<PAGE>
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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 October 29, 2000
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
December 1, 2000: 67,889,581
================================================================================
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NVIDIA CORPORATION
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of October 29, 2000 and January 30, 2000....... 3
Condensed Consolidated Statements of Income for the three months and nine months ended
October 29, 2000 and October 31, 1999................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended October 29,
2000 and October 31, 1999............................................................... 5
Notes to Condensed Consolidated Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 28
Item 6. Exhibits and Reports on Form 8-K.......................................................... 28
Signature........................................................................................... 30
</TABLE>
2
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PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
NVIDIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 29, January 30,
2000 2000
----------- -----------
(In thousands)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $694,883 $ 61,560
Accounts receivable, less allowances of $7,309 at October 29, 2000
and $6,443 at January 30, 2000........................................... 104,352 67,224
Inventory................................................................. 93,192 37,631
Prepaid expenses and other current assets................................. 33,313 6,760
-------- --------
Total current assets.................................................. 925,740 173,175
Property and equipment, net................................................ 37,425 25,886
Deposits and other assets.................................................. 20,181 3,189
-------- --------
$983,346 $202,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 86,716 $ 64,910
Accrued liabilities....................................................... 33,828 9,529
Current portion of capital lease obligations.............................. 685 1,786
-------- --------
Total current liabilities............................................. 121,229 76,225
Capital lease obligations, less current portion............................ 644 962
Deferred revenue........................................................... 200,000 --
Long-term debt............................................................. 300,000 500
Stockholders' equity:
Common stock.............................................................. 68 62
Additional paid-in capital................................................ 263,857 95,933
Deferred compensation..................................................... (15) (118)
Retained earnings......................................................... 97,563 28,686
-------- --------
Total stockholders' equity............................................ 361,473 124,563
-------- --------
$983,346 $202,250
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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NVIDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Revenues..................................................... $198,165 $ 97,015 $517,046 $246,050
Cost of revenues............................................. 124,643 60,195 324,249 155,766
-------- -------- -------- --------
Gross profit................................................. 73,522 36,820 192,797 90,284
-------- -------- -------- --------
Operating expenses:
Research and development.................................... 22,023 12,420 59,994 32,018
Sales, general and administrative........................... 14,852 9,293 41,569 24,693
-------- -------- -------- --------
Total operating expenses................................ 36,875 21,713 101,563 56,711
-------- -------- -------- --------
Operating income............................................. 36,647 15,107 91,234 33,573
Interest and other income, net............................... 4,630 430 10,056 1,141
-------- -------- -------- --------
Income before income tax expense............................. 41,277 15,537 101,290 34,714
Income tax expense........................................... 13,209 4,973 32,413 11,203
-------- -------- -------- --------
Net income................................................... $ 28,068 $ 10,564 $ 68,877 $ 23,511
======== ======== ======== ========
Basic net income per share................................... $ 0.43 $ 0.18 $ 1.07 $ 0.40
======== ======== ======== ========
Diluted net income per share................................. $ 0.35 $ 0.15 $ 0.87 $ 0.33
======== ======== ======== ========
Shares used in basic per share computation................... 66,003 60,030 64,660 59,090
Shares used in diluted per share computation................. 80,435 71,863 79,234 71,226
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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NVIDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
October 29, October 31,
2000 1999
------------ ------------
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 68,877 $ 23,511
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 10,721 6,143
Amortization of deferred compensation............................................ 103 578
Common stock issued in exchange for assets and services.......................... 1,382 9
Tax benefit from employee stock plans............................................ 53,424 1,857
Changes in operating assets and liabilities:
Accounts receivable............................................................. (37,128) (43,238)
Inventory....................................................................... (55,561) 16,889
Prepaid expenses and other current assets....................................... (26,553) (2,610)
Deposit and other assets........................................................ (8,496) (2,797)
Accounts payable................................................................ 21,306 8,047
Accrued liabilities............................................................. 24,299 2,179
-------- --------
Net cash provided by operating activities.......................................... 52,374 10,568
-------- --------
Cash flows used in investing activities:
Purchase of property and equipment................................................ (21,594) (9,949)
-------- --------
Cash flows from financing activities:
Payments under line of credit..................................................... -- (5,000)
Convertible notes - net of issuance costs......................................... 290,838 --
Common stock issued under stock plans............................................. 16,513 4,949
Advance in connection with Microsoft agreement.................................... 200,000 --
Sale of common stock under public offering, net of issuance costs................. 96,611 5,740
Payments under capital leases..................................................... (1,419) (1,365)
-------- --------
Net cash provided by financing activities.......................................... 602,543 4,324
-------- --------
Change in cash and cash equivalents................................................ 633,323 4,943
Cash and cash equivalents at beginning of period................................... 61,560 50,257
-------- --------
Cash and cash equivalents at end of period......................................... $694,883 $ 55,200
======== ========
Cash paid for interest............................................................. $ 121 $ 186
======== ========
Cash paid for taxes................................................................ $ 233 $ 12,665
======== ========
Noncash financing and investing activities:
Assets recorded under capital lease............................................... $ -- $ 1,168
======== ========
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 consolidated financial statements.
5
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NVIDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands)
1. Basis of presentation
The accompanying condensed consolidated unaudited financial statements of
NVIDIA Corporation (the Company or NVIDIA) 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 notes required by
generally accepted accounting principles for annual financial statements. In the
opinion of management, all adjustments, consisting 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 30, 2000.
2. Net income per share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using the as-if-converted
method for convertible debt and convertible preferred stock and the treasury
stock method for options and warrants. Equivalent shares of 605,000 for
convertible debt outstanding during the quarter were not included in the
computation of diluted earnings per share because the effect would be anti-
dilutive.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- --------------------------
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic net income per share-weighted-
average shares............................................. 66,003 60,030 64,660 59,090
Effect of dilutive securities:
Stock options outstanding................................... 14,432 11,367 14,574 11,624
Warrants.................................................... -- -- -- 188
Common stock issuable in connection with long-term
software license............................................ -- 466 -- 324
------ ------ ------ ------
Denominator for diluted net income per share................. 80,435 71,863 79,234 71,226
====== ====== ====== ======
</TABLE>
3. Comprehensive income
The Company had no other components of comprehensive income other than the
reported amounts of net income.
4. Inventory
<TABLE>
<CAPTION>
October 29, January 30,
2000 2000
------- -------
<S> <C> <C>
Work in-process......................................... $14,810 $ 6,446
Finished goods.......................................... 78,382 31,185
------- -------
Total inventory....................................... $93,192 $37,631
======= =======
</TABLE>
At October 29, 2000, the Company had noncancelable inventory purchase
commitments totaling $139.2 million.
