-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I6vou4QSVPKMHYYyRQCSk6ogJUqe9RBwzTNMU2WavufJ2QUQl0ZOrbhjWHs1cpr+ AjMf5iGZXKAtsiry2P35Eg== 0000891618-01-502615.txt : 20020413 0000891618-01-502615.hdr.sgml : 20020413 ACCESSION NUMBER: 0000891618-01-502615 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3DFX INTERACTIVE INC CENTRAL INDEX KEY: 0001010026 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770390421 STATE OF INCORPORATION: CA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22651 FILM NUMBER: 1814133 BUSINESS ADDRESS: STREET 1: 4435 FORTRAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4085913508 MAIL ADDRESS: STREET 1: 4435 FORTRAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 f77905e10-q.txt FORM 10-Q FOR PERIOD ENDED 10/31/01 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 Period Ended October 31, 2001. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from __________ to __________. Commission file number 0-22651 ------------ 3DFX INTERACTIVE, INC. (Exact name of registrant as specified in its charter) ------------ CALIFORNIA 77-0390421 ---------- ---------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 4435 FORTRAN DRIVE SAN JOSE, CALIFORNIA 95134 ------------ (Address of Principal Executive Office) (Zip Code) TELEPHONE NUMBER (408) 591-3508 ------------------------ (Registrant's telephone number, including area code) ------------------------ (Former name, former address and former fiscal year, if changed since last report) - -------------------------------------------------------------------------------- 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 periods 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, No Par Value --- 39,799,364 shares as of December 14, 2001 - -------------------------------------------------------------------------------- 3dfx Interactive, Inc. Index
PAGE PART 1 FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Net Liabilities in Liquidation at October 31, 2001........1 Condensed Consolidated Balance Sheet of Discontinued Operations at January 31, 2001................................................................................2 Consolidated Statement of Changes in Net Liabilities in Liquidation for the period from March 27, 2001 to October 31, 2001......................................3 Condensed Consolidated Statements of Discontinued Operations for the period from February 1, 2001 to March 26, 2001 and for the three and nine months ended October 31, 2000..............................................................4 Condensed Consolidated Statements of Cash Flows of Discontinued Operations for the period from February 1, 2001 to March 26, 2001 and for the nine months ended October 31, 2000..............................................................5 Notes to Condensed Consolidated Financial Statements................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Discontinued Operations............................................................10 Item 3. Quantitative and Qualitative Disclosure about Market Risk..........................16 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................................17 Item 2. Changes in Securities and Use of Proceeds..........................................17 Item 3. Defaults Upon Senior Securities....................................................17 Item 4. Submission of Matters to a Vote of Security Holders................................17 Item 5. Other Information..................................................................17 Item 6. Exhibits and Reports on Form 8-K...................................................17 SIGNATURES ...................................................................................18
PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS 3dfx INTERACTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET LIABILITIES IN LIQUIDATION (In thousands) (unaudited)
October 31, 2001 ---------------- ASSETS Cash and cash equivalents $ 2,610 Accounts receivable 24 Other current assets 1,013 Contingent receivable (Note 1) ------- Total assets $ 3,647 ======= LIABILITIES Accounts payable $24,333 Other liabilities 487 Estimated costs during period of liquidation (Note 1) 2,956 Contingent liabilities (Note 1) ------- Total liabilities 27,776 ------- Net liabilities in liquidation $24,129 =======
The accompanying notes are an integral part of these financial statements. -1- 3dfx INTERACTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET OF DISCONTINUED OPERATIONS (In thousands) (Unaudited)
January 31, 2001 ----------- ASSETS Current Assets: Cash and cash equivalents $ 9,391 Accounts receivable, net of allowance for doubtful accounts of $9,992 at January 31, 2001 6,398 Inventories, net 22,358 Deferred tax assets 35,000 Other current assets 1,214 Other assets held for sale 45,245 --------- Total current assets $ 119,606 ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 64,245 Accrued liabilities 11,642 nVidia term loan 15,000 Other current liabilities 6,366 --------- Total current liabilities 97,253 --------- Shareholders' Equity: Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding -- Common stock, no par value, 50,000,000 shares authorized; 39,787,740 shares issued and outstanding at January 31, 2001 430,922 Warrants 242 Accumulated other comprehensive loss (1,722) Accumulated deficit (407,089) --------- Total shareholders' equity 22,353 --------- Total liabilities and shareholders' equity $ 119,606 =========
The accompanying notes are an integral part of these financial statements. -2- 3dfx INTERACTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION (In thousands) (Unaudited)
For the period from March 27, 2001 to October 31, 2001 ------------------- Net assets in liquidation at March 27, 2001 $ 20,457 Selling, general and administrative expenses (3,901) Net gain on sale of assets held for sale 3,227 Decrease in deferred tax asset (35,000) -------- Net liabilities in liquidation at April 30, 2001 15,217 Selling, general and administrative expenses (5,929) Net loss on sale of assets held for sale (948) -------- Net liabilities in liquidation at July 31, 2001 22,094 Selling, general and administrative expenses (1,268) Net loss on sale of assets held for sale (767) -------- Net liabilities in liquidation at October 31, 2001 $ 24,129 ========
The accompanying notes are an integral part of these financial statements. -3- 3DFX INTERACTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS (In thousands, except per share data) (Unaudited)
