<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended August 1, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission file number: 0-23985
NVIDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3177549
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3535 Monroe Street
Santa Clara, California 95051
(408) 615-2500
(Address, including Zip Code, of Registrant's Principal Executive Offices
and Registrant's Telephone Number, including Area Code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding as of
August 29, 1999 was 29,558,130 shares.
================================================================================
<PAGE>
NVIDIA CORPORATION
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of August 1, 1999 and January 31, 1999............................. 3
Condensed Statements of Operations for the three months and six months ended August 1, 1999
and July 26, 1998.............................................................................. 4
Condensed Statements of Cash Flows for the six months ended August 1, 1999 and July 26, 1998... 5
Notes to Condensed Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 15
</TABLE>
PART II: OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings.............................................................................. 20
Item 2. Change in Securities and Use of Proceeds....................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................................ 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 21
Signature................................................................................................. 22
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
NVIDIA CORPORATION
CONDENSED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
August 1, January 31,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 46,757 $ 50,257
Accounts receivable, less allowances of $3,338 at August 1,
1999 and $2,627 at January 31, 1999.................................... 50,179 20,633
Inventory................................................................ 8,441 28,623
Prepaid expenses and other current assets................................ 2,746 1,599
----------- -----------
Total current assets.............................................. 108,123 101,112
Property and equipment, net................................................. 22,742 11,650
Deposits and other assets................................................... 3,538 570
----------- -----------
$ 134,403 $ 113,332
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 34,779 $ 35,730
Line of credit........................................................... -- 5,000
Accrued liabilities...................................................... 8,452 5,012
Current portion of capital lease obligations............................. 1,766 1,386
----------- -----------
Total current liabilities......................................... 44,997 47,128
Capital lease obligations, less current portion............................. 942 1,995
Long-term payable........................................................... 6,000 --
Stockholders' equity:
Common stock............................................................. 29 29
Additional paid-in capital............................................... 79,228 74,372
Deferred compensation.................................................... (328) (780)
Retained earnings (accumulated deficit).................................. 3,535 (9,412)
----------- -----------
Total stockholders' equity........................................ 82,464 64,209
----------- -----------
$ 134,403 $ 113,332
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
NVIDIA CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ---------------------------
August 1, July 26, August 1, July 26,
1999 1998 1999 1998
------------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue:
Product .............................................. $ 78,017 $ 10,963 $ 149,035 $ 35,605
Royalty .............................................. -- 1,171 -- 4,792
------------- ---------- ------------ ---------
Total revenue................................... 78,017 12,134 149,035 40,397
------------- ---------- ------------ ---------
Cost of revenue.......................................... 49,625 12,961 95,571 33,834
------------- ---------- ------------ ---------
Gross profit (loss)...................................... 28,392 (827) 53,464 6,563
------------- ---------- ------------ ---------
Operating expenses:
Research and development.............................. 10,813 5,724 19,598 10,366
Sales, general and administrative..................... 8,116 3,962 15,400 7,847
------------- ---------- ------------ ---------
Total operating expenses........................ 18,929 9,686 34,998 18,213
------------- ---------- ------------ ---------
Operating income (loss).................................. 9,463 (10,513) 18,466 (11,650)
Interest and other income, net........................... 369 22 711 49
------------- ---------- ------------ ---------
Income (loss) before income tax expense (benefit)........ 9,832 (10,491) 19,177 (11,601)
Income tax expense (benefit)............................. 3,146 (839) 6,230 (928)
------------- ---------- ------------ ---------
Net income (loss)........................................ $ 6,686 $ (9,652) $ 12,947 $ (10,673)
============= ========== ============ =========
Basic net income (loss) per share........................ $ 0.23 $ (0.68) $ 0.44 $ (0.75)
============= ========== ============ =========
Diluted net income (loss) per share...................... $ 0.19 $ (0.68) $ 0.37 $ (0.75)
============= ========== ============ =========
Shares used in basic per share computation............... 29,344 14,148 29,310 14,145
Shares used in diluted per share computation............. 35,455 14,148 35,455 14,145
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
NVIDIA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
August 1, July 26,
1999 1998
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 12,947 $ (10,673)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................................ 3,640 1,737
Amortization of deferred compensation....................... 452 1,665
Stock options granted in exchange of services............... 4 --
Tax benefit from stock options exercised.................... 503 --
Changes in operating assets and liabilities:
Accounts receivable...................................... (36,998) 12,326
Inventory................................................ 20,182 (2,514)
Prepaid expenses and other current assets................ (1,147) (831)
Deposit and other current assets......................... (2,968) (327)
Accounts payable......................................... (951) (847)
Accrued liabilities...................................... 3,441 (168)
Long-term payable........................................ 1,000 --
------------- -----------
Net cash provided by operating activities........................ 105 368
------------- -----------
Cash flows used in investing activities-
purchases of property and equipment........................... (4,716) (3,243)
------------- -----------
Cash flows from financing activities:
Payments under line of credit................................. (5,000) --
Issuance of mandatorily convertible notes..................... -- 6,000
Common stock issued under stock option plans.................. 990 26
Sale of common stock under public offering, net of
issuance costs.............................................. 5,810 --
Payments under capital leases................................. (689) (727)
------------- -----------
Net cash provided by (used in) financing activities.............. 1,111 (5,299)
------------- -----------
Change in cash and cash equivalents.............................. (3,500) 2,424
Cash and cash equivalents at beginning of period................. 50,257 7,984
------------- -----------
Cash and cash equivalents at end of period....................... $ 46,757 $ 10,408
============= ===========
Cash paid for interest........................................... $ 133 $ 239
============= ===========
Cash paid for taxes.............................................. $ 8,803 $ --
============= ===========
Noncash financing and investing activities:
Assets recorded under capital lease........................... $ 16 $ 2,159
============= ===========
Receipt of common stock in settlement of accounts
receivable.................................................. $ (7,452) $ --
============= ===========
Issuance of common stock in connection with long-term
software license............................................ $ 5,000 $ --
============= ===========
Liabilities assumed in connection with long-term software
license..................................................... $ 5,000 $ --
============= ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands)
1. Basis of presentation
The accompanying condensed unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. The results for the interim periods presented
are not necessarily indicative of the results that may be expected for any
future period. The following information should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended January 31, 1999.
2. 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.
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 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. The following is a
reconciliation of the denominators of the basic and diluted net income (loss)
per share computations for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- -------------------------
August 1, July 26, August 1, July 26,
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic net income (loss) per share -
weighted-average shares................................ 29,344 14,148 29,310 14,145
Effect of dilutive securities:
Stock options outstanding.............................. 5,718 -- 5,878 --
Warrants............................................... 141 -- 141 --
Common stock issuable in connection with long-term
software license....................................... 252 -- 126 --
------------ ------------ ------------ -----------
Denominator for diluted net income (loss) per share..... 35,455 14,148 35,455 14,145
============ ============ ============ ===========
</TABLE>
As of July 26, 1998, 9,327,087 shares of convertible preferred stock,
options to purchase 6,562,333 shares of common stock, and warrants to purchase
158,806 shares of common stock were outstanding. The effect of these common
equivalent shares would have been anti-dilutive for the three-month and six-
month periods ended July 26, 1998, and, as a result, such effect has been
excluded from the computation of diluted net loss per share during these
periods.
6
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands)
3. Comprehensive income
The Company had no other components of comprehensive income other than the
reported amounts of net income (loss).
4. Inventory
<TABLE>
<CAPTION>
August 1, January 31,
1999 1999
---------- ------------
<S> <C> <C>
Work in-process................... $ 3,455 $ 15,385
Finished goods.................... 4,986 13,238
---------- --------
Total inventory.............. $ 8,441 $ 28,623
========== ========
</TABLE>
At August 1, 1999, the Company had noncancelable inventory purchase
commitments totaling $49.6 million.
5. New Accounting Pronouncement
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the costs of computer software intended for internal
use. Effective February 1, 1999, the Company adopted SOP 98-1. There was no
material change to the Company's results of operations or financial position as
a result of the adoption of SOP 98-1.
