<PAGE>
FORM 10-Q
(Mark one)
[ X ] QUARTERY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
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 000-26209
Ditech Communications Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-2935531
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
825 East Middlefield Road
Mountain View, California 94043
(650) 623-1300
(Address, including zip code, and telephone number, including area code,
of registrant's executive offices)
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 past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days.
YES [ X ] NO [ ]
As of August 31, 1999, 12,243,940 shares of the Registrant's common stock were
outstanding.
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DITECH COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statements of Operations
THREE MONTHS ENDED JULY 31, 1999 AND 1998 3
Condensed Balance Sheets
AS OF JULY 31, 1999 AND APRIL 30, 1999 4
Statements of Cash Flows
THREE MONTHS ENDED JULY 31, 1999 AND 1998 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3 Qualitative and Quantitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 2. Changes in Securities and Use of Proceeds 27
ITEM 3. Defaults Upon Senior Securities 27
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 5. Other Information 28
ITEM 6. Exhibits and Reports on Form 8-K 28
Signatures 28
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
Ditech Communications Corporation
Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months
ended July, 31
--------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues $9,771 $5,124
Cost of goods sold 4,139 2,408
------------- -------------
Gross margin 5,632 2,716
------------- -------------
Operating expenses
Sales and marketing 1,735 1,285
Research and development 1,141 848
General and administrative 858 441
------------- -------------
Total operating expenses 3,734 2,574
------------- -------------
Income from operations 1,898 142
------------- -------------
Other income/(expense)
Interest income 63 49
Interest expense (172) (181)
------------- -------------
Total other income/(expense) (109) (132)
------------- -------------
Income before income taxes 1,789 10
Provision for income taxes 750 4
------------- -------------
Net income 1,039 6
Accretion of mandatorily redeemable preferred stock to redemption value 99 362
------------- -------------
Net income (loss) attributable to common stockholders $940 ($356)
------------- -------------
------------- -------------
Net income (loss) per share - basic $0.11 ($0.11)
------------- -------------
------------- -------------
Net income (loss) per share - diluted $0.08 ($0.11)
------------- -------------
------------- -------------
Number of shares used in per share calculations
Basic 8,359 3,269
------------- -------------
------------- -------------
Diluted 11,251 3,269
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these unaudited
financial statements.
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Ditech Communications Corporation
Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
July 31, April 30,
1999 1999
-------------------- ---------------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 8,126 $3,114
Accounts receivable, net 3,598 3,068
Inventories, net 4,549 4,606
Prepaids and other current assets 1,007 663
-------------------- ---------------------
Total current assets 17,280 11,451
Property and equipment, net 1,706 1,538
Other assets 3,702 1,341
-------------------- ---------------------
Total assets $22,688 $14,330
-------------------- ---------------------
-------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,306 $2,559
Accrued expenses 1,346 1,454
Income taxes payable 1,138 417
Deferred revenue 416 531
Current portion of long-term obligations 63 1,186
-------------------- ---------------------
Total current liabilities 5,269 6,147
Long-term obligations 60 6,264
Deferred income taxes 14 4
-------------------- ---------------------
Total liabilities 5,343 12,415
-------------------- ---------------------
Redeemable preferred stock - 25,258
Common stock 43,095 3,090
Deferred stock compensation (1,147) (1,229)
Accumulated deficit (24,603) (25,204)
-------------------- ---------------------
Total stockholders' equity (deficit) 17,345 (23,343)
-------------------- ---------------------
Total liabilities and stockholders' equity (deficit) $22,688 $14,330
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
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DITECH COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
July 31,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,039 $6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 350 86
Deferred income taxes (121) -
Amortization of deferred stock compensation 82 -
Changes in assets and liabilities:
Accounts receivable (530) (829)
Inventories 57 (999)
Other current assets (213) (22)
Income taxes payable 721 4
Accounts payable (253) 1,029
Accrued expenses and other (108) (264)
Deferred revenue (115) 1,502
--------------- -------------
Net cash provided by operating activities 909 513
--------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (288) (123)
Other assets (3,009) (4)
--------------- -------------
Net cash used by investing activities (3,297) (127)
--------------- -------------
Cash flows from financing activities:
Repurchase of common stock (3) -
Principal payments on notes payable (7,313) (125)
Principal payments on capital leases (14) (23)
Redemption of series A mandatorily redeemable preferred stock (19,655) -
Proceeds from issuance of common stock 34,377 -
Proceeds from exercise of stock options 8 230
--------------- -------------
Net cash provided by financing activities 7,400 82
--------------- -------------
Net increase in cash and cash equivalents 5,012 468
Cash and cash equivalents, beginning of period 3,114 3,433
--------------- -------------
Cash and cash equivalents, end of period $8,126 $3,901
--------------- -------------
--------------- -------------
</TABLE>
The accompanying notes are an integral part of these unaudited financial
statements.
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DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Ditech Communications Corporation ("Ditech" or the "Company") designs,
develops and markets echo cancellation equipment and optical
communications products for use in building and expanding
telecommunications and cable communications networks. The Company has
established a direct sales force that sells its products in the U.S.
and internationally. The Company operates in a single business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis of Presentation
The accompanying financial statements at July 31, 1999 and for the
three months ended July 31, 1999 and 1998, together with the related
notes, are unaudited but include all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation, in all material respects, of the
financial position and the operating results and cash flows for the
interim date and periods presented. Results for the interim period
ended July 31, 1999 are not necessarily indicative of results for the
entire fiscal year or future periods. These financial statements should
be read in conjunction with the financial statements and related notes
thereto for the year ended April 30, 1999 included in the Company's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission, file number 333-86691.
Computation of Earnings (Loss) per Share
Basic earnings per share is calculated based on the weighted average
number of shares of common stock outstanding during the period less
shares subject to repurchase, which are considered contingently
issuable shares. Diluted earnings per share is calculated based on the
weighted average number of shares of common stock and common stock
equivalents outstanding, including the dilutive effect of stock
options, using the treasury stock method, common stock subject to
repurchase and the assumed conversion of all outstanding shares of
Series B Mandatorily Redeemable Preferred Stock.
Comprehensive Income
There was no difference between the Company's net income and its total
comprehensive income for the three months ended July 31, 1999 or 1998.
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3. INVENTORIES
Inventories, net consisted of (in thousands):
<TABLE>
<CAPTION>
July, 31 April 30,
1999 1999
-------- ---------
<S> <C> <C>
Raw materials and work-in-progress $3,014 $2,362
Finished goods 1,535 2,244
-------- ---------
Total $4,549 $4,606
-------- ---------
-------- ---------
</TABLE>
4. INITIAL PUBLIC OFFERING
On June 9, 1999, the Company completed its initial public offering
of 3,000,000 shares of common stock and subsequently sold an
additional 450,000 shares pursuant to the underwriters' over
allotment option. As a result, the Company raised a total of $34.0
million after underwriter fees and other issuance costs ($400,000 of
which was incurred in Fiscal 1999). The Company used the net proceeds
from the offering to redeem all shares of series A mandatorily
redeemable preferred stock for $19.7 million, complete the purchase of
the Company's core echo cancellation technology for $3.0 million, and
retire the long-term note payable to a bank for $7.3 million. In
addition, all outstanding shares of series B mandatorily redeemable
preferred stock converted into common stock based on a conversion
ratio of 2 shares of common stock for every 3 shares of series B
mandatorily redeemable preferred stock.
5. SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No.131) which
was effective for the Company's fiscal year beginning May 1, 1998. This
statement supercedes Statement of Financial Accounting Standards No. 14
"Financial Reporting for Segments of a Business Enterprise." SFAS No.
131 changes current practice under Statement No. 14 by establishing a
new framework on which to base segment reporting and also requires
interim reporting of segment information.
The Company markets its products primarily to customers in the United
States who are in the telecommunications industry. Management uses one
measurement of profitability and does not disaggregate its business for
internal reporting. The Company's revenues by geographic area are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended July 31,
1999 1998
---------- ----------
<S> <C> <C>
USA $8,682 $4,977
Mexico 370 5
Rest of World 719 142
---------- ----------
$9,771 $5,124
---------- ----------
---------- ----------
</TABLE>
7
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International sales are entirely comprised of export sales.
6. LITIGATION
In June 1999, the Company received a favorable ruling from an
arbitration panel in the matter related to Antec Corporation's
alleged breach of a purchase contract. Subsequent to the favorable
ruling, the Company was notified by Antec's counsel of its intent to
contest the arbitrator's decision. In August, the Company and Antec
reached a final settlement in which the Company received a minor
settlement award. Additionally, the Company and Antec entered into a
patent license agreement. The Company will recognize $1.9 million of
revenue in the Company's second quarter of fiscal 2000 associated
with the fixed license fee payable in fiscal 2000.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN OUR REGISTRATION STATEMENT
ON FORM S-1 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, FILE NUMBER
333-86691. THE DISCUSSION IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE (SEE "FUTURE GROWTH
AND OPERATING RESULTS SUBJECT TO RISK" BELOW).
OVERVIEW
Ditech designs, develops and markets equipment used in building and expanding
telecommunications and cable communications networks. Our products fall into two
categories, echo cancellation equipment and equipment that enables and
facilitates communications over fiber optic networks. To date, the vast majority
of our revenue has been derived from sales of our echo cancellation products. We
began sales of our third generation echo cancellation products in March 1995. We
began sales of our first optical communications product in September 1996.
