<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 COMMISSION FILE NO.
000-00000 OR
[_] TRANSITION Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to ____________
Commission File Number 000-00000
----------------
ALTIGEN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3204299
- ----------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
47427 Fremont Boulevard 94538
Fremont, CA ---------------------------
- ----------------------------------------- (zip code)
(address of principal executive offices)
Registrant's telephone number, including area code: (510) 252-9712
-------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
AS OF FEBRUARY 15, 2000, 13,418,794 SHARES OF THE REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
<PAGE>
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of December 31, 1999 and
September 30, 1999
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended December 31, 1999 and 1998
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1999 and 1998
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on From 8-K
SIGNATURES
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ALTIGEN COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................................................. $ 31,745,864 $ 5,934,070
Short-term investments................................................................. 4,637,996 --
Accounts receivable, net of allowances of $301,031 and
$226,481, respectively............................................................. 1,811,767 1,684,032
Inventories............................................................................ 2,287,962 2,200,796
Prepaid expenses and other current assets.............................................. 881,643 1,953,621
------------ ------------
Total current assets........................................................ 41,365,232 11,772,519
------------ ------------
Property and equipment:
Furniture and equipment................................................................ 1,065,664 992,351
Computer software...................................................................... 602,375 523,875
------------ ------------
1,668,039 1,516,226
Less: Accumulated depreciation......................................................... (712,644) (601,903)
------------ ------------
Net property and equipment.................................................. 955,395 914,323
Long-term investments....................................................................... 1,521,799 --
------------ ------------
$ 43,842,426 $ 12,686,842
============ ============
LIABILITIES AND STOCKHOLDERS'EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................................................... $ 617,306 $ 1,485,672
Accrued liabilities:
Payroll and related benefits....................................................... 229,221 252,361
Warranty........................................................................... 811,761 828,551
Other.............................................................................. 313,459 185,683
Deferred revenue....................................................................... 680,707 593,955
------------ ------------
Total current liabilities................................................... 2,652,454 3,346,222
------------ ------------
Commitments and contingencies (Note 3)
Stockholders'equity
Convertible preferred stock, $.001 par value; Aggregate
liquidation preference of $20,990,401 at September 30, 1999;
Authorized-10,316,616 shares; Outstanding - fully converted to common
stock at December 31, 1999 and 8,146,156 shares at September 30, 1999................ -- 8,146
Common stock, $.001 par value; Authorized 23,957,117
shares; Outstanding - 13,395,960 shares at December 31,
1999 and 1,503,633 shares at September 30, 1999...................................... 13,396 1,503
Additional paid-in capital............................................................... 62,265,779 29,010,033
Deferred stock compensation.............................................................. (2,714,404) (2,957,645)
Accumulated deficit...................................................................... (18,374,799) (16,721,417)
Total stockholders' equity.................................................. 41,189,972 9,340,620
------------ ------------
$ 43,842,426 $ 12,686,842
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ALTIGEN COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
==========================
<S> <C> <C>
Revenues, net ...................................................................... 2,484,997 $ 917,115
Cost of revenues ................................................................ 1,160,650 477,606
----------- -----------
Gross profit ...................................................................... 1,324,347 439,509
----------- -----------
Operating expenses :
Research and development ............................................................. 821,232 857,966
Sales and marketing .................................................... 1,672,179 684,533
General and administrative .......................................... 713,507 314,323
Deferred stock compensation .......................................................... 243,240 192,590
----------- -----------
Total operating expenses ........................................................ 3,450,158 2,049,412
----------- -----------
Loss from operations ...................................................................... (2,125,811) (1,609,903)
Interest and other income, net ............................................................ 472,428 93,054
----------- -----------
Net loss ............................................................................ $(1,653,383) $(1,516,849)
=========== ===========
Basic net loss per share ............................................. $(0.13) $(1.68)
=========== ===========
Shares used in computing basic net loss per share ............................... 12,875,876 900,477
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ALTIGEN COMMUNICATIONS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------
1999 1998
==========================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $(1,653,383) $(1,516,849)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................................................ 110,741 66,792
Amortization of deferred stock compensation......................................... 243,240 192,590
Provision for accounts receivable allowances........................................ 74,550 72,378
Provision for excess and obsolete inventories....................................... 50,000 30,000
Increase in notes payable........................................................... -- 5,037
Change in operating assets and liabilities:
Accounts receivable............................................................... (202,285) 235,039
Inventories....................................................................... (137,166) (285,423)
Prepaid expenses and other current assets......................................... (389,484) (387,126)
Accounts payable.................................................................. (868,366) (288,143)
Accrued liabilities............................................................... 87,846 42,579
Deferred revenue.................................................................. 86,752 63,005
----------- -----------
Net cash used in operating activities........................................... (2,597,555) (1,770,121)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.................................................... (4,637,996) (4,514,183)
Purchases of long-term investments..................................................... (1,521,799) --
Purchases of property and equipment.................................................... (151,813) (244,167)
----------- -----------
Net cash used in investing activities............................................. (6,311,608) (4,758,350)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering of common stock.................................. 34,713,805 --
Proceeds from exercise of stock options................................................ 7,152 10,432
----------- -----------
Net cash provided by financing activities....................................... 34,720,957 10,432
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 25,811,794 (6,518,039)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................ 5,934,070 7,003,569
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................. $31,745,864 $ 485,530
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
AltiGen Communications, Inc. (the "Company") designs, manufactures and markets
integrated, multifunction telecommunications systems that allow businesses to
use data networks, such as the Internet, and the traditional telephone network
interchangeably and seamlessly to carry voice and data communications.
