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NVIDIA 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
q308form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q
 
   [X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended October 28, 2007
 
OR
 
  [   ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 0-23985
 
Logo
 
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.)
 
2701 San Tomas Expressway
Santa Clara, California 95050
(408) 486-2000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
x Large accelerated filer                                                           o Accelerated filer                                                                o Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
The number of shares of common stock, $.001 par value, outstanding as of November 14, 2007 was 555,571,452.
 
 

                                                            NVIDIA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 28, 2007

TABLE OF CONTENTS
 
 
 
Page
 
 
3
 
4
 
5
 
6
24
38
39
 
 
 
 
 
40
40
55
56
56
56
57
58




PART I. FINANCIAL INFORMATION


NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)

   
Three Months Ended
   
Nine Months Ended
 
   
October 28, 
2007
   
October 29,
2006
   
October 28, 
2007
   
October 29,
2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
1,115,597
   
$
820,572
   
$
2,895,130
   
$
2,189,898
 
         Cost of revenue
   
600,044
     
486,630
     
1,575,447
     
1,275,155
 
Gross profit
   
515,553
     
333,942
     
1,319,683
     
914,743
 
Operating expenses:
                               
         Research and development
   
179,529
     
140,732
     
495,802
     
391,191
 
         Sales, general and administrative
   
88,183
     
75,597
     
250,034
     
208,614
 
Total operating expenses
   
267,712
     
216,329
     
745,836
     
599,805
 
Operating income
   
247,841
     
117,613
     
573,847
     
314,938
 
         Interest income
   
17,416
     
10,652
     
46,250
     
28,278
 
         Interest expense
   
     
(22
)
   
     
(29
)
         Other income (expense), net
   
1,542
     
84
     
1,342
     
(266
)
Income before income tax expense
   
266,799
     
128,327
     
621,439
     
342,921
 
Income tax expense
   
31,138
     
21,816
     
80,787
     
58,297
 
Income before change in accounting principle
   
235,661
     
106,511
     
540,652
     
284,624
 
Cumulative effect of change in accounting principle
   
     
     
     
704
 
Net income
 
$
235,661
   
$
106,511
   
$
540,652
   
$
285,328
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share:
                               
Prior to cumulative effect of change in accounting principle
 
$
0.42
   
$
0.20
   
$
0.99
   
$
0.55
 
Cumulative effect of change in accounting principle
   
     
     
     
 
Basic net income per share
 
$
0.42
   
$
0.20
   
$
0.99
   
$
0.55
 
Shares used in basic per share computation
   
554,966
     
528,986
     
547,796
     
514,112
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share:
                               
Prior to cumulative effect of change in accounting principle
 
$
0.38
   
$
0.18
   
$
0.89
   
$
0.50
 
    Cumulative effect of change in accounting principle
   
     
     
     
 
Diluted net income per share
 
$
0.38
   
$
0.18
   
$
0.89
   
$
0.50
 
Shares used in diluted per share computation
   
612,985
     
586,733
     
605,733
     
570,422
 


 
See accompanying Notes to Condensed Consolidated Financial Statements.


3



NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)

   
October 28, 
2007
   
January 28,
2007
 
ASSETS
           
 Current assets:
           
         Cash and cash equivalents
 
$
1,056,702
   
$
544,414
 
         Marketable securities
   
796,251
     
573,436
 
         Accounts receivable, net
   
552,407
     
518,680
 
         Inventories
   
306,143
     
354,680
 
         Prepaid expenses and other current assets
   
44,551
     
40,560
 
 Total current assets
   
2,756,054
     
2,031,770
 
 Property and equipment, net
   
322,946
     
260,828
 
 Goodwill
   
292,934
     
301,425
 
 Intangible assets, net
   
78,173
     
45,511
 
 Deposits and other assets
   
25,156
     
35,729
 
   Total assets
 
$
3,475,263
   
$
2,675,263
 
 
 
 
 
 
 
 
 
 
 LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 Current liabilities:
               
         Accounts payable
 
$
449,792
   
$
272,075
 
         Accrued liabilities
   
406,650
     
366,732
 
Total current liabilities
   
856,442
     
638,807
 
 Deferred tax and other long-term liabilities
   
140,895
     
29,537
 
 Commitments and contingencies - see Note 13
               
 Stockholders’ equity:
               
         Preferred stock
   
     
 
         Common stock
   
615
     
583
 
         Additional paid-in capital
   
1,598,291
     
1,295,455
 
         Treasury stock, at cost
   
(861,547
)
   
(487,120
)
         Accumulated other comprehensive income, net
   
3,350
     
1,436
 
         Retained earnings
   
1,737,217
     
1,196,565
 
Total stockholders' equity
   
2,477,926
     
2,006,919
 
             Total liabilities and stockholders' equity
 
$
3,475,263
   
$
2,675,263
 

 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

4



NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) 
 
   
Nine Months Ended
 
   
October 28, 
2007
   
October 29,
2006
 
Cash flows from operating activities:
           
Net income
 
$
540,652
   
$
285,328
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Stock-based compensation
   
98,868
     
83,244
 
Depreciation and amortization
   
96,256
     
73,270
 
Deferred income taxes
   
67,279
     
25,617
 
Payments under patent licensing arrangement
   
(49,634
)
   
