<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1999
Registration No. 333-80037
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ALTIGEN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3661 94-3204299
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
47427 Fremont Boulevard
Fremont, California 94538
(510) 252-9712
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
GILBERT HU
Chief Executive Officer
AltiGen Communications, Inc.
47427 Fremont Boulevard
Fremont, California 94538
(510) 252-9712
Fax (510) 252-9738
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies of Communications to:
<TABLE>
<S> <C>
Eric W. Wright, Esq. Jorge del Calvo, Esq
Carmen Chang, Esq. Stanton Wong, Esq.
David Wang, Esq. Gabriella Lombardi, Esq.
Susan Tien, Esq. Davina Kaile, Esq.
Wilson Sonsini Goodrich & Rosati Pillsbury Madison & Sutro LLP
Professional Corporation 2550 Hanover Street
650 Page Mill Road Palo Alto, California 94304
Palo Alto, California 94304 (650) 233-4500
(650) 493-9300 Fax (650) 233-4545
Fax (650) 493-6811
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of each Class of Amount to be Offering Price Offering Registration
Securities to be Registered Registered(1) per Share Price(2) Fee(2)(3)
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<S> <C> <C> <C> <C>
Common Stock.................... 5,290,000 $12.00 $63,480,000 $17,648
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</TABLE>
(1) Includes up to 690,000 shares of Common Stock issuable by the registrant
upon exercise of the underwriters over-allotment option.
(2) Estimated pursuant to Rule 457 under the Securities Act of 1933.
(3) Includes an additional registration fee of $3,261 with respect to the
increase in the size of the offering. A registration fee of $14,387 was
previously paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall hereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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<PAGE>
Subject to Completion, Dated , 1999
The information contained in this prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and it is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
4,600,000 Shares
[LOGO OF ALTIGEN COMMUNICATIONS, INC.]
AltiGen Communications, Inc.
Common Stock
$ per share
- -------------------------------------------------------------------------------
This is an initial public offering of common stock of AltiGen Communications,
Inc.
AltiGen expects that the price to the public in the offering will be between
$10.00 and $12.00 per share.
We have applied to include the common stock 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................................ $ $
Underwriting discount..............................
Proceeds to AltiGen................................
</TABLE>
AltiGen has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 690,000 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 , 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]
The Telecommunications Solution for the Internet Era
AltiGen's server-based telecommunications system, AltiServ, allows for
seamless integration between packet-switched networks and the traditional
public telephone network.
The AltiServ system provides new services to end users, giving businesses the
choice of placing calls over data networks or traditional phone lines.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 29
Management............................................................... 40
Principal Stockholders................................................... 48
Certain Transactions..................................................... 49
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 55
Underwriting............................................................. 57
Legal Matters............................................................ 59
Experts.................................................................. 59
Where Can You Find More Information...................................... 59
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 products 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. These
products use computers to enable and administer these communications and are
commonly referred to as server-based telecommunications systems. 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, which are also
known as private branch exchanges or PBXs. To use these new services,
businesses have had to add hardware and software to their traditional PBXs.
As businesses seek capabilities beyond those of traditional PBXs to meet
today's communication needs, they have begun to purchase server-based
telecommunications systems in place of traditional PBXs. 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.
Telecommunications systems that provide these and other services over the
traditional telephone network using a general purpose computer are commonly
known as server-based PBX systems. Systems that provide these functions over
networks that use Internet Protocol, or IP, are commonly known as IP-based PBX
systems. IP is a standard software format for computers to communicate with
each other over the Internet. Our server-based telecommunications systems
combine the attributes of these two types of systems and allow small- to
medium-sized businesses to communicate over both the traditional telephone
network and IP networks, such as the Internet, providing these businesses with
a telecommunications solution for the Internet era.
We are a leader in the server-based PBX market and have been shipping our
products since July 1996. We sell our server-based 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 our leadership position in the server-based PBX market
and expand our current position in the IP-based PBX market. 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 server-based telecommunications.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by AltiGen ................ 4,600,000 shares
Common stock to be outstanding after the
offering....................................... 14,171,185 shares
Use of proceeds................................. General corporate purposes,
including working capital
Proposed Nasdaq National Market symbol.......... ATGN
</TABLE>
The number of shares outstanding is based on shares outstanding as of June 30,
1999, excluding 1,769,700 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 $54,019
Working capital........................................ 9,861 9,861 55,919
Total assets........................................... 13,235 13,235 59,293
Total stockholders' equity ............................ 10,790 10,790 56,848
</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 4,600,000
shares of common stock offered by this prospectus at an assumed public offering
price of $11.00 per share, after deducting the estimated 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 original equipment
manufacturers, or OEMs, which are 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 server-based telecommunications systems market 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 partners 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 branch
exchange or PBX systems. A PBX system is a private telephone system used in an
office that allows users to make calls to each other and to share a number of
outside lines to make calls to telephones outside of the network. Our principal
competitors that produce traditional PBX systems are Lucent Technologies and
Nortel Networks. We also compete against providers of server-based PBXs,
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. 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 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 failure of
dealers to provide adequate customer service could cause our business to
suffer. If we insufficiently 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. The motion has not yet been decided.
Although we intend to continue to litigate the lawsuit and to contest the
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 90% 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
Server-based 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 server-based telecommunications systems is relatively new and
rapidly evolving. Businesses have invested substantial resources in the
existing telecommunications infrastructure, including traditional PBXs, and may
be unwilling to replace these systems in the near term or at all. Businesses
may also be reluctant to adopt server-based telecommunications systems because
of their concern about the current
12
<PAGE>
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 server-based 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 server-based telecommunication 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 obtain the right 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 results of
13
<PAGE>
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
(upon our reincorporation in Delaware) 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 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 particularly 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 will be 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 $6.99 in the book value per
share of common stock from the price you pay. This calculation assumes you
purchase the common stock for $11.00 per share. 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
14,171,185 outstanding shares of common stock. All of the shares sold in this
offering will be immediately and freely tradeable. 9,542,549 of the remaining
shares are subject to lock-up arrangements between the stockholders and us or
the underwriters. At least 8,877,449 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 27.2%
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," "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.
Use of Proceeds
We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $46,058,000. If the underwriters fully
exercise the over-allotment option, the net proceeds of the shares we sell will
be $53,116,700. Net proceeds is what we expect to receive after paying the
underwriting discount and other expenses of the offering. For the purpose of
estimating net proceeds, we are assuming that the initial public offering price
will be $11.00 per share.
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.
16
<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 an assumed initial public offering price of $11.00 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, 8,146,270 shares issued and outstanding,
actual; 2,994,640 shares authorized, no shares issued
and outstanding, as adjusted.......................... $ 8 $ --
Common stock, $.001 par value; 23,957,117 shares
authorized, 1,424,915 shares issued and outstanding,
actual; 35,935,675 shares authorized, 14,171,185
shares issued and outstanding, as adjusted............ 1 14
Additional paid-in capital............................. 28,991 75,044
Deferred stock compensation............................ (3,150) (3,150)
Accumulated deficit.................................... (15,060) (15,060)
-------- --------
Total stockholders' equity............................ 10,790 56,848
-------- --------
Total capitalization................................ $ 10,790 $ 56,848
======== ========
</TABLE>
This table excludes 1,769,700 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.
17
<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 $56,848,000 or $4.01 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" assuming that the initial
public offering price will be $11.00 per share.
. 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
$2.88 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>
Assumed initial public offering price per share................ $11.00
Pro forma net tangible book value per share as of June 30,
1999.......................................................... $1.13
Increase per share attributable to the offering................ 2.88
-----
Pro forma as adjusted net tangible book value per share after
giving
effect to the offering........................................ 4.01
------
Dilution per share to new investors............................ $ 6.99
======
</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. The table
assumes that the initial public offering price will be $11.00 per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 9,571,185 67.5% $25,041,624 33.1% $ 2.62
New investors.......... 4,600,000 32.5 50,600,000 66.9 11.00
---------- ----- ----------- -----
Total................ 14,171,185 100.0% $75,641,624 100.0%
========== ===== =========== =====
</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 1,769,700 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.
18
<PAGE>
Selected Consolidated Financial Data
This section presents selected historical financial data of AltiGen, as a
Delaware corporation. You should read carefully the financial statement
included in this prospectus, including the notes to the financial statements.
The selected data in this section are not intended to replace the financial
statements.
AltiGen derived the consolidated statement of operations data for the year
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 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 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 3,763 3,787 9,251 10,790
</TABLE>
19
<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 server-based 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.
20
<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 the Quantum board represented 82.4% of 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
21
<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.
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<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.
23
<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
24
<PAGE>
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 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.
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<PAGE>
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 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."
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
26
<PAGE>
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 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.
27
<PAGE>
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 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.
28
<PAGE>
Business
AltiGen designs, manufactures and markets computer, or server, based
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. These products use computers
to enable and administer these communications and are commonly referred to as
server-based telecommunications systems. 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, which are also known as private branch
exchanges or PBXs. To use these new services, businesses have had to add
hardware and software to their traditional PBXs.
As businesses seek capabilities beyond those of traditional PBXs to meet
today's communication needs, they have begun to purchase server-based
telecommunications systems in place of traditional PBXs. 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.
Telecommunications systems that provide these and other services over the
traditional telephone network using a general purpose computer are commonly
known as server-based PBX systems. Systems that provide these functions over
networks that use Internet Protocol, or IP, are commonly known as IP-based PBX
systems. IP is a standard software format for computers to communicate with
each other over data networks, such as the Internet. Our server-based
telecommunications systems combine the attributes of these two types of systems
and allow small- to medium-sized businesses to communicate over both the
traditional telephone network and IP 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. A number of 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 e-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: a circuit-switched network for voice, such
as the telephone system, and a packet-switched network for data, such as the
Internet. A circuit-switched network establishes and maintains a dedicated line
between calling parties for the duration of a call. In contrast, most data
traffic today, traversing local area networks or LANs, wide area networks or
WANs and the Internet, is transmitted over packet-switched networks. LANs are
computer networks limited to a relatively small geographic area such as an
office building. WANs are
29
<PAGE>
computer networks that span larger geographic areas, such as states, countries
or continents. 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 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.
A growing number of businesses have recognized the Internet as a valuable and
economical medium for public and corporate communications. These businesses
seek to move their voice communications to packet-switched networks such as
corporate intranets and the Internet to reduce their telecommunications costs.
Although packet-switched networks can offer more efficiency and value to
businesses, the traditional telephone network remains the standard for voice
communication 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 legacy systems, which are
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 PBX as the backbone
of their connection to the voice network, and maintain a separate data
network. The traditional PBX switches calls between users on internal lines,
while allowing all users to share a fixed number of external phone lines.
Today's traditional PBX remains an expensive, proprietary solution. A
traditional PBX requires skilled personnel to physically prepare the
installation site and to install the equipment. Traditional PBX systems can be
difficult to install, upgrade and maintain. For example, adding voice mail to
a traditional PBX system requires personnel to configure and connect a
separate server to the PBX. Thus, after adding a number of features such as
voice mail, a traditional PBX 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.
30
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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 server-based telecommunications system,
including server-based PBXs and IP-based PBXs, has emerged to address the
challenges and inadequacies associated with traditional PBX systems. Frost &
Sullivan estimates that the market for server-based PBX systems 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 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 server-based telecommunications systems do not address the needs
of businesses that wish to transmit voice communications over both the
traditional telephone network and packet-switched 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 server-based telecommunications systems
using the Internet as well as the traditional telephone network.
The AltiGen Solution
We design, manufacture and market next generation, server-based
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 PBX systems. AltiServ, our Windows NT-
based system, interfaces with the circuit-switched network and packet-switched
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
server-based telecommunications systems. An example of our system is
illustrated below:
This graphic illustrates that AltiGen's server-based PBX system contains PBX,
voice messaging, auto-attendant, 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 packet-switched 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 packet-switched
networks, including the Internet, our systems eliminate toll charges
associated with long-distance calls. Using our products,
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<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 a traditional PBX, 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
server-based PBX market and expand our current position in the IP-based PBX
market.
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
targeted 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 server-based
telecommunications systems market. 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.
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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 called phone numbers 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, e-mail and data files into a single email
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 IP 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 Internet Protocol.
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 IP. 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
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<PAGE>
care of other administrative matters that affect one or more 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 users, and allows users to listen to the messages through personal computer
speakers. 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 PBXs, 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, record and manage voice messages left by callers reaching a
busy phone and to receive email communications. Unlike traditional PBXs,
AltiWare OE also supports sharing caller information and exchanging voice
messages and email 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 Internet Protocol. 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, such as the AltiServ system,
that support the H.323 standard. 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 simply a computer built
right on to the circuit board which can run special, high speed
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software 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, ISDN, or IP communication circuit board 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 to achieve high 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/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 distributors, dealers, original equipment manufacturers and strategic
partners in marketing, selling and supporting our products, 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. 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 customer calls and refers new leads to a qualified
dealer near the customer's location.
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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 in conjunction with 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 March 31, 1999, we had 27
software engineers in our research and development group.
Competition
The markets for our products are intensely competitive, continually evolving
and subject to changing technologies. We currently compete with companies
providing traditional PBX systems, principally Lucent Technologies and Nortel
Networks. We also compete against companies providing server-based PBXs
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 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;
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<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 for
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<PAGE>
preliminary injunction. The motion has 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 the 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 the products. Not all licenses required under 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 67 people, including 30 in engineering,
research and development and support and 29 in sales, marketing and
administration. We also employed eight 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.
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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.
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.
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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
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
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
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1999 to June 1999, Ms. Chu served as our Senior Director of Finance and
Administration. From February 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.
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.
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 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, which produces 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.
41
<PAGE>
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. 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.
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.
42
<PAGE>
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 10,000 shares of our common stock at $0.50 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 10,000 shares of our common stock at $7.00 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 $30,218 500,000
President and Chief Executive Officer
Simon Chouldjian.......................... 110,004 -- 80,000
Vice President of Manufacturing
Michele Shannon........................... 120,000 33,616 2,390
Vice President of Sales
</TABLE>
43
<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 856,738 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 assumed 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>
Potential
Realizable
Value at
Assumed
Annual Rates
Percent of of Stock
Total Price
Number of Options Appreciation
Securities Granted to for Option
Underlying Employees Exercise Price 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)........... 299,464 34.9% $0.14 10/30/07 $ $
Simon Chouldjian(3)..... 47,914 5.5 0.14 10/30/07
Michele Shannon......... 1,431 0.1 0.14 10/30/07
</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.
