PART II
Our common stock is traded on the Nasdaq National Market under the symbol NVDA. Public trading of our common stock began on January 22, 1999. Prior to that, there was no public market for our common stock. As of March 5, 2004, we had approximately 436 stockholders of record, not including those shares held in street or nominee name.
The following table sets forth for the periods indicated the high and low sales price for our common stock as quoted on the Nasdaq National Market:
|
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
Year ended January 30, 2005 |
|
|
|
|
|
|
|
First Quarter (through March 5, 2004) |
|
$ |
24.33 |
|
$ |
21.15 |
|
Year ended January 25, 2004 |
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
25.88 |
|
$ |
17.08 |
|
Third Quarter |
|
$ |
21.47 |
|
$ |
15.26 |
|
Second Quarter |
|
$ |
27.75 |
|
$ |
13.55 |
|
First Quarter |
|
$ |
14.83 |
|
$ |
9.33 |
|
Year ended January 26, 2003 |
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
18.27 |
|
$ |
9.99 |
|
Third Quarter |
|
$ |
16.98 |
|
$ |
7.20 |
|
Second Quarter |
|
$ |
40.65 |
|
$ |
14.30 |
|
First Quarter |
|
$ |
68.35 |
|
$ |
30.37 |
|
Dividend Policy
We have never paid any cash dividends on our common stock and do not expect to pay cash dividends for the foreseeable future.
Equity Compensation Plan Information
Information regarding our equity compensation plans, including both stockholder approved plans and non-stockholder approved plans, will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders under the caption "Compensation-Equity Compensation Plan Information," and is incorporated by reference into this report.
The following selected financial data should be read in conjunction with our financial statements and the notes thereto, and with Item 7, "Managements Discussion and Analysis of Financial Condition and Results of Operations." The consolidated statement of income data for the years ended January 25, 2004, January 26, 2003 and January 27, 2002 and the consolidated balance sheet data as of January 25, 2004 and January 26, 2003 have been derived from and should be read in conjunction with our audited consolidated financial statements and the notes thereto included herein. The consolidated statement of income data for the years ended January 28, 2001 and January 30, 2000 is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K. The consolidated balance sheet data as of January 27, 2002, January 28, 2001 and January 30, 2000 is derived from audited consolidated financial statements and the notes thereto which are not included in this Annual Report on Form 10-K.
|
|
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
January 28, |
January 30, |
|
|
|
2004 (A, B) |
|
|
2003 (C, D) |
|
|
2002 (E, F) |
|
|
2001 |
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
Consolidated Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,822,945 |
|
$ |
1,909,447 |
|
$ |
1,369,471 |
|
$ |
735,264 |
|
$ |
374,505 |
|
Gross profit |
|
$ |
528,878 |
|
$ |
576,012 |
|
$ |
519,238 |
|
$ |
272,879 |
|
$ |
141,843 |
|
Income from operations |
|
$ |
90,157 |
|
$ |
143,986 |
|
$ |
241,732 |
|
$ |
128,135 |
|
$ |
58,617 |
|
Income before income tax expense |
|
$ |
86,673 |
|
$ |
150,557 |
|
$ |
252,749 |
|
$ |
144,808 |
|
$ |
60,371 |
|
Income tax expense |
|
$ |
12,254 |
|
$ |
59,758 |
|
$ |
75,825 |
|
$ |
46,339 |
|
$ |
19,412 |
|
Net income |
|
$ |
74,419 |
|
$ |
90,799 |
|
$ |
176,924 |
|
$ |
98,469 |
|
$ |
40,959 |
|
Basic net income per share |
|
$ |
0.46 |
|
$ |
0.59 |
|
$ |
1.24 |
|
$ |
0.75 |
|
$ |
0.34 |
|
Diluted net income per share |
|
$ |
0.43 |
|
$ |
0.54 |
|
$ |
1.03 |
|
$ |
0.62 |
|
$ |
0.28 |
|
Shares used in basic per share computation |
|
|
160,924 |
|
|
153,513 |
|
|
143,015 |
|
|
130,998 |
|
|
119,488 |
|
Shares used in diluted per share computation |
|
|
172,707 |
|
|
168,393 |
|
|
171,074 |
|
|
159,294 |
|
|
144,392 |
|
|
|
January 25, |
January 26, |
January 27, |
January 28, |
January 30, |
|
|
2004 |
2003 |
2002 |
2001 |
2000 |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities |
|
$ |
604,043 |
|
$ |
1,028,413 |
|
$ |
791,377 |
|
$ |
674,275 |
|
$ |
61,560 |
|
Total assets |
|
$ |
1,399,344 |
|
$ |
1,617,015 |
|
$ |
1,503,174 |
|
$ |
1,016,902 |
|
$ |
203,085 |
|
Capital lease obligations, less current portion |
|
$ |
856 |
|
$ |
4,880 |
|
$ |
5,861 |
|
$ |
378 |
|
$ |
962 |
|
Deferred revenue |
|
|
-- |
|
|
-- |
|
$ |
70,193 |
|
$ |
200,000 |
|
|
-- |
|
Deferred income tax liability |
|
$ |
8,609 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
Long-term debt |
|
|
-- |
|
$ |
300,000 |
|
$ |
300,000 |
|
$ |
300,000 |
|
$ |
500 |
|
Long-term liabilities |
|
$ |
4,582 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
Total stockholders equity |
|
$ |
1,051,185 |
|
$ |
932,687 |
|
$ |
763,819 |
|
$ |
407,107 |
|
$ |
127,424 |
|
Cash dividends declared per common share |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
___________________________________________________________________________________________
(A) Fiscal 2004 included a charge of $3,500 related to the write-off of acquired research and development expense from the purchase of MediaQ, Inc. that had not yet reached technological feasibility and has no alternative future use.
(B) Fiscal 2004 included a charge of $13,068 in connection with our convertible subordinated debenture redemption.
(C) Fiscal 2003 included $40,365 in additional revenue related to our settlement of our arbitration with Microsoft regarding Xbox pricing.
(D) Fiscal 2003 included a charge for stock option exchange expenses of $61,832 related to personnel associated with cost of revenue (for manufacturing personnel), research and development, and sales, general and administrative of $6,164, $35,417 and $20,251, respectively.
(E) Fiscal 2002 included $10,030 of acquisition charges attributable to expenses related to our acquisition of assets from 3dfx.
(F) Fiscal 2002 included a charge of $3,687 related to our relocation from our previous headquarters.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report.
Overview
Our Company
NVIDIA Corporation is a market leader in digital media processor technology, dedicated to creating products that enhance the interactive experience on consumer and professional computing platforms. We design, develop and market graphics processing units, or GPUs, media and communications processors, or MCPs, ultra-low power media processors, or UMPs, and related software. Our products are integral to a wide variety of visual computing platforms, including enterprise personal computers, or PCs, consumer PCs, professional workstations, notebook PCs, personal digital assistants, cellular phones, game consoles and digital media centers. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our mission is to be the most important visual computing company in the world.
Recent Developments
Convertible Subordinated Debenture Redemption
On October 24, 2003, we redeemed our 4¾% convertible subordinated debentures, or the Notes, due 2007. The aggregate principal amount of the Notes outstanding was $300.0 million, which included $18.6 million of notes that we repurchased during the three months ended October 26, 2003. The redemption price was equal to approximately 102.7% of the outstanding principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In connection with the redemption of the Notes, we recorded a one-time charge of approximately $13.1 million, which included a $7.6 million redemption premium and $5.5 million of unamortized issuance costs.
SEC Investigation
On September 11, 2003, we announced that the Securities and Exchange Commission, or SEC, had concluded its investigation of us and that we have reached a final agreement with the SEC resolving an investigation undertaken by the SECs staff. Under the terms of the agreement, NVIDIA, without admitting or denying liability or wrongdoing, agreed to an administrative cease and desist order prohibiting any future violations of certain non-fraud financial reporting, books and records, and internal control provisions. There is no requirement to pay any fines or penalties.
Acquisition of MediaQ, Inc.
On August 19, 2003, we completed the acquisition of MediaQ, Inc., or MediaQ, a leading provider of graphics and multimedia technology for wireless mobile devices, for an aggregate purchase price that consisted of cash consideration of approximately $71.3 million, including $1.3 million of direct acquisition costs. With the integration of MediaQ, w e see an opportunity to leverage NVIDIAs resources and expertise in digital media processing to offer innovative products and thereby increase our revenues by entering into the multimedia handset market.
Microsoft Xbox
On August 14, 2003, Microsoft announced that it had entered into an agreement with one of our competitors to develop technology for future Xbox products and services. The impact that this announcement may have on our future revenue from the sale of Xbox processors to Microsoft is uncertain, but we do not believe that it will have a significant impact upon us for at least 18 24 months. Revenue from Microsoft during fiscal 2004, fiscal 2003 and fiscal 2002 accounted for 15%, 23% and 9%, respectively, of our total revenue.
Future Objectives and Challenges
Peripheral Component Interconnect Express, or PCI-Express
PCI Express is expected to enable a new level of performance for high bandwidth applications like graphics and networking. The transition to PCI Express, which is extremely complex, is central to our GPU and MCP objectives this year. We intend to lead this transition using a PCI Express high-speed interconnect, or HSI. HSI is a complex piece of networking technology that performs high-speed bi-directional interconnect protocol conversion. Using HSI, we expect to transform some of our GPUs into PCI Express compatible GPUs. With our PCI Express compatible GPUs, we expect that our partners will be able to launch PCI Express compatible solutions in April 2004. During fiscal 2005, we expect to launch and be in full production with a top-to-bottom product line of next generation PCI Express GPUs based on our brand new NV4X architecture.
Gross Margin Improvement
We remain intensely focused on driving down cost and improving gross margins. With the scale of our business, we believe driving gross margins to our historical levels can result in earnings improvements.
nForce3
Just as nForce2 was the driver for our platform processor business growth in fiscal 2004, nForce3 has the potential to achieve similar results for fiscal 2005. Our MCP objective is to innovate in all areas of features, performance and compatibility. During the first quarter of fiscal 2005, we intend to launch our next nForce3, which is expected to be the first single-chip MCP to offer gigabit Ethernet, dual independent serial Advanced Technology Attachment, or ATA, controllers, industry leading Redundant Array of Independent Disks, or RAID, features and hardware security processing.
Handsets
Our handheld objective is to drive the multimedia handheld era by building exciting products that leverage NVIDIAs expertise, resources, and investments in digital media processing. The first quarter of fiscal 2005 will mark the beginning of a series of introductions of exciting new ultra-low power media processors for handsets. Over the next several years, digital media processing technologies are expected to play a critical role in the cell phone industry. Cell phones that take digital pictures will eclipse shipments of digital cameras. With the UMPs on our roadmap, future cell phones will be able to receive television programs, record digital video like a camcorder, enable video phone calls, and be your portable game player.
.11 Micron Process
On February 24, 2004, we announced that we will be one of the first semiconductor companies to manufacture select up-coming GPUs at TSMC's 0.11 um (micron) process technology. We will combine TSMC's 0.11 micron process with our own engineering designs, to deliver high-performance and low-power consumption in a graphics processor. TSMC's 0.11 micron process technology is fundamentally a photolithographic shrink of its industry-leading 0.13 micron process. Though actual results are design-dependent, TSMC's 0.11 micron high-performance process also includes transistor enhancements that improve speed and reduce power consumption relative to its 0.13 micron technology.
Critical Accounting Policies and Estimates
Managements discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories, long-lived assets, goodwill, income taxes, stock-based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our condensed consolidated financial statements. Our management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of our board of directors and the audit committee has reviewed our disclosures relating to them in this report.
Revenue Recognition
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured. For all sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Our policy on sales to distributors and stocking representatives is to defer recognition of revenue and related cost of revenue until the distributors and representatives resell the product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates in accordance with Emerging Issues Task Force Issue 01-9, or EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Unclaimed rebates, which historically have not been significant, are reversed to revenue upon expiration of the rebate. Rebates typically expire six months from the date of the original sale.
Our customer programs also include marketing development funds, or MDFs, which we also account for in accordance with EITF 01-9. MDFs represent monies paid to retailers, system builders, OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners activities while also promoting NVIDIA products.
If market conditions decline, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
Accounts Receivable
We maintain an allowance for doubtful accounts receivable for estimated losses resulting from the inability of our customers to make required payments. Management determines this allowance, which consists of an amount identified for specific customer issues as well as an amount based on general estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit. If the financial condition of our customers or insurance carrier were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required that could adversely affect our operating results. Furthermore, there can be no assurance that we will be able to obtain credit insurance in the future. Our current credit insurance agreement expires on December 31, 2004.
As of January 25, 2004, our allowance for doubtful accounts receivable was $2.3 million and our gross accounts receivable balance was $219.5 million. Of the $219.5 million, $39.7 million was covered by credit insurance and $3.0 million was covered by letters of credit. As a percentage of our gross accounts receivable balance, our allowance for doubtful accounts receivable has ranged between 1% and 2%. As of January 25, 2004, our allowance for doubtful accounts receivable represented 1% of our gross accounts receivable balance. If our allowance for doubtful accounts receivable would have been recorded at 2% of our gross accounts receivable balance, then our allowance for doubtful accounts receivable balance at January 25, 2004 would have been approximately $4.4 million, rather than the actual balance of $2.3 million.
Inventories
We write down our inventory for estimated lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that could adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when products are sold. No significant sales of such products have occurred to date.
Valuation of Long-lived Assets
We review long-lived assets, such as property and equipment, and intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for impairment. The first step tests for possible impairment indicators. If an impairment indicator is present, the second step measures whether the asset is recoverable based on a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Our review requires the use of judgment and estimates. No such impairment charges have occurred to date. However, future events or circumstances may result in a charge to earnings if we determine that the carrying value of a long-lived asset is not recoverable.
Goodwill
We utilize a two-step approach to testing goodwill for impairment. The first step tests for possible impairment by applying a fair value-based test. The second step (if necessary) measures the amount of such an impairment by applying fair value-based tests to individual assets and liabilities. We elected to perform our annual goodwill impairment review during the fourth quarter of each fiscal year. We completed our annual impairment test during the fourth quarter of fiscal 2004 and concluded that there was no impairment. However, future events or circumstances may result in a charge to earnings due to the potential for a write down of goodwill in connection with such tests.
Income Taxes
Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes , establishes financial accounting and reporting standards for the effect of income taxes. In accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax effects attributable to temporary differences and carryforwards; and we record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.
Our calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. Our estimates of current and deferred tax assets and liabilities may change based, in part, on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the United States, or U.S., or foreign jurisdictions where we operate, or changes in other facts or circumstances. In addition, we recognize liabilities for potential U.S. and foreign income tax contingencies based on our estimate of whether, and the extent to which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements, accordingly.
As of January 25, 2004, we had a valuation allowance of $182.7 million. Of the total valuation allowance, $117.0 million is attributable to certain net operating loss and tax credit carryforwards resulting from the exercise of employee stock options. The tax benefit of these net operating loss and tax credit carryforwards, if and when realization is sustained, will be accounted for as a credit to stockholders' equity. Of the remaining valuation allowance at January 25, 2004, $21.4 million relates to federal and state tax attributes acquired in certain acquisitions for which realization of the related deferred tax assets was determined not more likely than not to be realized due, in part, to potential utilization limitations as a result of ownership changes; and $44.3 million relates to certain state deferred tax assets that management determined not more likely than not to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets related to certain acquisitions becomes probable, recognition of these tax benefits would first reduce goodwill to zero, then reduce other non-current intangible assets related to the acquisition to zero with any remaining benefit reported as a reduction to income tax expense. To the extent realization of the deferred tax assets related to certain state tax benefits becomes probable, we would recognize an income tax benefit in the period such asset is more likely than not to be realized.
Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our consolidated statements of income expressed as a percentage of revenue.
|
Year Ended |
|
|
|
January 25, |
January 26, |
January 27, |
|
2004 |
2003 |
2002 |
|
|
|
|
Revenue |
100.0% |
100.0% |
100.0% |
Cost of revenue |
71.0 |
69.5 |
62.1 |
Cost of revenue related to stock option exchange |
-- |
0.3 |
-- |
|
|
|
|
Gross profit |
29.0 |
30.2 |
37.9 |
Operating expenses: |
|
|
|
Research and development |
14.8 |
11.8 |
11.3 |
Sales, general and administrative |
9.1 |
7.9 |
7.2 |
In-process research and development |
0.2 |
-- |
-- |
Stock option exchange |
-- |
2.9 |
-- |
Amortization of goodwill |
0.0 |
0.0 |
0.7 |
Acquisition related charges |
0.0 |
0.0 |
0.7 |
Discontinued use of property |
0.0 |
0.0 |
0.3 |
|
|
|
|
Total operating expenses |
24.1 |
22.6 |
20.2 |
|
|
|
|
Income from operations |
4.9 |
7.6 |
17.7 |
Interest and other income, net |
0.5 |
0.3 |
0.8 |
Convertible debenture redemption expense |
(0.7) |
0.0 |
0.0 |
|
|
|
|
Income before income tax expense |
4.7 |
7.9 |
18.5 |
Income tax expense |
0.6 |
3.1 |
5.5 |
|
|
|
|
Net income |
4.1 % |
4.8 % |
13.0 % |
|
|
|
|
Fiscal Years Ended January 25, 2004, January 26, 2003, and January 27, 2002
Revenue
Revenue was $1.82 billion in fiscal 2004, $1.91 billion in fiscal 2003, and $1.37 billion in fiscal 2002, which represented a decrease of 5% from fiscal 2003 to 2004 and an increase of 39% from fiscal 2002 to 2003. The revenue decrease from fiscal 2003 to fiscal 2004 was primarily the result of a significant decrease in sales of Xbox processors to Microsoft, offset by growth in our GPU, MCP and UMP products. The revenue growth from fiscal 2002 to fiscal 2003 was primarily the result of significant sales of Xbox processors in addition to the strong overall demand for our GPU and MCP products.
Revenue from sales to customers outside of the United States and other Americas accounted for 75%, 68% and 82% of total revenue for fiscal 2004, 2003 and 2002, respectively. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the foreign CEMs and add-in board and motherboard manufacturers revenue is attributable to end customers in a different location. The increase in the percentage of revenue from sales to customers outside of the United States and other Americas for fiscal 2004 as compared to fiscal 2003 is primarily due to decreased sales of XGPUs and MCPs used in the Microsoft Xbox product, which are billed to Microsoft in the United States. The decrease in the percentage of revenue from sales to customers outside of the United States for fiscal 2003 as compared to fiscal 2002 is primarily due to increased sales of XGPUs and MCPs used in the Microsoft Xbox product.
Sales to Microsoft accounted for approximately 15% of revenues for fiscal 2004. Our other three largest customers accounted for approximately 45% of revenues for fiscal 2004. In fiscal 2003, sales to Microsoft accounted for approximately 23% of revenues. Our other three largest customers accounted for approximately 41% of revenues for fiscal 2003. In fiscal 2002, sales to Microsoft accounted for approximately 9% of revenues. Our other three largest customers accounted for approximately 44% of revenues for fiscal 2002.
In future periods, our revenue may be affected by demand for and market acceptance of our products and/or our customers products, our ability to successfully develop and produce our products in volume production, competitive pressures resulting in lower than expected average selling prices, and new product announcements or product introductions by our competitors.
Gross Profit
Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors (including wafer fabrication, assembly, testing and packaging), manufacturing support costs (including labor and overhead associated with such purchases), final test yield fallout, inventory provisions and shipping costs. Gross margin is the ratio of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of products sold.
Our gross margin was 29%, 30% and 38% in fiscal 2004, 2003 and 2002, respectively. Gross margin for fiscal 2004 as compared to fiscal 2003 decreased primarily due to a shift in the mix of product sales to our new generation of GeForce FX products. Our GeForce FX products generally have experienced lower gross margins than previous GeForce products. This decrease was offset by an increase in gross margins on sales of Xbox processors in fiscal 2004 when compared to fiscal 2003, which resulted from the pricing settlement with Microsoft that we announced on February 6, 2003. Gross margin for fiscal 2003 as compared to fiscal 2002 decreased primarily due to a shift in mix of product sales that included more sales of Xbox processors which, at that time, generally had lower margins than our other products. In addition, the decrease was due to an inventory write-down of approximately $21.0 million related to certain Xbox processors and nForce platform processors during the second quarter of fiscal 2003, and the stock option exchange expense of $6.2 million that was charged to cost of revenue related to manufacturing personnel during the third quarter of fiscal 2003.
In the future, we could be subject to excess or obsolete inventories and be required to take additional write-downs if growth slows or if we incorrectly forecast product demand. A reduction in demand and market acceptance of our products and/or our customers products could also negatively impact our gross margins. We do not expect past results to be indicative of future periods. We remain intensely focused on driving down cost and improving gross margins. We expect improvement in our gross margins and believe our gross margins can be 30% or more.
Operating Expenses
Research and Development. Research and development expenses consist of salaries and benefits, cost of development tools and software, cost of new product prototypes and consultant costs. Research and development expenses increased by $45.1 million, or 20%, from fiscal 2003 to fiscal 2004 primarily due to a $33.2 million increase related to additional personnel, including approximately 60 employees that we obtained as a result of our acquisition of MediaQ, a $21.2 million increase associated with lab equipment, software licenses, maintenance fees and increased depreciation and amortization charges, and a $2.0 million increase in facility expenses, offset by a $11.3 million decrease in new product development costs and other expenses during the period. Research and development expenses increased by $70.1 million, or 45%, from fiscal 2002 to 2003 primarily due to a $32.9 million increase related to additional personnel, a $22.2 million increase associated with lab equipment, software licenses, maintenance fees and depreciation charges, a $4.5 million increase related to engineering costs to develop next generation products, and a $10.5 million increase in facilities costs due to the move into a new building at our headquarters and a full year of occupation in all headquarter buildings as well as other expenses during the year.
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 the increased complexity and the greater 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 tradeshow and advertising expenses, travel and entertainment expenses and legal and accounting expenses. Sales, general and administrative expenses increased $13.8 million, or 9%, from fiscal 2003 to fiscal 2004 primarily due to a $12.9 million increase related to additional personnel, a $9.1 million increase in tradeshow, marketing development and general administrative activities and a $3.2 million increase in computer software and equipment related to the enhancement of our computer systems and the depreciation and amortization of new equipment. These increases were offset by an $11.4 million decrease in legal fees related to higher legal fees incurred during fiscal 2003 for various issues that have since been resolved, including the SEC inquiry, Microsoft arbitration and shareholder lawsuits. Sales, general and administrative expenses increased $52.5 million, or 53%, from fiscal 2002 to 2003 primarily due to a $16.4 million increase related to additional personnel and commissions, a $16.6 million increase in legal and accounting expenses associated with various legal proceedings, a $9.0 million increase in equipment and software primarily related to the enhancement of our computer systems, a $7.9 million increase in tradeshow and product launch costs, and a $2.6 million increase in facilities costs due to the move into a new building at our headquarters and a full year of occupation in all headquarter buildings as well as other increases associated with general administrative activities and travel and entertainment expenses.
We expect sales, general and administrative expenses to continue to increase in absolute dollars as we continue to support our operations, expand our sales, launch our new products and protect our business interests.
In-process research and development. In connection with our acquisition of MediaQ in August 2003, we wrote-off $3.5 million of in-process research and development expense, or IPR&D, that had not yet reached technological feasibility and has no alternative future use. In accordance with SFAS No. 2, Accounting for Research and Development Costs , as clarified by FIN 4, Applicability of SFAS No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of SFAS No. 2 , amounts assigned to IPR&D meeting the above-stated criteria must be charged to expense as part of the allocation of the purchase price.
Stock Option Exchange. On September 26, 2002, we commenced an offer, or the Offer, to our employees to exchange outstanding stock options with exercise prices equal to or greater than $27.00 per share, or Eligible Options. Stock options to purchase an aggregate of approximately 20,615,000 shares were eligible for tender at the commencement of the Offer, representing approximately 39% of our outstanding stock options as of the commencement date. Only employees of NVIDIA or one of our subsidiaries as of September 26, 2002 who continued to be employees through the Offer termination date of October 24, 2002 were eligible to participate in the Offer. Employees who were on medical, maternity, workers compensation, military or other statutorily protected leave of absence, or a personal leave of absence, were also eligible to participate in the Offer. Employees who were terminated on or before the Offer termination date of October 24, 2002, were not eligible to participate in the Offer. In addition, our Chief Executive Officer and Chief Financial Officer and members of our Board of Directors were not eligible to participate in this Offer.
On October 24, 2002, the offer period ended and we were obligated to exchange approximately 18,843,000 Eligible Options for total consideration of $61.8 million, consisting of $39.9 million in fully vested, non-forfeitable shares of our common stock (approximately 3,815,000 shares) and $21.9 million in employer and employee related taxes. The number of fully vested, non-forfeitable shares of our common stock to be issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of our common stock on October 24, 2002, of $10.46 per share.
Amortization of Goodwill. During fiscal 2002, amortization of goodwill was associated with goodwill from the asset purchase from 3dfx. The initial allocation of the purchase price included $57.4 million of goodwill, plus approximately $3.0 million of intangible assets previously allocated to workforce in place, which was reclassified into goodwill as of the beginning of fiscal 2003.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , we no longer amortize goodwill as of the beginning of fiscal 2003. We have elected to perform our annual impairment review during the fourth quarter of each fiscal year. We completed our annual goodwill impairment test for fiscal 2004 and concluded that there was no impairment.
Acquisition Related Charges. Acquisition related charges are attributable to expenses related to the acquisition of assets from 3dfx in fiscal 2002. These charges primarily consisted of bonuses to former 3dfx employees.
Discontinued Use of Property. Discontinued use of property consists of write-offs of $3.7 million relating to our previous office space in Santa Clara, California. Since we relocated in June 2001, we have been unable to secure a subtenant for our previous office space due to the decrease in demand for commercial rental space in Silicon Valley. The write-offs consist of all remaining costs related to the preexisting lease, including rental payments, capitalized leasehold improvements, and furniture and fixtures. In December 2001, we filed a complaint against Extreme Networks Inc., the sublessor of the property, seeking payment of lease payments and other property charges for the period of July 2001 through December 2001 and seeking a declaration that we are not liable for any future payments under the lease. In July, 2003, we settled the matter with Extreme Networks and in August, 2003, the complaint was dismissed with prejudice.
Interest Income and Interest Expense
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income decreased from $23.2 million to $18.6 million from fiscal 2003 to fiscal 2004 primarily due to lower average balances of cash, cash equivalents and marketable securities in fiscal 2004 when compared to fiscal 2003. This was caused by the redemption of our $300.0 million convertible subordinated debentures in October 2003. Interest income decreased from $27.7 million to $23.2 million from fiscal 2002 to fiscal 2003 primarily due to the decline in market interest rates.
Interest expense primarily consists of interest incurred as a result of capital lease obligations and, prior to the redemption in October 2003, interest on our convertible subordinated debentures. Interest expense decreased from $16.5 million to $12.0 million from fiscal 2003 to fiscal 2004 primarily due to the redemption of our convertible subordinated debentures.
Other Income (Expense), net
Other income and expense primarily consists of realized gains and losses on the sale of marketable securities and any gains or losses related to the disposal of fixed assets. Other income increased by $3.2 million from fiscal 2003 to fiscal 2004 primarily due to $2.5 million of realized gains on the sale of marketable securities during the third quarter of fiscal 2004 as a result of our liquidation of a significant portion of our marketable securities portfolio in order to obtain the cash required to redeem our convertible subordinated debentures in October 2003.
Convertible Debenture Redemption Expense
On October 24, 2003, we fully redeemed our $300.0 million of 4¾% convertible subordinated debentures due 2007, or the Notes. The aggregate principal amount of the Notes outstanding was $300.0 million, which included $18.6 million of Notes that we had purchased in the open market during the three months ended October 26, 2003. The redemption price was equal to approximately 102.7% of the outstanding principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In connection with the redemption of the Notes, we recorded a one-time charge of approximately $13.1 million, which included a $7.6 million redemption premium and $5.5 million of unamortized issuance costs.
Income Taxes
We recognized income tax expense of $12.3 million, $59.8 million and $75.8 million in fiscal 2004, 2003 and 2002 respectively. Income tax expense as a percentage of income before taxes, or our annual effective tax rate, was 14.1% in fiscal 2004, 39.7% in fiscal 2003 and 30.0% in fiscal 2002.
Significant items impacting our annual effective tax rate in fiscal 2004 included the $3.5 million MediaQ IPR&D write-off for which no tax benefit was recognized, the $75.0 million income tax benefit of certain tax contingencies as a result of settlement of our IRS exam, the $38.2 million income tax expense for the accrual of U.S. deferred income taxes on previous permanently reinvested foreign earnings and the $33.6 million income tax expense for the establishment of a valuation allowance on certain previously recognized state deferred tax assets determined not more likely than not to be realized due, in part, to projections of future sources of taxable income.
Please refer to Note 14 of the Notes to the Consolidated Financial Statements for further information regarding the components of income tax expense.
The increase in our annual effective tax rate from fiscal 2002 to fiscal 2003 was primarily due to our not recording any income tax expense or benefit for the third quarter of fiscal 2003 as our loss before income tax expense for that quarter was primarily attributable to a stock compensation charge for which no tax benefit may be available.
We expect our annual effective income tax rate to be 20% for fiscal 2005. Please refer to Part II, Item 7 "Critical Accounting Policies - Income Taxes" for items that may affect this estimate.
Liquidity and Capital Resources
As of January 25, 2004, we had $604.0 million in cash, cash equivalents and marketable securities, a decrease of $424.4 million from the end of fiscal 2003. The decrease was primarily due to the $300.0 million redemption of the Notes in October 2003 and the $71.3 million acquisition of MediaQ in August 2003. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.
Operating activities generated cash of $49.7 million, $265.0 million and $160.8 million during fiscal 2004, 2003 and 2002, respectively. The decrease in cash flows from operating activities in fiscal 2004 when compared to fiscal 2003 was primarily due to the increase in inventory and decrease in income taxes payable due to the settlement of certain tax contingencies.
Cash used in investing activities has consisted primarily of investments in marketable securities, the purchase of certain assets from various businesses and purchases of property and equipment, which include leasehold improvements for our facilities. Investing activities provided cash of $88.0 million and used cash of $277.3 million during fiscal 2004 and 2003, respectively. Net cash provided by investing activities in fiscal 2004 was primarily due to $286.9 million of net sales and maturities of marketable securities as we liquidated a significant portion of our marketable securities portfolio in order to obtain the cash required to redeem the $300.0 million Notes in October 2003. This increase in cash from sales and maturities of marketable securities was offset by $127.6 million in capital expenditures primarily attributable to purchases of new research and development emulation equipment, technology licenses and software and $71.3 million for the acquisition of MediaQ. We expect to spend approximately $80.0 million to $100.0 million for capital expenditures during fiscal 2005, primarily for software licenses, emulation equipment, computer and engineering workstations. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets.
Financing activities used cash of $270.3 million during fiscal 2004 compared to cash provided of $26.3 million in fiscal 2003. The increase in cash used in fiscal 2004 when compared to fiscal 2003 was primarily due to the $300.0 million redemption of the Notes, which included $18.6 million of Notes that we had purchased during the three months ended October 26, 2003.
Operating Capital and Capital Expenditure Requirements
We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12 months. However, there is no assurance that we will not 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. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:
· decreased demand and market acceptance for our products and/or our customers products;
· inability to successfully develop and produce in volume production our next-generation products;
· competitive pressures resulting in lower than expected average selling prices; and
· new product announcements or product introductions by our competitors.
For additional factors see "Business Risks Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, our stock price could decline."
Other key factors that could affect our liquidity include:
Shelf Registration Statement
In December 2003, we filed a Form S-3 with the Securities and Exchange Commission, or SEC, under their "shelf" registration process. This shelf registration was declared effective by the SEC on March 25, 2004. Under this shelf registration process, we may sell common stock, preferred stock, debt securities, warrants, stock purchase contracts and/or stock purchase units in one or more offerings up to a total dollar amount of $500.0 million. Unless otherwise indicated in the applicable prospectus supplement, we intend to use the proceeds for working capital and general corporate purposes. In particular, we expect to incur significant operating expenses in connection with:
· continuing to develop our technology;
· hiring additional personnel;
· expanding our sales and marketing organization and activities;
· acquiring complementary technologies or businesses; and
· capital expenditures
3dfx Asset Purchase
The 3dfx asset purchase closed on April 18, 2001. Under the terms of the Asset Purchase Agreement, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets. We are currently party to litigation relating to certain aspects of the asset purchase and 3dfxs subsequent bankruptcy in October 2002. Please refer to Note 13 of the Notes to the Consolidated Financial Statements for further information regarding this litigation.
Contractual Obligations
The following summarizes our contractual obligations that are both on our balance sheet and off balance sheet as of January 25, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:
Contractual Obligations |
|
Total |
Within 1 Year |
23 Years |
4-5 Years |
After 5 Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
Capital lease obligations, including interest |
|
$ |
5,047 |
|
$ |
4,179 |
|
$ |
868 |
|
$ |
-- |
|
$ |
-- |
|
Operating leases |
|
|
206,242 |
|
|
24,635 |
|
|
49,950 |
|
|
50,625 |
|
|
81,032 |
|
Purchase obligations (1) |
|
|
213,289 |
|
|
213,289 |
|
|
-- |
|
|
-- |
|
|
-- |
|
Other liabilities reflected on our balance sheet under GAAP |
|
|
6,520 |
|
|
2,020 |
|
|
3,000 |
|
|
1,500 |
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
431,098 |
|
$ |
244,123 |
|
$ |
53,818 |
|
$ |
52,125 |
|
$ |
81,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________
(1)Represents our noncancelable inventory purchase commitments as of January 25, 2004.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is set forth in Note 1 of the Notes to Consolidated Financial Statements under the subheading "New Accounting Pronouncements," which information is hereby incorporated by reference.
