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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 March 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
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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
March 31, 1999 was 10,823,999
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1
OPTi, Inc.
FORM 10-Q
For the Quarterly Period Ended March 31, 1999
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
a) Condensed Consolidated Statements of Operations 3
for the three months ended March 31, 1999 and 1998
b) Condensed Consolidated Balance Sheets 4
as of March 31, 1999 and December 31, 1998
c) Condensed Consolidated Statements of Cash Flows 5
for the three months ended March 31, 1999 and 1998
d) Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial 9-14
Condition and Results of Operations
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 5. Other Information 15
Signatures 16
2
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------------------
1999 1998
---------------- ----------------
(000's omitted, except per share data)
Net Sales $7,156 $9,845
Costs and expenses:
Cost of sales 4,565 7,381
Research and development 2,095 2,363
Selling, general, and
administrative 1,988 2,998
------------------ -------------------
Total costs and expenses 8,648 12,742
------------------ -------------------
Operating loss (1,492) (2,897)
Interest and other income, net 708 1,067
------------------ -------------------
Income/(Loss) before income
tax benefit (784) (1,830)
Income tax Provision/(Benefit) -- --
------------------ -------------------
Net loss ($784) ($1,830)
================== ===================
Basic and diluted net loss per share ($0.07) ($0.14)
================== ===================
Shares used in computing basic and
diluted per share amounts 10,813 13,191
================== ===================
See accompanying notes.
3
OPTi Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
------------------- --------------------
(Unaudited) (See Note 1)
Assets
(000's omitted)
Current assets
Cash and cash equivalents $64,966 $56,653
Short-term investments 4,250 4,250
Accounts receivable, net 1,949 3,232
Inventories 819 1,192
Other current assets 397 944
------------------- --------------------
Total current assets 72,381 66,271
Property and equipment, net 3,764 5,682
Other assets 1,122 9,622
------------------- --------------------
Total assets $77,267 $81,575
=================== ====================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $3,408 $5,991
Other current liabilities 3,879 4,489
------------------- --------------------
Total current liabilities 7,287 10,480
Long term liabilities
Long-term obligations under capital lease 1,250 1,644
Other long-term liabilities 166 166
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 -- 10,824 in 1999
10,811 in 1998 39,460 39,397
Retained earnings 29,104 29,888
------------------- --------------------
Total shareholders' equity 68,564 69,285
------------------- --------------------
Total liabilities and shareholders' equity $77,267 $81,575
=================== ====================
Note 1 - The consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements.
See accompanying notes.
4
OPTi Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months Ended March 31,
1999 1998
--------------------------------------------
(000's omitted)
Operating Activities:
Net loss ($784) ($1,830)
Adjustments:
Depreciation 1,483 1,474
Amortization -- 123
Changes in assets and liabilities:
Accounts receivable 1,283 3,038
Inventories 373 2,925
Other assets 552 491
Accounts payable (2,583) (8,657)
Other current liabilities (610) (125)
---------------- ---------------
Net cash used in
operating activities (286) (2,561)
Investing Activites:
Purchase of property and equipment (42) (71)
Proceeds from Sale/Return of property and equipment 477 --
Sale of Investment in UICC foundry 8,495 --
Purchase of short-term investments (11,600) (23,900)
Sale of short-term investments 11,600 23,900
---------------- ---------------
Net cash provided by/ (used in)
investing activities 8,930 (71)
---------------- ---------------
Financing Activities:
Net proceeds from sale of common stock 63 1,111
Payment of long-term liabilities (394) (219)
---------------- ---------------
Net cash provided by/ (used in)
financing activities (331) 892
---------------- ---------------
Net increase/(decrease) in cash
and cash equivalents 8,313 (1,740)
Cash and cash equivalents
beginning of period 56,653 63,832
---------------- ---------------
Cash and cash equivalents
end of period $64,966 $62,092
================ ===============
See accompanying notes.
5
OPTi Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. Basis of presentation
- -------------------------
The information at March 31, 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 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:
(In thousands, except per share data) Quarter Ended March 31,
1999 1998
-------- --------
Numerator:
Net loss $ (784) $ (1,830)
-------- --------
Denominator for basic
loss per share
weighted average shares 10,813 13,191
------- --------
Effect of dilutive securities:
Employee stock options -- --
Denominator for diluted
loss per share 10,813 13,191
------- --------
Basic and diluted net loss
per share $ (0.07) $ (0.14)
------- --------
The calculation of diluted net loss per share for the three months ended March
31, 1999 and 1998 exclude the impact of 1,176,582 and 2,767,108 outstanding
options, respectively, as well as 200,000 shares issuable through the
conversion of outstanding warrants, as their impact would be anti-dilutive.
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 March 31, 1999, the Company had approximately $4.3 million in
high quality, auction rate preferred securities with reset dates every thirty-
five days. At March 31, 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 first quarter of 1999 as all investments were held to
maturity during the period. At March 31, 1999, the fair value of the short-
term investment approximates cost.
