<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1999
REGISTRATION NO. 333-75063
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
DITECH COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3661 94-2935531
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
------------------
825 E. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(650) 623-1300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------
TIMOTHY K. MONTGOMERY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
825 E. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(650) 623-1300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
COPIES TO:
ANDREI M. MANOLIU
BRETT D. WHITE NEIL WOLFF
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
FIVE PALO ALTO SQUARE PROFESSIONAL CORPORATION
3000 EL CAMINO REAL 650 PAGE MILL ROAD
PALO ALTO, CA 94306-2155 PALO ALTO, CA 94304
(650) 843-5000 (650) 493-9300
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
MAY 12, 1999
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT SEEK OFFERS TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
3,000,000 Shares
[LOGO]
Common Stock
---------
Ditech Communications Corporation is offering all 3,000,000 shares. Prior to
this offering, there was no public market for Ditech's common stock. It is
currently estimated that the initial public offering price will be between
$11.00 and $13.00 per share.
The common stock has been approved for listing on the Nasdaq National Market
under the symbol "DITC."
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
Per Share Total
----------- ------------------
<S> <C> <C>
Public offering price............................................ $ $
Underwriting discount............................................ $ $
Proceeds, before expenses, to Ditech............................. $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Ditech has granted the underwriters the right to purchase up to 450,000
additional shares at the public offering price to cover any over-allotments.
--------------
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in Baltimore, Maryland
on , 1999.
BT ALEX. BROWN
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST
, 1999
<PAGE>
In the top half of the page is an eight-line block of text, which is
centered in the middle of the page. The text itself is flushed left. It reads:
"Ditech Communications Corporation."
On the top right-hand corner of the page is a one-inch high rectangle of
color. It extends approximately one-third of the way across the page and
gradually fades to white. Across the middle of the page is an arrow pointing to
a tab on the right edge of the page. To the left of the tab, superimposed over
the arrow, are the words "open here."
Ditech Communications Corporation
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
optical communications products.
TRADEMARKS:
The name Ditech Corporation is a registered trademark of Ditech. Ditech has
applied for trademarks for the following: Ditech, the DART acronym, and the wave
design logo. This prospectus also includes trademarks of companies other than
Ditech.
<PAGE>
DITECH COMMUNICATIONS CORPORATION
DITECH ECHO CANCELLATION SOLUTION
VOICE QUALITY IS THE COMPETITIVE DIFFERENCE
[Graphical illustration of telecommunication networks, with a cloud in the
center in which the following words appear:
Cable
Satellite
Wireline
Wireless
Voice-over packet
(Voice-over Internet,
ATM, Frame Relay)
Above the cloud are the words "Circuit Switched Network," and below the
cloud are the words "Packet Switched Network." Leading into the cloud from the
top left is a figure of a person on a telephone with two dotted lines leading to
a vertical line on the right labeled "Echo generated at 2-to-4 conversion
hybrid." Out of this are four dotted lines leading to the right to a box labeled
"Echo Cancellers." Out of this box come four dotted lines to the right to the
upper left portion of the cloud.
At the upper right portion of the cloud is the mirror image of the figures
described in the proceeding paragraph.
Leading into the cloud from the bottom left is a figure of a person on a
telephone with two dotted lines leading to a box on the right labeled "PBX" with
rectangle labeled "Echo Canceller (4SA)" sitting on top of it. Out of this are
two dotted lines leading to a vertical line on the right labeled "Echo generated
at hybrid." Out of this are four dotted lines leading to the right to a box
labeled "Packet Switch (e.g. router)." Out of this come four dotted lines to the
right to the lower left portion of the cloud.
At the lower right portion of the cloud is the mirror image of the figures
described in the proceeding paragraph.]
<TABLE>
<CAPTION>
DITECH PRODUCTS STATUS
<S> <C> <C>
[rectangle representing Echo Canceller (4SA)
an Echo Canceller] (For small office and network environments) Shipping
18T1/E1 Echo Canceller
[box representing (220 T1's in 7 foot rack)
an Echo Canceller] (126 e1's in 2.1m rack) Shipping
[box representing Quad T1 Echo Canceller
an Echo Canceller] (480 T1's in 7 foot rack) Shipping
[box representing Quad E1 Echo Canceller
Echo Canceller] (480 E1's in 2.1m rack) Shipping
[box representing Broadband Echo Canceller (BBEC")
Echo Canceller] (For higher capacity networks) Development
</TABLE>
BENEFITS TO SERVICE PROVIDER
- High capacity
- High performance
- Remote software upgradeability
- Low power consumption
<PAGE>
BUILDING THE NEW PUBLIC NETWORK
DITECH'S OPTICAL SOLUTION
EXPANDING THE NEW OPTICAL NETWORK
[Graphical illustration of a telecommunication network labeled "Long
Distance" represented by a large ring with (i) nine triangles on the ring
representing EDFA optical amplifiers, and (ii) four balls, the lower two of
which are labeled "Switching Center." To the left of the large ring is a box
labeled "SONET/SDH Terminal Packet Switch," underneath which the words "16
Wavelength DWDM Multiplexer System" are found. Out of this box come 16 arrows to
the right to a stack of 16 boxes labeled at the top with a "T" to denote that
they are Transponders. Out of each of these boxes comes an arrow to the right to
a trapezoid labeled "DWDM Mux." Out of this comes one arrow to the large ring.
At the right of the large ring is the mirror image of the figures described in
the proceeding four sentences, except that all arrows continue to go to the
right and the trapezoid labeled "DWDM Mux" is labeled "DWDM DeMux." Above and to
the left of the large ring is the figure of a person at a computer labeled
"Technician" with a dotted line out of the computer leading to two boxes, one of
which is labeled "Network Management System" and one of which is labeled
"Optical Telemetry System (OTS)." Out of these boxes comes a dotted line that
splits into two dotted lines, each leading to a box labeled "OTS." Out of each
of these boxes is a dotted line leading through one of the optical amplifiers on
the top of the large ring, then to a box labeled "Monitor," and them to one of
the optical amplifiers on the bottom of the large ring. In the center of the
large ring are the words "Remote Monitoring and Management."
Below the large ring is a graphical illustration of a telecommunication
network labeled "Local Exchange" represented by a smaller ring with four balls,
each with a different label as follows: "Remote Terminal"; "Central Office";
"Terminal"; "Campus"; and "ISP." Each of the first two balls, which are at the
top of the small ring, has a thick line leading up from it to one of the two
balls on the large ring labeled "Switching Center." To the left of the small
ring is a box labeled "SONET/SDH Terminal Packet Switch," underneath which the
words "4 Wavelength WDM Multiplexer System" are found. Out of this box come 4
arrows to the right to a stack of 4 boxes each labeled with a "T" to denote that
they are Transponders. Out of each of these boxes come an arrow to the right to
a trapezoid labeled "WDM Mux." Out of this comes one arrow to the small ring. At
the right of the small ring is the mirror image of the figures described in the
proceeding four sentences, except that all arrows continue to go to the right
and the trapezoid labeled "WDM Mux" is labeled "WDM DeMux." In the center of the
small ring are the words "Cost-effective, scalable solution."
To the left of the large and small rings and other graphical representations
is a cloud with the words "Voice," "Data," and "Video" in it. The cloud has two
dotted lines coming out of it, each to a box labeled "SONET/SDH Terminal Packet
Switch" on the left side of each of the two rings.]
<TABLE>
<CAPTION>
DITECH PRODUCTS STATUS
<S> <C> <C>
[Triangle] EDFA (optical amplifier) Shipping
Commercially
[Box with "T" in the middle] Transponder Available
Commercially
[Trapazoid] WDM Multiplexer/Demultiplexer Available
[Trapazoid] DWDM Multiplexer/Demultiplexer Development
Commercially
[Box with "OTS" in the middle] Optical Telemetry System (OTS) Available
[Box with "Monitor" in the middle] DWDM Channel Monitor Development
</TABLE>
BENEFITS TO SERVICE PROVIDER
- Cost-effective, scalable solutions
- Interoperable in multivendor networks
- Designed to industry standards
- Remote monitoring and management
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, ALL INFORMATION INCLUDED IN THIS PROSPECTUS
ASSUMES: (I) THE REDEMPTION OF ALL OF DITECH'S OUTSTANDING SERIES A PREFERRED
STOCK, THE CONVERSION OF ALL OF DITECH'S SERIES B PREFERRED STOCK TO COMMON
STOCK AT A RATE OF TWO SHARES OF COMMON STOCK FOR EACH THREE SHARES OF SERIES B
PREFERRED STOCK, AND THE AMENDMENT AND RESTATEMENT OF DITECH'S CERTIFICATE OF
INCORPORATION, ALL TO OCCUR AT THE CLOSING OF THIS OFFERING; AND (II) NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. AS USED IN THIS PROSPECTUS,
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "DITECH" REFERS TO DITECH
COMMUNICATIONS CORPORATION, A DELAWARE CORPORATION, ITS PREDECESSOR CALIFORNIA
CORPORATION AND THE CALIFORNIA CORPORATION'S PREDECESSORS AND SUBSIDIARIES.
DITECH
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. Our echo cancellation
products eliminate echo, which is a significant problem in existing and emerging
networks. Echo results from speech signals that are reflected back to the
speaker during a telephone call, making conversation difficult. This effect is
most pronounced when two people are talking over long distance, satellite,
cellular, PCS or packetized networks. Our echo cancellation products use a
software-intensive architecture coupled with one of the latest commercially
available digital signal processors, a semiconductor device that encodes and
decodes digital signals, to cancel echo and enhance the quality of voice
communications. To date, the vast majority of our revenue has been derived from
sales of our echo cancellation products. Our optical communications products
enable the implementation of wavelength division multiplexing ("WDM")
technology, a technology that enables multiple communication links to be carried
on one fiber optic connection which is becoming more widely adopted by service
providers to address network capacity constraints. Ditech's optical
communications products are designed to function either as stand-alone products
or as a complete system known as the Optical Path Solution.
Service providers, struggling to meet the demands of increasing traffic,
also face intense competition as worldwide deregulation and privatization have
enabled new players to enter the market. Growing numbers of service providers
are both expanding legacy infrastructures and building out new networks.
Consequently, traffic that was previously carried through the network of a
single service provider, is now routed through the networks of multiple service
providers. These networks are comprised of equipment from several different
vendors that must carry traffic over existing and emerging infrastructures. This
added complexity makes it more difficult to ensure network reliability and
service quality. Service providers, operating in an increasingly competitive
industry, must cost-effectively meet these challenges or lose business to
competitors who can.
Our objective is to become a leading provider of echo cancellation and
optical communications products required to cost-effectively build and manage
the telecommunications networks of the twenty-first century. Key elements of our
strategy include the following:
- Extend technology leadership;
- Increase optical communications products growth;
- Expand and leverage distribution channels;
- Strengthen existing and develop new customer relationships;
- Deliver cost-effective solutions; and
- Expand outsourced manufacturing.
3
<PAGE>
We have established a direct sales force that sells to our customers in the
United States 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 internationally. More than fifty companies
purchased our products in fiscal 1999.
Ditech was originally incorporated as Phone Info, Inc. in July 1983 and
subsequently changed its name to Automated Call Processing Corporation, Inc. In
March 1997, Automated Call Processing sold portions of its business and merged
with its wholly-owned subsidiary, and the surviving entity was renamed Ditech
Corporation. Ditech reincorporated in Delaware in April 1999 and changed its
name to Ditech Communications Corporation. Shortly following the
reincorporation, Ditech effected a 2-for-3 reverse split of its common stock and
redeemed all of its outstanding Series C preferred stock. Where we refer to
numbers of shares of common stock in this prospectus, we have adjusted those
numbers to reflect the reverse stock split. Our principal offices are located at
825 E. Middlefield Road, Mountain View, California 94043, and our telephone
number is (650) 623-1300.
RECENT OPERATING RESULTS
We recently completed our 1999 fiscal year. Based upon the information that
we have to date, we estimate that our revenues for the fiscal year ended April
30, 1999 will be between $25.10 million and $25.30 million as compared to
revenues of $12.30 million for the prior fiscal year, and our income from
operations will be between $1.45 million and $1.55 million as compared to income
from operations of $624,000 for the prior fiscal year. Our expectations are
preliminary and are subject to the completion of an audit of our April 30, 1999
financial statements.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Shares offered by Ditech.............................. 3,000,000 shares
Shares to be outstanding after the offering........... 11,766,846 shares
Use of proceeds....................................... Approximately $18.90 million to redeem Ditech's
outstanding Series A Preferred Stock, $2.96 million
to complete the acquisition of technology, $7.50
million to repay bank debt, and the balance for
general corporate purposes
Proposed Nasdaq National Market symbol................ DITC
</TABLE>
The number of shares to be outstanding following this offering is based on
the number of shares outstanding on April 30, 1999, assuming conversion of the
Series B preferred stock. It excludes:
- 863,482 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $3.60 per share;
- 456,746 shares of common stock reserved for issuance pursuant to our 1998
Stock Option Plan;
- 133,333 shares of common stock reserved for issuance pursuant to our 1999
Employee Stock Purchase Plan; and
- 100,000 shares of common stock reserved for issuance pursuant to our 1999
Non-Employee Directors' Stock Option Plan.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED APRIL 30, JANUARY 31,
-------------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
--------- ------ ------- ------- ------- ------ -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 10,764 $7,979 $14,354 $14,066 $12,326 $8,687 $18,025
Gross profit................................................ 5,334 4,186 7,190 7,276 6,675 4,658 9,437
Operating expenses.......................................... 962 1,320 2,617 3,307 6,051 4,018 8,576
Income from operations...................................... 4,372 2,866 4,573 3,969 624 640 861
Income from continuing operations........................... 2,667 1,621 2,792 2,343 7 109 277
Discontinued operations(1).................................. 390 (848 ) (1,413) 92 -- -- --
Net income.................................................. 3,057 773 1,379 2,435 7 109 277
Accretion of mandatorily redeemable preferred stock......... -- -- -- 187 1,374 1,030 1,115
Net income (loss) attributable to common stockholders....... $ 3,057 $ 773 $ 1,379 $ 2,248 $(1,367) $ (921) $ (838)
Basic and diluted per share data (2)
Income (loss) from continuing operations.................. $ 0.08 $0.06 $ 0.10 $ 0.09 $ (0.45) $(0.30) $ (0.24)
--------- ------ ------- ------- ------- ------ -------
--------- ------ ------- ------- ------- ------ -------
Net income (loss)......................................... $ 0.09 $0.03 $ 0.05 $ 0.09 $ (0.45) $(0.30) $ (0.24)
--------- ------ ------- ------- ------- ------ -------
--------- ------ ------- ------- ------- ------ -------
Number of shares used in per share calculations (2)
Basic..................................................... 32,411 27,903 27,903 24,772 3,061 3,055 3,447
--------- ------ ------- ------- ------- ------ -------
--------- ------ ------- ------- ------- ------ -------
Diluted................................................... 32,411 27,903 28,271 25,224 3,061 3,055 3,447
--------- ------ ------- ------- ------- ------ -------
--------- ------ ------- ------- ------- ------ -------
Pro forma net loss per share--basic and diluted (3)......... $ (0.14) $ (0.08)
------- -------
------- -------
Shares used in pro forma per share calculations--basic and
diluted (3)............................................... 7,234 7,620
------- -------
------- -------
Supplemental net income per share--diluted (4).............. $ 0.05 $ 0.05
------- -------
------- -------
Shares used in supplemental per share calculation-- diluted
(4)....................................................... 10,067 10,928
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................... $ 4,724 $ 7,895
Total assets................................................................................ 21,714 20,337
Long-term debt.............................................................................. 6,830 80
Redeemable preferred stock.................................................................. 32,236 --
Total stockholders' equity (deficit)........................................................ (23,499) 15,007
</TABLE>
- ------------------------------
(1) See Note 3 of notes to the financial statements included elsewhere in this
prospectus.
(2) The reduction in earnings per share due to accretion for redeemable
preferred stock will not occur after this offering because the Series A
preferred stock will be redeemed and the Series B preferred stock will be
converted to common stock at the closing of the offering.
(3) See Note 12 of notes to the financial statements included elsewhere in this
prospectus for an explanation of the method employed to determine the number
of shares used to compute per share amounts.
(4) Supplemental net income per share is calculated assuming that Ditech sold
enough stock at the beginning of the periods to redeem its Series A
preferred stock and to retire Ditech's debt. In this calculation Ditech
assumes the offering price is $12.00 per share (less underwriters discount),
offering expenses are $900,000, and the tax benefit on interest expense is
40%.
The balance sheet data has been adjusted to reflect the sale of 3,000,000
shares of Common Stock in this offering at an assumed initial public offering
price of $12.00 per share and the receipt and use of the estimated net proceeds
therefrom after deducting estimated underwriting discounts and estimated
offering expenses. See "Use of Proceeds." The adjusted balance sheet data also
reflects the redemption of the Series C preferred stock which occurred in April
1999.
5
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE
TRADING PRICE OF OUR COMMON STOCK TO DECLINE, AND YOU MAY LOSE PART OR ALL OF
YOUR INVESTMENT.
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 consolidation in its industry. If
this happens, our revenues and business would be materially and adversely
affected. Over 75% of our revenue came from our five largest customers in the
first nine months of fiscal 1999 and in fiscal 1998. Qwest/LCI accounted for 51%
of our revenue in the first nine months of fiscal 1999, and 42% of our revenue
in fiscal 1998. Our four next largest customers accounted collectively for 25%
of our revenue in the first nine months of 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.
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.
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
6
<PAGE>
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
If we do not successfully develop and introduce our new products and our
existing products become obsolete due to product introductions by competitors,
our revenues will decline. Our ability to maintain and increase revenue in the
future will depend primarily on:
- acceptance of our new Quad T1, Quad E1 and 4SA echo cancellation products;
- our successful development and introduction of our new Broadband Echo
Cancellation System;
- 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
7
<PAGE>
will achieve our product introduction dates, they may be delayed. As of January
31, 1999, we had neither shipped nor recognized revenue from the sale of any
significant amount of these new products. For the nine months ended January 31,
1999, sales of our 18T1 and 18E1 echo cancellation products accounted for the
vast majority of our revenue. Shipments of our optical amplifiers began in the
third quarter of calendar 1996 and accounted for all of our revenue for optical
communications products during the first nine months of 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 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 and for the
first nine months of fiscal 1999, we derived approximately 99.5%, 94.1% and
95.4%, 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 PROFITABILITY
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
8
<PAGE>
more resources to developing new products than we will. For more information on
the competition we face, see "Business--Competition."
WE DEPEND ON TELINNOVATION FOR TRANSITIONAL SUPPORT OF OUR ECHO CANCELLATION
TECHNOLOGY, THE LOSS OF WHICH COULD DELAY PRODUCT DEVELOPMENT
We recently 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
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 SOLE 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 one contract
manufacturer. We are in the process of establishing an additional relationship.
Until we are able to establish this additional manufacturing relationship, we
may not be able to successfully reduce manufacturing costs. In addition, we may
encounter problems in the transition of manufacturing to another contract
manufacturer, which could temporarily increase our manufacturing costs and cause
product delays. See "Business--Manufacturing."
WE HAVE NO COMMERCIAL MANUFACTURING EXPERIENCE WITH OUR NEW PRODUCTS. To
date we have manufactured our pre-production Broadband Echo Cancellation System
and 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
9
<PAGE>
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 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 PUTTING STRAINS ON OUR MANAGEMENT
In December 1998, we moved into our new corporate offices and research and
development facilities. We anticipate significantly expanding our management
team and business capacity to address potential growth in our customer base and
market opportunities. The relocation to our new facilities diverted our
management's attention from our business. Additional expansion of our business
may further 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
10
<PAGE>
services, and administrative personnel and scale our research and development
capability, which we may not be able to do.
RECENT AND PLANNED PERSONNEL ADDITIONS. Our Chief Executive Officer also
functions as our Vice President of Sales, and has only been the Chief Executive
Officer since September 1998. We recently hired our new Vice President of
Operations, who began working with us in December 1998, and a Vice President of
Marketing, especially for the marketing of our optical communications products,
who began working with us in April 1999. We may 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, Pong Lim, our Chairman of the Board, 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. Lim, Ms. Toni
Bellin, our Vice President of Operations, and Marc Schwager, our Vice President
of Marketing, and we maintain a "key person" life insurance policy only on Mr.
Lim. 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
Following this offering, and assuming that the underwriters' over-allotment
option is not exercised, Summit Partners and its affiliates, and Kenneth Jones,
will collectively control approximately 44.7% of our outstanding common stock,
as follows:
- Summit Partners and its affiliates 32.9%
- Kenneth Jones 11.8%
11
<PAGE>
In addition, Messrs. Avis and Chung, directors of Ditech, are affiliated with
Summit Partners, and Mr. Jones is a director of Ditech. 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. In addition, employees,
consultants and others who participate in the development of our products may
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. For
further information on our intellectual property and the difficulties in
protecting it, see "Business--Patents and 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.
WE ARE INVOLVED IN ARBITRATION PROCEEDINGS THAT MAY HAVE AN MATERIAL ADVERSE
AFFECT ON OUR FINANCIAL CONDITION IF IT IS RESOLVED UNFAVORABLY TO US
We are involved in an arbitration proceeding instigated by us, in which the
opposing party has made a counter-claim against us, involving monetary damages
that is set to be completed in May 1999. Although we believe we have a valid
claim to recover monetary damages, if we do not succeed on our claim and the
opposing party succeeds on their counterclaim, it could have a material adverse
effect on our financial condition. See "Business--Legal Proceedings."
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.
12
<PAGE>
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER
Provisions in our Certificate of Incorporation and Bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of our common stock. These provisions
include, among others:
- the division of the Board of Directors into three separate classes;
- the ability of the Board of Directors to issue up to 5,000,000 shares of
preferred stock, and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares
without any further vote or action by the stockholders;
- advance notice requirements for stockholders to nominate directors and
bring stockholder proposals to a vote; and
- the inability of stockholders to act by written consent.
Furthermore, because we are incorporated in Delaware, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions prohibit certain large stockholders, in particular those owning 15%
or more of the outstanding voting stock, from consummating a merger or
combination with a corporation unless (1) 66 2/3% of the shares of voting stock
not owned by the large stockholder approve the merger or combination or (2)
Board of Directors approves the merger or combination or the transaction that
resulted in the large stockholder owning 15% or more of our outstanding voting
stock. See "Description of Capital Stock--Anti-Takeover Effects of Provisions of
Charter Documents and Delaware Law."
THERE ARE A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK
Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that such sales may be made, could
materially and adversely affect the market price of our common stock.
All of the shares issued in this offering will be freely tradeable. Of the
8,766,846 shares of common stock outstanding as of April 30, 1999, 8,337,677
shares will become available for sale 180 days following the date of this
prospectus upon the expiration of lock-up agreements with our underwriters,
subject to the restrictions imposed by the federal securities laws on sales by
affiliates. An additional 429,169 shares may become available for sale at
various times after the 180 days following the date of this prospectus as
Ditech's repurchase option on such shares lapses, subject to the restrictions
imposed by the federal securities laws on sales by affiliates. In addition, up
to an additional 181,598 shares may become available for sale 180 days following
the date of this prospectus upon the exercise of stock options and additional
shares may come available thereafter as outstanding options vest and are
exercised. The underwriters, however, may waive the lock-up restriction at their
sole discretion. See "Shares Eligible for Future Sale."
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
13
<PAGE>
assessing the readiness of our computer systems and those of 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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements." The words "believe,"
"anticipate," "expect," "intend" and other similar words intended to identify
these statements as forward-looking statements. Such statements include
statements under the captions "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus as to, among others:
- the timing of availability of products under development or in beta-test;
- our ability to commercialize new products;
- the acceptance and performance of our products;
- our ability to reduce manufacturing costs and introduce enhanced products
with higher selling prices;
- the relative contributions to our revenues from future sales of our echo
cancellation and optical communications products;
- our expectations as to margins on our new products and products we sell
through original equipment manufacturers;
- our future sales and marketing, research and development and general
administrative expenditures and income tax rates;
- our expectations as to increases in working capital and planned
expenditures on property and equipment;
- our belief as to our future cash requirements;
- our state of readiness for the year 2000, the effect it will have on us
and the timing of development of our year 2000 contingency plans;
- the effectiveness of, and our ability to carry out, each element of our
business strategy;
- the commencement of shipping of our 4SA and Broadband Echo Cancellation
System echo cancellation products;
- our intentions with respect to future research and development and
manufacturing activities;
- our expectations as to the increase in demand for echo cancellation
products;
- our expectations of expanding our management team and business capacity;
- our expectations of our international presence and hiring personnel for
the overseas market; and
- our ability to satisfy cash requirements for at least the next twelve
months from a combination of the proceeds from this offering, our cash
flow from operations and our bank line of credit;
- our plan to take corrective actions based on our assessment of the impact
of Euro conversion on internal systems, sales and global markets;
- our plan to use the proceeds from this offering to redeem Series A
preferred stock, pay for acquisition of technology, repay debt, and for
general corporate purposes;
- our plan to enter into indemnification agreements with each director and
executive officer; and
- our estimates of revenues and income from operations for the year ended
April 30, 1999.
The ultimate outcome of the matters set forth in these statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. The cautionary statements made in this prospectus should
be read as being applicable to all related forward-looking statements wherever
they appear in this prospectus. We assume no obligation to update such
forward-looking statements or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to Ditech from the sale of the 3,000,000 shares of common
stock being offered, at an assumed initial public offering price of $12.00 per
share, are estimated to be approximately $32,580,000 after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. We expect to use the net proceeds:
- to redeem our outstanding Series A preferred stock upon the closing of the
offering for approximately $18.9 million (as of January 31, 1999);
- to pay Telinnovation $2.96 million as a one-time fee in connection with
the acquisition of certain of our technology;
- to repay up to approximately $7.5 million in debt owed to BankBoston, N.A.
as of January 31, 1999; and
- for general corporate purposes, including capital expenditures and
research and development.
The interest rate on the BankBoston term loan as of March 15, 1999 was 8.25%
(the current base rate of 7.75% plus 0.5%) and this debt will mature on December
31, 2002. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources." The amounts and timing
of our actual expenditures will depend upon numerous factors, including the
status of our product development and commercialization efforts, the amount of
proceeds actually raised in this offering, the amount of cash generated by our
operations, competition, and sales and marketing activities. If we receive
substantially less net proceeds from this offering than we currently
contemplate, then we may not repay some or all of our outstanding debt. Pending
application of the net proceeds as described above, we intend to invest the net
proceeds of the offering in short-term, investment-grade, interest-bearing
securities.
DIVIDEND POLICY
Ditech has never paid any cash dividends on its capital stock. We currently
anticipate that we will retain earnings to support operations and to finance the
growth and development of our business and do not anticipate paying cash
dividends for the foreseeable future. In addition, our credit agreement with
BankBoston prohibits us from paying cash dividends without the lender's written
consent.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Ditech as of January
31, 1999:
- on an actual basis;
- on a pro forma basis assuming the conversion of all of our Series B
preferred stock to common stock, and
- on an as adjusted pro forma basis assuming the sale of the 3,000,000
shares of common stock offered by us at an assumed initial public offering
price of $12.00 per share (after deducting the estimated underwriting
discount and offering expenses) and application of the estimated net
proceeds therefrom, including the redemption of all of our Series A
preferred stock for cash. The adjusted pro forma basis also reflects the
redemption of all of our Series C preferred stock for the preferred stock
we held in Globe Wireless that occurred in April 1999.
This table should be read in conjunction with our financial statements and
notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JANUARY 31, 1999
-------------------------------------
PRO FORMA PRO FORMA
ACTUAL ------------- AS ADJUSTED
--------- -----------
(IN
THOUSANDS)
-------------
<S> <C> <C> <C>
Capital lease, net of current.................................. $ 80 $ 80 $ 80
Note payable, net of current................................... 6,750 6,750 --
--------- ------------- -----------
Long term debt................................................. 6,830 6,830 80
--------- ------------- -----------
Redeemable preferred stock:
Series A preferred stock, $0.001 par value, 17,250,000 shares
authorized and outstanding actual and pro forma; no shares
authorized or outstanding pro forma as adjusted.............. 18,949 18,949 --
Series B preferred stock, $0.001 par value; 6,259,718 shares
authorized and outstanding actual; no shares authorized or
outstanding pro forma and pro forma as adjusted.............. 5,926 -- --
Series C preferred stock, $0.001 par value; 7,508,221 shares
authorized and outstanding actual and pro forma, no shares
authorized or outstanding pro forma as adjusted.............. 7,361 7,361 --
--------- ------------- -----------
Total redeemable preferred stock........................... 32,236 26,310 --
--------- ------------- -----------
Stockholders' equity (deficit):
Undesignated preferred stock, $.001 par value pro forma as
adjusted; no shares authorized actual and pro forma;
5,000,000 shares authorized, none issued and outstanding, pro
forma as adjusted............................................ -- -- --
Common stock, no par value actual and pro forma, $.001 par
value pro forma as adjusted; 50,000,000 shares authorized
actual, pro forma and pro forma as adjusted; 4,572,542 shares
issued and outstanding actual; 8,745,681 shares issued and
outstanding pro forma; and 11,745,681 shares issued and
outstanding pro forma as adjusted............................ 5 9 12
Additional paid in capital..................................... 1,878 7,800 40,377
Deferred stock compensation.................................... (409) (409) (409)
Accumulated deficit............................................ (24,973) (24,973) (24,973)
--------- ------------- -----------
Total stockholders' equity (deficit)........................... (23,499) (17,573) (15,007)
--------- ------------- -----------
Total capitalization....................................... $ 15,567 $ 15,567 $ 15,087
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
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<PAGE>
The number of shares of common stock referenced above excludes as of January
31, 1999:
- 647,598 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $1.27 per share; and
- 529,128 additional shares of common stock reserved for future issuance
under our stock option plans.
Subsequent to January 31, 1999, our Board of Directors and stockholders
approved:
- an increase in the number of shares of our common stock reserved pursuant
to our 1998 Stock Option Plan of 166,666 shares;
- our 1999 Employee Stock Purchase Plan, pursuant to which 133,333 shares of
our common stock have been reserved; and
- our 1999 Non-Employee Director Stock Option Plan, pursuant to which
100,000 shares of our common stock have been reserved.
In addition, subsequent to January 31, 1999 we granted additional stock
options and certain options were exercised. See "Management--Benefit Plans."
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<PAGE>
DILUTION
The net tangible book deficit of Ditech at January 31, 1999, was
approximately $18 million, or $2.07 per share (assuming conversion of the Series
B preferred stock). Net tangible book value per share is determined by dividing
our tangible net worth (tangible assets less liabilities) by the number of
shares of common stock outstanding. After giving effect to the sale by us of the
3,000,000 shares of common stock we are offering at an assumed public offering
price of $12.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, the net tangible book value of
Ditech as of January 31, 1999 would have been approximately $11.5 million, or
$0.98 per share. This represents an immediate increase in the net tangible book
value of $3.05 per share to existing stockholders and an immediate dilution in
the net tangible book value of $11.02 per share to new investors purchasing
shares at the assumed public offering price. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $ 12.00
Net tangible book value per share as of January 31, 1999................. $ (2.07)
Increase per share attributable to new investors in this offering........ 3.05
---------
Net tangible book value per share after the offering....................... 0.98
---------
Dilution per share to new investors........................................ $ 11.02
---------
---------
</TABLE>
The following table sets forth, as of January 31, 1999, the difference
between the number of shares of common stock purchased from Ditech (assuming the
conversion of Series B preferred stock), the total consideration paid and the
average price per share paid by the existing stockholders and by the new
investors at an assumed initial public offering price of $12.00 per share for
shares purchased in this offering, before deducting underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
------------------ --------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 8,745,681 74.5% $7,961,000 18.1% $ 0.91
New investors..................................... 3,000,000 25.5 36,000,000 81.9 12.00
------- -------- ------ -------
Total........................................... 11,745,681 100.0% $43,961,000 100.0%
------- -------- ------ -------
------- -------- ------ -------
</TABLE>
To the extent our existing option holders exercise their options currently
outstanding, there will be further dilution.
18
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for each of the three years ended April 30,
1998, and the balance sheet data as of April 30, 1998 and 1997, have been
derived from the audited financial statements of Ditech included elsewhere in
this prospectus that have been audited by PricewaterhouseCoopers LLP,
independent accountants. The statement of operations data for the nine months
ended January 31, 1998 and 1999, and the balance sheet data as of January 31,
1998 and 1999, have been derived from the unaudited financial statements of
Ditech included elsewhere in this prospectus. The statement of operations data
for each of the two years ended April 30, 1995, and the balance sheet data as of
April 30, 1996, 1995, and 1994 have been derived from the unaudited financial
statements of Ditech not included in this prospectus. The data set forth below
should be read in conjunction with the financial statements of Ditech, including
the notes thereto, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED APRIL 30, JANUARY 31,
----------------------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ------- ------- ------- ------ -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................ $10,764 $7,979 $14,354 $14,066 $12,326 $8,687 $18,025
Cost of goods sold..................................... 5,430 3,793 7,164 6,790 5,651 4,029 8,588
----------- ----------- ------- ------- ------- ------ -------
Gross profit......................................... 5,334 4,186 7,190 7,276 6,675 4,658 9,437
----------- ----------- ------- ------- ------- ------ -------
Operating expenses:
Sales and marketing.................................. 396 563 1,041 1,521 2,405 1,438 4,104
Research and development............................. 361 514 1,040 1,072 2,367 1,657 2,850
General and administrative........................... 205 243 536 714 1,279 923 1,622
----------- ----------- ------- ------- ------- ------ -------
Total operating expenses........................... 962 1,320 2,617 3,307 6,051 4,018 8,576
----------- ----------- ------- ------- ------- ------ -------
Income from operations................................. 4,372 2,866 4,573 3,969 624 640 861
Other income (expense), net............................ -- -- (5) (104) (593) (458) (398)
----------- ----------- ------- ------- ------- ------ -------
Income from continuing operations before income taxes.. 4,372 2,866 4,568 3,865 31 182 463
Provision for income taxes............................. 1,705 1,245 1,776 1,522 24 73 186
----------- ----------- ------- ------- ------- ------ -------
Income from continuing operations...................... 2,667 1,621 2,792 2,343 7 109 277
Discontinued operations:
Income (loss) from operations (1).................... 390 (848) (1,413) (2,751) -- -- --
Gain on disposal (1)................................. -- -- -- 2,843 -- -- --
----------- ----------- ------- ------- ------- ------ -------
Net income............................................. 3,057 773 1,379 2,435 7 109 277
Accretion of mandatorily redeemable preferred stock to
redemption value..................................... -- -- -- 187 1,374 1,030 1,115
----------- ----------- ------- ------- ------- ------ -------
Net income (loss) attributable to common
stockholders......................................... $ 3,057 $ 773 $ 1,379 $ 2,248 $(1,367) $ (921) $ (838)
----------- ----------- ------- ------- ------- ------ -------
----------- ----------- ------- ------- ------- ------ -------
Per share data (2)
Basic
Income (loss) from continuing operations........... $ 0.08 $ 0.06 $ 0.10 $ 0.09 $ (0.45) $(0.30) $ (0.24)
Discontinued operations............................ 0.01 (0.03) (0.05) 0.00 -- -- --
----------- ----------- ------- ------- ------- ------ -------
Net income (loss) per share........................ $ 0.09 $ 0.03 $ 0.05 $ 0.09 $ (0.45) $(0.30) $ (0.24)
----------- ----------- ------- ------- ------- ------ -------
----------- ----------- ------- ------- ------- ------ -------
Diluted
Income (loss) from continuing operations........... $ 0.08 $ 0.06 $ 0.10 $ 0.09 $ (0.45) $(0.30) $ (0.24)
Discontinued operations............................ 0.01 (0.03) (0.05) 0.00 -- -- --
----------- ----------- ------- ------- ------- ------ -------
Net income (loss) per share........................ $ 0.09 $ 0.03 $ 0.05 $ 0.09 $ (0.45) $(0.30) $ (0.24)
----------- ----------- ------- ------- ------- ------ -------
----------- ----------- ------- ------- ------- ------ -------
Number of shares used in per share calculations (2)
Basic................................................ 32,411 27,903 27,903 24,772 3,061 3,055 3,447
----------- ----------- ------- ------- ------- ------ -------
----------- ----------- ------- ------- ------- ------ -------
Diluted.............................................. 32,411 27,903 28,271 25,224 3,061 3,055 3,447
----------- ----------- ------- ------- ------- ------ -------
----------- ----------- ------- ------- ------- ------ -------
Pro forma data (3)
Net loss per share--basic and diluted................ $ (0.14) $ (0.08)
------- -------
------- -------
Shares used in per share calculations--basic and
diluted............................................ 7,234 7,620
------- -------
------- -------
Supplemental per share data (4)
Supplemental net income per share--diluted........... $ 0.05 $ 0.05
------- -------
------- -------
Shares used in supplemental per share calculation--
diluted............................................ 10,067 10,928
------- -------
------- -------
</TABLE>
19
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JANUARY
APRIL 30, 31,
------------------------------------------------------------- ---------
1994 1995 1996 1997 1998 1998
------------- ------------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 42 $ 100 $ 531 $ 4,199 $ 3,433 $ 3,222
Total assets......................................... 5,880 7,333 11,075 17,508 17,274 16,889
Long-term debt....................................... -- -- -- 7,875 7,410 7,500
Redeemable preferred stock........................... -- -- -- 29,747 31,122 30,777
Total stockholders' equity (deficit)................. 5,217 6,793 8,172 (22,768) (24,057) (23,610)
<CAPTION>
1999
---------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 4,724
Total assets......................................... 21,714
Long-term debt....................................... 6,830
Redeemable preferred stock........................... 32,236
Total stockholders' equity (deficit)................. (23,499)
</TABLE>
- ----------------------------------
(1) See Note 3 of notes to the financial statements included elsewhere in this
prospectus.
(2) The reduction in earnings per share due to accretion for redeemable
preferred stock will not occur after this offering because the Series A
preferred stock will be redeemed and the Series B preferred stock will be
converted to common stock at the closing of the offering. See Note 2 of
notes to the financial statements included elsewhere in this prospectus.