In November 1998, we acquired the echo cancellation technology that we
previously licensed from Telinnovation. We acquired this technology for a
total purchase price of 166,666 shares of our common stock and $2.96 million
in cash.In addition, we paid royalties to Telinnovation on the sales of our
products incorporating this technology until the $2.96 million cash portion
of the purchase price was paid from the proceeds of our initial public
offering in June 1999. We will amortize the purchased technology over a
period of five years.
We recognize revenue when a product has been shipped, no material vendor
obligations remain outstanding, and collection of the resulting receivable is
probable. In the event that we defer revenue recognition due to uncertainty
about collectibility or the existence of a material vendor obligation such as
installation, we recognize the revenue when the uncertainty is removed or the
obligation is fulfilled. We offer a five year warranty on all of our products.
The warranty generally provides that we will repair or replace any defective
product prior to the passage of five years from the invoice date.
To date, the vast majority of our revenue has been derived from sales of our
echo cancellation products. In fiscal 1997, fiscal 1998, fiscal 1999 and the
first three months of fiscal 2000, we derived approximately 99.5%, 94.1%, 93.7%
and 99.9%, respectively, of our revenue from the sale of our echo cancellation
products. We expect that a substantial majority of our revenue will continue to
come from sales of our echo cancellation products for the foreseeable future.
We have established a direct sales force that sells to our customers in the U.S.
and internationally. We also intend to expand the use of sales agents, systems
integrators, original equipment manufacturers and distributors to sell and
market our products
9
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internationally. In addition, we have entered into an agreement with an original
equipment manufacturer for distribution of our optical communications products
and are exploring the possibility of entering into others. We generally expect
that margins will be higher on our newer products than on our more established
products, and that margins on our new products will decline as competition from
competing products becomes more intense. In addition, we expect that gross
margins on products that we sell through original equipment manufacturers will
generally be less than gross margins on direct sales. Gross margins in any one
period may not be indicative of gross margins for future periods.
Historically the majority of our sales have been to customers in the U.S. These
customers accounted for over 89% of our revenue in the first three months of
fiscal 2000, over 86% of our revenue in fiscal 1999 and over 93% in fiscal 1998.
However, sales to some of our customers in the U.S. may result in our products
eventually being deployed internationally, especially in the case of any
original equipment manufacturer that distribute overseas. To date, substantially
all of our international sales have been export sales and denominated in U.S.
dollars.
Our revenue historically has come from a small number of customers. Our five
largest customers accounted for over 75% of our revenue in the first three
months of fiscal 2000, 65% of our revenue in fiscal 1999 and over 75% of our
revenue in fiscal 1998. Qwest/LCI accounted for 43% of our revenue in the three
months of fiscal 2000, and 42% of our revenue in fiscal 1999 and in fiscal 1998.
Our four next largest customers accounted collectively for 33% of our revenue in
the three months of fiscal 2000, 23% of our revenue in fiscal 1999 and 38% of
our revenue in fiscal 1998. MCI accounted for $7.6 million or more than 50%, of
our revenue in fiscal 1997, but only $1.4 million, or approximately 11%, of our
revenue in fiscal 1998. This reduction began shortly before the acquisition of
MCI by Worldcom. We also recently received a substantial unforecasted order from
one of our largest customers for deployment of our Broadband Echo Cancellation
System. We expect this order to result in an incremental $12 million to $15
million of revenue to be recognized over the next two to three quarters.
We have entered into an agreement to license certain of our optical technology
to Antec Corporation for $1.9 million payable in fiscal 2000, all of which will
be recognized in the second quarter of fiscal 2000, plus per unit royalties.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1999 AND 1998
The following table sets forth, for the periods indicated, the components of the
results of operations, as reflected in the Company's statement of operations, as
a percentage of sales.
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<TABLE>
<CAPTION>
Three months ended
-------------------------
July 31, July 31,
1999 1998
---- ----
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of goods sold 42.4 47.0
---- ----
Gross margin 57.6 53.0
---- ----
Operating expenses:
Sales and marketing 17.7 25.1
Research and development 11.7 16.5
General and administrative 8.8 8.6
---- ----
Total operating expenses 38.2 50.2
---- ----
Income from operations 19.4 2.8
Other income (expense), net (1.1) (2.6)
---- ----
Income before provision for income taxes 18.3 0.2
Provision for income taxes 7.7 0.1
---- ----
Net Income 10.6% 0.1%
---- ----
---- ----
</TABLE>
REVENUE. Revenue increased to $9.8 million in the first three months of fiscal
2000 from $5.1 million in the first three months of fiscal 1999. The primary
reason for this increase was market acceptance and sales of our fourth
generation echo cancellation products offset in part by decreased unit sales of
our third generation echo cancellation products. We expect unit sales of our
third generation echo cancellation products to continue to decrease as our
customers transition to our fourth generation echo cancellation products.
COST OF GOODS SOLD. Cost of goods sold consists of direct material costs,
personnel costs for test and quality assurance, and the cost of licensed
technology incorporated into our products. Cost of goods sold increased to $4.1
million in the first three months of fiscal 2000 from $2.4 million in the first
three months of fiscal 1999. The primary reason for the increase was costs
associated with increased unit sales of our fourth generation echo cancellation
products.
GROSS MARGIN. Gross margin increased to 57.6% in the first three months of
fiscal 2000 from 53.0% in the first three months of fiscal 1999. The primary
factor causing this increase in gross margin was the mix of products sold during
the first three months of fiscal 2000. In addition, margins were favorably
impacted by the reduction in product royalties as a result of completing the
acquisition of our core echo cancellation technology subsequent to our initial
public offering in June 1999.
SALES AND MARKETING. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs associated with customer
service, travel, trade shows and outside consulting services. Sales and
marketing expenses increased to $1.7 million in the first three months of fiscal
2000 from $1.3 million in the first three months of fiscal 1999.
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The primary cause for the increase was increases in personnel and related costs,
including travel, to support expansion of our customer service functions and
marketing efforts of our products both domestically and internationally,
including the formation of new direct and OEM channels partnerships. We plan to
continue to increase our expenditures in sales and marketing in order to broaden
distribution of our products both domestically and internationally.
RESEARCH AND DEVELOPMENT. Research and development expenses primarily consist
of personnel costs, contract consultants, and equipment and supplies used in the
development of echo cancellation and optical communications products. Research
and development expense increased to $1.1 million in the first three months of
fiscal 2000 from $848,000 in the first three months of fiscal 1999. The increase
is primarily related to increased personnel and related costs and increased
materials and consulting costs associated with both our echo cancellation
products and optical communications products. We expect research and development
expenses to continue to grow in future periods as we enhance current products
and develop new products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
consist of personnel costs for corporate officers and finance personnel, and
legal, accounting and consulting costs. General and administrative expenses
increased to $858,000 in the first three months of fiscal 2000 from $441,000 in
the first three months of fiscal 1999. The increase was primarily due to
amortization of deferred compensation in connection with stock options
previously granted, insurance premiums for directors and officers insurance
obtained as a result of becoming a public company and increased legal costs
associated with an arbitration matter. We expect general and administrative
expenses to increase as a result of the additional reporting requirements and
expenses incurred as a public company and increased infrastructure costs as we
continue to expand our business.
OTHER INCOME (EXPENSE). Other expense consists of interest expense attributable
to our outstanding debt and capital leases, offset by interest income on our
invested cash and cash equivalents balances. Other expense decreased to $109,000
in the first three months of fiscal 2000 from $132,000 in the first three months
of fiscal 1999. The decrease was primarily attributable to increased interest
income on funds invested from our initial public offering and a reduction in
interest expense due to the retirement of our outstanding debt.
INCOME TAXES. Income taxes consist of federal and state income taxes. The
effective tax rate in the first three months of fiscal 2000 was 42% as compared
to 40% in the first three months of fiscal 1999. The reason for the higher tax
rate in the first three months of fiscal 2000 was due to the existence of
certain nondeductible expenses, primarily amortization of deferred compensation
in connection with stock options previously granted. We expect that our ongoing
effective tax rate should remain at approximately 42%.
STOCK-BASED COMPENSATION
With respect to certain stock option grants in fiscal 1999, we have recorded
deferred compensation of $1,320,000 as of April 30, 1999. We amortized
approximately $82,000 of the deferred compensation in period ended July 31,
1999, and will amortize the remainder over the corresponding vesting period
of the stock options.
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LIQUIDITY AND CAPITAL RESOURCES
From the beginning of fiscal 1994 through the date of the recapitalization in
March 1997, we satisfied the majority of our liquidity requirements through cash
flow generated from operations. In connection with our recapitalization in March
1997, we had a net infusion of cash of approximately $4 million after using the
proceeds from issuance of preferred stock and subordinated debt to repurchase
common stock. Following our recapitalization, we satisfied the majority of our
liquidity requirements through cash flow generated from operations and funds
received upon exercises of stock options. In June 1999, we completed our
initial public offering as described below.
Operating activities used $102,000 of cash in fiscal 1998, primarily due to the
limited amount of profit for the year, increases in inventories and reductions
in accounts payable and accrued liabilities including royalties payable,
partially offset by a reduction of income taxes receivable. In fiscal 1999 we
generated $715,000 in cash from operations, primarily due to increased operating
profits, increases in accounts payable, income taxes payable and deferred
revenue, partially offset by an increase in inventories, accounts receivable and
other current assets. In the first quarter of fiscal 2000 we generated $909,000
in cash from operations, primarily due to increased operating profits and income
taxes payable, partially offset by an increase in accounts receivable and other
current assets and reductions in accounts payable and deferred revenue.
