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Opti Inc – ‘10-K405’ for 12/31/99

On:  Thursday, 3/30/00   ·   For:  12/31/99   ·   Accession #:  1012870-0-1783   ·   File #:  0-21422

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/30/00  Opti Inc                          10-K405    12/31/99    6:314K                                   Donnelley R R & S… 13/FA

Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Form 10-K                                             45    246K 
 2: EX-10.20    Patent License Agreement                               7     28K 
 3: EX-10.21    Lease Agreement With Pvc.Com Inc.                     43    222K 
 4: EX-21.1     Subsidiaries of Registrant                             1      4K 
 5: EX-23.1     Conset of Ernst & Young LLP                            1      5K 
 6: EX-27       Financial Data Schedule                                2      7K 


10-K405   —   Form 10-K
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Business
9Factors Affecting Earnings and Stock Price
12Item 2. Properties
"Item 3. Legal Proceedings
14Item 4. Submission of Matters to a Vote of Security Holders
15Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
"1999
16Item 6. Selected Consolidated Financial Data
17Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
20Item 7a. Quantitative and Qualitative Disclosure About Market Risk
"Item 8. Financial Statements and Supplementary Data
21Item 10. Directors and Executive Officers of the Registrant
22Item 11. Executive Compensation
"Summary Compensation Table
23Item 12. Security Ownership of Certain Beneficial Owners and Management
"Item 13. Certain Relationships and Related Transactions
25Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
27Signatures
361995 Stock Option Plan
371993 Employee Stock Purchase Plan
"1996 Employee Stock Purchase Plan
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------------------------------------------------------------------------------- ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ---------------- [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to ---------------- Commission File Number 0-21422 OPTi INC. (Exact name of registrant as specified in its charter) [Download Table] CALIFORNIA 77-0220697 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3393 Octavius Drive, Santa Clara, California 95054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 486-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the registrant (1) has filed all reports required 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 [_] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on March 22, 2000 as reported on the Nasdaq Stock Market, was approximately $67,072,605. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 22, 2000, registrant had 11,508,683 shares of Common Stock outstanding for non-affiliates. ------------------------------------------------------------------------------- -------------------------------------------------------------------------------
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OPTi INC. Form 10-K For the Fiscal Year Ended December 31, 1999 INDEX [Download Table] Page Number ------ Part I Item 1. Business................................................. 1 Item 2. Properties............................................... 10 Item 3. Legal Proceedings........................................ 10 Item 4. Submission of Matters to a Vote of Security Holders...... 12 Part II Item 5. Market for Registrant's Common Stock and Related 13 Stockholder Matters..................................... Item 6. Selected Consolidated Financial Data..................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 15 Item 7A. Quantitative and Qualitative Disclosures About Market 18 Risk.................................................... Item 8. Financial Statements and Supplementary Data.............. 18 Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosures.................... 18 Part III Item 10. Directors and Executive Officers of the Registrant....... 19 Item 11. Executive Compensation................................... 20 Item 12. Security Ownership of Certain Beneficial Owners and 21 Management.............................................. Item 13. Certain Relationships and Related Transactions........... 21 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on 23 Form 8-K................................................ Signatures......................................................... 25 i
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PART I Item 1. Business 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. Introduction OPTi Inc., a California corporation ("OPTi" or the "Company"), founded in 1989, is an independent supplier of semiconductor products to the personal computer ("PC") and embedded marketplaces. The Company's products provide in one or a few semiconductor devices the core logic functions or universal serial bus controller function of a PC or embedded product. During 1999, the Company shipped over two million core logic and universal serial bus ("USB") devices to more than 50 PC manufacturers, motherboard manufacturers, and add- in board manufacturers located primarily in Asia and the U.S. During the past year, the Company shifted its efforts away from its primary focus on the design, development, marketing and sale of core logic products to its peripheral products (primarily the USB device, USB) for use by OEM's in the personal computer market. During the month of February 1999 the Company stopped development of its core logic products completely. The Company continues to ship its core logic products today, mainly into embedded designs which historically have a much longer product life cycle than the PC market. During 1999 the Company's revenue from core logic chipsets was approximately 56% of its revenue as compared to 74% in 1998. Peripheral products were 44% and 26% of the Company's revenue during 1999 and 1998, respectively. In addition, the Company has continued, and is continuing, its efforts to maximize shareholder value through restructuring of the Company's business and assets. As previously announced, the Company has retained the services of Warburg Dillon Read, the investment banking division of USB, to advise the Company on possible strategic alternatives, including the sale of the Company, sale of divisions of the Company, or strategic licensing deals. During the first quarter of 2000, with the assistance of Warburg Dillon Reed, the Company announced the signing of a one-time full paid license on all of its patents and pending patents. 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 competion 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 experienced some success in the past few years. In the past the Company's sales have been primarily attributable to its introduction of highly integrated chipsets. The Company continues to focus its efforts on increasing the revenue it receives from licensing its core logic technology and continueing to sale its USB and core logic products into existing and new marketplaces. The Company sells, and will continue to sell, its products to its customers and their suppliers directly or through a network of independent sales representatives. In the first quarter of 2000 the Company signed a one-time fully paid license agreement for $13,500,000. The Company's strategy, at this time is to license its core logic technology that its 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. 1
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Industry Background During the last decade, the PC industry has grown rapidly as increased functionality combined with lower pricing have made PCs valuable and affordable tools for business and personal use. The principal functions of a PC are provided by a circuit board known as the motherboard, consisting of a microprocessor, bus circuits, various memory devices and core logic circuits. The bus is the pathway through which the microprocessor communicates with peripheral devices and adapter cards. Core logic circuits perform five principal functions in the PC: system control, memory control, bus control, bus buffering and peripherals control. System control refers to the computing functions which enable the microprocessor to manage the flow of data between the microprocessor, the system bus and memory. Memory control consists of the control functions employed by the microprocessors to efficiently manage the operations of memory devices. Bus control enables the PC to implement the protocols necessary to achieve compatibility with industry standard bus interfaces and protocols, such as Industry Standard Architecture ("ISA"), Extended Industry Standard Architecture ("EISA"), Video Enhancement Standard Architecture ("VESA") and Peripheral Control Interconnect ("PCI"). Peripherals control facilitates the operations of peripheral devices such as the disk drive, keyboard and display device. In personal computer designs employed in the early-1980's, the core logic functions were performed by several large scale integrated ("LSI") circuits and numerous discrete transistor ("TTL") circuits located on the motherboard. Although these circuits were available to PC manufacturers from third party semiconductor suppliers, the large number of discrete devices needed to implement core logic functions resulted in high part counts, low production yields and relatively high total system costs. Moreover, the qualifications and integration of numerous discrete devices caused the development effort to be complex and time consuming. The high development costs associated with this effort greatly favored PC manufacturers who had the development resources and expertise necessary to introduce complex computer systems in a timely fashion. The trend to higher performance, lower cost personal computers has been accompanied by a variety of changes in the market for personal computers and the technologies used to address these emerging market requirements. The consumer and home office sectors have become the fastest growing sectors of the PC market, driven, in part, by the emergence of low-cost multimedia computers and peripherals. Industry studies indicate that an increasing percentage of personal computers are now sold with multimedia functionality which typically involves sound and support of full screen, full-motion video technologies. As the personal computer industry has matured and become more consumer-oriented, large OEM PC suppliers, including major competitors from the consumer electronics arena, have captured market share from smaller PC vendors as strength of brand name, customer support and distribution channels have become more important competitive factors in the industry. These changes in the personal computer market and technology directly affect the market for core logic chipsets. The primary customer base for chipsets has shifted significantly to major PC manufacturers and to the suppliers to these leading OEM customers, in contrast to prior periods in which motherboard manufacturers and system integrators represented the largest portion of the market for core logic chipsets. Large OEMs require increasingly higher levels of product integration, thus enabling them to reduce parts count and control total product costs. The Company also expects that peripheral functions historically provided by add-in boards, such as sound functionality, may be provided by semiconductor circuits included on the personal computer motherboard or incorporated in the core logic chipset. During 1995 and 1996, almost a complete shift occurred in the personal computer market to Pentium class products and away from 486 microprocessor- based products. With this shift, the industry standard became a Pentium-based system with a VESA local bus or PCI local bus structure. During the second half of 1995, the market for 486-based computers and the related market for chipsets and motherboards and licensing motherboards used in 486 computers declined precipitously. Due to the speed of this shift, the personal computer 2
