<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 April 30, 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 June
5, 2000 was 32,221,953 shares.
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NVIDIA CORPORATION
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of April 30, 2000 and January 30,
2000........................................................... 3
Condensed Statements of Income for the three months ended April
30, 2000 and May 2, 1999....................................... 4
Condensed Statements of Cash Flows for the three months ended
April 30, 2000 and May 2, 1999................................. 5
Notes to Condensed Financial Statements........................ 6
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations.......................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 25
Item 2. Changes in Securities and Use of Proceeds...................... 25
Item 6. Exhibits and Reports on Form 8-K............................... 25
Signature............................................................... 26
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
NVIDIA CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
April
30, January 30,
2000 2000
-------- -----------
(In thousands)
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $269,800 $ 61,560
Accounts receivable, less allowances of $8,246 at April
30, 2000 and $6,443 at January 30, 2000............... 71,998 67,224
Inventory.............................................. 55,241 37,631
Prepaid expenses and other current assets.............. 16,187 6,760
-------- --------
Total current assets................................. 413,226 173,175
Property and equipment, net.............................. 30,443 25,886
Deposits and other assets................................ 4,122 3,189
-------- --------
$447,791 $202,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................... $ 68,527 $ 64,910
Accrued liabilities.................................... 14,321 9,529
Current portion of capital lease obligations........... 1,550 1,786
-------- --------
Total current liabilities............................ 84,398 76,225
Capital lease obligations, less current portion.......... 697 962
Deferred revenue......................................... 200,000 --
Long-term payable........................................ 250 500
Stockholders' equity:
Common stock........................................... 32 31
Additional paid-in capital............................. 115,506 95,964
Deferred compensation.................................. (65) (118)
Retained earnings...................................... 46,973 28,686
-------- --------
Total stockholders' equity........................... 162,446 124,563
-------- --------
$447,791 $202,250
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
NVIDIA CORPORATION
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
April 30, 2000 May 2, 1999
-------------------- ------------------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C>
Revenue............................... $ 148,483 $ 71,018
Cost of revenue....................... 92,975 45,946
------------------- ------------------
Gross profit.......................... 55,508 25,072
------------------- ------------------
Operating expenses:
Research and development............ 17,830 8,785
Sales, general and administrative... 12,114 7,284
------------------- ------------------
Total operating expenses.......... 29,944 16,069
------------------- ------------------
Operating income...................... 25,564 9,003
Interest and other income, net........ 1,328 342
------------------- ------------------
Income before income tax expense...... 26,892 9,345
Income tax expense.................... 8,605 3,084
------------------- ------------------
Net income............................ $ 18,287 $ 6,261
=================== ==================
Basic net income per share............ $ 0.58 $ 0.21
=================== ==================
Diluted net income per share.......... $ 0.47 $ 0.18
=================== ==================
Shares used in basic per share
computation.......................... 31,680 29,277
Shares used in diluted per share
computation.......................... 38,889 35,454
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
NVIDIA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
--------------------
April 30, May 2,
2000 1999
---------- ---------
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 18,287 $ 6,261
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 3,048 1,458
Amortization of deferred compensation................. 53 259
Tax benefit from employee stock plans................. 13,977 43
Changes in operating assets and liabilities:
Accounts receivable................................. (4,774) (13,566)
Inventory........................................... 17,610 13,430
Prepaid expenses and other current assets........... (9,427) (561)
Deposit and other current assets.................... (1,087) (20)
Accounts payable.................................... 3,367 (8,221)
Accrued liabilities................................. 4,792 4,277
--------- ---------
Net cash provided by operating activities............... 10,626 3,360
--------- ---------
Cash flows used in investing activities:
Purchase of property and equipment.................... (7,451) (2,483)
--------- ---------
Cash flows from financing activities:
Payments under line of credit......................... -- (5,000)
Common stock issued under employee stock plans........ 5,566 120
Advance in connection with Microsoft agreement........ 200,000 --
Sale of common stock under public offering, net of
issuance costs....................................... -- 5,810
Payments under capital leases......................... (501) (241)
--------- ---------
Net cash provided by financing activities............... 205,065 689
--------- ---------
Change in cash and cash equivalents..................... 208,240 1,566
Cash and cash equivalents at beginning of period........ 61,560 50,257
--------- ---------
Cash and cash equivalents at end of period.............. $ 269,800 $ 51,823
========= =========
Cash paid for interest.................................. $ 51 $ 77
========= =========
Cash paid for taxes..................................... $ 71 $ 834
========= =========
Noncash financing and investing activities:
Assets recorded under capital lease................... $ -- $ 16
========= =========
Liabilities assumed in connection with long-term
software license..................................... $ -- $ 10,000
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands)
1. Basis of presentation
The accompanying condensed unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair presentation have
been included. The results for the interim periods presented are not
necessarily indicative of the results that may be expected for any future
period. The following information should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended January 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 either the as-if-
converted method for convertible preferred stock or the treasury stock method
for options and warrants.