Investing activities used $602,000 in cash in fiscal 1998, $1.3 million in cash
in fiscal 1999 and $3.3 million in the first three months of fiscal 2000. These
amounts primarily represented purchases of property and equipment, costs
associated with the initial public offering in fiscal 1999, and the purchase of
our echo technology from Telinnovation in the first quarter of fiscal 2000.
Financing activities used $62,000 in cash in fiscal 1998, consisting of
repayment on term debt partially offset by proceeds from the exercise of stock
options. In fiscal 1999 we generated $298,000 of cash from financing, primarily
from the exercise of stock options partially offset by the principal repayments
on the term debt and capital leases. In the first quarter of fiscal 2000 we
generated $7.4 million of cash from financing, primarily from the net proceeds
from our initial public offering in June 1999, partially offset by the
application of the net proceeds of that offering and principal payments on our
capital leases. The application of the net proceeds from our initial public
offering that reduced cash from financing is as follows:
<TABLE>
<S> <C>
Net proceeds................................................. $34.4 million
Less:
Redemption of series A mandatorily redeemable
preferred stock....................................... 19.7 million
Retirement of long term debt............................ 7.3 million
Remaining after application of net proceeds.................. $ 7.4 million
</TABLE>
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As of July 31, 1999, we had cash and cash equivalents of $8.1 million as
compared to $3.1 million at April 30, 1999, primarily as a result of the
receipt and application of the net proceeds from our initial public offering.
In addition, we have a line of credit with the ability to borrow the lesser
of $3.0 million or 80% of qualified accounts receivable. At July 31, 1999,
borrowings of $2.0 million were available and no borrowings were outstanding.
In August 1999 we amended the line of credit to increase the ability to
borrow to the lesser of $3.0 million or 80% of qualified accounts receivable,
and reduce the interest rate to the lesser of LIBOR plus 1.25% or the prime
rate. The line of credit expires in August of 2000. During the third and
fourth quarter of fiscal 1998 and the second quarter of fiscal 1999, we were
in violation of certain minimum cash flow and ratio covenants related to the
credit line. At April 30, 1999, we were in violation of a quick ratio
covenant due primarily to the accrual for costs associated with our initial
public offering. The bank has waived all of these violations. We also had
approximately $350,000 available at July 31, 1999 under a separate operating
lease line of credit.
We have no material commitments other than obligations under operating leases,
particularly our facility lease.
We anticipate significant increases in working capital on a period to period
basis primarily as a result of planned increased product sales and higher
relative levels of inventory and receivables. We will also continue to expend
funds on property and equipment related to the expansion of systems
infrastructure and office equipment to support our growth and lab and test
equipment to support on-going research and development operations.
We have recently filed a Registration Statement on Form S-1 in connection
with a proposed public offering to raise additional capital to fund future
operations. We believe that we will be able to satisfy our cash requirements
for at least the next twelve months from a combination of the proceeds of
this offering, if completed, cash flow from operations and our bank line of
credit.
IMPACT OF EUROPEAN MONETARY CONVERSION
We are aware of the issues associated with the changes in Europe resulting from
the formation of a European economic and monetary union. One change resulting
from this union required EMU member states to irrevocably fix their respective
currencies to a new currency, the euro, as of January 1, 1999, at which date the
euro became a functional legal currency of these countries. During the next
three years, business in the EMU member states will be conducted in both the
existing national currency, such as the French franc or the Deutsche mark, and
the euro. As a result, companies operating or conducting business in EMU member
states will need to ensure that their financial and other software systems are
capable of processing transactions and properly handing these currencies,
including the euro.
We are still assessing the impact that the conversion to the euro will have on
our internal systems, the sale of our products, and the European and global
economies. To date we have experienced limited sales activities in the European
economies, substantially all of which have been in U.S. dollars. We will take
appropriate corrective actions based on the results of such assessment. We have
not yet determined the cost related to addressing this issue.
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IMPACT OF THE YEAR 2000 COMPUTER PROBLEM
The Year 2000 computer 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. Additionally, the month of
February will have 29 days in the year 2000. These problems could result in a
system failure or miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
STATE OF READINESS OF OUR PRODUCTS
We have been testing our existing products for use in the year 2000 and beyond.
Based on the results of these tests, we believe that the following products are
Year 2000 compliant:
<TABLE>
<CAPTION>
Echo Cancellation Products Optical Communications Products
- -------------------------- -------------------------------
<S> <C>
18T1 Optical amplifiers
18E1 DWDM Monitor
Quad T1 Optical telemetry system
Quad E1 Transponder
Broadband Echo Cancellation System WDM Multiplexer/Demultiplexer
4SA
</TABLE>
Certain of our customers may be using older versions of the above products and,
based on our testing, we believe they will not be required to upgrade those
products to become Year 2000 compliant. In addition, we have not tested certain
products for Year 2000 compliance that we no longer market, some of which might
still be in use.
STATE OF READINESS OF OUR INTERNAL SYSTEMS
We may be affected by Year 2000 issues related to non-compliant internal
systems developed by us or by third-party vendors. We are seeking assurances
from our third-party vendors for all systems in use by us and that are
material to our operations that such systems are Year 2000 compliant. We
completed our assessment of our internal systems in the first quarter of
fiscal 2000 and are not aware of any Year 2000 problem relating to any of
these internal systems. We believe that we do not have any systems material
to our operations that contain embedded chips that are not Year 2000
compliant.
Our internal operations and business are also dependent upon the computer-
controlled systems of third parties such as suppliers, customers and service
providers. We believe that absent a systemic failure outside of our control,
such as a prolonged loss of electrical or
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<PAGE>
telephone service, Year 2000 problems at such third parties will not have a
material impact on us.
COST
Based on our assessment to date, we do not anticipate that costs associated with
remediating our non-compliant products or internal systems will be material.
RISKS
Any failure to make our products Year 2000 compliant could result in:
- a decrease in sales of our products;
- an increase in allocation of resources to address Year 2000 problems
of our customers without additional revenue commensurate with such
dedication of resources; and/or
- an increase in litigation costs relating to losses suffered by
our customers due to such Year 2000 problems.
Failures of our internal systems could temporarily prevent us from processing
orders, issuing invoices, and developing products, and could require us to
devote significant resources to correcting such problems. Due to the general
uncertainty inherent in the Year 2000 computer problem, resulting from the
uncertainty of the Year 2000 readiness of third-party suppliers and vendors, we
are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our business, results of operations, and
financial condition.
CONTINGENCY PLANS
We have not yet developed contingency plans regarding our products, in house
applications or outside vendors. We expect to develop contingency plans in Fall
1999.
FUTURE GROWTH AND OPERATING RESULTS SUBJECT TO RISK
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR OUR PRODUCTS, THE LOSS OF ANY ONE
OF WHICH COULD CAUSE OUR REVENUE TO DECREASE
Our revenue historically has come from a small number of customers. A customer
may stop buying our products or significantly reduce its orders for our products
for a number of reasons, including the acquisition of a customer by another
company. If this happens, our revenue and business would be materially and
adversely affected. Our five largest customers accounted for over 75% of our
revenue in the first three months of fiscal 2000, over 65% of our revenue in
fiscal 1999 and over 75% of our revenue in fiscal 1998. Qwest/LCI accounted for
43% of our revenue in the first three months of fiscal 2000, 42%
16
<PAGE>
of our revenue in fiscal 1999 and in fiscal 1998. Our four next largest
customers accounted collectively for 33% of our revenue in the first three
months of fiscal 2000, 23% of our revenue in fiscal 1999 and 38% of our revenue
in fiscal 1998. MCI accounted for $7.6 million, or more than 50%, of our revenue
in fiscal 1997, but only $1.4 million, or approximately 11%, of our revenue in
fiscal 1998. This reduction began shortly before the acquisition of MCI by
Worldcom.
As an example, we received a substantial unforecasted order from one of our
largest customers for deployment of our Broadband Echo Cancellation System. We
expect this order to result in an incremental $12 million to $15 million of
revenue to be recognized over the next two to three quarters. If all or a
portion of this order is cancelled or delayed, our expected operating results
for the next two to three quarters would be adversely affected, which could
adversely affect our stock price.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND WE
ANTICIPATE THAT THEY MAY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY
AFFECT OUR STOCK PRICE
Our quarterly operating results have fluctuated significantly in the past and
may fluctuate in the future as a result of several factors, some of which are
outside of our control. If revenue declines in a quarter, whether due to a loss
in revenue or a delay in recognizing expected revenue, our operating results
will be adversely affected because many of our expenses are relatively fixed. In
particular, sales and marketing, research and development and general and
administrative expenses do not change significantly with variations in revenue
in a quarter. Adverse changes in our operating results could adversely affect
our stock price.
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD. Factors that could cause our
revenue to fluctuate from period to period include:
- the timing or cancellation of orders from, or shipments to, existing
and new customers;
- the timing of new product and service introductions by us, our
customers, our partners or our competitors;
- competitive pressures;
- variations in the mix of products offered by us; and
- variations in our sales or distribution channels.
In particular, sales of our echo cancellation products, which historically have
accounted for the vast majority of our revenue, have typically come from our
major customers ordering large quantities when they deploy a switching center.