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. These condensed
consolidated financial statements reflect the operations of the Company and its
wholly-owned subsidiary. All significant intercompany transactions and balances
have been eliminated. In our opinion, these condensed consolidated financial
statements include all adjustments necessary (which are of a normal and
recurring nature) for a fair presentation of the Company's financial position,
results of operations and cash flows for the periods presented.
The condensed consolidated balance sheet as of December 31, 1999 has been
derived from the unaudited condensed consolidated financial statements as of
that date.
These financial statements should be read in conjunction with our audited
condensed consolidated financial statements for the year ended September 30,
1999, included in the Company's 1999 Annual Report on Form 10-K. Our results of
operations for any interim period are not necessarily indicative of the results
of operations for any other interim period or for a full fiscal year.
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. The components of inventories include:
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1999 1999
------------ -------------
<S> <C> <C>
Raw materials................................ $1,158,359 $1,078,577
Work-in-progress............................. 407,117 451,453
Finished goods............................... 722,486 670,766
---------- ----------
$2,287,962 $2,200,796
========== ==========
</TABLE>
6
<PAGE>
LONG-TERM INVESTMENTS
The Company accounts for its investments in debt securities pursuant to the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, debt securities are classified as held-to-maturity
and recorded at amortized cost when the Company has the positive intent and
ability to hold the securities to maturity. Marketable debt securities not
classified as held-to-maturity are classified as available-for-sale. Available-
for-sale securities are carried at fair value, with unrealized holding gains and
losses reported as a separate component of stockholders' equity, if significant.
REVENUE RECOGNITION
Revenues consist of sales of hardware and software components 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
unaudited condensed consolidated balance sheets.
Software components are generally not sold separately from the Company's
hardware components. Accordingly, the Company allocates revenues between the
hardware and software components of its products based on management's best
estimate of their relative fair market values. The Company then accounts for
the recognition of software revenues in accordance with Statement of Position
(SOP) 97-2, "Software Revenue Recognition". Software revenues consist of
license revenues that are recognized upon the delivery of application products.
The Company provides limited post-contract customer support (PCS), consisting
primarily of technical support (help desk phone support) and "bug" fixes. In
accordance with SOP 97-2, revenue earned on software arrangements involving
multiple elements is allocated to each element based upon the relative fair
values of the elements. Although the Company provides PCS, the revenue
allocated to this element is recognized together with the initial licensing fee
on delivery of the software because: (1) the PCS fee is included with the
initial licensing fee; (2) the PCS included with the initial license fee is for
one year or less; (3) the estimated cost of providing PCS during the arrangement
is insignificant; and (4) unspecified upgrades/enhancements offered for minimal
or no cost during PCS arrangements historically have been and are expected to
continue to be minimal and infrequent. All estimated costs of providing the
services, including upgrades/enhancements are accrued for at the time of
delivery.
BASIC NET LOSS PER SHARE
Basic net loss per share has been calculated under 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. The basic net loss per share calculation has been appropriately
weighted to reflect the shares of common stock issued and preferred stock that
was converted to common stock upon the Company's initial public offering (see
Note 2). No diluted loss per share information has been presented in the
accompanying condensed consolidated statements of operations since potential
common shares from the conversion of preferred stock, stock options and warrants
are
7
<PAGE>
antidilutive. The Company evaluated the requirements of the Securities and
Exchange Commission Staff Accounting Bulletin No. 98 ("SAB No. 98"), 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 No. 98.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its
individual components. The statement requires the disclosure of all
changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners
("comprehensive income"). The Company adopted the provisions of SFAS
No. 130 in the first quarter of fiscal 1998. For the periods presented
within this 10-Q, the Company does not have any other comprehensive
income. Accordingly, comprehensive loss is the same as net loss for all
periods presented.