44
<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 fair
market value of our common stock at September 30, 1998 as determined by our
Board of Directors, minus 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 -- $ $
Simon Chouldjian........ -- -- 14,973 32,941
Michele Shannon......... 22,460 $15,000 6,239 32,625
</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,
2,096,248 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 1,573,802 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. 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.
45
<PAGE>
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. 2,096,248 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:
. 1,796,784 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 195,898 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.
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
46
<PAGE>
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, 299,464 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:
. 598,928 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
5,989 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.
47
<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 9,571,185 shares of common stock
outstanding as of June 30, 1999 and 14,171,185 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)(8)(9).... 1,429,461 14.0% 9.7%
Kenneth Tai(3)......... 900,388 9.4 6.3
Wen-Huang (Simon)
Chang(4)(9)........... 599,406 6.3 4.2
Thomas Shao(5)......... 211,496 2.2 1.5
Masaharu Shinya........ 119,786 1.2 *
Simon Chouldjian(6).... 45,532 * *
Michele Shannon(7)..... 46,074 * *
Philip McDermott....... -- -- --
Richard Black.......... -- -- --
All directors and
executive officers as
a group (9 persons)... 3,352,143 39.4 27.2
5% Stockholders
Technology Associates
Corporation(8)........ 942,817 9.8 6.6
11F 201, Chien Kuo
South Road,
Section 2, Taipei,
Taiwan R.O.C.
Shing-Kao (Jerry)
Liao.................. 496,739 5.2 3.5
</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 11,979 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.
48
<PAGE>
(3) Includes shares held by the following affiliated entities: 598,928 shares
registered in the name of InveStar Burgeon Venture Capital, Inc.; 99,822
shares registered in the name of InveStar Dayspring Venture Group, Inc.;
99,822 shares registered in the name of InveStar Excelsus Venture Capital
(Int'l) Inc., LDC; and 99,821 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 149,732 shares registered in the name of Mr. Chang's wife, Hsiang-
Li Chang Hu, and 143,743 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 17,968 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
20,620 shares.
(8) Includes 140,309 shares registered in the name of affiliated entity Tech
Alliance Corporation.
(9) Mr. Hu and Mr. Chang are brothers-in-law.
Certain Transactions
Equity Investment Transactions
Series B Preferred Stock. In August 1995 and January 1996, we sold 1,494,496
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)...................................... 119,786
Shing-Kao (Jerry) Liao............................. 118,396
Gilbert Hu(2)...................................... 79,837
Hsiang-Li Chang Hu(3).............................. 52,006
Ya-Ting Chang(3)................................... 52,006
Nicholas Shih(4)................................... 29,946
Diana Shih(4)...................................... 29,946
En-Kuang Lung...................................... 23,957
Chang-Hou Lin...................................... 23,679
</TABLE>
- -------------------
(1) Of the 119,786 series B shares purchased by Ms. Chu, 30,000 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.
49
<PAGE>
Series C Preferred Stock. From June 1996 to December 1997, we sold 3,593,565
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)................................... 598,928
Entities affiliated with InveStar Capital,
Inc.(2).......................................... 598,928
Entities affiliated with Techgains Corpora-
tion(3).......................................... 335,400
Shing-Kao (Jerry) Liao............................ 158,716
Masaharu Shinya................................... 119,786
Wen-Huang (Simon) Chang(4)........................ 64,364
Hsiang-Li Chang Hu(4)............................. 61,791
Ya-Ting Chang(4).................................. 43,823
Chin-Tzu Lin Wu(5)................................ 47,914
May Kuei-Rong Hu(6)............................... 11,979
Simon Chouldjian.................................. 5,989
Michele Shannon................................... 2,995
</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.
Series D Preferred Stock. In April, August and September 1998 and May 1999, we
sold a total of 1,423,222 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)................................... 343,889
Entities affiliated with InveStar Capital,
Inc.(2).......................................... 299,464
Entities affiliated with Kanematsu Corpora-
tion(3).......................................... 128,304
Wen-Huang (Simon) Chang........................... 83,850
</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.
50
<PAGE>
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
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.
Description of Capital Stock
Authorized Shares
Immediately following the closing of this offering, our authorized capital
stock will consist of 14,171,185 shares of common stock, $0.001 par value per
share, and 2,994,640 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 upon the
closing of this offering, there were outstanding 9,571,185 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
51
<PAGE>
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 8,146,270 shares of common
stock will be entitled to rights with respect to the registration of those
shares under the Securities Act. 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, 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 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.
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.
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<PAGE>
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.
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.
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
53
<PAGE>
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 Boston EquiServe L.P.
Its address is 150 Royall Street, Canton, Massachusetts 02021. Its telephone
number at this location is (781) 575-3010.
54
<PAGE>
Shares Eligible for Future Sale
Shares Eligible for Future Sale
When this offering is completed, we will have a total of 14,171,185 shares of
common stock outstanding, assuming no exercise of outstanding options. The
4,600,000 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 9,571,185 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.
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. Under Rule
144 and subject to certain volume limitations, 8,625,209 of the 9,571,185
restricted shares are expected to be immediately eligible for sale upon
consummation of this offering, 252,240 of the restricted shares will be
eligible for sale beginning the 181st day after the date of this offering, and
693,735 will become saleable after April 2000. However, 9,542,549 shares
eligible for sale under Rule 144 are subject to 180-day "lock-ups."
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 4,507,412 shares. Such
55
<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 approximately 9,542,549 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.
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<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.....................................
Dain Rauscher Wessels ......................................
FAC/Equities, a division of First Albany Corporation........
---------
Total...................................................... 4,600,000
=========
</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 $ per share. The underwriters may also allow, and such dealers may
reallow, a concession not in excess of $ 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 690,000 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 page of this prospectus, less
the underwriting discount. If this option is exercised in full, the total price
to public will be $58,190,000, and the total proceeds to AltiGen will be
$53,116,700. 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........... $0.77 $3,542,000 $4,073,300
</TABLE>
57
<PAGE>
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 9,542,549
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 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.
. 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.
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<PAGE>
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.
AltiGen and the underwriters expect that the shares will be ready for delivery
on the th business day following the date of this prospectus. Under
Securities and Exchange Commission regulations, secondary market trades are
required to settle in three business days following the trade date (commonly
referred to as "T+3"), unless the parties to the trade agree to a different
settlement cycle. As noted above, the shares will settle in T+ . Therefore,
purchasers who wish to trade on the date of this prospectus or during the next
succeeding business day[s] must specify an alternate settlement cycle at
the time of the trade to prevent a failed settlement. Purchasers of the shares
who wish to trade shares on the date of this prospectus or during the next
succeeding business day[s] should consult their own advisors.
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.
59
<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)
6,479,009 shares at September 30,
1997, 7,649,561 shares at September
30, 1998 and 8,146,270 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, 871,327 shares at
September 30, 1998, 1,424,915 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..... 3,053,420 $3,053 756,558 $ 756 $ 3,172,259 $ -- $ (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................. 1,856,680 1,857 -- -- 3,098,148 -- -- 3,100,005
Exercise of stock
options............... -- -- 13,600 14 1,172 -- -- 1,186
Net loss............... -- -- -- -- -- (1,631,160) (1,631,160)
--------- ------ --------- ------ ----------- ------------ ------------- ------------
BALANCE,
SEPTEMBER 30, 1996..... 4,986,163 4,986 770,158 770 6,360,403 -- (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............... -- -- 31,669 32 3,140 -- -- 3,172
Net loss............... -- -- -- -- -- -- (3,118,782) (3,118,782)
--------- ------ --------- ------ ----------- ------------ ------------- ------------
BALANCE,
SEPTEMBER 30, 1997..... 6,479,009 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................. 926,513 927 -- -- 7,783,906 -- -- 7,784,833
Exercise of stock
options............... -- -- 69,500 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..... 7,649,561 7,650 871,327 871 20,357,168 (1,288,333) (9,826,468) 9,250,888
Issuance of Series D
convertible preferred
stock................. 496,709 496 -- -- 5,771,840 -- -- 5,772,336
Exercise of stock
options............... -- -- 356,562 357 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 ......... 8,146,270 $8,146 1,424,915 $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 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.
F-8
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
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.
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.
F-9
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
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 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.
F-10
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
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 counterclaim against
the Company, seeking to enjoin the Company from making, importing, using,
selling or offering to sell its Quantum Board, a product which accounted for
approximately 90% of the Company's revenues for the nine months ended June 30,
1999. Netphone's motion is 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.
F-11
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
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,
1,634,987 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,
1,494,496 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,
3,349,525 shares outstanding at September
30, 1997, 3,593,565 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,
926,513 and 1,423,222 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 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.
F-12
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
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................ 1,634,987
Conversion of Series B outstanding preferred stock................ 1,494,496
Conversion of Series C outstanding preferred stock................ 3,593,565
Conversion of Series D outstanding preferred stock................ 1,423,222
1994 Stock Option Plan............................................ 1,598,714
1999 Stock Option Plan............................................ 2,096,248
----------
11,841,232
==========
</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 2,096,248 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 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.
F-13
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
In 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan") and
authorized the issuance of 2,096,248 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...................................... 306,052 $0.08
Granted................................................ 548,199 0.13
Exercised.............................................. (13,600) 0.08
Canceled............................................... (11,080) 0.10
--------- -----
September 30, 1996...................................... 829,571 0.11
Authorized............................................. -- --
Granted................................................ 100,621 0.17
Exercised.............................................. (31,669) 0.10
Canceled............................................... (52,781) 0.10
--------- -----
September 30, 1997...................................... 845,742 0.12
Granted................................................ 856,738 0.45
Exercised.............................................. (69,500) 0.13
Canceled............................................... (15,348) 0.52
--------- -----
September 30, 1998...................................... 1,617,632 0.29
Granted................................................ 580,111 5.09
Exercised.............................................. (356,562) 0.13
Canceled............................................... (71,481) 0.45
--------- -----
June 30, 1999........................................... 1,769,700 $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
-------- ------------ -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.08 -
$0.12 29,208 6.37 $0.12 18,872 $0.12
0.13 -
0.17 415,386 6.62 0.15 374,235 0.13
0.23 443,341 8.38 0.23 351,740 0.23
0.58 -
0.87 379,515 8.94 0.85 98,021 0.75
2.89 -
4.34 382,165 9.76 3.82 26,892 3.69
11.69 120,085 9.93 11.69 -- --
------- --------- ---- ----- ------- -----
$0.08 -
$11.69 1,769,700 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.
F-15
<PAGE>
AltiGen Communications, Inc.
Notes to Consolidated Financial Statements (Continued)
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 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.
4,600,000 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 , (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.
<PAGE>
Part II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale
and distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission and NASD registration fees and
the Nasdaq National Market listing fee. All of the expenses below will be paid
by AltiGen.
<TABLE>
<CAPTION>
Item
----
<S> <C>
Registration fee................................................. $ 17,648
NASD filing fee.................................................. 5,675
Nasdaq National Market listing fee............................... 60,000
Blue sky fees and expenses....................................... 25,000
Printing and engraving expenses.................................. 200,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 320,000
Transfer Agent and Registrar fees................................ 5,000
Miscellaneous.................................................... 16,677
----------
Total.......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law, we can indemnify
our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"). Our bylaws provide that we will indemnify our
directors and officers to the fullest extent permitted by law.
Our certificate of incorporation provides that, pursuant to Delaware law,
our directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty of care to AltiGen and our stockholders. This
provision in the certificate of incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware
law. In addition, each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Company or our stockholders,
for acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
In addition, our certificate of incorporation (Exhibit 3.1 to this
registration statement) provides that we shall indemnify our directors and
officers if such persons acted (1) in good faith, (2) in a manner reasonably
believed to be in or not opposed to our best interests and (3) with respect to
any criminal action or proceeding, with reasonable cause to believe such
conduct was lawful. We intend to obtain directors' and officers' liability
insurance in connection with this offering.
In addition, we have entered or, concurrently with this offering, will enter
into agreements to indemnify our directors and certain officers in addition to
the indemnification provided for in the certificate of incorporation and
bylaws. These agreements will, among other things, indemnify our directors and
certain
II-1
<PAGE>
officers for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by such person in any action or proceeding,
including any action by or in our right, on account of services by that person
as a director or officer of AltiGen or as a director or officer of any
subsidiary of AltiGen, or as a director or officer of any other company or
enterprise that the person provides services to at the request of AltiGen.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of AltiGen and its officers and directors, and by AltiGen
of the underwriters, for certain liabilities arising under the Securities Act
or otherwise.
Item 15. Recent Sales of Unregistered Securities
AltiGen has sold and issued the following securities within the past three
years. None of the transactions as set forth below involved any public
offering or any underwriter. The recipients in each transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to share certificates and instruments issued
in such transactions. All recipients had adequate access, through their
relationships with AltiGen, to information about AltiGen.
(1) In June 1996 through December 1997, we completed a series of private
placements of 3,593,565 shares of series C preferred stock to a group of
institutional investors, certain members of senior management and employees,
including Michele Shannon, and immediate family members of our directors and
executive officers, for an aggregate purchase price of $7,849,751.
(2) In March 1998 through May 1999, we completed a series of private
placements of 1,423,549 shares of series D preferred stock for an aggregate
offering price of $13,624,299. Of these 1,423,222 shares, 25,800 were sold to
certain of our employees pursuant to our 1998 Stock Purchase Plan.
(3) In June 1999, we issued 197,026 shares of common stock to 12 individuals
and entities in satisfaction of certain promissory notes held by them, for
aggregate consideration of $378,485.
(4) We have from time to time granted stock options to employees,
consultants and outside directors in reliance upon an exemption under the
Securities Act pursuant to Rule 701. From June 1, 1996 through June 30, 1999,
an aggregate of 471,331 shares of common stock were issued pursuant to option
exercises at exercise prices ranging from $0.05 to $7.00.
(5) In July 1999, AltiGen effected a one-for-1.66965 stock split of its
outstanding common and preferred stock.
The sales and issuances of securities in the transactions described in
paragraphs (1) and (2) above were deemed to be exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act") by virtue of
Regulation D and Regulation S promulgated thereunder as transactions by an
issuer not involving any public offering.
The sale and issuance of securities in the transaction described in
paragraph (3) above was deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) of the Securities Act.
The grants of stock options to employees, consultants and outside directors
described in paragraph (4) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder.
The issuance described in paragraph (5) above was or will be exempt from
registration under Section 2(3) of the Securities Act on the basis that such
transaction did not involve a "sale" of securities.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation.
3.2** Form of Amended and Restated Certificate of Incorporation, to be
filed and effective upon completion of this offering.