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industry has experienced excess inventories of 486-based computers and motherboards and rapidly deteriorating pricing for these products. The Company believes that the personal computer marketplace may be headed for another such shift as the industry moves from the Pentium class microprocessor to the Pentium III class microprocessor. The shift in the desktop marketplace started to occur in late 1999, while the mobile market has historically followed six to twelve months after the transition in the desktop marketplace. Concurrent with these shifts, the market for motherboards and chipsets changed significantly as Intel captured an increasing percentage of the motherboard market by selling completed motherboards and licensing motherboard production in the Far East, employing the Intel Pentium microprocessor, Intel chipsets and other circuitry. Intel's entry into the motherboard market has had a direct adverse effect on the Taiwan motherboard market, and resulted in a significant decline in demand for core logic chipsets from Taiwan motherboard manufacturers. Dramatic growth has continued in the PC market as computer and consumer electronics industries have converged, combining increased multimedia and communications capabilities. Today's systems increasingly offer more powerful microprocessors, highly integrated chipsets, integrated video, stereo sound, highspeed fax and modem communications and CD-ROM. Like the PC market, the market for chipsets is seasonal. In general, chipset suppliers experience higher sales in the second half of the calendar year than they experience in the first half of the year. Strategy The Company's strategy incorporates the following elements: License Opportunities for Chipset Technology One of the Company's principal strategies is to pursue licensing opportunities in the core logic area. During the first quarter of fiscal year 2000, the Company entered into a one-time licensing arrangement for $13,500,000 on the core logic technology that the Company had developed during its first twelve years in existence. We believe that there may be additional companies that may have the need to license the technology that we have developed. The Company is actively working to explore all of the possible licensing arrangements. Continue to Sale Products Which Address New Market Opportunities The Company continues to expand its market opportunities outside core logic, including USB controllers. The Company believes that its relationships with major PC OEMs who used the Company's core logic chipsets may provide a marketing opportunity in offering additional products outside of the core logic area. Address Both U.S. and Asia Markets A significant aspect of the Company's market strategy for its peripheral products, is to address both the U.S. market consisting of large PC OEMs and the Asian market consisting primarily of subcontractors for U.S. OEMs, motherboard manufacturers and add-in card manufacturers. The Company offers manufacturers in these markets low cost solutions designed for the specific needs of each market. Achieve Low Costs and Maintain Product Quality Through Custom Owned Tooling Design An important aspect of the Company's manufacturing strategy is to vigorously control production and operating costs through efficient product designs. The Company does not maintain its own internal production capabilities and relies on third-party foundries to produce its products. Over the last several years, the Company 3
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has implemented full custom designs in substantially all areas of its core logic chipsets and has established one or more than one foundry for each of its principal products. Reliance on outside foundries has enabled the Company to focus its development resources on circuit design and to avoid the capital expenditures and overhead required to maintain semiconductor manufacturing facilities. Product Design Innovations and Technologies The Company's products incorporate a variety of advanced technologies to enable PC manufacturers to introduce high performance low cost systems. These products, design innovations and technologies include: Peripheral Products USB Controller The Company currently offers a USB Host Controller which brings USB support to any PCI-based system. Its compact packaging allows it to be accommodated in virtually any personal computer, consumer electronic devices, or other systems requiring this functionality. The USB Controller is fully supported under Windows 95, Windows 98, and Windows CE. The Company's implementation is unique because it provides power management features not found in competitive solutions. Docking Station The Company currently offers a docking solution within its mobile computer product offerings. This solution supports either a 5 volt or 3.3 volt docking interface running synchronously or asynchronously at speeds up to 33 Megahertz. By offloading the primary PCI bus, the docking solution can increase its bandwidth. Sales and Marketing OPTi markets its products to PC suppliers, motherboard manufacturers, and add-on board manufacturers directly and through independent sales representatives. In North America, OPTi's sales organization from the Company's headquarters in Santa Clara, California. In Asia, the Company operates from a wholly owned subsidiary in Tokyo, Japan and through independent sales representatives located in Korea. The Company's products are used by a variety of major personal computer and motherboard manufacturers. In 1999, personal computer suppliers who used the Company's products included Compaq, , Siemens, Apple and NEC/Packard Bell. The Company's sales to any single customer fluctuates significantly from period to period based on order rates and design cycles. Any individual customer may or may not continue purchasing products in any particular subsequent product release or generation. It has been the Company's experience that its major customers have changed from quarter to quarter and year to year, and the Company expects these changes in its customer base will continue to occur based on the individual customer requirements and strategies. Sales to the Company's customers are typically made pursuant to specific purchase orders, which are cancelable without significant penalties. Sales to customers in Asia accounted for 82.2%, 86.0%, and 89.2% of net sales in the years ended December 31, 1999, 1998 and 1997, respectively. Sales to customers in Europe and other countries outside the U.S. and Asia accounted for 0.5%, 0.4%, and 0.3% of net sales in the years ended December 31, 1999, 1998 and 1997, respectively. During these three years, billings to almost all customers were made in US dollars. Approximately 16%, 15%, and 13% of sales were billed in Japanese yen in 1999, 1998 and 1997, respectively. Due to its export sales, the Company is subject to the risks of conducting business internationally, including unexpected changes in regulatory requirements, fluctuations in the U.S. dollar (which could increase the sales price in local currencies of the Company's products in international markets or make it difficult for the Company to obtain price reductions from its foundries), delays in obtaining export licenses for certain technology, tariffs and other barriers and restrictions. 4
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As is common in the semiconductor industry, the Company's business relationships with its customers require it to acquire and maintain inventories of its products based on forecast volumes from customers and in amounts greater than that supported by firm backlog. The Company's customers typically purchase products on a purchase order basis and do not become obligated to purchase any quantity of products prior to the issuance of the purchase order, even if the customer has previously forecast a substantially higher volume of products. The Company typically places non-cancelable orders to purchase its products from its foundries on an approximately twelve week rolling basis, while its customers generally place purchase orders approximately four weeks prior to delivery which may be canceled without significant penalty. Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expense and inventory levels could be disproportionately high, requiring significant working capital. The Company has experienced cancellation and shortfalls in purchase orders in the past, and in some instances such changes have resulted in inventory write-downs or write-offs. The Company expects that it will continue to experience such difficulties in the future. The Company's payment terms to its customers typically require payment 30 to 60 days after shipments of products, which is the industry standard. The Company sometimes obtains letters of credit in support of sales to customers primarily located in Asia. International sales supported by letters of credit are normally paid in a period of time which is shorter than the payment period for sales for which no letter of credit is provided. Customer Support and Service The Company believes that customer service and technical support are important competitive factors in the embedded and peripheral product markets. The Company provides technical support for customers in the U.S. and Asia. Manufacturers' representatives supplement the Company's efforts by providing additional customer service and technical support for OPTi products. Manufacturing, Quality Control and Design Methodology The Company subcontracts its manufacturing to independent foundries which allows OPTi to avoid the significant fixed overhead, staffing and capital requirements associated with semiconductor fabrication facilities. As a result, the Company is able to focus its resources on product design and development, test, quality assurance, marketing and customer support. The majority of the Company's products are currently manufactured using its custom owned tooling process and procured wafers and die primarily from United Microelectronics (UMC) in Taiwan, TSMC in Taiwan, Toshiba in Japan, and packaging houses in Taiwan. The Company, in an effort to secure long term capacity has developed strong relationships with its suppliers. The Company is constantly engaged in cost reduction programs that need to be successful in order to ensure the profitability for products that face intense price competition in the marketplace. Currently, the Company has been experiencing at time an inability to get the amount of wafers that it requires to met some of its customer demand. However, the semiconductor industry experiences cycles of under-capacity and over-capacity which have resulted in temporary shortages of products in high demand, as experienced in the industry at various times through 1999. The Company has attempted to reduce inventory risks by improving its forecasting capabilities. Despite the fact that the Company has taken measures to avoid supply shortages, periods of under-capacity may develop, creating possible shortages for the Company's products. In the event of lower demand for the Company's products, the Company may still be required to purchase wafers in excess of that demand. Any such shortage or delays that are caused by under capacity or any excess inventory created by a lowering of the Company's actual demand for wafers could have a material adverse effect on the Company's operating results. 5
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Research and Development 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 March 22, 2000, the Company had a staff of one research and development person, which conducts virtually all of the Company's product development with the assistance of outside contractors. During 1999, 1998 and 1997, respectively, the Company spent approximately $5.6, $9.7, and $12.6 million on research and development. All research and development costs are expensed as incurred. The Company has invested in technologies which, although not currently productized, may be integrated into future products. Competition The market for the Company's products is intensely competitive. Important competitive factors in the Company's markets are price, performance, time-to- market, added features, degree of integration, technical support and cost. The Company believes that it currently competes effectively with respect to these factors, although there can be no assurance that the Company will be able to compete effectively in the future. The Company's competitors in both the core logic chipset market and the peripheral products market include a large number of competitive companies, several of which have achieved a substantial market share. Certain of the Company's competitors in both of these markets have substantially greater financial, marketing, technical distribution and other resources, greater name recognition, lower cost structures and larger customer bases than the Company. In addition, the Company faces competition from current and prospective customers that evaluate the Company's capabilities against the merits of manufacturing products internally. The Company also faces competition from new and entering companies that have recently entered or may in the future enter the markets in which the Company participates. Competition in Mobile Core Logic Market/Embedded Marketplace The Company's main competitor in this market is Intel. Although Intel has not been as aggressive in this market as it has been in the desktop core logic area, there can be no assurances that they will not develop a strategy to attempt to control this market. The Company must continue to try to compete with Intel based on product features and product compatibility, but there can be no assurance that it will be successful in doing so. The Company's other competitors in the core logic area include major domestic and international semiconductor companies and established chipset companies, including Acer Labs Inc., Silicon Integrated Systems, United Microelectronics Corporation and VIA, Inc. Certain of these companies, in addition to Intel, have substantially greater financial, technical, marketing and other resources than the Company and several have their own internal production capabilities. The Company must face the challenge of competing at the high end of the marketplace, in the PC OEM area, based on features and at the lower end of the marketplace, the motherboard market, based on price. Competition in USB Market The Company's main competitors in this marketplace include CMD, Lucent Technologies and VIA, Inc. As in the core logic marketplace, certain of these companies have substantially greater financial, technical, marketing and other resources than the Company. The Company must continue to try and compete with these companies based on product features and price. Intellectual Property The Company seeks to protect its proprietary technology by the filing of patents. The Company currently has thirty patents based on certain aspects of the Company's designs. The Company currently has seven patents pending for its technologies, and there can be no assurance that the pending patents will be issued or, if issued, will provide protection for the Company's competitive position. 6
