<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Number 333-80037
3,250,000 Shares
[LOGO OF ALTIGEN COMMUNICATIONS, INC.]
AltiGen Communications, Inc.
Common Stock
$10.00 per share
- --------------------------------------------------------------------------------
This is an initial public offering of common stock of AltiGen Communications,
Inc. This is a firm commitment underwriting.
The common stock will be listed on the Nasdaq National Market under the symbol
"ATGN."
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Price to the public.............................. $10.00 $32,500,000
Underwriting discount............................ 0.70 2,275,000
Proceeds to AltiGen.............................. 9.30 30,225,000
</TABLE>
AltiGen has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 487,500 additional
shares from AltiGen within 30 days following the date of this prospectus to
cover over-allotments.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
CIBC World Markets
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
FAC/Equities
The date of this prospectus is October 4, 1999.
<PAGE>
[A chart showing the various types of networks over which users may place and
receive telephone calls and take advantage of other features of our products]
This diagram shows how Altigen's communications system connects telephone
users to one another using both the traditional telephone network and networks
over which computers communicate.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 30
Management............................................................... 41
Principal Stockholders................................................... 49
Certain Transactions..................................................... 51
Description of Capital Stock............................................. 53
Shares Eligible for Future Sale.......................................... 56
Underwriting............................................................. 58
Legal Matters............................................................ 61
Experts.................................................................. 61
Where Can You Find More Information...................................... 61
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-------------------------
AltiGen's principal executive offices are located at 47427 Fremont Boulevard,
Fremont, California 94538. Our telephone number is (510) 252-9712.
3
<PAGE>
Prospectus Summary
This summary highlights information contained in other parts of this
prospectus. You should read the entire prospectus carefully.
The Company
AltiGen designs, manufactures and markets integrated, multifunction
telecommunications systems that allow businesses to use data networks, such as
the Internet, and the traditional telephone network interchangeably and
seamlessly to carry voice and data communications. As the Internet accelerates
the convergence of voice and data communications, an increasing percentage of
voice communications is being carried over data networks, creating the need for
a next generation communications system. We believe that businesses,
particularly small- to medium-sized businesses, will begin to use integrated
systems that receive, manipulate and transmit voice communications over the
traditional telephone network, as well as data networks such as the Internet.
Our telecommunications systems provide new services to end users, giving
businesses the choice of placing calls over data networks or traditional phone
lines. Historically, manufacturers have not built this capability into
traditional private telephone switching systems. To use these new services,
businesses have had to add hardware and software to these traditional systems.
As businesses seek capabilities beyond those of traditional telephone systems
to meet today's communication needs, they have begun to purchase integrated,
multifunction telecommunications systems in place of traditional telephone
systems. These new integrated computer and telephone systems, which are
generally based on free and publicly available hardware and software standards,
allow products from different companies to be used together to provide basic
telephony services such as placing and receiving calls. Our integrated,
multifunction telecommunications systems allow small- to medium-sized
businesses to communicate over both the traditional telephone network and data
networks, such as the Internet, providing these businesses with a
telecommunications solution for the Internet era.
We are a leader in the market for integrated, multifunction telecommunications
systems that rely on general purpose computers, a market generally known as the
server-based PBX market, and have been shipping our products since July 1996.
We sell our integrated, multifunction telecommunications systems through our
network of over 400 dealers and through our key distributors, including Ingram
Micro Inc. and Tech Data Corporation. We also sell our systems through original
equipment manufacturers such as Nitsuko Corporation in Japan. We have joint
marketing agreements with Compaq Computer Corporation and Hewlett-Packard
Company.
Our goal is to extend and expand our market position. We intend to achieve this
goal by:
. increasing our brand name recognition;
. expanding our distribution channels;
. establishing relationships with technology and strategic partners;
. targeting key markets worldwide; and
. enhancing technology leadership in integrated, multifunction
telecommunications systems.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by AltiGen ................ 3,250,000 shares
Common stock to be outstanding after the
offering....................................... 12,821,049 shares
Use of proceeds................................. General corporate purposes,
including working capital
Nasdaq National Market symbol................... ATGN
</TABLE>
The number of shares outstanding is based on shares outstanding as of June 30,
1999, excluding 1,769,636 shares that are issuable upon exercise of outstanding
options at a weighted average exercise price of $1.89 per share.
---------------
Except as otherwise indicated, all information in this prospectus assumes:
. no exercise of the underwriters' over-allotment option;
. the automatic conversion of each outstanding share of preferred stock into
one share of common stock immediately prior to the completion of this
offering; and
. a one-for-1.66965 split of the common stock effected prior to the
effectiveness of this offering.
Please see "Capitalization" for a more complete discussion regarding the
outstanding shares of our common stock and options to purchase common stock and
other related matters.
---------------
Summary Consolidated Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Fiscal Year Ended September 30, June 30,
------------------------------------- -------------------
1995 1996 1997 1998 1998 1999
----------- ------- ------- ------- ----------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues, net........... -- $ 229 $ 1,379 $ 3,890 $ 2,559 $ 4,264
Gross profit (loss)..... -- (9) 339 1,370 811 2,097
Loss from operations.... $(1,101) (1,755) (3,325) (4,166) (2,947) (5,509)
Net loss................ $(1,068) $(1,631) $(3,119) $(3,920) $(2,809) $(5,234)
======= ======= ======= ======= ======= =======
Basic net loss per
share................. $ (1.77) $ (2.14) $ (3.91) $ (4.75) $ (3.47) $ (4.73)
======= ======= ======= ======= ======= =======
Shares used in comput-
ing basic net loss
per share............. 603 762 797 825 811 1,107
Unaudited pro forma ba-
sic net loss
per share............. $ (0.50) $ (0.59)
Shares used in comput-
ing unaudited
pro forma basic net
loss per share........ 7,827 8,867
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------
Pro As
Actual forma Adjusted
------- ------- --------
(Unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.............................. $ 7,961 $ 7,961 $37,186
Working capital........................................ 9,861 9,861 39,086
Total assets........................................... 13,235 13,235 42,460
Total stockholders' equity ............................ 10,790 10,790 40,015
</TABLE>
See Note 2 of the Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing per share data.
The pro forma numbers give effect to the conversion of all preferred stock
outstanding. The as adjusted numbers give effect to the sale of 3,250,000
shares of common stock offered by this prospectus at the initial public
offering price of $10.00 per share, after deducting the underwriting discount
and the estimated offering expenses payable by us and the application of the
estimated net proceeds from this offering.
5
<PAGE>
Risk Factors
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares. If any one of these
risks or uncertainties occurs, our business, operating results and financial
condition could be seriously harmed.
Risks Related to AltiGen
We have a history of losses and expect to incur future losses, which may
prevent us from becoming profitable
We have experienced operating losses since our inception. As of June 30, 1999,
we had an accumulated deficit of $15.1 million. We expect to incur operating
losses for the foreseeable future, and these losses may be substantial.
Further, we expect our operating cash flows to be negative for the foreseeable
future. Because we expect increased expenditures for product development and
general and administrative expenses, and substantial increases in sales and
marketing expenses, we will need to increase revenues significantly to achieve
profitability and positive operating cash flows. Even if we do achieve
profitability and positive operating cash flows, we may not be able to sustain
or increase profitability or positive operating cash flows on a quarterly or
annual basis.
We have a limited operating history, which makes it difficult to evaluate our
business and our prospects
We shipped our first products in July 1996. As a result of our limited
operating history, we have limited financial data that you can use to evaluate
our business. You must consider our prospects in light of the risks, expenses
and challenges we might encounter because we are at an early stage of
development in a new and rapidly evolving market. To address these risks and
achieve profitability and increased sales levels, we must:
. establish and increase market acceptance of our technology, products and
systems;
. expand our network of distributors, dealers and companies that buy our
products in bulk, customize them for particular applications or customers,
and resell them under their own names;
. introduce products and systems incorporating our technology and
enhancements to our product applications on a timely basis;
. respond effectively to competitive pressures; and
. successfully market and support our products and systems.
We may not successfully meet any of these challenges, and our failure to do so
will seriously harm our business and results of operations. In addition,
because of our limited operating history, we have limited insight into trends
that may emerge and harm our business.
Our operating results vary, making future operating results difficult to
predict
Our quarterly and annual operating results have varied significantly in the
past and will likely vary significantly in the future. A number of factors,
many of which are beyond our control, may cause our operating results to vary,
including:
. our sales cycle, which may vary substantially from customer to customer;
. unfavorable changes in the prices and delivery of the components we
purchase;
. the size and timing of orders for our products, which may vary depending
on the season, and the contractual terms of those orders;
. the size and timing of our expenses, including operating expenses and
expenses of developing new products and product enhancements;
6
<PAGE>
. deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or by our competitors; and
. our ability to attain and maintain production volumes and quality levels
for our products.
Our budgets and commitments that we have made for the future are based in part
on our expectations of future sales. If our sales do not meet expectations, it
will be difficult for us to reduce our expenses quickly, and consequently our
operating results may suffer.
Our dealers often require immediate shipment and installation of our products.
As a result, we have historically operated with limited backlog, and our sales
and operating results in any quarter depend primarily on orders booked and
shipped during that quarter.
Any of the above factors could harm our business, financial condition and
results of operations. We believe that period-to-period comparisons of our
results of operations are not meaningful, and you should not rely upon them as
indicators of our future performance.
Our market is highly competitive, and we may not have the resources to compete
adequately
The market for our integrated, multifunction telecommunications systems is new,
rapidly evolving and highly competitive. We expect competition to intensify in
the future as existing competitors develop new products and new competitors
enter the market. We believe that a critical component to success in this
market is the ability to establish and maintain strong partner and customer
relationships with a wide variety of domestic and international providers. If
we fail to establish or maintain these relationships, we will be at a serious
competitive disadvantage.
We face competition from companies providing traditional private telephone
systems. Our principal competitors that produce traditional private telephone
systems are Lucent Technologies and Nortel Networks. We also compete against
providers of multifunction telecommunications systems, including Picazo
Communications, Inc. and Artisoft, Inc. We potentially face competition from
companies such as Shoreline Teleworks, Inc., NBX Corporation, acquired by 3Com
Corporation, Selsius Systems, acquired by Cisco Systems, Inc., as well as any
number of future competitors. Many of our competitors are substantially larger
than we are and have significantly greater name recognition, financial, sales
and marketing, technical, customer support, manufacturing and other resources.
These competitors may also have more established distribution channels and
stronger relationships with service providers. These competitors may be able to
respond more rapidly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products. These competitors may enter our existing or future markets
with solutions that may be less expensive, provide higher performance or
additional features or be introduced earlier than our solutions. We also expect
that other companies may enter our market with better products and
technologies. If any technology that is competing with ours is more reliable,
faster, less expensive or has other advantages over our technology, then the
demand for our products and services could decrease and harm our business.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. If our
competitors successfully introduce new products or enhance their existing
products, this could reduce the sales or market acceptance of our products and
services, increase price competition or make our products obsolete. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing and customer support. We may not have
sufficient resources to make these investments or to make the technological
advances necessary to be competitive, which in turn will cause our business to
suffer. A description of our principal competitors and the competitive nature
of our market are discussed in greater detail in "Business--Competition."
7
<PAGE>
Losing either of our two key distributors would harm our business. We also need
to establish and maintain relationships with additional distributors and
original equipment manufacturers
Sales through our two key distributors, Ingram Micro Inc. and Tech Data
Corporation, accounted for 45% of our net revenues in the nine months ended
June 30, 1999. Our business and operating results will suffer if either of
these distributors does not continue distributing our products, fails to
distribute the volume of our products that it currently distributes or fails to
expand our customer base. We also need to establish and maintain relationships
with additional distributors and original equipment manufacturers. We may not
be able to establish, or successfully manage, relationships with additional
distribution partners. In addition, our agreements with distributors typically
provide for termination by either party upon written notice to the other party.
For example, our agreement with Tech Data provides for termination, with or
without cause, by either party upon 30 days' written notice to the other party,
or upon insolvency or bankruptcy. Generally, these agreements are non-exclusive
and distributors sell products that compete with ours. If we fail to establish
or maintain relationships with distributors and original equipment
manufacturers, our ability to increase or maintain our sales and our customer
base will be substantially harmed.
We sell our products through dealers and distributors, which limits our ability
to control the timing of our sales, and this makes it more difficult to predict
our revenues
We do not recognize revenue from the sale of our products to our distributors
until these products are sold to either dealers or end users. We have limited
or no control over the timing of product sales to dealers and end users. Our
lack of control over the revenue which we recognize from our distributors'
sales to dealers and end users limits our ability to predict revenue for any
given period. Our budgets and commitments that we have made for the future are
based in part on our expectations of future sales. If our sales do not meet
expectations, it will be difficult for us to reduce our expenses quickly, and
consequently our operating results may suffer.
We rely on sole-sourced components and third-party technology and products; if
these components are not available, our business may suffer
We purchase technology from third parties that is incorporated into our
products, including virtually all of our hardware products.
We order sole-sourced components using purchase orders and do not have supply
contracts for them. One sole-sourced component, a Mitel Corporation chip, is
particularly important to our business because it is included in virtually all
of our hardware products. If we were unable to purchase an adequate supply of
these sole-sourced components on a timely basis, we would be required to
develop alternative solutions. This could entail qualifying an alternative
source or redesigning our products based on different components. Our inability
to obtain these sole-sourced components, especially the Mitel Corporation chip,
could significantly delay shipment of our products, which could have a negative
effect on our business, financial condition and results of operations. See
"Business--Manufacturing and Assembly."
We rely on dealers to promote, sell, install and support our products, and
their failure to do so may substantially reduce our sales and thus seriously
harm our business
We rely on dealers who can provide high quality sales and support services. As
with our distributors, we compete with other telecommunications systems
providers for our dealers' business, as our dealers generally market competing
products. If a dealer promotes a competitor's products to the detriment of our
products or otherwise fails to market our products and services effectively, we
could lose market share. In addition, the loss of a key dealer or the failure
of dealers to provide adequate customer service could cause our business to
suffer. If we do not properly train our dealers to sell, install and service
our products, our business will suffer.
Software or hardware errors may seriously harm our business and damage our
reputation, causing loss of customers and revenues
Users expect telephone systems to provide a high level of reliability. Our
products are inherently complex and may have undetected software or hardware
errors. We have detected and may continue to detect errors and
8
<PAGE>
product defects in our installed base of products, new product releases and
product upgrades. For example, a small number of our boards failed and were
returned. We have replaced these boards and made certain design changes. We
cannot be sure that the problem has been fully addressed and that similar or
different problems may not occur in existing or new boards in the future. In
addition, end users may install, maintain and use our products improperly or
for purposes for which they were not designed. These problems may degrade or
terminate the operation of our products, which could cause end users to lose
telephone service, cause us to incur significant warranty and repair costs,
damage our reputation and cause significant customer relations problems. Any
significant delay in the commercial introduction of our products due to errors
or defects, any design modifications required to correct these errors or
defects or any negative effect on customer satisfaction as a result of errors
or defects could seriously harm our business, financial condition and results
of operations.
Any claims brought because of problems with our products or services could
seriously harm our business, financial condition and results of operations. We
currently offer a one-year hardware guarantee to end users. If our products
fail within the first year, we face replacement costs. Our insurance policies
may not provide sufficient or any coverage should a claim be asserted. In
addition, our introduction of products and systems with reliability, quality or
compatibility problems could result in reduced revenues, uncollectible accounts
receivable, delays in collecting accounts receivable, warranties and additional
costs. Our customers, end users or employees could find errors in our products
and systems after we have begun to sell them, resulting in product
redevelopment costs and loss of, or delay in, their acceptance by the markets
in which we compete. Further, we may experience significant product returns in
the future. Any of these events could have a material adverse effect on our
business, financial condition and results of operations.
We may face infringement issues that could harm our business by requiring us to
license technology on unfavorable terms or temporarily or permanently cease
sales of key products
We cannot be certain that our products do not, or will not, infringe patents,
trademarks, copyrights or other intellectual property rights held by third
parties. Third parties may assert infringement claims against us. From time to
time in the ordinary course of business we have been, and we expect to continue
to be, subject to claims of alleged infringement of the patents and
intellectual property rights of others. For example, we are currently engaged
in litigation with NetPhone, Inc. In June 1999, we received a letter from
NetPhone alleging that we infringe a patent owned by NetPhone. On June 30,
1999, we filed a request for a declaration from the United States District
Court for the Northern District of California that AltiGen does not infringe
any valid claim of NetPhone's patent. NetPhone answered AltiGen's complaint on
July 13, 1999 and asserted a counterclaim against AltiGen, alleging that
AltiGen infringes the NetPhone patent. On August 11, 1999, NetPhone filed a
motion to enjoin AltiGen from making, importing, using, offering to sell or
selling a device under the name Quantum. On September 7, 1999, we filed our
Opposition to NetPhone's motion, and countered with a Cross-Motion for Partial
Summary Judgment. NetPhone's Motion and our Cross-Motion have not yet been
decided. Although we intend to continue to litigate the lawsuit and to contest
NetPhone's Motion vigorously, litigation is subject to inherent uncertainties
and, therefore, we cannot assure you that we will prevail or that we can avoid
an adverse outcome.
This litigation could be costly and time consuming. An adverse outcome could
require us to obtain a license from NetPhone or require us to cease sales of
what NetPhone calls the "Quantum device" and possibly alter the design of some
of our products. For the first nine months of fiscal year 1999, sales of our
Quantum board constituted 84% of our revenues. Accordingly, an adverse outcome
could materially harm our business. See "Business--Legal Proceedings."
More generally, litigation related to these types of claims may require us to
acquire licenses under third-party patents which may not be available on
acceptable terms, if at all. We believe that an increasing portion of our
revenues in the future will come from sales of software applications for our
hardware products. The software market has traditionally experienced widespread
unauthorized reproduction of products in violation of developers' intellectual
property rights. This activity is difficult to detect, and legal proceedings to
enforce developers' intellectual property rights are often burdensome and
involve a high degree of uncertainty and substantial costs.
9
<PAGE>
Any failure by us to protect our intellectual property could harm our business
and competitive position
Our success depends, to a certain extent, upon our proprietary technology. We
currently rely on a combination of patent, trade secret, copyright and
trademark law, together with non-disclosure and invention assignment
agreements, to establish and protect the proprietary rights in the technology
used in our products.
Although we have filed patent applications, we are not certain that our patent
applications will result in the issuance of patents, or that any patents issued
will provide commercially significant protection to our technology. In
addition, others may independently develop substantially equivalent proprietary
information not covered by patents to which we own rights, may obtain access to
our know-how or may claim to have issued patents that prevent the sale of one
or more of our products. Also, it may be possible for third parties to obtain
and use our proprietary information without our authorization. Further, the
laws of some countries, such as those in Japan, one of our target markets, may
not adequately protect our intellectual property or may be uncertain. Our
success also depends on trade secrets that cannot be patented and are difficult
to protect.
If we fail to protect our proprietary information effectively, or if third
parties use our proprietary technology without authorization, our competitive
position and business will suffer. A description of our dependence on
proprietary technology is discussed in greater detail in "Business--
Intellectual Property."
Our products may not meet the legal standards required for their sale in some
countries; if we cannot sell our products in these countries, our results of
operations may be seriously harmed
The United States and other countries in which we intend to sell our products
have standards for safety and other certifications that must be met for our
products to be legally sold in those countries. We have tried to design our
products to meet the requirements of the countries in which we sell or plan to
sell them. We have also obtained or are trying to obtain the certifications
that we believe are required to sell our products in these countries. However,
we cannot guarantee that our products meet all of these standards or that we
will be able to obtain any certifications required. In addition, there is, and
will likely continue to be, an increasing number of laws and regulations
pertaining to the products we offer and may offer in the future. These laws or
regulations may include, for example, more stringent safety standards,
requirements for additional or more burdensome certifications or more stringent
consumer protection laws.
If our products do not meet a country's standards or we do not receive the
certifications required by a country's laws or regulations, then we may not be
able to sell those products in that country. This may seriously harm our
results of operation by reducing our sales or requiring us to invest
significant resources to conform our products to these standards.
Our market is subject to changing preferences; failure to keep up with these
changes would result in our losing market share, thus seriously harming our
business, financial condition and results of operations
Our customers and end users expect frequent product introductions and have
changing requirements for new products and features. Therefore, to be
competitive, we will need to develop and market new products and product
enhancements that respond to these changing requirements on a timely and cost-
effective basis. Our failure to do so promptly and cost-effectively would
seriously harm our business, financial condition and results of operations.
Also, introducing new products could require us to write off existing inventory
as obsolete, which could harm our results of operations.
If we do not manage our growth effectively, our business will suffer
We may not be successful in managing any future growth. We have expanded our
operations rapidly since our inception. In order to manage this expansion and
to grow in the future, we will need to expand or enhance our management,
manufacturing, research and development and sales and marketing capabilities.
We may not be able to hire the management, staff or other personnel required to
do so.
10
<PAGE>
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned operational systems, procedures and
controls may not be adequate to support our future operations. Difficulties in
installing and implementing new systems, procedures and controls may
significantly burden our management and our internal resources. Delays in the
implementation of new systems or operational disruptions when we transition to
new systems would impair our ability to accurately forecast sales demand,
manage our product inventory and record and report financial and management
information on a timely and accurate basis.
Lead times for materials and components used in the assembly of our products
vary significantly, and depend on factors such as the supplier, contract terms
and demand for a component at a given time. If orders do not match forecasts,
we may have excess or inadequate inventory of certain materials and components,
which may seriously harm our business, financial condition and results of
operations.
Our planned expansion in international markets will involve new risks that our
previous domestic operations have not prepared us to address; our failure to
address these risks could harm our business, financial condition and results of
operations
For the nine months ended June 30, 1999, approximately 10% of our net revenues
came from customers outside of the United States. We intend to expand our
international sales and marketing efforts. Our efforts are subject to a variety
of risks associated with conducting business internationally, any of which
could seriously harm our business, financial condition and results of
operations. These risks include:
. tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers, such as import or export licensing imposed
by foreign countries, especially on technology;
. potential adverse tax consequences, including restrictions on repatriation
of earnings;
. fluctuations in foreign currency exchange rates, which could make our
products relatively more expensive in foreign markets; and
. conflicting regulatory requirements in different countries that may
require us to invest significant resources customizing our products for
each country.