3.3** Bylaws.
3.4** Form of Amended and Restated Bylaws, to be filed and effective upon
completion of this offering.
4.1** See Exhibit 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate
of Incorporation and Bylaws defining the rights of holders of Common
Stock.
4.2 Specimen Common Stock certificates.
4.3** Third Amended and Restated Rights Agreement dated May 7, 1999 by and
among AltiGen Communications, Inc. and the Investors and Founder
named therein.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati.
10.1** Form of Indemnification Agreement.
10.2** 1994 Stock Option Plan, as amended, and form of stock option
agreement.
10.3** 1998 Stock Purchase Plan.
10.4** 1999 Stock Option Plan, as amended, and form of stock option
agreement.
10.5** 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.6** Sublease and Consent to Sublease Agreement: 47427 Fremont Boulevard,
Fremont, California between Hitachi America, Ltd. and Phase Metrics,
Inc., dated April 1, 1997.
10.7** Sub-Sublease and Consents to Sub-Sublease: 47427 Fremont Boulevard,
Fremont, California between Phase Metrics, Inc. and AltiGen
Communications, Inc., dated December 11, 1998.
10.8+** Dealer Agreement and Addendum between Teleco Inc. and AltiGen
Communications, Inc., dated September 9, 1996.
10.9+** Distributor Agreement between Kanematsu Semiconductor Corporation and
AltiGen Communications, Inc., dated April 21, 1997 and Modification
dated May 13, 1997.
10.10+** Distribution Agreement between Tech Data Product Management, Inc. and
AltiGen Communications, Inc., dated July 21, 1997.
10.11+** Distribution Agreement between TerraComSortium and AltiGen
Communications, Inc., dated November 3, 1997.
10.12+** OEM Private Label License Agreement between Renaissance Network
Technology Corporation and AltiGen Communications, Inc., dated May
1998.
10.13** Services Agreement between Sumitronics, Inc. and AltiGen
Communications, Inc., dated June 2, 1998 and related Commission
Agreement dated March 1999.
10.14+** Distribution Agreement between Ingram Micro Inc. and AltiGen
Communications, Inc., dated June 12, 1998.
10.15** Contract Purchase Agreement between RadiSys Corporation and AltiGen
Communications Inc., dated July 31, 1998.
10.16** Software License and Binary Distribution Agreement between Lucent
Technologies Inc. and AltiGen Communications, Inc., dated as of
September 23, 1998.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.17** Consulting and Development Agreement between Sollecon, Inc. and
AltiGen Communications, Inc., dated as of October 27, 1998.
10.18** Employment Agreement by and between the Registrant and Tricia Chu,
dated April 26, 1999.
10.19** Employment Agreement by and between the Registrant and Philip
McDermott, dated June 8, 1999.
10.20** Compaq Solutions Alliance Agreement between Compaq Computer
Corporation and AltiGen Communications, Inc., dated as of January 18,
1999.
10.21** Memorandum of Understanding between Hewlett-Packard Covision Internet
Solutions Program and AltiGen Communications, Inc., dated as of
November 9, 1998.
10.22+** Original Equipment Manufacture Private Label Agreement between
Nitsuko Corporation and AltiGen Communications, Inc., dated as of
February 2, 1999.
10.23+** Joint Development Agreement between Nitsuko Corporation, Sumisho
Electronics Co., Ltd. and AltiGen Communications, Inc., dated as of
July 14, 1998.
10.24 Form of Promissory Notes from the Registrant to Simon Chouldjian
11.1** Statement regarding Computation of Per Share Earnings (contained in
Notes to Financial Statements).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati (Included in Exhibit 5.1
hereto).
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- -------------------
** Previously filed.
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In
accordance with Rule 406, these confidential portions have been omitted
from this exhibit and filed separately with the Commission.
(b) Financial Statement Schedules
The following financial statement schedules are included in this
Registration Statement:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which the provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions, are inapplicable or not material, or the information called for
thereby is otherwise included in the financial statements and therefore has
been omitted.
Item 17. Undertakings
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of us
pursuant to the foregoing provisions, or otherwise, the Registrant been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is
II-4
<PAGE>
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of expenses by the Registrant incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus as filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by us pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and this offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, as amended,
AltiGen Communications, Inc. has duly caused this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fremont, State of California, on the
27th day of August, 1999.
ALTIGEN COMMUNICATIONS, INC.
/s/ Gilbert Hu
By: _________________________________
Gilbert Hu,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement on Form S-1 has been signed by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gilbert Hu Chief Executive Officer August 27, 1999
____________________________________ (principal executive
Gilbert Hu officer) and Director
/s/ Philip McDermott Chief Financial (principal August 27, 1999
____________________________________ financial and accounting
Philip McDermott officer)
* Director August 27, 1999
____________________________________
Wen-Huang Chang
* Director August 27, 1999
____________________________________
Thomas Shao
* Director August 27, 1999
____________________________________
Masaharu Shinya
* Director August 27, 1999
____________________________________
Kenneth Tai
* Director August 27, 1999
____________________________________
Richard Black
*By: /s/ Gilbert Hu
-----------------------------
Gilbert Hu
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Write-offs Period
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended September 30, 1996
Allowance for returns and doubtful
accounts......................... 0 10,000 -- 10,000
Year ended September 30, 1997
Allowance for returns and doubtful
accounts......................... 10,000 31,000 -- 41,000
Year ended September 30, 1998
Allowance for returns and doubtful
accounts......................... 41,000 92,000 -- 133,000
Nine months ended June 30, 1999
Allowance for returns and doubtful
accounts......................... 133,000 217,000 (150,000) 200,000
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
To AltiGen Communications Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of AltiGen Communications, Inc. included in
this Registration Statement and have issued our report thereon dated July 19,
1999. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying Schedule II--Valuation
and Qualifying Accounts is the responsibility of the Company's management and
is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
-------------------------------------
Arthur Andersen LLP
San Jose, California
July 19, 1999
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Certificate of Incorporation.
3.2** Form of Amended and Restated Certificate of Incorporation, to be
filed and effective upon completion of this offering.
3.3** Bylaws.
3.4** Form of Amended and Restated Bylaws, to be filed and effective upon
completion of this offering.
4.1** See Exhibit 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate
of Incorporation and Bylaws defining the rights of holders of Common
Stock.
4.2 Specimen Common Stock certificates.
4.3** Third Amended and Restated Rights Agreement dated May 7, 1999 by and
among AltiGen Communications, Inc. and the Investors and Founder
named therein.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati.
10.1** Form of Indemnification Agreement.
10.2** 1994 Stock Option Plan, as amended, and form of stock option
agreement.
10.3** 1998 Stock Purchase Plan.
10.4** 1999 Stock Option Plan, as amended, and form of stock option
agreement.
10.5** 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.6** Sublease and Consent to Sublease Agreement: 47427 Fremont Boulevard,
Fremont, California between Hitachi America, Ltd. and Phase Metrics,
Inc., dated April 1, 1997.
10.7** Sub-Sublease and Consents to Sub-Sublease: 47427 Fremont Boulevard,
Fremont, California between Phase Metrics, Inc. and AltiGen
Communications, Inc., dated December 11, 1998.
10.8+** Dealer Agreement and Addendum between Teleco Inc. and AltiGen
Communications, Inc., dated September 9, 1996.
10.9+** Distributor Agreement between Kanematsu Semiconductor Corporation and
AltiGen Communications, Inc., dated April 21, 1997 and Modification
dated May 13, 1997.
10.10+** Distribution Agreement between Tech Data Product Management, Inc. and
AltiGen Communications, Inc., dated July 21, 1997.
10.11+** Distribution Agreement between TerraComSortium and AltiGen
Communications, Inc., dated November 3, 1997.
10.12+** OEM Private Label License Agreement between Renaissance Network
Technology Corporation and AltiGen Communications, Inc., dated May
1998.
10.13** Services Agreement between Sumitronics, Inc. and AltiGen
Communications, Inc., dated June 2, 1998 and related Commission
Agreement dated March 1999.
10.14+** Distribution Agreement between Ingram Micro Inc. and AltiGen
Communications, Inc., dated June 12, 1998.
10.15** Contract Purchase Agreement between RadiSys Corporation and AltiGen
Communications Inc., dated July 31, 1998.
10.16** Software License and Binary Distribution Agreement between Lucent
Technologies Inc. and AltiGen Communications, Inc., dated as of
September 23, 1998.
10.17** Consulting and Development Agreement between Sollecon, Inc. and
AltiGen Communications, Inc., dated as of October 27, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.18** Employment Agreement by and between the Registrant and Tricia Chu,
dated April 26, 1999.
10.19** Employment Agreement by and between the Registrant and Philip
McDermott, dated June 8, 1999.
10.20** Compaq Solutions Alliance Agreement between Compaq Computer
Corporation and AltiGen Communications, Inc., dated as of January 18,
1999.
10.21** Memorandum of Understanding between Hewlett-Packard Covision Internet
Solutions Program and AltiGen Communications, Inc., dated as of
November 9, 1998.
10.22+** Original Equipment Manufacture Private Label Agreement between
Nitsuko Corporation and AltiGen Communications, Inc., dated as of
February 2, 1999.
10.23+** Joint Development Agreement between Nitsuko Corporation, Sumisho
Electronics Co., Ltd. and AltiGen Communications, Inc., dated as of
July 14, 1998.
10.24 Form of Promissory Notes from the Registrant to Simon Chouldjian
11.1** Statement regarding Computation of Per Share Earnings (contained in
Notes to Financial Statements).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati (Included in Exhibit 5.1
hereto).
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- -------------------
** Previously filed.
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In
accordance with Rule 406, these confidential portions have been omitted
from this exhibit and filed separately with the Commission.
<PAGE>
Exhibit 1.1
Draft of 8/26/99
4,600,000 Shares
ALTIGEN COMMUNICATIONS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
___________, 1999
CIBC World Markets Corp.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
FAC/Equities, a division of First Albany Corporation
c/o CIBC World Markets Corp.
World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
AltiGen Communications, Inc., a Delaware corporation (the "Company")
propose, subject to the terms and conditions contained herein, to sell to you
and the other underwriters named on Schedule I to this Agreement (the
"Underwriters"), for whom you are acting as Representatives (the
"Representatives"), an aggregate of 4,600,000 shares (the "Firm Shares") of the
Company's Common Stock, $.001 par value (the "Common Stock"). All of the
4,600,000 Firm Shares are to be issued and sold by the Company. The respective
amounts of the Firm Shares to be purchased by each of the several Underwriters
are set forth opposite their names on Schedule I hereto. In addition, the
Company proposes to grant to the Underwriters an option to purchase up to an
additional 690,000 shares (the "Option Shares") of Common Stock from it for the
purpose of covering over-allotments in connection with the sale of the Firm
Shares. The Firm Shares and the Option Shares are together called the "Shares."
CIBC World Markets Corp. has agreed to reserve a portion of the Shares to
be purchased by it under this Agreement for sale to the Company's directors,
officers, employees and business associates and other parties related to the
Company (collectively, "Participants"), as set forth in the Prospectus under the
heading "Underwriters" (the "Directed Share Program"). The Shares to be sold by
CIBC World Markets Corp. pursuant to the Directed Share Program are hereinafter
referred to as the "Directed Shares." Any Directed Shares not orally confirmed
for purchase by any Participants by the end of the business day on which this
Agreement is executed will be offered to the public by the Underwriters as set
forth in the Prospectus.
-1-
<PAGE>
1. Sale and Purchase of the Shares. On the basis of the representations,
-------------------------------
warranties and agreements contained in, and subject to the terms and conditions
of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters, and each of
the Underwriters agrees, severally and not jointly, to purchase from the
Company, at a price of $_____ per share (the "Initial Price"), the number of
Firm Shares set forth opposite the name of such Underwriter under the column
"Number of Firm Shares to be Purchased from the Company" on Schedule I to this
Agreement, subject to adjustment in accordance with Section 11 hereof.
(b) The Company grants to the several Underwriters an option to purchase,
severally and not jointly, all or any part of the Option Shares at the Initial
Price. The number of Option Shares to be purchased by each Underwriter shall be
the same percentage (adjusted by the Representatives to eliminate fractions) of
the total number of Option Shares to be purchased by the Underwriters as such
Underwriter is purchasing of the Firm Shares. Such option may be exercised only
to cover over-allotments in the sales of the Firm Shares by the Underwriters and
may be exercised in whole or in part at any time on or before 12:00 noon, New
York City time, on the business day before the Firm Shares Closing Date (as
defined below), and only once thereafter within 30 days after the date of this
Agreement, in each case upon written or telegraphic notice, or verbal or
telephonic notice confirmed by written or telegraphic notice, by the
Representatives to the Company no later than 12:00 noon, New York City time, on
the business day before the Firm Shares Closing Date or at least two business
days before the Option Shares Closing Date (as defined below), as the case may
be, setting forth the number of Option Shares to be purchased and the time and
date (if other than the Firm Shares Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company of the Firm Shares to
--------------------
the Representatives for the respective accounts of the Underwriters, and payment
of the purchase price by wire transfer in New York Clearing House (same day)
funds drawn to the order of the Company for the shares purchased from the
Company, against delivery of the respective certificates therefor to the
Representatives, shall take place at the offices of CIBC World Markets Corp.,
World Financial Center, New York, New York 10281, at 10:00 a.m., New York City
time, on the third business day following the date of this Agreement, or at such
time on such other date, not later than 10 business days after the date of this
Agreement, as shall be agreed upon by the Company and the Representatives (such
time and date of delivery and payment are called the "Firm Shares Closing
Date").
In the event the option with respect to the Option Shares is exercised,
delivery by the Company of the Option Shares to the Representatives for the
respective accounts of the Underwriters and payment of the purchase price by
wire transfer payable in New York Clearing House (same day) funds to the Company
shall take place at the offices of CIBC World Markets Corp. specified above at
the time and on the date (which may be the same date as, but in no event shall
be earlier than, the Firm Shares Closing Date) specified in the notice referred
to in Section 1(b) (such time and date of delivery and payment are called the
"Option Shares Closing Date"). The Firm Shares Closing Date and the Option
Shares Closing Date are called, individually, a "Closing Date" and, together,
the "Closing Dates."
-2-
<PAGE>
Certificates evidencing the Shares shall be registered in such names and
shall be in such denominations as the Representatives shall request at least two
full business days before the Firm Shares Closing Date or, in the case of Option
Shares, on the day of notice of exercise of the option as described in Section
l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, on the full
business day before the Firm Shares Closing Date (or the Option Shares Closing
Date in the case of the Option Shares).