SEGMENT REPORTING
In June 1997, the FASB also issued SFAS No.131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 was
adopted by the Company beginning on October 1, 1997. This statement
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.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivative financial instruments on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for
hedging accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which amends
SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000 (or October 1, 2000 for AltiGen). This
statement will not have a material impact on the financial condition or
results of the operations of the Company.
START-UP COSTS
In April 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-5, "Reporting on the Costs of Start- Up Activities".
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.
Note 2. INITIAL PUBLIC OFFERING
On October 4, 1999, the Company completed the initial public offering
(the "Offering") of its Common Stock, $.001 par value. In connection
with the Offering, 3,737,500 shares of Common Stock were sold at a price
of $10.00 per share. All of the Company's outstanding convertible
preferred stock were converted on a one-to-one bases to common stock.
8
<PAGE>
After deducting underwriting discounts and commissions of $2.6 million,
the Company received net proceeds from the Offering of approximately
$34.7 million. In addition, after deducting previously incurred and paid
other Offering expenses of $1.4 million, the Offering resulted in a net
increase to stockholders' equity of $33.3 million. The Company intends
to use the proceeds for general corporate purposes as described in the
prospectus for the Offering. None of the Company's net proceeds of the
Offering were paid directly or indirectly to any director, officer,
general partner of the Company or their associates, persons owning 10%
or more of any class of equity securities of the Company, or an
affiliate of the Company.
Note 3. COMMITMENTS AND CONTINGENCIES
The Company is 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 has not
infringed any valid claim of NetPhone's patent. NetPhone, in turn, has
filed a motion 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 77.6% of the Company's
revenues for fiscal year 1999 and 75.0% of the Company's revenues for
the three-month period ended December 31, 1999. The Company has
responded by filing an opposition to NetPhone's motion. NetPhone's
Motion has not yet been decided. A hearing was held on NetPhone's Motion
for Preliminary Injunction and the Court has taken the matter under
submission. 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 the Company's business or
financial condition.
9
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Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as
amended) that involve risks and uncertainties which may cause actual
results to differ materially from those predicted in the forward-looking
statements. Forward-looking statements can be identified by their use of
such verbs as "expects," "anticipates," and "believes" or similar verbs
or conjugations of such verbs. If any of our assumptions on which the
statements are based prove incorrect or should unanticipated
circumstances arise, our actual results could materially differ from
those anticipated by such forward-looking statements. The differences
could be caused by a number of factors or combination of factors,
including, but not limited to, the "Certain Factors Affecting Business
Operating Results, and Financial Conditions " described herein and the
Risk Factors described in our Securities and Exchange Commission
filings, including the Registration Statement on Form S-1, as amended
(Registration No. 333-79509), effective October 4, 1999.
OVERVIEW
We are a leading provider of integrated, multifunction
telecommunications systems. We were incorporated in May 1994 and began
operations in July 1994. From inception through July 1996, we were a
development-stage company and had no revenues. During this period, our
operating activities consisted primarily of developing our initial
product, recruiting personnel, raising capital and building our
corporate infrastructure. We first recognized revenues from product
sales of our Quantum board and AltiWare software in July 1996. We
generated net revenues of $2.5 million for the three months ended
December 31, 1999 and $917,000 for the three months ended December 31,
1998. As of December 31, 1999, we had an accumulated deficit of $18.4
million.
We derive our revenues from sales of our AltiServ system, which includes
Quantum boards, Triton boards and AltiWare software. Software sales
currently comprise about 12% of our net revenues. We generally do not
sell software separately from our hardware products. We believe
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.
Results of Operations
The following table sets forth condensed consolidated statements of
operations data for the periods indicated as a percentage of net
revenues.
10
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<TABLE>
<CAPTION>
Three Months Ended
December 31,
---------------------------------
1999 1998
==================================
(unaudited)
<S> <C> <C>
Revenues, net................................................................ 100.0% 100.0%
Cost of revenues............................................................. 46.7 52.1
----------- -----------
Gross profit................................................................. 53.3 47.9
Operating expenses :
Research and development................................................ 33.0 93.6
Sales and marketing..................................................... 67.3 74.6
General and administrative.............................................. 28.7 34.3
Deferred stock compensation............................................. 9.8 21.0
----------- -----------
Total operating expenses........................................... 138.8 223.5
----------- -----------
Loss from operations......................................................... (85.5) (175.6)
Interest and other income, net............................................... 19.0 10.2
----------- -----------
Net loss (66.5)% (165.4)%
=========== ===========
</TABLE>
Revenues, net. Revenues consist of sales to end users (including dealers) and
to distributors. Net revenues increased from $917,000 for the first quarter of
1999 to $2.5 million for the first quarter of 2000, representing an increase of
171.0%. This change was primarily from increased market acceptance of our
products through our main distributors. Sales through Ingram Micro and Tech
Data accounted for approximately 16.3% and 30.9%, respectively, of our revenues
for the first quarter of 2000, and approximately 23.6% and 34.0%, respectively,
of our revenues for the first quarter of 1999.
