
---------------------------
and construed in accordance with the laws of the State of California. If any
term or provision of this Sublease is found by a court of competent jurisdiction
to be void or unenforceable, such term or provision shall be deemed severed from
the remainder of the terms and provisions of this Sublease, and said remainder
shall remain in full force and effect, according to its terms, to the extent
permitted by law.
12.8 Parking. Subject to the provisions of Section 18.1 of the
-------
Master Lease, Sublessee shall have the non-exclusive right at no additional
cost, to use all parking spaces located in the Outside Area as outlined in red
on Exhibit D attached hereto.
12.9 Hazardous Materials. Attached hereto as Exhibit E is an
-------------------
environmental report prepared by Kennedy/Jenks Consultants with respect to the
Sublease Premises. Other than the information contained in such reports,
Sublessor represents and warrants that it has not received any written notice of
the release or disposal of any Hazardous Materials on or about the Sublease
Premises in violation of any Hazardous Materials Laws. Sublessor represents and
warrants that it has not released or disposed of any Hazardous Materials on or
about the Sublease Premises in violation of Hazardous Materials Laws. Except as
otherwise provided herein and except for the foregoing representation, Sublessor
makes no representation or warranty of any kind whatsoever with respect to any
Hazardous Materials on or about the Premises.
8.
<PAGE>
12.10 Signage. Sublessee's signage rights shall be subject to the
-------
provisions of Section 20.12 of the Master Lease, as amended hereby.
12.11 Subordination; Nondisturbance Agreement. Prior to the
---------------------------------------
Commencement Date, Sublessor shall request from Master Lessor, a nondisturbance
agreement from Master Lessor's lender which is reasonably acceptable to
Sublessee, and shall use reasonable efforts to obtain the same from Master
Lessor; provided, however, Sublessee's receipt of a non-disturbance agreement
from Master Lessor's lender shall not be a condition of this Sublease.
12.12 Exhibits. Subject to the terms hereof, all exhibits attached
---------
hereto are incorporated herein.
13. Landlord's Lien. Notwithstanding anything herein to the contrary,
---------------
but subject to any rights Sublessor may have under Exhibit C, Sublessor waives
any and all rights, title and interest Sublessor now has, or hereafter may have,
whether statutory or otherwise, to Sublessee's inventory, equipment,
furnishings, trade fixtures, books, and records, personal property, tenant
improvements paid for by Sublessee located at the Premises (singly and/or
collectively, the "Collateral"). Sublessor acknowledges that Sublessor has no
lien, right, claim, interest or title in or to the Collateral. Sublessor
further agrees that Sublessee shall have the right, at its discretion, to
mortgage, pledge, hypothecate or grant a security interest in the arrangement
related to the conduct of Sublessee's business at the Premises. The Collateral
shall not become the property of Sublessor and may be removed by Sublessee or at
any time and from time to time during the entire term of this Lease. Sublessee
shall promptly repair any damage caused by the removal of such property, whether
effected by Sublessee.
14. Furniture Purchase. Concurrently herewith, Sublessor agrees to sell
------------------
223 cubicle work stations to include files and chairs and existing white board
(collectively the "Furniture") subject to the terms set forth in the attached
Exhibit F ("Furniture") to the Sublease. Sublessor acknowledges that the
agreement to sell the Furniture to Sublessee on the terms and conditions set
forth herein is a material inducement for Sublessee to enter into this Sublease
and the consummation of such sale on the terms and conditions reasonable
satisfactory to Sublessee shall be condition of this transaction.
15. Effectiveness; Consent of Master Landlord. This Sublease shall be of
-----------------------------------------
no force or effect unless and until the Master Lessor has executed and delivered
to Sublessee and Sublessor a fully executed consent to this Sublease, which the
Parties will pursue promptly and in good faith.
9.
<PAGE>
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease on
the dates set forth below, to be effective as of the date first set forth above.
SUBLESSOR: SUBLESSEE:
APPLE COMPUTER, INC. NVIDIA, INC.
By: By:
-------------------------------- --------------------------------
Its: Its:
------------------------------- -------------------------------
Date: Date:
------------------------------ ------------------------------
<PAGE>
LESSOR'S CONSENT
Subject to the conditions listed below, MPJ, a California general partnership
("Lessor"), hereby consents to the forgoing Sublease between Apple Computer,
Inc., a California corporation ("Sublessor"), and NVidia, a Delaware corporation
("Sublessee"), dated April 2, 1998 (the "Sublease").
The foregoing consent of Lessor is subject to the following conditions:
1. This Consent shall not relieve Sublessor of any liability or obligations
under the Master Lease and Sublessor shall continue to remain liable under
the Master Lease as a principal obligor and not as a surety.
2. This Consent shall not be deemed to be a consent to any future sublease and
any further subletting of the Premises shall require the prior written
consent of Lessor.
3. This Consent shall not be deemed to be a consent to any construction of any
tenant improvements other than Sublessee's Improvements as set forth in
Exhibit G of the Sublease, which Improvements neither Tenant under the
Master Lease, nor Sublessee shall have any restoration obligations to the
Premises and neither party shall be required to remove such Improvements at
the termination of the Sublease or Master Lease. Exhibit G plans are
attached and initialed by the parties, and made a part hereof.
4. Except as provided herein, this Consent shall not alter or amend any term
of provision of the Master Lease, all of which shall remain unamended and
in full force and effect.
5. Lessor shall be provided a Certificate of Insurance evidencing Sublessee's
coverage under the terms of the Lease, naming MPJ and South Bay Development
as additional insured.
6. Notwithstanding anything in the Sublease to the contrary, Lessor does not
agree to execute and deliver a nondisturbance agreement and does not agree
that it will be bound by the terms of the Sublease if the Master Lease
terminates.
7. Master Lessor represents and warrants to Sublessee that it is not aware of
any defaults on the part of Sublessor, and there are no defaults on the
part of Master Lessor at the time of execution hereof.
<PAGE>
IN WITNESS WHEREOF, Landlord has executed this Consent on the date set forth
opposite of its signatures
MPJ, a California General Partnership
Dated: By:
---------------------- --------------------------------------
James D. Mair, General Partner
By:
--------------------------------------
W. Leslie Pelio, General Partner
By:
--------------------------------------
William F. Jury, General Partner
The foregoing conditions to Lessor's Consents are hereby accepted.
"SUBLESSEE"
NVidia, a Delaware corporation
By:
--------------------------------------
Print:
----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
"SUBLESSOR"
Apple Computer, Inc., a California corporation
By:
--------------------------------------
Print:
----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
<PAGE>
EXHIBIT A
MASTER LEASE
------------
<PAGE>
EXHIBIT A
SIXTH AMENDMENT TO LEASE
------------------------
THIS SIXTH AMENDMENT TO LEASE (the "Amendment") is made and entered into as
of December 22, 1995 by and between MPJ, a California general partnership
("Landlord"), and a APPLE COMPTER, INC., a California corporation ("Tenant"),
with reference to the following facts.
RECITALS
--------
A. Tenant and Landlord entered into a certain lease agreement dated June
1, 1988, amended by that certain Memorandum of Lease dated June 1, 1998; First
Amendment to Lease dated May 31, 1989, that certain Second Amendment to Lease
dated November 9, 1989, that certain Third Amendment to Lease dated February 8,
1995, that certain Fourth Amendment to Lease dated March 29, 1995, and that
certain Fifth Amendment to Lease dated June 20, 1995 (as amended, the "Lease"),
pursuant to which Tenant leases from Landlord certain premises described in the
Lease (the "Premises") and located in the building known as the Lawrence
Business Center in Santa Clara, California (the "Building").
B. In order to facilitate the making of a loan from Connecticut General
Life Insurance Company to Landlord to finance the Building, Landlord and Tenant
wish to amend paragraph ten (10) of Fourth Amendment to the Lease in certain
respects set forth below to provide for the disposition of the lease termination
fee provided for in the Lease.
AGREEMENT
---------
In consideration of the recitals set forth above and the covenants
contained herein, Landlord and Tenant hereby agree as follows:
1. Lease Termination Notice. Paragraph 10(a) of the Fourth Amendment to
------------------------
Lease is hereby amended by adding the following language at the end of the
paragraph: "Tenant and Landlord further agree to promptly give Lender written
notice of any election by Tenant to exercise any option to terminate the Lease
prior to its stated expiration date. The notice address for Lender is
Connecticut General Life Insurance Company, 900 Cottage Grove Road, Bloomfield,
CT, 06002, Attention: Real Estate Investment."
2. Lease Termination Fee. Paragraph 10(b) of the Fourth Amendment to
---------------------
Lease is here by amended by adding the following language to the end of the
paragraph: "Landlord and Tenant hereby further agree that any payment due and
payable by Tenant to Landlord under the Lease as consideration, fee or penalty
for any option of Tenant under the Lease to terminate the Lease prior to its
stated expiration date (a "Termination Fee") shall be paid by Tenant directly to
an escrow account established and controlled solely by Connecticut General Life
Insurance Company ("Lender") in accordance with such instructions as Lender
shall deliver to Tenant or Landlord. Tenant agrees that it will not make any
payment of any such Termination Fee under the Lease, or any portion thereof,
directly to Landlord without prior written consent from Lender, and Landlord
agrees that it will neither accept nor request any payment of any such
Termination Fee directly from Tenant without prior written consent from Lender."
3. Third-Party Beneficiary. Tenant and Landlord hereby acknowledge and
-----------------------
agree that Lender (and any of its successors or assigns), is a third-party
beneficiary of the provisions of this Amendment.
4. No Other Modifications. Except as specifically set forth in this
----------------------
Amendment, all provisions of the Lease shall remain in full force and effect.
<PAGE>
5. Authority. Each of the persons executing this instrument on behalf of
---------
a party hereto does hereby covenant and warrant that such party is a duly
authorized and existing entity, that such party has full right and authority to
fulfill each of its responsibilities and obligations hereunder, and that each
and all of the persons signing on behalf of such party are authorized to do so.
Upon any party's request, any other party hereto will provide the requesting
party with evidence reasonably satisfactory to the requesting party confirming
the foregoing covenants and warranties.
6. Successors and Assigns. All provisions of this instrument will be
----------------------
binding upon and inure to the benefit of, the parties hereto, their successors
and assigns.
7. General Provisions. (a) No waiver by any party of any of the
------------------
provisions of this Amendment will be effective unless in writing and signed by
an authorized representative of the party making such waiver, and then only to
the extent expressly provided in such written waiver. (b) Time is of the
essence. (c) This Amendment will be governed by California law. (d) The captions
preceding the sections of this instrument have been inserted for convenience of
reference and such captions in no way define or limit the scope or intent of any
provision hereof. (e) This Amendment may be executed in separate counterparts,
each of which, when taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
TENANT:
------
APPLE COMPUTER, INC.
A California corporation
By: /s/ Robert A.Hecox
----------------------------
Robert A. Hecox
Director, Real Estate
----------------------------
Its_________________________
LANDLORD:
--------
MJP, a California general partnership
/s/ James D. Mair
By ----------------------------
James D. Mair
General Partner
/s/ William F. Jury
By ----------------------------
William F. Jury
General Partner
/s/ W. Leslie Pelio
By _________________________
W. Leslie Pelio
General Partner
<PAGE>
FIFTH AMENDMENT TO LEASE
This Fifth Amendment to Lease is made and entered into as of June 20, 1995,
by and between MPJ, a California general partnership ("Landlord") and APPLE
COMPUTER, INC., a California corporation ("Tenant") with reference to the
following facts, understandings and intentions:
A. Landlord and Tenant entered into a Lease Agreement dated as of June 1,
1988 covering certain premises located in the City of Santa Clara, California
(the "Original Lease"). The Original Lease was amended by a First Amendment to
Lease dated as of May 31, 1989 (the "First Amendment"), by a Second Amendment to
Lease dated as of November 9, 1989 (the "Second Amendment"), by a Third
Amendment to Lease dated as of February 8, 1995 (the "Third Amendment") and by a
Fourth Amendment to Lease dated as of March 29, 1995 (the "Fourth Amendment").
The Original Lease as amended by the First Amendment, Second Amendment, Third
Amendment and Fourth Amendment is hereinafter referred to as the "Lease".
B. The parties desire to amend the Lease by, among other things, deleting
Building A from the Premises covered by Lease effective as of June 20, 1995.
NOW, THEREFORE, Landlord and Tenant hereby agree that the Lease is amended
as follows:
1. Effective as of June 20, 1995, Building A (as shown on the Site Plan
attached to the Original Lease as EXHIBIT "A") is deleted from the Premises
covered by the Lease. Accordingly, from and after June 1, 1995, the Premises
shall include only Buildings B, C and D. Landlord hereby accepts Building A in
its "as-is" condition including the building's roof and operating systems.
Tenant shall have no further responsibility or liability for any repairs,
replacement or restorations to Building A. In addition, Landlord and Tenant
expressly agree that the items listed on the inspection report prepared by
Therma for National Semiconductor dated May 1995 for 3565 Monroe, Santa Clara,
California ( a copy of which report is attached hereto as EXHIBIT "A") are not
the responsibility of Tenant and Tenant shall have no responsibility for repairs
or have any liability for any cost for those items listed in this report.
2. Notwithstanding the deletion of Building A from the Premises effective
as of June 20, 1995, Tenant shall pay to Landlord the Base Monthly Rent and
Additional Rent applicable to Building A for the entire month of June, 1995.
Landlord hereby acknowledges receipt of such payment.
3. On or before June 30, 1995, Tenant shall pay to Landlord,
1
<PAGE>
as a lease termination payment and in addition to all other amounts due under
the Lease, the sum of ______________________.
4. Landlord and Tenant acknowledge and agree that the Base Monthly Rent
for Buildings B, C & D payable by Tenant to Landlord pursuant to Section 3.1 of
the Lease during the period July 1, 1995 through December 31, 1995, shall be the
sum of
5. Notwithstanding the actual date on which Building A is deleted from
the Premises, Landlord and Tenant agree that effective as of July 1, 1995,
Tenant's Pro Rata Share as defined in Section 3.4 of the Lease, shall be:
218,816/275,264 or 79.49%
6. The first sentence of the second grammatical paragraph of Section 18.1
of the Lease is deleted in its entirety and the following language is
substituted in lieu thereof:
Tenant shall have the exclusive right to use all
parking spaces located in the Outside Area except for the
parking spaces located in the portion of the Outside Area
highlighted on Exhibit "B" attached hereto and made a part
hereof (the "Excluded Area"). The parking area in the
Excluded Area shall be for the exclusive use of the lessee
of Building A and its employees and invitees. Tenant shall
not park or permit its employees or invitees to park in the
parking spaces located in the Excluded Area.
7. Tenant shall modify any of its existing signs to delete any reference
to "3565" or "3865 Monroe". A new monument sign may be constructed by Landlord
or the new lessee of Building A provided the monument sign is constructed to the
left of the existing transformer, as Building A is faced from Monroe Street.
8. Except as modified herein, the Lease shall remain unamended and in full
force and effect.
[DOCUMENT CONTINUES]
2
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth Amendment
to Lease as of the day and year first above-written.
LENDER: TENANT:
MPJ, APPLE COMPUTER, INC.,
a California general a California corporation
partnership
/s/ James D. Mair /s/ Robert A. Hecox
By: --------------------------- By: ------------------------
JAMES D. MAIR
Its: General Partner Name:_______________________
---------------------------
Robert A. Hecox
Title: Director, Real Estate
6/16/95
/s/ William F. Jury ---------------------
By: ---------------------------
WILLIAM F. JURY
Its: General Partner
---------------------------
/s/ W. Leslie Pelio
By: ---------------------------
W. LESLIE PELIO
Its: General Partner
---------------------------
3
<PAGE>
EXHIBIT "A"
- --------------------------------------------------------------------------------
[LETTERHEAD OF THERMA APPEARS HERE]
- --------------------------------------------------------------------------------
Attention: Eric Bergtraun
From our recent inspection we make the following recommendations:
AC-1
- ----
Replace filters, belt, leaking first stage sight glass, supply fan motor
bearings; adjust and properly set power exhaust dampers, economizer and inlet
vane actuators; clean condenser coil, condensate pan, and pipe condensate drain
P-trap to drain:
...................................................................... $1,963.73
Air Handler 1
- -------------
Replace filter and reglue insulation on fan access panel:............. $91.51
Condensing Unit 1
- -----------------
Operating normally at this time.
AC-2
- ----
Replace filters, belts, exhaust fan motor pulley, supply fan motor bearings,
exhaust fan motor bearings; rewire morning warmup (currently disconnected);
verify operation*; adjust inlet vanes for proper operation; clean condensate
pan; resecure condensate piping; clean condenser coils and compartment. First
stage refrigerant circuit low on charge. Need to locate leak, repair and
recharge with refrigerant. Oil is noted around liquid line solenoid valve. May
need to be replaced (to be determined at completion of leak repairs):
.................................................................... $2,964.43**
AC-3
- ----
Replace belts and filters; clean condensate pan, condenser coils; resupport
condensate piping; replace two leaking compressor oil sight glasses; verify
operation*:
.................................................................... $1,427.30
AC-4
- ----
Replace belts, filters, supply fan shaft bearings, motor bearings, first and
second stage oil sight glasses; adjust inlet vanes. First stage refrigeration
circuit has no charge. Need to locate leak, repair and recharge with
refrigerant**; replace liquid line filter drier:
.................................................................... $2,899.77
<PAGE>
National Semiconductor/Apple 1
Inspection Report
3565 Monroe, Santa Clara
May 1995
- --------------------------------------------------------------------------------
AC-6
- ----
Replace belt, filter, supply fan shaft bearings, clean and degrease compressors:
...................................................................... $997.24
AC-7
Replace filters, reconnect economizer*, verify operation:............. $ 489.60
AC-8
- ----
Replace filters and belt:............................................. $69.39
BOILER 1
- --------
Resecure loose pipe insulation; clean burner pan and compartment; lag down
boiler pump: ......................................................... $352.03
EF-1
- ----
Replace belt and motor bearing:....................................... $ 521.25
EF-3
- ----
Operating normally at this time.
EF-4
- ----
Replace motor......................................................... $ 659.99
EF-5
- ----
Operating normally at this time.
EF-6
- ----
No power to motor. Visually appears to be okay--will need power in order to
check.
EF-7
- ----
Replace motor......................................................... $609.05
EF-8
- ----
No power to motor--cannot verify operation.
<PAGE>
National Semiconductor/Apple 1
Inspection Report
3565 Monroe, Santa Clara
May I995
- --------------------------------------------------------------------------------
EF-9
- ----
Replace motor:.......................................................... $609.05
EF-10
- -----
No power to motor. Visually appears to be okay--will need power in order to
check.
EF-11
- -----
Was used for chamber. No longer in building. Need to resecure exhaust stack:
........................................................................ $148.00
EF-13
- -----
Replace motor:.......................................................... $609.05
EF-14
- -----
No power to motor. Visually appears okay.
EF-15
- -----
Operating normally at this time.
EF-16
- -----
Replace motor:.......................................................... $609.05
EF-17
- -----
Replace motor:.......................................................... $609.05
AIR STATION
- -----------
Degrease and clean air compressor, tighten all fittings, clean air tank auto
drain, reconnect drain piping, remove and plug leaking manual
drain:.................................................................. $375.26
Note: Air compressor is oversized for application.
TIME CLOCK PANEL
- ----------------
Replace four burned out indicator lights:............................... $180.33
EXHAUST DUCT
- ------------
Need to cap duct where fan was removed:................................. $251.08
<PAGE>
National Semiconductor/Apple 1
Inspection Report
3565 Monroe, Santa Clara
May 1995
- --------------------------------------------------------------------------------
FUME HOOD EXHAUST
- -----------------
Replace belt:.......................................................... $41.29
In general there is miscellaneous abandoned electrical on roof for removed
equipment.
Materials will need to be ordered. Please allow 3-5 days for availability upon
authorization.
* Should further repairs be diagnosed as needed, they will be quoted as
discovered.
** Refrigerant leak repairs do not include replacement of components except as
noted. Should a component be diagnosed as needed, it will be quoted.
If you have any questions or I can be of assistance, please give me a call.
