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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended September 30, 2002
OR
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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 000-27427
ALTIGEN COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its
charter)
| DELAWARE |
|
94-3204299 |
| (State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification
Number) |
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| 47427 Fremont Boulevard Fremont,
CA |
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94538 |
| (Address of principal executive offices) |
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(Zip code) |
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, $0.001 par value
(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 requirement 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. ¨
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $6,056,868 as of December 19, 2002 based on the closing price
of the common stock as reported on The Nasdaq Stock Market for that date. Shares of common stock held by each officer and director and by each person known to own 5% or more of the outstanding common stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 13,543,580 shares of the Registrant’s common stock issued and outstanding on December 19, 2002.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes ¨ No x
The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $6,253,303 as of the last
business day of the Registrant’s most recently completed second fiscal quarter, based on the closing price of the common stock as of such date as reported on The Nasdaq Stock Market. Shares of common stock held by each officer and director and
by each person known to own 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
There were 13,130,397 shares of the Registrant’s common stock issued and outstanding on the last business day of the Registrant’s most recently completed second fiscal quarter.
DOCUMENT INCORPORATED BY REFERENCE
Certain sections of AltiGen Communications, Inc.’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be held on February 6, 2003 are incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
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| PART I |
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| PART II |
| Item 5. |
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| PART III |
| Item 10. |
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| Item 11. |
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| Item 13. |
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| PART IV |
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| Item 15. |
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As used in this report, unless the context otherwise requires, the
terms “the Company”, “AltiGen”, “we”, “our” and “us” refer to AltiGen Communications, Inc.
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FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended)
and information relating to us that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. These forward-looking statements include but are not limited to those statements
identified in this report with an asterisk (*) symbol. Additional forward looking statements may be identified by the words “anticipate”, “believe”, “ expect”, “intend”, “will” and similar
expressions, as they relate to us or our management.
The forward-looking statements contained herein reflect our
judgment as of the date of this Report with respect to future events, the outcome of which is subject to certain risks, including the factors set forth under the heading “Item 7—Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Certain Factors Affecting Business, Operating Results, and Financial Condition” and elsewhere in the report, which may have a significant impact on our business, operating results or financial condition.
Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially
from those described herein. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our stockholders should
carefully review the cautionary statements contained in this Form 10-K, including the “Certain Factors Affecting Business, Operating Results and Financial Condition” in Item 7 below.
PART I
INTRODUCTION
AltiGen Communications, Inc. (NASDAQ: ATGN) is the pioneer and market leader in Internet Protocol (IP) telephony systems for small
and medium sized businesses (SMBs). We design, manufacture and market next generation, time-tested IP phone systems and contact centers that use both the Internet and the public telephone network to take advantage of the convergence of voice and
data communications. Our products play an important role in the small to medium sized phone system market by delivering solutions that leverage the open systems concept. Unlike traditional proprietary phone systems, AltiGen systems are designed from
the ground up to be an open solution built on an industry standard platform.
The Company’s principal
executive offices are located at 47427 Fremont Blvd., Fremont, California 94538. The telephone number at that address is (510) 252-9712. We were incorporated in May 1994 and reincorporated by merger in Delaware in June 1999.
