Brandt v. Nvidia Corp. et al

OCR transcription for search; preserved printed pages are authoritative

Entered on Docket

May 01, 2008

GLORIA L. FRANKLIN, CLERK

U.S BANKRUPTCY COURT FILED
1 NORTHERN DISTRICT OF CALIFO
2

APR 30 2008
3
4 United St: ning tan f rt
iy Jase, ee
5
6
7
8
9
10 UNITED STATES BANKRUPTCY COURT
11 NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
12
13
14 In re Case No. 02-55795-RLE
15 3DFX INTERACTIVE, INC., Chapter 11
16 Debtor. Adv. Proc. No. 03-5079
17
18
19 WILLIAM A. BRANDT, JR., TRUSTEE,
20 Plaintiff,
21 VS .
22 nVIDIA CORPORATION, a Delaware
Corporation; et al.,
23 Defendant(s).
24 /
25
26 MEMORANDUM DECISION AFTER TRIAL
27 Before the Court is the First Amended Complaint (the
28 “Complaint”) filed by William A. Brandt, Jr., the Trustee of
[3dfx.nvidia.decis.4.08.] -l-

AUTHENTICAT, .
US. GOVERNMENT, :
INFORMATION
GPO

03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 1 of
41

oO OD FF SNA DR OH BP CW NYO Be

NO NO NHN NO NO NO KN NRO RO mw; mm we ee eee eee ie
ao NN ATW SF BO NY KH DODO OH HD DRO HW BR DH eB

the above-captioned chapter 11 estate of 3dfx Interactive,
Inc. (the “Trustee” and “3dfx”), against nVidia Corporation
and nVidia U.S. Investment Company (collectively, “nVidia”)
for avoidance of a fraudulent conveyance. This phase of the
case has been tried and submitted for decision.

The Trustee is represented by Peter G. Bertrand, Richard
C. Darwin and Kim Y. Arnone of Buchalter Nemer. nVidia is
represented by Robert P. Varian, Karen Johnson-McKewan and
James N. Kramer of Orrick, Herrington & Sutcliffe LLP.

This Memorandum Decision constitutes the Court’s findings
of fact and conclusions of law pursuant to Federal Rule of
Bankruptcy Procedure 7052.

I. FACTS
A. Procedural Background

1. The Adversary Proceeding

3dfix filed this chapter 11 case on October 15, 2002, and
the Trustee was appointed January 24, 2003. On February 24,
2003, the Trustee commenced this adversary proceeding.

The Complaint states four claims for relief based on
California Civil Code §§ 3439.04(a) and (b) and § 3439.05
(California's Uniform Fraudulent Transfer Act (the “UFTA”)),
applicable here through Bankruptcy Code § 544(b)(1). The
Trustee alleges that in the transaction between nVidia and
3dfx (the “Transaction”) documented in the Asset Purchase
Agreement dated December 15, 2000 (the “APA”), nVidia paid
less than reasonably equivalent value for what it received.
nVidia responded to the Complaint and the parties have engaged

in extensive discovery.

[3dfx. nvidia.decis.4.08.] -2-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 2 of

41

oO COCO NN DN OW FP W NY

NO wpo NbN NHN NH NH NH NH NO KF HF HF KF KF FO Oe OO Sel ele
Oo SN DN OO BP Ww NY F&F DTD 0 WH HN DBO FF W NYO KF OS

C

In August 2005, the Trustee filed a motion for summary
judgment which nVidia opposed. On December 22, 2005, the
Court issued an order granting in part and denying in part the
Trustee’s motion (the “Summary Judgment Order”). Docket no.
172. The Summary Judgment Order provides that judicial
estoppel precludes nVidia from asserting in this action that
the “transaction value” is anything other than $108 million.
The Court denied summary judgment regarding what specific
assets were transferred in the Transaction and the value, if
any, to be ascribed to them.

2. The Questions to be Tried

On January 26, 2007, the parties filed a Joint Statement
of Legal and Factual Questions for Trial (the “Joint
Statement”). Docket no. 237. On January 31, 2007, the Court
issued a Pre-Trial Order establishing a schedule for trial and
the manner in which this valuation phase of the trial would be
handied. Docket no. 253. A timed trial took place between
March 21, 2007 and April 5, 2007. Post-trial briefing is
complete and the matter is ready for decision.

Pursuant to the Joint Statement and Pre-Trial Order, the
issues to be determined at this phase of the case are:

In the Transaction:

1. What was transferred and/or surrendered by 3dfx to
nVidia?

2. With respect to what was transferred and/or
surrendered, what is subject to avoidance under applicable
state and federal fraudulent transfer statutes?

3. With respect to what is identified in the answer to

[3dfx.nvidia.decis.4.08.] -3-

ase: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 3 of

41

oO Oo ND DB Wn FP WO NY

NO NO WH NH NHB NY NN NN NO PY BF S YF FF FEF FF FF RS
oOo ND DK A BP WO HY FH OOo ON DA FP WY Y YF OD

the second question, what was the fair market value as of the
date it was transferred and/or surrendered?

4. Was the $70 million paid by nVidia reasonably
equivalent to the fair market value identified in the answer
to the third question?

3. The Witnesses

nVidia offered direct testimony by declarations from the
following witnesses which were admitted into evidence:

1. Jen-Hsun Huang, president and chief executive officer
of nVidia.

2. Christine Hoberg, former chief financial officer of
nVidia.

3. Alex Leupp, former president and chief executive
officer of 3dfx.

4. Phil Carmack, senior vice president of the handheld
GPU business unit of nVidia, former vice president of hardware
engineering at 3dfx and former executive vice president of
research and development at 3dfx.

5. Paul D. Carmichael, former in-house counsel for
nVidia.

6. Mark Maxson, a principal in the valuation practice at
Deloitte & Touche.

7. Mark Waissar, former vice president at Morgan
Stanley.

nVidia offered direct testimony by declarations and
reports from the following expert witnesses which were
admitted into evidence:

1. Roger J. Grabowski, regarding valuation issues.

[3dfx.nvidia.decis.4.08.] ~4-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 4 of

41

2. Roman Weil, regarding accounting issues.

3. Jon G. Peddie, regarding graphics industry issues.

4. Charles D. Murphy, III, regarding investment banking
issues.

5. Matthew R. Lynde, regarding patent damages issues.

The Trustee offered direct testimony by declarations and
reports from the following expert witnesses which were
admitted into evidence:

1. Richard Ferraro, regarding industry issues.

2. Michael J. Wagner, regarding valuation issues.

The Trustee also offered testimony by designated
deposition excerpts for Paul Carmichael, Richard Heddelson,
Steve Pettigrew as part of his case-in-chief.

The Court heard testimony from nVidia’s experts Messrs
Weil, Peddie, and Murphy and from the Trustee’s experts Messrs
Ferraro and Wagner.

The Court also heard testimony from Jen-Hsun Huang,
Christine Hoberg, Alex Leupp, Mark Maxson, and Richard Cording

(the former controller of nVidia).

20 Designated deposition excerpts were also admitted into

evidence. Before trial, both parties filed evidentiary
objections to certain parts of the declarations and experts’
reports. The Court ruled on these objections, in part, before
trial began.* To the extent the Court relies upon any
evidence for which there may have been a pending objection,

any such objection is overruled.

' See generally Docket nos. 311-344, 366, 372, 382.

(3dfx.nvidia.decis.4.08.] -5-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 5 of
41

oO Oo FH SN DBD OH RW YPN

NO KN NO KN NO KN KR NO RO wm meme
So AND nH FP WD NY | DT OO fF HD HR Ww BP WOW NO

B. Background Regarding the Parties

1. The Brief Life of 3dfx

3dfx was a publicly traded semiconductor company
incorporated in California in 1994. Its initial public
offering took place in April 1997. 3dfx described itself as
part of the world of “interactive electronic entertainment”
that had started with coin-operated arcade games, then moved
into home entertainment through the advent of inexpensive,
dedicated home game consoles that attached to televisions and
then progressed to games playable on personal computers. Ex.
5011, pp. 4-5.% 3dfx claimed that its products were used in
more than 700 titles for personal computer games and more than
20 titles for arcade games. Game titles included Everquest,
Alien vs. Predator, Hydro Thunder, and Savage Quest. EX.
5011, p. 10.°?

3dfx first shipped its graphics products (known as the
Voodoo Graphics chipset) in September 1996 and introduced
subsequent versions in 1997, 1998 and 1999 (with variations on
the Voodoo name, such as the Voodoo 2, 3, 4, and 5, Voodoo
Rush and Voodoo Banshee). 3dfx’s target market had
historically been the retail market for add-in graphics cards

and 3dfx had devoted significant energy to establishing 3dfx

*well-known manufacturers of these game consoles include
Sony Corporation, Nintendo Corporation, and Sega Enterprises,
Ltd. Successive generations of these game consoles have been
introduced for many years.

>References to the reporter’s transcript of trial
proceedings will be as follows: “RT __.” References to
Exhibits will be as follows: “Ex. __.”