(3) See Note 12 of notes to the financial statements included elsewhere in this
prospectus for an explanation of the method employed to determine the number
of shares used to compute per share amounts.
(4) Supplemental net income per share is calculated assuming that Ditech sold
enough stock at the beginning of the periods to redeem its Series A
preferred stock and to retire Ditech's debt. In this calculation Ditech
assumes the offering price is $12.00 per share (less underwriters discount),
offering expenses are $900,000, and the tax benefit on interest expense is
40%.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS
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.
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 March 1997, Automated Call Processing, a predecessor corporation to
Ditech, sold its call processing business to persons and entities related to
Ditech. Automated Call Processing also sold its wireless marine communications
business operated by its wholly-owned subsidiary, Globe Wireless, Inc., to
persons and entities related to Ditech. Automated Call Processing subsequently
merged with its wholly-owned subsidiary. The surviving entity, named Ditech
Corporation, reincorporated in Delaware in April 1999 and was renamed Ditech
Communications Corporation. Shortly after the reincorporation, Ditech effected a
2-for-3 reverse split of its common stock and a redemption of its Series C
preferred stock with the shares of preferred stock of Globe Wireless that it
held. Financial information for prior periods have been restated to reflect the
discontinuation of the lines of business in March 1997, the reincorporation and
reverse stock split. At the closing of this offering, we will redeem all of our
Series A preferred stock for approximately $18.9 million (as of January 31,
1999) in cash.
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, the cash
portion of which is to be paid upon the consummation of this offering. In
addition, we have been paying and are obligated to continue to pay royalties to
Telinnovation on the sales of our products incorporating this technology until
the $2.96 million cash portion of the purchase price has been paid from the
proceeds of this offering. 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 and for the first nine
months of fiscal 1999, we derived approximately 99.5%, 94.1% and 95.4%,
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.
21
<PAGE>
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 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 96% of our revenue in the first nine months
of fiscal 1999 and over 94% 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. Over 75%
of our revenue came from our five largest customers in the first nine months of
fiscal 1999 and in fiscal 1998. Qwest/LCI accounted for 51% of our revenue in
the first nine months of fiscal 1999, and 42% of our revenue in fiscal 1998. Our
four next largest customers accounted collectively for 25% of our revenue in the
first nine months of 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.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from our statements of
operations as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED APRIL 30, JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................................... 49.9 48.3 45.8 46.4 47.6
--------- --------- --------- --------- ---------
Gross margin......................................... 50.1 51.7 54.2 53.6 52.4
--------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing.................................. 7.3 10.8 19.5 16.5 22.8
Research and development............................. 7.2 7.6 19.2 19.1 15.8
General and administrative........................... 3.7 5.1 10.4 10.6 9.0
--------- --------- --------- --------- ---------
Total operating expenses........................... 18.2 23.5 49.1 46.2 47.6
--------- --------- --------- --------- ---------
Income from operations................................. 31.9 28.2 5.1 7.4 4.8
Other income (expense), net............................ (0.1) (0.7) (4.8) (5.3) (2.2)
--------- --------- --------- --------- ---------
Income from continuing operations before income
taxes.............................................. 31.8 27.5 0.3 2.1 2.6
Provisions for income taxes............................ 12.4 10.8 0.2 0.8 1.1
--------- --------- --------- --------- ---------
Income from continuing operations...................... 19.4 16.7 0.1 1.3 1.5
Discontinued operations:
Loss from operations................................. (9.8) (19.6) -- -- --
Gain on disposal..................................... -- 20.2 -- -- --
--------- --------- --------- --------- ---------
Net income......................................... 9.6% 17.3% 0.1% 1.3% 1.5%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED JANUARY 31, 1999 AND 1998
REVENUE. Revenue increased to $18.0 million for the nine months ended
January 31, 1999 from $8.7 million for the same period in fiscal 1998. The
primary reason for this increase was increased unit sales of our third
generation echo cancellation products. We believe that this increase in unit
sales is in part due to increased sales and marketing efforts made possible by
the increase in the number of sales and marketing personnel in the second half
of fiscal 1998.
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 $8.6
million for the nine months ended January 31, 1999 from $4.0 million for the
same period in fiscal 1998. The primary reason for the increase was costs
associated with increased unit sales of our third generation echo cancellation
products.
GROSS MARGIN. Gross margin decreased to 52.4% for the nine months ended
January 31, 1999 from 53.6% for the same period in fiscal 1998. The primary
factor causing this decline in gross margin was the increase in royalties
payable to Telinnovation.
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 $4.1 million for the nine months ended January
31, 1999 from $1.4 million for the same period in fiscal 1998. The primary cause
for the increase was increased expenditures associated with additional sales and
marketing personnel
23
<PAGE>
both domestically and internationally. The average number of sales and marketing
personnel for the nine months ended January 31, 1999 more than doubled as
compared to the same period in fiscal 1998. This increase in sales and marketing
personnel also resulted in a corresponding increase in personnel related costs
such as travel and accommodations. 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 $2.9 million for the
nine months ended January 31, 1999 from $1.7 million for the same period in
fiscal 1998. The increase is primarily related to increased personnel and supply
costs needed to support both echo cancellation and optical communications
product development, including our fourth generation echo cancellation, optical
telemetry and wavelength division multiplexing 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 $1.6 million for the nine months ended January 31, 1999 from
$923,000 for the same period in fiscal 1998. The increase was primarily due to
increased personnel costs to support the increased level of operations and
increased legal costs associated with increased contract negotiations and an
arbitration matter. See "Business--Legal Proceedings." General and
administrative expenses also increased due to consulting costs associated with
the relocation to our new headquarters and implementation of our new financial
accounting system. 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 income (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 income
(expense) decreased to $398,000 for the nine months ended January 31, 1999 from
$458,000 for the same period in 1998. The decrease was primarily attributable to
reduced interest costs due to a decline in the average level of debt outstanding
during fiscal 1999 and increased interest income due to increased invested cash
balances.
INCOME TAXES. Income taxes consist of federal and state income taxes. The
effective tax rate for the nine months ended January 31, 1998 and 1999 was 40%.
We expect that our ongoing effective tax rate should remain at approximately
40%.
FISCAL YEARS ENDED APRIL 30, 1998 AND 1997
REVENUE. Revenue decreased to $12.3 million in fiscal 1998 from $14.1
million in fiscal 1997. The decrease was primarily due to a decline in purchases
of echo cancellation products by MCI, which began shortly before it was acquired
by Worldcom.
COST OF GOODS SOLD. Cost of goods sold decreased to $5.7 million in fiscal
1998 from $6.8 million in fiscal 1997. The decrease was primarily due to a
decrease in echo cancellation product sales and, to a lesser extent, to
reductions in the production cost of our echo cancellation products.
GROSS MARGIN. Gross margin as a percentage of revenue increased to 54.2% in
fiscal 1998 from 51.7% in fiscal 1997. The increase in gross margin percentage
was primarily due to a reduction in the production cost of our echo cancellation
products.
24
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased to $2.4 million
in fiscal 1998 from $1.5 million in fiscal 1997. The increase was primarily
attributable to increased personnel costs associated with sales and marketing
staff added in the second half of fiscal 1998 focused on both domestic and
international markets.
RESEARCH AND DEVELOPMENT. Research and development expense increased to
$2.4 million in fiscal 1998 from $1.1 million in fiscal 1997. The increase was
primarily caused by increased personnel and supplies needed to support both echo
cancellation and optical communications product development.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased to
$1.3 million in fiscal 1998 from $714,000 in fiscal 1997. The increase was
primarily due to the expansion of the administrative services because of the
development of a stand-alone administrative organization. Prior to the
recapitalization in March 1997, the majority of our administrative services were
provided by a centralized corporate group that allocated its costs to us and the
entities that were divested as part of the discontinued operations.
OTHER INCOME (EXPENSE). Other expense increased to $593,000 in fiscal 1998
from $104,000 in fiscal 1997. The increase was due to the recognition of a full
year's interest on long term debt issued as part of the recapitalization in
March 1997 (subsequently refinanced in August 1997). This increased interest
expense was partially offset by increased interest income from increased
invested cash balances.
INCOME TAXES. The effective tax rate was 77% for fiscal 1998 as compared to
39% in fiscal 1997. The increase in the effective rate is primarily attributable
to a relatively small pre-tax income in fiscal 1998 and the existence of certain
nondeductible expenses.
DISCONTINUED OPERATIONS. We sold our call processing and marine radio
communications operations as part of our recapitalization in March 1997. As a
result, our financial information for fiscal 1997 reflects ten and one half
months of operating results of these entities and the ultimate gain realized on
their disposal (see Note 3 of notes to the financial statements).
FISCAL YEARS ENDED APRIL 30, 1997 AND 1996
REVENUE. Revenue decreased slightly to $14.1 million in fiscal 1997 from
$14.4 million in fiscal 1996. Revenue remained relatively unchanged as we were
operating at a relatively sustained operations level prior to our
recapitalization and sale of discontinued operations. The focus of Automated
Call Processing at that time was to grow the operations of Globe Wireless, Inc.,
one of the discontinued operations, while not investing heavily in our ongoing
operations to maximize our cash flow. As a result, the level of fluctuations in
our revenue was not significant.
COST OF GOODS SOLD. Cost of goods sold decreased to $6.8 million in fiscal
1997 from $7.2 million in fiscal 1996. The decrease was primarily due to the 2%
decline in sales of echo cancellation products during fiscal 1997 as well as a
small reduction in the production cost of our echo cancellation products.
GROSS MARGIN. Gross margin increased to 51.7% in fiscal 1997 from 50.1% in
fiscal 1996 due primarily to a small reduction in production costs of our echo
cancellation products.
SALES AND MARKETING. Sales and marketing expense increased to $1.5 million
in fiscal 1997 from $1.0 million in fiscal 1996. The increase was primarily
related to increases in personnel and related expenses related to a 50% increase
in the domestic sales and marketing staff.
25
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense remained
relatively constant at $1.1 million in fiscal 1997 compared to $1.0 million in
fiscal 1996, as we maintained our research and development efforts at a constant
level during that time.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $714,000 in fiscal 1997 from $536,000 in fiscal 1996. The increase in 1997 as
compared to 1996 is attributable to an increase in the provision for bad debt, a
move to new office space and increased personnel related costs.
OTHER INCOME (EXPENSE). Other expense increased to $104,000 in fiscal 1997
from $5,000 in fiscal 1996. The increase in 1997 as compared to 1996 was due to
interest expense associated with the issuance of debt in March 1997 as part of
the recapitalization. This increased interest cost was partially offset by
increased interest income from increased invested cash balances.
INCOME TAXES. The effective tax rate was 39% for fiscal 1997 and 1996.
DISCONTINUED OPERATIONS. The loss from operations of the discontinued
operations increased to $2.8 million in fiscal 1997 from $1.4 million in fiscal
1996. This increase was primarily attributable to increased expenditures to
expand the marine radio communications operations.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly statement of
operations data for the seven quarters ended January 31, 1999. In the opinion of
our management, this information has been prepared substantially on the same
basis as the audited financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting of normal recurring
adjustments, have been made in the amounts stated below to present fairly the
unaudited quarterly results of operations. The quarterly data should be read in
conjunction with our audited financial statements and the notes thereto
appearing elsewhere in this prospectus. The results of operations for any one
quarter are not necessarily indicative of the results of operations for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1998 1998 1998 1998 1999
--------- ------------ ------------ ----------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............................. $ 2,708 $ 2,564 $ 3,415 $ 3,639 $ 5,124 $ 5,814 $ 7,087
Cost of goods sold.................. 1,301 1,134 1,594 1,622 2,408 2,704 3,476
--------- ------------ ------------ ----------- --------- ------------ ------------
Gross profit...................... 1,407 1,430 1,821 2,017 2,716 3,110 3,611
--------- ------------ ------------ ----------- --------- ------------ ------------
Operating expenses:
Sales and marketing............... 326 371 740 968 1,285 1,307 1,512
Research and development.......... 490 552 615 710 848 1,016 987
General and administrative........ 301 295 328 355 441 551 629
--------- ------------ ------------ ----------- --------- ------------ ------------
Total operating expenses........ 1,117 1,218 1,683 2,033 2,574 2,874 3,128
--------- ------------ ------------ ----------- --------- ------------ ------------
Income from operations.............. 290 212 138 (16) 142 236 483
Other income (expense), net......... (198) (142) (118) (135) (132) (136) (131)
--------- ------------ ------------ ----------- --------- ------------ ------------
Income (loss) before income
taxes........................... 92 70 20 (151) 10 100 352
Provision for (benefit from) income
taxes............................. 37 28 8 (49) 4 40 141
--------- ------------ ------------ ----------- --------- ------------ ------------
Net income (loss)................... $ 55 $ 42 $ 12 $ (102) $ 6 $ 60 $ 211
--------- ------------ ------------ ----------- --------- ------------ ------------
--------- ------------ ------------ ----------- --------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1997 1997 1998 1998 1998 1998
----------- ------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................. 48.0 44.2 46.7 44.6 47.0 46.5
----- ----- ----- ----- ----- -----
Gross margin...................... 52.0 55.8 53.3 55.4 53.0 53.5
----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing............... 12.1 14.6 21.6 26.5 25.1 22.5
Research and development.......... 18.1 21.5 18.0 19.5 16.5 17.5
General and administrative........ 11.1 11.5 9.6 9.8 8.6 9.5
----- ----- ----- ----- ----- -----
Total operating expenses........ 41.3 47.6 49.2 55.8 50.2 49.5
----- ----- ----- ----- ----- -----
Income from operations.............. 10.7 8.2 4.1 (0.4) 2.8 4.0
Other income (expense), net......... (7.3) (5.5) (3.5) (3.7) (2.6) (2.3)
----- ----- ----- ----- ----- -----
Income (loss) before income
taxes......................... 3.4 2.7 0.6 (4.1) 0.2 1.7
Provision for (benefit from) income
taxes............................. 1.4 1.1 0.2 (1.3) 0.1 0.7
----- ----- ----- ----- ----- -----
Net income (loss)............... 2.0% 1.6% 0.4% (2.8)% 0.1% 1.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
JANUARY 31,
1999
-------------
<S> <C>
Revenue............................. 100.0%
Cost of goods sold.................. 49.0
-----
Gross margin...................... 51.0
-----
Operating expenses:
Sales and marketing............... 21.3
Research and development.......... 13.9
General and administrative........ 8.9
-----
Total operating expenses........ 44.1
-----
Income from operations.............. 6.9
Other income (expense), net......... (1.9)
-----
Income (loss) before income
taxes......................... 5.0
Provision for (benefit from) income
taxes............................. 2.0
-----
Net income (loss)............... 3.0%
-----
-----
</TABLE>
27
<PAGE>
Our quarterly sales trend over the seven quarters shows sequential increases
in revenue, except for the quarter ended October 31, 1997, which showed a
decline over the quarter ended July 31, 1997 due to a decline in purchases by
our largest customer shortly before it was acquired. The overall growth trend
reflects a broadening of our customer base as the increased sales staff both
domestically and internationally began to develop new customers. Gross margin
decreased in the quarter ended January 31, 1999 due to the increase in the
royalties payable to Telinnovation. Operating expenses generally increased over
the seven quarters as we expanded personnel levels in all operating expense
categories, with the largest increases in personnel occurring in sales and
marketing and research and development. Research and development expenses for
the quarter ended January 31, 1999 decreased slightly from the prior quarter's
levels primarily due to a slight reduction in spending after the development
efforts on our fourth generation echo cancellation products were substantially
completed in the quarter ended October 31, 1998.
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, our operating
results will be adversely affected because many of our expenses are relatively
fixed. In particular, research and development and general and administrative
expenses do not change significantly with variations in revenue in a quarter.
STOCK-BASED COMPENSATION
With respect to certain stock option grants in fiscal 1999, we have recorded
deferred compensation of $433,000 as of January 31, 1999. We amortized
approximately $24,000 of the deferred compensation in fiscal 1999, and will
amortize the remainder over the corresponding vesting period of the stock
options. See Note 15 of notes to financial statements.
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.
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. For the
nine months ended January 31, 1999, we generated $1.4 million 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 and other current assets.
Investing activities used $602,000 in cash in fiscal 1998 and $598,000 in
cash in the nine months ended January 31, 1999. These amounts primarily
represented purchases of property and equipment.
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. For the nine months ended January 31, 1999, we generated $479,000 of
cash from financing, primarily from the exercise of stock options partially
offset by the principal repayments on the term debt.
As of January 31, 1999, we had cash and cash equivalents of $4.7 million. In
addition, we had a line of credit with the ability to borrow the lesser of $2.0
million or 80% of qualified accounts
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<PAGE>
receivable. At January 31, 1999, borrowings of $1.6 million were available and
no borrowings were outstanding. Borrowings under the line of credit bear
interest at a rate of prime plus one-half of a percent. The line of credit
expires in August of 2000. At January 31, 1999, we also had outstanding an
aggregate of $7.5 million of term debt issued by a bank in August of 1997. This
debt replaced an original aggregate of $8.0 million subordinated promissory
notes issued to stockholders in connection with the recapitalization in March of
1997. The term debt bears interest at a rate of prime plus one-half of a percent
per annum, payable quarterly along with principal payments of $187,500,
$562,500, and $562,500 per calendar quarter in 1999, 2000 and 2001,
respectively. 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 both the term debt and credit line. The bank has
since waived these violations. We also had approximately $200,000 available
under a separate operating lease line of credit.
We have no material commitments other than obligations under operating
leases, particularly our facility lease. See Notes 6 and 15 of notes to
financial statements.
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 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, cash flow from operations and our bank line of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. Ditech is currently evaluating the impact of SOP 98-1 on its
financial statements and related disclosures.
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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<PAGE>
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 are not
currently aware of any Year 2000 problem relating to any of these internal
systems. We plan to test all such systems for Year 2000 compliance by June 30,
1999. 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 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;
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<PAGE>
- 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 by Fall
1999.
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<PAGE>
BUSINESS
COMPANY 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. Our echo cancellation
products eliminate echo, which is a significant problem in existing and emerging
networks. Echo results from speech signals that are reflected back to the
speaker during a telephone call, making conversation difficult. This effect is
most pronounced when two people are talking over long distance, satellite,
cellular, personal communications services or packetized networks. Our echo
cancellation products use a software-intensive architecture coupled with one of
the latest commercially available digital signal processors to cancel echo and
enhance the quality of voice communications. To date, the vast majority of our
revenue has been derived from sales of our echo cancellation products. Our
optical communications products enable the implementation of wavelength division
multiplexing technology, which is becoming more widely adopted by service
providers to address network capacity constraints. Ditech's optical
communications products are designed to function either as stand-alone products
or as a complete system known as the Optical Path Solution.
INDUSTRY OVERVIEW
TRENDS IN THE TELECOMMUNICATIONS INDUSTRY
The overall volume of voice and data traffic transmitted over
telecommunications and cable communications networks has grown rapidly in recent
years. Data traffic has grown due to the increased utilization of the Internet,
corporate data networks and higher bandwidth applications. Voice traffic, while
a more mature market, has increased steadily in the U.S. and more quickly
worldwide as wireline, wireless and satellite services are more widely deployed
internationally. As a result of this growth in data and voice traffic, networks
are increasingly operating at or near capacity. To deal with these capacity
constraints, incumbent and emerging service providers are investing significant
resources in the enhancement of existing and the deployment of new fiber optic,
wireless and satellite networks. This infrastructure deployment results in
significant opportunities for companies that provide the building blocks for
these networks.
Service providers, struggling to meet the demands of increasing traffic,
also face intense competition as worldwide deregulation and privatization have
enabled new players to enter the market. Growing numbers of service providers
are both expanding legacy infrastructures and building out new networks. As a
result, traffic that previously was carried through the network of a single
service provider, is now routed through the networks of multiple service
providers. These networks are comprised of equipment from several different
vendors that must carry traffic over existing and emerging infrastructures. This
added complexity makes it more difficult to ensure network reliability and
service quality. Service providers operating in an increasingly competitive
industry must cost-effectively meet these challenges or lose business to
competitors who can.
ECHO CANCELLATION MARKET
In the current deregulated market, voice quality is a key competitive
differentiator. One of the primary challenges faced by service providers in
delivering quality voice communication is the elimination of echo. Echo results
from signal reflection at the "hybrid," commonly the point where the two wires
of the local network meet the four wires of the long distance network. The
hybrid is not completely efficient in carrying the electrical energy from the
four-wire network to the two-wire network, and a certain amount of the
electrical energy or voice signal is reflected back from the hybrid towards the
speaker. Echo is present whenever the one-time delay of a rebounded voice
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signal exceeds 16 milliseconds. If the delay exceeds 32 milliseconds, the
quality of the voice call begins to degrade and an echo is reflected back to the
speaker. When these echo problems are present, people describe the effect as
their voices sounding hollow or like someone talking in a tunnel. Delays, either
due to a long transmission path, as in a long distance telephone call, or due to
the complex signal hand-off from one network to another, for instance wireless
to wireline, exacerbate the effect of echo. Therefore, most long distance,
digital wireless and satellite voice calls require echo cancellation. Delays are
also introduced as intelligent processing equipment is increasingly incorporated
into networks. Digital processing of voice signals requires time to compress,
decompress and route signals through networks. As there is a greater shift
towards voice-over packet, which is a means of packaging voice signals into
units of digital data for efficient transmission, these processing delays will
continue to increase.
To address these delays, service providers deploy echo cancellation
technology that quickly analyzes all voice channels and cancels any reflected
signals.
How an Echo Canceller Works
[Box in the center labeled "Echo Canceller" in which a smaller box is found
labeled "DSP." Inside the large box and above the smaller box are the words
"DSP" Cancels Echo." At the right of the box is a telephone, with a line leading
out of it to the left through the embedded boxes and out the other side, then
through a small box labeled "Hybrid" and to another telephone. At the small box
labeled "Hybrid" there is a dotted line leading back into the large box to the
box labeled "DSP" where it stops. Above the dotted line are the words "Reflected
signal." The text below this graphical representation describes what is being
depicted in the graphical representation]
As the figure above shows, a speaker's voice signal travels over the
network. At the hybrid, part of the speaker's voice signal is
reflected back towards the speaker. The digital signal processor, or
DSP, within the echo canceller eliminates or cancels this reflected
signal so the original speaker does not hear an echo.
Service providers are demanding both smaller and higher capacity equipment
as space in service provider facilities and central offices is becoming more
crowded. In addition, due to intense competition, service providers are
expanding network services offered to consumers. In order to compete
successfully, they must deliver these services reliably and under the strict
time-to-market and cost constraints demanded by consumers. Echo cancellation
products that address these market pressures are poised to gain share in a
market that is expanding worldwide.
While we are unaware of any independent analysis of the size and growth
characteristics of the echo cancellation market, we believe the demand for echo
cancellation will increase with the growth of the international market for voice
services, digital wireless networks and voice-over packet technology.
Additionally, as data and voice networks converge, we expect echo cancellation
products to be key building blocks for most existing and emerging networks,
regardless of the proportion of voice traffic that they carry.
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<PAGE>
OPTICAL COMMUNICATIONS PRODUCTS MARKET
The rise in traffic volumes, increased competition in the telecommunications
industry, and the increased complexity of voice and data networks have spurred
the deployment of several new technologies. Service providers seeking to expand
the capacity of their fiber optic network currently have three primary
alternatives: laying new fiber optic cables, implementing time division
multiplexing, another technology that enables multiple communication links to be
carried on one fiber optical connection, or deploying wavelength division
multiplexing. While appropriate for certain service providers, laying new fiber
optic cables and implementing technologies based on legacy infrastructures such
as time division multiplexing have significant drawbacks. Installing new fiber
optic cable is a costly and time-consuming process for service providers.
Similarly, time division multiplexing requires significant investment in network
equipment and has inherent bandwidth limitations. Wavelength division
multiplexing allows service providers to multiply their bandwidth capacity
without the costs and delays associated with installing new fiber. By
multiplying the number of channels that travel over wavelengths of light in a
fiber optic cable, wavelength division multiplexing significantly increases the
ability to expand network bandwidth. Dense wavelength division multiplexing
("DWDM") increases network bandwidth even more by increasing the number of
channels on a single fiber optic connection. As a result, many service providers
are attracted to the scalability of wavelength division multiplexing and dense
wavelength division multiplexing and their ability to multiply the capacity of
existing fiber. Like traditional service providers, cable communications service
providers are increasingly deploying wavelength division multiplexing systems in
order to meet traffic demands from a growing number of subscribers using cable
modems and other high-bandwidth access devices. According to Ryan Hankin Kent, a
market research firm in the telecommunications industry, sales of wavelength
division multiplexing systems in the U.S. are expected to increase approximately
58% over the next five years, rising from $1.9 billion in 1998 to $3.0 billion
in 2002.
Despite the substantial growth in data and voice traffic, there are
currently impediments to the widespread deployment of wavelength division
multiplexing by service providers. Wavelength division multiplexing enables a
single fiber connection to carry more traffic, making the reliability of that
connection increasingly important. Any interruption of service on a single fiber
could disrupt service to tens of thousands of end-users, which may result in
severe business consequences for service providers, including regulatory fines
and loss of business. WDM is also currently expensive to implement. To date,
wavelength division multiplexing has been deployed primarily in U.S. long
distance networks where the vast aggregation of traffic and the revenue it
generates can justify its expense. Local exchange carriers and international
service providers have lagged behind U.S. long distance service providers in
deploying wavelength division multiplexing technology. Industry analysts expect
this trend to reverse as local exchange and international service providers face
growing bandwidth demands of consumers and businesses using high bandwidth
applications, such as the Internet.
DITECH'S SOLUTIONS
ECHO CANCELLATION SOLUTION
Ditech designs, develops and markets echo cancellation products for
wireline, wireless, satellite and cable communications networks throughout the
world. Our products use a software-intensive architecture coupled with one of
the latest commercially available digital signal processors to cancel echo and
enhance the quality of voice communications. We believe our architectural
approach enables us to offer the highest capacity echo cancellation products
currently commercially available. The key elements of our echo cancellation
solution include:
EFFICIENT ARCHITECTURAL APPROACH. Our dynamic allocation of resources
technology is designed to solve the echo problem more efficiently than other
solutions, by applying processing power only
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<PAGE>
when and where it is needed. By using our dynamic allocation of resources
technology, a single digital signal processor can monitor multiple channels and
dynamically assign the full processor resources to each echo problem as it
arises. Using this efficient architectural approach, we can build our echo
cancellation products with fewer dedicated processors and fewer memory
integrated circuits, which reduces product size and power consumption
requirements.
TIME-TO-MARKET ADVANTAGE. Based on an intelligent software algorithm, which
is a sophisticated process or set of rules for our software to cancel echo, our
dynamic allocation of resources approach enables us to utilize off-the-shelf
integrated circuits and digital signal processors. Competitive echo cancellation
solutions using application specific integrated circuits are more expensive to
design, require more development time and are difficult to upgrade. Our approach
leverages rapid technological advances in the commercial integrated circuit and
digital signal processor industries. As a result, we believe that we are able to
deliver high performance products to market with shorter product development
cycles and lower investments in capital equipment than alternative solutions.
LOWER TOTAL COST OF OWNERSHIP. Our software-intensive compact design allows
us to offer echo cancellation products with approximately two to four times as
much echo cancelling capacity as other commercial suppliers based on a
seven-foot industry standard equipment rack located in service providers'
central offices or remote facilities. This higher capacity (more echo
cancellation capacity per rack) represents cost and space savings for service
providers. Our newest generation product will also offer more efficient cabling
and network equipment installation, saving service providers even more space and
deployment expense. Our products are designed to allow service providers to
remotely download and upgrade software via the Internet without interrupting
network service or dispatching a technician to the remote site, which also
lowers the cost of ownership. Finally, our products consume less power than
other solutions, resulting in greater reliability and additional cost savings
for our customers.
REMOTE MONITORING AND SERVICE ASSURANCE. Our real-time monitoring
technology, known as reflectometry, allows remote monitoring of real-time
performance data. Service providers can use this technology to identify problems
remotely and address them proactively. We are also able to assist our customers
on-line during this process. As a result, service providers can improve
performance levels and monitor voice quality on a consistent basis. Remote
monitoring systems also reduce our customers' costs by reducing the number of
technical personnel required for on-site services.
OPTICAL COMMUNICATIONS PRODUCTS SOLUTION
Ditech designs, develops and markets a suite of optical communications
products for telecommunications and cable communications networks. This suite of
products is called the Optical Path Solution and is comprised of optical
amplifiers, an optical telemetry system ("OTS"), wavelength division
multiplexing multiplexers and demultiplexers, transponders and a dense
wavelength division multiplexing monitor. To date we have shipped only our
optical amplifier product. The key characteristics of our Optical Path Solution
include:
PRODUCT BREADTH, MODULARITY, INTEROPERABILITY AND SCALABILITY. We provide
our customers with the option of purchasing our optical communications products
as either stand-alone products or our Optical Path Solution as a complete
system. Our products are modular in nature and adhere to optical communications
operating standards. Therefore, our products are interoperable with the optical
communications subsystems and systems of other manufacturers. Customers can
purchase our products to expand or improve existing optical communications
systems. Our products are also scalable, which enables our customers to improve
their existing optical communications systems, or to expand network capacity, on
an as-needed basis.
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<PAGE>
COST-EFFECTIVE SOLUTIONS FOR SERVICE PROVIDERS. Our optical products offer:
sophisticated monitoring and control features; modular, scalable subsystems; and
standards-based software and hardware. These characteristics are designed to
reduce overall network maintenance costs. In addition, we believe our optical
amplifiers' superior performance lowers our customers' capital costs. We have
focused on cost-effectiveness as a product design goal so that not only long
distance carriers, but also local exchange carriers, can justify deploying
wavelength division multiplexing technology.
SUPERIOR OPTICAL AMPLIFIER PERFORMANCE. Our optical amplifiers are based on
widely accepted EDFA (erbium doped fiber amplifier) technology, and we believe
that our optical amplifiers provide superior performance features that offer
consistent amplification and low noise figures, allowing optical signals to
travel longer distances without degradation. As a result, our products maintain
the quality of the optical signal over longer territorial spans, which reduces
the need for additional equipment and intervention by service providers.
REMOTE MONITORING AND MANAGEMENT CAPABILITY. All of our products are
designed with features that allow remote monitoring and management. These
features enable service providers to remotely monitor and predict service
outages in optical networks, which helps to improve reliability and lower the
troubleshooting costs involved in on-site monitoring. Optical telemetry system
management software also helps facilitate communications between legacy network
management software and our products. This promotes the use of our products on
existing networks and lowers overall cost of ownership. Additionally, the
optical telemetry system has many customizable capabilities for service
providers to cost-effectively monitor and manage their facilities and equipment.
DITECH'S STRATEGY
Our objective is to become a leading provider of the echo cancellation and
optical communications products required to cost-effectively build and manage
telecommunications and cable communications networks. Key elements of our
strategy include the following:
EXTEND TECHNOLOGY LEADERSHIP. We invest in product development and
enhancement efforts that are designed to provide service providers and the
original equipment manufacturers that serve them higher capacity products with
key price performance and management advantages. Our use of commercially
available technology and products enables us to incorporate technological
advances quickly with reduced research and development costs. This provides a
time-to-market advantage that enables us to rapidly deploy our products within
strict time constraints demanded by our customers. We collaborate with our
customers to develop value-added products designed to meet customer needs.
INCREASE OPTICAL COMMUNICATIONS PRODUCTS GROWTH. Our optical amplifier
began shipping in the third quarter of calendar 1996. Since our initial product
release, we have introduced three optical communications products and are
developing additional products, which together comprise our complete suite of
optical communications products known as the Optical Path Solution. We intend to
allocate significant resources to expand this product line and increase our
optical communications product revenue.
EXPAND AND LEVERAGE DISTRIBUTION CHANNELS. We have expanded our direct
sales channels in North America to Latin America, Europe and Asia. In addition,
we are actively pursuing select and strategic original equipment manufacturer
relationships for specific geographical markets or technology segments, and have
already entered into one such relationship. We believe that original equipment
manufacturer channels enable greater market share penetration while reducing
customer support costs. We intend to leverage our reputation for providing high
quality products and customer support in the echo cancellation market to
increase the penetration of our optical communications
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products. To further our presence and penetration in the global
telecommunications market, we will continue to expand our direct sales force and
broaden channels of distribution.
STRENGTHEN EXISTING AND DEVELOP NEW CUSTOMER RELATIONSHIPS. We intend to
continue to strengthen our customer-centric culture and support programs. We
offer a full suite of support services, including twenty-four hour technical
support seven days a week, a five-year product warranty, and engineering,
installation and field support. We intend to continue to design and develop
technology that enables us to assist our customers in diagnosing problems
on-line.
DELIVER COST-EFFECTIVE SOLUTIONS. We achieve cost-effective solutions as a
result of our business approach and product design philosophy. Our
software-intensive designs provide high performance, flexibility, upgradabililty
and remote monitoring and management. In addition, our modular, scalable
products allow our customers to build-out their networks on an incremental
basis. With designs that allow the use of some of the latest commercially
available electronic and optical component technologies, we can rapidly deliver
advanced products at low cost. Our products' open architecture also enables our
customers to build and operate multi-vendor equipment networks, allowing them to
better choose the combination of products most suitable for their specific
needs.
EXPAND OUTSOURCED MANUFACTURING. We intend to establish additional
third-party turnkey manufacturing relationships designed to decrease production
costs while increasing manufacturing volumes and order fulfillment requirements
and accelerating product deployment. We fulfill a majority of our echo
cancellation equipment orders within thirty days, which is a key competitive
advantage. We intend to continue to design products that facilitate higher
manufacturing volumes, rapid order fulfillment and deployment at lower costs.
PRODUCTS
ECHO CANCELLATION PRODUCTS
All of our echo cancellation products are designed to cancel echo in
wireline, wireless, satellite, packetized and cable communications networks. Our
echo cancellation product family consists of six products. The 18T1 and 18E1 are
our third generation echo cancellation products and have been deployed in
significant volumes since March 1995. The Quad T1 and Quad E1 products are our
fourth generation echo cancellation products. Production shipment commenced for
our Quad T1 and E1 products in the first quarter of calendar 1999. The 4SA is
designed for small office and network environments by utilizing a single Quad T1
module that is placed on top of a voice access device, such as a private branch
exchange ("PBX"). The 4SA commenced production shipment in the first quarter of
calendar 1999. The Broadband Echo Cancellation System ("BBEC") is a system level
product that employs the Quad T1 and is currently in early stages of beta
testing with customers. We believe we will begin production shipment of the
Broadband Echo Cancellation System in the second quarter of calendar 1999.
Our echo cancellation product family shares several common advantages:
HIGHER CAPACITY. We believe our fourth generation echo cancellation
products have approximately two to four times the echo cancellation capacity of
currently commercially available competitive products.
HIGH PERFORMANCE. Our echo cancellation products cancel echo in less than
50 milliseconds, which is a significant improvement relative to industry
standard cancellation times of 100 to 500 milliseconds as defined by the
International Telecommunication Union, the organization responsible for
developing global telecommunications standards.
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REMOTE SOFTWARE UPGRADABILITY. With our products, the latest software
upgrades can be downloaded remotely and incorporated into our products without
taking the echo cancellation products off-line and interrupting service.
LOWER POWER CONSUMPTION. We believe our products generally require less
power than competitive products as a result of our software-intensive design and
use of fewer integrated circuits.
ITU STANDARDS. Our products are fully compliant with current International
Telecommunication Union standards. As a member of the International
Telecommunication Union, we actively participate in establishing the evolving
global standards.
WARRANTY. We offer a five-year warranty on all of our echo cancellation
products.
The following table provides additional information with respect to each of
our echo cancellation products:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION FUNCTIONALITY
<S> <C> <C>
18T1 Single port echo canceller for use - A high capacity product that
at T1 (1.544 Mb/s) transmission rate cancels 220 T1 lines per seven-foot
(North American markets) industry standard equipment rack
- Low power consumption
18E1 Single port echo canceller for use - A high capacity product that
at E1 (2.048 Mb/s) transmission rate cancels 126 E1 lines per 2.1 meter
(international markets and North international industry standard
American gateway applications) equipment rack
- Low power consumption
Quad T1 Single module including four - Doubles the capacity of nearest
independent T1 cancellers (North commercially available competitive
American markets) product
- Cancels 480 T1 lines per rack
Quad E1 Single module including four - Doubles the capacity of nearest
independent E1 cancellers commercially available competitive
(international markets and North product
American gateway applications) - Cancels 480 E1 lines per rack
4SA Single Quad T1 module (North Ameri- - Designed for small office and net-
can markets) work environments
Broadband Echo Broadband echo cancellation system - First system level echo
Cancellation System utilizing DS3 (45 Mb/s) interfaces cancellation product
(BBEC) to accommodate the growing adoption - Uses two DS3s per shelf
of higher speed broadband - Reduces bulky T1 cabling and
infrastructures (North American installation
markets) - Fault tolerant architecture and
autonomous alarm reporting via
Ethernet to simplify fault
isolation
- Cancels 336 T1s per rack
</TABLE>
OPTICAL COMMUNICATIONS PRODUCTS
Our suite of optical communications products, called the Optical Path
Solution, is intended for use in telecommunications and cable communications
networks throughout the world. Our Optical Path Solution is comprised of optical
amplifiers, an optical telemetry system, transponders, four-channel wavelength
division multiplexing multiplexers and demultiplexers, and a dense wavelength
division multiplexing monitor. All of these products are intended to be sold
either as stand-alone products or as a complete system. All of our optical
communications products are commercially available, except the dense wavelength
division multiplexing monitor, which is undergoing customer beta testing. As of
January 31, 1999, we have only recognized revenue for our optical
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amplifiers, which have been shipping since the third quarter of calendar 1996.
Our sixteen-channel dense wavelength division multiplexing multiplexers and
demultiplexers are currently in development.
Our optical product family shares several common advantages:
INTEROPERABLE IN MULTI-VENDOR ENVIRONMENT. Our products and modules are
built to industry standards so that they easily interoperate with different
vendors' facilities and shelving.
DESIGNED TO INDUSTRY STANDARDS. Our suite of products are designed to meet
industry standards, such as those from the International Telecommunication
Union.