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The Company is currently being sued by one party. The party is alleging that certain of the Company's products have infringed upon the party's intellectual property rights. Moreover, the Company has been and may from time to time continue to be notified of claims that it may be infringing patents, copyrights or other intellectual property rights owned by other third parties. There can be no assurance that these or other companies will not in the future pursue claims against the Company with respect to the alleged infringement of patents, copyrights or other intellectual property rights. In addition, litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against third party claims of invalidity. The current litigation or any other litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that additional infringement, invalidity, right to use or ownership claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future. The Company has entered into license agreements in the past regarding certain alleged infringement claims asserted by third parties. In response to the current litigation or if any other claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available under reasonable terms or at all. The failure to obtain a license under a patent or intellectual property right from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of the products utilizing the intellectual property. In addition, should the Company decide to litigate the current claims or such other claims, such litigation could be extremely expensive and time consuming and could materially and adversely affect the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. Backlog Because the Company's customers typically expect quick deliveries, the Company seeks to ship products within a few weeks of receipt of a purchase order. A customer may reschedule delivery of products on a purchase order or cancel the purchase order entirely without significant penalty. In addition, the Company's actual shipments depend on the manufacturing capacity of the Company's foundries, packaging houses, internal test facilities, and other industry factors. In the past, the Company has experienced material order cancellations and deferrals, and expects that it will experience these issues in the future. As a result, the Company does not believe that backlog is a reliable indicator of future sales. At December 31, 1999, the Company's backlog scheduled for delivery within six months was approximately $3.4 million, all of which is expected to be filled during fiscal 2000 (subject to rescheduling or cancellations). This amount compares to a backlog of approximately $4.5 million as of December 31, 1998. 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. 7
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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 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 sale 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 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 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 fiscal 1999. The Company sold approximately $6 million of mobile core logic to Compaq and its subcontractors, representing a combined 27% of net sales for fiscal 1999. Also in fiscal 1999 the Company sold to Apple Computer and its subcontractors approximately $6 million in USB products, representing a combined 27% of net sales for that period. In 1998, the Company sold approximately $17 million of mobile core logic product to Compaq and its subcontractors, representing a combined 43% of net sales for that period. Also in fiscal 1998 the Company sold to Apple Computer and its subcontractors approximately $4 million in USB products, representing a combined 11% of net sales for that period. In 1997, the Company sold approximately $27 million of chipsets to Compaq and its subcontractors, representing a combined 40% of net sales in that period.. The Company expects that sales of its products to a relatively small group of customers will continue to account for a high percentage of its net sales in the foreseeable future, although the Company's customers in any one period will continue to change. However, there can be no assurance that any of these customers or any of the Company's other customers will continue to utilize the Company's products at current levels, if it all. The Company has experienced 8
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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 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 4% of the Company's receivables at December 31, 1999 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, the Company was unable to meet the demand for certain of its products due to limited foundry capacity and the Company expects that it will experience other production shortfalls or difficulties in the future. Because the Company's purchase orders with its outside foundries are non- cancelable by OPTi, the Company is subject to risks of, and has in the past experienced, excess or obsolete inventory due to an unexpected reduction in demand for a particular product. The manufacture of chipsets is a complex process and the Company may experience short-term difficulties in obtaining timely deliveries, which could affect the Company's ability to meet customer demand for its products. Should any of its major suppliers be unable or unwilling to continue to manufacture the Company's key products in required volumes, the Company would have to identify and qualify acceptable additional foundries. This qualification process could take up to six months or longer. No assurances can be given that any additional sources of supply could be in a position to satisfy any of the Company's requirements on a timely basis. The semiconductor industry experiences cycles of under-capacity and over-capacity which have resulted in temporary shortages of products in high demand. Any such delivery problems in the future could materially and adversely affect the Company's operating results. The Company began using Custom Production in 1993. Custom Production requires that the Company provide foundries with designs that differ from those traditionally developed by the Company in its gate array production and which are developed with specialized tools provided by the foundry. This type of design process is inherently more complicated than gate array production and there can be no assurance that the Company will 9
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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. 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. Employees As of December 31, 1999, the Company had 45 full-time employees, including 14 in research and development, 14 in marketing, sales, and support and 17 in finance, administration and operations. The Company's future success will depend, in part, on its ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel, who are in great demand. The Company's employees are not represented by any collective bargaining unit, and the Company has never experienced a work stoppage. The Company's ability to retain key employees is a critical factor to the Company's success. As of March 22, 2000, the Company employed 21 full- time employees, due to the reduction in staff action that the Company took in January 2000. The major reduction was in the research and development area as the Company made the decision to discontinue all future new product development. The Company will continue to make efforts to enhance features on its existing products and/or look to acquire technology. Item 2. Properties The Company is headquartered in Santa Clara, California, where it leases administrative, sales and marketing, product development, and distribution facilities in one location consisting of an aggregate of approximately 12,000 square feet. The Company has an additional two buildings, approximately 52,000 square feet and 45,000 square feet, that it leases in Milpitas, California. The 45,000 square foot facility is sub-leased through the life of the lease, October 2002, while the 52,000 square foot facility is sub-leased through December 2000. The Company believes that these facilities are adequate for its needs in the foreseeable future. The Company also leases office space in Tokyo, Japan to provide sales and technical support to customers in this region. The Company believes that this facility is adequate for its needs in the foreseeable future. Item 3. Legal Proceedings 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 10
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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 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. If Crystal prevails in its appeal and Tritech is unable to reimburse the Company due to its filing for Judicial Management the results would have a material adverse effect on Opti's financial position, results of operations, and cash flow. A March 1994 Development Agreement between the Company and TriTech Microelectronics International PTE LTD states that Tritech shall "fully and effectively indemnify, defend and save harmless" the Company against any claim that the products at issue in this action infringe the intellectual property rights of others. However, in May 1999, TriTech Microelectronics, Pte, Ltd. filed a "Petition For Judicial Management Order" in the High Court of the Republic of Singapore, on the grounds that TriTech is "unable to pay its debts" including its obligations to indemnify OPTi from Crystal's claim for damages. The Order for a Judicial Manager to be appointed for TriTech was granted on July 2, 1999. OPTi is in the process of filing a claim with the Judicial Managers in regards to the indemnification agreement. 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. 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 11
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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." On February 26, 1999, the Lemelson Medical, Education and Research Foundation (the "Lemelson Foundation") filed a complaint in the United States District Court for the district of Arizona against the Company and 87 other defendant companies claiming patent infringement. No complaint has actually been served against the Company. In August 1999, the Company and the Lemelson Foundation reached an agreement in regards to the patents at suit. Under terms of the license agreement, the Lemelson Foundation agrees not to sue the Company on its patents and pending applications and any subsequently filed applications claiming inventions originally disclosed in any such existing patents or pending applications. In September and October 1995, the Company was served with multiple shareholder class action lawsuits filed in the United States District Court for the Northern California District of California. The lawsuits, which named the Company and several of its officers and directors as defendants, alleged violations of the federal securities laws in connection with the announcement by OPTi Inc. of its financial results for the quarter ended September 30, 1995. In December 1997, the Company and its insurance carriers reached a settlement with the plaintiffs in regards to this suit. The Company was responsible for approximately $500,000 of the settlement amount, which was paid in fiscal 1998. While, the Company claims no wrongdoing in regards to this matter it believed that the expense and time spend to continue to defend its position would have been more costly than the actual settlement. The Company is also subject to commercial litigation which the Company believes is not material to its financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. 12
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PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters The following required information is filed as a part of this Report: On November 17, 1999, the Company paid a cash dividend of $4.00 per share on each share of its common stock. The Board of Directors made the determination of providing the cash dividend based upon the Company's then existing excess cash position. The Company had not previously paid cash dividends on its common stock, and currently intends to retain any future earnings for use in the operation of its business. Accordingly, the Company does not expect to pay further cash dividends in the foreseeable future. The Company's common stock is traded over-the-counter and is quoted on the National Market System under the symbol "OPTI". The following table sets forth the range of high and low closing prices for the Common Stock: [Download Table] Quarterly Period Ended ------------------------------------ Dec. 31, Sept. 30, June 30, Mar. 31, Common stock price per share: -------- --------- -------- -------- 1999 High................................. $7.25 $7.44 $6.44 $6.25 Low.................................. 3.06 5.63 5.28 4.13 1998 High................................. $4.88 $6.94 $7.13 $7.31 Low.................................. 3.25 4.00 6.44 6.00 As of March 22, 2000, there were approximately 185 holders of record of the Company's common stock. 13
