<PAGE>
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 Quarterly Period Ended June 30, 1999
[_] 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 0-21422
OPTi Inc.
(Exact name of registrant as specified in this charter)
CALIFORNIA 77-0220697
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
1440 McCarthy Blvd Milpitas, California 95035
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (408) 486-8000
Indicate by check mark whether the registrant (1) has filed all reports 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 period 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 [_]
The number of shares outstanding of the registrant's common stock as of June 30,
1999 was 10,937,349
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OPTi, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 1999
INDEX
Part I. Financial Information
Item 1. Financial Statements Page
----
a) Condensed Consolidated Statements of Operations 3
for the three months and six months ended June 30, 1999
and 1998
b) Condensed Consolidated Balance Sheets 4
as of June 30, 1999 and December 31, 1998
c) Condensed Consolidated Statements of Cash Flows 5
for the six months ended June 30, 1999 and 1998
d) Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial 10-16
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults on Senior Securities 18
Item 4. Submission of Matters to a Vote of Shareholders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
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OPTI INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net Sales $6,582 $8,632 $13,738 $18,477
Costs and expenses:
Cost of sales 4,334 6,201 8,899 13,582
Research and development 1,221 2,856 3,316 5,219
Selling, general, and
administrative 5,106 2,497 7,094 5,495
----------- ----------- ----------- ----------
Total costs and expenses 10,661 11,554 19,309 24,296
----------- ----------- ----------- ----------
Operating loss (4,079) (2,922) (5,571) (5,819)
Interest and other income, net 804 859 1,512 1,926
----------- ----------- ----------- ----------
Net loss ($3,275) ($2,063) ($4,059) ($3,893)
=========== =========== =========== ==========
Basic and diluted net loss per share ($0.30) ($0.15) ($0.37) ($0.29)
=========== =========== =========== ==========
Shares used in computing basic and
diluted per share amounts 10,875 13,390 10,844 13,291
=========== =========== =========== ==========
</TABLE>
See accompanying notes.
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OPTI INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------- -------------------
(Unaudited) (See Note 1)
Assets
(000's omitted)
<S> <C> <C>
Current assets
Cash and cash equivalents $67,258 $56,653
Short-term investments 4,250 4,250
Accounts receivable, net 1,657 3,232
Inventories 1,364 1,192
Other current assets 462 944
------------------- -------------------
Total current assets 74,991 66,271
Property and equipment, net 2,844 5,682
Other assets 1,115 9,622
------------------- -------------------
Total assets $78,950 $81,575
=================== ===================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $5,596 $5,991
Other current liabilities 6,217 4,489
-------------------- -------------------
Total current liabilities 11,813 10,480
Long term liabilities
Long-term obligations under capital lease 1,086 1,644
Other long-term liabilities 180 166
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized shares -- 5,000
No shares issued or outstanding --- ---
Common stock, no par value:
Authorized shares -- 50,000
Issued and outstanding shares -- 10,937 in 1999
10,811 in 1998 40,042 39,397
Retained earnings 25,829 29,888
-------------------- -------------------
Total shareholders' equity 65,871 69,285
-------------------- -------------------
Total liabilities and shareholders'
equity $78,950 $81,575
==================== ===================
</TABLE>
Note 1 - The consolidated balance sheet at December 31, 1998 has been derived
from the audited financial statements.
See accompanying notes.
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OPTI Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION> Six months Ended June 30,
1999 1998
-----------------------------------------------
(000's omitted)
<S> <C> <C>
Operating Activities:
Net loss ($4,059) ($3,893)
Adjustments:
Depreciation 2,493 3,586
Amortization --- 250
Changes in assets and liabilities:
Accounts receivable 1,575 6,901
Inventories (172) 3,616
Other assets 494 (441)
Accounts payable (395) (5,826)
Other current liabilities 1,728 193
--------------- -------------
Net cash provided by
operating activities 1,664 4,386
Investing Activites:
Purchase of property and equipment (132) (332)
Sale/Return of property and equipment 477 ---
Sale of Investment in UICC foundry 8,495 ---
Purchase of short-term investments (23,350) (40,748)
Sale of short-term investments 23,350 40,500
--------------- -------------
Net cash provided by/ (used in)
investing activities 8,840 (580)
--------------- -------------
Financing Activities:
Stock Repurchases --- (5,032)
Net proceeds from sale of common stock 645 3,366
Payment of long-term liabilities (544) (515)
--------------- -------------
Net cash provided by/ (used in)
financing activities 101 (2,181)
--------------- -------------
Net increase in cash and cash
equivalents 10,605 1,625
Cash and cash equivalents
beginning of period 56,653 63,832
--------------- -------------
Cash and cash equivalents
end of period $67,258 $65,457
--------------- -------------
</TABLE>
See accompanying notes.