<TABLE>
<CAPTION>
Three Months
Ended
----------------
April 30, May 2,
2000 1999
--------- ------
<S> <C> <C>
Denominator:
Denominator for basic net income per share--weighted-
average shares......................................... 31,680 29,277
Effect of dilutive securities:
Stock options outstanding............................. 7,209 6,035
Warrants.............................................. -- 142
------ ------
Denominator for diluted net income per share............ 38,889 35,454
====== ======
</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>
April
30, January 30,
2000 2000
------- -----------
<S> <C> <C>
Work in-process.......................................... $ 6,711 $ 6,446
Finished goods........................................... 48,530 31,185
------- -------
Total inventory........................................ $55,241 $37,631
======= =======
</TABLE>
At April 30, 2000, the Company had noncancelable inventory purchase
commitments totaling $122.3 million.
6
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED 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 or 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
----------------------
April 30,
2000 May 2, 1999
--------- -----------
<S> <C> <C>
United States.......................................... $ 14,845 $34,827
Asia Pacific........................................... 109,885 31,321
Europe................................................. 23,753 4,870
-------- -------
Total revenue........................................ 148,483 71,018
======== =======
Revenue to significant customers, those representing approximately 10% or
more of total revenue for the respective periods, is summarized as follows:
<CAPTION>
Three Months Ended
----------------------
April 30,
2000 May 2, 1999
--------- -----------
<S> <C> <C>
Sales
Customer A........................................... -- 13%
Customer B........................................... -- 27%
Customer C........................................... 12% 20%
Customer D........................................... -- 10%
Customer E........................................... 23% 10%
Customer F........................................... 11% 9%
<CAPTION>
As of
----------------------
April 30, January 30,
2000 2000
--------- -----------
<S> <C> <C>
Accounts receivable
Customer C........................................... 18% 15%
Customer E........................................... 22% 12%
Customer G........................................... 16% 13%
</TABLE>
6. Long-term Software Licensing Agreement
On April 12, 1999, the Company entered into a $10.0 million five-year
software licensing agreement with a supplier in the electronic design
automation industry. Under this agreement, the $10.0 million is due in two
installments. The first installment was settled in June 1999 for 243,902 shares
of the Company's common stock valued at $5.0 million. The second installment
was settled in cash on March 31, 2000.
7
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(In thousands)
7. 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 a product
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 immediately preceding Microsoft's termination of the
agreement. In addition, in the event that an individual or corporation makes an
offer to purchase shares equal 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
product 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.
8. Subsequent Events
In May 2000, the Company's Board of Directors approved a two-for-one stock
split of the Company's common stock, to be effected in the form of a 100% stock
dividend. The stock split will entitle each stockholder of record at the close
of business on June 12, 2000 to receive one additional share for every
outstanding share of common stock held. The transfer agent for the Company
expects to deliver the additional shares resulting from the stock split on or
about June 26, 2000. Upon completion of the stock split, the Company will have
approximately 64 million shares of common stock outstanding.