Interest Rate Risk
We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the U.S. Government and its agencies. These investments are denominated in U.S. dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities . All of the cash equivalents and marketable securities are treated as "available-for-sale" under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that decline in market value due to changes in interest rates. However, because our debt securities are classified as "available-for-sale", no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders equity, net of tax. As of January 25, 2004, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both 50 basis points would result in changes in fair market values for these investments of approximately $2.7 million.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and 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 currency exchange rates could harm our business in the future.
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.
Risks Related to Our Operations
Failure to transition to new manufacturing process technologies could affect our ability to compete
effectively.
Our strategy is to utilize the most advanced process technology appropriate for our products and available from commercial third-party foundries. Use of advanced processes may have greater risk of initial yield problems and higher product cost. 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 currently use 0.15-micron, 0.14 micron and 0.13 micron process technologies for our family of GPUs, MCPs and UMPs. The majority of our newest GPUs, the GeForce FX and the GeForce FX Go products are manufactured in 0.13-micron process technology.
We believe that the transition of our products to increasingly smaller geometries will be important to our competitive position. On February 24, 2004, we announced that we will be one of the first semiconductor companies to manufacture select up-coming GPUs at TSMC's 0.11 um (micron) process technology.
We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. Moreover, we are dependent on our relationships with our third-party manufacturers to migrate to smaller geometry processes successfully. We may continue to have difficulty migrating to new manufacturing process technologies successfully or on a timely basis. Our inability to transition to new manufacturing process technologies may adversely affect our operating results and harm our gross margins.
Failure to achieve expected manufacturing yields for existing and/or new products would reduce our gross margins.
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 us and the manufacturer.
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.
We are dependent on key personnel and the loss of these employees could harm our business.
Our performance is substantially dependent on the performance of our executive officers and key employees. Marv Burkett and David Shannon are our only officers or employees bound by an employment agreement, and so our relationships with our other officers and employees are 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.
Our failure to estimate customer demand properly may result in excess or obsolete inventory that could adversely affect our gross margins.
Inventory purchases are based upon future demand forecasts. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to write-down our inventory and our gross margins could be adversely affected.
Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors our stock price could decline .
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. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline, perhaps substantially. We believe that our quarterly and annual results of operations may be affected by a variety of factors that could harm our revenue, gross profit and results of operations.
Factors that have affected our results of operations in the past, and could 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;
· new product announcements or product introductions by our competitors;
· our ability to introduce new products in accordance with original equipment manufacturers, or OEMs, 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;
· declines in spending by corporations and consumers related to perceptions regarding an economic downturn in the U.S. and international economies;
· competitive pressures resulting in lower than expected average selling prices;
· product 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, terrorism 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 and other types of lawsuits;
· customer receivable bad debt write-offs;
· costs associated with the repair and replacement of defective products;
· 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. 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 operating expenses are relatively fixed, and we order materials in advance of anticipated customer demand. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls.
Most of our operating expenses are relatively fixed in the short term, and we may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall. 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 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 inventory 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.
To stay competitive, we may have to invest more resources in research and development.
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. We have substantially increased our engineering and technical resources and have 1,057 full-time employees engaged in research and development as of January 25, 2004, compared to 832 employees as of January 26, 2003. During fiscal years 2004, 2003 and 2002, research and development expenditures represented 15%, 12% and 11% as a percentage of revenue, respectively.
Risks Related to Our Products
PCI Express is central to our GPU as well as MCP strategies this year and the outcome of this strategy will impact our business.
PCI Express is expected to enable a new level of performance for high bandwidth applications like graphics and networking. The transition to PCI Express, which is extremely complex, is central to our GPU and MCP strategies this year. We intend to lead this transition using a PCI Express high-speed interconnect, or HSI. HSI is a complex piece of networking technology that performs high-speed bi-directional interconnect protocol conversion. Using HSI, we expect to transform some of our GPUs into PCI Express compatible GPUs. With our PCI Express compatible GPUs, we expect that our partners will be able to launch PCI Express compatible solutions in April 2004. During fiscal 2005, we expect to launch and be in full production with a top-to-bottom product line of next generation PCI Express GPUs based on our brand new NV4X architecture. If we fail to deliver PCI Express in a timely manner or if our PCI Express compatible products do not meet consumer and/or analysts expectations, our business could suffer.
We need to develop new products and to manage product transitions in order to succeed.
Our business depends to a significant extent on our ability to successfully develop new products for our target segments. Our add-in board and motherboard manufacturers, original design manufacturers, or ODMs, 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 functionalities into products that meet the exacting design requirements of OEMs, ODMs, CEMs and add-in board and motherboard manufacturers;
· price our products competitively; and
· introduce the products to the market within the limited window for OEMs, ODMs, and add-in board and motherboard 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 International Business Machines, or IBM, Taiwan Semiconductor Manufacturing Company, or TSMC, United Microelectronics Corporation, or UMC, 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 products and our customers' products; and
· availability of adequate quantity and configurations of various types of memory products.
A critical component of our product development effort is our partnerships with leaders in the computer aided design, or CAD, industry. We have invested significant resources to develop relationships with industry leaders, including Cadence Design Systems, Inc., IKOS Systems, Inc. and Synopsys, Inc., often assisting these companies in the product definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics market and develop products that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of PC manufacturers. If these relationships are not successful, we may not be able to develop new products in a timely manner.
In addition, our strategy includes utilizing 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 OEMs, ODMs, add-in board and motherboard manufacturers and consumers of personal computers and consumer electronics. In addition, we may not successfully develop or introduce new products in sufficient volumes within the appropriate time to meet both the 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 digital media processors would harm our business. In particular, we experienced delays in the introduction of digital media processors using our next generation technology during the first half of fiscal 2004 and any such delays in the future or failure of these or other processors to meet or exceed specifications of competitive products could materially harm our business.
Our failure to identify new product opportunities or develop new products could harm our business.
As our digital media 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 digital media 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 digital media processors to achieve high volumes, leading PC OEMs, ODMs, and add-in board and motherboard manufacturers must select our digital media 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 new products. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs, ODMs, and add-in board and motherboard 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 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 digital media processors non-competitive or obsolete or result in our holding excess inventory, any of which would harm our business.
We could suffer a loss of market share if our products contain significant defects.
Products as complex as those offered by us may contain defects or failures when introduced or when new versions or enhancements to existing products are released. We have in the past discovered defects and incompatibilities with customers hardware in certain of our products and may experience delays or loss of 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. If these defects or flaws exist and are not detected prior to volume production and distribution, we may be required to reimburse customers for costs to repair or replace the affected products in the field. These costs could be significant and could adversely affect our business and operating results.
Risks Related to Our Partners
We sell our products to a small number of customers and our business could suffer by the loss of these customers.
We have only a limited number of customers and our sales are highly concentrated. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key CEMs, ODMs, motherboard and add-in board manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, motherboard and add-in board manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, motherboard manufacturers, add-in board manufacturers and stocking representatives, each of which has relationships with a broad range of system builders and leading PC OEMs. Currently, we sell a significant majority of our digital media processors directly to stocking representatives, CEMs, ODMs, motherboard and add-in board manufacturers, which then sell boards with our graphics processor to leading PC OEMs, retail outlets and to a large number of system builders. As a result, our business could be harmed by the loss of business from PC OEMs, CEMs, ODMs, motherboard and add-in board manufacturers. In addition, revenue from PC OEMs, CEMs, ODMs, motherboard and add-in board manufacturers 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.
Difficulties in collecting accounts receivable could result in significant charges against income, which could harm our business.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses and to downturns in the economy and the industry. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. As of the of fiscal 2004, fiscal 2003 and fiscal 2002 our allowance for doubtful accounts represented 0.1%, 0.2% and 0.2% of revenue for each fiscal year, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which could adversely affect our operating results. We may have to record additional reserves or write-offs in the future, which could harm our business.
We depend on foundries and independent contractors to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.
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, IBM and UMC to produce our semiconductor wafers and utilize independent subcontractors to perform assembly, testing and packaging. Our wafer requirements represent a significant portion of the total production capacity at TSMC. 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. TSMC has no obligation to provide us with any specified minimum quantities of product. TSMC, IBM and UMC fabricate 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, IBM, UMC and any other manufacturers used by us to ensure adequate product supply to respond to customer demand. Any difficulties like these would harm our business.
There can be no assurance that IBM will be able to produce wafers of acceptable quality and with acceptable manufacturing yield and deliver those wafers to us and our independent assembly and testing subcontractors on a timely basis. .
On March 26, 2003, we announced that we have formed a multi-year strategic alliance under which IBM will manufacture our next-generation GeForce GPUs. As part of the agreement, we will gain access to IBMs suite of foundry services and manufacturing technologies, including power-efficient copper wiring, and a roadmap that is designed to lead to 65nm (nanometer; a billionth of a meter) in the next several years, giving us valuable tools to advance our GPUs. IBM began manufacturing the next-generation GeForce graphics processor in July 2003 at IBMs plant in East Fishkill, New York.
During the development of our relationship with IBM, our manufacturing yields and product performance could suffer due to difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of IBM. 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. 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.
We are dependent on third parties for assembly, testing and packaging of our products.
Our digital media processors are assembled and tested by Siliconware Precision Industries Company Ltd., Amkor Technology, ChipPAC Incorporated and Advanced Semiconductor Engineering. We do not have long-term agreements with any of these subcontractors. As a result of our dependence on third-party subcontractors for assembly, testing and packaging 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 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 digital media processors 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.
Microsoft announced that it had entered into an agreement with one of our competitors to develop technology for future Xbox products and services. The impact that this announcement may have on our future revenue from the sale of Xbox processors to Microsoft is uncertain.
On August 14, 2003, Microsoft announced that it had entered into an agreement with one of our competitors to develop technology for future Xbox products and services. The impact that this announcement may have on our future revenue from the sale of Xbox processors to Microsoft is uncertain, but we do not anticipate that it will have a significant impact upon us for at least 18 24 months. Revenue from the sale of Xbox processors to Microsoft during fiscal 2002, fiscal 2003 and fiscal 2004 accounted for 9%, 23% and 15%, respectively, of our total revenue.
We may not be able to realize the potential financial or strategic benefits of business acquisitions and that could hurt our ability to grow our business and sell our products.
In the past we have acquired and invested in other businesses that offered products, services and technologies that we believed would help expand or enhance our products and services or help expand our distribution channels. For any previous or future acquisition or investment, the following risks could impair our ability to grow our business and develop new products and, ultimately, could impair our ability to sell our products:
· difficulty in combining the technology, operations or workforce of the acquired business;
· disruption of our ongoing businesses;
· difficulty in realizing the potential financial or strategic benefits of the transaction;
· difficulty in maintaining uniform standards, controls, procedures and policies; and
· possible impairment of relationships with employees and customers as a result of any integration of new businesses and management personnel.
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, or a combination of cash and common stock. If the consideration is paid with our common stock, existing stockholders would be further diluted.
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.
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 the Xbox. In the event that an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft has first and last rights of refusal to purchase the stock. The provision could also delay or prevent a change in control of NVIDIA.
Risks Related to Our Competition
The 3D graphics, platform processor and handheld industries are highly competitive and we may be unable to compete.
The market for GPUs, MCPs and UMPs for PCs and handhelds 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 digital media 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 ours, or may provide better performance or additional features not provided by our products, which could harm our business.
Our primary source of competition is from companies that provide or intend to provide GPU and MCP solutions for the PC and handheld segments. Our competitors include the following:
· suppliers of MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, Intel, Silicon Integrated Systems and VIA;
· suppliers of desktop standalone GPUs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, Creative Technology, Matrox Electronics Systems Ltd. and XGI Technology, Inc.,;
· suppliers of notebook standalone GPUs that incorporate 3D graphics functionality as part of their existing solutions, such as ATI, Silicon Motion. and the joint venture of a division of SONICblue Incorporated (formerly S3 Incorporated) and VIA; and
· suppliers of UMPs for handheld devices that incorporate advanced graphics functionality as part of their existing solutions, such as ATI and Seiko-Epson.
If and to the extent we offer products outside of the personal computer, consumer electronics and handheld segments, 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.
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 for hardware components or subassemblies designed by PC OEMs, ODMs, and add-in board and motherboard manufacturers. Our add-in board and motherboard manufacturers and major OEM and ODM 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 an OEMs 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.
Risks Related to Market Conditions
We are subject to risks associated with international operations which may harm our business.
Our reliance on foreign third-party manufacturing, assembly, testing and packaging 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, including terrorism and war, which may delay the shipment of our products.
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.
Our business is cyclical in nature and an industry downturn could harm our business.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capital equipment and product development and rapid technological change. If we are unable to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our costs to sufficiently offset declines in demand, our revenues and earnings will suffer during downturns.
Our products may not continue to be accepted by the PC and consumer electronics segments.
Our success will depend in part upon continued broad adoption of our digital media processors for 3D graphics in PC and consumer electronics applications. The market for digital media 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 the PC segment is our core business, our business would suffer if for any reason our current or future digital media processors do not continue to achieve widespread acceptance in the PC segment. If we are unable to complete the timely development of products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the PC segment, our business would be harmed.
We are dependent on the PC market and the rate of its growth has and may in the future have a negative impact on our business.
During fiscal 2004, we derived the majority of our revenue from the sale of products for use in the desktop and notebook PC segments, including professional workstations . We expect to continue to derive most of our revenue from the sale or license of products for use in the desktop and notebook PC segments in the next several years. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, will 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.
Hostilities involving the United States and/or terrorist attacks could harm our business.
The financial, political, economic and other uncertainties following the terrorist attacks upon the United States led to a weakening of the global economy. Subsequent terrorist acts and/or the threat of future outbreak or continued escalation of hostilities involving the United States or other countries could adversely affect the growth rate of our revenue and have an adverse effect on our business, financial condition or results of operations. In addition, any escalation in these events or similar future events may disrupt our operations or those of our customers, distributors and suppliers, which could adversely affect our business, financial condition or results of operations.
Political instability in Taiwan and in The Peoples Republic of China could harm our business.
Because of our reliance on TSMC and UMC, our business may be harmed by political instability in Taiwan, including the worsening of the strained relations between The Peoples Republic of China and Taiwan, or if relations between the U.S. and The Peoples Republic of China are strained due to foreign relations events. Furthermore, any substantial disruption in our suppliers operations, either as a result of a natural disaster, political unrest, economic instability, acts of terrorism or war, equipment failure or other cause, could harm our business.
Our stock price may continue to experience significant short-term fluctuations.
The price of our common stock has fluctuated greatly. These price fluctuations have been rapid and severe. The price of our common stock may continue to fluctuate greatly in the future due to factors that are non-company specific, such as the decline in the U.S. economy, acts of terror against the U.S., war or due to a variety of company specific factors, including quarter to quarter variations in our operating results, shortfalls in revenue or earnings from levels expected by securities analysts and the other factors discussed above in these risk factors. In the past, following periods of volatility in the market price of a companys stock, securities class action litigation had been initiated against the issuing company.
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the U.S. Government and its agencies. These investments are denominated in U.S. dollars.
We account for our investment instruments in accordance with SFAS No. 115. All of the cash equivalents and marketable securities are treated as "available-for-sale" under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that decline in market value due to changes in interest rates. However, because our debt securities are classified as "available-for-sale", no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity.
Risks Related to Intellectual Property, Litigation and Government Action
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 and positions, which has resulted in protracted and expensive litigation. The digital media processor industry 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 or are included in legal actions 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 product lines intensifies, the volume of intellectual property infringement claims may increase. If infringement claims are made against us, we may seek licenses under the claimants patents or other intellectual property rights. However, licenses may not be offered at all or on terms acceptable to us, particularly by competitors. 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 and sale of one or more products, which could reduce our revenues and harm our business. 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 certain claims of infringement arising out of sale of our products.
Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.
We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property in the United States and internationally. We have numerous patents issued and pending in the United States and in foreign countries. Our patents and pending patent applications relate to technology used by us in connection with our products, including our digital media processors. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as: the commercial significance of our operations and our competitors operations in particular countries and regions; the location in which our products are manufactured; our strategic technology or product directions in different countries; and the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions.
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 by 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. Our failure to effectively protect our intellectual property could harm our business. We have licensed technology from third parties for incorporation in our digital media 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 licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.
