NVIDIA 2005 Annual Report Download - page 32

Interest expense primarily consists of interest incurred as a result of capital lease obligations and, prior to the redemption in October
2003, interest on the Notes. Interest expense decreased from $12.0 million to $0.2 million from fiscal 2004 to fiscal 2005. Interest
expense decreased from $16.5 million to $12.0 million from fiscal 2003 to fiscal 2004. These decreases were primarily due to the
redemption of the Notes.
Other Income (Expense), net
Other income and expense primarily consists of realized gains and losses on the sale of marketable securities. Other income decreased
by $2.4 million from fiscal 2004 to fiscal 2005 primarily due to $2.5 million of realized gains on the sale of marketable securities
during fiscal 2004 as a result of our liquidation of a significant portion of our marketable securities portfolio in order to obtain the cash
required to redeem the Notes in October 2003. This decrease was offset by a $1.0 million realized gain during fiscal 2005 related to
the receipt of cash and marketable securities as part of an investment exchange.
Stock Option Exchange
On September 26, 2002, we commenced an offer, or the Offer, to our employees to exchange outstanding stock options with exercise
prices equal to or greater than $27.00 per share, or Eligible Options. The Offer was implemented in order to improve employee
morale by realigning the cash and equity components of our compensation programs, eliminate significant out−of−the−money options
and reduce the number of outstanding stock options relative to the number of shares outstanding, or "options overhang", thereby
reducing future potential dilution to existing stockholders. 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 of the offer. 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 leaves of absence, or a personal leave of absence,
were also eligible to participate in the Offer. Employees who were terminated on or before the Offer termination date of October 24,
2002, were not eligible to participate in the Offer. In addition, our Chief Executive Officer and Chief Financial Officer and members
of our Board of Directors were not eligible to participate in this Offer.
Eligible employees who participated in the Offer received, in exchange for the cancellation of Eligible Options, a fixed amount of
consideration, represented by fully vested, non−forfeitable common stock less applicable withholding taxes, equal to the number of
shares underlying such Eligible Options, multiplied by $3.20, less the amount of applicable tax withholdings, divided by $10.46, the
closing price of our common stock as reported on the Nasdaq National Market on October 24, 2002. We concluded that the
consideration paid for the Eligible Options represented "substantial consideration" as required by Issue 39(f) of EITF Issue No. 00−23
"Issues Relating to Accounting for Stock Compensation Under APB Opinion No. 25 and FASB Interpretation No. 44," as the $3.20
per Eligible Option was at least the fair value for each Eligible Option, as determined using the Black−Scholes option−pricing model.
In determining the fair value of the Eligible Options using the Black−Scholes option−pricing model, we used the following
assumptions: (i) the expected remaining life was deemed to be the remaining term of the options, which was approximately 7.8 years;
(ii) a volatility of 50.0% during the expected life; (iii) a risk−free interest rate of 3.71%; and (iv) no dividends. The amount of $3.20
per Eligible Option was established at the commencement of the offer period and remained unchanged throughout the offer period.
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 did not grant stock options to any participants in the Offer for at least
six months following October 24, 2002. If any stock options were granted to participants in the Offer within the six months following
October 24, 2002, those stock options would have received variable accounting.
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