INDUSTRY BACKGROUND
AltiGen Communications is focused on the rapidly growing small to medium sized business market, which represents approximately 14 million businesses in the U.S AltiGen operates in the Americas and the Asia Pacific region. In a report
dated July 2002, Allied Business Intelligence forecasted that premise and hosted IP Private Branch Exchange (PBX) equipment revenues will exceed $12.7 billion by 2007. * In addition this report states that small and medium businesses have been a
proving ground for the deployment of live telephony systems, and that some form of IP-based systems will represent over 50% of enterprise PBX seats shipped by 2003. *
The economic downturn in the U.S. economy that began in 2000 has continued in fiscal 2002, especially in the telecommunications industry. Sales of traditional legacy phone
equipment provided by other vendors have steadily decreased while IP telecom solutions, like those which AltiGen sells, have increased. In fiscal 2002, we
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have experienced four quarters of sequential revenue growth, and we believe that AltiGen is well positioned to take advantage of this market opportunity when the overall economy improves. *
According to the Yankee Group in its report dated June 2002, shipments of IP-PBX are expected to surpass traditional PBX by 2005. *
Convergence of Voice and Data
Traditionally, businesses have supported two
separate, incompatible networks to handle their communications needs. The first has been the traditional telephone network, which relies on a technology called “circuit-switching.” A circuit-switched network establishes and maintains a
dedicated (i.e. not shared) line between calling parties for the duration of a call. The second type of network on which businesses have traditionally relied is a data or “packet-switched” network, such as the Internet. In packet-switched
networks, voice, video, images or data is divided into small packets of signals that are simultaneously routed over different paths to a final destination where they are recombined. Packet-switched networks are more efficient than the traditional
telephone network because network paths are not dedicated to a single user, but instead are available to be shared by all users. Thus, 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 data networks such as the Internet as a valuable and economical medium for internal and public communications. These
businesses seek to reduce their telecommunications costs by moving their voice communications to packet-switched networks, such as corporate intranets and the Internet. Although packet-switched networks can offer more efficiency and value to
businesses, the traditional telephone network remains the standard for voice communications today. As a result, businesses that wish to take advantage of packet-switched networks for voice communications must nevertheless be able to place and
receive calls over the traditional telephone network with customers, suppliers and others who rely solely on the traditional telephone network for voice communications. Consequently, there is a need for one common switching system that can interface
with both packet-switched networks and the traditional telephone network.
Evolution Begins in Small to Medium
Sized Businesses
Small to medium sized businesses of up to 500 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 that are retained because the costs of replacing them outweigh their shortcomings, and can more quickly take advantage of new
technological trends. Most of these businesses today use a traditional private telephone network as the backbone of their connection to the voice network, and maintain a separate data network.
Today’s traditional private telephone network remains an expensive, proprietary solution. These systems require skilled personnel to physically prepare the
installation site and to install the equipment, which can be difficult to install, upgrade and maintain. Thus administering this system may become prohibitively expensive for small to medium sized businesses with limited resources.
Most existing telecommunications systems do not address the needs of businesses that wish to transmit voice communications over
both the traditional telephone network and data networks. For example, businesses may wish to route internal calls over their existing voice network and route calls between offices over data networks, such as the Internet, all using the same
telecommunications system. We believe a significant opportunity exists to provide small to medium sized businesses with an integrated solution that delivers the benefits of integrated, multifunction telecommunications systems using IP networks as
well as the traditional telephone network.
THE ALTIGEN SOLUTION
Our IP telephony systems allow customers to implement business telecom solutions for SMBs that lower their costs, improve their productivity today and provide a technology
platform for the future. With our products,
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companies can migrate at their own pace with the same integrated system allowing SMBs to compete effectively with large enterprises of all sizes. IP Telephony technology has opened a window of
opportunity for resellers for new IP PBX and contact center sales.
The AltiServ™ Office IP PBX includes Voice over IP, a superior PBX, voice mail, robust auto attendants,
automatic call distribution, integrated contact center, built in e-mail server, mixed media messaging, built-in support for popular Customer Relationship Management (CRM).
The AltiServ Office IP PBX can be implemented for 8 to 320 users per system. Multiple systems can be cost effectively linked together, with up to 2,000 extensions. This can
be at a single site, a campus environment or multiple locations anywhere in the world using our patent pending, high quality VoIP technology. We offer affordable, robust networking capability with our Distributed Intelligence Network Architecture
(DINA), and individual IP PBX reliability with built-in redundancy and fault tolerant components.
The
AltiServ IP PBX is easy to use and manage and can provide a return on investment in months versus years. We provide, at no additional charge, easy to use Windows graphical user interfaces to manage single or multiple IP PBX’s as one.
