Trust Intelligence

OPTi is about to go to trial with AMD, after having won an almost identical case against Apple. The AMD case potentially could bring in 20 times the Apple amount or more.

Here is a part of the original Premium Service Report on OPTi, written long before the Apple case was decided.
++++++++++++++++++++++++++++++++
OPTi Inc (OPTI OTC BB)

OPTi was an independent supplier of semiconductor products to the personal computer market until fiscal 2003, when it sold its fabrication, distribution and sales operations to Opti Technologies, Inc., an unrelated third party.
INTELLECTUAL PROPERTY (IP)
The Company retained certain valuable patents related to hard-wired chip operating innovations. All future revenues will depend upon the results of its patent infringement cases and associated licensing efforts related to these innovations. I want to stress that OPTi is not a predatory patent-troll that buys patents and spends its time attacking unsuspecting companies. OPTi developed their technology and patented the significant innovations they represent. They deserve to be compensated when companies use their IP to make a profit.
The Company seeks to license the use of its IP and monitors the personal computer and semi-conductor markets looking for unlicensed usage. Many useful technology patents tend to become less valuable over time as the general level of technology advances and competitors find new ways to get the same result faster, cheaper and without having to pay Royalties or license fees. Sometime the reverse is true; as the general level of technology progresses, little-used patents become valuable because they are key to new applications. Luckily for OPTi, this is what seems to have happened with its IP. The Company has been finding more and more companies that are infringing its patents and “has been is actively working to explore all possible arrangements to settle such infringement.”
To understand the investment opportunity here, you have to understand 3 things:
1.    OPTi’s business plan is to generate cash from its IP and pay that cash to shareholders, retaining about $10 million working capital to finance the continuing defense of its technology
2.    why OPTi’s patent litigation is likely to provide a lot of cash flow for shareholders
3.    the general idea of what OPTi’s patents do and why so many other companies use their technology.
PRE-SNOOP Technology
As you probably know, computer components are not smart, but they are fast. Normally, they do one thing at a time. They pick up the next command, look for the information required to carry out the command, perform an action, and then they repeat the process. Each step takes time. Reducing the steps required reduces the time required and makes hardware perform faster. Thanks mainly to Microsoft and Intel, computer operating systems get bigger and bigger and therefore require faster and faster execution by the hardware if they are not to bog down. This is especially true now that Microsoft has introduced the new VISTA operating system. VISTA is so unwieldy and slow, it requires two processors to run it acceptably. No doubt, you’ve seen Intel’s “Duo Processor” and AMD’s “Dual-Core Processor” being touted in the newest computers. Intel now even has a “Core 2 Quad Processor” to try to speed things up.

Pre-snoop Technology lets a component get the next instruction BEFORE it needs it, instead of after it has completed all prior instructions. Conceptually (and that’s the main way I understand it) it allows a component to eavesdrop on the set of instructions while it is carrying out the latest command, so when it is finished, it knows what to do next, as opposed to having to spend time finding out what it needs to do next. It therefore makes whole systems noticeably faster than they’d otherwise be. Most electronic devices (like PCs, Video Game players, & MP3 players) have one or more central processing units (CPU). They perform instruction, logic, and mathematical functions. The CPU accesses information from many places, first looking in “cache memory”, which is a special high-speed storage mechanism. If the CPU finds the data in the cache, it does not have to do a more time-consuming search for data and then retrieve them from larger, slower, memory storage. Predictive cache snooping (PreSnoop) is a mechanism whereby a master control circuit requests information from the cache in advance of needing it. The “predictive” part about this process is the key; it lets the compilers plan for the data transfer in advance. Without a predictive snoop, the data transfer within the system would be 5-10% slower.

Intel has a non-exclusive legacy license to use OPTi’s Pre-Snoop patents and pays OPTi nothing. But nobody else, other than NVIDIA (which I will discuss later) has paid for the right to use their IP covered in this report.

