-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QxpQowL53xNFw9nqJsLomIZ9ssxKvkbF+WOR0/RknZ7eyjdjfVyW25+7RDNIM2E1 JspKCh+eAGBAf2vTY9/cng== 0001012870-99-000938.txt : 19990402 0001012870-99-000938.hdr.sgml : 19990402 ACCESSION NUMBER: 0001012870-99-000938 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTI INC CENTRAL INDEX KEY: 0000899297 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770220697 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21422 FILM NUMBER: 99580817 BUSINESS ADDRESS: STREET 1: 888 TASMAN DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4084868000 MAIL ADDRESS: STREET 1: 888 TASMAN DRIVE CITY: MILPITAS STATE: CA ZIP: 95035 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1998 [_]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)
CALIFORNIA 77-0220697 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1440 McCarthy Blvd., Milpitas, California 95035 (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 [X] 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. [_] 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, 1999 as reported on the Nasdaq Stock Market, was approximately $57,607,428. 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, 1999, registrant had 10,717,661 shares of Common Stock outstanding for non-affiliates. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- OPTi INC. Form 10-K For the Fiscal Year Ended December 31, 1998 INDEX
Page Number ------ Part I Item 1. Business................................................. 1 Item 2. Properties............................................... 11 Item 3. Legal Proceedings........................................ 12 Item 4. Submission of Matters to a Vote of Security Holders ..... 12 Executive Officers of the Registrant............................... 12 Part II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................................... 13 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 Risk..................................................... 19 Item 8. Financial Statements and Supplementary Data.............. 19 Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosures..................... 19 Part III Item 10. Directors and Executive Officers of the Registrant....... 20 Item 11. Executive Compensation................................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 22 Item 13. Certain Relationships and Related Transactions........... 23 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................. 24 Signatures......................................................... 26
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") market. 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. During 1998, the Company shipped over four million core logic, audio and universal serial bus ("USB") devices to more than 100 PC manufacturers, motherboard manufacturers, and add-in board manufacturers located primarily in Asia and the U.S. The Company currently competes principally in the mobile core logic chipset market for PC's and the USB controller marketplace. From the Company's inception through 1995, the Company's principal segment had been desktop core logic. However, with increasingly aggressive competition in this area, primarily from Intel Corporation, the Company revised its strategy in order to focus on market opportunities where the Company had strategic advantages. This led the Company to focus on the mobile core logic market where the Company experienced some success in the past few years and to focus on opportunities surrounding peripheral products, such as the USB controller, docking stations and LCD panel controller chips. The past year remained one of transition for the Company as it continued its initiative to develop technologies for future product applications to substitute for declining revenues in the core logic market. While the majority of the Company's revenues in the last fiscal year were derived from sales of mobile core logic chipsets, the Company continued and is continuing to shift resources to the design, development, marketing and sale of peripheral chips and products (e.g., USB and LCD flat panel controllers) for use by OEM's in the personal computer market, away from its traditional reliance on core logic chips. During 1998 the Company's revenue from core logic chipsets was approximately 74% of its revenue as compared to 73% in 1997. Peripheral products were 26% and 27% of the Company's revenue during 1998 and 1997, respectively. The Company sells, and will continue to sell, its products to PC manufacturers and motherboard manufacturers and their suppliers directly or through a network of independent sales representatives. 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 LLC, the investment banking division of UBS AG, to advise the Company on possible strategic alternatives, including the sale of divisions of the Company. The Company's strategy is to deliver new, innovative and cost effective products in a timely manner, develop products for emerging markets in the high performance PC segment, increase sales in existing global markets and strengthen its industry relationships. OPTi seeks to maintain its position as a low-cost provider of chipsets and peripheral products by vigorously controlling production and other operating costs. 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. 1 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. The Universal Serial Bus, or USB, is a standardized connection interface, or "plug-in", that replaces the numerous plug-ins currently in use on the PC. A significant number of peripheral devices are now available with a USB connection option. All new PCs come with a USB controller. 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 PC's has been accompanied by a variety of changes in the market 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. The LCD (Liquid Crystal Display), or "flat panel display," marketplace is an emerging market segment in the PC and consumer electronics industry. This technology allows the end user to have a larger size monitor on his or her desk in a relatively smaller space. An LCD requires a controller chip in order to guarantee an image quality that is equivalent to, or better than, standard bulkier monitors. 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 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 II and III class microprocessor. The shift in the desktop marketplace started to occur in mid to late 1998, 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. 2 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 design innovations and technologies include: 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. LCD Panel Controller The Company is developing a flat panel LCD (Liquid Crystal Display) controller, a key component inside future LCD VGA (Video Graphics Array) monitors. Normally, in order to connect VGA outputs to LCD monitors, VGA cards with special LCD control interface are needed. However, if the Company's development effort is successful, the LCD VGA monitor will be able to process regular analog VGA output signals as input without any additional interface card or circuit, thus providing a lower cost solution to the marketplace. There can be no assurance, however, that the Company can successfully develop or sell its flat panel LCD controller. Chipset Market and Products The Company currently competes in the mobile core logic segment of the personal computer market. In 1998 sales of core logic chipsets accounted for approximately 74% of the Company's revenue. In the first quarter of 1997, the Company began production shipments of its Firestar single chip BGA product which combines high performance features with space saving design capabilities for mobile applications based on the Intel 3.3V Pentium processor, Cyrix 6x86 processor and AMD5K86 processor. The scaleable features of Firestar allow designs of a high performance multimedia solution or, by implementing the Unified Memory Architecture (UMA) features, a highly integrated low-cost solution. Firestar also allows Fast Page Mode DRAM, EDO DRAM, or synchronous DRAM for further design options. The highly concurrent cycles and deep buffering features of Firestar also improve system performance. In the second half of 1997, the Company began shipments of its Firestar Plus product. The Firestar Plus solution is a pin-compatible upgrade to the Firestar that adds full Microsoft ACPI universal power management support. When combined with the integral OPTi standard power management unit, this solution gives far better battery life than comparable chipsets. The Firestar Plus can also team with the OPTi 82C602A companion chip to expand the number of PIO pins and ACPI events available in the total solution. 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 department operates from the Company's headquarters in Milpitas, California. In Asia, the Company operates from a branch office in Taipei, Taiwan, a wholly owned subsidiary in Tokyo, Japan and through independent sales representatives located in Korea. The Company also uses stocking representatives in Germany. 3 The Company's products are used by a variety of major personal computer and motherboard manufacturers. In 1998, personal computer suppliers who used the Company's products included Compaq, Hewlett-Packard, Siemens, 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 86.0%, 89.2%, and 80.3% of net sales in the years ended December 31, 1998, 1997 and 1996, respectively. Sales to customers in Europe and other countries outside the U.S. and Asia accounted for 0.4%, 0.1%, and 6.1% of net sales in the years ended December 31, 1998, 1997 and 1996, respectively. During these three years, billings to almost all customers were made in US dollars. Approximately 15%, 13%, and 4% of sales were billed in Japanese yen in 1998, 1997 and 1996, 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. 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 from 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 chipset 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. The Company works closely with its customers for product definitions so that the right products can be developed for the right market segments. Additionally, the Company works closely with its customers to design motherboards and add-in cards configured using OPTi products. OPTi believes that close contact with its customers not only improves the customers' level of satisfaction, but also provides important insights into requirements for new products. 4 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. These programs include the continued migration to increasingly dense sub-micron wafer technologies, adopting technologies which currently range from .6 to .35 micron technologies and below in the future. This migration allows for smaller die sizes with better yields and lower costs. In order for the Company to reduce die sizes and costs, the manufacturing technology related to packaging must continually be improved to reduce the amount of area needed for the external contacts of each device. Many of the Company's new and future products incorporate Ball Grid Array (BGA) assembly, including its recently announced single chip solution LCD panel applications. Currently, the Company believes that there is a sufficient level of wafer and package manufacturing capacity in the industry available . 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 1995. 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. The Company has an established testing capability, including sophisticated test equipment to perform both wafer sort and the final testing of finished devices. The Company tests all of its products at its headquarters in Milpitas, CA. The Company uses an automated design environment based on advanced workstations, dedicated product simulators, system simulation with hardware and software modeling and the use of a high level design description language in order to more rapidly define, develop and deliver new and enhanced products. The Company considers its computer-aided engineering ("CAE") and computer-aided design ("CAD") capabilities to be important to its success in all areas of new product development and intends to continue to enhance its CAE/CAD systems. Although the Company extensively tests hardware products prior to their introduction, it is possible that design errors may be discovered after initial product sampling, resulting in delays in volume production or recall of products sold. The occurrence of any such errors could have a materially adverse effect on the Company's product introduction schedule and operating results. Research and Development As of March 15, 1999, the Company had a staff of 19 research and development personnel, which conducts virtually all of the Company's product development. Currently the Company is focusing its development efforts 5 primarily on the development of new advanced designs for its peripheral products. See "Design Innovations and Technologies" page 4 above. During 1998, 1997 and 1996, respectively, the Company spent approximately $9.7, $12.6 million, and $14.1 million on research and development, most all of which was spent on core logic 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. The Company has developed informal relationships with a number of personal computer microprocessor and system software manufacturers. The Company believes that these relationships facilitate its design efforts by providing it with early access to specifications of future microprocessors and system software. As relationships in the personal computer industry are dynamic, there can be no assurance that such relationships will continue or that design specifications will be openly available on a timely basis. Failure to maintain these relationships may have a material adverse effect on the Company. 