We need additional qualified personnel to maintain and expand our business; our
failure to promptly attract and retain qualified personnel may seriously harm
our business, financial condition and results of operations
We depend, in large part, on our ability to attract and retain highly skilled
personnel, particularly engineers and sales and marketing personnel. We need
highly trained technical personnel to design and support our server-based
telecommunications systems. In addition, we need highly trained sales and
marketing personnel to expand our marketing and sales operations in order to
increase market awareness of our products and generate increased revenues.
Competition for highly trained personnel is intense, especially in the San
Francisco Bay Area where most of our operations are located. We cannot be
certain that we will be successful in our recruitment and retention efforts. If
we fail to attract or retain qualified personnel or suffer from delays in
hiring required personnel, our business, financial condition and results of
operations may be seriously harmed.
Our facilities are vulnerable to damage from earthquakes and other natural
disasters; any such damage could seriously or completely impair our business
We perform final assembly, software installation and testing of our products at
our facility in Fremont, California. Our facilities are located on or near
known earthquake fault zones and are vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures and similar events. If
such a disaster occurs, our ability to perform final assembly, software
installation and testing of our products at our facilities would be seriously,
if not completely, impaired. If we were unable to obtain an alternative place
or way to perform these functions, our business, financial condition and
results of operations would suffer. The insurance we maintain may not be
adequate to cover our losses against fires, floods, earthquakes and general
business interruptions.
11
<PAGE>
Our strategy to outsource assembly and test functions in the future could delay
delivery of products, decrease quality or increase costs
Based on volume or customer requirements, we may begin outsourcing some
assembly and test functions. In addition, we may determine that we need to
establish assembly and test operations overseas to better serve our
international customers. Establishing overseas assembly and test operations may
be more difficult or take longer than we anticipate. This outsourcing strategy
involves certain risks, including the potential lack of adequate capacity and
reduced control over delivery schedules, manufacturing yield, quality and
costs. In the event that any significant subcontractor were to become unable or
unwilling to continue to manufacture or test our products in the required
volumes, we would have to identify and qualify acceptable replacements. Finding
replacements could take time, and we cannot be sure that additional sources
would be available to us on a timely basis. Any delay or increase in costs in
the assembly and testing of products by third-party subcontractors could
seriously harm our business, financial condition and results of operations. Our
manufacturing and assembly operations are discussed in greater detail in
"Business--Manufacturing and Assembly."
We face year 2000 risks that, if realized, could disrupt our business
operations, resulting in harm to our business, financial condition and results
of operation
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, within
this year, computer systems and software may need to be upgraded to comply with
these year 2000 requirements. Our failure to complete implementation of the
required changes to address year 2000 requirements prior to the year 2000 might
result in significant difficulties in our administration of management
information systems and consequently have a material adverse effect on our
business, financial condition and results of operations. We have not yet
completed a review of the preparations of all of our major suppliers,
distributors and shippers to be year 2000 compliant. We therefore do not have a
basis to assess the impact, if any, that the year 2000 issue will have on our
suppliers, distributors, dealers and shippers and, consequently, on us. Failure
by our suppliers, distributors, dealers and shippers and other parties with
whom we do business to address year 2000 issues could negatively affect our
ability to distribute products for some period of time and otherwise disrupt
our business operations.
We also face the risk that some of our products may not be year 2000 compliant.
If any of our end user customers experience year 2000 issues as a result of
their use of our products, those end users could assert claims against us for
damages which, if successful, could harm our business, financial condition or
results of operations. In addition, many of our products have some third-party
technologies embedded in them, and we expect our products to be increasingly
integrated into enterprise systems involving sophisticated hardware and complex
software products. We cannot adequately evaluate these technologies or products
for year 2000 compliance. We may face claims under our warranties, or
otherwise, based on year 2000 problems in other companies' products, or issues
arising from the integration of multiple products within an overall system. We
are in the process of testing our products to identify any year 2000 issues.
For a more detailed description of our year 2000 assessment, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance."
Risks Related to the Industry
Integrated, multifunction telecommunications systems may not achieve widespread
acceptance, and our fixed costs in the short run could cause our operating
results and business to suffer
The market for integrated, multifunction telecommunications systems is
relatively new and rapidly evolving. Businesses have invested substantial
resources in the existing telecommunications infrastructure, including
traditional private telephone systems, and may be unwilling to replace these
systems in the near term or at all. Businesses may also be reluctant to adopt
integrated, multifunction telecommunications systems because of
12
<PAGE>
their concern about the current limitations of data networks, including the
Internet. For example, end users sometimes experience delays in receiving calls
and reduced voice quality during calls when routing calls over data networks.
Moreover, businesses that begin to route calls over the same networks that
currently carry only their data may also experience these problems if the
networks do not have sufficient capacity to carry all of these communications
at the same time. We incur many fixed costs in anticipation of a certain level
of revenues. If businesses defer purchasing or decide not to purchase
integrated, multifunction telecommunications systems and the market for our
products does not grow or grows substantially more slowly than we anticipate,
our operating results will suffer and our business will be harmed because we
will be unable to reduce fixed costs in the short term to offset the reduced
revenues.
Future regulation or legislation could harm our business or increase our cost
of doing business
In April 1998, the Federal Communications Commission submitted a report to
Congress stating that it may regulate certain Internet services if it
determines that such Internet services are functionally equivalent to
conventional telecommunications services. The increasing growth of the voice
over data network market and the popularity of supporting products and
services, however, heighten the risk that national governments will seek to
regulate the transmission of voice communications over networks such as the
Internet. In addition, large telecommunications companies may devote
substantial lobbying efforts to influence the regulation of this market so as
to benefit their interests, which may be contrary to our interests. These
regulations may include, for example, assessing access or settlement charges,
imposing tariffs or imposing regulations based on encryption concerns or the
characteristics and quality of products and services. Future laws, legal
decisions or regulations, as well as changes in interpretations of existing
laws and regulations, could require us to expend significant resources to
comply with them. In addition, these future events or changes may create
uncertainty in our market that could reduce demand for our products.
Evolving standards may delay our product introductions, increase our product
development costs or cause end users to defer or cancel plans to purchase our
products, any of which could adversely affect our business
The standards in our market are still evolving. These standards are designed to
ensure that integrated, multifunction telecommunications products from
different manufacturers can operate together. Some of these standards are
proposed by other participants in our market, including some of our
competitors, and include proprietary technology. In recent years, these
standards have changed, and new standards have been proposed, in response to
developments in our market. Our failure to conform our products to existing or
future standards may limit their acceptance by market participants. We may not
anticipate which standards will achieve the broadest acceptance in our market
in the future, and we may take a significant amount of time and expense to
adapt our products to these standards. We may also have to pay additional
royalties to developers of proprietary technologies that become standards in
our market. These delays and expenses may seriously harm our results of
operations. In addition, customers and users may defer or cancel plans to
purchase our products due to concerns about the ability of our products to
conform to existing standards or to adapt to new or changed standards, and this
could seriously harm our results of operations.
Risks Related to the Offering
We may need to raise more capital, but the availability of additional financing
is uncertain
We expect the net proceeds from this offering and recent private equity
financings to be sufficient to meet our working capital and capital expenditure
needs for at least the next 12 months. Subsequently, we may need to raise more
capital, and we may not be able to do so on favorable terms, or at all. We may
also need more capital to acquire or invest in complementary businesses or
products or to obtain the rights to use complementary technologies. If we
cannot raise more capital, if needed, on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities, or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, financial condition and
13
<PAGE>
results of operations. If we raise more capital by selling more shares of our
stock, our net tangible book value per share may decrease, the percentage
ownership of then-current stockholders may be diluted, and stock sold to new
investors may have rights, preferences or privileges senior to those of the
holders of our outstanding securities.
Our certificate of incorporation and bylaws and Delaware law will contain
provisions that could deter takeovers and prevent you from receiving a premium
for your shares
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. For example, our certificate of
incorporation to be effective upon the closing of this offering will provide
that our Board of Directors may issue up to 5,000,000 shares of preferred stock
without stockholder approval. See "Description of Capital Stock" for a more
complete discussion of these matters.
Our stock price may be volatile, exposing us to securities class action
litigation
Prior to this offering, you could not buy or sell our common stock in a public
market. An active public market for our common stock may not develop or be
sustained after this offering. Although the initial public offering price will
be fixed, the market price for our common stock will vary from the initial
offering price after this offering. The stock market in general, and the stock
prices of Internet-related companies in particular, have recently experienced
extreme volatility, which has often been unrelated to the operating performance
of any particular company or companies. The market price of our common stock
may fluctuate significantly, which is common among high technology companies,
due to a number of factors, some of which are beyond our control.
We may in the future be the target of securities class action litigation, which
could be costly and time-consuming to defend
Our stock price could decline below our initial public offering price
regardless of our actual operating performance. In the past, securities class
action litigation has often been brought against companies following periods of
volatility in their stock prices. We may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
our management's time and resources, which could harm our business, financial
condition and operating results.
Our management may not use the proceeds of this offering effectively
Our management has broad discretion over the use of a substantial portion of
the proceeds of this offering. Accordingly, it is possible that our management
may allocate the proceeds differently than investors in this offering would
have preferred, or that we will fail to maximize our return on the proceeds.
Investors will incur immediate dilution because the initial public offering
price of a share of our stock will exceed its book value
The initial public offering price of our common stock is substantially higher
than the book value per share of the outstanding common stock immediately after
the offering. If you purchase common stock in this offering, you will incur
immediate dilution of approximately $6.88 in the book value per share of common
stock from the price you pay. See "Dilution."
Substantial sales of our common stock by our existing stockholders could cause
our stock price to fall
If current stockholders sell a substantial number of their shares, including
shares issued upon the exercise of outstanding options, in the public market
during a short period of time, or if stockholders or analysts believe
14
<PAGE>
that these sales will be made, our stock price may decline significantly. These
sales may make it more difficult for us to sell equity securities in the future
at a time and price that we deem appropriate. After this offering, we will have
12,821,049 outstanding shares of common stock. All of the shares sold in this
offering will be immediately and freely tradeable. 9,571,049 of the remaining
shares are subject to lock-up arrangements between the stockholders and us or
the underwriters. At least 8,877,327 shares of common stock outstanding after
this offering will be eligible for sale in the public market 180 days following
the date of this prospectus.
Our officers and directors and their affiliates will exercise significant
control
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own, in the aggregate, approximately 24.9%
of our outstanding common stock. As a result, these stockholders will be able
to exercise significant control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, which could delay or prevent someone from acquiring or
merging with us. See "Principal Stockholders."
15
<PAGE>
Forward-Looking Statements
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. These statements include,
among others, statements regarding the following: expected product revenues as
a percentage of sales, expense levels, use of proceeds, liquidity and expansion
strategy and possible effects of changes in government regulation. These
statements may be found under "Prospectus Summary," "Risk Factors," "Business,"
"Use of Proceeds," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Forward-looking statements typically are
identified by use of terms such as "may", "will", "expect", "anticipate",
"intend", "estimate" and similar words, although some forward-looking
statements are expressed differently. You should be aware that our actual
results could differ materially from those contained in the forward-looking
statements due to a number of factors, including insufficient capital
resources, inability to integrate acquired businesses successfully, adverse
economic conditions and unanticipated difficulties in product development. You
should also consider carefully the statements under "Risk Factors" and other
sections of this prospectus, which address additional factors that could cause
our actual results to differ from those set forth in the forward-looking
statements.
16
<PAGE>
Use of Proceeds
We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $29,225,000. If the underwriters fully
exercise the over-allotment option, the net proceeds of the shares we sell will
be $33,758,750. Net proceeds is what we expect to receive after paying the
underwriting discount and other expenses of the offering.
We intend to use the net proceeds of this offering for working capital and
general corporate purposes, including increased sales and marketing programs,
commencement of international expansion and continued expenditures on
development of new products. We may also use a portion of the net proceeds for
potential acquisitions of businesses or technologies that are complementary to
our business, although we have no current agreements or commitments in this
regard.
The timing and amount of our actual expenditures will be based on many factors,
including the status of our research and development efforts and cash flow from
operations.
Until we use the net proceeds of the offering, we intend to invest the funds in
short-term, investment grade, interest-bearing securities.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, to support operations and
to finance the growth and development of our business. Therefore, we do not
expect to pay cash dividends in the foreseeable future.
17
<PAGE>
Capitalization
The following table shows:
. The capitalization of AltiGen on June 30, 1999, as a Delaware corporation.
. The capitalization of AltiGen on June 30, 1999, assuming the completion of
the offering at the initial public offering price of $10.00 per share, the
receipt of the net proceeds of the offering, and the conversion of all
outstanding preferred stock into common stock.
You should read the following table with our consolidated financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
------------------
As
Actual Adjusted
-------- --------
(in thousands)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.001 par value; 11,978,558 shares
authorized, 8,146,156 shares issued and outstanding,
actual; 5,000,000 shares authorized, no shares issued
and outstanding, as adjusted.......................... $ 8 $ --
Common stock, $.001 par value; 23,957,117 shares
authorized, 1,424,893 shares issued and outstanding,
actual; 50,000,000 shares authorized, 12,821,049
shares issued and outstanding, as adjusted............ 1 13
Additional paid-in capital............................. 28,991 58,212
Deferred stock compensation............................ (3,150) (3,150)
Accumulated deficit.................................... (15,060) (15,060)
-------- --------
Total stockholders' equity............................ 10,790 40,015
-------- --------
Total capitalization................................ $ 10,790 $ 40,015
======== ========
</TABLE>
This table excludes 1,769,636 shares of common stock issuable upon exercise of
outstanding options as of June 30, 1999, at a weighted average exercise price
of $1.89 per share.
18
<PAGE>
Dilution
AltiGen's unaudited pro forma net tangible book value on June 30, 1999 was
approximately $10,790,000 or $1.13 per share of common stock. Pro forma net
tangible book value is total assets minus the sum of liabilities and intangible
assets. Pro forma net tangible book value per share is net tangible book value
divided by the total number of shares outstanding before the offering and after
giving effect to the conversion of all outstanding shares of our preferred
stock upon the closing of this offering.
After giving effect to adjustments relating to the offering, AltiGen's
unaudited pro forma, as adjusted net tangible book value on June 30, 1999,
would have been $40,015,000 or $3.12 per share. The adjustments made to
determine pro forma as adjusted net tangible book value per share are the
following:
. An increase in the total assets to reflect the net proceeds of the
offering as described under "Use of Proceeds."
. The addition of the number of shares offered by this prospectus to the
number of common shares outstanding.
The following illustrates the pro forma increase in net tangible book value of
$1.99 per share and the dilution (the difference between the offering price per
share and net tangible book value per share) to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $10.00
Pro forma net tangible book value per share as of June 30,
1999.......................................................... $1.13
Increase per share attributable to the offering................ 1.99
-----
Pro forma as adjusted net tangible book value per share after
giving
effect to the offering........................................ 3.12
------
Dilution per share to new investors............................ $ 6.88
======
</TABLE>
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from AltiGen, the
total consideration paid and the average price paid per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 9,571,049 74.7% $25,041,624 43.5% $ 2.62
New investors.......... 3,250,000 25.3 32,500,000 56.5 10.00
---------- ----- ----------- -----
Total................ 12,821,049 100.0% $57,541,624 100.0%
========== ===== =========== =====
</TABLE>
The total consideration from existing stockholders includes 197,026 shares of
stock issued as payment on notes issued for professional services. As of June
30, 1999, there were options outstanding to purchase 1,769,636 shares of common
stock at the weighted average exercise price of $1.89 per share. To the extent
any of these options are exercised, there will be further dilution to
investors. The table above assumes no exercise of any stock options outstanding
as of June 30, 1999. See "Capitalization," "Management--Employee Benefit Plan,"
"Description of Capital Stock" and Note 5 of Notes to Consolidated Financial
Statements.
19
<PAGE>
Selected Consolidated Financial Data
This section presents selected historical financial data of AltiGen as a
Delaware corporation. You should read carefully the consolidated financial
statements included in this prospectus, including the notes to the consolidated
financial statements. The selected data in this section are not intended to
replace the consolidated financial statements.
AltiGen derived the consolidated statement of operations data for the years
ended September 30, 1995 and 1994 and consolidated balance sheet data as of
September 30, 1995 and 1994 from our unaudited consolidated financial
statements that are not included in this prospectus. AltiGen derived the
consolidated statement of operations data for the years ended September 30,
1996, 1997 and 1998, and for the nine months ended June 30, 1999, and
consolidated balance sheet data as of September 30, 1997 and 1998 and June 30,
1999 from the audited consolidated financial statements in this prospectus.
Those consolidated financial statements were audited by Arthur Andersen LLP,
independent public accountants. AltiGen derived the consolidated balance sheet
data as of September 30, 1996 from audited consolidated financial statements
that are not included in the prospectus. AltiGen derived the consolidated
statement of operations data for the nine months ended June 30, 1998, from the
unaudited consolidated financial statements included in this prospectus.
AltiGen's management believes that the unaudited historical consolidated
financial statements contain all adjustments needed to present fairly the
information included in those statements, and that the adjustments made consist
only of normal recurring adjustments. Results for the nine months ended June
30, 1999 are not necessarily indicative of the results for the year or for any
future period.
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended September 30, Ended June 30,
------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues, net........... -- -- $ 229 $ 1,379 $ 3,890 $ 2,559 $ 4,264
Cost of revenues........ -- -- 238 1,040 2,520 1,748 2,167
------- ------- ------- ------- ------- ------- -------
Gross profit (loss).... -- -- (9) 339 1,370 811 2,097
Operating expenses:
Research and develop-
ment.................. $ 44 $ 700 753 1,498 1,927 1,347 3,005
Sales and marketing.... -- 72 446 1,448 2,770 1,826 2,827
General and administra-
tive.................. 44 329 547 718 675 502 1,196
Deferred stock compen-
sation ............... -- -- -- -- 164 83 578
------- ------- ------- ------- ------- ------- -------
Total operating ex-
penses............... 88 1,101 1,746 3,664 5,536 3,758 7,606
------- ------- ------- ------- ------- ------- -------
Loss from operations.... (88) (1,101) (1,755) (3,325) (4,166) (2,947) (5,509)
------- ------- ------- ------- ------- ------- -------
Interest and other in-
come, net.............. -- 33 124 206 246 138 275
------- ------- ------- ------- ------- ------- -------
Net loss................ $ (88) $(1,068) $(1,631) $(3,119) $(3,920) $(2,809) $(5,234)
======= ======= ======= ======= ======= ======= =======
Basic net loss per
share................. $(0.50) $ (1.77) $ (2.14) $ (3.91) $ (4.75) $ (3.47) $ (4.73)
======= ======= ======= ======= ======= ======= =======
Shares used in comput-
ing basic net loss per
share................. 175 603 762 797 825 811 1,107
</TABLE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------- June 30,
1994 1995 1996 1997 1998 1999
---- ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term
investments............... $553 $ 1,768 $ 3,152 $ 3,093 $ 8,057 $ 7,961
Working capital............ 553 1,948 3,501 3,535 8,698 9,861
Total assets............... 596 2,076 3,762 4,714 11,102 13,235
Convertible preferred
stock..................... 1 3 5 6 8 8
Accumulated deficit........ (88) (1,156) (2,787) (5,906) (9,826) (15,060)
Total stockholders' equity
(deficit)................. 596 2,020 3,579 3,787 9,251 10,790
</TABLE>
20
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
You should read this discussion with our consolidated financial statements,
related notes and other financial information included in this prospectus.
Overview
We are a leading provider of integrated, multifunction telecommunications
systems. We were incorporated in May 1994 and began operations in July 1994.
From inception through July 1996, we were a development stage company and had
no revenues. During this period, our operating activities consisted primarily
of developing our initial product, recruiting personnel, raising capital and
building our corporate infrastructure. We first recognized revenues from
product sales of our Quantum board and AltiWare software in July 1996. We
generated net revenues of $229,000 in fiscal year 1996, $1.4 million in fiscal
year 1997, $3.9 million in fiscal year 1998 and $4.3 million for the nine
months ended June 30, 1999. As of June 30, 1999, we had an accumulated deficit
of $15.1 million.
We derive our revenues from sales of our AltiServ system, which includes
Quantum boards, Triton boards and AltiWare software. Software sales currently
make up less than 10% of our net revenues. We currently anticipate that
software sales will comprise a greater portion of our net revenues in the
future. Product revenues consist of sales to end users (including dealers) and
to distributors. Revenues from product sales to end users are recognized upon
shipment. We defer recognition of sales to distributors until they resell our
products to their customers. Under our distribution contracts, a distributor
has the right in some circumstances to return products it determines are
overstocked, so long as it provides an offsetting purchase order for products
in an amount equal to or greater than the dollar value of the returned
products. In addition, we afford distributors protection from subsequent price
reductions.
Our cost of revenues consists of component and material costs, direct labor
costs, provisions for excess and obsolete inventory, warranty costs and
overhead related to manufacturing our products. Software sales typically carry
a higher gross margin than hardware sales.
We have experienced operating losses and negative cash flows from operations in
each quarterly and annual period since our inception and we currently expect to
continue to incur losses for the foreseeable future. We have not recognized any
future tax benefits of our cumulative net operating losses due to uncertainty
as to future realizability.
21
<PAGE>
Results of Operations
The following table sets forth consolidated statements of operations data for
the periods indicated as a percentage of net revenues.
