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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, 2000
[_] 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.)
3393 Octavius Drive, Santa Clara, California 95054
(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,
2000 was 11,645,970
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OPTi, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
Part I. Financial Information
<S> <C>
Item 1. Financial Statements
a) Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2000 and 1999 .......................... 3
b) Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 .................................................... 4
c) Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 ......................................... 5
d) Notes to Condensed Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............... 14
Part II. Other Information
Item 1. Legal Proceedings ........................................................ 15
Item 2. Changes in Securities .................................................... 15
Item 3. Defaults on Senior Securities ............................................ 15
Item 4. Submission of Matters to a Vote of Shareholders .......................... 15
Item 6. Exhibits and Reports on Form 8-K ......................................... 15
Signatures ............................................................................. 16
</TABLE>
2
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<TABLE>
<CAPTION>
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------- ---------- --------- ----------
(000's omitted, except per share data)
Revenues
Net sales $ 3,324 $ 6,582 $ 5,367 $ 13,738
Net license revenues - - 13,311 -
---------- ---------- --------- ----------
Total revenues 3,324 6,582 18,678 13,738
Costs and expenses:
Cost of sales 2,303 4,334 3,696 8,899
Research and development 112 1,221 431 3,316
Selling, general, and
administrative 3,914 5,106 5,224 7,094
---------- ---------- --------- ----------
Total costs and expenses 6,329 10,661 9,351 19,309
---------- ---------- --------- ----------
Operating income (loss) (3,005) (4,079) 9,327 (5,571)
Interest and other income, net 519 804 1,023 1,512
---------- ---------- --------- ----------
Income (loss) before income tax
provision (2,486) (3,275) 10,350 (4,059)
Income tax provision 1 - 261 -
---------- ---------- --------- ----------
Net income (loss) ($2,487) ($3,275) $10,089 ($4,059)
========== ========== ========= ==========
Basic net income (loss) per share $(0.21) $(0.30) $0.87 $(0.37)
========== ========== ========= ==========
Diluted net income (loss) per share $(0.21) $(0.30) $0.87 $(0.37)
========== ========== ========= ==========
Shares used in computing basic
per share amounts 11,646 10,875 11,637 10,844
========== ========== ========= ==========
Shares used in computing diluted
per share amounts 11,646 10,875 11,653 10,844
========== ========== ========= ==========
</TABLE>
See accompanying notes.
3
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<TABLE>
<CAPTION>
OPTi Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
(Unaudited) (See Note 1)
Assets
(000's omitted)
Current assets
Cash and cash equivalents $36,616 $23,722
Accounts receivable, net 1,556 1,459
Inventories 577 298
Other current assets 813 943
------------- -------------
Total current assets 39,562 26,422
Property and equipment, net 334 668
Other assets 844 1,142
------------- -------------
Total assets $40,740 $28,232
============= =============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 1,416 $ 1,201
Accrued expenses 419 827
Accrued litigation 7,200 4,200
Accrued employee compensation 317 512
------------- -------------
Total current liabilities 9,352 6,740
Long-term liabilities
Other long-term liabilities - 310
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 -- 11,646 in 2000
and 11,620 in 1999 22,611 22,494
Retained earnings (accumulated deficit) 8,777 (1,312)
------------- -------------
Total shareholders' equity 31,388 21,182
------------- -------------
Total liabilities and shareholders'
equity $40,740 $28,232
============= =============
</TABLE>
Note 1 - The consolidated balance sheet at December 31, 1999 has been derived
from the audited financial statements.
See accompanying notes.
4
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<TABLE>
<CAPTION>
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months Ended June 30,
2000 1999
--------------------------------------------
<S> <C> <C>
(000's omitted)
Operating Activities:
Net income (loss) $10,089 $ (4,059)
Adjustments:
Depreciation 268 2,493
Changes in assets and liabilities:
Accounts receivable (486) 1,575
Inventories (356) (172)
Other assets 903 494
Accounts payable 1,004 (395)
Litigation accruals 3,000 -
Other current liabilities (560) 1,728
------------ -----------
Net cash provided by
operating activities 13,862 1,664
Investing Activites:
Purchase of property and equipment (24) (132)
Sale/Return of property and equipment 41 477
Sale of Investment in UICC foundry - 8,495
Cash impact of sale of OPTi Japan KK (1,102) -
Purchase of short-term investments - (23,350)
Sale of short-term investments - 23,350
------------ -----------
Net cash provided by (used in)
investing activities (1,085) 8,840
------------ -----------
Financing Activities:
Net proceeds from sale of common stock 117 645
Payment of long-term liabilities - (544)
------------ -----------
Net cash provided by
financing activities 117 101
------------ -----------
Net increase in cash and cash
equivalents 12,894 10,605
Cash and cash equivalents
beginning of period 23,722 56,653
------------ -----------
Cash and cash equivalents
end of period $36,616 $ 67,258
============ ===========
</TABLE>
See accompanying notes.