 
Excess tax benefits from stock-based compensation
   
     
(22,559
)
Cumulative effect of change in accounting principle
   
     
(704
)
In-process research and development
   
     
602
 
Other
   
618
     
262
 
Changes in operating assets and liabilities net of acquisitions:
               
Accounts receivable
   
(32,943
)
   
(112,335
)
Inventories
   
48,590
     
(112,540
)
Prepaid expenses and other current assets
   
(4,327
)
   
(10,502
)
Deposits and other assets
   
3,193
     
(13,670
)
Accounts payable
   
175,096
     
82,573
 
Accrued liabilities
   
74,077
     
78,130
 
Net cash provided by operating activities
   
1,017,725
     
356,716
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
               
       Purchases of marketable securities
   
(739,706
)
   
(179,050
)
Sales and maturities of marketable securities
   
521,712
     
146,745
 
       Purchases of property and equipment and intangible assets
   
(117,406
)
   
(69,564
)
Acquisition of businesses, net of cash and cash equivalents
   
     
(67,037
)
      Investments in non-affiliates
   
     
(8
)
Net cash used in investing activities
   
(335,400
)
   
(168,914
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
               
      Common stock issued under employee stock plans
   
204,390
     
154,607
 
      Stock repurchase
   
(374,427
)
   
(174,978
)
      Excess tax benefits from stock-based compensation
   
     
22,559
 
Net cash provided by (used in) financing activities
   
(170,037
)
   
2,188
 
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
   
512,288
     
189,990
 
Cash and cash equivalents at beginning of period
   
544,414
     
551,756
 
Cash and cash equivalents at end of period
 
$
1,056,702
   
$
741,746
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
               
       Cash paid for income taxes, net
 
$
4,299
   
$
27,226
 
Other non-cash activities:
               
       Unrealized gains from marketable securities
 
$
2,571
   
$
1,052
 
       Assets acquired by assuming related liabilities
 
$
16,348
   
$
51,463
 
       Deferred compensation
 
$
   
$
3,604
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements



5


 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1 - Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations and financial position have been included. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 28, 2007.  
 
Fiscal year
 
We operate on a 52 or 53-week year, ending on the Sunday in January nearest January 31. Each quarter in fiscal years 2008 and 2007 was a 13-week quarter.

Stock Split

On August 9, 2007, we announced that our Board approved a three-for-two stock split of our outstanding shares of common stock on Monday, August 20, 2007 to be effected in the form of a stock dividend. The stock split was effective on Monday, September 10, 2007 and entitled each stockholder of record to receive one additional share for every two outstanding shares of common stock held and cash in lieu of fractional shares. All share and per-share numbers contained herein have been retroactively adjusted to reflect this stock split.
 
Reclassifications
 
Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
 
Principles of Consolidation
 
Our condensed 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 revenue 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, income taxes, goodwill, stock-based compensation expense and contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.

Revenue Recognition
 
Product Revenue 
 
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 most 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 based on the shipping terms. 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 payment.
 
 
6

 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Our policy on sales to distributors, who have rights of return, is to defer recognition of revenue and related cost of revenue until the distributors 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 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products) and, as such, we accrue for 100% of the potential rebates and do not apply a breakage factor. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue upon expiration of the rebate.
 
Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense in accordance with EITF 01-09. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, or 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. Depending on market conditions, 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.

License and Development Revenue 
 
For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue using the percentage-of-completion method of accounting over the period that services are performed. For all license and service arrangements accounted for under the percentage-of-completion method, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, we have not recorded any such losses. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We are required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April 27, 2008. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial position, results of operations and cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We are required to adopt the provisions of SFAS No. 159 beginning with our fiscal quarter ending April 27, 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial position, results of operations and cash flows.

7



NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-3, or EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. We are required to adopt the provisions of EITF 07-3 beginning with our fiscal quarter ending April 27, 2008. The adoption of EITF 07-3 is not expected to have a significant impact on our consolidated financial position, results of operations and cash flows.

Adoption of FASB Interpretation No. 48

On January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, issued in July 2006. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes. Under FIN 48 we recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing the FIN 48. Please refer to Note 3 of these Notes to Condensed Consolidated Financial Statements for additional information.

Note 2 - Stock-Based Compensation

At the beginning of fiscal year 2007, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, we measure stock-based compensation at grant date, based on the fair value of the awards, and we recognize that compensation as expense using the straight-line attribution method over the requisite employee service period, which is typically the vesting period of each award. We elected to adopt the modified prospective application method provided by SFAS No. 123(R). Our estimates of the fair values of employee stock options are calculated using a binomial model.

For option grants prior to our adoption of SFAS No. 123(R), we record stock-based compensation expense equal to the amount that would have been recognized if the fair value method provided in accordance with Statement of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, or SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures, had been used.

    Cumulative Effect of Change in Accounting Principle
 
Our adoption of SFAS No. 123(R) resulted in a cumulative benefit from the accounting change of $0.7 million during fiscal year 2007, which reflects the net cumulative impact of estimating forfeitures in the determination of period expense by reversing the previously recognized cumulative compensation expense related to those forfeitures, rather than recording forfeitures when they occur as previously permitted.