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
September 30, June 30,
------------------------ ------------------
1996 1997 1998 1998 1999
------ ------ ------ ----------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues, net............. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......... 104.1 75.4 64.8 68.3 50.8
------ ------ ------ ------ ------
Gross profit (loss)...... (4.1) 24.6 35.2 31.7 49.2
Operating expenses:
Research and develop-
ment.................... 328.5 108.7 49.6 52.7 70.5
Sales and marketing...... 194.3 105.0 71.2 71.4 66.3
General and administra-
tive.................... 238.5 52.1 17.3 19.6 28.0
Deferred stock compensa-
tion.................... -- -- 4.2 3.2 13.6
------ ------ ------ ------ ------
Total operating ex-
penses................. 761.3 265.8 142.3 146.9 178.4
------ ------ ------ ------ ------
Loss from operations...... (765.4) (241.2) (107.1) (115.2) (129.2)
Interest and other income,
net...................... 54.0 15.0 6.3 5.4 6.4
------ ------ ------ ------ ------
Net loss.................. (711.4)% (226.2)% (100.8)% (109.8)% (122.8)%
====== ====== ====== ====== ======
</TABLE>
Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998
Revenues, net. Revenues consist of sales to end users (including dealers) and
to distributors. Net revenues increased to $4.3 million in the first nine
months of fiscal year 1999 from $2.6 million in the first nine months of fiscal
year 1998, representing an increase of 66.6%. This change resulted primarily
from increased sales of our AltiServ systems. In the first nine months of
fiscal year 1999, sales to Tech Data accounted for 24.7% of net revenues and
sales to Ingram Micro accounted for 20.2% of net revenues. In the first nine
months of fiscal year 1999, sales of our Quantum boards represented 84.0% of
our net revenues.
Cost of revenues. Cost of revenues in the first nine months of fiscal year 1999
increased to $2.2 million from approximately $1.7 million in the first nine
months of fiscal year 1998. Cost of revenues consists primarily of component
and material costs, direct labor costs, provisions for excess and obsolete
inventory, warranty costs and overhead related to manufacturing our products.
Cost of revenues decreased as a percentage of net revenues in the first nine
months of fiscal year 1999 compared to the first nine months of fiscal year
1998. This decrease was primarily a result of production efficiencies as well
as lower component and overhead costs due to increased production. In addition,
the cost of revenues for the first nine months of fiscal year 1998 includes a
provision for excess and obsolete inventory of $361,000 related primarily to
the impact of design changes to our Quantum product. As a result, gross profit
increased to $2.1 million in the first nine months of fiscal year 1999 from
$811,000 in the first nine months of fiscal year 1998.
Research and development expenses. Research and development expenses increased
to $3.0 million in the first nine months of fiscal year 1999 from $1.3 million
in the first nine months of fiscal year 1998. Research and development expenses
consist principally of salaries and related personnel expenses, consultant fees
and prototype expenses related to the design, development and testing of our
products. We expense our research and development costs as incurred. The
increase was primarily due to our hiring additional engineers, as well as
opening of a research and development office in China and increases in
depreciation and other related charges due to increases in capital spending on
design and simulation software. We currently intend to
22
<PAGE>
increase research and development expenses in absolute dollars in the
forseeable future to allow us to develop new products and features. Until these
new products and features are introduced, we expect this increase in expenses
to increase our net loss (or to reduce any net profit that we may have).
Sales and marketing expenses. Sales and marketing expenses increased to $2.8
million in the first nine months of fiscal year 1999 from $1.8 million in the
first nine months of fiscal year 1998, representing an increase of 54.8%. Sales
and marketing expenses consist of compensation, commissions and related costs
for personnel engaged in sales and marketing functions, trade show expenses,
selling and promotional programs, marketing programs and related expenses. This
increase was primarily due to hiring additional sales and marketing personnel,
increasing advertising and promotional activities and increasing training to
identify and educate new qualified authorized dealers. We currently intend to
increase sales and marketing expenses in absolute dollars as we continue to
pursue new channels and markets and to promote customer and end user awareness
of the features and benefits of our products. We expect these increased
expenses to increase the amount of our net losses (or reduce the amount of any
net profits that we may have).
General and administrative expenses. General and administrative expenses
increased to $1.2 million in the first nine months of fiscal year 1999 from
$502,000 in the first nine months of fiscal year 1998. General and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and administrative personnel, recruiting expenses,
professional fees and other general corporate expenses. The increase was
primarily due to the hiring of additional personnel in our finance and
accounting, management information systems and administrative groups, an
increase in related facilities expenses and professional services expenses. We
currently intend to increase general and administrative expenses in absolute
dollars, as we add personnel and incur additional costs resulting from the
growth of our business. We expect these increased expenses to increase the
amount of our net losses (or reduce the amount of any net profits that we may
have).
Deferred stock compensation expenses. Deferred stock compensation expenses were
$578,000 in the first nine months of fiscal year 1999 as compared to $82,000
for the first nine months of fiscal year 1998. Deferred stock compensation
expense reflect the amortization of stock compensation charges resulting from
granting stock options at exercise prices below the deemed fair value of our
common stock on the dates the options were granted. We are amortizing these
amounts using the straight line method over the vesting period of the stock
options. We expect to amortize approximately $770,000 of this deferred stock
compensation in fiscal year 1999, $973,000 in fiscal year 2000, $973,000 in
fiscal year 2001, $809,000 in fiscal year 2002 and $203,000 in fiscal year 2003
and doing so will decrease our net income.
Interest and other income, net. Net interest and other income increased to
$275,000 in the first nine months of fiscal year 1999 from $138,000 in the
first nine months of fiscal year 1998. This increase was due primarily to
higher average cash and cash equivalents balances between periods.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September
30, 1997
Revenues, net. Net revenues increased to $3.9 million in fiscal year 1998 from
$1.4 million in fiscal year 1997, representing an increase of 182.1%. This
increase resulted primarily from increased sales of our Quantum boards and
increased sales due to the addition of Tech Data and Ingram Micro as
distributors of our products. Sales to Tech Data accounted for 10.0% of net
revenues in fiscal year 1997 and for 24.4% of our net revenues in fiscal year
1998. Sales of Quantum boards represented 95% of net revenues in fiscal year
1998 and 100% of net revenues in fiscal year 1997.
Cost of revenues. Cost of revenues increased to $2.5 million in fiscal year
1998 from $1.0 million in fiscal year 1997. This increase was due primarily to
increased sales of our products and higher provision for excess and obsolete
inventory related primarily to the impact of design changes in our Quantum
product, offset by higher volume of lower cost software products and cost
reductions in our manufacturing process. As a result, gross profit increased to
$1.4 million in fiscal year 1998 from $339,000 in fiscal year 1997.
23
<PAGE>
Research and development expenses. Research and development expenses increased
to $1.9 million in fiscal year 1998 from $1.5 million in fiscal year 1997,
representing an increase of 28.7%. The increase was primarily related to
increases in personnel and personnel related costs and increases in the
depreciation and other related charges due to capital spending on design and
simulation software.
Sales and marketing expenses. Sales and marketing expenses increased to $2.8
million in fiscal year 1998 from $1.4 million in fiscal year 1997, representing
an increase of 91.3%. The increase was primarily due to
the hiring of additional sales and marketing personnel as well as increased
spending for marketing promotional programs and materials, advertising and
trade show expenses.
General and administrative expenses. General and administrative expenses
remained relatively flat at $675,000 in fiscal year 1998, compared to $718,000
in fiscal year 1997.
Deferred stock compensation expenses. We recorded deferred stock compensation
expense of $164,000 during fiscal year 1998. We did not record any deferred
stock compensation expenses in fiscal year 1997 or prior periods because we had
not granted any stock options at exercise prices below the deemed fair market
value of our common stock on the dates the options were granted.
Interest and other income, net. Net interest and other income increased to
$246,000 in fiscal year 1998 from $206,000 in fiscal year 1997, representing an
increase of 19.4%. This increase was due to higher average cash balances in
fiscal year 1998 due to our preferred stock financings.
Fiscal Year 1996
We began selling products in July 1996, and net revenues for fiscal year 1996
consisted primarily of sales of our AltiServ system. Cost of revenues of
$239,000 exceeded net revenues due to the impact of establishing additional
production capacity. Operating expenses generally were high as a percentage of
net revenues compared to subsequent periods due primarily to the fact that we
incurred operating costs for the full year but sold products only in the last
three months of the year. We did not incur any deferred stock compensation
expenses in fiscal year 1996. Net interest income of $124,000 primarily
represented interest earned on cash balances resulting from preferred stock
financings.
24
<PAGE>
Quarterly Results of Operations
The following tables set forth the unaudited consolidated statement of
operations data for each of the seven quarters ended June 30, 1999, as well as
that data expressed as a percentage of our total revenues for the quarters
presented. This unaudited quarterly information has been prepared on the same
basis as our audited consolidated financial statements and, in the opinion of
our management, reflects all normal recurring adjustments that we consider
necessary for a fair presentation of the information for the periods presented.
Operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31, March 31, June 30,
1997 1998 1998 1998 1998 1999 1999
------------ --------- -------- ------------- ------------ --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, net........... $ 581 $ 929 $1,049 $ 1,331 $ 917 $ 1,439 $ 1,908
Cost of revenues........ 670 517 561 772 478 746 943
------- ----- ------ ------- ------- ------- -------
Gross profit (loss).... (89) 412 488 559 439 693 965
Operating expenses:
Research and
development........... 371 428 548 580 858 1,179 968
Sales and marketing.... 477 629 720 944 685 1,066 1,076
General and
administrative........ 166 173 163 173 314 415 467
Deferred stock
compensation.......... 11 17 55 81 192 193 193
------- ----- ------ ------- ------- ------- -------
Total operating
expenses............. 1,025 1,247 1,486 1,778 2,049 2,853 2,704
------- ----- ------ ------- ------- ------- -------
Loss from operations.... (1,114) (835) (998) (1,219) (1,610) (2,160) (1,739)
Interest and other
income, net............ 49 40 49 108 93 106 76
------- ----- ------ ------- ------- ------- -------
Net loss................ $(1,065) $(795) $ (949) $(1,111) $(1,517) $(2,054) $(1,663)
======= ===== ====== ======= ======= ======= =======
As a Percentage of Total
Revenues:
Revenues, net........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 115.3 55.7 53.5 58.0 52.1 51.8 49.4
------- ----- ------ ------- ------- ------- -------
Gross profit (loss).... (15.3) 44.3 46.5 42.0 47.9 48.2 50.6
Operating expenses:
Research and
development........... 63.9 46.1 52.3 43.6 93.6 81.9 50.7
Sales and marketing.... 82.1 67.7 68.6 70.9 74.7 74.1 56.4
General and
administrative........ 28.6 18.6 15.6 13.0 34.2 28.9 24.5
Deferred stock
compensation.......... 1.8 1.8 5.2 6.1 20.9 13.4 10.1
------- ----- ------ ------- ------- ------- -------
Total operating
expenses............. 176.4 134.2 141.7 133.6 223.4 198.3 141.7
------- ----- ------ ------- ------- ------- -------
Loss from operations.... (191.7) (89.9) (95.2) (91.6) (175.5) (150.1) (91.1)
Interest and other
income, net............ 8.4 4.3 4.7 8.1 10.1 7.4 3.9
------- ----- ------ ------- ------- ------- -------
Net loss................ (183.3)% (85.6)% (90.5)% (83.5)% (165.4)% (142.7)% (87.2)%
======= ===== ====== ======= ======= ======= =======
</TABLE>
Our net product revenues increased in each of the consecutive quarters, except
the quarter ended December 31, 1998, due primarily to the continued acceptance
of our AltiServ system and enhancements to that system, as well as the
introduction of our Triton boards in March 1999. The seasonal decrease in
purchases by our customers in the quarter ended December 31, 1998 was worsened
due primarily to a sales promotion during the quarter ended September 30, 1998,
which may have resulted in end users accelerating purchases that would
otherwise have been made in the December quarter. Our gross profit for the
quarter ended December 31, 1997 decreased as a percentage of net revenues due
primarily to a change in the design of our Quantum boards that caused us to
write off as obsolete our existing inventory of Quantum boards and related
components that could no longer be used for the new design. Our research and
development expenses have increased in absolute dollars in each of the
consecutive quarters except for the third quarter of fiscal year 1999, but have
fluctuated as a percentage of net revenues, especially during the first two
quarters of fiscal year 1999, as we hired additional engineers to support the
development of our products. Research and
25
<PAGE>
development expense in the third quarter of fiscal year 1999 decreased in
absolute dollars and as a percentage of net revenues due to the completion of
the development of the Triton board in the second quarter of fiscal year 1999.
Sales and marketing expenses decreased in absolute terms for the quarter ended
December 31, 1998 due primarily to reduced expenses for advertising from
seasonal softness in our market.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sale of
private equity securities. As of June 30, 1999, we have raised an aggregate of
$24.7 million, net of offering expenses, through the sale of preferred and
common stock. As of June 30, 1999, we had cash and cash equivalents of $8.0
million.
Net cash used in our operating activities was $5.3 million for the nine months
ended June 30, 1999, $3.8 million for fiscal year 1998, $3.1 million for fiscal
year 1997, and $1.8 million for fiscal year 1996. Net cash used in operating
activities primarily reflected the impact of the net loss for each of the
periods.
Net cash provided by investing activities was $452,000 for the nine months
ended June 30, 1999, which was primarily a result of redemption of short-term
investments. Our purchases of short-term investments and property and equipment
exceeded the proceeds from the sale of short-term investments by $388,000 in
fiscal year 1998 and by $1.0 million in fiscal year 1997. Our proceeds from the
sale of short-term investments and our purchases of property and equipment
exceeded our purchases of short-term investments by $641,000 in fiscal year
1996. The relative decrease in cash used for investing activities in the fiscal
year 1998 compared to the prior year was primarily due to decreases in the net
cash being invested in the year. The relative increase in cash used for
investing activities for fiscal year 1997 compared to the prior period was
primarily due to an increase in purchases of $207,000 for engineering capital
equipment and a decrease in redemption of short-term investments of $2.0
million between the periods.
Net cash provided by financing activities was $5.8 million for the nine months
ended June 30, 1999. Cash provided by financing activities was $9.2 million for
fiscal year 1998, $3.3 million in fiscal year 1997 and $3.2 million in fiscal
1996. The increase in cash provided by investing activities for fiscal year
1998 as compared to fiscal year 1997 was primarily due to $1.4 million in net
proceeds from our issuance of series C preferred stock and $7.8 million in net
proceeds from our issuance of series D preferred stock. Cash provided by
financing activities for the nine months ended June 30, 1999 reflects the
issuance of additional series D preferred stock.
We currently believe that the net proceeds from this offering, together with
the existing cash and cash equivalents balances, will provide us with
sufficient funds to finance our operations through at least the next twelve
months. Our management intends to invest our cash in excess of current
operating requirements in short-term, interest-bearing, investment-grade
securities. Subsequently, we may need to raise additional funds, and additional
financing may not be available on favorable terms, if at all. We may also
require additional capital to acquire or invest in complementary businesses or
products, or obtain the right to use complementary technologies. If we cannot
raise funds, if needed, on acceptable terms, we may not be able to develop or
enhance our products, take advantage of future opportunities, or respond to
competitive pressures or unanticipated requirements, which could seriously harm
our business, financial condition and results of operations. If additional
funds are raised through the issuance of equity securities, the net tangible
book value per share may decrease, the percentage ownership of then current
stockholders may be diluted, and such equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Year 2000 Compliance
The information in this section is a "Year 2000 Readiness Disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act of 1998.
Impact of the year 2000 problem. The year 2000 problem refers to the potential
for system and processing failures of date-related data as a result of
computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize
26
<PAGE>
a date represented as "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions to
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
To date, we have not experienced any year 2000 issues with any of our internal
systems or our products, and we do not expect to experience any of them.
Assessment. The year 2000 problem affects the computers, software and other
equipment that we use, operate or maintain for our operations. Accordingly, we
have organized a program team responsible for monitoring the assessment and
remediation status of our year 2000 issues and reporting to our management.
This project team is currently assessing the potential effect and costs of
remediating year 2000 issues for our internal systems. To date, we have not
obtained independent verification or validation to assure the reliability of
our risk and cost estimates because we do not feel that the scope of our
program warrants this time and expense.
Internal infrastructure. We believe that we have identified most of the major
computers, software applications and related equipment used in connection with
our internal operations that need to be modified, upgraded or replaced to
minimize the possibility of a material disruption to our business. We have
begun modifying, upgrading and replacing major systems that we believe have
year 2000 issues.
Systems other than information technology systems. In addition to computers and
related systems, the operation of office and facilities equipment, such as fax
machines, security systems and other common devices may have year 2000 issues.
We are currently assessing the potential effect on and the costs of remediating
these issues, if any, for our office equipment and our facilities in Fremont,
California and Shanghai, China.
Products. Since June 1998, we have designed our products to be year 2000
compliant and believe that using these products as documented should not cause
any year 2000-related issues. We have tested and intend to continue to test all
of our products introduced since September 1998 for year 2000 issues. While we
believe these products are year 2000 compliant, it is impractical for us to
test these products in every telecommunications systems environment or with all
available combinations of our products with components supplied by our
customers or other third-party suppliers. As a result, there may be situations
where the combination of these products working with components supplied by
other third parties could result in year 2000 issues.
Two versions of our AltiWare CE software product introduced before September
1998 were not designed specifically to be year 2000 compliant. These versions
are currently being used on a small number of end user systems. As a result, we
have decided not to test these versions for year 2000 compliance. Instead, we
have notified all of our customers and advised them to upgrade any systems that
are using these older versions. We have and will continue to offer users who
request it a free software upgrade to a later version of AltiWare CE that is
year 2000 compliant. However, users who do not upgrade may experience year 2000
issues and may make potentially damaging claims against us. See "Risk Factors--
We face year 2000 risks that, if realized, could disrupt our business
operations, resulting in harm to our business, financial condition and results
of operation."
Costs of remediation. We currently anticipate that our total cost of addressing
our year 2000 issues will be $50,000, of which approximately $22,000 has been
incurred through June 30, 1999 and expensed to date. We do not have a separate
information technology or similar budget. The cost of addressing year 2000
issues will be reported as a general and administrative expense. We have not
deferred any material information technology projects due to our year 2000
efforts.
Suppliers. We are contacting third-party suppliers of components and our key
subcontractors used in the manufacturing of our products to identify and, to
the extent possible, resolve issues relating to the year 2000 issue. While we
expect that we will be able to resolve any significant year 2000 issue
identified with these third parties, because we have limited to no control over
the actions of these parties, there is no assurance that these third parties
will remediate any or all of the year 2000 issues identified. Any failure of
any of these third
27
<PAGE>
parties to timely resolve year 2000 issues with either their products sold to
us or their internal systems could have a material adverse effect on our
business, operating results and financial condition.
Most likely consequence of year 2000 issues. We expect to identify and resolve
all year 2000 issues that could materially adversely affect our business
operations. However, for the reasons discussed above, we believe that it is not
possible to determine with complete certainty that all year 2000 issues
affecting us have been identified or corrected. As a result, we believe that
the following consequences are possible:
. operational inconveniences and inefficiencies for us, our contract
manufacturers and our customers that will divert our management's time and
attention and our financial and human resources from ordinary business
activities;
. business disputes and claims for pricing adjustments or penalties by our
customers due to year 2000 issues, which we believe will be resolved in
the ordinary course of business; and
. business disputes alleging that we failed to comply with the terms and
conditions of contracts or industry standards of performance that result
in litigation.
Contingency plans. We are currently developing contingency plans to be
implemented if our efforts to identify and correct year 2000 issues affecting
our internal systems are not effective. Depending on the systems affected,
these plans could include:
. accelerated replacement of affected equipment or software;
. short- to medium-term use of backup equipment and software;
. increased work hours for our personnel; and
. use of contract personnel to correct, on an accelerated schedule, any year
2000 issues that arise or to provide manual workarounds for information
systems.
Our implementation of any of these contingency plans could have a material
adverse effect on our business, operating results and financial conditions.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board or FASB issued Statement
of Financial Accounting Standards or SFAS No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") which establishes standards for reporting and
presentation of comprehensive income. SFAS No. 130, which we adopted in the
first quarter of 1998, requires companies to report a new measurement of
income. "Comprehensive Income (Loss)" is to include as other comprehensive
income foreign currency translation gains and losses and other unrealized gains
and losses that have historically been excluded from net income (loss) and
reflected instead in equity. We do not have any items of other comprehensive
income and are, therefore, not required to report comprehensive income.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131, which we adopted beginning on October 1, 1997,
establishes standards for disclosures about operating segments, products and
services, geographic areas and major customers. We are organized and operate as
one operating segment. We operate primarily in one geographic area, the
United States.
In June 1998, FASB also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards, requiring every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 must be applied to derivative instruments and
to certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or
28
<PAGE>
substantively modified after September 30, 1997. In management's opinion, the
impact of adopting SFAS No. 133 on the financial statements will not be
material.
In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of Start-
Up Activities" ("SOP No. 98-5"). SOP No. 98-5 requires that all start-up costs
related to new operations must be expensed as incurred. In addition, all start-
up costs that were previously capitalized must be written off when SOP No. 98-5
is adopted. We adopted SOP NO. 98-5 in fiscal 1999. The adoption did not have a
material impact on our financial position or results of operations.
Qualitative and Quantitative Disclosures About Market Risk
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in cash
equivalents and short-term instruments. Due to the short-term nature of our
cash equivalents and investments, we have concluded that there is no material
market risk exposure. Therefore, no quantitative tabular disclosures are
required.
29
<PAGE>
Business
AltiGen designs, manufactures and markets integrated, multifunction
telecommunications systems that allow businesses to use data networks, such as
the Internet, and the traditional telephone network interchangeably and
seamlessly to carry voice and data communications. As the Internet accelerates
the convergence of voice and data communications, an increasing percentage of
voice communications is being carried over data networks, creating the need for
a next generation communications system. We believe that businesses,
particularly small- to medium-sized businesses, will begin to use integrated
systems that receive, manipulate and transmit voice communications over the
traditional telephone network, as well as over data networks such as the
Internet. Our telecommunications systems provide new services to end users,
giving businesses the choice of placing calls over data networks or traditional
phone lines. Historically, manufacturers have not built this capability into
traditional private telephone switching systems. To use these new services,
businesses have had to add hardware and software to these traditional systems.
As businesses seek capabilities beyond those of traditional telephone systems
to meet today's communications needs, they have begun to purchase integrated,
multifunction telecommunications systems in place of traditional telephone
systems. These new integrated computer and telephone systems, which are
generally based on free and publicly available hardware and software standards,
allow products from different companies to be used together to provide basic
telephony services such as placing and receiving calls. Our telecommunications
systems allow small- to medium-sized businesses to communicate over both the
traditional telephone network and data networks such as the Internet, providing
these businesses with a telecommunications solution for the Internet era.