6. Segment information
The Company operates in a single industry segment: the design, development
and marketing of 3D graphics processors for the personal computer (PC) market.
The Company's chief operating decision maker, the Chief Executive Officer,
reviews financial information presented on a consolidated basis for purposes of
making operating decisions and assessing financial performance. The following
table summarizes geographic information on net sales:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
August 1, July 26, August 1, July 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
United States................................. $ 28,543 $ 12,096 $ 63,370 $ 40,359
Asia Pacific.................................. 41,585 38 72,906 38
Europe........................................ 7,889 -- 12,759 --
------------ ------------ ------------ ------------
Total revenue............................ 78,017 12,134 149,035 40,397
------------ ------------ ------------ ------------
</TABLE>
7
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands)
Revenue from significant customers, those representing approximately 10% or
more of total revenue for the respective periods, is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
August 1, July 26, August 1, July 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales
Customer A.................................. 2% 78% 7% 60%
Customer B.................................. 24% 9% 25% 27%
Customer C.................................. 17% -- 18% --
Customer E.................................. 20% -- 16% --
</TABLE>
<TABLE>
<CAPTION>
As of
August 1, January 31,
1999 1999
--------- -----------
<S> <C> <C>
Accounts receivable
Customer A.................................. 1% 19%
Customer B.................................. 24% 28%
Customer C.................................. 17% 18%
Customer D.................................. 1% 14%
Customer E.................................. 18% 4%
</TABLE>
7. Long-term Software Licensing Agreement
On April 12, 1999, the Company entered into a $10.0 million five-year
software licensing agreement with a supplier in the electronic design automation
industry. Under this agreement, the $10.0 million is due in two installments.
The first installment was settled in June 1999 for 243,902 shares of the
Company's common stock valued at $5.0 million. The second installment is due on
or before March 31, 2000 and may be settled in cash or in stock at the option of
the Company.
8. Stock Repurchase Agreement
In June 1999, the Company repurchased 428,572 shares of the Company's common
stock from a major customer in settlement for a portion of then outstanding
accounts receivable, in the amount of $7.5 million.
9. Strategic Relationship and Patent License Agreements
On July 17, 1999, the Company entered into agreements with Silicon Graphics,
Inc. (SGI) to create a broad strategic alliance to collaborate on future
graphics technologies. As part of the Strategic Relationship Agreement, SGI has
dismissed its patent infringement suit against the Company and the Company has
licensed SGI's enabling 3D graphics patent portfolio. Additionally, SGI will
incorporate the Company's graphics technology into new desktop graphics systems
and transfer approximately 25 engineering personnel to the Company during the
second half of fiscal 2000. In connection with the Patent License Agreement, the
Company will pay SGI a total of $3.0 million in nine quarterly installments with
the final payment due in May 2001.
8
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands)
10. Line of Credit Agreement
In July 1999, the Company entered into an amended loan and security agreement
with a bank, which included a $10.0 million revolving credit facility with a
borrowing base equal to 80% of eligible accounts. Borrowings under the line of
credit bear interest at prime rate and are due in July 2000. Covenants governing
the credit facility require the maintenance of certain financial ratios. As of
August 1, 1999, the Company had no outstanding borrowings against the line of
credit.
9
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are subject to the "safe harbor" created
by those sections. These forward-looking statements include but are not limited
to: statements related to industry trends and future growth in the markets for
3D graphics processors; our product development efforts; the timing of our
introduction of new products; industry and consumer acceptance of our products;
and future profitability. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements. We undertake no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document. The business risks on pages 15
through 19, among other things, should be considered in evaluating our prospects
and future financial performance.
Overview
We design, develop and market 3D graphics processors that provide high
performance interactive 3D graphics to the mainstream PC market. Substantially
all of our revenue in the six months ended August 1, 1999 and July 26, 1998 was
derived from the sale and license of the RIVA family of graphics processors. In
the first quarter of fiscal 2000, we began commercial shipment of the RIVA TNT2
family of graphics processors. We expect that substantially all of our revenue
for the foreseeable future will be derived from the sale of our 3D graphics
processors in the mainstream PC market. We recognize product sales revenue upon
shipment, net of appropriate allowances. Our policy on sales to distributors is
to defer recognition of sales and related gross profit until the distributors
resell the product. Royalty revenue is generally recognized upon shipment of
product to the licensee's customers. Currently, all of our product sales and our
arrangements with third-party manufacturers provide for pricing and payment in
U.S. dollars. We have not engaged in any foreign currency hedging activities,
although we may do so in the future. Since we have no other product line, our
business would suffer if for any reason our graphics processors do not achieve
widespread acceptance in the mainstream PC market.
A majority of our sales have been to a limited number of customers and sales
are highly concentrated. We sell graphics processors to add-in board
manufacturers, primarily Creative Technology Ltd., Diamond Multimedia Systems,
Inc. STB Systems, Inc. and ASUSTeK, and motherboard manufacturers such as Intel
Corporation. These manufacturers incorporate our processors in the boards they
sell to PC original equipment manufacturers ("OEMs"), retail outlets and systems
integrators. The average selling prices ("ASPs") for our products, as well as
our customers' products, vary by distribution channel. Sales to Diamond
accounted for 24%, sales to Creative accounted for 17%, and sales to Edom
Technology Co., Ltd. accounted for 20% of our total revenue for the second
quarter ended August 1, 1999. For the first six months of fiscal 2000, sales to
Diamond accounted for 25%, sales to Creative accounted for 18% and sales to Edom
accounted for 16% of total revenue. Sales to STB accounted for 78% and sales to
Diamond accounted for 9% of our total revenue for the second quarter ended July
26, 1998. For the first six months of fiscal 1999, sales to STB accounted for
60% and sales to Diamond accounted for 27% of total revenue. The number of
potential customers for our products is limited, and we expect sales to Creative
will continue to account for a substantial portion of our revenue for the
foreseeable future. In June 1999, S3 Incorporated (S3), a supplier of graphics
processors and a competitor, entered into a definitive agreement to acquire
Diamond. We expect our sales to Diamond to decline significantly from prior
levels following the consummation of the acquisition. The transaction is
expected to be completed in October 1999, subject to regulatory and stockholder
approvals. 3Dfx Interactive, Inc., a 3D graphics company and a competitor,
completed the acquisition of STB in May 1999. Our sales to STB in the second
quarter declined to 2% from 13% of total revenue in the first quarter and STB is
no longer one of our significant customers.
As markets for our 3D graphics processors develop and competition increases,
we anticipate that product life cycles will remain short and ASPs will continue
to decline. In particular, ASPs and gross margins are expected to decline as
each product matures. Our 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, our existing
products must have competitive performance levels in order to be included in new
system configurations, or we must timely introduce new products with such
performance characteristics at costs and in sufficient volumes to maintain
overall average selling prices and gross margins. Failure to achieve necessary
costs and volume shipments with respect to future products or product
enhancements could result in rapidly declining ASPs, reduced margins, reduced
demand for products or loss of market share.
10
<PAGE>
We currently utilize Taiwan Semiconductor Manufacturing Company ("TSMC") and
WaferTech, LLC to produce semiconductor wafers and utilize independent
contractors to perform assembly, test and packaging. We depend on these
suppliers to allocate to us a portion of their manufacturing capacity sufficient
to meet our needs, to produce products of acceptable quality and at acceptable
manufacturing yields, and to deliver those products to us on a timely basis.
These manufacturers may not always be able to meet our near-term or long-term
manufacturing requirements. Yields or product performance could suffer due to
difficulties associated with adapting our technology and product design to the
proprietary process technology and design rules of each manufacturer. A
manufacturing disruption experienced by these manufacturers would impact the
production of our products, which would harm our business. In addition, as the
complexity of our products and the accompanying manufacturing process increases,
there is an increasing risk that we will experience problems with the
performance of new products and that there will be yield problems or other
delays in the development or introduction of these products. We have recently
introduced the RIVA TNT2 family of graphics processors and we may experience
problems or other delays while in production of these products.