Cost of revenues. Cost of revenues for the first quarter of 2000 increased to
$1.2 million from approximately $478,000 for the first quarter of 1999,
primarily due to the related increase in revenue. 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 from 52.1% for the first quarter of 1999 to 46.7% for the first
quarter of 2000. This decrease was primarily due to an increase in software
sales as a percentage of total products sold; 12% and 10% in first quarter of
2000 and 1999, respectively. In addition, increased production resulted in
lower component and overhead costs.
Gross profit. Gross profit increased to $1.3 million for the first quarter of
2000 from $440,000 for the first quarter of 1999. As a percentage of revenue,
gross profit increased from 47.9% for the first quarter of 1999 to 53.3% for the
first quarter of 2000. The increase in gross profit as a percentage of net
revenues was the result of lower component and overhead costs due to an increase
in production, as well as higher mix of more profitable direct sales to end
users. Although gross profit as a percentage of net revenues has increased each
period, there can be no assurance that this trend will continue in the future.
Research and development expenses. Research and development expenses remained
relatively flat at $821,000 for the first quarter of 2000 compared to $858,000
for the first quarter of 1999. 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. We
currently intend to increase research and
11
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development expenses in absolute dollars in the foreseeable future to allow us
to develop new products and new features for existing products. Until these new
products and features are introduced, we expect this increase in expenses to
increase our net loss (or to reduce any net profits that we may have).
Sales and marketing expenses. Sales and marketing expenses increased to $1.7
million for the first quarter of 2000 from $685,000 for the first quarter of
1999. 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 sales commissions expense as a result of
significantly higher revenue, 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.
General and administrative expenses. General and administrative expenses
increased to $714,000 for the first quarter of 2000 from $314,000 for the first
quarter of 1999. 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 legal fees related to the NetPhone
litigation (see Part II, Item 1, Legal Proceedings), hiring of additional
personnel in our finance and accounting, management information systems and
administrative groups, and an increase in related facilities expenses and
professional services expenses. We currently intend to increase general and
administrative expenses in absolute dollars as we continue to build the
infrastructure necessary to support the growth of our business and operate as a
public company.
Deferred stock compensation expense. Deferred stock compensation expense was
$243,000 for the first quarter of 2000 as compared to $193,000 for the first
quarter of 1999. Deferred stock compensation expense reflects the amortization
of stock compensation charges resulting from granting certain stock options in
prior periods, 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 $973,000 of this deferred stock compensation 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 increase our loss (or reduce any
profits that we may have).
Interest and other income, net. Net interest and other income increased to
$472,000 for the first quarter of 2000 from $93,000 for the first quarter of
1999. This increase was due to investing the proceeds from our recent initial
public offering.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sale of
private equity securities. We have raised an aggregate of $24.7 million, net of
offering expenses, through the sale of preferred stock. In October 1999, the
Company received cash proceeds, net of underwriters' discounts and commissions
of $2.6 million, totaling approximately $34.7 million upon the closing of the
initial public offering. In addition, after deducting previously incurred and
paid other Offering expenses of $1.4 million, the Offering resulted in a net
increase to stockholders' equity of $33.3 million. As of December 31, 1999, we
had cash and cash equivalents of $31.8 million, which consist of cash deposited
in checking and money market accounts and commercial paper with original
maturity of less than three months.
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Net cash used in our operating activities was $2.6 million for the first quarter
of 2000 and $1.8 million for the first quarter of 1999. Net cash used in
operating activities primarily reflected the impact of the net loss for each of
the periods, as well as working capital required to fund our growth in
operations.
Net cash used in investing activities was $6.3 million for the first quarter of
2000 and $4.8 million for the first quarter of 1999. The relative increase in
cash used for investing activities in the first quarter of 2000 compared to the
first quarter of 1999 was primarily due to increase in the net cash being
invested in short-term and long-term investments for the period.
Financing activities provided $34.7 million in cash for the first quarter of
2000, consisting primarily of proceeds from the exercise of stock options and
proceeds from the issuance of common stock upon the closing of our initial
public offering.
We currently believe that the net proceeds from the Company's initial public
offering will provide us with sufficient funds to finance our operations for at
least the next 12 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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Year 2000 Compliance
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 $39,000 has been
incurred through December 31, 1999. We do not have a separate information
technology or similar budget. The cost of addressing year 2000 issues
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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.