[3dfx.nvidia.decis.4.08.] -6-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 6 of

41

—

fn
oOo STD DB OH FBP WD NH

N NY NY WN NY NY NY WK WNW
oH NY DBD on FP WD NY KF OC

and Voodoo as brand names in the retail market. Ex. 5011, pp.
6-8. At the time of the Transaction, Voodoo Rampage was in
development but had not been completed. Voodoo Rampage had
been “taped out” in early December 2000 but it could have been
as much as another year before it would have been ready for
commercial exploitation. RT 1503-1505 and 1319-1321.

“2. 3dfx Merger with STB Systems, Inc.

Before May 1999, 3dfx was what is known as a “merchant

chip” business - it designed and sold graphics chips to a

So Oo Da IN DAWN PP W WN

variety of companies who then used the chips in their own
products. In May 1999, 3dfx completed its acquisition of STB
Systems, Inc. (“STB”), a Texas based graphics board company
with a manufacturing facility in Mexico. Ex. 5011, pp. 3, 14.
The purpose of the 3dfx/STB merger was to allow 3dfx an avenue
to deliver the 3dfx graphics chip directly to the
retail/distributor market on a graphics board designed and
built by 3dfx rather than on graphics cards designed by

various third party companies. Ex. 5011, p. 3. The

—
\o

acquisition of STB fundamentally changed 3dfx’s business
strategy. Alex Leupp, former chief executive officer of 3dfx,
characterized the STB acquisition as a “mistake.” Ex. BV, 6.

Jon Peddie,* nVidia’s industry expert, also described the
STB merger as an ill-advised strategic decision:

//

“See Ex. BZ, 413-9 for details regarding Mr. Peddie’s
credentials. Mr. Peddie is the principal of a technically
oriented marketing and management consulting firm that issues
market reports and publishes a bi-weekly report on computer
graphics and emerging trends in digital media technology.

[3dfx.nvidia.decis.4.08.] -7-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 7 of
41

oT OO ON DO WOW ee WY NY

NO wo vo NO NY NH NHN NO NO | FF KF KH KF SF FOO EFlhUh Sl
Oo “sD DR A BP WO NH KH DBD OO Oo HI DB HA BP WO LO

This change in 3dfx’s business and product offerings
brought it into direct competition with companies that
had previously been major customers. Although this
decision was intended to simplify the design process and
shorten product cycles by putting its chips ina single
board design . . . 3dfx’s transition from a merchant chip
company to an add-in board company undermined 3dfx’s
customer relationships and reduced its sales.

Ex. BZ, 15.

Following the merger, certain operating functions of each
company were combined in an attempt to achieve operating
efficiency. Various engineering functions were merged to
coordinate the graphics chip design process and graphics board
design process. The sales and marketing operations were
unified to address customer needs, particularly in the
retail/distribution channel. Ex. 5011, p. 3. However, as a
result of the merger, 3dfx lost two customers who had
accounted for 58% of its total revenues for fiscal year 1998.
3dfx was unable to replace the lost revenues attributable to
these two Significant customers. STB revenues also declined
after the merger because STB was unable to sell boards
incorporating graphics chips from other companies. Ex. 5011,
p. 21; Ex. BV, TI5-6.

3. 3dfx Merger with Gigapixel Corporation

In July 2000, 3dfx completed a merger with Gigapixel
Corporation (“Gigapixel”). One apparent rationale for this
merger was to expand the number of engineers working for 3dfx.
Gigapixel had about 40 graphics engineers at the time of the
merger who became 3dfx employees. Ex. BV, *7. Mr. Leupp

testified that the main purpose of 3dfx acquiring Gigapixel

was Gigapixel’s relationship with Microsoft and the X-Box

[3dfx .nvidia.decis.4.08.] -8-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 8 of

41

—_—

oOo mH ND AH HL WY NY

NO NO NO HN HN NH KN NY NO | FF Ke -— Fe Fe Re RE
oOo YD DO Wn BP Ww NY K§& CFD OO DH ND DBA FF WO NY

(then in development), and Gigapixel’s innovative approach to
designing graphics chips. RT 1291. Mr. Peddie described the
Gigapixel merger as a “desperate move” which was difficult to
link with a rational business purpose. Ex. BZ, 415.

4. Relationship between nVidia and 3dfx

Historically, nVidia and 3dfx had developed a well-known
rivalry with each other in the small field they occupied. As
Mr. Leupp, described it, “[b]lefore 3dfx bought STB Systems,
3dfx and nVidia had been serious competitors with one another.
The two companies were rivals down to the bone, and I
understood that the culture among our engineers was hostile to
nvidia.” Ex. BV, 27.

By the fall of 2000, nVidia did not view 3dfx as a direct
competitor because following the STB merger, 3dfx sold only
its own boards incorporating its own graphics chips. Ex. BT,
gil. UJen-Hsun Huang, nVidia’s chief executive officer,
testified that nVidia’s market focus was on selling its chips
to original equipment manufacturers, whereas 3dfx’s focus was
primarily on selling its chips as part of add-in boards sold
directly in the retail channel. At the time, the end-users of
nVidia’s chips were purchasers of computers that already
contained an nVidia graphics chip. Thus, the end-users of
3dfx’s chips were people who purchased an entire graphics
board containing 3dfx chips from retailers and then added
those boards to their computers. Ex. BT, 95; Ex. 5011, p. 15.

3dfx and nVidia were also suing each other for patent
infringement (collectively, the “Patent Litigation”). In

September 2000, the District Court hearing the Patent

[3dfx.nvidia.decis.4.08.] -9-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 9 of

41

oT OD mH ND OW eR WO NY Re

Oo wo bw NHN HN NY NH KN HNO ee HR HF | HF FO RP PS Pl
oOo YT KH nA BP WD NY KH DT Ob A AN DBA FF WO NY

Litigation issued a ruling favorable to 3dfx, largely adopting
the 3dfx position and largely rejecting nVidia’s. Ex. 53; RT
187.

5. 3dfx’s Financial Problems

In the beginning of 2000, 3dfx had approximately 650
employees. Approximately 265 of these employees were
engineers. 3dfx’s Mexican subsidiary also had roughly 1200
employees working in its Juarez, Mexico board manufacturing
facility. 3dfx had business premises in San Jose, California
and Richardson, Texas. Its graphics chips were manufactured
in Taiwan. Ex. 5011, p. 16.

Mr. Peddie testified that although 3dfx was not a small
company, its competitors, including nVidia, were larger and
more sophisticated and also had stronger financial backing.
Because of 3dfx’s limitations, it fell behind the technology
cycle, produced inferior products, and its operation as a
merchant chip company was doomed. By the fall of 2000, 3dfx
had effectively designed itself into a corner by committing to
an outmoded chip architecture that was not scalable or
economical. The company did not recognize the importance of
single chip compatibility, and ignored the importance of
industry compatibility. Ex. BZ, 4912-13.

3dfix’s SEC filings confirm this general assessment as did
Mr. Leupp. Ex. BV, 998-9; Ex. 5011, p. 35; Ex. 5054, pp. 19-
23.

By the time of the Transaction on December 15, 2000, 3dfx

had sustained losses each quarter since the quarter ending

[3dfx.nvidia.decis.4.08.] -10-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 10 of

41

oo Oo NAN DB OO BP WD NO =

NO NN NO KN KN YB KN NO NR RR RR a i
oo NSN DB OW BP Ww NY FK& OD 6 OH HN DB Hn FP YW NYO | O&O

April 30, 1999.° By the end of the third quarter of 2000,
30fx was also experiencing high inventory expenses, declining
margins and slowing demand for its products. Ex. BV, 48; Ex.
BU, 8.

In its 10-Q filed on December 20, 2000, 3dfx reported a
net loss of $291.5 million for the nine months ending October
31, 2000, and reported that during the three months ending
October 31, 2000, it had recorded a charge of $117 million for
the impairment of goodwill and other intangibles. Ex. 5054,
pp. 3, 9-10.

By the fall of 2000, not only had 3dfx suffered six
consecutive quarterly losses, but it also had essentially run
out of cash, and had even invited bankruptcy counsel to
address the November 20, 2000 board meeting. Ex. 5027.
According to Mr. Leupp, whether or not 3dfx signed a deal with
nVidia on December 15, 2000, 3dfx would have found it
necessary to lay off most, if not all, of its employees. Ex.
BV, @36.

Cc. Events Preceding the Transaction

1. 3dfx Retains Robertson Stephens

°3dfx had reported a net loss of $2.1 million for the
quarter ending April 30, 1999; a net loss of $11.6 million for
the quarter ending July 31, 1999; a net loss of $17.6 million
for the quarter ending October 31, 1999; a net loss of $31.9
million for the quarter ending January 31, 2000. Ex. 5011, p.
27. 3dfx reported a net loss of $12 million for the quarter
ending April 30, 2000, a net loss of $100 million for the
quarter ending July 31, 2000. Ex. 5015, p. 2. 3dfx reported
a net loss of $178 million for the 3 months ending October 31,
2000. Ex. 5054, p. 2. 3dfx reported a net loss of $63
million for fiscal year 2000. Ex. 5065, p. 3.