REMOTE MONITORING AND MANAGEMENT. Our products are designed to function in
a sophisticated, remote monitoring and management environment.
WARRANTY. We offer a five-year warranty on all of our optical products.
The following table provides additional information with respect to each of
our optical products:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION FUNCTIONALITY
<S> <C> <C>
Optical amplifiers Complete suite of transmit, line and - Consistent optical amplification
receive amplifiers that are based on and low noise figures, making them
erbium doped fiber amplifier (EDFA) suitable for dense wavelength
technology division multiplexing applications
- Supports higher bandwidth fiber
optic channels, allowing service
providers to expand bandwidth
without upgrading our amplifiers
Optical Telemetry Optical and element management and - Enables remote management and
System (OTS) facility monitoring solution that is monitoring of both our products and
designed with open interface legacy network equipment and
architecture facilities
- Management and monitoring commands
are carried on a supervisory
channel in the same fiber as the
revenue traffic but using
out-of-band wavelengths, thereby
not displacing revenue-generating
bandwidth
- Packaged in a compact module to
minimize space requirements
WDM Multiplexer And Four channel solution that combines - Packaged in a compact module to
Demultiplexer multiple optical wavelengths onto minimize space requirements
one fiber. At the far end, these - Accommodates network growth by
same devices function in reverse as supporting higher bandwidth fiber
demultiplexers optic channels
Transponder Accepts an optical signal from a - Allows legacy non-International
legacy laser source and re-transmits Telecommunication Union standards
the signal at an industry standard compliant transmission equipment to
compliant optical wavelength be used on WDM networks
suitable for transmission on a WDM - Packaged in a compact module that
network is half the size of currently
commercially available competing
products
DWDM Measures wavelength amplitude - Remotely deployable unit that is
Monitor signal- to-noise ratio and gain environmentally tolerant
flatness of each optical channel in - Sophisticated real-time monitoring
a multi-wavelength network, allowing of each optical signal
service providers to identify - User definable alarm thresholds
transmission path degradations - Easy to use graphical user
before they become service-affecting interface
</TABLE>
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The following diagram illustrates how our optical communications operate in
a network environment.
DITECH'S OPTICAL COMMUNICATION PRODUCTS
[Graphical illustration of a telecommunication network. To the left is a white
box labeled "SONET/ SDH Terminal Packet Switch." Out of this box come 4 arrows
to the right to a stack of 4 gray boxes each labeled with a "T" to denote that
they are Transponders. Out of each of these boxes come an arrow to the right to
a gray trapezoid labeled "WDM Mux." Out of this comes one arrow to the right to
a gray triangle labeled "EDFA" and under which are the words "Transmit
Amplifier." Out of this comes one arrow to the right to a gray triangle labeled
"EDFA" and under which are the words "Line Amplifier." Out of this comes one
arrow to the right to a gray triangle labeled "EDFA" and under which are the
words "Receive Amplifier." Out of this comes an arrow to the right to a gray
trapezoid labeled "WDM DeMux." Out of this come 4 arrows to the right to a white
box labeled "SONET/SDH Terminal Packet Switch." Above each of the two white
boxes labeled "SONET/SDH Terminal Packet Switch" is a cloud with the words
"Voice," "Data," and "Video" in it with a dotted line coming out of it to the
white box.
Above the graphical representation described above is the figure of a person at
a computer labeled "Technician" with a dotted line out of the computer leading
to two boxes, one of which is labeled "Network Management System" and one of
which is labeled "Optical Telemetry System (OTS)." Out of these boxes comes a
dotted line that splits into three lines, each leading to a box labeled "OTS."
Out of each of these boxes is a dotted line leading through one of the optical
amplifiers described above, then to a box labeled "Monitor."
Below the graphical representation described above is a white box and a gray
box. The white box is labeled "Multivendor Equipment" and the gray box is
labeled "Ditech Subsystems" to denote which of the components in the items
graphical representation are Ditech's subsystems]
CUSTOMERS
Our principal customers are competitive local exchange carriers, satellite,
wireless, cellular and cable communications service providers. Among our more
than fifty customers that have purchased our products in the first nine months
of fiscal 1999, the following is a list of our top ten customers by sales volume
for that period:
<TABLE>
<S> <C>
Qwest/LCI GCI
Frontier Communications GST
MCI Worldcom Ericsson Venezuela
GTE Telecom RSL Com
Facilicom Electronica Multimedia
</TABLE>
In addition to these service providers, we have sold products to one
original equipment manufacturer.
Our customer base is highly concentrated, and a small number of customers
has accounted for a significant portion of our total revenue. Over 75% of our
revenue came from our five largest customers in the first nine months of fiscal
1999 and in fiscal 1998. Qwest/LCI accounted for 51% of our revenue in the first
nine months of fiscal 1999, and 42% of our revenue in fiscal 1998. Our four next
largest customers accounted collectively for 25% of our revenue in the first
nine months of 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.
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RESEARCH AND DEVELOPMENT
We have engineering departments dedicated to and focused on developing high
performance echo cancellation products and optical communications products.
These engineering departments are staffed with appropriate talent in software
and hardware, radio-frequency, mechanical and test engineering, and photonic
physics. In addition, we have created an independent product verification group
whose charter is to ensure that we meet customers' expectations from an
ease-of-use perspective.
Our research and development expenses for the nine months ended January 31,
1999, fiscal 1998, fiscal 1997 and fiscal 1996 were approximately $2.9 million,
$2.4 million, $1.1 million and $1.0 million, respectively. We intend to increase
our research and development budget and staffing levels in fiscal 2000. As of
February 28, 1999, we had 26 employees engaged in research and development,
including 9 engineers with advanced degrees. By continuing to develop new
generation echo cancellation and optical communications products, we intend to
leverage our ability to address various markets with a relatively focused
investment in research and development. We believe that recruiting and retaining
qualified engineering personnel will be essential to our continuing success.
MANUFACTURING
We intend to operate as a "virtual" manufacturing organization by relying on
contract manufacturers to assemble our echo cancellation products and our
optical communications products. We perform only final test functions for our
echo cancellation products and both final assembly and test functions for our
optical communications products at our facility. We are ISO 9001 certified and
require that our contract manufacturers have ISO 9002 registration as a
condition of qualification. Our stringent incoming inspection procedures for
critical optical components include analysis and monitoring of the performance
characteristics of critical optical components and sub-assemblies. Our raw
materials are procured from outside suppliers through our contract
manufacturers. In procuring components, we and our contract manufacturers rely
on Texas Instruments as the sole source of our digital signal processors. Our
future success will depend in significant part on our ability to obtain
manufacturing on time, at low costs and in sufficient quantities to meet demand.
SALES AND MARKETING
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 internationally. 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.
In 1998, we expanded our direct sales coverage by establishing regional
sales offices throughout the U.S. We believe that our products can serve a
substantial market for echo cancellation products and optical communications
products outside of the U.S. To address these growing international markets, we
opened a sales office in Beijing, China to support Asia, another office in
Stuttgart, Germany to cover Europe and an office in Miami, Florida to focus on
Latin America. In 1997 and 1998, we derived approximately 10% and 6% of our
total revenue, respectively, from customers in international markets.
We are committed to enhancing our brand recognition by continuing to exhibit
in trade shows, participate in industry conferences (e.g. SuperComm, CTIA, OFC,
Telexpo in Brazil, Com Cable in China) and organize targeted technical seminars
to expand our company and product visibility. We conduct direct marketing and
have ongoing communications with our customers, the press and
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industry analysts. In addition, we intend to develop a sophisticated web site
that will provide detailed technical briefings and sales presentations to our
customers.
CUSTOMER SUPPORT
We have established a dedicated department to provide pre-sales technical,
system engineering, post-sales and field service support. These services are
available from headquarters as well as regional offices. In addition, we offer
customer service around the clock every day of the week. We have also
established relationships with third-party organizations for engineering,
furnish and installation services in North America and Europe.
With remote monitoring and management capabilities designed into all of our
products, we are capable of assisting our customers in diagnosing problems
on-line, thereby reducing the time and costs associated with dispatching a
technician to the remote site. In addition, the detailed technical information
we intend to provide on our website will provide our customers with useful
support information.
COMPETITION
The markets for our products are intensely competitive, continually evolving
and subject to rapid technological change. We believe that rapid product
introductions with price performance advantages is a critical competitive
factor. We believe we and our products also face competition in the following
areas:
- product features and enhancements (including improvements in product
performance, reliability, size, compatibility and scalability);
- cost of ownership (including power consumption and ease and cost of
maintenance);
- ease of product deployment and installation; and
- technical support and service.
Although we believe that we currently compete favorably with respect to all
of these factors, we may not have the financial resources, technical expertise
or marketing, manufacturing, distribution and support capabilities to compete
successfully in the future. We expect that competition in each of our markets
will increase in the future. In the echo cancellation market, our principal
competitors are Lucent and Tellabs for stand-alone products. Although Alcatel,
Nortel Networks, Ericsson and Nokia can provide echo cancellation in their
systems, they do not sell stand-alone products or compete in the open market.
Our principal competitors in the optical communications products market are
Alcatel, Ciena, Lucent and Pirelli.
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.
Competitors in any portion of our business are also capable of rapidly
becoming our competitors in other portions of our business. Many of our
competitors and potential competitors have substantially greater name
recognition and technical, financial, marketing, purchasing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies or standards and to changes in customer
requirements, to devote greater resources to the development, promotion and sale
of products, or to deliver competitive products at a lower price. We may not be
able to compete successfully against our current or future competitors.
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<PAGE>
Existing and potential customers are also our current and potential
competitors. These companies may develop or acquire additional competitive
products or technologies in the future and thereby reduce or cease their
purchases from us. In addition, we believe that the size of suppliers will be an
increasingly important part of purchasers' decision-making criteria in the
future. We may not be able to grow rapidly and therefore compete successfully
with our existing or new competitors. In addition, competitive pressures faced
by us may result in lower prices for our products, loss of market share, or
reduced gross margins, any of which could materially and adversely affect our
business, financial condition and results of operations.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
Our success will depend, in part, on our ability to protect our intellectual
property. We rely primarily on patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies and processes. Nevertheless, such measures may not be
adequate to safeguard the proprietary technology underlying our echo
cancellation and optical communications products. As of March 23, 1999, we had
three U.S. patents issued and five U.S. patent applications pending. These
patents expire between 2014 and 2016. No patents may issue as a result of these
or future applications. If they do issue, any patent claims allowed may not be
sufficiently broad to protect our technology. In addition, any existing or
future patents may be challenged, invalidated or circumvented, and any right
granted thereunder may not provide meaningful protection to us. The failure of
any patents to provide protection to our technology would make it easier for our
competitors to offer similar products.
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, the cash
portion of which is to be paid upon the consummation of this offering. In
addition, we have been paying and are obligated to continue to pay royalties to
Telinnovation on the sales of our products incorporating this technology until
the $2.96 million cash portion of the purchase price has been paid from the
proceeds of this offering.
We generally enter into confidentiality agreements with our employees and
strategic partners, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products or technology without authorization, develop similar technology
independently or design around our patents. In addition, effective patent,
copyright, trademark and trade secret protection may be unavailable or limited
outside of the U.S., Europe and Japan. We may not be able to obtain any
meaningful intellectual property protection in such countries and territories.
Additionally, we may, for a variety of reasons, decide not to file for patent,
copyright, or trademark protection outside of the United States. Further, we
occasionally incorporate the intellectual property of our customers into our
designs, and we have certain obligations with respect to the non-use and
non-disclosure of such intellectual property. However, the steps taken by us to
prevent misappropriation or infringement of the intellectual property of our
company or our customers may not be successful. Moreover, litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of proprietary rights
of others, including our customers. Such litigation could result in substantial
costs and diversion of our resources and could have a material adverse effect on
our business, financial condition and results of operations.
The telecommunications equipment industry is characterized by vigorous
protection and pursuit of intellectual property rights. We may receive in the
future notices of claims of infringement of other parties' proprietary rights.
We may not prevail in actions alleging infringement of third-party patents. In
addition, the invalidity of our patents may be asserted or prosecuted against
us. In addition, in a patent or trade secret action, an injunction could issue
against us, requiring that we
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<PAGE>
withdraw certain products from the market or necessitating that certain products
offered for sale or under development be redesigned. We have also entered into
certain indemnification obligations in favor of our customers and strategic
partners that could be triggered upon an allegation or finding of our
infringement of other parties' proprietary rights. Irrespective of the validity
or successful assertion of such claims, we would likely incur significant costs
and diversion of our resources with respect to the defense of such claims, which
could also have a material adverse effect on our business, financial condition
and results of operations. To address any potential claims or actions asserted
against us, we may seek to obtain a license under a third party's intellectual
property rights. Under such circumstances, a license may not be available on
commercially reasonable terms, if at all.
Substantial inventories of intellectual property are held by a few industry
participants, such as Lucent, Nortel Networks and certain major universities and
research laboratories. This concentration of intellectual property in the hands
of a few major entities also poses certain risks to us in seeking to hire
qualified personnel. We have on a few occasions recruited such personnel from
such entities. These entities or others may claim the misappropriation or
infringement of their intellectual property, particularly when and if employees
of these entities leave to work for us. We may not be able to avoid litigation
in the future, particularly if new employees join us after having worked for a
competing company. Such litigation could be very expensive to defend, regardless
of the merits of the claims, and could have a material adverse effect on our
business, financial condition and results of operations.
EMPLOYEES
As of February 28, 1999, we employed 85 persons, 20 of whom were primarily
engaged in operations, 26 of whom were engaged in research and development, 28
of whom were engaged in sales, marketing and technical support and 11 of whom
were engaged in finance and administration. Our employees are not represented by
any collective bargaining agreement, and we have not experienced a work
stoppage. We believe our employee relations are good.
FACILITIES
Our principal offices and facilities are located in one leased building
totaling 35,800 square feet in Mountain View, California. This lease expires on
December 15, 2003. We believe that our existing facilities are adequate to meet
our current needs.
LEGAL PROCEEDINGS
In January 1998, we filed a demand for Arbitration with the American
Arbitration Association in Los Angeles County against Antec Corporation, the
successor-in-interest through merger to Texscan Corporation. The demand for
arbitration alleges that Antec/Texscan breached a contract to purchase our
optical amplifier products and seeks monetary damages. Antec/Texscan have denied
liability and, in December 1998, filed a counterclaim against us claiming that
we breached the purchase contract first and seeking monetary damages. The matter
is set to complete arbitration in May 1999. Although we believe that we have a
valid claim to recover against Antec/Texscan for breach of contract and have
meritorious defenses to the counterclaim, if the case is resolved unfavorably to
us it could have a material adverse effect on our financial condition.
As of the date of this Prospectus, and other than as described above, we are
not involved in any material legal proceedings.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Certain information regarding Ditech's directors, executive officers and key
employees as of April 30, 1999 is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Timothy K. Montgomery............... 46 President, Chief Executive Officer and Director
Toni M. Bellin...................... 53 Vice President of Operations
Salim N. Jabr....................... 47 Vice President of Engineering and Development, Optical Products
Marc Schwager....................... 42 Vice President, Marketing
Serge Stepanoff..................... 56 Vice President of Engineering and Development, Echo Cancellation
Products
William J. Tamblyn.................. 40 Vice President and Chief Financial Officer
Pong C. Lim......................... 45 Chairman of the Board of Directors
Gregory M. Avis(1).................. 40 Director
Peter Y. Chung(2)................... 31 Director
William A. Hasler(1)(2)............. 57 Director
Kenneth E. Jones(1)................. 52 Director
George J. Turner.................... 61 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
TIMOTHY K. MONTGOMERY has served as Ditech's President and Chief Executive
Officer since September 1998 and as a Director since October 1998. From November
1997 to September 1998, he served as Ditech's Senior Vice President of Sales and
Marketing. Mr. Montgomery served as Vice President of Sales of Digital Link
Corporation, a manufacturer of digital access products for wide area networks,
from August 1993 to October 1997. From October 1992 to July 1993, Mr. Montgomery
worked as an independent consultant. From August 1986 to September 1992 Mr.
Montgomery was employed as Vice President of Sales at Telebit Corporation, a
networking company. Mr. Montgomery has a B.S.B.A. in marketing from Florida
State University.
TONI M. BELLIN joined Ditech in December 1998 as Vice President of
Operations. Before joining Ditech, Ms. Bellin served as the Vice President of
Operations for Digital Link Corporation from December 1993 to December 1998, and
as the Vice President of Operations of Zeiss Humphrey Systems, a medical capital
equipment manufacturer, from July 1987 to December 1993. Ms. Bellin has a B.A.
in business administration and an M.B.A. in executive management from St. Mary's
College.
SALIM N. JABR joined Ditech in May 1995 as Vice President of Engineering and
Development, Optical Products. In August 1994, Mr. Jabr founded ORCA Technology,
a company engaged in the development of DWDM systems. From November 1993 to
December 1994, Mr. Jabr was a senior staff manager for SDL Inc., a designer and
manufacturer of specialized semiconductor products. Mr. Jabr served as Director
of Optical Technology at Raychem Corporate Technology, a telecommunications and
industrial equipment manufacturing company, from September 1989 to November
1993. From June 1981 to September 1989, he worked at Litton Guidance and
Control, an aerospace company. He was also an Assistant Professor in Physics at
the University of Southern California from September 1979 to August 1981. Mr.
Jabr has a Ph.D. in physics and an M.S. in electrical engineering from Yale
University, and a B.S. in physics from The American University in Beirut.
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<PAGE>
MARC SCHWAGER joined Ditech in April 1999 as its Vice President, Marketing.
Before joining Ditech, Mr. Schwager served as the Director of Product Management
for Bandwidth Unlimited, a Silicon Valley start-up working in the optical
networking field, from November 1998 to April 1999. From May 1981 through
October of 1998, Mr. Schwager held a series of marketing positions at
Hewlett-Packard, most recently as Director of Marketing for the Advanced
Networks Division. Mr. Schwager holds a B.S. Chemical Engineering from
Rensselaer Polytechnic Institute.
SERGE STEPANOFF joined Ditech in February 1987 and was its Vice President of
Engineering until May 1991. In September 1996, he rejoined Ditech and assumed
his current position of Vice President of Engineering and Development, Echo
Cancellation Products. Mr. Stepanoff worked as Director of Software at Telecom
Solutions, a telecommunications company, from March 1995 to August 1996. From
May 1991 to February 1995, he was a Senior Manager for MCI Communications, a
telecommunications company. He has a B.S. in electrical engineering from Heald
Engineering College and an M.S. in Computer Science from West Coast University.
WILLIAM J. TAMBLYN joined Ditech in June 1997 as a Vice President and Chief
Financial Officer. Mr. Tamblyn was the Chief Financial Officer at Conductus,
Inc., a telecommunications company, from December 1993 to June 1997. He served
as Chief Financial Officer at Ramtek, an imaging company, from May 1993 to
December 1993. Prior to May 1993, Mr. Tamblyn worked in public accounting,
including for Coopers & Lybrand, LLP. He has a B.S. in accounting from San Jose
State University and is a certified public accountant.
PONG C. LIM has served as Ditech's Chairman of the Board since October 1998.
From March 1997 to September 1998, Mr. Lim served as Ditech's Chief Executive
Officer and President. From May 1994 to March 1997, Mr. Lim served as Ditech's
President and Chief Operating Officer. From June 1989 to April 1994, Mr. Lim
served as General Manager of Santa Clara Business Unit, a division of DSC
Communications, a telecommunications company. Mr. Lim has a B.S. in civil
engineering from Drexel University and an M.B.A. in marketing and finance from
the University of Phoenix.
GREGORY M. AVIS has been a director of Ditech since February 1997. Mr. Avis
has served as a Managing Partner of Summit Partners, a private equity capital
firm, since 1990 and has been a General Partner since 1987. Summit Partners and
its affiliates manage a number of venture capital funds, including Summit
Ventures IV, L.P., Summit Investors III, L.P. and Summit Subordinated Debt Fund,
L.P., which are all stockholders of Ditech. Mr. Avis also serves as a director
of Extended Systems, Inc., a network peripherals and wireless communications
company; Powerwave Technologies, Inc., a designer and manufacturer of power
amplifiers for wireless communications; Splash Technology Holdings, Inc., a
developer of color server systems; and several privately held companies. Mr.
Avis received a B.A. from Williams College and an M.B.A. from Harvard
University.
PETER Y. CHUNG has been a director of Ditech since February 1997. Mr. Chung
is a Principal of Summit Partners, a private equity capital firm, where he has
been employed since August 1994. Summit Partners and its affiliates manage a
number of venture capital funds, including Summit Ventures IV, L.P., Summit
Investors III, L.P. and Summit Subordinated Debt Fund, L.P., which are all
stockholders of Ditech. From August 1989 to July 1992, Mr. Chung worked in the
Mergers and Acquisitions Department of Goldman, Sachs & Co. Mr. Chung also
serves as a director of E-Tek Dynamics, Inc., an optical components and modules
company; Splash Technology Holdings, Inc., a developer of color server systems;
and several privately held companies. Mr. Chung received a B.A. from Harvard
University and an M.B.A. from Stanford University.
WILLIAM A. HASLER has been a director of Ditech since May 1997. He also
serves as a Co-Chief Executive Officer and Director of Aphton Corp., a
bio-pharmaceutical company, a position he has held since July 1998. From August
1991 to July 1998, Mr. Hasler was the Dean of the Haas School of Business at the
University of California at Berkeley, and from January 1984 to August 1991,
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Mr. Hasler served as a Vice Chairman of KPMG Peat Marwick. Mr. Hasler is a
director of numerous companies, including Quickturn Design Systems, Inc., a
design verification company, Solectron Corp., an electronics manufacturing
services company, TCSI Corporation, a telecommunications software company,
Tenera Inc., an engineering consulting firm, and Walker Interactive Systems,
Inc., an operations and analytical software company. He received a B.A. from
Pomona College and an M.B.A. from Harvard University.
KENNETH E. JONES has been a director of Ditech since July 1983. He is
currently the Chairman and Chief Executive Officer of Globe Wireless, Inc., a
position he has held since Globe Wireless was sold by Automated Call Processing
and became an independent company in 1997. Mr. Jones founded Automated Call
Processing in 1983 (which in 1997 merged with Ditech and changed its name to
Ditech Corporation), and worked as its President and Chief Executive Officer
until 1997. From 1986 to 1994, he also served as President and Chief Executive
Officer of Automated Call Processing's wholly-owned subsidiary, Ditech
Corporation. Prior to founding Automated Call Processing, Mr. Jones served as
President and Chief Executive Officer of Clausen-Koch Company, a private label
manufacturer of canned meats. Mr. Jones also served as the Chief Financial
Officer of Hills Brothers Coffee, Inc. from 1976 to 1979. Mr. Jones is a
director of Quadramed Corporation, a medical software company. He served as a
commanding officer of USS Flagstaff in the United States Navy and has a B.S.
from the University of Nebraska and an M.B.A. from Harvard University.
GEORGE J. TURNER has been a director of Ditech since November 1993. He is
currently the President and Chief Operating Officer of Globe Wireless, Inc., a
position he has held since December 1996. He previously worked for Automated
Call Processing for over ten years, serving the company in several senior
management roles. Mr. Turner has a B.A., an M.A. and a PhD. from the University
of California, Berkeley.
BOARD COMPOSITION
Ditech currently has authorized seven directors. In accordance with the
terms of our Amended and Restated Certificate of Incorporation, effective upon
the closing of this offering, the terms of office of the Board of Directors will
be divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 1999; Class II, whose term will expire at
the annual meeting of stockholders to be held in 2000; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2001. The Class
I directors are Gregory Avis and George Turner, the Class II directors are Peter
Chung and Kenneth Jones, and the Class III directors are William Hasler, Pong
Lim, and Timothy Montgomery. At each annual meeting of stockholders after the
initial classification, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. In addition, our Certificate of
Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
Ditech. Although directors of Ditech may be removed for cause by the affirmative
vote of the holders of a majority of the common stock, our Amended and Restated
Certificate of Incorporation provides that holders of two-thirds of the common
stock must vote to approve the removal of a director without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, Messrs. Avis, Hasler and Jones served as members of the
Compensation Committee of Ditech's Board of Directors. Mr. Avis is a Managing
Partner of Summit Partners, a
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private equity capital firm that became a major stockholder of Ditech in
connection with our recapitalization. See "Certain Transactions."
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any other entity that has one or more
executive officers serving as a member of Ditech's Board of Directors or
Compensation Committee. Prior to the formation of the Compensation Committee in
May 1997, the Board of Directors of Ditech as a whole made decisions relating to
compensation of Ditech's executive officers.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews the internal
accounting procedures of Ditech and consults with, and reviews the services
provided by, Ditech's independent accountants. Current members of the Audit
Committee are Messrs. Chung and Hasler.
The Compensation Committee of the Board of Directors reviews and recommends
to the Board of Directors the compensation and benefits of all officers of
Ditech and reviews general policy relating to compensation and benefits of
employees of Ditech. The Compensation Committee also administers the issuance of
stock options and other awards under Ditech's stock plans. Current members of
the Compensation Committee are Messrs. Avis, Hasler and Jones.
DIRECTOR COMPENSATION
Ditech does not currently provide cash compensation to non-employee
directors for services in such capacity, but directors may be reimbursed for
certain expenses in connection with attendance at Board of Directors and
committee meetings. See also "--Benefit Plans--1999 Non-Employee Directors'
Stock Option Plan."
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
Ditech's Bylaws provide that Ditech will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. Ditech is also empowered
under its Bylaws to enter into indemnification contracts with its directors and
officers and to purchase insurance on behalf of any person it is required or
permitted to indemnify. Pursuant to this provision, Ditech expects to enter into
indemnification agreements with each of its directors and executive officers.
Ditech has obtained officer and director liability insurance with respect to
liabilities arising out of certain matters, including matters arising under the
Securities Act. In addition, Ditech's Certificate of Incorporation provides
that, to the fullest extent permitted by Delaware law, Ditech's directors will
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to Ditech and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances, equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Under current
Delaware law, a director's liability to Ditech or its stockholders may not be
limited with respect to any breach of the director's duty of loyalty to Ditech
or its stockholders, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for any transaction from
which the director derived an improper personal benefit, for improper
transactions between the director and Ditech and for improper distributions to
stockholders and loans to directors and officers. This provision also does not
affect a director's responsibilities under any other laws such as the federal
securities laws or state or federal environmental laws.
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<PAGE>
There is no pending litigation or proceeding involving a director or officer
of Ditech as to which indemnification is being sought, nor is Ditech aware of
any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the provisions described above or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
EXECUTIVE COMPENSATION
The following table sets forth certain information for the fiscal year ended
April 30, 1999, regarding the compensation of Ditech's Chief Executive Officer
and each of the most highly compensated executive officers of Ditech whose
salary and bonus for such year were in excess of $100,000 on an annualized basis
(the "Named Executive Officers"). In accordance with Securities and Exchange
Commission rules, annual compensation in the form of perquisites and other
personal benefits has been omitted where the aggregate amount of such
perquisites and other personal benefits constitutes less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the Named Executive
Officer for the fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION (1) SECURITIES
----------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ----------------------------------------------- --------- ----------- ----------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Timothy Montgomery
Chief Executive Officer, President and Senior
Vice President, Sales and Marketing (1)...... 1999 $ 225,000 $ 100,000 133,333 --
Pong Lim
Chairman of the Board (2).................... 1999 175,000 100,000 -- $ 1,636
Salim Jabr
Vice President of Engineering and
Development, Optical Products................ 1999 120,000 43,000 -- --
Serge Stepanoff
Vice President of Engineering and
Development, Echo Cancellation Products...... 1999 120,000 42,960 -- --
William Tamblyn
Vice President and Chief Financial Officer... 1999 135,000 54,000 16,666 --
</TABLE>
- ------------------------
(1) Mr. Montgomery was promoted to his current position of President, Chief
Executive Officer of Ditech in September 1998.
(2) Mr. Lim served as President and Chief Executive Officer of Ditech until
September 1998, at which time Mr. Montgomery became President and Chief
Executive Officer. Mr. Lim became Chairman of the Board of Ditech in October
1998. Compensation listed in the "all other compensation" column consists of
insurance premiums paid by Ditech for the benefit of Mr. Lim.
49
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended April 30, 1999 to each of the Named Executive Officers. The
exercise price per share of each option was equal to the fair market value of
the common stock on the date of grant as determined in good faith by the Board
of Directors on such date based upon such factors as the purchase price paid by
investors for shares of Ditech's preferred stock, the absence of a trading
market for Ditech's securities and Ditech's financial outlook and results of
operations. During the fiscal year ended April 30, 1999, Ditech granted
employees, consultants and directors options to purchase an aggregate of 702,956
shares of common stock.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES APPRECIATION FOR
UNDERLYING % OF TOTAL EXERCISE OPTION TERM
OPTIONS OPTIONS GRANTED PRICE PER EXPIRATION --------------------
NAME GRANTED 1998 SHARE DATE 5% 10%
- ------------------------------------------------- ----------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery............................... 133,333 19.0 $ 1.50 10/15/08 $ 125,779 $ 318,748
Pong Lim......................................... -- -- -- -- -- --
William Tamblyn.................................. 16,666 2.4 1.50 11/6/08 15,772 39,842
Serge Stepanoff.................................. -- -- -- -- -- --
Salim Jabr....................................... -- -- -- -- -- --
</TABLE>
The options granted to Messrs. Montgomery and Tamblyn vest over a standard
four-year period, with 25% vesting after one year and monthly vesting
thereafter.
In accordance with the rules of the Securities and Exchange Commission, the
columns referring to potential realizable value show the gains or "option
spreads" that would exist for the options granted based on the assumed rates of
annual compound stock price appreciation of 5% and 10% from the date the option
was granted over the full option term. The rules of the SEC require us to use
these assumed annual compound rates of stock price appreciation. These estimated
rates do not represent our estimate or projection of future common stock prices.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding option exercises, and
the fiscal year end values of stock options held by each of the Named Executive
Officers during the fiscal year ended April 30, 1999 and exercisable and
unexercisable options held as of April 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
UNDERLYING AT APRIL 30, 1999 APRIL 30, 1999
SHARES ACQUIRED VALUE ---------------------------- --------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------------- --------- ----------- --------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery............... 299,998 $ 54,373 100,000 -- $ 825,000 --
Pong Lim......................... 479,998 247,499 -- -- -- --
William Tamblyn.................. 81,581 38,349 35,084 -- 304,969 --
Serge Stepanoff.................. -- -- 99,998 -- 89,482 --
Salim Jabr....................... 74,999 45,000 125,000 -- 1,138,125 --
</TABLE>
Each option grant permits immediate exercise subject to a repurchase option
in favor of Ditech, which lapses over a four-year period with 25% lapsing after
the first year and monthly thereafter. The fair market value of Ditech's common
stock on or about April 30, 1999 was $9.75 per share as determined in good faith
by the Board of Directors on such date based upon such factors as the
50
<PAGE>
absence of a trading market for Ditech's common stock, the probability of
completing the initial public offering and the low price of the initial public
offering price range.
BENEFIT PLANS
1997 STOCK OPTION PLAN. Ditech's 1997 Stock Option Plan was adopted by the
Board of Directors on February 20, 1997 and amended on November 13, 1997. The
1997 plan was approved by the stockholders on March 7, 1997. The Board
authorized and reserved an aggregate of 2,000,000 shares of Ditech common stock
for issuance under the 1997 plan. The 1997 plan provides for the grant of
incentive stock options to employees and nonstatutory stock options to
employees, directors and consultants of Ditech and its affiliates. The 1997 plan
provides that it will be administered by the Board of Directors, or a committee
appointed by the Board, which determines recipients and types of options to be
granted, including number of shares subject to the option and the exercisability
of the shares.
The terms of stock options granted under the 1997 plan may not exceed ten
years. The exercise price for a nonstatutory stock option granted under the 1997
plan cannot be less than 85% of the fair market value of the common stock on the
date of the option grant and the exercise price for an incentive stock option
granted under the 1997 plan cannot be less than 100% of the fair market value of
the common stock on the date of the option grant. However, options granted in
substitution for other options may be granted with a lower exercise price than
that above. The options may, but need not, contain provisions for early exercise
and the right of first refusal.
Options granted under the 1997 plan vest at the rate specified in each
optionee's option agreement. No stock option may be transferred by the optionee
other than by will or the laws of descent or distribution or, for a nonstatutory
stock option, upon the terms of the option agreement. An optionee whose
relationship with Ditech or any affiliate ceases for any reason (other than by
death or permanent and total disability) may exercise options in a period not to
exceed three months following such cessation. When an optionee's relationship
with Ditech and any affiliate ceases due to death or disability, options may be
exercised for between six and eighteen months.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Ditech or any affiliate of Ditech, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant, and the term of the option does not
exceed five years from the date of grant. No person shall be granted options
covering more than 200,000 shares of Ditech's common stock in any calendar year.
Upon certain changes in control of Ditech, all outstanding options under the
1997 plan shall either be assumed or substituted by the surviving entity. If the
surviving entity determines not to assume, continue or substitute such options,
the time during which such options may be exercised shall be accelerated. If the
options are not exercised following the acceleration, the options shall
terminate.
As of April 30, 1999, under the 1997 plan options to purchase 448,398 shares
of common stock were outstanding, and options to purchase 1,446,438 shares had
been exercised. On October 15, 1998, the Board voted that no additional grants
would be made under the 1997 plan.
1998 STOCK OPTION PLAN. Ditech's 1998 Stock Option Plan was adopted by the
Board of Directors on October 15, 1998 and approved by the stockholders on
November 6, 1998. The Board authorized and reserved an aggregate of 761,375
shares of Ditech common stock for issuance under the 1998 plan. In March and
April 1999 the Board of Directors and stockholders approved an amendment to the
1998 plan increasing the number of shares issuable under the 1998 plan by
51
<PAGE>
166,666 shares, and made certain technical amendments to the 1998 plan in
anticipation of Ditech becoming a public company.
The 1998 plan provides for the grant of incentive stock options to employees
and nonstatutory stock options to employees, directors and consultants of Ditech
and our affiliates. The 1998 plan provides that it will be administered by the
Board of Directors, or a committee appointed by the Board, which determines
recipients and types of options to be granted, including number of shares
subject to the option and the exercisability of the shares.
The terms of stock options granted under the 1998 plan may not exceed ten
years. The exercise price for a nonstatutory stock option granted under the 1998
plan cannot be less than 85% of the fair market value of the common stock on the
date of the option grant and the exercise price for an incentive stock option
granted under the 1998 plan cannot be less than 100% of the fair market value of
the common stock on the date of the option grant. However, options granted in
substitution for other options may be granted with a lower exercise price than
that above. The options may, but need not, contain provisions for early exercise
and the right of first refusal.
Options granted under the 1998 plan vest at the rate specified in each
optionee's option agreement. No stock option may be transferred by the optionee
other than by will or the laws of descent or distribution or, for a nonstatutory
stock option, upon the terms of the option agreement. An optionee whose
relationship with Ditech or any affiliate ceases for any reason (other than by
death or permanent and total disability) may exercise options in a period not to
exceed three months following such cessation. When an optionee's relationship
with Ditech and any affiliate ceases due to death or disability, options may be
exercised for between six and eighteen months.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Ditech or any affiliate of Ditech, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant, and the term of the option does not
exceed five years from the date of grant. No person shall be granted options
covering more than 200,000 shares of Ditech's common stock in any calendar year
Upon certain changes in control of Ditech, all outstanding options under the
1998 plan shall either be assumed or substituted by the surviving entity. If the
surviving entity determines not to assume, continue or substitute such options,
the time during which such options may be exercised shall be accelerated. If the
options are not exercised following the acceleration, the options shall
terminate.
As of April 30, 1999, Ditech had granted options to purchase 474,628 shares
of common stock under the 1998 plan and an additional 456,746 shares remained
available for future grant. Of the options granted:
- options to purchase 415,084 shares of common stock were outstanding;
- options to purchase 56,211 shares had been exercised;
- options to purchase 3,333 shares had been cancelled and became available
for future grant; and
- no options to purchase shares had been repurchased or had lapsed without
being exercised.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. In March and April 1999 the
Board adopted, and the stockholders approved, Ditech's 1999 Non-Employee
Directors' Stock Option Plan
52
<PAGE>
(the "Directors' Option Plan"). The Board has reserved 100,000 shares of common
stock for issuance under the Director's Option Plan. Under the Directors' Option
Plan
- each new non-employee director who is elected or appointed for the first
time following this offering other than at an annual meeting will
automatically be granted an option to purchase that number of shares of
common stock equal to 5,000 multiplied by the number of months remaining
until the next succeeding annual meeting of stockholders divided by
twelve; and
- each non-employee director will automatically be granted an option to
purchase 5,000 shares of common stock immediately following each annual
meeting of stockholders; provided, that such grant to a non-employee
director receiving such annual grant for the first time shall be 10,000
shares rather than 5,000 shares.
Options granted under the Directors' Option Plan are granted at 100% of the
fair market value of the common stock on the date of grant. Options granted
under the Directors' Option Plan have a five-year term and are fully vested. The
Directors' Option Plan will terminate in March 2009, unless earlier terminated
by the Board of Directors.
Upon certain changes in control of Ditech, all outstanding options under the
Directors' Option Plan shall be assumed by the surviving entity or the surviving
entity shall substitute similar options for such outstanding options. If the
surviving entity determines not to assume such outstanding options or substitute
similar options therefor, then the options will terminate if not exercised prior
to such change in control.
As of April 30, 1999, no options had been granted under the Directors'
Option Plan, and 100,000 shares were reserved for future grants or purchases
under the Directors' Option Plan.
EMPLOYEE STOCK PURCHASE PLAN. In March and April 1999 the Board adopted,
and the stockholders approved, Ditech's 1999 Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate 133,333 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. The offering period for
any offering will be no more than 27 months.
Employees are eligible to participate if they have been continuously
employed by Ditech, or an affiliate of Ditech designated by the Board for at
least three months on the commencement date of an offering or on the day after a
purchase date under an offering, and are customarily scheduled to work at least
20 hours per week and for at least five months per calendar year. Such three
month qualification requirement will not apply to the first offering under the
Purchase Plan. Employees who participate in an offering can have up to 10% of
their earnings withheld pursuant to the Purchase Plan. The amount withheld will
then be used to purchase shares of the common stock on specified dates
determined by the Board. The price of common stock purchased under the Purchase
Plan will be equal to 85% of the lower of the fair market value of the common
stock on the commencement date of each offering period or on the specified
purchase date. Employees may end their participation in the offering at any time
during the offering period. Participation ends automatically on termination of
employment with Ditech.