Our condensed consolidated income statements include stock-based compensation expense, net of amounts capitalized as inventory, as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
October 28, 
2007
   
October 29,
2006
   
October 28, 
2007
   
October 29,
2006
 
   
(In thousands)
 
Cost of revenue
 
$
2,566
   
$
2,305
   
$
8,077
   
$
5,278
 
Research and development
 
$
18,650
   
$
18,730
   
$
57,471
   
$
49,744
 
Sales, general and administrative
 
$
10,787
   
$
10,700
   
$
33,320
   
$
27,804
 


8



NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
During the three and nine months ended October 28, 2007, we granted approximately 7.3 million and 15.9 million stock options, respectively, with an estimated total grant-date fair value of $117.8 million and $187.6 million, respectively, and a per option weighted average grant-date fair value of $16.03 and $11.79, respectively. Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the awards that are not expected to vest was $22.7 million and $36.2 million for the three and nine months ended October 28, 2007, respectively.
 
During the three and nine months ended October 29, 2006, we granted approximately 5.9 million and 16.1 million stock options, respectively, with an estimated total grant-date fair value of $49.5 million and $123.1 million, respectively, and a per option weighted average grant date fair value of $12.62 and $11.44, respectively. Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the awards that are not expected to vest was $9.6 million and $23.8 million for the three and nine months ended October 29, 2006, respectively.

As of October 28, 2007 and October 29, 2006, the aggregate amount of unearned stock-based compensation expense related to our stock options was $244.7 million and $175.5 million, respectively, adjusted for estimated forfeitures.  We will recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.2 years and 2.1 years for the nine months ended October 28, 2007 and October 29, 2006, respectively.

 Valuation Assumptions

In fiscal year 2006, we transitioned from a Black-Scholes model to a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our stock option plans.  We reevaluated the assumptions we used to estimate the value of employee stock options and shares issued under our employee stock purchase plan, beginning with stock options granted and shares issued under our employee stock purchase plan.  At that time, our management also determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, could reasonably be expected to be a better indicator of our expected volatility than historical volatility. We also segregated options into groups for employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model.  As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities.  Our management believes the resulting binomial calculation provides a more refined estimate of the fair value of our employee stock options. For our employee stock purchase plan we continue to use the Black-Scholes model.

SFAS No. 123(R) also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that we record under SFAS No. 123(R) may differ significantly from what we have recorded in the current period.

The fair value of stock options granted under our stock option plans and shares issued under our employee stock purchase plan have been estimated at the date of grant using a straight-line attribution method with the following assumptions:

Stock Options:

   
Three Months Ended
   
Nine Months Ended
 
   
October 28, 
2007
   
October 29,
2006
   
October 28, 
2007
   
October 29,
2006
 
   
(using a binomial model)
 
Weighted average expected life of stock options (in years)
 
3.8 - 5.8
 
 
3.6 - 5.1
 
 
3.8 - 5.8
   
3.6 - 5.1
 
Risk free interest rate
   
4.1% -4.7%
 
   
4.7 %
     
4.1% -5.0%
     
4.7% -5.1%
 
Volatility
   
45% - 54%
 
   
44% - 47%
     
37% - 54%
     
39% - 51%
 
Dividend yield
   
 -
 
   
-
     
         -
     
-
 


9


 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Employee Stock Purchase Plan:

   
Three Months Ended
   
Nine Months Ended
 
   
October 28, 
2007
   
October 29,
 2006
   
October 28, 
2007
   
October 29,
2006
 
   
(using the Black Scholes model)
 
Weighted average expected life of stock options (in years)
 
0.5 - 2.0
   
0.5 - 2.0
   
0.5 - 2.0
   
0.5 - 2.0
 
Risk free interest rate
   
3.7% -5.1%
     
2.3% -5.2%
     
3.5% -5.2%
     
1.6% -5.2%
 
Volatility
   
38%-54%
     
30% - 47%
     
38% - 54%
     
30% - 47%
 
Dividend yield
   
 -
     
-
     
-
     
-
 

 Equity Incentive Program
 
We consider equity compensation to be long term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. We believe that properly structured equity compensation aligns the long-term interests of stockholders and employees by creating a strong, direct link between employee compensation and stock appreciation, as stock options are only valuable to our employees if the value of our common stock increases after the date of grant.

 2007 Equity Incentive Plan
 
At the Annual Meeting of Stockholders held on June 21, 2007, our stockholders approved the NVIDIA Corporation 2007 Equity Incentive Plan, or the 2007 Plan.
 
The 2007 Plan authorizes the issuance of incentive stock options, nonstatutory stock options, restricted stock, restricted stock unit, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards to employees, directors and consultants. Only our employees may receive incentive stock options. The 2007 Plan succeeds our 1998 Equity Incentive Plan, our 1998 Non-Employee Directors’ Stock Option Plan, our 2000 Nonstatutory Equity Incentive Plan, and the PortalPlayer, Inc. 2004 Stock Incentive Plan, or the Prior Plans.  All options and stock awards granted under the Prior Plans shall remain subject to the terms of the Prior Plans with respect to which they were originally granted. Up to 101,845,177 shares, which due to the subsequent stock split now totals 152,767,766 shares, of our common stock may be issued pursuant to stock awards granted under the 2007 Plan.
 