Industry Background
The Growth of the Internet
The Internet is experiencing tremendous growth and is emerging as a global
medium for communications and commerce. Many factors are driving the growth of
the Internet, including:
. improvements in the design and construction of computer systems and
networks;
. the emergence of technologies which facilitate the buying and selling of
goods and services on the Internet, which is referred to as online
commerce; and
. easier, faster and cheaper Internet access through a large and growing
base of personal computers and other devices.
According to International Data Corporation, or IDC, the number of Internet
users worldwide will grow from 69 million at the end of 1997 to 320 million by
2002. The increasing capabilities and use of the Internet and other networks
such as corporate intranets are significantly influencing telecommunications
today.
Convergence of Voice and Data
Traditionally, businesses have supported two separate, incompatible networks to
handle their communications needs. The first has been the traditional telephone
network, which relies on a technology called "circuit- switching." A circuit-
switched network establishes and maintains a dedicated (i.e. not shared) line
between calling parties for the duration of a call. The second type of network
on which businesses have traditionally relied is a data or "packet-switched"
network, such as the Internet. In packet-switched networks, voice, video,
images or data is divided into small packets of signals that are simultaneously
routed over different paths to a final destination where they are recombined.
Packet-switched networks are more efficient than the traditional telephone
network because network paths are not dedicated to a single user, but instead
are available to be shared by all users. In contrast to a circuit-switched
network, network capacity is allocated only during transmission, and messages
can be compressed and stored more efficiently. The Internet is accelerating the
convergence of voice and data to a single integrated packet-based network that
can support both voice and data using Internet Protocol.
30
<PAGE>
A growing number of businesses have recognized data networks such as the
Internet as a valuable and economical medium for internal and public
communications. These businesses seek to reduce their telecommunications costs
by moving their voice communications to packet-switched networks, such as
corporate intranets and the Internet. Although packet-switched networks can
offer more efficiency and value to businesses, the traditional telephone
network remains the standard for voice communications today. As a result,
businesses that wish to take advantage of packet-switched networks for voice
communications must nevertheless be able to place and receive calls over the
traditional telephone network with customers, suppliers and others who rely
solely on the traditional telephone network for voice communications.
Consequently, there is a need for one common switching system that can
interface with both packet-switched networks and the traditional telephone
network.
Evolution Begins in Small- to Medium-Sized Businesses
Small- to medium-sized businesses of up to 150 employees are likely to be the
first to use converged voice and data networks because, unlike large
organizations, they may not be heavily invested in outdated systems that
continue to be used because the costs of replacing them outweigh their
shortcomings, and can more quickly take advantage of new technological trends.
Most of these businesses today use a traditional private telephone network as
the backbone of their connection to the voice network, and maintain a separate
data network.
Today's traditional private telephone network remains an expensive,
proprietary solution. These systems require skilled personnel to physically
prepare the installation site and to install the equipment and can be
difficult to install, upgrade and maintain. For example, adding voice mail to
a traditional private telephone network system requires personnel to configure
and connect a separate server to the system. Thus, after adding a number of
features such as voice mail, a traditional private telephone network may
resemble the figure below:
[TRADITIONAL TELECOMMUNICATIONS SYSTEM GRAPHIC APPEARS HERE]
[This graphic illustrates that PBX systems are traditionally enhanced by
establishing connections with separate specialized communication systems such
as integrated voice response units, voice over IP gateways, voice mail
systems, and other adjunct communication systems.]
Once installed, this type of system can be difficult to maintain because of
the diversity of its hardware components, as well as the number and complexity
of connections between those components. Administering this system thus may
become prohibitively expensive for small- to medium-sized businesses with
limited resources.
In recent years, a new generation of integrated, multifunction
telecommunications systems has emerged to address the challenges and
inadequacies associated with traditional private telephone systems. Frost &
31
<PAGE>
Sullivan estimates that the market for integrated, multifunction
telecommunications systems that rely on general-purpose computers, which it
terms the "server-based PBX systems market" was $41.8 million in 1998 and will
grow to $403.9 million in 2002, representing a compounded annual growth rate
of 76.3%. Frost & Sullivan also estimates that the market for integrated,
multifunction telecommunications systems that rely on data networks that use
the same communications format as the Internet, which it refers to as
"IP-based PBX systems" was $31.5 million in 1998 and will grow to $595.1
million in 2002, representing a compounded annual growth rate of 108.4%.
Most existing telecommunications systems do not address the needs of
businesses that wish to transmit voice communications over both the
traditional telephone network and data networks. For example, businesses may
wish to route internal calls over their existing voice network and route calls
between offices over data networks, such as the Internet, all using the same
telecommunications system. We believe a significant opportunity exists to
provide small- to medium-sized businesses with an integrated solution that
delivers the benefits of integrated, multifunction telecommunications systems
using the Internet as well as the traditional telephone network.
The AltiGen Solution
We design, manufacture and market next generation, integrated, multifunction
telecommunications systems that use both data networks, such as the Internet,
and the traditional telephone network to provide new services to end users
that were unavailable with traditional private telephone systems. AltiServ,
our Windows NT-based system, interfaces with the traditional telephone network
and data networks, permitting our customers to take advantage of the
converging communications infrastructure. Our systems integrate voice and data
communications with fewer components than traditional systems and other
multifunction telecommunications systems. An example of our system is
illustrated below:
[GRAPHIC OF ALTIGEN'S ALTISERV SYSTEM]
[This graphic illustrates that AltiGen's server-based PBX system contains PBX,
voice messaging, e-mail, and VoIP capabilities within a single server-software
platform. The server-based PBX can connect with both the PSTN and IP
networks.]
Key benefits of our solution include:
. Ability to use both Data Networks, such as the Internet, and the
Traditional Telephone Network. Our systems provide the benefits of the
converging communications infrastructure by enabling businesses to route
voice calls over the Internet and other data networks or the traditional
telephone network. Our system design integrates seamlessly with both types
of networks, providing flexibility for businesses to configure their
telecommunications systems to suit their needs.
. Lower Telecommunications Costs. By routing voice over data networks,
including the Internet, our systems eliminate toll charges associated with
long-distance calls. Using our products,
32
<PAGE>
businesses can send and receive voice communications over the Internet or
existing data lines that constitute their intranets.
. Innovative Features. Our systems provide integrated voice and data
capability, allowing numerous features previously available only with a
combination of multiple systems, typically from different vendors.
AltiGen's AltiServ system has typical call handling and routing functions,
as well as specialized functions such as Zoomerang, which enables users to
retrieve a voice mail message, automatically place a call to respond and
return to the voice mail system to continue reviewing messages.
. Ease of Installation, Use and Maintenance. The configuration of the
AltiServ system and its use of industry-standard hardware and software
platforms allows for easy installation and system maintenance. AltiServ
enables system administrators to manage the voice, voice messaging, e-mail
and Internet features of our products through a single consistent user
interface.
. Reduced Administration Costs. Our user interface allows end users to
administer their system internally. With traditional private telephone
systems, businesses frequently require a third-party service provider to
perform tasks as simple as changing a phone extension or adding a phone
line. These expenses can be significant for installation, system upgrades
and modifications. Using AltiServ, system administrators can perform many
of these tasks and reduce additional expenditures.
Strategy
Our strategy is to capitalize on the need for a next generation
telecommunications system, which results from the convergence of voice and data
communications. Our objective is to extend our leadership position in the
integrated, multifunction telecommunications systems market and expand our
current position in the market for telecommunications systems that facilitate
carrying voice communications over the Internet.
Key elements of our business strategy are as follows:
. Increase our brand name recognition. We intend to increase awareness of
our brand name among our end users, dealers, distributors and original
equipment manufacturers, through radio, print and Web advertisements,
direct mail and other activities. We believe these efforts will generate
more sales leads for our dealers by increasing end user awareness of our
products.
. Expand our distribution channels. We sell our products through a network
of more than 400 dealers and distributors. We intend to expand this
network and to focus our sales efforts on larger dealers and distributors
with the goal of leveraging their ability to provide more complete
services to end users. We also intend to expand sales with existing and
new original equipment manufacturers.
. Establish relationships with technology and strategic partners. We have
established strategic alliances with companies such as Hewlett-Packard and
Compaq under which they market our products through their channels and to
their customers. We intend to pursue additional alliances with various
telecommunications and computer industry leaders. We believe these
alliances facilitate and accelerate the acceptance of our technology, as
well as enhance the marketing and distribution of our products.
. Target key markets worldwide. We intend to expand our presence globally by
establishing additional relationships with distributors and dealers in our
target markets to expand our sales presence. Currently, Nitsuko, one of
our key Japanese distributors, is localizing our products for its market.
. Enhance leadership in server-based telecommunications technologies. We
believe that we are a technology leader in the market for integrated,
multifunction telecommunications systems that rely on general-purpose
computers. We intend to maintain this position by leveraging our
technology expertise in the areas of switching and communications
applications that integrate voice and data networks. We intend to leverage
our engineering expertise and our core technologies to enhance the
capabilities of our existing products and to develop new products to meet
the evolving needs of our market.
33
<PAGE>
Products and Core Technologies
We design and develop hardware (circuit boards) and software for integration by
our distributors and dealers into general purpose computer platforms for use by
small- to medium-sized business. AltiGen's AltiServ system is a complete
communications system capable of coordinating different types of
communications, including e-mail and voice mail. The AltiServ system answers
incoming phone calls, transfers calls to individual extensions or to groups of
company representatives and tracks the call activity for future performance
improvements. An auto attendant feature allows incoming callers the opportunity
to select choices in the kind of service they need or to answer calls when no
attendants are available. Our software is designed for easy installation and
maintenance.
The AltiServ system functions over packet-switched networks including corporate
intranets and the Internet. AltiServ supports combining multiple forms of
communication such as voice mail and data files into a single e-mail message.
The AltiServ system forwards e-mail and voice mail messages over data networks
to other mail service systems. The AltiServ system also provides remote
employees access to their voice mail messages over the Internet.
The AltiServ system allows a business to connect multiple branch offices using
AltiServ systems such that calls between these locations can be carried over
low-cost data network connections as opposed to the traditional telephone
network.
The main features of our products are as follows:
<TABLE>
<CAPTION>
Product Description
------- -----------
<C> <S>
Software
AltiWare IP.......... Enables people to place and receive telephone calls
over data networks supporting the same communication
format as the Internet.
AltiView............. A personal computer program that allows users to, for
example, receive and place calls, listen to voice
mail messages and identify the phone number of the
caller.
AltiWare OE.......... A graphical user interface program that provides
telephone services to users through their computers.
AltiWare CE.......... Provides the same services as AltiWare OE but does
not support some desktop program messaging
capabilities offered by AltiWare OE.
Hardware
Triton IP............ A circuit board that allows calls to be carried over
public and private data networks that support the
Internet Protocol.
Triton T1............ A circuit board that allows calls to be carried over
telephone lines.
Quantum.............. A circuit board that allows calls to be carried over
traditional analog telephone lines.
ISDN BRI............. A circuit board that allows calls to be carried over
specialized digital telephone lines supporting the
Japanese telephone system.
</TABLE>
Software
AltiWare IP. AltiWare IP is a software program that allows users to place and
receive telephone calls from two or more locations connected by a network that
supports the same communication format as the Internet. For example, a business
may use AltiWare IP to connect branch offices so that long-distance calls
between these offices are made over the Internet, rather than over a
traditional telephone line, allowing the business to save long-distance toll
charges. AltiWare IP is designed so that making these calls is similar to
making calls over the traditional telephone network. Our product also allows
businesses to add more users, change the extensions of telephones on the system
and take care of other administrative matters that affect one or more
34
<PAGE>
locations from a single location, potentially reducing administrative costs.
Users may also add more features to their system by adding AltiWare OE
software.
AltiView. AltiView is a software program that shares information with other
parts of the AltiServ system and allows users to see the phone number of the
person calling them, to transfer the caller and to terminate the phone call by
clicking buttons on their computer screens. AltiView can also display other
information on a user's computer screen, such as a list of voice messages left
for the user, and allows the user to listen to the messages on his or her
personal computer. AltiView also supports special software messages that allow
it to work with Microsoft's Outlook product.
AltiWare OE. AltiWare Open Edition (OE) is a software program that enables
computers to provide the same services as traditional private telephone
systems, including controlling how and where telephone calls are connected to
users. AltiWare measures the time, type, duration and other data about each
call and records this information for later use. AltiWare OE allows users to
manage phone communications, to record and manage voice messages left by
callers reaching a busy phone and to receive e-mail communications. Unlike
traditional private telephone systems, AltiWare OE also supports sharing caller
information and exchanging voice messages and e-mail messages with multimedia
content.
AltiWare CE. AltiWare Classic Edition (CE) provides small- to medium-sized
businesses with all of the call features of AltiWare OE except the information
sharing and multimedia features.
Hardware
Triton IP. Triton IP is a circuit board that is based on H.323, an industry
standard format for transmitting voice and other kinds of communications over
data networks that use the same communications format as the Internet. The
Triton IP board translates telephone calls into electrical signals in H.323
format that can be sent over a data network and decoded by telephone systems
that support the H.323 standard, such as the AltiServ system. Each AltiServ
system can accept up to six Triton IP circuit boards, each of which can support
up to four calls simultaneously.
Triton T1. Triton T1 is a circuit board that enables the AltiServ system to
send and receive telephone calls over high-speed, digital lines commonly known
as T1 lines that some businesses use to connect to the traditional telephone
network. Each Triton T1 board can carry up to 24 telephone calls at one time.
The boards are designed to allow the AltiServ system to simultaneously provide
all users with voice mail services such as recording and playing voice mail
messages.
Quantum. Quantum is a circuit board that enables telephone calls to be carried
over analog telephone lines, which are the most common connection to the
traditional telephone network. The Quantum board can support up to 12
simultaneous telephone calls, up to six of which can simultaneously make use of
the AltiServ system's voice mail or auto attendant services. The Quantum board
can receive caller identification information from the public telephone
carriers, and can pass on this information to AltiView or directly to
telephones that are equipped to display the information. Finally, Quantum can
indicate to AltiWare system phone users that they have voice messages.
ISDN BRI. The ISDN BRI board enables voice conversations to be carried over
digital communications networks supporting a special information format which
defines the connection as supporting a carrier service called Integrated
Services Digital Network, or ISDN. The AltiServ system supports up to four ISDN
BRI boards for a total of eight ISDN communication channels. This board
complies with the Japanese INS64 standard for ISDN BRI and has received
approval from the Japan Approvals Institute for Telecommunications Equipment.
When used with our Triton Resource Board, the ISDN BRI board supports voice
messaging and voice conferencing.
Hardware and Firmware
AltiGen developed a single base circuit board with powerful digital signal
processing technology. Digital signal processing is a computer built on to the
circuit board which can run special, high-speed software
35
<PAGE>
programs, called firmware. The firmware can receive, send and modify digital
information for communications with network services. AltiGen's basic Triton
DSP board can be used to create different circuit boards to meet many
communication requirements by simply adding a few hardware and/or software
components to the basic board. For example, AltiGen's Triton DSP series circuit
board becomes a T1 or ISDN communication circuit board or a circuit board
supporting the same communication format as the Internet with simple changes in
on-board software and, in some cases, new chips.
This modular design not only allows AltiGen to provide new capabilities, but
also allows AltiGen's products to achieve a high degree of reliability since
the underlying technology is the same and hence receives our full attention to
any material and processing improvements that can or need to be made.
Software
AltiGen's software products are based on modular software components similar to
the concept discussed for our hardware and firmware above. The service provider
layer of software is composed of separate software components, each of which
communicates with a hardware circuit board within the AltiServ system. The
middleware layer interacts with all the service providers in the system and
manages their resources. This layer hides the complexity of the hardware from
application programs wanting to provide specific features. The application
program layer consists of components that implement the application logic such
as voice mail and auto attendant. These applications do not need to know about
the hardware or how to communicate with the hardware.
The layered architecture of AltiServ provides important benefits:
. Shorter time is required to develop new features;
. Development times are more predictable, thus saving money;
. New hardware and software features can be added easily and rapidly; and
. Changing one component in the system does not mean that other components have
to be changed.
Marketing, Sales and Customer Support
Marketing
Our marketing efforts currently focus on increasing demand for our products in
North America, Japan, Europe and Latin America. We work to increase market
awareness of our technology and demand for our products in the small- to
medium-sized business market through cooperative marketing, print, radio and
Web advertising and direct mail campaigns. We have a customer referral program
through which our AltiServ customers can refer potential buyers to us through
our Web site.
To assist our distributors, dealers, original equipment manufacturers and
strategic partners, we provide market development funds and technical and sales
training developed specifically for our products. In return, these companies
must provide us with point-of-sale reports that allow us to develop a profile
of end users of our systems and evaluate the effectiveness of our marketing
efforts.
We have recently formed marketing alliances with Hewlett-Packard and Compaq.
Specifically, we have signed a memorandum of understanding with the Covision
Internet Solutions Program of Hewlett-Packard, under which this group will
market our products through its Internet channels. We have signed a Compaq
Solutions Alliance Agreement, under which Compaq will market and bundle our
products to its channel members and to customers. To date we have not
recognized significant revenues as a result of these alliances.
Sales
We currently have sales and support staff in: New York, New York; Chicago,
Illinois; Atlanta, Georgia; Dallas, Texas; and Fremont, California. Our network
of distributors and over 400 dealers sell our systems to end users. Our sales
force answers incoming calls from end users and refers new leads to a qualified
dealer near each end user's location.
36
<PAGE>
Customers
Our customers are distributors and dealers who sell and resell our products to
end users. We have distribution agreements with Ingram Micro and Tech Data
Corporation in the United States and Kanematsu Semiconductor Corporation and
Nitsuko Corporation abroad. Sales through Ingram Micro and Tech Data accounted
for approximately 3% and 24%, respectively, of our revenues in fiscal year
1998, and approximately 20% and 25%, respectively, of our revenues in the nine
months ended June 30, 1999. We also have over 400 authorized dealers, who sell
our products directly to end users. We continually seek to identify and
authorize new dealers. We review our dealers quarterly and de-authorize those
who do not meet our standards.
Customer Support
We believe that consistent, high-quality service and support are key factors in
attracting and retaining customers. Our customer support group, located in
Fremont, California, coordinates service and technical support of our products
and provides service 24 hours a day, seven days a week. This group assists our
distributors and dealers in resolving installation and support issues that
arise from their sales to end users and also provides limited support to end
users to supplement their dealer support. Customers can also access technical
information and receive technical support through our Web site.
Research and Development
The market for our products is characterized by rapidly changing technology,
evolving industry standards and frequent product introductions. We believe that
our future success depends in large part upon our ability to continue to
enhance the functionality and uses of our core technology. We intend to extend
the functionality and uses of our hardware and software technology by
continuing to invest in research and development.
We currently conduct the majority of our product development in-house. We also
use a small number of independent contractors to assist with certain product
development and testing activities. We intend to continue working with our
strategic partners to enhance our products. As of June 30, 1999, we employed 30
individuals in engineering, research and development and support.
Competition
The markets for our products are intensely competitive, continually evolving
and subject to changing technologies. We currently compete with companies
providing traditional telephone systems, principally Lucent Technologies and
Nortel Networks. We also compete against companies providing multifunction
telecommunications systems, including Picazo Communications, Inc. and Artisoft,
Inc. We face potential competition from companies such as Shoreline Teleworks,
Inc., NBX Corporation, acquired by 3Com Corporation, Selsius Systems, acquired
by Cisco Systems, Inc., as well as any number of future competitors. Many of
our competitors are substantially larger than we are and have significantly
greater name recognition, financial, sales and marketing, technical, customer
support, manufacturing and other resources. These competitors may also have
more established distribution channels and stronger relationships with local,
long distance and Internet service providers. These competitors may be able to
respond more rapidly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products. These competitors may enter our existing or future markets
with solutions that may be less expensive, that may provide higher performance
or additional features or that may be introduced earlier than our solutions.
We believe the principal competitive factors in our market include, or are
likely to include:
. product performance and features such as the ability to integrate voice
and data;
. reliability;
. ease of use;
. size of customer base;
37
<PAGE>
. quality of service and technical support;
. sales and distribution capabilities; and
. strength of brand name.
We believe that our principal competitive advantages include:
. established brand-name recognition;
. a well-developed and trained channel; and
. a considerable lead in product development and marketing.
We cannot be certain that we will be able to compete successfully with existing
or new competitors. If we fail to compete successfully against current or
future competitors, our business could suffer.
Intellectual Property
We generally rely upon patent, copyright, trademark and trade secret laws to
protect and maintain our proprietary rights for our technology and products.
AltiGen is a registered trademark, and Zoomerang is a trademark pending
registration of AltiGen in the United States and other jurisdictions. In
addition, the AltiGen logo is a trademark of AltiGen in the United States and
other jurisdictions.
We have filed several U.S. patent applications relating to various aspects of
our client and server software, mixed-media communications and computer
telephony. We expect to file patent applications as we deem appropriate to
protect our technology and products. We cannot be sure that our patent
applications will result in the issuance of patents, or that any issued patents
will provide commercially significant protection to our technology.
To help protect our intellectual property rights, our employees, consultants
and strategic partners enter into confidentiality agreements that prohibit
disclosure of our proprietary information. We also currently require employees
and consultants to assign to us their ideas, developments, discoveries and
inventions.
We attempt to avoid infringing known proprietary rights of third parties in our
product and service development efforts. We have not, however, conducted and do
not conduct comprehensive patent searches to determine whether the technology
used in our products infringes patents held by third parties. In addition, it
is difficult to proceed with certainty in a rapidly evolving technological
environment in which there may be numerous patent applications pending, many of
which are confidential when filed, with regard to similar technologies. If we
were to discover that our products violate third-party proprietary rights, we
might not be able to obtain licenses to continue offering these products
without substantial reengineering. Efforts to undertake this reengineering
might not be successful, licenses might be unavailable on commercially
reasonable terms, if at all, and litigation might not be avoided or settled
without substantial expense and damage awards.