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CERTAIN FACTORS AFFECTING BUSINESS, OPERATING RESULTS, AND FINANCIAL CONDITION
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 December 31,
1999, we had an accumulated deficit of $18.4 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 future prospects
We shipped our first products in July 1996. As a result of our limited
operating history, we have limited financial data that you can use to evaluate
our business. You must consider our prospects in light of the risks, expenses
and challenges we might encounter because we are at an early stage of
development in a new and rapidly evolving market. To address these risks and
achieve profitability and increased sales levels, we must:
Establish and increase market acceptance of our technology, products and
systems; Expand our network of distributors, dealers and companies that buy our
products in bulk, customize them for particular applications or customers, and
resell them under their own names; Introduce products and systems incorporating
our technology and enhancements to our product applications on a timely basis;
Respond effectively to competitive pressures; and Successfully market and
support our products and systems.
We may not successfully meet any of these challenges, and our failure to do so
will seriously harm our business and results of operations. In addition,
because of our limited operating history, we have limited insight into trends
that may emerge and harm our business.
Our operating results vary, making future operating results difficult to predict
Our quarterly and annual operating results have varied significantly in the past
and will likely vary significantly in the future. A number of factors, many of
which are beyond our control, may cause our operating results to vary,
including:
Our sales cycle, which may vary substantially from customer to customer;
Unfavorable changes in the prices and delivery of the components we purchase;
The size and timing of orders for our products, which may vary depending on the
season, and the contractual terms of those orders; The size and timing of our
expenses, including operating expenses and expenses of developing new products
and product enhancements; 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.
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Our budgets and commitments that we have made for the future are based in part
on our expectations of future sales. If our sales do not meet expectations, it
will be difficult for us to reduce our expenses quickly, and consequently our
operating results may suffer.
Our dealers often require immediate shipment and installation of our products.
As a result, we have historically operated with limited backlog, and our sales
and operating results in any quarter depend primarily on orders booked and
shipped during that quarter.
Any of the above factors could harm our business, financial condition and
results of operations. We believe that period-to-period comparisons of our
results of operations are not meaningful, and you should not rely upon them as
indicators of our future performance.
Our market is highly competitive, and we may not have the resources to compete
adequately
The market for our integrated, multifunction telecommunications systems is new,
rapidly evolving and highly competitive. We expect competition to intensify in
the future as existing competitors develop new products and new competitors
enter the market. We believe that a critical component to success in this
market is the ability to establish and maintain strong partner and customer
relationships with a wide variety of domestic and international providers. If
we fail to establish or maintain these relationships, we will be at a serious
competitive disadvantage.
We face competition from companies providing traditional private telephone
systems. Our principal competitors that produce traditional private telephone
systems are Lucent Technologies and Nortel Networks. We also compete against
providers of multifunction telecommunications systems, including Picazo
Communications, Inc. and Artisoft, Inc. We potentially face competition from
companies such as Shoreline Teleworks, Inc., NBX Corporation, acquired by 3Com
Corporation, Selsius Systems, acquired by Cisco Systems, Inc., as well as any
number of future competitors. Many of our competitors are substantially larger
than we are and have significantly greater name recognition, financial, sales
and marketing, technical, customer support, manufacturing and other resources.
These competitors may also have more established distribution channels and
stronger relationships with service providers. These competitors may be able to
respond more rapidly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and sale
of their products. These competitors may enter our existing or future markets
with solutions that may be less expensive, provide higher performance or
additional features or be introduced earlier than our solutions. We also expect
that other companies may enter our market with better products and technologies.
If any technology that is competing with ours is more reliable, faster, less
expensive or has other advantages over our technology, then the demand for our
products and services could decrease and harm our business.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. If our
competitors successfully introduce new products or enhance their existing
products, this could reduce the sales or market acceptance of our products and
services, increase price competition or make our products obsolete. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing and customer support. We may not have
sufficient resources to make these investments or to make the technological
advances necessary to be competitive, which in turn will cause our business to
suffer.
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 47.2% of our net revenues for the first quarter of
2000. Our business and operating results will suffer if either of these
distributors does not continue distributing our products, fails to distribute
the volume of
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our products that it currently distributes or fails to expand our customer base.
We also need to establish and maintain relationships with additional
distributors and original equipment manufacturers. We may not be able to
establish, or successfully manage, relationships with additional distribution
partners. In addition, our agreements with distributors typically provide for
termination by either party upon written notice to the other party. For example,
our agreement with Tech Data provides for termination, with or without cause, by
either party upon 30 days' written notice to the other party, or upon insolvency
or bankruptcy. Generally, these agreements are non-exclusive and distributors
sell products that compete with ours. If we fail to establish or maintain
relationships with distributors and original equipment manufacturers, our
ability to increase or maintain our sales and our customer base will be
substantially harmed.