5
<PAGE>
OPTi Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
1. Basis of presentation
-------------------------
The information at June 30, 2000 and for the periods ended June 30, 2000 and
June 30, 1999, are unaudited, but include 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, 1999.
2. Net income (loss) per share
---------------------------------
Basic net income (loss) per share and diluted net (loss) per share are 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 common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options.
3. Short-Term Investments
--------------------------
The Company considers highly liquid investments with maturities of three months
or less from the acquisition date of the instrument to be cash equivalents. The
Company invests from time to time its excess cash in high quality, auction rate
preferred securities. At June 30, 2000, the Company had no short-term
investments.
4. Inventories
---------------
Inventories consist of finished goods and work in process (in thousands):
June 30, 2000 December 31, 1999
------------- -----------------
Finished Goods $ 200 $ 240
Work in process 377 58
------- ------
$ 577 $ 298
======= ======
5. Other Assets
--------------------------------------------
A summary of other assets (in thousands):
June 30, 2000 December 31, 1999
------------- -----------------
Investment in Tripath $725 $ 725
Deposits 119 240
Other Miscellaneous - 177
---- ------
Total Other Assets $844 $1,142
==== ======
6
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6. Segment Information
----------------------
Sales of the Company's product based on customer location were as follows
(in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------ ------ ------ -------
Taiwan $ 976 $2,205 $1,695 $ 4,539
Singapore 33 2,490 52 4,940
Japan 769 801 1,182 1,662
Other Far East 429 169 734 353
United States 1,112 858 1,694 2,140
Europe Other 5 59 10 104
------ ------ ------ -------
Total Net Sales $3,324 $6,582 $5,367 $13,738
====== ====== ====== =======
</TABLE>
7. Litigation
-------------
In January 1997, a patent infringement claim was brought against the Company by
Crystal Semiconductor, Inc. ("Crystal"), a subsidiary 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 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).
On July 23, 1999, the United States District Court for the Western District of
Texas entered an Order and Judgment in the patent infringement action brought by
Crystal Semiconductor Corporation against OPTi, Inc., Tritech Microelectronics
Pte Ltd., a Singapore company, and TriTech Microelectronics International, Inc.,
its American marketing subsidiary. The Court's judgment substantially reduced
the amount of damages that a jury had awarded to Crystal against OPTi, from
$19.4 million to $4 million.
The Court's Judgment also includes a permanent injunction against further
infringement. OPTi, however, is no longer in the audio chip business, having
sold its audio division to Creative Technology in November 1997.
Following the entry of judgment, all three parties involved in the suit appealed
the judgment to the United States Court of Appeals for the Federal Circuit.
Crystal appealed the judges decision to deny lost profits
7
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damages and price erosion damages as awarded by the jury and the denial of
prejudgment interest. OPTi appealed the courts ruling on one of the patents at
issue and the interpretation of that patent by the court.
In response to the Company's announcement of its intention to pay a dividend in
cash to its shareholders of four dollars per share, Crystal requested in the
Santa Clara County Superior Court of California that the Company stipulate to
preserve additional assets in order to pay a potential judgment should Crystal
prevail on appeal of the post-trial rulings in the Texas litigation. On
November 3, 1999, the Court entered a Stipulation and Order Regarding Payment of
Dividend obligating the Company to maintain and preserve assets in an amount not
less than $24,000,000, "until such time as the judgment in the Texas litigation,
after resolution of any appeals therein, is satisfied in full by the Company or
until such time as Crystal's claims against the Company in the Texas Litigation
are settled, released or waived by Crystal."
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. Based on the judgment entered into the
Texas court a new Stipulation and Order was entered into by the party whereas
the amount of liquid assets to be maintained and preserved was reduced to the
amount of the court judgment.