Litigation 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.
We are currently subject to claims of patent infringement, and we may be subject to patent infringement claims or suits brought by other parties in the future. These claims and any future lawsuits could divert our resources and result in the payment of substantial damages.
Future actions by the IRS or SEC or other governmental or regulatory agencies could harm our business.
As of January 25, 2004, the Internal Revenue Service, or IRS, closed our federal income tax return exam for our fiscal years ended January 28, 2001 and January 27, 2002. The results of our exam were submitted to the Joint Committee on Taxation, or the Joint Committee, for review.
With our exam closed, we recorded the tax benefit of the settlement in our financial statements for the fiscal year ended January 25, 2004 because we had certainty as to the outcome of certain tax contingencies for which we had established liabilities. However, the failure of the Joint Committee to agree with our settlement may result in a material adverse impact on the results of our operations in the period in which the matter is either resolved or in which an unfavorable outcome becomes probable and reasonably estimable. Please refer to Part II, Item 7 "Results of Operations - Income Taxes" and Note 14 of our Notes to the Consolidated Financial Statements for further information.
We are subject to changes in financial accounting standards, which may affect our reported financial results or the way we conduct business.
The Financial Accounting Standards Board and various federal legislative proposals have proposed changes to Accounting Principles Generally Accepted in the United States, or U.S. GAAP, that may require us to recognize compensation expense for our employee stock options. We currently us the intrinsic value method to measure compensation expense for stock-based awards to our employees. Under this method, we generally do no recognize compensation expense for an employee stock option when the exercise price of the stock option is equal to the fair market value on the date of grant. If any change to U.S. GAAP is adopted that requires us to recognize compensation expense for our employee stock options, our reported results of operations may be adversely affected.
The information required by this item is set forth in our consolidated financial statements and notes thereto included in this Annual Report.
Not applicable.
Controls and Procedures
(i) Evaluation of Disclosure Controls and Procedures. As of January 25, 2004, or the Evaluation Date, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives. Subject to these limitations, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when recorded.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
(ii) Changes in Internal Controls. There were no changes in our internal controls over financial reporting during the fiscal quarter ended January 25, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
Identification of Directors
Reference is made to the information regarding directors appearing under the heading "Election of Directors" in our 2004 Proxy Statement, which information is hereby incorporated by reference.
Identification of Executive Officers
Reference is made to the information regarding executive officers appearing under the heading "Management" in Part I of this Annual Report on Form 10-K, which information is hereby incorporated by reference.
Identification of Audit Committee and Financial Expert
Reference is made to the information regarding directors appearing under the heading "Report of the Audit Committee of the Board of Directors" in our 2004 Proxy Statement, which information is hereby incorporated by reference.
Material Changes to Procedures for Recommending Directors
Reference is made to the information regarding directors appearing under the heading "Election of Directors" in our 2004 Proxy Statement, which information is hereby incorporated by reference.
Compliance with Section 16(a) of the Exchange Act
Reference is made to the information appearing under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in our 2004 Proxy Statement, which information is hereby incorporated by reference.
Code of Ethics
Reference is made to the information appearing under the heading "Code of Ethics" in our 2004 Proxy Statement, which information is hereby incorporated by reference.
Reference is made to the information appearing under the heading "Executive Compensation" in our 2004 Proxy Statement, which information is hereby incorporated by reference.
Reference is made to information appearing in our 2004 Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information," which information is hereby incorporated by reference.
Reference is made to information appearing in our 2004 Proxy Statement under the heading "Certain Transactions," which information is hereby incorporated by reference.
Reference is made to the information appearing under the heading "Proposal No. 2:Ratification of Selection of Independent AuditorsFees Billed by the Independent Auditor" in our 2004 Proxy Statement, which information is hereby incorporated by reference.
PART IV
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On November 6, 2003, NVIDIA filed a report on Form 8-K, dated November 6, 2003, furnishing under "Item 12. Disclosure of Results of Operations and Financial Condition" its financial information for the three and nine months ended October 26, 2003. |
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Stockholders and Board of Directors
NVIDIA Corporation:
We have audited the consolidated financial statements of NVIDIA Corporation and subsidiaries (the "Company") as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NVIDIA Corporation and subsidiaries as of January 25, 2004 and January 26, 2003 and the results of their operations and their cash flows for each of the years in the three-year period ended January 25, 2004, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 of the accompanying notes to consolidated financial statements, effective January 28, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ KPMG LLP
Mountain View, California
February 12, 2004
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
January 25, |
January 26, |
|
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
214,422 |
|
$ |
346,994 |
|
Marketable securities |
|
|
389,621 |
|
|
681,419 |
|
Accounts receivable, less allowances of $11,731 and $17,468 in 2004 and 2003, respectively |
|
|
196,631 |
|
|
154,501 |
|
Inventories |
|
|
234,238 |
|
|
145,046 |
|
Prepaid expenses and other current assets |
|
|
14,539 |
|
|
12,393 |
|
Deferred income taxes |
|
|
3,261 |
|
|
11,249 |
|
|
|
|
|
|
|
Total current assets |
|
|
1,052,712 |
|
|
1,351,602 |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
190,029 |
|
|
135,152 |
|
Deposits and other assets |
|
|
7,731 |
|
|
10,473 |
|
Deferred income taxes |
|
|
-- |
|
|
43,317 |
|
Goodwill |
|
|
108,909 |
|
|
54,227 |
|
Intangible assets, net |
|
|
39,963 |
|
|
22,244 |
|
|
|
|
|
|
|
|
|
$ |
1,399,344 |
|
$ |
1,617,015 |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
185,342 |
|
$ |
141,129 |
|
Accrued liabilities |
|
|
144,755 |
|
|
228,467 |
|
Current portion of note and capital lease obligations |
|
|
4,015 |
|
|
5,676 |
|
Interest payable on convertible debenture |
|
|
-- |
|
|
4,176 |
|
|
|
|
|
|
|
Total current liabilities |
|
|
334,112 |
|
|
379,448 |
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
8,609 |
|
|
-- |
|
Capital lease obligations, less current portion |
|
|
856 |
|
|
4,880 |
|
Long-term convertible debenture |
|
|
-- |
|
|
300,000 |
|
Long-term liabilities |
|
|
4,582 |
|
|
-- |
|
Commitments and contingent liabilities see Note 13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
Common stock, $.001 par value; 1,000,000,000 shares authorized; 164,145,787 and 157,790,022 shares issued and outstanding in 2004 and 2003, respectively |
|
|
164 |
|
|
158 |
|
Additional paid-in capital |
|
|
583,481 |
|
|
531,030 |
|
Deferred compensation |
|
|
(5,468 |
) |
|
-- |
|
Accumulated other comprehensive income, net |
|
|
850 |
|
|
3,760 |
|
Retained earnings |
|
|
472,158 |
|
|
397,739 |
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
1,051,185 |
|
|
932,687 |
|
|
|
|
|
|
|
|
|
$ |
1,399,344 |
|
$ |
1,617,015 |
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,822,945 |
|
$ |
1,909,447 |
|
$ |
1,369,471 |
|
Cost of revenue |
|
|
1,294,067 |
|
|
1,327,271 |
|
|
850,233 |
|
Cost of revenue related to stock option exchange (1) |
|
|
-- |
|
|
6,164 |
|
|
-- |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
528,878 |
|
|
576,012 |
|
|
519,238 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
269,972 |
|
|
224,873 |
|
|
154,752 |
|
Sales, general and administrative |
|
|
165,249 |
|
|
151,485 |
|
|
98,944 |
|
In-process research and development |
|
|
3,500 |
|
|
-- |
|
|
-- |
|
Stock option exchange (1) |
|
|
-- |
|
|
55,668 |
|
|
-- |
|
Amortization of goodwill |
|
|
-- |
|
|
-- |
|
|
10,093 |
|
Acquisition related charges |
|
|
-- |
|
|
-- |
|
|
10,030 |
|
Discontinued use of property |
|
|
-- |
|
|
-- |
|
|
3,687 |
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
438,721 |
|
|
432,026 |
|
|
277,506 |
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
90,157 |
|
|
143,986 |
|
|
241,732 |
|
Interest income |
|
|
18,561 |
|
|
23,246 |
|
|
27,713 |
|
Interest expense |
|
|
(12,010 |
) |
|
(16,467 |
) |
|
(16,173 |
) |
Other income (expense), net |
|
|
3,033 |
|
|
(208 |
) |
|
(523 |
) |
Convertible debenture redemption expense |
|
|
(13,068 |
) |
|
-- |
|
|
-- |
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
86,673 |
|
|
150,557 |
|
|
252,749 |
|
Income tax expense |
|
|
12,254 |
|
|
59,758 |
|
|
75,825 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
74,419 |
|
$ |
90,799 |
|
$ |
176,924 |
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.46 |
|
$ |
0.59 |
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.43 |
|
$ |
0.54 |
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
Shares used in basic per share computation |
|
|
160,924 |
|
|
153,513 |
|
|
143,015 |
|
Shares used in diluted per share computation |
|
|
172,707 |
|
|
168,393 |
|
|
171,074 |
|
___________________________________________________________________________________________
(1) The $61,832 stock option exchange expense for the year ended January 26, 2003, relates to personnel associated with cost of revenue (for manufacturing personnel), research and development, and sales, general and administrative of $6,164, $35,417 and $20,251, respectively.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
(In thousands, except share data)
|
|
Common Stock |
Additional |
Deferred |
Accumulated Other |
|
Total Stock- |
Total |
|
|
Shares |
Amount |
Paid in Capital |
Compens-ation |
Comprehensive Income |
Retained Earnings |
holders Equity |
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 28, 2001 |
|
136,915,234 |
$137 |
$276,960 |
$(6) |
$-- |
$130,016 |
$407,107 |
|
Issuance of common stock from stock plans |
|
12,637,896 |
13 |
90,830 |
-- |
-- |
-- |
90,843 |
|
Tax benefit from stock plans |
|
-- |
-- |
88,932 |
-- |
-- |
-- |
88,932 |
|
Amortization of deferred compensation |
|
-- |
-- |
-- |
6 |
-- |
-- |
6 |
|
Issuance cost |
|
-- |
-- |
(101) |
-- |
-- |
-- |
(101) |
|
Unrealized gain |
|
-- |
-- |
-- |
-- |
528 |
-- |
528 |
528 |
Tax effect of unrealized gain |
|
-- |
-- |
-- |
-- |
(213) |
-- |
(213) |
(213) |
Cumulative translation adjustments |
|
-- |
-- |
-- |
-- |
(207) |
-- |
(207) |
(207) |
Net income |
|
-- |
-- |
-- |
-- |
-- |
176,924 |
176,924 |
176,924 |
|
|
|
|
|
|
|
|
|
|
Balances, January 27, 2002 |
|
149,553,130 |
150 |
456,621 |
-- |
108 |
306,940 |
763,819 |
177,032 |
Issuance of common stock from stock plans |
|
4,421,823 |
4 |
25,483 |
-- |
-- |
-- |
25,487 |
|
Stock option exchange offer |
|
3,815,069 |
4 |
39,902 |
-- |
-- |
-- |
39,906 |
|
Tax benefit from stock plans |
|
-- |
-- |
9,180 |
-- |
-- |
-- |
9,180 |
|
Deferred compensation |
|
-- |
-- |
-- |
(156) |
-- |
-- |
(156) |
|
Unrealized gain |
|
-- |
-- |
-- |
-- |
5,742 |
-- |
5,742 |
5,742 |
Tax effect of unrealized gain |
|
-- |
-- |
-- |
-- |
(2,297) |
-- |
(2,297) |
(2,297) |
Cumulative translation adjustments |
|
-- |
-- |
-- |
-- |
207 |
-- |
207 |
207 |
Net income |
|
-- |
-- |
-- |
-- |
-- |
90,799 |
90,799 |
90,799 |
|
|
|
|
|
|
|
|
|
|
Balances, January 26, 2003 |
|
157,790,022 |
158 |
531,186 |
(156) |
3,760 |
397,739 |
932,687 |
94,451 |
Issuance of common stock from stock plans |
|
6,355,765 |
6 |
37,667 |
-- |
-- |
-- |
37,673 |
|
Tax benefit from stock plans |
|
-- |
-- |
8,488 |
-- |
-- |
-- |
8,488 |
|
Deferred compensation |
|
-- |
-- |
6,140 |
(5,984) |
-- |
-- |
156 |
|
Amortization of deferred compensation |
|
-- |
-- |
-- |
672 |
-- |
-- |
672 |
|
Unrealized loss, net of related tax effect |
|
-- |
-- |
-- |
-- |
(4,850) |
-- |
(4,850) |
(4,850) |
Tax effect of unrealized loss |
|
|
|
|
|
1,940 |
-- |
1,940 |
1,940 |
Reclassification adjustment for net gains included in net income |
|
-- |
-- |
-- |
-- |
-- |
-- |
-- |
(3,159) |
Tax effect of reclassification adjustment for net gains included in net income |
|
-- |
-- |
-- |
-- |
-- |
-- |
-- |
632 |
Net income |
|
-- |
-- |
-- |
-- |
-- |
74,419 |
74,419 |
74,419 |
|
|
|
|
|
|
|
|
|
|
Balances, January 25, 2004 |
|
164,145,787 |
$164 |
$583,481 |
$(5,468) |
$850 |
$472,158 |
$1,051,185 |
$68,982 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
74,419 |
|
$ |
90,799 |
|
$ |
176,924 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
In-process research and development |
|
|
3,500 |
|
|
-- |
|
|
-- |
|
Depreciation and amortization |
|
|
82,016 |
|
|
58,216 |
|
|
43,491 |
|
Write-off of convertible debenture issuance costs |
|
|
5,485 |
|
|
-- |
|
|
-- |
|
Deferred income taxes |
|
|
55,135 |
|
|
29,768 |
|
|
(51,914 |
) |
Stock-based compensation |
|
|
-- |
|
|
(156 |
) |
|
364 |
|
Amortization of deferred compensation |
|
|
672 |
|
|
-- |
|
|
6 |
|
Issuance of common stock in exchange for stock options |
|
|
-- |
|
|
39,906 |
|
|
-- |
|
Bad debt expense |
|
|
731 |
|
|
1,917 |
|
|
1,446 |
|
Tax benefit from employee stock plans |
|
|
8,488 |
|
|
9,180 |
|
|
88,932 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(41,356 |
) |
|
(9,070 |
) |
|
(43,806 |
) |
Inventories |
|
|
(85,126 |
) |
|
68,831 |
|
|
(123,497 |
) |
Prepaid income taxes |
|
|
-- |
|
|
38,016 |
|
|
(38,016 |
) |
Prepaid expenses and other current assets |
|
|
(2,698 |
) |
|
(4,315 |
) |
|
277 |
|
Deposits and other assets |
|
|
(3,482 |
) |
|
63 |
|
|
(13,957 |
) |
Accounts payable |
|
|
43,506 |
|
|
(72,890 |
) |
|
141,717 |
|
Accrued liabilities |
|
|
(44,746 |
) |
|
26,564 |
|
|
108,646 |
|
Customer advance / deferred revenue |
|
|
(46,866 |
) |
|
(11,797 |
) |
|
(129,807 |
) |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
49,678 |
|
|
265,032 |
|
|
160,806 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
(734,642 |
) |
|
(639,500 |
) |
|
(472,917 |
) |
Sales and maturities of marketable securities |
|
|
1,021,590 |
|
|
422,200 |
|
|
15,320 |
|
Purchase of certain assets from various businesses |
|
|
-- |
|
|
-- |
|
|
(64,109 |
) |
Acquisition of businesses |
|
|
(71,303 |
) |
|
(3,901 |
) |
|
-- |
|
Purchases of property and equipment and intangible assets |
|
|
(127,604 |
) |
|
(63,123 |
) |
|
(96,966 |
) |
Release of restricted cash |
|
|
-- |
|
|
7,000 |
|
|
17,500 |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
88,041 |
|
|
(277,324 |
) |
|
(601,172 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Redemption of convertible debenture |
|
|
(300,000 |
) |
|
-- |
|
|
-- |
|
Common stock issued under employee stock plans |
|
|
37,757 |
|
|
25,487 |
|
|
90,476 |
|
Sale lease back financing |
|
|
-- |
|
|
5,734 |
|
|
11,246 |
|
Principal payments on capital leases |
|
|
(8,048 |
) |
|
(4,935 |
) |
|
(2,455 |
) |
Issuance costs |
|
|
-- |
|
|
-- |
|
|
(176 |
) |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(270,291 |
) |
|
26,286 |
|
|
99,091 |
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(132,572 |
) |
|
13,994 |
|
|
(341,275 |
) |
Cash and cash equivalents at beginning of period |
|
|
346,994 |
|
|
333,000 |
|
|
674,275 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
214,422 |
|
$ |
346,994 |
|
$ |
333,000 |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
15,167 |
|
$ |
15,100 |
|
$ |
14,830 |
|
|
|
|
|
|
|
|
|
Cash paid (refund) for income taxes, net |
|
$ |
(211 |
) |
$ |
(35,101 |
) |
$ |
26,429 |
|
|
|
|
|
|
|
|
|
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets recorded under capital lease arrangements |
|
$ |
2,528 |
|
$ |
-- |
|
$ |
-- |
|
|
|
|
|
|
|
|
|
Unrealized gains/(losses) from marketable securities |
|
$ |
(4,850 |
) |
$ |
5,742 |
|
$ |
528 |
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation |
|
$ |
6,140 |
|
$ |
-- |
|
$ |
-- |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
We design, develop and market graphics processing units, or GPUs, media and communications processors, or MCPs, ultra-low power media processors, or UMPs, and related software that are integral to a wide variety of visual computing platforms, including enterprise personal computers, or PCs, consumer PCs, professional workstations, notebook PCs, personal digital assistants, cellular phones, game consoles and digital media centers. We operate in one industry segment in the United States and other Americas, Asia and Europe. We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998.