Sincerely,
/s/ Diana Rossi
Diana Rossi:
Authorized by: __________________________________ Date: ________________
P.O. #: ________________________
<PAGE>
[MAP OF MONROE STREET BUILDINGS APPEARS HERE]
EXHIBIT B
<PAGE>
FOURTH AMENDMENT TO LEASE
This Fourth Amendment to Lease is made and entered into as of March 29,
1995, by and between MPJ, a California general partnership ("Landlord") and
APPLE COMPUTER, INC., a California corporation ("Tenant") with reference to the
following facts, understandings and intentions:
A. Landlord and Tenant entered into a Lease Agreement dated as of June 1,
1988 covering certain premises located in the City of Santa Clara, California
(the "Original Lease"). The Original Lease was amended by a First Amendment to
Lease dated as of May 31, 1989 (the "First Amendment"), by a Second Amendment to
Lease dated as of November 9, 1989 (the "Second Amendment") and a Third
Amendment to Lease dated as of February 8, 1995 (the "Third Amendment"). The
Original Lease as amended by the First Amendment, Second Amendment and Third
Amendment is hereinafter referred to as the "Lease".
B. The parties desire to amend the Third Amendment in its entirety and
replace it with this Fourth Amendment.
C. The term of the Lease is currently scheduled to end on December 31,
1995.
D. The parties desire to amend the Lease by, among other things,
extending the term of the Lease for seven (7) years, and deleting Building A
from the Premises covered by Lease effective as of January 1, 1996.
NOW, THEREFORE, Landlord and Tenant hereby agree that the Lease is amended
as follows:
1. The Third Amendment is deleted in its entirety and shall no longer
have any force or effect. This Fourth Amendment supersedes and replaces the
Third Amendment.
2. The term of the Lease is hereby extended for an additional period of
seven (7) years beginning on January 1, 1996 and ending on December 31, 2002.
3. Effective as of January 1, 1996, Building A (as shown on the Site Plan
attached to the Original Lease as Exhibit "A") is deleted from the Premises
covered by the Lease. Accordingly, from and after January 1, 1996, the Premises
shall include only Buildings B, C and D. The Lease shall remain in full force
and effect with respect to Building A through and including December 31, 1995.
On or before December 31, 1995, Tenant shall surrender Building A to Landlord in
the condition required by Section 7.2.D of the Original Lease and Paragraphs 7
and 8 of the First Amendment.
1
<PAGE>
4. The Base Monthly Rent payable by Tenant to Landlord pursuant to
Section 3.1 of the Lease during the period January 1, 1996 through December 31,
2002, shall be the following respective sums during the following respective
time periods:
TIME PERIOD BASE MONTHLY RENT
----------- -----------------
1/01/96 - 6/30/98
7/01/98 - 12/31/2000
1/01/2001 - 12/31/2002
5. Effective as of January 1, 1996, Tenant's Pro Rata Share as defined in
Section 3.4 of the Lease, shall be:
218,816/275,264 or 79.49%
6. Section 17.1 of the Lease is deleted in its entirety.
7. The first sentence of the second grammatical paragraph of Section 18.1
of the Lease is deleted and the following language is substituted in lieu
thereof:
Tenant shall have the nonexclusive right to use
seventy-nine percent (79%) of all parking spaces
located in the Outside Area. If Landlord or Tenant
requests, Landlord shall designate Seventy-nine
percent (79%) of the parking spaces located in the
Outside Area for Tenant's exclusive use.
8. Section 19 of the Lease is deleted in its entirety.
9. The first and second grammatical paragraphs of Section 6 of the Second
Amendment are amended in their entirety to read as follows:
Tenant is hereby granted one additional option to
extend the term of this Lease for one period of three
(3) years (the "Second Option Term"), such extension
to be on the same terms and conditions as the initial
term, except for the Base Monthly Rent which shall be
determined as provided below. It shall be a condition
precedent to the exercise of the Second Option Term
that Tenant shall not be in default under this Lease
at the time of exercise of such Second Option. If
Tenant elects to exercise the Second Option, Tenant
shall exercise said Second Option only by written
notice delivered to Landlord not later than June 30,
2002. There shall be no further options to extend the
term of this Lease at
2
<PAGE>
the end of the Second Option Term.
The Base Monthly Rent payable during the Second
Option Term shall be (i) the greater of ninety-two
(92%) of the fair market rental for the premises, or
(ii)
10. At any time on or after January 1, 2000, Tenant shall have the right
to terminate this Lease only by doing all of the following:
(a) Giving Landlord, at any time on or after January 1, 1999 but at
least twelve (12) months prior to Tenant's desired early termination date,
written notice ("Tenant's Early Termination Notice") stating that Tenant elects
to terminate the term of this Lease pursuant to this Paragraph l0 and specifying
Tenant's desired early termination date (the "Early Termination Date"), which
date must be at least twelve (12) months following Landlord's receipt of
Tenant's Early Termination Notice and shall in no event be earlier than January
1, 2000; and
(b) Paying to Landlord, concurrently with the Early Termination Date,
a cash sum equal to ___________ of all of the Base Monthly Rent and Additional
Rent that would have been payable under the Lease from and after the Early
Termination Date through December 31, 2002 discounted to its then present
value at a discount rate equal to the Bank of America Reference Rate in effect
at the time of the Early Termination Date. (For purposes of determining the
Additional Rent that would have been payable after the Early Termination Date,
it shall be assumed that the Additional Rent would have increased after the
Early Termination Date at the rate of three percent (3%) per year). This
payment shall be in addition to, and shall not be credited against, the Base
Monthly Rent and Additional Rent due under this Lease prior to the Early
Termination Date.
During the twelve (12) month or more period of time between the date Tenant
exercises its early termination right and the Early Termination Date, Tenant
shall continue to be obligated to perform all of its obligations under the
Lease, including payment of all Base Monthly Rent and Additional Rent accruing
through and including the Early Termination Date.
11. Except as modified herein, the Lease shall remain unamended and in
full force and effect.
[DOCUMENT CONTINUES]
3
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Fourth Amendment
to Lease as of the day and year first above-written.
LENDER: TENANT:
MPJ, APPLE COMPUTER, INC.,
a California general a California corporation
partnership
By: /s/ James D. Mair By: /s/ Joseph A. Graziano
--------------------------- ---------------------------------
JAMES D. MAIR
Its: General Partner Name: JOSEPH A. GRAZIANO
-------------------------- -------------------------------
By: /s/ W. Leslie Pelio Title: Executive Vice President and
Chief Financial Officer
--------------------------- ------------------------------
W. LESLIE PELIO 4/4/95
------------------------------
Its: General Partner
--------------------------
By: /s/ William F. Jury
---------------------------
WILLIAM F. JURY
Its: General Partner
--------------------------
4
<PAGE>
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease is made and entered into as of February 8,
1995, by and between MPJ, a California general partnership ("Landlord") and
APPLE COMPUTER, INC., a California corporation ("Tenant") with reference to the
following facts, understandings and intentions:
A. Landlord and Tenant entered into a Lease Agreement dated as of June l,
1988 covering certain premises located in the City of Santa Clara, California
(the "Original Lease"). The Original Lease was amended by a First Amendment to
Lease dated as of May 31, 1989 (the "First Amendment") and by a Second Amendment
to Lease dated as of November 9, 1989 (the "Second Amendment"). The Original
Lease as amended by the First Amendment and Second Amendment is hereinafter
referred to as the "Lease".
B. The term of the Lease is currently scheduled to end on December 31,
1995.
C. The parties desire to amend the Lease by, among other things,
extending the term of the Lease for seven (7) years, and deleting Buildings A
and D from the Premises covered by Lease effective as of January 1, 1996.
NOW, THEREFORE, Landlord and Tenant hereby agree that the Lease is amended
as follows:
1. The term of the Lease is hereby extended for an additional period of
seven (7) years beginning on January 1, 1996 and ending on December 31, 2002.
2. Effective as of January 1, 1996, Buildings A and D (as shown on the
Site Plan attached to the Original Lease as Exhibit "A") are deleted from the
Premises covered by the Lease. Accordingly, from and after January 1, 1996, the
Premises shall include only Buildings B and C. The Lease shall remain in full
force and effect with respect to Buildings A and D through and including
December 31, 1995. On or before December 31, 1995, Tenant shall surrender
Buildings A and D to Landlord in the condition required by Section 7.2.D of the
Original Lease and Paragraphs 7 and 8 of the First Amendment.
3. The Base Monthly Rent payable by Tenant to Landlord pursuant to
Section 3.1 of the Lease during the period January 1, 1996 through December 31,
2002, shall be the following respective sums during the following respective
time periods:
1
<PAGE>
TIME PERIOD BASE MONTHLY RENT
----------- -----------------
1/01/96 - 6/30/98
7/01/98 - 12/31/2000
1/01/2001 - 12/31/2002
4. Effective as of January 1, 1996, Tenant's Pro Rata Share as defined in
Section 3.4 of the Lease, shall be:
166,352/275,264 or 60.43%
5. Section 17.1 of the Lease is deleted in its entirety.
6. The first sentence of the second grammatical paragraph of Section 18.1
of the Lease is deleted and the following language is substituted in lieu
thereof:
Tenant shall have the nonexclusive right to use
sixty percent (60%) of all parking spaces located in
the Outside Area. If Landlord or Tenant requests,
Landlord shall designate sixty percent (60%) of the
parking spaces located in the Outside Area for
Tenant's exclusive use.
7. Section 19 of the Lease is deleted in its entirety.
8. The first and second grammatical paragraphs of Section 6 of the Second
Amendment are amended in their entirety to read as follows:
Tenant is hereby granted one additional option to
extend the term of this Lease for one period of three
(3) years (the "Second Option Term"), such extension
to be on the same terms and conditions as the initial
term, except for the Base Monthly Rent which shall be
determined as provided below. It shall be a condition
precedent to the exercise of the Second Option Term
that Tenant shall not be in default under this Lease
at the time of exercise of such Second Option. If
Tenant elects to exercise the Second Option, Tenant
shall exercise said Second Option only by written
notice delivered to Landlord not later than June 30,
2002. There shall be no further options to extend the
term of this Lease at the end of the Second Option
Term.
The Base Monthly Rent payable during the Second
Option Term shall be (i) the greater of the fair
market rental for
2
<PAGE>
the premises, or (ii)
9. At any time on or after January 1, 2000, Tenant shall have the right
to terminate this Lease only by doing all of the following:
(a) Giving Landlord, at any time on or after January 1, 1999 but at
least twelve (12) months prior to Tenant's desired early termination date,
written notice ("Tenant's Early Termination Notice") stating that Tenant elects
to terminate the term of this Lease pursuant to this Paragraph 9 and specifying
Tenant's desired early termination date (the "Early Termination Date"), which
date must be at least twelve (12) months following Landlord's receipt of
Tenant's Early Termination Notice and shall in no event be earlier than January
1, 2000; and
(b) Paying to Landlord, concurrently with the Early Termination Date,
a cash sum equal to ___________ of all of the Base Monthly Rent and Additional
Rent that would have been payable under the Lease from and after the Early
Termination Date through December 31, 2002 discounted to its then present value
at a discount rate equal to the Bank of America Reference Rate in effect at the
time of the Early Termination Date. (For purposes of determining the Additional
Rent that would have been payable after the Early Termination Date, it shall be
assumed that the Additional Rent would have increased, after the Early
Termination Date at the rate of three percent (3%) per year). This payment shall
be in addition to, and shall not be credited against, the Base Monthly Rent and
Additional Rent due under this Lease prior to the Early Termination Date.
During the twelve (12) month or more period of time between the date Tenant
exercises its early termination right and the Early Termination Date, Tenant
shall continue to be obligated to perform all of its obligations under the
Lease, including payment of all Base Monthly Rent and Additional Rent accruing
through and including the Early Termination Date.
10. If Landlord from time to time shall receive a bona fide proposal or
letter of intent (the "Third Party Proposal") from a third party to lease (i)
all or any portion of Building D, or (ii) all or any portion of Building D
together with all or any portion of Building A, and if Landlord is willing to
accept such Third Party Proposal, Landlord shall notify Tenant in writing
("Landlord's Offer Notice") of the following basic business terms on which the
Landlord is willing to lease such space (collectively referred to herein as
"Basic Business Terms"):
(a) The description of the space to be leased (the "Offered Space");
3
<PAGE>
(b) The term of the proposed lease;
(c) The rent for the initial term or the formula to be used to
determine such rent;
(d) Any option or options to extend (including the rent to be charged
during the extension periods);
(e) The contribution, if any, Landlord is willing to make toward the
cost of any tenant improvements; and
(f) Any other material business terms Landlord elects to specify.
Provided that (i) Tenant is not in default under this Lease, (ii) this
Lease is in full force and effect, and (iii) Tenant has not assigned this Lease
to an unaffiliated third party and is in physical occupancy of at least seventy-
five percent (75%) of the area of the Premises, then Tenant shall have the
right, for a period of ten (10) business days after Tenant's receipt of
Landlord's Offer Notice, to lease the Offered Space on the Basic Business Terms
contained in Landlord's Offer Notice and otherwise on the terms and conditions
contained in this Lease, by giving written notice of such election prior to the
expiration of such ten (10) business day period. Upon the giving of such notice,
Tenant shall become obligated to lease the Offered Space and Landlord shall be
obligated to lease the Offered Space to Tenant on the Basic Business Terms
contained in Landlord's Offer Notice and otherwise on the terms and conditions
of this Lease. Landlord and Tenant shall promptly execute an amendment to this
Lease reflecting (i) the addition of the Offered Space as part of the Premises
and (ii) the Basic Business Terms applicable to the Offered Space. (The parties
understand that the term of the Lease as it applies to the Offered Space may be
longer or shorter than the term of the Lease with respect to the remainder of
the Premises).
If Tenant does not deliver to Landlord its written election to lease the
Offered Space, within said ten (10) business day election period, or if Tenant
does not execute and deliver to Tenant the Amendment to Lease within ten (10)
business days after Tenant's receipt thereof, then Landlord shall thereafter
have the right, for a period of six (6) months, to lease the Offered Space to
any third party on substantially the same Basis Business Terms as are set forth
in Landlord's Offer Notice and on such form of lease as Landlord chooses. If the
monetary terms of a third party lease (i.e., rent and Landlord's tenant
improvement contribution) do not deviate by more than five percent (5%) from
those Basic Business Terms specified in Landlord's Offer Notice, the Basic
Business Terms of third party lease shall be deemed substantially the same as
the Basic Business Terms specified in Landlord's Offer Notice. If Landlord does
not enter into a lease with a third party within said six (6) month period,
Tenant's rights under this Paragraph 10
4
<PAGE>
shall revive.
The provisions of this Paragraph 10 shall terminate upon (i) the expiration
or earlier termination of this Lease, or (ii) any assignment by Tenant of its
interest in this Lease to any unaffiliated third party or the subletting by
Tenant of twenty-five percent (25%) or more of the Premises, or (iii) Tenant's
failure to exercise its right of first refusal to lease granted herein at its
first opportunity to do so (unless Landlord does not enter into a lease with a
third party within the six (6) month period described above).
11. Except as modified herein, the Lease shall remain unamended and in
full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Third Amendment
to Lease as of the day and year first above written.
LANDLORD: TENANT:
MPJ, APPLE COMPUTER, INC.,
a California general a California corporation
partnership
By: /s/ James D. Mair By: /s/ Joseph A. Graziano
-------------------------- --------------------------------
JAMES D. MAIR
Its: General Partner Name: JOSEPH A. GRAZIANO
------------------------- ------------------------------
By: /s/ William F. Jury Title: Executive Vice President and
Chief Financial Officer
-------------------------- -----------------------------
WILLIAM F. JURY 2-27-95
-----------------------------
Its: General Partner
-------------------------
By: /s/ W. Leslie Pelio
--------------------------
W. LESLIE PELIO
Its: General Partner
-------------------------
5
<PAGE>
SECOND AMENDMENT TO LEASE
-------------------------
This Second Amendment to Lease is made and entered into as of November 9, 1989
by and between MPJ, a California general partnership (hereinafter "Landlord"),
and APPLE COMPUTER, INC., a California corporation (hereinafter "Tenant"),
whereby both parties agree to amend the Lease as follows:
1. The additional premises of 3515 and 3525 Monroe Street, Santa Clara,
California will be added to the lease premises which are presently occupied
by Altera Corporation and should be added at the termination date of Altera
Corporation's lease and its vacancy of the premises, which is anticipated
to be March 1, 1990. With the addition of this space, the Tenant's Pro Rata
Share, as defined In Paragraph 3.4 of the Lease, shall be One Hundred
Percent (100%) and the Outside Area, as defined in Paragraph 18, shall be
amended to One Hundred Percent (100%) of the total Outside Area. Tenant
shall accept the additional premises on an "as is" basis and Landlord shall
not be obligated to pay for additional tenant improvements.
2. The additional rent for the expanded space shall be
from the termination date through June 30, 1991 _________
July 1, 1991 through December 31, 1992.
3. Tenant hereby exercises its Option to Extend, pursuant to Paragraph 17 of
the Lease, for the period January 1, 1993 through December 31, 1995
(hereinafter "Option Term"), except for rent.
4. The monthly installment of rent during the Option Term shall be
5. This Second Amendment supersedes any provisions contained in Paragraph 19
of the Lease.
6. Tenant is hereby granted one additional option to extend the term of this
Lease for one period of three (3) years (the "Second Option Term"), such
extension to be on the same terms and conditions as the initial term,
except for the Base Monthly Rent which shall be determined as provided
below. It shall be a condition precedent to the exercise of the Second
Option Term that Tenant shall not be in default under this Lease at the
time of exercise of such Second Option. If Tenant elects to exercise the
Second Option, Tenant shall exercise said Second Option only by written
notice delivered to Landlord at least one hundred and twenty (120) days
prior to the expiration of the Option Term of this Lease. There shall be no
further options to extend the term of this Lease at the end of the Second
Option Term.
Monthly installment of base rent payable during the Second Option Term
shall be (i) the
the fair market rental for the premises, or (ii)
month.
Promptly following the exercise of the Second Option by Tenant, the parties
shall endeavor to agree upon the Fair Market Rental of the Premises as of
the first day of the Second Option Term in question. In determining the
Fair Market Rental for the Premises, the Premises shall be compared only to
buildings of a similar quality and size and with similar improvements and
amenities in the Santa Clara/Cupertino area. If, within fifteen (15) days
after exercise of any Second Option, the parties cannot agree upon the Fair
Market Rental for the Premises as of the first day of the Second Option
Term in question, the parties shall submit the matter to binding appraisal
in accordance with the following procedures:
(i) Within thirty (30) days after exercise of the Second Option, the
parties shall either jointly appoint an appraiser for the purpose of
determining Fair Market Rental, or failing that, separately appoint a
disinterested appraiser. No person shall be appointed an appraiser
unless he has at least five (5) years experience in appraising major
office and R&D properties in the Santa Clara/Cupertino area and is a
member of a recognized society of real estate appraisers.
(ii) If, within thirty (30) days after their appointment, the two
appraisers agree on the Fair Market Rental for the Premises as of the
first day of the Second Option Term in question, that value shall be
binding and conclusive upon the parties. If the two appraisers thus
appointed cannot so agree, they shall appoint a third disinterested
appraiser having like qualifications. If, within thirty (30) days
after the appointment of the third appraiser, a majority of the
appraisers agree on the Fair Market Rental of the Premises as of the
first day of the Second Option
<PAGE>
Term in question, that value shall be binding and conclusive upon the
parties. If, within thirty (30) days after the appointment of the
third appraiser, a majority of the appraisers cannot so agree, the
three appraisers shall each submit their independent appraisals to
the parties; the appraisal farthest from the median of the three
appraisals shall be disregarded, and the mean average of the
remaining two appraisals shall be deemed the Fair Market Rental of
the Premises as of the first day of the Second Option Term in
question, and shall be binding and conclusive upon the parties.
(iii) Each party shall pay the fees and expenses of the appraiser appointed
by it and shall share equally the fees and expenses of the third
appraiser.