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Item 6. Selected Consolidated Financial Data [Download Table] Year Ended December 31, ---------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- -------- -------- -------- Consolidated Statement of Operations Data: Net sales...................... $22,257 $40,003 $ 67,842 $118,725 $163,676 Cost of sales.................. 14,403 26,712 50,471 111,395 121,587 ------- ------- -------- -------- -------- Gross margin................... 7,854 13,291 17,371 7,330 42,089 Operating expenses............. 16,776 20,623 27,836 31,000 27,458 ------- ------- -------- -------- -------- Operating income (loss)........ (8,922) (7,332) (10,465) (23,670) 14,631 Other income (expenses): Gain on sale of Audio line.... -- -- 12,391 -- -- Interest income and other..... 3,231 3,717 3,031 2,417 3,210 Interest expense.............. (261) (312) (473) (441) (306) ------- ------- -------- -------- -------- Income (loss) before provision for income taxes.............. (5,952) (3,927) 4,484 (21,694) 17,535 Provision (benefit) for income taxes......................... 59 285 9,872 (7,636) 6,285 ------- ------- -------- -------- -------- Net Income (loss).............. $(6,011) $(4,212) $ (5,388) $(14,058) $ 11,250 ------- ------- -------- -------- -------- Basic net income (loss) per share......................... $ (0.54) $ (0.35) $ (0.42) $ (1.13) $ 1.02 ======= ======= ======== ======== ======== Shares used in computing basic per share amounts............. 11,059 12,196 12,838 12,443 11,033 ======= ======= ======== ======== ======== Diluted net income (loss) per share......................... $ (0.54) $ (0.35) $ (0.42) $ (1.13) $ 0.85 ======= ======= ======== ======== ======== Shares used in computing diluted per share amounts..... 11,059 12,196 12,838 12,443 13,171 ======= ======= ======== ======== ======== Consolidated Balance Sheet Data: Cash, cash equivalents, and short-term investments....... $23,722 $60,903 $ 72,508 $ 56,372 $ 50,302 Working capital............... 19,682 55,791 75,360 76,188 71,481 Total assets.................. 28,232 81,575 111,615 115,501 106,458 Long-term obligations, excluding current portion.... 310 1,810 3,473 4,649 2,316 Shareholders' equity.......... 21,182 69,285 92,723 96,371 79,149 Cash dividends declared per common share................. $ 4.00 $ -- $ -- $ -- $ -- 14
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Item 7. Management's Discussion and Analysis of Financial Condition and 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. OPTi was founded in 1989 and is an independent volume supplier of semiconductor products to the personal computer market.. During 1999, the Company shipped more than two million core logic and peripheral products (such as USB contollers and docking stations to over 50 PC and motherboard manufacturers and add-on board manufacturers located primarily in Asia and the U.S. 1999 Compared to 1998--Net sales for the year ended December 31, 1999 ("1999") decreased 44% to $22.3 million, compared to net sales of $40.0 million for the year ended December 31, 1998 ("1998"). This decrease in sales was attributable to decreased sales of chipsets supporting the Company's mobile core logic products and decreased sales from audio products after the Company sold its Audio assets to Creative Technology in November 1997, as well as the loss of significant mobile core logic design wins in the second half of 1999 Revenue from core logic products were approximately 56% of net sales for 1999 as compared to approximately 74% in 1998. The remaining 44% of revenue in 1999 was from peripheral products (the vast majority from our USB product). The mix of revenues within the Company shifted in the second half of 1999 to a higher percentage of peripheral products, specifically the USB product, and a lower percentage of core logic products. It is likely that the Company will experience ongoing shifts in its revenue mix, as sales of core logic chipsets continue to decline. No assurances can be given that future revenues will reflect this product mix trend. Gross margin for 1999 increased to approximately 35% of net sales as compared to approximately 33% in 1998. This increase in gross margin for 1999 as compared to 1998 was primarily attributable to change in the Company's product mix from core logic to peripheral products. The Company was also sucessful in 1999 in obtaining a reduction in costs of wafers used in its core logic products and a reduction in the cost of assembling its core logic and peripheral products. The Company is likely to face potential inventory risks and adjustments if anticipated sales and shipments do not occur when expected. The markets for the Company's products are also 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 its gross margin level or that further substantial reductions in chipset prices will not result in future losses. Research and development ("R&D") expenses for 1999 decreased approximately 42% to $5.6 million, compared with $9.7 million for 1998. The decrease in research and development expenses from 1998 to 1999 is primarily related to the Company's decision to discontinue all development efforts related to mobile core logic. During fiscal 1999 the Companys main focus for research and development was on the peripheral products, USB controllers and LCD products. The Company anticipates a decline in this spending area in 2000 due to the reduction in headcount. Selling, general and administrative ("SG&A") expenses for 1999 increased approximately 2% to $11.2 million, compared with $10.9 million in 1998. This increase in SG&A expenses from 1998 to 1999 was primarily attributable to the litigation expenses that the Company incurred in regards to the award of a judgment for $4.0 million plus costs in the Crystal litigation in Austin, Texas. This increase was partially offset by, decreased costs related to reduced net sales and reduced headcount related expnses in both the sales and General & administrative areas. The Company anticipates a decline in this spending area in 2000 due to the reduction in headcount. 15
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Net interest and other income for 1999 was $3.0 million as compared to $3.4 million for 1998. Interest and other income consists primarily of interest income and has decreased primarily due to lower average interst rates during 1999 versus 1998 and lower cash balances in the fourth quarter of 1999, following the Company's payment of dividends. The Company's effective tax rate was 1% for 1999 and 7% for 1998. The Company's effective tax rate differed from the federal statutory rate in 1999 due primarily to federal alternative minimum taxes and the limitations controlling the timing for recognition of deferred tax assets established by Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes" which will prevent a tax benefit for potential operating losses. 1998 Compared to 1997--Net sales for the year ended December 31, 1998 ("1998") decreased 41% to $40.0 million, compared to net sales of $67.8 million for the year ended December 31, 1997 ("1997"). This decrease in sales was attributable to decreased sales of chipsets supporting the Company's mobile core logic products and decreased sales from audio products after the Company sold its Audio assets to Creative Technology in November 1997. In 1998 the Company shipped approximately 4.4 million chipsets and peripheral products as compared to approximately 5.7 million in 1997. Revenue from core logic products were approximately 74% of net sales for 1998 as compared to approximately 73% in 1997. The remaining 26% of revenue in 1998 was from peripheral products (USB, audio and graphics). The mix of revenues within the Company shifted in the second half of 1998 to a higher percentage of peripheral products, specifically the USB product, and a lower percentage of core logic products. Gross margin for 1998 increased to approximately 33% of net sales as compared to approximately 26% in 1997. This increase in gross margin for 1998 as compared to 1997 was primarily attributable to change in the Company's product mix from core logic to peripheral products. In 1997 the majority of non core logic products was audio products which carried a lower gross margin than the USB controller which was the majority of non core logic products in 1998. The Company was also sucessful in 1998 in obtaining a reduction in costs of wafers used in its core logic products and a reduction in the cost of assembling its core logic products. Research and development ("R&D") expenses for 1998 decreased approximately 23% to $9.7 million, compared with $12.6 million for 1997. The decrease in research and development expenses from 1997 to 1998 is primarily related to the Company's shift in market focus over the last year as the Company has focused more heavily on notebook directed technologies and has reduced research and development spending in other areas resulting in a net reduction in spending. Selling, general and administrative ("SG&A") expenses for 1998 decreased approximately 22% to $10.9 million, compared with $14.1 million in 1997. This decrease in SG&A expenses from 1997 to 1998 was primarily attributable to decreased net sales. Net interest and other income for 1998 was $3.4 million as compared to $2.5 million for 1997. Interest and other income consists primarily of interest income and has increased primarily due to higher average interst rates during 1998 versus 1997. The Company's effective tax rate was (7%) for 1998 and 220% for 1997. The Company's effective tax rate differed from the federal statutory rate in 1998 due primarily to federal alternative minimum taxes and the limitations controlling the timing for recognition of deferred tax assets established by Statement of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income Taxes" which will prevent a tax benefit for potential operating losses. Liquidity and Capital Resources--The Company has financed its operations through cash generated from operations and an initial public offering of equity in 1993. In 1999, the Company used cash from operating activities of $1.5 million primarily due to reductions in accounts payable and the Companys net loss for the year. 16
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This was partially offset by decreases in accounts receivable, and inventories as well as an increase in accrued expenses, relating to the litigation.. In 1998, the Company generated cash from operations of $9.4 million primarily due to reductions in accounts receivable and inventory due to lower sales. This was partially offset by a decrease in accounts payable and a net loss for the year. The Company's investing activities provided cash of approximately $14.0 million during 1999. The cash provided by investing activities was attributable to the sale of the Company's investment in the UICC wafer fab and the sale of its short- term investments. The Company's investing activities provided cash of approximately $3.6 million in 1998. The cash provided by investing activities was attributable to sale of its short-term investments of approximately $4.4 million, offset, in part, by purcahses of property and equipment. The Company's investing activities provided cash of $3.3 million in fiscal 1997. This cash generated during 1997 was primarily due to proceeds of $13.9 million from the sale of the Company's audio line, partially offset by, an investment into short term investments of approximately $8.7 million and a payment of approximately $1.6 million to United Microelectronics Corporation ("UMC") as partial payment under terms of the 1995 agreement that the Company signed with UMC. As of December 31, 1997 the Company has no further obligations under this agreement. Financing activities used cash of approximately $45.4 million in 1999. This use in cash for financing activitities during 1999 was mainly attributable to a cash dividend paid in November 1999 and principal payments on the capital lease obligations. This was partially offset by proceeds from the sale of the Company's common stock. Financing activities used cash of approximately $20.2 million in 1998. This use in cash for fiscal 1998 was primarily due to the Company repurchasing approximately $24.0 million of its common stock based on a repurchase program announced in June 1998 and principal payments on capital leases offset, in part, by proceeds from the sale of the Company's common stock The Company's manufacturing plans and expenditure levels are based primarily upon sales forecasts. Typically, the Company orders products from foundries pursuant to non-cancelable purchase orders on a rolling twelve week basis while its customers generally place product orders approximately four weeks prior to delivery, which orders may be canceled without significant penalty. The Company anticipates that the rate of new orders will vary significantly from month to month. As a result, backlog can fluctuate significantly. Consequently, if anticipated sales and shipments do not occur when expected, expense and inventory levels could be disproportionately high and the Company's operating results could be materially and adversely affected. In January 2000, the Company entered into a non-exclusive license agreement for all of its patents with a major semiconductor company. In return for the one time fully paid up license fee of $13,500,000, OPTi releases this company from any and all claims or liability for infringement of OPTi patents. OPTi is also released of liability for any infringement of the other company's patents that arose prior to the signing date. As of December 31, 1999, the Company's principal sources of liquidity included cash and cash equivalents and short term investments of approximately $23.7 million and working capital of $19.7 million. The Company believes that the existing sources of liquidity will satisfy the Company's projected working capital and other cash requirements through at least the end of 2000. 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." 17