[3dfx.nvidia.decis.4.08.] -11-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 11 of

41

oD Oo HN DB OW FR WY NYO

DO NO NO KN HN KN NY WN NO eR BB 8B ee Re ee ee
Oo SND OW FSP WY NY KF DGD OC eH ATX Dn BP WY NY —

In September 2000, 3dfx decided to try to sell its board
business assets and retained Houlihan Lokey Howard & Zukin to
advise it in that effort. In October 2000, 3dfx also retained
the investment banking firm of Robertson Stephens to conduct a
search to identify parties interested in either a strategic or
financial transaction with 3dfx. Robertson Stephens was well
recognized at the time as one of the premier investment
banking firms for technology companies such as 3dfx.® 3dfx
management and Robertson Stephens gave information to numerous
parties, several of whom signed confidentiality agreements and
received detailed information regarding 3dfx. Ex. 5057, pp.
42-43.

3dfx also explored several restructuring alternatives,
including selling the board business assets and returning to
its previous model of designing and selling graphics chips,
selling the board manufacturing assets in Mexico, and selling
the stock of STB. 3dfx approached several companies,
including Intel, ATI, and AMD, regarding potential
transactions. None of these companies were interested. Ex.
BV, @Til-18.

2. nVidia Retains Morgan Stanley

Following contact initiated by 3dfx in September 2000,
nVidia indicated its interest in exploratory discussions. Ex.

BT, 49. Around this same time, nVidia retained Morgan Stanley

°mMr. Peddie described Robertson Stephens at the time as
“widely recognized as one of the premier - and perhaps the

premier ~ investment bank/financial advisor for West Coast
technology firms such as 3dfx.” Ex. BZ, 18.
[3dfx.nvidia.decis.4.08.] -12-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 12 of

41

oO Oo OD SN Dn BR ]Y NO

NN WN bd bt HHO HO KN KN KROQ RR mee mm me
Hy AN HB vn FP WD NY FK§ TD BO OW ND DB Wn BP WO NO —

to assist it in the evaluation of a potential transaction with
3dfx. Ex. CE, 4413-17. On or about November 20, 2000, nVidia
and 3dfx entered into a letter agreement relating to the
treatment of confidential information (the “Non-Disclosure
Agreement”). Ex. 5026.

In late November 2000, Morgan Stanley provided the nVidia
board of directors with its analysis of a potential
transaction between 3dfx and nVidia (the “Project Titan
Materials”). Ex. 5028.’ Mark Waissar, who led the Morgan
Stanley team working on the assignment, described this
presentation to the nVidia board as reflecting a preliminary
analysis period during which Morgan Stanley evaluated 3dfx’s
entire business because Robertson Stephens had requested that
nVidia evaluate a purchase of the entire company, and
Robertson Stephens did not believe that a partial purchase of
assets would be feasible. Accordingly, the presentation
primarily contemplated a merger structure between nVidia and
3dfx. Ex. CB, 4912-13.

In the Project Titan Materials, Morgan Stanley expressed
its preliminary view that 3dfx’s liabilities exceeded its
assets and that 3dfx had little or no enterprise value.
However, the presentation also stated that other off-balance

sheet assets including 3dfx’s engineering workforce had

7Ex. 5028 was filed under seal pursuant to a protective
order and remains sealed; it was admitted for the limited
purpose of disclosing Morgan Stanley’s advice. Testimony
regarding Ex. 5028 and Morgan Stanley’s role in the
Transaction are not sealed. Duplicate versions of Ex. 5028

designated as Ex. AB and Ex. 66, also remain sealed. See
Docket no. 490.

[3dfx.nvidia.decis.4.08.] -13-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 130

41

—

mo 0 DH SND AW Se WH WY

, i) bo No we) No No NO i) i) — — — — — — — — — —
ee) ~~ on va) -& es) N _ jo) K2) oO ~ ion ws & ies) No —

positive theoretical equity value which nVidia might derive in
a merger. Ex. CB, 414-15.

One part of the Project Titan Materials suggested a
hypothetical net equity value for 3dfx between $50 million to
$125 million. This net equity value, in a merger context, was
premised on (i) assigning a value of $1 million to $1.5
million per engineer for 75 - 100 engineers; (ii) the present
value of a net operating loss tax shield of $12 million; (iii)
a negative net asset value of $27 million; and (iv) closing
and transaction costs of $10 million. In a section entitled
“Transaction Headcount Multiples,” Morgan Stanley provided a
summary of seven change of control transactions involving
technology companies for which a “per engineer” value for the
acquisition or merger was derived based on the reported
transaction price. The explanation for this data stated
“La]ssuming that 50% of the aggregate value is based on
technology value, an appropriate aggregate value/engineer
multiple would be in the range of $1.00MM - $1.5MM.” Ex.
5028, p. 13.

Mr. Waissar testified that because of 3dfx’s financial
condition, Morgan Stanley could not implement a discounted
cash flow valuation of the business, a net income analysis, an
operating income analysis, a gross margin analysis or a
revenue analysis. Instead, Morgan Stanley relied primarily on
the “theoretical valuation of intangibles.” Mr. Waissar
testified that this approach is removed from a profit and loss
analysis, which will typically yield more reliable data. This

preliminary valuation analysis was intended to give nVidia

[3dfx.nvidia.decis.4.08.] ~14-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 140

41

DR 0 Fe SND DBD A FP WD NH

NO NO bw NH HN HN KH NO NO HK Fe | RK RF KF PF El
Oo NI DB Wn BP W NYO K|& CO OO DW IN DB WT FP W NH

certain parameters which it could use to consider what a
merger with 3dfx might be worth to nVidia. Ex. CB, 415-17.

3. Competing Offers: Via Technologies, Inc. and nVidia

As a result of the combined efforts of Robertson Stephens
and 3dfx management, two offers emerged: one from Via
Technologies, Inc. (“Via”) and one from nVidia.®

The December 7, 2000 Via term sheet describes an
investment of a total of $40 million in secured convertible
notes, with $15 million to be funded upon signing definitive
documents and an additional $25 million to be funded on
completion of certain engineering milestones. The $15 million
was to be secured by essentially all assets of 3dfx. Under
the Via proposal, 3dfx was required to terminate the add-in
board business, dismiss a large number of employees and
deliver a new chip design by a specified deadline. Ex. G; Ex.
BV, 919.

The December 7, 2000 nVidia term sheet describes an offer
to purchase selected graphics chip assets for $100 million
cash, subject to the limitation that a minimum of fifty-six of
3dfx’s selected employees would accept employment offers from
nVidia. If fewer than fifty-six accepted offers, there would

be a $1 million per employee reduction in the purchase price.

8’ Robertson Stephens had apparently advised interested
parties that bids had to be submitted by December 4, 2000 and
agreement had to be reached by December 15, 2000. Mr. Waissar
testified that he understood there were two reasons for this:
3d£x was in deteriorating financial condition and 3dfx had
postponed announcing its quarterly financial results until
December 15, 2000. Ex. CB, G11; Ex. 5060, p. 43; Ex. CE, 931.
nVidia’s first term sheet was submitted in accordance with a
December 4, 2000 deadline. Ex. 5033.

[3dfx.nvidia.decis.4.08.] -15-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 15 of

41

oO Oo SY DBD AW FBP WD NO eS

NO NO NO NO KN YN KN NO KNORR RR ee ee ee
a A Dn nA FBP WB NHN F|§ DOD O fH NAN DH Wn FP WO NY KF OC

3dfx was to continue to exist following the closing and,
pending the closing, the parties would enter into an employee
services agreement pursuant to which nVidia would pay the
salaries of certain 3dfx engineers while they worked on nVidia
projects (the “Employee Services Agreement”). The term sheet
also provided that the definitive agreement would contain a
provision requiring 3dfx to apply the cash proceeds ina
manner acceptable to nVidia. To implement this, a portion of
the purchase price would be held in escrow following the
closing. Ex. BD; Ex. CE, 420.

On December 9, 2000, the 3dfx board met to consider the
competing offers from Via and nVidia. The 3dfx board minutes
set the stage as follows:

Given the fact that the company had no imminent

production, over 700 creditors, a significant monthly

cash burn rate and approximately $60 million in debt
the board of directors recognized that the company’s
precarious financial condition made it increasingly
unlikely in the near term that it would be able to pay
its debts as they become due and payable.
Ex. 5039.

The board first selected the Via proposal. However, one
of the 3dfx board members informed nVidia that nVidia had time
to submit a revised offer.? Ex. BV, 98; Ex. BT, 4718-19.

On December 10, nVidia submitted a revised proposal which
the 3dfx board voted to accept. Described in a term sheet

dated December 11, 2000, this offer provided, inter alia, that

(1) nVidia would purchase certain graphics related assets for

°Via was advised of this turn of events but dropped out
of the bidding at this point. Ex. BV, 431.