In October 2001, we introduced Altiserv Office, a new set of flagship IP-enabled telephony systems for next
generation business communications and customer contact centers. In fiscal 2002, the AltiServ Office product family represented over 30% of the Company’s revenues. This new family of products has allowed a new generation of resellers to deploy
and install systems even easier than before. Essentially, our customers now have the benefit of IP technologies, a phone system and a customer contact center, all in one box. This innovation has appealed to a new set of interconnect resellers that
specialize in selling phone systems.
The AltiServ Office systems are complete, converged PBX systems
pre-configured on industrial Windows 2000 server platforms. The chassis are industrial grade and manufactured by third party suppliers to our exacting design meeting our most stringent requirements. Our software and hardware are all pre-loaded and
ready to go, saving resellers staging time, increasing their profitability and making for faster, smoother installations for end user customers.
The Windows based system management interface is simple to use and is easily learned by reseller technicians and end user IT administrators. Our fast processors on hardware boards, which are installed
in the AltiServ Office chassis, handle call processing. The simple Windows interface is used to manage the system and read/write changes to disk. Additional cards can be easily added for system growth. The call processing cards are designed to
handle IP and analog trunks and station lines. IP cards can be used for IP extensions and also perform IP gateway functions to tie systems together over the Internet. Broadband cards also provide T1 and ISDN PRI communications if desired. All
features are integrated into a single box for simplicity. Voice mail, Automatic Call Distribution (ACD), Automated Attendants, E-Mail and Computer Telephony Integration are included in the basic package at no additional cost. AltiServ Office
supports standards-based H.323 IP phones and analog phones from multiple vendors.
Key benefits of our solutions
include:
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Reduced Administration Costs. Our user interface allows end users to administer their system internally. With traditional private
telephone systems, businesses frequently require a third-party service provider to perform tasks as simple as changing a phone extension or adding a phone line. These expenses can be significant for installation, system upgrades and modifications.
Using AltiServ, system administrators can perform many of these tasks without assistance from third parties. |
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Lower Toll Costs. By routing voice over data networks, including the Internet, our systems eliminate toll charges associated with
long-distance calls. Using our products, businesses can send and receive voice communications over the Internet or existing data lines that constitute their intranets. |
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Integrated Communications. Our systems provide the benefits of converging communications infrastructure by enabling businesses to
route voice calls over either IP networks and other data networks or the traditional telephone network. Our system design integrates seamlessly with both types of networks, providing flexibility for businesses to configure their telecommunications
systems to suit their needs. |
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Innovative Productivity 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. Our AltiServ system has typical call handling and routing functions, as well as specialized functions such as Zoomerang, which enables users to retrieve a
voicemail message, automatically place a call to respond and return to the voicemail system to continue reviewing messages. |
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Ease of Installation, Use and Maintenance. The design of the AltiServ system, using industry-standard hardware and software
platforms, allows for easy installation and system maintenance. AltiServ enables system administrators to manage the voice, voice messaging, email and Internet features of our products through a single consistent user interface. AltiServ Office make
it easier for resellers and end user customers to implement and maintain their systems than other vendors that provide many disparate components and multiple servers to provide similar functionality. All key applications are installed in a single
chassis. |
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Improved Customer Contact Capabilities. With the integrated contact center functionality of AltiServ Office our customers can
enhance communications with their customers by employing new technologies such as web chat, voice-annotated email, home-based agents, agent graphical reports and more. |
PRODUCTS AND CORE TECHNOLOGIES
Our products
fall into the following categories:
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Description
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| IP Telephony Platforms: |
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| AltiServ SmallOffice |
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A multi-application IP telephony system that combines a turnkey telephony chassis with AltiWare™ system software, Quantum™ or Triton™ telephony boards, Celeron processor with 128 MB
RAM, power supply and Windows software to provide next generation phone functions. This system accommodates eight users and can grow to 50 users per system. Multiple AltiServ SmallOffice systems can be linked together and managed as one,
whether in the same location or anywhere in the world. |
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| AltiServ Office |
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A multi-application IP Telephony system that combines a telephony chassis with AltiWare™ system software, Quantum™ or Triton™ telephony boards, Pentium III processor with
256 MB RAM, power supply, redundancy features and Windows 2000 software to provide next generation phone functions. This system accommodates 24 users and can grow to 150 users per system. Multiple AltiServ Office systems can be linked
together and managed as one, whether in the same location or anywhere in the world. |
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| AltiServ OfficePlus |