3. Registration Statement and Prospectus; Public Offering. The Company
------------------------------------------------------
has prepared and filed in conformity with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), and the published rules and
regulations thereunder (the "Rules") adopted by the Securities and Exchange
Commission (the "Commission") a Registration Statement (as hereinafter defined)
on Form S-1 (No. 333-80037), including a preliminary prospectus relating to the
Shares, and such amendments thereof as may have been required to the date of
this Agreement. Copies of such Registration Statement (including all amendments
thereof) and of the related Preliminary Prospectus (as hereinafter defined) have
heretofore been delivered by the Company to you. The term "Preliminary
Prospectus" means any preliminary prospectus (as described in Rule 430 of the
Rules) included at any time as a part of the Registration Statement or filed
with the Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules. The term "Registration Statement" as used
in this Agreement means the initial registration statement (including all
exhibits and financial schedules), as amended at the time and on the date it
becomes effective (the "Effective Date") and as thereafter amended by post
effective amendments. If the Company has filed an abbreviated registration
statement to register additional Shares pursuant to Rule 462(b) under the Rules
(the "462(b) Registration Statement") then any reference herein to the
Registration Statement shall also be deemed to include such 462(b) Registration
Statement. The term "Prospectus" as used in this Agreement means the prospectus
in the form included in the Registration Statement at the time of effectiveness
or, if Rule 430A of the Rules is relied on, the term Prospectus shall also
include the final prospectus filed with the Commission pursuant to Rule 424(b)
of the Rules.
The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the Prospectus, as soon
after the Effective Date and the date of this Agreement as the Representatives
deem advisable. The Company hereby confirms that the Underwriters and dealers
have been authorized to distribute or cause to be distributed each Preliminary
Prospectus and are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or supplements
thereto to the Underwriters).
4. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Underwriter as follows:
(a) On the Effective Date, the Registration Statement complied, and on the
date of the Prospectus, the date any post-effective amendment to the
Registration Statement becomes effective, the date any supplement or amendment
to the Prospectus is filed with the Commission and each Closing Date, the
Registration Statement and the Prospectus (and any amendment
-3-
<PAGE>
thereof or supplement thereto) will comply, in all material respects, with the
applicable provisions of the Securities Act and the Rules and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder. The Registration Statement did not, as
of the Effective Date, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading; and on the other dates referred
to above neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, will contain any untrue statement of a
material fact or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
When any related preliminary prospectus was first filed with the Commission
(whether filed as part of the Registration Statement or any amendment thereto or
pursuant to Rule 424(a) of the Rules) and when any amendment thereof or
supplement thereto was first filed with the Commission, such preliminary
prospectus as amended or supplemented complied in all material respects with the
applicable provisions of the Securities Act and the Rules and did not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. Notwithstanding the foregoing, none of the
representations and warranties in this paragraph 4(a) shall apply to statements
in, or omissions from, the Registration Statement or the Prospectus made in
reliance upon, and in conformity with, information herein or otherwise furnished
in writing by the Representatives on behalf of the several Underwriters for use
in the Registration Statement or the Prospectus. With respect to the preceding
sentence, the Company acknowledges that the only information furnished in
writing by the Representatives on behalf of the several Underwriters for use in
the Registration Statement or the Prospectus is the paragraph with respect to
stabilization on the inside front cover page of the Prospectus and the
statements contained under the caption "Underwriting" in the Prospectus.
(b) The Registration Statement is effective under the Securities Act and
no stop order preventing or suspending the effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been instituted or are threatened under
the Securities Act; any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules has been or will be made in the
manner and within the time period required by such Rule 424(b).
(c) The consolidated financial statements of the Company (including all
notes and schedules thereto) included in the Registration Statement and
Prospectus present fairly the financial position, the results of operations, the
statements of cash flows and the statements of stockholders' equity and the
other information purported to be shown therein of the Company at the respective
dates and for the respective periods to which they apply; and such financial
statements and related schedules and notes have been prepared in conformity with
generally accepted accounting principles, consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation of the
results for such periods have been made. The summary and selected financial data
included in the Prospectus present fairly the information shown therein as at
the respective dates and for the respective periods specified and the summary
and selected financial data have been presented on a basis consistent with the
consolidated financial statements so set forth in the Prospectus and other
financial information.
-4-
<PAGE>
(d) Arthur Andersen LLP, whose reports are filed with the Commission as a
part of the Registration Statement, are and, during the periods covered by their
reports, were independent public accountants as required by the Securities Act
and the Rules.
(e) The Company and each of its Subsidiaries (as hereinafter defined) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation. The Company and each such subsidiary
or other entity controlled directly or indirectly by the Company (collectively,
"Subsidiaries") is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the nature of the business
conducted by it or location of the assets or properties owned, leased or
licensed by it requires such qualification, except for such jurisdictions where
the failure to so qualify would not have a material adverse effect on the assets
or properties, business, results of operations or financial condition of the
Company and its Subsidiaries, taken as a whole (a "Material Adverse Effect").
The Company and each of its Subsidiaries has all requisite corporate power and
authority, and all necessary authorizations, approvals, consents, orders,
licenses, certificates and permits of and from all governmental or regulatory
bodies or any other person or entity (collectively, the "Permits"), to own,
lease and license its assets and properties and conduct its business, all of
which are valid and in full force and effect, as described in the Registration
Statement and the Prospectus, except where the lack of such Permits would not
have a Material Adverse Effect; the Company and each of its Subsidiaries has
fulfilled and performed in all material respects all its material obligations
with respect to such Permits and no event has occurred that allows, or after
notice or lapse of time would allow, revocation or termination thereof or
results in any other material impairment of the rights of the Company
thereunder. Except as may be required under the Securities Act and state and
foreign Blue Sky laws, no other Permits are required to enter into, deliver and
perform this Agreement and to issue and sell the Shares.
(f) The Company and each of its Subsidiaries owns and possesses adequate
rights in all patents, patent rights, licenses, inventions, copyrights,
technology, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems, or procedures),
trademarks, service marks, trade names, and trade dress rights (collectively,
the "Intellectual Property") currently employed by it in the operation of its
business and all such Intellectual Property which is material to the conduct of
its business as described in the Prospectus. Neither the Company nor any of its
Subsidiaries is aware of any infringement, misappropriation or violation by
others of, or conflict by others with rights of the Company or of its
Subsidiaries with respect to, any such Intellectual Property. Except as
disclosed in the Prospectus, neither the Company nor any of its Subsidiaries has
received any notice of or is otherwise aware of any infringement,
misappropriation or violation by the Company or of its Subsidiaries of, or
conflict by the Company with rights of others with respect to, any Intellectual
Property of others. Without limiting the foregoing, there are no United States
or foreign patents known to the Company or any of its Subsidiaries which the
Company or any of its Subsidiaries infringes by its present activities or has
infringed by its past activities, or which would preclude the pursuit of its
business and business strategy as described in the Prospectus. Without limiting
the generality of the foregoing, except as described in the Prospectus under the
caption ["Business-Legal Proceedings,"] there is no pending or, to the Company's
or any of its Subsidiaries' knowledge, threatened action, suit, proceeding or
claim challenging the validity,
-5-
<PAGE>
enforceability or scope of the Company's or of its Subsidiaries rights in or to
any such Intellectual Property; and except as described in the Prospectus, there
is no pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others that the Company has infringed, misappropriated or
otherwise violated, or is infringing, misappropriating or violating, any rights
of others in Intellectual Property, except for claims made by certain inventors
of U.S. patent no. 5,533,104 as set forth in letters dated May 5, 1998 and
December 10, 1998, copies of which have been provided to counsel to the
Underwriters.
(g) The Company and each of its Subsidiaries has good and marketable title
in fee simple to all items of real property and good and marketable title to all
personal property described in the Prospectuses as being owned by it and any
real property and buildings described in the Prospectuses as being held under
lease by the Company and each of its Subsidiaries is held by it under valid,
existing and enforceable leases, free and clear of all liens, encumbrances,
claims, security interests and defects, except such as are described in the
Registration Statement and the Prospectus or would not have a Material Adverse
Effect.
(h) There are no litigation or governmental proceedings to which the
Company or its Subsidiaries is subject or which is pending or, to the knowledge
of the Company, threatened, against the Company or any of its Subsidiaries,
which might have a Material Adverse Effect, affect the consummation of this
Agreement or which is required to be disclosed in the Registration Statement and
the Prospectus that is not so disclosed.
(i) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as described therein, (i)
there has not been any material adverse change with regard to the assets or
properties, business, results of operations or financial condition of the
Company; (ii) neither the Company nor its Subsidiaries has sustained any loss or
interference with its assets, businesses or properties (whether owned or leased)
from fire, explosion, earthquake, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or any court or legislative or
other governmental action, order or decree which would have a Material Adverse
Effect; and (iii) since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, except as reflected therein, neither
the Company nor its Subsidiaries has (A) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, except such
liabilities or obligations incurred in the ordinary course of business, (B)
entered into any transaction not in the ordinary course of business or (C)
declared or paid any dividend or made any distribution on any shares of its
stock or redeemed, purchased or otherwise acquired or agreed to redeem, purchase
or otherwise acquire any shares of its stock.
(j) There is no document, contract or other agreement of a character
required to be described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which is not described or
filed as required by the Securities Act or Rules. Each description of a
contract, document or other agreement in the Registration Statement and the
Prospectus accurately reflects in all respects the terms of the underlying
document, contract or agreement. Each agreement described in the Registration
Statement and Prospectus or listed in the Exhibits to the Registration Statement
is in full force and effect and is valid and enforceable
-6-
<PAGE>
by and against the Company or the Subsidiary, as the case may be, in accordance
with its terms. Neither the Company nor the Subsidiary, if the Subsidiary is a
party, nor to the Company's knowledge, any other party is in default in the
observance or performance of any term or obligation to be performed by it under
any such agreement, and no event has occurred which with notice or lapse of time
or both would constitute such a default, in any such case which default or event
would have a Material Adverse Effect. No default exists, and no event has
occurred which with notice or lapse of time or both would constitute a default,
in the due performance and observance of any term, covenant or condition, by the
Company or the Subsidiary, if the Subsidiary is a party thereto, of any other
agreement or instrument to which the Company or the Subsidiary is a party or by
which it or its Company, the Subsidiary or their properties or business may be
bound or affected which default or event would have a Material Adverse Effect.
(k) Neither the Company nor any of its Subsidiaries is in violation of any
term or provision of its charter or bylaws or of any franchise, license, permit,
judgment, decree, order, statute, Rule or regulation, where the consequences of
such violation would have a Material Adverse Effect.
(l) Neither the execution, delivery and performance of this Agreement by
the Company nor the consummation of any of the transactions contemplated hereby
(including, without limitation, the issuance and sale by the Company of the
Shares) will give rise to a right to terminate or accelerate the due date of any
payment due under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice or lapse of
time or both would constitute a default) under, or require any consent or waiver
under, or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company or any of its
Subsidiaries pursuant to the terms of, any indenture, mortgage, deed of trust or
other agreement or instrument to which the Company or any of its Subsidiaries is
a party or by which either the Company or any of its Subsidiaries or any of
their properties or businesses is bound, or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation applicable to the Company
or any of its Subsidiaries or violate any provision of the charter or bylaws of
the Company or any of its Subsidiaries, except for such consents or waivers
which have already been obtained and are in full force and effect.
(m) The Company has authorized and outstanding capital stock as set forth
under the caption "Capitalization" in the Prospectus. The certificates
evidencing the Shares are in due and proper legal form and have been duly
authorized for issuance by the Company. All of the issued and outstanding shares
of Common Stock have been duly and validly issued and are fully paid and
nonassessable. There are no statutory preemptive or other similar rights to
subscribe for or to purchase or acquire any shares of Common Stock of the
Company or its Subsidiaries or any such rights pursuant to its Certificate of
Incorporation or bylaws or any agreement or instrument to or by which the
Company or any of its Subsidiaries is a party or bound. The Shares, when issued
and sold pursuant to this Agreement, will be duly and validly issued, fully paid
and nonassessable and none of them will be issued in violation of any preemptive
or other similar right. Except as disclosed in the Registration Statement and
the Prospectus, there is no outstanding option, warrant or other right calling
for the issuance of, and there is no commitment, plan or arrangement to issue,
any share of stock of the Company or its Subsidiaries
-7-
<PAGE>
or any security convertible into, or exercisable or exchangeable for, such
stock. The Common Stock and the Shares conform in all material respects to all
statements in relation thereto contained in the Registration Statement and the
Prospectus. All outstanding shares of capital stock of each Subsidiary have been
duly authorized and validly issued, and are fully paid and nonassessable and are
owned directly by the Company or by another wholly-owned subsidiary of the
Company free and clear of any security interests, liens, encumbrances, equities
or claims, other than those described in the Prospectus.
(n) No holder of any security of the Company has the right to have any
security owned by such holder included in the Registration Statement or to
demand registration of any security owned by such holder during the period
ending 180 days after the date of this Agreement. Each stockholder who owns more
than 1% of the Company's outstanding capital stock and each director and
executive officer of the Company has delivered to the Representatives an
enforceable written lock-up agreement in the form attached to this Agreement
("Lock-Up Agreement").
(o) All necessary corporate action has been duly and validly taken by the
Company to authorize the execution, delivery and performance of this Agreement
and the issuance and sale of the Shares by the Company. This Agreement has been
duly and validly authorized, executed and delivered by the Company and
constitute and will constitute legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their respective
terms, except (i) as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
and (ii) to the extent that rights to indemnity or contribution under this
Agreement may be limited by Federal and state securities laws or the public
policy underlying such laws.
(p) Neither the Company nor any of its Subsidiaries is involved in any
labor dispute nor, to the knowledge of the Company, is any such dispute
threatened, which dispute would have a Material Adverse Effect. The Company is
not aware of any existing or imminent labor disturbance by the employees of any
of its principal suppliers or contractors, which would have a Material Adverse
Effect. The Company is not aware of any threatened or pending litigation between
the Company or its Subsidiaries and any of its executive officers which, if
adversely determined, could have a Material Adverse Effect and has no reason to
believe that such officers will not remain in the employment of the Company.
(q) No transaction has occurred between or among the Company and any of
its officers or directors or five percent stockholders or any affiliate or
affiliates of any such officer or director or five percent stockholders that is
required to be described in and is not described in the Registration Statement
and the Prospectus.