5
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OPTi Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. Basis of presentation
---------------------
The information at June 30, 1999 and 1998 and for the periods then ended,
is unaudited, but includes all adjustments (consisting of normal recurring
accruals) which the Company's management believes to be necessary for the fair
presentation of the financial position, results of operations and cash flows for
the periods presented. Interim results are not necessarily indicative of results
for a full year. The accompanying financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1998
2. Net loss per share
------------------
The Company follows the provisions of Statement of Financial Accounting
Standards No.128, "Earnings per Share." Basic net earnings (loss) per share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted net income per share is calculated
using the weighted average number of outstanding shares of common stock plus
dilutive common stock equilavents.
The following table sets forth the computation of basic and diluted
net loss per share:
<TABLE>
<CAPTION>
(In thousands, except per share data) Quarter Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------------------------- ------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(3,275) $(2,063) $(4,059) $(3,893)
------- ------- ------- -------
Denominator for basic
loss per share
weighted average shares 10,875 13,390 10,844 13,291
------- ------- ------- -------
Effect of dilutive securities:
Employee stock options --- --- --- ---
Denominator for diluted
------- ------- ------- -------
loss per share 10,875 13,390 10,844 13,291
======= ======= ======= =======
Basic and diluted net loss
per share $ (0.30) $ (0.15) $ (0.37) $ (0.29)
======= ======= ======= =======
</TABLE>
3. Investment in debt and equity securities
----------------------------------------
The Company considers highly liquid investments with maturities of three
months or less from the acquisition date of the instrument to be cash
equivalents. At June 30, 1999, the Company had approximately $4.3 million in
high quality, auction rate preferred securities with reset dates every
thirty-five days. At June 30, 1999, all short-term investments are designated as
available for sale. Interest and dividends on the investments are included in
interest income. There were no realized gains or losses on the Company's
investments during the second quarter of 1999 as all investments were held to
maturity during the period. At June 30, 1999, the fair value of short-term
investments, approximates cost.
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4. Inventories
-----------
Inventories consist of finished goods and work in process (in
thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Finished Goods $ 912 $ 688
Work in process 452 504
------- -------
$ 1,364 $ 1,192
------- -------
</TABLE>
5. Other Assets
------------
A summary of other assets (in thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Investment in Tripath $ 725 $ 725
Deposits 240 308
Investment in UICC --- 8,521
Other Miscellaneous 150 68
------- -------
Total Other Assets $ 1,115 $ 9,622
======= =======
</TABLE>
6. Segment Information
-------------------
Sales of the Company's product based on customer location were as
follows (in thousands):
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
---- ----
<S> <C> <C>
Taiwan $ 4,539 $ 11,843
Singapore 4,940 604
Japan 1,662 2,946
Other Far East 353 44
United States 2,140 2,968
Europe Other 104 72
--------- ---------
Total Net Sales $ 13,738 $ 18,477
========= =========
</TABLE>
7. Litigation
----------
In January 1997, a patent infringement claim was brought against the Company by
Crystal Semiconductor, Inc. ("Crystal'), a susidiary of Cirrus Logic, in the
United States District Court for the Western District of Texas. The claim
alleges that the Company and Tritech Microelectronics International, Inc. and
its Singapore parent company, Tritech Microelectronics Pte, Ltd. (collectively
"Tritech") infringe three patents owned by Crystal. These patents relate to the
analog-to-digital coder-decoder ("codec") module that was designed by Tritech
and incorporated into integrated PC audio chips formerly sold by the Company.
The suit seeks injunctive relief and damages.
A jury trial was held in this action from May 3-13, 1999. On May 17, 1999, the
jury returned a verdict that all of the asserted claims of the patents in suit
are valid and were infringed by the accused OPTi and TriTech products. The jury
further found that Tritech's infringement, but not OPTi's, was willful and
deliberate. The jury was asked to consider separately three different damages
allegations. The first was that Crystal lost profits because sales that it would
otherwise have made were in fact made by the
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defendants ("lost profits"). The second was that the defendants' conduct had
caused Crystal to reduce its selling prices from what they otherwise would have
been during the period of infringement ("price erosion"). The third allegation
was for the statutory alternative to lost profits, a "reasonable royalty". The
jury was asked to consider these questions with respect to the defendants as a
group and, of that amount, to assign a specific portion to OPTi. The jury's
verdict was as follows; all defendants $48.5 million, OPTi's portion of that
total $19.4 million.