Reclassifications
Certain prior year balance sheet and income statement balances were reclassified to conform to the current period presentation.
Principles of Consolidation
Our consolidated financial statements include the accounts of NVIDIA Corporation and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, inventories and income taxes. These estimates are based on historical facts and various other assumptions that we believe are reasonable.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with a maturity of three months or less at the time of purchase to be cash equivalents. As of January 25, 2004, our cash and cash equivalents were $214.4 million, which consists of $143.7 million invested in money market funds.
Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as "available-for-sale" under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist of highly liquid investments with a maturity of greater than three months when purchased. We classify our marketable debt securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method.
Inventories
Inventories are stated at the lower of cost, on a weighted average basis, or market. Write-downs to reduce the carrying value of obsolete, slow moving and non-usable inventory to net realizable value are charged to cost of revenue.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method based on estimated useful lives, generally three to five years. Depreciation expense includes the amortization of assets recorded under capital leases. Leasehold improvements and assets recorded under capital leases are amortized over the shorter of the lease term or the estimated useful life of the asset.
Debt Financing Costs
In connection with our convertible subordinated debenture, see Note 13, we incurred certain direct issuance costs from third parties who performed services that assisted in the closing of the transaction. These issuance costs were included in our consolidated balance sheet under "deposits and other assets" and were amortized on a straight line basis over the term of the financing. On October 24, 2003, we fully redeemed the convertible subordinated debenture. In connection with the redemption, we recorded a $13.1 million charge, which included $5.5 million of unamortized issuance costs.
Advertising Expenses
We expense advertising costs in the period in which they are incurred. Advertising expenses for fiscal 2004, 2003 and 2002 were approximately $11.3 million, $6.8 million and $4.6 million, respectively.
Stock Split
In August 2001, our Board of Directors approved a two-for-one stock split of our common stock for stockholders of record on August 28, 2001, effected in the form of a 100% stock dividend. The transfer agent distributed the shares resulting from the split on September 17, 2001. All share and per-share numbers contained herein reflect this stock split.
Revenue Recognition
We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection is reasonably assured. For all sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer. At the point of sale, we assess whether the arrangement fee is fixed and determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Our policy on sales to distributors and stocking representatives is to defer recognition of revenue and related cost of revenue until the distributors and representatives resell the product.
We record estimated reductions to revenue for customer programs at the time revenue is recognized. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We account for rebates in accordance with Emerging Issues Task Force Issue 01-9, or EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Unclaimed rebates, which historically have not been significant, are reversed to revenue upon expiration of the rebate. Rebates typically expire six months from the date of the original sale.
Our customer programs also include marketing development funds, or MDFs, which we also account for in accordance with EITF 01-9. MDFs represent monies paid to retailers, system builders, OEMs, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners activities while also promoting NVIDIA products.
If market conditions decline, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, marketable securities and trade accounts receivable. All marketable securities are held in our name, managed by several investment managers and held by one major custodial institution. Three customers accounted for approximately 54% of our accounts receivable balance at January 25, 2004. We perform ongoing credit evaluations of our customers financial condition and maintain an allowance for potential credit losses. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. Our overall estimated exposure excludes amounts covered by credit insurance and letters of credit.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144, or SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on the estimated discounted future cash flows expected to be generated by the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.
Accounting for Asset Retirement Obligations
In fiscal 2004, we adopted Statement of Financial Accounting Standards No. 143, or SFAS No. 143, Accounting for Asset Retirement Obligations , which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. Under our current operating lease agreements for our headquarters facility, we may be obligated to return a minimal amount of property to its original condition upon lease termination based on the landlords discretion at that time. We believe this obligation, if any, is immaterial.
Income Taxes
We record income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recorded or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We also account for income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to their relatively short maturities as of January 25, 2004 and January 26, 2003. Marketable securities are comprised of available-for-sale securities that are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders equity, net of tax.
Foreign Currency Translation
We use the U.S. dollar as our functional currency. Foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for inventories, prepaid expenses and other current assets, property, plant and equipment, deposits and other assets and equity, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the previously noted balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in "Other income (expense), net" and to date have not been significant.
Comprehensive Income
Comprehensive income consists of net earnings and unrealized gains and losses on available-for-sale securities, recorded net of tax.
Goodwill and Intangible Assets
Effective fiscal 2003, we completed the adoption of Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets . As required by SFAS No. 142, we discontinued amortizing the remaining balances of goodwill as of the beginning of fiscal 2003. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
In accordance with SFAS No. 142, we have elected to perform our annual impairment review during the fourth quarter. We have completed our annual goodwill impairment test and concluded that there was no impairment. Had SFAS No. 142 been adopted in fiscal 2002, our results would have been as follows:
|
|
Year Ended |
|
|
January 27, |
|
|
2002 |
|
|
|
|
|
(In thousands, except per share data) |
|
|
Net income |
|
$ |
176,924 |
|
Goodwill and workforce amortization, tax effected |
|
$ |
7,065 |
|
|
|
|
|
Adjusted net income |
|
$ |
183,989 |
|
Reported basic earnings per share |
|
$ |
1.24 |
|
Reported diluted earnings per share |
|
$ |
1.03 |
|
Adjusted basic earnings per share |
|
$ |
1.29 |
|
Adjusted diluted earnings per share |
|
$ |
1.08 |
|
Stock-Based Compensation
Statement of Financial Accounting Standards No. 148, or SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure , amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based compensation and the effect of the method used on reported results.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We use the intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for our stock-based employee compensation plans. As such, compensation expense is recorded if on the date of grant the current fair value per share of the underlying stock exceeds the exercise price per share. Compensation cost for our stock-based compensation plans as determined consistent with SFAS No. 123, would have decreased net income to the pro forma amounts indicated below:
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
74,419 |
|
$ |
90,799 |
|
$ |
176,924 |
|
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
|
537 |
|
|
-- |
|
|
-- |
|
Add: Stock option exchange expense included in reported net income, net of related tax effects |
|
|
-- |
|
|
37,285 |
|
|
-- |
|
Deduct: Compensation expense determined under fair value based method for stock options exchanged on October 25, 2002, net of related tax effects |
|
|
-- |
|
|
(167,714 |
) |
|
-- |
|
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
|
(74,513 |
) |
|
(37,698 |
) |
|
(89,274 |
) |
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
443 |
|
$ |
(77,328 |
) |
$ |
87,650 |
|
|
|
|
|
|
|
|
|
Basic net income per share as reported |
|
$ |
0.46 |
|
$ |
0.59 |
|
$ |
1.24 |
|
Basic net income (loss) per share pro forma |
|
$ |
0.00 |
|
$ |
(0.50 |
) |
$ |
0.61 |
|
Diluted net income per share as reported |
|
$ |
0.43 |
|
$ |
0.54 |
|
$ |
1.03 |
|
Diluted net income (loss) per share pro forma |
|
$ |
0.00 |
|
$ |
(0.50 |
) |
$ |
0.51 |
|
For the purpose of the pro forma calculation, the fair value of options granted under the our stock option plans has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
Year Ended |
Year Ended |
Year Ended |
|
January 25, |
January 26, |
January 27, |
|
2004 |
2003 |
2002 |
|
|
|
|
Weighted average expected life of stock options (in years) |
4 |
4 |
4 |
Risk free interest rate |
2.4% |
3.8% |
4.3% |
Volatility |
80% |
88% |
83% |
Dividend yield |
-- |
-- |
-- |
For the purpose of the pro forma calculation, the weighted-average per share fair value of options granted during the years ended January 25, 2004, January 26, 2003 and January 25, 2002 was approximately $9.43, $18.29 and $23.94, respectively.
For the purpose of the pro forma calculation the fair value of shares purchased under our Employee Stock Purchase Plan, or the Purchase Plan, has been estimated at the date of purchase using the Black-Scholes option pricing model with the following assumptions:
|
Year Ended |
Year Ended |
Year Ended |
|
January 25, |
January 26, |
January 27, |
|
2004 |
2003 |
2002 |
|
|
|
|
Weighted average expected life of stock options (in months) |
9 |
10 |
6 |
Risk free interest rate |
1.7% |
3.7% |
4.7% |
Volatility |
80% |
88% |
83% |
Dividend yield |
-- |
-- |
-- |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the purpose of the pro forma calculation the weighted-average fair value of shares purchased under the Purchase Plan during the year ended January 25, 2004, January 26, 2003 and January 27, 2002 was approximately $3.76, $14.27 and $8.79, respectively.
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 the convertible debentures and the treasury stock method for stock options. Under the as-if-converted method and the treasury stock method, the convertible debentures and the effect of stock options outstanding, respectively, are not included in the computation of diluted net income per share for periods when their effect is anti-dilutive. The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented.
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
Numerator: |
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net income per share |
|
$ |
74,419 |
|
$ |
90,799 |
|
$ |
176,924 |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share, weighted average shares |
|
|
160,924 |
|
|
153,513 |
|
|
143,015 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
11,783 |
|
|
14,880 |
|
|
28,059 |
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share, weighted average shares |
|
|
172,707 |
|
|
168,393 |
|
|
171,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.46 |
|
$ |
0.59 |
|
$ |
1.24 |
|
Diluted net income per share |
|
$ |
0.43 |
|
$ |
0.54 |
|
$ |
1.03 |
|
Diluted net income per share does not include the effect of the following anti-dilutive common equivalent shares:
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding |
|
|
7,906 |
|
|
5,892 |
|
|
2,504 |
|
Convertible subordinated debentures (equivalent common shares upon assumed conversion) |
|
|
-- |
|
|
6,472 |
|
|
6,472 |
|
|
|
|
|
|
|
|
|
|
|
|
7,906 |
|
|
12,364 |
|
|
8,976 |
|
|
|
|
|
|
|
|
|
The weighted-average price of stock options excluded from the computation of diluted earnings per share was $29.63, $32.45 and $54.62 for the years ended January 25, 2004, January 26, 2003 and January 27, 2002, respectively. The convertible subordinated debentures were convertible into shares of common stock at a conversion price of $46.36 per share and were anti-dilutive for the years ended January 26, 2003 and January 27, 2002. The convertible subordinated debentures were no longer outstanding as of January 25, 2004 due to the redemption on October 24, 2003.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, or EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 provides guidance on how to account for certain arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have a significant impact on our results of operations or financial position.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, or FIN 46, Consolidation of Variable Interest Entities , which addresses consolidation by business enterprises of variable interest entities, or VIEs, either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46, or FIN 46(R), resulting in variable effective dates based on the nature as well as the creation date of the VIE. We believe the adoption of FIN 46(R) will not have an impact on our results of operations or financial position.
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, or SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity . SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, except for certain provisions for mandatorily redeemable controlling interests and non-controlling interests in consolidated limited life entities which have been deferred by the Financial Accounting Standards Board. The adoption of SFAS No. 150 did not have an impact on our results of operations or financial position.
In November 2003, the Emerging Issues Task Force reached a consensus on Issue No. 03-01, or EITF No. 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments . EITF No. 03-01 establishes additional disclosure requirements for each category of FAS 115 investments in a loss position. Effective for years ending after December 15, 2003, companies must disclose the aggregate amount of unrealized losses, and the aggregate related fair value of their investments with unrealized losses. Those investments are required to be segregated by those in a loss position for less than twelve months and those in a loss position for greater than twelve months. Additionally, certain qualitative disclosures should be made to clarify a circumstance whereby an investments fair value that is below cost is not considered other-than-temporary. The provisions of this consensus do not have a significant effect on our financial position or operating results, and the disclosure requirements are included in Note 6.
Note 2 Acquisition of MediaQ, Inc.
On August 19, 2003, we completed the acquisition of MediaQ, Inc., or MediaQ, a leading provider of graphics and multimedia technology for wireless mobile devices. Our primary reasons for the acquisition of MediaQ, Inc. were to accelerate our entry into the handheld devices market, leverage MediaQs two-dimensional, or 2D, and low power capabilities, allowing us to continue to focus on three-dimensional, or 3D, and advanced video efforts, leverage existing MediaQ channel and design wins, and enhance MediaQs PDA business through our existing OEM and ODM channels. We believe that these objectives are achievable through the addition of a number of qualified engineers and technical employees from the former MediaQ workforce, thereby enhancing our expertise in the handheld devices market. We consider the former MediaQ workforce, combined with their know-how, to be key factors necessary to achieve the business objectives listed above and to develop future product generations of handheld devices.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The aggregate purchase price consisted of cash consideration of approximately $71.3 million, including $1.3 million of direct acquisition costs. Following is a summary of estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition:
|
|
Fair Market Value |
Straight-Line Depreciation/Amortization Period |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
1,505 |
|
|
-- |
|
Inventories |
|
|
4,066 |
|
|
-- |
|
Other assets |
|
|
612 |
|
|
-- |
|
Property and equipment |
|
|
1,460 |
|
|
9 months 3 years |
|
Deferred income tax assets |
|
|
1,601 |
|
|
-- |
|
In-process research and development |
|
|
3,500 |
|
|
-- |
|
Goodwill |
|
|
53,695 |
|
|
-- |
|
Intangible assets: |
|
|
|
|
|
|
|
Existing technology |
|
|
13,100 |
|
|
1 3 years |
|
Customer relationships |
|
|
2,100 |
|
|
18 months |
|
Backlog |
|
|
600 |
|
|
3 months |
|
Non-compete agreement |
|
|
150 |
|
|
18 months |
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
82,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
(2,115 |
) |
|
-- |
|
Current liabilities recognized in connection with the business combination |
|
|
(2,591 |
) |
|
-- |
|
Long-term deferred income tax liabilities |
|
|
(6,380 |
) |
|
-- |
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
(11,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
71,303 |
|
|
|
|
|
|
|
|
|
|
|
The amount of the purchase price allocated to purchased in-process research and development, or IPR&D, represents the value assigned to research and development projects of MediaQ that had commenced but had not yet reached technological feasibility and have no alternative future use. In accordance with SFAS No. 2, Accounting for Research and Development Costs , as clarified by FIN 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method an interpretation of FASB Statement No. 2, amounts assigned to IPR&D meeting the above-stated criteria were charged to expense as part of the allocation of the purchase price.
The pro forma results of operations have not been presented for the acquisition of MediaQ because the effect of this acquisition was not considered material.
Note 3 Asset Purchases
During fiscal year 2002, we completed the purchase of certain assets from various businesses, including 3dfx Interactive, Inc., or 3dfx, and other asset purchases, for an aggregate purchase price of approximately $79.1 million. These purchases have been accounted for under the purchase method of accounting. Excluding the 3dfx transaction, the aggregate purchase price for all other purchases is immaterial to our consolidated financial statements.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 3dfx asset purchase closed on April 18, 2001. The 3dfx asset purchase closed on April 18, 2001. Under the terms of the Asset Purchase Agreement, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx two million shares of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets. We are currently party to litigation relating to certain aspects of the asset purchase and 3dfxs subsequent bankruptcy in October 2002. Please refer to Note 13 of the Notes to the Consolidated Financial Statements for further information regarding this litigation.
The 3dfx asset purchase price of $70.0 million and direct transaction costs of $4.2 million were allocated based on fair values presented below. Upon the adoption of Statement of Financial Accounting Standards No. 142, or SFAS No. 142, approximately $3.0 million of intangible assets previously allocated to workforce in place were reclassified into goodwill in fiscal 2003. In addition, amortization of goodwill ceased in accordance with SFAS No. 142.
|
|
Fair Market Value |
Straight-Line Amortization Period |
|
|
|
|
|
|
|
(In thousands) |
|
|
(Years) |
|
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
2,433 |
|
|
1-2 |
|
Trademarks |
|
|
11,310 |
|
|
5 |
|
Goodwill |
|
|
60,418 |
|
|
-- |
|
|
|
|
|
|
|
|
Total |
|
$ |
74,161 |
|
|
|
|
|
|
|
|
|
|
|
The final allocation of the purchase price of the 3dfx assets is contingent upon the amount of additional consideration, if any, paid to 3dfx upon the final satisfaction of their liabilities.