(r) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
-8-
<PAGE>
(s) The Company has not taken, nor will it take, directly or indirectly,
any action designed to or which might reasonably be expected to cause or result
in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the Common Stock
to facilitate the sale or resale of any of the Shares.
(t) The Company and its Subsidiaries has filed all Federal, state, local
and foreign tax returns which are required to be filed through the date hereof,
or has received extensions thereof, and has paid all taxes shown on such returns
and all assessments received by it to the extent that the same are material and
have become due, and there are no tax audits or investigations pending, which if
adversely determined would have a Material Adverse Effect; nor are there any
material proposed additional tax assessments against the Company and any of its
Subsidiaries.
(u) The Shares have been duly authorized for quotation on the National
Association of Securities Dealers Automated Quotation ("Nasdaq") National Market
System, subject to official Notice of Issuance, and a registration statement has
been filed on Form 8-A pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which registration statement complies in
all material respects with the Exchange Act.
(v) The books, records and accounts of the Company and its Subsidiaries
accurately and fairly reflect, in reasonable detail, the transactions in, and
dispositions of, the assets of, and the results of operations of, the Company
and its Subsidiaries. The Company and each of its Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(w) The Company and its Subsidiaries is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are customary in the businesses in which they are engaged or propose to engage
after giving effect to the transactions described in the Prospectus; and neither
the Company nor any Subsidiary of the Company has reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not have a Material Adverse
Effect. Neither the Company nor any Subsidiary has been denied any insurance
coverage, which it has sought or for which it has applied.
(x) Each approval, consent, order, authorization, designation, declaration
or filing of, by or with any regulatory, administrative or other governmental
body necessary in connection with the execution and delivery by the Company of
this Agreement and the consummation of the transactions herein contemplated
required to be obtained or performed by the Company (except such additional
steps as may be required by the National Association of Securities Dealers, Inc.
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(the "NASD") or may be necessary to qualify the Shares for public offering by
the Underwriters under the state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(y) There are no affiliations with the NASD among the Company's officers,
directors or, to the best of the knowledge of the Company, any five percent or
greater stockholder of the Company, except as set forth in the Registration
Statement or otherwise disclosed in writing to the Representatives of the
Underwriters.
(z) (i) Each of the Company and its Subsidiaries is in compliance in all
material respects with all rules, laws and regulation relating to the use,
treatment, storage and disposal of toxic substances and protection of health or
the environment ("Environmental Law") which are applicable to its business; (ii)
neither the Company nor any of its Subsidiaries has received any notice from any
governmental authority or third party of an asserted claim under Environmental
Laws; (iii) each of the Company and its Subsidiaries has received all permits,
licenses or other approvals required of it under applicable Environmental Laws
to conduct its business and is in compliance with all terms and conditions of
any such permit, license or approval; (iv) to the Company's knowledge, no facts
currently exist that will require the Company or its Subsidiaries to make future
material capital expenditures to comply with Environmental Laws; and (v) no
property which is or has been owned, leased or occupied by the Company or its
Subsidiaries has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation of Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et. seq.) or otherwise designated as a
contaminated site under applicable state or local law.
(aa) The Company has been advised concerning the Investment Company Act of
1940, as amended (the "Investment Company Act") and is not and, after giving
effect to the offering and sale of the Shares and the application of proceeds
thereof as described in the Prospectus, will not be an "investment company"
within the meaning of the Investment Company Act.
(bb) Neither the Company nor any of its Subsidiaries nor any other person
associated with or acting on behalf of the Company or its Subsidiaries
including, without limitation, any director, officer, agent or employee of the
Company or its Subsidiaries has, directly or indirectly, while acting on behalf
of the Company or its Subsidiaries (i) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; (iii) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful
payment.
(cc) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
or any subsidiary would have any liability; neither the Company nor any
subsidiary has incurred or expects to incur liability under (i) Title IV of
ERISA with
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respect to termination of, or withdrawal from, any "pension plan" or (ii)
Section 412 or 4971 of the Internal Revenue Code of 1986, as amended, including
the regulations and published interpretations thereunder (the "Internal Revenue
Code"); and each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Internal Revenue
Code is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(dd) There are no issues related to the Company's preparedness for the Year
2000 that (i) are of a character required to be described or referred to in the
Registration Statement or Prospectus by the Act which have not been accurately
described in the Registration Statement or Prospectus or (ii) might reasonably
be expected to result in any material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company or that might materially affect its properties, assets or rights. All
internal computer systems and each Constituent Component (as defined below) of
those systems and all computer-related products and each Constituent Component
of those products of the Company will, by December 31, 1999, fully comply with
the Year 2000 Qualification Requirements. "Year 2000 Qualification Requirements"
means that the internal computer systems and each Constituent Component (as
defined below) of those systems and all computer-related products of each
Constituent Component (as defined below) of those products of the Company (i)
have been reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations), input and
output data containing date and information correctly regardless of whether the
date contains dates and times before, on or after January 1, 2000, (ii) have
been designated to ensure date and time entry recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components and peripherals provided as part of the configuration. The Company
has inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that might
reasonably be expected to result in any material adverse change.
5. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) Notification that the Registration Statement has become effective
shall have been received by the Representatives and the Prospectus shall have
been timely filed with the Commission in accordance with Section 7(a) of this
Agreement.
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and no order
suspending the effectiveness of the Registration Statement shall be in effect
and no proceedings for such purpose shall be pending
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before or threatened by the Commission, and any requests for additional
information on the part of the Commission (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Commission and the Representatives.
(c) The representations and warranties of the Company contained in this
Agreement and in the certificates delivered pursuant to Section 6(d) shall be
true and correct when made and on and as of each Closing Date as if made on such
date and the Company shall have performed all covenants and agreements and
satisfied all the conditions contained in this Agreement required to be
performed or satisfied by them at or before such Closing Date.
(d) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives and dated such Closing Date, of
the chief executive or chief operating officer and the chief financial officer
or chief accounting officer of the Company to the effect that (i) the signers of
such certificate have carefully examined the Registration Statement, the
Prospectus and this Agreement and that the representations and warranties of the
Company in this Agreement are true and correct on and as of such Closing Date
with the same effect as if made on such Closing Date and the Company has
performed all covenants and agreements and satisfied all conditions contained in
this Agreement required to be performed or satisfied by it at or prior to such
Closing Date, and (ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and to the best of their knowledge, no
proceedings for that purpose have been instituted or are pending under the
Securities Act.
(e) The Representatives shall have received on the Effective Date, at the
time this Agreement is executed and on each Closing Date a signed letter from
Arthur Andersen LLP addressed to the Representatives and dated, respectively,
the Effective Date, the date of this Agreement and each such Closing Date, in
form and substance reasonably satisfactory to the Representatives, confirming
that they are independent accountants within the meaning of the Securities Act
and the Rules, that the response to Item 10 of the Registration Statement is
correct insofar as it relates to them and stating in effect that:
(i) in their opinion the audited financial statements and financial
statement schedules included in the Registration Statement and the
Prospectus and reported on by them comply as to form in all material
respects with the applicable accounting requirements of the Securities Act
and the Rules;
(ii) on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the headings "Summary
Consolidated Financial Information" and "Selected Consolidated Financial
Data," carrying out certain procedures (but not an examination in
accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the comments set
forth in such letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company as to transactions and events subsequent
to the date of the latest audited financial statements, except as
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disclosed in the Registration Statement and the Prospectus, nothing came to
their attention which caused them to believe that:
(A) the amounts in "Summary Consolidated Financial Information," and
"Selected Consolidated Financial Data" included in the Registration
Statement and the Prospectus do not agree with the corresponding amounts in
the audited and unaudited financial statements from which such amounts were
derived; or
(B) with respect to the Company, there were, at a specified date not
more than five business days prior to the date of the letter, any increases
in the current liabilities and long-term liabilities of the Company or any
decreases in net income or in working capital or the stockholders' equity
in the Company, as compared with the amounts shown on the Company's audited
balance sheet for the fiscal year ended September 30, 1999 and the nine
months ended June 30, 1999 included in the Registration Statement; and
(iii) they have performed certain other procedures as may be
permitted under Generally Acceptable Auditing Standards as a result of
which they determined that certain information of an accounting, financial
or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company) set forth in the Registration Statement and the Prospectus and
reasonably specified by the Representatives agrees with the accounting
records of the Company.
(iv) based upon the procedures set forth in clauses (ii) and (iii)
above and a reading of the amounts included in the Registration Statement
under the headings "Summary Consolidated Financial Data" and "Selected
Consolidated Financial Data" included in the Registration Statement and
Prospectus and a reading of the financial statements from which certain of
such data were derived, nothing has come to their attention that gives them
reason to believe that the "Summary Consolidated Financial Data" and
"Selected Consolidated Financial Data" included in the Registration
Statement and Prospectus do not comply as to the form in all material
respects with the applicable accounting requirements of the Securities Act
and the Rules or that the information set forth therein is not fairly
stated in relation to the financial statements included in the Registration
Statement or Prospectus from which certain of such data were derived are
not in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial
statements included in the Registration Statement and Prospectus.
References to the Registration Statement and the Prospectus in this
paragraph (f) are to such documents as amended and supplemented at the date of
the letter.
(f) The Representatives shall have received on each Closing Date from
Wilson Sonsini Goodrich & Rosati, counsel for the Company, an opinion, addressed
to the Representatives and dated such Closing Date, and stating in effect that:
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(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware and
the jurisdiction of its incorporation. To the best of such counsel's
knowledge, except as disclosed in Exhibit 21.1 to the Registration
Statement, the Company has no subsidiary and does not control, directly or
indirectly, any corporation, partnership, joint venture, association or
other business organization. The Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the
character or location of its assets or properties (owned, leased or
licensed) or the nature of its businesses makes such qualification
necessary, except for such jurisdictions where the failure to so qualify
would not have a Material Adverse Effect.
(ii) The Company has all requisite corporate power and authority to
own, lease and license its assets and properties and conduct its business
as now being conducted and as described in the Registration Statement and
the Prospectus and with respect to the Company to enter into, deliver and
perform this Agreement and to issue and sell the Shares other than those
required under the Securities Act and state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital stock as set
forth in the Registration Statement and the Prospectus under the caption
"Capitalization"; the certificates evidencing the Shares are in due and
proper legal form and have been duly authorized for issuance by the
Company; all of the outstanding shares of Common Stock of the Company have
been duly and validly authorized and issued and are fully paid and
nonassessable and none of them was issued in violation of any preemptive or
other similar right. The Shares when issued and sold pursuant to this
Agreement will be duly and validly issued, outstanding, fully paid and
nonassessable and none of them will have been issued in violation of any
preemptive or other similar right. Except as disclosed in the Registration
Statement and the Prospectus, there are no preemptive rights or any
restriction upon the voting or transfer of any securities of the Company
pursuant to the Company's Certificate of Incorporation or bylaws or other
governing documents or any other instrument to which the Company is a party
or by which it may be bound. To the best of such counsel's knowledge,
except as disclosed in the Registration Statement and the Prospectus, there
is no outstanding option, warrant or other right calling for the issuance
of, and no commitment, plan or arrangement to issue, any share of stock of
the Company or any security convertible into, exercisable for, or
exchangeable for stock of the Company. The Common Stock and the Shares
conform in all material respects to the descriptions thereof contained in
the Registration Statement and the Prospectus.
(iv) Each of the Lock-Up Agreements executed by the Company's
directors, officers and employees has been duly and validly delivered by
such persons and constitutes the legal, valid and binding obligation of
each such person enforceable against each such person in accordance with
its terms, except as the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally and
by general equitable principles.
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<PAGE>
(v) All necessary corporate action has been duly and validly taken by
the Company to authorize the execution, delivery and performance of this
Agreement and the issuance and sale of the Shares. This Agreement has been
duly and validly authorized, executed and delivered by the Company and this
Agreement constitutes the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms except
(A) as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (B) to the extent that rights to indemnity or contribution
under this Agreement may be limited by Federal or state securities laws or
the public policy underlying such laws.
(vi) Neither the execution, delivery and performance of this Agreement
by the Company nor the consummation of any of the transactions contemplated
hereby (including, without limitation, the issuance and sale by the Company
of the Shares) will give rise to a right to terminate or accelerate the due
date of any payment due under, or conflict with or result in the breach of
any term or provision of, or constitute a default (or any event which with
notice or lapse of time, or both, would constitute a default) under, or
require consent or waiver under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of the
Company pursuant to the terms of any indenture, mortgage, deed trust, note
or other agreement or instrument filed with the Commission and to which the
Company is a party or by which it or any of its properties or businesses is
bound, or any franchise, license, permit, judgment, decree, order, statute,
rule or regulation of which such counsel is aware or violate any provision
of the charter or bylaws of the Company.
(vii) To such counsel's knowledge, no default exists, and no event
has occurred which with notice or lapse of time, or both, would constitute
a default, in the due performance and observance of any term, covenant or
condition by the Company of any indenture, mortgage, deed of trust, note or
any other agreement or instrument to which the Company is a party or by
which it or any of its assets or properties or businesses may be bound or
affected, where the consequences of such default would have a Material
Adverse Effect.
(viii) The Company is not in violation of any term or provision of
its charter or bylaws or any franchise, license, permit, judgment, decree,
order, statute, rule or regulation, where the consequences of such
violation would have a Material Adverse Effect.
(ix) No consent, approval, authorization or order of any court or
governmental agency or regulatory body is required for the execution,
delivery or performance of this Agreement by the Company or the
consummation of the transactions contemplated hereby or thereby, except
such as have been obtained under the Securities Act and such as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the several Underwriters.
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<PAGE>
(x) To the best of such counsel's knowledge, there is no litigation
or governmental or other proceeding or investigation, before any court or
before or by any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the Company which would
have a Material Adverse Effect.
(xi) The statements in the Prospectus under the captions "Risk
Factors--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 or key products," "Description of Capital Stock,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Shares Eligible for Future
Sale," "Management," "Principal Stockholders," "Certain Transactions," and
"Business--Intellectual Property" and "--Legal Proceedings" insofar as such
statements constitute a summary of documents referred to therein or matters
of law, are fair summaries in all material respects and accurately present
the information called for with respect to such documents and matters.
Accurate copies of all contracts and other documents required to be filed
as exhibits to, or described in, the Registration Statement have been so
filed with the Commission or are fairly described in the Registration
Statement, as the case may be.
(xii) The Registration Statement, all preliminary prospectuses and
the Prospectus and each amendment or supplement thereto (except for the
financial statements and schedules and other financial and statistical data
included therein, as to which such counsel expresses no opinion) comply as
to form in all material respects with the requirements of the Securities
Act and the Rules.