Our Board of Directors, or the Board, or its duly authorized committee determines the terms of each stock option granted under our 2007 Plan, including the exercise price, the form of consideration paid on exercise, the vesting schedule, restrictions on transfer and the term. The exercise price of a stock option granted under the 2007 Plan may not be less than 100% of the fair market value of the stock subject to the option on the date of grant (for an incentive stock option, not less than 110% if the optionee is a 10% holder of our outstanding stock). The term of an option will not be longer than ten years (although options generally expire prior to such time in connection with a termination of continued service) and may be subject to restrictions on transfer.
 
Unless terminated sooner, the 2007 Plan is scheduled to terminate on April 23, 2017. Our Board may suspend or terminate the 2007 Plan at any time. No awards may be granted under the 2007 Plan while the 2007 Plan is suspended or after it is terminated. The Board may also amend the 2007 Plan at anytime. However, if legal, regulatory or listing requirements require stockholder approval, the amendment will not go into effect until the stockholders have approved the amendment.
 
PortalPlayer, Inc. 1999 Plan and 1998 Employee Stock Purchase Plan

The description of the key features of the PortalPlayer, Inc. 1999 Stock Option Plan, or 1999 Plan, and 1998 Employee Stock Purchase Plan,  may be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 28, 2007.

10


 

NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 

The following summarizes the transactions under our equity incentive plans:   

   
Options Available
for Grant
   
Options
Outstanding
   
Weighted Average Exercise Price Per Share
 
Balances, January 28, 2007
   
32,672,486
     
110,988,289
   
$
8.87
 
Additional shares reserved
   
25,114,550
     
-
     
-
 
Granted
   
(15,920,384
)
   
15,920,384
   
$
26.80
 
Exercised
           
(29,893,595
)
 
$
5.84
 
Cancelled
   
2,314,552
     
(2,314,552
)
 
$
17.56
 
Balances, October 28, 2007
   
44,181,204
     
94,700,526
   
$
12.62
 

The aggregate intrinsic value of stock options exercised for the three and nine months ended October 28, 2007 was $253.9 million and $639.4 million, respectively. The aggregate intrinsic value of stock options exercised for the three and nine months ended October 29, 2006 was $97.3 million and $293.9 million, respectively.

Note 3 - Income Taxes

On January 29, 2007, we adopted FIN 48. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. At the adoption date of January 29, 2007, we had $63.8 million of unrecognized tax benefits, $61.1 million of which would affect our effective tax rate if recognized.  As of October 28, 2007, we had $81.6 million of unrecognized tax benefits, $78.9 million of which would affect our effective tax rate if recognized.  The recognition of the remaining unrecognized tax benefits of $2.7 million, at the adoption date and as of October 28, 2007, would be reported as an adjustment to goodwill as it relates to pre-acquisition unrecognized tax benefits. 

We have historically classified certain unrecognized tax benefits as income taxes payable, which was included within the current liabilities section of our Condensed Consolidated Balance Sheet. As a result of our adoption of FIN 48, we now classify an unrecognized tax benefit as a current liability, or as a reduction of the amount of a net operation loss carryforward or amount refundable, to the extent that we anticipate payment or receipt of cash for income taxes within one year.  Likewise, the amount is classified as a long-term liability if we anticipate payment or receipt of cash for income taxes during a period beyond a year. As of January 30, 2007, we reclassified unrecognized tax benefits of $33.1 million to income taxes payable and deferred tax liability, which is included within the deferred tax and other long-term liabilities section of our Condensed Consolidated Balance Sheet.  

Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing FIN 48. At the adoption date of January 29, 2007, we had accrued $6.2 million for the payment of interest related to unrecognized tax benefits, which is included as a component of our unrecognized tax benefits.  There have been no significant changes to these amounts during the nine months ended October 28, 2007.

While we believe that we have adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax-related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved. As of October 28, 2007, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.
 
    We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. As of October 28, 2007, the material tax jurisdictions that are subject to examination include the United States, Hong Kong, Taiwan, China and India and include our fiscal years 2002 through 2007. As of October 28, 2007, the material tax jurisdictions for which we are currently under examination include the U.S. for federal tax purposes for fiscal years 2004 through 2006, Taiwan for fiscal year 2003, and India for fiscal years 2005 and 2006.
 
 We recognized income tax expense of $31.1 million and $21.8 million for the three months ended October 28, 2007 and October 29, 2006, respectively, and $80.8 million and $58.3 million for the nine months ended October 28, 2007 and October 29, 2006, respectively.  Income tax expense as a percentage of income before taxes, or our effective tax rate, was 11.7% and 17.0% for the three months ended October 28, 2007 and October 29, 2006, respectively, and 13.0% and 17.0% for the nine months ended October 28, 2007 and October 29, 2006, respectively.  Our effective tax rate is lower than the United States Federal Statutory rate of 35% due primarily to income earned in lower tax jurisdictions and research tax credits.  During the quarter ended October 28, 2007, we lowered our estimate of the fiscal year 2008 annual effective tax rate from 14.0% to 13.0%.  The revision resulted primarily due to a change in the relative geographical mix of income subject to tax and increased research tax credits due to increased stock option deductions.