[3dfx.nvidia.decis.4.08.] -16-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 16 of

41

—

Da 0D FH HN DA Fe WY NH

NO NO bP NO KH KN PO KN HNO RR RRR Re ee ee
oo JN DBD A PW NY YK CD OD OH NT DB OW BP WO NO —

$60 million cash and one million shares of nVidia common stock
deliverable when 3dfx satisfied its liabilities and
obligations; (ii) 3dfx could monetize a portion of the stock
consideration if it certified that the monetization would
enable 3dfx to satisfy all of its liabilities and obligations;
(iii) 3dfx would continue as a stand-alone entity; (iv) nVidia
would provide a $15 million bridge loan to be funded upon
Signing; (v) nVidia would set up a $15 million fund earmarked
to pay bonuses for engineers who accepted nVidia’s employment
offers; (vi) following execution of definitive documents,
nVidia would deliver to 3dfx two lists of selected 3dfx
employees to whom nVidia intended to offer employment; and
(vil) the parties would enter into an Employee Services
Agreement so that prior to the closing, 3dfx employees would
work on nVidia projects at nVidia’s expense. Ex. 5041; Ex.
BT, 920; Ex. CE, 924.
D. The Asset Purchase Agreement

1. Documentation for the Transaction

Following the 3dfx board decision to accept the nVidia
offer, certain terms of the proposed asset purchase continued
to evolve. The final documentation for the Transaction
included, inter alia, the APA, Voting Agreement, Credit
Agreement, Security Agreement, Patent License Agreement,
Patent Standstill Agreement, Trademark Assignment Agreement,

and a fairness opinion for 3dfx. Exs. 5047-5049.1°

Defined terms used in the APA will be used consistently
herein.

[3dfx.nvidia.decis.4.08.] -17-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 17 of

41

BR WwW WN

So Oo Oo SI DN NSN

12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

It is not entirely clear when certain provisions that are
in the APA were added or when certain provisions in the
December 11, 2000 term sheet were deleted from the
Transaction. For example, nVidia’s counsel Paul Carmichael
testified that early in the negotiations, nVidia proposed that
the parties dismiss the Patent Litigation upon signing the
APA. 3dfx proposed that the Patent Litigation be dismissed
upon closing of the Transaction and this is what the APA
provides. Ex. CA, 427; Ex. 5047, p. 7. It is also unclear
when 3dfx made the decision to dissolve pursuant to its Plan
of Dissolution (as described in the APA). Ex. CA, 19; Ex.
5047, p. 1; Ex. 5060, p. 56. The Employee Services Agreement,
described in early term sheets, was apparently deleted shortly
before signing the APA on December 15, 2000, as was the $15
million bonus fund earmarked for the payment of bonuses to
engineers. The cash was also increased from $60 million to
$70 million. Ex. 5035; Ex. BD; Ex. 5041; Ex. CE, 427; RT 651-
653, 734.

Certain provisions of the APA are relevant for a
determination of the issues under consideration at this phase
of the case.

Section 1.1 describes the Specified Assets to be sold as

all of the properties, rights, interests, and other

tangible and intangible assets (wherever located and
whether or not required to be reflected on a balance
sheet prepared in accordance with GAAP) .. . that are or
were used in. . . or that otherwise directly or
indirectly related to, the graphics business of the

Seller Corporations (the ‘Graphics Business’).

Ex. 5047, p. 1.
3dfx is defined as the Seller and 3dfx and its

[3dfx.nvidia.decis.4.08.] -18-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 180

41

So feo HN DD AH Fe WD NY Fe

NO NO WN NO WN NO NY NN NO KR KR FF FF S| FP Fe ES hh S| he
oN DO UW BR WO NF OO OWN DOD AW PP WD YN YF OS

subsidiaries are defined as the Seller Corporations. Ex.
5047, pp. 1, A-6.

The Specified Assets are defined in § 1.1(a)-(1i). The
Specified Assets include, inter alia, (a) Patents, Patent
Applications, Trademarks, Tradenames; (b) Other Proprietary
Assets, (defined as all Proprietary Assets and goodwill of the
Seller Corporations, copyrights, trade secrets, know-how,
computer software, inventions, designs, drawings, existing and
in-development chip designs and related specifications, source
codes, verification and validation environments, manufacturing
specifications and databases, in-process research and
development, product reviews); (c) Inventory, Equipment, and
Other Tangible Assets; (d) Contracts; (e) Governmental
Authorizations; (£) Claims; (g) Other Assets (defined as

including existing and in development chip designs, related

specifications, source codes, customer lists); (h) Books and
Records; and (i) Proceeds. Ex. 5047, pp. 1-3. (The Court
will refer to the assets defined in §§ 1.1(a), (b), (g), (h)

as the Intellectual Property Assets.)

The APA also defines the Excluded Assets as those assets
on Exhibit C (subject to the Closing Agreement) that directly
and exclusively relate to the graphics board business of the
Seller. Ex. 5047, p. A-3. The Excluded Assets on Exhibit C
include the stock of the Seller Corporations, cash, and
accounts receivable. Ex. 5047, p. nv45374.

Sections 1.2 and 1.3 of the APA describe the payment

terms. In summary, nVidia agreed to pay $70 million cash at
Closing (the “Cash Consideration”), and subject to the
[3dfx.nvidia.decis.4.08.] -19-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 19 of

41

oOo ON DN AW RP WD YS

oS NO NO NH NHN NH NH NY NO HR KH Re FP KF FP KF FP
Co DO OW BP WD NH KF OD OD HN DA F&F W NY

conditions in § 1.3, to deliver one million shares of nVidia
common stock (the “Stock Consideration”). The essential
restriction on the Stock Consideration was that the Stock
Consideration was only deliverable upon completion of the
winding up of the business of 3dfx pursuant to its Plan of
Dissolution and upon certification that all Liabilities of the
Seller Corporations had been paid in full or otherwise
provided for in a manner satisfactory to nVidia. Upon certain
conditions, 3dfx was permitted to obtain an advance on the
Stock Consideration by monetizing up to a maximum of $25
million if this monetization was necessary and sufficient to
enable 3dfx to pay its Liabilities in full. Ex. 5047, pp. 3-
4,

Section 1.5 of the APA describes the $15 million credit:
facility and the non-exclusive, perpetual fully-paid license
for all of the Patents (other than those involved in the
Patent Litigation) and the sale of the Trademarks and
Trademark Applications given in exchange for this bridge
financing. Section 1.6 provides for the stay of the Patent
Litigation pending closing. Ex. 5047, pp. 5-6.

Section 2.5 of the APA provides that the Specified Assets
collectively constitute all of the properties, rights,
interests and other tangible and intangible assets necessary
to enable the Seller to conduct the Graphics Business in the
manner in which the Graphics Business is currently being
conducted and in the manner in which the Graphics Business is
proposed to be conducted. Ex. 5047, p. 11.

Section 2.16 of the APA provides that the Disclosure

[3dfx.nvidia.decis.4.08.] -20-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 20 of

41

—_—

oD Oo ON Dn TH HR WH NY

Nb wp NbN PD NV NH NH WV NO KH KH Re KF Fr RP SF ES
Oo NN DWN CA BP WO NY K§ COD CO WH AN DK WH FP WD NH

Schedule accurately sets forth information regarding the
employees of the Seller Corporations who perform services
related to the Specified Assets or the Graphics Business. Ex.
5047, po. 18-19. Schedule 2.16, dated December 15, 2000,
lists approximately 300 names with salary information, but a
later version of Schedule 2.16 states that after December 15,
2000, substantially all of Seller’s employees were terminated.
Ex. 5047, pp. nv45411-45418, nv45619-45626.

Section 4 of the APA describes the pre-closing covenants
of 3dfx. Section 4.2(a) provides, in pertinent part, that
3dfx will: (i) preserve intact the current business
organization relating to the Specified Assets and the Graphics
Business; (ii) keep available the services of current
employees relating to the Specified Assets and the Graphics
Business; and (iii) maintain good relations and goodwill with
all suppliers, customers, landlords, creditors, employees.

Ex. 5047, pp. 26-28.

2. nVidia’s Perspective Regarding the Transaction

Mr. Huang, nVidia’s chief executive officer, testified
that when nVidia first started discussing a possible
transaction with 3dfx, nVidia believed that 3dfx would remain
in the add-in board business and structured its first proposal
on terms that would have made nVidia the exclusive supplier of
chips to 3dfx. Because such a structure meant that 3dfx would
no longer need engineers to design graphics chips, nVidia
hoped to be able to hire a number of the best of them.
However, because engineers were in short supply, nVidia also

believed that the engineers would be in high demand by other

[3dfx.nvidia.decis.4.08.] -21-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 21 of

41

mo f2o 6 SIS DO BR WH NO

NO NH BP KD KN KN KN RO Rm mm ee eee
ao nN Dn FF WD NY YFKY§ COD OBO Bast Dn FP WOW NO &

companies and nVidia wanted to be able to recruit them before
other companies did. Ex. BT, 412.

In late November and early December 2000, nVidia had asked for
and obtained two lists of the 3dfx engineers containing
information about their compensation and Phil Carmack’s?!
subjective assessment of their skills. Exs. 142, 162; Ex. BU,
Gi16-17.

