================================================================================
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, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____________ to ___________
------------------------
Commission File Number 0-21422
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.)
660 Alder Drive, Milpitas, California 95035
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (408) 382-2600
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, 2001 was 11,633,903
================================================================================
OPTi, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 2001
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
a) Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2001 and 2000................................ 3
b) Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000.......................................................... 4
c) Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and 2000............................................... 5
d) Notes to Condensed Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 10
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
2
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(000's omitted, except per share data)
Revenues
Net product sales $ 1,655 $ 3,324 $ 3,772 $ 5,367
Net license revenues - - - 13,311
------- ------- ------- -------
Total revenues 1,655 3,324 3,772 18,678
------- ------- ------- -------
Costs and expenses:
Cost of sales 956 2,303 2,130 3,696
Research and development 285 112 386 431
Selling, general, and administrative 801 3,914 1,637 5,224
------- ------- ------- -------
Total costs and expenses 2,042 6,329 4,153 9,351
------- ------- ------- -------
Operating income (loss) (387) (3,005) (381) 9,327
Interest and other income, net 436 519 884 1,023
------- ------- ------- -------
Income (loss) before income tax provision 49 (2,486) 503 10,350
Income tax provision 2 1 12 261
------- ------- ------- -------
Net income (loss) $ 47 $(2,487) $ 491 $10,089
======= ======= ======= =======
Basic net income (loss) per share $ 0.00 $ (0.21) $ 0.04 $ 0.87
======= ======= ======= =======
Diluted net income (loss) per share $ 0.00 $ (0.21) $ 0.04 $ 0.87
======= ======= ======= =======
Shares used in computing basic
per share amounts 11,634 11,646 11,641 11,637
======= ======= ======= =======
Shares used in computing diluted
per share amounts 11,634 11,646 11,644 11,653
======= ======= ======= =======
See accompanying notes.
3
OPTi Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
------------ ------------
Assets
(000's omitted)
Current assets
Cash and cash equivalents $11,989 $12,146
Short-term investments 36,239 45,980
Accounts receivable, net 307 1,131
Inventories 386 1,140
Other current assets 286 359
------- -------
Total current assets 49,207 60,756
Property and equipment, net 170 157
Other assets 328 359
------- -------
Total assets $49,705 $61,272
======= =======
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $310 $1,365
Other current liabilities 734 2,441
------- -------
Total current liabilities 1,044 3,806
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 -- 11,634 in 2001
11,655 in 2000 22,567 22,646
Accumulated other comprehensive income 15,871 25,088
Retained earnings 10,223 9,732
------- -------
Total shareholders' equity 48,661 57,466
------- -------
Total liabilities and shareholders'
equity $49,705 $61,272
======= =======
Note 1 - The consolidated balance sheet at December 31, 2000 has been derived
from the audited financial statements.
See accompanying notes.
4
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months Ended June 30,
2001 2000
---------------------------
(000's omitted)
Operating Activities:
Net income $ 491 $10,089
Adjustments:
Depreciation 88 268
Changes in assets and liabilities:
Accounts receivable 824 (486)
Inventories 754 (356)
Other assets 104 903
Accounts payable (1,055) 1,004
Litigation accrual - 3,000
Other current liabilities (448) (560)
-------- -------
Net cash provided by
operating activities 758 13,862
Investing Activities:
Purchase of property and equipment (101) (24)
Sale of property and equipment - 41
Purchase of short-term investments (19,318) -
Cash impact of Sale of OPTi Japan KK - (1,102)
Sale of short-term investments 18,583 -
-------- -------
Net cash used in
investing activities (836) (1,085)
-------- -------
Financing Activities:
Net proceeds from sale of common stock - 117
Repurchase of common stock (79) -
-------- -------
Net cash provided by (used in)
financing activities (79) 117
-------- -------
Net increase (decrease) in cash
and cash equivalents (157) 12,894
Cash and cash equivalents
beginning of period 12,146 23,722
-------- -------
Cash and cash equivalents
end of period $ 11,989 $36,616
======== =======
See accompanying notes.
5
OPTi Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
1. Basis of presentation
------------------------
The information at June 30, 2001 and for the six month periods ended June 30,
2001 and 2000, 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, 2000.
2. Net income (loss) per share
-------------------------------
Basic net income per share and basic and diluted net loss per share are computed
by dividing net income 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.