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Year 2000 In prior years, the Company discussed the nature and progree of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experiernced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $100,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any Year 2000 matters that may arise are addressed promptly. Item 7a. 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 December 31, 1999, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Item 8. Financial Statements and Supplementary Data The Company's financial statements and the report of the independent auditors appear on pages F-1 through F-17 of this Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None. 18
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PART III Item 10. Directors and Executive Officers of the Registrant Directors and Executive Officers of the Registrant The directors and executive officers of the Company as of March 26, 1999 were as follows: [Download Table] Name Age Position with the Company ---- --- ------------------------- Bernard Marren............... 64 Chief Executive Officer, Chairman of the Board Douglas Gans................. 55 Chief Financial Officer and Secretary Stephen A. Dukker(1)......... 47 Director William Welling(1)(2)........ 63 Director Kapil K. Nanda(1)(2)......... 54 Director -------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Bernard T. Marren has served as President and Chief Executive Officer of the Company since May 1998. Mr. Marren was elected as a director in May 1996. Mr. Marren founded Western Microtechnology Inc.,a distributor of electronic systems and semiconductor devices. He served as its President from 1977 to 1994. From 1972 to 1976, Mr. Marren was President of American Microsystems. He also founded and was the first President of SIA (the Semiconductor Industry Association). Mr. Marren is also a director of several private companies. Douglas Gans was appointed Chief Financial Officer of the Company in January 2000. Mr. Gans has over 30 years of financial management experience. He is a consultant to the Company working for the Brenner Group. From 1991 to 1999 he held the position of CFO at Asante Technologies, Inc, and Sunseeds Corporation. Stephen A. Dukker was elected as a director of the Company in January 1993. He is currently President of E-machines where he has been employed since mid 1998. He was a Senior Vice President of Merchandising at Computer City from October 1997 to August 1998. He served as President of OPTi Inc. from January of 1996 to October 1997. From May 1994 to mid 1995, Mr. Dukker served as President of VideoLogic, Inc., a supplier of video and graphics add-on boards. From June 1991 through October 1993, he served as a Senior Vice President of CompUSA, Inc., a chain of discount computer superstores. During that time he was also a member of the Executive Committee of CompUSA and President of its Compudyne Computer manufacturing and mail order subsidiaries. Prior to joining CompUSA, Mr. Dukker was President of PC Brand, Inc., a manufacturer and mail order distributor of PC products from January 1988 to May 1991. William Welling was elected as a director in August 1998. He is currently Chairman and CEO of Xiox Corporation, a telecommunications software company. Since 1983 he has been Managing Partner of Venture Growth Associates, an investment firm. Mr. Welling also serves as a director on the boards of several private companies. Kapil K. Nanda was elected as a director in May 1996. Mr. Nanda is currently President of InfoGain Corporation, a software and development consulting company, which he founded in 1990. Prior to 1990, Mr. Nanda held various positions at Altos Computer Systems, a personal computer manufacturing company, from 1981 to 1989. Serving as Vice President of Engineering from 1984 to 1988. From 1974 to 1981, Mr. Nanda was employed at Intel Corporation, serving as Manager, Software Engineering from 1976 to 1981. Mr. Nanda holds a B.S. in Engineering from the University of Punjab, India, an M.S. in Engineering from the University of Kansas, and an M.B.A. from the University of Southern California. Compliance with Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file certain reports 19
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regarding ownership of, and transactions in, the Company's securities with the Securities and Exchange Commission (the "SEC") and with Nasdaq. Such officers, directors and 10% shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms that they file. Based solely on its review of copies of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) and Forms 5 and amendments thereto furnished to the Company with respect to the Last Fiscal Year, and any written representations referred to in Item 405(b)(2)(i) of Regulation S-K stating that no Forms 5 were required, the Company believes that, during the last Fiscal Year, all Section 16(a) filing requirements applicable to the Company's officers, directors and 10% shareholders were complied with Item 11. Executive Compensation Summary Compensation Table The following table sets forth certain information with respect to the compensation paid by the Company for services rendered during fiscal years 1999, 1998, and 1997 to Bernard Marren and Michael Mazzoni (the "Named Officers"). The table lists the principal position held by each Named Officer in the Last Fiscal Year. [Download Table] Long-Term Annual Compensation Compensation Fiscal -------------------- Awards All Other Name Year Salary ($) Bonus ($) Otpions (#) Compensation ---- ------ ---------- --------- ------------ ------------ Bernard Marren........... 1999 $251,250 $420,000 -- -- President and Chief Executive Officer 1998 150,923 -- 100,000 -- 1997 -- -- -- -- Michael Mazzoni(1)....... 1999 145,763 69,525 -- -- Chief Financial Officer 1998 136,475 50,000 45,000 -- 1997 96,771 10,350 -- -- -------- (1) On January 31, 2000, Mr. Mazzoni resigned from his position as Chief Financial Officer of the Company. Option Grants in Last Fiscal Year There were no options granted in the last fiscal year to the Named Officers. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values The following table provides information with respect to option exercises in the Last Fiscal Year by the Named Officers and the value of such officer's unexercised options at December 31, 1999 [Enlarge/Download Table] Total Value of Total Number of Unexercised Unexercised Options at In-the-Money Options at Shares Fiscal Year End (#) Fiscal Year End ($)(1) Acq. Value ------------------------- --------------------------- Name Exer. Realized Exercisable Unexercisable Exercisable Unexercisable ---- ------ -------- ----------- ------------- --------------------------- Bernard Marren.......... -- -- 100,000 -- $ 71,000 -- Michael Mazzoni......... 20,000 44,900 88,750 -- $ 7,100 -- -------- (1) Market value of underlying securities based on the closing price of the Company's Common Stock on December 31, 1999 on the Nasdaq National Market, minus the exercise price. 20
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Item 12. Security Ownership of Certain Beneficial Owners and Management The following nominee table sets forth the beneficial ownership of Common Stock of the Company as of March 22, 2000 by: (i) each present director of the Company; (ii) each of the officers named in the table under the heading "EXECUTIVE COMPENSATION--Summary Compensation Table"; (iii) all current directors and executive officers as a group; and (iv) each person known to the Company who beneficially owns 5% or more of the outstanding shares of its Common Stock. The number and percentage of shares beneficially owned is determined under the rules of the SEC, and the information is not necessarily indicitive of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes shares as to which the individual has sole or shares voting power or investment power and also any shares which the individual has the right to acquire within sixty (60) days of March 22, 2000 through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole voting and investment power (one shares such powers with his or her spouse) with respect to the shares, shown as beneficially owned. Unless otherwise indicated, officers and directors can be reached at the Company's principal executive offices. A total of 11,630,970 shares of the Company's Common Stock were issued and outstanding as of March 22, 2000. [Download Table] Shares Beneficially Owned ----------------------------- Name Number Percent ---- --------------- ------------- Bernard Marren(1)............................... 127,788 1.4% Michael Mazzoni(2).............................. 88,750 * Stephen Dukker(3)............................... 89,166 * Kapil Nanda(4).................................. 16,000 * William Welling(5).............................. 13,333 * Caxton International............................ 789,800 8.5% 315 Enterprise Drive Plainsboro, NJ 08536 Cramer Rosenthal McGlynn........................ 899,900 11.4% 707 Westchester Avenue White Plains, NY 10604 Dimension Fund Advisors......................... 713,800 5.5% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 MG Capital Management LLC....................... 1,177,000 10.1% 1725 Kearny Street No. 1 San Francisco, CA 94133 All Directors and Executive Officers as a group (5 persons)(6)................................. 335,037 2.9% -------- * Represents less than one percent. (1) Includes 12,000 shares subject to stock option exercisable as of March 22, 2000 or within sixty (60) days thereafter. (2) Includes 0 shares subject to stock option exercisable as of March 22, 2000 or within sixty (60) days thereafter. (3) Includes 0 shares subject to stock option exercisable as of March 22, 2000 or within sixty (60) days thereafter. (4) Includes 12,000 shares subject to stock option exercisable as of March 22, 2000 or within sixty (60) days thereafter. (5) Includes 0 shares subject to stock option exercisable as of March 22, 2000 or within sixty (60) days thereafter. (6) Includes shares pursuant to notes (1), (2), (3), (4), and (5). Item 13. Certain Relationships and Related Transactions Compensation Committee Interlocks and Insider Participation In February 1993, the Company established a compensation committee of the Board of Directors which currently consists of Mr. Nanda and Mr. Welling. 21
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Certain Transactions The Company's policy is that it will not make loans to, or enter into other transactions with, directors, officers or affiliates unless such loans or transactions are (i) approved by a majority of the Company's independent disinterested directors, (ii) may reasonably be expected to benefit the Company, and (iii) will be on terms no less favorable to the Company than could be obtained in arm's length transactions with unaffiliated third parties. The Company has entered into indemnification agreements with each of its directors and executive officers. Such agreements require the Company to indemnify such individuals to the fullest extent permitted by California law. 22
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PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1)Financial Statements The following financial statements are filed as part of this Report: [Download Table] Page ---- Report of Ernst & Young LLP, Independent Auditors................... F-1 Consolidated Balance Sheets, December 31, 1999and 1998.............. F-2 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........................................................... F-3 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998, and 1997.................................. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997........................................................... F-5 Notes to Consolidated Financial Statements.......................... F-6 (a)(2)Financial Statement Schedules [Download Table] Page Schedule Number Description Number --------------- ----------- ------ II Valuation and Qualifying Accounts.................. S-1 All other schedules not applicable. (a)(3)Exhibit Listing [Download Table] Exhibit Number Description ------- ----------- 3.1 Registrant's Articles of Incorporation, as amended.(2) 3.2 Registrant's Bylaws.(2) 10.1 1993 Stock Option Plan, as amended.(2) 10.2 1993 Director Stock Option Plan.(2) 10.3 1993 Employee Stock Purchase Plan.(2) 10.4 Form of Indemnification Agreement between Registrant and its officers and directors.(2) 10.6 OPTi Inc. 1993 Bonus Plan.(2) 10.10 Promissory Note between OPTi Inc. and Sumitomo Bank of California, dated November 14, 1994.(3) 10.11 Credit Agreement dated as of November 14, 1994 by and among OPTi Inc., certain banks therein named and Sumitomo Bank of California, as Agent.(3) 10.14 Foundry Venture Investment Agreement between the Registrant and United Microelectronics Corporation dated September 13, 1995.(4) 10.15 Foundry Capacity Agreement by and between the Registrant, FabVen and United Microelectronics Corporation dated September 13, 1995.(4) 10.16 Lease between the Registrant and John Arrillaga and Richard T. Peery as separate property trusts, dated April 26, 1995.(4) 10.17 OPTi Inc. 1995 Nonstatutory Stock Option Plan.(4) 10.18 1996 Employee Stock Purchase Plan.(5) 10.19 1995 Employee Stock Option Plan, as amended.(6) 10.20 Patent license agreement between Intel Corporation and OPTi Inc. 10.21 Lease Agreement between PVC.com Inc. and OPTi Inc. 21.1 Subsidiaries of Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney (see page 25, signature page). 27 Financial Data Schedule. 23