For the Period Three Nine February 1, Months Months 2001 to Ending Ending March 26, October 31, October 31, 2001 2000 2000 ----------- ----------- ----------- Revenues $ -- $ 39,189 $ 214,757 Cost of revenues -- 60,935 199,903 --------- --------- --------- Gross profit (loss) -- (21,746) 14,854 --------- --------- --------- Operating expenses: Research & development -- 18,767 54,830 Selling, general and administrative 7,801 15,399 50,750 In-process research & development -- -- 66,250 Amortization of goodwill and intangibles -- 9,667 17,993 Impairment of goodwill and other intangibles -- 117,065 117,065 --------- --------- --------- Total operating expenses 7,801 160,898 306,888 --------- --------- --------- Loss from discontinued operations (7,801) (182,644) (292,034) Other income (expense), net 182 696 215 --------- --------- --------- Loss from discontinued operations before income taxes (7,619) (181,948) (291,819) Provision (benefit) for income taxes (4,992) (3,375) (313) --------- --------- --------- Net loss from discontinued operations $ (2,627) $(178,573) $(291,506) ========= ========= ========= Net loss per share from discontinued operations: Basic $ (0.07) $ (4.53) $ (9.69) ========= ========= ========= Diluted $ (0.07) $ (4.53) $ (9.69) ========= ========= ========= Shares used in net loss per share from discontinued operations: Basic 39,788 39,442 30,077 ========= ========= ========= Diluted 39,788 39,442 30,077 ========= ========= =========
The accompanying notes are an integral part of these financial statements. -4- 3DFX INTERACTIVE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS OF DISCONTINUED OPERATIONS (In thousands) (Unaudited)
For the Period Nine Months from February 1, 2001 Ending to March 26, 2001 October 31, 2000 --------------------- ---------------- Cash flows from operating activities: Net loss from discontinued operations $ (2,627) $(291,506) Adjustments to reconcile net income to net cash from operating activities: Depreciation -- 18,181 Amortization -- 17,993 Stock compensation -- 1,539 Write-off of acquired in-process research & development -- 66,250 Impairment of goodwill and other intangibles -- 117,065 Deferred tax benefit related to write-off of intangibles -- (2,426) Decrease in allowance for doubtful accounts (5,573) (1,986) Changes in assets and liabilities: Accounts receivable 10,725 40,349 Inventory 183 (729) Other assets 544 11,622 Accounts payable -- 1,588 Accrued and other liabilities (11,394) (6,050) Deferred revenue -- (3,355) --------- --------- Net cash used in discontinued operating activities (8,142) (31,465) --------- --------- Cash flows from investing activities: Sales of short-term investments 188 24,012 Purchases of property and equipment -- (13,711) Merger with GigaPixel Corporation -- 5,319 --------- --------- Net cash provided by investment activities 188 15,620 --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock, net -- 2,238 Principal payments of capitalized lease obligations, net -- (588) Proceeds on short-term debt, net -- 5,983 --------- --------- Net cash provided by financing activities -- 7,633 --------- --------- Net decrease in cash and cash equivalents (7,954) (8,212) Cash and cash equivalents at beginning of period 9,391 41,818 --------- --------- Cash and cash equivalents at end of period $ 1,437 $ 33,606 ========= =========
The accompanying notes are an integral part of these financial statements. -5- 3DFX INTERACTIVE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - The Company and its Significant Accounting Policies: 3dfx Interactive, Inc. ("3dfx") was incorporated in California on August 24, 1994. 3dfx developed high performance, cost-effective graphics chips, graphics boards, software and related technology that enable an interactive and realistic 3D experience across multiple hardware platforms. 3dfx has subsidiaries in the United States, Mexico and other key markets in the world. The condensed consolidated financial statements include the financial statements of 3dfx and its wholly owned subsidiaries. All significant inter-company transactions and accounts have been eliminated. The unaudited condensed consolidated financial statements included herein have been prepared by 3dfx pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of 3dfx, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. While 3dfx believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the audited financial statements and accompanying notes included in 3dfx's Annual Report on Form 10-K for the fiscal year ended January 31, 2001 as filed with the Securities and Exchange Commission. As described below, on March 27, 2001, 3dfx's shareholders approved proposals to liquidate, wind up and dissolve 3dfx pursuant to a plan of dissolution. 3dfx is proceeding to wind up its affairs and dissolve. Accordingly, all activities of 3dfx as of March 27, 2001 are presented under the liquidation basis of accounting. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amount, if reasonably estimable. See "Activities While in Liquidation" below. Additionally, 3dfx's common stock has been delisted from the NASDAQ National Market effective May 16, 2001. Asset Sale and Plan of Dissolution On December 15, 2000, 3dfx entered into an asset purchase agreement with nVidia Corporation ("nVidia") and a subsidiary of nVidia ("nVidia Sub") under which nVidia Sub would acquire certain of 3dfx's assets, including its core graphics processor assets. Under the terms of the asset purchase agreement, nVidia Sub agreed to pay 3dfx $70.0 million in cash and 2,000,000 shares (on a post-split basis) of registered nVidia common stock, subject to the satisfaction of certain conditions specified in the asset purchase agreement as described below. Upon signing the asset purchase agreement, nVidia Sub loaned to 3dfx $15.0 million in cash for working capital. The asset sale to nVidia Sub was approved by 3dfx shareholders on March 27, 2001, and on April 18, 2001 substantially all of 3dfx's assets were sold to nVidia Sub. Upon closing, 3dfx received $55.0 million in cash, which amount was net of repayment of the $15.0 million cash loan 3dfx received upon signing the asset purchase agreement. In addition, under the terms of the asset purchase agreement, 3dfx and nVidia caused the pending patent litigation between the parties to be dismissed with prejudice. Under the terms of the asset purchase agreement, 3dfx may receive part or all of a one-time post-closing cash payment of up to $25.0 million upon its request if it is not in breach of the asset purchase agreement and it has expended all or substantially all of the $70.0 million cash consideration in payment of its liabilities and determines in good faith that (i) the remaining portion of the cash consideration previously received by it is not sufficient to pay its remaining liabilities, and (ii) such remaining liabilities could and would be satisfied if 3dfx received the post-closing cash payment and applied it to the payment of such liabilities, and if nVidia Sub does not determine in good faith that the requested amount would not permit 3dfx to pay in full its remaining liabilities. In the event that 3dfx receives the post-closing cash payment, the 2,000,000 shares of nVidia common stock comprising the remaining consideration otherwise payable to 3dfx under the asset purchase agreement will be reduced by the number of shares equal to the quotient determined by dividing the amount of the post-closing cash payment by $25. In August 2001, nVidia's board of directors approved a two-for-one stock split of nVidia's common stock for stockholders of record on August 28, 2001, to be effected in the form of a 100% stock dividend. As a result of the stock split, and as indicated above, -6- 3dfx is entitled to receive 2,000,000 shares of nVidia common stock, subject to the conditions set forth below. Irrespective of whether 3dfx receives