We sell our products through dealers and distributors, which limits our ability
to control the timing of our sales, and this makes it more difficult to predict
our revenues
We do not recognize revenue from the sale of our products to our distributors
until these products are sold to either dealers or end users. We have limited
or no control over the timing of product sales to dealers and end users. Our
lack of control over the revenue which we recognize from our distributors' sales
to dealers and end users limits our ability to predict revenue for any given
period. Our budgets and commitments that we have made for the future are based
in part on our expectations of future sales. If our sales do not meet
expectations, it will be difficult for us to reduce our expenses quickly, and
consequently our operating results may suffer.
We rely on sole-sourced components and third-party technology and products; if
these components are not available, our business may suffer
We purchase technology from third parties that is incorporated into our
products, including virtually all of our hardware products. We order sole-
sourced components using purchase orders and do not have supply contracts for
them. One sole-sourced component, a Mitel Corporation chip, is particularly
important to our business because it is included in virtually all of our
hardware products. If we were unable to purchase an adequate supply of these
sole-sourced components on a timely basis, we would be required to develop
alternative solutions. This could entail qualifying an alternative source or
redesigning our products based on different components. Our inability to obtain
these sole-sourced components, especially the Mitel Corporation chip, could
significantly delay shipment of our products, which could have a negative effect
on our business, financial condition and results of operations.
We rely on dealers to promote, sell, install and support our products, and their
failure to do so may substantially reduce our sales and thus seriously harm our
business
We rely on dealers who can provide high quality sales and support services. As
with our distributors, we compete with other telecommunications systems
providers for our dealers' business, as our dealers generally market competing
products. If a dealer promotes a competitor's products to the detriment of our
products or otherwise fails to market our products and services effectively, we
could lose market share. In addition, the loss of a key dealer or the failure of
dealers to provide adequate customer service could cause our business to suffer.
If we do not properly train our dealers to sell, install and service our
products, our business will suffer.
Software or hardware errors may seriously harm our business and damage our
reputation, causing loss of customers and revenues
Users expect telephone systems to provide a high level of reliability. Our
products are inherently complex and may have undetected software or hardware
errors. We have detected and may continue to detect errors and 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
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addressed and that similar or different problems may not occur in existing or
new boards in the future. In addition, end users may install, maintain and use
our products improperly or for purposes for which they were not designed. These
problems may degrade or terminate the operation of our products, which could
cause end users to lose telephone service, cause us to incur significant
warranty and repair costs, damage our reputation and cause significant customer
relations problems. Any significant delay in the commercial introduction of our
products due to errors or defects, any design modifications required to correct
these errors or defects or any negative effect on customer satisfaction as a
result of errors or defects could seriously harm our business, financial
condition and results of operations.
Any claims brought because of problems with our products or services could
seriously harm our business, financial condition and results of operations. We
currently offer a one-year hardware guarantee to end users. If our products
fail within the first year, we face replacement costs. Our insurance policies
may not provide sufficient or any coverage should a claim be asserted. In
addition, our introduction of products and systems with reliability, quality or
compatibility problems could result in reduced revenues, uncollectible accounts
receivable, delays in collecting accounts receivable, warranties and additional
costs. Our customers, end users or employees could find errors in our products
and systems after we have begun to sell them, resulting in product redevelopment
costs and loss of, or delay in, their acceptance by the markets in which we
compete. Further, we may experience significant product returns in the future.
Any of these events could have a material adverse effect on our business,
financial condition and results of operations.
We may face infringement issues that could harm our business by requiring us to
license technology on unfavorable terms or temporarily or permanently cease
sales of key products
We cannot be certain that our products do not, or will not, infringe patents,
trademarks, copyrights or other intellectual property rights held by third
parties. Third parties may assert infringement claims against us. From time to
time in the ordinary course of business we have been, and we expect to continue
to be, subject to claims of alleged infringement of the patents and intellectual
property rights of others. For example, we are currently engaged in litigation
with NetPhone, Inc. In June 1999, we received a letter from NetPhone alleging
that we infringe a patent owned by NetPhone. On June 30, 1999, we filed a
request for a declaration from the United States District Court for the Northern
District of California that AltiGen does not infringe any valid claim of
NetPhone's patent. NetPhone answered AltiGen's complaint on July 13, 1999 and
asserted a counterclaim against AltiGen, alleging that AltiGen infringes the
NetPhone patent. On August 11, 1999, NetPhone filed a motion to enjoin AltiGen
from making, importing, using, offering to sell or selling a device under the
name Quantum. On September 7, 1999, we filed our Opposition to NetPhone's
motion. NetPhone's Motion has not yet been decided. A hearing was held on
NetPhone's Motion for Preliminary Injunction on December 13, 1999, and the Court
has taken the matter under submission. Although we intend to continue to
litigate the lawsuit and to contest NetPhone's Motion vigorously, litigation is
subject to inherent uncertainties and, therefore, we cannot assure you that we
will prevail or that we can avoid an adverse outcome.
