-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BsOEPB0PH3pes+DMIFke/0AhfNM50BcIuqEh3DdHKIrOyZDAWXPYD7sdfx2n/PDG uaTjck5s9YSGtgkXIChuCg== 0001012870-99-004592.txt : 19991213 0001012870-99-004592.hdr.sgml : 19991213 ACCESSION NUMBER: 0001012870-99-004592 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NVIDIA CORP/CA CENTRAL INDEX KEY: 0001045810 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943177549 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23985 FILM NUMBER: 99772582 BUSINESS ADDRESS: STREET 1: 3535 MONROE STREET STREET 2: 415-617-4000 CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 408-615-2500 MAIL ADDRESS: STREET 1: 3535 MONROE STREET CITY: SANTA CLARA STATE: CA ZIP: 95051 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended October 31, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . Commission file number: 0-23985 ---------------- NVIDIA CORPORATION (Exact Name of Registrant as Specified in Its Charter) Delaware 94-3177549 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3535 Monroe Street Santa Clara, California 95051 (408) 615-2500 (Address, including Zip Code, of Registrant's Principal Executive Offices and Registrant's Telephone Number, including Area Code) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares of the registrant's common stock outstanding as of November 28, 1999 was 30,717,396 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NVIDIA CORPORATION TABLE OF CONTENTS PART I: FINANCIAL INFORMATION
Page ---- Item 1. Condensed Financial Statements (unaudited) Condensed Balance Sheets as of October 31, 1999 and January 31, 1999............................................................ 3 Condensed Statements of Operations for the three months and nine months ended October 31, 1999 and October 25, 1998.............. 4 Condensed Statements of Cash Flows for the nine months ended October 31, 1999 and October 25, 1998........................... 5 Notes to Condensed Financial Statements......................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 15 PART II: OTHER INFORMATION Item 2. Change in Securities and Use of Proceeds........................ 21 Item 6. Exhibits and Reports on Form 8-K................................ 21 Signature................................................................ 22
2 PART I: FINANCIAL INFORMATION Item 1. Condensed Financial Statements (unaudited) NVIDIA CORPORATION CONDENSED BALANCE SHEETS
October 31, January 31, 1999 1999 ----------- ----------- (In thousands) (Unaudited) ASSETS ------ Current assets: Cash and cash equivalents............................ $ 55,200 $ 50,257 Accounts receivable, less allowances of $4,995 at October 31, 1999 and $2,627 at January 31, 1999.......................... 56,419 20,633 Inventory............................................ 11,734 28,623 Prepaid expenses and other current assets............ 4,209 1,599 -------- -------- Total current assets............................... 127,562 101,112 Property and equipment, net............................ 26,624 11,650 Deposits and other assets.............................. 3,367 570 -------- -------- $157,553 $113,332 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable..................................... $ 43,027 $ 35,730 Line of credit....................................... -- 5,000 Accrued liabilities.................................. 7,191 5,012 Current portion of capital lease obligations......... 2,016 1,386 -------- -------- Total current liabilities.......................... 52,234 47,128 Capital lease obligations, less current portion........ 1,169 1,995 Long-term payable...................................... 5,750 -- Stockholders' equity: Common stock......................................... 30 29 Additional paid-in capital........................... 84,473 74,372 Deferred compensation................................ (202) (780) Retained earnings (accumulated deficit).............. 14,099 (9,412) -------- -------- Total stockholders' equity......................... 98,400 64,209 ======== ======== $157,553 $113,332 ======== ========
See accompanying notes to condensed financial statements. 3 NVIDIA CORPORATION CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended ----------------------- ----------------------- October 31, October 25, October 31, October 25, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (In thousands, except per share amounts) (Unaudited) Revenue: Product..................... $97,015 $51,150 $246,050 $86,755 Royalty..................... -- 1,153 -- 5,945 ------- ------- -------- ------- Total revenue............. 97,015 52,303 246,050 92,700 ------- ------- -------- ------- Cost of revenue............... 60,195 33,566 155,766 67,400 ------- ------- -------- ------- Gross profit.................. 36,820 18,737 90,284 25,300 ------- ------- -------- ------- Operating expenses: Research and development.... 12,420 6,290 32,018 16,656 Sales, general and administrative............. 9,293 4,697 24,693 12,544 ------- ------- -------- ------- Total operating expenses.. 21,713 10,987 56,711 29,200 ------- ------- -------- ------- Operating income (loss)....... 15,107 7,750 33,573 (3,900) Interest and other income, net.......................... 430 11 1,141 60 ------- ------- -------- ------- Income (loss) before income tax expense (benefit)........ 15,537 7,761 34,714 (3,840) Income tax expense (benefit).. 4,973 620 11,203 (308) ------- ------- -------- ------- Net income (loss)............. $10,564 $ 7,141 $ 23,511 $(3,532) ------- ------- -------- ------- Basic net income (loss) per share........................ $ 0.35 $ 0.50 $ 0.80 $ (0.25) ------- ------- -------- ------- Diluted net income (loss) per share........................ $ 0.29 $ 0.26 $ 0.66 $ (0.25) ------- ------- -------- ------- Shares used in basic per share computation.................. 30,015 14,165 29,545 14,152 ======= ======= ======== ======= Shares used in diluted per share computation............ 35,931 27,774 35,613 14,152 ======= ======= ======== =======
See accompanying notes to condensed financial statements. 4 NVIDIA CORPORATION CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended ----------------------- October 31, October 25, 1999 1998 ----------- ----------- (In thousands) (Unaudited) Cash flows from operating activities: Net income (loss)..................................... $ 23,511 $ (3,532) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation......................................... 6,143 2,796 Amortization of deferred compensation................ 578 2,191 Stock options granted in exchange of services........ 9 -- Tax benefit from employee stock plans................ 1,857 -- Changes in operating assets and liabilities: Accounts receivable................................. (43,238) (20,519) Inventory........................................... 16,889 (16,672) Prepaid expenses and other current assets........... (2,610) (569) Deposit and other current assets.................... (2,797) (387) Accounts payable.................................... 7,297 31,058 Accrued liabilities................................. 2,179 (303) Long-term payable................................... 750 -- -------- -------- Net cash provided by (used in) operating activities.... 10,568 (5,937) -------- -------- Cash flows used in investing activities--purchases of property and equipment................................ (9,949) (4,305) -------- -------- Cash flows from financing activities: Borrowings (payments) under line of credit............ (5,000) 5,000 Issuance of mandatorily convertible notes............. -- 11,000 Common stock issued under stock plans................. 4,949 25 Sale of common stock under public offering, net of issuance costs....................................... 5,740 -- Payments under capital leases......................... (1,365) (1,306) -------- -------- Net cash provided by financing activities.............. 4,324 14,719 -------- -------- Change in cash and cash equivalents.................... 4,943 4,477 Cash and cash equivalents at beginning of period....... 50,257 7,984 -------- -------- Cash and cash equivalents at end of period............. $ 55,200 $ 12,461 ======== ======== Cash paid for interest................................. $ 186 $ 390 ======== ======== Cash paid for taxes.................................... $ 12,665 $ -- ======== ======== Noncash financing and investing activities: Assets recorded under capital lease................... $ 1,168 $ 2,197 ======== ======== Receipt of common stock in settlement of accounts receivable........................................... $ (7,452) $ -- ======== ======== Issuance of common stock in connection with long-term software license..................................... $ 5,000 $ -- ======== ======== Liabilities assumed in connection with long-term software license..................................... $ 5,000 $ -- ======== ========