8
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are subject to the "safe harbor" created
by those sections. These forward-looking statements include but are not limited
to: statements related to industry trends and future growth in the markets for
3D graphics processors; our product development efforts; the timing of our
introduction of new products; industry and consumer acceptance of our products;
and future profitability. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements. We undertake no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document. The "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 every type of
desktop PC user, from professional workstations to low-cost PCs. In the first
quarter of fiscal 2000, we began commercial shipment of the RIVA TNT2 family of
graphics processors. During the third quarter of fiscal 2000, we launched the
NVIDIA GeForce 256 and NVIDIA Quadro, the industry's first GPUs, which are the
first products to incorporate transform and lighting into a single chip. In the
first quarter of fiscal 2001, we introduced the GeForce2 GTS, the first per-
pixel shading GPU intended to achieve cinematic-quality real-time graphics for
the desktop PC market. The GeForce 256, Quadro and GeForce2 GTS GPUs provide
the capability for content developers to build a new generation of e-commerce,
e-business, education and entertainment applications. We expect that a
significant portion of our revenue for the foreseeable future will be derived
from the sale of our 3D graphics processors in the PC market. We recognize
product sales revenue upon shipment, net of appropriate allowances. Our policy
on sales to distributors is to defer recognition of sales and related gross
profit until the distributors resell the product. Royalty revenue is generally
recognized upon shipment of product to the licensee's customers. Currently, all
of our product sales and our arrangements with third-party manufacturers
provide for pricing and payment in U.S. dollars. We have not engaged in any
foreign currency hedging activities, although we may do so in the future. Since
we have no other product line, our business would suffer if for any reason our
graphics processors do not achieve widespread acceptance in the 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., Canopus
Corporation, Creative Technology Ltd., ELSA AG, and Guillemot Corporation and
contract electronics manufacturers or CEMs, including Celestica Hong Kong Ltd.,
Intel Corporation, 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 original equipment
manufacturers or OEMs, retail outlets and systems integrators. The average
selling prices for our products, as well as our customers' products, vary by
distribution channel. Our three largest customers accounted for approximately
46% of revenues for the first quarter of fiscal 2001. Sales to Edom Technology
Co., Ltd., an Asian distributor, accounted for 23%, sales to Creative accounted
for 12%, and sales to ASUSTeK accounted for 11% of our total revenue for the
first quarter of fiscal 2001. Sales to Diamond Multimedia Systems, Inc.
accounted for 27%, sales to Creative accounted for 20%, sales to STB Systems,
Inc. accounted for 13%, sales to Intel accounted for 10% and sales to Edom
accounted for 10% of our total revenue for the first quarter of fiscal 2000.
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.
In October 1999, S3 Incorporated, a supplier of graphics processors and a
competitor, completed the acquisition of Diamond. Following the acquisition,
our sales to Diamond declined significantly to less than 1% of total revenue in
the first quarter of fiscal 2001 from 26% of total revenue in the first quarter
of fiscal 2000. Diamond is no longer one of our significant customers. 3Dfx
Interactive, Inc., a 3D graphics company and a competitor, completed the
acquisition of STB in May
9
<PAGE>
1999. Sales to STB declined significantly from prior levels following the
merger and our relationship terminated in the fourth quarter of fiscal 2000.
The loss of business from Diamond and STB has not had a material impact on our
revenues and profitability to date.
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. Accordingly, our existing products must
have competitive performance levels in order to be included in new system
configurations, or we must timely introduce new products with such performance
characteristics at costs and in sufficient volumes to maintain overall average
selling prices and gross margins. Failure to achieve necessary costs and volume
shipments with respect to future products or product enhancements could result
in rapidly declining average selling prices, reduced margins, reduced demand
for products or loss of market share.
We currently utilize Taiwan Semiconductor Manufacturing Company, or TSMC,
our primary manufacturer, and WaferTech LLC (a joint venture controlled by
TSMC) 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. Product returns or delays or difficulties in collecting accounts
receivable could result in significant charges against income, which could harm
our business.
10
<PAGE>
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 revenue.
<TABLE>
<CAPTION>
Three Months Ended
----------------------
April 30, May 2,
2000 1999
---------- ---------
<S> <C> <C>
Revenue................................................ 100.0% 100.0%
Cost of revenue........................................ 62.6 64.7
--------- ---------
Gross profit........................................... 37.4 35.3
Operating expenses:
Research and development............................. 12.0 12.4
Sales, general and administrative.................... 8.2 10.2
--------- ---------
Total operating expenses........................... 20.2 22.6
--------- ---------
Operating income................................... 17.2 12.7
Interest and other income, net......................... 0.9 0.4
--------- ---------
Income before income tax expense....................... 18.1 13.1
Income tax expense..................................... 5.8 4.3
--------- ---------
Net income......................................... 12.3% 8.8%
========= =========
</TABLE>
Three Months Ended April 30, 2000 and May 2, 1999
Revenue
Revenue increased 109% to $148.5 million in the three months ended April 30,
2000 from $71.0 million in the three months ended May 2, 1999. The growth was
primarily the result of increased sales of our graphics processors and the
strong demand for new products at higher unit average selling prices. Revenue
derived from the bundling of double data rate memories with a portion of our
new GeForce 256 GPU totaled $19.4 million in the first quarter of fiscal 2001.