(iv) If the two appraisers appointed by the parties cannot agree on the
appointment of the third appraiser, they shall give notice of such
failure to the parties. If the parties fail to agree upon the
selection of a third appraiser within ten (10) days after the
appraisers give such notice, either of the parties may, upon notice
to the other, apply for such appointment to the presiding judge of
the Superior Court of Santa Clara County, California.
All other terms and conditions of the Lease shall remain the same.
LANDLORD: MPJ, a California TENANT: APPLE COMPUTER, INC., a
general partnership California corporation
By: /s/ James D. Mair By: /s/ Joseph A. Graziano
-------------------------- --------------------------------
James D. Mair JOSEPH A. GRAZIANO
Its: General Partner Its: Sr. Vice President
and Chief Financial Officer
------------------------- -------------------------------
Date: 11-20-89 Date: 11-17-89
------------------------ ------------------------------
<PAGE>
AMENDMENT TO LEASE
(Microwave Dish)
THIS FIRST AMENDMENT TO LEASE ("Amendment") is made as of May 31, 1989, by
and between MPJ, a California general partnership ("Landlord") and APPLE
COMPUTER, INC., a California corporation ("Tenant").
RECITALS
- --------
A. Landlord and Tenant entered into a certain lease (the "Lease"), dated
for reference purposes June 1, 1988, of three (3) buildings located at 3565
Monroe Avenue, Santa Clara, California ("Monroe 1"), 3585 Monroe Avenue, Santa
Clara, California ("Monroe 2"), and 3535 Monroe Avenue, Santa Clara, California
("Monroe 3"), (collectively, the "Premises").
B. Tenant has requested the right to install microwave antenna dishes on
the roofs of the Premises.
C. Landlord and Tenant have agreed to amend the Lease to provide for such
microwave antenna dishes, in accordance with the terms and conditions of this
Amendment.
NOW THEREFORE, in consideration of the foregoing recitals and the mutual
covenants provided herein, the parties hereto agree as follows:
1. Unless otherwise indicated, all capitalized terms shall have the
meaning set forth in the Lease.
2. Landlord hereby grants to Tenant for the term of the Lease, as it may
be extended, the right, at Tenant's cost, to install, maintain, operate,
replace, repair and remove (collectively, "Construct" or the "Construction")
microwave antenna dishes together with all cable, wiring, conduits and related
equipment, (collectively, "Antenna"), on the roof ("Roof") of the Premises, such
microwave antenna dishes to be located as shown on Exhibit A attached hereto and
---------
incorporated herein.
3. Tenant agrees to indemnify and hold Landlord harmless from any claim
resulting from property damage or personal injury arising in connection with the
Construction and not covered by the insurance required to be carried by Tenant
under the Lease. Tenant agrees to carry insurance to cover such liability and
property damage. In no event, however, shall Tenant be liable for consequential
damages or for any damage to the Roof or Premises or injury caused by any person
or entity other
1
<PAGE>
than Tenant, its agents, employees or contractors.
4. Tenant is not obligated to pay any additional rent in connection with
the Antenna.
5. Landlord shall allow Tenant, at Tenant's cost, to hook-up the Antenna
to the Premises' electrical system.
6. The Antenna shall at all times remain the property of Tenant and
Tenant shall have the right to remove it at any time, subject to the terms and
conditions of this Amendment.
7. Tenant shall remove the Antenna at the expiration or earlier
termination of the Lease.
8. Tenant shall repair any damage caused to the Roof in connection with
any such installation and removal to the condition of the Roof immediately prior
to such damage, subject to damage caused by casualty or condemnation.
9. Tenant and its agents, employees and contractors shall have reasonable
access to the Roof to carry out the Construction.
10. Except as otherwise provided herein, the Lease shall remain in full
force and effect.
The parties hereto have entered into this Amendment effective as of the
date first above written:
LANDLORD: TENANT:
- -------- ------
MPJ APPLE COMPUTER, INC.,
a, California general partnership a California corporation
By: /s/ James D. Mair By: /s/ Robert Hecox
------------------------- ---------------------------
ROBERT A. HECOX
Its: General Partner Its: Real Estate Manager
------------------------ --------------------------
2
<PAGE>
EXHIBIT B
MICROWAVE SITE SURVEY
MONICA SCHRADLE (408) 974-6304
- --------------------------------------------------------------------
NAME PHONE
APPLE COMPUTER 3585 MONROE
- ------------------------------------------------------
ADDRESS
SANTA CLARA CA.
- ---------------------------------- ----------------
CITY STATE ZIP
DATE REQUESTED 4/19/89 AM 9:30 PM
- ---------------- --------- --------------
COMPLETED 5/2/89 AM PM 1:00
- ---------------------------------------------- ---
LEGEND (SHOW IN SKETCH)
[SKETCH APPEARS HERE]
[FLOOR PLAN OF MICROWAVE SITE SURVEY APPEARS HERE]
ii
<PAGE>
[LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE]
EXHIBIT B
The undisputed leader in MDS/ITFS reception dedicated to the manufacture of FINE
QUALITY reception products for over 30 years.
MICROWAVE 3 FT., 4 FT. OR 6 FT. DISH PARABOLICS - SECTION PARABOLICS FOR MDS
2150 TO 2162 MHZ OR NEW ITFS/MMDS - 2500-2690 MHZ
________________________________________________________________________________
3 Ft., 4 Ft. or 6 Ft. DISH PARABOLICS
Rugged dishes for Highest Gain - lowest
wind loading. Vertical or Horizontal
polarization with Dual Mode - Multi
channel capability in 45 degrees mount
position.
Protected against corrosion.
[PHOTO OF FEATURES: [PHOTO OF
MODEL 28 . MDS to ITFS Multi Channel - simple dipole MODEL 72
MICROWAVE change MICROWAVE
DISH PARABOLIC . Horizontal or Vertical Polarization DISH PARABOLIC
APPEARS HERE] . Dual or Multi Channel Polarization - 45 APPEARS HERE]
degrees mounting
. 4 to 8 Channel Ready
. Lowest Wind Loading
. Electronically Welded Pressure Tested Dipole
. All models include RG8 Cable with N Connector
. Focus adjustable for gain control
(except 6 Ft.)
. Compatible with all down converters
<TABLE>
<CAPTION>
SPECIFICATIONS MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz
---------------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <S> <C> <C> <C>
DISH SIZE 3 Ft. 4 Ft. 6 Ft. DISH SIZE 3 Ft. 4 Ft. 6 Ft.
---------------------------------------------------- ----------------------------------------------------
MDS MODEL 2128 2132 2172 ITFS/MMDS MODEL 2528 2532 2572
---------------------------------------------------- ----------------------------------------------------
FRONT-TO-BACK RATIO 25dB 30dB 36dB FRONT-TO-BACK RATIO 25dB 30dB 36dB
---------------------------------------------------- ----------------------------------------------------
IMPEDANCE 50 ohms 50 ohms 50 ohms IMPEDANCE 50 ohms 50 ohms 50 ohms
---------------------------------------------------- ----------------------------------------------------
BEAM WIDTH 10 degrees 10 degrees 8 degrees BEAM WIDTH 10 degrees 10 degrees 8 degrees
---------------------------------------------------- ----------------------------------------------------
</TABLE>
________________________________________________________________________________
SECTION PARABOLICS FEATURES:
The original high performance . Horizontal or Vertical
MDS unit. Wire formed closed Polarization
loop design for maximum . Dual or Multi Channel
strength with lowest wind Polarization - 45 degrees
loading. Mounts easily for mounting
Vertical or Horizontal . Lowest Wind Loading
polarization, and Dual Mode- . Electronically Welded
45 degrees Mounting provides Pressure Tested Dipole
Multi channel operation. . Includes RG8 Cable with N
[PHOTO OF Connector
MODEL 24 Des. Pats. 2269009, 268343 . Focus adjustable for gain
MICROWAVE Lic. under U.S. Pat. 4259143 control
SECTION Other Pats. Pending . Compatible with all down
PARABOLIC converters
APPEARS HERE]
SPECIFICATIONS
<TABLE>
<CAPTION>
<S> <C>
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz
---------------------------- -----------------------------
MDS MODEL 2124 ITFS/MMDS MODEL 2524
---------------------------- -----------------------------
FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB
---------------------------- -----------------------------
IMPEDANCE 50 ohms IMPEDANCE 50 ohms
---------------------------- -----------------------------
BEAM WIDTH 20 BEAM WIDTH 20
---------------------------- -----------------------------
</TABLE>
________________________________________________________________________________
Independent test range results: Gain figures, Polar Patterns
- ------------------ and VSWRS available upon request.
CONVERSION KIT
All existing Lance
MDS Units in field
use will receive [CHART OF FREQUENCY/CHANNEL DESIGNATION APPEARS HERE]
ITFS/MDS channels
with a dipole
conversion kit.
Information avail-
able on request.
- ------------------
[LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE]
iii
<PAGE>
[LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE]
MICROWAVE SECTION PARABOLICS -
CORNER REFLECTOR "THE ANGLE" FOR
MDS 2150-2162 MHz OR NEW ITFS/MMDS
2500-2690 MHz
- --------------------------------------------------------------------------------
SECTION PARABOLICS: Two models for Urban-Suburban
Reception, with even lower wind loading but with the
maximum reflector screen effect due to the unique
[PHOTO OF MODEL 21 formed wire closed loop design. Easy Horizontal or
MICROWAVE SECTION Vertical Mounting, with quick changeover to 45
PARABOLIC APPEARS degrees Dual Mode Mounting (requires only 2 bolts),
HERE] for Multi Channel reception.
SPECIFICATIONS
<TABLE>
<CAPTION>
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz
------------------------------------- --------------------------------------
<S> <C> <S> <C>
MDS MODEL 2121 ITFS/MMDS MODEL 2521
------------------------------------- --------------------------------------
FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB
------------------------------------- --------------------------------------
IMPEDANCE 50 ohms IMPEDANCE 50 ohms
------------------------------------- --------------------------------------
BEAM WIDTH 20 degrees BEAM WIDTH 20 degrees
------------------------------------- --------------------------------------
</TABLE>
[PHOTO OF MODEL 18 Both units are built with the same attention to
MICROWAVE SECTION detail as all other Lance MDS Units. Electronically
PARABOLIC APPEARS welded pressure tested dipole. Compatability with
HERE] all down converters. Simple Dipole change for
MDS/ITFS operation, includes RG8 Cable with N
Connector.
SPECIFICATIONS
<TABLE>
<CAPTION>
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz
------------------------------------- --------------------------------------
<S> <C> <S> <C>
MDS MODEL 2118 ITFS/MMDS MODEL 2518
------------------------------------- --------------------------------------
FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB
------------------------------------- --------------------------------------
IMPEDANCE 50 ohms IMPEDANCE 50 ohms
------------------------------------- --------------------------------------
BEAM WIDTH 25 degrees BEAM WIDTH 25 degrees
------------------------------------- --------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
[PHOTO OF MODEL 12 "THE ANGLE" Precision Stamped Aluminum forms the
MICROWAVE SECTION ANGLES' REFLECTOR for signal control - minimizes
PARABOLIC APPEARS unwanted "bounce" signals (ghosting) and creates the
HERE] ANGLES' High Front to Back Ratio.
SPECIFICATIONS
<TABLE>
<CAPTION>
MDS 2150-2162 MHz ITFS/MMDS 2500-2690 MHz
------------------------------------- --------------------------------------
<S> <C> <S> <C>
MDS MODEL 2112 ITFS/MMDS MODEL 2512
------------------------------------- --------------------------------------
FRONT-TO-BACK RATIO 20dB FRONT-TO-BACK RATIO 20dB
------------------------------------- --------------------------------------
IMPEDANCE 50 ohms IMPEDANCE 50 ohms
------------------------------------- --------------------------------------
BEAM WIDTH 35 degrees BEAM WIDTH 35 degrees
------------------------------------- --------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Shipping Information MDS/ITFS Units
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MDS MODEL 2112 2118 2121 2124 2128
- ------------------------------------------------------------------------------------------------------------------------------------
ITFS/MMDS MODEL 2512 2518 2521 2524 2528
- ------------------------------------------------------------------------------------------------------------------------------------
Weight, ea. 1.75 lbs. 3.5 lbs. 5 lbs. 7.5 lbs. 10.0 lbs.
- ------------------------------------------------------------------------------------------------------------------------------------
Std. Pack 10 10 10 5 5
- ------------------------------------------------------------------------------------------------------------------------------------
Carton Size 21 1/2 x 19 x 13 1/2 21 1/2 x 19 x 13 1/2 35 x 18 3/4 x 16 35 x 27 x 12 3/4 38 x 37 1/8 x 13 3/4
- ------------------------------------------------------------------------------------------------------------------------------------
Shipping Wt., Ctn. 20 lbs. 38 lbs. 56 lbs. 43 lbs. 59 lbs.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------
<S> <C> <C>
MDS MODEL 2132 2172
- ---------------------------------------------------------------
ITFS/MMDS MODEL 2532 2572
- ---------------------------------------------------------------
Weight, ea. 16.0 lbs. 40.5 lbs.
- ---------------------------------------------------------------
Std. Pack 3 1
- ---------------------------------------------------------------
Carton Size 50 3/4 x 48 x 16 74 x 38 x 13 3/4
- ---------------------------------------------------------------
Shipping Wt., Ctn. 59 lbs. 52 lbs.
- ---------------------------------------------------------------
</TABLE>
Specifications subject to change without notice.
Des. Pats. 269009, 268343 Lic. under U.S. Pat. 4259143 Other Pats. Pending
[LETTERHEAD OF LANCE INDUSTRIES APPEARS HERE]
iv
<PAGE>
Santa Clara Land Title Co. 9911628
Accommodation Only
Accommodation No. Sp 9-1646-LZ Recorded at the request of
SANTA CLARA LAND TITLE CO.
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO: 8:00
NOV 14 1988 A.M.
Wilson, Sonsini, Goodrich & Rosati
Two Palo Alto Square, Suite 900 LAURIE KANE, Recorder
Palo Alto, California 94306 Santa Clara County, Official Records
Attn: Real Estate Department/SLW K754 Page 1507
- --------------------------------------------------------------------------------
MEMORANDUM OF LEASE
-------------------
This Memorandum of Lease ("Memorandum") is entered into as of June 1, 1988,
by and between MPJ, a California general partnership ("Landlord"), and APPLE
COMPUTER, INC., a California corporation ("Tenant").
Landlord and Tenant hereby state the following for recording:
1. Landlord leases to Tenant, and Tenant hereby leases from Landlord, a
portion of that certain real property located in the City of Santa Clara, County
of Santa Clara, more particularly described on Exhibit A attached hereto upon
the terms and conditions contained in that certain lease agreement dated for
reference purposes June 1, 1988 between Landlord and Tenant ("Lease").
2. The Lease shall be for a term beginning on the Commencement Date as
that term is defined in the Lease and terminating December 31, 1992, subject to
one option to renew for an additional three years pursuant to Section 17 of the
Lease.
3. This Memorandum shall incorporate herein all of the terms and
provisions of the Lease as though fully set forth herein.
4. This Memorandum is solely for recording purposes and shall not be
construed to alter, modify, amend or supplement the Lease of which this is a
memorandum. If there is any inconsistency between this Memorandum and the
Lease, the Lease shall prevail.
LANDLORD: TENANT:
MPJ, a California APPLE COMPUTER, INC.,
general partnership a California corporation
By: [SIGNATURE ILLEGIBLE] By: /s/ Robert A. Hecox
--------------------------- ---------------------------
Robert A. Hecox
Its: General Partner Its: Real Estate Manager
-------------------------- --------------------------
<PAGE>
EXHIBIT "A"
K754 Page 1508
The land referred to herein is described as follows:
All that certain real property situate in the City of Santa Clara, County of
Santa Clara, State of California, being a portion of that certain 24.740 acre
parcel as shown on the certain Record of Survey filed in Book 447 of Maps at
Page 33, Santa Clara County Records, described as follows:
BEGINNING at the Northwest corner of said 24.740 acre parcel; thence from said
POINT OF BEGINNING, along the Northerly line of said 24.740 acre parcel N. 89
degrees 25' 00" E. 995.17 ft.; thence leaving said Northerly line S. 0 degrees
10' 00" W. 705.02 ft. to a point in the Southerly line of said 24.740 acre
parcel; thence along said Southerly line the following courses; S. 89 degrees
25' 00" W. 181.82 ft; South 2..00 ft.; and S. 89 degrees 25' 00" W. 760.70 ft.;
thence leaving said Southerly line, along a tangent curve to the right with a
radius of 50.00 ft., through a central angle of 90 degrees 34' 33" for an arc
length of 79.04 ft. to a point in the Westerly line of said 24.740 acre parcel;
thence along said Westerly line N. 0 degrees 00' 27" W. 656.49 ft. to the POINT
OF BEGINNING.
EXHIBIT "A"
<PAGE>
K754 Page 1509
STATE OF CALIFORNIA )
) ss.
COUNTY OF Santa Clara )
On this 8th day of November, in the year 1988, before me, the undersigned,
a Notary Public in and for said State, personally appeared James D. Mair,
personally known to me, to be the person who executed the within instrument as
one of the 3 General partners, on behalf of MPJ, the partnership therein named,
and acknowledged to me that the partnership executed it.
WITNESS my hand and official seal.
[SEAL APPEARS HERE]
/s/ Linda M. Vincent
_________________________
Notary Public
STATE OF CALIFORNIA )
) ss.
COUNTY OF SANTA CLARA )
On this 12th day of September, in the year 1988, before me, the
undersigned, a Notary Public in and for said State, personally appeared Robert
Hecox , personally known to me, to be the person who executed the within
instrument as Manager Real Estate, on behalf of Apple Computer, Inc., the
corporation therein named, and acknowledged to me that such corporation executed
the within instrument pursuant to its bylaws or to a resolution of its board of
directors.
WITNESS my hand and official seal.
/s/ Marla K. Summers
_________________________
Notary Public
[SEAL APPEARS HERE]
<PAGE>
LEASE AGREEMENT
---------------
This Lease is made and entered into as of June 1, 1988, by and between MPJ,
a California general partnership (hereinafter "Landlord") and APPLE COMPUTER,
INC., a California corporation (hereinafter "Tenant"). For and in consideration
of the rental and of the covenants and agreements hereinafter set forth to be
kept and performed by Tenant, Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the premises hereinafter described for the term, at the
rental and subject to and upon all of the terms, covenants and agreements
hereinafter set forth.
1. PREMISES.
--------
1.1 Description. Landlord hereby leases to Tenant and Tenant hereby
-----------
rents from Landlord those certain premises (the "Premises") located in the City
of Santa Clara, County of Santa Clara, described and consisting of the
following:
A. Those certain buildings known as Building A,
Building B and Building C as shown on the site
plan (the "Site Plan") attached hereto as Exhibit
"A", which buildings contain a total of
approximately 222,800 sq. ft. of floor space with
Building A containing approximately 56,448 sq.
ft. of floor space, Building B containing
approximately 77,416 sq. ft. of floor space, and
Building C containing approximately 88,936 sq.
ft. of floor space (collectively, the
"Buildings"); and
B. The improvements to be constructed in the
Buildings by Tenant with the Improvement
Allowance provided by Landlord pursuant to the
provisions of Exhibit "B" attached hereto (the
"Improvements").
The Premises are located on a larger parcel of real property (the "Parcel") on
which are located a total of four (4) buildings together with driveways, parking
areas and landscaped areas, all as shown on the Site Plan (the "Complex").
Landlord acknowledges that the calculation of the number of square feet
stated in this Section 1.1 for each Building reflects a measurement of the
respective Buildings from outside wall to outside wall including the inset area
at each entryway and the inset area for glazing but excluding truck dock areas
and roof overhangs. In the event that Tenant reasonably determines that the
<PAGE>
actual number of square feet contained in any of the Buildings is less than the
number of square feet indicated in this Section 1.1, using the referenced method
of measurement, Tenant shall be entitled to an equitable adjustment of the Base
Monthly Rent stated in Section 3.1 at the rate of Seventy-Seven and One-Half
Cents ($0.775) per square foot.
1.2 Work of Improvement. Landlord shall deliver the Premises to
-------------------
Tenant in their existing condition, and broom-clean. Landlord shall not be
required to remodel or otherwise construct any improvements or make any
alterations to the Premises. Tenant acknowledges and understands that the
Premises were previously occupied by another lessee. Any alterations, additions
or improvements to the Premises required or desired by Tenant shall be
constructed by Tenant at its sole cost and expense, subject to the provisions of
Exhibit "B" and Section 7.3.