(xiii) The Registration Statement is effective under the Securities
Act, and no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are threatened, pending or contemplated. Any required filing
of the Prospectus and any supplement thereto pursuant to Rule 424(b) under
the Securities Act has been made in the manner and within the time period
required by such Rule 424(b).
(xiv) The Shares have been approved for listing on the Nasdaq
National Market.
(xv) The capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock."
(xvi) The Company is not an "investment company" or an entity
controlled by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
(xvii) Except as specifically set forth in the Prospectus under the
captions "Risk Factors--We 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," and under the
caption "Business--Legal Proceedings," there are no legal or
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governmental proceedings (other than the patent application proceedings
themselves) pending or, to the best knowledge of such counsel, threatened
against the Company relating to any Intellectual Property owned or licensed
by the Company; and
(xviii) Except as specifically set forth in the Prospectus, to the
best of such counsel's knowledge the Company has not received any notice of
infringement with respect to any patent or any notice challenging the
validity, scope or enforceability of any of the patents, trademarks or
service marks owned by or licensed to the Company.
To the extent deemed advisable by such counsel, they may rely as to matters
of fact on certificates of responsible officers of the Company and public
officials. Copies of such certificates and other opinions shall be furnished to
the Representatives and counsel for the Underwriters.
In addition, such opinion shall state that such counsel has participated in
conferences with officers and other representatives of the Company,
representatives of the Representatives and representatives of the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (except as specified
in the foregoing opinion), on the basis of the foregoing, no facts have come to
the attention of such counsel which lead such counsel to believe that the
Registration Statement at the time it became effective (except with respect to
the financial statements and notes and schedules thereto and other financial
data, as to which such counsel need express no belief) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus as amended or supplemented (except with respect to the
financial statements, notes and schedules thereto and other financial data, as
to which such counsel need make no statement) on the date thereof contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) All proceedings taken in connection with the sale of the Firm Shares
and the Option Shares as herein contemplated shall be reasonably satisfactory in
form and substance to the Representatives, and their counsel and the
Underwriters shall have received from Pillsbury Madison & Sutro LLP a favorable
opinion, addressed to the Representatives and dated such Closing Date, with
respect to the Shares, the Registration Statement and the Prospectus, and such
other related matters, as the Representatives may reasonably request, and the
Company shall have furnished to Pillsbury Madison & Sutro LLP such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
(h) If the Shares have been qualified for sale in Florida, the
Representatives shall have received on each Closing Date certificates, addressed
to the Representatives, and dated such Closing Date, of an executive officer of
the Company, to the effect that the signer of such certificate has reviewed and
understands the provisions of Section 517.075 of the Florida Statutes, and
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represents that the Company has complied, and at all times will comply, with all
provisions of Section 517.075 and further, that as of such Closing Date, neither
the Company nor any of its affiliates does business with the government of Cuba
or with any person located in Cuba.
(i) The Representatives shall have received copies of the Lock-up
Agreements executed by each entity or person described in Section 4(n).
(j) The Company shall have furnished or caused to be furnished to the
Representatives such further certificates or documents as the Representatives
shall have reasonably requested.
(k) The Representatives shall have received on each Closing Date from Jun
He Law Offices, counsel for AltiGen Communications (Shanghai), Ltd. (the
"Subsidiary"), an opinion, addressed to the Representatives and dated such
Closing Date, in substantially the form attached as Exhibit A.
(l) The Representatives shall have received on each Closing Date from
Townsend and Townsend and Crew LLP, intellectual property counsel for the
Company, an opinion, addressed to the Representatives and dated such Closing
Date, and stating in effect the matters set forth in Exhibit B.
6. Covenants of the Company.
------------------------
(a) The Company covenants and agrees as follows:
(i) The Company shall prepare the Prospectus in a form approved by
the Representatives and file such Prospectus pursuant to Rule 424(b) under
the Securities Act not later than the Commission's close of business on the
second business day following the execution and delivery of this Agreement,
or, if applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Securities Act.
(ii) The Company shall promptly advise the Representatives in writing
(A) when any amendment to the Registration Statement shall have become
effective, (B) of any request by the Commission for any amendment of the
Registration Statement or the Prospectus or for any additional information,
(C) of the prevention or suspension of the use of any preliminary
prospectus or the Prospectus or of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or
the institution or threatening of any proceeding for that purpose and (D)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose. The
Company shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished the
Representatives a copy for its review prior to filing and shall not file
any such proposed amendment or supplement to which the Representatives
reasonably object. The Company shall use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
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(iii) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any event
occurs as a result of which the Prospectus as then amended or supplemented
would include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall be
necessary to amend or supplement the Prospectus to comply with the
Securities Act or the Rules, the Company promptly shall prepare and file
with the Commission, subject to the second sentence of paragraph (ii) of
this Section 7(a), an amendment or supplement which shall correct such
statement or omission or an amendment which shall effect such compliance.
(iv) The Company shall make generally available to its security
holders and to the Representatives as soon as practicable, but not later
than 45 days after the end of the 12-month period beginning at the end of
the fiscal quarter of the Company during which the Effective Date occurs
(or 90 days if such 12-month period coincides with the Company's fiscal
year), an earning statement (which need not be audited) of the Company,
covering such 12-month period, which shall satisfy the provisions of
Section 11(a) of the Securities Act or Rule 158 of the Rules.
(v) The Company shall furnish to the Representatives and counsel for
the Underwriters, without charge, signed copies of the Registration
Statement (including all exhibits thereto and amendments thereof) and to
each other Underwriter a copy of the Registration Statement (without
exhibits thereto) and all amendments thereof and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Securities
Act or the Rules, as many copies of any preliminary prospectus and the
Prospectus and any amendments thereof and supplements thereto as the
Representatives may reasonably request.
(vi) The Company shall cooperate with the Representatives and their
counsel in endeavoring to qualify the Shares for offer and sale in
connection with the offering under the laws of such jurisdictions as the
Representatives may designate and shall maintain such qualifications in
effect so long as required for the distribution of the Shares; provided,
however, that the Company shall not be required in connection therewith, as
a condition thereof, to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction or subject itself
to taxation as doing business in any jurisdiction.
(vii) For a period of five years after the date of this Agreement,
the Company shall supply to the Representatives, and to each other
Underwriter who may so request in writing, copies of such financial
statements and other periodic and special reports as the Company may from
time to time distribute generally to the holders of any class of its
capital stock and to furnish to the Representatives a copy of each annual
or other report it shall be required to file with the Commission.
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(viii) Without the prior written consent of CIBC World Markets Corp.,
for a period of 180 days after the date of this Agreement, the Company and
each of its individual directors and executive officers shall not issue,
sell or register with the Commission (other than on Form S-8 or on any
successor form), or otherwise dispose of, directly or indirectly, any
equity securities of the Company (or any securities convertible into,
exercisable for or exchangeable for equity securities of the Company),
except for the issuance of the Shares pursuant to the Registration
Statement and the issuance of shares pursuant to the Company's existing
stock option plan or bonus plan as described in the Registration Statement
and the Prospectus. In the event that during this period, (A) any shares
are issued pursuant to the Company's existing stock option plan or bonus
plan that are exercisable during such 180 day period or (B) any
registration is effected on Form S-8 or on any successor form relating to
shares that are exercisable during such 180 period, the Company shall
obtain the written agreement of such grantee or purchaser or holder of such
registered securities that, for a period of 180 days after the date of this
Agreement, such person will not, without the prior written consent of CIBC
World Markets Corp., offer for sale, sell, distribute, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, or exercise
any registration rights with respect to, any shares of Common Stock (or any
securities convertible into, exercisable for, or exchangeable for any
shares of Common Stock) owned by such person.
(ix) On or before completion of this offering, the Company shall make
all filings required under applicable securities laws and by the Nasdaq
National Market (including any required registration under the Exchange
Act).
(x) The Company will apply the net proceeds from the offering of the
Shares in the manner set forth under "Use of Proceeds" in the Prospectus.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses incident to
the public offering of the Shares and the performance of the obligations of the
Company under this Agreement including those relating to: (i) the preparation,
printing, filing and distribution of the Registration Statement including all
exhibits thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and the
printing, filing and distribution of this Agreement; (ii) the preparation and
delivery of certificates for the Shares to the Underwriters to the
Representatives; (iii) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the various jurisdictions
referred to in Section 7(a)(vi), including the reasonable fees and disbursements
of counsel for the Underwriters in connection with such registration and
qualification and the preparation, printing, distribution and shipment of
preliminary and supplementary Blue Sky memoranda; (iv) the furnishing (including
costs of shipping and mailing) to the Representatives and to the Underwriters of
copies of each preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required by this
Section to be so furnished, as may be reasonably requested for use in connection
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold; (v) the filing fees of the NASD in connection with its
review of the terms of the public
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<PAGE>
offering and reasonable fees and disbursements of counsel for the Underwriters
in connection with such review; (vi) the furnishing (including costs of shipping
and mailing) to the Representatives and to the Underwriters of copies of all
reports and information required by Section 7(a)(vii); (vii) inclusion of the
Shares for quotation on the Nasdaq National Market; (viii) all transfer taxes,
if any, with respect to the sale and delivery of the Shares by the Company to
the Underwriters; and (ix) the offer and sale of the Directed Shares by the
Underwriters. Subject to the provisions of Section 10, the Underwriters agree to
pay, whether or not the transactions contemplated hereby are consummated or this
Agreement is terminated, all costs and expenses incident to the performance of
the obligations of the Underwriters under this Agreement not payable by the
Company pursuant to the preceding sentence, including, without limitation, the
fees and disbursements of counsel for the Underwriters.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act against any and all
losses, claims, damages and liabilities, joint or several (including any
reasonable investigation, legal and other expenses incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Securities Act, the Exchange Act or other Federal or state law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment thereof or supplement
thereto, or arise out of or are based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) in whole or in part upon any breach
of the representations and warranties set forth in Section 4 hereof, or (iii) in
whole or in part upon any failure of the Company to perform any of its
obligations hereunder or under law; provided, however, that such indemnity shall
not inure to the benefit of any Underwriter (or any person controlling such
Underwriter) on account of any losses, claims, damages or liabilities arising
from the sale of the Shares to any person by such Underwriter if such untrue
statement or omission or alleged untrue statement or omission (x) was made in
such preliminary prospectus, the Registration Statement or the Prospectus, or
such amendment or supplement, in reliance upon and in conformity with
information furnished in writing to the Company by the Representatives on behalf
of any Underwriter specifically for use therein or (y) results solely from an
untrue statement of a material fact contained in, or the omission of a material
fact from, such preliminary prospectus, which untrue statement or omission was
completely corrected in the Prospectus (as then amended or supplemented) if the
Company shall sustain the burden of proving that the Underwriters sold Shares to
the person alleging such loss, claim, damage or liability without sending or
giving, at or prior to the written confirmation of such sale, a copy of the
Prospectus (as then amended or supplemented) if the Company had previously
furnished copies thereof to the Underwriters within a reasonable amount of time
prior to such sale or such confirmation, and the Underwriters failed to deliver
the corrected Prospectus, if required by law to have so delivered it and if
delivered would have been a complete defense against the person
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<PAGE>
asserting such loss, claim, damage or liability. This indemnity agreement will
be in addition to any liability that the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, each director of the Company, and each officer of the Company who
signs the Registration Statement, to the same extent as the foregoing indemnity
from the Company to each Underwriter, but only insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in any
preliminary prospectus, the Registration Statement or the Prospectus, or any
amendment thereof or supplement thereto, contained in the last paragraph of the
cover page, in the paragraph relating to stabilization on the inside front cover
page of the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus; provided, however, that the obligation of each
Underwriter to indemnify the Company (including any controlling person, director
or officer thereof) shall be limited to the net proceeds received by the Company
from such Underwriter.
(c) The Company agrees to indemnify and hold harmless CIBC World Markets
Corp. ("CIBC") and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
(the "CIBC Entities") against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation, legal and
other expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted), to which they, or any
of them, may become subject under the Securities Act, the Exchange Act or other
Federal or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in any
material prepared by or with the consent of the Company for distribution to
Participants in connection with the Directed Share Program, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, (ii) caused by the failure of any Participant to pay for and accept
delivery of Directed Shares that the Participant agreed to purchase; or (iii)
related to, or arising out of, or in connection with the Directed Share Program,
other than losses, claims, damages and liabilities that are finally judicially
determined to have resulted from the bad faith or gross negligence of the CIBC
Entities.
(d) Any party that proposes to assert the right to be indemnified under
this Section will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section, notify each
such indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 7(a), 7(b) or 7(c) shall be available to any party who shall fail to
give notice as provided in this Section 7(d) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice but the omission so to notify
such indemnifying party of any such action, suit or proceeding shall not relieve
it from any liability that it may have to any indemnified party for contribution
or
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<PAGE>
otherwise than under this Section. In case any such action, suit or proceeding
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and the approval by the indemnified party of such
counsel, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses, except as provided below and except for the
reasonable costs of investigation subsequently incurred by such indemnified
party in connection with the defense thereof. The indemnified party shall have
the right to employ its counsel in any such action, but the fees and expenses of
such counsel shall be at the expense of such indemnified party unless (i) the
employment of counsel by such indemnified party has been authorized in writing
by the indemnifying party, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the indemnifying
parties and the indemnified party in the conduct of the defense of such action
(in which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party) or (iii) the
indemnifying parties shall not have employed counsel to assume the defense of
such action within a reasonable time after notice of the commencement thereof,
in each of which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its written
consent, which consent shall not be unreasonably withheld or delayed.
8. Contribution.
------------
(a) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 7(a) or 7(b)
is due in accordance with its terms but for any reason is held to be unavailable
to or insufficient to hold harmless an indemnified party under Section 7(a) or
7(b), then each indemnifying party shall contribute to the aggregate losses,
claims, damages and liabilities (including any investigation, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting any contribution received by any person entitled hereunder to
contribution from any person who may be liable for contribution) to which the
indemnified party may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares or, if such allocation
is not permitted by applicable law or indemnification is not available as a
result of the indemnifying party not having received notice as provided in
Section 7 hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts but before deducting expenses) received by the
Company, as set forth in the table on the cover page of the Prospectus, bear to
(y) the underwriting discounts received by the Underwriters, as set
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<PAGE>
forth in the table on the cover page of the Prospectus. The relative fault of
the Company or the Underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
related to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter (except as may be provided in the Agreement Among Underwriters) be
liable or responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder; and (ii) the
Company shall be liable and responsible for any amount in excess of such
underwriting discount; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of the Section 15 of the Securities Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) in the immediately preceding sentence of this Section 8. Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than under this
Section. No party shall be liable for contribution with respect to any action,
suit, proceeding or claim settled without its written consent. The Underwriter's
obligations to contribute pursuant to this Section 8 are several in proportion
to their respective underwriting commitments and not joint.