6
4. Inventories
- ---------------
Inventories consist of finished goods and work in process (in thousands):
March 31, 1999 December 31, 1998
-------------- -----------------
Finished Goods $ 749 $ 688
Work in process 70 504
------ ------
$ 819 $1,192
------ ------
5. Other Assets
- ----------------
A summary of other assets (in thousands):
March 31, 1999 December 31, 1998
-------------- -----------------
Investment in Tripath $ 725 $ 725
Deposits 250 308
Investment in UICC -- 8,521
Other Miscellaneous 147 68
------ ------
Total Other Assets $1,122 $9,622
====== ======
6. Segment Information
- -----------------------
Sales of the Company's product based on customer location were as follows
(in thousands):
Quarter ended March 31,
1999 1998
---- ----
Taiwan $ 2,334 $ 6,370
Singapore 2,450 343
Japan 861 1,425
Other Far East 184 38
United States 1,282 1,638
Europe Other 45 31
------- -------
Total Net Sales $ 7,156 $ 9,845
======= =======
7. Litigation
- --------------
In January 1997, a patent infringement claim was brought against the
Company by Crystal Semiconductor, 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 infringed upon
patents held by Crystal. These patents relate to the "Codec" module
incorporated in various audio controller products. The suit is seeking
judgement that Crystal's patents in suit are enforceable and are infringed, a
preliminary and permanent injuction from the acts of infringement of Crystal's
patents in the suit,an award of damages, an award of treble damages for
willful nature of the defendants' infringement, and judgement for costs and
reasonable attorney fees. 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.
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
7
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 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 compliant
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. 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 recorded no tax provisions in the first quarter 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 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 periods ended March 31, 1999 and 1998 was equal to net loss.
8
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 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 and add-on board 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 March 31, 1999, the Company reported net sales of
$7,156,000, as compared to net sales of $9,845,000 for the quarter ended March
31, 1998. This decrease in net sales for the three month period ending March
31, 1999, as compared to the quarter ending March 31, 1998, is due primarily
to the sale of the audio division to Creative Technology Ltd. in November
1997, and core logic chipsets. The decrease 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 March 31, 1999 decreased to $4,565,000
which resulted in a gross margin of approximately 36.2%, as compared to
$7,381,000, which resulted in a gross margin of approximately 25.0% for the
quarter ended March 31, 1998. This increase in gross margin as a percentage of
sales for the three month period ended March 31, 1999 as compared to the
similar period ended March 31, 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 $2,095,000 for the quarter ended
March 31, 1999, as compared with $2,363,000 for the quarter ended March 31,
1998. This decrease 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 $1,988,000 in the quarter
ended March 31, 1999 as compared with $2,998,000 in the comparable period of
1998. This decrease is primarily attributable to lower sales related expenses
as a result of decreased sales and lower employee related expenses due to
lower marketing and sales headcount after the sale of the audio group.
Interest and other income, net was $708,000 and $1,067,000 for the quarters
ended March 31, 1999 and 1998, respectively. This decrease is primarily due to
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 provision during the first quarter of 1999 and
1998, as a result of incurring losses in those periods.
9
Liquidity and Capital Resources
Cash, cash equivalents, and short-term investments increased to $69,216,000 at
March 31, 1999 from $60,903,000 at December 31, 1998. Working capital for the
same period increased to $65,094,000 from $55,791,000 at December 31, 1998.
During the first three months of 1999, operating activities used $0.3 million
of cash. Cash used in operations was primarily due to a $2.6 million reduction
in accounts payable,caused by a reduction in inventory purchases, and a $0.6
million decrease in other current liabilities, offset, in part by a $1.3
million decrease in accounts receiveable, due to lower sales during the
quarter, $0.4 million reduction in inventory, and a $0.6 million reduction in
other assets. In addition, investing activities related to capital equipment
and short-term investments provided $8.9 million in the first quarter of 1999,
primarily from the sale of the Companys investment in its joint venture
foundry, UICC, in Taiwan. Financing activities used $0.3 million in the
quarter ended March 31, 1999 as compared to providing $0.9 million in 1998.
The financing use of cash in 1999 was primarily related to a reduction of long-
term liabilities.
At March 31, 1999, the Company's principal sources of liquidity included cash,
cash equivalents and short-term investments of approximately $69.2 million and
working capital of approximately $65.1 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 current 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
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 a 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.
10
Product Transitions and the Timing and Delivery of New Products
The market for mobile core logic products and preipheral products, the sale of
which make up the bulk of the Company's revenues, are 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. In addition, the
Company expects that the revenues from mobile core logic will decline in 1999
from 1998.
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, 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. 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 segments 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 quarter of 1999 or fiscal 1998. The Company sold approximately $2.0
million and $17.1 million of mobile core logic to Compaq and its
subcontractors, approximately representing a combined 29% and 43% of net sales
for the quarter ended March 31, 1999 and fiscal 1998, respectively. Also in
the first quarter of 1999 and fiscal 1998 the Company sold to Apple Computer
and its subcontractors approximately $2.4 and $4.4 million in USB products,
representing a combined 34% 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.
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.
11
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 that 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 29% and 21%
of the Company's receivables at March 31, 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 second half of 1995, 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
accumulated, 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
12
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.
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 82%, and 86% of the Company's total revenue for the three-month
period ending March 31, 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 integrated curcuits 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 one 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 and 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
13
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
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.
14
Part II. Other Information
Item 1. Legal Proceedings.
See notes section of this report on page 7 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 5. 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 March 31, 1999.
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: 05/13/99 By: /s/ Michael Mazzoni
-----------------------
Michael Mazzoni
Signing on behalf of the Registrant
and as Chief Financial Officer
16