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands except per share data):
Three Six
Months ended Months ended
June 30, June 30, 2001
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $ 47 $(2,487) $ 491 $10,089
====== ======= ====== =======
Weighted average number of common shares outstanding 11,634 11,646 11,641 11,637
====== ======= ====== =======
Basic net income (loss) per share $ 0.00 $ (0.21) $ 0.04 $ 0.87
====== ======= ====== =======
Weighted average number of common shares outstanding 11,634 11,646 11,641 11,637
Effect of dilutive securities:
Employee stock options -- -- 3 16
------- ------- ------ -------
Denominator for diluted net income per share 11,634 11,646 11,644 11,653
====== ======= ====== =======
Diluted net income (loss) per share $ 0.00 $ (0.21) $ 0.04 $ 0.87
====== ======= ====== =======
6
3. Short-Term Investments
-------------------------
At June 30, 2001, and December 31, 2000 the Company's short-term
investments include an unrealized gain of $16.2 million and $26.7 million,
respectively, related to its investment in Tripath Technology, Inc.
4. Inventories
--------------
Inventories consist of finished goods and work in process (in thousands):
June 30, 2001 December 31, 2000
------------- -----------------
Finished Goods $309 $ 871
Work in process 77 269
---- ------
$386 $1,140
==== ======
5. Segment Information
----------------------
Sales of the Company's product based on customer location were as follows
(in thousands):
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Taiwan $ 472 $ 976 $1,446 $1,695
Japan 255 769 517 1,182
Other Far East 218 462 421 786
United States 683 1,112 1,322 1,694
Europe Other 27 5 66 10
------ ------ ------ ------
Total Net Sales $1,655 $3,324 $3,772 $5,367
====== ====== ====== ======
7
6. Concentrations
-----------------
Tripath Technology, Inc.
Tripath Technology, Inc. ("Tripath"), an investment held by the Company, became
publicly traded in August 2000. This investment, with a cost of $0.7 million, is
reflected in the Company's June 30, 2001 balance sheet under short term
investments at a fair market value of $16.9 million and $27.4 million at
December 31, 2000. These shares were subject to lock-up agreements which
restricted their transfer until January 27, 2001. Tripath to date has a limited
operating history as it began to ship products in 1998 and many of its products
have only recently been introduced. Tripath also has a history of losses. As of
December 31, 2000, Tripath has an accumulated deficit of approximately $111
million. It incurred net losses of approximately $41 million in 2000, $32
million in 1999 and $34 million in 1998. It expects to continue to incur net
losses in the future and these losses may be substantial. As of July 31, 2001,
the fair market value of the Company's investment in Tripath has decreased by
$14.2 million from June 30, 2001 due to a decline in the trading price of
Tripath stock.
Major Customers and Credit Risks
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 NCR and its subcontractors, Holystone Enterprises, a Taiwan based
company and OPTi Japan, our former subsidiary, no other single customer
represented more than 10% of sales for the first six months of 2001. In the
first six months of 2001, the Company sold to Holystone Enterprises
approximately $1.4 million in USB controllers, representing approximately 37% of
net sales for the period. Also in the first six months of 2001, the Company sold
approximately $0.7 million of its embedded core logic product to NCR and its
subcontractors, representing approximately 18% of net sales for that period.
The Company also sold approximately $0.5 million of core logic product to OPTi
Japan representing 13% of net sales for the period.
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 40% of the
Company's receivables at June 30, 2001 were with these customers.
Suppliers
The Company's reliance on independent foundries, packaging houses and test
facilities 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 first three quarters 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
inventory surpluses and has in the past experienced write-downs of inventories
due to an unexpected reduction in demand for a certain product.
Products
The Company's product life cycles are typically very short and ramp into volume
production very quickly. At any point in time, the Company may rely on a limited
number of products for a significant share of the Company's revenue. In the
first half of 2001, the Company was highly dependent on continued revenue
contributions from its USB controller. For the first six months ended June 30,
2001, the Company sold approximately $2.0 million of its two port USB
controller, representing approximately 54% of revenue. In the second half of
2001, the Company anticipates that it will rely heavily upon existing products
in
8
production. Any significant shortfall in sales for the Company's current volume
products will have a material adverse effect upon the Company's financials.