2. Term.
----
2.l Term. The term of this Lease shall commence, as to each of the
----
Buildings, on the following respective Commencement Dates:
Building Commencement Date
-------- -----------------
A July 15, 1988
B October 1, 1988
C January 1, 1989
The term of this Lease shall end four (4) years following the Commencement Date
for Building C, unless sooner terminated pursuant to the provisions of this
Lease.
2.2 Occupancy. Landlord shall permit Tenant to enter each of the
---------
Buildings on the following respective dates, for the purpose of commencing
Tenant's desired remodeling:
Building Occupancy Date
-------- -----------------
A June 1, 1988
B August 1, 1988
C October 1, 1988
On the Occupancy Date for each Building, Landlord shall deliver possession of
such Building to Tenant broom-clean, with all electrical and mechanical
equipment and utility systems servicing such Building in good operating order,
reasonable wear and tear
-2-
<PAGE>
excepted. Within thirty (30) days after the Occupancy Date for each Building,
Tenant shall prepare a "punchlist" of corrective work that must be done by
Landlord to complete its delivery obligation.
Tenant acknowledges that the existing lessee has the right to extend its
scheduled vacancy date for Buildings B and C for up to twenty (20) days beyond
the above-referenced Occupancy Dates for Buildings B and C. If the existing
lessee exercises such right, then the Occupancy Date and Commencement Date for
Building B and/or Building C, as the case may be, shall be extended one (1) day
for each day that vacancy of the Building in question by the existing lessee is
delayed beyond the above-referenced scheduled Occupancy Date for such Building.
Landlord represents that it has negotiated and intends to execute with the
existing lessee, either at or shortly after executing this Lease, an agreement
terminating the tenancy of said lessee, which termination shall be effective on
or before the Occupancy Dates stated in this Section 2.2, as such Occupancy
Dates may be postponed pursuant to the following paragraph.
If for any reason Landlord cannot deliver possession of each Building on
the scheduled Occupancy Date for such Building, Land-lord shall not be subject
to any liability therefor, nor shall such failure affect the validity of this
Lease or the obligations of Tenant hereunder, but in such case the Commencement
Date for the Building in question shall be extended one (1) day for each day
that Landlord's delivery of possession was delayed beyond the scheduled
Occupancy Date, and, if such inability to deliver possession is the result of
the refusal of the existing lessee to surrender possession of such Building(s),
Landlord shall promptly exercise all rights and remedies available at law or in
equity to evict such lessee.
If the Occupancy Date has not occurred for any reason, other than the
default of Tenant, within ninety (90) days of the scheduled Occupancy Date
stated in Section 2.2, Tenant may terminate this Lease as to any such Building
whose Occupancy Date
-3-
<PAGE>
has been so delayed by written notice to Landlord, whereupon any monies
previously paid by Tenant to Landlord with respect to such Building shall be
reimbursed to Tenant, together with interest thereon from the date of
termination until paid at the interest rate stated in Section 20.14.
3. RENT.
----
3.1 Base Monthly Rent.
-----------------
Tenant's occupancy of any portion of the Premises prior to the
Commencement Date for such portion shall be subject to all of the provisions of
this Lease, including, without limitation, the provisions of Paragraphs 10 and
11; provided, however, that Tenant shall not be obligated to pay any Base
Monthly Rent or Additional Rent under this Lease until the Commencement Date for
the Building in question. Tenant's obligation to pay rent for each Building
shall commence on the Commencement Date for such Building, whether or not Tenant
has completed its remodeling for such Building.
Beginning on the Commencement Date for each Building and continuing through
the term of this Lease, Tenant shall pay to Landlord as Base Monthly Rent for
the Premises, the following respective sums for each Building, subject, however,
to adjustment as provided in Sections 1.1, 3.2 and 3.3 below:
Building Base Monthly Rent
-------- -----------------
A _______________
B _______________
C _______________
Total ===============
All Base Monthly Rent shall be paid in advance on the first day of each calendar
month of the term of the Lease, without deduction, offset, prior notice or
demand, in lawful money of the United States. If the Commencement Date is not
the first day of a month, or if the Lease termination date is not the last day
of the month, a prorated Base Monthly Rent shall be paid at the then current
rate for the fractional month during which the Lease commences and/or
terminates.
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<PAGE>
Within two (2) weeks following Tenant's execution of this lease, Tenant
shall pay to Landlord the sum, as advance rent to be applied
towards the Base Monthly Rents first accruing under this Lease.
3.2 Rental Adjustment. The Base Monthly Rent for each Building as
-----------------
specified in Section 3.1 above shall be increased in accordance with the
following formula to the extent Landlord disburses to Tenant the Improvement
Allowance for such Building pursuant to Exhibit "B": for each dollar of
Improvement Allowance disbursed up to and including Five Dollars ($5.00) per
square foot, the Base Monthly Rent shall be increased by One Cent ($.0l) per
square foot per month. For every dollar of Improvement Allowance over Five
Dollars ($5.00) per square foot, the Base Monthly Rent shall be increased by One
and Six-Tenths Cents ($.016) per square foot per month. For example, if Ten
Dollars ($10.00) per square foot of Improvement Allowance is disbursed for
Building A, the Base Monthly Rent for Building A shall be increased by the sum
of Seven Thousand Three Hundred Thirty-Eight Dollars and Twenty-Four cents
($7,338.24).
3.3 Rental During Option Term. If Tenant exercises the option to
-------------------------
extend the Lease Term pursuant to Section 17 below, then commencing on the first
day of the Option Term, the Base Monthly Rent shall be increased to a sum equal
to the total of:
(a Dollars plus (b) a sum equal to One Hundred Seventy-Two
fraction, the numerator of which is the New Index and the denominator
of which is the Initial Index; provided, however, that in no event shall the
monthly installment of Base Monthly Rent during the Option Term be more than
Monthly Rent during the Option Term be less than
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<PAGE>
____________________________________________________________________ plus one
For purposes of adjusting the Base Monthly Rent as provided in this Lease,
the following definitions shall apply:
(i) "Index" means the Consumer Price Index for All Urban Consumers
(all items) as published by United States Department of Labor,
Bureau of Labor Statistics for the San Francisco/Oakland/San
Jose Metropolitan Area (1982-1984=100 Base);
(ii) "Initial Index" means the Index last published prior to the
Building A Commencement Date of this Lease; and
(iii) "New Index" means the Index last published prior to the first
day of the Option Term.
If the Index is changed or the base year is altered from that used as of the
Commencement Date of this Lease, the Index shall be converted in accordance with
the conversion factor published by United States Department of Labor, Bureau of
Labor Statistics, to obtain the same results which would have been obtained had
the Index or the base year not been changed. If no conversion factor is
available, or if the Index is otherwise changed, revised or discontinued for any
reason, there shall be substituted in lieu thereof, and the term Index shall
thereafter refer to the most nearly comparable official price index of the
United States Government in order to obtain substantially the same result for
any adjustment required by this Lease as would have been obtained had the Index
not been changed, revised or discontinued.
3.4 Additional Rent. Commencing on the Commencement Date for each
---------------
Building, and continuing throughout the Lease term, Tenant shall pay within
thirty (30) days of receipt of billing therefor, as additional rent (i) all
utilities as required by Section 6.1, (ii) Tenant's Pro Rata Share of real
property taxes as
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<PAGE>
required by Section 4.1, (iii) Tenant's Pro Rata Share of the property insurance
premiums as required by Section 11.2, (iv) Tenant's Pro Rata Share of Outside
Area Expenses as required by Section 18, and (v) all other sums and charges
payable by Tenant pursuant to the terms of this Lease (hereinafter collectively
referred to as "Additional Rent"). The Additional Rent shall be paid in
addition to the Base Monthly Rent. In the event of nonpayment by Tenant of the
Additional Rent, Landlord shall have all the rights and remedies with respect
thereto as Landlord has for the nonpayment of the Base Monthly Rent.
As used in this Lease, and provided that the Commencement Date for each
Building occurs in the sequence stated in Section 2.1, the term "Tenant's Pro
Rata Share" shall mean the following fractions during the following time
periods:
<TABLE>
<CAPTION>
TIME PERIOD TENANT'S PRO RATA SHARE
- ----------------------------------- -----------------------
<S> <C>
From the Building A
Commencement Date until the 56,448
-------
Building B Commencement Date 275,264
From the Building B Commencement
Date until the Building C 133,864
-------
Commencement Date 275,264
After the Building C Commencement 222,800
-------
Date 275,264
</TABLE>
Landlord acknowledges that the calculation of the number of square feet
comprising the four (4) buildings in the Complex reflected in this Section 3.4
is consistent with the method stated in Section 1.1, and, if Tenant reasonably
determines that such calculation is inaccurate, Tenant shall be entitled to an
equitable adjustment of Tenant's Pro Rata Share.
3.5 Late Charges. Tenant acknowledges that late payment by Tenant to
------------
Landlord of the Base Monthly Rent and other sums due hereunder may cause
Landlord to incur costs not contemplated by this Lease, the exact amount of
which will be extremely difficult to ascertain. Such costs include, but are not
limited to, processing and accounting charges and late charges which may be
imposed on Landlord by the terms of any mortgage or deed of trust covering the
Premises. Accordingly, in the event Tenant fails to
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<PAGE>
pay any installment of Base Monthly Rent and/or other sums due hereunder within
ten (10) days after Tenant receives written notice that said rent or other sum
has not been paid when due, Tenant shall pay to Landlord, as Additional Rent, a
late charge equal to six percent (6%) of such overdue amount. The parties agree
that such late charge represents a fair and reasonable estimate of the cost
Landlord will incur by reason of late payment by Tenant. Acceptance of such
late charge by Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of its other rights and remedies granted under this Lease.
4. TAXATION.
--------
4.1 Real Property Taxes. Tenant shall pay to Landlord, as additional
-------------------
rent, Tenant's Pro Rata Share of all real property taxes which, during the term
of this Lease, are levied, assessed or imposed upon or against the Premises, the
Parcel and the Complex. Tenant shall pay its Pro Rata Share of such taxes to
Landlord on or before the later of (a) ten days after receipt of billing (which
shall include a copy of the tax collector's statement) or (b) ten days prior to
the delinquency date of such taxes. In the event any such real property taxes
cover any period of time prior to commencement or after the expiration of the
term of this Lease, Tenant's share of such taxes shall be equitably prorated to
cover only the period of time within the fiscal tax year during which the Lease
is in effect.
As used in this Lease, the term "real property tax" shall include any form
of assessment, levy, penalty or tax (other than inheritance, estate, net income
or franchise taxes) imposed by any authority having the direct or indirect power
to tax, including any city, county, state or federal government or any school,
agricultural, lighting, drainage or other improvement district thereof,
including, without limitation, any tax:
A. Upon, allocable to, or measured by the Premises or the Parcel or
the rental payable hereunder, including without limitation, any gross income tax
or excise tax levied by the state,
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<PAGE>
any political subdivision thereof, city or federal government with respect to
the receipt of such rental; or
B. Upon or with respect to the possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy by Tenant of the
Premises or any portion thereof; or
C. Upon or measured by the value of Tenant's personal property,
equipment or fixtures located in the premises; or
D. Upon this transaction or any document to which Tenant is a
party creating or transferring an interest or an estate in the Premises.
E. Notwithstanding the foregoing, in the event Landlord sells
or otherwise transfers the Premises or any portion thereof, Tenant shall have no
obligation, during the initial term of the Lease, to pay that portion, as
reasonably determined by Landlord based upon the county tax assessor's tax
statement for the Premises, of the real property taxes attributable to a
reassessment following such sale. This Section 4.1(E) shall be inapplicable
during the Option Term.
4.2 Personal Property Taxes. Tenant shall pay prior to delinquency
-----------------------
all taxes assessed against and levied upon trade fixtures, furnishings,
equipment and all other personal property of Tenant contained in the Premises or
elsewhere. When possible, Tenant shall cause said trade fixtures, furnishings,
equipment and all other personal property to be assessed and billed separately
from the real property of Landlord.
If any of Tenant's personal property shall be assessed with landlord's real
property, Tenant shall pay to Landlord the taxes attributable to Tenant on or
before the later of (a) ten (10) days after receipt of a written statement
setting forth the taxes applicable to Tenant's property, which statement shall
include a copy of the tax collector's statement, or (b) ten (10) days prior to
delinquency date of said taxes.
-9-
<PAGE>
4.3 Assessments. To the best of Landlord's knowledge, no special
-----------
assessments in addition to those shown on the property tax bill for the Premises
for the 1987-88 fiscal year will be imposed on the Premises during the term of
this Lease, except as disclosed in writing to Tenant. If any assessments are
levied against the Premises after the Commencement Date for any of the
Buildings, Landlord may elect to either pay the assessment in full or allow the
assessment to go to bond. If Landlord pays the assessment in full, Tenant shall
pay to Landlord each time payment of real property taxes is made, a sum equal to
that which would have been payable (as both principal and interest) had Landlord
allowed the assessment to go to bond.
4.4 Right to Contest. If Landlord receives any notice of assessment
-----------------
or reassessment, or notice of any imposition of new real property taxes,
Landlord shall provide Tenant with a copy of such notice within fifteen (15)
days after Landlord's receipt thereof. In the event Tenant desires in good
faith to contest or otherwise review by appropriate legal or administrative
proceedings the imposition of any such real property tax, Tenant shall, at least
ten (10) days prior to the delinquency of such real property tax, give Landlord
written notice of its intention to do so. Tenant may withhold payment of the
real property tax being contested if, but only if, both (i) non-payment is
permitted during the pendency of such proceedings without the foreclosure of any
tax lien or the imposition of any fine or penalty, and (ii) Tenant further
furnishes Landlord with a bond satisfactory to Landlord sufficient to protect
Landlord's interest in the Premises. Any such contest shall be prosecuted to
completion (whether or not this Lease shall have expired or terminated in the
interim) and shall be conducted without delay and solely at Tenant's expense.
Tenant shall protect and indemnify Landlord against any and all expenses or
damages resulting from such contest or other proceeding. At the request of
Tenant, Landlord shall join in any contest or other proceedings which Tenant may
desire to bring pursuant to this Section. Tenant shall pay all of Landlord's
expenses arising out
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<PAGE>
of such joinder. Within ten (10) days after the final determination of the
amount due from Tenant with respect to the real property tax contested, Tenant
shall pay the amount so determined to be due, together with all costs, expenses
and interest, whether or not this Lease shall have then expired or terminated.
5. USE.
---
5.1 Use. The Premises shall be used and occupied by Tenant for only
---
the following purposes and for no other purpose whatsoever without obtaining the
prior written consent of Landlord: office, light warehouse, distribution,
engineering, research and development, product testing, incidental training and
any other legal uses for Tenant's business as the same may exist from time to
time. This lease shall be subject to all applicable zoning ordinances and to
any municipal, county and state laws and regulations governing and regulating
the use of the Premises. Tenant acknowledges that neither Landlord nor
Landlord's agent has made any representation or warranty as to the suitability
of the Premises for the conduct of Tenant's business.
Notwithstanding the foregoing, Landlord represents that it has no knowledge
of any laws, statutes, ordinances, or governmental rules, regulations or
requirements ("Laws") or of any covenants, conditions, restrictions or
encumbrances ("CC&Rs") which would currently prevent or substantially interfere
with the Premises being used for the above-described uses. Landlord
acknowledges that the Premises are currently in the MP (Planned Industrial)
zoning classification established by the City of Santa Clara, and that the uses
that may be made of the Premises pursuant to this Section are permitted to be
made under zoning regulations which govern the use of the Premises.
5.2 Uses Prohibited.
---------------
A. Tenant shall not do or permit anything to be done in or
about the Premises which will increase the existing rate of insurance upon the
Premises (unless Tenant shall pay any increased premium as a result of such use
or acts) or cause the
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<PAGE>
cancellation of any insurance policy covering the premises or the Parcel, nor
shall Tenant sell or permit to be kept, used or sold in or upon the Premises or
the Outside Area, any articles which may be prohibited by a standard form
policy of fire insurance.
B. Tenant shall not do or permit anything to be done in or upon
the Premises or the Outside Area, which will in any way obstruct or interfere
with the rights of other tenants or occupants of the Parcel or injure or annoy
them or use or allow the Premises to be used for any unlawful or objectionable
purpose nor shall Tenant cause, maintain or permit any nuisance in or upon the
Premises, or the Outside Area. Tenant shall not commit or suffer to be
committed any waste in or upon the Premises or the Outside Area and Tenant shall
keep the Premises in a clean, attractive condition, free of any objectionable
noises, odors or dust.
C. Tenant shall not use the Premises or the Outside Area, or
permit anything to be in or about the Premises or Outside Area which will in any
way conflict with any Laws, statute, zoning restriction, ordinance, governmental
rule, regulation, or requirements now in force or which may hereafter be enacted
or promulgated. Tenant shall at its sole cost and expense promptly comply with
all laws, statutes, ordinances and governmental rules, regulations and
requirements now in force or which may hereafter be in force and with
requirements of any board or fire underwriters or other similar body
("Underwriter's Requirement") now or hereafter constituted relating to or
affecting the condition, use or occupancy of the Premises. The judgment of any
court of competent jurisdiction or the admission of Tenant in any action against
Tenant, whether Landlord is a party thereto or not, that Tenant has violated any
law, statute, ordinance or governmental rule, regulation or requirement, shall
be conclusive of that fact as between Landlord and Tenant.
6. UTILITIES AND WASTE DISPOSAL.
----------------------------
6.1 Utilities. Commencing on the Commencement Date for each
---------
Building, Tenant shall pay as additional rent, prior to delinquency, for all
water, gas, heat, light, power, telephone,
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<PAGE>
sewage, air conditioning and ventilating, scavenger, janitorial, and all other
materials and utilities supplied to the Premises and all taxes and surcharges
thereon.
6.2 Waste Disposal. Tenant shall store its waste either inside the
--------------
Premises or in its own dumpsters located within outside trash enclosures located
in the Outside Area.
6.3 Interference with Use of the Premises. In the event of a
-------------------------------------
material interference with Tenant's use of the leased Premises as a consequence
of the cessation of utility service caused by the negligence or willful
misconduct of Landlord or its agents, contractors, employees or invitees, Tenant
shall be entitled to an abatement of Base Monthly Rent to the extent of the
interference with Tenant's use of the leased Premises, if such cessation of
utility service and consequent material interference persists for a continuous
period of two (2) business days or more. Any abatement of Base Monthly Rent
shall commence with the first business day after the beginning of the cessation
of utility service and shall continue until that date on which the utility
service is restored.
7. MAINTENANCE AND REPAIRS, ALTERATIONS AND ADDITIONS.
---------------------------------------------------
7.1 Landlord's Obligations. Subject to the provisions of Section 12
----------------------
and except for damage caused by any negligent or intentional act or omission of
Tenant and Tenant's agents, employees or invitees, which damage is not covered
by the type of insurance to be maintained pursuant to Section 11.2 hereof,
Landlord, at Landlord's expense, shall keep in good order, condition and repair
the foundations, exterior walls and exterior roofs (including roof membranes) of
the Premises. Landlord shall not, however, be obligated to paint such exterior,
nor shall Landlord be required to maintain the interior surface of exterior
walls, ceilings or doors. Landlord shall have no obligation to make repairs
under this Section 7.1 until a reasonable time after receipt of written notice
of the need for such repairs. Tenant expressly waives the benefits of any
statute now or hereafter in effect which would otherwise afford Tenant the right
to make repairs at Landlord's expense or to terminate this Lease because of
-13-
<PAGE>
Landlord's failure to keep the Premises in good order, condition and repair.
If, within thirty (30) days after notice from Tenant, Landlord fails to commence
making repairs which are the obligation of Landlord under this Section 7.1,
Tenant shall have the right to make such repairs and charge Landlord for the
reasonable cost thereof. In such event, Landlord shall reimburse Tenant for the
cost of such repairs within thirty (30) days after receipt of billing from
Tenant.