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. As a result, we may commit resources to the
production of products without having received advance purchase commitments from
customers. Any inability to sell products to which we have devoted significant
resources could harm our business. In addition, cancellation or deferral of
product orders could result in our holding excess inventory, which could
adversely affect our profit margins and restrict our ability to fund operations.
Product returns or delays or difficulties in collecting accounts receivable
could result in significant charges against income, which could harm our
business.
Results of Operations
Three Months and Six Months Ended August 1, 1999 and July 26, 1998
Revenue
Product Revenue. Product revenue increased 612% to $78.0 million in the
second quarter ended August 1, 1999 from $11.0 million in the second quarter
ended July 26, 1998. Revenue of $149.0 million for the first half of fiscal 2000
grew 319% over the first half of fiscal 1999. The increase was primarily the
result of increased sales of our RIVA family of graphics processors,
particularly the RIVA TNT2 graphics processors. Revenue from sales outside of
the U.S. represented 63% and 58% of total revenue in the second quarter and the
first half of fiscal 2000, respectively. Substantially all of our revenue in the
comparable periods for the prior fiscal year was derived from product sales in
the U.S. This increase in revenue from sales outside of the U.S. is primarily
attributable to (i) the geographic limitation of the worldwide license agreement
with ST Microelectronics, Inc. with respect to sales of the RIVA128 and
RIVA128ZX graphics processors, which agreement did not restrict the sales of the
RIVA TNT and RIVA TNT2 families of processors in fiscal 2000, and (ii) increased
demand for our products in the Asia Pacific region. We believe that the
substantial growth in product revenue achieved in this period is not necessarily
indicative of future results. In addition, we expect that the ASPs of our
products will decline over the lives of the products. The declines in ASPs of 3D
graphics processors generally may also accelerate as the market develops and
competition increases.
Royalty Revenue. ST has a worldwide license to sell the RIVA128 and RIVA128ZX
graphics processors. Royalty revenue from sales by ST of the RIVA128 graphics
processor and a derivative of the RIVA128ZX graphics processor decreased to zero
in the second quarter and first half of fiscal 2000 due primarily to reduced
sales of such products and disputes with ST regarding payment. Royalty revenue
totaled $1.2 million, or 10% of our total revenue, in the second quarter ended
July 26, 1998 and $4.8 million for the first half of fiscal 1999. We do not
expect to record or receive royalty revenue from ST in the future.
Gross Profit
Gross profit consists of total revenue net of allowances less cost of
revenue. Cost of revenue consists primarily of the costs of semiconductors
purchased from contract manufacturers (including assembly, test and packaging),
manufacturing support costs (labor and overhead associated with such purchases),
inventory provisions and shipping costs. Gross profit increased to $28.4 million
in the second quarter of fiscal 2000 from a gross loss of $827,000 in the second
quarter of fiscal 1999. Excluding royalty revenue, gross profit margin on
product revenue increased to 36% in the second quarter of fiscal 2000 from (18)%
in the second quarter of fiscal 1999. For the first six months of fiscal 2000,
gross profit grew to $53.5 million from $6.6 million in the comparable period of
the prior year. Year-to-date gross profit margin on product revenue was 36% in
fiscal 2000 compared to 16% in fiscal 1999. The increase in gross profit margin
11
<PAGE>
relates primarily to significant increases in the volume of product shipped and
the favorable impact of the higher margin TNT2 graphics processors, partially
offset by declining profit margins in our older product families. Although we
achieved substantial growth in gross profit and gross profit margin in this
period, we do not expect to sustain these rates of growth in future periods.
Operating Expenses
Research and Development. Research and development expenses consist of
salaries and benefits, cost of development tools and software, costs of
prototypes of new products and consultant costs. As a percentage of total
revenue, research and development expenses decreased to 14% in the second
quarter of fiscal 2000 from 47% in the second quarter of fiscal 1999, and
increased in absolute dollars to $10.8 million from $5.7 million. Year-to-date
research and development expenses in fiscal 2000 increased to $19.6 million from
$10.4 million in fiscal 1999. As a percentage of total revenue, year-to-date
research and development expenses in fiscal 2000 decreased to 13% compared to
26% in the same period in fiscal 1999. The increase in absolute dollars was
primarily due to additional personnel and related engineering costs to support
our next generations products, such as depreciation charges incurred on capital
expenditures and software license and maintenance fees. We anticipate that we
will continue to devote substantial resources to research and development, and
we expect these expenses to increase in absolute dollars in the second half of
fiscal 2000. Research and development expenses are likely to fluctuate from time
to time to the extent we make periodic incremental investments in research and
development and our level of revenue fluctuates.
As part of a strategic collaboration agreement with ST, we received contract
funding in support of research and development and marketing efforts for the
RIVA128 and RIVA128ZX graphics processors. Accordingly, we recorded
approximately $625,000 and $1.3 million in the second quarter and first half of
fiscal 1999, respectively, as a reduction primarily to research and development.
We were obligated to provide continued development and support to ST through the
end of calendar 1998. We currently do not have any plans to enter into
contractual development arrangements and do not expect to receive contract
funding in the future.
Sales, General and Administrative. Sales, general and administrative expenses
consist primarily of salaries, commissions and bonuses earned by sales,
marketing and administrative personnel, promotional and advertising expenses,
travel and entertainment expenses and legal expenses. Sales, general and
administrative expenses as a percentage of total revenue decreased to 10% in the
second quarter of fiscal 2000 from 33% in the second quarter of fiscal 1999 and
increased in absolute dollars to $8.1 million from $4.0 million. For the first
six months of fiscal 2000, sales, general and administrative expenses increased
to $15.4 million compared to $7.8 million in the same period in fiscal 1999. The
increase in absolute dollars was primarily the result of additional personnel
and commissions and bonuses on sales of the TNT2 graphics processors as well as
legal expenses associated with patent litigation. We expect sales, general and
administrative expenses to continue to increase in absolute dollars as we expand
our operations, but we do not expect significant changes in these expenses as a
percentage of revenue in future periods.
Interest and Other Income (Expense), Net
Interest income primarily consists of interest earned on cash and cash
equivalents. Interest expense primarily consists of interest incurred as a
result of capital lease obligations. Net interest income increased to $369,000
in the second quarter of fiscal 2000 from $22,000 in the second quarter of
fiscal 1999. For the first two quarters of fiscal 2000, net interest income
increased to $711,000 from $49,000 in the comparable period of fiscal 1999. The
increase in net interest income was primarily due to higher average cash
balances as a result of cash proceeds received from the initial public offering
of our common stock in January 1999.
Income Taxes
We had an effective tax rate of 32% in the second quarter and first half of
fiscal 2000. The income taxes in the second quarter and first six months of
fiscal 1999 consisted primarily of deferred federal tax benefit. We anticipate
our tax rates for the remainder of fiscal 2000 will remain relatively constant,
depending on the availability and realizability of deferred tax assets.
Realization of the deferred tax assets will depend on future taxable income.
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<PAGE>
Stock-Based Compensation
With respect to stock options granted to employees, we recorded deferred
compensation of $4.3 million in 1997 and $361,000 in the one month ended January
31, 1998. These amounts are being amortized over the vesting period of the
individual options, generally four years. We amortized approximately $193,000 in
the second quarter of fiscal 2000 compared to $722,000 in the second quarter of
fiscal 1999. Year-to-date amortization decreased to $452,000 in fiscal 2000 from
$1.7 million in fiscal 1999. We anticipate total amortization of approximately
$650,000 in fiscal 2000.
Liquidity and Capital Resources
As of August 1, 1999, we had $46.8 million in cash and cash equivalents. In
February 1999, we received $5.8 million from the underwriters' exercise of their
option to purchase an additional 525,000 shares of common stock at a price of
$12 per share. Approximately $5.0 million of the net proceeds were used to repay
in full amounts outstanding under a bank line of credit. The balance of the net
proceeds will be used for general corporate purposes, including capital
expenditures and working capital. We historically have held our cash balances in
cash equivalents such as money market funds or as cash. We place the money
market funds with high-quality financial institutions and limit the amount of
exposure with any one financial institution. We had $49.6 million of
noncancelable inventory purchase commitments outstanding at August 1, 1999.