7. Comprehensive Income
-----------------------
The Company's total comprehensive income (loss) was as follows (in thousands):
Three Months Six Months
Ended Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $ 47 $(2,487) $ 491 $10,089
Other comprehensive income (loss) 2,281 --- (9,217) ---
------ ------- ------- -------
Comprehensive income (loss) $2,328 $(2,487) $(8,726) $10,089
====== ======= ======= =======
Other comprehensive income includes unrealized gains on marketable securities
net of taxes.
8. Litigation
-------------
The Company has been notified of claims that it may be infringing patents,
maskwork rights, or copyrights owned by third parties. There can be no assurance
that the Company will not become invloved in litigation regarding the alleged
infriungements by the Company of third party intellectual property rights.
However, the Company believes that the final disposition of such matters will
not have a material adverse effect on the Company's financial position, results
of operations and cash flows.
9. 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.
10. Taxes
---------
The Company recorded a tax provision of approximately 4% for the quarter ended
June 30, 2001. For the six months periods ended June 30, 2001 and 2000, the
Company recorded a tax provision of approximately 2% and 3%, respectively. The
Company's effective tax rate differed from the federal statutory rates during
2001 and 2000 primarily due to the utilization of prior year tax losses carried
forward, federal alternative minimum taxes and foreign taxes.
11. Recent Pronouncements
-------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 1999, FASB issued Financial
Accounting Standards No. 137 which deferred the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. The adoption of SFAS 133 did not
have an impact on the Company's results of operations or financial condition as
the Company held no derivative financial instruments and does not currently
engage in hedging activities.
9
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
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.
From the Company's inception through 1998, the Company's principal segments had
been desktop and mobile core logic. However, with increasingly aggressive
competion in this area, the Company revised its strategy and focus on market
opportunities where the Company had advantages. This led the Company to focus on
the embedded and USB controller marketplaces where the Company has experienced
limited success in the past several years.
The Net revenues for the second quarter ended June 30, 2001 were $1,655,000, as
compared to, net revenues of $3,324,000 for the quarter ended June 30, 2000. For
the six month periods ended June 30, 2001 and 2000, the Company reported net
revenues of $3,772,000 and $18,678,000, 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 for certain OPTi patents.
The decrease in net product sales for the three month and six month periods
ending June 30, 2001, as compared to the three month and six month periods
ending June 30, 2000, was due primarily to decreased sales of the Companys core
logic chipsets used in various embedded designs and a slow down in the add-in
marketplace for peripheral personal computer devices, such as the Company's USB
controller chip. The Company anticipates that its net revenue for the second
half of 2001 will continue to decline from its current levels.
Cost of product sales for the quarter ended June 30, 2001 decreased to $956,000
resulting in a gross margin of approximately 42.2%, as compared to cost of sales
of $2,303,000, and a product gross margin of approximately 30.7% for the quarter
ended June 30, 2000. Cost of sales for the first six months of 2001 was
$2,130,000, which resulted in a gross margin of approximately 43.5%, as compared
with cost of sales of $3,696,000, and a gross margin of approximately 31.1%, for
product sales, for the six months ended June 30, 2000. The Company's actual
gross margin for the six months ended June 30, 2000 was 80.2%, including the
license revenue of $13.3 million, which had no associated cost of goods sold.
The increase in product gross margin as a percentage of sales for the three-
month and six month periods ended June 30, 2001 as compared to the similar
periods ended June 30, 2000 is primarily due to product mix and a reduction in
assembly and test costs that the Company was able to negotiate during the first
quarter of 2001.
Research and development costs increased to $285,000 for the quarter ended June
30, 2001, as compared with $112,000 for the quarter ended June 30, 2000. For the
first six months of 2001 research and development costs were $386,000 as
compared to $431,000 for the comparable period of 2000. The increase in research
and development costs for the second quarter of 2001 as compared to the second
quarter of 2000, was primarily due to outside contractor expenses for new
product development during the period. As of June 30, 2001, the Company had one
research and development person, who conducts virtually all of the Company's
product development with outside contractors.