Following the jury's verdict, the parties have made various motions for
judgment. OPTi has moved for the entry of judgment, as a matter of law, that
Crystal did not prove its entitlement to price erosion damages, that the amount
of lost profits damages should be reduced, and that Crystal cannot recover both
lost profits and a reasonable royalty together. Crystal has moved for entry of
judgment in the amount found by the jury, plus prejudgment interest, compounded
quarterly (approximately $3.2 million is the OPTi portion). The motions have
been fully briefed since early June. There is no way to know when the Court will
rule on these motions.
The Court's judgement, when entered, will include a permanent injunction against
future infringement of the Crystal patents in the suit by OPTi. This injunction
will not affect OPTi's current business, because OPTi is not currently making or
selling any of the audio products found to be infringing the patents, nor any
integrated audio products that include a codec module.
Following the entry of judgment, it is likely that one or more party will appeal
the judgment to the United States Court of Appeals for the Federal Circuit. OPTi
will consider the Court's judgment and will decide whether to appeal and, if so,
on what issues. OPTi will likely oppose an appeal by Crystal on issues decided
in OPTi's favor.
A March 1994 Development Agreement between the Company and TriTech
Microelectronics International PTE LTD states that Tritech shall "fully and
effectively indemnify, defend and save harmless" the Company against any claim
that the products at issue in this action infringe the intellectual property
rights of others.
In May 1999, TriTech Microelectronics, Pte, Ltd. filed a "Petition For Judicial
Management Order" in the High Court of the Republic of Singapore, on the grounds
that TriTech is "unable to pay its debts" including its obligations to indemnify
OPTi from Crystal's claim for damages. The Order for a Judicial Manager to be
appointed for TriTech was granted on July 2, 1999. OPTi is in the process of
filing a claim with the Judicial Managers in regards to the imdemnification
agreement. If Tritech is unable to reimburse the Company due to its filing for
Judicial Management this would have a material adverse effect on Opti's
financial position, results of operations, and cash flow.
In September 1998, Crystal Semiconductor filed a second suit against the Company
and Does 1 through 1050 in the Superior court of the State of California. This
suit is a complaint to set aside fraudulent transfers, the sale of its audio
business and the stock repurchase program that the Company started and completed
in the summer of 1998, and for preliminary and permanent injunction, against the
Company divesting itself of its assets. On May 21, 1999, the Court signed a
Stipulation and Order entered into by OPTi and Crystal vacating the Preliminary
Injunction Hearing set for June 3, 1999. This Stipulation and Order obligates
OPTi to maintain and preserve liquid assets available, in an amount not less
then the verdict against OPTi, plus costs and interest, in the underlying patent
litigation between Crystal and OPTi. The Stipulation and Order further
provides that should the Texas Court enter a judgment against OPTi which
increases or reduces the amount of the jury verdict, then the amount of liquid
assets which OPTi shall maintain and preserve shall be adjusted in accordance
with such increase or reduction.
On February 26, 1999, the Lemelson Foundation filed a complaint in the United
States District Court for the district of Arizona against the Company and 87
other defendant companies claiming patent infringement. No complaint has
actually been served against the Company. The Company believes that the ultimate
resolution of this matter will not have a material adverse effect on its
financial position, results of operations, or cash flow.
8
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8. Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results, such as the amount that it will ultimately incur as a result of
the Crystal litigation and related recoveries from Tritech, could differ from
those estimates.
9. Taxes
-----
The Company recorded no tax provisions in the second quarter and the six month
periods of 1999 and 1998. The 1999 and 1998 benefit rate is less than the the
federal statutory rate due primarily to the limitations controlling the
recognition of deferred tax assets established by the Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
10. Comprehensive Income (Loss)
---------------------------
In January 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes standards
for reporting and displaying comprehensive income (loss) and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. Comprehensive loss for each of the three month and six month
periods ended June 30, 1999 and 1998 was equal to net loss.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Information set forth in this report constitutes and includes forward looking
information made within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve risks and uncertainties. The Company's actual results may
differ significantly from the results discussed in the forward looking
statements as a result of a number of factors, including product mix, the
settlement of litigation, the Company's ability to obtain or maintain design
wins, market conditions generally and in the personal computer and semiconductor
industries, product development schedules, competition and other matters.