Technically proficient people can access the US Patent Office Search page and find the crucial patents for the “predictive snooping of cache memory for master-initiated accesses technology”:
1. U.S. Patent No. 5,710,906
2. U.S. Patent No. 5,813,036
3. U.S. patent No. 6,405,291


LIMITED PIN COUNT Technology
OPTI also holds U.S. Patent No.s 5,944,807 and 6,098,141, both entitled “Compact ISA-Bus Interface”.
A Bus is actually the connection (interface) between different components that get plugged into it. The faster and more efficient the bus, the faster a computer (or other similar device) can function (as long as the other components are as fast or faster than the transfer of information through the bus). Busses have a limited number of “pin” connectors and components are made to fit standard Busses. OPTi’s patents allow individual pins on a Bus to be used for more than one thing. If you are technically oriented you may already know that this allows available signal lines to simultaneously handle both ISA and PCI devices. To do this, OPTi’s patents allow multiplexing (just like transmission on data lines like phone calls on fiber optic cable) which reduces the number of signal lines needed on an ISA bus from 58 to 22. The reduced number of pins required means that the size of the chipsets can be reduced.
PATENT DISPUTES
Before I explain OPTi’s specific licensing and lawsuit opportunities, it’s useful to know how the process works, or at least how OPTi conducts its business.
1.    OPTi monitors the technology market for devices that may be using their patented processes. They have experts take devices apart and determine whether the manufacturer is infringing.
2.    Once an infringement is identified and the Market for the device(s) ascertained, OPTi approaches the infringing party offering them a license to use their patents and requesting payment for prior infringing use.
3.    If the infringer refuses to pay what OPTi asks (a combination of cash for past use and cash or Royalties for future use) or make an acceptable counterproposal, OPTi will then file a lawsuit alleging patent infringement. As far as I know, no company has actually agreed to OPTi’s initial demands. This is not necessarily because they are unreasonable. It is because the infringer doesn’t want to pay anything, and if they have to pay, they want to pay as little as possible as far off in the future, as possible.
4.    If OPTi decides to proceed against an infringer, it files its case in Marshall or Tyler, Texas, which is in the Eastern Federal Court District for Texas. The court and judges in these venues tend to be more receptive to the patent holder and they do not tolerate the typical postponement tactics that are the stock and trade of defendants’ lawyers.
5.    After the filings, the Judge holds a Markman Hearing. This is “A court proceeding in patent litigation designed to determine the proper interpretation and scope of the claim language of the patent in question. During a Markman hearing, such things as the ordinary meaning of the words in the claim, drawings, other claims, the patent specification and the prosecution (application) history of the patent are used to assist in interpreting the claim language.”
In the hearing, the Plaintiff presents arguments supporting the validity of the claims listed at the end of the patent, while the defendant will argue that the technology in question wasn’t patentable and/or doesn’t pertain to their use of the technology. Within a few weeks of the Markman Hearing, the Judge rules on the validity of the patent claims. If the Plaintiff wins, this is often the point when the Defendant decides that it would be to their advantage to settle the claim. This is attractive for the losing Defendant because it avoids additional court costs and the chance that Punitive Damages are awarded at trial. Although not likely, Plaintiffs can be awarded up to treble damages in addition to costs, and payments for past infringement. In effect, if you lose the Markman Hearing, you are likely to lose the case (and visa versa). Whoever wins the Markman Hearing normally files for Summary Judgment, which is increasingly granted.
6.    if OPTi wins the Markman hearing and there is no settlement,  they proceed to trial.
7.    if there is a pre-trial settlement and the Defendant reneges on the terms, OPTi uses the settlement contract mechanisms to seek redress. The dispute basically goes to arbitration.
NVIDIA License DISPUTE
NVIDIA (NVDA on NASDAQ) offers programmable graphics processor technologies worldwide for computing, consumer electronics, and mobile devices. It has a Market Cap of over $18 billion and revenue of $3.77 billion. It has a very strong patent lock on graphics processors and most of its competitors license their graphics technology from NVDA. To speed up their graphics cards, NVDA has been using OPTi’s PreSnoop Technology and they have also been using the Limited Pin patents.
OPTi won a favorable Markman Hearing ruling on 13 of their 15 patent claims (indicating a very strong patent) in its patent infringement case against NVIDIA. As a result, on August 3, 2006, the two companies entered into a license and settlement agreement in which OPTi
1.    agreed to dismiss its patent infringement lawsuit against NVIDIA
2.    licensed patents to NVIDIA.
In return, NVIDIA
1.    made a non-refundable $11 million payment to the Company (which OPTi distributed to shareholders).
2.    agreed that, starting Feb. 2007, NVDA would pay $750,000 royalty payments to OPTi for each Quarter, so long as NVIDIA continues to use the Company’s Predictive Snoop technology. To get an ongoing non-exclusive license, NVDA has to pay 12 Quarterly payments. The agreement allowed NVIDIA to choose to pay OPTi a lump sum of $7,000,000 instead of quarterly payments as long as they do it before Feb. 1, 2008. After that date, NVIDIA owes a total of $9 million.
On February 5, 2007, OPTi announced that it had received a letter from NVIDIA stating that NVIDIA has discontinued the use of the Predictive Snooping technology and that NVIDIA will not pay any more money to OPTi. They had already paid the $11 million. NVDA has made no Quarterly payments, nor have they paid the lump sum alternative.
OPTi’s experts went through retail channels and bought products that used the NVDA graphics chipsets to determine whether NVIDA had, in fact, discontinued using the PreSnoop patents. Apparently NVIDIA has 5 different versions of its popular NFORCE chipset. On the newest most advanced version (6), they turned off the PreSnoop function, but did not do that on the other 4 versions that they sell. I think they actually only disabled #6 for one of their OEM customers and not others. On October 17, 2007, OPTi announced that, according to their agreement with NVIDIA, OPTi had initiated the arbitration process because OPTi believes that NVIDIA has breached the terms of the August 3, 2006 license agreement.
In the latest OPTi SEC filing, preliminary to the Nov. 27, 2007 Annual Meeting, OPTi wrote:
“The Company disclosed that the arbitrator had been selected and that the Company was seeking damages through the arbitration in the range of $7 million to $9 million. The Company also disclosed that it currently expects to learn the outcome of the arbitration in the next six months, and that it estimates there is an 80% chance of the Company receiving a favorable outcome in the arbitration.
As I understand the plan, OPTi is going to have the arbitration hearing after the February 1, 2008. You will recall that the Infringement/License settlement agreement makes that the deadline for paying “only” $7 million as a lump sum. After that date, NVIDIA owes $9 million minus any $750,000 quarterly payments already made. They have made no payments and presumably don’t plan on making any.
OPTi expects to collect $7 to $9 million from NVIDIA by mid-summer. With less than 12 million shares outstanding, they should distribute between 50 and 70 cents per share to each shareholder, as a result. While OPTI suggests there is an 80% chance of recovery, it looks like a slam dunk to me. They already have an agreement in which NVIDIA admits to having used the technology in the products. The contract specifies that as long as NVIDIA is offering products with the PreSnoop technology for sale it must pay OPTi. And of course, OPTi has proof that it has purchased lots of product that have NVIDIA chipsets where PreSnoop was not turned off.

