NVIDIA 2003 Annual Report Download - page 12

The staff of the Enforcement Division of the Securities & Exchange Commission (“SEC”) informed us in
January 2002 that it had concerns relating to certain accounting matters and that the SEC along with the U.S.
Attorney’s Office for the Northern District of California had authorized investigations into such matters. In
accordance with the suggestion and advice of the SEC staff, we launched a review of these matters. On April 29,
2002, we announced that the Audit Committee of our Board of Directors had, with assistance from the law firm of
Cooley Godward LLP and forensic auditors from the accounting firm of KPMG LLP, concluded its review and
determined that it was appropriate to restate our financial statements for fiscal 2000, 2001 and the first three
quarters of fiscal 2002. The Audit Committee has worked and continues to work in cooperation with the SEC. After
receiving a Wells notice indicating the SEC staff intended to recommend to the SEC that an enforcement action be
initiated, we reached an agreement in principle with the SEC staff in April 2003 that would resolve the SEC’s
investigation of us in matters related to the restatement. The agreement is subject to final approval of the SEC.
Under the terms of the agreement in principle, NVIDIA, without admitting or denying liability or wrongdoing,
would agree to an administrative cease and desist order prohibiting any future violations of certain non-fraud
financial reporting, books and records, and internal control provisions of the federal securities laws. We would not
be required to pay any fines or penalties. The documentation of the agreement and the SEC’s review of the
agreement may take several weeks or months to complete. Further, there can be no assurance that the agreement
will be approved by the SEC. Notwithstanding the above, actions by the SEC or other governmental or regulatory
agencies with respect to us or our personnel arising out of the restatement of our financial statements or other
matters may take significant time, may be expensive and may divert management’s attention from other business
concerns and harm our business.
On April 18, 2001, we completed the purchase of certain assets of 3dfx, including patents and patent
applications. Under the terms of the Asset Purchase Agreement, the cash consideration due at the closing was
$70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15,
2000. The Asset Purchase Agreement also provides, subject to the other provisions thereof, that if 3dfx certifies
to our satisfaction all its debts and other liabilities have been provided for, then we are obligated to pay 3dfx two
million shares of NVIDIA common stock. If 3dfx cannot make such a certification, but instead certifies to our
satisfaction that its debts and liabilities can be satisfied for less than $25.0 million, then 3dfx can elect to receive
a cash payment equal to the amount of such debts and liabilities and receive 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 cannot
certify that all of its debts and liabilities have been provided for, or can be satisfied, for less than $25.0 million,
we are not obligated under the agreement to pay any additional consideration for the assets. On October 15, 2002,
3dfx filed for Chapter 11 bankruptcy protection. We believe that the bankruptcy filing by 3dfx will allow a
determination of the full number and scope of 3dfx’s debts and liabilities. NVIDIA may be obligated under the
Asset Purchase Agreement to pay 3dfx the contingent consideration following this determination, subject to
offsets for NVIDIA’s claims against 3dfx arising from the Asset Purchase Agreement. On March 12, 2003, we
were served with a complaint by the Trustee for 3dfx seeking, among other things, additional payment for the
purchased assets and the assumption by us of 3dfx’s liabilities. In addition, Carlyle Fortran Trust and
CarrAmerica, former landlords of 3dfx, have filed suits against us seeking payment of the rents due by 3dfx.
We were engaged with Microsoft in discussions related to pricing and volumes of the Xbox chipset. These
discussions and our agreement contemplated use of a third party to resolve matters and on April 23, 2002
Microsoft submitted the matter to binding arbitration. On February 6, 2003, NVIDIA and Microsoft announced
that the companies had settled all issues related to pricing of the Microsoft Xbox GPU and MCP chipset and have
ended the arbitration between them. In addition to resolving this pricing dispute, we have agreed to collaborate
with Microsoft on future cost reductions for the Xbox.
We are subject to other legal proceedings, but we do not believe that the ultimate outcome of any of these
proceedings will have a material adverse effect on our financial position or overall trends in results of operations.
However, if an unfavorable ruling were to occur in any specific period, there exists the possibility of a material
adverse impact on the results of operations of that period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
10