Readers are encouraged to refer to "Factors Affecting Earnings and Stock Price"
found below in this Item 2.
OPTi was founded in 1989 and is an independent volume supplier of semiconductor
products to the personal computer market. During 1998, the Company shipped more
than four million core logic, peripheral products (such as USB controllers and
docking stations), and audio chipsets to over 100 PC and motherboard
manufacturers located primarily in Asia and the U.S.
The past year was one of continued transition for the Company as it continued to
experience a significant reduction in revenue and continued its initiative to
develop technologies for future product applications to substitute for declining
revenues in the core logic market. If the Company is unable to make this
transition successfully it would have a material adverse impact on operating
results.
For the quarter ended June 30, 1999, the Company reported net sales of
$6,582,000, as compared to net sales of $8,632,000 for the quarter ended June
30, 1998. For the six month periods ended June 30, 1999 and 1998, the Company
reported net sales of $13,738,000 and $18,477,000, respectively. This decrease
in net sales for the three month and six month periods ending June 30, 1999, as
compared to the three month and six month periods ending June 30, 1998, is due
primarily to reductions in sales for the Company's core logic chipsets used in
various mobile product designs. The decrease in both the three and six month
period of 1999 as compared to 1998 was partially offset by an increase in the
sale of the Company's USB controller device, the 82c861.
Cost of sales for the quarter ended June 30, 1999 decreased to $4,334,000
resulting in a gross margin of approximately 34.2%, as compared to $6,201,000,
and a gross margin of approximately 28.2% for the quarter ended June 30, 1998.
Cost of sales for the first six months of 1999 was $8,899,000, which resulted in
a gross margin of approximately 35.2%, as compared with $13,582,000, and a gross
margin of 26.5%. This increase in gross margin as a percentage of sales for the
three month and six month periods ended June 30, 1999 as compared to the similar
periods ended June 30, 1998 is primarily due to reduced wafer and assembly costs
and benefits from product mix changes as the Company began volume shipments of
its 82c861 USB controller chip, which carries margins above the historical
levels.
Research and development costs decreased to $1,221,000 for the quarter ended
June 30, 1999, as compared with $2,856,000 for the quarter ended June 30, 1998.
For the first six months of 1999 research and development expenses decreased to
$3,316,000, as compared to $5,219,000, for the comparable period of 1998. This
decrease for both the three month and six month periods ending June 30, 1999 as
compared to the similar periods of 1998 is primarily attributable to reduced
headcount related expenses due to the Company discontinuing development in the
core logic area as of February 1999. During the quarter ended March 31, 1999,
the Company incurred approximately $600,000 in expenses due to impaired assets
and severance costs relating to the discontinuation of the core logic
development programs.
Selling, general, and administrative costs were $5,106,000 in the quarter ended
June 30, 1999 as compared with $2,497,000 in the comparable period of 1998, and
were $7,094,000 for the first six
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months of 1999 as compared to $5,495,000, for the first six months of 1998. The
increase in selling, general, and administrative costs for the three month and
six month periods ended June 30, 1999 as compared to the three month and six
month periods ending June 30, 1998 is primarily attributable to higher legal
expenses in regards to the Crystal litigation and the Judicial Management filing
of Tritech Microelectronics. Legal expenses for the quarter ended June 30, 1999
were approximately $3.2 million higher than in the corresponding period of 1998.
Interest and other income, net was $804,000 and $859,000 for the quarters ended
June 30, 1999 and 1998, respectively. For the first six months of 1999, interest
and other income, net was $1,512,000, as compared to $1,926,000, for the
comparable period of 1998. This decrease in the three month period of 1999 as
compared to 1998 is primarily due to lower interest rates during the
corresponding periods. The decrease in interest and other income, net for the
six months periods ending June 30, 1999 and 1998 is attributable to lower
interest rates and a one time benefit during the quarter ended March 1998 of
approximately $200,000 for the settlement of a dispute with a customer, and a
lower average cash balance during the first quarter of 1999 as compared with the
first quarter of 1998 as a result of the Company's stock repurchase program,
which was initiated on June 2, 1998 and ended in the third quarter of 1998.