(b) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 7(c) is due
in accordance with its terms but for any reason is held to be unavailable to or
insufficient to hold harmless a CIBC Entity under Section 7(c), then the Company
shall contribute to the aggregate losses, claims, damages and liabilities
(including any investigation, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted), but after deducting any contribution
received by any to which a CIBC Entity may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the CIBC Entities on the other from the offering of the Directed Shares
or, if such allocation is not permitted by applicable law or indemnification is
not available as a result of the Company not having received notice as provided
in Section 7 hereof, in such proportion as is appropriate to reflect not only
the relative benefits referred to above but also the relative fault of the
Company on the one hand and the CIBC Entities on the other in connection with
the state-
-24-
<PAGE>
ments or omissions which resulted in such losses, claims, damages, liabilities
or expenses, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the CIBC Entities shall be deemed
to be in the same proportion as the total proceeds from the offering of the
Directed Shares (net of underwriting discounts but before deducting expenses)
received by the Company and the underwriting discounts received by the CIBC
Entities for the Directed Shares, bear to the total price to the public of the
Directed Shares. The relative fault of the Company or the CIBC Entities shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact related to information supplied by the
Company or the CIBC Entities and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8(b) were determined by pro rata
allocation (even if the CIBC Entities were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8(b), (i) in no case shall any CIBC Entity be liable or responsible
for any amount in excess of the underwriting discount applicable to the Directed
Shares distributed to the public. For purposes of this Section 8(b), each
person, if any, who controls a CIBC Entity within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act shall have the same
rights to contribution as such CIBC Entity, and each person, if any, who
controls the Company within the meaning of the Section 15 of the Securities Act
or Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to clauses
(i) and (ii) in the immediately preceding sentence of this Section 9. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this
Section, notify such party or parties from whom contribution may be sought, but
the omission so to notify such party or parties from whom contribution may be
sought shall not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have hereunder or otherwise than
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its written consent.
9. Termination. This Agreement may be terminated with respect to the
-----------
Shares to be purchased on a Closing Date by the Representatives by notifying the
Company.
(a) in the absolute discretion of the Representatives at or before any
Closing Date: (i) if on or prior to such date, any domestic or international
event or act or occurrence has materially disrupted, or in the opinion of the
Representatives will in the future materially disrupt, the securities markets;
(ii) if there has occurred any new outbreak or material escalation of
hostilities or other calamity or crisis the effect of which on the financial
markets of the United States is such as to make it, in the judgment of the
Representatives, inadvisable to proceed with the offering; (iii) if there shall
be such a material adverse change in general financial, political or economic
conditions or the effect of international conditions on the financial markets in
the United States is such as to make it, in the judgment of the Representatives,
inadvisable or impracticable to market the Shares; (iv) if trading in the Shares
has been suspended by the
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<PAGE>
Commission or trading generally on the New York Stock Exchange, Inc., on the
American Stock Exchange, Inc. or the Nasdaq National Market has been suspended
or limited, or minimum or maximum ranges for prices for securities shall have
been fixed, or maximum ranges for prices for securities have been required, by
said exchanges or by order of the Commission, the National Association of
Securities Dealers, Inc., or any other governmental or regulatory authority; or
(v) if a banking moratorium has been declared by any state or Federal authority;
or (vi) if, in the judgment of the Representatives, there has occurred a
Material Adverse Effect, or
(b) at or before any Closing Date, that any of the conditions specified in
Section 6 shall not have been fulfilled when and as required by this Agreement.
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) if this Agreement
is terminated by the Representatives or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the reasonable fees and
disbursements of their counsel) incurred by them in connection with the proposed
purchase and sale of the Shares or in contemplation of performing their
obligations hereunder and (z) no Underwriter who shall have failed or refused to
purchase the Shares agreed to be purchased by it under this Agreement, without
some reason sufficient hereunder to justify cancellation or termination of its
obligations under this Agreement, shall be relieved of liability to the Company
or to the other Underwriters for damages occasioned by its failure or refusal.
10. Substitution of Underwriters. If one or more of the Underwriters
----------------------------
shall fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 10) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting Underwriters
on such Closing Date shall not exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, then each of the
nondefaulting Underwriters shall be obligated to purchase such Shares on the
terms herein set forth in proportion to their respective obligations hereunder;
provided, that in no event shall the maximum number of Shares that any
Underwriter has agreed to purchase pursuant to Section 1 be increased pursuant
to this Section 11 by more than one-ninth of such number of Shares without the
written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting Underwriters
on such Closing Date shall exceed 10% of the Shares that all the Underwriters
are obligated to purchase on such Closing Date, then the Company shall be
entitled to one additional business day within
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<PAGE>
which it may, but is not obligated to, find one or more substitute underwriters
reasonably satisfactory to the Representatives to purchase such Shares upon the
terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or Prospectus)
may be effected by the Representatives and the Company. If the number of Shares
to be purchased on such Closing Date by such defaulting Underwriter or
Underwriters shall exceed 10% of the Shares that all the Underwriters are
obligated to purchase on such Closing Date, and none of the nondefaulting
Underwriters or the Company shall make arrangements pursuant to this Section
within the period stated for the purchase of the Shares that the defaulting
Underwriters agreed to purchase, this Agreement shall terminate with respect to
the Shares to be purchased on such Closing Date without liability on the part of
any nondefaulting Underwriter to the Company and without liability on the part
of the Company, except in both cases as provided in Sections 7(b), 8, 9 and 10.
The provisions of this Section shall not in any way affect the liability of any
defaulting Underwriter to the Company or the nondefaulting Underwriters arising
out of such default. A substitute underwriter hereunder shall become an
Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements, representations,
-------------
warranties, indemnities and other statements of the Company or its officers and
of the Underwriters set forth in or made pursuant to this Agreement shall remain
in full force and effect, regardless of any investigation made by or on behalf
of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in Sections 8 and 9 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 7(b), 8, 9
and 10 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters,
the Company and their respective successors and assigns, and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered or by telephone or telegraph if subsequently confirmed in writing, (a)
if to the Representatives, c/o CIBC World Markets Corp., World Financial Center,
New York, New York 10281 Attention: Jennifer Aranoff, Esq., with a copy to
Jorge del Calvo, Esq., Pillsbury Madison & Sutro LLP, 2550 Hanover Street, Palo
Alto, California 94304 and (b) if to the Company, to its agent for service as
such agent's address appears on the cover page of the Registration Statement
with a copy to Carmen Chang, Esq., Wilson Sonsini Goodrich & Rosati, 650 Page
Mill Road, Palo Alto, California 94304.
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<PAGE>
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflict of laws.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the agreement among
us.
Very truly yours,
ALTIGEN COMMUNICATIONS, INC.
By
-------------------------------------
Title:
---------------------------------
Confirmed:
CIBC WORLD MARKETS CORP.
- -----------------------------------------
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I annexed
hereto.
By CIBC WORLD MARKETS CORP.
By
---------------------------------------
Title:
-----------------------------------
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<PAGE>
SCHEDULE I
Name Number of Firm Shares to
Be Purchased
- ---------------------------------------------- -----------------------------
CIBC World Markets Corp.
Dain Rauscher Wessels
First Albany Corporation
Total
<PAGE>
EXHIBIT A
CIBC World Markets Corp.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
FAC/Equities, a division of First Albany Corporation
c/o CIBC World Markets Corp.
World Financial Center
New York, New York 10281
Re: AltiGen Communications (Shanghai), Ltd.
Dear Sirs:
We are lawyers in the People's Republic of China ("PRC") and are qualified
to issue legal opinions with regard to the laws of the PRC. We have been asked
to provide this legal opinion in connection with AltiGen Communications
(Shanghai), Ltd. (the "Company"), a wholly foreign owned enterprise established
in Shanghai of the PRC by AltiGen Communications, Inc. ("AltiGen"), a company
organized under the laws of the State of Delaware, United States of America.
For purposes of this opinion, we have reviewed copies of the documents
identified in Annex I hereto (the "Documents") and we have also made such
inquires and have reviewed such matters of law and such other documents and
materials as we have deemed necessary in connection with the rendering of the
opinions as expressed below. Terms used herein and not otherwise defined shall
have the same meanings as ascribed to them in Annex I.
In our examination of the Documents, we have assumed without independent
investigation and inquiry that:
(i) all signatures, seals and chops are genuine, all natural persons
have the necessary legal capacity, all Documents submitted to us as
originals are authentic, and all Documents submitted to us as certified or
photostatted copies conform to the originals;
(ii) no amendments, revisions, modifications or other changes have
been made with respect to any of the Documents to the date of this opinion
after they were submitted to us for purposes of this legal opinion;
(iii) each of the parties to the Documents, other than those
organized and existing under the laws of the PRC, is duly organized and is
validly existing in good standing under the laws of its jurisdiction of
organization and/or incorporation; and
(iv) each of the PRC parties to the Documents whose business license
and other constitutional documents are not listed in Annex I has been duly
established under the laws of the PRC and has been duly approved and
authorized by the competent
A-1
<PAGE>
governmental authorities of the PRC to carry on its business and to perform
its obligations under the Documents to which it is a party.
Based on and in reliance of the foregoing and subject to the further
qualifications and conditions as set forth below, we are of the opinion that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the PRC. To the best of our
knowledge, the Company has no subsidiary and does not control, directly or
indirectly, any corporation, partnership, joint venture, association or
other business organization. The Company is duly qualified and in good
standing as a wholly foreign owned enterprise in the PRC in which the
character or location of its assets or properties (owned, leased or
licensed) or the nature of its businesses makes such qualification
necessary, except to the extent that the failure to so qualify would not
have a material adverse effect;
(v) The Company has all requisite corporate power and authority to
owe, lease and license its assets and properties and conduct its business
as now being conducted and as described in the Registration Statement and
the Prospectus and has, to our knowledge after due inquiry, obtained all
necessary consents, authorizations, approvals, orders, licenses,
certificates, and permits of and from, and declarations and filings with,
all PRC governmental authorities or other PRC authorities necessary to own
or hold its properties and conduct its business;
(vi) All registered capital of the Company required to be paid by
AltiGen has been fully paid, and one hundred percent (100%) equity interest
of the Company is owned by AltiGen, free and clear of any perfected
security interest or, to the best of our knowledge, any other security
interests, liens, encumbrances, equities or claims.
(vii) There are no preemptive rights or any restriction upon the
voting or transfer of any equity interest of the Company pursuant to the
Company's organizational documents or other governing documents or any
other instrument to which the Company is a party or by which it may be
bound. To the best of our knowledge, there is no outstanding option,
warrant or other right calling for the issuance of, and no commitment, plan
or arrangement to issue, any share of stock of the Company or any security
convertible into, exercisable for, or exchangeable for stock of the
Company;
(viii) All leases to which the Company is a party are valid and
binding, and no default has occurred or is continuing thereunder which
might result in a material adverse effect on the Company or AltiGen, and
the Company enjoys peaceful and undisturbed possession under all such
leases to which the Company is a party as lessee;
(ix) No consent, approval, authorization or order of any court or
governmental agency or regulatory body having jurisdiction over the Company
is required for the consummation of the transactions contemplated by the
Underwriting Agreement;
A-2
<PAGE>
(x) Neither the execution, delivery and performance of the
Underwriting Agreement by AltiGen nor the consummation of any of the
transactions contemplated thereby (including, without limitation, the
issuance and sale by AltiGen of its shares) will give rise to a right to
terminate or accelerate the due date of any payment due under, or conflict
with or result in the breach of any term or provision of, or constitute a
default (or any event which with notice or lapse of time, or both, would
constitute a default) under, or require consent or waiver under, or result
in the execution or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company pursuant to the terms of any indenture,
mortgage, dead trust, note or other agreement or instrument of which we are
aware and to which the Company is a party or by which either the Company or
any of its properties or businesses is bound, or any franchise, license,
permit, judgment, decree, order, statute, rule or regulation of which we
are aware or violate any provision of the organizational or other governing
documents of the Company;
(xi) The Company is not in violation of any term or provision of its
organizational or other governing documents or any franchise, license,
permit, judgment, decree, order, statute, rule or regulation, where the
consequences of such violation would have a material Adverse effect;
(xii) To the best of our knowledge, there is no litigation or
governmental or other proceeding or investigation, before any court or
before or by any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the Company which would
have a material adverse effect;
(xiii) The Assignment Agreement executed by and between the Company
and AltiGen (the "Assignment Agreement") has been duly and validly
authorized, executed and delivered by the Company and constitutes a legal,
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms. There are no United States or foreign
patents known to us which the Company infringes by its present activities
or has infringed by its past activities, or which would preclude the
pursuit of its business. There is no pending or, to the Company's
knowledge, threatened action, suit, proceeding or claim by others that the
Company has infringed, misappropriated or otherwise violated, or is
infringing, misappropriating or violating, any rights of others in
intellectual property;
(xiv) The statements in the Prospectus under the heading "Business--
Facilities" do not contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein
with regard to the Company, in light of the circumstances under which they
were made, not misleading; and
(xv) The statements in the Prospectus under the heading "Business
Facilities" insofar as such statements constitute summary descriptions of
the documents referred to therein with regard to the Company, fairly
present the information called for with respect to such documents.
A-3
<PAGE>
This opinion is limited to the PRC law of general application at the date
of this opinion and is given on the basis that it will be governed by, and
construed in accordance with, the laws of the PRC. We have made no
investigation of, and do not express or imply any views on, the laws of any
country other then the PRC.
The PRC laws and regulations referred to herein are laws and regulations
currently in force on the date of the opinion and there is no guarantee that any
of such laws and regulations will not be changed, amended, replaced in the
immediate future or in the longer term with or without retrospective effect.
This opinion is addressed to you for your own benefit only and solely for
the purposes of the initial public offering of the shares by AltiGen. It is
strictly limited to the matters stated herein and is not to be read as extending
by implication to any other matter. Further, it is not to be transmitted to any
other person nor is it to be relied upon by any other person or quoted or
referred to in any public document or filed with any governmental or other
regulatory authority or agency or any other person other than you and your legal
counsels without our written consent.