See accompanying notes to condensed financial statements. 5 NVIDIA CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (In thousands) 1. Basis of presentation The accompanying condensed unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period. The following information should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 31, 1999. 2. Net income (loss) per share Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period, using either the as-if-converted method for convertible preferred stock or the treasury stock method for options and warrants. The following is a reconciliation of the denominators of the basic and diluted net income (loss) per share computations for the periods presented:
Three Months Ended Nine Months Ended ----------------------- ----------------------- October 31, October 25, October 31, October 25, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Denominator: Denominator for basic net income (loss) per share-- weighted-average shares..... 30,015 14,165 29,545 14,152 Effect of dilutive securities: Stock options outstanding.. 5,683 2,603 5,812 -- Warrants................... -- 108 94 -- Mandatorily convertible notes..................... -- 1,571 -- -- Convertible preferred stock..................... -- 9,327 -- -- Common stock issuable in connection with long-term software license.......... 233 -- 162 -- ------ ------ ------ ------ Denominator for diluted net income (loss) per share..... 35,931 27,774 35,613 14,152 ------ ------ ------ ------
As of October 25, 1998, there were 9,327,087 shares of convertible preferred stock, options to purchase 7,455,458 shares of common stock, warrants to purchase 158,806 shares of common stock and $11,000,000 convertible notes with a conversion price of $7.00 per share outstanding. The effect of these common equivalent shares would have been anti-dilutive for the nine-month period ended October 25, 1998, and, as a result, such effect has been excluded from the computation of diluted net loss per share. 3. Comprehensive income The Company had no other components of comprehensive income other than the reported amounts of net income (loss). 6 NVIDIA CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) (Unaudited) (In thousands) 4. Inventory
October 31, January 31, 1999 1999 ----------- ----------- Work in-process...................................... $ 8,726 $15,385 Finished goods....................................... 3,008 13,238 ------- ------- Total inventory.................................... $11,734 $28,623 ======= =======
At October 31, 1999, the Company had noncancelable inventory purchase commitments totaling $104.3 million. 5. New Accounting Pronouncement In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which provides guidance on accounting for the costs of computer software intended for internal use. Effective February 1, 1999, the Company adopted SOP 98-1. There was no material change to the Company's results of operations or financial position as a result of the adoption of SOP 98-1. 6. Long-term Software Licensing Agreement On April 12, 1999, the Company entered into a $10.0 million five-year software licensing agreement with a supplier in the electronic design automation industry. Under this agreement, the $10.0 million is due in two installments. The first installment was settled in June 1999 for 243,902 shares of the Company's common stock valued at $5.0 million. The second installment is due on or before March 31, 2000 and may be settled in cash or in stock at the option of the Company. 7. Stock Repurchase Agreement In June 1999, the Company repurchased 428,572 shares of the Company's common stock from a major customer in settlement for a portion of then outstanding accounts receivable, in the amount of $7.5 million. 8. Segment information The Company operates in a single industry segment: the design, development and marketing of 3D graphics processors for the personal computer (PC) market. The Company's chief operating decision maker, the Chief Executive Officer, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The following table summarizes geographic information on net sales:
Three Months Ended Nine Months Ended ----------------------- ----------------------- October 31, October 25, October 31, October 25, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- United States................ $23,451 $38,136 $ 86,821 $78,495 Asia Pacific................. 50,264 12,181 123,170 12,219 Europe....................... 23,300 1,986 36,059 1,986 ------- ------- -------- ------- Total revenue.............. $97,015 $52,303 $246,050 $92,700 ======= ======= ======== =======
7 NVIDIA CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) (Unaudited) (In thousands) Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods, is summarized as follows:
Three Months Ended Nine Months Ended ----------------------- ----------------------- October 31, October 25, October 31, October 25, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Sales Customer A.............. 1% 30% 5% 40% Customer B.............. 15% 31% 21% 28% Customer C.............. 10% 21% 15% 12% Customer D.............. -- 16% 3% 9% Customer E.............. 16% -- 16% -- Customer F.............. 12% -- 10% -- Customer G.............. 11% -- 6% --
As of October 31, January 31, 1999 1999 ----------- ----------- Accounts receivable Customer A...................................... 1% 19% Customer B...................................... 12% 28% Customer C...................................... 14% 18% Customer D...................................... -- 14% Customer E...................................... 14% 4% Customer F...................................... 10% -- Customer G...................................... 13% --
9. Strategic Relationship and Patent License Agreements On July 17, 1999, the Company entered into agreements with Silicon Graphics, Inc. (SGI) to create a broad strategic alliance to collaborate on future graphics technologies. As part of the Strategic Relationship Agreement, SGI has dismissed its patent infringement suit against the Company and the Company has licensed SGI's enabling 3D graphics patent portfolio. Additionally, SGI will incorporate the Company's graphics technology into new desktop graphics systems. During this quarter, 17 engineering personnel transferred from SGI to the Company. In connection with the Patent License Agreement, the Company will pay SGI a total of $3.0 million in nine quarterly installments with the final payment due in May 2001. 10. Line of Credit Agreement In July 1999, the Company entered into an amended loan and security agreement with a bank, which included a $10.0 million revolving credit facility with a borrowing base equal to 80% of eligible accounts. Borrowings under the line of credit bear interest at prime rate and are due in July 2000. Covenants governing the credit facility require the maintenance of certain financial ratios. As of October 31, 1999, the Company had no outstanding borrowings against the line of credit. 