Legal Proceedings
Generally, litigation, which could be costly and time consuming, may be
necessary to determine the scope and validity of others' proprietary rights, or
to enforce any patent issued to us, in either case, in judicial or
administrative proceedings. For example, we are currently engaged in litigation
with NetPhone, Inc. In June 1999, we received a letter from NetPhone alleging
that we infringe a patent owned by NetPhone. On June 30, 1999, we filed a
request for a declaration from the United States District Court for the
Northern District of California that AltiGen does not infringe any valid claim
of NetPhone's patent. NetPhone answered AltiGen's complaint on July 13, 1999
and asserted a counterclaim against AltiGen alleging that AltiGen infringes the
NetPhone patent and seeking to preliminarily and permanently enjoin AltiGen
from making, importing, using, offering to sell or selling a device under the
name Quantum. On August 11, 1999, NetPhone filed a motion
38
<PAGE>
for preliminary injunction. On September 7, 1999, we filed our Opposition to
NetPhone's motion, and countered with a Cross-Motion for Partial Summary
Judgment. NetPhone's Motion and our Cross-Motion have not yet been decided.
Based upon advice of our patent prosecution counsel, we believe that the claims
of NetPhone's patent are invalid or not infringed by our Quantum board product.
Accordingly, we intend to continue to litigate the lawsuit and to contest
NetPhone's Motion vigorously, and we do not believe that the ultimate outcome
of this matter will have a material impact on our business. However, litigation
is subject to inherent uncertainties and, therefore, we cannot assure you that
we will prevail in this litigation, or that an adverse outcome would not
adversely affect our business or financial condition.
An adverse outcome in the NetPhone litigation or any other litigation could
subject us to significant liabilities to third parties, require us to obtain
licenses from third parties, or require us to cease product sales and possibly
alter the design of our products. Not all licenses to third-party patents or
proprietary rights may be available on acceptable terms. In addition, the laws
of certain countries may not protect our intellectual property.
Manufacturing and Assembly
Our manufacturing operations consist of purchasing, receiving, inspecting,
testing, packaging and shipping. We depend on three suppliers that provide us
with about 75% of our hardware product components. We put these components into
kits and send them to a sub-contractor or external manufacturing facility for
assembly. The final hardware assembly, software installation and testing of our
products is performed in-house at our 11,000 square-foot manufacturing floor,
located at our corporate headquarters in Fremont, California. Our manufacturing
and assembly processes enable us to configure our products to adapt to
different customer specifications at the final assembly stage. This flexibility
is designed to reduce both our assembly cycle time and our need to maintain a
large inventory of finished goods. We believe that the efficiency of our
assembly process to date is largely due to our product architecture and our
commitment to assembly process design.
We test our products both during and after the assembly process using
internally developed product assurance testing procedures, which include
initial visual inspection and functional testing and final systems testing.
Although we generally use standard components for our products and try to
maintain alternative sources of supply, we purchase some key components from
sole-source suppliers for which alternative sources are not currently
available. We incorporate the following sole-sourced components in our
products:
. A Mitel Corporation chip is included in all of our boards and is
particularly important because it is the means by which our boards
communicate with each other to enable our products to function correctly.
. Texas Instruments Incorporated's digital signal processor, or DSP, chip
for our Triton family of boards. The DSP chip is designed to perform the
mathematics, data compression and other tasks that are needed to
manipulate voice communications that are routed through our products. The
DSP chip is also used in our Integrated Services Digital Network Basic
Rate Interface board. This board enables our products to work with
communications networks that are used in Japan. We expect that sales of
these boards will represent an increasing percentage of our revenues in
the future.
. PMC-Sierra, Inc.'s T1 chip for our Triton T1 board allows our board to
work with digital communications lines. We expect that sales of our Triton
T1 board will represent an increasing percentage of our revenues in the
future.
Employees
As of June 30, 1999, we employed 73 people, including 30 in engineering,
research and development and support and 34 in sales, marketing and
administration. We also employed nine people in manufacturing. None of our
employees is subject to a collective bargaining agreement, and we consider our
relations with our employees to be good.
Competition for technical personnel in our industry is intense. We believe that
we have been successful in recruiting qualified employees, but there is no
assurance that we will continue to be as successful in the future. We believe
that our future success depends in part on our continued ability to hire,
assimilate and retain qualified personnel.
39
<PAGE>
Facilities
Our headquarters for corporate administration, research and development and
sales and marketing occupies approximately 35,000 square feet of space in
Fremont, California, which we lease at an annual rental of approximately
$325,000. We also conduct research and development in a 2,919 square foot
facility in Shanghai, China, which we lease at an annual rate of approximately
$30,000. We believe that our existing facilities are adequate for our needs
through at least the end of 1999. We believe that any additional space we may
need in the future will be available on commercially reasonable terms.
40
<PAGE>
Management
Executive Officers and Directors
Our executive officers and directors, and their ages as of June 30, 1999, are
as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gilbert Hu(2)................. 42 President, Chief Executive Officer, Director
Philip M. McDermott........... 53 Chief Financial Officer
Simon Chouldjian.............. 46 Vice President of Manufacturing
Tricia Chu.................... 45 Vice President of Finance and Administration
En-Kuang Lung................. 32 Vice President of Research and Development
Carl M. Marszewski............ 56 Vice President of Business Development
Michele Shannon............... 37 Vice President of Sales
Anthony Spielman.............. 51 Vice President of Marketing
Tsyr-Yi (Shirley) Sun......... 39 Director of IP Telephony
Richard Black(1).............. 65 Director
Wen-Huang (Simon) Chang(1).... 47 Director
Thomas Shao(1)................ 64 Director
Masaharu Shinya(2)............ 55 Director
Kenneth Tai(2)................ 49 Director
</TABLE>
- -------------------
(1) Member of the Audit
Committee.
(2) Member of the Compensation
Committee.
Gilbert Hu founded AltiGen and has served as our President and Chief Executive
Officer and a Director since May 1994. Before founding AltiGen, Mr. Hu was a
founder, President and Chief Executive Officer of Centrum Communications, Inc.,
a networking company acquired by 3Com Corporation in early 1994. Mr. Hu has
also served in technical and managerial roles at Vitalink Communication
Corporation, an internetworking equipment manufacturer. He received a Bachelor
of Science degree in Electrical Engineering from National Chiao-Tung University
in Taiwan and a Masters of Science degree in Electrical Engineering from
Arizona State University. Mr. Hu is a brother-in-law of director Wen-Huang
(Simon) Chang.
Philip M. McDermott has served as our Chief Financial Officer since June 1999.
From October 1995 until May 1999, Mr. McDermott served as Director of Finance
Americas Sales for 3Com Corporation, a networking equipment company. From
October 1994 to October 1995, Mr. McDermott served as Vice President of
Finance, Operations and Administration for DAVID Systems, a division of Chipcom
Corporation, a public networking company. Chipcom was subsequently acquired by
3Com Corp. Mr. McDermott received Certified Management Accountant accreditation
from The Society of Management Accounting in Montreal, Canada.
Simon Chouldjian has served as our Vice President of Manufacturing since June
1997. From July 1984 to June 1997, Mr. Chouldjian was the founder and Vice
President of Engineering of Luxcom, Inc., a manufacturer of communication hub
equipment. Mr. Chouldjian has held supervisory and project leader positions in
engineering at the Hewlett-Packard Company and TRW, Inc. He received a Bachelor
of Science degree in Electrical Engineering from the University of California,
Berkeley and a Masters of Science degree in Electrical Engineering from
Stanford University.
Tricia Chu has served as our Vice President of Finance and Administration since
June 1999. From March 1999 to June 1999, Ms. Chu served as our Senior Director
of Finance and Administration. From February
41
<PAGE>
1994 to March 1999, Ms. Chu worked for 3Com Corporation, first as Controller of
3Com's Remote Access Division, then as Controller of Americas Sales. Ms. Chu
has also held finance and accounting positions with Centrum Communications,
Inc., a networking company acquired by 3Com Corporation in early 1994,
Integrated Silicon Solutions, Inc., a designer and manufacturer of memory
devices, and Rugged Digital Systems Inc., a producer of computer systems. Ms.
Chu received a Bachelor of Science degree in Finance and International Trade
from Tankung University in Taiwan and a Masters in Business Administration from
Central State University in Oklahoma.
En-Kuang Lung has served as our Vice President of Research and Development
since May 1998. Mr. Lung joined our engineering group in September 1995 as
Director of Application Engineering and, in February 1997, was named as our
Director of Platform Engineering. From January 1990 to September 1995, Mr. Lung
worked first as Senior Software Engineer/Project Lead, then as Manager of
Product Development for Centigram Communications Corp., a manufacturer of voice
messaging systems. Prior to working at Centigram, Mr. Lung spent over two years
at Bell Northern Research/Nortel, where he worked on the development of
Nortel's Meridian digital telephone sets. Mr. Lung received a Bachelor of
Science degree in Electrical Engineering and Computer Science from The Johns
Hopkins University. Mr. Lung has informed us that he intends to leave AltiGen
in late October 1999 to pursue an employment opportunity in an unrelated field.
Carl M. Marszewski has served as our Vice President of Business Development
since November 1998. From August 1997 to November 1998, Mr. Marszewski worked
as an independent sales and marketing consultant who specialized in
distribution channel development for small companies. From January 1994 to July
1997, Mr. Marszewski served as a Vice President of Worldwide Sales of Repeater
Technology, Inc., a wireless telecommunications company. Mr. Marszewski has
held managerial positions with Compression Labs, Inc., a videoconferencing
equipment manufacturer, and Nortel, a telecommunications equipment company. Mr.
Marszewski received a Bachelor of Arts degree in Psychology from Seton Hall
University.
Michele Shannon has served as our Vice President of Sales since October 1996.
From March 1995 to October 1996, Ms. Shannon was Director of Worldwide Channel
Sales and Marketing at NetManage, Inc., an international supplier of standards-
based intranet software. Ms. Shannon served from December 1991 to February 1995
as Director of Field Marketing at Novell, Inc., a networking applications
company. Ms. Shannon has also held sales and marketing positions with
Businessland Inc., a retailer of advanced office equipment and computer
systems. Ms. Shannon received a Bachelor of Arts degree in music from Arizona
State University.
Anthony Spielman has served as our Vice President of Marketing since May 1999.
From September 1997 until December 1998, Mr. Spielman was Senior Director of
U.S. Sales and Business Development for Teltrend Ltd., a European and U.S.-
based networking company. From May 1994 to October 1997, Mr. Spielman served as
Vice President of Marketing and Asian Sales for SBE, Inc., a data
communications company. Mr. Spielman has also held marketing positions at
Asante Technologies, Inc., a manufacturer of networking products, 3Com
Corporation, Network Systems Corporation, a manufacturer of secure networking
and provider of intranet solutions, and the Hewlett-Packard Company.
Tsyr-Yi (Shirley) Sun has served as our Director of IP Telephony since April
1998. From February 1994 to March 1998, Ms. Sun worked for 3Com Corporation as
an Engineering Manager. From August 1991 to February 1994, Ms. Sun was a
founder and an Engineering Manager with Centrum Communications, Inc., a
networking company acquired by 3Com Corporation in early 1994. Ms. Sun received
a Bachelor of Science degree in Mechanical Engineering from National Central
University in Taiwan and a Master of Science degree in computer science from
Utah State University. We have appointed Ms. Sun to replace En-Kuang Lung as
our Vice President of Research and Development effective upon Mr. Lung's
resignation.
Richard Black has served as a Director of AltiGen since May 1999. Since
December 1987, he has served as a director of Oak Technology, Inc., a supplier
of semiconductor products to the personal computer and consumer electronics
markets. He also served as President of Oak from January 1998 to March 1999 and
has been Vice-Chairman of Oak since March 1999. Currently, Mr. Black also sits
on the boards of directors of
42
<PAGE>
investment advisors and investment banking companies Gabelli Funds, Inc. and
Gabelli Asset Management, Inc. Mr. Black also sits on the boards of GSI
Lumonics Inc., a manufacturer of laser scanning systems and components, and
Morgan Group, Inc., a public transportation services company. From April 1987
until December 1998, he was a general partner of KBA Partners, L.P., a venture
capital firm. He has also served in managerial positions with Vulcan Material
Company, a producer of construction materials. Mr. Black received a Bachelor of
Science degree in Engineering from Texas A&M University, a Masters in Business
Administration from Harvard University and an honorary Ph.D. from Beloit
College.
Wen-Huang (Simon) Chang has served as a Director of AltiGen since June 1994.
From July 1991 to January 1995, he was Chairman of Centrum Technology
Corporation, a networking company. From August 1991 to early 1994, he served as
a director of Centrum Communications, Inc., a networking company acquired by
3Com Corporation in early 1994. Mr. Chang received a Bachelor of Science Degree
in Forest Industry from the National Taiwan University in Taiwan. Mr. Chang is
a brother-in-law of Gilbert Hu, our President and Chief Executive Officer and a
Director.
Thomas Shao has served as a Director of AltiGen since April 1996. Since
September 1997, Dr. Shao has served as Managing Director of Technology
Associates Management Co., Ltd., a venture fund manager consisting of five
employees. From September 1995 to September 1997, Dr. Shao was a senior
consultant for Technology Associates Corporation of Taiwan, a venture capital
firm. From September 1985 to September 1995, he served as Senior Vice President
of DynaTech Development Corporation, a management consulting and investment
firm. Prior to 1985, Mr. Shao held positions with AT&T/Bell Labs and IBM. In
addition to AltiGen, Dr. Shao is a member of the board of directors of AboveNet
Communications Inc., a colocation company. Dr. Shao received a Bachelor of
Science degree in Mechanical Engineering from the National Taiwan University in
Taiwan, a Masters of Science in Aeronautical Engineering from the University of
Illinois and a Ph.D. in Applied Mathematics and Computer Science from the
University of Illinois.
Masaharu Shinya has served as a Director of AltiGen since April 1999. From July
1990 to March 1999, he served as President of Kanematsu Semiconductor
Corporation, Mr. Shinya continues to serve as an advisor to Kanematsu
Semiconductor Corporation. Mr. Shinya was on the board of directors for Quality
Semiconductor, Inc., a semiconductor manufacturer, until its acquisition by
Integrated Device Technology, Inc. Mr. Shinya received a Bachelors degree in
Economics from Waseda University in Japan.
Kenneth Tai has served as a Director of AltiGen since April 1998. Since March
1996, Mr. Tai has been the Chairman of InveStar Capital (Taiwan), Inc., a
venture capital firm. Since April 1998, Mr. Tai also has served as the chairman
of DigiTimes Publication, Inc., a daily electronic newspaper reporting on
technology issues in Taiwan. From March 1993 to December 1995, Mr. Tai served
as the Vice-Chairman of UMAX USA, which makes computer peripherals. Mr. Tai was
one of the co-founders of the Acer Group, and held various positions with the
Acer Group, including Vice President of Worldwide Sales and Marketing, and
President of the Acer Group USA from 1990 to March 1993. Mr. Tai received a
Bachelor of Science degree in Electrical Engineering from the National Chiao
Tung University in Taiwan and a Masters in Business Administration from Tamkang
University in Taiwan.
Classified Board and Tenure of Officers
Our by-laws provide that, following the closing of this offering, our Board of
Directors will be divided into three classes of directors, with each class
serving a staggered three-year term. As a result, a portion of our Board of
Directors will be elected each year. To implement the classified structure,
prior to the consummation of the offering, two of the nominees to the Board
will be elected to one-year terms, two will be elected to two-year terms and
three will be elected to three-year terms. Thereafter, directors will be
elected for three-year terms. Thomas Shao and Kenneth Tai have been designated
Class I directors whose term expires at the 2000 annual meeting of
stockholders. Richard Black and Wen-Huang (Simon) Chang have been designated
Class II directors whose term expires at the 2001 annual meeting of
stockholders. Masaharu Shinya and Gilbert Hu have been designated Class III
directors whose term expires at the 2002 annual meeting of stockholders.
43
<PAGE>
Each executive officer is appointed by the Board of Directors and serves until
his or her successor has been duly elected and qualified or until his or her
earlier resignation or removal.
Board Committees
Our Board of Directors currently has two committees: an Audit Committee and a
Compensation Committee.
The Audit Committee makes recommendations to our Board of Directors regarding
the selection of independent auditors, reviews the results and scope of audit
and other services provided by our independent auditors and reviews the
accounting principles and auditing practices and procedures to be used for our
financial statements.
The Compensation Committee reviews and makes recommendations to our Board of
Directors regarding the compensation of officers and other managerial
employees.
Compensation Committee Interlocks and Insider Participation
Mr. Hu, our President and Chief Executive Officer, also is a member of the
Compensation Committee of our Board of Directors. None of our executive
officers serves as a member of the Board of Directors or compensation committee
of another entity that has one or more executive officers serving on our Board
of Directors or compensation committee.
Director Compensation and Other Arrangements
Our directors do not receive cash compensation for their services as directors,
but are reimbursed for their reasonable and necessary expenses associated with
attendance of meetings of the Board of Directors and its committees.
Additionally, in April 1998, our non-employee directors each received options
to purchase 5,989 shares of our common stock at $0.83 per share under our 1994
Stock Option Plan. At that time, our non-employee directors were Messrs. Chang,
Lin, Shao and Tai. In June 1999 our directors Messrs. Black and Shinya each
were granted options to purchase 5,989 shares of our common stock at $11.69 per
share under our 1999 Stock Option Plan.
Executive Compensation
The following table sets forth the compensation earned for services rendered to
AltiGen in all capacities for fiscal year 1998 by our Chief Executive Officer
and our other most highly compensated executive officers whose salary and bonus
during the last completed fiscal year exceeded $100,000. These individuals are
referred to as the "Named Executive Officers" here and elsewhere in this
prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------- ------------
Bonus and Securities
Salary Commissions Underlying
Name and Principal Position ($) ($) Options (#)
--------------------------- ------ ----------- ------------
<S> <C> <C> <C>
Gilbert Hu................................ $120,000 $30,218 299,463
President and Chief Executive Officer
Simon Chouldjian.......................... 110,004 -- 47,914
Vice President of Manufacturing
Michele Shannon........................... 120,000 33,616 1,431
Vice President of Sales
</TABLE>
44
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to stock
options granted to the Named Executive Officers in fiscal year 1998. The
figures representing percentages of total options granted to employees in the
fiscal year 1998 are based on an aggregate of 856,706 options granted by us
during the fiscal year ended September 30, 1998 to our employees and
consultants, including the Named Executive Officers.
Also shown below is the potential realizable value over the term of the option.
In accordance with the rules of the Securities and Exchange Commission, we have
based our calculation of the potential realizable value on the term of the
option at its time of grant, and we have assumed that:
. the value of our stock at the initial public offering price appreciates at
the indicated annual rate compounded annually for the entire term of the
option; and
. the option is exercised and sold on the last day of its term for the
appreciated stock price.
These amounts are based on 5% and 10% assumed rates of appreciation and do not
represent our estimate of future stock prices. Actual gains, if any, on stock
option exercises will be dependent on the future performance of the common
stock. The gains shown are net of the option exercise price, but do not include
deductions for taxes and other expenses payable upon the exercise of the option
or for sale of underlying shares of common stock. Unless otherwise indicated,
the options in this table were granted under the 1994 Stock Option Plan, have
10-year terms, and vest over a period of four years. Twenty-five percent of the
shares subject to each option will vest on the first anniversary of the vesting
start date, and 1/48th of the shares subject to each option will vest each
month thereafter. All of the options have exercise prices equal to the fair
market value of our common stock on the date of grant.
Option Grants During Fiscal Year Ended September 30, 1998
<TABLE>
<CAPTION>
Percent of Potential Realizable
Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Price Appreciation
Underlying Employees Exercise Price for Option Term ($)
Options In Fiscal Per Share Expiration ---------------------
Name Granted (#) Year 1998 ($/share) Date(1) 5% 10%
---- ----------- ---------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gilbert Hu(2)........... 299,463 35.0% $0.23 10/30/07 $4,809,060 $7,698,422
Simon Chouldjian(3)..... 47,914 5.6 0.23 10/30/07 769,448 1,231,746
Michele Shannon......... 1,431 0.2 0.23 10/30/07 22,980 36,787
</TABLE>
- -------------------
(1) The options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated.
(2) The vesting start date for the options granted to Mr. Hu is July 1, 1994.
(3) The vesting start date for the options granted to Mr. Chouldjian is June 9,
1997.
45
<PAGE>
Aggregate Option Exercises in Last Fiscal Year
The following table summarizes the value of options held at September 30, 1998
by our Named Executive Officers. The value of unexercised in-the-money options
at September 30, 1998 figures in the right-hand columns are based on the
difference between the initial public offering price of $10.00 per share and
the per-share exercise price, multiplied by the number of shares issued upon
exercise of the option.
Aggregated Option Exercises in Fiscal Year Ended September 30, 1998
<TABLE>
<CAPTION>
Value of
Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at
Shares Options at September 30, 1998
Acquired on Value September 30, 1998 (#) ($)
Exercise Realized ---------------------- --------------------
Name (#) ($) Vested Unvested Vested Unvested
---- ----------- -------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gilbert Hu.............. -- -- 618,872 -- $6,078,310 $
Simon Chouldjian........ -- -- 14,973 32,941 146,286 321,834
Michele Shannon......... 22,459 $220,772 6,239 32,625 61,329 320,618
</TABLE>
Employee Benefit Plans
1994 Stock Option Plan
Our Board of Directors has adopted, and our stockholders have approved, the
1994 Stock Option Plan, under which stock options may be granted to our
officers, employees, consultants and outside directors. As of June 30, 1999,
2,096,246 shares of common stock have been exercised or reserved for issuance
under our 1994 Stock Option Plan. Any options which have been granted but which
expire or terminate unexercised are returned to the plan and may be granted at
a later date to any qualified recipient. As of June 30, 1999, there were a
total of 1,573,753 options outstanding under the 1994 Stock Option Plan.
The Compensation Committee of our Board of Directors administers our 1994 Stock
Option Plan. The Committee has the authority to interpret the 1994 Stock Option
Plan and to determine:
. the persons to whom options are granted;
. when options are granted;
. the number of shares subject to each option; and
. the terms and conditions associated with each option, including the
exercise price and the time period during which the option will be
exercisable.