According to Mr. Huang, hiring the 3dfx engineers was the
true value of the Transaction. He testified that the purchase
price that nVidia agreed to pay had nothing to do with any
attempt to value the assets that 3dfx was selling to nVidia.
nVidia did not conduct a formal appraisal of the assets before
Signing the APA because the value of the assets was not what
drove nVidia’s interest in doing the deal or the purchase
price. According to Mr. Huang:

The total consideration was competitively driven, i.e.,

what 3dfx management was willing to accept, what we felt

we could afford, and what it took to beat out Via. It
was very competitive because 3dfx had business
relationships with Via; in the past there had been talks
of partnership arrangements. What was important to
nVidia in this transaction was not the value of the
assets that we were buying, but the opportunity to be
first in line to recruit the 3dfx design engineers. We
were willing to pay a premium over the value of 3dfx’s
assets to get that head start over other potential

Suitors for the 3dfx engineers.

Ex. BT, (924-25.

Mr. Huang also testified that when it was apparent that

'' Phil Carmack, vice president of hardware engineering at
3dfx until 1998, at Gigapixel in 1999, and again at 3dfx as
executive vice president of research and development following
the Gigapixel merger. He became an nVidia employee following
the Transaction. Ex. BU, @%7, 21-25.

[3dfx.nvidia.decis.4.08.] ~22-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 22 ol

41

—

coc Oo Fe SN DBD OW HP WY NY

NO wo no WN NO NO WN NH NO | KF Fe KF Fe RF RFE Eel RR
oO NY DB Un ff WO NYO —|§ DTD OBO DB ANANDNDB Hn BP Ww NY

3dfx planned to dissolve after the Transaction, nVidia wanted
to be sure that any dissolution was completed in a way that
did no harm to nVidia, or to nVidia’s reputation for fair
dealing in the market, and did no harm to the creditors that
nVidia and 3dfx had in common. Ex. BT, {37.

nVidia originally proposed to escrow the Stock
Consideration until 3dfx could certify that its creditors had
been paid in full. However, 3dfx wanted to be able to use the
Stock Consideration to pay its creditors. Because nVidia
wanted to use the Stock Consideration to motivate 3dfx to
complete the transaction quickly, nVidia agreed to let 3dfx
monetize an agreed maximum amount of $25 million to pay
creditors if 3dfx could certify that doing so would result in
full payment of its Liabilities. Ex. BT, 27.
E. Events Following December 15, 2000

1. 3dfx Announces the Transaction and the Termination of
Employees

On Friday, December 15, 2000, the parties signed the APA
and 3dfx management announced to its employees that the
company was shutting down and the employees would be
terminated. Ex. BV, 939. Phil Carmack testified that on
December 15, 2000, he received written notification that he
was being laid off. He understood that his colleagues also
received this layoff notice. On December 18, 2000, he
attended a presentation made by nVidia to certain of the
engineers at which nVidia presented employment offers. Ex.
BU, FI20-24.

Mr. Huang testified that he and other members of nVidia’'s

[3dfx.nvidia.decis.4.08. ] -23-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 23 of

41

Ww NN

oOo CO SN DH ne Bf

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Management met with 3dfx employees in Northern California on
December 18, 2000 and then flew to Texas to meet with
employees there. Ex. BT, {33. nVidia representatives met
individually with the 3dfx employees nVidia wanted to recruit
and made offers to approximately 120 of them. These offers
included 10 percent pay increases, stock options and
incentives to accept promptly. Ex. BT, 933; Ex. CE, 935-37.

Mr. Huang was confident that he would be able to persuade
3dfx engineers to accept nVidia’s offers. RT 131, RT 167-168.
Consistent with Mr. Leupp’s view of historical animosity
between the two groups of engineers, Christine Hoberg,
nVidia’s chief financial officer at the time, testified that
other members of nVidia management did not share Mr. Huang’s
confidence and were very nervous about the recruiting process.
She testified that some of the engineers viewed Mr. Huang as
Darth Vader. RT 768.

nVidia ultimately hired 107 former 3dfx employees, most
of whom were engineers. They began working at nVidia in early
January 2001. Ex. BU, 4919-25; Ex. BT, 933-34.

2. nVidia Obtains Regulatory Approval

In order to obtain the required regulatory approval of

the Transaction,”

nVidia filed a Notification and Report Form
for Certain Mergers and Acquisitions with the Department of
Justice and the Federal Trade Commission as required by the

Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the *“HSR

"Section 7A of the Clayton Act, 15 U.S.C. § 18a (1996),
and the rules promulgated thereunder.

[3dfx.nvidia.decis.4.08.] -24-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 24 of

41

oD 0 AH SNA DT BP WD NH =

NO dN NO KN NY KR KH KROQ DR om meet
a ANY HD nO BP WD NH KF DGD 0 OH aI DH BP WD NH

Notification”). Ex. 84.

Pursuant to § 801.10 of the Code of Federal Regulations,
the value of the assets listed on the HSR Notification is to
be either the fair market value or the acquisition price, if
the acquisition price has been determined and if it is greater
than the fair market value. 16 C.F.R. § 801.10 (2002). The
HSR Notification states that nVidia is acquiring certain
assets of 3dfx relating to its graphics business with an
approximate value of $108 million. The $108 million was based
on the $70 million in Cash Consideration and the value of the
Stock Consideration as of December 15, 2000. Ex. 5064, p. 8.
After approximately 30 days, nVidia obtained regulatory
approval of the Transaction. Ex. 213.

3. Deloitte & Touche LLP and KPMG LLP: nvVidia’s
Accounting for the Transaction

In December 2000, nVidia retained Deloitte & Touche LLP
(“D&T”) to assist it with its allocation of the purchase price
to the assets acquired on a fair value basis for financial
reporting purposes. D&T produced a report dated May 3, 2001
(the “D&T Report”). Ex. 5064. Based upon the sum of the Cash
Consideration and the Stock Consideration it anticipated would
be paid, nVidia management told D&T that the fair value of the
assets to be acquired from 3dfx was approximately $107.4
million. Ex. 5064, p. 8. The phrase “fair value” used in the
D&T Report was the standard accounting definition for the
purchase price paid by a willing buyer to a willing seller.
Ex. CD, 97; Ex. U, pp. 71, 188-189.

nVidia management advised D&T that the net book value of

[3dfx.nvidia.decis.4.08.] -25-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 25 of

41

So Oo Om HN Dn AW PP WO NY KF

BS NO HN NHN WH NY NHN NN NY FP KF KF FF KF KF KF PO PS Se
oOo KN ON A BR WwW NF OO ON Dn OHO ee WYO HY

the Inventory, Equipment and Other Tangible Assets was $2.4
million. D&T believed this was reasonably representative of
the fair value of these assets and used this figure in its
purchase price allocation. Ex. 5064, p. 25.

D&T attempted to allocate the remaining consideration
($105 million) to intangible assets consisting of: (i) an
assembled workforce; (ii) Patents; (111) Trademarks and Trade
Names; (iv) other intangibles in the nature of goodwill; (v)
developed technology; and (vi) in-process research and
development. D&T concluded that the material contributory
intangible assets were an assembled workforce, and Trademarks
and Trade Names. Ex. 5064, p. 28.

Based on discussions with nVidia management concerning
the composition of the assembled workforce, D&T determined
that its value would likely be material enough to warrant its
valuation for allocation purposes. D&T allocated $3 million
to an assembled workforce of 107 employees based on the
avoided cost of recruiting this many high-caliber employees.
Ex. 5064, p. 28. Mark Maxson, the D&T principal in charge of
the engagement, testified that there was economic benefit in
this opportunity to recruit the 3dfx engineers and the D&T
Report referred to this opportunity to recruit as an assembled
workforce. Ex. CD, 911; Ex. 5064, pp. 20, 28.

D&T also believed that the 3dfx Trademark and Tradename
portfolio was sufficiently established and recognized by
retail consumers to justify attaching a value to it. D&T used
the income approach and assigned a fair value of $11.310

million to the Trademark portfolio. Ex. 5064, pp. 31-32.

[3dfx.nvidia.decis.4.08.] -26-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 26 of

41

So A SN DWN WOW Be WD NR

NO NO BR KN KN KH KR KR RO Re Ree
Oo NI DBD vn FP WD NY YK OD O mH NI BD aA FP Ww NY KK CO

D&T attempted to allocate purchase price to the Patents
and Patent Applications. nVidia management did not expect the
Patents to generate any material third party license revenue
and D&T stated that it could not attribute specific cash flows
to the Patents due to the primarily defensive nature of the
portfolio. D&T thus concluded that it could not estimate the
value of the Patents with reasonable reliability. Ex. 5064,
p. 31.

D&T also analyzed developed technology assets (described
as proprietary assets, including trade secrets, source codes,
and designs for existing chips) and in-process research and
development (described as development assets not currently
technologically feasible). D&T could not attribute individual
cash flows to these assets, however, because nVidia had
indicated it had no strategy to sell, lease, market or make
alternative use of them. Accordingly, D&T concluded that the
value of these assets was “inseparable from goodwill.” Ex.
5064, p. 33.