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A multi-application IP Telephony system that combines a turnkey telephony chassis with AltiWare™ system software, Quantum™ or Triton™ telephony boards, Pentium III processor with
512 MB RAM, power supply, mission critical redundancy features and Windows 2000 software to provide next generation phone functions. This system accommodates 36 users and can grow to 320 users per system. Multiple AltiServ OfficePlus
systems can be linked together and managed as one, whether in the same location or anywhere in the world. |
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| AltiWare OE |
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Our system software enables people to place and receive telephone calls over IP or public Telephone networks, manages overall call processing for the system
as well as value added functions such as voicemail, automatic call distribution, automated attendant, unified messaging, call detail recording and built-in integration with popular Customer Relationship Management (CRM) packages. This software may
only be used on AltiServ systems. |
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| AltiView™ |
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A personal computer program that allows users to receive and place calls, listen to voicemail messages and identify the phone number of the caller. This
feature is optional on AltiServ SmallOffice and is included in AltiServ Office and OfficePlus. |
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| AltiConsole™ |
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A PC Windows desktop Operator Attendant application interface. This software allows an AltiServ operator to handle and process high volumes of
calls. |
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| AltiAgent™ |
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Designed as a PC interface for contact center agents, this feature provides both individual and workgroup status and also allows contact center agents to
also perform the same operations as AltiView. |
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| AltiSupervisor™ |
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Designed as a PC interface for contact center supervisors. This software provides individual and workgroup status, silent monitoring of agents, barge-in
functionality and allows contact center agents to perform the operations in AltiView. |
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| Hardware: |
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| Triton IP Board |
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This microprocessor-controlled board allows calls to be carried over public and private data networks that support IP and can be used for IP trunks or people
extensions. |
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| Triton T1/ PRI Board |
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This microprocessor-controlled board allows calls to be carried over digital interoffice lines. |
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| Quantum Board |
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This microprocessor-controlled board allows calls to be carried over traditional analog telephone extension lines. |
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| Server Chassis |
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This chassis is the box used to house our software and hardware to provide a phone system or contact center. |
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| RAID hardware |
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In case of power failure, this hardware is used to provide backup memory storage. |
AltiGen Hardware and Firmware
In 1996, we developed a single base circuit board with powerful digital signal processing technology. Digital signal processing is a
computer built on to the circuit board, which can run special, high-speed software programs, called firmware. Firmware can receive, send and modify digital information for communications with network services. Our newest board, the 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, the Triton DSP series circuit board becomes a T1 or ISDN communication
circuit board or a circuit board supporting the same communication format as the Internet with simple changes in on-board software and, in some cases, new circuits.
This modular design not only allows us to provide new capabilities, but also allows our products to achieve a high degree of reliability and cost reduction since the
underlying technology is the same.
AltiGen Modular Software
Our software products are based on modular software components similar to the concept described above for our hardware and firmware. 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
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hides the complexity of the hardware from application programs to provide specific features. The application program layer consists of components that implement the application logic such as
voicemail and auto attendant. These applications do not depend on any particular hardware integration,
The
layered architecture of AltiServ provides important benefits:
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New feature development generally occurs more frequently; |
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Development times are more predictable, thus saving money; |
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New hardware and software features can be added easily and rapidly; and |
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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 the Americas and the Asia Pacific region. We are working to increase market awareness of our technology and demand for our products in the small to mid-sized business market through public relations, print, email and web campaigns.
Among our marketing highlights are the following:
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TMC Labs Innovation Award for 2002. |
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Introduction of AltiWare™ Open Edition 4.5 with Multisite Management Capabilities, Enabling a Distributed Intelligence Network Architecture |
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Introduction of Alti-IP 600™ Phone for Total Plug-and-Play IP Telephony for the SMB Market. |
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assist our distributors, dealers and strategic partners, we provide market development funds, marketing tools 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.