Consequently, we may get one or more large orders in one quarter from a customer
and then no orders the next quarter. As a result, our revenue may vary
significantly from quarter to quarter.
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<PAGE>
In addition, the sales cycle for our products is typically lengthy. Before
ordering our products our customers perform significant technical evaluations,
which typically last up to 90 days in the case of our echo cancellation products
and up to 180 days in the case of our optical communications products. Once an
order is made, delivery times can vary depending on the product ordered, with
delivery times for optical communications products exceeding those for our echo
cancellation products. As a result, revenue forecasted for a specific customer
for a particular quarter may not occur in that quarter. Because of the potential
large size of our customers' orders, this would adversely affect our revenue for
the quarter.
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD. Many of our expenses do not vary
with our revenue. Factors that could cause our expenses to fluctuate from period
to period include:
- the extent of marketing and sales efforts necessary to promote and
sell our products;
- the timing and extent of our research and development efforts;
- the availability and cost of key components for our products; and
- the timing of personnel hiring.
If we incur such additional expenses in a quarter in which we do not experience
increased revenue, our profitability would be adversely affected and we may even
incur losses for that quarter.
WE ANTICIPATE THAT AVERAGE SELLING PRICES FOR OUR PRODUCTS WILL DECLINE IN THE
FUTURE, WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY
We expect that the price we can charge our customers for our products will
decline as new technologies become available and as competitors lower prices
either as a result of reduced manufacturing costs or a strategy of cutting
margins to achieve or maintain market share. As a result, we may face reduced
profitability and perhaps losses in future periods. We expect price reductions
to be more pronounced in the market for our echo cancellation products, at least
in the near term, due to more established competition for these products. While
we intend to reduce our manufacturing costs in an attempt to maintain our
margins and to introduce enhanced products with higher selling prices, we may
not execute these programs on schedule. In addition, our competitors may drive
down prices faster or lower than our planned cost reduction programs. Even if we
can reduce our manufacturing costs, many of our operating costs will not decline
immediately if revenue decreases due to price competition.
IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE OUR NEW PRODUCTS, OUR
PRODUCTS MAY BECOME OBSOLETE
18
<PAGE>
If we do not successfully develop and introduce our new products and our
existing products become obsolete due to product introductions by competitors,
our revenue will decline. Our ability to maintain and increase revenue in the
future will depend primarily on:
- acceptance of our new Broadband Echo Cancellation System and 4SA
echo cancellation products;
- our successful introduction and sale of our new optical monitors,
telemetry systems, transponders and four-channel wavelength division
multiplexing products; and
- our successful development and introduction of our sixteen-channel
wavelength division multiplexing products.
However, we may not be able to successfully produce or market our new products
in commercial quantities, complete product development when anticipated, or
increase sales. These risks are of particular concern when a new generation
product is introduced. As a result, while we believe we will achieve our product
introduction dates, they may be delayed. For the year ended April 30, 1999,
sales of our 18T1 and 18E1 echo cancellation products accounted for the vast
majority of our revenue, and for the first three months of fiscal 2000 accounted
for a substantial portion of our revenue. Shipments of our optical amplifiers
began in the third quarter of calendar 1996 and accounted for substantially all
of our revenue for optical communications products during fiscal 1999. In the
past, we experienced an unforeseen delay in the development of one of our
products due to the need to design around a part that did not function as
anticipated and also when the first version of one of our optical communications
products did not fully meet customer requirements. We have in the past
experienced, and in the future may experience, similar unforeseen delays in the
development of our new products. We must devote a substantial amount of
resources in order to develop and achieve commercial acceptance of our new echo
cancellation and optical communications products. We may not be able to address
evolving demands in these markets in a timely or effective way. Even if we do,
customers in these markets may purchase or otherwise implement competing
products.
CUSTOMERS MAY DELAY ORDERS FOR OUR EXISTING PRODUCTS IN ANTICIPATION OF NEW
PRODUCTS. Our customers may delay orders for our existing products in
anticipation of the release of our or our competitors' new products. Further, if
our or our competitors' new products substantially replace the functionality of
our existing products, our existing products may become obsolete, and we could
be forced to sell them at reduced prices or even at a loss.
IF WE ARE NOT ABLE TO DEVELOP SUBSTANTIAL REVENUE FROM SALES OF OUR OPTICAL
COMMUNICATIONS PRODUCTS, OUR ABILITY TO GROW OUR BUSINESS MAY BE SUBSTANTIALLY
IMPAIRED
To date, the vast majority of our revenue has been derived from sales of our
echo cancellation products. If we are not able to develop substantial revenue
from sales of our optical communications products, our ability to grow our
business may be substantially impaired. In fiscal 1997, fiscal 1998, fiscal 1999
and the first three months of fiscal 2000,
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<PAGE>
we derived approximately 99.5%, 94.1%, 93.7% and 99.9%, respectively, of our
revenue from the sale of our echo cancellation products. We expect that a
substantial majority of our revenue will continue to come from sales of our
echo cancellation products for the foreseeable future.
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN OR INCREASE SALES OF OUR PRODUCTS
The markets for our echo cancellation and optical communications products are
intensely competitive, continually evolving and subject to rapid technological
change. We may not be able to compete successfully against current or future
competitors, including our customers. Certain of our customers also have the
ability to internally produce the equipment that they currently purchase from
us. In such cases, we also compete with their internal product development
capabilities. We expect that competition in each of the echo cancellation and
optical communications markets will increase in the future. We may not have the
financial resources, technical expertise or marketing, manufacturing,
distribution and support capabilities to compete successfully.
One of our competitors, Nortel Networks, has announced that it is developing an
integrated switch, which would have echo cancellation capability built into it
and would therefore eliminate the need for the echo cancellation capability
provided by our products. Announcements such as these, or the commercial
availability of such switches or other competing products, may cause our
customers to delay or cancel orders for our products.
Most of our competitors and potential competitors have substantially greater
name recognition and technical, financial and marketing resources than we do.
Such competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than we will.
WE DEPEND ON TELINNOVATION FOR TRANSITIONAL SUPPORT OF OUR ECHO CANCELLATION
TECHNOLOGY, THE LOSS OF WHICH COULD DELAY PRODUCT DEVELOPMENT
We acquired our echo cancellation technology from Telinnovation. Prior to this
acquisition we licensed this technology from Telinnovation, which provided
engineering support for our use of this technology. We are currently focused on
increasing our knowledge of this technology so that we will be able to modify
and enhance it ourselves. If Telinnovation does not fulfill its obligations to
assist us during this transitional phase, or if we need to devote more resources
to this technology than we currently expect, our product development plans could
be delayed.
IF WE DO NOT REDUCE MANUFACTURING COSTS OF OUR PRODUCTS TO RESPOND TO
ANTICIPATED DECREASING AVERAGE SELLING PRICES, OUR ABILITY TO GENERATE PROFITS
COULD BE ADVERSELY AFFECTED
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<PAGE>
In order to respond to increasing competition and our anticipation that average
selling prices will decrease, we are attempting to reduce manufacturing costs of
our new and existing products. If we do not reduce manufacturing costs and
average selling prices decrease, our operating results will be adversely
affected. We may not be able to successfully reduce the cost of manufacturing
our products due to a number of factors, including:
WE RELY ON A LIMITED SOURCE OF MANUFACTURING. Manufacturing of our echo
cancellation products and the electronic printed circuit board assemblies for
our optical communications products is currently outsourced to two contract
manufacturers. If we or these contract manufacturers terminate any of these
relationships, or if we otherwise establish new relationships, we may encounter
problems in the transition of manufacturing to another contract manufacturer,
which could temporarily increase our manufacturing costs and cause product
delays.
WE HAVE NO COMMERCIAL MANUFACTURING EXPERIENCE WITH OUR NEW PRODUCTS. To date
we have manufactured our pre-production optical communications products in our
facilities but not in commercial quantities. We will need to outsource the
manufacturing of these products once we begin to commercially manufacture them.
We may experience delays and other problems during the transition to outsourcing
the manufacture of these products.
WE OPERATE IN AN INDUSTRY EXPERIENCING RAPID TECHNOLOGICAL CHANGE, WHICH MAY
MAKE OUR PRODUCTS OBSOLETE
Our future success will depend on our ability to develop, introduce and market
enhancements to our existing products and to introduce new products in a timely
manner to meet our customers' requirements. The echo cancellation and optical
communications markets we target are characterized by:
- rapid technological developments;
- frequent enhancements to existing products and new product
introductions;
- changes in end user requirements; and
- evolving industry standards.
WE MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID CHANGES.
The emerging nature of these products and their rapid evolution will require us
to continually improve the performance, features and reliability of our
products, particularly in response to competitive product offerings. We may not
be able to respond quickly and effectively to these developments. The
introduction or market acceptance of products incorporating superior
technologies or the emergence of alternative technologies and new industry
standards could render our existing products, as well as our products currently
under development, obsolete and unmarketable. In addition, we may have only a
limited amount of time to penetrate certain markets, and we may not be
successful in achieving widespread
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<PAGE>
acceptance of our products before competitors offer products and services
similar or superior to our products. We may fail to anticipate or respond on a
cost-effective and timely basis to technological developments, changes in
industry standards or end user requirements. We may also experience significant
delays in product development or introduction. In addition, we may fail to
release new products or to upgrade or enhance existing products on a timely
basis.