Our 1994 Stock Option Plan permits the grant of stock options that qualify as
incentive stock options, or ISOs, under Section 422 of the Internal Revenue
Code, and non-qualified stock options, or NSOs, which do not so qualify. The
exercise price of options granted under our 1994 Stock Option Plan may not be
less than 100% of the fair market value of our common stock on the date of
grant in the case of ISOs, and not less than 85% of the fair market value of
our common stock on the date of grant in the case of NSOs. In addition, the
exercise price of options granted to a greater than 10% stockholder may not be
less than 110% of the fair market value on the date of grant. The value of
common stock subject to ISOs that become exercisable by any one employee in any
calendar year may not exceed $100,000.
The term of each option granted under our 1994 Stock Option Plan is determined
by our Board's Compensation Committee; provided that the maximum term of any
option granted under the 1994 Stock Option Plan is ten years or, in the case of
an option granted to a greater than 10% stockholder, five years.
46
<PAGE>
Generally, options granted under our 1994 Stock Option Plan vest and become
exercisable over a four-year period. In the event there is a change of control
of AltiGen, all of the unexercised options granted under our 1994 Stock Option
Plan will terminate unless those options are assumed or substituted by the
successor corporation (or a parent or subsidiary thereof). The 1994 Stock
Option Plan may be terminated or suspended by our Board of Directors in its
sole discretion.
1998 Stock Purchase Plan
Our Board of Directors has adopted, and our stockholders have approved,
AltiGen's 1998 Stock Purchase Plan, pursuant to which 15,452 shares of series D
preferred stock were reserved for issuance to some of our employees,
consultants, and outside directors. The 1998 Stock Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code.
Our Board of Directors or a Board committee administers our 1998 Stock Purchase
Plan. The Board or committee has authority to set the purchase price of shares
subject to the 1998 Stock Purchase Plan; provided, however, that the price of
each share purchased under our 1998 Stock Purchase Plan may not be less than
85% of the fair market value at the time of purchase and, in the case of a
purchase by a greater than 10% stockholder, the price may not be less than 110%
of the fair market value.
1999 Stock Option Plan
Our Board of Directors has adopted, and our stockholders have approved,
AltiGen's 1999 Stock Option Plan, under which stock options may be granted to
our officers, employees, consultants and outside directors. 2,096,246 shares of
common stock have been reserved for issuance under the 1999 Stock Option Plan.
An annual increase will be added on the first day of our fiscal year beginning
in 2000 equal to the lesser of:
. 3,000,000 shares;
. 5% of the outstanding shares on that date; or
. an amount determined by the Board of Directors.
Any options which have been granted but which expire or terminate unexercised
are returned to the plan and may be granted at a later date to any qualified
recipient. As of June 30, 1999, there were a total of 195,883 options
outstanding under the 1999 Stock Option Plan.
The Compensation Committee of our Board of Directors administers our 1999 Stock
Option Plan. The Committee has the authority to interpret the 1999 Stock Option
Plan and to determine:
. the persons to whom options are granted;
. when options are granted;
. the number of shares subject to each option;
. the terms and conditions associated with each option, including the
exercise price and the time period during which the option will be
exercisable; and
. the forms of agreement for use under the 1999 Stock Option Plan.
Our 1999 Stock Option Plan permits the grant of stock options that qualify as
ISOs under Section 422 of the Internal Revenue Code, and NSOs which do not so
qualify. The exercise price of options granted under our 1999 Stock Option Plan
may not be less than 100% of the fair market value of our common stock on the
date of grant in the case of ISOs, and not less than 85% of the fair market
value of the common stock on the date of grant in the case of NSOs. Also, the
exercise price of options granted to a greater than 10% stockholder may not be
less than 110% of the fair market value on the date of grant. The value of
common stock subject to ISOs that become exercisable by any one employee in any
calendar year may not exceed $100,000.
47
<PAGE>
Our Board's Compensation Committee determines the term of each option granted
under our 1999 Stock Option Plan; provided that the maximum term of any option
granted under the 1999 Stock Option Plan is ten years or, in the case of an
option granted to a greater than 10% stockholder, five years. Generally,
options granted under our 1999 Stock Option Plan vest and become exercisable
over a four-year period. In the event there is a change of control of AltiGen,
any unexercised options granted under our 1999 Stock Option Plan may be assumed
or substituted by the successor corporation. Any unexercised options not
assumed or substituted will become fully vested and exercisable, and the
optionee will be provided a fixed time period in which to exercise those
options. Any options that remain unexercised at the end of that period will
immediately terminate. At its sole discretion, our Board of Directors may
terminate or suspend the 1999 Stock Option Plan.
1999 Employee Stock Purchase Plan
Our Board of Directors has adopted, and our stockholders have approved, the
1999 Employee Stock Purchase Plan, which will be effective upon the completion
of this offering. Initially, 500,000 shares of common stock will be reserved
for issuance under the 1999 Employee Stock Purchase Plan. An annual increase
will be added on the first day of our fiscal year beginning in 2000 equal to
the lesser of:
. 1,000,000 shares;
. 2% of the outstanding shares on that date; or
. an amount determined by the Board of Directors.
The 1999 Employee Stock Purchase Plan, which is intended to qualify under
Section 423 of the Code, will be administered by the Board of Directors or by a
committee of the Board. Our employees, including officers and directors of
AltiGen who are also employees, or any subsidiary designated by the Board of
Directors for participation in the 1999 Employee Stock Purchase Plan, are
eligible to participate in the 1999 Employee Stock Purchase Plan if they are
customarily employed for more than 20 hours per week and more than five months
per year. The 1999 Employee Stock Purchase Plan will be implemented by
consecutive offering periods generally six months in duration. However, the
first offering period under the 1999 Employee Stock Purchase Plan will commence
on the effective date of this offering and terminate on or before July 31,
2001. The Board of Directors may change the dates or duration of one or more
offering periods.
The 1999 Employee Stock Purchase Plan permits our eligible employees to
purchase shares of common stock through payroll deductions at 85% of the lower
of the fair market value of the common stock on the first day of the offering
period or a specified exercise date. Participants generally may not purchase
shares on any exercise date, to the extent that, immediately after the grant,
the participant would own stock or options to purchase stock totaling 5% or
more of the total combined voting power of all stock of AltiGen, or greater
than $25,000 worth of our stock in any calendar year. In addition, no more than
10,000 shares may be purchased by any participant during any offering period.
In the event of a sale or merger of AltiGen, the Board may accelerate the
exercise date of the current purchase period to a date prior to the change of
control, or the acquiring corporation may assume or replace the outstanding
purchase rights under the 1999 Employee Stock Purchase Plan.
48
<PAGE>
Principal Stockholders
The following table sets forth information regarding the beneficial ownership
of shares of our common stock as of June 30, 1999 and as adjusted to reflect
the sale of shares in this offering. The table shows ownership by:
. each person or entity known to us to own beneficially more than 5% of the
shares of our outstanding stock;
. each of our directors;
. each of our named executive officers; and
. all of our directors and executive officers as a group.
The percentage ownership figures are based on 9,571,049 shares of common stock
outstanding as of June 30, 1999 and 12,821,049 shares outstanding after
completion of this offering. The percentage ownership figures shown in the
"After Offering" column in following table are adjusted to reflect the
conversion of all outstanding shares of preferred stock upon the closing of
this offering, assume no exercise of the underwriters' overallotment option and
do not include shares issuable upon conversion of options outstanding as of
June 30, 1999.
Unless otherwise indicated, the principal address of each of the stockholders
below is: c/o AltiGen Communications, Inc., 47427 Fremont Boulevard, Fremont,
California 94538. Except as otherwise indicated in the footnotes to this table,
and subject to applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares of
AltiGen common stock as beneficially owned by them.
<TABLE>
<CAPTION>
Percent of Shares
Number of Beneficially Owned
Name and Address Shares Beneficially ------------------------------
of Beneficial Owner Owned(1) Before Offering After Offering
------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
Directors and Executive
Officers
Gilbert Hu(2)(10)...... 1,429,459 14.0% 10.6%
Kenneth Tai(3)......... 900,385 9.4 7.0
Wen-Huang (Simon)
Chang(4)(10).......... 599,400 6.3 4.7
Thomas Shao(5)......... 211,495 2.2 1.6
Masaharu Shinya........ 119,785 1.3 *
Simon Chouldjian(6).... 45,531 * *
Michele Shannon(7)..... 46,072 * *
Tsyr-Yi (Shirley)
Sun(8)................ 16,569 * *
Philip McDermott....... -- -- --
Richard Black.......... -- -- --
All directors and
executive officers as
a group (10 persons).. 3,368,696 32.8 24.9
5% Stockholders
Technology Associates
Corporation(9)........ 942,815 9.9 7.4
11F 201, Chien Kuo
South Road,
Section 2, Taipei,
Taiwan R.O.C.
Shing-Kao (Jerry)
Liao.................. 496,737 5.2 3.9
</TABLE>
- -------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares. Shares of common stock subject to
options that are currently exercisable or exercisable within 60 days of
June 30, 1999 are deemed to be outstanding and to be beneficially owned by
the person holding such options for the purpose of computing the percentage
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
(2) Includes 11,978 shares registered in the name of Mr. Hu's wife May Kuei-
Rong Hu, 99,841 registered in the name of his daughter Michelle Hu, and
99,841 shares registered in the name of his daughter Stephanie Hu. Also
includes vested, but unexercised, options held by Mr. Hu to purchase
618,872 shares.
49
<PAGE>
(3) Includes shares held by the following affiliated entities: 598,927 shares
registered in the name of InveStar Burgeon Venture Capital, Inc.; 99,821
shares registered in the name of InveStar Dayspring Venture Group, Inc.;
99,821 shares registered in the name of InveStar Excelsus Venture Capital
(Int'l) Inc., LDC; and 99,820 shares registered in the name of Forefront
Venture Partners, L.P. Director Kenneth Tai is a general partner of all of
the above entities and disclaims beneficial ownership of the securities
held by the entities except for his proportional interest in the entities.
Also includes vested, but unexercised, options held by Mr. Tai to purchase
1,996 shares.
(4) Includes 149,730 shares registered in the name of Mr. Chang's wife, Hsiang-
Li Chang Hu, and 143,741 shares registered in the name of his daughter Ya-
Ting Chang. Also includes vested, but unexercised, options held by Mr.
Chang to purchase 1,996 shares.
(5) Includes 179,678 shares registered in the name of Techgains Corporation, of
which Mr. Shao is managing director, and 17,967 shares registered in the
name of TSS Enterprises. Also includes 11,854 vested, but unexercised,
shares held by TSS Enterprises. Mr. Shao disclaims beneficial ownership of
the securities held by these entities except for his proportional interest
in the entities. Also includes vested, but unexercised, options held by Mr.
Shao to purchase 1,996 shares.
(6) Includes vested, but unexercised, options held by Mr. Chouldjian to
purchase 25,953 shares.
(7) Includes vested, but unexercised, options held by Ms. Shannon to purchase
20,619 shares.
(8) Includes vested, but unexercised, options held by Ms. Sun to purchase
14,773 shares.
(9) Includes 140,309 shares registered in the name of affiliated entity Tech
Alliance Corporation.
(10) Mr. Hu and Mr. Chang are brothers-in-law.
50
<PAGE>
Certain Transactions
Equity Investment Transactions
Series B Preferred Stock. In August 1995 and January 1996, we sold 1,494,478
shares of our series B preferred stock for $1.17 per share. The purchasers of
the series B preferred stock included, among others:
<TABLE>
<CAPTION>
Shares of
Purchaser Series B Preferred Stock
--------- ------------------------
<S> <C>
Tricia Chu(1)...................................... 119,785
Shing-Kao (Jerry) Liao............................. 118,396
Gilbert Hu(2)...................................... 79,837
Hsiang-Li Chang Hu(3).............................. 52,005
Ya-Ting Chang(3)................................... 52,005
Nicholas Shih(4)................................... 29,946
Diana Shih(4)...................................... 29,946
En-Kuang Lung...................................... 23,957
Chang-Hou Lin...................................... 23,679
</TABLE>
- -------------------
(1) Of the 119,785 series B shares purchased by Ms. Chu, 17,967 were
subsequently transferred to other individuals.
(2) Mr. Hu subsequently transferred all 79,837 shares to his sister Hsiang-Li
Chang Hu.
(3) Hsiang-Li Chang Hu is the spouse, and Ya-Ting Chang is the child, of
director Wen-Huang (Simon) Chang. Ms. Chang Hu is the sister of our
President and Chief Executive Officer Gilbert Hu.
(4) Nicholas Shih is the son, and Diana Shih is the daughter, of our Vice
President of Finance and Administration Tricia Chu.
Series C Preferred Stock. From June 1996 to December 1997, we sold 3,593,512
shares of our series C preferred stock at a weighted average price of $2.19 per
share. The purchasers of our series C preferred stock included, among others:
<TABLE>
<CAPTION>
Shares of
Purchaser Series C Preferred Stock
--------- ------------------------
<S> <C>
Entities affiliated with Technology Associates
Corporation(1)................................... 598,927
Entities affiliated with InveStar Capital,
Inc.(2).......................................... 598,927
Entities affiliated with Techgains Corpora-
tion(3).......................................... 335,399
Shing-Kao (Jerry) Liao............................ 158,715
Masaharu Shinya................................... 119,785
Wen-Huang (Simon) Chang(4)........................ 64,363
Hsiang-Li Chang Hu(4)............................. 61,790
Ya-Ting Chang(4).................................. 43,822
Chin-Tzu Lin Wu(5)................................ 47,914
May Kuei-Rong Hu(6)............................... 11,978
Simon Chouldjian.................................. 5,989
Michele Shannon................................... 2,994
</TABLE>
- -------------------
(1) Technology Associates Corporation and Tech Alliance Corporation are
affiliated. Together, these entities are considered a greater than 5%
stockholder of AltiGen.
(2) InveStar Capital, Inc. includes affiliated entities InveStar Burgeon
Venture Capital, Inc., InveStar Dayspring Venture Capital Group, Inc.,
InveStar Excelsus Venture Capital (Int'l) Inc., LDC. and Forefront Venture
Partners L.P. Together, these entities are considered a greater than 5%
stockholder of AltiGen. Director Kenneth Tai is a general partner of all of
the above funds, and disclaims beneficial ownership of the securities held
by such entities, except for his proportional interest in the entities.
(3) Techgains Corporation is affiliated with Tekkang Management Consulting Inc.
and TSS Enterprises. Together, these entities are considered a greater than
5% stockholder of AltiGen. Director Thomas Shao is a Managing Director of
Techgains Corporation and a joint owner and principal of TSS Enterprises.
(4) Hsiang-Li Chang Hu is the spouse, and Ya-Ting Chang is the child, of
director Wen-Huang (Simon) Chang. Ms. Chang Hu is the sister of our
President and Chief Executive Officer Gilbert Hu.
(5) Chin-Tzu Lin Wu is the mother-in-law of our Vice President of Research and
Development En-Kuang Lung.
(6) May Kuei-Rong Hu is the spouse of our President and Chief Executive Officer
Gilbert Hu.
51
<PAGE>
Series D Preferred Stock. In April, August and September 1998 and May 1999, we
sold a total of 1,423,194 shares of our series D preferred stock at a weighted
average price of $9.57 share. The purchasers of our series D preferred stock
included, among others:
<TABLE>
<CAPTION>
Shares of
Purchaser Series D Preferred Stock
--------- ------------------------
<S> <C>
Entities affiliated with Technology Associates
Corporation(1)................................... 343,888
Entities affiliated with InveStar Capital,
Inc.(2).......................................... 299,463
Entities affiliated with Kanematsu Corpora-
tion(3).......................................... 128,303
Wen-Huang (Simon) Chang........................... 83,849
Tsyr-Yi (Shirley) Sun............................. 1,796
</TABLE>
- -------------------
(1) Technology Associates Corporation and Tech Alliance Corporation are
affiliated. Together, these entities are considered a greater than 5%
stockholder of AltiGen.
(2) InveStar Capital, Inc. includes affiliated entities InveStar Burgeon
Venture Capital, Inc., InveStar Dayspring Venture Capital Group, Inc.,
InveStar Excelsus Venture Capital (Int'l) Inc., LDC. and Forefront Venture
Partners L.P. Together, these entities are considered a greater than 5%
stockholder of AltiGen. Director Kenneth Tai is a general partner of all of
the above funds, and disclaims beneficial ownership of the securities held
by such entities, except for his proportional interest in the entities.
(3) Kanematsu Corporation, Kanematsu Semiconductor Corporation, and Kanematsu
USA, Inc. are affiliated entities. Director Masaharu Shinya formerly was
President of Kanematsu Semiconductor Corporation.
Distributor Agreement with Kanematsu Semiconductor Corporation
In a distributor agreement dated as of April 1997, we granted Kanematsu
Semiconductor Corporation a non-exclusive, non-transferable right to market and
distribute certain of our products to original equipment manufacturers, system
integrators and dealers in several East and South Asian countries, including
Japan, China, Korea, Taiwan, Singapore, the Philippines and India. At the time
we signed this agreement, Mr. Shinya, who is currently one of our directors,
was the President of Kanematsu Semiconductor Corporation. In fiscal year 1998,
our agreement with Kanematsu Semiconductor generated approximately $82,000 in
revenue to us. Unless terminated by written notice provided by either party,
the distributor agreement automatically renews on an annual basis.
Employment Contract with Tricia Chu
In March 1999, we entered into an employment contract with Tricia Chu, our Vice
President of Finance and Administration. Ms. Chu currently holds options that,
when fully vested, will have an aggregate exercise price of $138,000. The
contract provides that in the event Ms. Chu is terminated without cause all of
her options will immediately vest and become exercisable.
Employment Contract with Philip McDermott
In June 1999, we entered into an employment contract with Philip McDermott, our
Chief Financial Officer. Mr. McDermott currently holds options that, when fully
vested, will have an aggregate exercise price of $840,000. The contract
provides that in the event of a change of control of AltiGen immediately after
which Mr. McDermott no longer holds the title and responsibilities of Chief
Financial Officer (or a position of similar title and responsibilities), all of
his options will immediately vest and become exercisable.
Conversion of Promissory Notes by Simon Chouldjian
Between February and June 1997, we issued five promissory notes to Simon
Chouldjian, now our Vice President of Manufacturing, in return for consulting
services. In these notes, we agreed to sell Mr. Chouldjian a total of 22,689
(pre-split) shares of our preferred stock at the price of our preferred stock
as of the date of each note. Between September 1995 and December 1998, we also
issued promissory notes to other persons for consulting services. In June 1999,
the Board authorized the conversion of these notes; and the noteholders,
including Mr. Chouldjian, agreed to accept one share of common stock in lieu of
each share of preferred stock. In the aggregate, we received approximately
$378,000 from the noteholders for conversion of their notes. The original
principal amount of Mr. Chouldjian's notes totaled approximately $31,000.
52
<PAGE>
Description of Capital Stock
Authorized Shares
Immediately following the closing of this offering, our authorized capital
stock will consist of 50,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share,
issuable in series. As of June 30, 1999, and assuming the conversion of all
outstanding shares of preferred stock into shares of common stock that will
occur upon the closing of this offering, there were outstanding 9,571,049
shares of common stock held by 179 stockholders.
Common Stock
The holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available in such amounts as our Board may from
time to time determine. These rights may be subordinate to the rights of
holders of outstanding shares of preferred stock. Each stockholder is entitled
to one vote for each share of common stock held on all matters submitted to a
vote of stockholders. The common stock is not entitled to preemptive rights and
is not subject to conversion or redemption. Upon a liquidation, dissolution or
winding up of AltiGen, and after payment of claims of creditors, the assets
legally available for distribution to stockholders are to be distributed
ratably among the holders of the common stock and any participating preferred
stock outstanding at the time after payment of liquidation preferences.
Preferred Stock
Our certificate of incorporation authorizes our Board of Directors to create
and issue one or more series of preferred stock and to determine the rights and
preferences of each wholly unissued series and any qualifications, limitations
or restrictions thereon. Among other rights, our Board may determine, without
further vote or action by our stockholders, dividend rights, voting rights,
redemption rights, conversion rights, liquidation preferences and the number of
shares constituting any series or the designation of any series. The issuance
of preferred stock could, among other things, have the effect of delaying,
deferring or preventing a change in control of AltiGen without further action
by the stockholders, and may adversely affect the voting and other rights of
the holders of our common stock. The issuance of preferred stock with voting
and conversion rights may have the effect of decreasing the market price of our
common stock, and may adversely affect the voting power of the holders of our
common stock, including the loss of voting control to others. Upon the
completion of this offering, each outstanding share of preferred stock will be
converted into a share of common stock, leaving no shares of preferred stock
issued or outstanding. At present, we have no plans to issue any shares of
preferred stock after the completion of this offering.
Registration Rights
After this offering, the holders of approximately 8,146,156 shares of common
stock will be entitled to rights with respect to the registration of those
shares under the Securities Act of 1933. Under the terms of the agreements
between us and the holders of such registrable securities, if we propose to
register any of our securities under the Securities Act of 1933, either for our
own account or for the account of other security holders exercising
registration rights, the holders are entitled to notice of the registration and
are entitled to include their shares in the registration. Additionally, a
majority of the holders of these shares of common stock may require us on no
more than one occasion to file a registration statement under the Securities
Act of 1933 at our expense with respect to the shares of common stock, and we
are required to use our best efforts to effect that registration. Moreover, the
holders of at least 30% of these shares of common stock may require us to file
additional registration statements at our expense. All of these registration
rights are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to defer a registration, or to limit the
number of shares included in a registration.
53
<PAGE>
Limitations on Director Liability
Our certificate of incorporation provides that, to the fullest extent permitted
by the Delaware General Corporation Law, none of our directors will be
personally liable to our stockholders for monetary damages, subject to our
reincorporation in Delaware. Section 102(b)(7) of the Delaware General
Corporation Law provides that a director's liability for breach of fiduciary
duty may be eliminated, except for liability:
. for any breach of the director's duty of loyalty to the corporation or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, for unlawful
dividends or unlawful stock repurchase or redemptions; and
. for any transaction from which the director derives an improper personal
benefit.
Any amendment to these provisions of the Delaware General Corporation Law will
automatically be incorporated by reference into our certificate of
incorporation, without any vote on the part of our stockholders unless
otherwise required.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permitted by Delaware law. Generally, we are required to
indemnify our directors and officers for all:
. judgments;
. fines;
. settlements;
. legal fees; and
. other expenses incurred in connection with pending or threatened legal
proceedings arising from the director's or officer's position with us.