In July 1999, we entered into an amended loan and security agreement with a
bank, which included a $10.0 million revolving credit facility with a borrowing
base equal to 80% of eligible accounts. Borrowings under the line of credit bear
interest at prime rate and are due in July 2000. Covenants governing the credit
facility require the maintenance of certain financial ratios. As of August 1,
1999, we had no outstanding borrowings against the line of credit.
Operating activities generated $105,000 during the first six months of fiscal
2000 compared to $368,000 during the first six months of fiscal 1999. The cash
flow from operating activities during the six months of fiscal 2000 was positive
principally due to higher net income, offset by changes in operating assets and
liabilities. Our accounts receivable are highly concentrated. Five customers
accounted for approximately 61% of the accounts receivable for the first six
months of fiscal 2000. Although we have not experienced any bad debt write-offs
to date, we may be required to write off bad debt in the future, which could
harm our business. In June 1999, we repurchased 428,572 shares of our common
stock from a major customer in settlement for a portion of then outstanding
accounts receivable in the amount of $7.5 million.
To date, our investing activities have consisted primarily of purchases of
property and equipment. Our capital expenditures, including capital leases, were
$14.7 million during the first six months of fiscal 2000 and $5.4 million during
the first six months of fiscal 1999. The increase was primarily attributable to
a $10.0 million obligation pursuant to a long-term licensing agreement with a
supplier. We expect capital expenditures to increase as we further expand
research and development initiatives and as our employee base grows. The timing
and amount of future capital expenditures will depend primarily on our future
growth. We expect to spend an additional $5.0 million for capital expenditures
in the next six months, primarily for software licenses, emulation equipment and
the purchase of computer and engineering workstations.
We believe that our existing cash balances, anticipated cash flows from
operations and capital lease financing will be sufficient to meet our operating
and capital requirements for at least the next 12 months, although we could be
required, or could elect, to raise additional funds during that period. We
expect that we may need to raise additional equity or debt financing in the
future. Additional financing may not be available on favorable terms or at all
and may be dilutive to our then-current stockholders. We also may require
additional capital for other purposes not presently contemplated. If we are
unable to obtain sufficient capital, we could be required to curtail capital
equipment purchases and/or research and development expenditures, which could
harm our business.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software like this may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
13
<PAGE>
We are heavily dependent upon the proper functioning of our own computer or
data-dependent systems. These include, but are not limited to, information
systems in business, finance, operations and service. Any failure or
malfunctioning on the part of these or other systems could adversely affect us
in ways that are not currently known, discernible, quantifiable or otherwise
anticipated by us.
Our graphics processors and related software do not depend on any date-
sensitive functions in order to perform in accordance with their respective
designs, and we do not expect their functions to be negatively affected by the
Year 2000 issue. Our products are ultimately used with a number of different
hardware and software products, and to the extent these third-party products are
not Year 2000 compliant, the interoperability of our products may be adversely
affected. Given the number of third-party components and our limited resources,
we do not expect to review these third-party products.
We have conducted and completed an initial audit of our critical internal
financial, informational and operational systems and our electronic design tools
to identify and evaluate those areas of our business that may be affected by the
Year 2000 issue. We have completed a detailed plan to implement and test any
necessary modifications to these key areas to ensure that they are Year 2000
compliant. Our plan includes the following components:
. independent validation of our Year 2000 assessment procedures;
. formal communications with all significant suppliers, large customers and
tools vendors to determine the extent to which we are vulnerable to those
third parties' failure to remedy their own Year 2000 issues; and
. the development of contingency plans to address situations that may result
if we are unable to achieve Year 2000 readiness of our critical
operations.
We anticipate that any required remediation programs will be completed by the
end of calendar 1999.
To date, we have not incurred material incremental costs associated with our
efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. We believe that future costs
associated with our Year 2000 compliance efforts will not exceed $500,000.
In addition to the risks associated with our own systems, we have
relationships with, and are to varying degrees dependent upon, a large number of
third parties that provide information, goods and services to us and manufacture
our graphics processors. Our business could suffer if key suppliers experience
Year 2000 issues that cause them to delay manufacturing or shipment of finished
product to us. In addition, our results of operations could suffer if any of our
key customers encounter Year 2000 issues that cause them to delay or cancel
substantial purchase orders or delivery of our product. We have begun to
initiate formal communications to ascertain the Year 2000 compliance of key
suppliers and determine the extent to which we may be vulnerable to those third
parties' failure to remedy their own Year 2000 issues.
We have completed an inventory of internal systems, hardware, software,
communication networks and non-information technology systems and services. To
date, we have substantially completed the following:
. assessing specific underlying computer systems, programs and hardware;
. evaluating remediation or replacement of Year 2000 non-compliant
technology;
. conducting validation and testing of technologically-compliant Year 2000
solutions; and
. completing implementation of Year 2000 compliant systems.
While we plan to complete modifications or upgrades of our business-critical
systems prior to the Year 2000, we may be unable to develop a plan to address
the Year 2000 issue in a timely manner or to upgrade any or all of our major
systems in accordance with our plan. If any required modifications or upgrades
or modifications by key suppliers or customers are not completed in a timely
manner or are not successful, we may be unable to conduct our business. In
addition, any upgrades made may not effectively address the Year 2000 issue.
Furthermore, the systems of other
14
<PAGE>
companies on which we rely for the manufacture of our products may not be
converted in a timely manner. A failure to convert by another company, or a
conversion that is incompatible with our systems, could harm our business.
We or one or more third parties may encounter unforeseen problems with
respect to any of our systems, which could harm our business. We are currently
evaluating possible actions, including accumulating excess inventory of our
finished products, to be taken in the event that our assessment of the Year 2000
issue is not successfully completed on a timely basis, but we have not yet
established a formal contingency plan.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from the investments
without significantly increasing risk. To minimize potential loss arising from
adverse changes in interest rates, we maintain a portfolio of cash and cash
equivalents primarily in highly rated domestic money market funds. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate.
Exchange Rate Risk
We consider our exposure to foreign exchange rate fluctuations to be minimal.
Currently, all of our arrangements with third-party manufacturers provide for
pricing and payment in U.S. dollars, and, therefore, are not subject to exchange
rate fluctuations. To date, we have not engaged in any currency hedging
activities, although we may do so in the future. Fluctuations in foreign
currency exchange rates could harm our business in the future.
Certain Business Risks
In addition to the risks discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our business is subject to
the risks set forth below.
Our operating results are unpredictable and they may fluctuate. Many of our
revenue components fluctuate and are difficult to predict, and our operating
expenses are largely independent of revenue in any particular period. It is
therefore difficult for us to accurately forecast revenue and profits or losses.
We believe that, even if we do achieve significant sales of our products, our
quarterly and annual results of operations will be affected by a variety of
factors that could adversely affect our revenue, gross profit and results of
operations.
Factors that have affected our results of operations in the past, and are
likely to affect our results of operations in the future, include the following:
. demand and market acceptance for our 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 our customers;
. new product announcements or product introductions by our competitors;
. our ability to introduce new products in accordance with OEM design
requirements and design cycles;
. changes in the timing of product orders due to unexpected delays in the
introduction of our products and/or our customers' products or due to the
life cycles of our 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;
. rates of return in excess of that forecasted/expected due to quality
issues;
15
<PAGE>
. the rescheduling or cancellation of customer orders;
. the unanticipated termination of strategic relationships;
. seasonal fluctuations associated with the tendency of PC sales to decrease
in the second quarter and increase in the second half of each calendar
year; and
. the level of expenditures for our research and development and sales,
general and administrative functions.
In addition, we may experience difficulties related to the production of
current or future products and other factors may delay the introduction or
volume sales of new products we develop. We believe that quarterly and annual
results of operations also could be affected in the future by other factors,
including the following:
. changes in the relative volume of sales of our products;
. seasonality in the PC market;
. our ability to reduce the process geometry of our products;
. supply constraints for the other components incorporated into our
customers' products;
. the loss of a key customer;
. changes in the pricing of dynamic random access memory devices ("DRAMs")
or other memory components;
. legal and other costs related to defending intellectual property
litigation;
. costs associated with protecting our intellectual property;
. costs related to acquiring or licensing intellectual property;
. inventory write-downs; and
. foreign exchange rate fluctuations.