In the event of certain changes of control of Ditech, the Board has
discretion to provide that each right to purchase common stock will be assumed
or an equivalent right substituted by the successor corporation, or the Board
may shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to the change in
control. The Purchase Plan will terminate at the Board's discretion. The Board
has the authority to amend or terminate the Purchase Plan, subject to the
limitation that no such action may adversely affect any outstanding rights to
purchase common stock.
53
<PAGE>
401(k) PLAN. We maintain a retirement and deferred savings plan for our
employees that is intended to qualify as a tax-qualified plan under the Code.
The 401(k) Plan provides that each participant may contribute up to a statutory
limit, which was $10,000 in calendar year 1998.
EMPLOYMENT AGREEMENTS
In September 1998, Ditech entered into an employment agreement with Timothy
Montgomery to serve as Ditech's President and Chief Executive Officer at a base
salary of $225,000 a year starting on November 1, 1998, with an annual
discretionary bonus set by the Board and based upon specific objectives to be
agreed upon by Mr. Montgomery and the Board. The employment agreement also
provides that Mr. Montgomery will receive an option to purchase 133,333 shares
of Ditech common stock. The employment agreement is at-will, contains a
non-solicitation agreement, and provides that if Mr. Montgomery is terminated
without cause, he will be paid a lump sum equal to twelve months base salary.
However, if Mr. Montgomery resigns, his employment is terminated for cause, or
there is a change in control of Ditech, he will receive no severance benefits.
In the event of a change of control of Ditech, all of Mr. Montgomery's
outstanding, unvested options will immediately become fully vested.
In September 1998, Ditech entered into an employment agreement with Pong Lim
to serve as Chairman of the Board of Directors and a Ditech employee at a base
salary of $175,000 a year, with an annual bonus based on Ditech financial
achievements. In addition, if the requirements tied to the bonus are met, all of
Mr. Lim's remaining unvested stock options will become fully vested in September
1999. The employment agreement is at-will, contains a non-solicitation agreement
and provides that if Mr. Lim is terminated for any reason before September 1999,
his compensation package will be paid in full, including the bonus and
accelerated vesting provisions.
In November 1998, Ditech entered into an employment agreement with Toni
Bellin to serve as Vice President of Operations at a base salary of $150,000 a
year, with a guaranteed bonus of $25,000 in 1999 and an option to purchase
100,000 shares of Ditech common stock. The employment agreement is at-will,
although if Ms. Bellin is terminated for other than cause or permanent
disability during her first two years of service Ditech must pay Ms. Bellin's
base salary for the lesser of a period of one year following the termination of
her employment, or the period ending on the second anniversary of her first day
of employment. Ms. Bellin received a signing bonus of $25,000, though if she
severs her employment with Ditech within her first twelve months with the
company she must repay $12,500 of the signing bonus.
In April 1999, Ditech entered into an employment agreement with Marc
Schwager to serve as Vice President of Marketing at a base salary of $150,000 a
year, with a guaranteed bonus of $30,000 in 1999 and an option to purchase
100,000 shares of Ditech common stock. The employment agreement is at-will,
although if Mr. Schwager is terminated for other than cause or permanent
disability during his first year of service Ditech must pay Mr. Schwager's base
salary for the period ending on the first anniversary of his first day of
employment. Mr. Schwager received a signing bonus of $25,000, though if he
severs his employment with Ditech within his first twelve months with the
company he must repay $12,500 of the signing bonus.
54
<PAGE>
CERTAIN TRANSACTIONS
STOCK AND NOTE PURCHASE AGREEMENT. On March 11, 1997, Ditech completed a
recapitalization. In connection with the recapitalization, Ditech entered into a
Stock and Note Purchase Agreement with entities affiliated with Summit Partners
(collectively, "Summit Partners") and a small group of other accredited
investors. Pursuant to this agreement, Ditech issued an aggregate of 12,506,539
shares of Series A preferred stock at a purchase price of $1.00 per share or an
aggregate purchase price of $12,506,539; 6,259,718 shares of Series B
convertible preferred stock at a purchase price of approximately $0.86 per share
or an aggregate purchase price of approximately $5,394,937; and two Class A
subordinated promissory notes in the aggregate original principal amount of
$8,000,000, for a total purchase price of approximately $25,901,476. Of these
amounts, Summit Partners purchased 12,000,000 shares of Series A preferred
stock, 5,801,475 shares of Series B preferred stock and both Class A
subordinated promissory notes. Subsequent to the deal, Mr. Avis, a Managing
Partner of Summit Partners, and Mr. Chung, a Principal of Summit Partners, were
elected to our Board of Directors.
SHAREHOLDERS AGREEMENT. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into a Shareholders Agreement with the investors who
were part of the Purchase Agreement, including Summit Partners, and with Kenneth
E. Jones, the founder and a current director of Ditech. The investors agreed to
vote in favor of the election of certain representatives, a joint director and
at least one Series B director, designated by the investors to serve as members
of Ditech's Board of Directors. Messrs. Avis and Chung were elected pursuant to
this provision. The restrictions under this agreement terminate upon this
offering. In addition, Mr. Jones agreed to restrictions on the sale, transfer,
assignment, pledge or other disposition of any interest in any of his shares,
except pursuant to a public sale or a sale to Ditech which does not otherwise
violate the provisions of the Purchase Agreement. The agreement provides Summit
Partners with a right of first refusal should Mr. Jones elect to transfer any of
his shares and also with a right to participate in any transfer of Mr. Jones'
shares.
REGISTRATION AGREEMENT. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into a Registration Agreement with certain investors,
including Summit Partners, pursuant to which the holders of a majority of the
Series B preferred stock and the common stock held by holders of Series B
preferred stock may request registration under the Securities Act of all or any
portion of the shares of common stock issuable upon conversion of the Series B
preferred stock and the common stock held by holders of Series B preferred stock
on Form S-1, and the holders of at least 15% of the Series B preferred stock and
common stock held by holders of Series B preferred stock may request
registration under the Securities Act of all or any portion of their shares of
Series B preferred stock and common stock held by holders of Series B preferred
stock on Form S-2 or S-3.
ESCROW AGREEMENT. Concurrent with the Stock and Note Purchase Agreement,
Ditech entered into an Escrow Agreement with State Street Bank and Trust Company
of California, N.A. as Escrow Agent and a group of redeeming shareholders
pursuant to which Ditech authorized the redemption of 90.12% of its outstanding
common stock (26,092,717 shares) in exchange for $21,485,621 in cash, 4,743,461
shares of its Series A preferred stock, valued at $1.00 per share, and 7,508,221
shares of its Series C preferred stock, valued at approximately $1.00 per share,
for an aggregate redemption price of $33,737,303. Of these shares redeemed,
Ditech redeemed 12,655,750 shares of common stock from two trusts and one
company controlled by Mr. Jones (Seahawk Investment Trust, Seahawk Ranch
Irrevocable Trust, and Western General Corporation), and 1,405,234 shares of
common stock from Mr. Turner. Each of Messrs. Jones and Turner are directors of
Ditech. The shares of common stock referred to above reflect a forward stock
split that occurred on March 11, 1997.
55
<PAGE>
STOCK PURCHASE AGREEMENT. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into a Stock Purchase Agreement with Kenneth E. Jones
pursuant to which Ditech sold 8,347,437 shares of the common stock of Globe
Wireless, Inc., a Delaware corporation, to Mr. Jones for an aggregate purchase
price of $1,413,000.
ASSET PURCHASE AGREEMENTS. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into two Asset Purchase Agreements with entities
controlled by Kenneth E. Jones. As part of the first agreement, Automated Call
Processing LLC, a California limited liability company controlled by Mr. Jones,
purchased assets including technical equipment, raw materials and intellectual
property, from Ditech for a total of $690,000. As part of the second agreement,
ACP Interactive LLC, a California limited liability company controlled by Mr.
Jones, purchased assets including technical equipment, raw materials and
intellectual property, from Ditech for a total of $520,000.
Ditech believes that the foregoing transactions were in its best interests
and were on terms no less favorable to Ditech than could be obtained from
unaffiliated third parties.
Ditech has entered into employment contracts with each of its Chief
Executive Officer, Chairman, and Vice President of Operations. See
"Management--Employment Agreements."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 30, 1999, and as adjusted to reflect
the sale of the common stock offered by this prospectus, by:
- each stockholder who is known by us to own beneficially more than 5% of
our common stock;
- each of our Named Executive Officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Except as indicated by footnote, and subject to community property laws where
applicable, we believe, based on information furnished by such persons, that the
persons named in the table below have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 8,766,846 shares of common stock
(including shares issuable upon conversion of Series B preferred stock that will
convert to common stock on a two-for-three ratio on or prior to the closing of
the offering) outstanding as of April 30, 1999, and 11,766,846 shares of common
stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PERCENT BENEFICIALLY
OWNED AFTER THE
PRIOR TO THE OFFERING OFFERING
-------------------------- -----------------------
BENEFICIAL OWNER NUMBER PERCENT PERCENT
- ------------------------------------------------------------------- ------------- ----------- -----------------------
<S> <C> <C> <C>
Entities affiliated with Summit Partners (1)....................... 3,867,649 44.1% 32.9%
Seahawk Ranch Irrevocable Trust (2)................................ 758,985 8.7 6.5
Seahawk Investment Trust (2)....................................... 611,324 7.0 5.2
Timothy Montgomery (3)............................................. 399,998 4.5 3.4
Pong Lim (4)....................................................... 499,998 5.7 4.2
William Tamblyn (5)................................................ 116,665 1.3 *
Toni Bellin (6).................................................... 100,000 1.1 *
Serge Stepanoff (7)................................................ 99,998 1.1 *
Salim Jabr (8)..................................................... 199,999 2.2 1.7
Marc Schwager (9).................................................. 100,000 1.1 *
Gregory Avis (10).................................................. 3,867,649 44.2 32.9
Peter Chung (11)................................................... 3,867,649 44.2 32.9
William Hasler..................................................... 66,666 * *
Kenneth E. Jones (12).............................................. 1,387,421 15.8 11.8
George Turner...................................................... 154,052 1.8 1.3
All directors and executive officers as a group (12 persons)(13)... 6,992,446 75.0% 56.7%
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1 percent.
57
<PAGE>
(1) Shares consist of 3,515,433 shares held by Summit Ventures IV L.P., 116,262
shares held by Summit Investors III, L.P., and 235,954 shares held by Summit
Subordinated Debt Fund, L.P. Summit Partners is located at 600 Atlantic
Ave., Suite 2800, Boston, MA 02210-2227. Summit Partners IV, L.P. is the
General Partner of Summit Ventures IV, L.P. Stamps, Woodsum & Co. IV is the
General Partner of Summit Partners IV, L.P. Summit Partners SD II, L.L.C. is
the General Partner of Summit Subordinated Debt Fund II, L.P. The following
individuals are General Partners of Stamps, Woodsum & Co. IV, Summit
Partners SD II, L.L.C., and c: E. Roe Stamps, IV, Stephen G. Woodsum, Martin
J. Mannion, John A. Genest, Gregory M. Avis, Bruce R. Evans, Walter G.
Kortschak, Thomas S. Roberts, Joseph F. Trustey and Kevin P. Mohan. As
general partners, such persons may be deemed to have beneficial ownership of
the shares held by Summit Ventures IV, L.P., Summit Subordinated Debt Fund
II, L.P. and Summit Subordinated Debt Fund II, L.P.
(2) Seahawk Investment Trust and Seahawk Ranch Irrevocable Trust are located at
550 Pilgrim Drive, Foster City, California 94404. Kenneth Jones and Signe
Kim Lauridsen-Jones are trustees of the Seahawk Investment Trust and, as
such, may be deemed to have beneficial ownership of the shares held by
Seahawk Investment Trust. Mr. Jones and Philip E. Blake are trustees of the
Seahawk Ranch Irrevocable Trust and, as such, may be deemed to have
beneficial ownership of the shares held by Seahawk Ranch IrrevocableTrust.
(3) Includes 100,000 shares which may be acquired pursuant to the exercise of
stock options. On April 30, 1999, 190,972 of Mr. Montgomery's shares were
subject to a repurchase option in favor of Ditech.
(4) On April 30, 1999, 71,388 of Mr. Lim's shares were subject to a repurchase
option in favor of Ditech. The address for Mr. Lim is c/o Ditech
Corporation, 825 E. Middlefield Rd., Mountain View, CA 94043.
(5) Includes 35,084 shares which may be acquired pursuant to the exercise of
stock options. On April 30, 1999, 34,359 of Mr. Tamblyn's shares were
subject to a repurchase option in favor of Ditech.
(6) Consists solely of 100,000 shares which may be acquired pursuant to the
exercise of stock options.
(7) Consists solely of 99,998 shares which may be acquired pursuant to the
exercise of stock options.
(8) Includes 125,000 shares which may be acquired pursuant to the exercise of
stock options.
(9) Consists solely of 100,000 shares which may be acquired pursuant to the
exercise of stock options.
(10) The shares are beneficially owned by Summit Partners. Mr. Avis is a
Managing Partner of Summit Partners. See footnote (1). The address for Mr.
Avis is c/o Summit Partners, 600 Atlantic Ave., Suite 2800, Boston, MA
02210-2227.
(11) The shares are beneficially owned by Summit Partners. Mr. Chung is a
Principal of Summit Partners. See footnote (1). The address for Mr. Chung is
c/o Summit Partners, 600 Atlantic Ave., Suite 2800, Boston, MA 02210-2227.
(12) Total number of shares includes 758,985 shares of common stock held by
Seahawk Ranch Irrevocable Trust, of which Mr. Jones is a trustee; 611,324
shares of common stock held by Seahawk Investment Trust, of which Mr. Jones
is a trustee; and 17,112 shares of common stock held by Western General
Corporation, of which Mr. Jones is the president. The address for Mr. Jones
is 550 Pilgrim Drive, Foster City, California 94404.
(13) Includes 560,082 shares that may be acquired pursuant to the exercise of
stock options. See notes 1 through 12 above.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of Ditech
will consist of 50,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of undesignated Preferred Stock, $0.001 par value.
COMMON STOCK
As of April 30, 1999, and assuming conversion of our Series B preferred
stock, there were 8,766,846 shares of common stock outstanding held of record by
143 stockholders. The holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders. The
holders of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefore,
subject to the rights of the holders of preferred stock. In the event of a
liquidation, dissolution or winding up of Ditech, holders of the common stock
are entitled to share ratably in all assets remaining after payment of
liabilities and amounts due to the holders of preferred stock as described
below. Holders of common stock have no preemptive rights and no right to convert
their common stock into any other securities. There are no redemption or sinking
fund provisions applicable to the common stock.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon such preferred stock,
including dividend rights, conversion rights, terms of redemption, liquidation
preference, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The Board of Directors, without stockholder approval, can issue
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of common stock. The issuance of preferred stock
could have the effect of delaying, deferring or preventing a change in control
of Ditech. We have no present plan to issue any shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW
CHARTER DOCUMENTS. The Certificate of Incorporation and Bylaws include a
number of provisions that may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of Ditech. First, the
Certificate of Incorporation provides that all stockholder actions upon
completion of this offering must be effected at a duly called meeting of holders
and not by a consent in writing. Second, the Bylaws provide that special
meetings of the holders may be called only by (1) the Chairman of the Board of
Directors, (2) the Chief Executive Officer or (3) Board of Directors pursuant to
a resolution adopted by a majority of the total number of authorized directors.
Third, the Certificate of Incorporation and the Bylaws provide for a classified
Board of Directors, in which approximately one-third of the directors would be
elected each year. Consequently, any potential acquiror would need to
successfully complete two proxy contests in order to take control of the Board
of Directors. Stockholders will not be able to cumulate votes for directors
(under cumulative voting, a minority stockholder holding a sufficient percentage
of a class of shares may be able to ensure the election of one or more
directors). Finally, the Bylaws establish procedures, including advance notice
procedures with regard to the nomination of candidates for election as directors
and stockholder proposals. These provisions of the Certificate of Incorporation
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control or management of Ditech. Such provisions also may
have the effect of preventing changes in the management of Ditech.
59
<PAGE>
DELAWARE TAKEOVER STATUTE. Ditech is subject to the provisions of Section
203 of the Delaware General Corporation Law ("Section 203"). In general, Section
203 prohibits a publicly-held Delaware corporation, such as Ditech upon
completion of this offering, from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction pursuant to which the person became an interested stockholder,
unless the business combination is approved in a manner prescribed by Delaware
law. For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock.
REGISTRATION RIGHTS
Following this offering, holders of approximately 4,363,365 shares of common
stock will have registration rights pursuant to an agreement entered into with
those stockholders. The agreement specifies that its terms will not apply to
this offering. Following this offering, the holders of a majority of such shares
of common stock may request registration under the Securities Act of all or any
portion of such shares of common stock on Form S-1, and the holders of at least
15% of the common stock held by such holders may request registration under the
Securities Act of all or any portion of their shares of common stock held by
such holders on Form S-2 or S-3. In addition, if we propose to register any of
our securities under the Securities Act, the holders of those shares of common
stock are entitled, subject to certain restrictions and exceptions, to include
their shares of common stock in the registration. The underwriters of any such
offering have the right, in certain circumstances and subject to certain
conditions, to limit the number of shares included in the offering. We are
required to bear all registration and selling expenses (other than underwriters'
discounts and commissions) in any such offering.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota N.A. has been appointed as the transfer agent and
registrar for Ditech's common stock.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of the common stock prevailing from time
to time. Furthermore, since only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of Ditech to raise equity
capital in the future.
Upon completion of this offering, based on the number of shares outstanding
as of April 30, 1999, Ditech will have outstanding an aggregate of 11,766,846
shares of common stock assuming:
- the issuance by Ditech of the shares of common stock offered hereby;
- no exercise of exercisable options to purchase 863,482 shares of common
stock; and
- no exercise of the Underwriters' over-allotment option to purchase 450,000
shares of common stock.
Of these shares, the 3,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except for shares held by "affiliates" of Ditech as that term is defined in Rule
144 under the Securities Act (whose sales would be subject to certain
limitations and restrictions described below) and the regulations promulgated
thereunder.
The remaining 8,766,846 shares held by officers, directors, employees,
consultants and other stockholders of Ditech were sold by Ditech in reliance on
exemptions from registration requirements of the Securities Act and are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 701
promulgated under the Securities Act, which rules are summarized below. As a
result of and subject to the provisions of the 180-day lock-up agreements
described below and the provisions of Rules 144 and 701, additional shares may
be available for sale in the public market as follows, subject to the
restrictions imposed by the federal securities laws on sales by affiliates:
- 8,337,677 restricted securities will be eligible for sale 180 days after
the date of this prospectus upon expiration of the lock-up agreements
referred to below; and
- an additional 429,169 shares may become available for sale at various
times after the 180 days following the date of this prospectus as Ditech's
repurchase option on such shares lapses.
An additional 181,598 shares may be eligible for sale 180 days after the date of
this prospectus upon the exercise of stock options and additional shares may
become available at various times thereafter as outstanding options vest and are
exercised. In order to sell shares of common stock under Rule 144, the shares
must be held for a period longer than one year prior to such sale.
The stockholders and optionholders of Ditech have agreed with the
representatives of the Underwriters for a period of 180 days after the date of
this prospectus, that they will not, directly or indirectly, offer, sell,
contract to sell or grant any option to sell or otherwise dispose of, directly
or indirectly, any shares of common stock or securities convertible into or
exchangeable for, or any rights to purchase or acquire, common stock, without
the prior written consent of BT Alex. Brown Incorporated. BT Alex. Brown
Incorporated, in its sole discretion and at any time without notice, may release
all or any portion of the securities subject to the 180-day lock-up agreement.
If BT Alex. Brown Incorporated releases securities subject to the lock-up
agreements, these securities will be available for sale prior to the expiration
of the 180-day period. Ditech has agreed that it will not, without the prior
written consent of BT Alex. Brown Incorporated, offer, sell or otherwise dispose
61
<PAGE>
of any shares of common stock, options to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that Ditech may
issue shares upon the exercise of options granted prior to the date hereof, and
may grant additional options under its stock option plans, provided that,
without the prior written consent of BT Alex. Brown Incorporated, such
additional options shall not be exercisable during such 180-day period.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, an affiliate of Ditech, or person (or persons whose
shares are aggregated) who has beneficially owned restricted securities that
were not acquired from Ditech or an affiliate of Ditech within the previous one
year, will be entitled to sell in any three-month period a number of shares that
does not exceed the greater of:
- 1% (approximately 117,668 shares immediately after this offering) of the
then outstanding shares of Ditech's common stock or
- the average weekly trading volume of Ditech's common stock in the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about
Ditech. A person (or person whose shares are aggregated) who is not deemed to
have been an affiliate of Ditech at any time during the 90 days immediately
preceding the sale and who beneficially owns restricted securities is entitled
to sell such shares pursuant to Rule 144(k) without regard to the limitations
described above; provided that at least two years have elapsed since the later
of the date the shares were acquired from Ditech or from an affiliate of Ditech.
An employee, officer or director of or consultant to Ditech who purchased or
was awarded shares or options to purchase shares pursuant to a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701 under the Securities Act, which permits affiliates and non-affiliates
to sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. In addition, non-affiliates may sell Rule 701 shares without
complying with public information, volume and notice provisions of Rule 144.
We intend to file a registration statement under the Securities Act to
register shares of common stock reserved for issuance under our stock option and
employee stock purchase plans, thus permitting the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statement will become effective immediately upon filing.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, BT Alex. Brown
Incorporated, BancBoston Robertson Stephens LLC and Hambrecht & Quist LLC, have
severally agreed to purchase from Ditech the following respective number of
shares of common stock at the assumed public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------------------------------------------------------------------------- -----------
<S> <C>
BT Alex. Brown Incorporated..................................................
BancBoston Robertson Stephens LLC............................................
Hambrecht & Quist LLC........................................................
-----------
Total.................................................................... 3,000,000
-----------
-----------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will
purchase all shares of the common stock offered hereby if any of such shares are
purchased.
We have been advised by BT Alex. Brown Incorporated that the underwriters
propose to offer the shares of common stock directly to the public at the
initial public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The underwriters may allow and such dealers may reallow a concession not
in excess of $ per share to certain other dealers. After the initial
public offering of the shares, the offering price and other selling terms may be
changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 450,000 additional
shares of common stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. To the extent that the underwriters exercise such option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number set forth next to such
underwriter's name in the above table bears to the total number of shares of
common stock offered hereby. The underwriters may exercise such option only to
cover over-allotments made in connection with the sale of common stock offered
by this prospectus. If purchased, the underwriters will offer such additional
shares on the same terms as those on which the 3,000,000 shares are being
offered.
The following table summarizes the compensation to be paid to the
underwriters by Ditech, and the expenses payable by Ditech.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- --------------- ---------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
Ditech............................................................ $ $ $
</TABLE>
Ditech has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect thereof.
Ditech and its officers and directors and certain stockholders have agreed
not to offer, sell or otherwise dispose of any shares of common stock for a
period of 180 days after the date of this
63
<PAGE>
prospectus without the prior written consent of BT Alex. Brown Incorporated.
Such consent may be given at any time without any public notice.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiation between us and the representatives of the
underwriters. Among the factors to be considered in such negotiations are
prevailing market conditions, the results of operations of Ditech in recent
periods, the market capitalization and stages of development of other companies
that we and the representatives of the underwriters believe to be comparable to
Ditech, estimates of the business potential, and its industry in general and the
present state of Ditech's development and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
We have been advised by the representatives of the underwriters that during
and after this offering, the underwriters may purchase and sell common stock in
the open market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the common stock; and syndicate short positions involve the sale by the
underwriters of a greater number of shares of common stock than they are
required to purchase from us in this offering. The underwriters also may impose
penalty bids, whereby selling concessions allowed to the syndicate members or
other broker-dealers in respect of the common stock sold in this offering for
their account may be reclaimed by the syndicate if such securities are
repurchased by the syndicate in stabilizing or short-covering transactions.
These activities may stabilize, maintain or otherwise affect the market price of
the common stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market or otherwise and these activities, if commenced, may be
discontinued at any time.
The representatives of the underwriters have informed us that the
underwriters do not intend to confirm orders to any account over which they
exercise discretionary authority.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $900,000.
We are obligated to pay interest under a credit agreement with and granted a
security interest in our assets to BankBoston, N.A., an affiliate of BancBoston
Robertson Stephens LLC, a representative of the underwriters. We are also
obligated to pay rent to BancBoston Leasing Inc., also an affiliate of
BancBoston Robertson Stephens LLC, pursuant to a lease line of credit.
64
<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for Ditech by Cooley Godward LLP, Palo Alto, California. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
EXPERTS
The financial statements of Ditech as of April 30, 1997 and 1998, and for
each of the three years in the period ended April 30, 1998, appearing in this
prospectus and registration statement have been audited by and have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In April 1998, Ditech's Board of Directors determined to change its
accountants and approved the engagement of PricewaterhouseCoopers LLP (formerly
Coopers & Lybrand LLP) to replace the former accountants as Ditech's principal
accountants. Prior to and as of PricewaterhouseCoopers' appointment, there were
no disagreements with the former accountants during the two years ended April
30, 1997 or during the subsequent interim period preceding their replacement on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which, if not resolved to the former
accountants' satisfaction, would have caused them to make reference to the
matter in their report. The former accountants issued an unqualified opinion on
the financial statements of Ditech as of and for the two years ended April 30,
1997. The former accountants' report does not cover any of the financial
statements of Ditech included in this Prospectus. Ditech did not consult with
PricewaterhouseCoopers LLP on any accounting or financial reporting matters in
the periods prior to their appointment.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock being offered. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to Ditech
and our common stock, we refer you to the registration statement and to the
exhibits and schedules filed therewith. Statements contained in this prospectus
as to the contents of any contract or other document referred to are not
necessarily complete, and in each instance we refer you to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference. A copy of
the registration statement may be inspected and copied by anyone at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants, such as Ditech, that file electronically with the SEC.
The address of the site is http://www.sec.gov.
Ditech intends to furnish to its stockholders annual reports containing
audited financial statements certified by an independent public accounting firm
and quarterly reports containing unaudited interim financial information for
each of the first three fiscal quarters of each fiscal year of Ditech.
65
<PAGE>
DITECH COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants...................................................... F-2
Balance Sheets......................................................................... F-3
Statements of Operations............................................................... F-4
Statements of Stockholders' Equity (Deficit)........................................... F-5
Statements of Cash Flows............................................................... F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ditech Communications Corporation:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of Ditech Corporation at April 30,
1997 and 1998, and the results of its operations and cash flows for each of the
three years in the period ended April 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
March 12, 1999, except for the final paragraph
of note 15 as to which the date is April 29, 1999
San Jose, California
F-2
<PAGE>
DITECH COMMUNICATIONS CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
APRIL 30, JANUARY 31, JANUARY 31,
-------------------- ------------ ---------------
1997 1998 1999 1999 (NOTE 12)
--------- --------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 4,199 $ 3,433 $ 4,724
Investments................................................ 221 -- --
Accounts receivable, net of allowance for doubtful accounts
of $75, $30 and $100 in 1997, 1998 and 1999,
respectively............................................. 2,203 2,190 2,097
Inventories................................................ 1,660 2,163 4,209
Deferred income taxes...................................... 364 473 637
Other assets............................................... 38 89 320
Income taxes receivable.................................... 848 142 --
--------- --------- ------------
Total current assets..................................... 9,533 8,490 11,987
Property and equipment, net.................................. 426 1,228 1,588
Investment in preferred stock................................ 7,508 7,508 7,508
Other assets................................................. 41 48 631
--------- --------- ------------
Total assets............................................. $ 17,508 $ 17,274 $ 21,714
--------- --------- ------------
--------- --------- ------------
LIABILITIES
Current liabilities:
Note payable, current portion.............................. $ 125 $ 563 $ 750
Accounts payable........................................... 1,391 1,212 2,778
Accrued expenses........................................... 1,138 892 948
Deferred revenue........................................... -- -- 1,316
Income taxes payable....................................... -- -- 207
Obligations under capital lease, current portion........... -- 41 57
--------- --------- ------------
Total current liabilities................................ 2,654 2,708 6,056
Deferred income taxes........................................ -- 91 91
Note payable, net of current portion......................... 7,875 7,313 6,750
Obligations under capital lease, net of current portion...... -- 97 80
--------- --------- ------------
Total liabilities........................................ 10,529 10,209 12,977
--------- --------- ------------
Commitments and contingencies (Note 6 and 15)
Redeemable preferred stock:
Series A preferred stock, $0.001 par value, 17,250 shares
authorized, issued and outstanding actual and pro forma
(Liquidation value: $18,439 in 1998)..................... 17,053 18,100 18,949 $ 18,949
Series B convertible preferred stock, $0.001 par value,
6,260 shares authorized, issued and outstanding actual
and no pro forma shares
(Liquidation value: $5,767 in 1998)...................... 5,333 5,661 5,926 --
Series C preferred stock, $0.001 par value, 7,508 shares
authorized, issued and outstanding actual and pro
forma.................................................... 7,361 7,361 7,361 7,361
--------- --------- ------------ ---------------
Total redeemable preferred stock......................... 29,747 31,122 32,236 $ 26,310
--------- --------- ------------ ---------------
---------------
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value: 50,000 shares authorized and
2,860 and 3,080 shares issued and outstanding at April 30,
1997 and 1998, respectively; 4,573 shares outstanding at
January 31, 1999 and 8,746 shares pro forma................ -- 3 5 $ 9
Deferred stock compensation.................................. -- -- (409) (409)
Additional paid in capital................................... -- 75 1,878 7,800
Accumulated deficit.......................................... (22,768) (24,135) (24,973) (24,973)
--------- --------- ------------ ---------------
Total stockholders' deficit.............................. (22,768) (24,057) (23,499) $ (17,573)
--------- --------- ------------ ---------------
---------------
Total liabilities, redeemable preferred stock and
stockholders' deficit.................................... $ 17,508 $ 17,274 $ 21,714
--------- --------- ------------
--------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
DITECH COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED APRIL 30, JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.................................................... $ 14,354 $ 14,066 $ 12,326 $ 8,687 $ 18,025
Cost of goods sold......................................... 7,164 6,790 5,651 4,029 8,588
--------- --------- --------- --------- ---------
Gross profit............................................. 7,190 7,276 6,675 4,658 9,437
--------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing...................................... 1,041 1,521 2,405 1,438 4,104
Research and development................................. 1,040 1,072 2,367 1,657 2,850
General and administrative............................... 536 714 1,279 923 1,622
--------- --------- --------- --------- ---------
Total operating expenses................................. 2,617 3,307 6,051 4,018 8,576
--------- --------- --------- --------- ---------
Income from operations..................................... 4,573 3,969 624 640 861
--------- --------- --------- --------- ---------
Other income (expense):
Interest income.......................................... 3 21 175 135 155
Interest expense......................................... (8) (125) (768) (593) (553)
--------- --------- --------- --------- ---------
Total other income (expense)........................... (5) (104) (593) (458) (398)
--------- --------- --------- --------- ---------
Income from continuing operations before income
taxes................................................ 4,568 3,865 31 182 463
Provision for income taxes................................. 1,776 1,522 24 73 186
--------- --------- --------- --------- ---------
Income from continuing operations.......................... 2,792 2,343 7 109 277
Discontinued operations:
Loss from operations (net of income tax benefits of
$1,131 and $1,037 in 1996 and 1997).................... (1,413) (2,751) -- -- --
Gain on disposal (net of income tax benefit of $364)..... -- 2,843 -- -- --
--------- --------- --------- --------- ---------
Net income................................................. 1,379 2,435 7 109 277
Accretion of mandatorily redeemable preferred shares to
redemption value......................................... -- 187 1,374 1,030 1,115
--------- --------- --------- --------- ---------
Net income (loss) attributable to common stockholders...... $ 1,379 $ 2,248 $ (1,367) $ (921) $ (838)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per share data
Basic
Income from continuing operations...................... $ 0.10 $ 0.09 $ (0.45) $ (0.30) $ (0.24)
Discontinued operations................................ (0.05) 0.00 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) per share............................ $ 0.05 $ 0.09 $ (0.45) $ (0.30) $ (0.24)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted
Income from continuing operations...................... $ 0.10 $ 0.09 $ (0.45) $ (0.30) $ (0.24)
Discontinued operations................................ (0.05) 0.00 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) per share............................ $ 0.05 $ 0.09 $ (0.45) $ (0.30) $ (0.24)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of shares used in per share calculations
Basic.................................................... 27,903 24,772 3,061 3,055 3,447
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................. 28,271 25,224 3,061 3,055 3,447
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma data
Net loss per share--basic and diluted.................... $ (0.14) $ (0.08)
--------- ---------
--------- ---------
Shares used in per share calculation--basic and
diluted................................................ 7,234 7,620
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE>
DITECH COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
--------------------- RECEIVABLE FROM DEFERRED STOCK PAID IN ACCUMULATED
SHARES AMOUNT STOCKHOLDERS COMPENSATION CAPITAL DEFICIT
--------- ---------- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, MAY 1, 1995................ 27,903 $ 28 $ (87) $ 9,610 $ (2,758)
Net income........................... -- -- -- 1,379
--------- ---------- ----- ----------- -------------
BALANCES, APRIL 30, 1996............. 27,903 28 (87) 9,610 (1,379)
Exercise of stock options............ 1,050 1 -- 154 --
Tax benefit on exercise of stock
options............................ -- -- -- 307 --
Collection of stockholder notes
receivable......................... -- -- 87 --
Repurchase of common stock........... (26,093) (29) -- (10,071) (23,637)
Accretion for dividend on Series A
and B redeemable preferred stock... -- -- -- (187)
Net income........................... -- -- -- 2,435
--------- ---------- ----- ----------- -------------
BALANCES, APRIL 30, 1997............. 2,860 -- -- -- (22,768)
Exercise of stock options............ 153 2 -- 21 --
Issuance of common stock............. 67 1 -- 54 --
Accretion for dividend on Series A
and B redeemable preferred stock... -- -- -- (1,374)
Net income........................... -- -- -- 7
--------- ---------- ----- ----------- -------------
BALANCES, APRIL 30, 1998............. 3,080 3 -- 75 (24,135)
Exercise of stock options............ 1,327 1 -- 872 --
Issuance of common stock............. 167 1 -- 499 --
Repurchase of common stock........... (1) -- -- (1) --
Accretion for dividend on Series A
and B redeemable preferred stock... -- -- -- (1,115)
Deferred compensation on issuance of
stock options...................... -- -- -- $ (433) 433 --
Amortization of deferred stock
compensation....................... -- -- -- 24 -- --
Net income........................... -- -- -- -- 277
--------- ---------- ----- ------ ----------- -------------
BALANCES, JANUARY 31, 1999
(UNAUDITED)........................ 4,573 $ 5 $ -- $ (409) $ 1,878 $ (24,973)
--------- ---------- ----- ------ ----------- -------------
--------- ---------- ----- ------ ----------- -------------
<CAPTION>
TOTAL
----------
<S> <C>
BALANCES, MAY 1, 1995................ $ 6,793
Net income........................... 1,379
----------
BALANCES, APRIL 30, 1996............. 8,172
Exercise of stock options............ 155
Tax benefit on exercise of stock
options............................ 307
Collection of stockholder notes
receivable......................... 87
Repurchase of common stock........... (33,737)
Accretion for dividend on Series A
and B redeemable preferred stock... (187)
Net income........................... 2,435
----------
BALANCES, APRIL 30, 1997............. (22,768)
Exercise of stock options............ 23
Issuance of common stock............. 55
Accretion for dividend on Series A
and B redeemable preferred stock... (1,374)
Net income........................... 7
----------
BALANCES, APRIL 30, 1998............. (24,057)
Exercise of stock options............ 873
Issuance of common stock............. 500
Repurchase of common stock........... (1)
Accretion for dividend on Series A
and B redeemable preferred stock... (1,115)
Deferred compensation on issuance of
stock options...................... --
Amortization of deferred stock
compensation....................... 24
Net income........................... 277
----------
BALANCES, JANUARY 31, 1999
(UNAUDITED)........................ $ (23,499)
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
DITECH COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED APRIL 30, JANUARY 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,379 $ 2,435 $ 7 $ 109 $ 277
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loss from discontinued operations............................. 1,413 2,751 -- -- --
Gain on disposal of discontinued operations................... -- (2,843) -- -- --
Depreciation and amortization................................. 29 68 175 110 299
Increase (decrease) in provision for doubtful accounts........ -- 75 (45) (45) 70
Loss on disposal of property and equipment.................... -- 1 -- -- --
Deferred income taxes......................................... (199) (142) (18) -- (164)
Amortization of deferred stock compensation................... -- -- -- -- 24
Change in assets and liabilities:
Accounts receivable......................................... (2,416) 749 58 307 22
Inventories................................................. (688) (562) (503) (349) (2,173)
Other assets................................................ 1 (69) (58) (14) (231)
Income taxes receivable/payable............................. -- (848) 705 72 349
Accounts payable............................................ 941 80 (177) (335) 1,566
Accrued expenses and other.................................. 1,422 (455) (246) (479) 55
Deferred revenue............................................ -- -- -- -- 1,316
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities of
continuing operations................................... 1,882 1,240 (102) (624) 1,410
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of discontinued operations.................. -- 2,623 -- --
Purchases of property and equipment............................. (182) (289) (823) (626) (482)
Other assets.................................................... -- -- -- (25) (116)
Maturity (purchase) of investments.............................. (514) 293 221 221 --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities of
continuing operations....................................... (696) 2,627 (602) (430) (598)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Issuance of note payable........................................ -- -- 8,000 -- --
Issuance of subordinated promissory notes....................... -- 8,000 -- -- --
Collection of notes receivable from stockholders................ -- 87 -- -- --
Repayment of subordinated promissory notes...................... -- -- (8,000) -- --
Repurchase of common stock...................................... -- (21,486) -- -- (1)
Principal payments on note payable.............................. -- -- (125) -- (375)
Principal payments under capital lease obligations.............. -- -- (15) -- (18)
Proceeds from issuance of preferred stock....................... -- 17,901 -- -- --
Proceeds from issuance of common stock.......................... -- -- 55 55 --
Proceeds from exercise of stock options......................... -- 155 23 23 873
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities of
continuing operations....................................... -- 4,657 (62) 78 479
--------- --------- --------- --------- ---------
Net cash used in discontinued operations.......................... (755) (4,856) -- -- --
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. 431 3,668 (766) (976) 1,291
Cash and cash equivalents, beginning of period.................... 100 531 4,199 4,199 3,433
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.......................... $ 531 $ 4,199 $ 3,433 $ 3,223 $ 4,724
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Ditech Communications Corporation (formerly Automated Call Processing
Corporation) (the "Company") is a Delaware corporation that reincorporated from
a California corporation in April 1999. 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 one business segment.