Based on the $3 million allocated to avoided recruiting
costs for the workforce, and the $11,310,000 allocated to
Trademarks and Tradenames, D&T determined that the total fair
value of the “identifiable intangible assets” was $14,310,000
and the fair value allocated to the tangible assets was
$2,432,500. The remainder of the $107,437,500 assumed
purchase price - $90.695 million - was allocated to
“goodwill.” The D&T Report defined goodwill as the “residual
amount remaining unallocated to an identifiable intangible

asset.” Ex. 5064, p. 3.

[3dfx.nvidia.decis.4.08.] -27-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 27 ol

41

Oo Oo JN DB Wn FP WD NH

NO NO PB NH NH NH NH NN NN FF HF KF HF KF HY PF EF PS le
CoN AO WA BP WY NY KH CO OD AN DAH fF WwW NY | O&O

Mr. Maxson testified that D&T had no role in establishing
the amount agreed to be paid by nVidia - D&T’s only role was
to assist in the accounting exercise that ended with the $90
million residual amount the D&T Report described as goodwill.
Mr. Maxson stated:

[T]he accounting concept [of] goodwill is usually an

overpayment or synergies that are unique to the buyer,

which is what causes [it] - excess purchase price is
another term that’s used sometimes . .. and that means
consideration or deal value above and beyond the items
that were actually received.
RT 1371. Mr. Maxson also testified that the $90 million in
the goodwill category was a “residual number” and was not an
opinion of the value of goodwill. RT 1371; Ex. CD, 16.

At some point in the due diligence process, nVidia
retained the accounting firm KPMG LLP (“KPMG”) to assist it in
performing due diligence in connection with the Transaction.
KPMG advised nVidia that applicable GAAP and SEC Rules”
required nVidia to account for the Transaction as the
acquisition of a business. This meant that nVidia had to
include pro forma financial statements in the Form S-4
Registration Statement which was to be filed in January 2001.

Exs. 5057, 5060.

Michael Dance, the KPMG audit partner, testified that if

3 See Determining Whether a Nonmonetary Transaction

Involves Receipt of Productive Assets or of a Business, Issue
No. 98-3 (2000) (Emerging Issues Task Force) (‘“EITF No. 98-3")
and Pro Forma Financial Statement Preparation Requirements,
SEC Reg. S-X, Rule 11-01, 17 C.F.R. § 210.11-02(a) (2008).
The FITF was formed by the SEC and the FASB in order to
consider and respond to new issues in accounting practice. An
EITF consensus is made part of GAAP until a later FASB
pronouncement supersedes it. Ex. BX, 4914, 16-17; Ex. P.

(3dfx.nvidia.decis.4.08.] -28-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 28 of

41

oO CO SD DBD mn FP WD NH

Ny NO NY NH NY NY NY N YN FF FF FH FP KF FF KF KF hl
oOo KN DO A BR WO NY S-& OD OD A NH DH An Ff WY NY KF OS

acquired assets had the ability to generate revenues, the pro
forma information illuminated a transaction’s continuing
impact on the buyer’s financial statements. In his view,
D&T’S allocation of purchase price to goodwill and Trademarks
implied an ability to generate revenues and the allocation of
purchase price to a workforce implied an ability to conduct
business activities. Ex. 274(d), pp. 35:9-15; 42:21-25; 43:1-
6; 54:1-10; 57:16-24; 58:1-11; 68:15-17; 71:23-72:1-12; Ex. T.

4. The Closing

On March 27, 2001, 3dfx held its annual shareholders’
meeting at which 3dfx obtained shareholder approval of the APA
and the Plan of Dissolution. Ex. 5060; Ex. BV, @{40-42.

nVidia believed it had no obligation to close the
Transaction because certain of the 3dfx representations and
warranties in the APA were inaccurate. Ex. BT, 9935-37.
Nonetheless, the parties entered into a Closing Agreement
pursuant to which nVidia paid the remaining $55 million in
Cash Consideration and the Transaction closed on April 19,
2001. Ex. 5049, p. nv45010-45019; Ex. CE, (943-45. The
parties also dismissed the Patent Litigation as the APA
contemplated. Ex. 5049, p. nv45082-45087. The Stock
Consideration was not provided to 3dfx due to the fact that it
did not satisfy the conditions stated in § 1.3 of the APA.
Ex. 5047, pp. 3-4.

Mr. Huang testified that by April of 2001, nVidia had
substantially realized the benefits it had hoped to achieve
from the Transaction. nVidia had succeeded in hiring about
100 engineers, and in exchange for funding the $15 million

[3dfx.nvidia.decis.4.08.] -29-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 29 of

41

Oo CO YD HDB Wn BP WD NH

NO NO NH NH HN NH ND NHN NO HR §— KF FP KF YF FF FF Pe
Oo NY DO OW BRB BO NY SF OO OH ND DO HD BP WY NY | &

bridge loan, had received an assignment of 3dfx’s Trademarks
and Tradenames, and an irrevocable license to all of 3dfx's
Patents (other than those at issue in the Patent Litigation).
Ex. BT, 4935-37.

Mr. Huang stated that nVidia paid the balance of the Cash
Consideration because it was important that nVidia be viewed
in the marketplace as a fair company and nVidia wanted to do
what it could to assure that 3dfx paid its creditors, several
of whom were nVidia’s key suppliers. Ex. BT, 4935-37.

II. JURISDICTION

The Court has jurisdiction over this adversary proceeding
pursuant to 28 U.S.C. §§ 1334(b) and 157(b) (2) (A), (E), (H)
and (0).

III. DISCUSSION
A. Introduction

The Trustee contends that the APA transferred to nVidia
3dfx's graphics business or business unit, its organized
workforce, and the economic goodwill embedded in, attached to
or associated with that workforce. The Trustee’s valuation
expert contends these assets had a fair market value of at
least $140 million. Accordingly, the Trustee claims the $70
million nVidia paid was not reasonably equivalent value for
what it acquired.

nVidia argues that nVidia purchased only certain tangible
and intangible assets and settled the Patent Litigation.
According to nVidia’s experts, these tangible and intangible
assets and the settlement of the Patent Litigation had a fair

market value of $13.4 million. nVidia paid $70 million for

[3dfx.nvidia.decis.4.08.] -30-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 30 of

41

oO fF ANY DBO A Ff W NY

NY wpo bh Nb ND KY WN NY NH KK FP Ff SF KF Fr PF RFS eS
oOo YO mH BP Ww NY KH ODO CO A AHN DAH FF WY NY | OC

its own strategic reasons and because nVidia believed it was
in a competitive bidding situation and needed to pay this
amount to achieve its goals. nVidia asserts that it did not
purchase a graphics business because, among other reasons,
3dfx did not have one at the time of the Transaction. nVidia
also contends that it did not acquire an organized workforce
through the Transaction because outside the APA, nVidia
individually recruited only certain of 3dfx’s former engineers
whose employment was terminated by 3dfx. nVidia also argues
that engineers are not assets under fraudulent conveyance
analysis.

The Trustee’s theory of this case appears to be premised
in part on a belief that the basic deal structure agreed to by
the principals of 3dfx and nVidia was fundamentally unfair.
This belief turns on the fact that the Stock Consideration was
only deliverable when 3dfx certified that its creditors had
been paid and the fact that only $25 million of the Stock
Consideration could be monetized to pay creditors. The
Trustee argues that this structure favored shareholders at the
expense of creditors and that nVidia knew the $70 million in
Cash Consideration and the additional $25 million available
from the Stock Consideration was insufficient for 3dfx to
satisfy its Liabilities.™

The Court notes that the Trustee sued certain former

4wr. Huang testified that it was 3dfx management that
wanted the Stock Consideration. RT 510-513, 515-522. It is
not clear from the record how or when the parties came to
agree on the provision for monetizing part of the Stock
Consideration.

[3dfx.nvidia.decis.4.08.] -31-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 31 of

41

—_

o> OC oS oS

NM NO HN bw KH NO KN DR Rm ee i se ee
Oo NT DO nA FP WD NY K|&— CO OO DB ND WB OH BP W NY

officers and directors of 3dfx for breach of fiduciary duty.
The Court approved the Trustee’s compromise of those claims
pursuant to which the Trustee received $5.5 million in
exchange for complete releases. (See Ch. 11 case no. 02-
55795-RLE, Docket nos. 480, 496.) The Court also notes that
the Trustee did not establish that nVidia knew the available
cash would be insufficient for its stated purpose at any
relevant point in time.
B. Applicable Law

1. Civil Code § 3439, et seq.

The Trustee’s Complaint is based on California Civil Code
§ 3439, et seq. applicable herein through Bankruptcy Code
§ 544 (b) (1).

Civil Code § 3439.05 provides in pertinent part that:

[A] transfer made by a debtor is fraudulent as to a
creditor whose claim arose before the transfer was made

if the debtor made the transfer . . . without
receiving a reasonably equivalent value in exchange for
the transfer . . . and the debtor was insolvent at that

time or the debtor became insolvent as a result of the
transfer[.]