7.2 Tenant's Obligations.
--------------------
A. Subject to the provisions of Sections 12 and 7.1, Tenant, at
Tenant's expense, shall maintain in good order, condition and repair the
Premises and every part thereof, including but not limited to floors, ceilings,
windows, doors, skylights, interior walls, and the interior surfaces of the
exterior walls, plumbing, heating, air conditioning and ventilating equipment,
electrical and lighting facilities and equipment to the Premises including
circuit breakers and exterior lighting attached to the Premises. Said
maintenance shall include, without limitation, a periodic agreement with a
reputable and licensed heating and air conditioning service company which
provides for service to the HVAC equipment at least as often as every ninety
(90) days if Tenant's use of the Premises is limited to normal business hours
(8:00 a.m. to 6:00 p.m.); if Tenant's use extends beyond normal business hours,
such service shall be as often as may be required by Landlord. If Tenant does
not provide Landlord with a copy of any such required maintenance contract
within thirty (30) days after written request from Landlord, Landlord may elect,
at its option, to keep and maintain the heating and air conditioning systems in
the Premises, and in such event Tenant shall pay to Landlord upon demand the
full cost of such maintenance and repairs to such systems.
B. All glass, both interior and exterior, is at the sole risk
of Tenant, and any broken glass shall promptly be replaced by Tenant at Tenant's
expense with glass of the same kind, size and quality according to the current
local code.
-14-
<PAGE>
C. In the event the Premises are damaged due to an attempted
burglary or forcible entry into the Premises, Tenant shall be responsible for
any ensuing damage to the Premises.
D. Upon the expiration or earlier termination for this Lease,
Tenant shall surrender the Premises in the same condition as received, broom
clean, ordinary wear and tear, damage by fire, earthquake, acts of God, or
condemnation alone excepted. Tenant, at its sole cost and expense, agrees to
repair any damage to the Premises caused by or in connection with the removal of
any articles of personal property, business or trade fixtures, machinery,
equipment or furniture, including without limitation thereto, repairing the
floor and patching and painting the walls where required by Landlord to
Landlord's reasonable satisfaction. Tenant shall indemnify Landlord against any
loss or liability resulting from delay by Tenant in so surrendering the
Premises, including without limitation, any claims made by any succeeding Tenant
founded on such delay.
E. In the event Tenant fails to perform Tenant's obligations
under this Section 7, Landlord shall give Tenant written notice to do such acts
as are reasonably required to maintain the Premises. If Tenant fails to do the
work and diligently prosecute it to completion, then Landlord shall have the
right (but not the obligation) to do such acts and expend such funds at the
expense of Tenant as are reasonably required to perform such work. Any amount
so expended by Landlord shall be paid by Tenant within thirty (30) days after
demand with interest at ten percent (10%) per annum form the date of such work.
Landlord shall have no liability to Tenant for any damage, inconvenience, or
interference with the use of the Premises as a result of performing any such
work.
F. Tenant shall have the benefit of all warranties available to
Landlord which would reduce the cost of performing the obligations of Tenant
pursuant to Section 7.2. Landlord warrants to Tenant that all of the
improvements existing on the Premises as of the Occupancy Date shall have been
constructed in good and
-15-
<PAGE>
workmanlike manner in accordance with all Laws, Underwriter's Requirements and
the plans and specifications therefor. Tenant shall not be responsible for the
cost of maintenance or repair to the Premises or any portion thereof to the
extent such maintenance or repair is necessary as a result of the negligent act
or omission of Landlord or its agents, employees, contractors or invitees.
G. If Tenant becomes obligated pursuant to Section 7.2(a) to
perform any item of repair to the plumbing, heating, air conditioning and
ventilating equipment, or electrical and lighting facilities and equipment,
which would, under generally accepted accounting principles, properly be
considered a capital improvement to the Premises, the cost of which exceeds
Twenty-Five Thousand Dollars ($25,000), then Landlord and Tenant shall share the
initial cost of such capital improvement as follows: (i) Tenant shall pay the
first Twenty-Five Thousand Dollars ($25,000) of such initial cost; (ii) Tenant
shall pay a share of the remaining cost, in the same proportion that the number
of years remaining in the Lease term bears to ten (10) years, determined by
amortizing such cost over ten (10) years on a straight line basis; and (iii)
Landlord shall pay, within sixty (60) days of written notice from Tenant setting
forth the amount to be paid by Landlord, the remaining share of the initial
cost. In the event that Tenant exercises its option to extend the term of this
Lease pursuant to Section 17, Tenant will again pay to Landlord, within sixty
(60) days of the commencement of the Option Term, a share of the cost of such
capital improvement in excess of Twenty-Five Thousand Dollars ($25,000), in the
proportion that the number of years then remaining in the Lease term bears to
ten (10) years.
7.3 Leasehold Improvements.
-----------------------
A. Tenant shall not construct any leasehold improvements or
otherwise alter the leased Premises without Landlord's prior written approval
of the plans and specifications therefor, which approval shall not be
unreasonably withheld; provided, however that Tenant shall have the right to
make interior
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<PAGE>
nonstructural alterations to the Premises which do not exceed Twenty-Five
Thousand Dollars ($25,000) in cost, without obtaining Landlord's prior written
approval. All such leasehold improvements shall be installed by Tenant at
Tenant's expense by a licensed contractor in compliance with the approved plans
and specifications therefor and in strict accordance with all Laws. All such
construction shall be done in a good and workmanlike manner using new materials
of good quality. Tenant shall not commence construction of any leasehold
improvements until (1) all required governmental approvals and permits shall
have been obtained; (2) all requirements regarding insurance imposed by this
Lease have been satisfied; and (3) Tenant shall have given Landlord at least
five (5) days prior written notice of its intention to commence such
construction. All leasehold improvements constructed by Tenant (except those
constructed with the Improvement Allowance pursuant to Exhibit B") shall remain
the property of Tenant during the Lease term but shall not be damaged, altered
or removed from the Premises. At the expiration or sooner termination of the
Lease term, all leasehold improvements shall be surrendered to Landlord as a
part of the realty and shall then become Landlord's property, and Landlord shall
have no obligation to reimburse Tenant for all or any portion for the value or
cost thereof; however, Landlord may, at its option, require Tenant to remove any
leasehold improvements in which case Tenant shall so remove such leasehold
improvements prior to the expiration or sooner termination of the Lease term.
Upon request, within thirty (30) days of Tenant's application for consent
to such leasehold improvements or no later than one hundred twenty (120) days
before the expiration of the Lease term, Landlord shall advise Tenant in writing
whether it reserves the right to require Tenant to remove any leasehold
improvements from the Premises upon termination of the Lease. In the event that
Landlord does not so designate any such leasehold improvements within the time
stated, Tenant shall not be required to remove such leasehold improvements from
the Premises. Notwithstanding the
-17-
<PAGE>
provisions of this Section 7.3(A), those leasehold improvements installed in the
Premises at Tenant's expense (except those constructed with the Improvement
Allowance pursuant to Exhibit "B" or which replace leasehold improvements
existing as of the Occupancy Date) shall remain the property of Tenant following
the expiration or sooner termination of the Lease Term, and Tenant shall not be
required to surrender such leasehold improvements to Landlord.
Within ten (10) business days after demand therefor from Tenant, Landlord
shall execute and deliver a lien waiver or other document in form customarily
required by any supplier, lessor or lender in connection with the installation
in the Premises of Tenant's personal property or trade fixtures, pursuant to
which Landlord shall waive any right it may have or acquire with respect to such
property. Landlord reserves the right to approve the form of any lien waiver it
is required to execute and to make reasonable modifications to any such form.
B. Alterations Required by Law. Tenant shall, at its sole
---------------------------
cost, make any alteration, addition or change of any sort, whether structural or
otherwise, to the Premises that is required by Law because of (1) Tenant's use
or change of use of the Premises, (2) Tenant's application for a new permit or
governmental approval, or (3) Tenant's construction or installation of any
leasehold improvements or trade fixtures.
C. In the event Tenant is required by any Law or Underwriter's
Requirement to make any capital improvement to the Premises, Tenant shall have
the right to contest or otherwise review by appropriate legal or administrative
proceedings the application of such Law or Underwriter's Requirement. If Tenant
desires to so contest or cause the review of such Law or Underwriter's
Requirement, Tenant shall give Landlord written notice of its intention to do so
and may conduct such contest or other review so long as it pays all costs, and
compliance therewith may be held in abeyance pending completion of such
proceedings. If required by Landlord, Tenant shall obtain and furnish Landlord
with
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<PAGE>
an appropriate bond or other security sufficient to protect Landlord from
Tenant's failure to comply with such Law or Underwriter's Requirement during the
pendency of such proceedings. Tenant shall protect and indemnify Landlord
against any and all expenses or damages resulting from such contest or other
proceeding.
D. If any capital improvement is required to be made to the
Premises in order to comply with any Law or Underwriter's Requirement and if
Tenant is not obligated to make such capital improvement pursuant to Section
7.3(B), then the following shall apply:
(i) Landlord shall construct such capital improvement at its
sole cost and expense in accordance with the applicable Law
or Underwriter's Requirement.
(ii) All reasonable costs paid by Landlord to construct such
required capital improvement (including financing costs)
shall be amortized over the useful life of such
improvement with interest on the unamortized balance at the
then prevailing market rate Landlord would pay if it
borrowed funds to permanently finance such improvement from
an institutional lender following completion. Landlord
shall notify Tenant of its determination of the appropriate
amortization schedule based upon the foregoing and the
monthly amortization payment that must be made to amortize
such costs, and shall provide Tenant with the information
upon which such determination is made. Such determination
shall be subject to the approval of Tenant. As Additional
Rent, Tenant shall pay an amount equal to such monthly
amortization payment for each month after such capital
improvement is completed until the expiration of the term
of
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<PAGE>
this Lease. The Additional Rent described by this Section
shall not be subject to the adjustment required to be made
to the Base Monthly Rent payable during the Option Term
pursuant to Section 3.3 hereof.
8. ENTRY BY LANDLORD. Landlord and Landlord's agent shall have the right
-----------------
at reasonable times and upon reasonable written notice to Tenant, of not less
then twenty-four (24) hours, except in an emergency, and subject to Tenant's
security requirements, to enter the Premises to inspect the same or to maintain
and repair, make alterations or additions to the Premises or any portion
thereof, to the extent permitted or required by this Lease, or to show the
Premises to prospective purchasers and lenders or, during the last six (6)
months of the Lease term, to prospective tenants. Landlord may, at any time,
place on or about the Premises any ordinary "For Sale" signs; Landlord may at
any time during the last ninety (90) days of the term of the Lease place on or
about the Premises any ordinary "For Lease" signs. Tenant hereby waives claim
for abatement of rent or for damages for any injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or quiet enjoyment of
the Premises, and any other loss occasioned thereby, provided that Landlord
shall have used all reasonable efforts to minimize such injury, inconvenience,
interference or loss.
9. LIENS. Tenant shall keep the Premises and the Parcel free from any
-----
liens arising out for work performed, materials furnished or obligations
incurred by Tenant and shall indemnify, hold harmless and defend Landlord from
any liens and encumbrances arising out of any work performed or materials
furnished by or at the direction of Tenant. In the event that Tenant shall not,
within thirty (30) days following receipt of notice of the imposition of any
such liens, cause such lien to be released of record by payment or posting of a
proper bond, Landlord shall have, in addition to all other remedies provided
herein and by law, the right, but not the obligation, to cause the same to be
released by
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such means as it shall deem proper, including payment of the claim giving rise
to such lien. All such sums paid by Landlord and all expenses incurred by it
in connection therewith including attorneys' fees and costs shall be payable to
Landlord by Tenant within thirty (30) days of demand with interest at the rate
of ten percent (10%) per annum. Landlord shall have the right at all times to
post and keep posted on the Premises any notices permitted or required by law,
or which Landlord shall deem proper, for the protection of Landlord and the
Premises, and any other party having an interest therein, from mechanics' and
material persons' liens and Tenant shall give to Landlord at least ten (10)
business days prior written notice of the expected date of commencement of any
work relating to alterations or additions to the Premises.
10. INDEMNITY.
---------
10.1 Indemnity. Tenant shall indemnify and hold Landlord harmless
---------
from and against any and all claims of liability for any injury or damage to any
person or property arising from Tenant's use of the Premises, or from the
conduct of Tenant's business, or from any activity, work or thing done,
permitted or suffered by Tenant in or upon the Premises or the Outside Area.
Subject to the provisions of Section 11.3, entitled Waiver of Subrogation,
Tenant shall further indemnify and hold Landlord harmless from and against any
and all claims arising from any breach or default in the performance of any
obligation on Tenant's part to be performed under this Lease, or arising from
any negligence of Tenant or Tenant's agents, contractors or employees, and from
and against all costs, attorneys' fees, expenses and liabilities incurred in the
defense of any such claim, or any action or proceeding brought thereon. In the
event any action or proceeding is brought against Landlord by reason of such
claim, Tenant upon notice from Landlord shall defend same at Tenant's expense.
Notwithstanding anything to the contrary in the Lease, Tenant shall neither
release Landlord from, nor indemnify Landlord with respect to: (i) the
negligence or willful misconduct of Landlord,
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<PAGE>
the other occupants of the Complex, or their respective agents, employees,
contractors or invitees; or (ii) a breach of Landlord's obligations or
representations under this Lease. Landlord shall indemnify and hold harmless
Tenant from all damages, liabilities, judgments, actions, attorneys' fees,
consultants' fees, costs and expenses arising from the negligence or willful
misconduct of Landlord or its employees, agents contractors or invitees, or the
breach of Landlord's obligations or representations under this Lease.
10.2 Exemption of Landlord from Liability. Landlord shall not be
------------------------------------
liable for injury to Tenant's business or loss of income therefrom or for damage
which may be sustained by the person, goods, wares, merchandise or property of
Tenant, its employees, invitees, customers, agents or contractors or any other
person in or about the Premises, caused by or resulting from fire, steam,
electricity, gas, water or rain, which may leak or flow from or into any part of
the Premises, or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures of the same, whether the said damage or injury results from conditions
arising upon the Premises or from other sources or places and regardless of
whether the cause of such damage or injury or the means of repairing the same is
inaccessible to Tenant. Landlord shall not be liable for any damages arising
from any act or neglect of any other tenant, if any, of the Parcel. The
provisions of this Paragraph 10.2 shall not apply to or in the event of any
damage or injury caused by the willful misconduct or negligence of Landlord, its
agents or employees.
11. INSURANCE.
---------
11.1 Liability Insurance. Tenant shall, at its own expense, maintain
-------------------
in full force and effect during the Lease Term the following insurance:
A. Tenant shall maintain a policy or policies of comprehensive
general liability insurance, including fire and property damage carried with a
company or companies satisfactory to
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Landlord, which will insure Tenant and Landlord (and such others as are
designated by Landlord) against liability for personal injury, bodily injury,
death, and damage to property occurring in or about, or resulting from any
occurrence in or about, the Premises with combined single limit coverage of not
less than Three Million Dollars ($3,000,000.00). Such comprehensive general
liability insurance shall be extended to include "blanket contractual liability"
endorsement insuring Tenant's performance of Tenant's obligation to indemnify
Landlord contained in Section 10.1 and all of the other broadened liability
features normally contained in an extended liability endorsement. If Landlord's
lender, insurance advisor or counsel reasonably determines at any time that the
amount of such coverage is not adequate and provided such increase is reasonably
approved by Tenant, Tenant shall increase such coverage to such amount as
Landlord's lender, insurance advisor or counsel reasonably deems adequate. The
limits of such insurance shall not limit the liability of Tenant. Tenant shall
deliver to Landlord certificates of insurance evidencing the existence and
amounts of such insurance naming Landlord as an additional insured. In the
event Tenant fails to procure and maintain such insurance, Landlord may (but
shall not be required to) procure same at Tenant's expense after ten (10) days
prior written notice. No such policy shall be cancellable or subject to
reduction of coverage or other modification except after thirty (30) days prior
written notice to Landlord by the insurer. All such policies shall be written
as primary policies, not contributing with and not in excess of coverage which
Landlord may carry. Tenant shall, within twenty (20) days prior to the
expiration of such policies, furnish Landlord with renewals or binders or
Landlord may order such insurance and charge the cost to Tenant, which amount
shall be payable by Tenant upon demand. Tenant shall have the right to provide
such insurance coverage pursuant to blanket policies obtained by Tenant provided
such blanket policies expressly afford coverage to the Premises and to Landlord
as required by this Lease.
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<PAGE>
11.2 Property Insurance. Landlord shall, at Tenant's expense, procure
------------------
and maintain at all times during the term of this Lease a policy or policies of
insurance covering loss or damage to the Premises in the amount of the full
replacement value thereof and loss of rental income (for a maximum of twelve
(12) months) thereof, providing protection against all perils included within
the classification of fire, extended coverage, vandalism, malicious mischief,
sprinkler leakage and special extended peril (all-risk) (and, if required by
Landlord's lender, flood and earthquake). Landlord shall not be required to
cause such insurance to cover any of Tenant's personal property, inventory,
trade fixtures or any modifications, alterations, or improvements made or
constructed by Tenant to or within the Premises. During the term of this Lease,
Tenant shall pay to Landlord, as additional rent, the amount of the premium for
the insurance required under this Section 11.2 within ten (10) days after
receipt by Tenant of a copy of the premium statement or other reasonably
satisfactory evidence of the amount due, which shall include the method of
calculation of Tenant's share thereof if the insurance covers improvements other
than the Premises. If the term of this Lease does not expire concurrently with
the expiration of the period covered by the insurance Tenant's liability for
such premium shall be prorated on an annual basis.
Tenant shall not be obligated to pay the cost of earthquake insurance to
the extent it exceeds a commercially reasonable rate. If the cost of earthquake
insurance exceeds a commercially reasonable rate, Tenant shall nonetheless
continue to pay an amount equal to a commercially reasonable rate for such
earthquake insurance so long as such insurance is carried by Landlord. For
purposes hereof, a "commercially reasonable rate" for earthquake insurance
shall mean any rate that is within the range of the then current cost of
earthquake coverage which is then being paid by Prime Owners (defined below) of
industrial buildings in Santa Clara County containing more than 50,000 square
feet that were built after 1976 or which is being reimbursed or paid by tenants
occupying, under triple net leases, such buildings. Prime Owners
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shall be any entity whose individual real property holdings exceed Twenty-Five
Million Dollars ($25,000,000) in fair market value who fit into the following
categories: (i) institutional investors such as pension funds, insurance
companies, and syndications where partnership interests were offered pursuant to
a registered public offering; and (ii) industrial developers and their
affiliated partnerships (e.g., Lincoln Property Company, Trammel Crow,
Peery/Arrillaga, the Koll Company). Notwithstanding the foregoing: (i) in the
event that it is not the prevailing practice, because of the excessive cost of
earthquake insurance coverage, for Prime Owners of industrial buildings in Santa
Clara County containing more than 50,000 square feet that were built after 1976
to pay, or tenants occupying such buildings under triple net leases to
reimburse, the cost of earthquake insurance coverage, the rate paid by the
remaining Prime Owners or reimbursed by their tenants shall not be deemed to
establish a commercially reasonable rate, and (ii) an annual rate of earthquake
insurance coverage of Ten Dollars ($10) per One Thousand Dollars ($1,000) of
replacement cost is acknowledged by the parties to be at the high end of the
range of commercially reasonable rates for earthquake insurance as of the date
of this Lease.
Landlord shall maintain, at its sole cost and expense, a policy or policies
of comprehensive general liability insurance insuring Landlord (and such others
as are designated by Landlord) against liability for personal injury, bodily
injury, death, and damage to property occurring or resulting from an occurrence
in, on or about the Premises, with combined single limit coverage of not less
than Three Million Dollars ($3,000,000), or such greater coverage as Landlord
may from time to time determine is reasonably necessary for its protection.
11.3 Waiver of Subrogation. Landlord and Tenant each hereby waive any
---------------------
and all rights of recovery against the other, and against the officers,
partners, employees, agents and representatives of the other, on account of
loss or damage to such waiving party's property or the property of others under
its control to the
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extent that such injury, loss or damage is insured against under any insurance
policy in force at the time of such loss or damage. Landlord and Tenant agree
to notify the insurance carrier or carriers under any such policy that the
foregoing mutual waiver of subrogation is contained in this Lease.