6
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands)
5. Segment Information
The Company operates in a single industry segment: the design, development and
marketing of 3D graphics processors for the entire desktop personal computer
(PC) market, from professional workstations to low-cost PCs. 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 Nine Months Ended
---------------------------- ----------------------------
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
United States........................................... $ 13,491 $23,451 $ 51,638 $ 86,821
Asia Pacific............................................ 156,894 50,264 388,215 123,170
Europe.................................................. 27,780 23,300 77,193 36,059
-------- ------- -------- --------
Total revenues......................................... $198,165 $97,015 $517,046 $246,050
======== ======= ======== ========
</TABLE>
Revenue to significant customers, those representing approximately 10% or more
of total revenue and accounts receivable for the respective periods, is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
EDOM................................................... 24% 16% 23% 16%
Asustek................................................ 11% 12% 10% 10%
Mitac.................................................. 11% 1% 6% --
Celestica.............................................. 10% 3% 10% 1%
Diamond.............................................. -- 15% -- 21%
Creative............................................... 4% 10% 7% 15%
Guillemot.............................................. 8% 11% 5% 6%
</TABLE>
<TABLE>
<CAPTION>
As of
---------------------------
October 29, January 30,
2000 2000
---- ----
<S> <C> <C>
Accounts receivable
EDOM................................................... 14% 12%
Asustek................................................ 10% 6%
Mitac.................................................. 8% 1%
Celestica.............................................. 14% 13%
Diamond................................................ -- 4%
Creative............................................... 6% --
Guillemot.............................................. 13% 8%
</TABLE>
7
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In thousands)
6. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" or SFAS 133. SFAS 133, as amended by SFAS
No. 137 and No. 138, establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Management does not expect the
adoption of SFAS 133 to have a material impact on the Company's results of
operations, financial position or cash flows. The Company is required to adopt
SFAS 133, as amended, in fiscal 2002.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" or
SAB 101. SAB 101 summarizes certain of the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company is required to adopt SAB 101 by the fourth quarter of the fiscal year
2001. The SEC recently issued implementation guidance in the form of
"Frequently asked Questions and Answers." The Company's preliminary conclusion
is that the implementation of SAB 101 will not have a material impact on its
financial position, results of operations or cash flows.
In March 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-02,
"Accounting for Web Site Development Costs." EITF No. 00-2 establishes
accounting and reporting standards for capitalization of web site development
costs in accordance with Statement of Position No. 98-1. EITF No. 00-2 is
effective for web site development costs incurred for fiscal quarters beginning
after June 30, 2000. Management believes that EITF 00-02 will not have a
material impact on the Company's financial position, results of operations or
cash flows.
The "EITF" issued EITF No. 00-10, "Accounting for Shipping and Handling Fees
and Costs." EITF 00-10 establishes accounting and reporting standards for the
classification of shipping and handling costs, as well as costs incurred related
to shipping and handling. EITF 00-10 is effective for the fourth quarter of
fiscal years beginning after December 15, 1999. Adoption of this EITF is not
expected to have a material impact on the results of operations, financial
position or cash flows.
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 487,804 shares of the
Company's common stock valued at $5.0 million. The second installment was
settled in cash on March 31, 2000.
8
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8. Microsoft Agreement
On March 5, 2000, the Company entered into an agreement with Microsoft
pursuant to which the Company agreed to develop and sell graphics chips and to
license certain technology to Microsoft and its licensees for use in the Xbox
video game console under development by Microsoft. In April 2000, Microsoft paid
the Company $200 million as an advance against graphics chip purchases.
Microsoft may terminate the agreement at any time. If termination occurs prior
to offset in full of the advance payments, the Company would be required to
return to Microsoft up to $100 million of the prepayment and to convert the
remainder into preferred stock of the Company at a 30% premium to the 30-day
average trading price of its common stock preceding Microsoft's termination of
the agreement. In addition, in the event that an individual or corporation makes
an offer to purchase shares equal to or greater than thirty percent (30%) of the
outstanding shares of the Company's common stock, Microsoft has first and last
rights of refusal to purchase the stock. The graphics chip contemplated by the
agreement is highly complex, and the development and release of the Microsoft
Xbox video game console and its commercial success are dependent upon a number
of factors, many of which the Company cannot control. The Company cannot
guarantee that it will be successful in developing the graphics chip for use by
Microsoft or that the product will be developed or released, or if released,
will be commercially successful.
9. Stockholders' Equity and Stock Split
In May 2000, the Company's Board of Directors approved a two-for-one stock
split of the Company's common stock for stockholders of record on June 12, 2000,
effected in the form of a 100% stock dividend. The transfer agent distributed
the shares resulting from the split on June 26, 2000. All share and per-share
numbers contained herein reflect this stock split.
In October 2000, the Company sold an additional 1,400,000 shares of its common
stock to the public for net proceeds of approximately $96.6 million, after
deducting underwriting discounts, commissions and expenses of the offering.
10. Debt
In October 2000, the Company sold $300 million of Convertible Subordinated
Notes (the Notes) due October 15, 2007. Proceeds net of issuance costs were
$290.8 million. Issuance costs are being amortized to interest expense on a
straight-line basis over the term of the notes. Interest on the Convertible
Subordinated Notes accrues at the rate of four and three-quarters percent per
annum and is payable semiannually in arrears on April 15 and October 15 of each
year, commencing April 15, 2001. The Convertible Subordinated Notes are
redeemable at the Company's option on and after October 20, 2003. The Notes are
convertible at the option of the holder at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, into
shares of common stock at a conversion price of $92.71 per share, subject to
adjustment in certain circumstances. In connection with its debt financing
arrangement, the Company incurs certain direct, incremental costs from third
parties who perform services that assist in the closing of the related
transactions. These costs are included in deposits and other assets on the
balance sheet and amortized using the straight line method over the term of the
financing.
11. Legal Proceedings
On September 21, 1998, 3Dfx Interactive, Inc. (3Dfx) filed a patent
infringement lawsuit against the Company in the United States District Court for
the Northern District of California alleging infringement of a 3Dfx patent. On
March 2, 1999, 3Dfx added a second patent to the suit and on May 24, 1999, 3Dfx
added a third patent to the suit. The amended complaint alleges that the
Company's RIVA TNT, RIVA TNT2 and RIVA TNT2 Ultra products infringe the patents
in suit and seeks unspecified compensatory and trebled damages and attorney's
fees. The Company's current generation of products is not identified as
infringing any of the patents in suit. The Company has filed an answer and
counter-claims asserting that the patents in suit are invalid and not infringed.
These assertions are supported by The Company's investigations to
9
<PAGE>
date and an opinion from the Company's patent counsel in this suit. The District
Court has issued its claim construction ruling and the trial is scheduled to
start on May 22, 2001.
On August 28, 2000, the Company filed a patent infringement lawsuit against
3Dfx in the United States District Court for the Northern District of
California. The lawsuit alleges that 3Dfx's graphics chips and card products,
which are used to accelerate 3D graphics on personal computers, infringe five of
the Company's patents and seeks an injunction restraining 3Dfx from
manufacturing, selling or importing infringing graphics chips and card
products, including its Voodoo3, Voodoo4, Voodoo5 and VSA-100 family of
products, as well as monetary damages.
On February 22, 2000, Graphiques Matrox, Inc. and Systemes Electroniques
Matrox Ltd. (collectively "Matrox") filed suit against the Company in the
Superior Court, Judicial District of Montreal, Province of Quebec, Canada. The
suit alleges that the Company improperly solicited and recruited Matrox's
employees and encouraged Matrox's employees to breach their Matrox
confidentiality and/or non-competition agreements. The suit by Matrox seeks,
among other things, certain injunctive relief. The Company believes that the
claims asserted by Matrox are without merit and the Company intends to
vigorously defend this suit. The trial of this matter is scheduled for April 4,
2001.
On May 19, 2000, the Company filed suit against Matrox in Santa Clara County
Superior Court alleging that Matrox's efforts to prevent its current and former
employees from pursuing employment opportunities with the Company constitute
interference with prospective economic advantage, interference with contract and
unfair competition. The Company's suit seeks, among other things, unspecified
monetary damages, a declaration that Matrox's confidentiality and/or non-
competition agreements are unenforceable under California law and a declaration
that Matrox's use of those agreements and other tactics constitutes unfair
competition. On May 26, 2000, the case was transferred to the San Jose Division
of the United States District Court for the Northern District of California. On
June 14, 2000, Matrox filed an answer denying the Company's claims and a
counterclaim alleging trade secret misappropriation, intentional interference
with contractual relations and unfair competition. Matrox's California suit
seeks unspecified monetary damages and injunctive relief. The Company filed an
answer to this counterclaim on July 7, 2000, denying all of Matrox's claims. As
with the Montreal action, the Company believes that the claims asserted by
Matrox are without merit and the Company intends to vigorously defend this suit.