Cal. Civ. Code § 3439.05 (West 2008)?.
The UFTA contains a number of definitions relevant to the
Court’s decision. Civil Code § 3439.01({i) provides that only

transfers of “assets” are subject to avoidance. Section

S California fraudulent conveyance law and Bankruptcy
Code § 548 are similar in form and substance and both may be
analyzed contemporaneousiy. Accordingly, the Court has relied
on cases decided under the UFTA, its predecessor, the Uniform
Fraudulent Conveyance Act, and § 548 of the Bankruptcy Code.
See Wyle v. C.H. Rider & Family (In re United Energy Corp.),
944 F. 20d 589, 594 (9th Cir. 1991).

[3dfx nvidia.decis.4.08.] -32-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 32 of

41

co oD wT ODN OH FR OW NYS

NON NO WN Hb KH HN KH KN NY HF KF FF FR FO ES lS

3439.01(a) defines “asset” as “property of the debtor” and
“property” is defined in § 3439.01(h) as anything that may be
“subject of ownership.” Id. Also, the property must be
subject to enforcement of a money judgment. See Cal. Civ.
Code § 3439.01, (Legis. Committee Comment, Assembly 1986).

2. Reasonably Equivalent Value

In determining whether a transfer has been for an
exchange of reasonably equivalent value, the court analyzes
all the circumstances surrounding the transfer. 5 Collier on

Bankruptcy 9548.05[1][b] at 548-35 (Alan N. Resnick & Henry J.

Sommer eds., 15th ed. rev. 2002); see also Barber v. Golden

Seed Co., Inc., 129 F. 3d 382, 387 (7th Cir. 1997) (applying

Bankruptcy Code § 548 - reasonable equivalence should depend

on all the facts of each case). In Sharp v. Chase Manhattan

Bank USA, N.A. (In re Commerical Financial Services, Inc.),

350 B.R. 559 (Bankr. N.D. Okla. 2005), the court explained:

Generally, the ‘totality of the circumstances’ test is
fact-intensive and may include consideration of fair
market value (which may be established by comparable
sales, income production capacity or some other valid
measure of value), the arms-length nature of the
transaction, the economic circumstances and relationship
of the parties, the maturity, competitiveness and
efficiency of the market, industry standards, and other
factors.

Id. at 577.
The phrase “reasonably equivalent value” is not defined
in the UFTA or the Bankruptcy Code. As the court explained in

In re Kemmer, 265 B.R. 224 (Bankr. E.D. Cal. 2001), defining

reasonably equivalent value has been left to the courts:
[t]here is no hard and fast rule in the Ninth Circuit as

to what constitutes ‘reasonably equivalent value.’ The
concept of ‘reasonable equivalence’ is not wholly

[3dfx.nvidia.decis.4.08.] -33-

®.

se: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 33 of
41

Co Oo SN Do mW BP WD YN

NON NO bw WH KH KN NY HN YN KK KF HF HF KF BF OS S| EF
Oo J DA WA BP WO NY FY CO ODO ODO NDT DB WO BP Ww NH KF OS

synonymous with ‘market value’ even though market value
is an extremely important factor to be used in the
court’s analysis.
Id. at 232 (citation omitted).
Because the policy behind fraudulent conveyance law is to
preserve assets of the estate, reasonably equivalent value is
determined from the standpoint of the estate’s creditors, it

is not determined from the defendant's perspective. See

Frontier Bank v. Brown (In re Northern Merchandise, Inc.), 371

F. 3d 1056, 1059 (9th Cir. 2004) (citing Harman v. First Am.

Bank (In re Jeffrey Bigelow Design Grou Inc.), 956 F. 2d
479, 484 (4th Cir. 1992)) (primary focus is on the net effect
of the transaction on the debtor’s estate and the funds

available to pay the unsecured creditors); Gill v. Maddalena

(In re Maddalena), 176 B.R. 551, 555 (Bankr. C.D. Cal. 1995)

(debtor’s creditors suffered a significant net loss in
comparing the value of what was transferred by debtor to the

value of what he received in exchange); Pajaro Dunes Rental

Agency, Inc. v. Spitters (In re Pajaro Dunes Rental Agency,

Inc.), 174 B.R. 557, 578 (Bankr. N.D. Cal. 1994) (reasonable

equivalence analysis is from perspective of creditors of the

estate); In re Consol. Capital Equities Corp., 143 B.R. 80, 87

(Bankr. N.D. Tex. 1992) (citing Kirkland v. Risso, 98 Cal.

App. 3d 971 (Ct. App. 1 Dist. 2 Div. 1979)) (applying
California law, when analyzing the fairness of consideration
the court assumes a creditor’s perspective).

Finally, as the court noted in Pajaro Dunes, if it is

necessary for a just result, the court may construe a

segmented transaction as one transaction. In re Pajaro Dunes

[3dfx.nvidia.decis.4.08.] -34-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 34 of

41

oT OO 7H SN DBD A Be OW NY

NO NO NO NO HP KH HO HN NO KR HF HF HF SF RPO SEO eS Re
Oo NY DBD vn FP WD NH K|§— DD 0D A ANA Dn BP Ww NY

Rental Agency, Inc., 174 B.R. at 584. The court need not

allow the labels put on a transaction by the interested
parties to control the rights of third parties. Id. at 584-85

(citing Douglas G. Baird & Thomas H. Jackson, Fraudulent

Conveyance Law, 38 Vand. L. Rev. 829 (1985)).

3. Burden of Proof

Under both the UFTA and Bankruptcy Code § 548, the
Trustee has the burden of proving the elements of a fraudulent

transfer by a preponderance of the evidence. Whitehouse v.

Six Corp., 40 Cal. App. 4th at 534; 5 Collier on Bankruptcy

q@548.10 at 548-80.5.

While the burden of proof itself does not shift, during
the progress of the case, the burden of going forward with the
evidence to rebut a prima facie case may shift. See

Braunstein v. Walsh (In re Rowanoak Corp.), 344 F. 3d 126, 131

(lst Cir. 2003) (burden of proof does not shift but duty of
going forward may shift if trustee establishes prima facie
case); Whitehouse v. Six Corp., 40 Cal. App. 4th at 534
(applying UFTA, plaintiff has burden of proof but burden
shifts to defendant upon threshold showing of less than

reasonably equivalent value); 5 Collier on Bankruptcy 7548.10

at 548-80.5-81.

To establish his prima facie case, the Trustee must prove
what was transferred, that what was transferred is subject to
avoidance under applicable law, and the fair market value of
what was transferred or surrendered. By comparing the fair
market value of the property transferred to what was received,

the Trustee may establish that 3dfx did not receive a

[3dfx.nvidia.decis.4.08.] -35-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 35 of

41

Oo Oo NY DB Wn F&F WD YP

Oo wo HN NH HN Hb NY HN NY KF Ke FF Se Re RO Re Re
Co YH nA BP W NYO K&— CD ODO FF AH Dn FP WO NY KF O&O

reasonably equivalent value in exchange. See In re Maddalena,

176 B.R. at 553-54.

The Trustee contends that the Summary Judgment Order
establishes his prima facie case that the assets transferred
to nVidia had a fair market value of at least $108 million.’®
The Trustee also contends that he proved at trial that the
assets actually transferred to nVidia included a workforce,
intellectual property and goodwill with a fair market value of
$140 million. From this contention, the Trustee argues in his
Post-Trial Brief that the burden shifted to nVidia to show
“that assets not subject to the fraudulent conveyance law were
included in the assets acquired and the value of those
assets.” Docket no. 452, Trustee’s Post-Trial Brief, p. 8.

The Summary Judgment Order does not establish the
Trustee’s prima facie case, nor does it shift the burden of
production or burden of proof to nVidia. The Summary Judgment
Order simply says that nVidia may not claim that the
transaction value is something other than $108 million. To
the extent this may be unclear, the Court may use its inherent

authority to interpret its orders. See In re Menk, 241 B.R.

896, 906 (9th Cir. BAP 1999) (citing Beneficial Trust Deeds v.

Franklin (In re Franklin), 802 F.2d 324, 326-27 (9th Cir.

1986)); Koehler v. Grant, 213 B.R. 567, 569 (8th Cir. BAP

1997) (bankruptcy court retains subject matter jurisdiction to

interpret orders entered prior to dismissal); see also In re

This argument is based on the fact that nVidia stated
$108 million in the HSR Notification.

[3dfx.nvidia.decis.4.08.] -36-

Case: 03-05079 Doc# 499 _ Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 36 of

41

—_—

DoT 0 HN Dn F WD NY

NO NO WHO NY NY YN NY NO KN Se HF FH | Fe Fe KF RF S|
Oo SN DH A BP W NH KK CD O0O BA AN DWH FP WO NY

United States Brass Corp., 255 B.R. 189, 192 (Bankr. E.D. Tex.

2000), aff’d 301 F. 3d 296 (5th Cir. 2002) (bankruptcy court
has jurisdiction to clarify and enforce its own orders). The
Court’s Summary Judgment Order does not set a floor of $108
million for valuation purposes and does not shift the burden
of production or proof to nVidia.*’ It simply provides that
nVidia may not claim that the transaction value is something
other than $108 million and nVidia does not make such a claim.