Any one or more of the factors discussed above could prevent us from
achieving our expected future revenue or net income.
Because most operating expenses are relatively fixed in the short term, we
may be unable to adjust spending sufficiently in a timely manner to compensate
for any unexpected sales shortfall. We may 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 us to invest significantly greater resources than anticipated in
research and development or sales and marketing efforts, our business could
suffer. Accordingly, we believe that period-to-period comparisons of our results
of operations should not be relied upon as an indication of our future
performance. In addition, the results of any quarterly period are not indicative
of results to be expected for a full fiscal year.
We have a limited operating history and a history of losses. We have a
limited operating history and it is difficult to predict our future operating
results. Our recent revenue growth may not be sustainable and should not be
considered indicative of future revenue growth, if any. Although we generated
net income in the twelve months ended August 1, 1999, and in the three months
ended December 31, 1997, we incurred losses in the first half of fiscal 1999, in
the first three quarters of fiscal 1997 and in each quarter of our prior fiscal
years. We may not be profitable on a quarterly or annual basis in the future.
We need to develop new products and manage product transitions in order to
succeed. Our business will depend to a significant extent on our ability to
successfully develop new products for the 3D graphics market. Our 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, our existing products must have competitive
performance levels or we must timely introduce new products with such
performance characteristics in order to be included in new system
configurations. This requires that we do the following:
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<PAGE>
. 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 our 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, we believe that significant expenditures for research and
development will continue to be required in the future.
Our strategy is to utilize the most advanced process technology appropriate
for our products and available from commercial third-party foundries. Use of
advanced processes has in the past resulted in initial yield problems. New
products that we introduce may not incorporate the features and functionality
demanded by PC OEMs, add-in board manufacturers and consumers of 3D graphics. In
addition, we may not successfully develop or introduce new products in
sufficient volumes within the appropriate time to meet both the PC OEMs' design
cycles and market demand. We have in the past experienced delays in the
development of some new products. Our failure to successfully develop, introduce
or achieve market acceptance for new 3D graphics products would harm our
business.
As markets for our 3D graphics processors develop and competition increases,
we anticipate that product life cycles will remain short and average ASPs will
continue to decline. In particular, we expect ASPs and gross margins for our 3D
graphics processors to decline as each product matures and as unit volumes
increase. As a result, we will need to introduce new products and enhancements
to existing products to maintain overall ASPs and gross margins. In order for
our 3D graphics processors to achieve high volumes, leading PC OEMs and add-in
board manufacturers must select our 3D graphics processor for design into their
products, and then successfully complete the designs of their products and sell
them. We may be unable to successfully identify new product opportunities or
develop and bring to market in a timely fashion any new products. In addition,
we cannot guarantee that any new products we develop will be selected for design
into PC OEMs' and add-in board manufacturers' products, that any new designs
will be successfully completed or that any new products will be sold. As the
complexity of our products and the manufacturing process for our products
increases, there is an increasing risk that we will experience problems with the
performance of our products and that there will be delays in the development,
introduction or volume shipment of our products. We recently introduced the RIVA
TNT2 family of graphics processors. While we have not experienced yield problems
to date, we may experience problems or other delays while in production with
these products. We may experience difficulties related to the production of
current or future products or other factors may delay the introduction or volume
sale of new products we developed. In addition, we may be unable to successfully
manage the production transition risks with respect to future products. Failure
to achieve any of the foregoing with respect to future products or product
enhancements could result in rapidly declining ASPs, reduced margins, reduced
demand for our products or loss of market share. In addition, technologies
developed by others may render our 3D graphics products non-competitive or
obsolete or result in our holding excess inventory, either of which would harm
our business.
In the design and development of new products and product enhancements, we
rely on third-party software development tools. While we currently are not
dependent on any one vendor for the supply of these tools, some or all of these
tools may not be readily available in the future. For example, we have
experienced delays in the introduction of products in the past as a result of
the inability of then-available software development tools to fully simulate the
complex features and functionality of our products. The design requirements
necessary to meet consumer demands for more features and greater functionality
from 3D graphics products in the future may exceed the capabilities of the
software development tools available to us. If the software development tools we
use become unavailable or fail to produce designs that meet consumer demands,
our business could suffer.
We may be unable to obtain design wins. Our future success will depend in
large part on achieving design wins, which entails having our existing and
future products chosen as the 3D graphics processors for hardware components or
subassemblies designed by PC OEMs and add-in board manufacturers. Our failure to
achieve one or more design wins would harm our business. The process of being
qualified for inclusion in a PC OEM's product can be lengthy and could cause us
to miss a cycle in the demand of end users for a particular product feature,
which also could harm our business.
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<PAGE>
Our ability to achieve design wins will depend in part on our ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render our products incompatible with
products developed by major hardware manufacturers and software developers,
including Intel and Microsoft. This would require us to invest significant time
and resources to redesign our products to ensure compliance with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design wins
could suffer. Our failure to achieve design wins would result in the loss of any
potential sales volume that could be generated by newly designed PC hardware
component or board subassembly. This would give a competitive advantage to the
3D graphics processor manufacturer that achieved the design win.
We are dependent on the desktop PC market, which may not continue to grow. In
the first six months of fiscal 2000, we derived all of our revenue from the sale
of products for use in PCs. We expect to continue to derive substantially all of
our 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. These
factors result in short product life cycles and regular reductions of ASPs over
the life of a specific product. Although the PC market has grown substantially
in recent years, this growth may not continue. A reduction in sales of PCs, or a
reduction in the growth rate of PC sales, would likely reduce demand for our
products. Moreover, changes in demand could be large and sudden. Since PC
manufacturers often build inventories during periods of anticipated growth, they
may be left with excess inventories if growth slows or if they have incorrectly
forecast product transitions. In these cases, PC manufacturers may abruptly
suspend substantially all purchases of additional inventory from suppliers like
us until the excess inventory has been absorbed. Any reduction in the demand for
PCs generally, or for a particular product that incorporates our 3D graphic
processors, could harm our business.
The market for mainstream PC 3D graphics is new and uncertain. Our 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, the market
for mainstream PC 3D graphics computing may not continue to develop or may not
grow at a rate sufficient to support our business. The development of the market
for 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 software applications like this, most of which are games,
and a broader base of software applications may not develop in the near term or
at all. 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, a broad market for full function 3D
graphics on mainstream PCs may not develop. Our business will suffer if the
market for mainstream PC 3D graphics fails to develop or develops more slowly
than expected.
We are dependent on a small number of customers and we are subject to order
and shipment uncertainties. We have only a limited number of customers and our
sales are highly concentrated. We primarily sell our products to add-in board
and motherboard manufacturers, which incorporate graphics products in the boards
they sell to PC OEMs. Sales to add-in board and motherboard manufacturers are
primarily dependent on achieving design wins with leading PC OEMs. We believe
that a considerable portion of our revenue in the most recent quarter was
attributable to products that ultimately were incorporated into PCs sold by
Compaq Computer Corporation, Dell Computer Corporation, Gateway 2000, Inc.,
Hewlett-Packard, Intel, International Business Machines Corporation and Micron
Technology, Inc. The number of add-in board and motherboard manufacturers and
leading PC OEMs is limited, and we expect that a small number of add-in board
and motherboard manufacturers directly, and a small number of PC OEMs
indirectly, will continue to account for a substantial portion of our revenue
for the foreseeable future. As a result, our business could be harmed by the
decision of a single PC OEM or add-in board and motherboard manufacturers to
cease using our products or by a decline in the number of products sold by a
single PC OEM or add-in board and motherboard manufacturers or by a small number
of customers. In addition, revenue from add-in board and motherboard
manufacturers or PC OEMs that have directly or indirectly accounted for
significant revenue in past periods, individually or as a group, may not
continue, or may not reach or exceed historical levels in any future period.