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the "safe harbor" created by those sections. These forward-looking statements include but are not limited to: statements related to industry trends and future growth in the markets for 3D graphics processors; our product development efforts; the timing of our introduction of new products; industry and consumer acceptance of our products; and future profitability. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The business risks on pages 15 through 20, among other things, should be considered in evaluating our prospects and future financial performance. Overview We design, develop and market 3D graphics processors that provide high performance interactive 3D graphics to the mainstream PC market. In the first quarter of fiscal 2000, we began commercial shipment of the RIVA TNT2 family of graphics processors. During the third quarter, we launched the NVIDIA GeForce 256(TM) and NVIDIA Quadro(TM) the industry's first graphics processor units (GPUs), and the first products to incorporate transform and lighting into a single chip. The GeForce 256 and Quadro GPUs are graphics processors capable of building a new generation of e-commerce, e-business, education and entertainment applications. We expect that substantially all of our revenue for the foreseeable future will be derived from the sale of our 3D graphics processors in the mainstream PC market. We recognize product sales revenue upon shipment, net of appropriate allowances. Our policy on sales to distributors is to defer recognition of sales and related gross profit until the distributors resell the product. Royalty revenue is generally recognized upon shipment of product to the licensee's customers. Currently, all of our product sales and our arrangements with third-party manufacturers provide for pricing and payment in U.S. dollars. We have not engaged in any foreign currency hedging activities, although we may do so in the future. Since we have no other product line, our business would suffer if for any reason our graphics processors do not achieve widespread acceptance in the mainstream PC market. A majority of our sales have been to a limited number of customers and sales are highly concentrated. We sell graphics processors to add-in board manufacturers, primarily Creative Technology Ltd., Diamond Multimedia Systems, Inc., STB Systems, Inc. and ASUSTeK Computer Inc., and motherboard manufacturers such as Intel Corporation. These manufacturers incorporate our processors in the boards they sell to PC original equipment manufacturers ("OEMs"), retail outlets and systems integrators. The average selling prices ("ASPs") for our products, as well as our customers' products, vary by distribution channel. Sales to Edom Technology Co., Ltd. accounted for 16%, sales to Diamond accounted for 15%, sales to ASUSTeK accounted for 12%, sales to Guillemot Corporation accounted for 11% and sales to Creative accounted for 10% of our total revenue for the third quarter ended October 31, 1999. For the first nine months of fiscal 2000, sales to Diamond accounted for 21%, sales to Edom accounted for 16%, sales to Creative accounted for 15% and sales to ASUSTeK accounted for 10% of total revenue. Sales to STB accounted for 30%, sales to Diamond accounted for 31%, sales to Creative accounted for 21% and sales to Intel accounted for 16% of our total revenue for the third quarter ended October 25, 1998. For the first nine months of fiscal 1999, sales to STB accounted for 40%, sales to Diamond accounted for 28% and sales to Creative accounted for 12% of total revenue. The number of potential customers for our products is limited, and we expect sales to be concentrated to a few major customers for the foreseeable future. In October 1999, S3 Incorporated, a supplier of graphics processors and a competitor, completed the acquisition of Diamond. Our sales to Diamond declined significantly to 15% in the third quarter from 24% of total revenue in the second quarter of fiscal 2000 following the consummation of the acquisition. 3Dfx Interactive, Inc., a 3D graphics company and a competitor, completed the acquisition of STB in May 1999. Our sales to STB in the third quarter declined to 1% from 13% of total revenue in the first quarter and STB is no longer one of our significant customers. 9 Currently, the loss of business from Diamond and STB did not have a material impact on our revenues and profitability due to our ability to expand product sales to other customers. As markets for our 3D graphics processors develop and competition increases, we anticipate that product life cycles in the high end will remain short and ASPs will continue to decline. In particular, ASPs and gross margins are expected to decline as each product matures. Our add-in board manufacturers and major OEM customers typically introduce new system configurations as often as twice per year for the high end, typically based on spring and fall design cycles. Accordingly, our existing products must have competitive performance levels in order to be included in new system configurations, or we must timely introduce new products with such performance characteristics at costs and in sufficient volumes to maintain overall average selling prices and gross margins. Failure to achieve necessary costs and volume shipments with respect to future products or product enhancements could result in rapidly declining ASPs, reduced margins, reduced demand for products or loss of market share. We currently utilize Taiwan Semiconductor Manufacturing Company ("TSMC") and WaferTech, LLC (a joint venture of TSMC) to produce semiconductor wafers, and utilize independent contractors to perform assembly, test and packaging. We depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields, and to deliver those products to us on a timely basis. These manufacturers may not always be able to meet our near-term or long-term manufacturing requirements. Yields or product performance could suffer due to difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of each manufacturer. A manufacturing disruption experienced by these manufacturers would impact the production of our products, which could harm our business. In addition, as the complexity of our products and the accompanying manufacturing process increases, there is an increasing risk that we will experience problems with the performance of new products and that there will be yield problems or other delays in the development or introduction of these products. We have recently introduced the GeForce 256 family of graphics processors and we may experience problems or other delays while in production of these products. Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to the production of products without having received advance purchase commitments from customers. Any inability to sell products to which we have devoted significant resources could harm our business. In addition, cancellation or deferral of product orders could result in our holding excess inventory, which could adversely affect our profit margins and restrict our ability to fund operations. Product returns or delays or difficulties in collecting accounts receivable could result in significant charges against income, which could harm our business. Results of Operations Three Months and Nine Months Ended October 31, 1999 and October 25, 1998 Revenue Product Revenue. Product revenue increased 90% to $97.0 million in the third quarter ended October 31, 1999 from $51.2 million in the third quarter ended October 25, 1998. Revenue of $246.1 million for the first nine months of fiscal 2000 grew 184% over the first nine months of fiscal 1999. The increase was primarily the result of increased sales of our RIVA TNT2 graphics processors and the strong demand for the new GeForce 256(TM) GPU products at higher unit ASPs. Revenue from sales outside of the U.S. represented 76% and 65% of total revenue in the third quarter and the first nine months of fiscal 2000, respectively. Our international revenue increased 419% to $73.6 million in the third quarter of fiscal 2000 from $14.2 million in the comparable quarter a year ago. This increase in revenue from sales outside of the U.S. is primarily attributable to (i) the geographic limitation of the worldwide license agreement with ST Microelectronics, Inc. with respect to sales of the RIVA 128 and RIVA 128ZX graphics processors, which agreement did not restrict the sales of the RIVA TNT and RIVA TNT2 families of processors in fiscal 2000, and (ii) increased demand for our products in the Asia Pacific and European regions. We believe that the substantial growth in product revenue 10 achieved in this period is not necessarily indicative of future results. In addition, we expect that the ASPs of our products will decline over the lives of the products. The declines in ASPs of 3D graphics processors generally may also accelerate as the market develops and competition increases. Royalty Revenue. ST has a worldwide license to sell the RIVA 128 and RIVA 128ZX graphics processors. Royalty revenue from sales by ST of the RIVA 128 graphics processor and a derivative of the RIVA 128ZX graphics processor decreased to zero in the third quarter and first nine months of fiscal 2000 due primarily to reduced sales of such products and disputes with ST regarding payment. Royalty revenue totaled $1.2 million, or 2% of our total revenue, in the third quarter ended October 25, 1998 and $5.9 million for the first nine months of fiscal 1999. We do not expect to record or receive royalty revenue from ST in the future. Gross Profit Gross profit consists of total revenue net of allowances less cost of revenue. Cost of revenue consists primarily of the costs of semiconductors purchased from contract manufacturers (including assembly, test and packaging), manufacturing support costs (labor and overhead associated with such purchases), inventory provisions and shipping costs. Our gross profit margin in any period varies depending on the mix of types of graphics processors sold. Gross profit increased to $36.8 million in the third quarter of fiscal 2000 from $18.7 million in the third quarter of fiscal 1999. Excluding royalty revenue, gross profit margin on product revenue increased to 38% in the third quarter of fiscal 2000 from 34% in the third quarter of fiscal 1999. For the first nine months of fiscal 2000, gross profit grew to $90.3 million from $25.3 million in the comparable period of the prior year. Year-to-date gross profit margin on product revenue was 37% in fiscal 2000 compared to 22% in fiscal 1999. The increase in gross profit margin relates primarily to significant increases in unit shipments and the favorable impact of the higher margin RIVA TNT2 graphics processors, partially offset by declining profit margins in our older product families. In the third quarter of fiscal 2000, a portion of our new GeForce 256(TM) GPU sold was bundled with Double Data Rate (DDR) memories, and the inclusion of the DDR memories has tended to increase absolute margin dollars but to lower the gross margin percentage. We expect to continue bundling DDR memories with some of our high-performance products for the foreseeable future, which may negatively impact our gross margin percentage. Although we achieved substantial growth in gross profit and gross profit margin in this period, we do not expect to sustain these rates of growth in future periods. Operating Expenses Research and Development. Research and development expenses consist of salaries and benefits, cost of development tools and software, costs of prototypes of new products and consultant costs. As a percentage of total revenue, research and development expenses increased to 13% in the third quarter of fiscal 2000 from 12% in the third quarter of fiscal 1999, and increased in absolute dollars to $12.4 million from $6.3 million. Year-to-date research and development expenses in fiscal 2000 increased to $32.0 million from $16.7 million in fiscal 1999. As a percentage of total revenue, year-to- date research and development expenses in fiscal 2000 decreased to 13% compared to 18% in the same period in fiscal 1999. The increase in absolute dollars was primarily due to additional personnel and related engineering costs to support our next generations products, such as depreciation charges incurred on capital expenditures and software license and maintenance fees. As part of the strategic relationship agreement, 17 engineering personnel transferred from SGI during this quarter. 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 fourth quarter of fiscal 2000. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and our level of revenue fluctuates. As part of a strategic collaboration agreement with ST, we received contract funding in support of research and development and marketing efforts for the RIVA 128 and RIVA 128ZX graphics processors. Accordingly, we recorded approximately $625,000 and $1.9 million in the third quarter and first nine months of fiscal 1999, respectively, as a reduction primarily to research and development. We were obligated to provide continued 11 development and support to ST through the end of calendar 1998. We currently do not have any plans to enter into contractual development arrangements and do not expect to receive contract funding in the future. Sales, General and Administrative. Sales, general and administrative expenses consist primarily of salaries, commissions and bonuses earned by sales, marketing and administrative personnel, promotional and advertising expenses, travel and entertainment expenses and legal expenses. Sales, general and administrative expenses as a percentage of total revenue increased to 10% in the third quarter of fiscal 2000 from 9% in the third quarter of fiscal 1999 and increased in absolute dollars to $9.3 million from $4.7 million. For the first nine months of fiscal 2000, sales, general and administrative expenses increased to $24.7 million compared to $12.5 million in the same period in fiscal 1999. The increase in absolute dollars was primarily the result of additional personnel and commissions and bonuses on sales of the RIVA TNT2 and GeForce 256 graphics processors as well as legal expenses associated with patent litigation. We expect sales, general and administrative expenses to continue to increase in absolute dollars as we expand our operations, but we do not expect significant changes in these expenses as a percentage of revenue in future periods. Interest and Other Income, Net Interest income primarily consists of interest earned on cash and cash equivalents. Interest expense primarily consists of interest incurred as a result of capital lease obligations. Net interest income increased to $430,000 in the third quarter of fiscal 2000 from $11,000 in the third quarter of fiscal 1999. For the first nine months of fiscal 2000, net interest income increased to $1.1 million from $60,000 in the comparable period of fiscal 1999. The increase in net interest income was primarily due to higher average cash balances as a result of cash proceeds received from the initial public offering of our common stock in January 1999. Income Taxes We had an effective tax rate of 32% in the third quarter and first nine months of fiscal 2000. For the first nine months of fiscal 1999, we recorded an aggregate benefit of $308,000 for income taxes. We anticipate our tax rates for the remainder of fiscal 2000 will remain relatively constant, depending on the availability and realizability of deferred tax assets. Realization of the deferred tax assets will depend on future taxable income. Stock-Based Compensation With respect to stock options granted to employees, we recorded deferred compensation of $4.3 million in 1997 and $361,000 in the one month ended January 31, 1998. These amounts are being amortized over the vesting period of the individual options, generally four years. We amortized approximately $126,000 in the third quarter of fiscal 2000 compared to $526,000 in the third quarter of fiscal 1999. Year-to-date amortization decreased to $578,000 in fiscal 2000 from $2.2 million in fiscal 1999. We anticipate total amortization of approximately $650,000 in fiscal 2000. Liquidity and Capital Resources As of October 31, 1999, we had $55.2 million in cash and cash equivalents, an increase of $4.9 million over the same balance at the end of fiscal 1999. We historically have held our cash balances in cash equivalents such as money market funds or as cash. We place the money market funds with high-quality financial institutions and limit the amount of exposure with any one financial institution. We had $104.3 million of noncancelable inventory purchase commitments outstanding at October 31, 1999. In July 1999, we entered into an amended loan and security agreement with a bank, which included a $10.0 million revolving credit facility with a borrowing base equal to 80% of eligible accounts. Borrowings under the line of credit bear interest at prime rate and are due in July 2000. Covenants governing the credit facility require the maintenance of certain financial ratios. As of October 31, 1999, we had no outstanding borrowings against the line of credit. 12 Operating activities generated cash of $10.6 million and used cash of $5.9 million during the first nine months of fiscal 2000 and 1999, respectively. For the first nine months of fiscal 2000, the most significant source of cash was $23.5 million of net income, offset by changes in operating assets and liabilities. Our accounts receivable are highly concentrated. Five customers accounted for approximately 64% of the accounts receivable for the first nine months of fiscal 2000. Although we have not experienced any significant bad debt write-offs to date, we may be required to write off bad debt in the future, which could harm our business. In June 1999, we repurchased 428,572 shares of our common stock from a major customer in settlement for a portion of then outstanding accounts receivable in the amount of $7.5 million. To date, our investing activities have consisted primarily of purchases of property and equipment. Our capital expenditures, including capital leases, were $21.1 million during the first nine months of fiscal 2000 and $6.5 million during the first nine months of fiscal 1999. The increase was primarily attributable to a $10.0 million obligation pursuant to a long-term licensing agreement with a supplier. We expect capital expenditures to increase as we further expand research and development initiatives and as our employee base grows. The timing and amount of future capital expenditures will depend primarily on our future growth. We expect to spend an additional $5.0 million for capital expenditures in the next three months, primarily for software licenses, emulation equipment and the purchase of computer and engineering workstations. Financing activities provided cash of $4.3 million in the nine months ended October 31, 1999, compared to $14.7 million in the nine months ended October 25, 1998. In February 1999, we received $5.7 million from the underwriters' exercise of their option to purchase an additional 525,000 shares of common stock at a price of $12 per share. Additionally, we received proceeds of $4.9 million from the issuance of common stock under employee stock option and purchase plans. We used $5.0 million to repay in full amounts outstanding under a bank line of credit. The balance of the net proceeds will be used for general corporate purposes, including capital expenditures and working capital. We believe that our existing cash balances, anticipated cash flows from operations and capital lease financing will be sufficient to meet our operating and capital requirements for at least the next 12 months, although we could elect to raise additional funds during that period. We expect that we may need to raise additional equity or debt financing in the future. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases and/or research and development expenditures, which could harm our business. Year 2000 Compliance The Year 2000 issue is the result of computer programs written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software like this may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. We are heavily dependent upon the proper functioning of our own computer or data-dependent systems. These include, but are not limited to, information systems in business, finance, operations and service. Any failure or malfunctioning on the part of these or other systems could adversely affect us in ways that are not currently known, discernible, quantifiable or otherwise anticipated by us. Our graphics processors and related software do not depend on any date- sensitive functions in order to perform in accordance with their respective designs, and we do not expect their functions to be negatively affected by the Year 2000 issue. Our products are ultimately used with a number of different hardware and software products, and to the extent these third-party products are not Year 2000 compliant, the interoperability of our products may be adversely affected. Given the number of third-party components and our limited resources, we do not expect to review these third-party products. 13 We have conducted and completed an audit of our critical internal financial, informational and operational systems and our electronic design tools to identify and evaluate those areas of our business that may be affected by the Year 2000 issue. We have completed a detailed plan to implement and test any necessary modifications to these key areas to ensure that they are Year 2000 compliant. Our plan includes the following components: . independent validation of our Year 2000 assessment procedures; . formal communications with all significant suppliers, large customers and tools vendors to determine the extent to which we are vulnerable to those third parties' failure to remedy their own Year 2000 issues; and . the development of contingency plans to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations. We anticipate that any required remediation programs will be completed by the end of calendar 1999. To date, we have not incurred material incremental costs associated with our efforts to become Year 2000 compliant, as the majority of the costs have occurred as a result of normal upgrade procedures. We believe that total costs associated with our Year 2000 compliance efforts will not exceed $500,000. In addition to the risks associated with our own systems, we have relationships with, and are to varying degrees dependent upon, a large number of third parties that provide information, goods and services to us and manufacture our graphics processors. Our business could suffer if key suppliers experience Year 2000 issues that cause them to delay manufacturing or shipment of finished product to us. In addition, our results of operations could suffer if any of our key customers encounter Year 2000 issues that cause them to delay or cancel substantial purchase orders or delivery of our product. We have completed formal communications to ascertain the Year 2000 compliance of key suppliers and determined the extent to which we may be vulnerable to those third parties' failure to remedy their own Year 2000 issues. We have completed an inventory of internal systems, hardware, software, communication networks and non-information technology systems and services. To date, we have substantially completed the following: . assessing specific underlying computer systems, programs and hardware; . evaluating remediation or replacement of Year 2000 non-compliant technology; . conducting validation and testing of