WE MAY NEED TO MODIFY OUR PRODUCTS AS A RESULT OF CHANGES IN INDUSTRY
STANDARDS. The emergence of new industry standards, whether through adoption by
official standards committees or widespread use by service providers, could
require us to redesign our products. If such standards become widespread, and
our products are not in compliance, our current and potential customers may not
purchase our products. The rapid development of new standards increases the risk
that our competitors could develop and introduce new products or enhancements
directed at new industry standards before us.
IF EMERGING COMPETITIVE SERVICE PROVIDERS AND THE TELECOMMUNICATIONS INDUSTRY AS
A WHOLE EXPERIENCE A DOWNTURN OR REDUCTION IN GROWTH RATE, THE DEMAND FOR OUR
PRODUCTS WILL DECREASE, WHICH WILL ADVERSELY AFFECT OUR BUSINESS
Our success will depend in large part on continued development and expansion of
voice and data communications networks. Development of communications networks
is driven in part by the growth of competitive service providers that emerged as
a result of the Telecommunications Act of 1996 and privatization of the
telecommunications industry on a global scale. We are subject to risks of growth
constraints due to our current and planned dependence on emerging competitive
and privatized overseas service providers. These potential customers may be
constrained for a number of reasons, including their limited capital resources,
changes in regulation and consolidation.
WE DEPEND ON TEXAS INSTRUMENTS AS THE SOLE SOURCE OF A COMPONENT USED IN OUR
PRODUCTS, THE LOSS OF WHICH COULD DELAY PRODUCT SHIPMENTS
We rely on Texas Instruments as the sole source of the digital signal processors
that we use in our echo cancellation products. We have no guaranteed supply
arrangements with Texas Instruments. Any extended interruption in the supply of
digital signal processors from Texas Instruments would affect our ability to
meet scheduled deliveries of our echo cancellation products to customers. If we
are unable to obtain a sufficient supply of digital signal processors from Texas
Instruments, we could experience difficulties in obtaining alternative sources
or in altering product designs to use alternative components. Resulting delays
or reductions in product shipments could damage customer relationships, and we
could lose customers and orders.
OUR BUSINESS IS GROWING, WHICH IS DIVERTING OUR MANAGEMENT'S ATTENTION FROM THE
DAY TO DAY OPERATIONS OF OUR BUSINESS AND MAY REDUCE OUR ABILITY TO FOCUS ON
FUTURE BUSINESS OPPORTUNITIES
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<PAGE>
We anticipate significantly expanding our business capacity to address potential
growth in our customer base and market opportunities. Expansion of our business
may strain our management personnel, operations and resources. Growth in our
customer base may require us to improve our predictions of what customers are
likely to need and when they will need it, which may also further strain our
sales and marketing personnel. Continued growth will require us to hire more
engineering, sales, marketing, operations, customer support and services, and
administrative personnel and scale our research and development capability,
which we may not be able to do. We may also experience problems in integrating
new personnel into our corporate culture. In addition, new hires may not be
productive during the time that they are being integrated into our business.
WE MAY EXPERIENCE UNFORESEEN PROBLEMS AS WE DIVERSIFY OUR INTERNATIONAL CUSTOMER
BASE, WHICH WOULD IMPAIR OUR ABILITY TO GROW OUR BUSINESS
Historically, we have sold mostly to customers in North America. We currently
are contemplating the expansion of our international presence, which will
require additional hiring of personnel for the overseas market and other
expenditures. Our planned expansion overseas may not be successful. As we expand
our sales focus further into international markets, we will face additional and
complex issues that we may not have faced before, such as addressing currency
fluctuations, manufacturing overseas and import/export controls, which will put
additional strain on our management personnel. In the past, substantially all of
our international sales have been denominated in U.S. dollars, however, in the
future, we may be forced to denominate a greater amount of international sales
in foreign currencies. The number of installations we will be responsible for is
likely to increase as a result of our continued international expansion. In the
past, we have experienced difficulties installing one of our echo cancellation
products overseas. In addition, we may not be able to establish more
relationships with original equipment manufacturers. If we do not, our ability
to increase sales could be materially impaired.
IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
PERSONNEL, OR ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL TECHNICAL PERSONNEL,
OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE IMPAIRED
We depend heavily on Tim Montgomery, our President and Chief Executive Officer,
and on other key management and technical personnel, for the conduct and
development of our business and the development of our products. If we lose the
services of any one of these people for any reason, this could adversely affect
our ability to conduct and expand our business and to develop new products. We
do not have employment contracts with any of our executive officers other than
Mr. Montgomery, Mr. Pong Lim, our Chairman of the Board, Ms. Toni Bellin, our
Vice President of Operations, and Marc Schwager, our Vice President of
Marketing. We believe that our future success will depend in large part upon our
continued ability to attract, retain and motivate highly skilled employees, who
are in great demand. However, we may not be able to do so.
A SMALL GROUP OF ENTITIES OWN OR CONTROL A SUBSTANTIAL AMOUNT OF OUR STOCK AND
MAY, THEREFORE, INFLUENCE OUR AFFAIRS
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A small group of entities own or control a substantial amount of our stock and
may, therefore, influence our affairs. As a result, these stockholders as a
group will be able to substantially influence the management and affairs of
Ditech and, if acting together, would be able to influence most matters
requiring the approval by our stockholders, including the election of directors,
any merger, consolidation or sale of all or substantially all of our assets and
any other significant corporate transactions. The concentration of ownership may
also delay or prevent a change of control of Ditech at a premium price if these
stockholders oppose it.
OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO PROTECT
We rely on a combination of patents, trade secrets, copyright and trademark
laws, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights. Nevertheless, such
measures may not be adequate to safeguard the technology underlying our echo
cancellation and optical communications products. Employees, consultants and
others who participate in the development of our products may also breach their
agreements with us regarding our intellectual property, and we may not have
adequate remedies for any such breach. In addition, we may not be able to
effectively protect our intellectual property rights in certain countries. We
may, for a variety of reasons, decide not to file for patent, copyright or
trademark protection outside of the United States. We also realize that our
trade secrets may become known through other means not currently foreseen by us.
Notwithstanding our efforts to protect our intellectual property, our
competitors may be able to develop products that are equal or superior to our
products without infringing on any of our intellectual property rights.
OUR PRODUCTS EMPLOY TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF
THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION
Although we do not believe that our products infringe the proprietary rights of
any third parties, third parties may still assert infringement or invalidity
claims (or claims for indemnification resulting from infringement claims)
against us. Such assertions could materially adversely affect our business,
financial condition and results of operations. In addition, irrespective of the
validity or the successful assertion of such claims, we could incur significant
costs in defending against such claims.
IF WE VIOLATE OUR BANK DEBT COVENANTS, WE MAY NOT BE ABLE TO UTILIZE OUR BANK
LINE OF CREDIT
In the past we were in violation of certain minimum cash and ratio covenants of
a line of credit. If operating results do not meet certain thresholds, we may be
in violation of these covenants in the future. If we are in violation of these
covenants, we may not be able to utilize our bank line of credit.
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<PAGE>
ACQUISITIONS AND INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS
We regularly review acquisition and investment prospects that would complement
our existing product offerings, augment our market coverage, secure supplies of
critical materials or enhance our technological capabilities. Acquisitions or
investments could result in a number of financial consequences, including:
- potentially dilutive issuances of equity securities;
- large one-time write-offs;
- reduced cash balances and related interest income;
- higher fixed expenses which require a higher level of revenues to
maintain gross margins;
- the incurrence of debt and contingent liabilities; and
- amortization expenses related to goodwill and other intangible
assets.
Furthermore, acquisitions involve numerous operational risks, including:
- difficulties in the integration of operations, personnel,
technologies, products and the information systems of the acquired
companies;
- diversion of management's attention from other business concerns;
- diversion of resources from our existing businesses, products or
technologies;
- risks of entering geographic and business markets in which we have
no or limited prior experience; and
- potential loss of key employees of acquired organizations.
OUR OR THIRD PARTIES' COMPUTER SYSTEMS MAY FAIL IN THE YEAR 2000, WHICH WOULD
DELAY OUR PRODUCT DEVELOPMENT AND THE MANUFACTURING OF OUR PRODUCTS
Failure of our computer systems could adversely affect our product development
processes and/or our ability to cost-effectively manage Ditech during the time
required to fix such problems. In addition, computer failures could cause the
manufacturer of our products to incur delays in manufacturing, or our customers
to postpone or cancel orders for our products. We are currently assessing the
readiness of our computer systems and those of
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<PAGE>
our manufacturers and major customers to handle dates beyond the year 1999.
Unforeseen problems in our own computers and embedded systems and from
customers, our manufacturers, suppliers and other organizations with which we
conduct transactions worldwide may arise. These statements constitute year 2000
disclosures under federal law. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of the Year 2000 Computer
Problem" for more information on the status of our preparation relating to this
issue.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain investment portfolio holdings of various short-term securities.
Because of the short-term duration of the financial instruments held by us,
we do not believe that our financial instruments are materially sensitive to
changes in interest rates.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, the Company received a favorable ruling from an arbitration
panel in the matter related to Antec Corporation's alleged breach of a
purchase contract. Subsequent to the favorable ruling, the Company was
notified by Antec's counsel of its intent to contest the arbitrator's
decision. In August, the Company and Antec reached a final settlement in
which the Company received a minor settlement award.