12. Double Data Rate (DDR) Non-High Speed Memory
In accordance with EITF 99-19: Reporting Revenue Gross as a Principle
versusNet as an Agent, in the third quarter of fiscal 2001, the Company began
accounting for revenue and the cost of revenue for its non-high speed DDR and
single data rate (SDR) memory on a net basis as a component of total revenues.
The Company is acting in the capacity of an agent for this product. In
accordance with EITF 99-19, prior period amounts for DDR and SDR were restated
to comply with this classification.
10
<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 made 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 "Certain Business
Risks" section, among other things, should be considered in evaluating our
prospects and future financial performance.
Overview
We design, develop and market a "top-to-bottom" family of award-winning 3D
graphics processors, graphics processing units or GPUs and related software that
set the standard for performance, quality and features for a broad range of
desktop PCs, from professional workstations to low-cost PCs. Our 3D graphics
processors are used in a wide variety of applications, including games, business
productivity, the Internet and industrial design. Our graphics processors were
the first to incorporate a 128-bit multi-texturing graphics architecture
designed to deliver to users of our products a highly interactive 3D experience
with compelling visual quality, realistic imagery and motion, stunning effects,
and complex object and scene interaction at real-time frame rates. The NVIDIA
TNT2, TNT2 M64 and Vanta graphics processors deliver high performance 3D and 2D
graphics at affordable prices, making them the graphics hardware of choice for a
wide range of applications for both consumer and commercial use. Our graphics
processors are designed to be architecturally compatible backward and forward,
giving our OEM customers and end users a low cost of ownership. We are
recognized for developing the world's first GPU, which incorporates independent
hardware transform and lighting processing units, along with a complete
rendering pipeline, into a single-chip architecture. Our GPUs, the GeForce2
Ultra, the GeForce2 GTS, the GeForce2 MX, the GeForce 256, NVIDIA Quadro2 Pro,
Quadro2 MXR and Quadro, process hundreds of billions of operations per second
and increase the PC's ability to render high-definition 3D scenes in real-time.
The GeForce 256, Quadro and GeForce2 family of GPUs provide the capability for
content developers to build a new generation of entertainment, e-commerce, e-
business and education applications. We also developed an integrated core
logic/graphics chipset called Aladdin TNT2 through a partnership with Acer
Laboratories, Inc. or ALi, one of the leading suppliers of core logic chipsets
for the PC. The Aladdin TNT2 chipset brings NVIDIA-class graphics performance
and quality to the value PC segment.
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. In accordance with EITF 99-19: Recording Revenue Gross as
a Principle versus Net as an Agent, in the third quarter of fiscal 2001, we
began accounting for revenue and the cost of revenue for our non-high speed DDR
and SDR memory on a net basis as a component of total revenues. We are acting in
the capacity of an agent for this product. 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 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 and
motherboard manufacturers, primarily Asustek Computer Inc., Creative Technology
Ltd., ELSA AG and Guillemot Corporation, and contract electronics manufacturers
or CEMs, including Celestica Hong Kong Ltd., Mitac International Corporation,
Micro-Star International Co., Ltd., or MSI, SCI Systems, Inc., and VisionTek,
Inc. These manufacturers incorporate our processors in the boards they sell to
PC OEMs, retail outlets and systems integrators. The average selling prices for
our products, as well as our customers' products, vary by distribution channel.
Sales to Edom Technology Co., Ltd., an Asian distributor, accounted for 24%,
sales to Mitac and Asustek accounted for 11% and sales to Celestica accounted
for 10% of our total revenue for the third quarter of fiscal
11
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2001. For the first nine months of fiscal 2001, sales to Edom accounted for 23%,
and sales to Celestica and Asustek accounted for 10% of our total revenue. For
the third quarter of fiscal 2000, sales to Edom accounted for 16%, sales to
Diamond Multimedia Systems, Inc. accounted for 15%, sales to Asustek accounted
for 12%, sales to Guillemot accounted for 11% and sales to Creative accounted
for 10% of our total revenue. For the first nine months of fiscal 2000, sales to
Diamond Multimedia Systems, Inc. accounted for 21%, sales to Edom accounted for
16%, and sales to Creative accounted for 15% of our total revenue. Diamond is no
longer one of our significant customers following its acquisition by S3
Incorporated in October 1999. The number of potential customers for our products
is limited, and we expect sales to be concentrated to a few major customers for
the foreseeable future.
As markets for our 3D graphics processors develop and competition increases,
we anticipate that product life cycles in the high end will remain short and
average selling prices will continue to decline. In particular, average selling
prices 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 for the high end, typically
based on spring and fall design cycles. In order to maintain average selling
prices and gross margins, our existing and new products must achieve competitive
performance levels to be designed into new system configurations and must be
produced at low costs, in sufficient volumes and on a timely basis, especially
with respect to our new products.
We currently utilize Taiwan Semiconductor Manufacturing Company, or TSMC, as
our primary manufacturer, 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 a new manufacturer. The
level of finished goods inventory we maintain may fluctuate and therefore a
manufacturing disruption experienced by these manufacturers would impact the
production of our products, which could 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.
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.
We may build memory and component inventories during periods of anticipated
growth and in connection with selling workstation boards directly to major OEMs.
We could be subject to excess or obsolete inventories and be required to take
corresponding write-downs if growth slows or if we incorrectly forecast product
demand. A reduction in demand could negatively impact our gross margins and
financial results. Product returns or delays or difficulties in collecting
accounts receivable could result in significant charges against income, which
could harm our business.
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Results of Operations
The following table sets forth, for the periods indicated, certain items in
our statements of operations expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues...................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 62.9 62.0 62.7 63.3
----- ----- ----- -----
Gross profit.................................. 37.1 38.0 37.3 36.7
Operating expenses:
Research and development..................... 11.1 12.8 11.6 13.0
Sales, general and administrative............ 7.5 9.6 8.0 10.0
----- ----- ----- -----
Total operating expenses.................. 18.6 22.4 19.6 23.0
----- ----- ----- -----
Operating income.............................. 18.5 15.6 17.7 13.7
Interest and other income, net................ 2.3 0.4 1.9 0.5
----- ----- ----- -----
Income before income tax expense.............. 20.8 16.0 19.6 14.2
Income tax expense............................ 6.7 5.1 6.3 4.6
----- ----- ----- -----
Net income.................................... 14.1% 10.9 13.3% 9.6%
===== ===== ===== =====
</TABLE>
Three Months and Nine Months Ended October 29, 2000 and October 31, 1999
Revenue
Revenue increased 104% to $198.2 million in the third quarter ended October
29, 2000 from $97.0 million in the third quarter ended October 31, 1999.
Revenues of $517.0 million for the first nine months of fiscal 2001 grew 110%
over the first nine months of fiscal 2000. The growth was primarily the result
of increased sales of our RIVA TNT2 and GeForce families of graphics processors
related to commercial desktop wins and the strong demand for our new products,
which have higher unit average selling prices. We began bundling double data
rate memories with GeForce products sold in the third quarter of fiscal 2000.