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 The Company's main competitor in this market is Intel. The Company must continue to try to compete with Intel based on product features, time to market 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 time to market 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 market 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, time to market and product compatibility, but there can be no assurance that it will be successful in doing so. Competition in LCD Monitor Controller Market The Company's main competitors in the LCD controller marketplace include Genesis Microchips, Pixelworks, Sage, and Arithmos. Genesis Microchips recently announced the acquisition of an additional 6 competitor in the market, Paradise Inc. With this acquisition, Genesis Microchips now has product offerings in both the high and low ends of the market. As in the core logic marketplace, certain of these companies have substantially greater financial, technical, marketing and other resources than the Company. Licenses, Patents and Trademarks The Company seeks to protect its proprietary technology by the filing of patents. The Company currently has twenty patents based on certain aspects of the Company's designs. The Company currently has fourteen 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. The company also attempts to protect its trade secrets and other propriety information through agreements with customers and suppliers, proprietary information agreements with employees and consultants as well as other security measures. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will be successful. The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. There can be no assurance that third parties will not assert claims against the Company with respect to existing or future products or that licenses will be available on reasonable terms, or at all, with respect to any third-party technology. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the company's technical and management personnel, whether or not litigation is determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to expend significant resource to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available. 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. Patent disputes in the semiconductor industry have often been settled through cross licensing arrangements. Because the Company currently does not yet have a large portfolio of patents, the Company may not be able to settle an alleged patent infringement claim through a cross licensing arrangement. In the event any third party made a valid claim against the Company or its customers and a license was not made available to the Company on commercially reasonable terms, the Company's operating results would be adversely affected. In addition, the laws of certain countries in which the Company's products are or may be developed, manufactured or sold, including Taiwan, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. See Item 3 "Legal Proceedings" for a description of certain proceedings involving the Company regarding intellectual property rights. 7 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, 1998, the Company's backlog scheduled for delivery within six months was approximately $4.5 million, all of which is expected to be filled during fiscal 1999 (subject to rescheduling or cancellations). This amount compares to a backlog of approximately $3.7 million as of December 31, 1997. Factors Affecting Earnings and Stock Price Fluctuations in Operating Results The Company has experienced significant fluctuations in its quarterly operating results in the past and expects that it will experience such fluctuations in the future. In the past, these fluctuations have been caused by a variety of factors including increased competition from Intel and other suppliers, price competition, ongoing rapid price declines, changes in customer demand, the timing of delivery of new products, inventory adjustments, changes in the availability of foundry capacity and changes in the mix of products sold. In the future, the Company's operating results in any given period may be adversely affected by one or more of these factors. Price Competition The market for the Company's products are subject to severe price competition and price declines. There can be no assurance that the Company will succeed in reducing its product costs rapidly enough to maintain or increase its' gross margin level or that further substantial reduction in chipset prices will not result in lower profitability or losses. Changes in Customer Demand The Company currently places non-cancelable orders to purchase products from independent foundries, while its customers generally place purchase orders with a significantly shorter lead time which may be canceled without significant penalty. In the past, the Company has experienced order cancellations and deferrals and expects that it will experience cancellations in the future from time to time. Any such order cancellations, deferrals, or a shortfall in a receipt of orders, as compared to order levels expected by the Company, could have a significant adverse effect on the Company's operating results in any given period. Product Transitions and the Timing and Delivery of New Products The market for mobile core logic and peripheral products, the sale of which make up the bulk of the Company's revenues, 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. In addition, the Company expects that the revenues from mobile core logic will decline in 1999 from 1998. Product Development; Technological Change The Company's ability to maintain or increase its sales levels and profitability depends directly on its timely introduction and rapid ramp up of new products. In the past, the Company has experienced material delays in 8 the introduction of new products and expects that it will experience similar problems from time to time in the future. Material delays in the introduction, production or sale of a new product can have a very severe effect on the Company's operating results in any given period, possibly resulting in a significant shortfall in sales and earnings from that expected by the Company or securities analysts. In particular, the Company will be highly dependent on the timely completion and production of its USB controller, docking solution, and LCD panel controller products during 1999. Any such delay or shortfall could have an immediate and very significant adverse effect on the trading price of the Company's stock. Investors in the Company's securities must be willing to bear the risks of such fluctuations. Each of the product segments in which the Company offers new products are intensely competitive and the Company must compete with entrenched competitors who have established greater product breadth and distribution channels. The introduction of new products can result in a greater than expected decline and demand for existing products and create an imbalance between products ordered by customers and products 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 1998. The Company sold approximately $17 million of mobile core logic to Compaq and its subcontractors, representing a combined 43% of net sales for fiscal 1998. 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 mobile core logic product to Compaq and its subcontractors, representing a combined 40% of net sales for that period. In 1996, the Company sold approximately $37 million of chipsets to Compaq and its subcontractors, representing a combined 31% 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. There can be no assurance that any of these customers or any of the Company's other customers will continue to utilize the Company's products at current levels, if it all. The Company has experienced significant changes in the composition of its major customer base and expects that this variability will continue in the future. The loss of any major customer or any reduction in orders by any such customer could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has no long-term volume commitments from any of its major customers and generally enters into individual purchase orders with its customers. The Company has experienced cancellations of orders and fluctuations in order levels from period to period and expects it will continue to experience such cancellations and fluctuations in the future. Customer purchase orders may be cancelled and order 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 9 customers are unable to remain profitable. Approximately 21% of the Company's receivables at December 31, 1998 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 and packaging houses involves several risks, including the absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over delivery schedules, manufacturing yields and costs. At times during the second half of 1995, the Company was unable to meet the demand for certain of its products due to limited foundry capacity and the Company expects that it will experience other production shortfalls or difficulties in the future. Because the Company's purchase orders with its outside foundries are non- cancelable by OPTi, the Company is subject to risks of, and has in the past experienced, excess or obsolete inventory due to an unexpected reduction in demand for a particular product. The manufacture of chipsets is a complex process and the Company may experience short-term difficulties in obtaining timely deliveries, which could affect the Company's ability to meet customer demand for its products. Should any of its major suppliers be unable or unwilling to continue to manufacture the Company's key products in required volumes, the Company would have to identify and qualify acceptable additional foundries. This qualification process could take up to six months or longer. No assurances can be given that any additional sources of supply could be in a position to satisfy any of the Company's requirements on a timely basis. The semiconductor industry experiences cycles of under-capacity and over-capacity which have resulted in temporary shortages of products in high demand. Any such delivery problems in the future could materially and adversely affect the Company's operating results. The Company began using Custom Production in 1993. Custom Production requires that the Company provide foundries with designs that differ from those traditionally developed by the Company in its gate array production and which are developed with specialized tools provided by the foundry. This type of design process is inherently more complicated than gate array production and there can be no assurance that the Company will not experience delays in developing designs for Custom Production or that such designs will not contain bugs. To the extent bugs are found, correcting such bugs is likely to be both expensive and time consuming. In addition, the use of Custom Production requires the Company to purchase wafers from the foundry instead of finished products. As a result, the Company is required to increase its inventories and maintain inventories of unfinished products at packaging houses. The Company is also dependent on these packaging houses and its own internal test functions for adequate capacity. The Company intends to continue to shift a substantial amount of its capacity to increasingly dense sub-micron processes. The Company has limited experience with processes below .45 micron, which are increasingly more complex. Although the Company extensively