Effective March 11, 1997, the Company sold its operations doing business as
Automated Call Processing Corporation ("ACP") and its wholly owned subsidiary,
Globe Wireless ("GW") and subsequently merged with its wholly owned subsidiary,
Ditech Corporation and renamed the Company. The operations of ACP and GW have
been presented as discontinued operations in the financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes 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 revenue recognition is deferred due to
uncertainty about collectibility or the existence of a material vendor
obligation such as installation, the revenue is recognized when the uncertainty
is removed and/or the vendor obligation is fulfilled.
WARRANTIES
The Company's products are warranted for one to five years. A provision for
the estimated future cost of warranty is made at the time a sale is recorded.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Management
believes that the financial institutions in which it maintains such deposits are
financially sound and, accordingly, minimal credit risk exists with respect to
these deposits. Cash and cash equivalents are held by two major U.S. financial
institutions.
F-7
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, investments, accounts receivable, accounts
payable and note payable are considered to approximate fair value based upon
comparable market information available at the respective balance sheet dates.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by
using the first-in, first-out ("FIFO") method. Appropriate consideration is
given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives ranging from three to
five years or, in the case of leasehold improvements, the lease period, if
shorter. Upon disposal, the assets and related accumulated depreciation are
removed from the Company's accounts, and the resulting gains or losses are
reflected in the statements of operations.
CERTAIN RISKS AND CONCENTRATIONS
The Company's products are concentrated in the telecommunications component
industry, which is highly competitive and rapidly changing. Revenues for the
Company's products are concentrated with a relatively limited number of
customers. During the year ended April 30, 1996, three customers accounted for
78% (34%, 30% and 14%) of net revenues. During the year ended April 30, 1997,
two customers accounted for 65% (54% and 11%) of net revenues. During the year
ended April 30, 1998, three customers accounted for 67% (42%, 14%, and 11%) of
net revenues. Net revenues from customers outside the United States, which were
denominated in U.S. dollars, were 35%, 10% and 6% in 1996, 1997 and 1998,
respectively. The Company's accounts receivable was concentrated with two
customers at April 30, 1997 (representing 42% and 28% of receivables) and one
customer at April 30, 1998 (representing 75% of receivables).
A significant component of one of the Company's products is purchased from a
sole vendor. If the Company was unable to obtain the component at prices
reasonable to the Company, it would experience delays in redesigning the product
to function with a component from an alternative supplier. The Company relies on
a single manufacturer for a majority of the Company's products. The Company may
experience delays if it were to shift production to an alternative vender.
INCOME TAXES
Income taxes are accounted for under the liability method. Under this
method, deferred income taxes are recognized for temporary differences by
applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-8
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements at January 31, 1999 and for the nine
months ended January 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 January 31, 1999 are not necessarily
indicative of results for the entire fiscal year or future periods.
PRINCIPALS OF CONSOLIDATION
In fiscal years 1997 and 1996, the Company's financial statements included
the accounts of the Company and its two subsidiaries. Intercompany transactions
and balances were eliminated in consolidation. See Note 3 for discussion on
discontinued operations presentation for ACP and GW.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net income and its total comprehensive income for 1996, 1997 and 1998.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation," ("SFAS 123"), the Company accounts
for grants of equity instruments to employees using the intrinsic value method
described in Accounting Practice Bulletin No. 25, "Accounting for Stock Issued
to Employees," ("APB 25"). All other grants are accounted for using the fair
value method described in FAS 123, with appropriate compensation expense
recognition in the statement of operations, where significant.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs which are incurred
during the application's development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on
its financial statements and related disclosures.
EARNINGS 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
F-9
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
average number of shares of common stock and common stock equivalent
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 preferred stock.
A reconciliation of the numerator and denominator used in the calculation of
the historical basic and diluted net income (loss) per share follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Historical net income (loss) per share, basic and diluted:
Basic:
Net income......................................................... $ 1,379 $ 2,435 $ 7
Less accretion on mandatorily redeemable preferred stock........... -- 187 1,374
--------- --------- ---------
Net income (loss) attributable to common stockholders.............. $ 1,379 $ 2,248 $ (1,367)
--------- --------- ---------
--------- --------- ---------
Weighted average shares of common stock outstanding................ 27,903 24,772 3,061
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share........................................ $ 0.05 $ 0.09 $ (0.45)
--------- --------- ---------
--------- --------- ---------
Diluted:
Net income......................................................... $ 1,379 $ 2,435 $ 7
Less accretion on mandatorily redeemable preferred stock........... -- 187 1,374
--------- --------- ---------
Net income (loss) attributable to common stockholders.............. $ 1,379 $ 2,248 $ (1,367)
--------- --------- ---------
--------- --------- ---------
Weighted average shares of common stock outstanding................ 27,903 24,772 3,061
Dilutive effect of stock options................................... 368 452 --
--------- --------- ---------
Shares used in calculation of diluted per share numbers............ 28,271 25,224 3,061
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share........................................ $ 0.05 $ 0.09 $ (0.45)
--------- --------- ---------
--------- --------- ---------
</TABLE>
RECLASSIFICATIONS
Certain 1996, 1997 and 1998 amounts in the Statement of Operations have been
reclassified to conform with the 1999 presentation. These reclassifications did
not change previously reported shareholders' equity (deficit) or net income.
3. DISCONTINUED OPERATIONS
Effective March 11, 1997 the Company sold, in their entirety, both the
operating entities of ACP and GW. ACP represented the call processing segment of
the Company's business and GW represented the wireless marine communications
segment of the Company's business. Both had operations that were separate and
distinct from Ditech Corporation and each other. ACP was sold for cash of
$1,210,000, to a limited liability company and a limited partnership of which
the manager and controlling member is a director and shareholder of the Company.
All of the common stock in GW was sold for cash of $1,413,000. The sale of
GW was to certain shareholders of the Company, a new investor and entities
controlled by a director and shareholder of the Company. The Company accounts
for its investment in GW Series A preferred stock at the
F-10
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
lesser of historical cost or market. As no liquid market exists for the stock,
the Company has evaluated the recoverability of the investment based on
secondary financings that GW has completed. To date the financings that have
been completed indicate that no impairment has occurred. The shares of Series A
preferred stock of Globe Wireless are nonredeemable, nonvoting and
nonconvertible securities. The shares are entitled to a 6% per annum
noncumulative dividend when and if declared by the Board of Directors of Globe
Wireless.
The following summarizes the revenues, operations and gain on disposal of
the entities.
Revenue from discontinued operations for the years ended April 30, 1996 and
1997 were (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
ACP...................................................................... $ 5,983 $ 5,161
GW....................................................................... 2,195 2,072
--------- ---------
Total.................................................................. $ 8,178 $ 7,233
--------- ---------
--------- ---------
</TABLE>
Income (loss) from operations of discontinued operations for the years ended
April 30, 1996 and 1997 were (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
ACP (net of tax benefit of $201 in 1996 and $583 in 1997)............... $ (248) $ 119
GW (net of tax benefit of $930 in 1996 and $454 in 1997)................ (1,165) (2,870)
--------- ---------
$ (1,413) $ (2,751)
--------- ---------
--------- ---------
</TABLE>
Gain on disposal of discontinued operations during the year ended April 30,
1997 were (in thousands):
<TABLE>
<S> <C>
ACP (net of tax benefit of $305).................................. $ 63
GW (net of tax benefit of $59).................................... 2,780
---------
$ 2,843
---------
---------
</TABLE>
F-11
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET ACCOUNTS
INVESTMENTS:
The amortized cost of the Company's investments consist of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 30,
1997
-----------
<S> <C>
U.S. government obligations........................................................ $ 100
Municipal bonds.................................................................... 121
-----
$ 221
-----
-----
</TABLE>
All of the Company's held to maturity investments matured within the first
six months of fiscal 1998. The cost of investments approximates their fair value
and the amount of unrealized gains and losses were not significant at April 30,
1997.
INVENTORIES:
Inventories comprised (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Raw materials and work in progress....................................... $ 160 $ 484
Finished goods........................................................... 1,500 1,679
--------- ---------
Total.................................................................. $ 1,660 $ 2,163
--------- ---------
--------- ---------
</TABLE>
PROPERTY AND EQUIPMENT:
Property and equipment comprised (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Furniture and fixtures................................................... $ 23 $ 118
Equipment................................................................ 499 1,190
Leasehold improvements................................................... 25 25
Computer software........................................................ -- 190
--------- ---------
547 1,523
Less: accumulated depreciation and amortization.......................... (121) (295)
--------- ---------
Total.................................................................. $ 426 $ 1,228
--------- ---------
--------- ---------
</TABLE>
Included in property and equipment are assets under capital lease of
$154,000 at April 30, 1998 with related accumulated amortization of $9,000.
Prior to fiscal year 1998, the Company did not have any assets under capital
lease.
F-12
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. BALANCE SHEET ACCOUNTS (CONTINUED)
ACCRUED EXPENSES:
Accrued expenses comprised (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Accrued royalties........................................................ $ 287 $ 171
Accrued compensation..................................................... 417 332
Other accrued expenses................................................... 434 389
--------- ---------
Total.................................................................. $ 1,138 $ 892
--------- ---------
--------- ---------
</TABLE>
5. NOTE PAYABLE
In August 1997, the Company entered into an $8 million loan with a bank in
conjunction with its line of credit (see Note 6), collateralized by
substantially all the Company assets. Interest is based on the bank's Base Rate
plus .25% to 1% or LIBOR Rate plus 2.0% to 2.75%, as allowed based on compliance
with certain covenants and the Company's elected instrument. Based on the
quarterly principal payments the loan will be paid in full December 31, 2002.
The Note has covenants including a minimum quick ratio and minimum quarterly
earnings before interest, taxes, depreciation and amortization. During fiscal
1998, the Company was out of compliance with certain of the notes covenants. The
Company received a waiver from the bank for these instances of non-compliance.
The loan was used to repay the subordinated promissory notes of $8,000,000 to
shareholders, which were issued as part of the recapitalization.
At April 30, 1998, principal payments consist of the following (in
thousands):
<TABLE>
<S> <C>
1999....................................................... $ 563
2000....................................................... 1,125
2001....................................................... 2,250
2002....................................................... 2,250
2003....................................................... 1,688
---------
7,876
Less current portion....................................... (563)
---------
$ 7,313
---------
---------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office facilities under a non-cancelable operating
lease expiring in December 2003. The Company is responsible for taxes, insurance
and maintenance expenses related to the leased facilities. Under the terms of
the lease agreement, the lease may be extended, at the Company's option, and the
lease provides for potential adjustments of the minimum monthly rent upon
exercise of the option(s). The Company also has operating leases on furniture
and equipment from unrelated parties. Additionally, the Company has capital
leased equipment with future minimum payments.
F-13
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At April 30, 1998, future minimum payments under the leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, OPERATING CAPITAL
- ------------------------------------------------------------------------ ------------- -----------
<S> <C> <C>
1999.................................................................... $ 143 $ 54
2000.................................................................... 48 54
2001.................................................................... 15 39
2002.................................................................... -- 17
2003.................................................................... -- 9
----- -----
$ 206 173
-----
-----
Less amount representing interest....................................... 35
-----
138
Less current portion 41
-----
$ 97
-----
-----
</TABLE>
Rent expense for the years ended April 30, 1996, 1997 and 1998 was $87,000,
$131,000 and $384,000, respectively.
LINE OF CREDIT
At April 30, 1998, the Company had a revolving line of credit of $3 million
collateralized by substantially all of the Company's assets. Borrowings under
the agreement bear interest at the bank's Base Rate plus .25% to 1.0% or at
LIBOR Rate plus 2.0% to 2.75%, as allowed based on covenants and the Company's
elected instrument. On August 13, 1998, the Company converted the existing line
into a new revolving line of credit with available borrowings of $2 million or
80% of eligible accounts receivable, whichever is lower, with the same financial
institution. Borrowings under the agreement are at the bank's Base Rate plus
.50% until April 30, 1999 and then are adjustable based on attaining certain
covenants at the bank's Base Rate plus .25% to 1.0% or LIBOR Rate plus 2.0% to
3.0%. The line expires on August 20, 2000. There were no amounts outstanding at
April 30, 1997 or 1998.
ARBITRATION
In January 1998, the Company filed a demand for Arbitration with the
American Arbitration Association in Los Angeles County against Antec
Corporation, the successor-in-interest through merger to Texscan Corporation.
The demand for arbitration alleges that Antec/Texscan breached a contract to
purchase our optical amplifier products and seeks monetary damages.
Antec/Texscan have denied liability and, in December 1998, filed a counterclaim
against the Company claiming that the Company breached the purchase contract
first and seeking monetary damages. The matter is set to complete arbitration in
May 1999. Although management believes that it has a valid claim to recover
against Antec/Texscan for breach of contract and has meritorious defenses to the
counterclaim, if the case is resolved unfavorably to us it could have a material
adverse effect on our financial condition and results of operations. The Company
has not accrued for any potential losses as they are not probable and currently
cannot be estimated.
F-14
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED STOCK
The Company has authorized and issued 17,250,000 shares of Series A
preferred stock, 6,259,718 shares of Series B preferred stock and 7,508,221
Series C preferred stock. Certain former common stockholders of the Company own
a portion of the Series A preferred stock and Series C preferred stock. The
rights, preferences and privileges of the Series A, Series B and Series C
preferred shares are as follows:
LIQUIDATION RIGHTS
The preferred stock has certain liquidation preferences over the common
stock in the event of a liquidating event such as dissolution of the affairs of
the Company or a take-over by another corporation. The Series C preferred
stockholders have distribution preference related to the Globe Wireless
preferred stock and related to unpaid dividends over the Series A and Series B
preferred stockholders. The liquidation preferences entitle the Series A and
Series B preferred stockholders to receive $1.00 and $0.86 per share,
respectively, in addition to amounts due on unpaid dividends which have been
accrued or declared. The Series A preferred stockholders have preference over
the Series B preferred stockholders in determining the order of liquidation
payout. Subsequently, the Series C preferred stockholders may then receive the
difference between the GW preferred liquidation value of $1.00 and the GW
preferred fair market value, if the fair market value is less than the
liquidation value. The preferred stock does not participate in the distribution
of assets remaining after the liquidation preference has been paid.
CONVERSION RIGHTS
The Series A and Series C preferred stock have no conversion rights. The
Series B preferred stockholders have the right at any time to convert each share
of preferred stock into shares of common stock at the specified conversion rate
per share, which currently is $1.29 per share of common stock. The conversion
rate will be adjusted for stock splits and recapitalization. In the event of a
public offering of the Company's common stock where the net proceeds received by
the Company equals or exceeds $20,000,000 and the offering price is at least
$3.89 per share, or in the event of approval from two thirds of Series B
preferred stockholders, all shares of the Series B preferred stock automatically
convert into common stock at the specified conversion rate.
REDEMPTION RIGHTS
The Company may not redeem any or all of the Series A and Series B preferred
stock until after February 1, 2004, with a request of the majority of the
outstanding stockholders. The Series B preferred stock may be redeemed only if
there are no shares of Series A preferred stock then outstanding.
The Company, upon the election of the holders of a majority of the
outstanding shares, will redeem all of the Series A preferred stock in the event
of a public offering of the Company's common stock. Upon a change in ownership
or fundamental change in the Company and an election by a majority of the
stockholders, the Series A and Series B preferred stockholders may redeem all of
their shares at liquidation value and unpaid dividends. The Series A preferred
has preference over the Series B preferred. Series C preferred redemption shall
only occur upon the redemption or sale of Globe Wireless preferred.
F-15
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED STOCK (CONTINUED)
VOTING RIGHTS
The Series B preferred stockholders are entitled to vote on all matters with
the holders of common stock as if on an as converted basis and have the right to
elect two directors to the Board of Directors. The Series A preferred
stockholders have no rights to vote. The Series C preferred stockholders shall
have 2/3 of one vote for every five shares held and have the right along with
the holders of common stock to elect two directors to the Board of Directors.
DIVIDEND RIGHTS
The preferred stockholders will be entitled to receive dividends in
preference to the common stockholders. In addition, Series A and Series B
stockholders dividends shall be on a pro rata basis based on liquidation values
of each. From the date of issuance, cumulative dividends are payable when and if
declared or accumulate as part of the shares' liquidation preferences at 6% per
year, compounded daily.
The carrying amounts of both Series A and Series B have been increased by
amounts representing dividends not currently declared or paid but which will be
payable under the dividend rights of the respective series of preferred stock.
The increases have been effected by a charge against accumulated deficit.
Dividends for Series C stockholders shall accrue only when dividends are
paid with respect to the investment in Globe Wireless preferred stock on a pro
rata basis.
8. STOCKHOLDERS' EQUITY (DEFICIT)
RECAPITALIZATION
In March 1997, the Company recapitalized its financial structure by
exchanging substantially all of the then outstanding shares of common stock for
cash of $21,486,000 and Series A and C preferred stock. In retiring the common
stock outstanding at that time, the excess of the fair value of the common stock
over the original issuance price of common stock of $23,637,000 was recorded
against retained earnings, which gave rise to the accumulated deficit of
$22,768,000 as of April 30, 1997.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the 'Plan') serves as the successor
equity incentive program to the Company's 1987 Stock Option Plan and the
Supplemental Stock Option Plan (the 'Predecessor Plans'). All outstanding stock
options under the Predecessor Plans will continue to be governed by the terms
and conditions of the Plan. The Company has reserved 2,000,000 shares of common
stock for issuance under the Plan. Under the Plan, the Board of Directors may
grant incentive or non-statutory stock options at a price not less than 100% or
85%, respectively, of fair market value of common stock, as determined by the
Board of Directors, at grant date. Options under the Plan may be immediately
exercisable. The options have a ten-year term. Shares issued through early
option exercises are subject to the Company's right of repurchase at the
original exercise price. The number of shares subject to repurchase generally
decreases by 25% of the options shares one year after the grant date, and
thereafter, ratably over 48 months. No shares were subject to repurchase as of
April 30, 1998.
F-16
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
All the options associated with the ACP operations were either exercised or
cancelled during the year ended April 30, 1997 (with the discontinued
operations). No options were outstanding at April 30, 1997.
Activity under the Plan was as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AGGREGATE AVERAGE
FOR GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
----------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, May 1, 1995....................... 1,069 1,351 $0.15 $ 200 $ 0.15
Options granted........................... (376) 376 $0.15-$1.50 139 $ 0.37
----------- ----------- -------------- ----------- -----
Balances, April 30, 1996.................... 693 1,727 $0.15-$1.50 339 $ 0.20
Options granted........................... (255) 255 $0.83-$1.50 281 $ 1.10
Options exercised......................... -- (1,050) $0.15 (155) $ 0.15
Options canceled.......................... 162 (162) $1.50 (243) $ 1.50
----------- ----------- -------------- ----------- -----
Balances, April 30, 1997.................... 600 770 $0.15-$0.83 222 $ 0.29
Reservation of shares..................... 632
Options granted........................... (982) 982 $0.83 810 $ 0.83
Options exercised......................... -- (153) $0.15 (23) $ 0.15
Options canceled.......................... 33 (33) $0.83 (27) $ 0.83
----------- ----------- -------------- ----------- -----
Balances, April 30, 1998.................... 283 1,566 $0.15-$0.83 982 $ 0.63
Additional shares reserved................ 761
Reserved shares cancelled................. (95)
Options granted........................... (461) 461 $0.83-$7.50 759 $ 1.65
Options exercised......................... -- (1,327) $0.15-$3.00 (873) $ 0.66
Options canceled.......................... 41 (52) $0.83 (43) $ 0.83
----------- ----------- -------------- ----------- -----
Balances, January 31, 1999 (unaudited)...... 529 648 $0.15-$7.50 $ 825 $ 1.27
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Options Outstanding at April 30, 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
APRIL 30, 1998
WEIGHTED AVERAGE ----------------------------
WEIGHTED REMAINING WEIGHTED
RANGE OF OPTIONS AVERAGE CONTRACTUAL LIFE AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE YEARS OPTIONS EXERCISE PRICE
- --------------- ------------- --------------- ------------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$0.15 467 $ 0.15 6.86 305 $ 0.15
$0.83 1,099 $ 0.83 9.24 57 $ 0.83
----- ---
$0.15-$0.83 1,566 $ 0.63 8.53 362 $ 0.26
----- ---
----- ---
</TABLE>
The estimated weighted average fair value of options granted during fiscal
year 1996, 1997 and 1998 was $0.27, $0.29 and $0.29 per share, respectively. The
Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan other than
F-17
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
that described above. If compensation cost for the Company's stock option plan
had been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS 123, the Company's net income for
the years ended April 30, 1996, 1997 and 1998 would have been reduced to the pro
forma amounts indicated in the following table (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
APRIL 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations before income taxes, as reported....... $ 4,568 $ 3,865 $ 31
Less: net expense per SFAS 123........................................... 10 31 86
--------- --------- ---------
Pro forma income (loss) from continuing operations....................... 4,558 3,834 (55)
Less: pro forma provision (benefit) for income taxes..................... 1,772 1,510 (22)
--------- --------- ---------
Pro forma income (loss) from continuing operations....................... $ 2,786 $ 2,324 $ (33)
--------- --------- ---------
--------- --------- ---------
Income from continuing operations as reported............................ $ 2,792 $ 2,343 $ 7
--------- --------- ---------
--------- --------- ---------
Net income from continuing operations per share:
Pro forma.............................................................. $ 0.10 $ 0.09 $ (0.46)
--------- --------- ---------
--------- --------- ---------
As reported............................................................ $ 0.10 $ 0.09 $ (0.45)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The fair value of options granted under the Company's stock option plans
during 1996, 1997 and 1998 was estimated on the date of grant using the
Black-Scholes option pricing model. The model utilized the multiple option
approach with the following weighted average assumptions used: no dividend
yield, expected volatility is zero based on private company status, risk-free
interest rates of 6.28%, 6.48% and 5.90% in 1996, 1997 and 1998, respectively,
and expected lives of four years. Forfeitures are recognized as they occur.
9. INCOME TAXES
The provision for income taxes for continuing operations reflected in the
statements for the years ended April 30, 1996, 1997 and 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 1,452 $ 1,308 $ 41
State.................................................... 523 356 1
--------- --------- ---------
Total current.......................................... 1,975 1,664 42
--------- --------- ---------
Deferred:
Federal.................................................. (168) (105) (19)
State.................................................... (31) (37) 1
--------- --------- ---------
Total deferred......................................... (199) (142) (18)
--------- --------- ---------
Total................................................ $ 1,776 $ 1,522 $ 24
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The deferred income tax provision reflects the tax effect of changes in the
amounts of temporary differences during each year ended April 30, 1996, 1997 and
1998. As of April 30, 1997 and 1998, the Company's deferred tax assets and
liabilities consisted of (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax asset (liability):
Uniform capitalization................................................... $ 200 $ 238
Depreciation............................................................. (36) (79)
Inventory reserves and other, net........................................ 200 223
--------- ---------
Total.................................................................. $ 364 $ 382
--------- ---------
--------- ---------
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax provision at federal statutory rate.......................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit.............................. 6.1 6.1 13.0
Other, primarily non-deductible expenses......................... (1.2) (0.7) 30.4
--- --- ---
Total........................................................ 38.9% 39.4% 77.4%
--- --- ---
--- --- ---
</TABLE>
10. 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 131") effective for fiscal years
beginning after December 31, 1997. This statement supercedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 changes current practice under Statement No. 14
by establishing a new framework on which to base segment reporting and also
required interim reporting of segment information.
The Company markets its products from its continuing operations, primarily
to customers in the United States and in the telecommunications industry.
Management uses one measurement of profitability and does not disaggregate its
business for internal reporting. The Company's revenues, from its continuing
operations, by geographic area are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
USA............................................................ $ 9,330 $ 12,673 $ 11,539
Mexico......................................................... 4,278 120 345
Rest of the world.............................................. 746 1,273 442
--------- --------- ---------
$ 14,354 $ 14,066 $ 12,326
--------- --------- ---------
--------- --------- ---------
</TABLE>
International sales are entirely comprised of export sales.
F-19
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS
Transactions between the Company and its former wholly owned subsidiaries,
other than the reorganization transactions described in Notes 1 and 3 to these
financial statements, are as follows (in thousands):
<TABLE>
<CAPTION>
GW ACP
--------- ---------
<S> <C> <C>
Year-ended April 30 1996
Benefits, goods and services provided.............................................. $ 397 $ --
Year ended April 30, 1997:
Benefits, goods and services provided/(used)....................................... $ 450 $ (30)
Income tax refund transferred...................................................... -- 420
</TABLE>
12. UNAUDITED PRO FORMA NET LOSS PER SHARE AND PRO FORMA
STOCKHOLDERS EQUITY (DEFICIT) (UNAUDITED):
Pro forma basic net loss per share has been computed as described in Note 2
and also gives effect to common equivalent shares from Series B Preferred Shares
that will automatically convert upon the closing of the Company's initial public
offering (using the as-if-converted method).
A reconciliation of the numerator and denominator used in the calculation of
unaudited pro forma basic and diluted net income per share follow (in thousands
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
APRIL 30, 1998 JANUARY 31, 1999
-------------- -----------------
<S> <C> <C>
Pro forma net income per share, basic and diluted:
Net income.................................................................. $ 7 $ 277
Less accretion of non-convertible mandatorily redeemable Series A preferred
stock....................................................................... 1,047 849
-------------- -----------------
Net loss attributable to common stockholders................................ $ (1,040) $ (572)
-------------- -----------------
-------------- -----------------
Weighted average shares of common stock outstanding......................... 3,061 3,862
Less stock subject to repurchase............................................ -- (415)
Adjustments to reflect the effect of the assumed conversion of convertible
Series B preferred stock.................................................... 4,173 4,173
-------------- -----------------
Shares used in computing pro forma net loss per share....................... 7,234 7,620
-------------- -----------------
-------------- -----------------
Pro forma net loss per share................................................ $ (0.14) $ (0.08)
-------------- -----------------
-------------- -----------------
</TABLE>
If the offering contemplated by this Prospectus is consummated, all of the
shares of Series B convertible Preferred stock outstanding as of the closing
date will automatically be converted into an aggregate of approximately
4,173,139 shares of common stock based on the number of shares of Series B
convertible preferred stock outstanding at January 31, 1999. Unaudited pro forma
stockholders' equity at January 31, 1999, as adjusted for the conversion of the
Series B convertible preferred stock, is disclosed on the balance sheet.
F-20
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. PROFIT SHARING PLAN
The Company maintains a 401(k) profit sharing plan for all eligible
employees. Employees may contribute to the Plan based on statutory limits. Any
Company contributions are at the discretion of the Board of Directors. The
Company made no contributions to the Plan during the years ended April 30, 1996,
1997 and 1998.
14. SUPPLEMENTAL CASHFLOW INFORMATION
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Interest paid.............................................................. $ 8 $ 7 $ 600
Income taxes paid.......................................................... 334 1,072 --
Noncash financing activities:
Accretion of preferred stock............................................... -- 187 1,374
Acquisition of asset under capital lease................................... -- -- 154
Issuance of Series A preferred stock....................................... -- 4,743 --
Issuance of Series C preferred stock....................................... -- 7,508 --
</TABLE>
15. SUBSEQUENT EVENTS
In December 1998, the Company leased new office space for its headquarters.
The lease expires in December 2003. Total minimum rental payments over the term
of the lease are approximately $5 million.
In March 1999, the Company's Board of Directors (i) authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell its common stock to the public and
(ii) approved the reincorporation of the Company from California to Delaware.
In the second fiscal quarter of 1999, the Company was out of compliance with
a specific financial covenant. The Company has received a waiver for this
instance of non-compliance.
During fiscal 1999, the Company granted options to certain employees under
the 1997 Stock Plan and 1998 Stock Option Plan with exercise prices below the
deemed fair market value of the Company's common stock at the date of grant. In
accordance with the requirements of APB 25, the Company has recorded deferred
compensation for the difference between the exercise price of the stock options
and the fair market value of the Company's shares at the date of grant. This
deferred compensation is being amortized to expense over the period during which
the options become exercisable, generally four years. At January 31, 1999, the
Company had recorded deferred compensation related to these options in the total
amount of $433,000, of which $24,000 had been amortized to expense during 1999.
Future compensation expense from options granted through January 31, 1999 is
estimated to be $27,000 for the remainder of fiscal 1999 and $108,000, $108,000,
$108,000 and $58,000 for the years ending April 30, 2000, 2001, 2002 and 2003,
respectively.
In November 1998, the Company adopted its 1998 Stock Option Plan and
determined not to grant any further options under its 1997 Stock Option Plan.
The Company reserved a total of 761,375 shares of common stock for issuance
under the 1998 Stock Option Plan. The terms of
F-21
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
options granted under the 1998 Stock Option Plan are substantially similar to
those granted under the 1997 Stock Option Plan.
In March 1999, the Company adopted its 1999 Employee Stock Purchase Plan and
1999 Non-Employee Directors' Stock Option Plan covering an aggregate of 133,333
and 100,000 shares of common stock, respectively. In March the Company increased
the shares reserved under the 1998 Stock Option Plan by 166,666 common shares.
In November 1998, the Company entered into an agreement with a partnership
for the purchase of technology included in its echo cancellation products which
it had previously licensed. The Company issued 166,666 of its common shares,
increased the royalty percentage until a triggering event and agreed to pay
$2.96 million upon a triggering event. A triggering event is defined as an IPO
or merger where the Company is not the surviving entity. After the triggering
event the Company is no longer required to pay royalties on the technology.
The Company reincorporated in Delaware on April 21, 1999; all amounts have
been retroactively adjusted to effect this presentation. On April 27, 1999 the
Company effected a two-for-three reverse split of the Company's common stock.
All relevant share data has been adjusted to reflect this reverse stock split.
On April 29, 1999 the Company redeemed its Series C preferred stock by
distributing the Company's investment in GW preferred stock. This distribution
was for full settlement and redemption of the Company's Series C preferred
stock.
F-22
<PAGE>
[LOGO]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF THE COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Disclosure Regarding Forward-Looking Statements........................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 21
Business.................................................................. 32
Management................................................................ 45
Certain Transactions...................................................... 55
Principal Stockholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Change in Accountants..................................................... 65
Additional Information.................................................... 65
Index to Financial Statements............................................. F-1
</TABLE>
--------------
DEALER PROSPECTUS DELIVERY OBLIGATION:
Until , 1999 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a Prospectus. This is
in addition to the dealers' obligation to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
SHARES
[LOGO]
COMMON STOCK
------------------
P R O S P E C T U S
------------------
BT ALEX. BROWN
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST
, 1999
- -------------------------------------------
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- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee, the NASD filing fee and the Nasdaq National Market
application fee.
<TABLE>
<S> <C>
Registration fee.............................................. $ 12,469
NASD filing fee............................................... 4,100
Nasdaq National Market application fee........................ 76,625
Blue sky qualification fee and expenses....................... 5,000
Printing and engraving expenses............................... 175,000
Legal fees and expenses....................................... 300,000
Accounting fees and expenses.................................. 230,000
Directors' and Officers' Liability Insurance.................. 50,000
Transfer agent and registrar fees............................. 5,000
Miscellaneous................................................. 41,806
---------
Total..................................................... $ 900,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and executive officers
and may indemnify its other officers, employees and other agents to the fullest
extent not prohibited by Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to
II-1
<PAGE>
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise. In addition, the Indemnity Agreement filed as Exhibit 10.15 to
this Registration Statement provides for indemnification by the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since February 22, 1996, except as otherwise noted, the Registrant has sold
and issued the following unregistered securities (references to shares of Common
Stock take account of a 2-for-3 reverse stock split to occur prior to the
closing of this offering):
(1) On March 11, 1997, the Registrant issued an aggregate of 12,506,539 shares
of Series A Redeemable Preferred Stock; 6,259,718 shares of Series B
Convertible Preferred Stock; and two Class A Subordinated Promissory Notes
to a group of accredited investors for a total purchase price of
$25,901,476, payable as follows: for the Series A Redeemable Preferred
Stock, $12,506,539; for the Series B convertible stock; $5,394,937; and for
the Class A Subordinated Promissory Notes, the aggregate original principal
amount of $8,000,000.
(2) On March 11, 1997, the Registrant redeemed 26,092,717 shares of Common
Stock in exchange for 4,743,461 shares of Series A Redeemable Preferred
Stock and 7,508,221 shares of Series C Preferred Stock and $21,485,621 in
cash.
(3) On September 15, 1997, the Registrant issued to William A. Hasler 66,666
shares of Common Stock. The stock is subject to a repurchase option that
vests over a four-year period.
(4) On November 15, 1998, the Registrant issued to Telinnovation 166,666 shares
of Common Stock as consideration for technology acquired.
(5) As of March 15, 1999, the Registrant had granted incentive stock options
and nonstatutory stock options to employees, directors and consultants
covering an aggregate of 2,381,345 shares of the registrant's Common Stock,
at a weighted average price of $0.89 a share. Options to purchase 643,015
shares are currently outstanding. The Registrant has sold 1,492,401 shares
of its Common Stock to employees, directors or consultants pursuant to the
exercise of stock options.
The sale and issuance of securities in the transactions described in
paragraphs 1, 2 and 4 above were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and/or Regulation D thereunder. The
purchasers in each case represented their intention to acquire the securities
for investment only and not with a view to distribution thereof. Appropriate
legends are affixed to the stock certificate issued in such transactions. All
recipients either received adequate information about the Registrant or had
access, through employment or other relationships, to such information. The sale
and issuance of securities in the transactions described in paragraphs 3 and 5
above were deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2) and/or Rule 701 of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 * Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant, filed April 27, 1999.
3.2 Form of Certificate of Incorporation of the Registrant to be effective upon the closing of the offering.
3.3 Bylaws of the Registrant.
4.1 * Reference is made to Exhibits 3.1 through 3.3.
4.2 ** Specimen Stock Certificate.
4.3 * Amended and Restated Registration Agreement, dated March 19, 1999, between Ditech and certain investors.
5.1 Opinion of Cooley Godward LLP.
10.1 * Lease Agreement, dated August 31, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC, as amended
January 25, 1999.
10.2 * 1997 Ditech Stock Option Plan.
10.3 * 1998 Amended and Restated Ditech Stock Option Plan.
10.4 * 1999 Employee Stock Purchase Plan.
10.5 1999 Non-Employee Directors' Stock Option Plan.
10.6 * Employment Agreement, dated September 1998, between Ditech and Timothy Montgomery.
10.7 * Employment Agreement, dated September 14, 1998, between Ditech and Pong Lim.
10.8 * Employment Agreement, dated November 4, 1998, between Ditech and Toni Bellin.
10.9 * Credit Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.10* First Amendment to the Credit Agreement, dated August 13, 1998, between Ditech and BankBoston, N.A.
10.11* Second Amendment to the Credit Agreement, dated December 18, 1998, between Ditech and BankBoston, N.A.
10.12* Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.13* Intellectual Property Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.14* Master Amendment and Lease Schedule, dated December 15, 1998, between Ditech and BancBoston Leasing Inc.
10.15+* Invention Purchase Agreement, dated November 15, 1998, between Ditech and Telinnovation.
10.16* Form of Indemnity Agreement to be entered between Ditech and its executive
officers and directors.
10.17 Employment Agreement dated April 27, 1999, between Ditech and Marc Schwager.
10.18 Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler.
16.1 * Letter re: change in certifying accountant.
23.1 Consent of PricewaterhouseCoopers LLP.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 * Power of Attorney.
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
* Exhibit was previously filed with the Form S-1 filed on March 25, 1999.
** Exhibit to be filed by amendment.
+ Confidential treatment requested as to a portion of this exhibit pursuant to
Rule 406 under the Securities Act. The confidential portion of such exhibit
has been omitted and filed separately with the Commission.
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted from
the form of Prospectus as filed as part of the registration statement in
reliance upon Rule 430A and contained in the form of Prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of the registration statement as of the time it was
declared effective, and (2) for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and this offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant has
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Santa Clara, State
of California, on the 10th day of May, 1999.
<TABLE>
<S> <C> <C>
DITECH COMMUNICATIONS CORPORATION
By: /s/ TIMOTHY K. MONTGOMERY
-----------------------------------------
Timothy K. Montgomery
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ TIMOTHY K. MONTGOMERY Officer and Director
- ------------------------------ (principal executive May 10, 1999
Timothy K. Montgomery officer)
/s/ WILLIAM J. TAMBLYN Chief Financial Officer
- ------------------------------ (principal financial and May 10, 1999
William J. Tamblyn accounting officer)
*
- ------------------------------ Chairman of the Board of May 10, 1999
Pong C. Lim Directors
*
- ------------------------------ Director May 10, 1999
Gregory M. Avis
*
- ------------------------------ Director May 10, 1999
Peter Y. Chung
*
- ------------------------------ Director May 10, 1999
William A. Hasler
*
- ------------------------------ Director May 10, 1999
Kenneth E. Jones
*
- ------------------------------ Director May 10, 1999
George J. Turner
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ WILLIAM J. TAMBLYN
-------------------------
William J. Tamblyn
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 * Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant, filed April 27, 1999.
3.2 Form of Certificate of Incorporation of the Registrant to be effective upon the closing of the offering.
3.3 Bylaws of the Registrant.
4.1 * Reference is made to Exhibits 3.1 through 3.3.
4.2 ** Specimen Stock Certificate.