The Company recorded no tax provisions in the second quarter and the six month
periods of 1999 and 1998. The 1999 and 1998 benefit rate is less than the the
federal statutory rate due primarily to the limitations controlling the
recognition of deferred tax assets established by the Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
In February 1999 the Company made the decision to discontinue its development
efforts in the core logic area. Core logic products have historically been the
vast majority of the Company's revenues. Revenues from core logic products
during the first six months of 1999 were approximately 50% as compared to
approximately 74% for fiscal year 1998. The Company will focus its research and
development efforts in the areas of LCD panel controllers, new USB controller
designs, and docking stations. A failure to develop products with required
feature sets or performance standards or a delay as short as a few months in
bringing a new product to market could significantly reduce the Company's net
sales for a substantial period, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company currently believes that its net sales for the third quarter of 1999
will be significantly lower than the second quarter of 1999. The anticipated
decrease in net sales in the three months ended September 30, 1999 as compared
to the three months ended June 30, 1999 is primarily attributable to declining
sales in the Company's current universal serial bus and core logic businesses.
If the Company is not successful in its current product design schedules or is
unable to obtain production design wins with customers on new products, the
Company will also have a significant decline in net sales for the quarter ending
December 31, 1999. Any reduction in the Company's net sales will have an adverse
effect on the financial results of the Company during those periods. The Company
will make every effort to reduce its operating expenses but anticipates that it
will not be able to reduce them to the levels necessary to offset the reduction
in net sales.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments increased to $71,508,000 at
June 30 31, 1999 from $60,903,000 at December 31, 1998. Working capital for
the same period increased to $65,678,000 from $55,791,000 at December 31,
1998. During the first six months of 1999, operating activities provided $1.7
million of cash. Cash provided in operating activities was primarily due to
the Company's net loss adjusted for depreciation as well as a $1.7 million
increase in other liabilities due to the litigation with Crystal, a $1.6
million reduction in accounts receivable, caused by a reduction in net sales,
partially offset, by a $0.4 million decrease in other accounts payable. In
addition, investing activities provided $8.8 million in the first six months
of 1999, primarily from the sale of the Company's investment in its joint
venture
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foundry, UICC, in Taiwan. Financing activities provided $0.1 million in the six
months ended June 30, 1999. The cash provided by financing activities in 1999
was primarily related to proceeds of $0.6 million from the exercise of employee
stock options, offset, in part by a $0.5 million reduction of long-term
liabilities.
At June 30, 1999, the Company's principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $71.5 million and
working capital of approximately $65.7 million. The Company believes that its
existing sources of liquidity will satisfy the Company's projected working
capital and other cash requirements through at least the next twelve months.
Year 2000 Readiness
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company considers a product to be in "Year 2000
compliance" if the product's performance and functionality are unaffected by
processing of dates prior to, during and after the year 2000, but only if all
products (for example hardware, software and firmware) used with the product
properly exchange accurate date data with it. The Company has a program to
assess the capability of its products to determine whether or not they are in
Year 2000 compliance. Although the Company believes its semiconductor products
are in Year 2000 compliance, the Company has determined that certain of its
products are not and will not be Year 2000 compliant. The products that will not
be Year 2000 compliant should not adversely effect the Company. However, the
assessment of whether a complete system will operate correctly depends on the
BIOS capability and software design and integration, and for many end-users this
will include BIOS and software and components provided by companies other than
OPTi. The Company does not believe it is legally responsible for costs incurred
by customers related to ensuring such customers' or end-users' Year 2000
capability. In addition, the Company has contacted some of its major customers
to determine whether their products into which the Company's products have been
and will be integrated are Year 2000 compliant. The Company has received
assurances of Year 2000 compliance from a number of those customers and the
customers are under no contractual obligation to provide such information to the
Company.
The Company anticipates that substantial litigation may be brought against
vendors, including the Company, of all component products of systems that are
unable to properly manage data related to the Year 2000. The Company's
agreements with customers typically contain provisions designed to limit the
Company's liability for such claims. It is possible, however, that these
measures will not provide protection from liability claims, as a result of
existing or future federal, state or local laws or ordinances or unfavorable
judicial decisions. Any such claims, with or without merit, could result in a
material adverse affect on the Company's business, financial condition and
results of operations, including increased warranty costs, customer satisfaction
issues and potential lawsuits.