12. DAMAGE OR DESTRUCTION.
---------------------
A. If any one or more of the Buildings that are part of the Premises
are damaged by any peril, then Landlord shall restore the damage to such
Building(s), except to the extent that this Lease is terminated either in its
entirety or in part by Landlord pursuant to Section 12B hereof or by Tenant
pursuant to Section 12C hereof. If this Lease is not so terminated either in
its entirety or in part, all proceeds of the insurance carried pursuant to
Section 11.2 shall be paid to Landlord and shall be used for the restoration of
the damage. The party who has obtained and is then carrying such insurance
shall be responsible for paying any "deductible" amount that is excluded from
coverage. Upon receipt of such insurance proceeds and the issuance of all
necessary governmental approvals, Landlord shall commence and diligently
prosecute to completion the restoration of the Building(s) to substantially the
same condition existing immediately prior to such damage. However, if Landlord
commences such restoration but has not substantially completed such restoration
within two hundred forty (240) days after the date of such damage, then Tenant
shall have the option to terminate this Lease as to the Building(s) so damaged
on the following terms: (i) within thirty (30) days after the expiration of such
two hundred forty (240) day period, Tenant shall notify Landlord as to whether
or not it elects to exercise its option to terminate this Lease; and (ii) if
Tenant makes such election and the restoration is not substantially completed
within thirty (30) days after Landlord's receipt of such notice of election from
Tenant, then this Lease shall terminate as to the Building(s) so damaged and not
restored.
B. Landlord shall have the following options to terminate this
Lease as to the Building(s) damaged, which may be exer-
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cised only by delivery to Tenant of a written notice of election to terminate
within thirty (30) days after the date the damage occurs:
(1) In the event any one of the Buildings is damaged by a peril
that is not covered by the insurance carried pursuant to Section 11.2, and the
cost to restore the damage exceeds five percent (5%) of the then replacement
cost of the Building so damaged, Landlord shall have the option to terminate
this Lease in part as to the Building so damaged. Notwithstanding the foregoing,
if Landlord so partially terminates this Lease, Tenant may within fifteen (15)
days after receipt of Landlord's notice of termination agree to pay the cost to
restore the damage to the extent it exceeds five percent (5%) of the then
replacement cost of the Building so damaged, in which case this Lease shall not
be so partially terminated and Landlord shall proceed to restore the damage
following receipt of Tenant's contribution toward the cost of restoration.
(2) In the event any one of the Buildings is damaged by any
peril, whether or not covered by the insurance carried pursuant to Section 11.2,
during the last year of the Lease term (as it may be extended) to such an extent
that the estimated cost to restore exceeds an amount equal to six (6) times the
then Base Monthly Rent allocable to the Building(s) so damaged, then Landlord
shall have the option to terminate this Lease in part as to the Building(s) so
damaged. Notwithstanding the foregoing, Landlord may not so terminate this
Lease pursuant to this subparagraph if Tenant, at the time of such damage, has
an express written option to further extend the Lease Term and Tenant exercises
such option to so further extend the Lease Term within fifteen (15) days
following Landlord's exercise of its option to terminate.
C. If any one or more of the Buildings is damaged by any peril and
Landlord does not elect to terminate this Lease as to the Building(s) so damaged
or is not entitled to terminate this Lease pursuant to Section 12B, then as soon
as reasonably practicable, Landlord shall furnish Tenant with the written
opinion of Landlord's architect or construction consultant as to when the
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restoration work required of Landlord may be completed and the estimated cost of
such restoration work. Tenant shall have the following options to terminate
this Lease, either in whole or in part, which may be exercised only by delivery
to Landlord of a written notice of election to terminate within fifteen (15)
days after Tenant receives from Landlord the estimate of the time needed to
complete such restoration:
(1) Tenant may terminate this Lease as to any one or more of the
Building(s) so damaged, if the damage is caused by a peril not covered by the
insurance carried pursuant to Section 11.2 and the cost to restore the damaged
Building exceeds five percent (5%) of the then replacement cost thereof.
Notwithstanding the foregoing, if Tenant elects to exercise such option to
terminate, Landlord may within fifteen (15) days after receipt of Tenant's
notice of termination agree to pay the entire cost of restoration, in which case
such option to terminate shall be of no further force and effect and Landlord
shall proceed to restore the damage.
(2) Tenant may terminate this Lease as to any one or more of the
Building(s) so damaged, if any Building is damaged by a peril (whether or not
covered by the insurance required to be carried pursuant to Section 11.2) during
the last year of the Lease term and (i) such damage affects more than twenty
percent (20%) of the building area within the Building that would be affected by
Tenant's exercise of its option to terminate, and (ii) such damage cannot be
substantially restored within sixty (60) days following the date of such damage.
(3) Tenant may terminate this Lease as to any one or more of the
Building(s) affected by the damage, in the event any Building is damaged by any
peril (whether or not covered by the insurance required to be carried pursuant
to Section 11.2) and the restoration cannot be completed by Landlord within two
hundred seventy (270) days after the date of such damage.
D. If this Lease is terminated in whole or in part by the proper
exercise of an option to terminate granted to Landlord or Tenant by this Lease,
then (i) this Lease shall terminate as to
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the Building(s) affected by the termination fifteen (15) days after the date the
option to terminate is properly exercised, (ii) the Base Monthly Rent and all
other charges due hereunder shall be prorated as of the date of termination, and
(iii) neither Landlord nor Tenant shall have any further rights or obligations
under this Lease with respect to that part of the Premises affected by such
termination except for those that have accrued prior to the date of termination.
In addition to the foregoing, in the event this Lease is terminated in part as
to one or more Buildings, then the following shall apply:
(1) Tenant's Pro Rata Share shall be adjusted by subtracting from
the numerator of the fraction set forth in Section 3.4 the number of square feet
contained within the Building(s) as to which this Lease is terminated.
(2) The then Base Monthly Rent shall be reduced by an amount
proportionately equal to the reduction in the number of square feet of the
Premises thereafter covered by this Lease.
E. Landlord's obligation (should it elect or be obligated to repair
or rebuild) shall be limited to the basic Buildings and the leasehold
improvements paid for with the Improvement Allowance and installed pursuant to
Exhibit "B". Tenant shall at its own expense forthwith replace or fully repair
all trade fixtures, equipment and leasehold improvements other than those paid
for with the Improvement Allowance and installed pursuant to Exhibit "B". All
insurance shall be made available to Landlord to permit it to discharge its
obligations under this lease regarding restoration; provided, however, that
Tenant shall receive proceeds payable under the insurance carried pursuant to
Section 11.2, to the extent any proceeds remain after deducting that portion
attributable to the shell of the Building(s), the leasehold improvements
existing as of the Occupancy Date for such Building(s) and the leasehold
improvements installed with the Improvement Allowance, that are fairly allocable
to the leasehold improvements installed at the expense of Tenant.
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<PAGE>
F. In the event of any damage to the Premises which does not result
in a termination of this Lease, in whole or in part, the Base Monthly Rent and
other sums payable hereunder shall be temporarily abated proportionately with
the degree to which Tenant's use of the Premises is impaired by such damage
(based upon the ratio of building area rendered unusable to the total building
area), commencing from the date of such damage or destruction and continuing
during the period required by Landlord to complete its restoration of the
Premises. Tenant shall not be entitled to any compensation or damages from
Landlord for loss of the use of the Premises, damage to Tenant's personal
property or any inconvenience occasioned by such damage or restoration. Tenant
hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the California Civil Code, and the provisions of any similar
law hereafter enacted.
G. In the event that Landlord becomes obligated to restore damage to
the Premises caused by a peril not covered by the insurance carried pursuant to
Section 11.2, then the following shall apply:
(1) Landlord shall restore such damage at its sole cost and
expense.
(2) The cost of restoring such uninsured loss shall be treated
in the same manner as the construction by Landlord of a capital improvement
required by future Law, as provided in Section 7.3(b), so that the cost of
restoration is amortized over the useful life of the restoration, and as
additional rent, Tenant shall pay an amount equal to the monthly amortization
payment required to so amortize the cost of such restoration for each month
after the restoration is completed until (i) the expiration of the initial Lease
term if the uninsured loss occurs during the initial Lease term, or (ii) the
expiration of the then current Option Period if the uninsured loss occurs during
such Option Period.
(3) Notwithstanding the foregoing, if Tenant elects to terminate
this Lease pursuant to Section 12C(l) because of damage not covered by
insurance, and if Landlord elects to pay the
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cost of restoration pursuant to such Section to avoid such termination, then
the additional rent required to be paid pursuant to subparagraph (2) above shall
be based only on the lesser of (i) the actual cost of restoration, or (ii) ten
percent (10%) of the then replacement cost of the Building(s) damaged. The rent
shall not be increased as a result of restoration costs paid by Landlord for
uninsured loss in excess of ten percent (10%) of the then replacement cost of
the Building(s) damaged.
13. CONDEMNATION.
------------
13.1 Definition of Terms. For the purposes of this Lease, the term
-------------------
(1) "Taking" means a taking of the Premises or damage to the Premises related to
the exercise of the power of eminent domain and includes a voluntary conveyance,
in lieu of court proceedings, to any agency, authority, public utility, person
or corporate entity empowered to condemn property; (2) "Total Taking" means the
taking of the entire Premises or so much of the Premises as to prevent or
substantially impair the use thereof by Tenant for the uses herein specified;
(3) "Partial Taking" means the taking of only a portion of the Premises which
does not constitute a Total Taking; (4) "Date of Taking" means the date upon
which the title to the Premises, or a portion thereof, passes to and vests in
the condemnor or the effective date of any order for possession if issued prior
to the date title vests in the condemnor; and (5) "Award" means the amount of
any award made, consideration paid, or damages ordered as a result of a Taking.
13.2 Rights. The parties agree that in the event of a Taking all
------
rights between them or in and to an Award shall be as set forth herein and
Tenant shall have no right to any Award except as set forth herein.
13.3 Total Taking. In the event of a Total Taking during the term
------------
hereof (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the Premises shall cease and be terminated as of the Date of
Taking; (2) Landlord shall refund to Tenant any prepaid rent; (3) Tenant shall
pay to Landlord any rent or charges due Landlord under the Lease, each prorated
as
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of the Date of Taking; (4) Tenant shall receive from the Award those portions of
the Award attributable to trade fixtures and moving expenses of Tenant; and (5)
the remainder of the Award shall be paid to and be the property of Landlord.
Notwithstanding the provisions of Section 13.3, Tenant shall be entitled to that
portion of any Award attributable to the leasehold improvements which Tenant
would be entitled to remove from the Premises.
13.4 Partial Taking. In the event of a Partial Taking during the term
--------------
hereof (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the portion of the Premises taken shall cease and terminate as
of the Date of Taking; (2) from and after the Date of Taking the Base Monthly
Rent shall be an amount equal to the product obtained by multiplying the Base
Monthly Rent immediately prior to the Taking by the quotient obtained by
dividing the number of square feet of floor area contained in the Premises after
the Taking by the number of square feet of floor area contained in the Premises
prior to the Taking; (3) Tenant shall receive from the Award the portions of
the Award attributable to trade fixtures of Tenant; and (4) the remainder of the
Award shall be paid to and be the property of Landlord.
14. ASSIGNMENT AND SUBLETTING.
-------------------------
14.1 Transfer. The following provisions shall apply to any
--------
assignment, subletting or other transfer by Tenant or any subtenant or assignee
or other successor in interest of the original Tenant (collectively referred to
in this paragraph as "Tenant"):
A. Tenant shall not do any of the following (collectively
referred to herein as a "Transfer"), whether voluntarily, involuntarily, or by
operation of law, without the prior written consent of Landlord, which consent
shall not be unreasonably withheld: (i) assign or otherwise transfer its
interest in this Lease or in the Premises; (ii) sublet all or any part of the
Premises or allow it to be sublet, occupied or used by any person or entity
other than Tenant; (iii) transfer any right appurtenant to this Lease or the
Premises; or (iv) mortgage, pledge,
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hypothecate or encumber this Lease. Any attempt to Transfer without Landlord's
consent shall constitute a default by Tenant and shall be voidable at Landlord's
option. Landlord's consent to any one Transfer shall not constitute a waiver of
the provisions of this paragraph 14.1 as to any subsequent transfer nor a
consent to any subsequent Transfer. No Transfer, even with the consent of
Landlord, shall relieve Tenant of its personal and primary obligation to pay the
rent and to perform all of the other obligations to be performed by Tenant
hereunder. The acceptance of rent by Landlord from any person shall not be
deemed to be a waiver by Landlord of any provision of this Lease nor to be a
consent to any Transfer.
B. Tenant shall give Landlord at least fifteen (15) days prior
written notice of its desire to Transfer and of the proposed terms of such
Transfer, which notice shall include: (i) the name and legal composition of the
proposed transferee; (ii) the nature of the proposed transferee's business to be
carried on in the Premises; (iii) the basic terms and provisions of the proposed
sublease, assignment or other transfer, including, without limitation, all
consideration to be given on account of the Transfer; and (iv) a financial
statement or other reasonable financial information that Landlord may request
concerning the proposed transferee. Tenant's notice shall not be deemed to have
been served or given until such time as Tenant has provided Landlord with all
information reasonably requested by Landlord pursuant to this subparagraph (b).
Tenant shall immediately notify Landlord of any modifications to the proposed
terms of such Transfer.
C. In the event that Tenant seeks to make any Transfer, Landlord
shall have the right to withhold its consent to such Transfer, as permitted
pursuant to subparagraph (a) above, or to exercise any of the rights set forth
in this subparagraph (c) by giving written notice of its election within fifteen
(15) days after Tenant's notice of intent to transfer has been deemed given to
Landlord. The following rights are in addition to Landlord's right to withhold
its consent to any transfer and may be exercised
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<PAGE>
by Landlord at its sole discretion without limiting Landlord in the exercise of
any other right or remedy which Landlord may have:
(1) Landlord may elect to permit Tenant to so assign the Lease
or sublease such part of the Premises on the terms and conditions contained in
Tenant's notice, in which event Tenant may do so, without being released of its
liability for the performance of all of its obligations under the Lease.
D. Tenant expressly agrees that the provisions of this paragraph
14.1 are not unreasonable standards or conditions for purposes of Section 1951.4
of the California Civil Code, as amended from time to time.
E. Notwithstanding anything to the contrary in this Section 14,
Tenant may enter into any of the following transactions, so long as it first
notifies Landlord in writing of its intent to do so and provides Landlord with a
copy of the instrument implementing such Transfer, without the prior consent of
Landlord: (i) any Transfer to a corporation which controls, is controlled by, or
is under common control with Tenant (with "control" meaning ownership of more
than fifty percent (50%) of the stock or beneficial interest); (ii) an
assignment of the Lease in connection with the sale of all or substantially all
of the assets of Tenant; (iii) a Transfer made in connection with a merger,
consolidation or other non-bankruptcy reorganization of Tenant or a Transfer of
stock ownership in Tenant.
14.2 Attorneys' Fees. Tenant shall pay Landlord's reasonable
---------------
attorneys' fees not to exceed Five Hundred Dollars ($500.00) incurred in
connection with Landlord's review of the proposed assignment, sublease or
transfer.
15. SUBORDINATION.
-------------
15.1 Subordination. This Lease at Landlord's option shall be subject
-------------
and subordinate to all ground or underlying leases which now exist affecting the
Premises or the Parcel, or both, and to the lien of any mortgages or deeds of
trust in any amount or amounts whatsoever which now exist against the Premises
and/or the Parcel, or on or against Landlord's interest or estate therein or
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<PAGE>
on or against any ground or underlying lease, without the necessity of the
execution and delivery of any further instruments on the part of Tenant to
confirm such subordination; provided, however, that Landlord shall use all
reasonable efforts to obtain within sixty (60) days from the date hereof a
recognition and nondisturbance agreement whereby the lessor under any such
ground or underlying lease and holder of any mortgage or deed of trust shall
agree that, so long as Tenant is not in default hereunder, this Lease shall
remain in full force and effect notwithstanding the termination of any such
lease or foreclosure of such mortgage or deed of trust. If any mortgagee,
trustee or ground lessor shall elect to have this Lease prior to the lien of its
mortgage, deed of trust or ground lease, and shall give written notice thereof
to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust or
ground lease, whether this Lease is dated prior or subsequent to the date of
said mortgage, deed of trust or ground lease or the date of the recording
thereof.
15.2 Subordination Agreements. Tenant covenants and agrees to
------------------------
promptly execute and deliver upon demand without charge therefor, any instrument
or instruments of subordination necessary to subordinate this Lease to any
future ground or underlying leases and/or to the lien of any future mortgage or
deed of trust in any amount or amounts whatsoever which may hereafter be placed
by Landlord on or against the Premises and/or the Parcel, or on or against
Landlord's interest or estate therein or on or against any ground or underlying
lease; provided, however, Tenant shall not be required to execute and deliver
any such subordination agreement unless the lender consents in writing to the
Lease and agrees in writing that in the event of foreclosure of the mortgage, or
in the event the lender comes into possession or acquires title to the Premises
as a result of the foreclosure of its mortgage or the notes secured thereby, or
as a result of any other means, the lender agrees that the Lease shall not be
terminated and that lender shall recognize Tenant and further agrees that Tenant
shall not be disturbed in its possession of the Premises for any reason
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<PAGE>
other than one which would entitle the Landlord to terminate the Lease under its
terms or that would cause, without any further action by Landlord, the
termination of the Lease or would entitle Landlord to dispossess the Tenant from
the Premises.
15.3 Quiet Enjoyment. Landlord covenants and agrees with Tenant that
---------------
upon Tenant paying rent and other monetary sums due under the Lease and
performing its covenants and conditions, Tenant shall and may peaceably and
quietly have, hold and enjoy the Premises for the Term, subject however to the
term of the Lease and of any of the ground leases, mortgages or deeds of trust
described above.
15.4 Attornment. In the event any proceedings are brought for default
----------
under any ground or underlying lease or in the event of foreclosure or the
exercise of the power of sale under any mortgage or deed of trust made by
Landlord covering the Premises, Tenant shall attorn to the purchaser upon any
such foreclosure or sale and recognize such purchaser as the Landlord under this
Lease; provided said purchaser expressly agrees in writing to be bound by the
terms of the Lease.
16. DEFAULT; REMEDIES.
-----------------
16.1 Default. The occurrence of any of the following shall constitute
-------
a material default and breach of this Lease by Tenant:
A. Any failure by Tenant to pay the rent or any other monetary
sums required to be paid hereunder (where such failure continues for seven (7)
days after written notice thereof by Landlord to Tenant);
B. The abandonment of the Premises by Tenant;
C. A failure by Tenant to observe and perform any other
provisions of this Lease to be observed or performed by Tenant, where such
failure continues for twenty (20) days after written notice thereof by Landlord
to Tenant; provided, however, that if the nature of such default is such that
the same cannot reasonably be cured within such twenty (20) day period, Tenant
shall not be deemed to be in default if Tenant shall within such
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period commence such cure and thereafter diligently prosecute the same to
completion;
D. The making by Tenant of any general assignment for the
benefit of creditors;
E. A court makes or enters any decree or order with respect to
Tenant or Tenant submits to or seeks a decree or order (or petition or pleading
is filed in connection therewith) which (i) grants or constitutes (or seeks) an
order for relief, appointment of a trustee or confirmation of a reorganization
plan under the Bankruptcy Laws of the United States; (ii) approves as properly
filed (or seeks such approval of) a petition seeking liquidations or
reorganization under said Bankruptcy Laws or any other debtor's relief law or
statute of the United States or any state thereof; (iii) otherwise directs (or
seeks) the winding up or liquidation of Tenant; provided, however, that if any
such petition, decree or order is not voluntarily filed or made by Tenant, that
Tenant shall not be in default until such petition, decree or order remains
undischarged for a period of sixty (60) days.