a post-closing payment, the shares of nVidia common stock will only become deliverable to 3dfx upon satisfaction of certain conditions specified in the asset purchase agreement, including the completion of the winding up of the business of 3dfx pursuant to 3dfx's plan of dissolution, and 3dfx's certification that (i) all liabilities of 3dfx and its subsidiaries have been paid in full or otherwise provided for and (ii) 3dfx has or will be validly dissolved. In the event the contingencies are not met and the remaining consideration from nVidia is not paid, 3dfx will have to explore other options, including filing for bankruptcy. As a result of the contingencies described above, the contingent receivable and related tax expense on the gain have not been recorded in the accompanying consolidated statement of net liabilities in liquidation as of October 31, 2001. The ultimate total of the value of nVidia stock received by 3dfx, if any, is dependent on the number and market value of shares received given the conditions described above. On December 15, 2000, the board of directors of 3dfx also approved a plan of dissolution and on March 27, 2001 this plan of dissolution was approved by 3dfx's shareholders. On March 30, 2001, 3dfx filed a certificate of election to liquidate, wind up and dissolve with the California Secretary of State's office. 3dfx is proceeding to wind up its affairs and is no longer operating or generating revenues in the normal course of business. Accordingly, all of the activities of 3dfx have been presented on a liquidation basis of accounting. 3dfx has substantially reduced its costs in order to conserve its resources. These cost cutting measures include a reduction of a significant portion of 3dfx's workforce, reduction in office space and other efforts to reduce non-essential expenses. 3dfx has also been providing manufacturing services to third parties to help cover the overhead associated with its Juarez, Mexico manufacturing facility pending the sale or shut-down of that facility. The sales and costs of sales related to these operations are recorded as other income and expense on the condensed consolidated statement of discontinued operations for the period from February 1, 2001 to March 26, 2001 and as selling, general, and administrative expense from March 27, 2001 to October 31, 2001. Activities While in Liquidation During the nine months ended October 31, 2001, 3dfx disposed of most of its inventory and other assets held for sale through the asset purchase agreement with nVidia Sub as well as through sales to other parties. Any remaining inventory and other assets held for sale have been written down to their net realizable value, most of which equals zero. As 3dfx is in liquidation, these remaining assets may be sold. 3dfx believes that any gains on such sales that may be realized will be immaterial. During the nine months ended October 31, 2001, 3dfx terminated substantially all of its remaining employees and continued to liquidate its remaining assets, negotiate with third parties for resolutions of various litigation matters that would be agreeable to all parties involved, and to reach settlements with its vendors in reduction of its accounts payable, as well as to reach mutually satisfactory settlements with the lessors to its facilities and various equipment leases. At October 31, 2001, 3dfx had total future lease obligations of $13.8 million, of which $2.3 million has been accrued. At October 31, 2001, 3dfx was still in negotiations to settle certain remaining leases under which it has contractual obligations, which range from $0 to $11.5 million and therefore no amounts have been recorded for this contingent liability. After establishing a reserve for the winding up of its affairs, 3dfx used the remaining proceeds received from the asset sale to nVidia Sub to pay a significant portion of its and its subsidiaries' known and determinable debts and liabilities. Changes in net liabilities for the period from March 27, 2001 to October 31, 2001 were a result of selling, general and administrative expenses of $11.1 million, which is comprised of operating expenses, accrued expenses and lease termination expense, partially offset by the forgiveness of liabilities, a decrease in the deferred tax asset of $35.0 million and the net gain on sale of assets to nVidia Sub of $1.5 million, which was comprised of the following: (a) a gain on the sale of inventory and other assets held for sale to nVidia Sub of $14.3 million, which was comprised of the purchase by nVidia Sub of certain inventory, fixed assets and intangible assets with net book values of $55.5 million offset by proceeds of $70.0 million and (b) losses of $12.8 million on sale and impairment of inventory and other assets held for sale. -7- 3dfx expects to continue to incur certain administrative and other costs associated with winding up its affairs. Should 3dfx qualify for its final payment from nVidia Sub, 3dfx believes that it will have sufficient cash to pay all of its and its subsidiaries' known current and determinable liabilities. However, the amount of unknown or contingent liabilities cannot be quantified and could decrease or eliminate any remaining assets available for distribution to 3dfx's shareholders. Further, if 3dfx or its subsidiaries are subject to any contingent liabilities, this could require that it establish reserves that could delay any distribution to 3dfx shareholders. Because of the uncertainties as to the precise net realizable value of 3dfx's assets and the settlement amount of 3dfx's and its subsidiaries' debts and liabilities, 3dfx cannot at this time determine the timing or amount of distributions that may be made to its shareholders, if any. Only if there are assets remaining at the time of 3dfx's dissolution will 3dfx shareholders receive a distribution of those assets. Note 2 - Balance Sheet Components (in Thousands): Inventory:
January 31, 2001 Raw materials $ 1,972 Work in-process 70 Finished goods 20,316 ------- Total inventory $22,358 =======
Other assets held for sale:
January 31, 2001 Computer Equipment $ 8,268 Purchased computer software 7,653 Furniture and equipment 4,428 Goodwill and other intangibles 20,765 Other assets 4,131 ------- Other assets held for sale $45,245 =======
Estimated Costs During Period of Liquidation:
October 31, 2001 Income taxes payable $ 265 Accrued salaries, wages and benefits 1,407 Deferred tax liability -- Accrued leases payable 406 Other accrued liabilities 878 ------ Estimated costs during period of liquidation $2,956 ======
Accrued Liabilities:
January 31, 2001 Income taxes payable $ 96 Accrued salaries, wages and benefits 3,524 Deferred tax liability 4,735 Accrued leases payable -- Other accrued liabilities 3,287 ------- Accrued Liabilities $11,642 =======