 
11

 
 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Note 4 - 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 treasury stock method. Under the treasury stock method, the effect of stock options outstanding is 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:  

   
Three Months Ended
   
Nine Months Ended
 
   
October 28, 
2007
   
October 29,
2006
   
October 28, 
2007
   
October 29,
2006
 
   
(In thousands, except per share data)
 
Numerator:
                       
Net income
 
$
235,661
   
$
106,511
   
$
540,652
   
$
285,328
 
Denominator:
                               
Denominator for basic net income per share, weighted average shares
   
554,966
     
528,986
     
547,796
     
514,112
 
Effect of dilutive securities:
                               
Stock options outstanding
   
58,019
     
57,747
     
57,937
     
56,310
 
Denominator for diluted net income per share, weighted average shares
   
612,985
     
586,733
     
605,733
     
570,422
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
                               
Basic net income per share
 
$
0.42
   
$
0.20
   
$
0.99
   
$
0.55
 
Diluted net income per share
 
$
0.38
   
$
0.18
   
$
0.89
   
$
0.50
 

Diluted net income per share for the three and nine months ended October 28, 2007 does not include the effect of anti-dilutive common equivalent shares from stock options outstanding of 8.5 million and 11.5 million, respectively. Diluted net income per share for the three and nine months ended October 29, 2006 does not include the effect of 9.6 million and 10.6 million anti-dilutive common equivalent shares, respectively.

Note 5 - 3dfx

During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the APA, 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 APA 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 one million shares, which due to subsequent stock splits now totals six 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 APA to pay any additional consideration for the assets.

12


 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 

In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us. On October 13, 2005, the Bankruptcy Court held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Bankruptcy Court denied the Trustee’s Motion for Summary Adjudication in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than $108.0 million. The Bankruptcy Court denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA was at least $108.0 million. In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against NVIDIA. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.  The Trustee advised that he intended to object to the settlement. However, the conditional settlement never progressed substantially through the confirmation process.

     On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property? At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit post-trial briefing. That briefing was completed on May 25, 2007, and the Bankruptcy Court’s decision is still pending.
 
The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below. The final allocation of the purchase price of the 3dfx assets is contingent upon the outcome of all of the 3dfx litigation. Please refer to Note 13 of these Notes to Condensed Consolidated Financial Statements for further information regarding this litigation. 
 
  
 
Fair Market
Value
   
Straight-Line Amortization Period
 
   
(In thousands)
   
(Years)
 
Property and equipment
  $
2,433
     
1-2
 
Trademarks
   
11,310
     
5
 
Goodwill
   
85,418
     
--
 
Total
  $
99,161
         
 
Note 6 - Business Combinations

On February 20, 2006, we completed our acquisition of ULi Electronics, Inc., or ULi, a core logic developer for the personal computer, or PC, industry. The acquisition represents our ongoing investment in our platform solution strategy and has strengthened our sales, marketing, and customer engineering presence in Taiwan and China. The aggregate purchase price consisted of cash consideration of approximately $53.1 million.

On March 29, 2006, we completed our acquisition of Hybrid Graphics Ltd., or Hybrid Graphics, a developer of embedded 2D and 3D graphics software for handheld devices. The aggregate purchase price consisted of cash consideration of approximately $36.7 million.

13


 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
On January 5, 2007, we completed our acquisition of PortalPlayer Inc., or PortalPlayer, a leading supplier of semiconductors, firmware, and software for personal media players, or PMPs, and secondary display-enabled computers to accelerate our ongoing investment in our handheld product strategy. Pursuant to the terms of the acquisition, we paid cash consideration of approximately $344.9 million in exchange for common stock in PortalPlayer and recognized an additional purchase price of $2.9 million, the value of approximately 658,000 options, which due to the subsequent stock split now totals 987,000 options, of NVIDIA common stock issued upon conversion of outstanding PortalPlayer stock options. The allocation of the purchase price for the PortalPlayer acquisition has been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available.
 
We allocated the purchase price of each of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired, as well as in-process research and development, or IPR&D, if identified, based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions determined by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives.
 
As of October 28, 2007, the estimated fair values of the purchase price allocated to assets we acquired and liabilities we assumed on the respective acquisition dates were as follows:  

   
ULi
   
Hybrid Graphics
   
PortalPlayer
 
   
(In thousands)
 
Fair Market Values
                 
Cash and cash equivalents
 
$
21,551
   
$
1,180
   
$
10,174
 
Marketable Securities
   
-
     
-
     
176,492
 
Accounts receivable
   
8,148
     
808
     
16,850
 
Inventories
   
4,896
     
-
     
2,326
 
Other assets
   
935
     
73
     
12,761
 
Property and equipment
   
1,010
     
134
     
19,996
 
In-process research and development
   
-
     
602
     
13,400
 
Goodwill
   
31,204
     
27,906
     
106,172
 
Intangible assets:
                       
    Existing technology
   
2,490
     
5,179
     
6,700
 
    Customer relationships
   
653
     
2,650
     
2,700
 
    Backlog
   
-
     
-
     
2,200
 
    Patents
   
-
     
-
     
600
 
    Trademark
   
-
     
482
     
-
 
    Non-compete agreements
   
-
     
72
     
-
 
Total assets acquired
   
70,887
     
39,086
     
370,371
 
Current liabilities
   
(17,031
)
   