4.3 * Amended and Restated Registration Agreement, dated March 19, 1999, between Ditech and certain investors.
5.1 Opinion of Cooley Godward LLP.
10.1 * Lease Agreement, dated August 31, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC., as amended
January 25, 1999.
10.2 * 1997 Ditech Stock Option Plan.
10.3 * 1998 Amended and Restated Ditech Stock Option Plan.
10.4 * 1999 Employee Stock Purchase Plan.
10.5 1999 Non-Employee Directors' Stock Option Plan.
10.6 * Employment Agreement, dated September 1998, between Ditech and Timothy Montgomery.
10.7 * Employment Agreement, dated September 14, 1998, between Ditech and Pong Lim.
10.8 * Employment Agreement, dated November 4, 1998, between Ditech and Toni Bellin.
10.9 * Credit Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.10* First Amendment to the Credit Agreement, dated August 13, 1998, between Ditech and BankBoston, N.A.
10.11* Second Amendment to the Credit Agreement, dated December 18, 1998, between Ditech and BankBoston, N.A.
10.12* Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.13* Intellectual Property Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.14* Master Amendment and Lease Schedule, dated December 15, 1998, between Ditech and BancBoston Leasing Inc.
10.15+* Invention Purchase Agreement, dated November 15, 1998, between Ditech and Telinnovation.
10.16* Form of Indemnity Agreement to be entered between Ditech and its executive
officers and directors.
10.17 Employment Agreement dated April 27, 1999, between Ditech and Marc Schwager.
10.18 Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler.
16.1 * Letter re: change in certifying accountant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1 * Power of Attorney.
27.1 * Financial Data Schedule.
</TABLE>
- ------------------------
* Exhibit was previously filed with the Form S-1 filed on March 25, 1999.
** Exhibit to be filed by amendment.
+ Confidential treatment requested as to a portion of this exhibit pursuant to
Rule 406 under the Securities Act. The confidential portion of such exhibit
has been omitted and filed separately with the Commission.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DITECH COMMUNICATIONS CORPORATION
I.
The name of this corporation is DITECH COMMUNICATIONS CORPORATION.
II.
The address of the registered office of the corporation in the
State of Delaware is 9 East Loockerman Street, City of Dover, County of Kent,
and the name of the registered agent of the corporation in the State of
Delaware at such address is the National Registered Agents, Inc.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock
to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the corporation is authorized to issue is Eighty
One Million Seventeen Thousand Nine Hundred Thirty Nine (81,017,939) shares.
Fifty Million (50,000,000) shares shall be Common Stock, each having $.001
par value. Thirty One Million Seventeen Thousand Nine Hundred Thirty Nine
(31,017,939) shares shall be Preferred Stock, each having $.001 par value.
Effective at the time of filing with the Secretary of State of the State of
Delaware of this Amended and Restated Certificate of Incorporation (the
"Effective Time"), each Three (3) shares of the corporation's Common Stock
issued and outstanding shall, automatically and without any action on the
part of the respective holders thereof, be converted and combined into Two
(2) shares of Common Stock of the corporation. No fractional shares shall be
issued and, in lieu thereof, any holder of less than one share of Common
Stock shall be entitled to receive cash for such holder's fractional share
based upon a value per share at the date of the Effective Time equal to $9.75.
B. The Preferred Stock may be issued from time to time in one or
more series. Except as provided in Paragraph C below, the Board of Directors
is hereby authorized, by filing a certificate (a "Preferred Stock
Designation") pursuant to the Delaware General Corporation Law ("DGCL"), to
fix or alter from time to time the designation, powers, preferences and
rights of the
1.
<PAGE>
shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to
establish from time to time the number of shares constituting any such series
or any of them; and to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of
shares of any series shall be decreased in accordance with the foregoing
sentence, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number
of shares of such series.
C. Seventeen Million Two Hundred Fifty Thousand (17,250,000)
shares of Preferred Stock are designated "Series A Preferred," Six Million
Two Hundred Fifty Nine Thousand Seven Hundred Eighteen (6,259,718) shares of
Preferred Stock are designated "Series B Preferred" and Seven Million Five
Hundred Eight Thousand Two Hundred Twenty One (7,508,221) shares of Preferred
Stock are designated "Series C Preferred." The relative rights, preferences,
privileges and restrictions granted to or imposed upon the respective classes
and series of Common Stock and Preferred Stock or the holders thereof are as
follows:
1. DIVIDENDS. When and as declared by the Corporation's
Board of Directors, the Corporation shall pay preferential dividends in cash
to the holders of the Series A Preferred, Series B Preferred and Series C
Preferred as provided in this Section 1.
a. Dividends on each share of the Series A Preferred
shall accrue on a daily basis at the rate of six percent (6%) per annum of
the sum of the Series A Liquidation Value plus all accumulated and unpaid
dividends thereon, from and including the Series A Original Issue Date to and
including the first to occur of the date on which the Series A Liquidation
Value of such share (plus all accrued and unpaid dividends thereon) is paid
to the holder thereof in connection with the liquidation of the Corporation
or the redemption of such share by the Corporation or the date on which such
share is otherwise acquired by the Corporation. Such dividends shall accrue
whether or not they have been declared and whether or not there are profits,
surplus or other funds of the Corporation legally available for the payment
of dividends, and such dividends shall be cumulative such that all accrued
and unpaid dividends shall be fully paid or declared with funds irrevocably
set apart for payment before any dividends, distributions, redemptions or
other payments may be made with respect to any Junior Securities.
b. Dividends on each share of the Series B Preferred
shall accrue in an amount equal to the greater of (i) the rate of six percent
(6%) per annum (calculated on a daily basis) of the sum of the Series B
Liquidation Value plus all accumulated and unpaid dividends thereon or (ii)
the dividends declared (if any) with respect to the Common Stock. Such
dividends shall accrue, from and including the Series B Original Issue Date
to and including the first to occur of the date on which the Series B
Liquidation Value of such share (plus all accrued and unpaid dividends
thereon) is paid to the holder thereof in connection with the liquidation of
the Corporation or the redemption of such share by the Corporation or the
date on which such share is otherwise acquired by the Corporation; PROVIDED
that all accrued but unpaid dividends with respect to any share of Series B
Preferred shall be retired and shall not be paid upon the conversion of such
share into Common Stock in accordance with Section 5 below. Such
2.
<PAGE>
dividends shall accrue whether or not they have been declared and whether or
not there are profits, surplus or other funds of the Corporation legally
available for the payment of dividends, and such dividends shall be
cumulative such that all accrued and unpaid dividends shall be fully paid or
declared with funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with respect to any
Common Stock.
c. Dividends on each share of the Series C Preferred
shall accrue at such time, and only at such time, as dividends are paid with
respect to the Globe Preferred in an amount equal to the quotient obtained by
dividing the Globe Dividend Amount by the number of outstanding shares of
Series C Preferred. Such dividends shall accrue whether or not they have
been declared and whether or not there are profits, surplus or other funds of
the Corporation legally available for the payment of dividends, and such
dividends shall be cumulative such that all accrued and unpaid dividends
shall be fully paid or declared with funds irrevocably set apart for payment
before any dividends, distributions, redemptions or other payments may be
made with respect to any Common Stock.
d. No dividends or other distributions shall be made
with respect to the Common Stock in any fiscal year, other than dividends
payable solely in Common Stock, until the dividends (if any) set forth in
Sections 1.(a), 1.(b) and 1.(c) above have been declared and paid.
e. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. Except as
otherwise provided herein, if at any time the Corporation pays less than the
total amount of dividends then accrued with respect to the Series A Preferred
or the Series B Preferred, such payment shall be distributed pro rata among
the holders thereof based upon the aggregate Series A Liquidation Value (plus
all accrued and unpaid dividends) of the shares of Series A Preferred held by
each such holder or the aggregate Series B Liquidation Value (plus all
accrued and unpaid dividends) of the shares of Series B Preferred held by
each such holder, as the case may be.
2. LIQUIDATION.
a. Upon any liquidation, dissolution or winding up of
the Corporation (whether voluntary or involuntary), each holder of Series C
Preferred shall be paid in kind, prior and in preference to any distribution
of any of the assets of the Corporation to the holders of the Common Stock, a
number of shares of Globe Preferred equal to the product obtained by
multiplying (a) the number of shares of Series C Preferred then held by such
holder by (b) the quotient obtained by dividing the total number of shares of
Globe Preferred then held by the Corporation by the total number of shares of
Series C Preferred then outstanding. In addition, the holders of Series C
Preferred shall be entitled to receive, pro rata based upon the number of
shares of Series C Preferred then held by each such holder, in cash an amount
equal to all accrued and unpaid dividends with respect to the Series C
Preferred. Not less than 30 days prior to the payment date stated therein,
the Corporation shall mail written notice of any such liquidation,
dissolution or winding up to each record holder of Series C Preferred,
setting forth in reasonable detail the amount of Globe Preferred and cash to
be paid with respect to each share of Series C Preferred in connection with
such liquidation, dissolution or winding up.
3.
<PAGE>
b. After payment has been made to the holders of the
Series C Preferred of the full amounts to which they shall be entitled as set
forth in Section 2a., each holder of Series A Preferred shall be entitled to
be paid, before any distribution or payment is made upon any Junior
Securities, an amount in cash equal to the aggregate Series A Liquidation
Value of all shares of Series A Preferred held by such holder (plus all
accrued and unpaid dividends thereon), and the holders of Series A Preferred
shall not be entitled to any further payment. If upon any such liquidation,
dissolution or winding up of the Corporation, the Corporation's assets to be
distributed among the holders of the Series A Preferred are insufficient to
permit payment to such holders of the aggregate amount which they are
entitled to be paid under this Section 2b., then the entire assets available
to be distributed to the Corporation's stockholders shall be distributed pro
rata among the holders of Series A Preferred based upon the aggregate Series
A Liquidation Value (plus all accrued and unpaid dividends) of the shares of
Series A Preferred held by each such holder. Not less than 30 days prior to
the payment date stated therein, the Corporation shall mail written notice of
any such liquidation, dissolution or winding up to each record holder of
Series A Preferred, setting forth in reasonable detail the amount of assets
to be paid with respect to each share of Series A Preferred in connection
with such liquidation, dissolution or winding up.
c. After payment has been made to the holders of the
Series A Preferred of the full amounts to which they shall be entitled as set
forth in Section 2b., each holder of Series B Preferred shall be paid, prior
and in preference to any distribution of any of the assets of the Corporation
to the holders of the Common Stock, an amount in cash equal to the Series B
Liquidation Value of all shares of Series B Preferred held by such holder.
If upon any such liquidation, dissolution or winding up of the Corporation,
the Corporation's assets to be distributed among the holders of the Series B
Preferred are insufficient to permit payment to such holders of the aggregate
amount which they are entitled to be paid under this Section 2c., then the
entire assets available to be distributed to the Corporation's stockholders
shall be distributed pro rata among the holders of Series B Preferred based
upon the aggregate Series B Liquidation Value of the shares of Series B
Preferred held by each such holder. Not less than 30 days prior to the
payment date stated therein, the Corporation shall mail written notice of any
such liquidation, dissolution or winding up to each record holder of Series B
Preferred, setting forth in reasonable detail the amount of assets to be paid
with respect to each share of Series B Preferred in connection with such
liquidation, dissolution or winding up.
d. After payment has been made to the holders of the
Series A Preferred and Series B Preferred of the full amounts to which they
shall be entitled as set forth in Sections 2b. and 2c., each holder of Series
C Preferred shall be paid, prior and in preference to any distribution of any
of the assets of the Corporation to the holders of the Common Stock, an
amount in cash equal to Series C Special Liquidation Value of all shares of
Series C Preferred held by such holder. If upon any such liquidation,
dissolution or winding up of the Corporation, the Corporation's assets to be
distributed among the holders of the Series C Preferred are insufficient to
permit payment to such holders of the aggregate amount which they are
entitled to be paid under this Section 2d., then the entire assets available
to be distributed to the Corporation's stockholders shall be distributed pro
rata among the holders of Series C Preferred
4.
<PAGE>
based upon the aggregate Series C Special Liquidation Value of the shares of
Series C Preferred held by each such holder.
e. After payment has been made to the holders of
Preferred Stock of the full amounts to which they shall be entitled as set
forth in Sections 2a., 2b., 2c. and 2d. above, then the entire remaining
assets and funds of the Corporation legally available for distribution, if
any, shall be distributed ratably among holders of Common Stock in a manner
such that the amount distributed to each such holder shall equal the amount
obtained by multiplying the entire remaining assets and funds of the
Corporation legally available for distribution hereunder by a fraction, the
numerator of which shall be the number of shares of Common Stock then held by
such holder and the denominator of which shall be the total number of shares
of Common Stock then outstanding.
f. Neither the consolidation or merger of the
Corporation into or with any other Person (whether or not the Corporation is
the surviving entity), nor the sale or transfer by the Corporation of all or
any part of its assets, nor the reduction of the capital stock of the
Corporation nor any other form of recapitalization or reorganization
affecting the Corporation shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 2.
3. PRIORITY OF PREFERRED STOCK ON DIVIDENDS AND REDEMPTION.
So long as any shares of Series A Preferred remain
outstanding, without the prior written consent of the holders of a majority
of the outstanding shares of Series A Preferred, the Corporation shall not,
nor shall it permit any Subsidiary to, redeem, purchase or otherwise acquire,
directly or indirectly, any Junior Securities, nor shall the Corporation
directly or indirectly pay or declare any dividend (cash, stock or otherwise)
or make any distribution upon any Junior Securities, except, in each case, as
otherwise expressly permitted pursuant to Section 4b.(ii) below or the terms
of the Purchase Agreement. So long as any share of Series B Preferred
remains outstanding, without the prior written consent of the holders or a
majority of the outstanding shares of Series B Preferred, the Corporation
shall not, nor shall it permit any Subsidiary to, redeem, purchase or
otherwise acquire directly or indirectly, any Common Stock, nor shall the
Corporation directly or indirectly pay or declare any dividend (cash, stock
or otherwise) or make any distribution upon the Common Stock except, in each
case, as otherwise expressly permitted pursuant to Section 4b.(ii) below or
the terms of the Purchase Agreement.
4. REDEMPTIONS.
a. SCHEDULED REDEMPTIONS.
(i) SCHEDULED REDEMPTIONS OF SERIES A PREFERRED.
At any time on or after February 1, 2004, the Corporation shall, at the
request of holders of at least a majority of the then outstanding shares of
Series A Preferred, redeem all outstanding shares of Series A Preferred at a
price per share equal to the Series A Liquidation Value PLUS all accrued and
unpaid dividends thereon. Holders of Series A Preferred requesting
redemption hereunder shall notify the Corporation at least thirty (30) days
prior to the date on which such redemption
5.
<PAGE>
shall take place. Such notice (the "Series A Redemption Notice") shall
specify the date of the requested redemption. The Corporation shall reply to
the Series A Redemption Notice within fifteen (15) days by notifying the
holder or holders of Series A Preferred requesting redemption hereunder the
number of shares which the Corporation may lawfully redeem on the date
specified for redemption.
(ii) SCHEDULED REDEMPTION OF SERIES B PREFERRED.
At any time on or after February 1, 2004, the Corporation shall, at the
request of holders of at least a majority of the then outstanding shares of
Series B Preferred, redeem all outstanding shares of Series B Preferred at a
price per share equal to the Series B Liquidation Value. Holders of Series B
Preferred requesting redemption hereunder shall notify the Corporation at
least thirty (30) days prior to the date on which such redemption shall take
place. Such notice (the "Series B Redemption Notice") shall specify the date
of the requested redemption. The Corporation shall reply to the Series B
Redemption Notice within fifteen (15) days by notifying the holder or holders
of Series B Preferred requesting redemption hereunder the number of shares
which the Corporation may lawfully redeem on the date specified for
redemption.
b. SPECIAL REDEMPTIONS.
(i) In the event of a Change in Ownership or a
Fundamental Change, the Corporation shall, upon the election of the holders
of a majority of outstanding shares of Series A Preferred, upon the
consummation of such transaction redeem the outstanding shares of Series A
Preferred at a price per share equal to the Series A Liquidation Value PLUS
all accrued and unpaid dividends thereon. Immediately following the
redemption of the outstanding shares of Series A Preferred in connection with
such Change in Ownership or Fundamental Change, the Corporation shall, upon
the election of holders of a majority of the outstanding shares of Series B
Preferred redeem the outstanding shares of Series B Preferred at a price per
share equal to the Series B Liquidation Value; PROVIDED, HOWEVER, that the
holders of Series B Preferred may elect to convert such shares into shares of
Common Stock in accordance with Section 5 hereof at any time prior to the
closing of such Change in Ownership or Fundamental Change.
(ii) In the event of (i) a redemption of all (but
not less than all) of the shares of Globe Preferred held by the Corporation
or (ii) a sale by the Corporation of all (but not less than all) of the Globe
Preferred to a third party, the Corporation shall redeem all of the
outstanding shares of Series C Preferred at a price per share equal to the
Series C Redemption Value. Any redemption pursuant to this Section 4b.(ii)
shall take place on a date fixed by the Corporation, which date shall be not
more than ten (10) days after the Corporation's receipt of proceeds from a
redemption of the Globe Preferred.
c. REDEMPTION WITH PROCEEDS OF PUBLIC OFFERING.
(i) Upon the election of the holders of a majority
of the outstanding shares of Series A Preferred, the Corporation shall apply
the net cash proceeds from any Public Offering (after deduction of all
discounts, underwriters' commissions and other reasonable expenses) to redeem
all outstanding shares of Series A Preferred at a price per share
6.
<PAGE>
equal to the Series A Liquidation Value PLUS all accrued and unpaid dividends
thereon. Such redemption shall take place on a date fixed by the holders of
a majority of the outstanding shares of Series A Preferred, which date shall
be not more than ten (10) days after the Corporation's receipt of such
proceeds.
(ii) Upon the election of the holders of a majority
of the outstanding shares of Series B Preferred, the Corporation shall apply
the net cash proceeds from any Public Offering (after deduction of all
discounts, underwriters' commissions and other reasonable expenses) to redeem
shares of Series B Preferred at a price per share equal to the Series B
Liquidation Value thereof; PROVIDED, HOWEVER, that no such redemption shall
occur in the event that all outstanding shares of Series B Preferred are
automatically converted into shares of Common Stock upon the closing of a
Qualifying IPO pursuant to Section 5b. below. Any redemption pursuant to
this Section 4c.(ii) shall take place on a date fixed by the holders of a
majority of the outstanding shares of Series B Preferred, which date shall be
not more than ten (10) days after the Corporation's receipt of such proceeds.
d. REDEMPTION PAYMENTS. For each share of Series A
Preferred, Series B Preferred or Series C Preferred that is to be redeemed
hereunder, the Corporation shall be obligated on the Redemption Date to pay
to the holder thereof (upon surrender by such holder at the Corporation's
principal office of the certificate representing such share) an amount in
immediately available funds equal to the Series A Liquidation Value of such
share (plus all accrued and unpaid dividends thereon), the Series B
Liquidation Value or the Series C Redemption Value, as the case may be. If
the funds of the Corporation legally available for redemption of shares of
Series A Preferred on any Redemption Date are insufficient to redeem the
total number of shares of Series A Preferred to be redeemed on such date,
those funds which are legally available shall be used to redeem the maximum
possible number of shares of Series A Preferred pro rata among the holders of
Series A Preferred to be redeemed based upon the aggregate number of shares
of Series A Preferred held by each such holder in accordance with Section 4f.
below. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of shares of Series A Preferred, such
funds shall immediately be used to redeem the balance of the shares of Series
A Preferred which the Corporation has become obligated to redeem on any
Redemption Date but which it has not so redeemed. If the funds of the
Corporation legally available for redemption of shares of Series B Preferred
on any Redemption Date are insufficient to redeem the total number of shares
of Series B Preferred to be redeemed on such date, then, subject to the
foregoing, those funds which are legally available shall be used to redeem
the maximum possible number of shares of Series B Preferred pro rata among
the holders of Series B Preferred based on the number of shares of Series B
Preferred held by each such holder in accordance with Section 4f. below. At
any time thereafter, provided that the Corporation has fully satisfied its
obligation to redeem shares of Series A Preferred hereunder when additional
funds of the Corporation are legally available for redemption of shares of
Series B Preferred, such funds shall immediately be used to redeem the
balance of the shares ofSeries B Preferred which the Corporation has become
obligated to redeem on any Redemption Date but which it has not redeemed. If
the funds or assets of the Corporation legally available for redemption of
shares of Series C Preferred on any Redemption Date are insufficient to
redeem
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the total number of shares of Series C Preferred to be redeemed on such date,
those funds or assets which are legally available shall be used to redeem the
maximum possible number of shares of Series C Preferred pro rata among the
holders of Series C Preferred to be redeemed based upon the aggregate number
of shares of Series C Preferred held by each such holder in accordance with
Section 4f. below. At any time thereafter when additional funds or assets of
the Corporation are legally available for the redemption of shares of Series
C Preferred, such funds or asset, as applicable, shall immediately be used to
redeem the balance of the shares of Series C Preferred which the Corporation
has become obligated to redeem on any Redemption Date but which it has not so
redeemed. Redemption of shares of Series A Preferred or Series B Preferred
pursuant to any one of Sections 4a., 4b. or 4c. shall not relieve the
Corporation of its obligation to redeem outstanding shares of Series A
Preferred or Series B Preferred pursuant to any other of such sections which
may apply.
e. NOTICE. Except as otherwise provided herein, the
Corporation shall mail written notice of (a) a potential Change in Ownership,
Fundamental Change or Public Offering, (b) each redemption of Globe Preferred
and (c) each redemption of any Series A Preferred, Series B Preferred or
Series C Preferred to each record holder of the Series A Preferred, the
Series B Preferred and/or the Series C Preferred, as applicable, (1) not more
than 60 nor less than 30 days prior to (x) in the case of an event referred
to in (a) above, the date of closing of such event and (y) in the case of a
redemption referred to in (c) above, the date on which such redemption is to
be made and (2) in the case of an event referred to in (b) above, not more
than five days following such event. In case fewer than the total number of
shares represented by any certificate are redeemed, a new certificate
representing the number of unredeemed shares shall be issued to the holder
thereof without cost to such holder within five business days after surrender
of the certificate representing the redeemed shares.
f. DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES
TO BE REDEEMED. The number of shares of Series A Preferred to be redeemed
from each holder thereof in redemptions hereunder shall be the number of
shares determined by multiplying the total number of shares of Series A
Preferred to be redeemed by a fraction, the numerator of which shall be the
total number of shares of Series A Preferred then held by such holder and the
denominator of which shall be the total number of shares of Series A
Preferred then outstanding. The number of shares of Series B Preferred to be
redeemed from each holder thereof in redemptions hereunder shall be the
number of shares determined by multiplying the total number of shares of
Series B Preferred to be redeemed by a fraction, the numerator of which shall
be the total number of shares of Series B Preferred then held by such holder
and the denominator of which shall be the total number of shares of Series B
Preferred then outstanding. The number of shares of Series C Preferred to be
redeemed from each holder thereof in redemptions hereunder shall be the
number of shares determined by multiplying the total number of shares of
Series C Preferred to be redeemed by a fraction, the numerator of which shall
be the total number of shares of Series C Preferred then held by such holder
and the denominator of which shall be the total number of shares of Series C
Preferred then outstanding.
g. DIVIDENDS AFTER REDEMPTION DATE. No share of Series
A Preferred shall be entitled to any dividends accruing after the date on
which the Series A
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Liquidation Value of such share (plus all accrued and unpaid dividends
thereon) is paid to the holder of such share. No share of Series B Preferred
shall be entitled to any dividends accruing after the date on which the
Series B Liquidation Value of such share is paid to the holder of such share.
No share of Series C Preferred shall be entitled to any dividends accruing
after the date on which the Series C Redemption Value of such share is paid
to the holder of such share. On such date, all rights of the holder of such
share shall cease, and such share shall no longer be deemed to be issued or
outstanding.
h. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any shares
of Preferred Stock which are redeemed or otherwise acquired by the
Corporation shall be canceled and retired to authorized but unissued shares
and shall not be reissued, sold or transferred.
i. OTHER REDEMPTIONS OR ACQUISITION. The Corporation
shall not, nor shall it permit any Subsidiary to, redeem or otherwise acquire
any shares of Preferred Stock, except as expressly authorized herein.
j. AUTOMATIC REDEMPTION OF SERIES C PREFERRED.
Notwithstanding anything to the contrary set forth in this Certificate of
Incorporation, unless the Board of Directors of the corporation shall have
given notice to the holders of a majority of the outstanding shares of Series
C Preferred on or prior to April 29, 1999 that the Series C Preferred shall
not be redeemed pursuant to this Section 4j., then, on April 29, 1999,
without notice or any other action on the part of the corporation or any
stockholder of the corporation, each share of Series C Preferred then
outstanding shall automatically be redeemed, out of funds or assets legally
available therefor, by the corporation by payment in kind per share of one
share of Globe Preferred. Such redemption shall be deemed to take place at
the close of business on April 29, 1999 (the "Redemption Time"). The
corporation shall send notice of such redemption to all holders of Series C
Preferred within five days following the Redemption Time. From and after the
Redemption Time, any certificates representing shares of Series C Preferred
so redeemed shall no longer represent shares of Series C Preferred, but
rather shall represent the right to receive one share of Globe Preferred per
share of Series C Preferred represented by such certificate. For each share
of Series C Preferred redeemed hereunder the corporation shall be obligated,
from and after the Redemption Time upon surrender by the holder of a
certificate representing such share of Series C Preferred at the
corporation's principal office, to transfer to the holder thereof one share
of Globe Preferred.
5. CONVERSION OF SERIES B PREFERRED.
The holders of Series B Preferred shall have conversion rights as
follows (the "Conversion Rights"):
a. RIGHT TO CONVERT. Each share of Series B Preferred
shall be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share, at the office of the Corporation or any
transfer agent for the Series B Preferred, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Series
B Initial Issue Price by the Series B Conversion Price, determined as
hereinafter provided, in effect at the time of conversion. The price at
which shares of Common Stock shall
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be deliverable upon conversion of shares of Series B Preferred (the "Series B
Conversion Price") shall initially be $0.86185 per share of Common Stock and
shall be subject to adjustment as hereinafter provided.
b. AUTOMATIC CONVERSION. Each share of Series B
Preferred shall automatically be converted into shares of Common Stock at the
then effective Conversion Price upon the earlier to occur of (i) the closing
of an underwritten Public Offering at a price per share (prior to underwriter
commissions and offering expenses) of not less than $2.59 (as adjusted for
stock splits, stock dividends, reclassifications and like events) and in
which the Corporation receives aggregate gross proceeds of not less than
$20,000,000 (a "Qualifying IPO"), or (ii) the receipt by the Corporation of
the affirmative vote at a duly noticed shareholders meeting or pursuant to a
duly solicited written consent of the holders of more than sixty-six and
two-thirds percent (66-2/3%) of the then outstanding shares of Series B
Preferred in favor of the conversion of all of the shares of Series B
Preferred into Common Stock. In the event of the automatic conversion of the
Series B Preferred upon a public offering as set forth in subsection (i)
hereof, the Person(s) entitled to receive the Common Stock issuable upon such
conversion of Series B Preferred shall not be deemed to have converted such
Series B Preferred until immediately prior to the closing of such transaction.
c. MECHANICS OF CONVERSION. No fractional shares of
Common Stock shall be issued upon conversion of Series B Preferred. In lieu
of any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price. Before any holder of Series B Preferred shall be
entitled to convert the same into full shares of Common Stock and to receive
certificates therefor, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series B Preferred, and shall give written notice to the
Corporation at such office that he elects to convert the same; PROVIDED,
HOWEVER, that in the event of an automatic conversion pursuant to Section
5b., the outstanding shares of Series B Preferred shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent; PROVIDED, FURTHER, that the
Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such automatic conversion unless the
certificates evidencing such shares of Series B Preferred are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as
practicable after such delivery, or such agreement and indemnification in the
case of a lost certificate, issue and deliver at such office to such holder
of Series B Preferred, a certificate or certificates for the number of shares
of Common Stock to which he shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result
of a conversion into fractional shares of Common Stock. Such conversion
shall be deemed to have been made immediately prior to the close of business
on the date of such surrender of the shares of Series B Preferred to be
converted, or in the case of automatic conversion on the date of closing of
the offering or the effective date of such written consent, and the person or
persons
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entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on such date.
d. ADJUSTMENTS TO CONVERSION PRICE FOR CERTAIN EVENTS.
(i) ADJUSTMENTS FOR SUBDIVISIONS, STOCK DIVIDENDS,
COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK. In the event that the
Corporation at any time or from time to time shall declare or pay, without
consideration, any dividend on Common Stock payable in Common Stock or in any
right to acquire Common Stock for no consideration, or effects a subdivision
or combination of its outstanding shares of Common Stock into a greater or
smaller number of shares without a proportionate and corresponding
subdivision or combination of its outstanding shares of Series B Preferred,
then and in each such event Series B Conversion Price shall be appropriately
increased or decreased proportionally.
(ii) ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If the Common Stock issuable upon conversion of the Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than in an event provided for in Section
5d.(i) above), the Series B Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the shares of Series
B Preferred shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive,
a number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by
the holders upon conversion of shares of such Series B Preferred immediately
before that change.
(iii) ADJUSTMENTS FOR OTHER DIVIDENDS AND
DISTRIBUTIONS. In the event that the Corporation shall declare a
distribution with respect to the Common Stock payable in securities of other
issuers, evidences of indebtedness issued by this Corporation or other
issuers, assets (excluding cash dividends) or options or rights and for which
no adjustment is made pursuant to Section 5d.(i) or Section 5d.(ii), the
holders of Series B Preferred shall be entitled to a proportionate share of
any such distribution as though they were the holders of the number of shares
of Common Stock of the Corporation into which their shares of Series B
Preferred are convertible as of the record date fixed for the determination
of the holders of Common Stock of the Corporation entitled to receive such
distribution.
e. NO IMPAIRMENT. Except as provided in Section 6
hereof, the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the
provisions of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series B Preferred against impairment.
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f. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence
of each adjustment or readjustment of the Conversion Price of any Series B
Preferred pursuant to this Section 5, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of Series B Preferred a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of such Series B Preferred,
furnish or cause to be furnished to such holder a like certificate setting
forth (i) such adjustments and readjustments, (ii) the Series B Conversion
Price at the time in effect, and (iii) the number of shares of Common Stock
and the amount, if any, of other property which at the time would be received
upon the conversion of such holder's shares of Series B Preferred.
g. NOTICES OF RECORD DATE. In the event that this
Corporation shall propose at any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of earnings or
earned surplus;
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all of its
property or business, or to liquidate, dissolve or wind up; then, in
connection with each such event, this Corporation shall send to the holders
of Series B Preferred:
(1) at least 20 days' prior written
notice of the date on which a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date on which the
holders of Common Stock shall be entitled thereto) or for determining rights
to vote in respect of the matters referred to in (iii) and (iv) above; and
(2) in the case of the matters
referred to in (iii) and (iv) above, at least 20 days' prior written notice
of the date when the same shall take place (and specifying the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock
for securities or other property deliverable upon the occurrence of such
event).
Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of Series B
Preferred at the address for each such holder as shown on the books of this
Corporation.
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h. The Corporation shall at all times reserve and keep
available, out of its authorized but unissued Common Stock, solely for the
purpose of effecting the conversion of the Series B Preferred, the full
number of shares of Common Stock deliverable upon the conversion of all
Series B Preferred from time to time outstanding. The Corporation shall from
time to time (subject to obtaining necessary director and shareholder
consent), in accordance with the laws of the State of Delaware, increase the
number of authorized shares of Common Stock if at any time the authorized
number of shares of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all of the shares of Series B
Preferred at the time outstanding.
i. The Corporation shall pay any and all issue and
other taxes that may be payable in respect of any issue or delivery of shares
of Common Stock on conversion of Series B Preferred pursuant to this Section
5.
6. VOTING RIGHTS.
a. GENERAL. Except as otherwise expressly provided
herein and as otherwise required by applicable law, the Series A Preferred
shall have no voting rights; provided that each holder of Series A Preferred
shall be entitled to notice of all meetings of shareholders at the same time
and in the same manner as notice is given to all shareholders entitled to
vote at such meetings. Except as otherwise required by law or except as
otherwise set forth herein, the holder of each share of Series B Preferred
issued and outstanding shall have a number of votes with respect to such
share equal to the number of shares of Common Stock into which such share of
Series B Preferred is then convertible. Except as otherwise required by law
or except as otherwise set forth herein, each holder of issued and
outstanding Series C Preferred shall have two-thirds (2/3) of one (1) vote
for each five (5) shares of Series C Preferred held by such holder. The
holder of Series B Preferred and Series C Preferred shall be entitled to
notice of any shareholders' meeting in accordance with the Bylaws of the
Corporation.
b. BOARD OF DIRECTORS.
(i) At each election of directors of the
Corporation, so long as any share of Series B Preferred is outstanding, the
holders of Series B Preferred shall be entitled, voting as a single series,
to elect two (2) directors of the Corporation (the "Series B Directors"). In
the case of any vacancy in the office of a Series B Director, a successor
shall be elected to hold office for the unexpired term of such director by
the affirmative vote of the holders of a majority of the Series B Preferred,
voting as a single class, given at a special meeting of such shareholders
called for that purpose or by the unanimous written consent of such
shareholders. Prior to an annual or special meeting of the holders of the
Series B Preferred convened for the purpose of electing a director to fill a
vacancy on the Board of Directors as provided above, the acting and incumbent
Series B Director may appoint a director to serve as such until the holders
of the Series B Preferred duly elect a successor director.
(ii) At each election of directors of the
Corporation, so long as any share of Common Stock or Series C Preferred is
outstanding, the holders of Common Stock and Series C Preferred shall be
entitled, voting together, to elect two (2) directors of Corporation
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(the "Common Directors"). In the case of any vacancy in the office of a
Common Director, a successor shall be elected to hold office for the
unexpired term of such director by the affirmative vote of the holders of a
majority of the Common Stock and Series C Preferred, voting together, given
at a special meeting of such shareholders called for that purpose or by the
unanimous written consent of such shareholders. Prior to an annual or
special meeting of the holders of the Common Stock and Series C Preferred
convened for the purpose of electing a director to fill a vacancy on the
Board of Directors as provided above, the acting and incumbent Common
Director may appoint a director to serve as such until the holders of the
Common Stock and Series C Preferred duly elect a successor director.
(iii) At each election of directors of the
Corporation, so long as any share of Series B Preferred, Common Stock and
Series C Preferred is outstanding, the holders of Common Stock, Series B
Preferred and Series C Preferred shall be entitled, voting together, to elect
three (3) directors of the Corporation (the "Joint Directors"). In the case
of any vacancy in the office of a Joint Director, a successor shall be
elected to hold office for the unexpired term of such director by the
affirmative vote of the holders of a majority of the Common Stock, Series B
Preferred and Series C preferred, voting together, given at a special meeting
of such shareholders called for that purpose or by the unanimous written
consent of such shareholders.
c. PROTECTIVE PROVISIONS.
(i) So long as any share of Series A Preferred
remains outstanding, the Corporation shall not, without the vote or written
consent of the holders of a majority of the shares of Series A Preferred then
outstanding, voting separately as a series:
(1) sell, lease or otherwise dispose
of, or permit any Subsidiary to sell, lease or otherwise dispose of, more
than 20% of the consolidated assets of the Corporation and its Subsidiaries
(computed on the basis of book value, determined in accordance with generally
accepted accounting principles consistently applied, or fair market value,
determined by the Corporation's Board of Directors in its reasonable good
faith judgment) in any transaction or series of related transactions (other
than sales of inventory in the ordinary course of business), unless prior to
or contemporaneously with the consummation of such transaction the
Corporation redeems all of the outstanding shares of Series A Preferred
pursuant to the terms of Section 4b. hereof;
(2) merge or consolidate with any
Person or permit any Subsidiary to merge or consolidate with any Person
(other than a merger or consolidation between or among Wholly-Owned
Subsidiaries), unless prior to or contemporaneously with the consummation of
such transaction the Corporation redeems all of the outstanding shares of
Series A Preferred pursuant to the terms of Section 4b. hereof (regardless of
whether such transaction would otherwise constitute a Change in Ownership or
a Fundamental Change).
(3) authorize, issue or enter into any
agreement providing for the issuance (contingent or otherwise) of, (A) any
notes or debt securities
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containing equity features (including, without limitation, any notes or debt
securities convertible into or exchangeable for capital stock or other equity
securities issued in connection with the issuance of capital stock or other
equity securities or containing profit participation features) or (B) any
capital stock or other equity securities (or any securities convertible into
or exchangeable for any capital stock or other equity securities) which are
senior to Common Stock with respect to the payment of dividends, redemptions
or distributions upon liquidation or otherwise;
(4) liquidate, dissolve or effect a
recapitalization or reorganization in any form of transaction (including,
without limitation, any reorganization into a limited liability company, a
partnership or any other non-corporate entity which is treated as a
partnership for Canadian or United States income tax purposes); or
(5) increase the number of authorized
shares of the Series A Preferred or alter, change or otherwise impair or
adversely affect the rights or the relative preferences and priorities of the
holders of the Series A Preferred.