16.2 Remedies. In the event of any such material default or breach by
--------
Tenant, Landlord may at any time thereafter, with or without notice and demand
and without limiting Landlord in the exercise of any right or remedy at law or
in equity which Landlord may have by reason of such default or breach:
A. Maintain this Lease in full force and effect and recover the
rent and other monetary charges as they become due, without terminating Tenant's
right to possession, irrespective of whether Tenant shall have abandoned the
Premises. In the event Landlord elects to not terminate the Lease, Landlord
shall have the right to attempt to re-let the Premises at such rent and upon
such conditions and for such a term, and to do all acts necessary to maintain or
preserve the Premises as Landlord deems reasonable and necessary without being
deemed to have elected to terminate the Lease including removal of all persons
and property from the Premises; such property may be removed and stored in a
public
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warehouse or elsewhere at the cost of and for the account of Tenant. In the
event any such re-letting occurs, this Lease shall terminate automatically upon
the new Tenant taking possession of the Premises.
B. Terminate Tenant's right to possession by any lawful means,
in which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In the event Landlord shall be entitled
to recover from Tenant all damages incurred by Landlord by reason of Tenant's
default including without limitation thereto, the following: (i) the worth at
the time of award of any unpaid rent which had been earned at the time of such
termination; plus (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award, exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided; plus (iv) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom; plus (v) at Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
applicable state law. Upon any such re-entry Landlord shall have the right to
make any reasonable repairs, alterations or modifications to the Premises, which
Landlord in its sole discretion deems reasonable and necessary. As used in
clauses (i) and (ii) above, the "worth at the time of award" is computed by
allowing interest at the rate specified in Paragraph 20.14 from the date of
default. As used in clause (iii), the "worth at time of award" is computed by
discounting such amount at the discount rate of the U.S. Federal Reserve Bank at
the time of award plus one percent (1%). The term "rent", as used in this
Section 16, shall be deemed to be and to mean the rent to be paid pursuant to
Sec-
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tion 3 and all other monetary sums required to be paid by Tenant pursuant to the
terms of this Lease.
16.3 Default by Landlord. Landlord shall not be in default unless
-------------------
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no event later than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any first mortgage or deed of trust covering
the Premises whose name and address shall have theretofore been furnished to
Tenant in writing, specifying wherein Landlord has failed to perform such
obligation, provided however, that if the nature of Landlord's obligation is
such that more than thirty (30) days are required for performance, then Landlord
shall not be in default if Landlord commences performance within such thirty-day
period and thereafter diligently prosecutes the same to completion.
17. OPTIONS
-------
17.1 Options to Extend. Tenant is hereby granted one option to extend
-----------------
the term of this Lease for one period of three (3) years (the "Option Term"),
such extension to be on the same terms and conditions as the initial term,
except for the Base Monthly Rent which shall be determined as provided in
Paragraph 3.4 above. It shall be a condition precedent to the exercise of the
option that Tenant shall not be in default under this Lease at the time of
exercise of such option. If Tenant elects to exercise the option, Tenant shall
exercise said option only by written notice delivered to Landlord at least
ninety (90) days prior to the expiration of the initial term of this Lease.
There shall be no further options to extend the term of this lease at the end of
the Option Term.
18. OUTSIDE AREA.
------------
18.1 Use of Outside Area. The term "Outside Area" as used in this
-------------------
Lease shall mean the driveways, walkways, parking areas, landscaped areas, and
all other areas on the Parcel which are outside of a building. Subject to the
terms and conditions of this Lease and such rules and regulations as Landlord
may from time to prescribe, which shall be subject to the reasonable approval of
Tenant, Tenant's employees, invitees and customers shall, in common
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with other occupants of the Parcel, and their respective employees, invitees and
customers, and others entitled to the use thereof, have the non-exclusive right
to use the access roads, parking areas, driveways, and walkways which are
provided and designated by Landlord for the general use and convenience of the
occupants of the Parcel. Landlord reserves the right from time to time to make
changes in the shapes, size, location, amount and extent of the Outside Area.
Landlord further reserves the right to promulgate such reasonable rules and
regulations relating to the use of the Outside Area and any part or parts
thereof, as Landlord may deem appropriate for the best interest of the occupants
of the Parcel. The approved rules and regulations shall be binding upon Tenant
upon delivery of a copy of them to Tenant, and Tenant shall abide by them and
cooperate in their observance. Such rules and regulations may be amended by
Landlord from time to time, with or without advance notice, and all amendments
shall be effective upon delivery of a copy to Tenant.
Tenant shall have the nonexclusive right to use all parking spaces located
in the Outside Area as outlined in red on Exhibit "A". Tenant shall not park or
permit the parking of Tenant's vehicles or trucks or the vehicles or trucks of
Tenant's employees, invitees, customers, suppliers or others, in any other
portion of the Outside Area not designated by Landlord for such use by Tenant.
Tenant shall not abandon any inoperative vehicles or equipment on any portion of
the Outside Area. Tenant shall make no alterations, improvements or additions
to the Outside Area.
Landlord shall operate, manage, maintain, and repair the Outside Area in
good order, condition and repair. Such maintenance and repair shall include
parking lot sweeping, landscaping services, maintenance or repair or fountains,
landscape irrigation systems, paving, sidewalks, fences and lighting. The
manner in which the Outside Area shall be maintained and the expenditures for
such maintenance shall be at the discretion of Landlord. Landlord's cost of
such repair, maintenance, operation and management shall be referred to herein
as "Outside Area Expenses." Tenant
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shall pay to Landlord its share of such Outside Area Expenses as provided in
Paragraph 18.2 below.
18.2 Outside Area Expenses. Tenant shall pay to Landlord, as
---------------------
Additional Rent, within thirty (30) days after receipt of billing but not more
often than once each calendar month, Tenant's Pro Rata Share of the Outside Area
Expenses. Tenant acknowledges and agrees that the Outside Area Expenses shall
include an additional five percent (5%) of the actual expenditures in order to
compensate Landlord for accounting and processing services. Tenant shall have
the right to inspect the supporting records of Landlord with respect to the
Outside Area Expenses. Notwithstanding anything contained in this Section 18,
the term "Outside Area Expenses" shall not include, nor shall Tenant have any
obligation to pay, any of the following: (i) depreciation on real property,
interest expense or rent due pursuant to any underlying ground leases; (ii) the
cost to correct any defective design or construction of the Outside Area; (iii)
the cost to correct or repair damage to the Outside Areas to the extent it is
required to be covered by insurance pursuant to Section 11.2 of the Lease or is
covered by any warranty; (iv) the cost of any repair required or resulting from
the negligence of Landlord, its agents or contractors or (v) any fee or
compensation for management or administration of the Premises in addition to the
referenced fee for accounting and processing services. Landlord shall use all
reasonable efforts to obtain services and materials to be provided hereunder at
the fair market value which would be charged by an independent third party
providing such service or material.
19. EXPANSION. Provided Tenant is not in default under this Lease and
---------
provided that this Lease is in full force and effect and provided further that
Tenant has not assigned this Lease, then Tenant shall have the following rights
to lease, at the termination of the existing lease (including, all extension
options) to Altera Semiconductor, Inc. ("Altera"), the space in Building D
presently leased to Altera. Tenant further acknowledges that Altera has an
option to extend the term of its existing lease.
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A. Before listing or advertising Building D to prospective tenants
or purchasers, Landlord shall first notify Tenant of the availability of
Building D and shall present the first offer to lease Building D to Tenant.
B. After presentation of Landlord's offer, and provided that
Landlord and Tenant are unable to reach agreement, following good faith
negotiations, as to the terms and conditions under which the parties would be
willing to enter into a lease of Building D, Tenant shall have a right of first
refusal to lease Building D as set forth herein. If Landlord proposes to lease
a space in Building D (the "Available Space") to a prospective tenant and if
Altera has failed to exercise any right of first refusal it may have as to the
Available Space, then Landlord shall notify Tenant in writing of the following
basic business terms upon which the Landlord is willing to lease such space
(collectively referred to herein as the "Basic Business Terms"): (i) the
description of the Available Space; (ii) the term of the Lease; (iii) the tenant
improvements Landlord is willing to construct or that it will require to be
constructed and the contribution Landlord is willing to make to pay for such
tenant improvements; (iv) the rent for initial term or the formula to be used to
determine such rent (including, if applicable) free rent, Tenant's share of
taxes, assessments, operating expenses, insurance costs and the like; (v) any
option or options to extend (including the rent to be charged during the
extension periods); and (vi) any other material business term Landlord elects to
specify.
C. If Tenant, within ten (10) business days after receipt of
Landlord's notice, delivers to Landlord its written agreement to lease the
Available Space on the Basic Business Terms stated in Landlord's Notice, the
Landlord shall lease to Tenant and Tenant shall lease from Landlord the
Available Space on the terms and conditions in Landlord's Notice (the "Second
Lease") provided, however, that this Lease shall be modified to include, and the
Second Lease shall include, a cross-default provision providing
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that Tenant will be in default under both the Second Lease and this Lease, if it
is in default under either Lease.
D. If Tenant does not deliver to Landlord its written agreement to
the Second Lease on the terms contained in Landlord's notice within said ten
(10) business day period, then Landlord shall thereafter have the right to lease
the Available space on the same Basic business Terms set forth in Landlord's
notice and on such form of Lease, as Landlord chooses; provided, however, that
Landlord may make any changes to such form of lease at the request of any
prospective tenant to induce it to lease such space from Landlord so long as
Landlord does not change the Basic Business Terms set forth in Landlord's
notice.
E. The provisions of this paragraph shall terminate upon (i) the
expiration or earlier termination of this Lease; or (ii) any assignment by
Tenant of its interest in this Lease or the subletting by Tenant of
substantially all of the Premises for substantially all of the remainder of the
Lease Term; or (iii) as to any particular space, Tenant's failure to exercise
its right of refusal granted herein as to such space at its first opportunity to
do so.
F. Provided that Tenant shall have exercised its option to lease
Building D, Landlord shall, at least one hundred twenty (120) days before the
renewal date for the insurance carried by Landlord pursuant to Section 11.2,
provide Tenant with a statement identifying the material terms of such insurance
coverage, including the premiums payable, coverage limits and deductibles
required. In the event that Tenant reasonably determines that Tenant can
maintain such insurance at a cost to Tenant of at least five percent (5%) less
than the cost to Tenant of reimbursing the cost of maintaining such coverage to
Landlord, then Tenant shall be entitled to notify Landlord, no more than thirty
(30) days following receipt of Landlord's statement, that Tenant intends to
maintain such insurance. Tenant shall thereafter maintain the insurance
required by Section 11.2 hereof, in conformance with consistent requirements
imposed from time to time by the holders of
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mortgages or deeds of trust of the Premises, including, if required, delivery to
such parties of reasonably satisfactory evidence of the maintenance of such
coverage.
20. MISCELLANEOUS.
-------------
20.1 Estoppel Certificate.
--------------------
A. Tenant shall at any time upon not less than ten (10)
business days' prior written notice from Landlord execute, acknowledge and
deliver to Landlord a statement in writing (i) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect) and the date to which the rent and other charges are paid in
advance, if any, (ii) acknowledging that there are not, to Tenant's knowledge,
any uncured defaults on the part of Landlord hereunder, or specifying such
defaults if any are claimed, and (iii) certifying, to the best of Tenant's
knowledge, such other information and facts concerning this lease as may be
reasonably requested by a lender making a loan to Landlord to be secured by a
deed of trust or mortgage covering the Premises or a purchaser of the Premises
from Landlord. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises.
B. Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant (i) that this Lease is in full force and effect
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that not more than
one month's rent has been paid in advance.
20.2 Transfer of Landlord's Interest. In the event of a sale or
-------------------------------
conveyance by Landlord of Landlord's interest in the Premises other than a
transfer for security purposes only, Landlord shall be relieved from and after
the date specified in such notice of transfer of all obligations and liabilities
accruing thereafter on the part of the Landlord, provided that any funds in the
hands of Landlord at the time of transfer in which Tenant has an
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interest, shall be delivered to the successor of Landlord. This Lease shall not
be affected by any such sale and Tenant agrees to attorn to the purchaser or
assignee provided all of Landlord's obligations hereunder accruing after the
date of transfer are assumed in writing by the transferee.
20.3 Captions; Attachments; Defined Terms.
------------------------------------
A. The captions of the paragraphs of this Lease are for
convenience only and shall not be deemed to be relevant in resolving any
question of interpretation or construction of any section of this Lease.
B. Exhibits attached here to, and addenda and schedules
initialed by the parties, are deemed by attachment to constitute part of this
Lease and are incorporated herein.
C. The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular. Words used in neuter gender include
the masculine and feminine and words in the masculine and feminine gender
include the neuter If there be more than one Landlord or Tenant, the obligations
hereunder imposed upon Landlord or Tenant shall be joint and several. If the
Tenants are husband and wife, the obligations shall extend individually to their
sole and separate property as well as to their community property. The term
"Landlord" shall mean only the owner or owners at the time in question of the
fee title. The obligations contained in this Lease to be performed by Landlord
shall be binding on Landlord's successors and assigns only during their
respective periods of ownership.
20.4 Entire Agreement. This instrument along with any exhibits and
-----------------
attachments hereto constitutes the entire agreement between Landlord and Tenant
relative to the Premises and this Agreement and the exhibits and attachments may
be altered, amended or revoked only by an instrument in writing signed by both
Landlord and Tenant. Landlord and Tenant agree hereby that all prior or
contemporaneous oral agreements between and among themselves and their agents or
representatives relative to the leasing of the Premises are merged in or revoked
by this Agreement.
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20.5 Severability. If any term or provision of this Lease shall, to
------------
any extent, be determined by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this Lease shall not be affected thereby, and
each term and provision of the Lease shall be valid and enforceable to the
fullest extent permitted by law.
20.6 Costs of Suit.
-------------
A. If Tenant or Landlord shall bring any action for any relief
against the other, declaratory or otherwise, arising out of this Lease,
including any suit by Landlord for the recovery of rent or possession of the
Premises, the losing party shall pay the successful party a reasonable sum for
attorneys' fees which shall be deemed to have accrued on the commencement of
such action and shall be paid whether or not such action is prosecuted to
judgment.
B. Should Landlord, without fault on Landlord's part, be made a
party to any litigation instituted by Tenant or by a third party against Tenant,
or by or against any person holding under or using the Premises by license of
Tenant, or for the foreclosure of any lien for labor or material furnished to or
for Tenant or any such other person or otherwise arising out of or resulting
from any act or transaction of Tenant or of any such other person, Tenant
covenants to save and hold Landlord harmless from any judgment rendered against
Landlord or the Premises or any part thereof, and all costs and expenses
incurred by Landlord or in connection with such litigation, including reasonable
attorneys' fees paid by Landlord to attorneys approved by Tenant.
20.7 Time; Joint and Several Liability. Time is of the essence of
---------------------------------
this Lease and each and every provision hereof, except as to the conditions
relating to the delivery of possession of the Premises to Tenant. All the terms,
covenants and conditions contained in this Lease to be performed by either party
shall consist of more than one person or organization, shall be deemed to be
joint and several, and all rights and remedies of the parties
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shall be cumulative and non-exclusive of another remedy at law or in equity.
20.8 Binding Effect; Choice of Law. The parties hereto agree that all
-----------------------------
the provisions hereof are to be construed as both covenants and conditions as
though the words importing such covenants and conditions were used in each
separate paragraph hereof; subject to any provision hereof restricting
assignment or subletting by Tenant and subject to Section 20.2, all of the
provisions hereof shall bind and inure to the benefit of the parties hereto and
their respective heirs, legal representatives, successors and assigns. This
Lease shall be governed by the laws of the State of California.
20.9 Waiver. No covenant, term or condition or the breach thereof,
------
shall be deemed waived, except by written consent of the party against whom the
waiver is claimed, and any waiver or the breach of any covenant, term or
condition shall not be deemed to be a waiver of any preceding or succeeding
breach of the same or any other covenant, term or condition.
20.10 Surrender of Premises. The voluntary or other surrender of this
---------------------
Lease by Tenant, or a mutual cancellation thereof shall not work a merger, and
shall, at the option of the Landlord, terminate all or any existing subleases or
subtenancies, or may, at the option of Landlord operate as an assignment to it
or any or all such subleases or subtenancies.
20.11 Holding Over. This Lease shall terminate without further notice
------------
at the expiration of the Lease Term. Any holding over by Tenant after expiration
shall not constitute a renewal or extension or give Tenant any rights in or to
the Premises except as expressly provided in this Lease; provided, however, that
in the event Tenant notifies Landlord in writing at least ninety (90) days
before the expiration of the Lease term, Tenant shall be entitled to a one-time
thirty (30) day extension of the expiration of the Lease term. Any holding over
after the expiration with or without the expressed or implied consent of
Landlord shall be construed to be a tenancy from month to month, at one hundred
percent (100%) of
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the monthly rent for the last month of the Lease Term during the first ninety
(90) days of such holding over, and thereafter at one hundred twenty-five
percent (125%) of such rent, and shall otherwise be on the terms and conditions
herein specified insofar as applicable.
20.12 Signs. Tenant shall not place any sign upon the Premises or the
-----
Outside Area without Landlord's prior written consent. Landlord hereby consents,
subject to compliance with requirements of the City of Santa Clara and to the
reasonable approval of Landlord of plans and specifications therefor, to the
erection of monument signs at such locations as Tenant shall reasonably require
and to the placement of identifying logos on the Building(s) constituting the
leased Premises. Following the expiration of the Lease term, Tenant shall remove
such logos from the Building(s) and shall restore the facade of the Building to
its condition existing prior to their erection. Obtaining permits for Tenant
signs as may be required by any governmental agency shall be the responsibility
of Tenant.
20.13 Reasonable Consent. Except as limited elsewhere in this Lease,
------------------
wherever in this Lease Landlord or Tenant is required to give consent or
approval to any action on the part of the other, such consent or approval shall
not be unreasonably withheld. In the event of failure to give any such consent,
the other party shall be entitled to specific performance at law and shall have
such other remedies to it under this Lease, but in no event shall Landlord or
Tenant be responsible in monetary damages for failure to give consent unless
said failure is withheld maliciously or in bad faith.
20.14 Interest on Past Due Obligations. Any amount due to Landlord not
--------------------------------
paid when due shall bear interest from the due date at a per annum rate equal to
three percent (3%) in excess of the then existing Bank of America prime rate, or
the maximum rate permitted by law, whichever is less.
20.15 Recording. Tenant shall not record this Lease without Landlord's
---------
prior written consent. Either party shall, upon
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request of the other, execute, acknowledged and deliver to the other a "short
form" memorandum of this Lease for recording purposes.
20.16 Notices. All notices or demands of any kind required or desired
-------
to be given by Landlord or Tenant hereunder shall be in writing and shall be
effective upon receipt or rejection at the addresses set forth below:
Landlord: MPJ
511 Division Street
Campbell, CA 95008
Attn: James D. Mair
Copy to: W. Leslie Pelio
560 Division Street
Campbell, CA 95008
Tenant: Apple Computer, Inc.
20525 Mariani Avenue, MS:16-0
Cupertino, CA 95014
Attn: Real Estate Dept.
Either party may change its address for notice by giving written notice to the
other party in accordance with the provisions of this paragraph.
20.17 Corporate Authority. If Tenant is a corporation, each
-------------------
individual executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on behalf
of said corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
20.18 Partnership Authority. Each individual executing this Lease on
---------------------
behalf of Landlord represents and warrants that he is duly authorized to execute
and deliver this Lease on behalf of the Landlord and that this Lease is binding
upon Landlord in accordance with its terms.
21. BROKERAGE COMMISSIONS. Landlord and Tenant represent that they have
---------------------
not had any dealings with any real estate brokers or salesmen or incurred any
obligations for the payment of real estate brokerage commissions or finder's
fees which would be earned or due and payable by reason of the execution of this
Lease other than to Cornish & Carey Commercial Real Estate and Grubb & Ellis
Company
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(the "Brokers"). Landlord shall pay any commission due to the Brokers.