This litigation could be costly and time consuming. An adverse outcome could
require us to obtain a license from NetPhone or require us to cease sales of
what NetPhone calls the "Quantum device" and possibly alter the design of some
of our products. For the first quarter of 2000, sales of our Quantum board
constituted 75.0% of our revenues. Accordingly, an adverse outcome could
materially harm our business. See "Part II, Item 1, 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.
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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.
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
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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.
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 first quarter of 2000, approximately 3.2% 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 facility is 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 facility is located on or near known
earthquake fault zones and is vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures and similar events. If
such a
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disaster occurs, our ability to perform final assembly, software installation
and testing of our products at our facility 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.
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.
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."
22
<PAGE>
Risks Related to the Industry
Integrated, multifunction telecommunications systems may not achieve widespread
acceptance, and our fixed costs in the short run could cause our operating
results and business to suffer
The market for integrated, multifunction telecommunications systems is
relatively new and rapidly evolving. Businesses have invested substantial
resources in the existing telecommunications infrastructure, including
traditional private telephone systems, and may be unwilling to replace these
systems in the near term or at all. Businesses may also be reluctant to adopt
integrated, multifunction telecommunications systems because of their concern
about the current limitations of data networks, including the Internet. For
example, end users sometimes experience delays in receiving calls and reduced
voice quality during calls when routing calls over data networks. Moreover,
businesses that begin to route calls over the same networks that currently carry
only their data may also experience these problems if the networks do not have
sufficient capacity to carry all of these communications at the same time. We
incur many fixed costs in anticipation of a certain level of revenues. If
businesses defer purchasing or decide not to purchase integrated, multifunction
telecommunications systems and the market for our products does not grow or
grows substantially more slowly than we anticipate, our operating results will
suffer and our business will be harmed because we will be unable to reduce fixed
costs in the short term to offset the reduced revenues.
Future regulation or legislation could harm our business or increase our cost of
doing business
In April 1998, the Federal Communications Commission submitted a report to
Congress stating that it may regulate certain Internet services if it determines
that such Internet services are functionally equivalent to conventional
telecommunications services. The increasing growth of the voice over data
network market and the popularity of supporting products and services, however,
heighten the risk that national governments will seek to regulate the
transmission of voice communications over networks such as the Internet. In
addition, large telecommunications companies may devote substantial lobbying
efforts to influence the regulation of this market so as to benefit their
interests, which may be contrary to our interests. These regulations may
include, for example, assessing access or settlement charges, imposing tariffs
or imposing regulations based on encryption concerns or the characteristics and
quality of products and services. Future laws, legal decisions or regulations,
as well as changes in interpretations of existing laws and regulations, could
require us to expend significant resources to comply with them. In addition,
these future events or changes may create uncertainty in our market that could
reduce demand for our products.
Evolving standards may delay our product introductions, increase our product
development costs or cause end users to defer or cancel plans to purchase our
products, any of which could adversely affect our business
The standards in our market are still evolving. These standards are designed to
ensure that integrated, multifunction telecommunications products from different
manufacturers can operate together. Some of these standards are proposed by
other participants in our market, including some of our competitors, and include
proprietary technology. In recent years, these standards have changed, and new
standards have been proposed, in response to developments in our market. Our
failure to conform our products to existing or future standards may limit their
acceptance by market participants. We may not anticipate which standards will
achieve the broadest acceptance in our market in the future, and we may take a
significant amount of time and expense to adapt our products to these standards.
We may also have to pay additional royalties to developers of proprietary
technologies that become standards in our market. These delays and expenses may
seriously harm our results of operations. In addition, customers and users may
defer or cancel plans to purchase our products due to concerns about the ability
of our products to conform to existing standards or to adapt to new or changed
standards, and this could seriously harm our results of operations.
23
<PAGE>
Item 3. Quantitative and Qualitative 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.
Currently, all of our sales and expenses are denominated in U.S. dollars and, as
a result, we have not experienced significant foreign exchange gains and losses
to date. We have not engaged in foreign currency hedging activities to date.
PART II
Item1. 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 preliminary
injunction. On September 7, 1999, we filed our Opposition to NetPhone's motion.