(ii) So long as any share of Series B Preferred
remains outstanding, the Corporation shall not, without the vote or written
consent of the holders of a majority of the shares of Series B Preferred then
outstanding, voting separately as a series:
(1) sell, lease or otherwise dispose
of, or permit any Subsidiary to sell, lease or otherwise dispose of, more
than 20% of the consolidated assets of the Corporation and its Subsidiaries
(computed on the basis of book value, determined in accordance with generally
accepted accounting principles consistently applied, or fair market value,
determined by the Corporation's Board of Directors in its reasonable good
faith judgment) in any transaction or series of related transactions (other
than sales of inventory in the ordinary course of business), unless prior to
or contemporaneously with the consummation of such transaction the
Corporation redeems all of the outstanding shares of Series B Preferred
pursuant to the terms of Section 4b. hereof;
(2) merge or consolidate with any
Person or permit any Subsidiary to merge or consolidate with any Person
(other than a merger or consolidation between or among Wholly-Owned
Subsidiaries), unless prior to or contemporaneously with the consummation of
such transaction the Corporation redeems all of the outstanding shares of
Series B Preferred pursuant to the terms of Section 4b. hereof (regardless of
whether such transaction would otherwise constitute a Change in Ownership or
a Fundamental Change);
(3) authorize, issue or enter into any
agreement providing for the issuance (contingent or otherwise) of, (A) any
notes or debt securities containing equity features (including, without
limitation, any notes or debt securities convertible into or exchangeable for
capital stock or other equity securities issued in connection with the
issuance of capital stock or other equity securities or containing profit
participation features) or (B) any capital stock or other equity securities
(or any securities convertible into or exchangeable for any capital stock or
other equity securities) which are senior to Common Stock with respect to the
payment of dividends, redemptions or distributions upon liquidation or
otherwise;
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(4) liquidate, dissolve or effect a
recapitalization or reorganization in any form of transaction (including,
without limitation, any reorganization into a limited liability company, a
partnership or any other non-corporate entity which is treated as a
partnership for Canadian or United States income tax purposes); or
(5) increase the number of authorized
shares of the Series B Preferred or alter, change or otherwise impair or
adversely affect the rights or the relative preferences and priorities of the
holders of the Series B Preferred.
(iii) So long as any share of Series C Preferred
remains outstanding, the Corporation shall not, without the vote or written
consent of the holders of a majority of the shares of Series C Preferred then
outstanding, voting separately as a series, increase the number of authorized
shares of the Series C Preferred or alter, change or otherwise impair or
adversely affect the rights or the relative preferences and priorities of the
holders of the Series C Preferred.
7. EVENTS OF NONCOMPLIANCE.
a. DEFINITION. An Event of Noncompliance shall have
occurred if:
(i) the Corporation fails to make any redemption
payment with respect to the Series A Preferred or Series B Preferred which it
is required to make hereunder, whether or not such payment is legally
permissible or is prohibited by any agreement to which the Corporation is
subject; or
(ii) the Corporation or any Subsidiary makes an
assignment for the benefit of creditors or admits in writing its inability to
pay its debts generally as they become due; or an order, judgment or decree
is entered adjudicating the Corporation or any Subsidiary bankrupt or
insolvent; or any order for relief with respect to the Corporation or any
Subsidiary is entered under the United States Bankruptcy Code; or the
Corporation or any Subsidiary petitions or applies to any tribunal for the
appointment of a custodian, trustee, receiver or liquidator of the
Corporation or any Subsidiary or of any substantial part of the assets of the
Corporation or any Subsidiary, or commences any proceeding (other than a
proceeding for the voluntary liquidation and dissolution of a Subsidiary)
relating to the Corporation or any Subsidiary under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction; or any such petition or application is
filed, or any such proceeding is commenced, against the Corporation or any
Subsidiary and either (i) the Corporation or any such Subsidiary by any act
indicates its approval thereof, consent thereto or acquiescence therein or
(ii) such petition, application or proceeding is not dismissed within 60 days.
b. CONSEQUENCES OF EVENTS OF NONCOMPLIANCE.
(i) If an Event of Noncompliance of the type
described in Section 7a.(i) has occurred, the holder or holders of a majority
of the shares of Series A Preferred and a majority of the shares of Series B
Preferred then outstanding may demand (by written
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notice delivered to the Corporation) immediate redemption of all or any
portion of the Series A Preferred owned by such holder or holders at a price
per share equal to the Series A Liquidation Value thereof (plus all accrued
and unpaid dividends thereon) and all or any portion of the Series B
Preferred owned by such holder or holders at a price per share equal to the
Series B Liquidation Value thereof (plus all accrued and unpaid dividends
thereon). The Corporation shall give prompt written notice of such election
to the other holders of Series A Preferred and Series B Preferred (but in any
event within five days after receipt of the initial demand for redemption),
and each such other holder may demand immediate redemption of all or any
portion of such holder's Series A Preferred or Series B Preferred by giving
written notice thereof to the Corporation within seven days after receipt of
the Corporation's notice. The Corporation shall redeem all Series A
Preferred and Series B Preferred as to which rights under this Section 7b.(i)
have been exercised within 15 days after receipt of the initial demand for
redemption.
(ii) If an Event of Noncompliance of the type
described in Section 7a.(ii) has occurred, all of the Series A Preferred and
Series B Preferred then outstanding shall be subject to immediate redemption
by the Corporation (without any action on the part of the holders of the
Series A Preferred or the Series B Preferred) at a price per Share equal to
the Series A Liquidation Value (plus all accrued and unpaid dividends
thereon) or the Series B Liquidation Value, respectively.
(iii) If any Event of Noncompliance exists, each
holder of Series A Preferred and each holder of Series B Preferred shall also
have any other rights which such holder is entitled to under any contract or
agreement at any time and any other rights which such holder may have
pursuant to applicable law.
8. DEFINITIONS.
"CHANGE IN OWNERSHIP" means any sale, transfer or issuance or
series of sales, transfers and/or issuance of shares of the Corporation's
capital stock by the Corporation or any holders thereof which results in
Controlling Shareholders ceasing record and beneficial owners of capital
stock of the Corporation possessing the voting power (under ordinary
circumstances) to elect a majority of the Corporation's Board of Directors or
ceasing to be the record and beneficial owners of at least 5l% of the
Corporation's issued and outstanding Common Stock.
"COMMON STOCK" means the Corporation's Common Stock, $.001 value
per share, and any capital stock of any class of the Corporation hereafter
authorized which is not limited to a fixed sum or percentage of par or stated
value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution
or winding up of the Corporation.
"CONTROLLING SHAREHOLDERS" means Summit Ventures IV, L.P. and
Summit Investors III, L.P. and Kenneth E. Jones.
"FAIR MARKET VALUE" shall mean, with respect to the Series B
Preferred, the fair market value of a share of the Series B Preferred as
established by mutual agreement of the holders of a majority of the Series B
Preferred then outstanding and the Corporation or, with respect to the
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Globe Preferred, the fair market value of a share of Globe Preferred as
established by mutual agreement of the holders of a majority of the Series C
Preferred then outstanding and the Corporation (including the approval of at
least one Series B Director); PROVIDED, HOWEVER, if such parties cannot agree
on such value within ten (10) days of the reply given pursuant to any
redemption notice as set forth herein, then the fair market value shall be
established by appraisal as set forth below:
(i) Appraisals hereunder shall be undertaken by two (2)
appraisers, one (1) selected by the Corporation and one (1) selected by the
holders of a majority of the Series B Preferred then outstanding. Such
appraisers shall have twenty (20) days following the appointment of the last
appraiser to be appointed to agree upon a fair market value.
(ii) In the event that such appraisers cannot so agree
within such period of time (A) if such appraisers' valuations do not vary by
more than ten percent (10%), then the fair market value shall be the mean of
such valuations and (B) if such appraisers' valuations differ by more than
ten percent (10%), such appraisers shall select a third appraiser who shall
calculate the fair market value independently. Except as set forth in the
next sentence, following such independent appraisal, the fair market value
shall be the average of the two (2) valuations which are closest in amount.
If one appraiser's valuation is the mean of the two (2) other valuations,
such mean valuation shall be the fair market value. In the event that the
two (2) original appraisers cannot agree upon a third appraiser within thirty
(30) days following the end of the thirty (30) day period referred to above,
then the third appraiser shall be appointed by the by the American
Arbitration Association.
(iii) The fees and expenses of the appraisers chosen
pursuant to the provisions above shall be paid by the Corporation.
"FUNDAMENTAL CHANGE" means (a) any sale or transfer of more than
20% of the assets of the Corporation and its Subsidiaries on a consolidated
basis (measured either by book value in accordance with generally accepted
accounting principles consistently applied or by fair market value determined
in the reasonable good faith judgment of the Corporation's Board of
Directors) in any transaction or series of transactions (other than sales of
inventory in the ordinary course of business) and (b) any merger or
consolidation to which the Corporation is a party, except for a merger in
which the Corporation is the surviving corporation, the terms of the Series A
Preferred and Series B Preferred are not changed and the Series A Preferred
and Series B Preferred are not exchanged for cash, securities or other
property, and after giving effect to such merger the Controlling Stockholders
continue to be the record and beneficial owners of capital stock of the
Corporation possessing the voting power (under ordinary circumstances) to
elect a majority of the Corporation's Board of Directors and continue to be
the record and beneficial owners of a majority of the Corporation's issued
and outstanding Common Stock.
"GLOBE" means Globe Wireless, Inc., a California corporation, and
its successors.
"GLOBE DIVIDEND AMOUNT" means the difference obtained by
subtracting (a) any Tax of the Corporation resulting from the receipt by the
Corporation of dividends with respect to the
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Globe Preferred from (b) any amounts paid by Globe and received by the
Corporation as a dividend with respect to the Globe Preferred.
"GLOBE PREFERRED" means the shares of Series A Preferred Stock,
$.001 value per share, of Globe (or any securities issued with respect
thereto) held by the Corporation.
"GLOBE PREFERRED REDEMPTION AMOUNT" means the difference obtained
by subtracting (a) any Tax of the Corporation resulting from the redemption
by Globe of the Globe Preferred or the sale by the Corporation to a third
party of the Globe Preferred from (b) the aggregate proceeds received by the
Corporation upon all redemptions by Globe of the Globe Preferred or upon the
sale by the Corporation to a third party of the Globe Preferred.
"JUNIOR SECURITIES" means any capital stock or other equity
securities of the Corporation, except for the Series A Preferred.
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or
any department, agency or political subdivision thereof.
"PREFERRED STOCK" means the Series A Preferred, the Series B
Preferred and the Series C Preferred.
"PUBLIC OFFERING" means any offering by the Corporation of its
capital stock or equity securities to the public pursuant to an effective
registration statement under the United States Securities Act of 1933, as
then in effect, or any comparable statement under any similar federal statute
then in force.
"PURCHASE AGREEMENT" means the Purchase Agreement, dated as of
February 21, 1997, by and among Ditech Corporation, a California corporation,
and certain Persons, as such agreement may from time to time be amended in
accordance with its terms.
"REDEMPTION DATE" as to any share means the applicable date
specified herein with respect to such redemption; provided no such date shall
be a Redemption Date unless the Liquidation Value of such share (plus, in the
case of the Series A Preferred, all accrued and unpaid dividends thereon) is
actually paid in full on such date, and if not so paid in full, the
Redemption Date shall be the date on which such amount is fully paid.
"SERIES A LIQUIDATION VALUE" shall be equal to $1.00.
"SERIES A ORIGINAL ISSUE DATE" shall be March 11, 1997.
"SERIES A PREFERRED" means the Corporation's Series A Redeemable
Preferred Stock, $.001 value per share.
"SERIES B INITIAL ISSUE PRICE" shall be equal to $0.86185.
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"SERIES B LIQUIDATION VALUE" shall be equal to the greatest of (i)
the Series B Initial Issue Price plus all accrued and unpaid dividends, (ii)
the Fair Market Value of the Series B Preferred or (iii) the quotient
obtained by dividing (A) the value of the entire assets available to be
distributed to the holders of the Series B Preferred and Common Stock
(assuming, for purposes of this definition, that the amount payable to the
holders of the Series C Preferred by operation of Section 2d. hereof is zero
(0)) by (B) the sum of the number of shares of Common Stock then outstanding
plus the number of shares of Common Stock into which the shares of Series B
Preferred then outstanding are then convertible.
"SERIES B ORIGINAL ISSUE DATE" shall be March 11, 1997.
"SERIES B PREFERRED" means the Corporation's Series B Convertible
Preferred Stock, $.001 value per share.
"SERIES C PREFERRED" means the Corporation's Series C Preferred
Stock, $.001 value per share.
"SERIES C REDEMPTION VALUE" means the fraction obtained by dividing
the Globe Preferred Redemption Amount by the total number of shares of Series
C Preferred then outstanding.
"SERIES C SPECIAL LIQUIDATION VALUE" shall be the difference
obtained by subtracting (i) the Fair Market Value of a share of Globe
Preferred from (ii) the liquidation preferential amount of a share of Globe
Preferred.
"SUBSIDIARY" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity
of which (a) if a corporation, a majority of the total voting power of shares
of stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the
time owned or controlled, directly or indirectly, by that Person or one or
more of the other Subsidiaries of that Person or a combination thereof, or
(b) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly,
by any Person or one or more Subsidiaries of that person or a combination
thereof. For purposes hereof, a Person or Persons shall be deemed to have a
majority ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company, partnership, association
or other business entity gains or losses or shall be or control the managing
general partner of such limited liability company, partnership, association
or other business entity. Globe shall not be deemed a Subsidiary of the
Corporation.
"TAX" or "TAXES" means federal, state, county, local, foreign or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer registration, excise, utility, environmental, communications, real
or personal property, capital stock, license, payroll, wage or other
withholding, employment, social security, severance, stamp, occupation,
alternative or add-on minimum, estimated and other taxes of any kind
whatsoever (including, without
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limitation, deficiencies, penalties, additions to tax, and interest
attributable thereto) whether disputed or not.
(b) "WHOLLY-OWNED SUBSIDIARY" means, with respect to any
Person, a Subsidiary of which all of the issued and outstanding capital stock
or other ownership interests are owned by such Person or another Wholly-Owned
Subsidiary of such Person.
V.
For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and
regulation of the powers of the corporation, of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided
that:
A.
1. The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of Directors. The
number of directors which shall constitute the whole Board of Directors shall
be fixed at seven until no shares of Series B Preferred shall remain
outstanding, and thereafter shall be fixed exclusively by one or more
resolutions adopted by the Board of Directors.
2. BOARD OF DIRECTORS.
a. Subject to the rights of the holders of any series
of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the initial public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended (the "Act"), covering the offer and sale of Common Stock to the
public (the "Initial Public Offering"), the directors shall be divided into
three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting
of stockholders following the closing of the Initial Public Offering, the
term of office of the Class I directors shall expire and Class I directors
shall be elected for a full term of three years. At the second annual
meeting of stockholders following the Initial Public Offering, the term of
office of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following the Initial Public Offering, the term of office of the
Class III directors shall expire and Class III directors shall be elected for
a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
During such time or times that the corporation is subject to Section 2115(b)
of the California General Corporation Law ("CGCL"), this Section A.2.a of
this Article
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V shall become effective and be applicable only when the corporation is a
"listed" corporation within the meaning of Section 301.5 of the CGCL. The
election of the directors shall be apportioned among the classes as follows:
Class I -- one Series B Director and one Joint Director; Class II -- one
Series B Director and one Common Director; Class III -- one Common Director
and two Joint Directors. At such time as no shares of Series B Preferred
shall be outstanding, the Series B Director shall become a Joint Director.
b. In the event that the corporation is subject to
Section 2115(b) of the CGCL AND is not a "listed" corporation or ceases to be
a "listed" corporation under Section 301.5 of the CGCL, Section A. 2. a. of
this Article V shall not apply and all directors shall be elected at each
annual meeting of stockholders to hold office until the next annual meeting.
c. No person entitled to vote at an election for
directors may cumulate votes to which such person is entitled, unless, at the
time of such election, the corporation is subject to Section 2115(b) of the
CGCL AND is not a "listed" corporation or ceases to be a "listed" corporation
under Section 301.5 of the CGCL. During this time, every stockholder
entitled to vote at an election for directors may cumulate such stockholder's
votes and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which such
stockholder's shares are otherwise entitled, or distribute the stockholder's
votes on the same principle among as many candidates as such stockholder
thinks fit. No stockholder, however, shall be entitled to so cumulate such
stockholder's votes unless (i) the names of such candidate or candidates have
been placed in nomination prior to the voting and (ii) the stockholder has
given notice at the meeting, prior to the voting, of such stockholder's
intention to cumulate such stockholder's votes. If any stockholder has given
proper notice to cumulate votes, all stockholders may cumulate their votes
for any candidates who have been properly placed in nomination. Under
cumulative voting, the candidates receiving the highest number of votes, up
to the number of directors to be elected, are elected.
Notwithstanding the foregoing provisions of this section, each
director shall serve until his successor is duly elected and qualified or
until his death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
3. REMOVAL OF DIRECTORS. Removal of directors shall be
governed as provided in the Bylaws of the corporation.
4. VACANCIES
a. Subject to the rights of the holders of any series
of Preferred Stock, any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other causes and any newly
created directorships resulting from any increase in the number of directors,
shall, unless the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the affirmative vote
of a majority of the directors then in office, even though less than a quorum
of the Board of Directors, and not by the stockholders. Any director elected
in accordance with the preceding sentence shall hold office for the
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remainder of the full term of the director for which the vacancy was created
or occurred and until such director's successor shall have been elected and
qualified.
b. If at the time of filling any vacancy or any newly
created directorship, the directors then in office shall constitute less than
a majority of the whole board (as constituted immediately prior to any such
increase), the Delaware Court of Chancery may, upon application of any
stockholder or stockholders holding at least ten percent (10%) of the total
number of the shares at the time outstanding having the right to vote for
such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen
by the directors then in offices as aforesaid, which election shall be
governed by Section 211 of the DGCL.
c. At any time or times that the corporation is subject
to Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office who have been elected by stockholders shall
constitute less than a majority of the directors then in office, then
(i) Any holder or holders of an aggregate of five
percent (5%) or more of the total number of shares at the time outstanding
having the right to vote for those directors may call a special meeting of
stockholders; or
(ii) The Superior Court of the proper county shall,
upon application of such stockholder or stockholders, summarily order a
special meeting of stockholders, to be held to elect the entire board, all in
accordance with Section 305(c) of the CGCL. The term of office of any
director shall terminate upon that election of a successor.
B.
1. BYLAW AMENDMENTS
Subject to paragraph (h) of Section 43 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative
vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the voting stock of the
corporation entitled to vote. The Board of Directors shall also have the
power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by written consent of stockholders in
accordance with the Bylaws prior to the closing of the Initial Public
Offering and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
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4. Advance notice of stockholder nominations for the
election of directors and of business to be brought by stockholders before
any meeting of the stockholders of the corporation shall be given in the
manner provided in the Bylaws of the corporation.
VI.
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
B. This corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the CGCL) for breach of duty to the
corporation and its shareholders through bylaw provisions or through
agreements with the agents, or through shareholder resolutions, or otherwise,
in excess of the indemnification otherwise permitted by Section 317 of the
CGCL, subject, at any time or times the corporation is subject to Section
2115(b) to the limits on such excess indemnification set forth in Section 204
of the CGCL.
C. Any repeal or modification of this Article VI shall be
prospective and shall not affect the rights under this Article VI in effect
at the time of the alleged occurrence of any act or omission to act giving
rise to liability or indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, except as provided in
paragraph B. of this Article VII, and all rights conferred upon the
stockholders herein are granted subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
any particular class or series of the Voting Stock required by law, this
Certificate of Incorporation or any Preferred Stock Designation, the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
voting stock, voting together as a single class, shall be required to alter,
amend or repeal Articles V, VI and VII.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DITECH COMMUNICATIONS CORPORATION
I.
The name of this corporation is DITECH COMMUNICATIONS CORPORATION.
II.
The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is National Registered Agents, Inc.
III.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is Fifty Five
Million (55,000,000) shares. Fifty Million (50,000,000) shares shall be Common
Stock, each having a par value of one tenth of one cent ($.001). Five Million
(5,000,000) shares shall be Preferred Stock, each having a par value of one
tenth of one cent ($.001).
B. The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized, by filing a
certificate (a "Preferred Stock Designation") pursuant to the Delaware General
Corporation Law, to fix or alter from time to time the designation, powers,
preferences and rights (voting or otherwise) granted upon, and the
qualifications, limitations or restrictions of, any wholly unissued series of
Preferred Stock, and to establish from time to time the number of shares
constituting any such series or any of them; and to increase or decrease the
number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
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V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
1. MANAGEMENT OF BUSINESS.
a. The management of the business and the conduct of the
affairs of the corporation shall be vested in its Board of Directors. The
number of directors which shall constitute the whole Board of Directors shall be
fixed exclusively by one or more resolutions adopted by the Board of Directors.
2. BOARD OF DIRECTORS.
a. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Initial
Public Offering, the term of office of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the
third annual meeting of stockholders following the Initial Public Offering, the
term of office of the Class III directors shall expire and Class III directors
shall be elected for a full term of three years. At each succeeding annual
meeting of stockholders, directors shall be elected for a full term of three
years to succeed the directors of the class whose terms expire at such annual
meeting. During such time or times that the corporation is subject to Section
2115(b) of the California General Corporation Law ("CGCL"), this Section A.2.a
of this Article V shall become effective and be applicable only when the
corporation is a "listed" corporation within the meaning of Section 301.5 of the
CGCL.
b. In the event that the corporation is subject to Section
2115(b) of the CGCL AND is not a "listed" corporation or ceases to be a "listed"
corporation under Section 301.5 of the CGCL, Section A. 2. a. of this Article V
shall not apply and all directors shall be shall be elected at each annual
meeting of stockholders to hold office until the next annual meeting.
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<PAGE>
c. No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation is subject to Section 2115(b) of the CGCL AND is not a
"listed" corporation or ceases to be a "listed" corporation under Section 301.5
of the CGCL. During this time, every stockholder entitled to vote at an
election for directors may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which such stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder thinks fit. No stockholder,
however, shall be entitled to so cumulate such stockholder's votes unless (i)
the names of such candidate or candidates have been placed in nomination prior
to the voting and (ii) the stockholder has given notice at the meeting, prior to
the voting, of such stockholder's intention to cumulate such stockholder's
votes. If any stockholder has given proper notice to cumulate votes, all
stockholders may cumulate their votes for any candidates who have been properly
placed in nomination. Under cumulative voting, the candidates receiving the
highest number of votes, up to the number of directors to be elected, are
elected.
Notwithstanding the foregoing provisions of this section, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. REMOVAL OF DIRECTORS. Removal of directors shall be governed
as provided in the Bylaws of the corporation.
4. VACANCIES
a. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such
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vacancies or newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the affirmative vote of a
majority of the directors then in office, even though less than a quorum of the
Board of Directors, and not by the stockholders. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified.
b. If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in offices as aforesaid, which election shall be governed by Section 211 of the
DGCL.
c. At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office who have been elected by stockholders shall constitute
less than a majority of the directors then in office, then:
(i) Any holder or holders of an aggregate of five percent
(5%) or more of the total number of shares at the time outstanding having the
right to vote for those directors may call a special meeting of stockholders; or
(ii) The Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of stockholders, to be held to elect the entire board, all in accordance
with Section 305(c) of the CGCL. The term of office of any director shall
terminate upon that election of a successor.
B.
1. BYLAW AMENDMENTS
Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the voting stock of the corporation entitled to
vote. The Board of Directors shall also have the power to adopt, amend, or
repeal Bylaws.
2. BALLOTS.
The directors of the corporation need not be elected by written
ballot unless the Bylaws so provide.
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3. ACTION BY STOCKHOLDERS.
No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws or by written consent of stockholders in accordance with the Bylaws
prior to the closing of the Initial Public Offering and following the closing of
the Initial Public Offering no action shall be taken by the stockholders by
written consent.
4. ADVANCE NOTICE.
Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
A. The liability of the directors for monetary damages shall be
eliminated to the fullest extent under applicable law.
B. This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the CGCL) for breach of duty to the corporation
and its shareholders through bylaw provisions or through agreements with the
agents, or through shareholder resolutions, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the CGCL, subject, at any
time or times the corporation is subject to Section 2115(b) to the limits on
such excess indemnification set forth in Section 204 of the CGCL.
C. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the voting stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
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BYLAWS
OF
DITECH COMMUNICATIONS CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETINGS.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors. Nominations of persons
for election to the Board of Directors of the corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders: (i) pursuant to the corporation's notice of meeting of
stockholders; (ii) by or at the
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direction of the Board of Directors; or (iii) by any stockholder of the
corporation who was a stockholder of record at the time of giving of notice
provided for in the following paragraph, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in Section 5.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. For
nominations or other business to be properly brought before an annual meeting by
a stockholder pursuant to clause (iii) of Section 5(a) of these Bylaws, (i) the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation, (ii) such other business must be a proper matter for
stockholder action under the General Corporation Law of Delaware, (iii) if the
stockholder, or the beneficial owner on whose behalf any such proposal or
nomination is made, has provided the corporation with a Solicitation Notice (as
defined in this Section 5(b)), such stockholder or beneficial owner must, in the
case of a proposal, have delivered a proxy statement and form of proxy to
holders of at least the percentage of the corporation's voting shares required
under applicable law to carry any such proposal, or, in the case of a nomination
or nominations, have delivered a proxy statement and form of proxy to holders of
a percentage of the corporation's voting shares reasonably believed by such
stockholder or beneficial owner to be sufficient to elect the nominee or
nominees proposed to be nominated by such stockholder, and must, in either case,
have included in such materials the Solicitation Notice, and (iv) if no
Solicitation Notice relating thereto has been timely provided pursuant to this
section, the stockholder or beneficial owner proposing such business or
nomination must not have solicited a number of proxies sufficient to have
required the delivery of such a Solicitation Notice under this Section 5. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the ninetieth (90th) day nor earlier than the close of business on
the one hundred twentieth (120th) day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced more than thirty (30) days prior to or
delayed by more than thirty (30) days after the anniversary of the preceding
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the one hundred twentieth
(120th) day prior to such annual meeting and not later than the close of
business on the later of the ninetieth (90th) day prior to such annual meeting
or the tenth (10th) day following the day on which public announcement of the
date of such meeting is first made. In no event shall the public announcement
of an adjournment of an annual meeting commence a new time period for the giving
of a stockholder's notice as described above. Such stockholder's notice shall
set forth: (A) as to each person whom the stockholder proposed to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "1934 Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (B) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any,
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on whose behalf the proposal is made; and (C) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such stockholder, as they appear on
the corporation's books, and of such beneficial owner, (ii) the class and number
of shares of the corporation which are owned beneficially and of record by such
stockholder and such beneficial owner, and (iii) whether either such stockholder
or beneficial owner intends to deliver a proxy statement and form of proxy to
holders of, in the case of the proposal, at least the percentage of the
corporation's voting shares required under applicable law to carry the proposal
or, in the case of a nomination or nominations, a sufficient number of holders
of the corporation's voting shares to elect such nominee or nominees (an
affirmative statement of such intent, a "Solicitation Notice").
(c) Notwithstanding anything in the second sentence of
Section 5(b) of these Bylaws to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the corporation is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
corporation at least one hundred (100) days prior to the first anniversary of
the preceding year's annual meeting, a stockholder's notice required by this
Section 5 shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the corporation not later than
the close of business on the tenth (10th) day following the day on which such
public announcement is first made by the corporation.
(d) Only such persons who are nominated in accordance with the
procedures set forth in this Section 5 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 5. Except as otherwise provided by law, the Chairman of the
meeting shall have the power and duty to determine whether a nomination or any
business proposed to be brought before the meeting was made, or proposed, as the
case may be, in accordance with the procedures set forth in these Bylaws and, if
any proposed nomination or business is not in compliance with these Bylaws, to
declare that such defective proposal or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded.
(e) Notwithstanding the foregoing provisions of this Section 5,
in order to include information with respect to a stockholder proposal in the
proxy statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the corporation proxy statement pursuant to
Rule 14a-8 under the 1934 Act.
(f) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the 1934 Act.
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SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation
may be called, for any purpose or purposes, by (i) the Chairman of the Board
of Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board of Directors for adoption) or (iv) by the holders of shares entitled to
cast not less than fifty percent (50%) of the votes at the meeting, and shall
be held at such place, on such date, and at such time as the Board of
Directors, shall fix.
At any time or times that the corporation is subject to Section 2115(b) of
the California General Corporation Law ("CGCL"), stockholders holding five
percent (5%) or more of the outstanding shares shall have the right to call a
special meeting of stockholders as set forth in Section 18(c) herein.
(b) If a special meeting is properly called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may
be transacted at such special meeting otherwise than specified in such notice.
The Board of Directors shall determine the time and place of such special
meeting, which shall be held not less than thirty-five (35) nor more than one
hundred twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within one hundred (100) days after the receipt of the request, the
person or persons properly requesting the meeting may set the time and place of
the meeting and give the notice. Nothing contained in this paragraph (b) shall
be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
(c) Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors
are to be elected pursuant to the corporation's notice of meeting (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
corporation who is a stockholder of record at the time of giving notice provided
for in these Bylaws who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 6(c). In the
event the corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be), for election to such
position(s) as specified in the corporation's notice of meeting, if the
stockholder's notice required by Section 5(b) of these Bylaws shall be delivered
to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day
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following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote
shall constitute a quorum for the transaction of business. In the absence of
a quorum, any meeting of stockholders may be adjourned, from time to time,
either by the chairman of the meeting or by vote of the holders of a majority
of the shares represented thereat, but no other business shall be transacted
at such meeting. The stockholders present at a duly called or convened
meeting, at which a quorum is present, may continue to transact business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum. Except as otherwise provided by statute, the
Certificate of Incorporation or these Bylaws, in all matters other than the
election of directors, the affirmative vote of the majority of shares present
in person or represented by proxy at the meeting and entitled to vote on the
subject matter shall be the act of the stockholders. Except as otherwise
provided by statute, the Certificate of Incorporation or these Bylaws,
directors shall be elected by a plurality of the votes of the shares present
in person or represented by proxy at the meeting and entitled to vote on the
election of directors. Where a separate vote by a class or classes or series
is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented
by proxy, shall constitute a quorum entitled to take action with respect to
that vote on that matter and, except where otherwise provided by the statute
or by the Certificate of Incorporation or these Bylaws, the affirmative vote
of the majority (plurality, in the case of the election of directors) of the
votes cast by the holders of shares ofsuch class or classes or series shall
be the act of such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the
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chairman of the meeting or by the vote of a majority of the shares casting
votes. When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting, the
corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
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SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
(b) Every written consent shall bear the date of signature of
each stockholder who signs the consent, and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the earliest dated consent delivered to the corporation in the
manner herein required, written consents signed by a sufficient number of
stockholders to take action are delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is
consented to is such as would have required the filing of a certificate under
any section of the Delaware General Corporation Law if such action had been
voted on by stockholders at a meeting thereof, then the certificate filed under
such section shall state, in lieu of any statement required by such section
concerning any vote of stockholders, that written consent has been given in
accordance with Section 228 of the Delaware General Corporation Law.
(d) Notwithstanding the foregoing, no such action by written
consent may be taken following the closing of the initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock
of the corporation (the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board
of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by a
majority in interest of the stockholders entitled to vote, present in person or
by proxy, shall act as chairman. The Secretary, or, in his absence, an
Assistant Secretary directed to do so by the President, shall act as secretary
of the meeting.
(b) The Board of Directors of the corporation shall be entitled
to make such rules or regulations for the conduct of meetings of stockholders as
it shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if
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any, the chairman of the meeting shall have the right and authority to prescribe
such rules, regulations and procedures and to do all such acts as, in the
judgment of such chairman, are necessary, appropriate or convenient for the
proper conduct of the meeting, including, without limitation, establishing an
agenda or order of business for the meeting, rules and procedures for
maintaining order at the meeting and the safety of those present, limitations on
participation in such meeting to stockholders of record of the corporation and
their duly authorized and constituted proxies and such other persons as the
chairman shall permit, restrictions on entry to the meeting after the time fixed
for the commencement thereof, limitations on the time allotted to questions or
comments by participants and regulation of the opening and closing of the polls
for balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 17. CLASSES OF DIRECTORS.
(a) Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the Initial Public Offering and during such time or
times that the corporation is not subject to Section 2115(b) of the CGCL, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering (assuming the corporation is not subject to Section 2115(b) of
the CGCL), the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three years. At the second annual
meeting of stockholders following the Initial Public Offering (assuming the
corporation is not subject to Section 2115(b) of the CGCL), the term of office
of the Class II directors shall expire and Class II directors shall be elected
for a full term of three years. At the third annual meeting of stockholders
following the Initial Public Offering (assuming the corporation is not subject
to Section 2115(b) of the CGCL), the term of office of the Class III directors
shall expire and Class III directors shall be elected for a full term of three
years. At each succeeding annual meeting of
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stockholders (assuming the corporation is not subject to Section 2115(b) of the
CGCL), directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting.
(b) In the event that the corporation is subject to Section
2115(b) of the CGCL at any time, or from time to time, Section 17(a) of these
Bylaws shall not apply and all directors shall be elected at each annual meeting
of stockholders to hold office until the next annual meeting.
(c) No person entitled to vote at an election for directors may
cumulate votes to which such person is entitled, unless, at the time of such
election, the corporation is subject to Section 2115(b) of the CGCL. During
such time or times that the corporation is subject to Section 2115(b) of the
CGCL, every stockholder entitled to vote at an election for directors may
cumulate such stockholder's votes and give one candidate a number of votes equal
to the number of directors to be elected multiplied by the number of votes to
which such stockholder's shares are otherwise entitled, or distribute the
stockholder's votes on the same principle among as many candidates as such
stockholder thinks fit. No stockholder, however, shall be entitled to so
cumulate such stockholder's votes unless (i) the names of such candidate or
candidates have been placed in nomination prior to the voting and (ii) the
stockholder has given notice at the meeting, prior to the voting, of such
stockholder's intention to cumulate such stockholder's votes. If any
stockholder has given proper notice to cumulate votes, all stockholders may
cumulate their votes for any candidates who have been properly placed in
nomination. Under cumulative voting, the candidates receiving the highest number
of votes, up to the number of directors to be elected, are elected.
Notwithstanding the foregoing provisions of this section, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
SECTION 18. VACANCIES.
(a) Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted
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immediately prior to any such increase), the Delaware Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
(10%) of the total number of the shares at the time outstanding having the right
to vote for such directors, summarily order an election to be held to fill any
such vacancies or newly created directorships, or to replace the directors
chosen by the directors then in offices as aforesaid, which election shall be
governed by Section 211 of the Delaware General Corporation Law.
(c) At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy, the directors
then in office who have been elected by stockholders shall constitute less than
a majority of the directors then in office, then
(1) Any holder or holders of an aggregate of five percent
(5%) or more of the total number of shares at the time outstanding having the
right to vote for those directors may call a special meeting of stockholders; or
(2) The Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of stockholders, to be held to elect the entire board, all in accordance
with Section 305(c) of the CGCL. The term of office of any director shall
terminate upon that election of a successor.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When
one or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. REMOVAL.
(a) During such time or times that the corporation is subject to
Section 2115(b) of the CGCL, the Board of Directors or any individual director
may be removed from office at any time without cause by the affirmative vote of
the holders of at least a majority of the outstanding shares entitled to vote on
such removal; provided, however, that unless the entire Board is removed, no
individual director may be removed when the votes cast against such director's
removal, or not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively at an election which the same total
number of votes were cast (or, if such action is taken by written consent, all
shares entitled to vote were voted) and the entire number of directors
authorized at the time of such director's most recent election were then being
elected.
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(b) Following any date on which the corporation is no longer
subject to Section 2115(b) of the CGCL and subject to any limitations imposed by
law, the Board of Directors or any individual director may be removed from
office at any time without cause by the affirmative vote of the holders of at
least a majority of the outstanding shares entitled to vote on such removal.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an
annual meeting of the Board of Directors shall be necessary and such meeting
shall be held for the purpose of electing officers and transacting such other
business as may lawfully come before it.
(b) REGULAR MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of Directors may be
held at any time or date and at any place within or without the State of
Delaware which has been designated by the Board of Directors and publicized
among all directors. No formal notice shall be required for regular meetings of
the Board of Directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors
(d) TELEPHONE MEETINGS. Any member of the Board of Directors,
or of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, including a voice messaging system or other system or technology
designed to record and communicate messages, facsimile, telegraph or telex, or
by electronic mail or other electronic means, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a
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written waiver of notice. All such waivers shall be filed with the corporate
records or made a part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; PROVIDED, HOWEVER, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
(b) At each meeting of the Board of Directors at which a quorum
is present, all questions and business shall be determined by the affirmative
vote of a majority of the directors present, unless a different vote be required
by law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and provided
in the resolution of the Board of Directors shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to (i) approving or adopting, or
recommending to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law
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to be submitted to stockholders for approval, or (ii) adopting, amending or
repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, from time to
time, appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall any such committee have the powers denied to
the Executive Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to any requirements of any
outstanding series of preferred Stock and the provisions of subsections (a) or
(b) of this Bylaw, may at any time increase or decrease the number of members of
a committee or terminate the existence of a committee. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation from the committee or from the Board of Directors. The Board of
Directors may at any time for any reason remove any individual committee member
and the Board of Directors may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of
any committee may be waived in writing at any time before or after the meeting
and will be waived by any director by attendance thereat, except when the
director attends such special meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized number
of members of any such committee shall constitute a quorum for the transaction
of business, and the act of a majority of those present at any meeting at which
a quorum is present shall be the act of such committee.
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SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President (if a director), or if the President is absent, the
most senior Vice President (if a director), or, in the absence of any such
person, a chairman of the meeting chosen by a majority of the directors present,
shall preside over the meeting. The Secretary, or in his absence, any Assistant
Secretary directed to do so by the President, shall act as secretary of the
meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by the
Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman
of the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers, as the Board of Directors
shall designate from time to time. If there is no President, then the Chairman
of the Board of Directors shall also serve as the Chief Executive Officer of the
corporation and shall have the powers and duties prescribed in paragraph (c) of
this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is
present. Unless some other officer has been elected Chief Executive Officer
of the corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of
the corporation. The President shall perform
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other duties commonly incident to his office and shall also perform such other
duties and have such other powers, as the Board of Directors shall designate
from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume
and perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record all
acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings of
the stockholders and of all meetings of the Board of Directors and any committee
thereof requiring notice. The Secretary shall perform all other duties given
him in these Bylaws and other duties commonly incident to his office and shall
also perform such other duties and have such other powers, as the Board of
Directors shall designate from time to time. The President may direct any
Assistant Secretary to assume and perform the duties of the Secretary in the
absence or disability of the Secretary, and each Assistant Secretary shall
perform other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep or cause to be kept the books of account of the corporation
in a thorough and proper manner and shall render statements of the financial
affairs of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order
of the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties
commonly incident to his office and shall also perform such other duties and
have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Treasurer or any
Assistant Treasurer, or the Controller or any Assistant Controller to assume and
perform the duties of the Chief Financial Officer in the absence or disability
of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and
each Controller and Assistant Controller shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be
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necessary to make it effective. Any resignation shall be without prejudice to
the rights, if any, of the corporation under any contract with the resigning
officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the
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President or any Vice President and by the Treasurer or Assistant Treasurer or
the Secretary or Assistant Secretary, certifying the number of shares owned by
him in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or othe
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to agree to indemnify the corporation in such manner as it shall
require or to give the corporation a surety bond in such form and amount as it
may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the Delaware General Corporation Law.
