NVIDIA 2009 Annual Report Download - page 38

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. 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. The conditional settlement never progressed substantially
through the confirmation process.
On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee’s case against NVIDIA. On January
2, 2007, NVIDIA terminated 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? The parties completed post-trial briefing on May 25, 2007.
On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of
the trial proceedings and the parties' contentions and evidence and concluded that "the creditors of 3dfx were not injured by the
Transaction." This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and
intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the
Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in
NVIDIA’s favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on
September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court, where the appeal is
pending.
While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee’s case
still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs
and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending
resolution of the appeal of the Trustee’s case. We do not believe the resolution of this matter will have a material impact on our results
of operations or financial position.
The Equity Committee Lawsuit
On December 8, 2005, the Trustee filed a Form 8-K on behalf of 3dfx, disclosing the terms of the conditional settlement agreement
between NVIDIA and the Creditor’s Committee. Thereafter, certain 3dfx shareholders filed a petition with the Bankruptcy Court to
appoint an official committee to represent the claimed interests of 3dfx shareholders. The court granted that petition and appointed an
Equity Securities Holders’ Committee, or the Equity Committee. The Equity Committee thereafter sought and obtained an order
granting it standing to bring suit against NVIDIA, for the benefit of the bankruptcy estate, to compel NVIDIA to pay the stock
consideration then unpaid from the APA, and filed its own competing plan of reorganization/liquidation. The Equity Committee’s plan
assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts, and thus to trigger NVIDIA's
obligation to pay six million shares of stock consideration specified in the APA. NVIDIA contends, among other things, that such a
commitment is not sufficient and that its obligation to pay the stock consideration had long before been extinguished. On May 1, 2006,
the Equity Committee filed its lawsuit for declaratory relief to compel NVIDIA to pay the stock consideration. In addition, the Equity
Committee filed a motion seeking Bankruptcy Court approval of investor protections for Harbinger Capital Partners Master Fund I,
Ltd., an equity investment fund that 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.
After the Bankruptcy Court denied our motion to dismiss on September 6, 2006, the Equity Committee again amended its
complaint, and NVIDIA moved to dismiss that amended complaint as well. On December 21, 2006, the Bankruptcy Court granted the
motion as to one of the Equity 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 Committee seeks determinations that
(1) the APA was not terminated before 3dfx filed for bankruptcy protection, (2) the 3dfx bankruptcy estate still holds some rights in
the APA, and (3) 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 did not progress
substantially in 2007. On July 31, 2008, the Equity Committee filed a motion for summary judgment on its first three causes of
action. On September 15, 2008, NVIDIA filed a cross-motion for summary judgment. On October 24, 2008, the Court held a hearing
on the parties’ cross-motions for summary judgment. On January 6, 2009, the Bankruptcy Court issued a Memorandum Decision
granting NVIDIA’s motion and denying the Equity Committee’s motion, and entered an Order to that effect on January 30, 2009. On
February 27, 2009, the Bankruptcy Court entered judgment in favor of NVIDIA. The Equity Committee has waived its right to appeal
by stipulation entered on February 18, 2009, and the judgment is now final.
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Source: NVIDIA CORP, 10-K, March 13, 2009 Powered by Morningstar® Document Research℠