In addition to the indemnification provided for in our bylaws, we have entered
into agreements to indemnify our directors and executive officers. These
agreements, among other things, indemnify each of our directors and executive
officers for all expenses, including attorneys' fees, judgments, fines and
approved settlement amounts, incurred in any action or proceeding arising from
the fact that the individual; is or was serving as a director, officer,
employee, agent or fiduciary of us, of one of our subsidiaries or, if at our
request, of another company or enterprise. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
Delaware law and certain provisions of our certificate of incorporation and
bylaws
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of our company by means of a
tender offer, a proxy contest, or otherwise, and the removal of incumbent
officers and directors. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of our company to first negotiate
with us. We believe that the benefits of increased protection of our company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweighs the
disadvantages of discouraging such proposals, including proposals that are
priced above the then current market value of our common stock, because, among
other things, negotiation of such proposals could result in an improvement of
their terms.
54
<PAGE>
We are subject to section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the date such stockholder became an interested stockholder,
unless:
. prior to such date the Board of Directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
. on or subsequent to such date, the Board of Directors approves the
business combination and the stockholders authorize the business
combination at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt of the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
Our certificate of incorporation and bylaws require that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by a
consent in writing. In addition, special meetings of our stockholders may be
called only by the Board of Directors or certain of our officers. Our bylaws
provide that, beginning upon the closing of the offering, our Board of
Directors will be divided into three classes, with each class serving staggered
three-year terms. These provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of our company.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is EquiServe L.P. Its
address is 150 Royall Street, Canton, Massachusetts 02021. Its telephone number
at this location is (781) 575-3010.
55
<PAGE>
Shares Eligible for Future Sale
Shares Eligible for Future Sale
When this offering is completed, we will have a total of 12,821,049 shares of
common stock outstanding, assuming no exercise of outstanding options. The
3,250,000 shares offered by this prospectus will be freely tradeable unless
they are purchased by our "affiliates," as defined in Rule 144 under the
Securities Act of 1933. The remaining 9,571,049 shares are "restricted," which
means they were originally sold in offerings that were not subject to a
registration statement filed with the Securities and Exchange Commission. These
restricted shares may be resold only through registration under the Securities
Act of 1933 or under an available exemption from registration, such as provided
through Rule 144.
Under Rule 144, Rule 701 and subject to certain volume limitations, none of the
9,571,049 restricted shares are expected to be immediately eligible for sale
upon consummation of this offering, 8,877,327 of the restricted shares will be
eligible for sale beginning the 91st day after the date of this offering, and
693,722 will become saleable after April 2000. However, all of the 9,571,049
restricted shares eligible for sale under Rule 144 are subject to 180-day
"lock-ups."
Rule 144
In general, under Rule 144, a person, or persons whose shares are aggregated,
who has beneficially owned restricted securities for at least one year,
including the holding period of any holder who is not an affiliate, is entitled
to sell within any three month period a number of our shares of common stock
that does not exceed the greater of:
. 1% of the then-outstanding shares of our common stock; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. A person
who is not deemed an affiliate of ours at any time during the 90 days preceding
a sale and who has beneficially owned shares for at least two years, including
the holding period of any prior owner who is not an affiliate, would be
entitled to sell shares following this offering under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
or notice requirements of Rule 144.
Rule 701 and Options
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to AltiGen who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. All holders of Rule 701 shares are required to wait
until 90 days after the date of this prospectus before selling such shares.
However, all shares issued by us pursuant to Rule 701 are subject to lock-up
provisions and will only become eligible for sale upon the expiration of 180
days after this offering.
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering shares of common stock subject to outstanding
options or issued or issuable under our 1994 Stock Option Plan, 1999 Stock
Option Plan, 1998 Stock Purchase Plan and our 1999 Employee Stock Purchase
Plan. Based on the number of shares subject to outstanding options at June 30,
1999, and currently reserved for issuance under all such plans, such
registration statement would cover approximately 4,707,944 shares. Such
56
<PAGE>
registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market immediately after the 180-day lock-up agreements
expire. Also beginning 180 days after the date of this offering, certain
holders of shares of common stock will be entitled to certain rights with
respect to registration of such shares of common stock for offer and sale to
the public. See "Description of Capital Stock--Registration Rights".
Lock-up Agreements
The holders of all 9,571,049 shares of common stock have agreed to a 180-day
"lock-up" with respect to these shares. This generally means that they cannot
sell these shares during the 180 days following the date of this prospectus.
After the 180-day lock-up period, these shares may be sold in accordance with
Rule 144.
57
<PAGE>
Underwriting
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated, and FAC/Equities, a division of First Albany
Corporation, are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
CIBC World Markets Corp..................................... 1,320,000
Dain Rauscher Wessels ...................................... 985,000
FAC/Equities, a division of First Albany Corporation........ 335,000
Banc of America Securities LLC.............................. 50,000
Deutsche Bank Securities Inc................................ 50,000
A.G. Edwards & Sons, Inc.................................... 50,000
Hambrecht & Quist LLC....................................... 50,000
ING Barings LLC............................................. 50,000
Prudential Securities Incorporated.......................... 50,000
SG Cowen Securities Corporation............................. 50,000
Warburg Dillon Read LLC..................................... 50,000
Brean Murray & Co., Inc..................................... 30,000
Gruntal & Co., L.L.C........................................ 30,000
Pennsylvania Merchant Group................................. 30,000
Raymond James & Associates, Inc............................. 30,000
Suntrust Equitable Securities Corporation................... 30,000
Tucker Anthony Incorporated................................. 30,000
H.G. Wellington & Co. Inc................................... 30,000
---------
Total...................................................... 3,250,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised AltiGen that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to other securities dealers at such price less a concession
of $0.32 per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $0.10 per share to other dealers. After
the shares are released for sale to the public, the representatives may change
the offering price and other selling terms at various times.
AltiGen has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 487,500 additional shares
from AltiGen to cover over-allotments. If the underwriters exercise all or part
of this option, they will purchase shares covered by the option at the initial
public offering price that appears on the cover
58
<PAGE>
page of this prospectus, less the underwriting discount. If this option is
exercised in full, the total price to public will be $37,375,000, and the total
proceeds to AltiGen will be $34,758,750. The underwriters have severally agreed
that, to the extent the over-allotment option is exercised, they will each
purchase a number of additional shares proportionate to the underwriter's
initial amount reflected in the foregoing table.
The following table provides information regarding the amount of the discount
to be paid to the underwriters by us.
<TABLE>
<CAPTION>
Total without Exercise
of Over-Allotment Total with Full Exercise
Per Share Option of Over-Allotment Option
--------- ---------------------- ------------------------
<S> <C> <C> <C>
AltiGen........... $0.70 $2,275,000 $2,616,250
</TABLE>
AltiGen estimates that its total expenses of the offering, excluding the
underwriting discount, will be approximately $1,000,000.
AltiGen has agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act of 1933 and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
AltiGen, its officers and directors, and holders of approximately 9,547,092
shares of common stock have agreed to a 180-day "lock up" with respect to
shares of common stock and certain other of AltiGen securities that they
beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This "lock up" means that, subject to certain exceptions, for a
period of 180 days following the date of this prospectus, AltiGen and such
persons may not offer, sell, pledge or otherwise dispose of these securities
without the prior written consent of CIBC World Markets Corp.
The representatives have informed AltiGen that they do not expect discretionary
sales by the representatives to exceed five percent of the shares offered by
this prospectus.
The underwriters have reserved for sale up to 322,000 shares for employees,
directors and certain other persons associated with AltiGen. These reserved
shares will be sold at the initial public offering price that appears on the
cover page of this prospectus. The number of shares available for sale to the
general public in the offering will be reduced to the extent reserved shares
are purchased by such persons. The underwriters will offer to the general
public, on the same terms as other shares offered by this prospectus, any
reserved shares that are not purchased by such persons.
There is no established trading market for the shares. The offering price for
the shares has been determined by the representatives and us, based on the
following factors:
. our record of operations;
. our current financial position and future prospects;
. the experience of our management;
. the economics of our industry in general; and
. the character of the equities markets.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
59
<PAGE>
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither AltiGen nor the underwriters make any representation or prediction as
to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
60
<PAGE>
Legal Matters
The validity of the shares of common stock offered hereby will be passed upon
for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Pillsbury Madison & Sutro LLP, Palo Alto, California, is
acting as counsel for the underwriters in connection with selected legal
matters relating to the shares of common stock offered by this prospectus.
Experts
The consolidated financial statements and schedule included in this prospectus
or elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, to the extent and for the periods
indicated in their reports and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
Where Can You Find More Information
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission in connection with this offering. In addition, upon
completion of the offering, we will be required to file annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy the registration statement and any
other documents filed by us at the Securities and Exchange Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the Public Reference Room. Our Securities and Exchange
Commission filings are also available to the public at the Securities and
Exchange Commission's Internet site at "http://www.sec.gov".
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of ours, the
reference may not be complete, and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
This prospectus includes statistical data that were obtained from industry
publications generated by International Data Corporation and Frost & Sullivan.
These industry publications generally indicate that the authors of these
publications have obtained information from sources believed to be reliable,
but do not guarantee the accuracy and completeness of their information. While
AltiGen believes these industry publications to be reliable, AltiGen has not
independently verified their data.
61
<PAGE>
AltiGen Communications, Inc.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To AltiGen Communications, Inc.:
We have audited the accompanying consolidated balance sheets of AltiGen
Communications, Inc. (a Delaware corporation) and subsidiary as of September
30, 1997 and 1998 and June 30, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1998 and for the nine months ended June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AltiGen Communications, Inc.
and subsidiary as of September 30, 1997 and 1998 and June 30, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1998 and for the nine month period ended June
30, 1999 in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
-------------------------------------
Arthur Andersen LLP
San Jose, California
July 19, 1999
F-2
<PAGE>
AltiGen Communications, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
------------------------ June 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 1,987,869 $ 7,003,569 $ 7,960,700
Short-term investments................. 1,105,538 1,053,060 --
Accounts receivable, net of allowances
of $41,000, $133,000 and $200,000,
respectively.......................... 438,015 1,022,991 1,338,331
Inventories............................ 846,178 1,294,080 2,268,340
Prepaid expenses and other current
assets................................ 85,199 175,248 738,829
----------- ----------- -----------
Total current assets.................. 4,462,799 10,548,948 12,306,200
----------- ----------- -----------
Property and equipment:
Furniture and equipment................ 305,291 528,448 932,309
Computer software...................... 78,211 295,947 492,668
----------- ----------- -----------
383,502 824,395 1,424,977
Less: Accumulated depreciation......... (131,830) (271,241) (495,914)
----------- ----------- -----------
Net property and equipment............ 251,672 553,154 929,063
----------- ----------- -----------
$ 4,714,471 $11,102,102 $13,235,263
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 188,016 $ 441,457 $ 791,160
Notes payable.......................... 278,573 365,687 --
Accrued liabilities:
Payroll and related benefits.......... 47,807 91,160 179,369
Warranty.............................. 139,000 474,410 828,551
Other................................. 92,362 187,722 131,374
Deferred revenue....................... 182,168 290,778 514,867
----------- ----------- -----------
Total current liabilities............. 927,926 1,851,214 2,445,321
----------- ----------- -----------
Commitments (Note 4)
Stockholders' equity:
Convertible preferred stock, $.001 par
value; aggregate liquidation
preference of $20,990,757 at June 30,
1999; Authorized--11,978,558 shares;
Outstanding (Series A, B, C and D)
6,478,923 shares at September 30,
1997, 7,649,657 shares at September
30, 1998 and 8,146,156 shares at June
30, 1999.............................. 6,479 7,650 8,146
Common stock, $.001 par value
Authorized--23,957,117 shares
Outstanding--801,827 shares at
September 30, 1997, 871,325 shares at
September 30, 1998, 1,424,893 shares
at June 30, 1999..................... 802 871 1,425
Additional paid-in capital............. 9,685,673 20,357,168 28,991,066
Deferred stock compensation............ -- (1,288,333) (3,150,234)
Accumulated deficit.................... (5,906,409) (9,826,468) (15,060,461)
----------- ----------- -----------
Total stockholders' equity............ 3,786,545 9,250,888 10,789,942
----------- ----------- -----------
$ 4,714,471 $11,102,102 $13,235,263
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
AltiGen Communications, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended September 30, Ended June 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net........... $ 229,277 $ 1,378,528 $ 3,889,336 $ 2,558,498 $4,263,379
Cost of revenues........ 238,697 1,039,721 2,519,794 1,747,732 2,166,687
----------- ----------- ----------- ----------- -----------
Gross profit (loss).... (9,420) 338,807 1,369,542 810,766 2,096,692
Operating expenses:
Research and develop-
ment.................. 753,160 1,497,860 1,927,433 1,347,408 3,005,308
Sales and marketing.... 445,442 1,447,905 2,770,090 1,825,703 2,827,055
General and administra-
tive.................. 546,838 718,139 674,626 502,364 1,195,480
Deferred stock compen-
sation................ -- -- 163,858 82,098 577,770
----------- ----------- ----------- ----------- -----------
Total operating ex-
penses............... 1,745,440 3,663,904 5,536,007 3,757,573 7,605,613
----------- ----------- ----------- ----------- -----------
Loss from operations.... (1,754,860) (3,325,097) (4,166,465) (2,946,807) (5,508,921)
Interest and other in-
come, net.............. 123,700 206,315 246,406 138,250 274,928
----------- ----------- ----------- ----------- -----------
Net loss................ $(1,631,160) $(3,118,782) $(3,920,059) $(2,808,557) $(5,233,993)
=========== =========== =========== =========== ===========
Basic net loss per
share................. $ (2.14) $ (3.91) $ (4.75) $ (3.47) $ (4.73)
=========== =========== =========== =========== ===========
Shares used in comput-
ing basic net loss per
share................. 761,860 796,680 825,334 810,528 1,107,331
=========== =========== =========== =========== ===========
Unaudited pro forma ba-
sic net loss per
share................. $ (0.50) $ (0.59)
=========== ===========
Shares used in comput-
ing unaudited pro
forma basic net loss
per share............. 7,827,437 8,867,273
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
AltiGen Communications, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Deferred Total
---------------- ---------------- Paid-In Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Compensation Deficit Equity
--------- ------ --------- ------ ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1995..... 3,053,387 $3,053 756,560 $ 757 $ 3,172,258 $ -- $ (1,156,467) $ 2,019,601
Issuance of Series B
convertible preferred
stock................. 76,063 76 -- -- 88,824 -- -- 88,900
Issuance of Series C
convertible preferred
stock................. 1,856,627 1,857 -- -- 3,098,148 -- -- 3,100,005
Exercise of stock
options............... -- -- 12,102 12 1,174 -- -- 1,186
Net loss............... -- -- -- -- -- (1,631,160) (1,631,160)
--------- ------ --------- ------ ----------- ------------ ------------- ------------
BALANCE,
SEPTEMBER 30, 1996..... 4,986,077 4,986 768,662 769 6,360,404 -- (2,787,627) 3,578,532
Issuance of Series C
convertible preferred
stock................. 1,492,846 1,493 -- -- 3,322,130 -- -- 3,323,623
Exercise of stock
options............... -- -- 33,165 33 3,139 -- -- 3,172
Net loss............... -- -- -- -- -- -- (3,118,782) (3,118,782)
--------- ------ --------- ------ ----------- ------------ ------------- ------------
BALANCE,
SEPTEMBER 30, 1997..... 6,478,923 6,479 801,827 802 9,685,673 -- (5,906,409) 3,786,545
Issuance of Series C
convertible preferred
stock................. 244,039 244 -- -- 1,425,879 -- -- 1,426,123
Issuance of Series D
convertible preferred
stock................. 926,695 927 -- -- 7,783,906 -- -- 7,784,833
Exercise of stock
options............... -- -- 69,498 69 9,519 -- -- 9,588
Deferred stock
compensation.......... -- -- -- 1,452,191 (1,452,191) -- --
Amortization of de-
ferred stock compensa-
tion.................. -- -- -- -- -- 163,858 163,858
Net loss............... -- -- -- -- -- -- (3,920,059) (3,920,059)
--------- ------ --------- ------ ----------- ------------ ------------- ------------
BALANCE,
SEPTEMBER 30, 1998..... 7,649,657 7,650 871,325 871 20,357,168 (1,288,333) (9,826,468) 9,250,888
Issuance of Series D
convertible preferred
stock................. 496,499 496 -- -- 5,771,840 -- -- 5,772,336
Exercise of stock
options............... -- -- 356,542 357 44,099 -- -- 44,456
Issuance of common
stock as payment on
notes payable......... -- -- 197,026 197 378,288 -- -- 378,485
Deferred stock
compensation.......... -- -- -- -- 2,439,671 (2,439,671) -- --
Amortization of de-
ferred stock compensa-
tion.................. -- -- -- -- -- 577,770 -- 577,770
Net loss............... -- -- -- -- -- -- (5,233,993) (5,233,993)
--------- ------ --------- ------ ----------- ------------ ------------- ------------
BALANCE,
JUNE 30, 1999 ......... 8,146,156 $8,146 1,424,893 $1,425 $28,991,066 $(3,150,234) $ (15,060,461) $ 10,789,942
========= ====== ========= ====== =========== ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
AltiGen Communications, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended September 30, Ended June 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(1,631,160) $(3,118,782) $(3,920,059) $(2,808,557) $(5,233,993)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation.......... 32,390 75,382 139,411 90,671 224,673
Amortization of
deferred stock
compensation......... -- -- 163,858 82,098 577,770
Provision for accounts
receivable
allowances........... 10,000 31,000 92,000 89,000 217,000
Provision for excess
and obsolete
inventories.......... 94,000 187,000 418,000 361,000 126,000
Increase in notes
payable.............. 4,315 274,258 87,114 40,885 12,798
Changes in operating
assets and
liabilities:
Accounts receivable... (175,426) (303,589) (676,976) (412,976) (532,340)
Inventories........... (242,778) (679,595) (865,902) (618,666) (1,100,260)
Prepaid expenses and
other current
assets............... 20,760 (70,824) (90,049) (45,258) (563,581)
Accounts payable...... 30,585 145,583 253,441 (21,603) 349,703
Accrued liabilities... 34,901 195,868 474,123 378,414 386,002
Deferred revenue...... 54,048 128,120 108,610 32,386 224,089
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities........... (1,768,365) (3,135,579) (3,816,429) (2,832,606) (5,312,139)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from sale of
short-term
investments........... 2,340,441 371,000 52,478 -- 1,053,060
Purchases of short-term
investments........... (1,657,096) (1,138,538) -- (4,932,767) --
Purchases of property
and equipment......... (42,161) (249,644) (440,893) (184,565) (600,582)
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) investing
activities........... 641,184 (1,017,182) (388,415) (5,117,332) 452,478
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net proceeds from
issuance of
convertible preferred
stock................. 3,188,905 3,323,623 9,210,956 6,891,970 5,772,336
Net proceeds from
issuance of common
stock................. 1,186 3,172 9,588 8,771 44,456
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities........... 3,190,091 3,326,795 9,220,544 6,900,741 5,816,792
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 2,062,910 (825,966) 5,015,700 (1,049,197) 957,131
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 750,925 2,813,835 1,987,869 1,987,869 7,003,569
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 2,813,835 $ 1,987,869 $ 7,003,569 $ 938,672 $ 7,960,700
=========== =========== =========== =========== ===========
NONCASH FINANCING
ACTIVITIES:
Issuance of common
stock as payment on
notes payable......... $ -- $ -- $ -- $ -- $ 378,485
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements
June 30, 1999
1. ORGANIZATION OF THE COMPANY:
AltiGen Communications, Inc. (the "Company") was incorporated in California on
May 18, 1994 and began operations in July of that year. In June 1999, the
Company reincorporated in Delaware. The Company designs, manufactures, and
markets server-based telecommunications systems that allow businesses to use
data networks such as the Internet and the traditional telephone network
interchangeably to carry voice and data communications.
The Company is subject to the risks associated with early stage technology
companies. These risks include, but are not limited to: history of losses,
limited operating history, dependence on a smaller number of key individuals,
customers and suppliers, competition from larger, more established companies,
the continued need for additional financing, the impact of rapid technological
changes and changes in customer demand/requirements. There is no assurance that
the Company's efforts will be successful.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Fiscal Year End
The Company's consolidated financial statements for the nine months ended June
30, 1999 reflect the operations of the Company and its wholly owned subsidiary.
The subsidiary is located in Shanghai, China and was incorporated in November
1998. As of June 30 1999, the Company had approximately $29,400 in long lived
assets located in China. All significant intercompany transactions and balances
have been eliminated. The Company's fiscal year end is September 30. Unless
otherwise stated, all references to 1998, 1997, and 1996 refer to the twelve
months ended September 30 of that year.
Unaudited Interim Financial Data
The unaudited consolidated financial statement data for the nine months ended
June 30, 1998 has been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company performs
ongoing credit evaluations of its customers' financial condition and requires
letters of credit whenever deemed necessary to help reduce its credit risk.
Additionally, the Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends related to past losses and other information. As of September 30, 1997,
1998 and June 30, 1999, approximately 65%, 66% and 85%, respectively, of
accounts receivable were concentrated with ten customers.
F-7
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company's purchases are concentrated with three suppliers and certain key
components of the Company's products are sole sourced. For fiscal years 1996,
1997, 1998 and for the nine months ended June 30 1999 these three suppliers
provided 73%, 72%, 78% and 75%, respectively, of all raw materials purchased.
Loss of one of these suppliers could adversely impact the Company's operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less from the date of purchase to be cash equivalents.
Investments in highly liquid financial instruments with original maturities
greater than three months but less than one year are classified as short-term
investments. As of June 30, 1999, the Company's cash and cash equivalents
consisted of commercial paper, cash deposited in checking and money market
accounts. For fiscal years 1996, 1997, and 1998 and for the nine months ended
June 30, 1999, the Company did not make any cash payments for interest or
income taxes.
