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3dfx to dissolve, sell assets to Nvidia

3dfx (Nasdaq: TDFX) sees the end.

The vendor of 3D graphics accelerators on Friday said its board has voted to dissolve the company following the sale of most of the company's assets to competitor Nvidia (Nasdaq: NVDA) for cash and stock.

Shares of 3dfx fell to 1 in afterhours activity on the Island electronic communications network, following the announcement. 3dfx stock slid 0.16 to 1.78 in Friday's regular trading ahead of the news.

Under the deal, Nvidia would pay $70 million cash and 1 million shares. At Friday's closing price of 37.4375 for Nvidia, the is worth $107.4 million. The agreement requires approval from 3dfx shareholders.

Nvidia agreed to loan 3dfx $15 million in working capital, which would be credited against the purchase price. The companies also agreed to give up their patent lawsuits against each other.

Should shareholders approve the sale, it would mark the demise of a 3D graphics revolutionary. 3dfx's Voodoo graphics chips introduced previously unseen levels of 3D performance and started the industry on its current cycle of rapid technology rollouts.

But 3dfx -- which originally made chipsets for third party manufacturers of graphics cards -- never recovered from its plunge into the card industry with the purchase of STB Systems. As 3dfx struggled to integrate the STB business, Nvidia and ATI Technologies (Nasdaq: ATYT) introduced chipsets that matched and then surpassed 3dfx's products, and resulted in 3dfx's rivals capturing design wins with most of the major PC manufacturers.

Although 3dfx remained the top retail seller, that channel represents only 10 percent of the overall 3D graphics market. And 3dfx suffered from the same retail slowdown recently seen by PC makers, especially in Europe, said Alex Leupp, president and CEO.

The company was also hurt by price wars in the market for 3D graphics cards.

"High inventory expenses, decreasing margins, and slowing demand have done irreparable harm to 3dfx," the company said in a statement. "While the company had recently announced plans to expand ... it has been unable to invest in its expansion under current business and financial market conditions."

Not only has demand slowed, but 3dfx could not borrow enough money to meet build inventory and meet current demand, the company said.

All of those problems were reflected in 3dfx's fiscal third quarter report, also released Friday, after market close. 3dfx lost $55.9 million, or $1.42 per share, excluding amortization and special charges. First Call had no consensus analyst estimate available for 3dfx's quarter ended Oct. 31.

However, the company in early October warned the third quarter would be far worse than originally expected. 3dfx has now reported disappointing results in six of the last seven quarters.

Third quarter revenue fell 63 percent year-over-year to $39.2 million.

Including amortization and all charges, 3dfx in the third quarter lost $178.6 million, or $4.53 per share.

The company said it will cut costs, including slashing most of its workforce by early next year. 3dfx plans to use the proceeds from its asset sale to pay debts first, then distribute the remainder to shareholders

3dfx had about $118.6 million in current liabilities at the end of the third quarter.

• 3dfx sees another quarterly letdown
• 3Dfx posts huge loss in second quarter
• 3dfx says component shortage will water down 2Q sales>