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-------- (1) Incorporated by reference to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1993, of OPTi Inc. (2) Incorporated by reference to Registration Statement on Form S-1 (File No. 33-59978) as declared effective by the Securities and Exchange Commission on May 11, 1993. (3) Incorporated by reference to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1994, of OPTi Inc. (4) Incorporated by reference to the Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, of OPTi Inc. (5) Incorporated by reference to Registration Statement on Form S-8 (File No. 333-15181) as filed with the Securities and Exchange Commission on October 31, 1996. (6) Incorporated by reference to Registration Statement on Form S-8 (File No. 333-17299) as filed with the Securities and Exchange Commission on December 5, 1996. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 1998. (c) Exhibits. See Item 14 (a)(3) above. (d) Financial Statements Schedules. See Item 14(a)(2) above. 24
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Milpitas, State of California on the 30th day of March 2000. OPTi Inc. /s/ Bernie Marren By:____________________________________ Bernard Marren Chief Executive Officer and Chairman of the Board POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Bernard Marren and Michael Mazzoni and each of them, jointly and severally, his true and lawful attorney-in-fact, each with full power of substitution and resubstitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents, or their substitute or substitutes, or any of them, shall do or cause to be done by virtue Hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the persons on behalf of the Registrant and in the capacities and on the dates indicated: [Download Table] Signatures Title Date ---------- ----- ---- /s/ Bernie Marren Chief Executive Officer March 30, 2000 ____________________________________ and Chairman of the Bernard Marren Board (Principal Executive Officer) /s/ Douglas Gans Chief Financial Officer March 30, 2000 ____________________________________ (Principal Financial and Douglas Gans Accounting Officer) ____________________________________ Director March 30, 2000 Stephen A. Dukker /s/ William Welling Director March 30,2000 ____________________________________ William Welling /s/ Kapil K. Nanda Director March 30, 2000 ____________________________________ Kapil K. Nanda 25
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REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders OPTi Inc. We have audited the accompanying consolidated balance sheets of OPTi inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OPTi Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basis financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST &YOUNG LLP San Jose, California February 14, 2000 F-1
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OPTi Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) [Download Table] December 31, ------------------ 1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 23,722 $ 56,653 Short term investments.................................... -- 4,250 Accounts receivable, net of allowance for doubtful accounts of $151 in 1999 and $800 in 1998................ 1,459 3,232 Inventories............................................... 298 1,192 Prepaid expenses and other current assets................. 943 944 -------- -------- Total current assets.................................... 26,422 66,271 Property and equipment: Machinery and equipment................................... 11,085 26,008 Furniture and fixtures.................................... 847 1,412 -------- -------- 11,932 27,420 Accumulated depreciation.................................. (11,264) (21,738) -------- -------- 668 5,682 Other assets............................................... 1,142 9,622 -------- -------- Total assets............................................ $ 28,232 $ 81,575 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilites: Accounts payable.......................................... $ 1,201 $ 5,991 Accrued expenses.......................................... 827 485 Accrued Litigation........................................ 4,200 1,100 Accrued employee compensation............................. 512 1,052 Current obligations under capital leases.................. -- 1,852 -------- -------- Total current liabilities............................... 6,740 10,480 Long-term obligations under capital leases................. -- 1,644 Other long-term liabilities................................ 310 166 Commitments and contingences Shareholders' equity: Preferred stock, no par value: Authorized shares--5,000,000 No shares issued or outstanding.......................... -- -- Common stock, no par value: Authorized shares--50,000,000 Issued and outstanding shares--11,620,970 in 1999,and 10,810,549 in 1998...................................... 22,494 39,397 Retained earnings/(Accumulated deficit)................... (1,312) 29,888 -------- -------- Total shareholders' equity.............................. 21,182 69,285 -------- -------- Total liabilities and shareholders' equity.............. $ 28,232 $ 81,575 ======== ======== See accompanying notes. F-2
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OPTi Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) [Download Table] Year Ended December 31, -------------------------- 1999 1998 1997 ------- ------- -------- Net Sales......................................... $22,257 $40,003 $ 67,842 Costs and expenses: Cost of sales.................................... 14,403 26,712 50,471 Research and development......................... 5,611 9,681 12,565 Selling, general and administrative.............. 11,165 10,942 14,058 Restructuring.................................... -- -- 1,213 ------- ------- -------- Total costs and expenses.......................... 31,179 47,335 78,307 ------- ------- -------- Operating loss.................................... (8,922) (7,332) (10,465) Gain on sale of Audio line........................ -- -- 12,391 Interest income and other......................... 3,231 3,717 3,031 Interest expense.................................. (261) (312) (473) ------- ------- -------- 2,970 3,405 14,949 ------- ------- -------- Income (loss) before provision for income taxes... (5,952) (3,927) 4,484 Provision for income taxes........................ 59 285 9,872 ------- ------- -------- Net loss.......................................... $(6,011) $(4,212) $ (5,388) ======= ======= ======== Basic and diluted net loss per share.............. $ (0.54) $ (0.35) $ (0.42) ======= ======= ======== Shares used in computing basic and diluted per share amounts.................................... 11,059 12,196 12,838 ======= ======= ======== See accompanying notes. F-3
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OPTi Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts) [Download Table] Retained Common Stock Earnings/ Total -------------------- (Accumulated Shareholders' Shares Amount Deficit) Equity ---------- -------- ------------ ------------- Balance at December 31, 1996.. 12,661,213 $ 56,883 $ 39,488 $ 96,371 Sale of common stock........ 465,295 1,740 -- 1,740 Net loss and comprehensive loss....................... -- -- (5,388) (5,388) ---------- -------- -------- -------- Balance at December 31, 1997.. 13,126,508 58,623 34,100 92,723 Sale of common stock........ 1,264,416 4,769 -- 4,769 Stock repurchase............ (3,580,375) (23,995) -- (23,995) Net loss and comprehensive loss....................... -- -- (4,212) (4,212) ---------- -------- -------- -------- Balance at December 31, 1998.. 10,810,549 39,397 29,888 69,285 Sale of common stock........ 810,421 4,392 -- 4,392 Cash Dividend............... -- (21,295) (25,189) (46,484) Net loss and comprehensive loss....................... -- -- (6,011) (6,011) ---------- -------- -------- -------- Balance at December 31, 1999.. 11,620,970 $ 22,494 $ (1,312) $ 21,182 ========== ======== ======== ======== See accompanying notes. F-4
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OPTi Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) [Download Table] Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Operating activities Net loss........................................ $ (6,011) $ (4,212) $ (5,388) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization................. 3,717 6,629 5,213 Deferred taxes................................ -- -- 9,888 Gain on sale of audio line.................... -- -- (12,391) Changes in operating assets and liabilities: Accounts receivable......................... 1,773 8,550 6,168 Inventories................................. 894 3,825 (896) Prepaid expenses and other current assets... 1 254 41 Accounts payable............................ (4,790) (5,180) 1,453 Accrued expenses............................ 3,442 (54) (398) Accrued employee compensation............... (540) (315) (82) Income taxes payable........................ -- (106) (5) -------- -------- -------- Net cash provided by (used in) operating activities..................................... (1,514) 9,391 3,603 Investing activities Purchases of property and equipment............. (248) (830) (227) Sale of Property and equipment.................. 1,545 -- -- Sale of Investment in UICC foundry.............. 8,495 -- -- Purchase of short term investments.............. (36,150) (57,750) (72,626) Sale of short term investments.................. 40,400 62,176 63,950 Net proceeds from sale of Audio line............ -- -- 13,873 Increase in other assets........................ (15) 7 (1,647) -------- -------- -------- Net cash provided by investing activities....... 14,027 3,603 3,323 Financing activities Net proceeds from sale of common stock.......... 4,392 4,769 1,740 Repurchase of common stock...................... -- (23,995) -- Cash dividend................................... (46,484) -- -- Principal payments on capital lease obligations.................................... (3,352) (947) (1,206) -------- -------- -------- Net cash provided by (used in) financing activites...................................... (45,444) (20,173) 534 Net increase (decrease) in cash and cash equivalents.................................... (32,931) (7,179) 7,460 Cash and cash equivalents at beginning of year.. 56,653 63,832 56,372 -------- -------- -------- Cash and cash equivalents at end of year........ $ 23,722 $ 56,653 $ 63,832 ======== ======== ======== Supplemental cash flow information Cash paid for interest.......................... $ 261 $ 312 $ 473 Cash paid for income taxes...................... $ -- $ 210 $ -- See accompanying notes. F-5
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OPTi Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Summary of Significant Accounting Policies The Company. OPTi Inc., a California corporation, is engaged in marketing semiconductor products for use principally by personal computer manufacturers, add in card manufacturers and motherboard manufacturers. The Company is no longer in the research and development business after it terminated the design group in January 2000. The Company anticipates that it will continue to sell its previously designed products at lower than historical levels. The Company also intends to try and license its patent portfolio. In the first quarter of 2000, the Company signed a license agreement for $13,500,000 relating to the patents of the Company. The Company is also involved in a patent litigation trial. The Company has reserved $4 million on its balance sheet at this time. The outcome of the appeal will not be known until later this year. For more information in regards to the litigation please refer to Note 11 of this section. Principles of Consolidation. The consolidated financial statements include the Company and its majority and wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value. The Company is exposed to credit risk in the event of default by the financial institutions or issuers of the investments only to the extent of amounts recorded on the balance sheet. Short-Term Investments. The Company invests from time to time its excess cash in high quality,auction rate preferred securities. At December 31, 1998, 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 1999 as all investments were held to maturity during the year. At December 31, 1999, the company had no short-term investments. Inventories. Inventories, comprised of finished goods and work in process, are stated at the lower of cost (using the first-in, first-out method ) or market. The market value is based upon estimated net realizable value. Property and Equipment. Property and equipment, including machinery and equipment under capital lease, are stated at cost, less accumulated depreciation and amortization. Depreciation for non-leased property and equipment is computed by the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Assets under capital lease are amortized using the straight-line method over the shorter of the remaining term of the lease or the estimated economic life of the asset. This amortization for assets under capital lease are included in depreciation expense. Revenue Recognition. The Company records sales upon shipment and provides an allowance for the estimated return of product. Net Loss Per Share. The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic and diluted net loss per share are computed by dividing net loss by the weighted average number of common shares outstanding during the period. The computation of diluted net loss per share did not assume the impact of the conversion of outstanding options or warrants for any of the periods presented because their inclusion would have been antidilutive. Accounting for Employee Stock Options. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). The Company has elected to continue to account for employee stock options in accordance with APB Opinion No. 25 and has adopted the "disclosure only" alternative described in FAS 123. 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. F-6
