Description

OPTi, Inc. (OPTI, $3)

On January 3, 2001 OPTI announced a postponement of its plan of voluntary liquidation. The company will proceed as soon as practicable with a distribution to its shareholders of cash and the shares of Tripath Technology which OPTI owns. OPTI determined that it would be prudent to postpone the liquidation plan to allow the company more time to evaluate its intellectual property position and investigate a potentially broader infringement claim program.

Liquidation Analysis (in millions except per share data)

Cash 22.75
U.S. Gov’t Bonds and TRPH shares 12.11
Patents/infringement claims -
Other assets 1.20

Liabilities 1.38
Contingent liabilities 1.10

Networth 33.58
Networth per share 2.88*

*OPTI has 11,634,000 shares outstanding

Primary Assets

Cash

On November 21, 2001, OPTI announced their intention to pay an initial liquidating distribution of $2 - $2.35 to shareholders in January or February of 2002. With the January 3rd announcement this range was not formally restated. OPTI’s CFO says we should see a dividend declaration by the end of January. He also said it is possible that OPTI will pay the lower end of the 2-2.35 range in an effort to maintain Nasdaq listing requirements ($4 million networth and minimum bid price of $1). The company is and expects to remain cash flow neutral for the life of the claim pursuits. Under the liquidation plan, management showed a strong interest in distributing as much cash as possible.

1,914,155 million common shares of TriPath (TRPH – $1.70)

On November 21, 2001, OPTI announced their intention to pay a dividend of approximately .17 shares of TRPH for each one share of OPTI. The dividend should be paid in February or March of 2002. Investors can short TRPH at a rate of .17 share for each share of OPTI purchased – this trade eliminates your market risk on TRPH and essentially makes it a cash dividend.

Infringement Claims/Patents

This is OPTI’s main asset of interest after Q1, 2002 and is thus the focus of this investment. Purchasing OPTI shares today at $3 is really buying this asset (call it a stub or litigation warrant) at $0.12 - $0.50 per share. OPTI is claiming that certain semi-conductor chip manufacturers in the PC industry infringed on several patents owned by OPTI in the area of core logic. Five formal claims have been made with three to seven additional potential claims in the PC industry. In 1999, Intel settled with OPTI for $13.3 million. Outside intellectual property counsel estimates settlements of $0 - $50 million from the PC claims (not including Intel settlement proceeds). OPTI is currently investigating the gaming industry, the telecom industry, “point of sale” equipment manufacturers and other sectors for additional patent infringement claims.

None of the individual unsettled or potential claims have any significant public data available. None of them have been filed in a public court as they are all currently seeking settlement. We don’t have the names of the counter-parties or the amounts of the individual claims. The monetary size, total number of potential claims, and timing issues are unknown. The general formula of the claims is 5% of the U.S. product sales subject to the infringement. OPTI has indicated that as (or if) new claims arise, the fact that a claim exists will be disclosed in regular SEC filings hopefully allowing us to inventory and track claims in the four+ sectors. The company does not expect a major settlement in 2002. However the next win should set a strong precedent for unsettled claims. This could easily be a 5 year+ process.

Another issue: Two of the primary patents relating to the infringement claims are currently being renewed at the Patent Office. OPTI has received informal approval from the Patent Office but won’t have formal approval until the end of the first quarter. While the chance of loosing these patents is small, such a loss would seriously impact claims on future revenue streams.

Outside Counsel

Derwin & Siegel are outside intellectual property counsel to OPTI. They are representing the company under a contingency agreement. Pursuant to the agreement Derwin & Siegel are entitled to 15% of any settlement awards and 30% of any awards won through litigation.

Recent Development

On December 12, 2001, W. Joseph Breider of Breider Moore & Co. (the “Breider Group”), a San Fransicso based NASD member firm, announced a letter had been sent to OPTI notifying them that their shareholder group representing in excess of 10% of the company’s outstanding shares will vote against the liquidation plan. The Breider Group claims its following will grow to more than 50% of OPTI shareholders when the company holds it shareholder meeting in January. The Breider Group will seek a new slate of board members for the annual meeting as well according to reports.

It is believed by some that Caxton Corporation, one of OPTI’s largest holders, is behind the activism. The reason the group wishes not to liquidate is because the liquidation process is limited to a three-year period. While a two-year extension is possible, creating a five year life-span, it is believed this activist group does not want OPTI’s hands tied by time. In all likelihood the group wants the company to fight longer and harder on the infringement claims in an effort to increase settlements and court awards.

Apparently the OPTI board is beginning to side with Breider. The January 3rd announcement is directly tied to the time limit issue under a liquidation plan. The shareholder meeting has been postponed to Q2, 2002.

Conclusion

The implied value the market is giving OPTI’s patents and infringement claims is $1.3 million (market cap minus book value). The one and only settlement to date has been with Intel and has garnered shareholders $13.3 million. There are four formal claims pending, three to seven possible PC claims and an unknown number of potential gaming, telecom, point of sale and other claims. Derwin & Siegel clearly sees credibility in the additional claims as evidenced by their contingency arrangement. The Breider group has also exemplified their confidence in OPTI’s outcome through their actions.

Catalysts

A purchase of OPTI at $3 is essentially the purchase of a $0.12 to $0.50 litigation warrant which could pay shareholders anywhere from $0 to $4.00+ over a 5year+ period.

Catalyst

A purchase of OPTI at $3 is essentially the purchase of a $0.12 to $0.50 litigation warrant which could pay shareholders anywhere from $0 to $4.00+ over a 5year+ period.