Note 4 Goodwill
The carrying amount of goodwill is as follows:
|
|
January 25, 2004 |
January 26, 2003 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
3dfx |
|
$ |
50,326 |
|
$ |
50,326 |
|
MediaQ |
|
|
53,695 |
|
|
-- |
|
Other |
|
|
4,888 |
|
|
3,901 |
|
|
|
|
|
|
|
Total goodwill |
|
$ |
108,909 |
|
$ |
54,227 |
|
|
|
|
|
|
|
Note 5 Amortizable Intangible Assets
We are currently amortizing our intangible assets with definitive lives over periods ranging from 1 to 5 years. The components of our amortizable intangible assets are as follows:
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
January 25, 2004 |
January 26, 2003 |
|
|
|
|
|
|
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated
Amortization |
Net Carrying Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology licenses |
|
$ |
15,178 |
|
$ |
(7,161 |
) |
$ |
8,017 |
|
$ |
7,028 |
|
$ |
(3,972 |
) |
$ |
3,056 |
|
Patents |
|
|
19,319 |
|
|
(8,992 |
) |
|
10,327 |
|
|
10,319 |
|
|
(4,478 |
) |
|
5,841 |
|
Acquired intellectual property |
|
|
27,067 |
|
|
(10,590 |
) |
|
16,477 |
|
|
11,117 |
|
|
(5,236 |
) |
|
5,881 |
|
Trademarks |
|
|
11,310 |
|
|
(6,283 |
) |
|
5,027 |
|
|
11,310 |
|
|
(4,021 |
) |
|
7,289 |
|
Other |
|
|
250 |
|
|
(135 |
) |
|
115 |
|
|
250 |
|
|
(73 |
) |
|
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
73,124 |
|
$ |
(33,161 |
) |
$ |
39,963 |
|
$ |
40,024 |
|
$ |
(17,780 |
) |
$ |
22,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense associated with intangible assets for the years ended January 25, 2004 and January 26, 2003 was $16.2 million and $9.6 million, respectively. Amortization expense for the net carrying amount of intangible assets at January 25, 2004 is estimated to be $18.4 million in fiscal 2005, $13.4 million in fiscal 2006, $6.5 million in fiscal 2007, $1.5 million in fiscal 2008 and $0.1 million in fiscal 2009.
Note 6 Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as "available-for-sale" under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist of highly liquid investments with a maturity of greater than three months when purchased. We classify our marketable debt securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders equity, net of tax. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized gains for fiscal 2004, fiscal 2003 and fiscal 2002 were $2.9 million, $0.3 million and $0.2 million, respectively.
The following is a summary of cash equivalents and marketable securities at January 25, 2004 and at January 26, 2003:
|
|
January 25, 2004 |
|
|
|
|
|
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized (Loss) (1) |
|
|
Estimated Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
$ |
65,147 |
|
$ |
214 |
|
$ |
(127 |
) |
$ |
65,234 |
|
Commercial paper |
|
|
15,592 |
|
|
-- |
|
|
-- |
|
|
15,592 |
|
Obligations of the U.S. government & its agencies |
|
|
198,084 |
|
|
574 |
|
|
(111 |
) |
|
198,547 |
|
U.S. corporate notes, bonds, and obligations |
|
|
175,678 |
|
|
957 |
|
|
(90 |
) |
|
176,545 |
|
Money market |
|
|
143,661 |
|
|
-- |
|
|
-- |
|
|
143,661 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
598,162 |
|
$ |
1,745 |
|
$ |
(328 |
) |
$ |
599,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
$ |
209,958 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
389,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
$ |
599,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) |
The fair value of investments with loss positions is $96.9 million at January 25, 2004. We evaluated the nature of these investments, which are primarily obligations of the U.S. government and its agencies and U.S. corporate notes, the duration of the impairments, and the amount of the impairments relative to the underlying portfolio and concluded that such amounts were not "other-than-temporary" as defined by SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities . |
|
|
|
January 26, 2003 |
|
|
|
|
|
|
Amortized Cost |
|
|
Unrealized Gain |
|
|
Unrealized (Loss) |
|
|
Estimated Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
$ |
92,286 |
|
$ |
535 |
|
$ |
(635 |
) |
$ |
92,186 |
|
Commercial paper |
|
|
109,465 |
|
|
-- |
|
|
-- |
|
|
109,465 |
|
Obligations of the U.S. government & its agencies |
|
|
359,003 |
|
|
2,847 |
|
|
(11 |
) |
|
361,839 |
|
U.S. corporate notes, bonds, and obligations |
|
|
262,914 |
|
|
3,551 |
|
|
(21 |
) |
|
266,444 |
|
Money market |
|
|
192,754 |
|
|
-- |
|
|
-- |
|
|
192,754 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,016,422 |
|
$ |
6,933 |
|
$ |
(667 |
) |
$ |
1,022,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
|
|
|
|
|
|
|
|
|
$ |
341,269 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
681,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
$ |
1,022,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of cash equivalents and marketable securities classified as available-for-sale at January 25, 2004 and at January 26, 2003 by expected maturity are shown below.
|
|
January 25, 2004 |
January 26, 2003 |
|
|
|
|
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year |
|
$ |
282,762 |
|
$ |
283,123 |
|
$ |
592,025 |
|
$ |
593,714 |
|
Due in 1 5 years |
|
|
315,400 |
|
|
316,456 |
|
|
424,397 |
|
|
428,974 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
598,162 |
|
$ |
599,579 |
|
$ |
1,016,422 |
|
$ |
1,022,688 |
|
|
|
|
|
|
|
|
|
|
|
Note 7 - Balance Sheet Components
Certain balance sheet components are as follows:
|
|
January 25, |
January 26, |
|
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
Inventories: |
|
(In thousands) |
|
|
|
Raw materials |
|
$ |
22,131 |
|
$ |
17,510 |
|
Work in-process |
|
|
44,523 |
|
|
13,179 |
|
Finished goods |
|
|
167,584 |
|
|
114,357 |
|
|
|
|
|
|
|
Total inventories |
|
$ |
234,238 |
|
$ |
145,046 |
|
|
|
|
|
|
|
At January 25, 2004, we had outstanding inventory purchase obligations totaling $213.3 million.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
January 25, |
January 26, |
|
|
2004 |
2003 |
|
|
|
|
|
|
(In thousands) |
|
|
|
Software |
|
$ |
116,150 |
|
$ |
48,006 |
|
Test equipment |
|
|
73,287 |
|
|
49,961 |
|
Computer equipment |
|
|
70,173 |
|
|
54,479 |
|
Leasehold improvements |
|
|
58,649 |
|
|
54,416 |
|
Construction in process |
|
|
1,620 |
|
|
4,862 |
|
Office furniture and equipment |
|
|
17,996 |
|
|
17,359 |
|
|
|
|
|
|
|
|
|
|
337,875 |
|
|
229,083 |
|
Accumulated depreciation and amortization |
|
|
(147,846 |
) |
|
(93,931 |
) |
|
|
|
|
|
|
Property and equipment, net |
|
$ |
190,029 |
|
$ |
135,152 |
|
|
|
|
|
|
|
Depreciation expense for fiscal 2004, 2003 and 2002 was $59.3 million, $42.6 million and $24.3 million, respectively. Assets recorded under capital leases included in property and equipment were $19.5 million and $17.1 million as of January 25, 2004 and January 26, 2003, respectively. Related accumulated amortization was $14.0 million and $8.7 million as of January 25, 2004 and January 26, 2003, respectively.
|
|
January 25, |
January 26, |
|
|
2004 |
2003 |
|
|
|
|
|
|
(In thousands) |
|
|
|
Accrued customer programs |
|
$ |
54,875 |
|
$ |
50,018 |
|
Customer advances |
|
|
11,530 |
|
|
58,396 |
|
Taxes payable |
|
|
29,609 |
|
|
82,952 |
|
Accrued payroll and related expenses |
|
|
30,270 |
|
|
20,575 |
|
Deferred rent |
|
|
8,151 |
|
|
5,050 |
|
Other |
|
|
10,320 |
|
|
11,476 |
|
|
|
|
|
|
|
Total accrued liabilities |
|
$ |
144,755 |
|
$ |
228,467 |
|
|
|
|
|
|
|
Note 8 Guarantees
Financial Accounting Standards Board Interpretation No. 45, or FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a rollforward of the entitys product warranty liabilities.
We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. The reductions to revenue for estimated product returns for fiscal 2004, fiscal 2003 and fiscal 2002 are as follows:
Description |
|
Balance at Beginning of Period |
Additions (1) |
Deductions (2) |
Balance at End of Period |
|
|
|
|
|
|
|
|
(In thousands) |
Year ended January 25, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for sales returns |
|
$ |
13,228 |
|
$ |
23,796 |
|
$ |
(27,603 |
) |
$ |
9,421 |
|
|
|
|
|
|
|
|
|
|
|
Year ended January 26, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for sales returns |
|
$ |
15,586 |
|
$ |
20,147 |
|
$ |
(22,505 |
) |
$ |
13,228 |
|
|
|
|
|
|
|
|
|
|
|
Year ended January 27, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for sales returns |
|
$ |
7,092 |
|
$ |
17,171 |
|
$ |
(8,677 |
) |
$ |
15,586 |
|
|
|
|
|
|
|
|
|
|
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Allowances for sales returns are charged as a reduction to revenue.
(2) Represents amounts written off against the allowance for sales returns.
In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion included intellectual property indemnification provisions in the terms of our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. However, historically costs related to these indemnification provisions have not been significant. We have not recorded any liability in our consolidated financial statements for such indemnifications.
Note 9 - Stockholders Equity
Convertible Preferred Stock
As of January 25, 2004, there were no shares of preferred stock outstanding and we have no current plans to issue any of the authorized preferred stock.
2000 Nonstatutory Equity Incentive Plan
On August 1, 2000, our Board of Directors approved the 2000 Nonstatutory Equity Incentive Plan, or the 2000 Plan, to provide for the issuance of our common stock to employees and affiliates who are not directors, officers or 10% stockholders. The 2000 Plan provides for the issuance of nonstatutory stock options, stock bonuses and restricted stock purchase rights. Option grants issued under the 2000 plan generally expire in six to 10 years. The Compensation Committee appointed by the Board of Directors has the authority to amend the 2000 Plan and to determine the option term, exercise price and vesting period of each grant. Initial option grants generally vest ratably over a four-year period, with 25% becoming vested approximately one year from the date of grant and the remaining 75% vesting on a quarterly basis over the next three years. Subsequent option grants generally vest quarterly over a four-year period. There were a total of 21,939,202 shares authorized for issuance and 10,309,447 shares available for future issuance under the 2000 Plan as of January 25, 2004.
1998 Equity Incentive Plan
The Equity Incentive Plan, or the 1998 Plan, was adopted by our Board of Directors on February 17, 1998 and was approved by our stockholders on April 6, 1998 as an amendment and restatement of our then existing Equity Incentive Plan which had been adopted on May 21, 1993. The 1998 Plan provides for the issuance of our common stock to directors, employees and consultants. The 1998 Plan provides for the issuance of stock bonuses, restricted stock purchase rights, incentive stock options or nonstatutory stock options. On the last day of each fiscal year, starting with the year ending January 31, 1999, the aggregate number of shares of common stock that are available for issuance are automatically increased by a number of shares equal to five percent (5%) of our outstanding common stock on such date, including on an as-if-converted basis preferred stock and convertible notes, and outstanding options and warrants, calculated using the treasury stock method. There were a total of 110,094,385 shares authorized for issuance and 18,647,584 shares available for future issuance under the 1998 Plan as of January 25, 2004.
Pursuant to the 1998 Plan, the exercise price for incentive stock options is at least 100% of the fair market value on the date of grant or for employees owning in excess of 10% of the voting power of all classes of stock, 110% of the fair market value on the date of grant. For nonstatutory stock options, the exercise price is no less than 85% of the fair market value on the date of grant.
Option grants issued under the 1998 Plan generally expire in six to 10 years. Vesting periods are determined by the Board of Directors. However, initial option grants under the 1998 Plan generally vest ratably over a four year period, with 25% becoming vested approximately one year from the date of grant and the remaining 75% vesting on a quarterly basis over the next three years. Subsequent option grants generally vest quarterly over a four year period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1998 Non-Employee Directors Stock Option Plan
In February 1998, our Board of Directors adopted the 1998 Non-Employee Directors Stock Option Plan, or the Directors Plan, to provide for the automatic grant of non-qualified options to purchase shares of our common stock to directors of us who are not employees or consultants of us or of an affiliate of us. The Directors Plan was amended on May 22, 2002.
Under the amended Directors Plan, each non-employee director who is elected or appointed to our Board of Directors for the first time is automatically granted an option to purchase 75,000 shares, which vests quarterly over a three-year period, or Initial Grant. Previously, such a director was entitled to a grant of 200,000 shares, vesting monthly over a four-year period.
Under the amended Directors Plan, on August 1, 2002, each non-employee director was automatically granted an option to purchase 75,000 shares, which will vest 33% on the first anniversary of the grant date, with the remaining 66% vesting quarterly over the second and third years after the date of grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant, or 2002 Grants. Previously, such a director was entitled to an annual grant of 80,000 shares, vesting 100% on the first anniversary of the date of the grant.
On August 1, 2003 and on each August 1 thereafter, each non-employee director will be automatically granted an option to purchase 25,000 shares, or Annual Grant. These Annual Grants will begin vesting on the second anniversary of the date of the grant and vest quarterly during the next year. The Annual Grants will be fully vested on the third anniversary of the date of the grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant.
On August 1, 2002 and each August 1 of each year thereafter, each non-employee director who is a member of a committee of the Board of Directors will automatically be granted an option to purchase 5,000 shares, or Committee Grant. The Committee Grants vest in full on the first anniversary of the date of the grant, provided that the director has attended at least 75% of the meetings during the year following the date of the grant. Previously, such a director was entitled to a grant of 20,000 shares, vesting in full on the first anniversary of the date of the grant.
If a non-employee director fails to attend at least 75% of the regularly scheduled meetings during the year following the grant of an option, rather than vesting as described previously, the 2002 Grants and Committee Grants will vest annually over four years following the date of grant at the rate of 10% per year for the first three years and 70% for the fourth year, and the Annual Grants will vest 30% upon the three-year anniversary of the grant date and 70% for the fourth year, such that in each case the entire option will become fully vested on the four-year anniversary of the date of the grant. For the 2002 Grants, Annual Grants and Committee Grants, if the person has not been serving on the Board of Directors or committee since a prior years annual meeting, the number of shares granted will be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve in such capacity.
The Compensation Committee administers the amended Directors Plan. A total of 1,200,000 shares have been authorized and issued under the amended Directors Plan of which none is available for future issuance as of January 25, 2004. In July 2000, our Board of Directors amended the 1998 Plan to incorporate the automatic grant provisions of the amended Directors Plan. Future grants to non-employee directors will be made out of the 1998 Plan until such time as shares may become available under the amended Directors Plan.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan
In February 1998, our Board of Directors approved the 1998 Employee Stock Purchase Plan, or the Purchase Plan. In June 1999, the Purchase Plan was amended to increase the number of shares reserved for issuance automatically each year at the end of our fiscal year for the next 10 years (commencing at the end of fiscal 2000 and ending 10 years later in 2009) by an amount equal to 2% of the outstanding shares of us on each such date, including on an as-if-converted basis preferred stock and convertible notes, and outstanding options and warrants, calculated using the treasury stock method; provided that the maximum number of shares of common stock available for issuance from the Purchase Plan could not exceed 26,000,000 shares. There are a total of 19,199,814 shares authorized for issuance. At January 25, 2004, 3,760,932 shares have been issued under the Purchase Plan and 15,438,882 shares are available for future issuance.
The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. Under the Purchase Plan, the Board has authorized participation by eligible employees, including officers, in periodic offerings following the adoption of the Purchase Plan. Under the Purchase Plan, separate offering periods shall be no longer than 27 months. Under the current offering adopted pursuant to the Purchase Plan, each offering period is 24 months, which is divided into four purchase periods of 6 months.
Employees are eligible to participate if they are employed by us or an affiliate of us designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld pursuant to the Purchase Plan and applied on specified dates determined by the Board to the purchase of shares of common stock. The Board may increase this percentage at its discretion, up to 15%. The price of common stock purchased under the Purchase Plan will be equal to the lower of the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period at 85% at the fair market value of the common stock on the relevant purchase date. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with us and in each case their contributions are refunded.