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Recent Pronouncements. The company has adopted statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company's comprehensive net loss was the same as its net loss for the years ended December 31, 1999, 1998 and 1997. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. FAS 133 is effective for fiscal years beginning after June 15, 2000 and the Company believes that the adoption of FAS 133 will not have a significant impact on the Company's operating results or cash flow. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. All registrants are expected to apply the accounting and disclosures described in SAB 101. SAB 101 is not expected to have a significant effect on the Company's consolidated results of operations, financial position, or cash flows. Note 2--Inventories A summary of inventories follows (in thousands): [Download Table] 1999 1998 ---- ------ Finished goods................................................. $240 $ 688 Work in process................................................ 58 504 ---- ------ Total inventory.............................................. $298 $1,192 ==== ====== Note 3--Other Assets A summary of other assets (in thousands): [Download Table] 1999 1998 ------ ------ Investment in UICC........................................... $ -- $8,521 Investment in Tripath........................................ 725 725 Deposits..................................................... 240 308 Other miscellaneous.......................................... 177 68 ------ ------ Total Other Assets......................................... $1,142 $9,622 ====== ====== At December 31, 1999, the Company's investment in Tripath represents an approximate 10% equity interest in the design company. The investment was accounted for under the cost method of accounting. Note 4--Obligations Under Capital Lease Assets capitalized under leases totaled $6,656,000 at December 31, 1998 related and accumulated amortization on these leased assets was $4,386,000. During 1999, the Company purchased all equipment being held under capital lease arrangements. Note 5--Shareholders' Equity Preferred Stock The Board of Directors has authority to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges, qualifications, limitations and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without any further vote or action by the shareholders. F-7
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock Option Plans Pro forma information regarding net loss and net loss per share is required by SFAS 123 which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of the grant using a Black- Scholes option pricing model. The fair value of the Company's stock based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions: [Download Table] 1999 1998 1997 --------- --------- --------- Expected Life................................ 4.8 years 5.0 years 4.5 years Expected volatility.......................... 0.95 0.57 0.62 Risk Free Interest Rate...................... 6.00% 5.40% 6.23% For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information): [Download Table] 1999 1998 1997 ------- ------- ------- Pro forma net loss............................ $(6,415) $(5,693) $(8,670) Pro forma basic and diluted net loss per share........................................ $ (0.58) $ (0.47) $ (0.68) Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect was not fully reflected until 1999. The weighted average fair value of options granted under all stock option plans was $5.82, $5.13 and $3.49 for the years ending 1999, 1998 and 1997, respectively 1993 Stock Option Plan The Company's 1993 Stock Option Plan (the "1993 Plan"), which was adopted in February 1993, provides for the granting of incentive stock options to employees and for the granting of nonstatutory stock options to employees and consultants of the Company. The Board of Directors determines the term of each option, the option price and the condition under which the option becomes exercisable. The options generally vest over four years from the date of grant and expire ten years from the date of grant. The activity under the 1993 Plan (including the Evergreen Plan) is as follows: [Download Table] Outstanding ------------------------- Weighted Ave. Shares Exercise Price --------- -------------- Outstanding at December 31, 1996................. 1,691,308 $4.49 Granted......................................... 130,000 $5.50 Exercised....................................... (214,161) $2.77 Canceled........................................ (191,714) $7.30 --------- Outstanding at December 31, 1997................. 1,415,433 $4.30 Granted......................................... 145,000 $5.13 Exercised....................................... (855,873) $3.02 Canceled........................................ (341,746) $6.83 --------- Outstanding at December 31, 1998................. 362,814 $5.20 Granted......................................... 45,000 $5.94 Exercised....................................... (24,877) $5.32 Canceled........................................ -- $ -- --------- Outstanding at December 31, 1999................. 191,937 $5.15 ========= F-8
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Approximately 49,813, 425,795 and 666,432 options oustanding were exercisable as of December 31, 1999, 1998 and 1997, respectively. The weighted average exercise price for the exercisable shares as of December 31, 1999, was $ 5.15. 1995 Stock Option Plan The Company's 1995 Stock Option Plan (the "1995 Plan"), which was adopted in August 1995, provides for the granting of up to 2,500,000 nonstatutory stock options to employees and consultants of the Company. The Board of Directors determines the term of each option, the option price and the condition under which the option becomes exercisable. The options generally vest over four years from the date of grant and expire ten years from the date of grant. The activity under the 1995 Plan is as follows: [Download Table] Outstanding ------------------------- Weighted Ave. Shares Exercise Price --------- -------------- Outstanding at December 31, 1996................... 2,210,574 $5.17 Granted.......................................... 395,500 $5.24 Exercised........................................ (119,899) $5.11 Canceled......................................... (899,920) $5.25 --------- ----- Outstanding at December 31, 1997................... 1,586,255 $5.06 Granted.......................................... 189,000 $5.47 Exercised........................................ (347,188) $5.04 Canceled......................................... (614,299) $5.21 --------- ----- Outstanding at December 31, 1998................... 813,768 $5.06 Granted.......................................... 45,500 $5.69 Exercised........................................ (542,933) $5.04 Canceled......................................... (266,522) $5.19 --------- ----- Outstanding at December 31, 1999................... 49,813 $5.15 ========= ===== Approximately 49,813, 425,795 and 666,432 options outstanding were exercisable as of December 31, 1999, 1998 and 1997, respectively. The weighted average exercise price for the exercisable shares as of December 31, 1999, was $5.15. Stock Options Outstanding and Stock Options Exercisable: The following table summarizes information about options outstanding at December 31, 1999: [Download Table] Options Outstanding Options Exercisable --------------------------------------- ---------------------- Range of Number Weighted Average Weighted Number Weighted Exercise of Contractual Life Average of Average Prices Shares (in years) Exercise Price Shares Exercise Price -------- ------- ---------------- -------------- ------- -------------- $3.44 5,000 8.79 $3.44 5,000 $3.44 $4.63 115,835 8.72 $4.63 115,835 $4.63 $5.25 980 6.30 $5.25 980 $5.25 $5.32 40,380 5.20 $5.32 40,380 $5.32 $6.25 46,885 8.07 $6.25 46,885 $6.25 $8.88 1,670 5.31 $8.88 1,670 $8.88 $9.50 1,000 6.08 $9.50 1,000 $9.50 F-9
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1993 Director Stock Option Plan In February 1993, the Company adopted the 1993 Director Stock Option Plan (the "Director Plan") and reserved 50,000 shares of common stock for issuance thereunder. Under this plan, non-employee directors are granted options to purchase common stock at 100% of fair market value on dates specified in the plan. The options generally vest over four years from the date of grant and expire ten years from the date of grant. In May 1996, the Company's shareholders authorized an additional 50,000 shares for grant under the plan. The activity under the 1993 Director Plan is as follows: [Download Table] Outstanding ----------------------- Weighted Ave. Shares Exercise Price ------- -------------- Outstanding at December 31, 1996................... 81,943 $ 8.44 Granted........................................... 12,000 $ 5.31 Exercised......................................... -- $ -- Canceled.......................................... (8,000) $15.38 ------- Outstanding at December 31, 1997................... 85,943 $ 7.35 Granted........................................... 21,333 $ 3.44 Exercised......................................... (8,611) $ 5.25 Canceled.......................................... (42,666) $ 8.07 ------- Outstanding at December 31, 1998................... 55,999 $ 5.64 Granted........................................... -- $ -- Exercised......................................... (21,333) $ 3.44 Canceled.......................................... -- $ -- ------- Outstanding at December 31, 1999................... 34,666 $ 6.99 ======= 1993 Employee Stock Purchase Plan In February 1993, the Company adopted the 1993 Employee Stock Purchase Plan (the "Purchase Plan") under Section 423 of the Internal Revenue Code and reserved 150,000 shares of common stock for issuance thereunder. Under the Purchase Plan, qualified employees are entitled to purchase shares at 85% of fair market value. As of December 31, 1999 and 1998, 149,399 shares had been issued under the Purchase Plan. 1996 Employee Stock Purchase Plan In October 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan") under Section 423 of the Internal Revenue Code and reserved 250,000 shares of common stock for issuance thereunder. Under the Purchase Plan, qualified employees are entitled to purchase shares at 85% of fair market value. As of December 31, 1999 and 1998, 249,998 shares had been issued under the Purchase Plan. Common Stock Reserved At December 31, 1999, the Company has reserved shares of common stock for future issuance as follows: [Download Table] 1993 Employee Stock Purchase Plan.............................. 601 1996 Employee Stock Purchase Plan.............................. 2 1993 Directors Stock Option Plan............................... 65,334 Common Stock Warrants.......................................... 200,000 1993 Stock Option Plan (including the Evergreen Plan).......... 744,210 1995 Stock Option Plan......................................... 1,481,608 ---------- Totals....................................................... 2,491,755 ========== F-10
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6--Commitments The Company leases its facilities under noncancelable operating leases. At December 31, 1999, future minimum commitments related to these leases are as follows (in thousands): [Download Table] 2000................................................................ $1,804 2001................................................................ 1,474 2002................................................................ 1,141 ------ Total............................................................. $4,419 ====== The Company has entered into an agreeement to sub-lease a facility that will reduce its commitment above by approximately $648,000, $674,000, and $523,000 for the years 2000 through 2002, respectively. This sub-lease is for a facility that the Company has never occupied. In January 1999, the Company entered into an agreement to sub-lease one floor of its facility for the period of January 4, 1999 to December 31, 2000. This sub-lease agreement will reduce the company's commitment on leased facilities by $384,000 for the year 2000. In February 1999, the Company entered into an additional sub-lease agreeement for the additional floor of the same facility for the period of February 19, 1999 to December 31, 2000, with a renewal provision for the period of January 1, 2001 to the end of the lease at October 2002. The renewal provision has to be exercised 270 days prior to December 31, 2000. If the renewal option is exercised the sublessor has the ability to lease the existing floor space or the entire building. This sublease agreement will reduce the Company's commitment above by $384,000 for the year 2000. Rental expense for operating leases amounted to $421,000, $1,402,000 and $1,529,000 for the years ended December 31, 1999, 1998, and 1997, respectively. The rental expense for the fiscal years 2000 will be reduced due to the additional sublease agreements that the Company has entered into in January and February 1999. Note 7--Concentrations Credit Risks and Major Customers 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 fiscal 1999. The Company sold approximately $6 million of mobile core logic to Compaq and its subcontractors, representing a combined 27% of net sales for 1999. Also in fiscal 1999 the Company sold to Apple Computer and its subcontractors approximately $6 million in USB products, representing a combined 27% of net sales for that period. In 1998, the Company sold approximately $17 million of mobile core logic product to Compaq and its subcontractors, representing a combined 43% of net sales for that period. Also in fiscal 1998, the Company sold to Apple Computer and its subcontractors approximately $4 million in USB products, representing a combined 11% of net sales for that period. In 1997, the Company sold approximately $27 million of chipsets to Compaq and its subcontractors, representing a combined 40% of net sales in that period. 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. 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 F-11