Note 3 - Net Loss Per Share: Basic net loss per share is computed using the weighted average number of common shares outstanding during the periods. Diluted net loss per share is computed using the weighted average number of common and potentially dilutive common shares during the periods presented. -8- Diluted loss per share was the same as basic loss per share for the three and nine months ended October 31, 2000. During the three and nine month periods ended October 31, 2000, options to purchase approximately 5,761,000 and 5,860,000 shares of common stock, respectively, were outstanding but not included in the calculation because they were anti-dilutive. In June 2001, 3dfx granted to Richard A. Heddleson, 3dfx's Chief Financial Officer, 800,000 stock options at an exercise price of $.38 per share. During the period from February 1, 2001 to March 26, 2001, options to purchase approximately 3,276,380 shares of common stock were outstanding but not included in the calculation because they were anti-dilutive. Note 4 - Comprehensive Loss: Total comprehensive loss for the period February 1, 2001 to March 26, 2001 was $3.4 million, comprised of $700,000 from an unrealized loss on investment in 3Dlabs and net loss from discontinued operations of $2.7 million. Other comprehensive income (loss) for the three months ended October 31, 2000 was an unrealized loss of ($.6) million, representing a loss from investing activities, resulting in total comprehensive loss of ($179.2) million. Other comprehensive income (loss) for the nine months ended October 31, 2000 was an unrealized loss of ($3.9) million, representing a loss from investing activities, resulting in total comprehensive income (loss) of ($295.4) million. NOTE 5 - Legal Contingencies: On December 21, 2000, CagEnt Technologies Inc. filed suit against 3dfx in the Northern California District Federal Court. The complaint alleged patent infringement relating to CagEnt's patent no. 5,856,829. The complaint sought a declaratory judgment of infringement, injunctive relief enjoining future infringement and money damages caused by the alleged infringement, together with pre-judgment interest, attorneys' fees and cost of suit. On August 2, 2001, 3dfx reached a settlement with CagEnt, under which CagEnt and 3dfx agreed to release all claims against each other. 3dfx did not make or agree to make any payment to CagEnt as part of the settlement. The settlement of CagEnt's claim will not affect the contemplated liquidation and winding up of 3dfx's business pursuant to the 3dfx plan of dissolution. In February 2000 MCI Worldcom, Inc. filed a suit against STB Systems, Inc., a wholly owned subsidiary of 3dfx, in the 192nd District Court in Dallas County, Texas. The complaint involves a dispute over the amount owed by STB Systems, Inc. for services rendered by MCI Worldcom, Inc. 3dfx is also a party to various legal proceedings involving collection matters and other matters against it. 3dfx is currently seeking resolutions that are mutually acceptable to the parties involved in each of these matters. However, there is no assurance that resolutions will be achieved. Although the amount of any liability that could arise with respect to these proceedings cannot be predicted accurately, 3dfx believes that any liability that might result from such claims will not have a material adverse effect on its financial position. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF DISCONTINUED OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Discontinued Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements contained in this document, including without limitation statements to the effect that 3dfx or its management "believes," "expects," "anticipates," "plans," "may," "will," "projects," "continues," or "estimates," or statements concerning "potential," or "opportunity" or other variations thereof or comparable terminology or the negative thereof, that are not statements of historical fact should be considered forward-looking statements. These forward-looking statements are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Some of such risks and uncertainties are set forth below under "Risk Factors". Overview 3dfx developed high performance, cost-effective graphics chips, graphics boards, software and related technology that enable an interactive and realistic 3D experience across multiple hardware platforms, but is now in the process of winding up its business. As discussed below, on March 27, 2001, 3dfx's shareholders approved proposals to liquidate, wind up and dissolve 3dfx pursuant to a plan of dissolution and to sell certain of its assets to nVidia US Investment Company ("nVidia Sub"), a wholly owned subsidiary of nVidia Corporation ("nVidia"). 3dfx is continuing to wind up its affairs and dissolve. Accordingly, all activities of 3dfx are presented on a liquidation basis in the accompanying condensed consolidated financial statements. Additionally, 3dfx's common stock has been delisted from the NASDAQ National Market effective May 16, 2001. Asset Sale and Plan of Dissolution On December 15, 2000, 3dfx entered into an asset purchase agreement with nVidia and nVidia Sub under which nVidia Sub would acquire certain of 3dfx's assets, including its core graphics processor assets. Under the terms of the asset purchase agreement, nVidia Sub agreed to pay 3dfx $70.0 million in cash and 2,000,000 shares (on a post-split basis) of registered nVidia common stock, subject to the satisfaction of certain conditions specified in the asset purchase agreement as described below. Upon signing the asset purchase agreement, nVidia Sub loaned to 3dfx $15.0 million in cash for working capital. The asset sale to nVidia Sub was approved by 3dfx shareholders on March 27, 2001, and on April 18, 2001 substantially all of 3dfx's assets were sold to nVidia Sub. Upon closing, 3dfx received $55.0 million in cash, which amount was net of repayment of the $15.0 million cash loan 3dfx received upon signing the asset purchase agreement. In addition, under the terms of the asset purchase agreement, 3dfx and nVidia Sub caused the pending patent litigation between the parties to be dismissed with prejudice. Under the terms of the asset purchase agreement, 3dfx may receive part or all of a one-time post-closing cash payment of up to $25.0 million upon its request if it is not in breach of the asset purchase agreement, it has expended all or substantially all of the $70.0 million cash consideration in payment of its liabilities and determines in good faith that (i) the remaining portion of the cash consideration previously received by it is not sufficient to pay its remaining liabilities, and (ii) such remaining liabilities could and would be satisfied if 3dfx received the post-closing cash payment and applied it to the payment of such liabilities, and if nVidia Sub does not determine in good faith that the requested amount would not permit 3dfx to pay in full its remaining liabilities. In the event that 3dfx receives the post-closing cash payment, the 2,000,000 shares of nVidia common stock comprising the remaining consideration otherwise payable to 3dfx under the asset purchase agreement will be reduced by the number of shares equal to the quotient determined by dividing the amount of the post-closing cash payment by $25. In August 2001, nVidia's board of directors approved a two-for-one stock split of nVidia's common stock for stockholders of record on August 28, 2001, to be effected in the form of a 100% stock dividend. As a result of the stock split, and as indicated above 3dfx is entitled to receive 2,000,000 shares