(1,373
)
   
(14,380
)
Acquisition related costs
   
(781
)
   
(740
)
   
(8,101
)
Long-term liabilities
   
-
     
(301
)
   
(46
)
Total liabilities assumed
   
(17,812
)
   
(2,414
)
   
(22,527
)
Net assets acquired
 
$
53,075
   
$
36,672
   
$
347,844
 

 
ULi
 
Hybrid Graphics
 
PortalPlayer
 
 
Straight-line depreciation / amortization period
 
Property and equipment
 
4 - 49 months
   
1 - 36 months
   
3 - 60 months
 
Intangible assets:
                 
Existing technology
 
3 years
   
3 years
   
3 years
 
Customer relationships
 
3 years
   
3 years
   
1-3 years
 
Backlog
 
-
   
-
   
2 months
 
Patents
 
-
   
-
   
3 years
 
Trademark
 
   
3 years
   
 
Non-compete agreements
 
   
3 years
   
 
 
14


 
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
The amount of the IPR&D represents the value assigned to research and development projects of Hybrid Graphics and PortalPlayer that had commenced but had not yet reached technological feasibility at the time of the acquisition and for which we had no alternative future use. In accordance with Statement of Financial Accounting Standards No. 2, or SFAS No. 2, Accounting for Research and Development Costs, as clarified by FASB issued Interpretation No. 4, or 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 research and development expenses as part of the allocation of the purchase price.

The pro forma results of operations for these acquisitions have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to our results.
 
Note 7 - Goodwill
 
The carrying amount of goodwill is as follows:

   
October 28,
2007
   
January 28,
2007
 
   
(In thousands)
 
3dfx
 
$
75,326
   
$
75,326
 
MediaQ
   
35,342
     
35,342
 
ULi
   
31,204
     
31,051
 
Hybrid Graphics
   
27,906
     
27,906
 
PortalPlayer
   
106,172
     
114,816
 
Other
   
16,984
     
16,984
 
Total goodwill
 
$
292,934
   
$
301,425
 

    During the nine months of fiscal year 2008, goodwill related to PortalPlayer decreased by $8.6 million primarily as a result of a $10.3 million increase in the fair value of land acquired based on a third party appraisal which we obtained as a result of our acquisition of PortalPlayer. This decrease in PortalPlayer goodwill was primarily offset by an increase of $1.2 million in estimates of amounts payable to their employee benefit plan for periods prior to the date of acquisition. Please refer to Note 6 of these Notes to Condensed Consolidated Financial Statements for further information regarding the PortalPlayer acquisition.
 
Note 8 - Amortizable Intangible Assets
 
We are currently amortizing our intangible assets with definitive lives over periods ranging from one to five years, primarily on a straight-line basis. The components of our amortizable intangible assets are as follows:

   
October 28, 2007  
   
January 28, 2007  
 
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying
Amount
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying
Amount
 
   
(In thousands)           
 
Technology licenses
   $
87,350
     $
(29,550
 )    $
57,800
     $
37,516
     $
(20,480
 )    $
17,036
 
Patents
   
35,098
     
(26,924
 )    
8,174
     
34,623
     
(24,569
 )    
10,054
 
Acquired intellectual property
   
50,812
     
(38,613
 )    
12,199
     
50,212
     
(31,894
 )    
18,318
 
Trademarks
   
11,310
     
(11,310
 )    
-
     
11,310
     
(11,310
 )    
-
 
Other
   
1,494
     
(1,494
 )    
-
     
1,494
     
(1,391
 )    
103
 
Total intangible assets
   $
186,064
     $
(107,891
 )    $
78,173
     $
135,155
     $
(89,644
 )    $
45,511
 

    
15


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
 
      The increase in the gross carrying amount of technology licenses as of October 28, 2007 when compared to January 28, 2007 is primarily related to approximately $49.6 million in payments under a confidential patent licensing arrangement that we entered into during the third quarter of fiscal year 2007. Our aggregate commitment for license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however, the net outlay may be reduced by the occurrence of certain events covered by the arrangement.
 
 Amortization expense associated with intangible assets for the three and nine months ended October 28, 2007 was $5.7 million and $18.2 million, respectively. Amortization expense associated with intangible assets for the three and nine months ended October 29, 2006 was $4.0 million and $12.1 million, respectively.  Future amortization expense related to the net carrying amount of intangible assets at October 28, 2007 is estimated to be $5.2 million for the remainder of fiscal 2008, $17.3 million in fiscal 2009, $11.8 million in fiscal 2010, $7.6 million in fiscal 2011, $6.5 million in fiscal 2012 and a total of $29.8 million in fiscal 2013 and fiscal years subsequent to fiscal 2013.

Note 9 - 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 primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments. We classify our marketable 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 and unrealized gains for the three and nine months ended October 28, 2007 were not material.

Note 10 - Balance Sheet Components

Certain balance sheet components are as follows:

             October 28,
2007
   
January 28,
2007
 
 
(In thousands)
Inventories:
           
Raw materials
  $
40,019
    $
56,261
 
Work in-process
   
121,364
     
111,058
 
Finished goods
   
144,760
     
187,361
 
Total inventories
  $
306,143
    $
354,680
 

At October 28, 2007, we had outstanding inventory purchase obligations totaling approximately $784.2 million.