On July 7, 2000, Crystal Semiconductor and the Company signed a settlement
agreement to be effective as of June 24, 2000. Under the terms of the
agreement, OPTi will pay Crystal Semiconductor $7,000,000 over a period of time
ending October 15, 2000. Upon receipt of the final payment from OPTi to Crystal
Semiconductor, Crystal and OPTi agree to dismiss with prejudice all claims now
pending in the California State Court Action and to release each other from all
claims that were brought or could have been brought in the action up to the date
of the dismissal of that action. The $7 million settlement has been accrued in
the Company's June 30, 2000 financial statements.
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 could differ from those estimates.
9. Taxes
--------
The Company's tax provision recorded for the six months ended June 30, 2000,
relates primarily to the federal alternative minimum tax.
10. Comprehensive Income (Loss)
-------------------------------
Comprehensive income (loss) for each of the three month and six month periods
ended June 30, 2000 and 1999 was equal to net income (loss).
11. Sale of OPTi KK Japan
-------------------------
Effective June 23, 2000 the Company sold the assets and liabilities of OPTi KK,
its wholly owned Japanese subsidiary, in exchange for $645,000 in debt. The sale
resulted in a net loss of approximately $50,000 which was recorded in the second
quarter of 2000.
8
<PAGE>
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
ability of the Company to generate future license revenues, the Company's
ability to obtain or maintain design wins, market conditions generally and in
the electronics 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.
The Company currently competes principally in the embedded and USB controller
marketplaces. From the Company's inception through 1995, the Company's
principal segment had been desktop core logic. However, with increasingly
aggressive competition in this area, primarily from Intel Corporation, the
Company revised its strategy and focus on market opportunities where the Company
had strategic advantages. This led the Company to focus on the mobile core
logic and embedded marketplaces where the Company has experienced some success
in the past few years.
The Company's strategy, at this time is to license its core logic technology
that it has developed during its history and to look for areas where the Company
can either develop or acquire technology for emerging markets in the high
performance PC segment, increase sales in existing global markets and strengthen
its industry relationships. During the first quarter of fiscal year 2000, the
Company entered into a one-time licensing arrangement for $13,500,000 on its
core logic technology. In addition, the Company has continued, and is
continuing, its efforts to maximize shareholder value through the restructuring
of the Company's business and assets.
For the quarter ended June 30, 2000, the Company reported revenues of
$3,324,000, as compared to revenues of $6,582,000 for the quarter ended June 30,
1999. For the six month periods ended June 30, 2000 and 1999, the Company
reported net sales of $18,678,000 and $13,738,000, respectively. Net revenues
for the six months ended June 30, 2000 included net license revenues of
$13,311,000 resulting from a one-time non-exclusive licensing fee concerning
OPTi patents. The decrease in product net sales for the three month and six
month periods ending June 30, 2000, as compared to the three month and six month
periods ending June 30, 1999, is due primarily to reductions in sales for the
Company's core logic chipsets used in various mobile product designs.
Cost of sales for the quarter ended June 30, 2000 decreased to $2,303,000
resulting in a gross margin of approximately 30.7%, as compared to cost of sales
of $4,334,000, and a gross margin of approximately 34.2% for the quarter ended
June 30, 1999. Cost of sales for the first six months of 2000 was $3,696,000,
which resulted in a gross margin of approximately 31.1%, as compared with cost
of sales of $8,899,000, and a gross margin of 35.2%, for the six months ended
June 30, 1999. The decrease in gross margin as a percentage of sales for the
three-month and six month periods ended June 30, 2000 as compared to the similar
periods ended June 30, 1999 is primarily due to the larger percentage of older,
end of life products sold during the first half of 2000, as well as overhead
costs being a higher percentage of sales due to the lower product revenue during
2000 versus 1999.
Research and development costs decreased to $112,000 for the quarter ended June
30, 2000, as compared with $1,221,000 for the quarter ended June 30, 1999. For
the first six months of 2000 research and development expenses decreased to
$431,000, as compared to $3,316,000, for the comparable period of 1999. The
decrease for both the three month and nine month periods ending June 30, 2000 as
compared to the similar periods of 1999 is primarily attributable to reduced
headcount related expenses due to the Company discontinuing new product
development efforts. In January 2000, the Company had a reduction in staff as
it made the decision to terminate all design efforts on its newer products, such
as the LCD product. As of June 30, 2000, the Company had one research and
9
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development person, who conducts virtually all of the Company's product
development with the assistance of outside contractors.