Revenue from sales outside of the United States accounted for 90% of total
revenue for the first quarter of fiscal 2001 and 51% of total revenue for the
first quarter of fiscal 2000. Our international revenue increased 269% to
$133.6 million for the quarter from $36.2 million a year ago. This increase in
revenue from sales outside of the United States is primarily attributable to
(i) expanded use of 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 quarter 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 revenue net of allowances less cost of
revenue. Cost of revenue consists primarily of the costs of semiconductors
purchased from contract manufacturers (including assembly, test and packaging),
manufacturing support costs (labor and overhead associated with such
purchases), inventory provisions and shipping costs. Our gross profit margin in
any period varies depending on the mix of types of graphics processors sold.
Gross profit increased 121% from the first quarter of fiscal 2000 to the same
period of fiscal 2001, primarily due to significant increases in unit shipments
and the favorable impact of the higher margin GeForce 256 and GeForce2 GTS
graphics processing units, partially offset by declining profit margins
11
<PAGE>
in our previous generation products. We began the bundling of double data rate
memories with our GeForce processors in the second half of fiscal 2000. The
inclusion of the double date rate 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 date rate memories with
some of our high-performance products for at least the next six months.
Although we achieved substantial growth in gross profit and gross profit margin
from the first quarter 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 103% from the first quarter of fiscal 2000 to the same
period 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 our level of revenue
fluctuates.
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 66%
from the first quarter of fiscal 2000 to the same period of fiscal 2001,
primarily due to costs associated with additional personnel, commissions and
bonuses on sales of the RIVA TNT2 and GeForce 256 graphics processors, and
increased promotional expenses associated with GeForce2 GTS product launch and
trade show expenses. We expect sales and marketing expenses to continue to
increase in absolute dollars as we expand sales and marketing efforts and
increase promotional activities. While we expect sales, general and
administrative expenses to continue to increase in absolute dollars as we
expand our operations, 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. Interest expense increased slightly by
$86,000. Interest and other income increased $897,000 from the first quarter of
fiscal 2000 to the same period of fiscal 2001, due to higher average cash
balances as a result of a $200 million advance received from Microsoft in
connection with our development agreement with Microsoft.
Income Taxes
We had an effective tax rate of 32% in the first quarter of fiscal 2000 and
the same period of fiscal 2001. We anticipate our income tax rates for fiscal
2001 will be relatively constant, depending 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
$259,000 in the first quarter of fiscal 2000 and $53,000 in the first quarter
of fiscal 2001. We anticipate total amortization of approximately $113,000 in
fiscal 2001.
12
<PAGE>
Liquidity and Capital Resources
As of April 30, 2000, we had $269.8 million in cash and cash equivalents, an
increase of $208.2 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
$122.3 million of noncancelable manufacturing commitments outstanding at April
30, 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 with a borrowing
base equal to 80% of eligible accounts. Borrowings under the line of credit
bear interest at the prime rate and are due in July 2000. Covenants governing
the loan agreement require the maintenance of certain financial ratios. As of
April 30, 2000, we had no outstanding borrowings against the line of credit.
Operating activities generated cash of $10.6 million during the first
quarter of fiscal 2001 and $3.4 million during the first quarter of fiscal
2000. The increase from the first quarter of fiscal 2000 to the same period of
fiscal 2001 was due to a substantial increase in net income, offset by changes
in operating assets and liabilities. Our accounts receivable are highly
concentrated. As of April 30, 2000,our three largest customers accounted for
approximately 56% of our accounts receivable. Although we have not experienced
any significant bad debt write-offs to date, we may be required to write off
bad debt in the future, which could harm our business.
To date, our investing activities have consisted primarily of purchases of
property and equipment. Our capital expenditures, including capital leases,
decreased from $12.5 million in the first quarter of fiscal 2000 to $7.5
million in the first quarter of fiscal 2001. The decrease was primarily
attributable to a $10.0 million obligation in the first quarter of fiscal 2000
pursuant to a long-term licensing agreement with an electronic design
automation supplier, offset by additional purchases of computer and emulation
equipment, to support increased research and development activities in the
first quarter of fiscal 2001. 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 million
for capital expenditures in fiscal 2001, primarily for software licenses,
emulation equipment, purchase of computer and engineering workstations,
enterprise resource planning system implementation and tenant improvements in
our new headquarter 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 million over the terms of the leases.
Financing activities provided cash of $205.1 million in the first quarter of
fiscal 2001, compared to $689,000 in the first quarter 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 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 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 immediately preceding the
termination.
We believe that our existing cash balances, anticipated cash flows from
operations and existing credit facilities, 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
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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.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software like this may recognize a date using "00" as the
year 1900 rather than the year 2000. Although we have not experienced any
significant Year 2000 problems to date, there remains the possibility that such
problems may arise.