Revenue derived from the bundling of double data rate memories with a portion of
our GeForce products totaled $15.0 million in the third quarter and $44.3
million in the first nine months of fiscal 2001. Revenue from sales outside of
the United States accounted for 93% of total revenue for the third quarter and
90% of total revenue for the first nine months of fiscal 2001. Revenue from
sales outside of the U.S. represented 76% of total revenue in the third quarter
and 65% in the first nine months of fiscal 2000. Our international revenue
increased 151% to $184.7 million for the third quarter of fiscal 2001 from $73.6
million a year ago. This increase in revenue from sales outside of the United
States is primarily attributable to (i) expanded use of contract equipment
manufacturers or CEMs and add-in board manufacturers located outside of the
United States, and (ii) increased demand for our products in the Asia Pacific
and European regions. Revenue by geographical region is allocated to
individual countries based on the location to which the products are initially
shipped. The portion of revenue derived from foreign CEMs and add-in board
manufacturers attributable to end customers in the U.S. is not separately
disclosed. Although we achieved substantial growth in product revenue from the
first nine months of fiscal 2000 to the same period in fiscal 2001, we do not
expect to sustain this rate of growth in future periods. In addition, we
expect that the average selling prices of our products will decline over the
lives of the products. The declines in average selling prices of 3D graphics
processors generally may also accelerate as the market develops and
competition increases.
Gross Profit
Gross profit consists of total revenues net of allowances less cost of
revenues. Cost of revenues 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. Our gross profit margin can vary in any
period depending upon the mix of types of graphics processors sold. Our gross
profit margin percentage decreased slightly from 38.0% in the third quarter of
fiscal 2000 to 37.1% the same period of fiscal 2001, and increased slightly from
36.7% for the first nine months of fiscal 2000 to 37.3% for the same period of
fiscal 2001. Absolute dollar gross profit margin increased for the third
quarter and first nine months of fiscal 2001 compared to the same periods in
fiscal 2000 due to an increase in unit shipments. We began the bundling of
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double data rate memories with our GeForce processors in the second half of
fiscal 2000. The inclusion of the double data rate high speed memories has
reduced the gross margin percentage but has no incremental impact on absolute
margin dollars, as they are sold at cost. We expect to continue bundling double
data rate memories with some of our high-performance products for at least the
next six months. Although we achieved growth in gross profit and gross profit
margin from the first nine months of fiscal 2000 to the same period of fiscal
2001, 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. Research and development
expenses increased by 77% from the third quarter of fiscal 2000 to the same
period of fiscal 2001, and 87% from the first nine months of fiscal 2000 to the
first nine months of fiscal 2001, primarily due to additional personnel and
related engineering costs to support development of our next generation
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 foreseeable future due to
increased complexity and the number of products under development. Research and
development expenses are likely to fluctuate from time to time to the extent we
make periodic incremental investments in research and development, and these
investments may be independent of our level of revenues.
Sales, General and Administrative. Sales, general and administrative expenses
consist primarily of salaries, commissions and bonuses, promotional and
advertising expenses, travel and entertainment expenses and legal and accounting
expenses. Sales, general and administrative expenses increased 60% from the
third quarter of fiscal 2000 compared to the same period of fiscal 2001, and 68%
from the first nine months of fiscal 2000 compared to the first nine months of
fiscal 2001, primarily due to costs associated with additional personnel,
commissions and bonuses on sales of the RIVA TNT2 and GeForce families of
graphics processors, and the increase in bad debt provision of $2.0 million in
the second quarter of fiscal 2001 related to one customer that filed for
bankruptcy. We expect sales and marketing expenses to increase slightly in
absolute dollars for the fourth quarter of fiscal 2001 and as we continue to
expand our operations, our sales, general and administrative expenses are likely
to increase in absolute dollars. However, we do not expect significant changes
in these expenses as a percentage of revenue in future periods.
Interest and Other Income, 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 and interest on our convertible debt.
Interest expense remained relatively flat in the third quarter of fiscal 2001 as
compared to fiscal 2000. Interest expense should increase in future periods due
to the issuance of $300 million of convertible debt in October 2000. Interest
and other income increased $4.2 million from the third quarter of fiscal 2000 to
the same period of fiscal 2001. The increase was due to higher average cash
balances as a result of a $200 million advance received from Microsoft in
connection with our agreement with Microsoft and the receipt of $387.4 million
from our combined convertible debt and common stock offerings which closed in
October of fiscal 2001.
Income Taxes
We had an effective tax rate of 32% in the first nine months of fiscal 2001
and fiscal 2000. We anticipate our income tax rates for fiscal 2001 will be
relatively constant, but the rate depends on the income tax attributable to
foreign operations and availability of research and experimentation credits.
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 $103,000
in the first nine months of fiscal
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2001 and $578,000 in the first nine months of fiscal 2000. We anticipate total
amortization of approximately $113,000 in fiscal 2001.
Liquidity and Capital Resources
As of October 29, 2000, we had $694.9 million in cash and cash equivalents, an
increase of $633.3 million from the end of fiscal 2000. 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
$139.2 million of noncancelable manufacturing commitments outstanding at October
29, 2000.
In July 1999, we entered into an amended loan and security agreement with a
bank, which included a $10.0 million revolving loan agreement. The agreement
expired on July 29, 2000.
Operating activities generated cash of $52.5 million during the first nine
months of fiscal 2001 and generated cash of $10.6 million during the first nine
months of fiscal 2000. The increase from the first nine months of fiscal 2000 to
same period of fiscal 2001 was due to a substantial increase in net income,
offset by changes in operating assets and liabilities. Income tax benefit
derived from the difference between the exercise price and the fair value of
acquired stock in association with employees' exercise of stock options totaled
$53.4 million for the first nine months of fiscal 2001 compared to $1.9 million
in the first nine months of fiscal 2000. Our accounts receivable are highly
concentrated. As of October 29, 2000, our four largest customers accounted for
approximately 46% of our accounts receivable. During the second quarter of
fiscal 2001, we recorded a bad debt provision of $2.0 million related to one
customer that filed for bankruptcy. Significant bad debt write-offs in the
future could harm our business.
To date, our investing activities have consisted primarily of purchases of
property and equipment. We incurred $21.7 million in capital expenditures in the
first nine months of fiscal 2001, including $10 million attributable to a
software license agreement with an electronic design automation supplier. This
compared to capital expenditures of $9.9 million in the first nine months of
fiscal 2000 for purchases of computer and emulation equipment to support
increased research and development activities and enterprise resource planning
system implementation. 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 approximately $30.0 to $40.0 million for
capital expenditures in fiscal 2001, primarily for software licenses, emulation
equipment, purchase of computer and engineering workstations, future phases of
enterprise resource planning system implementation and tenant improvements in
our new headquarters facility.
In April 2000, we entered into leases for our new headquarters complex in
Santa Clara, California. Our new complex will comprise four buildings,
representing approximately 500,000 total square feet. We expect the first phase
of two buildings consisting of approximately 250,000 square feet to be completed
in June 2001, the second phase of one building consisting of approximately
125,000 square feet to be completed in July 2001 and the last phase to be
completed in March 2002. The leases expire in 2012 and include two seven-year
renewals at our option. Future minimum lease payments under these operating
leases total approximately $240.0 million over the terms of the leases.
Financing activities provided cash of $602.5 million in the first nine months
of fiscal 2001, compared to $4.3 million in the first nine months of fiscal
2000. On March 5, 2000, we entered into an agreement with Microsoft in which we
agreed to develop and sell graphics chips and to license certain technology to
Microsoft and its licensees for use in a product under development by Microsoft.