technologically-compliant Year 2000 solutions; and . completing implementation of Year 2000 compliant systems. While we plan to complete modifications or upgrades of our business-critical systems prior to the Year 2000, we may be unable to develop a plan to address the Year 2000 issue in a timely manner or to upgrade any or all of our major systems in accordance with our plan. If any required modifications or upgrades or modifications by key suppliers or customers are not completed in a timely manner or are not successful, we may be unable to conduct our business. In addition, any upgrades made may not effectively address the Year 2000 issue. Furthermore, the systems of other companies on which we rely for the manufacture of our products may not be converted in a timely manner. A failure to convert by another company, or a conversion that is incompatible with our systems, could harm our business. We or one or more third parties may encounter unforeseen problems with respect to any of our systems, which could harm our business. We are currently evaluating possible actions, including accumulating excess inventory of our finished products, to be taken in the event that our assessment of the Year 2000 issue is not successfully completed on a timely basis. 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from the investments without significantly increasing risk. To minimize potential loss arising from adverse changes in interest rates, we maintain a portfolio of cash and cash equivalents primarily in highly rated domestic money market funds. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. Exchange Rate Risk We consider our exposure to foreign exchange rate fluctuations to be minimal. Currently, all of our arrangements with third-party manufacturers provide for pricing and payment in U.S. dollars, and, therefore, are not subject to exchange rate fluctuations. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in foreign currency exchange rates could harm our business in the future. Certain Business Risks In addition to the risks discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," our business is subject to the risks set forth below. Our operating results are unpredictable and they may fluctuate. Many of our revenue components fluctuate and are difficult to predict, and our operating expenses are largely independent of revenue in any particular period. It is therefore difficult for us to accurately forecast revenue and profits or losses. We believe that, even if we do achieve significant sales of our products, our quarterly and annual results of operations will be affected by a variety of factors that could adversely affect our revenue, gross profit and results of operations. Factors that have affected our results of operations in the past, and are likely to affect our results of operations in the future, include the following: . demand and market acceptance for our products; . the successful development of next-generation products; . unanticipated delays or problems in the introduction or performance of next-generation products; . market acceptance of the products of our customers; . new product announcements or product introductions by our competitors; . our ability to introduce new products in accordance with OEM design requirements and design cycles; . changes in the timing of product orders due to unexpected delays in the introduction of our products and/or our customers' products or due to the life cycles of our customers' products ending earlier than anticipated; . fluctuations in the availability of manufacturing capacity or manufacturing yields; . competitive pressures resulting in lower than expected average selling prices; . the volume of orders that are received and that can be fulfilled in a quarter; . rates of return in excess of that forecasted/expected due to quality issues; . the rescheduling or cancellation of customer orders; . the unanticipated termination of strategic relationships; 15 . seasonal fluctuations associated with the tendency of PC sales to decrease in the second quarter and increase in the second half of each calendar year; and . the level of expenditures for our research and development and sales, general and administrative functions. In addition, we may experience difficulties related to the production of current or future products and other factors may delay the introduction or volume sales of new products we develop. We believe that quarterly and annual results of operations also could be affected in the future by other factors, including the following: . changes in the relative volume of sales of our products; . seasonality in the PC market; . our ability to reduce the process geometry of our products; . supply constraints for the other components incorporated into our customers' products; . the loss of a key customer; . introductions of enabling technologies to keep pace with faster generations of processors and controllers; . shortages of memories due to increased demand in the industry; . changes in the pricing of dynamic random access memory devices ("DRAMs") or other memory components; . legal and other costs related to defending intellectual property litigation; . costs associated with protecting our intellectual property; . costs related to acquiring or licensing intellectual property; . inventory write-downs; and . foreign exchange rate fluctuations. Any one or more of the factors discussed above could prevent us from achieving our expected future revenue or net income. Because most operating expenses are relatively fixed in the short term, we may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall. We may be required to reduce prices in response to competition or to pursue new market opportunities. If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly greater resources than anticipated in research and development or sales and marketing efforts, our business could suffer. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. We have a limited operating history and a history of losses. We have a limited operating history and it is difficult to predict our future operating results. Our recent revenue growth may not be sustainable and should not be considered indicative of future revenue growth, if any. We generated net income in the last five consecutive quarters ended October 31, 1999, and in the three months ended December 31, 1997. However, we incurred losses in the first half of fiscal 1999, in the first three quarters of fiscal 1997 and in each quarter of our prior fiscal years. We may not be profitable on a quarterly or annual basis in the future. We need to develop new products and manage product transitions in order to succeed. Our business will depend to a significant extent on our ability to successfully develop new products for the 3D graphics market. Our add-in board manufacturers and major OEM customers typically introduce new high end system 16 configurations as often as twice per year, typically based on spring and fall design cycles. Accordingly, our existing products must have competitive performance levels or we must timely introduce new products with such performance characteristics in order to be included in new system configurations. This requires that we do the following: . anticipate the features and functionality that consumers will demand; . incorporate those features and functionality into products that meet the exacting design requirements of PC OEMs and add-in board manufacturers or contract electronics manufacturers (CEMs); . price our products competitively; and . introduce the products to the market within the limited window for PC OEM and add-in board manufacturer or CEM design cycles. As a result, we believe significant expenditures for research and development will continue to be required in the future. Our strategy is to utilize the most advanced process technology appropriate for our products and available from commercial