Sales
We currently have sales and support staff in: New York, Illinois, Ohio, Colorado,
Florida, Washington DC, Texas, China and in our headquarters in Fremont, California. Our network of distributors and over 350 resellers sell our systems to end-users. Our inside sales force answers incoming calls from end users and refers new leads
to a qualified dealer near each end user’s location. The inside sales force is also responsible for account management of our smaller resellers. Our outside sales force in the Americas includes regional sales managers and technology solutions
managers, who work on our larger reseller deals and recruit new large reseller partners. In fiscal 2002, we continued our expansion to a more scalable reseller community by signing on an increasing number of resellers that currently sell traditional
phone systems from companies including Avaya, Comdial and NEC.
Customers
Our direct customers are primarily distributors and resellers who sell and resell our products to end-users. We have distribution
agreements with AltiSys, Ingram Micro, and Synnex in the Americas, Emotion, Neteltech and others in Asia. Sales through Altisys, Ingram Micro, and Synnex accounted for approximately 27%, 25%, and 32% respectively, of our revenues in fiscal 2002, and
approximately 26%, 21%, and 43% respectively, of our revenues in fiscal 2001. We also have over 350 authorized resellers who sell our products directly to end-users. We review our resellers quarterly and discontinue distribution through those who do
not meet our revenue and technical standards.
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Customer Support
We believe that consistent, high-quality service and support are key factors in attracting and retaining customers. Our customer support groups, located in California,
New York, Texas and Shanghai, coordinates service and technical support of our products and provides service twenty-four hours a day, seven days a week. These personnel assist our distributors and resellers in resolving installation and support
issues that arise from their sales to end users and also provides limited support to end users to supplement their dealer support. Resellers and end-user 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 September 30, 2002, we employed 53 individuals in engineering, research and development and
support.
During fiscal 2002, 2001, and 2000, our research and development expense was approximately $4,071,000,
$4,847,000, and $4,334,000, respectively.
COMPETITION
The markets for our products are intensely competitive, continually evolving and subject to changing technologies. We currently compete with companies providing traditional
telephone systems, principally Avaya Communications, NEC and Nortel Networks. We also compete against companies providing IP and IP-enabled telecommunications systems, including, Shoreline Communications, Inc., 3Com Corporation, 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. In fiscal
2002, we continued to be price competitive with low cost of ownership. We believe that our principal competitive advantages include:
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System designed for small and medium business budgets; |
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Demonstrated and referenceable ability to cut communications costs; |
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Time-Tested Reliability since 1996; |
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Focused service and technical support since we only sell IP Telephony; |
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Over 350 resellers and growing channels; and |
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A considerable lead in product development. |
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.
SEASONALITY
Typically, the IP PBX industry experiences some seasonal variations in demand, with weaker sales in the winter months because of holidays and customers’ planned shutdowns. This seasonality is particularly evident in the
North American market.
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 by 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 continue to file patent applications 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.
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.
MANUFACTURING AND ASSEMBLY
Our manufacturing
operations consist of purchasing, receiving, inspecting, testing, packaging and shipping. We depend on four suppliers who provided us with about 75% of our hardware product components during fiscal 2002. 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 test our products both during and
after the assembly process using internally developed product assurance testing procedures, which include visual inspection, 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:
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A Zarlink 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. |
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Texas Instruments’ digital signal processor (“DSP”) chip is included in 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. We expect that sales of these boards will represent an increasing percentage of our revenues in the future.*
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Xilinx, Inc.’s chip for our Triton product line board allows our board to work with digital communications lines. We expect that sales of our Triton
product line board will represent an increasing percentage of our revenues in the future.* |
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Legerity, Inc.’s chips for our Triton Analog product line allows our board to work with analog communications lines. We expect that sales of our Triton
product line board will represent an increasing percentage of our revenues in the future.* |
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Advantech provides the chassis for our AltiServ Office and AltiCenter Office products based on our customer specifications. |
Loss of any key component supplier would adversely impact our business.