The Company has initiated a comprehensive program to address Year 2000 readiness
in its internal systems and with its customers and suppliers. The Company's
program has been designed to address its most critical internal systems first
and to gather information regarding the Year 2000 compliance of products
supplied to it and into which the Company's products are integrated. Assessment
and remediation are proceeding in tandem, and the Company intends to have its
critical internal systems in Year 2000 compliance by the end of the third fiscal
quarter of 1999. These activities are intended to encompass all major categories
of systems in use by the Company, including manufacturing, engineering, sales,
finance and human resources. The costs incurred to date related to these
programs have not been material. The Company currently expects that the total
cost of its Year 2000 readiness programs, excluding redeployed resources, will
not exceed $500,000 over the next fiscal year. The total cost estimate does not
include potential costs related to any customer or other claims or the costs of
internal software or hardware
12
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replaced in the normal course of business. The total cost estimate is based on
the current assessment of the Company's Year 2000 readiness needs and is subject
to change as the projects proceed.
The Company has also initiated formal communications with its significant
suppliers and financial institutions to determine the extent to which the
Company is vulnerable to those third parties' failure to remedy their own Year
2000 issue. To date the Company has contacted its significant suppliers and
financial institutions and has received assurances of Year 2000 compliance from
several of those contacted. Most of the suppliers with the Company are under no
contractual obligation to provide such information to the Company. The Company
is taking steps with respect to new supplier agreements to ensure that the
suppliers' products and internal systems are Year 2000 compliant. While the
Company currently expects that the Year 2000 issue will not pose significant
operational problems, delays in the implementation of new information systems,
or a failure to fully identify all Year 2000 dependencies in the Company's
systems and in the systems of its suppliers, customers and financial
institutions could have material adverse consequences, including delays in the
delivery or sale of products. Therefore, the Company is developing contingency
plans for continuing operations in the event such problems arise. The Company
expects to have a contingency plan developed by September 1999.
Factors Affecting Earnings and Stock Price
Fluctuations in Operating Results
The Company has experienced significant fluctuations in its quarterly operating
results in the past and expects that it will experience such fluctuations in the
future. In the past, these fluctuations have been caused by a variety of factors
including increased competition from Intel and other suppliers, price
competition, ongoing rapid price declines, changes in customer demand, the
timing of delivery of new products, inventory adjustments, changes in the
availability of foundry capacity and changes in the mix of products sold. In the
future, one or more of these factors may adversely affect the Company's
operating results in any given period.
Price Competition
The markets for the Company's products are subject to severe price competition
and price declines. There can be no assurance that the Company will succeed in
reducing its product costs rapidly enough to maintain or increase its' gross
margin level or that further substantial reduction in chipset prices will not
result in lower profitability or losses.
Changes in Customer Demand
The Company currently places non-cancelable orders to purchase products from
independent foundries, while its customers generally place purchase orders with
a significantly shorter lead-time, which may be canceled without significant
penalty. In the past, the Company has experienced order cancellations and
deferrals and expects that it will experience cancellations in the future from
time to time. Any such order cancellations, deferrals, or a shortfall in a
receipt of orders, as compared to order levels expected by the Company, could
have a significant adverse effect on the Company's operating results in any
given period.
Product Transitions and the Timing and Delivery of New Products
A substantial majority of the Company's current net sales is derived from its
mobile core logic products. In February 1999 the Company discontinued its
development efforts in the core logic area. The Company will focus its research
and development efforts in the areas of LCD panel controllers, new USB
controller designs, and docking stations. A failure to develop products with
required feature sets or performance standards or a delay as short as a few
months in bringing a new product to market could significantly
13
<PAGE>
reduce the Company's net sales for a substantial period, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Product Development; Technological Change
The Company's ability to maintain or increase its sales levels and profitability
depends directly on its timely introduction and rapid ramp up of new products.
In the past, the Company has experienced material delays in the introduction of
new products and expects that it will experience similar problems from time to
time in the future. Material delays in the introduction, production or sale of a
new product can have a very severe effect on the Company's operating results in
any given period, possibly resulting in a significant shortfall in sales and
earnings from that expected by the Company or securities analysts. In particular
because the Company is no longer developing its core logic products, the Company
will be highly dependent on the timely completion and production of its USB
controller, docking solution, and LCD panel controller products during 1999, to
offset the decline in its revenue for its core logic products. Any such delay or
shortfall could have an immediate and very significant adverse effect on the
trading price of the Company's stock. Investors in the Company's securities must
be willing to bear the risks of such fluctuations.
Each of the product areas in which the Company offers new products are intensely
competitive and the Company must compete with entrenched competitors who have
established greater product breadth and distribution channels. The introduction
of new products can result in a greater than expected decline and demand for
existing products and create an imbalance between products ordered by customers
and products that the Company has in inventory. This imbalance can result in
surplus or obsolete inventory, leading to write-offs or other unanticipated
costs or disruptions.