tests hardware products prior to their introduction, it is possible that design errors may be discovered after initial product sampling, resulting in delays in volume production or recall of products sold. The occurrence of any such errors could have a materially adverse effect on the Company's product introduction schedule and operating results. Dependence on Sales Outside of North America Sale to customers located outside of North America accounted for 86% of the Company's total revenues for fiscal 1998. In fiscal 1999, the Company expects that a large portion of it revenues will be from sales to customers outside of North America, particularly to manufactures located in the Asia-Pacific region which sell their products worldwide. These sales are subject to a variety of risks, including fluctuations in currency 10 exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles and potentially adverse tax consequences and export license requirements. In addition, the Company is subject to risks inherent in conduction business internationally, including political and economic instability and unexpected changes in diplomatic and trade relationships. In particular, the economies of certain countries in the Asia-Pacific region are experiencing considerable economic instability and downturns. Because the Company's sales to date have been denominated in United States dollars, increases in the value of the United States dollar could increase the price in local currencies of the Company's IC products in non-US markets and make the Company's products more expensive than competitors' products that are denominated in local currencies. There can be no assurance that one or more of the factors described above will not have a material adverse effect on the Company's business, financial condition and results of operations. Competition The Company competes in markets that are intensely competitive. The Company believes that its ability to compete successfully depends upon a number of factors including price, performance, the timely delivery of new products by the Company, the introduction of new products by its competitors, product features, the emergence of new PC standards, quality and customer support. There can be no assurance that the Company will continue to compete successfully with respect to any one or more of these factors. The Company has experienced loss of market share in the core logic area, primarily to Intel. 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, 1998, the Company had 91 full-time employees, including 35 in research and development, 26 in marketing, sales, and support and 30 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. Item 2. Properties The Company is headquartered in Milpitas, California, where it leases administrative, sales and marketing, product development, test and distribution facilities in two locations consisting of an aggregate of approximately 97,000 square feet. The Company has sublet to third parties approximately 52,000 of the 97,000 square feet through December 2000. The leases for the Company's facilities expire in October 2002. The Company believes that these facilities are adequate for its needs in the foreseeable future. The Company also leases office space in Tokyo, Japan, and Taipei, Taiwan to provide sales and technical support to customers in these regions. The Company believes that these facilities are adequate for its needs in the foreseeable future. 11 Item 3. Legal Proceedings In January 1997, a patent infringement claim was brought against the Company by Crystal Semiconductor, a subidiary of Cirrus Logic, in the United States District Court for the Western District of Texas. The claim alleges that the Company and Tritech Microelectronics International infringed upon patents held by Crystal. These patents relate to the "Codec" module incorporated in various audio controller products. The suit is seeking judgement that Crystal's patents in suit are enforceable and are infringed, a preliminary and permanent injuction from the acts of infringement of Crystal's patents in the suit, an award of damages, an award of treble damages for willful nature of the defendants' infringement, and judgement for costs and reasonable attorney fees. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on its financial position, results of operations, or cash flow. In September 1998, Crystal Semiconductor filed a second suit against the Company and Does 1 through 1050 in the Superior court of the State of California. This suit is a complaint to set aside fraudulent transfers, the sale of its audio business and the stock repurchase program that the Company started and completed in the summer of 1998, and for preliminary and permanent injunction, against the Company divesting itself of its assets. On February 26, 1999, the Lemelson Foundation filed a complaint in the United States District Court for the district of Arizona against the Company and 87 other defendant companies claiming patent infringement. No compliant has actually been served against the Company. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on its financial position, results of operations, or cash flow. 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. Executive Officers of the Registrant The executive officers of the Company as of March 26, 1999 were as follows:
Name Age Position with the Company - ---- --- ------------------------- Bernard Marren............ 63 Chief Executive Officer, Chairman of the Board Micahel Mazzoni........... 36 Chief Financial Officer and Secretary
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 was Chairman and Chief Executive Officer of Die Enhancements, a processor of silicon wafers to produce fully tested die for the multi-chip module market from 1994 to 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 an employee of American Microsystems. He also founded and was the first President of SIA (the Semiconductor Industry Association). Mr. Marren is also a director of two private companies. Michael Mazzoni was appointed Chief Financial Officer of the Company in January 1998. Mr. Mazzoni joined OPTi in October 1993 as Manager, Investor Relations and has served as Corporate Controller since mid 1995. Prior to joining the Company, he served in various accounting positions at Everex Systems, Inc., a personal computer manufacturer from April 1992 to October 1993. He served as Corporate Controller at Everex from February 1993 to October 1993. From March 1986 to March 1992, Mr. Mazzoni was employed at Santa Cruz Operation. Inc. ("SCO") in various treasury, accounting and finance positions. At the time of his departure from SCO he was serving as Manager, Corporate Finance. 12 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: The Company has not paid cash dividends on its common stock, and currently intends to retain any future earnings for use in the development and operations of its business. Accordingly, the Company does not expect to pay any 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 sale prices for the Common Stock:
Quarterly Period Ended ------------------------------------ Dec. 31, Sept. 30, June 30, Mar. 31, -------- --------- -------- -------- Common stock price per share: 1998 High............................ $4.88 $6.94 $7.13 $7.31 Low............................. 3.25 4.00 6.44 6.00 1997 High............................ $7.63 $7.50 $6.13 $6.50 Low 5.75 4.25 4.50 5.00
As of March 22, 1999, there were approximately 214 holders of record of the Company's common stock. 13 Item 6. Selected Consolidated Financial Data
Year Ended December 31, ---------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- -------- -------- -------- (In thousands, except per share data) Consolidated Statement of Operations Data: Net sales...................... $40,003 $67,842 $118,725 $163,676 $134,099 Cost of sales.................. 26,712 50,471 111,395 121,587 90,020 ------- ------- -------- -------- -------- Gross margin................... 13,291 17,371 7,330 42,089 44,079 Operating expenses............. 20,623 27,836 31,000 27,458 22,614 ------- ------- -------- -------- -------- Operating income (loss)........ (7,332) (10,465) (23,670) 14,631 21,465 Other income (expenses): Gain on sale of Audio line -- 12,391 -- -- -- Interest income and other.... 3,717 3,031 2,417 3,210 1,523 Interest expense............. (312) (473) (441) (306) (233) ------- ------- -------- -------- -------- Income (loss) before provision for income taxes.............. (3,927) 4,484 (21,694) 17,535 22,755 Provision (benefit) for income taxes......................... 285 9,872 (7,636) 6,285 8,201 ------- ------- -------- -------- -------- Net Income (loss).............. $(4,212) $(5,388) $(14,058) $ 11,250 $ 14,554 ------- ------- -------- -------- -------- Basic net income (loss) per share......................... $ (0.35) $ (0.42) $ (1.13) $ 1.02 $ 1.71 ======= ======= ======== ======== ======== Shares used in computing basic per share amounts............. 12,196 12,838 12,443 11,033 8,501 ======= ======= ======== ======== ======== Diluted net income (loss) per share......................... $ (0.35) $ (0.42) $ (1.13) $ 0.85 $ 1.17 ======= ======= ======== ======== ======== Shares used in computing diluted per share amounts..... 12,196 12,838 12,443 13,171 12,436 ======= ======= ======== ======== ======== Consolidated Balance Sheet Data: Cash, cash equivalents, and short-term investments...... $60,903 $72,508 $ 56,372 $ 61,362 $ 50,302 Working capital.............. 55,791 75,360 76,188 95,551 71,481 Total assets................. 81,575 111,615 115,501 142,616 106,458 Long-term obligations, excluding current portion... 1,810 3,473 4,649 5,323 2,316 Shareholders' equity......... 69,285 92,723 96,371 108,756 79,149
14 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 1998, the Company shipped more than four million core logic, peripheral products (such as USB controllers and docking stations), and audio chipsets to over 100 PC and motherboard manufacturers and add-on board manufacturers located primarily in Asia and the U.S. The past year was one of continued transition for the Company as it continued to experience a significant reduction in revenue and continued its initiative to develop technologies for future product applications to substitute for declining revenues in the core logic market. 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 controller, 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. The Company expects that it will continue to 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 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 a change in the Company's product mix from core logic to peripheral products. In 1997 the majority of non core logic products was from 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. 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 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. The Company focused more heavily on notebook directed technologies in 1998, reducing 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. 15 Net interest and other income for 1998 was $3.4 million as compared to $2.6 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. 1997 Compared to 1996--Net sales for 1997 decreased 43% to $67.8 million, compared to net sales of $118.7 million for the year ended December 31, 1996 ("1996"). This decrease in sales was attributable to decreased sales of chipsets supporting the Company's desktop core logic business segment and decreased sales from the Company's audio line. In 1997 the Company shipped approximately 5.7 million chipsets as compared to approximately 9.0 million chipsets in 1996. Revenue from core logic products were approximately 73% of net sales for 1997 as compared to approximately 71% in 1996. The remaining 27% of revenue in 1997 was from peripheral products (audio and graphics). The mix of revenues within the core logic area shifted to notebook core logic products in 1996 and continued in 1997 as the Company had no major product wins in 1997 for desktop products. Gross margin for 1997 increased to approximately 26% of net sales as compared to approximately 6% in 1996. This increase in gross margin for 1997 as compared to 1996 was primarily attributable to inventory write-downs taken on some of the Company's Pentium class desktop core logic products and reductions in selling prices for the Company's Pentium class desktop core logic products during fiscal 1996. R&D expenses for 1997 decreased approximately 11% to $12.6 million, compared with $14.1 million for 1996. The decrease in research and development expenses from 1996 to 1997 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 the associated research and development headcount related expenses accordingly. SG&A expenses for 1997 decreased approximately 17% to $14.1 million, compared with $16.9 million in 1996. This decrease in SG&A expenses from 1996 to 1997 was primarily attributable to a reduction in sales expenses relating to decreased net sales. Restructuring and other expenses for 1997 were $1.2 million as compared to zero for 1996. During the second quarter of 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 reducing headcount, vacating leased facilities, reducing the value of certain assets as the Company moves forward with its revised business model, and other activities. Net interest and other income for 1997 was $2.5 million as compared to $2.0 million for 1996. Interest and other income consists primarily of interest income and has increased primarily due to higher average balances of cash and cash equivalents and short term investments in 1997 versus 1996. In November 1997, the Company sold some of the assets associated with its Audio line, substantially under the terms of the Asset Purchase Agreement dated November 22, 1997, to Creative Technology Ltd. ("Creative"), a Singapore corporation. Creative paid the Company cash of $14.0 million and delivered a warrant to purchase 200,000 shares of OPTi's Common Stock at a price of $10.00 per share and expiring in 2002. 