In April 2000, Microsoft paid us $200.0 million as an advance against graphics
chip purchases. Microsoft may terminate the agreement at any time. If
termination occurs prior to offset in full of the advance payments, we would be
required to return to Microsoft up to $100.0 million of the prepayment and to
convert the remainder into shares of our preferred stock at a 30% premium to the
30-day average trading price of our common stock preceding Microsoft's
termination of the agreement.
15
<PAGE>
In October 2000, we sold 1,400,000 shares of our common stock and $300 million
of Convertible Subordinated Notes due October 15, 2007 in a public offering.
Proceeds from the offering were approximately $387.4 million after deducting
underwriting discounts, commissions and offering expenses. Issuance costs
related to are being amortized to interest expense on a straight-line basis
over the term of the notes. Interest on the Convertible Subordinated Notes
accrues at the rate of four and three-quarter percent per annum and is payable
semiannually in arrears on April 15 and October 15 of each year, commencing
April 15, 2001. The Convertible Subordinated Notes are redeemable at our
option on and after October 20, 2003. The Notes are convertible at the option
of the holder at any time prior to the close of business on the maturity date,
unless previously redeemed or repurchased, into shares of common stock at a
conversion price of $92.71 per share, subject to adjustment in certain
circumstances.
We believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating and capital requirements for
at least the next 12 months. However, we may need to raise additional equity or
debt financing within this time frame. Additional financing may not be available
on favorable terms or at all and may be dilutive to our then-current
stockholders. We also may require additional capital for other purposes not
presently contemplated. If we are unable to obtain sufficient capital, we could
be required to curtail capital equipment purchases or research and development
expenditures, which could harm our business.
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 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 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 and/or our customers' products;
. the successful development and volume production of next-generation products;
16
<PAGE>
. 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 customers' products;
. fluctuations in the availability of manufacturing capacity or manufacturing
yields;
. competitive pressures resulting in lower than expected average selling
prices;
. rates of product return in excess of that forecasted or expected due to
quality issues;
. the rescheduling or cancellation of customer orders;
. the loss of a key customer or the termination of a strategic relationship;
. seasonal fluctuations associated with the PC market;
. substantial disruption in our suppliers' operations, either as a result of a
natural disaster, equipment failure or other
cause;
. supply constraints for and changes in the cost of the other components
incorporated into our customers' products,
including memory devices;
. our ability to reduce the manufacturing costs of our products;
. legal and other costs related to defending intellectual property;
. bad debt write-offs;
. unexpected inventory write-downs; and
. introductions of enabling technologies to keep pace with faster generations
of processors and controllers.
Any one or more of the factors discussed above could prevent us from achieving
our expected future revenue or net income.
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 future performance.
In addition, the results of any quarterly period are not indicative of results
to be expected for a full fiscal year.
Our 3D graphics solution may not continue to be accepted by the PC market.
Our success will depend in part upon continued broad adoption of our 3D
graphics processors for high performance 3D graphics in PC applications. The
market for 3D graphics processors has been characterized by unpredictable and
sometimes rapid shifts in the popularity of products, often caused by the
publication of competitive industry benchmark results, changes in dynamic random
memory devices pricing and other changes in the total system cost of add-in
boards, as well as by severe price competition and by frequent new technology
and product introductions. Only a small
17
<PAGE>
number of products have achieved broad market acceptance and such market
acceptance, if achieved, is difficult to sustain due to intense competition.
Since we have no other product line, our business would suffer if for any reason
our current or future 3D graphics processors do not continue to achieve
widespread acceptance in the PC market. If we are unable to complete the timely
development of or successfully and cost-effectively manufacture and deliver
products that meet the requirements of the PC market, our business would be
harmed.
Our integrated graphics product may not be accepted by the PC market.
We expect that integrated graphics chipset products will become an increasing
part of the lower cost segment of the PC graphics market. We have only recently
introduced a 3D graphics processor targeted at this segment, as part of a joint
development effort with ALi. If this product is not competitive in this segment
and the integrated chipset segment continues to account for an increasing
percentage of the units sold in the PC market, our business may suffer.
We need to develop new products and to 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 introduce new products on a timely basis with such
performance characteristics in order to be included in new system
configurations. This requires that we do the following:
. anticipate the features and functionality that consumers will demand;
. incorporate those features and functionality into products that meet the
exacting design requirements of PC OEMs
and add-in board manufacturers or CEMs;
. price our products competitively; and
. introduce the products to the market within the limited window for PC OEMs
and add-in board manufacturers.
As a result, we believe that significant expenditures for research and
development will continue to be required in the future. The success of new
product introductions will depend on several factors, including the following:
. proper new product definition;
. timely completion and introduction of new product designs;
. the ability of Taiwan Semiconductor Manufacturing Co., or TSMC, our primary
manufacturer, and any additional third-party manufacturers to effectively
manufacture our new products in a timely manner;
. the quality of any new products;
. differentiation of new products from those of our competitors;
. market acceptance of our and our customers' products; and
. availability of adequate quantity and configurations of various types of
memory products.
Our strategy is to utilize the most advanced semiconductor process technology
appropriate for our products and available from commercial third-party
foundries. Use of advanced processes has in the past resulted in initial yield
problems. New products that we introduce may not incorporate the features and
functionality demanded by PC OEMs, add-in board manufacturers and consumers of
3D graphics. In addition, we may not successfully develop or introduce
18
<PAGE>
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.
Our failure to identify new product opportunities or to develop new products
could harm business.
As markets for our 3D graphics processors develop and competition increases,
we anticipate that product life cycles at the high end will remain short and
average selling prices will continue to decline. In particular, we expect
average selling prices and gross margins for our 3D graphics processors to
decline as each product matures and as unit volume increases. As a result, we
will need to introduce new products and enhancements to existing products to
maintain overall average selling prices and gross margins. In order for our 3D
graphics processors to achieve high volumes, leading PC OEMs and add-in board
manufacturers must select our 3D graphics processor for design into their
products and then successfully complete the designs of their products and sell
them. We may be unable to successfully identify new product opportunities or to
develop and bring to market in a timely fashion 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 products increases,
there is an increasing risk that we will experience problems with the
performance of products and that there will be delays in the development,
introduction or volume shipment of our products. We may experience difficulties
related to the production of current or future products or other factors may
delay the introduction or volume sale of new products we develop. 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
average selling prices, reduced margins, and reduced demand for 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.
We rely on third-party vendors to supply us tools for the development of our
new products and we may be unable to obtain the tools necessary to develop these
products.
In the design and development of new products and product enhancements, we
rely on third-party software development tools. While we currently are not
dependent on any one vendor for the supply of these tools, some or all of these
tools may not be readily available in the future. For example, we have
experienced delays in the introduction of products in the past as a result of
the inability of then available software development tools to fully simulate the
complex features and functionalities of our products. The design requirements
necessary to meet consumer demands for more features and greater functionality
from 3D graphics 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.
Our industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions that could result in substantial costs
to us.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights or positions, which has resulted in protracted
and expensive litigation. The 3D graphics market in particular has been
characterized recently by the aggressive pursuit of intellectual property
positions, and we expect our competitors to continue to pursue aggressive
intellectual property positions. In addition, from time to time we receive
notices alleging that we have infringed patents or other intellectual property
rights owned by third parties. We expect that, as the number of issued hardware
and software patents increases, and as competition in our markets intensifies,
the volume of intellectual property infringement claims will increase. If
infringement claims are made against us, we may seek licenses under the
claimant's patents or other intellectual property rights. However, licenses may
not be offered at all or on terms acceptable to us. The failure to obtain a
license from a third party for technology used by us could cause us to incur
substantial liabilities and to suspend the manufacture of products. Furthermore,
we may initiate claims or litigation against third parties for infringement of
our proprietary rights or to establish the validity of our proprietary rights.