We depend on third-party manufacturers to produce our products. We do not
manufacture the semiconductor wafers used for our products and do not own or
operate a wafer fabrication facility. Our products require wafers manufactured
with state-of-the-art fabrication equipment and techniques. We utilize TSMC and
WaferTech to produce our semiconductor wafers and utilize independent
contractors to perform assembly, test and packaging. We depend on these
suppliers to allocate to us a portion of their manufacturing capacity sufficient
to meet our needs, to produce products of
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<PAGE>
acceptable quality and at acceptable manufacturing yields, and to deliver those
products to us on a timely basis. These manufacturers may be unable to meet our
near-term or long-term manufacturing requirements. We obtain manufacturing
services on a purchase order basis and TSMC has no obligation to provide us with
any specified minimum quantities of product. TSMC fabricates wafers for other
companies, including certain of our competitors, and could choose to prioritize
capacity for other users or reduce or eliminate deliveries to us on short
notice. Because the lead time needed to establish a strategic relationship with
a new manufacturing partner could be several months, there is no readily
available alternative source of supply for any specific product. We believe that
long-term market acceptance for our products will depend on reliable
relationships with TSMC and any other manufacturers used by us to ensure
adequate product supply to respond to customer demand.
We are dependent primarily on TSMC and we expect in the future to continue to
be dependent upon third-party manufacturers to do the following:
. produce wafers of acceptable quality and with acceptable manufacturing
yields;
. deliver those wafers to us and our independent assembly and testing
subcontractors on a timely basis and;
. allocate to us a portion of their manufacturing capacity sufficient to
meet our needs.
Our wafer requirements represent a small portion of the total production
capacity of TSMC. Although our products are designed using TSMC's process design
rules, TSMC may be unable to achieve or maintain acceptable yields or deliver
sufficient quantities of wafers on a timely basis or at an acceptable cost.
Additionally, TSMC may not continue to devote resources to the production of our
products or to advance the process design technologies on which the
manufacturing of our products are based. Any difficulties like this would harm
our business.
Low manufacturing yields would harm our business. Semiconductor manufacturing
yields are a function both of product design, which is developed largely by us,
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 us and the
manufacturer. The risk of low yields is compounded by the offshore location of
our manufacturers, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems. Because of our potentially
limited access to wafer fabrication capacity from our manufacturers, any
decrease in manufacturing yields could result in an increase in our per unit
costs and force us to allocate our available product supply among our customers.
This could potentially harm customer relationships as well as revenue and gross
profit. Our wafer manufacturers may be unable to achieve or maintain acceptable
manufacturing yields in the future. Our inability to achieve planned yields from
our wafer manufacturers could harm our business.
We face many other risks. Also inherent in our business are additional risks,
which include but are not limited to the following:
. our ability to manage growth;
. our dependence on key personnel;
. the risk of product returns, product defects or product incompatibilities;
. our inability to transition to new manufacturing process technologies;
. the risks associated with international operations, which accounted for a
significant portion of our revenue in the first six months of fiscal 2000;
. the cyclical nature of the semiconductor industry; and
. our ability to adequately protect our intellectual property rights.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On April 9, 1998, the Company was notified that Silicon Graphics, Inc. (SGI)
had filed a patent infringement lawsuit against the Company in the United States
District Court for the District of Delaware. The suit alleged that the sale and
use of the Company's RIVA family of 3D graphics processors infringes a United
States patent held by SGI. The parties to this case reached an agreement to
settle the case in July 1999. The Company entered into agreements with SGI to
create a broad strategic alliance to collaborate on future graphics
technologies. As part of the Strategic Relationship Agreement, SGI has dismissed
its patent infringement suit against the Company and the Company has licensed
SGI's enabling 3D graphics patent portfolio. Additionally, SGI will incorporate
the Company's graphics technology into new desktop graphics systems and transfer
approximately 25 engineering personnel to the Company during the second half of
fiscal 2000. In connection with the Patent License Agreement, the Company will
pay SGI a total of $3.0 million in nine quarterly installments with the final
payment due in May 2001.
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds from Sales of Registered Securities
We commenced our initial public offering on January 21, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-47495). The managing
underwriters of the public offering were Morgan Stanley & Co., Hambrecht & Quist
and Prudential Securities (the Underwriters). In the offering, we sold an
aggregate of 3.5 million shares of our common stock for an initial price of
$12.00 per share. On February 2, 1999, we sold an additional 525,000 shares of
our common stock at a price of $12.00 per share pursuant to the exercise of the
Underwriters' over-allotment option. The aggregate proceeds from the offering
were $48.3 million. We paid expenses of approximately $5.0 million, of which
approximately $3.4 million represented underwriting discounts and commissions
and approximately $1.6 million represented expenses related to the offering. Net
proceeds from the offering were $43.3 million. Of the net proceeds, as of August
1, 1999, $5.0 million had been used to repay in full amounts outstanding under a
bank line of credit. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in our Registration
Statement. As of August 1, 1999, the remainder of the net proceeds were invested
in money market funds.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on June 17, 1999, the following
proposals were adopted by the margin indicated:
(a) To elect two directors, Harvey C. Jones, Jr. and William J. Miller to
hold office until the 2002 Annual Meeting of Stockholders.
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Harvey C. Jones, Jr. 23,213,349 3,219
William J. Miller 23,213,586 2,892
</TABLE>
Directors continuing in office until the 2000 Annual Meeting:
Tench Coxe
Mark A. Stevens
Directors continuing in office until the 2001 Annual Meeting:
James C. Gaither
Jen-Hsun Huang
A. Brooke Seawell
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<PAGE>
(b) To approve the amendment of the Company's 1998 Employee Stock Purchase
Plan to provide for annual increases to the number of shares of common
stock reserved for issuance thereunder.
Shares voting:
For 21,260,044
Against 427,375
Abstain 18,864
Broker non-vote 1,510,195
(c) To ratify the selection of KPMG LLP as independent accountants of the
Company for its fiscal year ended January 30, 2000.
Shares voting:
For 22,696,907
Against 1,094
Abstain 10,281
Broker non-vote 508,196
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.15 Amendment to Loan and Security Agreement, dated July 30, 1999, between the Company and Imperial Bank
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the registrant during the three months
ended August 1, 1999.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on September 9, 1999.
NVIDIA Corporation
By: /s/ Christine B. Hoberg
------------------------------------
Christine B. Hoberg
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.15 Amendment to Loan and Security Agreement, dated July 30, 1999, between the Company and Imperial Bank
27.1 Financial Data Schedule
</TABLE>
23
<PAGE>
EXHIBIT 10.15
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment to Loan and Security Agreement is entered into as of
July 30, 1999 (the "Amendment"), by and between IMPERIAL BANK ("Bank") and
NVIDIA CORPORATION ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of September 3, 1998, as amended (the "Agreement"). The
parties desire to amend the Agreement in accordance with the terms of this
Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Certain defined terms in Section 1.1 of the Agreement are hereby added
or amended to read as follows:
"Borrowing Base" means an amount equal to eighty percent (80%) of
Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.
"Committed Revolving Line" means a credit extension of up to Ten
Million Dollars ($10,000,000).
"Credit Extension" or "Credit Extensions" means an Advance, a Letter
of Credit or other extension of credit under this Agreement.
"Revolving Maturity Date" means July 29, 2000.
2. Clause (i) of the defined term "Eligible Accounts" is amended to read
as follows
"(i) Accounts with respect to an account debtor,
including Subsidiaries and Affiliates, whose total obligations to
Borrower exceed twenty percent (20%) of all Accounts, to the extent
such obligations exceed the aforementioned percentage, except that the
concentration limit for Accounts owing from each of STB Systems, Inc.,
Diamond Multimedia Systems, Inc., Intel and Creative Labs shall be
fifty percent (50%). Increases to the concentration limit will be
considered for approval by Bank on a case by case basis;"
3. The reference in clause (g) of the defined term "Permitted
Investments" to $200,000 is amended to read "$500,000."