22. HAZARDOUS MATERIALS. Landlord and Tenant agree as follows with
-------------------
respect to the existence or use of "Hazardous Material" (as defined below) on
the Premises:
A. Tenant shall be entitled to cause such inspections, soils and
groundwater tests, and other evaluations to be made of the Premises as Tenant
deems necessary regarding (i) the presence and use of Hazardous Materials in or
about the Premises, and (ii) the potential for exposure of Tenant's employees
and other persons to any Hazardous Materials used and stored by previous
occupants in or about the Premises. To facilitate assigning responsibility for
the presence of any Hazardous Materials on the Premises, Tenant shall use its
best efforts to take all samples of soil and groundwater necessary in the course
of its inspection and evaluation before the Commencement Date as to each
Building, and shall thereafter cause the evaluation of such samples to be
conducted as promptly as reasonably possible.
B. Landlord hereby makes the following warranties and
representations to Tenant, each of which is made to the best of Landlord's
knowledge as of the date of this Lease:
(1) Any handling, transportation, storage, treatment, disposal,
release or use of Hazardous Materials that has occurred on the Premises prior to
the date hereof has been in compliance with all Hazardous Materials Laws.
(2) The Premises are, and Landlord's operations concerning the
Premises are, as of the date of this Lease, in compliance with all Hazardous
Materials Laws.
(3) The soil and groundwater on or under the Premises are free
of Hazardous Materials in amounts which would (i) violate any Hazardous
Materials Laws to the extent that any governmental entity could require either
Landlord or Tenant to take any remedial action with respect to such Hazardous
Materials, or (ii) pose a substantial risk of impairing the health of any
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person on or about the Premises (including, without limitation, Tenant's
employees, agents or invitees).
(4) Neither the Premises nor any improvements thereon or
personal property contained therein contains PCBs or asbestos.
(5) No litigation has been brought or threatened, nor any
settlements reached with any governmental or private party, concerning the
actual or alleged presence of Hazardous Materials on or about the Premises or
any disposal, release or threatened release of Hazardous Materials in or about
the Premises prior to the date of this Lease.
C. Landlord warrants and represents to Tenant that it has received
no notice of (i) any violation, or alleged violation, of any Hazardous Material
Law that has not been corrected to the satisfaction of the appropriate
authority, (ii) any pending claims relating to the presence of Hazardous
Material on the Premises, or (iii) any pending investigation by any governmental
agency concerning the Premises relating to Hazardous Materials. Landlord is not
aware of any reports, studies or other written evidence of any investigation of
the Premises to determine the presence of Hazardous Materials. Each party shall
deliver to the other copies of any report, study or other written evidence of
any such investigation which comes into the possession of such party. Tenant
shall notify Landlord in writing of all Hazardous Materials (except in
incidental quantities) which Tenant brings onto the premises.
D. Any handling, transportation, storage, treatment, disposal or use
of Hazardous Materials by Tenant in or about the Premises shall strictly comply
with all applicable Hazardous Materials Laws and shall be conducted in a manner
which will not impair the health of any person on or about the Complex.
E. Landlord at its sole expense shall remove from the Premises all
Hazardous Materials and all facilities and equipment existing as of the
Occupancy Date for each Building, whose removal is deemed necessary by an
independent, qualified consultant chosen by Tenant in order (i) to avoid a
violation at any time of
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Hazardous Materials Laws, (ii) to eliminate a substantial risk of impairing the
health of any person or about the Premises (including, without limitation,
Landlord's or Tenant's employees, agents or invitees), or (iii) to satisfy the
reasonably anticipated requirements of a financial institution which would be
imposed as a precondition to such financial institution's acquiring a security
or other interest in the Premises. All such facilities and equipment shall be
decommissioned in accordance with applicable Hazardous Materials Laws and proper
decommissioning shall be evidenced only by delivery to Tenant of reasonably
satisfactory evidence of such fact.
F. Landlord shall indemnify, defend upon demand with counsel
reasonably acceptable to Tenant, and hold harmless Tenant from and against any
and all (i) liabilities, judgments, interest, penalties, fines, monetary
sanctions, attorneys' fees, experts' fees, and court costs resulting from any
claim, demand, order or requirement of any governmental agency with jurisdiction
or any claim or demand brought or threatened by any party other than the parties
to this Lease, and (ii) reasonably incurred remediation costs, investigation
costs and related expenses which result from or arise in any manner whatsoever
out of:
(1) The breach of any warranty or inaccuracy of any
representation by Landlord or the failure of Landlord to perform any obligation
of Landlord contained in this Section 22;
(2) The presence of Hazardous Materials, as of the Occupancy
Date for each Building, as may be disclosed by the inspections, soils and
groundwater tests, other evaluations performed by Tenant, or otherwise disclosed
or discovered, in amounts which exceed the minimum action levels or other
standards imposed by Hazardous Materials Laws applicable at any time during the
Lease term in or under the Premises or in the soil or groundwater underneath the
Premises;
(3) Use, storage, release or disposal of Hazardous Materials on
or about the Promises by any party other than Tenant,
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or its agents, employees or contractors, after the Occupancy Date for each
Building;
(4) The exposure of any person to a Hazardous Material stored,
used or disposed of by any party other than Tenant in or about the Premises
after the Occupancy Date for each Building.
G. Tenant shall indemnify, defend upon demand with counsel
reasonably acceptable to Landlord, and hold harmless Landlord from and against
any and all liabilities, judgments, interest, penalties, fines, monetary
sanctions, attorneys' fees, experts' fees and court costs resulting from any
claim, demand, order or requirement of any governmental agency with jurisdiction
or any claim or demand brought or threatened by any party other than the parties
to this Lease, and (ii) reasonably incurred remediation costs, investigation
costs and other related expenses which result from or arise in any manner
whatsoever out of the following:
(1) The use, storage, release or disposal of Hazardous Materials
on or about the Premises by Tenant, its agents, employees, or contractors after
the date hereof;
(2) The exposure of any person to a Hazardous Material stored,
used, released or disposed of by Tenant, its agents, employees, or contractors
in or about the Premises after the date hereof.
H. As used herein, the term "Hazardous Materials" means any
substance, material or waste which is or becomes regulated by any local
governmental authority, the State of California, or the United States
Government. The term "Hazardous Materials" includes, without limitation, any
material or substance which is (i) defined as a "hazardous waste", "extremely
hazardous waste", or "restricted hazardous waste" under Sections 25115, 25117 or
15122.7, or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a
"hazardous substance" under Section 25316 of the California Health and Safety
Code, Division 20, Chapter 6.8
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(Carpenter-Presley-Tanner Hazardous Substances Account Act), (iii) defined as a
"hazardous material", "hazardous substance", or "hazardous waste" under Section
25501 of the California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Materials Release, Response, Plans and Inventory), (iv) defined as a
"hazardous substance" under Section 25281 of the California Health and Safety
Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances),
(v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as
"hazardous" or "extremely hazardous" pursuant to Article II of Title 22 of the
California Administrative Code, Division 4, Chapter 20, (viii) designated as a
"hazardous substance" pursuant to Section 311 of the Federal Water Pollution
Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section 307 of the
Federal Water Pollution Control Act (33 U.S.C. 1317), (ix) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined as a "hazardous substance"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensations, and Liability Act, 42 U.S.C. 9601 et seq., or (xi) regulated
under the Toxic Substances Control Act, 15 U.S.C. 2601 et seq.
I. Landlord and Tenant shall each give written notice to the other
as soon as reasonably practicable of (i) any communication received from any
governmental authority concerning Hazardous Material which relates to the
Premises and (ii) any contamination of the Premises by Hazardous Materials which
constitutes a violation of any Hazardous Material Law.
J. The obligations of Landlord and Tenant under this Section 22
shall survive the expiration or earlier termination of this Lease.
K. The rights and obligations of Landlord and Tenant with respect to
issues relating to Hazardous Material are exclusively established by this
Section 22. In the event of any inconsistency between any other part of this
Lease and this Section 22, the terms of this Section 22 shall control.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the date
and year first above written.
LANDLORD: TENANT:
MPJ, a California APPLE COMPUTER, INC.,
general partnership a California corporation
By: /s/ James D. Mair By: /s/ Del Yocam
----------------------- ---------------------------
Del Yocam, Executive Vice
Title: General Partner President and Chief
-------------------- Operating Officer
By: /s/ W. Leslie Pelio
-----------------------
Title: General Partner
--------------------
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<PAGE>
EXHIBIT "B"
-----------
IMPROVEMENTS
------------
1. The Premises shall be delivered to Tenant in their present condition.
Landlord shall not be required to construct, furnish or install any work,
alterations, additions or improvements to the Premises.
2. Tenant, at its expense, shall construct, furnish or install all
improvements, equipment or fixtures within the Premises that are necessary for
Tenant's occupancy and use of the Premises (hereinafter referred to as "Tenant's
Work"). Tenant's Work shall be in conformity with plans submitted to and
approved by Landlord and shall be performed all in accordance with the following
provisions:
A. Tenant shall cause all plans, drawings and specifications for
Tenant's Work, whether preliminary or final, to be prepared by licensed
architects and, where appropriate, mechanical, electrical and structural
engineers. Tenant shall cause all plans, drawings and specifications for
Tenant's Work to be prepared in strict compliance with all applicable
governmental laws, ordinances, codes and regulations.
B. Tenant shall prepare and submit to Landlord for its approval,
which approval shall be given or refused within seven (7) days after submission
of such drawings and if not refused within such time shall be deemed given, as
to design, two sets of fully dimensioned scaled preliminary drawings of the
Premises and Tenant's proposed work therein.
C. Following approval of Tenant's preliminary drawings by Landlord,
Tenant shall prepare final plans and specifications for Tenant's Work in
conformity with such approved preliminary drawings, and shall furnish two copies
of such final plans and specifications to Landlord for its determination as to
the conformity with approved preliminary drawings and for its approval as to any
matters not shown in the approved preliminary drawings. Landlord shall approve
or disapprove such final plans and specifications within seven (7) days
following receipt of the same
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<PAGE>
and in the event of disapproval, Tenant shall promptly revise and resubmit such
final plans and specifications as required by Landlord.
D. After approval of final plans and specifications by Landlord,
Tenant shall at its sole cost, obtain all required building permits and other
governmental approvals necessary to commence Tenant's Work. Immediately
following the issuance of the building permits and other governmental approval,
Tenant shall proceed forthwith to commence and complete performance of Tenant's
Work. Tenant's contractors and subcontractors shall be acceptable to and
approved by Landlord. Any damage to the Building of which the Premises are a
part caused by Tenant or its contractors or subcontractors in connection with
the performance of Tenant's Work shall be repaired at Tenant's expense.
E. Any changes in Tenant's Work from the final plans and
specifications approved by Landlord shall be subject to Landlord's approval, and
Tenant shall pay all costs incurred by Landlord in reviewing any requested
change.
F. Upon completion of Tenant's Work, Tenant shall furnish to
Landlord for its permanent files one reproducible set of "as built" drawings
showing Tenant's Work as constructed or installed in the Premises.
3. If Tenant is not in default under this Lease and the Lease is in full
force and effect, Landlord shall make available to Tenant the sum of Five
Hundred Sixty-Four Thousand Four Hundred Eighty Dollars ($564,480.00) towards
the cost of Tenant's Work in Building A, the sum of Seven Hundred Seventy-Four
Thousand One Hundred Sixty Dollars ($774,166.00) towards the cost of Tenant's
Work in Building B, and Eight Hundred Eighty-Nine Thousand Three Hundred Sixty
Dollars ($889,360.00) towards the cost of Tenant's Work in Building C, in
accordance with the terms and conditions of this Paragraph 3 (the "Improvement
Allowance"). In the event that Tenant elects not to apply the entire amount of
the Improvement Allowance designated for a particular Building in the
improvement of that building, Tenant shall be entitled to apply the Improvement
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Allowance to the remaining Building, providing that Tenant shall apply a minimum
amount of the Improvement Allowance to each Building equal to the product of
Five Dollars ($5.00) and the number of square feet comprising such Building, and
further provided that the Improvement Allowance shall be applied to general
purpose improvements. Upon the Commencement Date for each Building, on Tenant's
request, Landlord shall reimburse Tenant up to the foregoing dollar sums, for
the cost of Tenant's Work, provided that Tenant shall furnish Landlord:
A. A statement from Tenant's architect certifying that the final
plans and specifications were prepared in compliance with applicable Laws and,
to the best of the architect's knowledge, that the Tenant's Work has been
completed in compliance with the approved final plans and specifications;
B. An itemized statement of such costs, certified as correct by
Tenant;
C. Copies of paid invoices evidencing that all work for which
reimbursement is requested has been paid for in full by Tenant;
D. Unconditional mechanic's lien releases from Tenant's general
contractors, suppliers, materialmen and all subcontractors who have done work or
supplied materials to the Premises; and
E. An estoppel certificate executed by Tenant as described in
Paragraph 20.1 of the Lease.
Landlord's reimbursement obligation shall apply to any portion of the cost
of Tenant's Work as to which Tenant fulfills its obligations in this paragraph
3. In the event that payment for any portion of the Tenant's Work is the
subject of a good faith dispute, Landlord shall be entitled to withhold from the
amount which would otherwise be reimbursable to Tenant a sum equal to one and
one-half (1-1/2) times the amount in dispute. Landlord shall hold such withheld
sums in an interest-bearing account and shall pay the sums so withheld to Tenant
upon Tenant's compliance with this paragraph 3, together with the interest so
earned.
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In the event that any lien is recorded against Landlord's interest in the
Complex as a result of construction performed for Tenant pursuant to this
Exhibit B, Landlord shall be entitled to require Tenant to cause such lien to be
released of record as provided in Section 9 of the Lease and, in the event that
Tenant pays or bonds over such lien, and provided Tenant has complied with the
provisions of this paragraph 3, Landlord shall release to Tenant the sums
withheld.
4. Provided that Tenant has complied with its obligations pursuant to
paragraph 3, if Landlord does not reimburse the full amount of the Improvement
Allowance to tenant when due, Tenant shall be entitled, among its other rights
or remedies, to offset against Base Monthly Rent, the amount of the Improvement
Allowance due, together with interest at the rate stated in Section 20.14.
*
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EXHIBIT B
SUBLEASED PREMISES
------------------
<PAGE>
EXHIBIT C
CONFIRMATION OF COMMENCEMENT DATE AGREEMENT
-------------------------------------------
THIS CONFIRMATION OF COMMENCEMENT DATE AGREEMENT is entered into by and
between Apple Computer, Inc., a California corporation ("Sublessor") and NVidia,
a Delaware corporation ("Sublessee") with respect to the following facts:
A. Sublessor and Sublessee entered into a Sublease dated as of April 2, 1998
with respect to those certain premises commonly known as 3535 Monroe Drive,
Santa Clara, California (the "Subleased Premises").
B. Because the master landlord, MPJ, a California general partnership, was
required to consent to the Sublease, the commencement date of the Subleased was
not fixed. The parties hereto desire to set forth herein the commencement date
of the Sublease and such other matters as may pertain thereto.
NOW, THEREFORE, the parties agree as follows:
1. The term of the Sublease commenced on ________________, 1998, and
will expire on December 31, 2002. Sublessee has accepted full and complete
possession of the Subleased Premises. All of Sublessor's obligations which have
accrued prior to the date hereof have been performed.
2. The Base Monthly Rent owing under Paragraph 3.1 of the Sublease is as
follows:
Insert Dates in lieu of months 1-12 insert Base Monthly Rent
Insert Dates in lieu of months 13-24 insert Base Monthly Rent
Insert Dates in lieu of months 25-36 insert Base Monthly Rent
Insert Dates in lieu of months 37-48 insert Base Monthly Rent
Insert Dates in lieu of months 49-55 insert Base Monthly Rent
3. All other terms and conditions of the Sublease shall remain unmodified
and in full force and effect.
APPLE COMPUTER, INC. NVIDIA
a California corporation a Delaware corporation
By: By:
------------------------------- -------------------------------
Its: Its:
------------------------------ -----------------------------
Date: Date:
----------------------------- -----------------------------
<PAGE>
EXHIBIT D
PARKING
-------
<PAGE>
EXHIBIT E
ENVIRONMENTAL REPORT
--------------------
<PAGE>
EXHIBIT F
TERMS OF FURNITURE PURCHASE
---------------------------
1. Purchase of Furniture. The total purchase price for the Furniture is
---------------------
Three Hundred Fifty Six Thousand Eight Hundred Dollars ($356,800.00) which
includes the California state tax (together, the "Furniture Price"). Upon
execution of this Sublease, Sublessee agrees to purchase the furniture as
itemized on the attached Schedule A (the "Initial Furniture"). Upon execution
of the Sublease, Sublessee shall pay to Sublessor a deposit in the amount of
Fifty Six Thousand Eight Hundred Dollars ($56,800.00) which will be applied to
the purchase price of the Furniture. Commencing on the Commencement Date of the
Sublease, Sublessee shall pay to Sublessor in twelve (12) equal monthly
installments (without interest) of Twenty Five Thousand Dollars ($25,000.00)
concurrently with Base Monthly Rent. The final installment of the Furniture
Price shall be due and payable on May 31, 1999.
2. Title to Furniture.
------------------
2.1 Furniture. Upon Sublessee's payment to Sublessor of the entire
---------
remaining balance of the Furniture Price, Sublessor agrees to convey legal title
to the Furniture itemized on the attached Schedule A (the "Furniture"), by bill
of sale reasonably acceptable to Sublessee. Such conveyance shall be without
representation or warranty whatsoever, except that Sublessor shall warrant that
it holds legal title to the Remaining Furniture and that such Remaining
Furniture is free and clear of all encumbrances created by or through Sublessor.
2.3 Sublease Termination. In the event that this Sublease terminates
--------------------
due to a default by Sublessee which was not cured within any applicable grace
period, Sublessee's right to acquire title to any furniture for which a bill of
sale has not been given by Sublessor in accordance with paragraphs 2.1 or 2.2
above (or for which Sublessee is not otherwise entitled to pursuant to the terms
thereof) shall terminate concurrently therewith. Upon such termination,
Sublessor shall be entitled to retain all Furniture Payments made to the date of
the termination and shall maintain full legal title to the Furniture for which a
bill of sale has not been given by Sublessor in accordance with paragraphs 2.1
or 2.2 above (or for which Sublessee is not otherwise entitled to pursuant to
the terms thereof). For example, if the Furniture Price allocable to the
Initial Furniture is fully paid and the Sublease terminates after some payments
of the Furniture Price allocable to the Remaining Furniture have already been
made to Sublessor, Sublessee shall have no right whatsoever to claim title to
any portion of the Remaining Furniture or to obtain any refund of such payments.
In the event of a termination of the Sublease due to a casualty or condemnation
as set forth in Sections 12 and 13 of the Master Lease, respectively, Sublessee
may acquire legal title to that portion of the Furniture for which full payment
of the Furniture Price has not yet been paid by making full payment to Sublessor
prior to the date of termination. If Sublessee fails to pay the outstanding
balance of the Furniture Price by such termination date, Sublessor shall be
entitled to retain all Furniture Payments made to the date of the Termination
and shall maintain full legal title to the Furniture for which a bill of sale
has not been given by Sublessor in accordance with paragraphs 2.1 or 2.2 above
(or for which Sublessee is not otherwise entitled to pursuant to the terms
thereof).
3. Maintenance and Repair of Furniture. The Furniture is currently
-----------------------------------
located in the Sublease Premises. By entering into this Sublease, Sublessee
accepts the Furniture in its current condition, "as-is", and without
representation or warranty of any kind. Sublessee shall not remove from the
Sublease Premises the Furniture for which Sublessee has not yet received a bill
of sale from Sublessor until the entire Furniture Price has been paid in full to
Sublessor. Prior to payment of the entire Furniture Price to Sublessor,
Sublessee shall maintain in good condition and repair that portion of the
Furniture for which Sublessee has not yet received a bill of sale from
Sublessor. Upon expiration of the Sublease term or any earlier termination of
this Sublease, if Sublessee has
<PAGE>
failed to pay the entire Furniture Price to Sublessor as provided herein,
Sublessee shall surrender the Furniture for which Sublessee has not yet received
a bill of sale in accordance with paragraphs 2.1 or 2.2 above (or for which
Sublessee is not otherwise entitled to pursuant to the terms thereof) in the
same condition as that Furniture is in on the Commencement Date, normal wear and
tear excepted.
<PAGE>
EXHIBIT G
SUBLESSEE'S TENANT IMPROVEMENTS
-------------------------------
<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
July 24, 1998