   
October 28,
2007
   
January 28,
2007
 
   
(In thousands)
 
Deposits and other assets:
           
Investment in non-affiliates
  $
9,684
    $
11,684
 
Long-term prepayments
   
6,687
     
8,245
 
Deferred income taxes
   
-
     
7,380
 
Other
   
8,785
     
8,420
 
         Total deposits and other assets
  $
25,156
    $
35,729
 
 

 
16




NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
   
October 28,
2007
   
January 28,
2007
 
   
(In thousands)
 
Accrued Liabilities:
           
Accrued customer programs
 
$
237,163
   
$
181,182
 
Accrued payroll and related expenses
   
96,676
     
81,352
 
Accrued legal settlement
   
30,600
     
30,600
 
Deferred rent
   
11,850
     
12,551
 
Income and other taxes payable
   
7,240
     
37,903
 
Deferred revenue
   
3,663
     
1,180
 
Other
   
19,458
     
21,964
 
Total accrued liabilities
 
$
406,650
   
$
366,732
 

Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the nature of accrued customer programs and their accounting treatment related to our revenue recognition policies and estimates.
 
   
October 28,
2007
   
January 28,
2007
 
   
(In thousands)
 
Deferred tax and other long-term liabilities:
           
Deferred income tax liability
  $
59,898
    $
-
 
Income taxes payable
   
40,667
     
-
 
Other long-term liabilities
   
25,234
     
14,180
 
Accrued payroll taxes related to stock options
   
8,995
     
8,995
 
Asset retirement obligations
   
6,101
     
6,362
 
Total deferred tax and other long-term liabilities
  $
140,895
    $
29,537
 

Please refer to Note 3 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the reclassification of income taxes payable from accrued liabilities to deferred tax and other long-term liabilities as a result of the adoption of FIN 48.
 
Note 11 - Comprehensive Income

Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax. The components of comprehensive income, net of tax, were as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
October 28, 
2007
   
October 29,
2006
   
October 28, 
2007
 
October 29,
2006
 
   
(In thousands)
 
Net income
 
$
235,661
   
$
106,511
   
$
540,652
   
$
285,328
 
Net change in unrealized gains on available-for-sale securities, net of tax
   
1,830
     
1,078
     
2,071
     
684
 
Reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax
   
(67
)
   
(28
)
   
(157
)
   
(52
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
$
237,424
   
$
107,561
   
$
542,566
   
$
285,960
 
 
 
17

 
 
 NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 12 - Guarantees
 
FASB Interpretation No. 45, or FIN 45, Guarantor’s 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 tabular reconciliation of the changes of the entity’s product warranty liabilities.

       The following table summarizes the changes in the estimated product warranty liabilities for the three and nine months ended October 28, 2007 and October 29, 2006:  

   
Three Months Ended
   
Nine Months Ended
 
   
October 28,
2007
   
October 29,
2006
   
October 28,
2007
 
October 29,
2006
 
   
(In thousands)
 
Balance at beginning of period
 
$
20,694
   
$
12,381
   
$
17,958
   
$
10,239
 
Additions (1)
   
7,362
     
6,697
     
20,810
     
30,887
 
Deductions (2)
   
(5,546
)
   
(5,567
)
   
(16,258
)
   
(27,615
)
Balance at end of period (3)
 
$
22,510
   
$
13,511
   
$
22,510
   
$
13,511
 

 (1) Includes $6,584 and $19,611 for the three and nine months ended October 28, 2007, respectively, and $6,697 and $30,887 for the three and nine months ended October 29, 2006, respectively, towards allowance for sales returns estimated at the time revenue is recognized primarily based on historical return rates and is charged as a reduction to revenue.

(2) Includes $5,546 and $ 16,258 for the three months and nine months ended October 28, 2007, respectively, and $5,567 and $27,615 for the three and nine months ended October 29, 2006, respectively, written off against the allowance for sales returns.
 
(3) Includes $17,830 as of October 28, 2007 and $13,511 as of October 29, 2006 relating to 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 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. As such, we have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.
 

18


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 13 - Commitments and Contingencies
 
Litigation

3dfx

On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into the APA to purchase certain graphics chip assets from 3dfx which closed on April 18, 2001.

 
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease, Carlyle Fortran Trust, or Carlyle. In December 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease, CarrAmerica Realty Corporation. The landlords’ complaints both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer. The landlords’ sought to recover money damages, including amounts owed on their leases with 3dfx in the aggregate amount of approximately $15 million. In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In January 2003, the landlords’ actions were removed to the United States Bankruptcy Court for the Northern District of California and consolidated, for purposes of discovery, with a complaint filed against NVIDIA by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA in 2005, the District Court withdrew the reference to the Bankruptcy Court for the landlords’ actions, which were removed to the United States District Court for the Northern District of California. The Trustee’s lawsuit remained in the Bankruptcy Court.  On November 10, 2005, the District Court granted our motion to dismiss the landlords’ respective amended complaints and allowed the landlords until February 4, 2006 to amend their complaints. The landlords re-filed claims against NVIDIA in early February 2006, and NVIDIA again filed motions requesting the District Court to dismiss those claims. On September 29, 2006, the District Court dismissed the CarrAmerica action in its entirety and without leave to amend. The District Court found, among other things, that CarrAmerica lacked standing to bring the lawsuit and that standing rests exclusively with the bankruptcy Trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle action in its entirety, finding that Carlyle also lacked standing to pursue its claims, and that certain claims were substantively unmeritorious.  Carlyle filed a notice of appeal from that order on January 9, 2007.  Both landlords’ appeals are pending before the United States Court of Appeals for the Ninth Circuit, and briefing on both appeals has been consolidated. NVIDIA has filed motions to recover its litigation costs and attorneys fees against both Carlyle and CarrAmerica. The District Court has postponed consideration of those motions until after the appeals are resolved.