4. Sections 2.1 is amended to read as follows:
2. Loan And Terms Of Payment.
-------------------------
2.1 Credit Extensions.
-----------------
Borrower promises to pay to the order of Bank, in lawful money of the
United States of America, the aggregate unpaid principal amount of all
Credit Extensions made by Bank to Borrower hereunder. Borrower shall also
pay interest on the unpaid principal amount of such Credit Extensions at
rates in accordance with the terms hereof.
1
<PAGE>
2.1.1 Revolving Advances.
------------------
(a) Subject to and upon the terms and conditions of this Agreement,
Borrower may request Advances in an aggregate outstanding amount not to
exceed the lesser of the Committed Revolving Line. At any time the Credit
Extensions exceed Five Million Dollars ($5,000,000), then, subject to and
upon the terms and conditions of this Agreement, Borrower may request
Advances in an aggregate outstanding amount not to exceed the lesser of (i)
the Committed Revolving Line or (ii) the Borrowing Base, minus, in each
case, the face amount of outstanding Letters of Credit, including any drawn
but unreimbursed Letters of Credit and the FX Reserve. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1.1 may be repaid and reborrowed at any time prior to the
Revolving Maturity Date, at which time all Advances under this Section
2.1.1 shall be immediately due and payable. Borrower may prepay any
Advances without penalty or premium.
(b) Whenever Borrower desires an Advance, Borrower will notify Bank
by facsimile transmission or telephone no later than 3:00 p.m. Pacific
time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto. Bank is authorized to make
---------
Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled
to rely on any telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a designee thereof, and Borrower
shall indemnify and hold Bank harmless for any damages or loss suffered by
Bank as a result of such reliance. Bank will credit the amount of Advances
made under this Section 2.1.1 to Borrower's deposit account.
2.1.2 Letters of Credit Sublimit Under the Revolving Facility.
-------------------------------------------------------
(a) Subject to the terms and conditions of this Agreement, Bank
agrees to issue or cause to be issued letters of credit (each a "Letter of
Credit," collectively, the "Letters of Credit") for the account of Borrower
in an aggregate face amount not to exceed the lesser of the following (i)
(A) the lesser of the Committed Revolving Line or the Borrowing Base (when
the Borrowing Base is applicable), minus (B) the sum of the then
outstanding principal balance of the Advances, the Foreign Exchange Reserve
and the face amount of outstanding Letters of Credit, or (ii) Five Million
--
Dollars ($5,000,000). Each such Letter of Credit shall have an expiry date
no later than the Revolving Maturity Date; provided that the expiry date
may be up to 90 days after the Revolving Maturity Date as long as Borrower
secures its reimbursement and other obligations in connection with any
Letter of Credit outstanding after such date with cash on terms reasonably
acceptable to Bank. All such Letters of Credit shall be, in form and
substance, acceptable to Bank in its sole discretion and shall be subject
to the terms and conditions of Bank's form of application and letter of
credit agreement. All amounts actually paid by Bank in respect of a Letter
of Credit shall, when paid, constitute an Advance under this Agreement.
(b) The obligation of Borrower to immediately reimburse Bank for
drawings made under Letters of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms
of this Agreement and such Letters of Credit, under all circumstances
whatsoever. Borrower shall indemnify, defend, protect, and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection
with any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of Credit payable
in a currency other than United States Dollars. If a demand for payment is
made under any such Letter of Credit, Bank shall treat such demand as an
advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange
in San Francisco, California, for sales of that other currency for cable
transfer to the country of which it is the currency. Upon the issuance of
any Letter of Credit payable in a currency other than United States
Dollars, Bank shall create a reserve under the Committed Revolving Line for
Letters of Credit against fluctuations in currency exchange rates, in an
2
<PAGE>
amount equal to ten percent (10%) of the face amount of such Letter of
Credit. The amount of such reserve may be amended by Bank from time to time
to account for fluctuations in the exchange rate. The availability of funds
under the Committed Revolving Line shall be reduced by the amount of such
reserve for so long as such Letter of Credit remains outstanding.
2.1.3 Foreign Exchange Sublimit. If there is availability under
-------------------------
the Committed Revolving Line, then Borrower may enter in foreign exchange
contracts with the Bank under which Borrower commits to purchase from or
sell to Bank a set amount of foreign currency more than one business day
after the contract date (the "FX Contract") or treat such settlement as an
Advance under the Revolving Committed Line. Bank will subtract 10% of each
outstanding FX Contract (the "FX Reserve") from the foreign exchange
sublimit, which is a maximum of $5,000,000 (the "FX Sublimit"). Bank may
terminate the FX Contracts if an Event of Default occurs. All FX Contracts
shall be subject to Bank's then standard terms and conditions.
5. Section 2.3(a) is hereby amended in its entirety to read as follows:
(a) Interest Rates. Except as set forth in Section 2.3(b), the
--------------
Advances shall bear interest, on the outstanding daily balance thereof, at
a rate equal to the Prime Rate.
6. Section 4.1 is amended to read as follows:
4.1 Springing Lien. Borrower grants Bank a continuing security
--------------
interest in all currently existing and hereafter acquired or arising
Collateral in order to secure prompt repayment of all Obligations and in
order to secure prompt performance by Borrower of its covenants and duties
under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in
the Collateral. Borrower shall from time to time execute and deliver to
Bank, at the request of Bank, all financing statements and other documents
that Bank may reasonably request, in form satisfactory to Bank, to perfect
and continue perfected Bank's security interest in the Collateral.
Notwithstanding any provision of this Section 4.1 to the contrary, the
grant of security interest hereunder shall be effective only until Borrower
settles litigation outstanding against Borrower to Bank's satisfaction.
Upon such settlement, the grant shall not be effective unless or until an
Event of Default occurs, at which time such grant shall automatically be
effective and Bank shall have the right to file with the California
Secretary of State or such other appropriate government office the
financing statement on Form UCC-1 and the Intellectual Property Security
Agreement delivered in connection with this Amendment. Bank shall otherwise
retain such financing statement and Intellectual Property Security
Agreement in its offices.
7. Section 6.3 is hereby amended to read as follows:
6.3. Financial Statements, Reports, Certificates. Borrower shall
-------------------------------------------
deliver to Bank: (a) within five (5) days of filing, copies of all
financial statements and reports sent or made available generally by
Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission; (b) promptly upon receipt of notice thereof, a report
of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (c) such
budgets, sales projections, operating plans or other financial information
as Bank may reasonably request from time to time.
Within fifteen (15) days after the last day of each month in which the
outstanding Credit Extensions exceed $5,000,000 (and at least seven days
prior to requesting Credit Extensions that would cause the outstanding
Credit Extensions to exceed $5,000,000), Borrower shall deliver to Bank a
Borrowing Base Certificate signed by a Responsible Officer in substantially
the form of Exhibit C hereto, together with aged listings of accounts
---------
receivable and accounts payable.
When there are outstanding Credit Extensions, Borrower shall deliver
to Bank a Compliance
3
<PAGE>
Certificate signed by a Responsible Officer in substantially the form of
Exhibit D within fifty (50) days after the end of each of the first three
---------
fiscal quarters of each fiscal year and within one-hundred twenty (120)
days after the end of each fiscal year. When there are no outstanding
Credit Extensions, Borrower shall deliver to Bank a Compliance Certificate
signed by a Responsible Officer in substantially the form of Exhibit D as a
---------
condition to requesting any Credit Extensions.
Bank shall have a right to audit the Collateral at any time that
outstanding Credit Extensions exceed $5,000,000, provided such audit shall
occur not more than annually as long as an Event of Default has not
occurred and is continuing.
8. Sections 6.8 through 6.10 are hereby amended in their entirety to read
as follows:
6.8 Quick Ratio. Borrower shall maintain, as of the last day of each
-----------
fiscal quarter, a ratio of Quick Assets to Current Liabilities, of not less
than 1.25 to 1.00. In calculating compliance with this Section and Section
6.9, all indirect borrowings not already accounted for on Borrower's
balance sheet shall be deemed a liability. All indirect borrowings already
accounted for on Borrower's balance sheet shall not be deemed a liability.