The following summarizes the transactions under the 1998 Plan, 2000 Plan and Directors Plan:
|
Options
Available for Grant |
Options Outstanding |
Weighted Average Price Per Share |
|
|
|
|
|
|
|
|
Balances, January 28, 2001 |
13,080,404 |
50,549,356 |
$10.30 |
Authorized |
9,954,182 |
-- |
-- |
Granted |
(15,159,700) |
15,154,700 |
38.14 |
Exercised |
-- |
(12,282,958) |
6.87 |
Cancelled |
1,541,369 |
(1,541,369) |
13.90 |
|
|
|
|
Balances, January 27, 2002 |
9,416,255 |
51,879,729 |
19.14 |
Authorized |
13,957,063 |
-- |
-- |
Granted |
(8,522,650) |
8,522,650 |
28.09 |
Shares of common stock issued in exchange for stock options |
(3,815,069) |
-- |
-- |
Exercised |
-- |
(3,816,695) |
4.62 |
Cancelled - unvested (1) |
18,067,604 |
(18,067,604) |
36.53 |
Cancelled vested (2) |
2,882,376 |
(2,882,376) |
32.51 |
|
|
|
|
Balances, January 26, 2003 |
31,985,579 |
35,635,704 |
12.93 |
Authorized |
8,796,156 |
-- |
-- |
Granted |
(12,680,144) |
12,675,144 |
14.77 |
Exercised |
-- |
(4,688,703) |
5.17 |
Cancelled |
855,440 |
(855,440) |
19.26 |
|
|
|
|
Balances, January 25, 2004 |
28,957,031 |
42,766,705 |
$14.20 |
|
|
|
|
(1) Includes 16,193,886 unvested stock options cancelled in exchange for shares of common stock.
(2) Includes 2,649,607 vested stock options cancelled in exchange for shares of common stock.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes information about stock options outstanding as of January 25, 2004:
|
Options Outstanding |
Options Exercisable |
|
|
|
Range of Exercise Prices |
Number Outstanding |
Weighted Average Remaining Contractual
Life |
Weighted Average Exercise Price |
Number Exercisable |
Weighted Average Exercise Price |
|
|
|
|
|
|
$0.09 - $0.09 |
12,000 |
2.6 |
$0.09 |
12,000 |
$0.09 |
0.33 0.33 |
166,900 |
3.6 |
$0.33 |
166,900 |
$0.33 |
0.66 0.79 |
571,360 |
3.9 |
$0.75 |
571,360 |
$0.75 |
1.04 1.38 |
357,291 |
4.0 |
$1.31 |
357,291 |
$1.31 |
1.58 2.25 |
4,915,622 |
4.4 |
$1.78 |
4,914,122 |
$1.78 |
4 .09 5.88 |
4,644,781 |
5.6 |
$4.80 |
4,185,698 |
$4.77 |
7.65 11.07 |
4,744,990 |
7.0 |
$9.41 |
2,431,695 |
$9.45 |
11.51 17.18 |
14,880,723 |
6.1 |
$14.52 |
4,265,731 |
$15.18 |
17.53 26.25 |
7,838,336 |
6.7 |
$20.12 |
4,130,320 |
$19.79 |
26.38 39.54 |
4,003,202 |
7.1 |
$32.36 |
2,392,121 |
$30.83 |
42.98 53.61 |
631,000 |
7.6 |
$43.36 |
614,562 |
$43.17 |
65.47 65.47 |
500 |
8.0 |
$65.47 |
218 |
$65.47 |
|
|
|
|
|
|
$0.09 - $65.47 |
42,766,705 |
6.1 |
$14.20 |
24,042,018 |
$12.46 |
|
|
|
|
|
|
Note 10 Retirement Plan
We have a 401(k) Retirement Plan, or the Plan, covering substantially all of our United States employees. Under the Plan, participating employees may defer up to 100 percent of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits.
Note 11 Stock Option Exchange
On September 26, 2002, we commenced an offer, or the Offer, to our employees to exchange outstanding stock options with exercise prices equal to or greater than $27.00 per share, or Eligible Options. Stock options to purchase an aggregate of approximately 20,615,000 shares were eligible for tender at the commencement of the Offer, representing approximately 39% of our outstanding stock options as of the commencement date. Only employees of NVIDIA or one of our subsidiaries as of September 26, 2002 who continued to be employees through the Offer termination date of October 24, 2002 were eligible to participate in the Offer. Employees who were on medical, maternity, workers compensation, military or other statutorily protected leave of absence, or a personal leave of absence, were also eligible to participate in the Offer. Employees who were terminated on or before the Offer termination date of October 24, 2002, were not eligible to participate in the Offer. In addition, our Chief Executive Officer and Chief Financial Officer and members of our Board of Directors were not eligible to participate in this Offer.
Eligible employees who participated in the Offer received, in exchange for the cancellation of Eligible Options, a fixed amount of consideration, represented by fully vested, non-forfeitable common stock less applicable withholding taxes, equal to the number of shares underlying such Eligible Options, multiplied by $3.20, less the amount of applicable tax withholdings, divided by $10.46, the closing price of our common stock as reported on the Nasdaq National Market on October 24, 2002. We concluded that the consideration paid for the Eligible Options represented "substantial consideration" as required by Issue 39(f) of EITF Issue No. 00-23 "Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44," as the $3.20 per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the Black-Scholes option-pricing model, we used the following assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which was approximately 7.8 years; (ii) a volatility of 50.0% during the expected life; (iii) a risk-free interest rate of 3.71%; and (iv) no dividends. The amount of $3.20 per Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Variable accounting is not required under Issue 39(a) of EITF Issue No. 00-23 for Eligible Options subject to the Offer that were not surrendered for cancellation, because: (i) the shares of our common stock offered as consideration for the surrendered options were fully vested and non-forfeitable; and (ii) the number of shares to be received by an employee who accepted the Offer was based on the number of surrendered Eligible Options multiplied by $3.20, divided by the fair value of the stock at the date of exchange. We further concluded that the "look back" and "look forward" provisions of FASB Interpretation No. 44, paragraph 45 did apply to the stock options surrendered for cancellation. Based on the terms of the Offer, variable accounting is not required for any of our outstanding stock options existing at the time of the Offer. We do not intend to grant stock options to any participants in the Offer for at least six months following October 24, 2002. If any stock options were granted to participants in the Offer within the six months following October 24, 2002, those stock options would have received variable accounting.
On October 24, 2002, the offer period ended and we were obligated to exchange approximately 18,843,000 Eligible Options for total consideration of $61.8 million, consisting of $39.9 million in fully vested, non-forfeitable shares of our common stock (approximately 3,815,000 shares) and $21.9 million in employer and employee related taxes. The number of fully vested, non-forfeitable shares of our common stock to be issued was determined by dividing the total consideration due (less the amount of applicable tax withholdings) by the closing price of our common stock on October 24, 2002, of $10.46 per share.
The shares of our common stock issued in exchange for Eligible Options were fully vested. However, a portion of the shares equal to 25% of the total consideration, based on the closing price of our common stock on the offer termination date, have a six month holding period, and a portion of the shares equal to 25% of such total consideration have a one year holding period. Withholding taxes and other charges were deducted from the remaining 50% of the total consideration, and the shares issued after such withholding did not have a holding restriction.
Note 12 - Discontinued Use of Property
We moved into our new headquarters in June 2001 and was still obligated to pay rent for a portion of our previous office space. Since relocating, we have been unable to secure a subtenant for our previous office space due to the decrease in demand for commercial rental space as a result of the declining economy. We recorded a loss of approximately $3.7 million during fiscal 2002 for the remaining costs related to the preexisting lease, including rental payments, capitalized leasehold improvements, and furniture and fixtures, as the leased property or improvements have no substantive future use or benefit. In December 2001, we filed a complaint against Extreme Networks Inc., the sublessor of the property, seeking payment of lease payments and other property charges for the period of July 2001 through December 2001 and seeking a declaration that we are not liable for any future payments under the lease. In July, 2003, we settled the matter with Extreme Networks and in August, 2003, the complaint was dismissed with prejudice.
Note 13 - Financial Arrangements, Commitments and Contingencies
Convertible Subordinated Debentures
In October 2000, we sold $300.0 million of convertible subordinated debentures, or the Notes, due October 15, 2007 in a public offering. Proceeds from the offering were approximately $290.8 million after deducting underwriting discounts, commissions and offering expenses. Issuance costs related to the offering totaled $9.2 million and were amortized to interest expense over the term of the Notes. Interest on the Notes accrued at the rate of 4¾% per annum and was payable semiannually in arrears on April 15 and October 15 of each year, commencing April 15, 2001. Interest expense, excluding the amortization of issuance costs, related to the Notes for fiscal 2004, 2003 and 2002 was $10.4 million, $14.2 million and $14.2 million, respectively. The Notes were redeemable at our option on or after October 20, 2003 and were also 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 $46.36 per share, subject to adjustment in certain circumstances.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 24, 2003, we fully redeemed the Notes. The aggregate principal amount of the Notes outstanding was $300.0 million, which included $18.6 million of Notes that we had purchased in the open market during the three months ended October 26, 2003. The redemption price was equal to approximately 102.7% of the outstanding principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. In connection with the redemption of the Notes, we recorded a charge in our consolidated income statement of approximately $13.1 million, which included a $7.6 million redemption premium and $5.5 million of unamortized issuance costs.
Lease Obligations
Our headquarters complex is located on a leased site in Santa Clara, California and is comprised of five buildings. The related leases expire in 2012 and each includes two seven-year renewals at our option. Future minimum lease payments under these operating leases total approximately $193.8 million over the remaining terms of the leases and are included in the future minimum lease payment schedule below.
In addition to the commitment of our headquarters, we have other office facilities under operating leases expiring through fiscal 2013. Future minimum lease payments under our noncancelable capital and operating leases as of January 25, 2004, are as follows:
Year ending January: |
|
Operating |
Capital |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
2005 |
|
$ |
24,635 |
|
$ |
4,179 |
|
2006 |
|
|
24,887 |
|
|
868 |
|
2007 |
|
|
25,063 |
|
|
-- |
|
2008 |
|
|
25,500 |
|
|
-- |
|
2009 |
|
|
25,125 |
|
|
-- |
|
2010 and thereafter |
|
|
81,032 |
|
|
-- |
|
|
|
|
|
|
|
Total |
|
$ |
206,242 |
|
|
5,047 |
|
|
|
|
|
|
|
Less amount representing interest at rates ranging from 5% - 10% |
|
|
|
|
|
(176 |
) |
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
|
|
|
4,871 |
|
Less current portion |
|
|
|
|
|
4,015 |
|
|
|
|
|
|
|
|
Long term portion |
|
|
|
|
$ |
856 |
|
|
|
|
|
|
|
|
Rent expense for the years ended January 25, 2004, January 26, 2003 and January 27, 2002 was approximately $26.4 million, $25.6 million and $13.8 million, respectively.
The following is an analysis of the property and equipment under capital leases by major classes:
|
|
January 25, |
January 26, |
|
|
2004 |
2003 |
|
|
|
|
Classes of Property and Equipment: |
|
(In thousands) |
|
|
|
|
|
|
|
|
Computer equipment |
|
$ |
4,331 |
|
$ |
4,347 |
|
Test equipment |
|
|
9,309 |
|
|
6,895 |
|
Office equipment and furniture |
|
|
5,232 |
|
|
5,261 |
|
Software and other |
|
|
634 |
|
|
634 |
|
|
|
|
|
|
|
|
|
|
19,506 |
|
|
17,137 |
|
Accumulated amortization |
|
|
(14,016 |
) |
|
(8,683 |
) |
|
|
|
|
|
|
Leased property and equipment, net |
|
$ |
5,490 |
|
$ |
8,454 |
|
|
|
|
|
|
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an agreement to purchase certain graphics chip assets from 3dfx. The asset purchase closed on April 18, 2001. In May 2002, we were served with a complaint filed by the landlord of 3dfxs San Jose, California commercial real estate lease. In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In December 2002, we were served with a complaint filed by the landlord of 3dfxs Austin, Texas commercial real estate lease. The landlords complaints both assert claims for, among other things, interference with contract, successor liability and fraudulent transfer. The landlords are seeking to recover, among other things, amounts owed on their leases in the aggregate amount of approximately $10 million. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate. The Trustees complaint asserts claims for, among other things, successor liability and fraudulent transfer. The Trustees complaint seeks additional payments from us, the amount of which has not been quantified. The landlords actions have been removed to the Bankruptcy Court from the Superior Court of California and consolidated with the Trustees action for purposes of discovery. Discovery is currently proceeding and no trial date has been set. We believe the claims asserted against us are without merit and we will continue to defend ourselves vigorously.
We are subject to other legal proceedings, but we do not believe that the ultimate outcome of any of these proceedings will have a material adverse effect on our financial position or overall trends in results of operations. However, if an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period.
Note 14 Income Taxes
The provision for income taxes applicable to income before income taxes consists of the following:
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
2004 |
2003 |
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Current: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
State |
|
|
221 |
|
|
135 |
|
|
134 |
|
Foreign |
|
|
(51,590 |
) |
|
20,555 |
|
|
38,673 |
|
|
|
|
|
|
|
|
|
Total current |
|
|
(51,369 |
) |
|
20,690 |
|
|
38,807 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
19,861 |
|
|
20,569 |
|
|
(43,738 |
) |
State |
|
|
35,274 |
|
|
9,319 |
|
|
(8,176 |
) |
Foreign |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
55,135 |
|
|
29,888 |
|
|
(51,914 |
) |
Charge in lieu of taxes attributable to employer stock option plans |
|
|
8,488 |
|
|
9,180 |
|
|
88,932 |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
12,254 |
|
$ |
59,758 |
|
$ |
75,825 |
|
|
|
|
|
|
|
|
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income before income taxes consists of the following:
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
2004 |
2003 |
2002 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(17,816 |
) |
$ |
20,764 |
|
$ |
39,613 |
|
Foreign |
|
|
104,489 |
|
|
129,793 |
|
|
213,136 |
|
|
|
|
|
|
|
|
|
|
|
$ |
86,673 |
|
$ |
150,557 |
|
$ |
252,749 |
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate of 35% to income before income taxes as follows:
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
2004 |
2003 |
2002 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
Tax expense computed at Federal Statutory Rate |
|
$ |
30,336 |
|
$ |
52,695 |
|
$ |
88,462 |
|
State income taxes (benefit), net of federal tax effect |
|
|
544 |
|
|
(4,241 |
) |
|
(531 |
) |
Foreign tax rate differential |
|
|
(11,671 |
) |
|
23,222 |
|
|
(7,489 |
) |
Research and experimental credit |
|
|
(5,230 |
) |
|
(12,048 |
) |
|
(4,736 |
) |
In-process research and development |
|
|
1,225 |
|
|
-- |
|
|
-- |
|
Change in estimates |
|
|
(36,766 |
) |
|
-- |
|
|
-- |
|
Increase in beginning of year valuation allowance |
|
|
33,599 |
|
|
-- |
|
|
-- |
|
Other |
|
|
217 |
|
|
130 |
|
|
119 |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
12,254 |
|
$ |
59,758 |
|
$ |
75,825 |
|
|
|
|
|
|
|
|
|
The tax effect of temporary differences that gives rise to significant portions of the deferred tax assets and liabilities are presented below:
|
|
January 25, |
January 26, |
|
|
2004 |
2003 |
|
|
|
|
Deferred tax assets: |
|
(In thousands) |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
105,503 |
|
$ |
57,988 |
|
Accruals and reserves, not currently deductible for tax purposes |
|
|
10,286 |
|
|
10,243 |
|
Property, equipment and intangible assets |
|
|
19,194 |
|
|
5,733 |
|
Research and other tax credit carryforwards |
|
|
99,806 |
|
|
87,265 |
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
234,789 |
|
|
161,229 |
|
Less valuation allowance |
|
|
(182,669 |
) |
|
(106,663 |
) |
|
|
|
|
|
|
Net deferred tax assets |
|
|
52,120 |
|
|
54,566 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Unremitted earnings of foreign subsidiary(ies) |
|
|
(57,468 |
) |
|
-- |
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
(5,348 |
) |
$ |
54,566 |
|
|
|
|
|
|
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of January 25, 2004, we had a valuation allowance of $182.7 million. Of the total valuation allowance, $117.0 million is attributable to certain net operating loss and tax credit carryforwards resulting from the exercise of employee stock options. The tax benefit of these net operating loss and tax credit carryforwards, if and when realization is sustained, would be accounted for as a credit to stockholders' equity. Of the remaining valuation allowance as of January 25, 2004, $21.4 million relates to federal and state tax attributes acquired in certain acquisitions for which realization of the related deferred tax assets was determined not more likely than not to be realized due, in part, to potential utilization limitations as a result of stock ownership changes, and $44.3 million relates to certain state deferred tax assets that management determined not more likely than not to be realized due, in part, to projections of future taxable income. To the extent realization of the deferred tax assets related to certain acquisitions becomes probable, recognition of these acquired tax benefits would first reduce goodwill to zero, then reduce other non-current intangible assets related to the acquisition to zero with any remaining benefit reported as a reduction to income tax expense. To the extent realization of the deferred tax assets related to certain state tax benefits becomes probable, we would recognize an income tax benefit in the period such asset is more likely than not to be realized.
