NVIDIA 2003 Annual Report Download - page 20

commissions, a $16.6 million increase in legal and accounting expenses associated with various legal
proceedings, a $9.0 million increase in equipment and software primarily related to the enhancement of our
computer systems, a $7.9 million increase in tradeshow and product launch costs, and a $2.6 million increase in
facilities costs due to the move into a new building at our headquarters and a full year of occupation in all
headquarter buildings as well as other increases associated with general administrative activities and travel and
entertainment expenses. Sales, general and administrative expenses increased $40.2 million, or 69%, from fiscal
2001 to 2002 primarily due to a $21.5 million increase related to additional personnel and commissions, a
$6.2 million increase in tradeshow and product launch costs, and a $12.5 million increase in facilities costs due to
the move into several buildings at our new headquarters and other increases associated with general
administrative activities, an American Red Cross donation associated with the events of September 11, 2001, and
travel and entertainment expenses.
We expect sales, general and administrative expenses to continue to increase in absolute dollars as we
continue to support our operations, expand our sales and protect our business interests.
Stock Option Exchange
On September 26, 2002, we commenced an offer (the “Offer”) to our employees to exchange outstanding
stock options with exercise prices equal to or greater than $27.00 per share (“Eligible Options”). Stock options to
purchase an aggregate of approximately 20,615,000 shares were eligible for tender at the commencement of the
Offer, representing approximately 39% of our outstanding stock options as of the commencement date. Only
employees of NVIDIA or one of our subsidiaries as of September 26, 2002 who continued to be employees
through the Offer termination date of October 24, 2002 were eligible to participate in the Offer. Employees who
were on medical, maternity, worker’s compensation, military or other statutorily protected leave of absence, or a
personal leave of absence, were also eligible to participate in the Offer. Employees who were terminated on or
before the Offer termination date of October 24, 2002, were not eligible to participate in the Offer. In addition,
our Chief Executive Officer and Chief Financial Officer and members of our Board of Directors were not eligible
to participate in this Offer.
Eligible employees who participated in the Offer received, in exchange for the cancellation of Eligible
Options, a fixed amount of consideration, represented by fully vested, non-forfeitable common stock and
applicable withholding taxes, equal to the number of shares underlying such Eligible Options, multiplied by
$3.20, less the amount of applicable tax withholdings, divided by $10.46, the closing price of our common stock
as reported on the Nasdaq National Market on October 24, 2002. We concluded that the consideration paid for
the Eligible Options represented “substantial consideration” as required by Issue 39(f) of EITF Issue No. 00-23
“Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation
No. 44,” as the $3.20 per Eligible Option was at least the fair value for each Eligible Option, as determined using
the Black-Scholes option-pricing model. In determining the fair value of the Eligible Options using the
Black-Scholes option-pricing model, we used the following assumptions: (i) the expected remaining life was
deemed to be the remaining term of the options, which was approximately 7.8 years; (ii) a volatility of 50.0%
during the expected life; (iii) a risk-free interest rate of 3.71%; and (iv) no dividends. The amount of $3.20 per
Eligible Option was established at the commencement of the offer period and remained unchanged throughout
the offer period.
Variable accounting is not required under Issue 39(a) of EITF Issue No. 00-23 for Eligible Options subject
to the Offer that were not surrendered for cancellation, because: (i) the shares of our common stock offered as
consideration for the surrendered options were fully vested and non-forfeitable; and (ii) the number of shares to
be received by an employee who accepted the Offer was based on the number of surrendered Eligible Options
multiplied by $3.20, divided by the fair value of the stock at the date of exchange. We further concluded that the
“look back” and “look forward” provisions of FASB Interpretation No. 44, paragraph 45 did apply to the stock
options surrendered for cancellation. Based on the terms of the Offer, variable accounting is not required for any
of our outstanding stock options existing at the time of the Offer. We do not intend to grant stock options to any
participants in the Offer for at least six months following October 24, 2002. If any stock options are granted to
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