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) customers are unable to remain profitable. Approximately 9% of the Company's receivables at December 31, 1999 were with these customers. Suppliers 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 1999, 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 particular product. Products During fiscal year 2000 the Company will be highly dependent on continued revenue contributions from its embedded product line and its USB controller. Any significant shortfall in sales for the Company's current volume products or problems with the manufacturing of these products will have a material adverse effect upon the Company's financials. Note 8--Geographic Segments Net sales by the geographic location of the Companys customers, based on shipped to location, are summarized by geographic areas as follows (in thousands): [Download Table] Year Ended December 31, ----------------------- 1999 1998 1997 ------- ------- ------- Taiwan............................................. $ 7,908 $22,761 $39,979 Japan.............................................. 3,610 6,085 8,773 USA................................................ 3,850 5,408 7,074 Singapore.......................................... 6,710 5,138 8,511 Other Far East..................................... 68 436 3,285 Europe/Other....................................... 111 175 220 ------- ------- ------- Total Net Sales.................................. $22,257 $40,003 $67,842 ======= ======= ======= F-12
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 9--Taxes The provision (benefit) for income taxes consists of the following (in thousands): [Download Table] 1999 1998 1997 ----- ---- ------ Federal: Current................................................ $ -- $238 $ (137) Deferred............................................... -- -- 9,888 ----- ---- ------ -- 238 9,751 State: Current................................................ -- -- -- Deferred............................................... -- -- -- ----- ---- ------ -- -- -- Foreign: Current................................................ 59 47 121 Deferred............................................... -- -- -- ----- ---- ------ 59 47 121 ----- ---- ------ Total................................................. $ 59 $285 $9,872 ===== ==== ====== A reconciliation of the income tax provision (benefit) at the federal statutory rate to the income tax provision (benefit) at the effective rate is as follows (in thousands): [Download Table] 1999 1998 1997 ------- ------- ------- Income taxes computed at the federal statutory rate.............................. $(2,104) $(1,485) $ 1,502 Net operating losses not benefitted.......... 2,104 1,485 -- State taxes (net of federal benefit)......... -- -- -- Benefit of net operating income.............. -- -- (1,502) Alternative minimum taxes.................... -- 238 93 Valuation reserve movement................... -- -- 9,888 Foreign Taxes................................ 59 47 121 Other individually immaterial items.......... -- -- (230) ------- ------- ------- $ 59 $ 285 $ 9,872 ======= ======= ======= F-13
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components of deferred taxes consist of the following (in thousands): [Download Table] 1999 1998 -------- -------- Deferred tax assets: Inventory reserve..................................... $ 3,800 $ 3,801 Credit carryforwards.................................. 5,200 4,875 Capitalized research & development costs.............. 1,400 913 Accounts receivable reserve........................... 60 309 Reserve for sales return.............................. 20 154 Net operating losses.................................. 8,789 6,689 Amortization.......................................... 1,700 1,690 Other individually immaterial items................... 300 313 -------- -------- Total deferred tax assets........................... 21,269 18,744 Valuation Allowance................................. (19,469) (16,940) -------- -------- 1,800 1,804 -------- -------- Deferred tax liabilities: Depreciation.......................................... (1,800) (1,804) -------- -------- Net deferred tax assets............................. $ -- $ -- ======== ======== At December 31, 1999, the Company had federal and state net operating loss carryforwards of approximately $24.0 million and $6.0 million, respectively, expiring in the years 2001 through 2018. At December 31, 1999, the Company had tax credit carryovers of approximately $3.0 million and $2.5 million for federal and state purposes, expiring in the years 2007 through 2013. In addition, the Company had federal alternative minimum tax credit carryforwards of approximately $497,000 that will not expire. The tax benefit associated with exercise of non-qualified stock options, disqualifying dispositions of stock options and shares acquired under the employee stock purchase plan created net operating losses of $1,798,000 in 1997. These benefits were fully reserved by a valuation allowance, and will be credited to paid in capital when realized. Note 10--Employee Benefit Plan Savings Plan. The Company has a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer up to 15% of their pre-tax salary, but not more than the statutory limits. The Company currently does not match employee contributions made to the savings plan. Administrative costs of the plan are immaterial. Note 11--Contingencies In January 1997, a patent infringement claim was brought against the Company by Crystal Semiconductor, Inc. ("Crystal"), a susidiary of Cirrus Logic, in the United States District Court for the Western District of Texas. The claim alleges that the Company and Tritech Microelectronics International, Inc. and its Singapore parent company, Tritech Microelectronics Pte, Ltd. (collectively "Tritech") infringe three patents owned by Crystal. These patents relate to the analog-to-digital coder-decoder ("codec") module that was designed by Tritech and incorporated into integrated PC audio chips formerly sold by the Company. The suit seeks injunctive relief and damages. F-14
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. This $4 million has been accrued in the Company's financial statements. 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 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 interpertation of that patent by the court. If Crystal prevails in its appeal and Tritech is unable to reimburse the Company due to its filing for Judicial Management the results would have a material adverse effect on Opti's financial position, results of operations, and cash flow. A March 1994 Development Agreement between the Company and TriTech Microelectronics International PTE LTD states that Tritech shall "fully and effectively indemnify, defend and save harmless" the Company against any claim that the products at issue in this action infringe the intellectual property rights of others. However, in May 1999, TriTech Microelectronics, Pte, Ltd. filed a "Petition For Judicial Management Order" in the High Court of the Republic of Singapore, on the grounds that TriTech is "unable to pay its debts" including its obligations to indemnify OPTi from Crystal's claim for damages. The Order for a Judicial Manager to be appointed for TriTech was granted on July 2, 1999. OPTi is in the process of filing a claim with the Judicial Managers in regards to the imdemnification agreement. 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 F-15
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 February 26, 1999, the Lemelson Medical, Education and Research Foundation (the "Lemelson Foundation") filed a complaint in the United States District Court for the district of Arizona against the Company and 87 other defendant companies claiming patent infringement. No complaint has actually been served against the Company In August 1999, the Company and the Lemelson Foundation reached an agreement in regards to the patents at suit. Under terms of the license agreement, the Lemelson Foundation agrees not to sue the Company on its patents and pending applications and any subsequently filed applications claiming inventions originally disclosed in any such existing patents or pending applications. In September and October 1995, the Company was served with multiple shareholder class action lawsuits filed in the United States District Court for the Northern California District of California. The lawsuits, which named the Company and several of its officers and directors as defendants, alleged violations of the federal securities laws in connection with the announcement by OPTi Inc. of its financial results for the quarter ended September 30, 1995. In December 1997, the Company and its insurance carriers reached a settlement with the plaintiffs in regards to this suit. The Company was responsible for approximately $500,000 of the settlement amount, which was paid in fiscal 1998. While, the Company claims no wrongdoing in regards to this matter it believed that the expense and time spend to continue to defend its position would have been more costly than the actual settlement. Note 12--Restructuring During the second quarter ot 1997, the Company initiated a restructuring program as a result of decisions by its Chief Executive Officer and Board of Directors to adjust the Company's organizational structure in order to align resources with a revised business model and to lower the Company's cost structure. The restructuring actions resulted in a charge of $1,213,000 (approximately $600,000 of which related to non-cash activities) which included approximately $140,000 associated with the termination of approximately 30 employees primarily at the Company's headquarters in Milpitas, CA, approximately $335,000 for costs associated with vacating leased facilities, approximately $600,000 for the write-down of capital assets, and approximately $138,000 in other charges. At December 31, 1997 all activities had been completed and all liabilities had been paid. Note 13--Sale of Audio line On November 26, 1997, the Company sold certain assets associated with its Audio line, under the terms of the Asset Purchase Agreement dated November 22, 1997, to Creative Technology Ltd., ("Creative"), an unaffiliated, Singapore corporation. Under the terms of the Asset Purchase Agreement, the Company transferred to Creative all of the Audio line assets except for the related accounts receivable and inventory. All liabilities of the audio line were retained by the Company except for certian obligations relating to licensing agreements and a supply contract. At the closing, Creative paid the Company $14,000,000 in cash and the Companyissued a warrant to purchase 200,000 Shares of OPTi's Common Stock at a price of $10.00 per share. The warrant expires on November 25, 2002. F-16
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OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company recognized a net gain of $12.4 million as a result of the sale of the Audio line. This gain is derived from the cash proceeds of $14.0 million offset by expenses of $0.2 million for fixed assets, $0.8 million for inventory write-down, $0.5 million for write-down of prepaid assets, and $0.1 million for legal costs related to the transaction. The Company's revenues from the sale of its audio products represented approximately 28% and 27% of the Company's revenues in 1996 and the first nine months of 1997, respectively Note 14--Subsequent Events In January 2000, the Company entered into a non-exclusive license agreement for all of its patents with a major semiconductor company. In return for the one time fully paid up license fee of $13,500,000, OPTi releases this company from any and all claims or liability for infringement of OPTi patents. OPTi is also released of liability for any infringement of the other companys patents that arose prior to the signing date. On January 13, 2000, the Company announced the termination of approximately twenty employees as part of a reduction in the Company's operations. The vast majority of employees effected by this reduction were research and development employees. The Company at this time has no research and development employees to work on future development. F-17
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OPTi Inc. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In thousands) [Download Table] Additions Balance Charged to Balance Beginning Costs and at End of Period Expenses Deductions of Period --------- ---------- ---------- --------- Year ended December 31, 1997 Allowance for doubtful accounts.... $1,275 $325 -- $1,600 Year ended December 31, 1998 Allowance for doubtful accounts.... $1,600 $421 $1,221(1) $ 800 Year ended December 31, 1999 Allowance for doubtful accounts.... $ 800 $ 50 $ 699(1) $ 151 -------- (1) Represents specific write-off of accounts. S-1

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