EMPLOYEES
As of September 30, 2002, we had 107
full-time employees, including 53 in research and development and support, 33 in marketing and sales, 7 in operations, and 14 in finance and administration. Of these full time employees, 69 were located in the United States and 38 in China. Our
future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical, marketing, engineering and management personnel, who are in great demand.
Our headquarters for
corporate administration, research and development and sales and marketing occupies approximately 35,000 square feet of space in Fremont, California. We also lease approximately 4,000 square feet of facility in McKinney, Texas to serve as our
technical support and training. Outside the United States, we lease approximately 5100 square feet of facility in Shanghai, China where we conduct administration, research and development, sales and marketing. In fiscal 2002, we leased another 1,600
square feet of facility in Beijing, China to serve as our sales and marketing. We believe that our existing facilities are adequate for our needs through at least the end of year 2003.* We believe that any additional space we may need in the future
will be available on commercially reasonable terms.*
Item 3. Legal Proceedings
We may become
parties to litigation in the normal course of our business. Litigation in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex
litigation are difficult to predict.
On September 6, 2002, Vertical Networks, Inc. filed suit against AltiGen
Communications, Inc. in United States District Court for the Northern District of California, Case No. C02 04253 (WHA), alleging infringement of Vertical Networks’ United States Patents Nos. 6,266,341; 6,289,025; 6,292,482; 6,389,009; and
6,396,849. On October 28, 2002, Vertical Networks amended its Complaint to add allegations of infringement of Patents Nos. 5,617,418 and 5,687,174. Vertical Networks filed a Second Amended Complaint on November 20, 2002 to identify the
AltiGen products and/or activities that allegedly infringe the seven patents-in-suit. Vertical Networks seeks a judgment of patent infringement, damages, including treble damages for alleged willful infringement, and attorneys’ fees and costs.
AltiGen filed an Answer and Counterclaims for Declaratory Relief on December 9, 2002. AltiGen believes it has strong defenses and arguments in this dispute and intends to vigorously litigate its position.
11
Item 4. Submission of Matters to a Vote of Security Holders
None
EXECUTIVE OFFICERS
The following sets forth certain information with regard to the executive officers of the Company and their ages as of September 30, 2002:
| Name
|
|
Age
|
|
Position
|
| Gilbert Hu (1) |
|
45 |
|
President, Chief Executive Officer, Director |
| Philip M. McDermott |
|
56 |
|
Chief Financial Officer |
| Richard De Soto |
|
56 |
|
Chief Marketing and Sales Officer |
| Simon Chouldjian |
|
49 |
|
Vice President of Manufacturing |
| Tsyr-Yi (Shirley) Sun |
|
42 |
|
Vice President of Research and Development |
(1) |
|
Member of the Compensation Committee |
Gilbert Hu founded AltiGen and has served as our President, Chief Executive Officer and a Director since May 1994. Before founding AltiGen, Mr. Hu was a founder, President and Chief Executive Officer
of Centrum Communications, Inc., a networking company acquired by 3Com Corporation in early 1994. Mr. Hu has also served in technical and managerial roles at Vitalink Communication Corporation, an internet working 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 to May
1999, Mr. McDermott served as Director of Finance Americas Sales for 3Com Corporation. 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 Corporation. Mr. McDermott received Certified Management Accountant accreditation from The Society of Management Accounting in Montreal, Canada.
Richard De Soto has served as our Chief Marketing and Sales Officer since January 2001. From December 1999 to December 2000,
Mr. De Soto served as Vice President of Marketing for Entera, Inc., a streaming media and web caching software company. Entera was subsequently acquired by Cacheflow, Inc. From February 1998 to November 1999, Mr. De Soto served as Chief Marketing
Officer for Freegate Corporation, an internet server appliance company. From October 1996 to January 1998, Mr. De Soto served as Senior Director of Internet Business Unit and Corporate Channel Marketing for NetManage, Inc., a networking software
company. He received a Bachelor of Art degree in Marketing and Public Relations from San Jose State University and an Advanced Information Systems certificate from the Cambridge Information Technology Center in Cambridge.
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.