of nVidia's common stock, subject to the conditions set forth below. -10- Irrespective of whether 3dfx receives a post-closing payment, the shares of nVidia common stock will only become deliverable to 3dfx upon satisfaction of certain conditions specified in the asset purchase agreement, including the completion of the winding up of the business of 3dfx pursuant to 3dfx's plan of dissolution, and 3dfx's certification that (i) all liabilities of 3dfx and its subsidiaries have been paid in full or otherwise provided for and (ii) 3dfx has or will be validly dissolved. In the event the contingencies are not met and the remaining consideration from nVidia is not paid, 3dfx will have to explore other options, including filing for bankruptcy. As a result of the contingencies described above, a contingent receivable and related tax expense on the gain have not been recorded in the accompanying consolidated statement of net liabilities in liquidation as of October 31, 2001. The ultimate total of the value of nVidia stock received by 3dfx, if any, is dependent on the number and market value of shares received given the conditions described above. On December 15, 2000, the board of directors of 3dfx also approved a plan of dissolution and on March 27, 2001 this plan of dissolution was approved by 3dfx's shareholders. On March 30, 2001, 3dfx filed a certificate of election to liquidate, wind up and dissolve with the California Secretary of State's office. 3dfx is proceeding to wind up its affairs and is no longer operating or generating revenues in the normal course of business. Accordingly, all of the activities of 3dfx have been presented on a liquidation basis of accounting. 3dfx has substantially reduced its costs in order to conserve its resources. These cost cutting measures include a reduction of a significant portion of 3dfx's workforce, reduction in office space and other efforts to reduce non-essential expenses. 3dfx has also been providing manufacturing services to third parties to help cover the overhead associated with its Juarez, Mexico manufacturing facility pending the sale or shut-down of that facility. The sales and costs of sales related to these operations are recorded as other income and expense on the condensed consolidated statement of discontinued operations for the period from February 1, 2001 to March 26, 2001 and as selling, general, and administrative expense from March 27, 2001 to October 31, 2001. Activities While in Liquidation During the nine months ended October 31, 2001, 3dfx disposed of most of its inventory and other assets held for sale through the asset purchase agreement with nVidia Sub as well as through sales to other parties. Any remaining inventory and other assets held for sale have been written down to their net realizable value, most of which equals zero. As 3dfx is in liquidation, these remaining assets may be sold. 3dfx believes that any gains on such sales that may be realized will be immaterial. During the nine months ended October 31, 2001, 3dfx terminated substantially all of its remaining employees and continued to liquidate its remaining assets, negotiate with third parties for resolutions of various litigation matters that would be agreeable to all parties involved, and to reach settlements with its vendors in reduction of its accounts payable, as well as to reach mutually satisfactory settlements with the lessors to its facilities and equipment leases. At October 31, 2001, 3dfx had total future lease obligations of $13.8 million, of which $2.3 million has been accrued. At October 31, 2001, 3dfx was still in negotiations to settle certain remaining leases under which they have contingent contractual obligations, which range from $0 to $11.5 million and therefore no amounts have been recorded for this contingent liability. After establishing a reserve for the winding up of its affairs, 3dfx used the remaining proceeds received from the asset sale to nVidia Sub to pay a significant portion of its and its subsidiaries' known and determinable debts and liabilities. Changes in net liabilities for the period from March 27, 2001 to October 31, 2001 were a result of selling, general and administrative expenses of $11.1 million, which is comprised of operating expense, accrued expenses and lease termination expense, partially offset by the forgiveness of liabilities, a decrease in the deferred tax asset of $35.0 million and the net gain on sale of assets to nVidia Sub of $1.5 million, which was comprised of the following: (a) a gain on the sale of inventory and other assets held for sale to nVidia Sub of $14.3 million, which was comprised of the purchase by nVidia Sub of certain inventory, fixed assets and intangible assets with net book values of $55.5 million offset by proceeds of $70.0 million and (b) losses of $12.8 million on sale and impairment of inventory and other assets held for sale. 3dfx expects to continue to incur certain administrative and other costs associated with winding up its affairs. Should 3dfx qualify for its final payment from nVidia Sub, 3dfx believes that it will have sufficient cash to pay all of its and its subsidiaries' known -11- current and determinable liabilities. However, the amount of unknown or contingent liabilities cannot be quantified and could decrease or eliminate any remaining assets available for distribution to 3dfx's shareholders. Further, if 3dfx or its subsidiaries are subject to any contingent liabilities, this could require that it establish reserves that could delay any distribution to 3dfx shareholders. Because of the uncertainties as to the precise net realizable value of 3dfx's assets and the settlement amount of 3dfx's and its subsidiaries' debts and liabilities, 3dfx cannot at this time determine the timing or amount of distributions that may be made to its shareholders, if any. Only if there are assets remaining at the time of 3dfx's dissolution will 3dfx shareholders receive a distribution of those assets. Statement of Changes in Net Liabilities in Liquidation During the period from March 27, 2001 to April 30, 2001, 3dfx incurred selling, general and administrative costs of $3.9 million and recorded a decrease in deferred tax asset of $35.0 million. During this period 3dfx also incurred a net gain on sale of assets held for sale of $3.2 million, which was comprised of the following: (a) a gain on the sale of inventory and other assets held for sale to nVidia Sub of $14.3 million, which was comprised of the purchase by nVidia Sub of certain inventory, fixed assets and intangible assets with net book values of $55.5 million offset by proceeds of $70.0 million and (b) losses of $11.1 million on sale and impairment of inventory and other assets held for sale. During the quarter ended July 31, 2001, 3dfx incurred selling, general and administrative expenses of $5.9 million, which were comprised of equipment expense, including current period lease payments and the accrual of certain future lease payments, personnel expense and the accrual of future anticipated salary, severance and associated benefit expenses, current period facilities expenses and current period legal, banking and other professional service expenses, offset by