16 The Company's effective tax rate was 220% provision for 1997 and a 35.2% benefit for 1996. The Company's effective tax rate differed from the federal statutory rate in 1997 due to a $9.8 million increase in the Company's reserve against deferred tax assets at December 31, 1997. The effective tax rate differed from the federal statutory rate in 1996 due to primarily to state income taxes and an increase in the Company's reserve against deferred tax assets at December 31, 1996. 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 1998, the Company generated cash from operating activities of $9.4 million primarily due to reductions in accounts receivable and inventories. This was partially offset by a decrease in accrued payable and a net loss for the year. All of these changes were a result of the Company's decrease in sales in 1998 as compared with 1997. In 1997, the Company generated cash from operations of $3.6 million primarily due to reductions in accounts receivable due to lower sales and an increase in accounts payable partially offset by the Company's net loss for the year. The Company's investing activities provided cash of approximately $3.6 million in 1998. The cash provided by investing activities was attributable to a net sale of its short-term investments of approximately $4.4 million, offset, in part, by purchases 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, a net investment into short term investments of approximately $8.7 million and a payment of approximately $1.6 million to United Microelectronics Corporation ("UMC") under terms of the 1995 February and Joint Venture 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 $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.. Financing activities in 1997 provided cash of approximately $10.5 million. The cash generated in 1997 was primarily due to proceeds from the sale of stock, offset by principal payments on capital lease obligations. Under the UMC agreement, the Company entered into a joint venture arrangement with UMC, together with other US semiconductor companies, to build a separate semiconductor manufacturing facility located in Taiwan at an estimated cost of $1 billion. The Company has completed its investment commitment of $8.5 million in the joint venture. Under the terms of the UMC agreement, the Company received an approximate 0.9% equity ownership in the joint venture company and certain capacity rights. The facility was expected to open during 1998, but fires during construction have delayed the opening. UMC has stated that it expects insurance will cover its fire losses. On March 4, 1999, the Company entered into an agreement with UMC to sell UMC approximately 24.0 million shares of stock in the joint venture wafer fabrication plant for a purchase price of approximately $8.5 million. The Company received the cash on March 19, 1999. Following the sale, the Company holds no shares of stock of the joint venture. 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. As of December 31, 1998, the Company's principal sources of liquidity included cash and cash equivalents and short term investments of approximately $60.9 million and working capital of $55.8 million. The Company believes that the existing sources of liquidity as well as its $10 million line of credit will satisfy the Company's projected working capital and other cash requirements through at least the end of 1999. 17 Year 2000 Readiness The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. The Company considers a product to be in "Year 2000 compliance" if the product's performance and functionality are unaffected by processing of dates prior to, during and after the year 2000, but only if all products (for example hardware, software and firmware) used with the product properly exchange accurate date data with it. The Company has a program to assess the capability of its products to determine whether or not they are in Year 2000 compliance. Although the Company believes its semiconductor products are in Year 2000 compliance, the Company has determined that certain of its products are not and will not be Year 2000 compliant. The products that will not be Year 2000 compliant should not adversely effect the Company. However, the assessment of whether a complete system will operate correctly depends on the BIOS capability and software design and integration, and for many end-users this will include BIOS andsoftware and components provided by companies other than OPTi. The Company does not believe it is legally responsible for costs incurred by customers related to ensuring such customers' or end-users' Year 2000 capability. In addition, the Company has contacted its major customers to determine whether their products into which the Company's products have been and will be integrated are Year 2000 compliant. The Company has received assurances of Year 2000 compliance from a number of those customers and the customers are under no contractual obligation to provide such information to the Company. The Company anticipates that substantial litigation may be brought against vendors, including the Company, of all component products of systems that are unable to properly manage data related to the Year 2000. The Company's agreements with customers typically contain provisions designed to limit the Company's liability for such claims. It is possible, however, that these measures will not provide protection from liability claims, as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Any such claims, with or without merit, could result in a material adverse affect on the Company's business, financial condition and results of operations, including increased warranty costs, customer satisfaction issues and potential lawsuits. The Company has initiated a comprehensive program to address Year 2000 readiness in its internal systems and with its customers and suppliers. The Company's program has been designed to address its most critical internal systems first and to gather information regarding the Year 2000 compliance of products supplied to it and into which the Company's products are integrated. Assessment and remediation are proceeding in tandem, and the Company intends to have its critical internal systems in Year 2000 compliance by the end of the third fiscal quarter of 1999. These activities are intended to encompass all major categories of systems in use by the Company, including manufacturing, engineering, sales, finance and human resources. The costs incurred to date related to these programs have not been material. The Company currently expects that the total cost of its Year 2000 readiness programs, excluding redeployed resources, will not exceed $500,000 over the next fiscal year. The total cost estimate does not include potential costs related to any customer or other claims or the costs of internal software or hardware replaced in the normal course of business. The total cost estimate is based on the current assessment of the Company's Year 2000 readiness needs and is subject to change as the projects proceed. The Company has also initiated formal communications with its significant suppliers and financial institutions to determine the extent to which the Company is vulnerable to those third parties' failure to remedy their own Year 2000 issue. To date the Company has contacted its significant suppliers and financial institutions and has received assurances of Year 2000 compliance from several of those contacted. Most of the suppliers with the Company are under no contractual obligation to provide such information to the Company. The Company is taking steps with respect to new supplier agreements to ensure that the suppliers' products and internal systems are Year 2000 compliant. While the Company currently expects that the Year 2000 issue will not pose significant operational problems, delays in the implementation of new information systems, or a failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of its suppliers, customers and financial institutions could have material adverse consequences, including delays in the delivery or sale of products. Therefore, the Company is developing contingency plans for continuing operations in the event such problems arise. The Company expects to have a contingency plan developed by September 1999. 18 Item 7A. Quantitative and Qualitative Disclosure About Market Risk Disclosure omitted as amounts are immaterial. 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. 19 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:
Name Age Position with the Company - ---- --- ------------------------- Bernard Marren............... 63 Chief Executive Officer, Chairman of the Board Micahel Mazzoni.............. 36 Chief Financial Officer and Secretary Stephen A. Dukker (1)........ 46 Director William Welling (2).......... 62 Director Kapil K. Nanda (1)(2)........ 53 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 was Chairman and Chief Executive Officer of Die Enhancements, a processor of silicon wafers to produce fully tested die for the multi-chip module market from 1994 to 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 an employee of American Microsystems. He also founded and was the first President of SIA (the Semiconductor Industry Association). Mr. Marren is also a director of two private companies. Michael Mazzoni was appointed Chief Financial Officer of the Company in January 1998. Mr. Mazzoni joined OPTi in October 1993 as Manager, Investor Relations and has served as Corporate Controller since mid 1995. Prior to joining the Company, he served in various accounting positions at Everex Systems, Inc., a personal computer manufacturer from April 1992 to October 1993. He served as Corporate Controller at Everex from February 1993 to October 1993. From March 1986 to March 1992, Mr. Mazzoni was employed at Santa Cruz Operation. Inc. ("SCO") in various treasury, accounting and finance positions. At the time of his departure from SCO he was serving as Manager, Corporate Finance. 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. Since 1993 he has been a director at Genesis Microchip, Inc., a fabless semiconductor company that designs, develops and markets high quality digital image manipulation integrated circuit solutions. Mr. Welling also serves as a director on the boards of several private companies. 20 Kapil K. Nanda was elected as a director in May 1996. Mr. Nanda is currently President of InfoGain Corporation, a software development and 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 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, except for a late filing of Form 3 by Michael Mazzoni, resulting in 5 stock option grants not being reported on time, a late filing of Form 5 by Stephen Dukker, resulting in one purchase transaction and one option grant not being reported on time, a late Form 5 by William Welling, resulting in one option grant not being reported on time, failure to file a Form 4 by Jerry Chang, resulting in twelve sales transactions not being reported, and a failure to file a Form 4 by David Zacarias, resulting in twelve sales transactions not being reported. 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 1998, 1997, and 1996 to Bernard Marren, Michael Mazzoni, Jerry Chang, and David Zacarias (the "Named Officers"). The table lists the principal position held by each Named Officer in the Last Fiscal Year.