third-party foundries. Use of advanced processes has in the past resulted in initial yield problems. New products that we introduce may not incorporate the features and functionality demanded by PC OEMs, add-in board manufacturers and consumers of 3D graphics. In addition, we may not successfully develop or introduce new products in sufficient volumes within the appropriate time to meet both the PC OEMs' design cycles and market demand. We have in the past experienced delays in the development of some new products. Our failure to successfully develop, introduce or achieve market acceptance for new 3D graphics products would harm our business. As markets for our 3D graphics processors develop and competition increases, we anticipate that product life cycles in the high end will remain short and ASPs will continue to decline. In particular, we expect ASPs and gross margins for our 3D graphics processors to decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain overall ASPs and gross margins. In order for our 3D graphics processors to achieve high volumes, leading PC OEMs and add-in board manufacturers must select our 3D graphics processor for design into their products, and then successfully complete the designs of their products and sell them. We may be unable to successfully identify new product opportunities or develop and bring to market in a timely fashion any new products. In addition, we cannot guarantee that any new products we develop will be selected for design into PC OEMs' and add-in board manufacturers' products, that any new designs will be successfully completed or that any new products will be sold. As the complexity of our products and the manufacturing process for our products increases, there is an increasing risk that we will experience problems with the performance of our products and that there will be delays in the development, introduction or volume shipment of our products. We recently introduced the RIVA TNT2 and GeForce 256 families of graphics processors. While we have not experienced yield problems to date, we may experience problems or other delays while in production of these products. We may experience difficulties related to the production of current or future products or other factors may delay the introduction or volume sale of new products we developed. In addition, we may be unable to successfully manage the production transition risks with respect to future products. Failure to achieve any of the foregoing with respect to future products or product enhancements could result in rapidly declining ASPs, reduced margins, reduced demand for our products or loss of market share. In addition, technologies developed by others may render our 3D graphics products non-competitive or obsolete or result in our holding excess inventory, either of which would harm our business. In the design and development of new products and product enhancements, we rely on third-party software development tools. While we currently are not dependent on any one vendor for the supply of these tools, some or all of these tools may not be readily available in the future. For example, we have experienced delays in the introduction of products in the past as a result of the inability of then-available software development tools to 17 fully simulate or emulate the complex features and functionality of our products. The design requirements necessary to meet consumer demands for more features and greater functionality from 3D graphics products in the future may exceed the capabilities of the software development tools available to us. If the software development tools we use become unavailable or fail to produce designs that meet consumer demands, our business could suffer. We may be unable to obtain design wins. Our future success will depend in large part on achieving design wins, which entails having our existing and future products chosen as the 3D graphics processors for hardware components or subassemblies designed by PC OEMs and add-in board manufacturers. Our failure to achieve one or more design wins would harm our business. The process of being qualified for inclusion in a PC OEM's product can be lengthy and could cause us to miss a cycle in the demand of end users for a particular product feature, which also could harm our business. Our ability to achieve design wins will depend in part on our ability to identify and ensure compliance with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers, including Intel and Microsoft. This would require us to invest significant time and resources to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, our ability to achieve design wins could suffer. Our failure to achieve design wins would result in the loss of any potential sales volume that could be generated by newly designed PC hardware component or board subassembly. This would give a competitive advantage to the 3D graphics processor manufacturer that achieved the design win. We are dependent on the desktop PC market, which may not continue to grow. In the first nine months of fiscal 2000, we derived all our revenue from the sale of products for use in PCs. We expect to continue to derive substantially all of our revenue from the sale or license of products for use in PCs. The PC market is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and significant price competition. These factors result in short product life cycles and regular reductions of ASPs over the life of a specific product. Although the PC market has grown substantially in recent years, this growth may not continue. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, would likely reduce demand for our products. Moreover, changes in demand could be large and sudden. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they have incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until the excess inventory has been absorbed. Any reduction in the demand for PCs generally, or for a particular product that incorporates our 3D graphic processors, could harm our business. The market for mainstream PC 3D graphics is new and uncertain. Our success will depend, in part, upon the demand for 3D graphics for mainstream PC applications. The market for 3D graphics on mainstream PCs has only recently begun to emerge and is dependent on the future development of, and substantial end-user and OEM demand for, 3D graphics functionality. As a result, the market for mainstream PC 3D graphics computing may not continue to develop or may not grow at a rate sufficient to support our business. The development of the market for 3D graphics on mainstream PCs will in turn depend on the development and availability of a large number of mainstream PC software applications that support or take advantage of 3D graphics capabilities. Currently there are only a limited number of software applications like this, most of which are games, and a broader base of software applications may not develop in the near term or at all. Until very recently, the majority of multimedia PCs incorporated only 2D graphics acceleration technology, and as a result, the majority of graphics applications currently available for mainstream PCs are written for 2D acceleration technology. Consequently, a broad market for full function 3D graphics on mainstream PCs may not develop. Our business will suffer if the market for mainstream PC 3D graphics fails to develop or develops more slowly than expected. 