discounts received from vendors. In addition, 3dfx incurred an additional $900,000 in losses on the sale of and impairment of assets held for sale during the quarter ended July 31, 2001. Not included in the accrual of future expenses were approximately $12.0 million in facilities lease payments on properties that 3dfx is currently attempting to sublease. In addition, as a result of the contingencies described above relating to the receipt of the remaining consideration from Nvidia, the contingent receivable and related tax expense on the gain resulting from the asset sale have not been recorded in the accompanying consolidated statement of net liabilities in liquidation as of July 31, 2001. During the quarter ended October 31, 2001, 3dfx incurred selling, general and administrative expenses of $1.3 million, which were comprised of current period facilities expenses, severance and associated benefit expenses for employees of STB de Mexico, payment of unaccrued income taxes in the United Kingdom and lease termination expenses associated with the Company's facility in Belfast, Northern Ireland, and current period legal, and other professional service expenses, offset by discounts received from vendors. In addition, 3dfx incurred an additional $767,000 in losses on the sale and impairment of assets held for sale during the quarter ended October 31, 2001. Not included in the accrual of future expenses were approximately $11.5 million in facilities lease payments on properties that 3dfx is currently attempting to assign. In addition, as a result of the contingencies described above relating to the receipt of the remaining consideration from Nvidia, the contingent receivable and related tax expense on the gain resulting from the asset sale have not been recorded in the accompanying consolidated statement of net liabilities in liquidation as of October 31, 2001. Liquidity and Capital Resources As of October 31, 2001, 3dfx had cash, and cash equivalents of $2.6 million. On April 18, 2001, 3dfx completed the sale of substantially all of its assets to nVidia Sub and at the closing received cash in the net amount of $55.0 million pursuant to an asset purchase agreement. After establishing a reserve for the winding up of its affairs, 3dfx used the remaining proceeds received from the asset sale to nVidia Sub to pay a significant portion of its and its subsidiaries' known and determinable debts and liabilities. Subject to 3dfx in the future satisfying certain additional conditions provided for in the asset purchase agreement, nVidia Sub is obligated to pay to 3dfx 2,000,000 shares of common stock of nVidia (taking into account the stock split effected by nVidia in August 2001) or a combination of up to $25.0 million in cash and a lesser number of shares of nVidia common stock. 3dfx is also seeking to liquidate its remaining assets. -12- 3dfx's principal anticipated liquidity requirements involve reaching settlements with its vendors in reduction of its accounts payable, as well as reaching mutually satisfactory settlements with the lessors to its facilities and equipment leases. 3dfx may also seek to assign or sublease its leased properties. In addition, unknown or contingent liabilities could require substantial cash resources. Management cannot reasonably estimate the amount of future obligations at this time. 3dfx is seeking to address each of the foregoing liquidity requirements, as well as the continuing expenses associated with the winding up of its business and the overhead associated with its Juarez, Mexico manufacturing facility, with its remaining cash and other resources. Should 3dfx qualify for its final payment from nVidia Sub, 3dfx believes that it will have sufficient cash to pay all of its and its subsidiaries' known current and determinable liabilities. However, the amount of unknown or contingent liabilities cannot be quantified and could decrease or eliminate any remaining assets. At this time, 3dfx cannot determine if there will be any assets remaining after paying for, or providing for the payment of, all of its and its subsidiaries' debts and liabilities. Only if there are assets remaining after the payment or provision for 3dfx's and its subsidiaries' debts and liabilities, will 3dfx shareholders receive a distribution of those assets. RISK FACTORS This report contains certain forward-looking statements within the meaning of the deferral securities laws. 3dfx's actual results and the timing of certain events could differ greatly from those anticipated in these forward-looking statements as a result of known and unknown factors, including the risks faced by 3dfx described below. The risks and uncertainties described below are not the only ones facing 3dfx. Additional risks and uncertainties not presently known by 3dfx or that 3dfx does not currently believe are important may also harm 3dfx's business operations. If any of the following risks actually occur, 3dfx's business, financial conditions or results of operations could be seriously harmed. The following factors and other information in this Report should be considered carefully in evaluating 3dfx and an investment in 3dfx's common stock. 3DFX CANNOT DETERMINE AT THIS TIME THE AMOUNT OF DISTRIBUTIONS TO ITS SHAREHOLDERS, OR WHETHER ANY DISTRIBUTIONS WILL BE MADE, BECAUSE THERE ARE A VARIETY OF FACTORS, SOME OF WHICH ARE OUTSIDE OF 3DFX'S CONTROL, THAT COULD AFFECT THE ABILITY OF 3DFX TO MAKE DISTRIBUTIONS TO ITS SHAREHOLDERS. 3dfx cannot determine at this time the amount of or whether there will be any distributions to its shareholders because that determination depends on a variety of factors, including, but not limited to, the value of 3dfx's remaining assets, the amount of 3dfx's and its subsidiaries' known and unknown debts and liabilities (including those relating to real estate leases) to be paid in the future, the resolution of pending litigation and other contingent liabilities, general business and economic conditions and other matters. Examples of uncertainties that could reduce the value or eliminate distributions to 3dfx shareholders include the following: - 3dfx will be entitled to receive an advance of up to $25.0 million from nVidia Sub only if the advance will pay 3dfx's and its subsidiaries' remaining debts and liabilities. If the advance is made, the number of shares of common stock of nVidia receivable by 3dfx from the asset sale will be reduced. - Delays in completing the dissolution of 3dfx could result in additional expenses and result in no distributions to 3dfx shareholders. - The amount of 3dfx's and its subsidiaries' debts and liabilities and the estimate of the costs and expenses of 3dfx's dissolution, including any resulting tax liabilities. If actual debts, liabilities, costs and expenses exceed 3dfx's expectations, actual net proceeds will be reduced and may result in no distribution to shareholders at all. - If liabilities of 3dfx or its subsidiaries that are unknown or contingent later arise or become fixed in amount and must be satisfied or reserved for as part of the dissolution. - If the resolution of pending or future litigation results in greater than anticipated liabilities or expenses. -13- - A decline in the value of nVidia's common stock. For the foregoing reasons, there can be no assurance that there will be any distribution to shareholders, even if the asset sale is completed. 