ITEM 2. CHANGES IN SECURTIES AND USE OF PROCEEDS
During the quarter, the Company issued an aggregate of 3,450,000 shares of
its common stock as part of its initial public offering completed on June 9,
1999. The shares were registered on a Registration Statement on Form S-1,
registration number 333-75063, declared effective on June 9, 1999. All of the
shares registered were sold in the offering for an aggregate offering price
of $37,950,000. The managing underwriters in the offering were Deutsche Banc
Alex. Brown, BancBoston Robertson Stephens and Hambrecht & Quist. Total
underwriting discounts and commissions were $2,656,500, and total offering
expenses were approximately $1,300,000. The Company's initial public offering
generated net proceeds to the Company, after underwriter fees and other
offering expenses, of $34.0 million which the Company used for the following
purposes (in millions):
<TABLE>
<S> <C>
Retirement of series A mandatorily redeemable
preferred stock $19.7
Retirement of notes payable 7.3
Purchase of echo technology 3.0
</TABLE>
The balance of the offering proceeds has been retained for general corporate
purposes. Of the amount paid to redeem the series A mandatorily redeemable
preferred stock, approximately $14.3 was paid to redeem the Series A
mandatorily redeemable preferred stock held by entities affiliated with
Summit Partners, which collectively beneficially owned 44.1% of the Company's
common stock. Two of the Company's directors, Messrs. Greg Avis and Peter
Chung, are affiliated with Summit Partners.
In addition, all outstanding shares of series B mandatorily redeemable
preferred stock converted into common stock at the exchange ratio of 2 shares
of common for every 3 shares of series B mandatorily redeemable preferred,
upon completion of the initial public offering. Shares of common stock issue
upon conversion of the were not registered shares under the Securities Act of
1933, as amended, in reliance on Section 3(a)(9).
Certain stock options aggregating 5,000 shares were exercised by an executive
officer of the Company in June, 1999 for $4,125 in cash. The shares issued
were not registered shares under the Securities Act of 1933, as amended, in
reliance on Rule 701.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE>
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibit
10.11.1* Third Amendment to Credit Agreement, dated August 13,
1999 between Ditech and BankBoston, N.A.
10.21** Patent License Agreement, dated as of August 13, 1999,
between Ditech and Antec Corporation
27* Financial data schedule for the period ended July
31, 1999
* Incorporated by reference from the exhibits with
corresponding numbers from the Registrant's Registration
Statement (No. 333-86691), filed on September 8, 1999.
** Confidential treatment has been requested for a portion
of this exhibit. The agreement has been filed seperately
with the Commission.
(b) Reports on Form 8-K
</TABLE>
No reports on form 8-K were filed during the quarter ended July 31, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ditech Communications Corporation
Date: September 13, 1999 By: /s/ William J. Tamblyn
-------------------------
William J. Tamblyn
Vice President Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
28
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
(a) Exhibit
10.11.1* Third Amendment to Credit Agreement, dated August 13,
1999 between Ditech and BankBoston, N.A.
10.21** Patent License Agreement, dated as of August 13, 1999,
between Ditech and Antec Corporation
27* Financial data schedule for the period ended July
31, 1999
* Incorporated by reference from the exhibits with
corresponding numbers from the Registrant's
Registration Statement (No. 333-86691), filed on
September 8, 1999.
** Confidential treatment has been requested for a portion
of this exhibit. The agreement has been filed seperately
with the Commission.
</TABLE>
29
<PAGE>
CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED
AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.
PATENT LICENSE AGREEMENT
This is a PATENT LICENSE AGREEMENT ("Agreement") effective as of
August 13, 1999 ("Effective Date") by and between DITECH COMMUNICATIONS
CORPORATION ("Ditech"), a Delaware corporation having a principal place of
business at 825 East Middlefield Road, Mountain View, California 94043, and
ANTEC CORPORATION ("Antec"), a Delaware corporation having a principal place
of business at 11450 Technology Circle, Duluth, GA 30097.
ARTICLE 1
RECITALS
1.1 Ditech designs, develops, manufactures and sells
telecommunications hardware products, including echo cancellation products
and optical fiber amplifiers.
1.2 Antec designs, develops, manufactures and sells cable
television equipment and supplies.
1.3 Ditech is the owner of United States patents 5,594,748,
5,861,981, and 5,887,091.
1.4 Antec desires a license under the above-identified United
States patents and the foreign counterparts corresponding thereto.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT
TO THE OMITTED PORTIONS.
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1.5 Ditech is willing to grant a license right to Antec under the
patents set forth in Section 1.3 upon the terms and conditions herein set
forth.
ARTICLE 2
DEFINITIONS
2.1 "ANTEC LICENSED PRODUCTS" shall mean end products containing,
or made in accordance with, an invention covered by at least one claim of the
Ditech Licensed Patents.
2.2 "FIELD OF USE" shall mean the Hybrid Fiber Cable Network field.
2.3 "HYBRID FIBER COAX NETWORK OR HFC NETWORK" shall mean a network
for transmitting signals to an end user where the signals are modulated onto
RF carriers and the network includes a linearly amplitude modulated optical
fiber link as the primary distribution network from a head end followed by a
coaxial distribution network that provides the signals directly to the end
user.
2.4 "DITECH LICENSED PATENTS" shall mean United States patents
5,594,748, 5,861,981, and 5,887,091, all patents issuing on continuation
applications (but not continuation in part applications) and divisional
applications stemming from the patent applications of the foregoing patents,
and all reissues and reexaminations of all of the foregoing, and all patents
outside the United States
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that are owned by Ditech and that correspond to the foregoing United States
patents.
2.5 "NET SALES REVENUE" shall mean total sales revenue of Antec and
its Subsidiaries from the sale or other disposition for value of Antec
Licensed Products in the Field of Use, less only the following deductions:
the cost of freight out, insurance, cash discounts actually granted, and
returns for which credit actually is given, all of which deductions shall be
stated separately.
2.6 "SUBSIDIARY" of a party to this Agreement shall mean:
(a) any organization of which more than fifty percent
(50%) of the voting stock is owned or controlled directly or indirectly by
such party;
(b) any organization which directly or indirectly
owns or controls more than fifty percent (50%) of the voting stock of such
party; or
(c) any organization of which more than fifty percent
(50%) of the majority ownership is directly or indirectly common to the
majority ownership of such party.
2.7 "TRANSFER(S)" (TRANSFERRED) as used herein shall mean (i)
deliver(ed) to others (including for export) other than by sale, regardless
of the
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basis of compensation, if any, (e.g. by consignment or by gift) and/or (ii)
sell (sold) in combination with other products.
ARTICLE 3
GRANT OF LICENSES
3.1 Ditech hereby grants to Antec a non-exclusive, worldwide,
royalty-bearing license under the Ditech Licensed Patents to make, have made,
use, import, offer to sell, sell and otherwise Transfer the Antec Licensed
Products, only in the Field of Use, without the right to grant sublicenses.
3.2 Antec sales of Antec Licensed Products through Subsidiaries
shall be restricted as follows: Antec shall have the right to conduct sales
of Antec Licensed Products, under the license of this Agreement, through
Antec Subsidiaries, provided that Antec shall be responsible for the
reporting and payment of royalties due for such sales, the maintenance of
records in respect thereto, and for all other obligations under this
Agreement in respect of such Subsidiary.
3.3 No patent license is granted by Ditech either directly or by
implication, estoppel, or otherwise:
(a) other than under the Ditech Licensed Patents;
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(b) with respect to any item other than Antec
Licensed Products, notwithstanding that such other item may incorporate Antec
Licensed Products;
(c) to parties acquiring any item from Antec for the
combination of such acquired item with any other item, including other items
provided by Antec, or for the use of any such combination; or
(d) any product outside the Field of Use.
3.4 No license or other right is granted herein to either party,
directly or by implication, estoppel or otherwise, with respect to any trade
secrets or know-how, and no such license or other right shall arise from the
consummation of this Agreement or from any acts, statements or dealings
leading to such consummation. Subject to Antec's reporting requirements under
Article 4, neither party is required hereunder to furnish or disclose to the
other party any trade secrets, know-how, manufacturing information, technical
information or other information whatsoever.
ARTICLE 4
PAYMENT OBLIGATIONS
4.1 Notwithstanding anything to the contrary contained herein,
all amounts due and payable by Antec in favor of Ditech pursuant to section
4.2 shall
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be secured by an irrevocable standby letter of credit, which letter of credit
shall name Ditech as beneficiary and shall be (i) issued by a bank acceptable
to Ditech in its sole and reasonable discretion, (ii) in an amount equal to
$1,400,000 through November 30, 1999, which amount may be reduced thereafter
to $900,000 through February 29, 2000, and which may thereafter be eliminated
(iii) substantially in the form attached hereto as Exhibit A; PROVIDED,
HOWEVER, that such letter of credit shall only be reduced as specified in
(ii) above if Antec remits all payments due to Ditech pursuant to section 4.2
below at such time and in such manner as specified in Section 4.2 below.
4.2 As partial consideration of the license granted herein, Antec
agrees to pay to Ditech a license fee of one million eight hundred ninety
hundred thousand dollars ($1,890,000.00), to be paid by wire transfer or
certified check made payable to "Ditech Communications Corporation" and
delivered to the person identified in section 7.1 below, in payments upon the
dates set forth below:
(a) four hundred ninety thousand dollars
($490,000.00) upon execution of this Agreement;
(b) five hundred thousand dollars ($500,000.00) on or
before October 31, 1999; and
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(c) nine hundred thousand dollars ($900,000.00) on or
before January 31, 2000.