Yours faithfully,
__________________________________________
For and on behalf of JUN HE LAW OFFICE
A-4
<PAGE>
ANNEX I
DOCUMENTS REVIEWED
For purposes of the opinion, we have reviewed the copies of the following
documents submitted to us:
2. Establishment of the Company
(b) Project Proposal for the establishment of the Company.
(c) Feasibility Study Report for the establishment of the Company dated
September 22, 1998.
(d) Official Reply on the Project Proposal by the Shanghai Foreign
Investment Commission dated September 23, 1998,
(e) Article of Association of thc Company dated September 22, 1999.
(f) Approval Letter for Feasibility Study Report and Article of
Associations numbered Hu Wai Zi Wei Pi Zi (98) 1317 issued by the Shanghai
Foreign Investment Commission dated October 27, 1998.
(g) Certificate of Approval on Foreign Investment Enterprise numbered Wai
Jing Mao Hu Du Zi Zi No.[1998] 1444 (the "Approval Certificate"), issued by the
People's Government of Shanghai Municipality dated November 3, 1998.
(h) Business License of the Company numbered Qi Du Hu Zhang Fu Zi No.
025517 (the "Business License") issued by the State Administration for Industry
and Commerce dated November 17, 1998.
(i) Verification Report of Capital Contribution numbered Hu Zhong Zhou Bio
Zi (98) 4163 issued by Shanghai Zhongzhou Certified Public Accounts dated
December 29, 1998.
(j) Revision of Article 8 of Articles of Associations of the Company dated
May 14, 1999 (the "Revision").
(k) Approval Letter on the Revision numbered Hu Wai Zi Wei Pi Zi'(99) 536
issued by the Shanghai Foreign Investment Commission dated May 26,1999.
12. Leased Housing Property
(a) Lease Contract on Housing by and between the Company and Shu Loke
Investment LTD. dated September 15, 1998.
(b) Invoice of the payment for leased housing in May 1999 dated May 21,
1999.
AI-1
<PAGE>
(c) Lease Permit for the Lease Housing numbered Hu Fang Zu Zheng Xu Zi
(99) 99 issued by Shanghai Administration of Real Estate dated February 12,
1999.
13. Tax and Customs
(a) Certificate of Tax Registration numbered Fuo Shui Fu Zi No.
310104607399396 by Shanghai Taxation Administration dated December 15, 1999.
(b) Certificate of Customs Registration numbered Hu Guan Zi No. 310494397
by Shanghai Customs dated December 25, 1999.
14. Foreign Exchange
(a) Certificate of Foreign Exchange Registration numbered 15354 issued by
State Administration of foreign Exchange dated November 24, 1998.
15. Labor Management
(a) Employment Plan of the Company.
(b) Standard Contract of Employment.
(c) Standard Confidential Agreement of Employee.
16. Intellectual Property
(a) Standard Confidential Information and Invention Assignment Agreement.
(b) Assignment Agreement executed by and between AltiGen and the Company
dated __________, 1999 (the "Assignment Agreement").
17. Assets of the Company
AI-2
<PAGE>
EXHIBIT B
(i) Such counsel have no reason to believe that the Registration
Statement, as of the Effective Date, and the Prospectus as of its date and
as of the applicable Closing Date: (A) contained or contain any untrue
statements of material fact with respect to (1) patents, patent rights,
licenses, inventions, copyrights, technology, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks, trade names and trade dress rights (collectively, "Intellectual
Property") of the Company, (2) any claim or allegation that the Company is
infringing, misappropriating or violating, or has infringed,
misappropriated or violated, any Intellectual Property of any other person
or entity or (3) any lawsuit, arbitration or other legal proceedings with
respect to Intellectual Property to which the Company is a party; or (B)
omitted or omit to state any material fact that relates to any Intellectual
Property used, owned, possessed or licensed by the Company or any legal
proceeding with respect thereto and that is required to be stated in the
Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) To the best of such counsel's knowledge, the statements in the
Prospectus under the captions "Risk Factors--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," and "--Any failure by us to protect our intellectual property
could harm our business and competitive position" and "Business--
Intellectual Property" and "--Legal Proceedings" contain accurate
descriptions of the Company's Intellectual Property and, insofar as such
statements constitute summaries of documents or matters of law or legal
conclusions, are accurate and fairly present such summaries, matters of law
and legal conclusions;
(iii) Such counsel have reviewed the Company's patent applications
("Applications"), which Applications are listed on Schedule I to such
opinion, and to the best of such counsel's knowledge, the Applications were
properly prepared and filed, are being diligently pursued by the Company,
and are held either by the Company as the sole assignee of record or have
listed inventors who have an obligation to assign to the Company, and such
counsel are not aware of others who have asserted any ownership rights in
such Applications other than as described in the Prospectus;
(iv) [Such counsel are not aware that any issued patent held by the
Company, all of which are listed on Schedule I to such opinion, is invalid
or unenforceable, and are not aware of any person or entity other than the
Company who has asserted any ownership rights in such patents];
(v) To the best of such counsel's knowledge, except as specifically
set forth in the Prospectus under the captions "Risk Factors--We face
infringement issues that could harm our business," and "--Any failure by us
to protect our intellectual property could harm our business and
competitive position" under the caption "Business--Legal
B-1
<PAGE>
Proceedings," there are no legal or governmental proceedings (other than
the patent application proceedings themselves) pending or, to the best
knowledge of such counsel, threatened against the Company relating to any
Intellectual Property owned or licensed by the Company;
(vi) Except as specifically set forth in the Prospectus, to the best
of such counsel's knowledge the Company has not received any notice of
infringement with respect to any patent or any notice challenging the
validity, scope or enforceability of any of the patents, trademarks or
service marks owned by or licensed to the Company, and to the best of such
counsel's knowledge, the Company is not infringing, misappropriating or
otherwise violating any Intellectual Property (as defined above) of any
other person or entity (including any patent or right which is the subject
of any patent application known to such counsel) or any license of
Intellectual Property to which the Company is a party; and such counsel is
unaware of any infringements, misappropriations or violations by others of
the Company's Intellectual Property which, in the judgment of such counsel,
could materially and adversely affect the Company's rights in such
Intellectual Property;
(vii) All claims of U.S. Patent No. 5,875,234 issued in the names of
Clayton et al. are either invalid or are not infringed by any of the
Company's current services, products, systems or business processes; and
(viii) To the best of such counsel's knowledge, the Company has the
full and exclusive worldwide right, title and interest to the inventions of
all the Applications as described in such Applications, and all
continuations, divisions, reissues and substitutes of such Applications,
together with the right of priority under the International Convention for
the Protection of Industrial Property, Inter-American Convention Relating
to Patents, Designs and Industrial Models, and any other international
agreements to which the United States of America adheres. To the best of
such counsel's knowledge, no third parties have any rights in the United
States or in any foreign country to such Applications, nor to any
continuations, divisions, reissues or substitutes of such Applications.
B-2
<PAGE>
EXHIBIT 4.2
ALTIGEN COMMUNICATIONS, INC.
A Delaware Corporation
Certificate
Number DC-________ ___________ Shares
Common Stock
THIS CERTIFIES THAT _______________________ is the registered holder of
________________________ (____) shares of the COMMON STOCK of AltiGen
Communications, Inc., a Delaware Corporation transferable only on the books of
the Corporation by the holder hereof in person or by attorney upon surrender of
this certificate properly endorsed.
This certificate and the shares represented hereby are issued and shall be
held subject to all the provisions of the Certificate of Incorporation and the
By-laws of the Corporation and any amendments thereto, to all of which the
holder of this certificate, by acceptance hereof, assents.
The Corporation is authorized to issue two classes of stock, Common Stock
and Preferred Stock. A statement of all of the rights, preferences, privileges
and restrictions granted to or imposed upon the respective classes or series of
shares of stock of the Corporation and upon the holders thereof as established
by the Certificate of Incorporation may be obtained by any stockholder upon
request at the principal office of the Corporation, and the Corporation will
furnish any shareholder, upon request and without charge, a copy of such
statement.
IN WITNESS WHEREOF, the said Corporation has caused this certificate to be
signed by its duly authorized officers on this _______ day of _________, ______.
___________________________________ ___________________________________
Assistant Secretary President
<PAGE>
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI APPEARS HERE]
August 23, 1999
EXHIBIT 5.1
-----------
AltiGen Communications, Inc.
47427 Fremont Boulevard
Fremont, CA 95438
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on June 4, 1999 (Registration No. 333-
80037), as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 5,290,000
shares of your Common Stock, $0.001 par value per share (the "Shares"). The
Shares include an over-allotment option granted to the underwriters of the
offering to purchase up to 690,000 shares. We understand that the Shares are to
be sold to the underwriters of the offering for resale to the public as
described in the Registration Statement. As your legal counsel, we have examined
the proceedings taken, and are familiar with the proceedings proposed to be
taken, by you in connection with the sale and issuance of the Shares to be sold
by you ("Company Shares").
It is our opinion that upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Company Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Company Shares, when issued and sold in the manner described in the
Registration Statement, will be legally issued, fully paid and non-assessable.
We are members of the Bar of the State of California only and express no
opinion as to any matter relating to the laws of any jurisdiction other than the
laws of the State of California and the federal laws of the United States.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
[LOGO] [LETTERHEAD OF ALTIGEN COMMUNICATIONS, INC. APPEARS HERE]
EXHIBIT 10.24
PROMISSORY NOTE
2,262 SHARES February 3, 1997
FOR SERVICES RENDERED, AltiGen Communications, Inc., ("the Company"),
hereby acknowledges and confirms it will issue TWO THOUSAND TWO HUNDRED
SIXTY-TWO shares of the stock of AltiGen Communications, Inc., valued at the
fair market value as of the date of this note to SIMON CHOULDJIAN ("Investor"),
on or before December 31, 1998.
1. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
2. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Investor and shall extend to any
holder hereof.
ALTIGEN COMMUNICATIONS, INC.
/s/ Gilbert Hu
Gilbert Hu, President & CEO
<PAGE>
[LOGO] [LETTERHEAD OF ALTIGEN COMMUNICATIONS, INC. APPEARS HERE]
PROMISSORY NOTE
4,385 SHARES March 13, 1997
FOR SERVICES RENDERED, AltiGen Communications, Inc., ("the Company"),
hereby acknowledges and confirms it will issue FOUR THOUSAND THREE HUNDRED
EIGHTY FIVE (4,385) SHARES of the stock of AltiGen Communications, Inc., valued
at the fair market value as of the date of this note to SIMON CHOULDJIAN
("Investor"), on or before December 31, 1998.
1. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
2. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Investor and shall extend to any
holder hereof.
ALTIGEN COMMUNICATIONS, INC.
/s/ Gilbert Hu
Gilbert Hu, President & CEO
<PAGE>
[LOGO] [LETTERHEAD OF ALTIGEN COMMUNICATIONS, INC. APPEARS HERE]
PROMISSORY NOTE
5,028 SHARES April 11, 1997
FOR SERVICES RENDERED, AltiGen Communications, Inc., ("the Company"),
hereby acknowledges and confirms it will issue FIVE THOUSAND TWENTY-EIGHT
(5,028) SHARES of the stock of AltiGen Communications, Inc., valued at the fair
market value as of the date of this note to SIMON CHOULDJIAN ("Investor"), on or
before December 31, 1998.
1. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
2. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Investor and shall extend to any
holder hereof.
ALTIGEN COMMUNICATIONS, INC.
/s/ Gilbert Hu
Gilbert Hu, President & CEO
<PAGE>
[LOGO] [LETTERHEAD OF ALTIGEN COMMUNICATIONS, INC. APPEARS HERE]
PROMISSORY NOTE
4414 SHARES May 9, 1997
FOR SERVICES RENDERED, AltiGen Communications, Inc., ("the Company"),
hereby acknowledges and confirms it will issue FOUR THOUSAND FOUR HUNDRED
FOURTEEN (4,414) SHARES of the stock of AltiGen Communications, Inc., valued at
the fair market value as of the date of this note to SIMON CHOULDJIAN
("Investor"), on or before December 31, 1998.
1. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
2. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Investor and shall extend to any
holder hereof.
ALTIGEN COMMUNICATIONS, INC.
/s/ Gilbert Hu
Gilbert Hu, President & CEO
<PAGE>
[LOGO] [LETTERHEAD OF ALTIGEN COMMUNICATIONS, INC. APPEARS HERE]
PROMISSORY NOTE
6,600 SHARES June 16, 1997
FOR SERVICES RENDERED, AltiGen Communications, Inc., ("the Company"),
hereby acknowledges and confirms it will issue SIX THOUSAND SIX HUNDRED (6,600)
SHARES of the stock of AltiGen Communications, Inc., valued at the fair market
value as of the date of this note to SIMON CHOULDJIAN ("Investor"), on or before
December 31, 1998.
1. GOVERNING LAW. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.
2. SUCCESSORS AND ASSIGNS. The provisions of this Note shall inure to the
benefit of and be binding on any successor to Investor and shall extend to any
holder hereof.
ALTIGEN COMMUNICATIONS, INC.
/s/ Gilbert Hu
Gilbert Hu, President & CEO
Ref: Inv. #5 on 06/14/97
<PAGE>
EXHIBIT 21.1
------------
List of Subsidiaries
--------------------
AltiGen Communications (Shanghai) Ltd.
<PAGE>
EXHIBIT 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
-----------------------------------
ARTHUR ANDERSEN LLP
San Jose, California
August 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALTIGEN
COMMUNICATIONS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> JUN-30-1999 SEP-30-1998
<CASH> 7,961 8,057
<SECURITIES> 0 0
<RECEIVABLES> 1,538 1,156
<ALLOWANCES> (200) (133)
<INVENTORY> 2,268 1,294
<CURRENT-ASSETS> 12,306 10,549
<PP&E> 1,425 824
<DEPRECIATION> (496) (271)
<TOTAL-ASSETS> 13,235 11,102
<CURRENT-LIABILITIES> 2,445 1,851
<BONDS> 0 0
0 0
8 8
<COMMON> 1 1
<OTHER-SE> 10,780 9,242
<TOTAL-LIABILITY-AND-EQUITY> 13,235 11,102
<SALES> 4,264 3,890
<TOTAL-REVENUES> 4,264 3,890
<CGS> 2,167 2,520
<TOTAL-COSTS> 2,167 2,520
<OTHER-EXPENSES> 7,606 5,536
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (275) (246)
<INCOME-PRETAX> (5,234) (3,920)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,234) (3,920)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,234) (3,920)
<EPS-BASIC> (4.73) (4.75)
<EPS-DILUTED> (4.73) (4.75)
</TABLE>