We have agreed to indemnify certain customers for claims of infringement arising
out of sale of our products.
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Litigation by or against us or our customers concerning infringement would
likely result in significant expense to us and divert the efforts of our
technical and management personnel, whether or not the litigation results in a
favorable determination for us.
We are subject to a patent infringement lawsuit and could be subject to future
lawsuits that could divert our resources and result in the payment of
substantial damages.
On September 21, 1998, 3Dfx Interactive, Inc. filed a patent infringement suit
against us in the United States District Court for the Northern District of
California alleging infringement of a 3Dfx patent. On March 2, 1999, 3Dfx added
a second patent to the suit and on May 24, 1999, 3Dfx added a third patent to
the suit. The amended complaint alleges that our RIVA TNT, RIVA TNT2 and RIVA
TNT2 Ultra products infringe the patents in suit and seeks unspecified
compensatory and trebled damages and attorneys' fees. Our current generation of
products is not identified as infringing any of the patents in suit. We have
filed an answer and counter-claims asserting that the patents in suit are
invalid and not infringed. These assertions are supported by our investigations
to date and an opinion from our patent counsel in this suit. The District Court
has ruled on claims construction issues and this matter is set for trial on May
22, 2001. We have and will continue to defend vigorously this suit. The
litigation with 3Dfx has resulted, and we expect that the 3Dfx litigation will
continue to result, in significant legal expenses, whether or not the litigation
results in a favorable determination for us. In the event of an adverse result
in the 3Dfx suit, we might be required to do one or more of the following:
. pay substantial damages (including treble damages);
. permanently cease the manufacture and sale of any of the infringing products;
. expend significant resources to develop non-infringing products; or
. obtain a license from 3Dfx for infringing products.
On August 28, 2000, we filed a patent infringement lawsuit against 3Dfx in the
United States District Court for the Northern District of California. The
lawsuit alleges that 3Dfx's graphics chip and card products, which are used to
accelerate 3D graphics on personal computers, infringe five of our patents and
seeks an injunction restraining 3Dfx from manufacturing, selling or importing
infringing graphics chip and card products including its Voodoo 3, Voodoo 4,
Voodoo 5 and VSA-100 family of products, as well as monetary damages. The matter
is in its earliest stages, discovery has not yet begun and no trial date has
been set.
We have in the past been subject to patent infringement suits with SGI and S3
Incorporated, both of which were settled and resulted in cross-licenses and, in
the case of SGI, payments by us. In addition, we may be subject to patent
infringement suits brought by other parties in the future. For example, we
have been advised by Rambus Inc. that it believes our products infringe certain
patents owned by Rambus and requesting that we agree to certain licensing terms,
including royalty payments. We believe the Rambus patents are invalid, not
infringed and unenforceable. Although we currently are having discussions with
Rambus regarding potential business alternatives to Rambus' proposed licensing
terms, we cannot guarantee that we will be able to reach a satisfactory
agreement with Rambus. If we are unable to do so, Rambus may sue us for patent
infringement at any time.
We may be unable to adequately protect our intellectual property.
We rely primarily on a combination of patents, trademarks, copyrights, trade
secrets, employee and third-party nondisclosure agreements and licensing
arrangements to protect our intellectual property. We own 33 issued United
States patents, and have 55 United States patent applications pending. Our
issued patents have expiration dates from April 2015 to April 2018. Our issued
patents and pending patent applications relate to technology developed by us in
connection with the development of our 3D graphics processors. Our pending
patent applications and any future applications may not be approved. In
addition, any issued patents may not provide us with competitive advantages or
20
<PAGE>
may be challenged by third parties. The enforcement of patents of others may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to our
trade secrets or intellectual property, or disclose our intellectual property or
trade secrets. Our failure to effectively protect our intellectual property
could harm our business. We have licensed technology from third parties for
incorporation in our graphics processors, and expect to continue to enter into
license agreements for future products. These licenses may result in royalty
payments to third parties, the cross-license of technology by us or payment of
other consideration. If these arrangements are not concluded on commercially
reasonable terms, our business could suffer.
Our failure to achieve one or more design wins would harm our business.
Our future success will depend in large part on achieving design wins, which
entails having our existing and future products chosen as the 3D graphics
processors for hardware components or subassemblies designed by PC OEMs and
motherboard and add-in board manufacturers. Our add-in board manufacturers and
major OEM customers typically introduce new high-end system configurations as
often as twice per year, generally 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. 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.
Our ability to achieve design wins also depends in part on our ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render our products incompatible with
products developed by major hardware manufacturers and software developers,
including Intel and Microsoft. 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.
We are dependent on the PC market, which may not continue to grow.
In fiscal 2000, we derived all of our revenue from the sale of products for
use in PCs. In the first three quarters of fiscal 2001, we derived most of our
revenue from the sale of products for use in the entire desktop PC market, from
professional workstations to low-cost PCs. We expect to continue to derive most
of our revenue from the sale or license of products for use in PCs in the next
several years. 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 average selling prices 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 acceptance of next generation products in business PC 3D graphics may not
continue to develop.
Our success will depend in part upon the demand for performance 3D graphics
for business PC applications. The market for performance 3D graphics on business
PCs has only recently begun to emerge and is dependent on the future development
of, and substantial end-user and OEM demand for, 3D graphics functionality. As a
result, the market for business PC 3D graphics computing may not continue to
develop or may not grow at a rate sufficient to support our business. The
development of the market for performance 3D graphics on business PCs will in
turn depend on the development and availability of a large number of business PC
software applications that support or take advantage of performance 3D graphics
capabilities. Currently there are only a limited number of software applications
like this, most of which are games, and a broader base of software applications
may not develop in the near term or at all.
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Consequently, a broad market for full function performance 3D graphics on
business PCs may not develop. Our business prospects will suffer if the market
for business PC 3D graphics fails to develop or develops more slowly than
expected.
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 and CEMs, which incorporate graphics products in the boards they
sell to PC OEMs. Sales to add-in board manufacturers and CEMs are primarily
dependent on achieving design wins with leading PC OEMs. The number of add-in
board manufacturers and CEMs and leading PC OEMs is limited. We expect that a
small number of add-in board manufacturers and CEMs 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 loss of business from PC OEMs or add-in board manufacturers and CEMs. In
addition, revenue from add-in board manufacturers, motherboard manufacturers,
CEMs and PC OEMs that have directly or indirectly accounted for significant
revenue in past periods, individually or as a group, may not continue, or may
not reach or exceed historical levels in any future period.
Our business may be harmed by instability in Asia due to the concentration of
customers who are located or have substantial operations in Asia, including
Taiwan. The People's Republic of China and Taiwan have in the past experienced
and currently are experiencing strained relations. A worsening of these
relations or the development of hostilities between the two could result in
disruptions in Taiwan and possibly other areas of Asia, which could harm our
business. While we believe political instability in Asia has not adversely
affected our business, because of our reliance on companies with operations in
Asia, continued economic and political instability in Asia might harm us.
We may be unable to manage our growth and, as a result, may be unable to
successfully implement our strategy.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. As of
October 29, 2000, we had 618 employees as compared to 392 employees as of
January 30, 2000. We expect that the number of our employees will increase
substantially over the next 12 months. Our future growth, if any, will depend on
our ability to continue to implement and improve operational, financial and
management information and control systems on a timely basis, as well as our
ability to maintain effective cost controls. Further, we will be required to
manage multiple relationships with various customers and other third parties.