Long-Term Annual Compensation Compensation Awards ---------------- ------------ All Other Fiscal Year Salary $ Bonus $ Options (#) Compensation ----------- -------- ------- ------------ ------------ Bernard Marren.......... 1998 150,923 -- 100,000 -- President and Chief Executive Officer 1997 -- -- -- -- 1996 -- -- -- -- Michael Mazzoni......... 1998 136,475 50,000 45,000 -- Chief Financial Officer 1997 96,771 10,350 -- -- 1996 85,375 21,250 30,000 -- Jerry Chang (1)......... 1998 91,204 -- -- -- President and Chief Executive Officer 1997 209,747 16,450 -- -- 1996 193,128 15,385 150,000 -- David Zacarias (2)...... 1998 17,813 -- -- -- Chief Operating and Financial Officer 1997 209,747 16,450 -- -- 1996 193,128 15,385 90,000 --
- -------- (1) On May 15, 1998, Mr. Chang resigned from his position as President and Chief Executive Officer of the Company. (2) On January 30, 1998, Mr. Zacarias resigned from his position as Chief Operating and Financial Officer. 21 Option Grants in Last Fiscal Year The following table provides information with respect to options granted in the Last Fiscal Year to the Named Officers.
Individual Grants ---------------------------------------------------- Potential Realizable Shares of Value at Assumed Common Stock Percent of Annual Rates of Stock Underlying Total Options Price Appreciation Options Granted to for Option Term (3) Granted Employees in Exercise Expiration ---------------------- Name (#)(1) Fiscal Year (2) Price ($/Sh) Date 5% 10% ---- ------------ --------------- ------------ ---------- ---------- ----------- Bernard Marren.......... 100,000 29.9% $4.63 12/09 291,178 737,903 Michael Mazzoni......... 45,000 13.5% $6.25 01/09 176,877 448,240
- -------- (1) All options to Named Officers are granted under the Company's 1993 Stock Option Plan at an exercise price equal to the fair market value on the date of grant. These stock options vest and become exercisable as to 1/8 of the shares beginning six (6) months following the vesting commencement date and as to 1/48 of the shares on the first day of each month thereafter. Under certain terms of the Option Plan, the option plan administrator retains the discretion, subject to certain limitations within the plan, to modify, extend, renew or accelerate the vesting of options and to reprice outstanding options. In particular, subject to Board approval, the stock plan administrator may reduce the exercise price of an option to the current fair market price of the underlying stock if the price of such stock has declined since the date on which the option was granted. (2) Based on 334,000 options granted to employees during the Last Fiscal Year under the 1993 and 1995 Stock Option Plan(s). (3) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values The following table provides information with respect to option exercises in the Last Fiscal Year by the Named Officers and the value of such officer's unexercised options at December 31, 1998.
Total Value of Total Number of Unexercised In-the-Money- Unexercised Options at Options at Fiscal Year Fiscal Year End (#) End ($)(1) Shares Value ------------------------- ------------------------- Name Acq. Exer. Realized Exercisable Unexercisable Exercisable Unexercisable ---- ---------- --------- ----------- ------------- ----------- ------------- Bernard Marren.......... -- -- 14,583 85,417 -- -- Michael Mazzoni......... -- -- 54,959 53,791 -- -- Jerry Chang............. 501,041 2,584,248 -- -- -- -- David Zacarias.......... 118,375 184,416 -- -- -- --
- -------- (1) Market value of underlying securities based on the closing price of the Company's Common Stock on December 31, 1998 on the Nasdaq National Market, minus the exercise price. 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 26, 1999 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 22 within sixty (60) days of March 26, 1999 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 10,812,827 shares of the Company's Common Stock were issued and outstanding as of March 26, 1998.
Shares Beneficially Owned ----------------------------- Name Number Percent ---- --------------- ------------- Bernard Marren (1)............................... 44,749 * Michael Mazzoni (2).............................. 108,750 1.0% Stephen Dukker (3)............................... 85,166 * Kapil Nanda (4).................................. 7,666 * William Welling (5).............................. -- * Caxton International............................. 914,900 8.5% 315 Enterprise Drive Plainsboro, NJ 08536 Schaenen Fox Capital Management LLC.............. 1,230,230 11.4% 200 Park Avenue, Suite 3900 New York, NY 10166 Dimension Fund Advisors.......................... 597,600 5.5% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 All Directors and Executive Officers as a group (5 persons) (6)................................. 246,331 2.3%
- -------- * Represents less than one percent. (1) Includes 34,749 shares subject to stock option exercisable as of March 26, 1998 or within sixty (60) days thereafter. (2) Includes 108,750 shares subject to stock option exercisable as of March 26, 1998 or within sixty (60) days thereafter. (3) Includes 0 shares subject to stock option exercisable as of March 26, 1998 or within sixty (60) days thereafter. (4) Includes 7,666 shares subject to stock option exercisable as of March 26, 1998 or within sixty (60) days thereafter. (5) Includes 0 shares subject to stock option exercisable as of March 26, 1998 or within sixty (60) days thereafter. (6) Inludes 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. 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 traansactions 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. 23 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:
Page ---- Report of Ernst & Young LLP, Independent Auditors................... F-1 Consolidated Balance Sheets, December 31, 1998 and 1997............. F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996............................................ F-3 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997, and 1996.................................. F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996........................................... F-5 Notes to Consolidated Financial Statements.......................... F-6
(a)(2) Financial Statement Schedules
Schedule Page Number Description Number -------- ----------- ------ II Valuation and Qualifying Accounts......................... S-1
All other schedules not applicable. (a)(3) Exhibit Listing
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. 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 ammended. (6)
24
Exhibit Number Description ------- ----------- 21.1 Subsidiaries of Registrant. 23.1 Consent of Independent Auditors. 24.1 Power of Attorney (see page 28, signature page). 27 Financial Data Schedule.