During fiscal 2004, we recorded an income tax benefit of approximately $75.0 million related to settlement of certain tax contingencies and an income tax expense of approximately $38.2 million for the accrual of U.S. deferred income taxes on previous permanently reinvested foreign earnings through January 26, 2003, which nets to an income tax benefit of $36.8 million.
We have not provided for U.S. income taxes on a cumulative total of approximately $152.5 million of undistributed earnings as of as of January 25, 2004 for certain non-U.S. subsidiaries as we intend to reinvest these earnings indefinitely in operations outside the U.S.
As of January 25, 2004, we had a federal net operating loss carryforward of approximately $280.3 million and cumulative state net operating loss carryforwards of approximately $162.2 million. The federal net operating loss carryforward will expire beginning in fiscal year 2012 and the state net operating loss carryforwards will begin to expire in fiscal year 2005 according to the rules of each particular state. As of January 25, 2004, we had federal research and experimentation tax credit carryforwards of approximately $60.3 million that will begin to expire in fiscal year 2008; and federal foreign tax credit carryforwards of approximately $0.2 million that will begin to expire in fiscal year 2006. The research and experimentation tax credit carryforward attributable to states is approximately $50.4 million, of which approximately $49.1 million is attributable to the State of California and may be carried over indefinitely, and approximately $1.3 million is attributable to various other states and will expire beginning in fiscal year 2016 according to the rules of each particular state. We have other California state tax credit carryforwards of approximately $3.3 million that will begin to expire in fiscal year 2006. Utilization of net operating losses and tax credit carryforwards may be subject to limitations due to ownership changes and other limitations provided by the Internal Revenue Code and similar state provisions. If such a limitation applies, the net operating loss and tax credit carryforwards may expire before full utilization.
Note 15 Microsoft Agreement
On March 5, 2000, we entered into an agreement with Microsoft, or the Microsoft Agreement, in which we agreed, under certain terms and conditions, to develop and sell processors for use in the Xbox video game console. The terms of the Microsoft Agreement also state that 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 our common stock, Microsoft has first and last rights of refusal to purchase the stock. In April 2000, Microsoft paid us $200.0 million under the Microsoft Agreement as an advance against processor purchases and for licensing its technology. This advance was fully utilized by purchases made by Microsoft through the quarter ended April 28, 2002 and Microsoft is currently paying in advance for the two-chip platform processors sold to it.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We were engaged with Microsoft in discussions related to pricing and volumes of the Xbox platform processors. The Microsoft Agreement contemplated the use of a third party to resolve disputed matters, and on April 23, 2002 Microsoft submitted the pricing dispute to binding arbitration. On February 6, 2003, NVIDIA and Microsoft announced that arbitration was over and the companies had settled all issues related to pricing of the Microsoft Xbox platform processors. In addition to resolving this pricing dispute, we have agreed to collaborate with Microsoft on future cost reductions for the Xbox, together the Microsoft Settlement. As a result of the Microsoft Settlement, we recorded $40.4 million in additional revenue in the fourth quarter of fiscal 2003. The balance of $35.1 million in payments that we had received from Microsoft in excess of revenue recognized on sales to Microsoft as of January 26, 2003 was not required to be returned to Microsoft and rather was left with us to credit towards future purchases. This amount was classified as "Customer Advances" within the balance of Accrued Liabilities in our consolidated balance sheet as of January 26, 2003.
Note 16 - Segment Information
We design, develop and market GPUs, MCPs, UMPs and related software. We operate in one industry segment in the United States and other Americas, Asia and Europe. Our 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. Revenue by geographical region is allocated to individual countries based on the location to which the products are initially billed even if the foreign contract equipment manufacturers, or CEMs, and add-in board and motherboard manufacturers revenue is attributable to end customers located in a different location. The following table summarizes information pertaining to our operations in different geographic areas:
|
|
Year Ended |
Year Ended |
Year Ended |
|
|
January 25, |
January 26, |
January 27, |
|
|
2004 |
2003 |
2002 |
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
U.S. and Other Americas |
|
$ |
450,869 |
|
$ |
603,750 |
|
$ |
243,697 |
|
Asia Pacific |
|
|
1,265,329 |
|
|
1,232,942 |
|
|
1,071,726 |
|
Europe |
|
|
106,747 |
|
|
72,755 |
|
|
54,048 |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,822,945 |
|
$ |
1,909,447 |
|
$ |
1,369,471 |
|
|
|
|
|
|
|
|
|
|
|
As of |
As of |
|
|
January 25, |
January 26, |
|
|
2004 |
2003 |
|
|
|
|
|
|
|
|
Long-lived assets (including property & equipment, goodwill and intangible assets): |
|
(In thousands) |
|
|
|
|
|
|
|
|
U.S. and Other Americas |
|
$ |
335,167 |
|
$ |
208,698 |
|
Asia Pacific |
|
|
1,653 |
|
|
1,365 |
|
Europe |
|
|
2,081 |
|
|
1,560 |
|
|
|
|
|
|
|
Total long-lived assets |
|
$ |
338,901 |
|
$ |
211,623 |
|
|
|
|
|
|
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods, is summarized as follows:
|
Year Ended |
Year Ended |
Year Ended |
|
January 25, |
January 26, |
January 27, |
|
2004 |
2003 |
2002 |
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
Customer A |
12% |
15% |
14% |
Customer B |
15% |
23% |
9% |
Customer C |
12% |
9% |
10% |
Customer D |
21% |
17% |
20% |
|
As of |
As of |
|
January 25, |
January 26, |
|
2004 |
2003 |
|
|
|
Accounts Receivable: |
|
|
|
|
|
Customer A |
15% |
12% |
Customer B |
-- |
-- |
Customer C |
18% |
17% |
Customer D |
21% |
18% |
Note 17 Quarterly Summary (Unaudited)
|
|
Fiscal 2004
Quarters Ended |
|
|
|
|
|
Jan. 25, 2004 |
Oct. 26, 2003 |
July 27, 2003 |
April 27, 2003 |
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
472,119 |
|
$ |
486,069 |
|
$ |
459,774 |
|
$ |
404,983 |
|
Cost of revenue |
|
$ |
333,914 |
|
$ |
351,938 |
|
$ |
329,800 |
|
$ |
278,415 |
|
Gross profit |
|
$ |
138,205 |
|
$ |
134,131 |
|
$ |
129,974 |
|
$ |
126,568 |
|
Net income |
|
$ |
24,166 |
|
$ |
6,356 |
|
$ |
24,150 |
|
$ |
19,747 |
|
Basic net income per share |
|
$ |
0.15 |
|
$ |
0.04 |
|
$ |
0.15 |
|
$ |
0.12 |
|
Diluted net income per share |
|
$ |
0.14 |
|
$ |
0.04 |
|
$ |
0.14 |
|
$ |
0.12 |
|
|
|
Fiscal 2003
Quarters Ended |
|
|
|
|
|
Jan. 26, 2003 |
Oct. 27, 2002 |
July 28, 2002 |
April 28, 2002 |
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
Statement of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
468,953 |
|
$ |
430,304 |
|
$ |
427,285 |
|
$ |
582,905 |
|
Cost of revenue |
|
$ |
301,442 |
|
$ |
322,106 |
|
$ |
327,983 |
|
$ |
375,740 |
|
Cost of revenue related to stock option exchange |
|
$ |
-- |
|
$ |
6,164 |
|
$ |
-- |
|
$ |
-- |
|
Gross profit |
|
$ |
167,511 |
|
$ |
102,034 |
|
$ |
99,302 |
|
$ |
207,165 |
|
Net income (loss) |
|
$ |
50,936 |
|
$ |
(48,636 |
) |
$ |
5,254 |
|
$ |
83,245 |
|
Basic net income (loss) per share |
|
$ |
0.32 |
|
|
($0.32 |
) |
$ |
0.03 |
|
$ |
0.55 |
|
Diluted net income (loss) per share |
|
$ |
0.30 |
|
|
($0.32 |
) |
$ |
0.03 |
|
$ |
0.47 |
|
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Description |
|
Balance at Beginning of Period |
Additions (3) |
Deductions |
Balance at End of Period |
|
|
|
|
|
|
|
|
(In thousands) |
Year ended January 25, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for sales returns and allowances |
|
$ |
13,228 |
|
$ |
23,796 |
|
$ |
(27,603) (1 |
) |
$ |
9,421 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
4,240 |
|
$ |
731 |
|
$ |
(2,661) (2 |
) |
$ |
2,310 |
|
|
|
|
|
|
|
|
|
|
|
Year ended January 26, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for sales returns and allowances |
|
$ |
15,586 |
|
$ |
20,147 |
|
$ |
(22,505) (1 |
) |
$ |
13,228 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
2,493 |
|
$ |
2,413 |
|
$ |
(666) (2 |
) |
$ |
4,240 |
|
|
|
|
|
|
|
|
|
|
|
Year ended January 27, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for sales returns and
allowances |
|
$ |
7,092 |
|
$ |
17,171 |
|
$ |
(8,677) (1 |
) |
$ |
15,586 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
1,311 |
|
$ |
2,628 |
|
$ |
(1,446) (2 |
) |
$ |
2,493 |
|
|
|
|
|
|
|
|
|
|
|
______________________________
(1) Represents amounts written off against the allowance for sales returns.
(2) Represents uncollectible accounts written off against the allowance for doubtful accounts.
(3) Allowances for sales returns are charged as a reduction to revenue. Allowances for doubtful accounts are charged to expenses.
Exhibit Number |
Description of Document |
|
|
2.1(1) |
Asset Purchase Agreement, dated as of December 15, 2000, by and among NVIDIA Corporation, NVIDIA US Investment Company and 3dfx Interactive, Inc. |
3.1(2) |
Amended and Restated Certificate of Incorporation. |
3.3(3) |
Certificate of Amendment of Amended and Restated Certificate of Incorporation. |
3.3(4) |
Bylaws, as amended. |
4.1 |
Reference is made to Exhibits 3.1 and 3.2. |
4.2(5) |
Specimen Stock Certificate. |
4.3(6) |
Second Amended and Restated Investors Rights Agreement, dated August 19, 1997 between the Company and the parties indicated thereto and First Amendment to Second Amended and Restated Investors Rights Agreement, dated July 22, 1998. |
4.4(7) |
Second Amendment to Second Amended and Restated Investors Rights Agreement, dated April 12, 1999. |
10.1(8) |
Form of Indemnity Agreement between NVIDIA Corporation and each of its directors and officers. |
10.2(9) |
1998 Equity Incentive Plan, as amended. |
10.5(10) |
1998 Employee Stock Purchase Plan, as amended. |
10.6(11) |
Form of Employee Stock Purchase Plan Offering, as amended. |
10.7(12) |
1998 Non-Employee Directors Stock Option Plan. |
10.11(13) |
2000 Nonstatutory Equity Incentive Plan, as amended |
10.12(14) |
Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building A. |
10.13(15) |
Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building B. |
10.14(16) |
Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building C. |
10.15(17) |
Lease dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests III for Building D. |
10.16(18) |
Employment Agreement between NVIDIA Corporation and David Shannon, dated July 12, 2002. |
10.17(19) |
Employment Agreement between NVIDIA Corporation and Marvin Burkett, dated August 12, 2002. |
21.1(20) |
List of Registrants Subsidiaries. |
23.1(20) |
Consent of KPMG LLP. |
24 |
Power of Attorney (included in signature page) |
31.1(20) |
Rule 13a-14(a)/15d-14(a) President and Chief Executive Officer Certification |
31.2 (20) |
Rule 13a-14(a)/15d-14(a) President and Chief Financial Officer Certification |
32.1(20)* |
Certification of the Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002. |
32.2(20)* |
Certification of the Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002. |
* The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Nvidia Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
|
|
(1) |
Previously filed as Exhibit 2.1 to our Annual Report on Form 10-K405, for the year ended January 28, 2001 filed on April 27, 2001 (No. 000-23985) and incorporated by reference herein. |
(2) |
Previously filed as Exhibit 4.1 to our Registration Statement on Form S-8 filed on March 23, 1999 (No. 333-74905) and incorporated by reference herein. |
(3) |
Previously filed as Exhibit 3.4 to our Quarterly Report on Form 10-Q, for the quarter ended July 28, 2002 filed on September 10, 2002 (No. 000-23985) and incorporated by reference herein. |
(4) |
Previously filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q, for the quarter ended July 29, 2001 filed on September 10, 2001 (No. 000-23985) and incorporated by reference herein. |
(5) |
Previously filed as Exhibit 4.2 to our Registration Statement on Form S-1/A filed on April 24, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(6) |
Previously filed as Exhibit 4.3 to our Registration Statement on Form S-1/A filed on Nov. 20, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(7) |
Previously filed as Exhibit 4.4 to our Quarterly Report on Form 10-Q, for the quarter ended May 2, 1999 filed on June 15, 1999 (No. 000-23985) and incorporated by reference herein. |
(8) |
Previously filed as Exhibit 10.1 to our Registration Statement on Form S-1 filed on March 6, 1998 (No. 333-47495), as amended, and incorporated by reference herein. |
(9) |
Previously filed as Exhibit 10.2 to our Annual Report on Form 10-K, for the year ended January 26, 2003 filed on April 25, 2003 (No. 000-23985) and incorporated by reference herein. |
(10) |
Previously filed as Exhibit 99.4 to our Registration Statement on Form S-8 filed on December 8, 2000 (No. 333-51520) and incorporated by reference herein. |
(11) |
Previously filed as Exhibit 99.5 to our Registration Statement on Form S-8 filed on September 23, 2002 (No. 333-100010) and incorporated by reference herein. |
(12) |
Previously filed as Exhibit 10.7 to our Quarterly Report on Form 10-Q/A, for the quarter ended April 28, 2002 filed on July 3, 2002 (No. 000-23985) and incorporated by reference herein. |
(13) |
Previously filed as Exhibit 10.11 to our Annual Report on Form 10-K, for the year ended January 26, 2003 filed on April 25, 2003 (No. 000-23985) and incorporated by reference herein. |
(14) |
Previously filed as Exhibit 10.1 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(15) |
Previously filed as Exhibit 10.2 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(16) |
Previously filed as Exhibit 10.3 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(17) |
Previously filed as Exhibit 10.4 to our Registration Statement on Form S-3/A filed on April 20, 2000 (No. 333-33560), as amended, and incorporated by reference herein. |
(18) |
Previously filed as Exhibit 10.19 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein. |
(19) |
Previously filed as Exhibit 10.20 to our Quarterly Report on Form 10-Q, for the quarter ended October 27, 2002 filed on December 10, 2002 (No. 000-23985) and incorporated by reference herein. |
(20) |
Filed herewith. |
Pursuant to the requirements of Section 13 or 15(d) 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 March 29, 2004.
NVIDIA Corporation
By /s/ JEN-HSUN HUANG_______
Jen-Hsun Huang
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jen-Hsun Huang and Marvin D. Burkett, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including posting effective amendments) to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-facts and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date |
|
|
|
|
|
|
|
President, Chief Executive Officer |
|
/s/ JEN-HSUN HUANG |
and Director (Principal Executive
Officer) |
|
|
|
|
Jen-Hsun Huang |
|
March 29, 2004 |
|
|
|
|
|
|
/s/ MARVIN D. BURKETT |
Chief Financial Officer (Principal
Financial and Accounting Officer) |
|
|
|
|
Marvin D. Burkett |
|
March 29, 2004 |
|
|
|
|
|
|
/s/ TENCH COXE |
|
|
|
|
|
Tench Coxe |
Director |
March 29, 2004 |
|
|
|
|
|
|
/s/ JAMES C. GAITHER |
|
|
|
|
|
James C. Gaither |
Director |
March 29, 2004 |
|
|
|
|
|
|
/s/ HARVEY C. JONES |
|
|
|
|
|
Harvey C. Jones |
Director |
March 29, 2004 |
|
|
|
|
|
|
/s/ WILLIAM J. MILLER |
|
|
|
|
|
William J. Miller |
Director |
|
|
|
|
|
|
|
/s/ A. BROOKE SEAWELL |
|
|
|
|
|
A. Brooke Seawell |
Director |
|
|
|
|
|
|
|
/s/ MARK A. STEVENS |
|
|
|
|
|
Mark A. Stevens |
Director |
March 29, 2004 |
|
|
|