Selling, general, and administrative costs were $3,914,000 in the quarter ended
June 30, 2000 as compared with $5,106,000 in the comparable period of 1999, and
$5,224,000 for the first six months of 2000 as compared to $7,094,000, for the
first six months of 1999. The decrease in selling, general, and administrative
costs for the three and six month periods ended June 30, 2000 as compared to the
three and six month periods ending June 30, 1999 is primarily attributable to
lower headcount related expenses during the periods. Selling, general and
administrative expenses for the period ended June 30, 2000 included
approximately $3,000,000 resulting from additional costs incurred in settling
the Crystal Semiconductor litigation.
Interest and other income, net was $519,000 and $804,000 for the quarters ended
June 30, 2000 and 1999, respectively. For the first six months of 2000,
interest and other income, net was $1,023,000, as compared to $1,512,000, for
the comparable period of 1999. The decrease in the three month and six month
periods ending June 30, 2000 and 1999 is attributable to the dividend paid by
the Company in the fourth quarter of 1999 of $46,484,000, which reduced the cash
available for investment.
The Company's tax provision recorded for the six months ended June 30, 2000,
relates primarily to the federal alternative minimum tax.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments increased to $36,616,000 at
June 30, 2000 from $23,722,000 at December 31, 1999. Working capital for the
same period increased to $30,210,000 from $19,682,000 at December 31, 1999.
During the first six months of 2000, operating activities generated $13.9
million of cash. Cash generated from operating activities was primarily due to
the Company's net license revenue of $13.3 million partially offset by increases
in the Company's litigation accrual of $3.0 million. The Company also showed a
reduction in cash due to the sale of all assets and liabilities of its
subsidiary, OPTi Japan KK, in the second quarter of 2000. The cash reduction
was due to cash included in the transaction. The transaction had minimal impact
on the income statement of the Company.
At June 30, 2000, the Company's principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $36.6 million and
working capital of approximately $30.2 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Financial Instruments
and for Hedging Activities" ("SFAS 133") which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for fiscal years beginning after June
15, 2000 and is not anticipated to have an impact on the Company's results of
operations or financial condition when adopted as the Company holds no
derivative financial instruments and does not currently engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 is effective for years beginning after
December 15, 1999 and is required to be reported beginning in the quarter ended
December 31, 2000. SAB 101 is not expected to have a significant effect on the
Company's consolidated results of operations, financial position, or cash flows.
10
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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, the Company's operating results in any given period may be adversely
affected by one or more of these factors.
Price Competition
The market 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 net product sales is derived from its
mobile core logic products. The market for mobile core logic products is
characterized by frequent transitions in which products rapidly incorporate new
features and performance standards. 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.
Continued Sales of Current Products
The Company's ability to maintain or increase its sales levels and profitability
depends directly on its ability to continue to sell its existing products at
current volumes. The Company, after its decision to terminate all new product
development in January 2000, will have no new product introductions for the
foreseeable future. Any inability to continue sales at the current level 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 segments in which the Company offers new products is
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 which the Company has in inventory. This imbalance can
result in surplus or obsolete inventory, leading to write-offs or other
unanticipated costs or disruptions.
11
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Customer Concentration
The Company primarily sells product 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. 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 product
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 at 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. At this time the Company is not shipping any
products to either Compaq and its subcontractors or to Apple and its
subcontractors. 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 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 10% of the
Company's receivables at June 30, 2000 were with these 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, packaging houses, and
test 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 second half of 1999 and the first half of 2000, 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.
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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.
Dependence on Intellectual Property position
The success of the Company's current strategy of licensing its core logic
technology can be affected by new developments in intellectual property law
generally and with respect to semiconductor patents in particular and upon the
Company's success in defending its patent position. It is difficult to predict
developments and changes in intellectual property law in advance, however such
changes could have an adverse impact on the Company's ability to license its
previously developed technology.
Possible Volatility of Stock Price
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 1999, there have been no material changes in the Company's
market risk exposure.
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OPTi Inc.
Part II. Other Information
Item 1. Legal Proceedings.
See notes to the condensed consolidated balance sheet 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.
Not applicable and has been omitted.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.20 Settlement Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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OPTi Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OPTi Inc.
Date: 8/10/00 By: \s\ Douglas E. Gans
--------------------
Douglas E. Gans
Signing on behalf of the Registrant and as
Chief Financial Officer
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OPTi Inc.
Index to Exhibits
Exhibit No. Exhibit Description Page No.
------------- ----------------------- --------
10.20 Settlement Agreement 18
27.1 Financial Data Schedule 23
17