Our systems, procedures or controls may not be adequate to support our
operations and our management may be unable to achieve the rapid execution
necessary to successfully implement our strategy.
We are dependent on key personnel and the loss of these employees could harm
our business.
Our performance will be substantially dependent on the performance of our
executive officers and key employees. None of our officers or employees is bound
by an employment agreement, and our relationships with these officers and
employees are, therefore, at will. We do not have "key person" life insurance
policies on any of our employees. The loss of the services of any of our
executive officers, technical personnel or other key employees, particularly
Jen-Hsun Huang, our President and Chief Executive Officer, would harm our
business. Our success will depend on our ability to identify, hire, train and
retain highly qualified technical and managerial personnel. Our failure to
attract and retain the necessary technical and managerial personnel would harm
our business.
We depend on third-party fabrication 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 acceptable quality and at
acceptable manufacturing yields, and to
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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 quarters, there
is no readily available alternative source of supply for any specific product.
We believe that long-term market acceptance for our products will depend on
reliable relationships with TSMC and any other manufacturers used by us to
ensure adequate product supply to respond to customer demand.
In September 1999, a significant earthquake in Taiwan contributed to a
temporary shortage of graphics processors in the third and fourth quarters of
fiscal 2000. Because of our reliance on TSMC, our business may be harmed by
political instability in Taiwan, including the worsening of the strained
relations between The People's Republic of China and Taiwan. Furthermore, any
substantial disruption in our suppliers' operations, either as a result of a
natural disaster, political unrest, economic instability, equipment failure or
other cause, could harm our business.
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 significant portion of the total production
capacity of TSMC. Although our products are designed using TSMC's process design
rules, TSMC may be unable to achieve or maintain acceptable yields or deliver
sufficient quantities of wafers on a timely basis and/or at an acceptable cost.
Additionally, TSMC may not continue to devote resources to the production of our
products, or to advance the process design technologies on which the
manufacturing of our products is based. Any difficulties like these would harm
our business.
Failure to achieve expected manufacturing yields would reduce our product
supply and harm our business.
Semiconductor manufacturing yields are a function both of product design,
which is developed largely by us, and process technology, which typically is
proprietary to the manufacturer. Since low yields may result from either design
or process technology failures, yield problems may not be effectively determined
or resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used. As a
result, yield problems may not be identified until well into the production
process, and resolution of yield problems would require cooperation by and
communication between the manufacturer and us.
The risk of low yields is compounded by the offshore location of most of our
manufacturers, increasing the effort and time required to identify, communicate
and resolve manufacturing yield problems. Because of our potentially limited
access to wafer fabrication capacity from our manufacturers, any decrease in
manufacturing yields could result in an increase in our per unit costs and force
us to allocate our available product supply among our customers. This could
potentially harm customer relationships as well 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 also face the risk of
product recalls or product returns resulting from design or manufacturing
defects that are not discovered during the manufacturing and testing process. In
the event of a significant number of product returns due to a defect or recall,
our business could suffer.
Failure to transition to new manufacturing process technologies could affect
our ability to compete effectively.
Our strategy is to utilize the most advanced semiconductor process technology
appropriate for our products and available from commercial third-party
foundries. Use of advanced processes may have greater risk of initial yield
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problems. Manufacturing process technologies are subject to rapid change and
require significant expenditures for research and development. We continuously
evaluate the benefits of migrating to smaller geometry process technologies in
order to improve performance and reduce costs. We have migrated to the .18
micron technology with the GeForce2 GTS GPUs, and we believe that the transition
of our products to increasingly smaller geometries will be important to our
competitive position. Other companies in the industry have experienced
difficulty in migrating to new manufacturing processes and, consequently, have
suffered reduced yields, delays in product deliveries and increased expense
levels. We may experience similar difficulties and the corresponding negative
effects. Moreover, we are dependent on our relationships with our third-party
manufacturers to migrate to smaller geometry processes successfully. We may be
unable to migrate to new manufacturing process technologies successfully or on a
timely basis.
The 3D graphics industry is highly competitive and we may be unable to
compete.
The market for 3D graphics processors for PCs in which we compete is intensely
competitive and is characterized by rapid technological change, evolving
industry standards and declining average selling prices. We believe that the
principal competitive factors in this market are performance, breadth of product
offerings, access to customers and distribution channels, backward-forward
software support, conformity to industry standard APIs, manufacturing
capabilities, price of graphics processors and total system costs of add-in
boards and motherboards. We expect competition to increase both from existing
competitors and new market entrants with products that may be less costly than
our 3D graphics processors or may provide better performance or additional
features not provided by our products.
Our primary source of competition is from companies that provide or intend to
provide 3D graphics solutions for the PC market. Our competitors include the
following:
. suppliers of graphics add-in boards that utilize their internally developed
graphics chips, such as ATI Technologies Inc. and Matrox Electronics Systems
Ltd.;
. suppliers of integrated core logic chipsets that incorporate 2D and 3D
graphics functionality as part of their existing solutions, such as Intel,
Silicon Integrated Systems and Via Technologies;
. companies that have traditionally focused on the professional market and
provide high end 3D solutions for PCs and workstations, including 3DLabs Inc.,
SGI and Evans and Sutherland Computer Corporation; and
. companies that focus on the video game market, such as 3Dfx and VideoLogic
Group plc.
If and to the extent we offer products outside of the 3D graphics processor
market, we may face competition from some of our existing competitors as well as
from companies with which we currently do not compete. We cannot accurately
predict if we will compete successfully in any new markets we may enter.
We may compete with Intel in the integrated low-cost chipset market.
In June 2000, Intel began shipping the Intel 815 and 815e 3D graphics chipsets
that are targeted at the low-cost PC market. Intel has significantly greater
resources than we do, and our products may not compete effectively against
future products introduced by Intel. In addition, we may be unable to compete
effectively against Intel or Intel may introduce additional products that are
competitive with our products in either performance or price or both. We expect
Intel to continue to do the following:
. invest heavily in research and development and new manufacturing facilities;
. maintain its position as the largest manufacturer of PC microprocessors;
. increasingly dominate the PC platform; and
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. promote its product offerings through advertising campaigns designed to
engender brand loyalty among PC users.
Intel may in the future develop graphics add-in cards or graphics-enabled
motherboards that could directly compete with graphics add-in cards or graphics-
enabled motherboards based on our product. In addition, due to the widespread
industry acceptance of Intel's microprocessor architecture and interface
architecture, including its AGP, and Intel's intellectual property position with
respect to such architecture, Intel exercises significant influence over the PC
industry generally. Any significant modifications by Intel to the AGP, the
microprocessor or core logic components or other aspects of the PC
microprocessor architecture could result in incompatibility with our technology,
which would harm our business. In addition, any delay in the public release of
information relating to modifications like this could harm our business.
We are dependent on third parties for assembly and testing of our products.
Our graphics processors are assembled and tested by Advance Semiconductor
Engineering, Inc., ChipPAC Incorporated and Siliconware Precision Industries
Company Ltd., all of which are based in Asia. Because we rely on Asian assembly
and test subcontractors, our business may be harmed by political instability in
Asia, including the worsening of the strained relations between The People's
Republic of China and Taiwan. We do not have long-term agreements with any of
these subcontractors. As a result of our dependence on third-party
subcontractors for assembly and testing of our products, we do not directly
control product delivery schedules or product quality. Any product shortages or
quality assurance problems could increase the costs of manufacture, assembly or
testing of our products and could harm our business. Due to the amount of time
typically required to qualify assemblers and testers, we could experience
significant delays in the shipment of our products if we are required to find
alternative third parties to assemble or test our products or components. Any
delays in delivery of our products could harm our business.