18 We are dependent on a small number of customers and we are subject to order and shipment uncertainties. We have only a limited number of customers and our sales are highly concentrated. We primarily sell our products to CEMs, add-in board and motherboard manufacturers, which incorporate graphics products in the boards they sell to PC OEMs. Sales to add-in board and motherboard manufacturers are primarily dependent on achieving design wins with leading PC OEMs. We believe that a considerable portion of our revenue in the most recent quarter was attributable to products that ultimately were incorporated into PCs sold by Compaq Computer Corporation, Dell Computer Corporation, Gateway 2000, Inc., Hewlett-Packard, Intel, International Business Machines Corporation and Micron Technology, Inc. The number of add-in board and motherboard manufacturers and leading PC OEMs is limited. We expect that a small number of add-in board and motherboard manufacturers directly, and a small number of PC OEMs indirectly, will continue to account for a substantial portion of our revenue for the foreseeable future. As a result, our business could be harmed by the loss of business from the OEM or add-in board and motherboard manufacturers. In addition, revenue from add-in board and motherboard manufacturers or PC OEMs that have directly or indirectly accounted for significant revenue in past periods, individually or as a group, may not continue, or may not reach or exceed historical levels in any future period. We depend on third-party manufacturers to produce our products. We do not manufacture the semiconductor wafers used for our products and do not own or operate a wafer fabrication facility. Our products require wafers manufactured with state-of-the-art fabrication equipment and techniques. We utilize TSMC and WaferTech to produce our semiconductor wafers and utilize independent contractors to perform assembly, test and packaging. We depend on these suppliers to allocate to us a portion of their manufacturing capacity sufficient to meet our needs, to produce products of acceptable quality and at acceptable manufacturing yields, and to deliver those products to us on a timely basis. These manufacturers may be unable to meet our near-term or long- term manufacturing requirements. We obtain manufacturing services on a purchase order basis and TSMC has no obligation to provide us with any specified minimum quantities of product. TSMC fabricates wafers for other companies, including certain of our competitors, and could choose to prioritize capacity for other users or reduce or eliminate deliveries to us on short notice. Because the lead time needed to establish a strategic relationship with a new manufacturing partner could be several months, there is no readily available alternative source of supply for any specific product. We believe that long-term market acceptance for our products will depend on reliable relationships with TSMC and any other manufacturers used by us to ensure adequate product supply to respond to customer demand. During this quarter, the effects of the earthquake in Taiwan contributed to a temporary shortage of graphics processors. Any substantial disruption in our suppliers' operations, either as a result of a natural disaster, equipment failure or other cause, could have a material adverse effect on our business. We are dependent primarily on TSMC and we expect in the future to continue to be dependent upon third-party manufacturers to do the following: . produce wafers of acceptable quality and with acceptable manufacturing yields; . deliver those wafers to us and our independent assembly and testing subcontractors on a timely basis and; . allocate to us a portion of their manufacturing capacity sufficient to meet our needs. Our wafer requirements represent a small portion of the total production capacity of TSMC. Although our products are designed using TSMC's process design rules, TSMC may be unable to achieve or maintain acceptable yields or deliver sufficient quantities of wafers on a timely basis or at an acceptable cost. Additionally, TSMC may not continue to devote resources to the production of our products or to advance the process design technologies on which the manufacturing of our products are based. Any difficulties like this would harm our business. 19 Low manufacturing yields would harm our business. Semiconductor manufacturing yields are a function both of product design, which is developed largely by us, and process technology, which is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems would require cooperation by and communication between the manufacturer and us. The risk of low yields is compounded by the offshore location of most of our manufacturers, increasing the effort and time required identifying, communicating and resolving manufacturing yield problems. Because of our potentially limited access to wafer fabrication capacity from our manufacturers, any decrease in manufacturing yields could result in an increase in our per unit costs and force us to allocate our available product supply among our customers. This could potentially harm customer relationships as well as revenue and gross profit. Our wafer manufacturers may be unable to achieve or maintain acceptable manufacturing yields in the future. Our inability to achieve planned yields from our wafer manufacturers could harm our business. We face many other risks. Also inherent in our business are additional risks, which include but are not limited to the following: . our ability to manage growth; . our dependence on key personnel; . the risk of product returns, product defects or product incompatibilities; . our inability to transition to new manufacturing process technologies; . the risks associated with international operations, which accounted for a significant portion of our revenue in the first nine months of fiscal 2000; . the cyclical nature of the semiconductor industry; and . our ability to adequately protect our intellectual property rights. 20 PART II: OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds Use of Proceeds from Sales of Registered Securities We commenced our initial public offering on January 21, 1999 pursuant to a Registration Statement on Form S-1 (File No. 333-47495). The managing underwriters of the public offering were Morgan Stanley & Co., Hambrecht & Quist and Prudential Securities (the Underwriters). In the offering, we sold an aggregate of 3.5 million shares of our common stock for an initial price of $12.00 per share. On February 2, 1999, we sold an additional 525,000 shares of our common stock at a price of $12.00 per share pursuant to the exercise of the Underwriters' over-allotment option. The aggregate proceeds from the offering were $48.3 million. We paid expenses of approximately $5.0 million, of which approximately $3.4 million represented underwriting discounts and commissions and approximately $1.6 million represented expenses related to the offering. Net proceeds from the offering were $43.3 million. Of the net proceeds, as of October 31, 1999, $5.0 million had been used to repay in full amounts outstanding under a bank line of credit. The use of the proceeds from the offering does not represent a material change in the use of proceeds described in our Registration Statement. As of October 31, 1999, the remainder of the net proceeds was invested in money market funds. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed herewith:
Exhibit Number Description of Document ------- ----------------------- 27.1 Financial Data Schedule
(b) Reports on Form 8-K No Reports on Form 8-K were filed by the registrant during the three months ended October 31, 1999. 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 9, 1999. NVIDIA Corporation /s/ Christine B. Hoberg By: _________________________________ Christine B. Hoberg Chief Financial Officer (Principal Financial and Accounting Officer) 22 INDEX TO EXHIBITS
Exhibit Number Description of Document ------- ----------------------- 27.1 Financial Data Schedule
23 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF OCTOBER 31, 1999 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-30-2000 AUG-02-1999 OCT-31-1999 55,200 0 61,414 4,995 11,734 127,562 39,240 12,616 157,553 52,234 0 0 0 30 98,370 157,553 97,015 97,015 60,195 60,195 21,713 0 54 15,537 4,973 10,564 0 0 0 10,564 0.35 0.29
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