3DFX MAY NOT BE ABLE TO SATISFY ITS DEBT OBLIGATIONS AND MAY FILE OR BE FORCED INTO BANKRUPTCY BY ITS CREDITORS. The proceeds provided by the asset sale to nVidia Sub may not be sufficient to satisfy all of 3dfx's known and unknown outstanding debts and liabilities. In the event that the proceeds from the nVidia asset sale are insufficient to pay its outstanding debts and other liabilities, 3dfx's creditors will be able to foreclose on any collateral granted by 3dfx to secure its indebtedness, and may force 3dfx into involuntary bankruptcy. Further, in the event that there are insufficient proceeds to pay or otherwise provide for 3dfx debts and obligations, there will be no assets available for distribution to 3dfx's shareholders. THE TIMING OF THE DISSOLUTION OF 3DFX IS NOT KNOWN AND THEREFORE 3DFX CANNOT DETERMINE THE TIMING OF ANY DISTRIBUTIONS TO ITS SHAREHOLDERS. Several factors affect the timing of 3dfx's ability to dissolve, including the timing of the sale of 3dfx's remaining assets, 3dfx's ability to determine the amount of its and its subsidiaries' known and unknown debts and liabilities and 3dfx's ability to resolve litigation and other contingent liabilities. Any delay in the dissolution of 3dfx will result in a delay in making distributions, if any, to 3dfx shareholders. 3DFX IS UNABLE TO SPECIFY THE TYPE OF ASSETS THAT MAY BE DISTRIBUTED TO 3DFX'S SHAREHOLDERS, IF ANY DISTRIBUTION IS MADE. 3dfx expects to receive a combination of cash and shares of nVidia common stock from the asset sale to nVidia Sub. 3dfx also expects to receive additional proceeds from the sale of its remaining assets, although it may not be successful in doing so. 3dfx may distribute the shares of nVidia common stock received by it upon its dissolution directly to its shareholders, or it may sell these shares in the open market or contribute the shares to a liquidating trust for the benefit of 3dfx's shareholders. Further, 3dfx may elect to directly distribute shares of nVidia common stock to some of its shareholders, while distributing an equivalent per share value in cash to others who would otherwise be entitled to receive a fractional amount or small number of shares of nVidia common stock. At this time, 3dfx is unable to provide specifics about the type of assets that 3dfx's shareholders may receive or what the value of those assets might be at the time of distribution. 3DFX'S SHAREHOLDERS COULD BE REQUIRED TO RETURN DISTRIBUTIONS IF CONTINGENT RESERVES ARE INSUFFICIENT TO SATISFY 3DFX'S LIABILITIES. If 3dfx (or a liquidating trust to which 3dfx's assets are transferred) makes a distribution to its shareholders but maintains inadequate reserves for the payment of its and its subsidiaries debts and liabilities, each shareholder could be required to return any additional amounts owed, up to the amount of the total distribution that the shareholder received. A distribution to 3dfx's shareholders could be delayed or diminished due to the need to make adequate provisions for 3dfx's and its subsidiaries' debt and liabilities, including contingent liabilities associated with lawsuits and threatened claims against 3dfx and its subsidiaries. The determination of whether a distribution is made and the amount of the distribution depends on 3dfx's ability to pay, or provide for the payment of, its and its subsidiaries' debts and liabilities, including contingent liabilities related to lawsuits and threatened claims. If these contingent liabilities later arise or become fixed in amount, 3dfx will be required to pay, or provide for the payment of, such liabilities from any remaining assets. This could result in the delay of distributions to 3dfx shareholders and the substantial reduction or elimination of any distributions. If 3dfx's or its subsidiaries' creditors believe that 3dfx has not adequately reserved assets for the payment of its or its subsidiaries' debts and liabilities, these creditors may be able to obtain from a court and injunction that prohibits 3dfx from making distributions to its shareholders. This action could delay or substantially diminish the distributions to be made to 3dfx's shareholders or holders of beneficial interests of the liquidating trust, as the case may be. -14- 3DFX MAY NOT BE ABLE TO DISPOSE OF ITS REMAINING ASSETS FOR VALUES EQUALING OR EXCEEDING THOSE CURRENTLY DESIRED BY 3DFX. Many factors affect the prices that 3dfx may receive for 3dfx's remaining assets, including availability of buyers for these assets and perceived quality of these assets. Many of these factors are beyond 3dfx's control. As a result of the foregoing, 3dfx may not be able to sell or otherwise dispose of its assets for prices equaling or exceeding those desired by 3dfx or currently offered in the asset sale. 3DFX'S BOARD OF DIRECTORS MAY AMEND THE PLAN OF DISSOLUTION. 3dfx's board of directors and shareholders have adopted a plan of dissolution for the liquidation, winding up and dissolution of 3dfx. 3dfx's board of directors has reserved the right, in its sole discretion, to amend the plan of dissolution unless it determines that the amendment would materially and adversely affect 3dfx's shareholders' interests. SINCE A MAJORITY OF 3DFX'S SHAREHOLDERS HAVE APPROVED OF THE DISSOLUTION OF 3DFX, SALES OF THE REMAINING ASSETS WOULD NOT BE SUBJECT TO SHAREHOLDER APPROVAL. Since a majority of 3dfx's shareholders have approved of the dissolution of 3dfx, the 3dfx board of directors has broad authority to sell any or all of the remaining assets of 3dfx on such terms as the board of directors determines advisable or appropriate, even if those terms may not be acceptable to 3dfx shareholders. 3dfx shareholders will not have a subsequent opportunity to vote on any disposition of 3dfx's remaining assets. 3DFX'S COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET EFFECTIVE MAY 16, 2001. As a result of the decline in the trading price of 3dfx's common stock, 3dfx's common was delisted effective as of the opening of business on May 16, 2001. 3dfx's common stock is currently traded in over-the-counter bulletin board of the National Association of Securities Dealers, Inc. The delisting of 3dfx's common stock means that, among other things, fewer investors have access to trade 3dfx's common stock, which may reduce demand for the stock. These factors may adversely affect 3dfx's common stock price. ONCE 3DFX IS DISSOLVED OR ALL OF ITS ASSETS ARE TRANSFERRED TO A LIQUIDATING TRUST, IT WILL CLOSE ITS STOCK TRANSFER BOOKS AND NO TRANSFER OF 3DFX'S COMMON STOCK WILL BE RECORDED. Once 3dfx is dissolved or all of its assets are transferred to a liquidating trust, it will close its stock transfer books and no transfer of 3dfx's common stock will be recorded. Thereafter, certificates representing 3dfx common stock will not be assignable or transferable on 3dfx's books except by will, intestate succession or operation of law. The equity interests of all of 3dfx's shareholders will be fixed on the basis of their respective stock holdings at the close of business on the final record date for the distribution of all remaining assets of 3dfx, and after the final record date, any distributions made by 3dfx will be made solely to the shareholders of record on such date, except as may be necessary to reflect subsequent transfers recorded on 3dfx's books as may be necessary to reflect subsequent transfers of 3dfx's common stock as a result of any assignments by will, intestate succession or operation of law. For any other trades after the final record date, the seller and purchaser of 3dfx's stock will need to negotiate and rely on contractual obligations between themselves with respect to the right to a liquidating distribution arising from ownership of 3dfx's common stock. 