- -------- (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. 25 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 31st day of March 1999. OPTi Inc. By: /s/ Bernard Marren ----------------------------------- 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:
Signatures Title Date ---------- ----- ---- /s/ Bernard Marren Chief Executive Officer and March 31, 1999 ____________________________________ Chairman of the Board Bernard Marren (Principal Executive Officer) /s/ Michael Mazzoni Chief Financial Officer March 31, 1999 ____________________________________ (Principal Financial and Michael Mazzoni Accounting Officer) Director March 31, 1999 ____________________________________ Stephen A. Dukker /s/ William Welling Director March 31, 1999 ____________________________________ William Welling /s/ Kapil Nanda Director March 31, 1999 ____________________________________ Kapil K. Nanda
26 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. These 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OPTi Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP San Jose, California January 28, 1999 F-1 OPTi Inc. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
December 31, ----------------- 1998 1997 ------- -------- ASSETS Current assets: Cash and cash equivalents............................. $56,653 $ 63,832 Short term investments................................ 4,250 8,676 Accounts receivable, net of allowance for doubtful accounts of $800 in 1998 and $1,600 in 1997.......... 3,232 11,782 Inventories........................................... 1,192 5,017 Prepaid expenses and other current assets............. 944 1,472 ------- -------- Total current assets................................ 66,271 90,779 Property and equipment: Machinery and equipment............................... 26,008 25,183 Furniture and fixtures................................ 1,412 1,407 ------- -------- 27,420 26,590 Accumulated depreciation.............................. (21,738) (15,543) ------- -------- 5,682 11,047 Other assets............................................ 9,622 9,789 ------- -------- Total assets........................................ $81,575 $111,615 ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 5,991 $ 11,171 Accrued expenses...................................... 1,585 1,639 Accrued employee compensation......................... 1,052 1,367 Income taxes payable.................................. -- 106 Current obligations under capital leases.............. 1,852 1,136 ------- -------- Total current liabilities........................... 10,480 15,419 Long-term obligations under capital leases.............. 1,644 3,473 Other long-term liabilities............................. 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 10,810,549 in 1998, and 13,126,508 in 1997............................. 39,397 58,623 Retained earnings..................................... 29,888 34,100 ------- -------- Total shareholders' equity.......................... 69,285 92,723 ------- -------- Total liabilities and shareholders' equity.......... $81,575 $111,615 ======= ========
See accompanying notes. F-2 OPTi Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Year Ended December 31, -------------------------- 1998 1997 1996 ------- ------- -------- Net Sales...................................... $40,003 $67,842 $118,725 Costs and expenses: Cost of sales................................ 26,712 50,471 111,395 Research and development..................... 9,681 12,565 14,084 Selling, general and administrative.......... 10,942 14,058 16,916 Restructuring................................ -- 1,213 -- ------- ------- -------- Total costs and expenses....................... 47,335 78,307 142,395 ------- ------- -------- Operating loss................................. (7,332) (10,465) (23,670) Gain on sale of Audio line..................... -- 12,391 -- Interest income and other...................... 3,717 3,031 2,417 Interest expense............................... (312) (473) (441) ------- ------- -------- 3,405 14,949 1,976 ------- ------- -------- Income (loss) before provision (benefit) for income taxes.................................. (3,927) 4,484 (21,694) Provision (benefit) for income taxes........... 285 9,872 (7,636) ------- ------- -------- Net loss....................................... $(4,212) $(5,388) $(14,058) ======= ======= ======== Basic and diluted loss per share............... $ (0.35) $ (0.42) $ (1.13) ======= ======= ======== Shares used in computing basic and diluted per share amounts................................. 12,196 12,838 12,443 ======= ======= ========
See accompanying notes. F-3 OPTi Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts)
Common Stock Total -------------------- Retained Shareholders' Shares Amount Earnings Equity ---------- -------- -------- ------------- Balance at December 31, 1995....................... 11,876,963 $ 55,210 $ 53,546 $108,756 Sale of common stock...... 784,250 1,673 -- 1,673 Net loss.................. -- -- (14,058) (14,058) ---------- -------- -------- -------- 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.................. -- -- (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.................. -- -- (4,212) (4,212) ---------- -------- -------- -------- Balance at December 31, 1998....................... 10,810,549 $ 39,397 $ 29,888 $ 69,285 ========== ======== ======== ========
See accompanying notes. F-4 OPTi Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, --------------------------- 1998 1997 1996 -------- ------- -------- Operating activities Net loss......................................... $ (4,212) $(5,388) $(14,058) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................. 6,629 5,213 5,266 Deferred taxes................................. -- 9,888 (4,335) Gain on sale of audio line..................... -- (12,391) -- Changes in operating assets and liabilities: Accounts receivable.......................... 8,550 6,168 8,529 Inventories.................................. 3,825 (896) 20,313 Prepaid expenses and other current assets.... 254 41 2,744 Accounts payable............................. (5,180) 1,453 (11,735) Accrued expenses............................. (54) (398) 257 Accrued employee compensation................ (315) (82) 339 Income taxes payable......................... (106) (5) (2,800) -------- ------- -------- Net cash provided by operating activities........ 9,391 3,603 4,520 Investing activities Purchases of property and equipment.............. (830) (227) (6,380) Sale of short term investments................... 62,176 63,950 -- Purchase of short term investments............... (57,750) (72,626) -- Net proceeds from sale of Audio line............. -- 13,873 -- Increase in other assets......................... 7 (1,647) (5,190) -------- ------- -------- Net cash provided by/(used in) investing activi- ties............................................ 3,603 3,323 (11,570) Financing activities Net proceeds from sale of common stock........... 4,769 1,740 1,673 Repurchase of common stock....................... (23,995) -- -- Net proceeds from sale (purchase) of subsidiary stock........................................... -- -- (151) Proceeds from sale and leaseback of fixed as- sets............................................ -- -- 2,099 Principal payments on capital lease obligations.. (947) (1,206) (1,561) -------- ------- -------- Net cash provided by /(used in) financing activi- ties............................................ (20,173) 534 2,060 Net increase (decrease) in cash and cash equiva- lents........................................... (7,179) 7,460 (4,990) Cash and cash equivalents at beginning of year... 63,832 56,372 61,362 -------- ------- -------- Cash and cash equivalents at end of year......... $ 56,653 $63,832 $ 56,372 ======== ======= ======== Supplemental cash flow information Cash paid for interest........................... $ 312 $ 473 $ 441 Equipment leased under capital lease obligation.. $ -- $ -- $ 2,099 Cash paid for income taxes....................... $ 210 $ -- $ --
See accompanying notes. F-5 OPTi Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Summary of Significant Accounting Policies The Company OPTi Inc., a California corporation, is engaged in designing and marketing core logic chipsets and peripheral products for use principally by personal computer, add in card manufacturers and motherboard manufacturers. 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 its excess cash in high quality, auction rate preferred securities with reset dates every thirty-five days. 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 1998 as all investments were held to maturity during the year. At December 31, 1998 the fair value of short term investments approximates cost. 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. The 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 Income (loss) Per Share The Company follows the provisions of Statement of Financial Accounting Standards No.128, "Earnings per Share." Basic net income (loss) per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated using the weighted average number of outstanding shares of common stock plus dilutive common stock equivalents. The following table sets forth the computation of basic and diluted net loss per share:
Fiscal Year Ended ----------------------------------------- 1998 1997 1996 ------------ ------------ ------------- (In thousands, except per share data) Numerator: Net loss...................... $ (4,212) $ (5,388) $ (14,058) ============ ============ ============= Denominator for basic loss per share weighted average shares.. 12,196 12,838 12,443 ------------ ------------ ------------- Effect of dilutive securities: Employee stock options.......... -- -- -- ------------ ------------ ------------- Denominator for diluted loss per share.......................... 12,196 12,838 12,443 ============ ============ ============= Basic and diluted net loss per share.......................... $ (0.35) $ (0.42) $ (1.13) ============ ============ =============
F-6 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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, 1998, 1997 and 1996. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 superseded SFAS 14, "financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for the way that public business enterprises report selected information about operating segments in annual financial statements, SFAS 131 also establishes standards for the related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not have a material impact on the Company's results of operations, or financial position. 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, 1999 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. Note 2--Inventories A summary of inventories follows (in thousands):
1998 1997 ------ ------ Finished Goods................................................. 688 2,508 Work in Process................................................ 504 2,509 ------ ------ Total Inventory.............................................. $1,192 $5,017 ====== ======
Note 3--Other Assets A summary of other assets (in thousands):
1998 1997 ------ ------ Investment in UICC............................................. $8,521 $8,521 Investment in Tripath.......................................... 725 725 Deposits....................................................... 308 392 Other Miscellaneous............................................ 68 151 ------ ------ Total Other Assets........................................... $9,622 $9,789 ====== ======
F-7 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4--Obligations Under Capital Lease The Company leases certain machinery and equipment under capital leases. The related obligations under capital leases represent the present value of future minimum lease payments. Assets capitalized under leases totaled $6,656,000 and $6,876,000 at December 31, 1998 and 1997, respectively. Accumulated amortization on these leased assets was $4,386,000 and $3,982,000 at December 31, 1998 and 1997, respectively. The aggregate minimum annual payments under capital lease obligations as of December 31, 1998, were as follows (in thousands): 1999................................................................. $2,058 2000................................................................. 939 2001................................................................. 833 ------ Future minimum lease payments........................................ 3,830 Less amount representing interest.................................... 334 ------ Present value of future minimum lease payments....................... 3,496 Less current obligations under capital lease ........................ 1,852 ------ Long-term obligations under capital lease............................ $1,644 ======