6.9 Total Liabilities-Tangible Net Worth. Borrower shall maintain,
------------------------------------
as of the last day of each fiscal quarter, a ratio of Total Liabilities to
Tangible Net Worth of not more than 1.0 to 1.0.
6.10 Profitability. Borrower shall have a net income, less any
-------------
capitalized software development costs not already expensed, after taxes,
of at least One Dollar ($1.00) for each fiscal quarter.
9. Section 6.11 is hereby deleted from the Agreement in its entirety.
10. The Borrowing Base Certificate to be delivered after the date of this
Amendment shall be in substantially the form of Exhibit C hereto.
---------
11. The Compliance Certificate to be delivered after the date of this
Amendment shall be in substantially the form of Exhibit D hereto.
---------
12. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
13. Borrower represents and warrants that the representations and
warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
14. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
15. As a condition to the effectiveness of this Amendment, Bank shall have
received, in form and substance satisfactory to Bank, the following:
(a) this Amendment, duly executed by Borrower;
(b) a non-refundable loan fee of Fifteen Thousand Dollars ($15,000),
plus all Bank Expenses incurred through the date of this Amendment;
(c) Corporate Resolutions to Borrow; and
(d) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment
as of the first date above written.
NVIDIA CORPORATION
By:____________________________________
Title:_________________________________
IMPERIAL BANK
By:____________________________________
Title:_________________________________
5
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., Pacific Time
TO: EMERGING GROWTH INDUSTRIES DATE: _______________________
FAX#: (650) 233-3020 TIME: _______________________
- --------------------------------------------------------------------------------
FROM: NVIDIA Corporation
-------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:___________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:___________________________________________________________
PHONE NUMBER:___________________________________________________________________
FROM ACCOUNT # ________________ ACCOUNT #___________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $___________________________________________
PRINCIPAL PAYMENT (ONLY) $___________________________________________
INTEREST PAYMENT (ONLY) $___________________________________________
PRINCIPAL AND INTEREST (PAYMENT) $___________________________________________
OTHER INSTRUCTIONS:_____________________________________________________________
________________________________________________________________________________
All representations and warranties of Borrower stated in the Loan Agreement
are true, correct and complete in all material respects as of the date of the
telephone request for and Advance confirmed by this Payment / Advance Form;
provided, however, that those representations and warranties expressly referring
to another date shall be true, correct and complete in all material respects as
of such date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
___________________________________ _______________________________________
Authorized Requester Phone #
Authorized Requester Phone #
___________________________________ _______________________________________
___________________________________________________
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
6
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Borrower: NVIDIA Corporation
Commitment Amount: $10,000,000 (Applies only when Credit Extensions exceed $5,000,000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of _______ $__________________
2. Additions (please explain on reverse) $__________________
3. TOTAL ACCOUNTS RECEIVABLE $__________________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $__________________
5. Balance of 20% over 90 day accounts $__________________
6. Concentration Limits $__________________
7. Foreign Accounts $__________________
8. Governmental Accounts $__________________
9. Contra Accounts $__________________
10. Demo Accounts $__________________
11. Intercompany/Employee Accounts $__________________
12. Other (please explain on reverse) $__________________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $__________________
14. Eligible Accounts (#3 minus #13) $__________________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $__________________
BALANCES
16. Maximum Loan Amount $10,000,000
17. Total Funds Available [Lesser of #15 or #16] $__________________
18. Present balance owing on Line of Credit $__________________
19. Outstanding under Sublimits ( ) $__________________
20. RESERVE POSITION (#17 minus #18 and #19) $__________________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Imperial Bank.
NVIDIA CORPORATION
By: ___________________________________
Authorized Signer
7
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: IMPERIAL BANK
FROM: NVIDIA CORPORATION
The undersigned authorized officer of NVIDIA Corporation hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending ______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under "Complies" column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ ------------------------ --------
<S> <C> <C>
10Q, 10K Within 5 days of filing Yes No
Compliance Certificate Quarterly within 50 days Yes No
When Credit Extensions * $5,000,000
-----------------------------------
A/R & A/P Agings Monthly within 20 days Yes No
Borrowing Base Certificate Monthly within 20 days Yes No
Audits Annual Yes No
</TABLE>
If Credit Extensions are less than $5,000,000, A/R, A/P and BBC and any
other required collateral reporting will not be required; provided that
A/R, A/P, and BBC and all other required collateral reporting are provided
one week prior to borrowing.
<TABLE>
<CAPTION>
Financial Covenant Required Actual Complies
------------------ --------- ------ -------
<S> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.25:1.00 ____:1.00 Yes No
Maximum Total Liabilities-TNW 1.00:1.00 ____:1.00 Yes No
Profitability $1.00 $________ Yes No
</TABLE>
<TABLE>
<S> <C>
Comments Regarding Exceptions: See Attached. --------------------------------------------------
BANK USE ONLY
Very truly yours,
Received by:_______________________________
______________________________________________ Authorized Signer
Signature
Date:______________________________________
______________________________________________
Title Verified:__________________________________
Authorized Signer
Date:______________________________________
Compliance Status: Yes No
--------------------------------------------------
</TABLE>
* Greater than
8
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
Borrower: NVIDIA CORPORATION
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of NVIDIA
Corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the state of its
incorporation.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation duly called and held, at which a quorum was present and voting, (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
I FURTHER CERTIFY that attached hereto are true and correct copies of
the Memorandum and Articles, as amended, of the Corporation, each of which is in
full force and effect as of the date hereof.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
- ---------------------- ------------------------ ----------------------
______________________ ________________________ ______________________
______________________ ________________________ ______________________
______________________ ________________________ ______________________
______________________ ________________________ ______________________
______________________ ________________________ ______________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Imperial Bank ("Bank"),
on such terms as may be agreed upon between the officers, employees, or agents
and Bank, such sum or sums of money as in their judgment should be borrowed,
without limitation, including such sums as are specified in that certain
Amendment to Loan and Security Agreement dated as of July 30, 1999 (the
"Amendment").
Execute Amendment. To execute and deliver to Bank the Amendment, and
also to execute and deliver to Bank one or more renewals, extensions,
modifications, consolidations, or substitutions therefor.
Grant Security. To grant a security interest to Bank in the Collateral
described in the Amendment, which security interest shall secure all of the
Corporation's Obligations, as described in the Amendment.
Negotiate Items. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be
1
<PAGE>
credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and costs, and to execute and deliver such other documents and agreements
as they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on July 30, 1999 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X______________________________________
________________________________________________________________________________
2
<PAGE>
IMPERIAL BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(Revolver)
Name(s): NVIDIA CORPORATION Date: July 30, 1999
$ credited to deposit account No. ________ when Advances are
requested or by wire transfer or cashiers check
Amounts paid to others on your behalf:
$15,000.00 to Imperial Bank for Loan Fee
$ to Bank counsel fees and expenses
$ TOTAL (AMOUNT FINANCED)
Upon consummation of this transaction, this document will
also serve as the authorization for Imperial Bank to disburse the loan proceeds
as stated above.
__________________________________ _________________________________
Signature Signature
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF AUGUST 1, 1999 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED AUGUST 1, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS .
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> MAY-03-1999
<PERIOD-END> AUG-01-1999
<CASH> 46,757
<SECURITIES> 0
<RECEIVABLES> 53,517
<ALLOWANCES> 3,338
<INVENTORY> 8,441
<CURRENT-ASSETS> 108,123
<PP&E> 33,016
<DEPRECIATION> 10,274
<TOTAL-ASSETS> 134,403
<CURRENT-LIABILITIES> 44,997
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 82,435
<TOTAL-LIABILITY-AND-EQUITY> 134,403
<SALES> 78,017
<TOTAL-REVENUES> 78,017
<CGS> 49,625
<TOTAL-COSTS> 49,625
<OTHER-EXPENSES> 18,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> 9,832
<INCOME-TAX> 3,146
<INCOME-CONTINUING> 6,686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,686
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.19
</TABLE>