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 customers' products;
. the successful development and volume production of next-generation
products;
. 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 products of our customers' products;
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. fluctuations in the availability of manufacturing capacity or
manufacturing yields;
. competitive pressures resulting in lower than expected average selling
prices;
. rates of 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 the 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;
. unexpected inventory write-downs; and
. introduction 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 our 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 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. 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.
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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 timely introduce new products 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 TSMC, WaferTech, and any additional third-party
manufacturers to effectively manufacture our new products;
. the quality of any new products;
. differentiation of new products from those of our competitors; and
. market acceptance of our and our customers' 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 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
may result in production delays.
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 volumes increase. 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
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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 developed. In
addition, we may be unable to successfully manage the production transition
risks with respect to future products. Failure to achieve any of the foregoing
with respect to future products or product enhancements could result in rapidly
declining 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. 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 that could divert our
resources and result in the payment of substantial damages.
On September 21, 1998, 3Dfx 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
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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. We
anticipate that the trial date will be set by the District Court after it rules
on claims construction issues. 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.
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.
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 30 issued United
States patents, have three United States patent applications allowed, and have
36 United States patent applications pending. Our issued patents have
expiration dates from April 14, 2015 to March 30, 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 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 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
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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 quarter of fiscal 2001, we derived all 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
substantially all 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.
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. In October 1999, S3, a supplier of graphics processors and a
competitor, completed the acquisition of Diamond, one of our largest customers.
Following the consummation of the acquisition, our sales to Diamond declined
significantly to less than 1% of total revenue in the first quarter of fiscal
2001 from 26% of total revenue in the first quarter of fiscal 2000. 3Dfx, a 3D
graphics company and a competitor, completed the acquisition of STB in May
1999. Sales to STB, another one of our largest customers, declined
significantly from prior levels following the acquisition and our relationship
with STB terminated in the fourth quarter of fiscal 2000.
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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 April 30, 2000, we had 462 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 fabrications 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 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,
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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 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 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
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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., Matrox
Electronics Systems Ltd. and S3;
. 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., Ltd., SGI, Evans and Sutherland Computer Corporation and Intergraph
Corporation; and
.companies with strength in the video game market, such as 3Dfx and
VideoLogic Group plc.
We may compete with Intel in the integrated low-cost chipset market.
In June 1999, Intel began shipping the Intel 810, a 3D graphics chipset that
is 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
. 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 that our customers may develop. 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.
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We are dependent on third parties for assembly and testing of our products.
Our graphics processors are assembled and tested by Amkor Technology Inc.,
Siliconware Precision Industries Company Ltd., ChipPAC Incorporated and
Advanced Semiconductor Engineering 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;
. potentially adverse taxes;
. the burdens of complying with a variety of foreign laws; and
. other factors beyond our control.
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;
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. 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 implementation is expected to
occur in phases throughout fiscal 2001. We are heavily dependent upon the
proper functioning of our internal systems to conduct our business. There is no
assurance that we will be successful in the implementation of our ERP system.
Delays in the implementation, 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 this implementation.
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<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
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 employees and
encouraged Matrox 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.
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 and 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 its 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.
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds from Sales of Registered Securities
We commenced our initial public offering on January 21, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-47495). The managing
underwriters of the public offering were Morgan Stanley & Co., Hambrecht &
Quist and Prudential Securities (the Underwriters). In the offering, we sold an
aggregate of 3.5 million shares of our common stock for an initial price of
$12.00 per share. On February 2, 1999, we sold an additional 525,000 shares of
our common stock at a price of $12.00 per share pursuant to the exercise of the
Underwriters' over-allotment option. The aggregate proceeds from the offering
were $48.3 million. We paid expenses of approximately $5.0 million, of which
approximately $3.4 million represented underwriting discounts and commissions
and approximately $1.6 million represented expenses related to the offering.
Net proceeds from the offering were $43.3 million. Of the net proceeds, as of
April 30, 2000, $5.0 million had been used to repay in full amounts outstanding
under a bank line of credit. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in our
Registration Statement. As of April 30, 2000, the remainder of the net proceeds
was invested in money market funds or held as cash.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the registrant during the three months
ended April 30, 2000.
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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 June 14, 2000.
NVIDIA Corporation
By: /s/ Christine B. Hoberg
-----------------------------------
Christine B. Hoberg
Chief Financial Officer (Principal
Financial and Accounting Officer)
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
27