4. Valuation Principles

In dealing with the conflicting views of the valuation
experts, this Court finds the analysis of the court in Peltz
v. Hatten, 279 B.R. 710, 737-738 (D. Del. 2002), aff'd sub

nom., In re USN Comm., Inc., 60 Fed. Appx. 401 (3rd Cir. 2003)

both wise and instructive:

First, it is clear that experts and industry analysts
often disagree on the appropriate valuation of corporate
properties, even when employing the same analytical tools
such as a [discounted cash flow] analysis or a comparable
sales method. Simply put, when it comes to valuation
issues, reasonable minds can and often do disagree. This
is because the output of financial valuation models are
driven by their inputs, many of which are subjective in
nature. . . . Second, in determining whether a value is
objectively “reasonable” the court gives significant
deference to marketplace values. When sophisticated
parties make reasoned judgments about the value of assets
that are supported by then prevailing marketplace values
and by the reasonable perceptions about growth, risks,
and the market at the time, it is not the place of
fraudulent transfer law to reevaluate or question those
transactions with the benefit of hindsight.

Id. at 737 (citations omitted). This Court will view the

See Declaration of John Sipple filed in support of
nVidia’s Opposition to Trustee’s Motion for Summary Judgment
explaining context for the HSR Notification and how it is used
to assess potential impact on competition. Docket no. 139.

[3dfx.nvidia.decis.4.08.] -37-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 37 of

41

oO Oo SYD DD A FPF WD NH

wo wp HN NY NY NY NHN NY NN RH KH FP FF KF FF FF Ee
oD DN WN FB BO NY KF CO OU OND DH FF WY Y YF CC

evidence on fair market value and reasonably equivalent value
through this philosophical lens.

The valuation experts, Roger Grabowski’® for nVidia, and
Michael Wagner’? for the Trustee, had appropriate credentials
for the task and agreed on many fundamental valuation
principles. Mr. Wagner and Mr. Grabowski agreed that the
overarching objective of the valuation exercise was to predict
the most probable price at which the assets would have been
sold in the applicable competitive open market on the
valuation date under conditions requisite to a fair sale.

They both defined fair market value as the price expressed in
terms of cash equivalents at which property would change hands
between a hypothetical willing and able buyer anda
hypothetical willing and able seller, acting at arms length in
an open and unrestricted market, when neither is under
compulsion to buy or sell and both have reasonable knowledge
of relevant facts. Ex. 43, 96; Ex. BW, 911; RT 918-924.

Mr. Grabowski and Mr. Wagner also agreed that Robertson
Stephens had done a competent and thorough job of seeking out
any and all investors or purchasers for 3dfx, in whole or in
part, and would have been able to solicit the most likely

prospective buyers or investors in the market as it existed at

'8 See Appendix C to Ex. BW for complete details regarding
his credentials. In brief, Mr. Grabowski is Managing
Director, Standard and Poor’s Corporate Value Consulting,
Chicago.

see Ex. 2 to Ex. 43 for complete details regarding his
credentials. In brief, Mr. Wagner is Senior Advisor at
Charles River Associates, Inc.

[3dfx.nvidia.decis.4.08.] -38-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 38 of

41

coco Oo wm YN DOWN PR WD Ye

No wo bh bh NH NHN NHN NN NO FH HH KF FF KF SKY Rr RP lS
Oo TD DA rn FP WO NY KY DTD ODO FH AN Dn FP WD NY

that time. In other words, they agreed that an appropriate
market exposure had taken place. Ex. Q, pp. 4, 14-15; RT 925-

929. See also Ex. AC, pp. 9-14.

5. The Use of Generally Accepted Accounting Principles

One of the cornerstones of the Trustee’s theory of this
case is that nVidia accounted for the Transaction as the
purchase of a business under generally accepted accounting
principles (“GAAP”) so the Court must find that the
Transaction was the purchase of a business for fraudulent
conveyance purposes.’°

Parties to avoidance actions who have taken the Trustee’s
approach that GAAP dictate a bankruptcy court’s determination
of solvency, have generally been unsuccessful. See Arrow
Electronics, Inc. v. Justus (In re Kaypro), 230 B.R. 400, 413
(9th Cir. BAP 1999) aff'd in part rev’d in part, 218 F. 3d
1070 (9th Cir. 2000) (GAAP relevant but not controlling in
insolvency determinations); Sierra Steel, Inc. v. Totten
Tubes, Inc. (In re Sierra Steel, Inc.), 96 B.R. 275, 278 (9th
Cir. BAP 1989) (court is to make determination of solvency,
not accountants and board which promulgates GAAP); Kendall v.

Sorani (In re Richmond Produce Co., Inc.), 151 B.R. 1012, 1019

(Bankr. N.D. Cal. 1993), aff'd, 195 B.R. 455 (N.D. Cal. 1996)

°Tn 2002 nVidia told the SEC: “The purchase of certain
assets of 3dfx constituted the purchase of a ‘business’ as

defined by EITF 98-3 . . .[the engineers] had the ability to
continue business activities they conducted before the
acquisition. . . nVidia obtained the critical elements of a
business (i.e., long lived assets, intellectual property,
trademarks and an organized skilled workforce ...” Ex.
5086.

[3dfx.nvidia.decis.4.08.] -39-

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 39 of

41

—

> OD Oo SN Dn nm BP WD ND

NO No NbN NY ND NY NY YN NO ee FF FE FF RRO ee
ao NT DH nO FF WD NY K& DBD 0 HOH NIN DBO FP W NY

Case: 03-05079 Doc# 499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 40 of

(GAAP do not control solvency determination, solvency inquiry
must be to what extent an asset would have value for a
creditor attempting to satisfy its claim, goodwill can not be
sold to satisfy creditor’s claim).

In EBC I, Inc. v. America Online, Inc. (In re EBC I,
Inc.), 380 B.R. 348 (Bankr. D. Del. 2008) both parties ina
fraudulent conveyance action cited to IRS Revenue Procedure
77-12 to support their arguments about valuing the inventory
of a retail business for solvency purposes (i.e., was it
appropriate to use book value or to make an upward adjustment
because the inventory was to be sold at retail?). In
dismissing the arguments that the Revenue Procedure provided
an answer, the court found the “Revenue Procedure, like
[GAAP,] to be unhelpful because the tax and accounting
implications of how assets are listed on a company’s balance
sheet often have little to do with what a willing buyer and
willing seller would agree is the fair market value of those
assets.” Id. at 357, n.3.

The parties in EBC I also disagreed regarding the
relevance of GAAP treatment of preferred stock. The court
found that GAAP was irrelevant to the question before it.

GAAP does not deal with the true market value of assets

or the determination of what are legal liabilities of a

company. . . Just as GAAP rules regarding the book value

of assets does (sic) not determine their fair market
value, Similarly GAAP rules for treating debt as equity
and vice versa are not relevant in determining whether

they are truly debt or equity.

Id. at 358 (internal citations omitted).

[3dfx.nvidia.decis.4.08.] -40-

41

Co OO IN DN ON ek WD NY

NO NO DN DN BD DD RQ ND RO me eee eae
oO SN DBD OA FP Ye NO SF Do OBO OOOH OONLUROUOULULUNULUmLrELlLUCO

The opinion of Roman Weil,*! nVidia’s accounting expert,
is consistent with this position. In explaining why nVidia
used purchase accounting for the Transaction, he stated:

GAAP provide that if the acquirer purchases enough assets
so that it could readily, that is with minor effort and
cost, purchase additional assets to have a stand-alone
business, even if it has not, then the acquirer should
use purchase accounting for the assets it did purchase.
GAAP do not mean, by applying the purchase accounting
rule, that the asset purchase must have resulted in the
purchase of a business as that term is used in non-
technical language or that the transaction was an
acquisition of all the assets and liabilities of the
company. nVidia’s accountants invoked purchase accounting
in order to explain why it used fair values, instead of
book values, and why it recorded goodwill for the
transaction.

Ex. N, p. 9.
For purposes of the issues to be decided here, this Court

believes that the positions taken in Kaypro, Sierra Steel,

Richmond Produce and EBC I in the context of solvency

determinations are applicable. GAAP or SEC rules will not be
used to exclude facts or the required analysis of those facts,
or to supplant the Court’s fact finding role in this context.
GAAP will not determine what constitutes an asset or the fair
market value of an asset. The Court’s determination of what
constitutes an asset will be guided by the applicable UFTA

definition, not the accounting definition.?? The evidence

*' See Exhibit 1 to Ex. N for complete details regarding
Mr. Weil’s qualifications as an expert on accounting issues.
In brief, he is a professor of accounting at the Graduate
School of Business of the University of Chicago.

~ Statement of Financial Accounting Concepts No. 6
defines assets as probable future economic benefits obtained
or controlled by a particular entity as a result of past
transactions or events. Elements of Financial Statements,

[3dfx.nvidia.decis.4.08.] -41-

Case: 03-05079 Doc#499 Filed: 04/30/08 Entered: 05/01/08 10:05:14 Page 41 of

41