ADVANCED MICRO DEVICES PreSnoop Patent DISPUTE
Advanced Micro Devices (AMD) is the second largest semiconductor maker in the Computer business. It has a market cap of almost $5 billion and revenue of over $6 billion a year. To compete with Intel and be able to run Microsoft Vista, it makes processors that use OPTi’s PreSnoop IP.  In November 2006, OPTi announced that it had filed a patent infringement lawsuit against AMD.
OPTi started trying to get AMD to license the technology about 5 years ago, to no effect. Apparently, AMD outsourced their chipsets to some Taiwanese firms and they infringed the PreSnoop patents for the last 4 years. The advent of the AMD Dual-Core processors, post VISTA, increased the unauthorized usage of the patented technology. AMD chips could not compete with Intel chips, which use PreSnoop, without using the technology. In effect, all AMD computer, device, and chip sales depended upon them providing a competitive product by using PreSnoop to speed them up.
A Markman Hearing is scheduled for July, 2008.
Luckily for OPTi shareholders, these are the same 3 PreSnoop patents, and therefore the same claims, as in the NVIDIA Markman Hearing. Better yet, the venue is the same court and the case will be pled before the same Judge that ruled so overwhelmingly in OPTi’s favor against NVIDIA.
Maximum award in this case, given the years of infringement, may be in the neighborhood of $100 million, given that using the PreSnoop patents contribute so much to making AMD chips competitive to Intel’s. If the case went to a full trial, there could be a damage award too, although recent precedents have made “treble” damage awards rare. A win in court would likely award OPTi court costs, cash for prior use, and perhaps some damages.
Using the NVIDIA case as an example, we can expect that AMD would enter into a settlement agreement shortly after losing the Markman Hearing. Obviously, OPTi will only settle for a significant lump sum or ongoing licensing revenues based upon a per-unit or periodic Royalty future use.
In whatever form it might take, $100 million translates into another $8 per share in distributions, over time. The July 2008 Markman hearing result will be a major event and affect the share price as well as the distributions. And I remind you, the same Judge has already ruled in OPTi’s favor on the same exact patents. If AMD does not settle to OPTi’s satisfaction, the actual court case is likely to start about within 6 months after the ruling, since the Judge values speedy justice.