Inventories
Inventories (which include costs associated with components assembled by third-
party assembly manufacturers, as well as internal labor and overhead) are
stated at the lower of cost (first-in, first-out) or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Provisions for excess and obsolete inventory totaled
approximately $94,000, $187,000 and $418,000 for fiscal years 1996, 1997 and
1998, respectively, and $361,000 and $126,000 for the nine months ended June
30, 1998 and 1999, respectively. The components of inventories include:
<TABLE>
<CAPTION>
September 30,
------------------- June 30,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Raw materials................................. $529,632 $ 966,516 $1,309,620
Work-in-progress.............................. 41,088 -- 184,364
Finished goods................................ 275,458 327,564 774,356
-------- ---------- ----------
$846,178 $1,294,080 $2,268,340
======== ========== ==========
</TABLE>
Prepaid Royalties
The Company has recently developed an ISDN product which contains certain
third-party proprietary technology, which has been modified for the Company's
use. In connection with the above, the Company prepaid royalty payments to the
owner of this technology totaling $100,000 and $300,000 as of September 30,
1998 and June 30, 1999, respectively. The prepayments are included in prepaid
expenses and other current assets in the accompanying consolidated balance
sheets and will be amortized against future product shipments. Royalty payments
will be determined based on 40% of the profit (as defined) realized from the
Company's sales of this product. Such sales are expected to commence in the
fourth quarter of fiscal 1999.
Prepaid Offering Costs
The Company capitalized offering costs of $299,000 as of June 30, 1999. The
costs primarily consist of legal and accounting fees related to an initial
public offering of the Company's common stock currently in process. The
prepayments are included in prepaid expenses and other current assets in the
accompanying consolidated balance sheets as of June 30, 1999 and will be offset
against proceeds from the pending initial public offering.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets which is
three years. Depreciation expense for fiscal years 1996, 1997, 1998
F-8
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
and for the nine months ended June 30, 1999 was $32,000, $75,000, $139,000 and
$225,000, respectively. All repairs and maintenance costs are expensed as
incurred.
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company capitalizes eligible computer software development costs
upon the establishment of technological feasibility, which it has defined as
completion of a working model. The amount of costs eligible for capitalization,
after consideration of factors such as realizable value, were not material and,
accordingly, all software development costs have been charged to research and
development expense in the accompanying consolidated statements of operations.
Stock-Based Compensation
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," which establishes a fair value method of
accounting for stock-based compensation plans. As allowed under the provisions
of SFAS No. 123, the Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
employee stock option plan (see Note 5 for a discussion of compensation cost
recorded related to certain employee stock options granted). The Company
follows the provisions of SFAS No. 123 for options granted to consultants and
nonemployees. Compensation expense for such grants for all periods presented
was nominal and therefore immaterial.
Revenue Recognition
Revenues consist of sales to end users, including dealers, and to distributors.
Revenues from sales to end users are recognized upon shipment. The Company
provides for estimated sales returns and allowances and warranty costs related
to such sales at the time of shipment. Net revenues consist of product revenues
reduced by estimated sales returns and allowances. Sales to distributors are
made under terms allowing certain rights of return and protection against
subsequent price declines on the Company's products held by the distributors.
Upon termination, any unsold products may be returned by the distributor for a
full refund. These agreements may be canceled by either party based on a
specified notice. As a result of the above provisions, the Company defers
recognition of revenues and the proportionate costs of revenues derived from
sales to distributors until such distributors resell the Company's products to
their customers. The amounts deferred as a result of this policy are reflected
as "deferred revenue" in the accompanying consolidated balance sheets.
For fiscal years 1996, 1997, 1998 and for the nine months ended June 30, 1999,
sales to four distributors of the Company's products accounted for
approximately 24%, 25%, 46% and 53% of net revenues, respectively.
The following customers accounted for more than 10% of net revenues:
<TABLE>
<CAPTION>
Fiscal Year Nine
Ended Months
September 30, Ended
---------------- June 30,
1996 1997 1998 1999
---- ---- ---- --------
<S> <C> <C> <C> <C>
Customer A.............................................. -- 10% 24% 25%
Customer B.............................................. -- -- -- 20%
Customer C.............................................. 24% -- 14% --
</TABLE>
Revenues derived from sales to customers outside of the United States,
primarily in Japan, accounted for approximately 4%, 11%, 7% and 10% of the
Company's net revenues for fiscal years 1996, 1997, 1998 and for the nine
months ended June 30, 1999, respectively.
F-9
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company offers free software upgrades to users of their products when an
error in the software has been subsequently detected. Accordingly, the Company
offers free software upgrades for certain products that were determined to not
be Year 2000 compliant.
Computation of Basic Net Loss Per Share and Pro Forma Basic Net Loss Per Share
Historical net loss per share has been calculated under Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128
requires companies to compute earnings per share under two methods (basic and
diluted). Basic net loss per share is calculated by dividing net loss by the
weighted average shares of common stock outstanding during the period. No
diluted loss per share information has been presented in the accompanying
consolidated statements of operations since potential common shares from the
conversion of preferred stock, stock options and warrants are antidilutive. The
Company evaluated the requirements of the Securities and Exchange Commission
Staff Accounting Bulletin No. 98 ("SAB"), and concluded that there are no
nominal issuances of common stock or potential common stock which would be
required to be shown as outstanding for all periods presented herein as
outlined in SAB 98.
Unaudited pro forma basic net loss per share has been calculated assuming the
conversion of the outstanding preferred stock into an equivalent number of
shares of common stock, as if the shares had been converted on the dates of
their issuance.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
presentation of comprehensive income. SFAS No. 130, which was adopted by the
Company in the first quarter of 1998, requires companies to report a new
measurement of income. "Comprehensive Income (Loss)" is to include as other
comprehensive income foreign currency translation gains and losses and other
unrealized gains and losses that have historically been excluded from net
income (loss) and reflected instead in equity. The Company does not have any
items of other comprehensive income and is, therefore, not required to report
comprehensive income.
Segment Reporting
In June 1997, the Financial Accounting Standards Board also issued SFAS No.131
"Disclosures About Segments of an Enterprise and Related Information." ("SFAS
No. 131"). SFAS No. 131 was adopted by the Company beginning on October 1,
1997. SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers. The
Company is organized and operates as one operating segment. The Company
operates primarily in one geographic area, the United States.
Financial Instruments
In June 1998, FASB also issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards, requiring every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings. SFAS No. 133 is effective for fiscal years beginning
after June 15, 2000. The Statement must be applied to derivative instruments and
to certain derivative instruments embedded in hybrid contracts that were issued,
acquired or substantively modified after September 30, 1997. In management's
opinion, the impact of adopting SFAS No. 133 on the financial statements will
not be material.
Start-up Costs
In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of Start-
Up Activities" ("SOP No. 98-5"). SOP No. 98-5 requires that all start-up costs
related to new operations must be expensed as
F-10
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
incurred. In addition, all start-up costs that were previously capitalized must
be written off when SOP No. 98-5 is adopted. The Company adopted SOP No. 98-5
in fiscal 1999. The adoption did not have a material impact on the Company's
financial position or results of operations.
Stock Split and Reincorporation
In July 1999, the Company's Board of Directors approved a one for 1.66965
reverse stock split of its convertible preferred and common stock. All
convertible preferred and common share amounts in the accompanying consolidated
financial statements have been adjusted retroactively to give effect to this
split.
In June 1999, the Company's Board of Directors approved the reincorporation of
the Company in Delaware. Upon reincorporation, the Company issued new shares
with a par value of $0.001 per share to all convertible preferred and common
stockholders. All convertible preferred and common share amounts in the
accompanying consolidated financial statements have been adjusted retroactively
to give effect to this change.
3. NOTES PAYABLE:
As of September 30, 1998, the Company had non-interest-bearing notes payable of
$365,687 outstanding to consultants in exchange for services received by the
Company primarily during fiscal years 1996 and 1997. During the nine months
ended June 30, 1999, the Company issued additional notes payable of $12,798 to
consultants. The Company had agreed to issue a total of 197,026 shares of
preferred stock at the fair market values on the dates of the respective
issuances of the notes, which is $1.17-$8.35 per share, as payment for the
notes. In June 1999, the note holders agreed to accept common shares on a 1:1
basis in lieu of preferred shares. Such common shares were issued in June 1999
and are reflected in the accompanying consolidated statements of stockholders'
equity.
4. COMMITMENTS AND CONTINGENCIES:
Commitments
The Company leases its facilities under operating lease agreements expiring
through February 2002. Rent expense for all operating leases totaled
approximately $74,000, $125,000, $167,000 and $278,000 for fiscal years 1996,
1997 and 1998 and for the nine months ended June 30, 1999, respectively.
Minimum future lease payments under all noncancellable operating leases as of
June 30, 1999 are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 95,000
2000............................................................ 331,000
2001............................................................ 27,000
--------
$453,000
========
</TABLE>
Contingencies (unaudited)
From time to time and in the ordinary course of business, the Company has been
and will continue to be subject to claims of alleged infringement of the
patents and intellectual property rights of others. In addition, the Company
may file actions against others to defend its intellectual property rights. The
Company is currently engaged in litigation with NetPhone, Inc. (NetPhone), a
competitor, related to alleged infringement by the Company of a NetPhone
patent. The Company has responded to NetPhone's complaint in the U.S. District
Court requesting a declaration that the Company does not infringe any valid
claim of NetPhone's patent. NetPhone, in turn, has filed a motion against the
Company, seeking to enjoin the Company from
F-11
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
making, importing, using, selling or offering to sell its Quantum Board, a
product which accounted for approximately 84% of the Company's revenues for the
nine months ended June 30, 1999. The Company has responded by filing our
Opposition to NetPhone's motion and countered with a cross-motion. These
motions are scheduled for hearing in September 1999. AltiGen intends to
vigorously defend itself against the allegations and motion asserted by
NetPhone and based upon advice of AltiGen's patent prosecution counsel, does
not believe that the ultimate outcome of this matter will have a material
impact on the Company's financial condition or results of its operations.
However, litigation of this nature is subject to inherent uncertainties and
therefore, there is no assurance that the Company will prevail in the
litigation or that an adverse outcome will not adversely affect our business or
financial condition.
5. CAPITAL STOCK:
Convertible Preferred Stock
Preferred stock consists of the following:
<TABLE>
<CAPTION>
September 30,
--------------------- June 30,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Series A, 1,634,987 shares authorized,
1,634,972 shares outstanding at September
30, 1997 and 1998 and June 30, 1999...... $1,500,914 $1,500,914 $1,500,914
Series B, 1,494,496 shares authorized,
1,494,478 shares outstanding at September
30, 1997 and 1998 and June 30, 1999...... 1,746,700 1,746,700 1,746,700
Series C, 3,593,565 shares authorized,
3,349,473 shares outstanding at September
30, 1997, 3,593,512 shares outstanding at
September 30, 1998 and June 30, 1999..... 6,423,628 7,849,751 7,849,751
Series D, 3,593,568 shares authorized,
926,695 and 1,423,194 shares outstanding
at September 30, 1998 and June 30, 1999.. -- 7,784,833 13,557,169
</TABLE>
The rights and preferences of the outstanding series A, B, C and D preferred
stock are as follows:
Dividends
The holders of series A, B, C and D preferred stock are entitled to receive
non-cumulative dividends at an annual rate of $0.08, $0.12, $0.17 and $0.83 per
share, respectively. Such dividends shall be payable only when, as, and if
declared by the Board of Directors. No dividends shall be payable on any common
stock until dividends to series A, B, C and D preferred stock have been paid or
declared by the Board of Directors. Additionally, no dividends shall be paid or
declared for any series of preferred stock unless at the same time a like
proportionate dividend, ratably in proportion to the respective annual dividend
rates fixed therefore, is paid and declared for the shares of all other series
preferred stock. As of September 30, 1998 and June 30, 1999, no dividends have
been declared.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
holders of series A, B, C and D preferred stock are entitled to receive, in
preference to holders of common stock, the amounts of $0.83, $1.17, $1.67 and
$8.35 per share, respectively, plus all declared but unpaid dividends. Such
amounts will be adjusted for any stock split, stock dividends and
recapitalizations. After payment of the above amounts, holders of common stock
are entitled to receive the amount of $0.83 per share, adjusted for any stock
split, stock
F-12
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
dividends and recapitalizations. If such amounts are not available to
sufficiently satisfy the full preferential amount, the entire assets of the
Company will be distributed to the preferred shareholders in proportion to
their aggregate liquidation preference of the shares of preferred stock held.
After payment to the holders of preferred stock and common stock of the above
preferential amounts, the entire remaining assets and funds of the Company
shall be distributed to the holders of common stock and preferred stock in
proportion to the shares of common stock and preferred stock, on an as-
converted basis, held by these holders.
Voting Rights
The holders of the series A, B, C and D preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which such
preferred stock is convertible.
Conversion
Each share of series A, B, C and D preferred stock is convertible into one
share of common stock at (a) the date specified by vote or written consent by
preferred shareholders of at least two-thirds of outstanding preferred stock or
(b) the consummation of the Company's sale of common stock in an underwritten
public offering which results in aggregate cash proceeds to the Company in
excess of $10,000,000 and the public offering price is not less than $8.35 per
share. The conversion rate is subject to adjustment for dilution, including,
but not limited to, stock splits, stock dividends and stock combinations.
Common Stock
According to the Company's amended Articles of Incorporation, the Company is
authorized to issue 23,957,117 shares of common stock. At June 30, 1999, the
Company had reserved the following shares for future issuance:
<TABLE>
<S> <C>
Conversion of Series A outstanding preferred stock................ 1,634,972
Conversion of Series B outstanding preferred stock................ 1,494,478
Conversion of Series C outstanding preferred stock................ 3,593,512
Conversion of Series D outstanding preferred stock................ 1,423,194
1994 Stock Option Plan............................................ 1,598,736
1999 Stock Option Plan............................................ 2,096,246
----------
11,841,138
==========
</TABLE>
1998 Stock Purchase Plan
In June 1999, the Company ratified the 1998 Stock Purchase Plan and authorized
the issuance of 15,452 shares of Series D preferred stock to employees,
consultants and directors. The price of each preferred share purchased under
the 1998 Stock Purchase Plan may not be less than 85% of the fair market value
at the time of purchase and, in the case of a purchase by a greater than 10%
shareholder, the price may not be less than 110% of the fair market value. All
shares available under the 1998 Stock Purchase Plan were sold during fiscal
year 1998.
Stock Option Plans
In October 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan") and authorized the issuance of 2,096,246 shares, as amended, thereunder
to employees, directors, and consultants. Under the 1994 Plan, the Board of
Directors may grant incentive and nonqualified stock options to employees,
directors, and consultants of the Company. The exercise price per share for an
incentive stock option cannot be less
F-13
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
than 100% of the fair market value, as determined by the Board of Directors, on
the date of grant. The exercise price per share for nonqualified stock options
cannot be less than the 85% of the fair market value, as determined by the
Board of Directors, on the date of grant. Also, the exercise price of options
granted to a greater than 10% shareholder may not be less than 110% of the fair
market value on the date of grant. The value of common stock subject to
incentive stock options that become exercisable by any one employee in any
calendar year may not exceed $100,000. Options generally vest over a four year
period and generally expire ten years after the date of grant.
In 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan") and
authorized the issuance of 2,096,246 shares to employees, directors and
consultants. Under the 1999 Plan, the Board of Directors may grant incentive
and nonqualified stock options to employees, directors and consultants of the
Company. The exercise price per share for an incentive stock option cannot be
less than 100% of the fair market value, as determined by the Board of
Directors, on the date of grant. The exercise price per share for a
nonqualified stock option cannot be less than 85% of the fair market value, as
determined by the Board of Directors, on the date of grant. Also, the exercise
price of options granted to a greater than 10% shareholder may not be less than
110% of the fair market value on the date of grant. The value of common stock
subject to incentive stock options that become exercisable by any one employee
in any calendar year may not exceed $100,000. Options under this plan generally
vest over a four year period and generally expire ten years after the date of
grant. Option activity under the 1994 and 1999 Plans was as follows:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Outstanding Price
----------- --------
<S> <C> <C>
September 30, 1995...................................... 306,048 $0.08
Granted................................................ 548,194 0.13
Exercised.............................................. (12,102) 0.08
Canceled............................................... (11,078) 0.10
--------- -----
September 30, 1996...................................... 831,062 0.11
Authorized............................................. -- --
Granted................................................ 100,617 0.17
Exercised.............................................. (33,165) 0.10
Canceled............................................... (52,780) 0.10
--------- -----
September 30, 1997...................................... 845,734 0.12
Granted................................................ 856,706 0.45
Exercised.............................................. (69,498) 0.13
Canceled............................................... (15,346) 0.52
--------- -----
September 30, 1998...................................... 1,617,596 0.29
Granted................................................ 580,058 5.09
Exercised.............................................. (356,542) 0.13
Canceled............................................... (71,476) 0.45
--------- -----
June 30, 1999........................................... 1,769,636 $1.89
========= =====
</TABLE>
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Exercisable at September 30, 1997................... 497,190 $0.10
Exercisable at September 30, 1998................... 744,861 $0.15
Exercisable at June 30, 1999 ....................... 869,760 $0.35
</TABLE>
F-14
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes information concerning outstanding and
exercisable options at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- --------------------------
Weighted Weighted Weighted
Exercise Number Average Average Number Average
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
------------- ------------ -------------- -------------- ----------- --------------
<C> <S> <C> <C> <C> <C>
$0.08 - $0.12 29,207 6.37 $0.12 18,872 $0.12
0.13 - 0.17 415,371 6.62 0.15 374,235 0.13
0.23 443,325 8.38 0.23 351,740 0.23
0.58 - 0.87 379,501 8.94 0.85 98,021 0.75
2.89 - 4.34 382,151 9.76 3.82 26,892 3.69
11.69 120,081 9.93 11.69 -- --
------------- --------- ---- ----- ------- -----
$0.08 -$11.69 1,769,636 8.46 $1.89 869,760 $0.35
============= ========= ==== ===== ======= =====
</TABLE>
The Company accounts for the Plan under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Had compensation expense for the Plan been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and basic net loss per share would have
been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
Nine Months
Fiscal Year Ended September 30, Ended June 30,
------------------------------------- --------------
1996 1997 1998 1999
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Net loss:
As reported........... $(1,631,160) $(3,118,782) $(3,920,059) $(5,233,993)
Pro forma............. (1,632,026) (3,122,558) (3,931,305) (5,369,256)
Basic net loss per
share:
As reported........... $ (2.14) $ (3.91) $ (4.75) $ (4.73)
Pro forma............. (2.14) (3.92) (4.76) (4.85)
</TABLE>
The weighted-average grant date fair value of options granted during fiscal
years 1996, 1997, 1998 and the nine months ended June 30, 1999 was $0.03,
$0.06, $0.13 and $1.17 respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1996, 1997,
1998 and 1999: risk free interest rates ranging from 4.5%-6.2%; expected
dividend yields of zero percent; expected lives of 5 years. Because the Company
has been a non-public entity, it has omitted expected volatility in determining
the fair value for its options.
In connection with the issuance of certain stock options to employees in fiscal
years 1998 and 1999, the Company has recorded deferred stock compensation in
the aggregate amount of approximately $3,892,000, representing the difference
between the deemed fair value of the Company's common stock and the exercise
price of stock options at the date of grant. The Company is amortizing the
deferred stock compensation expense over the vesting period of four years. For
fiscal year 1998 and for the nine months ended June 30, 1999, amortization of
deferred stock compensation expense was $163,858 and $577,770, respectively.
In June 1999, the Board of Directors adopted the 1999 Employee Stock Purchase
Plan under which 299,464 shares of common stock were reserved for issuance to
eligible employees at a price of 85% of the lower of the fair market value of
the common stock on the first day of the offering period or a specified
exercise date (last trading day in January or July). The number of shares will
be increased on the first day of each fiscal year beginning in 2000 by the
lesser of (i) 598,928 shares, (ii) 2% of the outstanding shares on that date or
(iii) a lesser amount determined by the Board of Directors. Participants under
the 1999 Purchase Plan
F-15
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
generally may not purchase shares on any exercise date to the extent that,
immediately after the grant, the participant would own stock totaling 5% or
more of the total combined voting power of all stock of the Company, or greater
than $25,000 worth of stock in any calendar year. In addition, no more than
5,989 shares may be purchased by any participant during any offering period. In
the event of a sale or merger of the Company, the Board may accelerate the
exercise date of the current purchase period to a date prior to the change of
control, or the acquiring company may assume or replace the outstanding
purchase rights under the 1999 Purchase Plan. The first offering period under
the 1999 Plan will commence on the effective date of this offering and
terminate on or before July 31, 2001.
6. INCOME TAXES:
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes". SFAS No. 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. The components of the net
deferred income tax asset are as follows:
<TABLE>
<CAPTION>
September 30,
------------------------ June 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net operating loss carryforwards.... $ 1,575,000 $ 2,807,000 $ 2,850,000
Capitalized start-up costs.......... 353,000 263,000 176,000
Reserve and other cumulative tempo-
rary differences................... 273,000 414,000 1,047,000
Research and development credit
carryforward....................... 182,000 317,000 420,000
Net capitalized research and devel-
opment expenses.................... 107,000 204,000 356,000
----------- ----------- -----------
2,490,000 4,005,000 4,849,000
Valuation allowance................. (2,490,000) (4,005,000) (4,849,000)
----------- ----------- -----------
Net deferred tax asset.......... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
As of June 30, 1999, the Company has cumulative net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $7.8 million and $3.1 million, respectively, which expire in
various periods from 2002 to 2019. Under current tax law, net operating loss
carryforwards available in any given year may be limited upon the occurrence of
certain events, including significant changes in ownership interests, such as
an initial public stock offering.
A valuation allowance has been recorded for the entire deferred tax asset as a
result of uncertainties, regarding realization of the asset, including limited
operating history of the Company, the lack of profitability to date and the
uncertainty over future operating profitability and taxable income.
As of September 30, 1997 and 1998 and June 30, 1999 the Company had no
significant deferred tax liabilities.
F-16
<PAGE>
[LOGO OF ALTIGEN COMMUNICATIONS, INC.]
AltiGen Communications, Inc.
3,250,000 Shares
Common Stock
----------------
PROSPECTUS
----------------
,
CIBC World Markets
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
FAC/Equities
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
Dealer Prospectus Delivery Obligation: Until October 29, 1999 (25 days after
the commencement of the offering), all dealers that effect transactions in
these securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