Customer Concentration
The Company primarily sells to PC, motherboard, and add-in card manufacturers.
The Company performs ongoing credit evaluations of its customers but does not
require collateral. The Company maintains reserves for potential credit losses,
and such losses have been within management's expectations. With the exception
of sales to Compaq and its subcontractors and Apple and its subcontractors no
other single customer represented more than 10% of sales in the first six months
of 1999 or fiscal 1998. The Company sold approximately $3.7 million and $17.1
million of mobile core logic to Compaq and its subcontractors, represented
approximately 27% and 43% of net sales for the six months ended June 30, 1999
and fiscal year 1998, respectively. Also in the first six months of 1999 and
fiscal year 1998 the Company sold to Apple Computer and its subcontractors
approximately $4.9 and $4.4 million in USB products, representing a combined 36%
and 11% of net sales for those periods, respectively. The Company expects that
sales of its products to a relatively small group of customers will continue to
account for a high percentage of its net sales in the foreseeable future,
although the Company's customers in any one period will continue to change.
However, there can be no assurance that any of these customers or any of the
Company's other customers will continue to utilize the Company's products at
current levels, if it all. The Company has experienced significant changes in
the composition of its major customer base and expects that this variability
will continue in the future. The loss of any major customer or any reduction in
orders by any such customer could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company has no long-term volume commitments from any of its major customers
and generally enters into individual purchase orders with its customers. The
Company has experienced cancellations of orders and fluctuations in order levels
from period to period and expects it will continue to experience such
cancellations and fluctuations in the future. Customer purchase orders may be
cancelled and order
14
<PAGE>
volume levels can be changed or delayed with limited or no penalties. The
replacement of cancelled, delayed or reduced purchase orders with new business
cannot be assured. Moreover, the Company's business, financial condition and
results of operations will depend in significant part on its ability to obtain
orders from new customers, as well as on the financial condition and success of
its customers. Therefore, any adverse factors affecting any of the Company's
customers or their customers could have a material effect on the Company's
business, financial condition and results of operation.
Credit Risks
Many of the Company's customers, particularly the motherboard manufacturers in
Taiwan, operate at very low profit margins and undertake significant inventory
risks. To the extent the Company provides open terms of credit to some of the
larger of these customers, the Company is exposed to significant credit risks if
these customers are unable to remain profitable. Approximately 3% and 21% of
the Company's receivables at June 30, 1999 and December 31, 1998, respectively,
were with these types of customers.
Dependence on Foundries and Manufacturing Capacity
Almost all of the Company's products are manufactured by outside foundries
pursuant to designs provided by the Company. In most instances, the Company
provides foundries with a custom-tooled design ("Custom Production"), whereby
the Company receives a finished die from the foundry which it sends to a third
party for cutting and packaging. This process subjects the Company to the risk
of low production yields as the die moves through the production and packaging
process. The Company's reliance on independent foundries and packaging houses
involves several risks, including the absence of adequate capacity, the
unavailability of or interruptions in access to certain process technologies and
reduced control over delivery schedules, manufacturing yields and costs. At
times during the past several years, the Company was unable to meet the demand
for certain of its products due to limited foundry capacity and the Company
expects that it will experience other production shortfalls or difficulties in
the future.
Because the Company's purchase orders with its outside foundries are
non-cancelable by OPTi, the Company is subject to risks of, and has in the past
experienced, excess or obsolete inventory due to an unexpected reduction in
demand for a particular product. The manufacture of chipsets is a complex
process and the Company may experience short-term difficulties in obtaining
timely deliveries, which could affect the Company's ability to meet customer
demand for its products. Should any of its major suppliers be unable or
unwilling to continue to manufacture the Company's key products in required
volumes, the Company would have to identify and qualify acceptable additional
foundries. This qualification process could take up to six months or longer. No
assurances can be given that any additional sources of supply could be in a
position to satisfy any of the Company's requirements on a timely basis. The
semiconductor industry experiences cycles of under-capacity and over-capacity,
which have resulted in temporary shortages of products in high demand. Any such
delivery problems in the future could materially and adversely affect the
Company's operating results.
The Company began using Custom Production in 1993. Custom Production requires
that the Company provide foundries with designs that differ from those
traditionally developed by the Company in its gate array production and which
are developed with specialized tools provided by the foundry. This type of
design process is inherently more complicated than gate array production and
there can be no assurance that the Company will not experience delays in
developing designs for Custom Production or that such designs will not contain
bugs. To the extent bugs are found, correcting such bugs is likely to be both
expensive and time consuming. In addition, the use of Custom Production requires
the Company to purchase wafers from the foundry instead of finished products. As
a result, the Company is required to increase its inventories and maintain
inventories of unfinished products at packaging houses. The Company is also
dependent on these packaging houses and its own internal test functions for
adequate capacity.