APPLE PreSnoop Patent DISPUTE
Apple Inc. (AAPL), with a Market Cap of over $160 billion and revenue of more than $24 billion is another PreSnoop Patent infringer. At the moment, Apple uses Intel chips, so it is no longer infringing. But before it changed chip manufacturers, its chips used OPTi’s technology and Apple did not have a license to do so.
On January 16, 2007, OPTi filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas against Apple Inc. for infringement of the three patents, all entitled “Predictive Snooping of Cache Memory for Master-Initiated Accesses”. The complaint alleges that Apple has infringed the patents by making, selling, and offering for sale desktop and portable computers and servers incorporating Predictive Snooping technology. OPTi has requested a jury trial.
Apple has been somewhat reasonable. They admit that they infringed the patent and apparently offered to settle for $5 to $7 million (about 50 cents per share of OPTi). OPTi refused, seeing no reason to settle for so little. I presume that this was because OPTi is very confident of winning, given that this case will once again be heard by the same judge who declared the validity of the same patents in the NVIDIA case. The Markman Hearing in this case is scheduled for the Fall of 2008.

OTHER PreSnoop Patent DISPUTES
OPTi continues to scour the processor marketplace looking for other companies that may be infringing its PreSnoop IP. With the obsession with speed in processing, PreSnoop technology is quite useful from video games to cell phones. There may be 30 or more additional targets. One of the companies in OPTi’s sights is Broadcom Corp (BRCM), a maker of semiconductors mostly used for wired and wireless communications. They have a market Cap of over $15 billion and revenues above $3.6 billion.  OPTi is investigating Broadcom’s (and other producers’) server market core logic chipsets to ascertain whether they infringing. I don’t have information regarding cell phone chips infringing, but with the increasing migration of cell phones into hybrids with MP3, camera, internet and general computer functions to compete with Apple’s Iphone, PreSnoop technology should be increasingly in demand.
Once the biggest, richest companies have been signed up as licensees and paid what they owe for past usage, my guess is that OPTi will go after the next tier of companies using the technology, so it is not clear when the opportunity will cease. Sooner or later someone will come up with better technology and companies will stop using OPTi’s PreSnoop, as long as the cost of the new technology isn’t too expensive. I presume this will bias OPTi to try to get their money up-front whenever possible.

LIMITED PIN COUNT Technology
There are a number of companies that are infringing the Compact ISA Bus Interface patents, some of them the same ones as for the PreSnoop Patents. In fact, the case in which OPTi won the Markman hearing against NVIDIA involved both PreSnoop and Limited Pin patents.  On July 3, 2007, OPTi announced that it had filed a patent infringement lawsuit in the United States District Court for the Eastern District of Texas against eight companies. They have been charged with infringing on the two U.S. patents entitled “Compact ISA-Bus Interface”. The complaint alleges that Advanced Micro Devices, Atmel Corporation (ATML), Broadcom Corporation, Renesas Technology America, Inc., Silicon Storage Technology, Inc. (SSTI), Standard Microsystems Corp. (SMSC), STMicroelectronics (STM) and VIA Technologies, Inc. (from Taiwan) have infringed the patents by making, selling, and offering one or more of the following products: core logic chipsets, Super I/O devices, Trusted Platform Modules, certain flash memory devices, certain I/O controllers and other semiconductor products incorporating Compact ISA-Bus Interface technology. OPTi has requested a jury trial in this matter.”