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SECTION 37. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall, subject to applicable law, not be more than sixty (60) nor less than ten
(10) days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may
fix a new record date for the adjourned meeting.
(b) Prior to the Initial Public Offering, in order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any stockholder of
record seeking to have the stockholders authorize or take corporate action by
written consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date. If no record date has been
fixed by the Board of Directors within ten (10) days of the date on which such a
request is received, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business or an officer or agent of
the corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such
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action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; PROVIDED, HOWEVER, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation and applicable law, if any, may be declared by the Board of
Directors pursuant to law at any regular or special meeting.
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Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation and applicable
law.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers" shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law or any other applicable law; PROVIDED, HOWEVER, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors and executive officers; and, PROVIDED, FURTHER,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person unless (i) such indemnification is expressly required to be made
by law, (ii) the proceeding was authorized by the Board of Directors of the
corporation, (iii) such indemnification is provided by the corporation, in its
sole discretion, pursuant to the powers vested in the corporation under the
Delaware General Corporation Law or any other applicable law or (iv) such
indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law or any other applicable law.
The Board of Directors shall have the power to delegate the determination of
whether indemnification shall be given to any such person to such officers or
other persons as the Board of Directors shall determine.
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(c) EXPENSES. The corporation shall advance to any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director or
executive officer, of the corporation, or is or was serving at the request of
the corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law or any other applicable law for the corporation
to indemnify the claimant for the amount claimed. In connection with any claim
by an executive officer of the corporation (except in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such executive officer is or was a director of the corporation)
for advances, the corporation shall be entitled to raise a defense as to any
such action clear and convincing evidence that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation, or with respect to any criminal action or
proceeding that such person acted without reasonable cause to believe that his
conduct was lawful. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel or its
21.
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stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law or any other applicable law, nor an actual determination
by the corporation (including its Board of Directors, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Bylaw shall not be exclusive of any other right which such person
may have or hereafter acquire under any applicable statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law, or by any other applicable law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law or any other applicable law, the corporation, upon
approval by the Board of Directors, may purchase insurance on behalf of any
person required or permitted to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law. If this Section
43 shall be invalid due to the application of the indemnification provisions of
another jurisdiction, then the corporation shall indemnify each director and
executive officer to the full extent under any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(1) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation, prosecution,
defense, settlement,
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arbitration and appeal of, and the giving of testimony in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(2) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and expenses
of any nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" shall include, in addition
to the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(4) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(5) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.
23.
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(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by overnight
delivery service, facsimile, telex or telegram, except that such notice other
than one which is delivered personally shall be sent to such address as such
director shall have filed in writing with the Secretary, or, in the absence of
such filing, to the last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by
a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the name
and address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail or by
overnight delivery service, as above provided, shall be deemed to have been
given as at the time of mailing, and all notices given by facsimile, telex or
telegram shall be deemed to have been given as of the sending time recorded at
time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by
the corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever
notice is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom
(i) notice of two consecutive annual meetings, and all notices of meetings or of
the taking of action by written consent without a meeting to such
24.
<PAGE>
person during the period between such two consecutive annual meetings, or
(ii) all, and at least two, payments (if sent by first class mail) of dividends
or interest on securities during a twelve-month period, have been mailed
addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken
or held without notice to such person shall have the same force and effect as if
such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding shares of the voting stock of the
corporation entitled to vote. The Board of Directors shall also have the power
to adopt, amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
25.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . . . . . .1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE III Stockholders' Meetings . . . . . . . . . . . . . . . . . . . . . . . .1
Section 4. Place Of Meetings. . . . . . . . . . . . . . . . . . . . . . . . .1
Section 5. Annual Meetings. . . . . . . . . . . . . . . . . . . . . . . . . .1
Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . .4
Section 7. Notice Of Meetings . . . . . . . . . . . . . . . . . . . . . . . .5
Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Section 9. Adjournment And Notice Of Adjourned Meetings . . . . . . . . . . .5
Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 11. Joint Owners Of Stock. . . . . . . . . . . . . . . . . . . . . . .6
Section 12. List Of Stockholders . . . . . . . . . . . . . . . . . . . . . . .6
Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . .7
Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE IV Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Section 15. Number And Term Of Office. . . . . . . . . . . . . . . . . . . . .8
Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Section 17. Classes of Directors . . . . . . . . . . . . . . . . . . . . . . .8
Section 18. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 19. Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 20. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 22. Quorum And Voting. . . . . . . . . . . . . . . . . . . . . . . . 12
Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . 12
Section 24. Fees And Compensation. . . . . . . . . . . . . . . . . . . . . . 12
Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
i.
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE V Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 27. Officers Designated. . . . . . . . . . . . . . . . . . . . . . . 14
Section 28. Tenure And Duties Of Officers. . . . . . . . . . . . . . . . . . 14
Section 29. Delegation Of Authority. . . . . . . . . . . . . . . . . . . . . 15
Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 31. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VI Execution Of Corporate Instruments And Voting Of Securities
Owned By The Corporation. . . . . . . . . . . . . . . . . . . . . . . 16
Section 32. Execution Of Corporate Instruments . . . . . . . . . . . . . . . 16
Section 33. Voting Of Securities Owned By The Corporation. . . . . . . . . . 16
ARTICLE VII Shares Of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 34. Form And Execution Of Certificates . . . . . . . . . . . . . . . 16
Section 35. Lost Certificates. . . . . . . . . . . . . . . . . . . . . . . . 17
Section 36. Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 37. Fixing Record Dates. . . . . . . . . . . . . . . . . . . . . . . 18
Section 38. Registered Stockholders. . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VIII Other Securities Of The Corporation . . . . . . . . . . . . . . . . 19
Section 39. Execution Of Other Securities. . . . . . . . . . . . . . . . . . 19
ARTICLE IX Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 40. Declaration Of Dividends . . . . . . . . . . . . . . . . . . . . 19
Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE X Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 42. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XI Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 43. Indemnification Of Directors, Executive Officers,
Other Officers, Employees And Other Agents. . . . . . . . . . . . . . . . . . 20
ARTICLE XII Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 44. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
ii.
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE XIII Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE XIV Loans To Officers. . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 46. Loans To Officers. . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
iii.
<PAGE>
Exhibit 5.1
[Cooley Godward Letterhead]
May 10, 1999
Ditech Communications Corporation
825 E. Middlefield Rd.
Mountain View, California 94010
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Ditech Communications Corporation (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), including a prospectus to
be filed with the Commission pursuant to Rule 424(b) of Regulation C promulgated
under the Securities Act of 1933, as amended (the "Prospectus"), and the
underwritten public offering of up to 3,450,000 shares of Common Stock (the
"Common Stock").
In connection with this opinion, we have (i) reviewed the Registration
Statement, the Company's Certificate of Incorporation and Bylaws and the
originals or copies certified to our satisfaction, of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below, (ii) assumed
that the Form of Certificate of Incorporation, as set forth in Exhibit 3.2 of
the Registration Statement, shall have been duly filed with the office of the
Delaware Secretary of State and (ii) assumed that the shares of the Common Stock
will be sold to the Underwriters at a price established by the Pricing Committee
of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that the Common Stock, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By /s/ Andrei Manoliu
---------------------------
Andrei Manoliu
<PAGE>
Exhibit 10.5
DITECH COMMUNICATION CORPORATION
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
APPROVED BY THE BOARD OF DIRECTORS MARCH 5, 1999
APPROVED BY STOCKHOLDERS APRIL 21, 1999
AMENDED AND RESTATED BY THE BOARD OF DIRECTORS APRIL 23, 1999
AMENDED AND RESTATED BY STOCKHOLDERS APRIL 26, 1999
EFFECTIVE DATE: MARCH 5, 1999
TERMINATION DATE: MARCH 4, 2009
1. PURPOSES.
(a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive
Options are the Non-Employee Directors of the Company.
(b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means
by which Non-Employee Directors may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of Nonstatutory
Stock Options.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to
retain the services of its Non-Employee Directors, to secure and retain the
services of new Non-Employee Directors and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation
of the Company, whether now or hereafter existing, as those terms are defined
in Sections 424(e) and (f), respectively, of the Code.
(b) "ANNUAL GRANT" means an Option granted annually to all Non-Employee
Directors who meet the specified criteria pursuant to subsection 6(b) of the
Plan.
(c) "ANNUAL MEETING" means the annual meeting of the stockholders of
the Company.
(d) "BOARD" means the Board of Directors of the Company.
(e) "CODE" means the Internal Revenue Code of 1986, as amended.
(f) "COMMON STOCK" means the common stock of the Company. Share
numbers do not reflect the reverse stock split anticipated to occur at the
end of April 1999.
(g) "COMPANY" means Ditech Communication Corporation, a Delaware
corporation.
(h) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who
is compensated for
<PAGE>
such services or (ii) who is a member of the Board of Directors of an
Affiliate. However, the term "Consultant" shall not include either Directors
of the Company who are not compensated by the Company for their services as
Directors or Directors of the Company who are merely paid a director's fee by
the Company for their services as Directors.
(i) "CONTINUOUS SERVICE" means that the Optionholder's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is
not interrupted or terminated. The Optionholder's Continuous Service shall
not be deemed to have terminated merely because of a change in the capacity
in which the Optionholder renders service to the Company or an Affiliate as
an Employee, Consultant or Director or a change in the entity for which the
Optionholder renders such service, provided that there is no interruption or
termination of the Optionholder's Continuous Service. For example, a change
in status from a Non-Employee Director of the Company to a Consultant of an
Affiliate or an Employee of the Company will not constitute an interruption
of Continuous Service. The Board or the chief executive officer of the
Company, in that party's sole discretion, may determine whether Continuous
Service shall be considered interrupted in the case of any leave of absence
approved by that party, including sick leave, military leave or any other
personal leave.
(j) "DIRECTOR" means a member of the Board of Directors of the Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an
Affiliate. Mere service as a Director or payment of a director's fee by the
Company or an Affiliate shall not be sufficient to constitute "employment" by
the Company or an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the
greatest volume of trading in the Common Stock) on the last market trading
day prior to the day of determination, as reported in The Wall Street Journal
or such other source as the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
2.
<PAGE>
(o) "INITIAL GRANT" means an Option granted to a Non-Employee Director
who meets the specified criteria pursuant to subsection 6(a) of the Plan.
(p) "NON-EMPLOYEE DIRECTOR" means a Director who is not employed by the
Company or an Affiliate.
(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code
and the regulations promulgated thereunder.
(r) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "OPTION" means a Nonstatutory Stock Option granted pursuant to the
Plan.
(t) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionholder evidencing the terms and conditions of an individual
Option grant. Each Option Agreement shall be subject to the terms and
conditions of the Plan.
(u) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.
(v) "PLAN" means this Ditech Communication Corporation 1999 Non-Employee
Directors' Stock Option Plan.
(w) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.
(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan. The
Board may not delegate administration of the Plan to a committee.
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine the provisions of each Option to the extent not
specified in the Plan.
(ii) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in
a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
3.
<PAGE>
(iii) To amend the Plan or an Option as provided in Section 12.
(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of
the Company which are not in conflict with the provisions of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in stock, the stock that may be issued pursuant to
Options shall not exceed in the aggregate one hundred fifty thousand
(150,000) shares of Common Stock.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the stock not acquired under such Option shall revert
to and again become available for issuance under the Plan.
(c) SOURCE OF SHARES. The stock subject to the Plan may be unissued
shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
Nondiscretionary Options as set forth in section 6 shall be granted
under the Plan to all Non-Employee Directors.
6. NON-DISCRETIONARY GRANTS.
Without any further action of the Board, each Non-Employee Director
shall be granted the following Options:
(a) INITIAL GRANTS. After the date of approval of the Plan by the
Board, each person who is appointed or elected for the first time to be a
Non-Employee Director other than at an Annual Meeting automatically shall,
upon the date of his or her appointment or election to be a Non-Employee
Director by the Board or stockholders of the Company, be granted an Initial
Grant to purchase the number of shares of Common Stock equal to the Initial
Grant Number on the terms and conditions set forth herein. The "Initial Grant
Number" shall be seven thousand five hundred (7,500) multiplied by the
fraction equal (i) to the number of months remaining from such date of
appointment or election until the date of the next Annual Meeting or, if no
such date has been set then the first anniversary of the previous year's
Annual Meeting (with a fraction of a month rounded up to the next whole
month), divided by (ii) 12.
(b) ANNUAL GRANTS. On the day of each Annual Meeting immediately
following such Annual Meeting, each Non-Employee Director then serving as
such automatically shall be granted an Annual Grant to purchase seven thousand
five hundred (7,500) shares of Common Stock on the terms and conditions set
forth herein; provided, however, that an Annual Grant to a Non-Employee
Director receiving an Annual Grant for the first time, and who was not a
director of the Company at the closing of the Company's initial public
offering of its Common Stock, shall be an option to purchase 15,000 shares
of Common Stock.
4.
<PAGE>
7. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as required by the Plan. Each Option shall contain such
additional terms and conditions, not inconsistent with the Plan, as the Board
shall deem appropriate. Each Option shall include (through incorporation of
provisions hereof by reference in the Option or otherwise) the substance of
each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of five
(5) years from the date it was granted.
(b) EXERCISE PRICE. The exercise price of each Option shall be one
hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, an
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of
Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option may be paid, to the extent permitted by applicable statutes and
regulations, in any combination of (i) cash or check, (ii) delivery to the
Company of other Common Stock, (ii) deferred payment or (iv) any other form
of legal consideration that may be acceptable to the Board and provided in
the Option Agreement; provided, however, that at any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by
deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be
interest under the deferred payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by
will or by the laws of descent and distribution and shall be exercisable
during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering
5.
<PAGE>
written notice to the Company, in a form satisfactory to the Company,
designate a third party who, in the event of the death of the Optionholder,
shall thereafter be entitled to exercise the Option.
(e) VESTING GENERALLY. Options shall be fully vested and exercisable on
the date of grant.
(f) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent
that the Optionholder was entitled to exercise it as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service, or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, after termination, the Optionholder does
not exercise his or her Option within the time specified in the Option
Agreement, the Option shall terminate.
(g) EXTENSION OF TERMINATION DATE. If the exercise of the Option
following the termination of the Optionholder's Continuous Service (other
than upon the Optionholder's death or Disability) would be prohibited at any
time solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in
subsection 7(a) or (ii) the expiration of a period of three (3) months after
the termination of the Optionholder's Continuous Service during which the
exercise of the Option would not be in violation of such registration
requirements.
(h) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability,
the Optionholder may exercise his or her Option (to the extent that the
Optionholder was entitled to exercise it as of the date of termination), but
only within such period of time ending on the earlier of (i) the date twelve
(12) months following such termination or (ii) the expiration of the term of
the Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.
(i) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the three-month period after the termination of
the Optionholder's Continuous Service for a reason other than death, then the
Option may be exercised (to the extent the Optionholder was entitled to
exercise the Option as of the date of death) by the Optionholder's estate, by
a person who acquired the right to exercise the Option by bequest or
inheritance or by a person designated to exercise the Option upon the
Optionholder's death, but only within the period ending on the earlier of (1)
the date eighteen (18) months following the date of death or (2) the
expiration of the term of such Option as set forth in the Option Agreement.
If, after death, the Option is not exercised within the time specified
herein, the Option shall terminate.
6.
<PAGE>
8. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Options, the
Company shall keep available at all times the number of shares of Common
Stock required to satisfy such Options.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Options and to issue and sell shares of
Common Stock upon exercise of the Options; provided, however, that this
undertaking shall not require the Company to register under the Securities
Act the Plan, any Option or any stock issued or issuable pursuant to any such
Option. If, after reasonable efforts, the Company is unable to obtain from
any such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for failure to issue
and sell stock upon exercise of such Options unless and until such authority
is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
10. MISCELLANEOUS.
(a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Option unless and until such Optionholder has
satisfied all requirements for exercise of the Option pursuant to its terms.
(b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument executed
or Option granted pursuant thereto shall confer upon any Optionholder any
right to continue to serve the Company as a Non-Employee Director or shall
affect the right of the Company or an Affiliate to terminate (i) the
employment of an Employee with or without notice and with or without cause,
(ii) the service of a Consultant pursuant to the terms of such Consultant's
agreement with the Company or an Affiliate or (iii) the service of a Director
pursuant to the Bylaws of the Company or an Affiliate, and any applicable
provisions of the corporate law of the state in which the Company or the
Affiliate is incorporated, as the case may be.
(c) INVESTMENT ASSURANCES. The Company may require an Optionholder, as
a condition of exercising or acquiring stock under any Option, (i) to give
written assurances satisfactory to the Company as to the Optionholder's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he
or she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Option; and (ii) to
give written assurances satisfactory to the Company stating that the
Optionholder is acquiring the stock subject to the Option for the
Optionholder's own account and not with any present intention of selling or
otherwise distributing the stock.
7.
<PAGE>
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (iii) the issuance of the shares upon
the exercise or acquisition of stock under the Option has been registered
under a then currently effective registration statement under the Securities
Act or (iv) as to any particular requirement, a determination is made by
counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may,
upon advice of counsel to the Company, place legends on stock certificates
issued under the Plan as such counsel deems necessary or appropriate in order
to comply with applicable securities laws, including, but not limited to,
legends restricting the transfer of the stock.
(d) WITHHOLDING OBLIGATIONS. The Optionholder may satisfy any federal,
state or local tax withholding obligation relating to the exercise or
acquisition of stock under an Option by any of the following means (in
addition to the Company's right to withhold from any compensation paid to the
Optionholder by the Company) or by a combination of such means: (i)
tendering a cash payment; (ii) authorizing the Company to withhold shares
from the shares of the Common Stock otherwise issuable to the Optionholder as
a result of the exercise or acquisition of stock under the Option; or (iii)
delivering to the Company owned and unencumbered shares of the Common Stock.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock
subject to the Plan, or subject to any Option, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or other transaction not involving
the receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject both to
the Plan pursuant to subsection 4(a) and to the nondiscretionary Options
specified in Section 5, and the outstanding Options will be appropriately
adjusted in the class(es) and number of securities and price per share of
stock subject to such outstanding Options. The Board shall make such
adjustments, and its determination shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a transaction "without receipt of consideration" by the Company.)
(b) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (i) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company, (ii) a merger or
consolidation in which the Company is not the surviving corporation or (iii)
a reverse merger in which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, then (i) any surviving corporation or
acquiring corporation shall assume any Options outstanding under the Plan or
shall substitute similar Options (including an option to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 11(b) for those outstanding under the Plan, or (ii) in the event
any surviving corporation or acquiring corporation
8.
<PAGE>
refuses to assume such Options or to substitute similar Options for those
outstanding under the Plan, then such Options shall terminate if not
exercised prior to such event.
12. AMENDMENT OF THE PLAN AND OPTIONS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time,
may amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder
approval is necessary to satisfy the requirements of Rule 16b-3 or any Nasdaq
or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion,
submit any other amendment to the Plan for stockholder approval.
(c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.
(d) AMENDMENT OF OPTIONS. The Board at any time, and from time to
time, may amend the terms of any one or more Options; provided, however, that
the rights under any Option shall not be impaired by any such amendment
unless (i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before
the tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No
Options may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Option granted while the
Plan is in effect except with the written consent of the Optionholder.
14. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the date the Plan is adopted by the
Board but no Option shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
9.
<PAGE>
15. CHOICE OF LAW.
All questions concerning the construction, validity and interpretation
of this Plan shall be governed by the law of the State of California, without
regard to such state's conflict of laws rules.
10.
<PAGE>
Exhibit 10.17
[DITECH LETTERHEAD]
April 23, 1999
Marc Schwager
221 Garland Way
Los Altos, CA 94022
Subject: Employment Offer
Dear Marc:
We are pleased to offer you employment as Vice President, Marketing,
reporting to Tim Montgomery, CEO & President. This offer is contingent upon
the approval of Ditech's Board of Directors - Compensation Committee.
Your compensation package consists of the following:
- - Annual Base salary of $150,000.
- - Management By Objectives Bonus of $30,000. This is guaranteed for the
first year of employment, (total annual compensation is $180,000).
- - Subject to the approval of the Company's Board of Directors or its
Compensation Committee, you will be granted stock options to purchase
100,000 shares of the Company's Common Stock. The exercise price per
share will be equal to the fair market value per share on the date the
option is granted. The option will be subject to the terms and
conditions applicable to options granted under the Company's 1998 Stock
Plan, as described in that Plan and the applicable stock option
agreement. The option will be immediately exercisable. The purchased
shares will be subject to repurchase by the Company at the exercise
price in the event that your service terminates before you vest in the
shares.
- - If the company terminates your employment for any reason other than
cause or permanent disability during your first year of service, then
the Company will continue to pay your base salary until the anniversary
of your first day of employment. The same period will be credited as
continuous service for purposes of the stock options described above.
However, this paragraph will not apply unless you (a) have executed a
general release (in a form prescribed by the Company) of all known and
unknown claims that you may then have against the Company or persons
affiliated with the Company and (b) have agreed not to prosecute any
legal action for other proceedings based on those claims. This
paragraph is subject to Board approval.
- - Signing Bonus of $25,000. However, should you sever your employment
from Ditech within a year from your hire date, you will repay Ditech
$12,500.
Your benefit package with Ditech Corporation will include Health insurance
coverage (with partial premium due if for family coverage) beginning the
first of the month after date of employment, Life and Long Term Disability
insurance with option for additional coverage, Flexible Spending Program
participation and 401(k) participation. Eligibility for 401(k) participation
is effective after 90 days of employment.
Your employment with Ditech Corporation is at-will. You will be asked to
sign the statement of your acceptance and a confidentiality agreement when
you report to work.
<PAGE>
PAGE 2 OF 2
We look forward to working with you and having you as a part of our valuable
and dynamic team! Please indicate your acceptance by signing and returning
this letter by April 28, 1999. You may fax your acceptance to (650)
564-9593. We anticipate your start to be on May 10, 1999, this will enable
your inclusion in our printed prospectus for our initial public offering.
This supercedes offer letter dated April 22, 1999.
Sincerely, Accepted by:
/s/ Glenda Dubsky /s/ Marc Schwager 4-27-99
- ----------------------------- ----------------------- -------------
Glenda Dubsky Marc Schwager Date
Manager, Human Resources
<PAGE>
EXHIBIT 10.18
DITECH CORPORATION
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of the 15th day
of September, 1997, by and between DITECH CORPORATION, a California corporation
(the "Company"), and WILLIAM HASLER ("Purchaser").
WHEREAS, the Company desires to issue, and Purchaser desires to acquire,
stock of the Company as herein described, on the terms and conditions
hereinafter set forth;
WHEREAS, the issuance of common stock hereby is in connection with a
compensatory benefit plan for the employees, directors, officers, advisers or
consultants of the Company and is intended to comply with the provisions of Rule
701 promulgated by the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act").
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. PURCHASE AND SALE OF STOCK. Purchaser hereby agrees to purchase from
the Company, and the Company hereby agrees to sell to Purchaser, an aggregate of
one hundred thousand (100,000) shares of the Common Stock of the Company (the
"Stock") at $0.55 per share, for an aggregate purchase price of $55,000, payable
in cash.
The closing hereunder, including payment for and delivery of the Stock
shall occur at the offices of the Company immediately following the execution of
this Agreement, or at such other time and place as the parties may mutually
agree.
2. REPURCHASE OPTION.
(a) In the event Purchaser's relationship as a director of the
Corporation (or a parent or subsidiary of the Company) terminates for any reason
(including death or disability), or for no reason, with or without cause, then
the Company shall have an irrevocable option (the "Repurchase Option"), for a
period of ninety (90) days after said termination, or such longer period as may
be determined by the Company if such later repurchase is deemed necessary by the
Company for treatment of all or part of its stock as Qualified Small Business
Stock under Section 1202 of the Internal Revenue Code of 1986, as amended (the
"Code"), and regulations promulgated thereunder, to repurchase from Purchaser or
Purchaser's personal representative, as the case may be, at the original price
per share indicated above paid by Purchaser for such Stock ("Option Price"), up
to but not exceeding the number of shares of Stock which have not vested under
the provisions of Section 2b below as of such termination date.
(b) One hundred percent (100%) of the Stock shall initially be
subject to the Repurchase Option. Two Thousand Eighty-Four (2,084) shares of
the Stock shall vest and be released from the Repurchase Option on a monthly
basis measured from the Vesting
1.
<PAGE>
Commencement Date (as set forth on the signature page to this Agreement),
until all the Stock is released from the Repurchase Option (provided in each
case that Purchaser's relationship as a director of the Company (or a parent
or subsidiary of the Company) has not been terminated prior to the date of
such release).
3. EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be
exercised by written notice signed by an officer of the Company or by any
assignee or assignees of the Company and delivered or mailed as provided in
Section 16a. Such notice shall identify the number of shares of Stock to be
purchased and shall notify Purchaser of the time, place and date for settlement
of such purchase, which shall be scheduled by the Company within the term of the
Repurchase Option set forth in Section 2a above. The Company shall be entitled
to pay for any shares of Stock purchased pursuant to its Repurchase Option in
cash or by offset against any indebtedness owing to the Company by Purchaser, or
by a combination of both, at the Company's option. Upon delivery of such notice
and payment of the purchase price in any of the ways described above, the
Company shall become the legal and beneficial owner of the Stock being
repurchased and all rights and interest therein or related thereto, and the
Company shall have the right to transfer to its own name the Stock being
repurchased by the Company, without further action by Purchaser.
4. ADJUSTMENTS TO STOCK. If, from time to time, during the term of the
Purchase Option there is any change affecting the Company's outstanding Common
Stock as a class that is effected without the receipt of consideration by the
Company (through merger, consolidation, reorganization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating,
dividend, combination of shares, change in corporation structure or other
transaction not involving the receipt of consideration by the Company), then any
and all new, substituted or additional securities or other property to which
Purchaser is entitled by reason of Purchaser's ownership of Stock shall be
immediately subject to the Repurchase Option and be included in the word "Stock"
for all purposes of the Repurchase Option with the same force and effect as the
shares of the Stock presently subject to the Repurchase Option, but only to the
extent the Stock is, at the time, covered by such Repurchase Option. While the
total Option Price shall remain the same after each such event, the Option Price
per share of Stock upon exercise of the Repurchase Option shall be appropriately
adjusted.
5. CORPORATE TRANSACTION. In the event of (a) a sale of substantially
all of the assets of the Company; (b) a merger or consolidation in which the
Company is not the surviving corporation (other than a merger or consolidation
in which shareholders immediately before the merger or consolidation have,
immediately after the merger or consolidation, greater stock voting power); (c)
a reverse merger in which the company is the surviving corporation but the
shares of the Company's common stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise (other than a reverse merger in which
stockholders immediately before the merger have, immediately after the merger,
greater stock voting power); or (d) any transaction or series of related
transactions in which in excess of 50% of the Company's voting power is
transferred, then the Repurchase Option may be assigned by the Company to any
successor of the Company, and the Repurchase Option shall apply if Purchaser
does not become a director of the Company
2.
<PAGE>
(or a Parent or subsidiary of the Company) or the Company shall terminate
Purchaser's relationship as a director of the Company (or a Parent or
subsidiary of the Company). In such case, the references to the Company
shall be deemed to refer to such successor as its Parents and Subsidiaries.
6. TERMINATION OF REPURCHASE OPTION. Sections 2, 3, 4 and 5 of this
Agreement shall terminate upon the exercise in full or expiration of the
Repurchase Option, whichever first occurs.
7. ESCROW OF UNVESTED STOCK. As security for Purchaser's faithful
performance of the terms of this Agreement and to insure the availability for
delivery of Purchaser's Stock upon exercise of the Repurchase Option herein
provided for, Purchaser agrees, at the closing hereunder, to deliver to and
deposit with the Secretary of the Company or the Secretary's designee ("Escrow
Agent"), as Escrow Agent in this transaction, three (3) stock assignments duly
endorsed (with date and number of shares blank) in the form attached hereto as
Exhibit A, together with a certificate or certificates evidencing all of the
Stock subject to the Repurchase Option; said documents are to be held by the
Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow
Instructions of the Company and Purchaser set forth in Exhibit B attached hereto
and incorporated by this reference, which instructions shall also be delivered
to the Escrow Agent at the closing hereunder.
8. RIGHTS OF PURCHASER. Subject to the provisions of Sections 7, 9, 12
and 14 herein, Purchaser shall exercise all rights and privileges of a
shareholder of the Company with respect to the Stock.
9. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
hypothecate, donate, encumber or otherwise dispose of any interest in the Stock
while the Stock is subject to the Repurchase Option. After any Stock has been
released from the Repurchase Option, Purchaser shall not assign, hypothecate,
donate, encumber or otherwise dispose of any interest in the Stock except in
compliance with the provisions herein and applicable securities laws.
10. RESTRICTIVE LEGENDS. All certificates representing the Stock shall
have endorsed thereon legends in substantially the following forms (in addition
to any other legend which may be required by other agreements between the
parties hereto):
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
OPTION SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER,
OR SUCH HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THIS COMPANY. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY
SHARES SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT
OF THE COMPANY."
3.
<PAGE>
(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
(c) Any legend required by appropriate blue sky officials.
11. INVESTMENT REPRESENTATIONS. In connection with the purchase of the
Stock, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Stock. Purchaser is
purchasing the Stock for investment for Purchaser's own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Act.
(b) Purchaser understands that the Stock has not been registered
under the Act by reason of a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of Purchaser's investment
intent as expressed herein.
(c) Purchaser further acknowledges and understands that the Stock
must be held indefinitely unless the Stock is subsequently registered under the
Act or an exemption from such registration is available. Purchaser further
acknowledges and understands that the Company is under no obligation to register
the Stock. Purchaser understands that the certificate evidencing the Stock will
be imprinted with a legend which prohibits the transfer of the Stock unless the
Stock is registered or such registration is not required in the opinion of
counsel for the Company.
(d) Purchaser is familiar with the provisions of Rules 144 and 701,
under the Act, as in effect from time to time, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof (or from an affiliate of such issuer), in a
non-public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of issuance of
the securities, such issuance will be exempt from registration under the Act.
In the event the Company becomes subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the securities
exempt under Rule 701 may be sold by Purchaser ninety (90) days thereafter,
subject to the satisfaction of certain of the conditions specified by Rule 144
and the market stand-off provision described in Section 12 below.
In the event that the sale of the Stock does not qualify under Rule 701 at
the time of purchase, then the Stock may be resold by Purchaser in certain
limited circumstances subject to the provisions of Rule 144, which requires,
among other things: (i) the availability of certain public information about the
Company and (ii) the resale occurring following the required
4.
<PAGE>
holding period under Rule 144 after the Purchaser has purchased, and made
full payment of (within the meaning of Rule 144), the securities to be sold.
(e) Purchaser further understands that at the time Purchaser wishes
to sell the Stock there may be no public market upon which to make such a sale,
and that, even if such a public market then exists, the Company may not be
satisfying the current public current information requirements of Rule 144 or
701, and that, in such event, Purchaser would be precluded from selling the
Stock under Rule 144 or 701 even if the minimum holding period requirement had
been satisfied.
(f) Purchaser further warrants and represents that Purchaser has
either (i) preexisting personal or business relationships, with the Company or
any of its officers, directors or controlling persons, or (ii) the capacity to
protect his own interests in connection with the purchase of the Stock by virtue
of the business or financial expertise of himself or of professional advisors to
Purchaser who are unaffiliated with and who are not compensated by the Company
or any of its affiliates, directly or indirectly.
12. MARKET STAND-OFF AGREEMENT. Purchaser shall not sell, dispose of,
transfer, make any short sale of, grant any option for the purchase of, or enter
into any hedging or similar transaction with the same economic effect as a sale,
any Common Stock of the Company held by Purchaser, including the Stock (the
"Restricted Securities"), for a period of time specified by the underwriter(s)
(not to exceed one hundred eighty (180) days) following the effective date of a
registration statement of the Company filed under the Act. Purchaser agrees to
execute and deliver such other agreements as may be reasonably requested by the
Company and/or the underwriter(s) which are consistent with the foregoing or
which are necessary to give further effect thereto. In order to enforce the
foregoing covenant, the Company may impose stop-transfer instructions with
respect to Purchaser's Restricted Securities until the end of such period.
13. SECTION 83(B) ELECTION. Purchaser understands that Section 83(a) of
the Code, taxes as ordinary income the difference between the amount paid for
the Stock and the fair market value of the Stock as of the date any restrictions
on the Stock lapse. In this context, "restriction" includes the right of the
Company to buy back the Stock pursuant to the Repurchase Option set forth in
Section 2a above. Purchaser understands that Purchaser may elect to be taxed at
the time the Stock is purchased, rather than when and as the Repurchase Option
expires, by filing an election under Section 83(b) (an "83(b) Election") of the
Code with the Internal Revenue Service within thirty (30) days from the date of
purchase. Even if the fair market value of the Stock at the time of the
execution of this Agreement equals the amount paid for the Stock, the 83(b)
Election must be made to avoid income under Section 83(a) in the future.
Purchaser understands that failure to file such an 83(b) Election in a timely
manner may result in adverse tax consequences for Purchaser. Purchaser further
understands that an additional copy of such 83(b) Election is required to be
filed with his or her federal income tax return for the calendar year in which
the date of this Agreement falls. Purchaser acknowledges that the foregoing is
only a summary of the effect of United States federal income taxation with
respect to purchase of the Stock hereunder, and does not purport to be complete.
Purchaser further acknowledges
5.
<PAGE>
that the Company has directed Purchaser to seek independent advice regarding
the applicable provisions of the Code, the income tax laws of any
municipality, state or foreign country in which Purchaser may reside, and the
tax consequences of Purchaser's death. Purchaser assumes all responsibility
for filing an 83(b) Election and paying all taxes resulting from such
election or the lapse of the restrictions on the Stock.
14. REFUSAL TO TRANSFER. The Company shall not be required (a) to
transfer on its books any shares of Stock of the Company which shall have been
transferred in violation of any of the provisions set forth in this Agreement or
(b) to treat as owner of such shares or to accord the right to vote as such
owner or to pay dividends to any transferee to whom such shares shall have been
so transferred.
15. NO EMPLOYMENT RIGHTS. This Agreement is not an employment contract
and nothing in this Agreement shall affect in any manner whatsoever the right or
power of the Company (or a parent or subsidiary of the Company) to terminate
Purchaser's service as a director of the Company (or a Parent or subsidiary of
the Company) for any reason at any time, with or without cause and with or
without notice.
16. MISCELLANEOUS.
(a) NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery or
sent by telegram or fax or upon deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to the
other party hereto at his address hereinafter shown below its signature or at
such other address as such party may designate by ten (10) days' advance written
notice to the other party hereto.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of the successors and assigns of the Company and, subject to the
restrictions on transfer herein set forth, be binding upon Purchaser,
Purchaser's successors, and assigns. The Repurchase Option of the Company
hereunder shall be assignable by the Company at any time or from time to time,
in whole or in part.
(c) ATTORNEYS' FEES; SPECIFIC PERFORMANCE. Purchaser shall reimburse
the Company for all costs incurred by the Company in enforcing the performance
of, or protecting its rights under, any part of this Agreement, including
reasonable costs of investigation and attorneys' fees. It is the intention of
the parties that the Company, upon exercise of the Repurchase Option and payment
of the Option Price, pursuant to the terms of this Agreement, shall be entitled
to receive the Stock, in specie, in order to have such Stock available for
future issuance without dilution of the holdings of other shareholders.
Furthermore, it is expressly agreed between the parties that money damages are
inadequate to compensate the Company for the Stock and that the Company shall,
upon proper exercise of the Repurchase Option, be entitled to specific
enforcement of its rights to purchase and receive said Stock.
6.
<PAGE>
(d) GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of California. The
parties agree that any action brought by either party to interpret or enforce
any provision of this Agreement shall be brought in, and each party agrees
to, and does hereby, submit to the jurisdiction and venue of, the appropriate
state or federal court for the district encompassing the Company's principal
place of business.
(e) FURTHER EXECUTION. The parties agree to take all such further
action(s) as may reasonably be necessary to carry out and consummate this
Agreement as soon as practicable, and to take whatever steps may be necessary to
obtain any governmental approval in connection with or otherwise qualify the
issuance of the securities that are the subject of this Agreement.
(f) INDEPENDENT COUNSEL. Purchaser acknowledges that this Agreement
has been prepared on behalf of the Company by Cooley Godward LLP, counsel to the
Company and that Cooley Godward LLP does not represent, and is not acting on
behalf of, Purchaser. Purchaser has been provided with an opportunity to
consult with Purchaser's own counsel with respect to this Agreement.
(g) ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes and merges all prior agreements or understandings, whether
written or oral. This Agreement may not be amended, modified or revoked, in
whole or in part, except by an agreement in writing signed by each of the
parties hereto.
(h) SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(i) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
7.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
DITECH CORPORATION
By: /s/ Pong Lim
-----------------------------------
Title: President and CEO
--------------------------------
Address: 570 Maude Court
------------------------------
Sunnyvale, CA 94086
------------------------------
PURCHASER:
/s/ William A. Hasler
--------------------------------------
WILLIAM HASLER
Address:
------------------------------
------------------------------
VESTING COMMENCEMENT DATE: JULY 9, 1997
ATTACHMENTS:
Exhibit A -- Stock Assignment Separate from Certificate
Exhibit B -- Joint Escrow Instructions
8.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of
our report dated March 12, 1999, and for the final paragraph of Note 15 as to
which the date is April 29, 1999 on our audits of the financial statements of
Ditech Communications Corporation as of April 30, 1997 and 1998 and for each of
the three years in the period ended April 30, 1998. We also consent to the
reference to us under the headings "Experts" and "Selected Financial Data."
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
May 10, 1999