Tsyr-Yi (Shirley) Sun has served as our Vice President of Research and Development since October 1999, and has served as our Director of IP Telephony from April 1998 to
October 1999. From February 1994 to March 1998, Ms. Sun worked for 3Com Corporation as an Engineering Manager. From August 1991 to February 1994, Ms. Sun was a founder and an Engineering Manager with Centrum Communications, Inc., a networking
12
company acquired by 3Com Corporation in early 1994. Ms. Sun received a Bachelor of Science degree in Mechanical Engineering from National Central University in Taiwan and a Master of Science
degree in computer science from Utah State University.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
From October 4, 1999, the date of our initial public offering, to June 11, 2002, our common stock was traded on the Nasdaq National Market under the symbol “ATGN”. Since June 12, 2002, our
common stock has traded on the Nasdaq SmallCap Market under the symbol “ATGN”. The following table sets forth the range of high and low sales prices for our common stock for the periods indicated:
| |
|
Fiscal 2002
|
|
Fiscal 2001
|
| |
|
High
|
|
Low
|
|
High
|
|
Low
|
| 1st Quarter |
|
$ |
1.06 |
|
$ |
0.77 |
|
$ |
4.31 |
|
$ |
0.75 |
| 2nd Quarter |
|
$ |
1.03 |
|
$ |
0.60 |
|
$ |
3.50 |
|
$ |
0.94 |
| 3rd Quarter |
|
$ |
0.79 |
|
$ |
0.51 |
|
$ |
1.70 |
|
$ |
0.96 |
| 4th Quarter |
|
$ |
0.75 |
|
$ |
0.42 |
|
$ |
1.31 |
|
$ |
0.56 |
As of September 30, 2002, the Company had approximately 132
shareholders of record. 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.*
We received aggregate net proceeds of approximately
$33.3 million from the initial public offering of shares of our common stock in October 1999. As of September 30, 2002, proceeds from our initial public offering have been used for working capital and general corporate purposes, including research
and development of new products, sales and marketing efforts, general and administrative expenses and international expansion. The remaining net proceeds have been invested in cash, cash equivalents and short-term investments.
| Plan category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
Weighted-average exercise price of outstanding options, warrants and rights
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities
reflected in column (a))(1)
|
| |
|
(a)
|
|
(b)
|
|
(c)
|
| Equity compensation plans approved by security holders |
|
3,545,771 |
|
$ |
4.10 |
|
1,237,397 |
| Equity compensation plans not approved by security holders |
|
— |
|
|
— |
|
— |
| |
|
|
|
|
|
|
|
| Total |
|
3,545,771 |
|
$ |
4.10 |
|
1,237,397 |
| |
|
|
|
|
|
|
|
(1) |
|
The number of shares reserved for issuance under the Company’s 1999 Stock Option Plan will be increased on the first day of the Company’s fiscal year
by an amount equal to the lesser of (i) 1,796,783 shares; (ii) 5% of the Company’s outstanding shares on that date; or (iii) a lesser amount as determined by the Board of Directors. The number of shares reserved for issuance under the
Company’s 1999 Employee Stock Purchase Plan will be increased on the first day of each fiscal year by an amount equal to the lesser of (i) 598,928 shares; (ii) 2% of the outstanding shares on that date; or (iii) a lesser amount as
determined by the Board of Directors. |
13
Item 6. Selected Financial Data
This
section presents selected historical financial data of AltiGen as a Delaware corporation. This section should be read carefully in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of
Operations” and the consolidated financial statements included in this Form 10-K, including the notes to the consolidated financial statements. The selected data in this section are not intended to replace our consolidated financial statements.
| |
|
Fiscal Year Ended September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
| |
|
(in thousands, except per share data) |
|
| Consolidated Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues, net |
|
$ |
9,896 |
|
|
$ |
9,632 |
|
|
$ |
12,410 |
|
|
$ |
6,599 |
|
|
$ |
3,890 |
|
| Cost of revenues |
|
|
4,571 |
|
|
|
7,346 |
|
|
|
5,747 |
|
|
|
3,300 |
|
|
|
|