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. Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net loss and 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 Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since the Company's employee stock options have characteristics significantly different from those of traded options, and since changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-8 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fair value of the Company's stock based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
1998 1997 1996 --------- --------- --------- Expected Life.................................. 5.0 years 4.5 years 4.5 years Expected volatility............................ 0.57 0.62 0.60 Risk Free Interest Rate........................ 5.40% 6.23% 6.50%
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):
1998 1997 1996 ------- ------- -------- Pro forma net loss.............................. $(5,693) $(8,670) $(16,800) Pro forma basic net loss per share.............. $ (0.47) $ (0.68) $ (1.35) Pro forma diluted net loss per share............ $ (0.47) $ (0.68) $ (1.35)
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999. During October 1996, the Company offered a repricing of stock options to all non-officers and directors. The repriced exercise price was for $5.32 per share. Approximately 1,100,000 options were repriced at that time The weighted average fair value of options granted under all stock option plans was $5.13, $3.49 and $2.86 for the years ending 1998, 1997 and 1996, 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:
Outstanding ------------------------- Weighted Ave Shares Exercise Price --------- -------------- Outstanding at December 31, 1995................... 2,301,747 $ 5.39 Granted.......................................... 497,000 $ 5.42 Exercised........................................ (667,621) $ 1.74 Canceled......................................... (439,818) $10.45 --------- 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 =========
F-9 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Approximately 192,710, 1,021,787 and 1,128,716 options outstanding were exercisable as of December 31, 1998, 1997 and 1996, respectively. 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:
Outstanding --------------------------- Weighted Average Shares Exercise Price --------- ---------------- Outstanding at December 31, 1995................. 626,922 $11.31 Granted........................................ 2,073,000 $ 5.72 Canceled....................................... (489,348) $10.05 --------- 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 =========
Approximately 424,401, 666,432, and 328,772 options outstanding were exercisable as of December 31, 1998, 1997 and 1996, respectively. Stock Options Outstanding and Stock Options Exercisable: The following table summarizes information about the 1993 and 1995 Stock Option Plans at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------- ------------------------ Weighted Average Weighted Weighted Number Contractual Average Number Average Range of Exercise Prices of Shares Life (in years) Exercise Price of Shares Exercise Price ------------------------ --------- ---------------- -------------- --------- -------------- $0.60--$1.88 6,289 2.67 $1.28 6,289 $1.28 $3.44--$3.84 60,502 9.34 $3.45 6,647 $3.57 $4.63 433,062 8.37 $4.63 182,779 $4.63 $5.13--$5.38 496,351 7.04 $5.31 355,140 $5.30 $5.88--$9.50 180,378 8.56 $6.52 66,256 $6.88
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 F-10 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. For the years ended December 31, 1998 and 1997 21,333 and 43,999 shares at a weighted average price of $3.44 and $7.50 per share were granted. At December 31, 1998, 119,998 options with exercise prices of between $3.44 and $16.75 had been granted, of which 13,333 had been exercised, 50,666 were returned to the plan and an additional 28,665 were vested. 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, 1998, 149,399 shares were 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 150,000 shares of common stock for issuance thereunder. In October 1997, the Company added an additional 100,000 shares to this plan, for a total of 250,000 shares available. Under the Purchase Plan, qualified employees are entitled to purchase shares at 85% of fair market value. As of December 31, 1998, 249,998 shares were issued under the Purchase Plan. Common Stock Reserved At December 31, 1998, the Company has reserved shares of common stock for future issuance as follows: 1993 Employee Stock Purchase Plan.............................. 601 1996 Employee Stock Purchase Plan.............................. 2 1993 Directors Stock Option Plan............................... 86,667 1993 Stock Option Plan (including the Evergreen Plan).......... 990,087 1995 Stock Option Plan......................................... 2,024,541 ---------- Totals....................................................... 3,101,898 ==========
Warrants The Company issued a warrant to Creative Technology Ltd in November 1997 as part of the asset purchase agreement entered into between the companies. The warrant allows Creative Technology to purchase 200,000 shares of common stock at the purchase price of $10.00 per share. The warrant expires on November 25, 2002. Note 6--Commitments The Company leases its facilities under noncancelable operating leases. At December 31, 1998, future minimum commitments related to these leases are as follows (in thousands): 1999............................................................. $ 2,059 2000............................................................. 2,083 2001............................................................. 2,157 2002............................................................. 1,669 ------- Total.......................................................... $ 7,968 =======
F-11 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has entered into an agreement to sub-lease a facility that will reduce its commitment above by approximately $621,000, $648,000, $674,000, and $523,000 for the years 1999 through 2002, respectively. This sub-lease is for a facility that the Company has never occupied and will not have a material effect on the Company's financials. Rental expense for operating leases amounted to $1,402,000, $1,529,000, and $1,584,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The Company has a $10.0 million unsecured line of credit of which none was outstanding as of December 31, 1998. The credit is available through October 1999 and is subject to certain financial covenants. At December 31, 1998 the Company was in violation of the Profitability covenant and the Consolidated Tangible Net Worth covenant of the Agreement. The Company has obtained a waiver for these violations through December 31, 1998. In 1995, the Company entered into a manufacturing agreement and foundry venture agreement with United Microelectronics Corporation ("UMC"). Under the original terms of the agreements, the Company received an immediate supply of wafers from UMC and the Company committed to invest the equivalent of $30 million in cash for a 5% equity interest in the foundry venture. The Company made a payment of approximately $6.9 million in January 1996 per the original agreement. The terms of the agreement were subsequently changed so that the Company's commitment to invest any additional funds to the venture could have been eliminated and the Company would retain a prorated share of wafer supplies and equity ownership, based on its reduced total investment. The Company, based on the economic value of the foundry, made an additional investment in December 1997 for approximately $1.6 million, bringing its total investment to approximately $8.5 million. The Company does not have Board of Director or management representation in the foundry venture. Due to the Company's percentage ownership and limited influence on the operations of the foundry venture, the Company has accounted for this investment on the cost basis. At December 31, 1998, the Company had invested approximately $2 million in a design company focused on power amplification. This investment represents an approximate 10% equity interest in the design company. The investment was accounted for under the cost method of accounting. The design company's losses through December 31, 1998 were not significant. 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 1998. The Company sold approximately $17 million of mobile core logic 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 mobile core logic product to Compaq and its subcontractors, representing a combined 40% of net sales for that period. In 1996, the Company sold approximately $37 million of chipsets to Compaq and its subcontractors, representing a combined 31% 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. F-12 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 21% of the Company's receivables at December 31, 1998 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 1995, the Company was unable to meet the demand for certain of its products due to limited foundry capacity and the Company expects that it will experience other production shortfalls or difficulties in the future. Because the Company's purchase orders with its outside foundries are non-cancelable by OPTi, the Company is subject to inventory surpluses and has in the past experienced write-downs of inventories due to an unexpected reduction in demand for a particular product. Products The Company's product life cycles are typically very short and ramp into volume production very quickly. At any point in time, the Company may rely on a limited number of products for a significant share of the Company's revenues. In the first half of 1999, the Company will be highly dependent on continued revenue contributions from its principal notebook product line and its USB controller. In the second half of 1998, the Company will rely heavily upon the successful product transitions into its LCD graphic panel controller chip for the flat panel display marketplace. Any significant shortfall in sales for the Company's current volume products or problems with the successful transition to next generation products will have a material adverse effect upon the Company's financials. Note 8--Segment Information Sales of the Company's product based on customer location were as follows (in thousands):
Year Ended December 31, ------------------------ 1998 1997 1996 ------- ------- -------- Taiwan.............................................. $22,761 $39,979 $ 67,512 Japan............................................... 6,085 8,773 5,327 Singapore........................................... 5,138 8,511 20,816 Other Far East...................................... 436 3,285 1,662 Europe/Other........................................ 175 220 7,241 United States....................................... 5,408 7,014 16,167 ------- ------- -------- Total Sales....................................... $40,003 $67,842 $118,725 ======= ======= ========
Note 9--Bonuses In 1993, the Company adopted the OPTi Inc. Bonus Plan (the "Bonus Plan"). Under the Bonus Plan the maximum aggregate quarterly amount of bonuses, including officers, may not exceed 10% of pre-tax, pre-bonus income for the quarter. The bonus is generally based on the success of the employee in achieving goals and the Company's performance as a whole. The Company recorded bonuses of $1,196,000, $1,449,000, and $1,156,000 for the years ended December 31, 1998, 1997 and 1996, respectively, which were allocated as shown below (in F-13 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) thousands). Bonuses paid to research and development personnel in 1997 and 1998 include bonuses to attract and retain high quality engineering talent.