Selling, general, and administrative costs were $801,000 in the quarter ended
June 30, 2001 as compared with $3,914,000 in the comparable period of 2000, and
$1,637,000 for the first six months of 2001 as compared to $5,224,000, for the
first six months of 2000. The decrease in selling, general, and administrative
costs for the three-month and six month periods ended June 30, 2001 as compared
to the three-month and six month periods
10
ending June 30, 2000 is primarily attributable to lower headcount related
expenses and lower legal expenses during the period. 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 $436,000 and $519,000 for the quarters ended
June 30, 2001 and 2000, respectively. Interest and other income, net for the six
month periods ended June 30, 2001 and 2000, was $884,000 and $1,023,000,
respectively. The decrease in the three and six month periods ended June 30,
2001 as compared to the three and six month periods ended June 30, 2000 is
primarily due to a lower average cash balance due to the payment of $7,000,000
during the second half of 2000 as settlement of the Crystal Semiconductor
litigation.
The Company recorded a tax provision of approximately 4% for the quarter ended
June 30, 2001. For the six months periods ended June 30, 2001 and 2000, the
Company recorded a tax provision of approximately 2% and 3%, respectively. The
Company's effective tax rate differed from the federal statutory rates during
2001 and 2000 primarily due to the utilization of prior year tax losses carried
forward, federal alternative minimum taxes and foreign taxes.
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments decreased to $48,228,000 at
June 30, 2001 from $58,126,000 at December 31, 2000. The decline in cash, cash
equivalents and short-term investments of approximately $9.9 million from
December 31, 2000 to June 30, 2001, primarily relates to the decrease in value
of the Company's investment in Tripath Technologies. The investment in Tripath
Technologies, net of accrued taxes, decreased by approximately $9.2 million
during that period. Working capital as of June 30, 2001 decreased to $48,163,000
from $56,950,000 at December 31, 2000. This decrease also relates primarily to
the decrease in the value of the Tripath Technologies investment. As of July
31, 2001, the fair market value of the Company's investment in Tripath
Technologies has decreased by approximately $14.2 million due to declines in the
trading price of Tripath stock. During the first six months of 2001, operating
activities generated approximately $0.8 million of cash. Cash generated from
operating activities was primarily due to a $0.8 million reduction in accounts
receivable, $0.8 million reduction in inventories and a $0.5 million of net
income, partially offset by, a $1.1 million reduction in accounts payable and a
$0.5 million reduction in other current liabilities. Investing activities used
$0.8 million of cash during the first six months of 2001. This use in cash was
due to net purchases of short term investments of $0.7 million and the purchase
of $0.1 million of property and equipment. Financing activities for the first
six months of 2001 used $0.1 million due to the stock repurchase program
announced by the Company in December 2000.
At June 30, 2001, the Company's principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $48.2 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.
Investigation of Strategic Alternatives
With respect to future plans of the Company, management is currently looking
into all strategic alternatives in order to maximize shareholder value. The
Company is unable to elaborate further but is hopeful that it can announce
something further in August of 2001. However, there can be no assurance that
such strategic alternatives will be determined by that time or at all.
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 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
11
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 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
USB controller products. The market for USB controllers is characterized by
frequent transitions in which this functionality can be and is incorporated into
other semiconductor devices, such as the core logic. 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 sale its existing products at
current volumes. The Company will have few, if any, 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 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 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.
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 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. During 1999 and 1998 both Compaq and its
subcontractors and Apple and its subcontractors were significant customers. At
this time the Company is not shipping any products to either Compaq and its
subcontractors or 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.
12
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 40% of the
Company's receivables at June 30, 2001 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 three quarters 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 its products 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 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 and test houses. The Company is also dependent on these packaging
houses and third party test houses 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
13
intellectual property law and 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Sensitivity
We maintain our cash and cash equivalents primarily in money market funds.
We do not have any derivative financial instruments. As of June 30, 2001, all of
our debt investments mature in less than six months. Accordingly, we do not
believe that our debt investments have significant exposure to interest rate
risk.
We maintain an investment in the common shares of Tripath Technology, Inc. This
investment is not hedged and is subject to extreme volatility. Assuming a
hypothetical 75% adverse change in market prices, this investment would decrease
in value by $12.7 million, based on the value of this investment as of June 30,
2001. This estimate is not necessarily indicative of future performance, and
actual results may differ materially.
14
OPTi Inc.
Part II. Other Information
Item 1. Legal Proceedings.
See note 8 of Notes to Condensed Consolidated Financial Statements on
page 9 of this report.
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:
None
(b) Reports on Form 8-K:
None.
15
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: 8/6/01 By: \s\ Michael Mazzoni
-------------------
Michael Mazzoni
Signing on behalf of the Registrant and as
Chief Financial Officer
16