The infringers knew exactly what they have been doing. OPTi had the patent and the infringers thought they could be able to get away with infringing because of a technicality that invalidates the patents. They are wrong. Here’s why they thought they were safe:
There is a loophole in the patent rules. Members of a “Standards” committee are not allowed to patent something that must be reviewed by that Committee. The name of the “inventor” of the Limited Pin patents (Mark Williams) coincidentally happened to be the same name as one of the people on the Standards Committee. But these are two different people. Apparently, the infringers’ attorneys checked out the patents and decided that they were invalid because the names were the same, and went no further. They did not verify that the person on the Committee was the same as the inventor, so they felt confident that a Judge would through out an infringement claim because the patent wasn’t valid. .
Because OPTi already won a Markman Hearing against NVIDIA on the Limited Pin Count patents and future filings will be heard by the Judge that made that favorable decision, it makes sense to be confident that the Bus Interface will provide more income for shareholders. After all, the defense to any infringement action is either that the defendant did not infringe or that the patent is not valid. The infringers targeted by OPTi were relying on being able to invalidate the patent because of the “inventor-committee” issue. They have no case there and they certainly are infringing.
In fact, I’ve heard that a few of the infringers are looking to settle. One of these infringing companies has already offered to settle for about $5 million (about 40 cents per share of OPTi) but talks are ongoing. I get the impression that OPTi wants more than was offered. Some of these cases could settle as early as during Q1, 2007, but there is no specific guidance to that effect. There could be quite a few other companies infringing these patents because the way computers are going, companies always want to increase the number of channels on existing hardware, instead of making the hardware bigger and more complex. I presume that OPTi will go after the largest infringers with the deepest pockets first and then work their way down to smaller and smaller infringers.
FUTURE LITIGATION & CLAIMS
The Company expects to file new cases during the first half of 2008. I do not know which additional companies that they will target, but more cases against more infringers increases the chances of additional money being distributed to shareholders.
EXPENSES
Beside general office expenses, there are 2 executive employees. The CEO and CFO get reasonably low salaries and they get a small percentage of the cash recovered and paid out to shareholders. In other words, their incentive plan works for them only when shareholders get cash sent to them. The rest of OPTi expenses are related to litigation. Their Chicago law firm works on a fee basis and are the people responsible for the legal success so far.
CASH POSITION
At the end of Q3, 2007, OPTi had cash, cash equivalents and available-for-sale investments of approximately $12.2 million and no significant liabilities. The Company believes this cash position will cover expenses for the following twelve months. As I understand it, the company likes to keep at least $10 million on hand to avoid being put in a weak position where they may be tempted to settle for less money in any of their suits or licensing negotiations. As they receive cash in future settlements or judgments, they will retain enough cash to top up their “war chest” and distribute the rest to shareholders.

  RISKS
1.    Litigation Risk: Obviously the company is all about litigation and licensing so buying shares is a bet that they will continue to win
2.    Limited Trading on OTC BB makes this an illiquid investment.
3.    Uncertainty of future distributions and their timing. Everything will depend upon when they make deals or win cases and how much they get.

OVERALL SUITABILITY
The company keeps expenses to a minimum and takes care of its limited business. It does not have an IR person or a website. It only issues public releases of information for significant actions, like the Arbitration filing against NVIDIA. It does file SEC quarterly and annual reports, 8Ks (material events) and other statutory filings, as required.
This company exists to earn income from Intellectual Property and to distribute it to shareholders in an efficient manner. It is not suitable for investors that mush have predictably timed payments or who can’t afford to wait. Owning this stock is a bet that OPTi can obtain licensing revenues and/or court judgments of at least $50 million, adjusted for the time-value of money. Although the outcome of court cases and settlement talks can not be easily predicted, it is obvious that buyers of this stock have somehow handicapped the likely outcomes.