1998 1997 1996 ------ ------ ------ Research and development............................... $ 959 $ 625 $ 834 Selling, general and administrative.................... 237 824 322 ------ ------ ------ $1,196 $1,449 $1,156 ====== ====== ======
Note 10--Taxes The provision (benefit) for income taxes consists of the following (in thousands):
1998 1997 1996 ---- ------ ------- Federal: Current.............................................. $238 $( 137) $(3,116) Deferred............................................. -- 9,888 (3,372) ---- ------ ------- 238 9,751 (6488) State: Current.............................................. -- -- (185) Deferred............................................. -- -- (963) ---- ------ ------- -- -- (1,148) ---- ------ ------- Foreign: Current.............................................. 47 121 -- Deferred............................................. -- -- -- ---- ------ ------- 47 121 -- Total.................................................. $285 $9,872 $(7,636) ==== ====== =======
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):
1998 1997 1996 ------- ------ ------- Income taxes computed at the federal statutory rate........................................... $(1,485) $1,502 $(7,611) Net operating losses not benefitted............. 1,485 -- -- State taxes (net of federal benefit)............ -- -- (746) Benefit of net operating income................. -- (1,502) -- Alternative minimum taxes....................... 238 93 -- Valuation reserve movement...................... -- 9,888 699 Foreign Taxes................................... 47 121 -- Other individually immaterial items............. -- (230) 22 ------- ------ ------- $ 285 $9,872 $(7,636) ======= ====== =======
F-14 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components of deferred taxes consist of the following (in thousands):
1998 1997 -------- -------- Deferred tax assets: Inventory reserve...................................... $ 3,801 $ 5,355 Credit carryforwards................................... 4,875 2,066 Capitalized research & development costs............... 913 1,103 Accounts receivable reserve............................ 309 620 Reserve for sales return............................... 154 159 Net operating losses................................... 6,689 4,889 Amortization........................................... 1,690 397 Other individually immaterial items.................... 313 130 -------- -------- Total deferred tax assets............................ 18,744 14,719 Valuation Allowance.................................. (16,940) (12,837) -------- -------- 1,804 1,882 -------- -------- Deferred tax liabilities: Non-recurring engineering.............................. -- -- Depreciation........................................... (1,804) (1,882) -------- -------- Net deferred tax assets.............................. $ -- $ -- ======== ========
The valuation allowance decreased by $4,103,000 and $10,668,000 in 1998 and 1997, respectively. At December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $18.4 million and $6.2 million, respectively, expiring in the years 2001 through 2017. At December 31, 1998, the Company had tax credit carryovers of approximately $2.5 million and $2.0 million for federal and state purposes, expiring in the years 2007 through 2012. 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 1997and $1,470,000 in 1996. These benefits were fully reserved by a valuation allowance, and will be credited to paid in capital when realized. Note 11--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 12--Contingencies 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 F-15 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. In January 1997, a patent infringement claim was brought against the Company by Crystal Semiconductor, 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 infringed upon patents held by Crystal. These patents relate to the "Codec" module incorporated in various audio controller products. The suit is seeking judgement that Crystal's patents in suit are enforceable and are infringed, a preliminary and permanent injunction from the acts of infringement of Crystal's patents in the suit,an award of damages, an award of treble damages for willful nature of the defendants' infringement, and judgement for costs and reasonable attorney fees. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on its financial position, results of operations, or cash flow. In September 1998, Crystal Semiconductor filed a second suit against the Company and Does 1 through 1050 in the Superior court of the State of California. This suit is a complaint to set aside fraudulent transfers, the sale of its audio business and the stock repurchase program that the Company started and completed in the summer of 1998, and for preliminary and permanent injunction, against the Company divesting itself of its assets. On February 26, 1999, the Lemelson Foundation filed a complaint in the United States District Court for the district of Arizona against the Company and 87 other defendant companies claiming patent infringement. No complaint has actually been served against the Company. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on its financial position, results of operations, or cash flow. Note 13--Restructuring During the second quarter of 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 14--Sale of Audio Line On November 26, 1997, the Company sold some of the assets associated with its Audio line, substantially 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 certain obligations relating to licensing agreements and a supply contract. At the closing, Creative paid the Company $14,000,000 in cash and issued a warrant to purchase 200,000 Shares of OPTi's Common Stock at a price of $10.00 per share expiring in 2002. 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. F-16 OPTi INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. Fourteen million dollars of the purchase price, paid in cash, is being used by the Company to fund its daily activities; however, by selling the Audio line, the Company loses a significant source of continued revenue. Note 15--Subsequent Events (Unaudited) 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, 1999. This sub-lease agreement will reduce the company's commitment on leased facilities by $368,000 and $384,000 for the years 1999 and 2000, respectively. In February, the Company entered into an additional sub-lease agreement 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 $323,000 and $384,000 for the years 1999 and 2000. 0n March 4, 1999, the Company entered into an agreement with UMC to sell UMC approximately 24.0 million shares of stock of the joint venture wafer fabrication plant located in Taiwan for a purchase price of approximately $8.5 million. The Company received the cash on March 19, 1999. Following the sale, the Company holds no shares of stock of the joint venture. F-17 OPTi Inc. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Additions Balance Charged to Balance Beginning Costs and at End of Period Expenses Deductions of Period --------- ---------- ---------- --------- Year ended December 31, 1996 Allowance for doubtful accounts...................... $ 850 $425 -- $1,275 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
-------- (1) Represents specific write-off of accounts. S-1 EX-21.1 2 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT Name of Subsidiary Jurisdiction of Incorporation ------------------ ----------------------------- OPTi Communications Group, Inc. California OPTi International Co. Limited Barbados MediaChips, Inc. California OPTi Japan Kabushiki Kaisha Japan
EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-39215, 333-26153, 333-17299, 333-15181, 33-80706 and 33- 65756) pertaining to the 1996 Employee Stock Purchase Plan, the 1995 Nonstatutory Stock Option Plan, the 1993 Stock Option Plan, the 1993 Employee Stock Purchase Plan and the 1993 Director Stock Option Plan of OPTi, Inc. of our report dated January 28, with respect to the consolidated financial statements and schedule of OPTi Inc. included in this Annual Report (Form 10- K) for the year ended December 31, 1998. /s/ Ernst & Young LLP San Jose, California March 30, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 56,653 63,832 4,250 8,676 4,032 13,382 800 1,600 1,192 5,017 66,271 90,779 26,008 26,590 21,738 15,543 81,575 111,615 10,480 15,419 0 0 0 0 0 0 39,397 58,623 29,888 34,100 81,575 111,615 40,003 67,842 40,003 67,842 26,712 50,471 47,335 78,307 0 0 0 0 312 473 (3,297) 4,484 285 9,872 (4,212) 4,484 0 0 0 0 0 0 (4,212) (5,388) (0.35) (0.42) (0.35) (0.42)
-----END PRIVACY-ENHANCED MESSAGE-----