In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us. On October 13, 2005, the Bankruptcy Court held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Bankruptcy Court denied the Trustee’s Motion for Summary Adjudication in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than $108.0 million. The Bankruptcy Court denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA was at least $108.0 million. In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx.  The Trustee advised that he intended to object to the settlement.However, the conditional settlement never progressed substantially through the confirmation process.

On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property? At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit post-trial briefing. That briefing was completed on May 25, 2007, and the Bankruptcy Court’s decision is still pending.

19


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Following the Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the conditional settlement agreement between NVIDIA and the Creditor’s Committee, certain shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. That petition was granted and an Equity Holders’ Committee was appointed. Since that appointment, the Equity Holders’ Committee has filed a competing plan of reorganization/liquidation. The Equity Holders’ Committee’s plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. The Equity Holders’ Committee contends that the commitment by an investor to pay in equity capital is sufficient to trigger NVIDIA's obligations under the APA to pay the stock consideration.  NVIDIA contends, among other things, that such a commitment is not sufficient and that its obligation to pay the stock consideration has been extinguished. By virtue of stock splits since the execution of the APA, the stock consideration would now total six million shares of NVIDIA common stock. The Equity Holders’ Committee filed a motion with the Bankruptcy Court seeking an order giving it standing to bring a lawsuit to obtain the stock consideration. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy Court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At a hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the APA was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the APA, and that the APA is capable of being assumed by the bankruptcy estate.  Because of the trial of the Trustee's fraudulent transfer claims against NVIDIA, the Equity Committee's lawsuit has not progressed substantially in 2007.  The next status conference is not scheduled until January 25, 2008. In addition, the Equity Holders Committee filed a motion seeking Bankruptcy Court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the Bankruptcy Court approved the proposed protections.
 
Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices
 
In June 2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.

We voluntarily contacted the SEC regarding the Audit Committee’s review.  In late August 2006, the SEC initiated an inquiry related to our historical stock option grant practices. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review. In November 2006, we voluntarily provided the SEC with further documents. We continued to cooperate with the SEC throughout its inquiry.  On October 26, 2007, the SEC formally notified us that the SEC's investigation concerning our historical stock option granting practices had been terminated and that no enforcement action was recommended.

Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated complaint in the United States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have been consolidated and plaintiffs filed a consolidated complaint on April 23, 2007. All of the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. Plaintiffs in these actions allege claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud. The Northern District of California action also alleges violations of federal provisions, including Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief. We intend to take all appropriate action in response to these complaints. Between May 14, 2007 and May 17, 2007, we filed several motions to dismiss the federal, Delaware and Santa Clara actions. All of the motions remain pending.


20


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to investigate, evaluate, and make a determination as to how NVIDIA should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA.  Currently, the Special Litigation Committee's investigation is ongoing.
 
Department of Justice Subpoena and Investigation, and Civil Cases
 
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units, or GPUs, and cards. No specific allegations have been made against us. We are cooperating with the DOJ in its investigation.

As of November 12, 2007, over 50 civil complaints have been filed against us. The majority of the complaints were filed in the Northern District of California, several were filed in the Central District of California, and other cases were filed in several other Federal district courts.  On April 18, 2007, the Judicial Panel on Multidistrict Litigation transferred the actions currently pending outside of the Northern District of California to the Northern District of California for coordination of pretrial proceedings before the Honorable William H. Alsup.  By agreement of the parties, Judge Alsup will retain jurisdiction over the consolidated cases through trial or other resolution.

In the consolidated proceedings, two groups of plaintiffs (one representing all direct purchasers of graphic processing units, or GPUs, and the other representing all indirect purchasers) filed consolidated, amended class-action complaints. These complaints purport to assert federal antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, Inc., or ATI, and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI.  The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law claim for unjust enrichment.

Plaintiffs filed their first consolidated complaints on June 14, 2007.  On July 16, 2007, we moved to dismiss those complaints.  The motions to dismiss were heard by Judge Alsup on September 20, 2007.  The Court subsequently granted and denied the motions in part, and gave the plaintiffs leave to move to amend the complaints.  On November 7, 2007, the Court granted plaintiffs’ motion to file amended complaints, ordered defendants to answer the complaints, lifted a previously entered stay on discovery, and set a trial date for January 12, 2009.  We believe the allegations in the complaints are without merit and intend to vigorously defend the cases.  
  

21


NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 14 - Stockholders’ Equity

Stock Repurchase Program
 
During fiscal year 2005, we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million.  During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. On May 21, 2007, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $1.7 billion. 

The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requi