3DFX IS AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO ITS STOCK PRICE VOLATILITY. Historically, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. 3dfx may be the target of litigation like this. Securities litigation would result in substantial costs and divert management's attention and resources, which would seriously harm 3dfx's ability to complete its dissolution and may reduce or eliminate the assets available for distribution to 3dfx shareholders. 3DFX MAY BE SUBJECT TO CLAIMS OF FRAUDULENT CONVEYANCE BY 3DFX'S CREDITORS. 3dfx has incurred substantial indebtedness. Under federal and state fraudulent conveyance statutes in a bankruptcy, reorganization or rehabilitation case or similar proceeding or a lawsuit by unpaid creditors of 3dfx, under certain circumstances, such court could void the asset sale to nVidia Sub or the sale of its remaining assets and/or take other action -15- detrimental to 3dfx and its shareholders. These circumstances include the findings that, at the time 3dfx consummated the asset sale, (i) the assets were sold to hinder, delay or defraud current or future creditors or (ii) (A) 3dfx received less than reasonably equivalent value or fair consideration for its assets and (B) 3dfx, (1) was insolvent or was rendered insolvent by reason of an asset sale, (2) was engaged, or about to engage, in a business or transaction for which its assets constituted unreasonably small capital, (3) intended to incur, or believed that it would incur, debts beyond its ability to pay as such debts matured (as all of the foregoing terms are defined in or interpreted under such fraudulent conveyance statutes) or (4) was a defendant in an action for money damages, or had a judgment for money damages docketed against it (if, in either case, after final judgment, the judgment is unsatisfied). The measure of insolvency for purposes of the foregoing considerations will vary depending upon the federal or local law that is being applied in any such proceeding. Generally, however, 3dfx would be considered insolvent if, at the time it consummated an asset sale, either (i) the fair market value (or fair saleable value) of its assets is less than the amount required to pay its total existing debts and liabilities (including the probable liability on contingent liabilities) as they become absolute and mature or (ii) it is incurring debts beyond its ability to pay as such debts mature. 3DFX MAY BE UNABLE TO NEGOTIATE SETTLEMENTS WITH RESPECT TO ITS REMAINING LIABILITIES. 3dfx is currently in the process of negotiating settlements with respect to its and its subsidiaries' remaining debts and liabilities which include property leases, contracts and trade payables. If 3dfx is unable to successfully negotiate satisfactory resolutions of these obligations, it will have less or no cash proceeds to distribute to its shareholders. 3DFX WILL CONTINUE TO INCUR THE EXPENSE OF COMPLYING WITH REPORTING REQUIREMENTS UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). 3dfx is obligated to comply with applicable reporting requirements of the Exchange Act, even though compliance with such reporting requirements is economically burdensome. The Exchange Act provides for an exemption which allows an issuer to terminate its reporting obligations under the Exchange Act if it has less than 300 record holders or less than 500 record holders and its total assets have not exceeded $10.0 million on the last day of each of the issuer's most recent three fiscal years. At this time, 3dfx has approximately 480 record holders and has had in excess of $10.0 million in total assets for the last three fiscal years. As such, 3dfx is unable to terminate its reporting obligations. 3dfx cannot predict if, or when, it will meet the requirements for the exemption. The expenses for the preparation and filing of periodic reports will reduce the cash available for distribution to 3dfx shareholders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 3dfx's cash equivalents are exposed to financial market risks due to fluctuations and interest rates, which may affect interest income. Due to the short term nature of 3dfx's investment portfolio, 3dfx would not expect operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates. 3dfx does not use its investment portfolio for trading or other speculative purposes. -16- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 21, 2000, CagEnt Technologies Inc. filed suit against 3dfx in the Northern California District Federal Court. The complaint alleges patent infringement relating to CagEnt's patent no. 5,856,829. The complaint sought a declaratory judgment of infringement, injunctive relief enjoining future infringement and money damages caused by the alleged infringement, together with pre-judgment and post-judgment interest, attorneys' fees and cost of suit. On August 2, 2001, 3dfx reached a settlement with CagEnt, under which CagEnt and 3dfx agreed to release all claims against each other. 3dfx did not make or agree to make any payment to CagEnt as part of the settlement. The settlement of CagEnt's claim will not affect the contemplated liquidation and winding up of 3dfx's business pursuant to the 3dfx plan of dissolution. In February 2000 MCI Worldcom, Inc. filed a suit against STB Systems, Inc., a wholly owned subsidiary of 3dfx, in the 192nd District Court in Dallas County, Texas. The complaint involves a dispute over the amount owed by STB Systems, Inc. for services rendered by MCI Worldcom, Inc. 3dfx is also a party to various legal proceedings involving collection matters and other matters against it. 3dfx is currently seeking resolutions that are mutually acceptable to the parties involved in each of these matters. However, there is no assurance that resolutions will be achieved. Although the amount of any liability that could arise with respect to these proceedings cannot be predicted accurately, 3dfx believes that any liability that might result from such claims will not have a material adverse effect on its financial position. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K (i) Current Report on Form 8-K filed on August 3, 2001 disclosing the settlement of the lawsuit between 3dfx and CagEnt Technologies, Inc. on August 2, 2001. -17- Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: December 14, 2001 3DFX INTERACTIVE, INC. (Registrant) By: /s/ RICHARD A. HEDDLESON ----------------------------- Richard A. Heddleson Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) -18- -----END PRIVACY-ENHANCED MESSAGE-----