4.3 As additional partial consideration for the licenses granted
herein, Antec agrees to pay to Ditech a royalty of [***] percent ([***]%) of
Net Sales Revenue of each unit of Antec Licensed Products. Antec agrees to
pay Ditech a minimum annual royalty payment of $[***] per year during the
term of this Agreement. The minimum annual royalty shall be due on each
anniversary of the Effective Date of this Agreement. Royalty actually paid
during the previous twelve months before such anniversary shall be credited
against such $[***]annual royalty. If the royalty actually paid during such
previous twelve months has not equaled $[***], then Antec agrees to forward
to Ditech, on each such anniversary date, an amount which, when added to the
royalty actually paid during such previous twelve months, equals $[***].
4.4 The products subject to royalty under this Agreement shall be
all Antec Licensed Products sold by Antec and/or by its Subsidiaries. For
sales of units of Antec Licensed Products by both Antec and a Subsidiary of
Antec, the Net Sales Revenue of such units shall be calculated on the sales
revenue of the higher priced sale. Royalties shall accrue on each unit of
Antec Licensed Products when
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such unit is sold (as evidenced by bill or invoice), or Transferred; whether
or not payment is received by Antec.
4.5 An accounting period shall end on last day of each March, June,
September and December during the term of this Agreement, and royalty payable
pursuant to Section 4.3 shall be due within thirty (30) days after the end of
each accounting period for units of Antec Licensed Products as to which such
royalty accrues during such accounting period. Antec shall bear and pay all
taxes which are required by any national government, including any political
subdivision thereof, as the result of the existence or operation of this
Agreement, except any necessary, appropriate, and required income tax imposed
upon royalties of Section 4.3, by such national government. Antec may deduct
or withhold such income tax from said royalties of Section 4.3 provided Antec
furnishes Ditech with a tax certificate, or other document evidencing payment
of such income tax.
4.6 All royalties shall be paid in U.S. dollars and shall be paid
on a quarterly basis. All royalties for an accounting period computed on
invoiced amounts in currencies other than United States dollars shall be
converted directly into United States dollars without intermediate
conversions to another currency at the telegraphic transfer selling (TTS)
rate as quoted by the Bank of New York,
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New York, New York, at the close of banking on the last day of such
accounting period (or the business day thereafter if such last day shall be a
Sunday or other non-business day). Antec shall provide written confirmation
of the quoted TTS rate directly to Ditech with the corresponding royalty
report.
4.7 Each royalty payment shall be accompanied by a corresponding
royalty report identifying by country of sale: (i) the units of Antec
Licensed Product(s) sold, by name and model, by Antec and its Subsidiaries,
(ii) the corresponding selling price of each model, (iii) the quantity of
each model sold, (iv) the items permitted to be deducted from total sales
revenue under Section 2.3, separately stated for each unit of each model of
Antec Licensed Products, (v) the total Net Sales Revenue for each such model,
(vi) the total royalty due for each such model, and (vii) the total royalty
due.
4.8 Each royalty report shall be certified by an officer of Antec
or by a designee of such officer, to be correct to the best of Antec's
knowledge and information.
4.9 Antec shall be liable for interest on any overdue royalty
commencing on the date such royalty becomes due, at an interest rate of one
and one half percent (1 1/2%) per month. If such interest rate exceeds the
maximum legal rate in
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the jurisdiction where a claim therefore is being asserted, the interest rate
shall be reduced to such maximum legal rate. Such interest shall accrue and
be paid from the date such overdue royalty was due until the date such
overdue royalty is actually paid.
4.10 Once a year, Ditech, through an independent auditor which may
include technical personnel, shall have the right, upon two weeks prior
notice and at reasonable hours of the day, at Ditech's expense, to audit
Antec's and its Subsidiaries' books of account and records and all other
documents and material in possession or under the control of Antec with
respect to the subject matter in respect of this Agreement and to make copies
and extracts thereof. Any such audit shall only be for a time period
beginning three years before the start of the audit. In the event that any
such audit reveals an underpayment by Antec, Ditech shall notify Antec of the
amount owing. Antec shall remit payment therefor to Ditech within seven (7)
days thereafter in the amount of such underpayment plus the interest on such
underpayment calculated as set forth in paragraph 4.9, above. In the event
that any such audit reveals an underpayment by Antec of more than two percent
(2%) of the royalty actually due, Antec shall pay the fees and expenses of
Ditech's independent auditor, including such technical personnel, making such
audit.
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4.11 Upon request by Ditech, but not more than once each year, Antec
shall furnish Ditech with that portion of the unaudited financial statements
of Antec and its Subsidiaries selling Antec Licensed Products setting forth
the number and revenue for all Antec Licensed Products (by model number),
manufactured, shipped, distributed and/or sold by Antec and its Subsidiaries
during the time period extending from the later of the Effective Date of this
Agreement or the date of any previous statement, as requested by Ditech, up
to and including the date of the current statement.
4.12 Antec agrees to maintain accurate books of account and records
of Antec and its Subsidiaries at its principal place of business covering all
transactions related to the licenses being granted herein, such books and
records appropriate and sufficient to make the royalty report required of
Section 4.7, as certified in Section 4.8, and to enable the audit of Section
4.10. During each year of the existence of this Agreement, Antec shall retain
all such books of account and records, of the then-current year and for the
five years immediately preceding the then-current year. Antec further shall
retain the last three (3) years' accounts and records for at least three (3)
years after the expiration or termination of this Agreement for possible
inspection and audit by Ditech.
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ARTICLE 5
TERM AND TERMINATION
5.1 The term of this Agreement is five (5) years and shall begin
upon the Effective Date and shall automatically terminate five (5) years
after the Effective Date, unless previously terminated as hereinafter
provided in this Article 5.
5.2 Ditech shall have the right to terminate this Agreement, or the
licenses granted hereunder, if Antec at any time:
(a) fails timely to make any payment set forth in
Section 4.2;
(b) fails timely to pay any accrued royalties;
(c) fails timely to deliver any report which meets
the date and other requirements of Section 4.7;
(d) fails to permit an audit as, and under the
conditions, required by Section 4.10;
(e) fails timely to deliver to Ditech any document
required by Section 4.11;
(f) fails to maintain records which meet the
requirements of Section 4.12;
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(g) becomes insolvent or admits in writing its
inability to pay its debts as they mature or makes an assignment for the
benefit of creditors; or
(h) files a petition under any U.S. or foreign
bankruptcy laws.
5.3 If Antec does not cure any failure of or under Section 5.2(a),
5.2(g) or 5.2(h) within three (3) days after written notice from Ditech to
Antec indicating such failure, Ditech may then terminate this Agreement or
the licenses granted herein, effective immediately upon written notice
thereof, all payments not yet then due under Section 4.2, Section 4.3
(minimum royalty payments only), and 5.4, shall become immediately due and
payable and Ditech may immediately and without notice to Antec, present the
letter of credit issued pursuant to Section 4.1 for payment of any and all
amounts due and payable by Antec in favor of Ditech pursuant to Section 4.2.
In addition, in the event that this Agreement is terminated pursuant to this
section, Antec shall be required to pay interest on the entire outstanding
owed at the time of termination including all accelerated payments, which
interest shall be paid at the rate of ten percent (10%) per annum from the
Effective Date to the date that payment is made.
5.4 In the event that this Agreement is terminated by Ditech
pursuant to section 5.3, Antec shall be required to pay Ditech the additional
amount of one
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hundred and fifty thousand dollars ($150,000) representing
additional costs to Ditech of entering into this Agreement.
5.5 If Antec does not cure any such failure enumerated in Section
5.2(b) through 5.2(f) within thirty (30) days after written notice from
Ditech to Antec specifying the nature of such failure, Ditech may then
terminate this Agreement or the licenses granted herein, effective upon
written termination notice given after such thirtieth (30th) day.
5.6 In the event that all or substantially all of Antec's assets
hereafter are transferred to a third party ("transfer"), or a majority of
Antec's outstanding shares or securities (representing the right to vote for
the election of directors or other managing authority) hereafter become
acquired, owned or controlled, directly or indirectly, by a third party
("acquisition"), Antec shall promptly give written notice to Ditech of such
transfer or acquisition. All payments set forth in Section 4.2 shall
immediately become due and payable by Antec upon such transfer or
acquisition. This Agreement may be assigned to the third party only with the
written consent of Ditech, which shall not unreasonably be withheld.
Unresolved or anticipated claims between Ditech and such third party,
including but not limited to those involving intellectual property, shall be
considered one of the reasonable causes for withholding such consent. Any
such consented-to
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assignment may include conditions that insure the protection of Ditech's
interests. If such consent is withheld, then, at the option of Ditech, this
Agreement or Antec's licenses under this Agreement shall terminate as of the
date of such transfer or acquisition.
5.7 Section 3.3, Article 4, Article 5, Article 6, Article 7,
Section 8.11 and Section 8.12 and any other clause which by its nature is
intended to survive expiration or termination of this Agreement shall remain
in effect after such expiration or termination.
5.8 No termination or expiration of this Agreement, or termination
of the license granted hereunder, shall relieve Antec of any obligation or
liability accrued hereunder prior to such expiration or termination, or
rescind or give right to rescind anything done or any payments made by Antec,
or other consideration given to Ditech hereunder prior to the time such
expiration or termination becomes effective. Such expiration or termination
shall not affect in any manner the rights of Ditech arising under this
Agreement prior to such expiration or termination.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES
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6.1 Ditech represents and warrants that it is the legal owner of
the Ditech Licensed Patents.