NetPhone's Motion has not yet been decided. A hearing was held on NetPhone's
Motion for Preliminary Injunction on December 13, 1999, and the Court has taken
the matter under submission. Based upon advice of our patent prosecution
counsel, we believe that the claims of NetPhone's patent are invalid or not
infringed by our Quantum board product. Accordingly, we intend to continue to
litigate the lawsuit and to contest NetPhone's Motion vigorously, and we do not
believe that the ultimate outcome of this matter will have a material impact on
our business. However, litigation is subject to inherent uncertainties and,
therefore, we cannot assure you that we will prevail in this litigation, or that
an adverse outcome would not adversely affect our business or financial
condition.
An adverse outcome in the NetPhone litigation or any other litigation could
subject us to significant liabilities to third parties, require us to obtain
licenses from third parties, or require us to cease product sales and possibly
alter the design of our products. Not all licenses to third-party patents or
proprietary rights may be available on acceptable terms. In addition, the laws
of certain countries may not protect our intellectual property.
Item 2. Changes in Securities and Use of Proceeds
On October 4, 1999, the Company completed an initial public offering (the
"Offering") of its Common Stock, $.001 par value. The managing underwriters in
the Offering were CIBC World Markets Corp., Dain Rauscher Wessels, a division of
Dain Rauscher Incorporated, and FAC/Equities, a division of First Albany
Corporation (the "Underwriters"). The shares of Common Stock sold in the
Offering were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-
80037) that was declared effective by the SEC on October 4, 1999. The Offering
commenced on October 4, 1999. All 3,737,500 shares of Common Stock registered
under the Registration Statement (including 487,500 shares sold pursuant to the
exercise of the Underwriters' over-allotment option) were sold at a price of
$10.00 per share. The aggregate price of the Offering amount registered was
$37.4 million. In connection with the Offering, the Company paid
24
<PAGE>
an aggregate of $2.6 million in underwriting discounts and commissions to the
Underwriters. After deducting the underwriting discounts and commissions and
other Offering expenses of $1.4 million, the Company received net proceeds from
the Offering of approximately $33.3 million.
The Company intends to use the proceeds for general corporate purposes as
described in the prospectus for the Offering. None of the Company's net
proceeds of the Offering were paid directly or indirectly to any director,
officer, general partner of the Company or their associates, persons owning 10%
or more of any class of equity securities of the Company, or an affiliate of the
Company.
For the three month ended December 31, 1999, we issued 8,671 shares of common
stock pursuant to the exercise of stock options at exercise prices ranging from
$0.23 to $0.87. All of the stock options were granted under our 1998 Stock
Option Plan prior to our initial public offering. Our issuance of shares of our
common stock upon the exercise of these options was exempt from registrant
pursuant to rule 701 promulgated under the Securities Act of 1933, as amended.
Upon closing of our initial public offering on October 4, 1999, all outstanding
shares of our convertible Series A preferred stock (consisting of 1,634,972
shares), Series B preferred stock (consisting of 1,494,478 shares), Series C
preferred stock (consisting of 3,593,512 shares) and Series D preferred stock
(consisting of 1,423,194 shares) were converted on a share-for-share basis into
shares of our common stock in accordance with the terms of each such series of
preferred stock.
Item 4. Submission of Matters to a Vote of Security Holders.
1. To elect two Class 1 directors to serve for a term expiring on the date on
which the Annual Meeting of Stockholders is held in the year 2003: Thomas
Shao and Kenneth Tai
2. To ratify and approve the appointment of Arthur Anderson LLP as the
independent public accountants of the Company for the fiscal year ending
September 30, 2000
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits:
Exhibits 27.1 - Financial Data Schedule
(b) Report on Form 8-K
None
Item 3. and Item 5. not applicable
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Fremont, State of
California, on the 11th day of February, 2000.
ALTIGEN COMMUNICATIONS, INC.
By: /s/ Philip M. McDermott
-----------------------
Philip M. McDermott,
Chief Financial Officer
(Principal Financial and Accounting Officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
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<SECURITIES> 4,638
<RECEIVABLES> 2,113
<ALLOWANCES> (301)
<INVENTORY> 2,288
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<PP&E> 1,668
<DEPRECIATION> (713)
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<CURRENT-LIABILITIES> 2,652
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0
0
<COMMON> 13
<OTHER-SE> 41,177
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<SALES> 2,485
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<CGS> 1,161
<TOTAL-COSTS> 3,450
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (472)
<INCOME-PRETAX> (1,653)
<INCOME-TAX> 0
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<NET-INCOME> (1,653)
<EPS-BASIC> (0.13)
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