15
<PAGE>
The Company intends to continue to shift a substantial amount of its capacity
too increasingly dense sub-micron processes. The Company has limited experience
with processes below .45 micron, which are increasingly more complex. Although
the Company extensively tests hardware products prior to their introduction, it
is possible that design errors may be discovered after initial product sampling,
resulting in delays in volume production or recall of products sold. The
occurrence of any such errors could have a materially adverse effect on the
Company's product introduction schedule and operating results.
Dependence on Sales Outside of North America
Sales to customers located outside of North America accounted for approximately
84%, and 86% of the Company's total revenue for the six-month period ending June
30, 1999 and the twelve-month period ending December 31, 1998, respectively. In
fiscal 1999, the Company expects that a large portion of its revenue will be
from sales to customers outside of North America, particularly to manufacturers
located in the Asia-Pacific region, which sells their products worldwide. These
sells are subject to a variety of risks, including fluctuations in currency
exchange rates, tariffs, import restrictions and other trade barriers,
unexpected changes in regulatory requirements, longer accounts receivable
payment cycles and potentially adverse tax consequences and export license
requirements. In addition, the Company is subject to risks inherent in
conducting business internationally, including political and economic
instability and unexpected changes in diplomatic and trade relationships. In
particular, the economies of certain countries in the Asia-Pacific region are
experiencing considerable economic instability and downturns. Because the
majority of the Company's sales to date have been denominated in United States
dollars, increases in the value of the United States dollar could increase the
price in local currencies of the Company's IC products in non-US markets and
make the Company's products more expensive than competitors' products that are
denominated in local currencies. There can be no assurance that one or more of
the factors described above will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Competition
The Company competes in markets that are intensely competitive. The Company
believes that its ability to compete successfully depends upon a number of
factors including price, performance, the timely delivery of new products by the
Company, the introduction of new products by its competitors, product features,
the emergence of new industry standards, quality and customer support. There can
be no assurances that the Company will continue to compete successfully with
respect to any or more of these factors. The Company has experienced loss of
market share in the core logic area, to some of its competitors in the past.
Dependence on Key Personnel
The Company's performance will be substantially dependent on the performance of
its executive officers and key employees. Given the Company's early stage of
development of its peripheral products (LCD panel controller, IEEE1394
products), the Company will be dependent on its ability to attract, retain and
motivate high quality personnel, especially its management and development
teams. The Company does not have "key personnel" life insurance policies on any
of its employees. The loss of the services of any of its executive officers,
technical personnel or other key employees would have a material adverse effect
on the business, financial condition and results of operations of the Company.
The Company's success depends on its ability to identify, hire, train and retain
highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
able to identify, attract, assimilate or retain highly qualified technical and
managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel would have a material adverse
effect on the Company's business, financial condition and results of operations.
Possible Volatility of Stock Price
16
<PAGE>
There can be no assurances as to the Company's operating results in any given
period. The Company expects that the trading price of its common stock will
continue to be subject to significant volatility.
17
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
See notes section of this report on page 7.
Item 2. Changes in Securities.
Not applicable and has been omitted.
Item 3. Defaults on Senior Securities.
Not applicable and has been omitted.
Item 4. Submission of Matters to a Vote of Shareholders.
The annual Meeting of Shareholders was held on June 17, 1999, for the
purpose of electing directors of the Company, and confirming the appointment of
Ernst & Young LLP as the independent auditors of the company for the fiscal year
ended December 31, 1999. The voting on each matter is set forth below.
Election of Directors:
Nominee For Withheld
- ------- ---------- --------
Bernard Marren 10,235,612 62,451
Stephen Dukker 10,221,613 76,450
Kapil Nanda 10,234,013 64,050
William Welling 10,230,513 67,550
Proposal to ratify the appointment of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year 1999:
For Against Abstain
---------- ------- -------
10,259,543 11,175 27,345
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
three months ended June 30, 1999.
18
<PAGE>
Signatures
Pursuant to the requireemnts 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.
OPTi Inc.
Date: 07/22/99 By: /s/ Michael Mazzoni
-------------------------
Michael Mazzoni
Signing on behalf of the
Registrant and as Chief
Financial Officer
19
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