6.2 The persons executing this Agreement on behalf of Antec and
Ditech represent and warrant that they are duly authorized to legally bind
Antec and Ditech respectively, to the terms and conditions of this Agreement.
6.3 EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH ABOVE IN THIS
ARTICLE 6, NEITHER PARTY GRANTS ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, BY
STATUTE OR OTHERWISE, REGARDING THE ANTEC LICENSED PRODUCTS OR COMPONENTS
THEREOF, THEIR FITNESS FOR ANY PURPOSE, THEIR QUALITY, THEIR MERCHANTABILITY,
THEIR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES,
THE VALIDITY OR COVERAGE OF ANY PATENT LICENSED UNDER THIS AGREEMENT, OR
OTHERWISE.
ARTICLE 7
NOTICE
7.1 Notices, approvals, and consents required or permitted under
this Agreement shall be in writing and shall be sent by hand or by registered
or certified mail, postage prepaid, to the address given below or to such
other
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addresses as the parties may hereafter specify, and shall be deemed to have
been made, given or provided on the date of mailing:
If to Ditech:
William Tamblyn
Vice President and Chief Financial Officer
Ditech Communications Corporation
825 East Middlefield Road
Mountain View, California 94043
If to Antec:
Lawrence Margolis
Chief Financial Officer
Antec Corporation
11450 Technology Circle
Duluth, GA 30097
ARTICLE 8
MISCELLANEOUS
8.1 This Agreement sets forth the entire understanding of the
parties with respect to the subject matter herein and supersedes all prior
agreements between them as to such subject matter, whether oral or written.
8.2 This Agreement is not effective until it has been signed
hereinbelow by or on behalf of each party upon which event it shall be
effective as of the Effective Date first above written. This Agreement may
not be modified after its
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execution except by a writing signed by authorized representatives of the
parties hereto.
8.3 No waiver of any right under this Agreement shall be deemed
effective unless contained in a writing signed by the party charged with such
waiver, and no waiver of any rights arising from any breach or failure to
perform shall be deemed to be a waiver of any future right or of any other
right arising under this Agreement.
8.4 Nothing contained in this Agreement shall be construed as
conferring any right to use in advertising, publicity, or other promotional
activities any name, trade name, trademark or other designation of either
party hereto (including any contraction, abbreviation or simulation of any of
the foregoing); and each party hereto agrees not to use or refer to this
Agreement or any provision thereof in any promotional activity associated
with apparatus licensed hereunder, without the express written approval of
the other party.
8.5 No assignment of this Agreement, other than as set forth in
Section 5.5, is permitted and any attempted assignment in derogation of the
foregoing shall be void. Neither party shall assign any of its patents
licensed hereunder unless such assignment or grant is made subject to the
terms and conditions of this Agreement.
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8.6 Each of Antec and Ditech represent that they have executed no
agreement which is in conflict with this Agreement, and agree that no option
or license shall be granted on any basis to any third party which is in
conflict with this Agreement unless and until this Agreement is terminated.
8.7 The headings of the several Sections are inserted for
convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Agreement.
8.8 If any provision of this Agreement is or becomes or is deemed
invalid, illegal, or unenforceable in any jurisdiction, such provision shall
be deemed amended to conform to applicable laws so as to be valid and
enforceable, or, if it cannot be so amended without materially altering the
intention of the parties, it shall be stricken and the remainder of this
Agreement shall remain in full force and effect.
8.9 Nothing herein contained shall be deemed to create an agency,
joint venture or partnership relation between the parties hereto.
8.10 Each party agrees to mark each product licensed under this
Agreement with a patent notice in the manner required by the appropriate
patent statutes of the jurisdiction where patents licensed hereunder are in
force or pending. An
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occasional lapse in this required marking shall not be considered a material
breach provided the party corrects its marking process promptly upon being
notified of such lapse.
8.11 Antec and Ditech irrevocably submit to the jurisdiction of the
United States District Court for the Northern District of California and the
Superior Court of the County of Santa Clara, California to obtain any legal
or equitable relief. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without reference to its
conflicts of law provisions, as though it were written, executed and fully
performed within the State of California. The parties expressly waive any
law, rule or regulation that might suggest or require the application of the
laws, rules or regulations of any other jurisdiction in addition to or in
place of the laws of the State of California.
8.12 In the event it becomes necessary to enforce this Agreement or
take any steps to collect any amounts owed under the Agreement, the
prevailing Party in such enforcement proceedings or collection proceedings
shall be entitled to recover its reasonable attorneys' fees and costs.
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IN WITNESS WHEREOF, the parties have executed this Agreement by their
respective authorized representatives this 13 day of August, 1999.
DITECH COMMUNICATIONS CORPORATION
By: /s/ William J. Tamblyn
Print Name William J. Tamblyn
ANTEC CORPORATION
By: /s/ Armando Rois-Mendez
Print Name Armando Rois-Mendez
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EXHIBIT A
FORM OF STANDBY LETTER OF CREDIT
NO.___________________
August __, 1999
Ditech Communications Corporation
825 East Middlefield Road
Mountain View, California 94043
Expiry Date: February 29, 2000
Ladies and Gentlemen:
We hereby establish, at the request and for the account of Antec Corporation,
a Delaware corporation (the "COMPANY"), in your favor, this Irrevocable
Letter of Credit No. __________ in the aggregate amount of up to One Million
Four Hundred Thousand and No/100 Dollars ($1,400,000.00) (the "STATED
AMOUNT") effective immediately and expiring at the close of banking business
at our _____________________________________ office (such office or such
other office designated and notified to you by ____________________ (the
"BANK") or by a successor bank being the "BANK'S OFFICE") on the Expiry Date.
After November 30, 1999, the Stated Amount may be reduced from One Million
Four Hundred Thousand and No/100 Dollars ($1,400,000) to Nine Hundred
Thousand and No/100 Dollars ($900,000) until the Expiry Date.
We hereby irrevocably authorize you to draw on us, in an aggregate amount not
to exceed the Stated Amount and in accordance with the terms and conditions
hereinafter set forth, by your draft, drawn on us at the Bank's Office,
payable at sight on any day other than a Saturday, Sunday or other day on
which banking institutions in the State of California or New York are
authorized or required by law or other governmental action to close, and
accompanied by the original Letter of Credit along with your written and
completed certificate signed by you in substantially the form of ANNEX A
attached hereto (such draft accompanied by such certificate and the original
Letter of Credit being your "FUNDING REQUEST").
Funds under this Letter of Credit are available to you against your Funding
Request referring therein to the number of this Letter of Credit. Your
Funding Request shall be dated the date of its presentation, and shall be
presented to us at the Bank's Office, Attention: Letter of Credit Department.
If we receive your Funding Request at such office, all in strict conformity
with the terms and conditions of this Letter of Credit, not later than 12:00
noon (California time) on a Business Day prior to the termination hereof, we
will honor the same no later than 12:30 p.m. (California time) on the next
Business Day in accordance with your payment instructions. If we receive your
Funding Request at such office, all in strict conformity with the terms and
conditions of this Letter of Credit, after 12:00 noon (California time) on a
Business Day prior to
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the termination hereof, we will honor the same no later than 12:30 p.m.
(California time) on the second next succeeding Business Day in accordance
with your payment instructions.
This Letter of Credit shall automatically terminate on the Expiry Date. This
Letter of Credit may be canceled prior to the Expiry Date upon our receipt of
written consent to cancel from you accompanied by the original Letter of
Credit.
This Letter of Credit sets forth in full our undertaking, and such
undertaking shall not in any way be modified, amended, amplified or limited
by reference to any document, instrument or agreement referred to herein,
except only the certificates and the drafts referred to herein; and any such
reference shall not be deemed to incorporate herein by reference any
document, instrument or agreement except for such certificates and such
drafts. All payments made hereunder shall be made out of the Bank's own funds
and not out of the funds of the Company. No funds resulting from a draw
hereunder shall be paid to the Company.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce,
Publication No. 500 (the "UNIFORM CUSTOMS"). This Letter of Credit, as to
matters not governed by the Uniform Customs, shall be governed by the laws
of the State of California, including the Uniform Commercial Code as in
effect in the State of California. Communications with respect to this
Letter of Credit shall be in writing and shall be addressed to us at
_________________________________, Attention: Letter of Credit Department,
specifically referring to the number of this Letter of Credit.
Very truly yours,
, as Bank
- ------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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ANNEX A
CERTIFICATE FOR DRAWING
IRREVOCABLE LETTER OF CREDIT NO._________________
The undersigned, a duly authorized officer of the undersigned (the
"BENEFICIARY"), hereby certifies to __________________________ (the "BANK"),
with reference to Irrevocable Letter of Credit No. ______________ (the
"LETTER OF CREDIT," the terms defined therein and not otherwise defined
herein being used herein as therein defined) issued by the Bank in favor of
the Beneficiary, as follows:
Antec Corporation, a Delaware corporation ("ANTEC"), is in default with
respect to its obligations under the Patent License Agreement dated August
__, 1999, by and between Antec and Beneficiary.
IN WITNESS WHEREOF, the Beneficiary has executed and delivered this
Certificate as of the ____ day of ____________, ____.
DITECH COMMUNICATIONS CORPORATION
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
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