We are subject to risks associated with product defects and incompatibilities.
Products as complex as ours may contain defects or failures when introduced or
when new versions or enhancements to existing products are released. We have in
the past discovered software defects and incompatibilities with customers'
hardware in certain of our products and may experience delays or lost revenue to
correct any new defects in the future. Errors in new products or releases after
commencement of commercial shipments could result in loss of market share or
failure to achieve market acceptance. Our products typically go through only one
verification cycle prior to beginning volume production and distribution. As a
result, our products may contain defects or flaws that are undetected prior to
volume production and distribution. The widespread production and distribution
of defective products could harm our business.
We are subject to risks associated with international operations.
Our reliance on foreign third-party manufacturing, assembly and testing
operations subjects us to a number of risks associated with conducting business
outside of the United States, including the following:
. unexpected changes in, or impositions of, legislative or regulatory
requirements;
. delays resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and restrictions;
. longer payment cycles;
. imposition of additional taxes and penalties;
. the burdens of complying with a variety of foreign laws; and
. other factors beyond our control.
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We also are subject to general political risks in connection with our
international trade relationships. In addition, the laws of certain foreign
countries in which our products are or may be manufactured or sold, including
various countries in Asia, may not protect our products or intellectual property
rights to the same extent, as do the laws of the United States. This makes the
possibility of piracy of our technology and products more likely. Currently, all
of our arrangements with third-party manufacturers provide for pricing and
payment in U.S. dollars, and to date we have not engaged in any currency hedging
activities, although we may do so in the future. Fluctuations in currency
exchange rates could harm our business in the future.
The semiconductor industry is cyclical in nature.
The semiconductor industry historically has been characterized by the
following factors:
. rapid technological change;
. cyclical market patterns;
. significant average selling price erosion;
. fluctuating inventory levels;
. alternating periods of overcapacity and capacity constraints; and
. variations in manufacturing costs and yields and significant expenditures for
capital equipment and product development.
In addition, the industry has experienced significant economic downturns at
various times, characterized by diminished product demand and accelerated
erosion of average selling prices. We may experience substantial period-to-
period fluctuations in results of operations due to general semiconductor
industry conditions.
Failure in implementation of our enterprise resource planning system could
adversely affect our operations.
In December 1999, we began the implementation of an SAP A.G. system as our
enterprise resource planning, or ERP, system to replace our information systems
in business, finance, operations and service. The first phase of the
implementation was successfully completed in June 2000 and our operations are
fully functioning under the new ERP system. Future phases of the implementation
are expected to occur throughout fiscal 2001 and fiscal 2002. We are heavily
dependent upon the proper functioning of our internal systems to conduct our
business. System failure or malfunctioning may result in disruptions of
operations and inability to process transactions. Our results of operations and
financial position could be adversely affected if we encounter unforeseen
problems with respect to system operations or future implementation.
Some provisions in our certificate of incorporation, our bylaws and our
agreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and bylaws contain provisions that could make
it more difficult for a third party to acquire a majority of our outstanding
voting stock. These provisions include the following:
. the ability of the board of directors to create and issue preferred stock
without prior stockholder approval;
. the prohibition of stockholder action by written consent;
. a classified board of directors; and
. advance notice requirements for director nominations and stockholder
proposals.
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On March 5, 2000, we entered into a licensing and development agreement with
Microsoft that included a grant to Microsoft of first and last rights of refusal
over any offer we receive to purchase 30% or more of the outstanding shares of
our common stock. This provision could also delay or prevent a change in control
of NVIDIA.
We are subject to risks associated with interest rate and foreign exchange
rate fluctuation.
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.
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.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On September 21, 1998, 3Dfx filed a patent infringement lawsuit against us in
the United States District Court for the Northern District of California
alleging infringement of a 3Dfx patent. On March 2, 1999, 3Dfx added a second
patent to the suit and on May 24, 1999, 3Dfx added a third patent to the suit.
The amended complaint alleges that our RIVA TNT, RIVA TNT2 and RIVA TNT2 Ultra
products infringe the patents in suit and seeks unspecified compensatory and
trebled damages and attorney's fees. Our current generation of products is not
identified as infringing any of the patents in suit. We have filed an answer and
counter-claims asserting that the patents in suit are invalid and not infringed.
These assertions are supported by our investigations to date and an opinion from
our patent counsel in this suit. The District Court has issued its claim
construction ruling and the trial is scheduled to start on May 22, 2001.
On August 28, 2000, we filed a patent infringement lawsuit against 3Dfx in the
United States District Court for the Northern District of California. The
lawsuit alleges that 3Dfx's graphics chips and card products, which are used to
accelerate 3D graphics on personal computers, infringe five of our patents and
seeks an injunction restraining 3Dfx from manufacturing, selling, or importing
infringing graphics chips and card products, including its Voodoo3, Voodoo4,
Voodoo5 and VSA-100 family of products, as well as monetary damages.
On February 22, 2000, Graphiques Matrox, Inc. and Systemes Electroniques
Matrox Ltd. (collectively "Matrox") filed suit against us in the Superior Court,
Judicial District of Montreal, Province of Quebec, Canada. The suit alleges that
we improperly solicited and recruited Matrox's employees and encouraged Matrox's
employees to breach their Matrox confidentiality and/or non-competition
agreements. The suit by Matrox seeks, among other things, certain injunctive
relief. We believe that the claims asserted by Matrox are without merit and we
intend to vigorously defend this suit. The trial of this matter is scheduled for
April 4, 2001.
On May 19, 2000, we filed suit against Matrox in Santa Clara County Superior
Court alleging that Matrox's efforts to prevent its current and former employees
from pursuing employment opportunities with us constitute interference with
prospective economic advantage, interference with contract and unfair
competition. Our suit seeks, among other things, unspecified monetary damages, a
declaration that Matrox's confidentiality and/or non-competition agreements are
unenforceable under California law and a declaration that Matrox's use of those
agreements and other tactics constitutes unfair competition. On May 26, 2000,
the case was transferred to the San Jose Division of the United States District
Court for the Northern District of California. On June 14, 2000, Matrox filed an
answer denying our claims and a counterclaim alleging trade secret
misappropriation, intentional interference with contractual relations and unfair
competition. Matrox's California suit seeks unspecified monetary damages and
injunctive relief. We filed an answer to this counterclaim on July 7, 2000,
denying all of Matrox's claims. As with the Montreal action, we believe that the
claims asserted by Matrox are without merit and we intend to vigorously defend
this suit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
Exhibit
Number Description of Document
------- -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1. A Current Report on Form 8-K dated September 28, 2000 reporting under
Item 5 -other events was filed updating our Risk Factors and description of our
Business.
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2. A Current Report on Form 8-K dated October 5, 2000 reporting under Item 7 -
Financial Statements, Pro Forma Financial Information and Exhibits was filed to
include the following exhibits pertaining to our secondary common stock offering
and $300 million convertible debt offering:
Exhibit No. Description
1.1 Form of Underwriting Agreement.
4.1 Form of Indenture to be entered into between NVIDIA and
Chase Manhattan Bank and Trust Company, as Trustee.
4.2 Form of Supplemental Indenture No. 1 to be entered into
between NVIDIA and Chase Manhattan Bank and Trust Company,
as Trustee.
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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 December 8, 2000.
NVIDIA Corporation
By: /s/ Christine B. Hoberg
--------------------------------------------
Christine B. Hoberg
Chief Financial Officer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
27.1 Financial Data Schedule
31
