<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1999
REGISTRATION NO. 333-75063
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
DITECH CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA (Before
reincorporation)
DELAWARE (After 3661 94-2935531
reincorporation)
(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: / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per
share.............................. 3,450,000 $13.00 $44,850,000 $12,469
</TABLE>
(1) Includes 450,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(3) Includes a registration fee of $10,008 previously paid by the Registrant.
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
APRIL 7, 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 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. See "Underwriting" for a discussion of the factors used to determine the
initial public offering price.
Ditech intends to apply to have the common stock 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 7.
<TABLE>
<CAPTION>
Per Share Total
----------- ------------------
<S> <C> <C>
Public offering price............................................ $ 12.00 $ 36,000,000.00
Underwriting discount............................................ $ 0.84 $ 2,520,000.00
Proceeds, before expenses, to Ditech............................. $ 11.16 $ 33,480,000.00
</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
ING BARING FURMAN SELZ LLC
, 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 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 subsystems.
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."
TRADEMARKS:
The name Ditech Corporation appearing in this prospectus 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.
2
<PAGE>
DITECH 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.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. THE OUTCOME OF THE
EVENTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS IS SUBJECT TO RISKS AND
ACTUAL RESULTS COULD DIFFER MATERIALLY. THE SECTIONS ENTITLED "RISK FACTORS,"
"DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS"
CONTAIN A DISCUSSION OF SOME OF THE FACTORS THAT COULD CONTRIBUTE TO THOSE
DIFFERENCES.
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 optical communications
subsystems. 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 ("DSPs") 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 subsystem products enable the
implementation of wavelength division multiplexing ("WDM") technology, which is
becoming more widely adopted by service providers to address network capacity
constraints. Ditech's optical communications subsystem 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 subsystem 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 subsystem products growth;
- Expand and leverage distribution channels;
- Strengthen existing and develop new customer relationships;
- Deliver cost-effective solutions; and
- Expand outsourced manufacturing.
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 ("OEMs") and
distributors to sell and market our products internationally.
3
<PAGE>
More than fifty companies purchased our products in fiscal 1999. Our top ten
customers for that period are Qwest/LCI, Frontier Communications, MCI Worldcom,
GTE Telecom, Facilicom, GCI, GST, Ericsson Venezuela, RSL, and Electronica
Multimedia.
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 was
merged with Ditech Corporation, its wholly-owned subsidiary, and the surviving
entity was renamed Ditech Corporation. Ditech will reincorporate in Delaware
prior to the closing of this offering. Our principal offices are located at 825
E. Middlefield Road, Mountain View, California 94043, and our telephone number
is (650) 623-1300.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Shares offered by Ditech.............................. 3,000,000 shares
Shares to be outstanding after the offering........... 11,745,681 shares (1)
Use of proceeds....................................... Approximately $18.9 million to redeem Ditech's
outstanding Series A Preferred Stock, $2.96 million
to complete the acquisition of technology, $7.5
million to repay bank debt, and the balance for
general corporate purposes
Proposed Nasdaq National Market symbol................ DITC
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED APRIL 30, JANUARY 31,
-------------------------------------------- ---------------
1995
------ 1996 1997 1998 1998 1999
------- ------- ------- ------ -------
1994 (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
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 (2)......................... 390 (848 ) (1,413) (2,751) -- -- --
Gain on disposal (2)...................................... -- -- -- 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 (3)
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 (3)
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
Net loss per share--basic and diluted..................... $ (0.14) $ (0.08)
------- -------
------- -------
Shares used in per share calculations--basic and
diluted................................................. 7,234 7,620
------- -------
------- -------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
JANUARY 31, 1999
--------------------------
ACTUAL AS ADJUSTED(4)
--------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 4,724 $ 7,895
Total assets............................................................................ 21,714 27,845
Long-term debt.......................................................................... 6,830 80
Total stockholders' equity (deficit).................................................... (23,499) 15,007
</TABLE>
- ------------------------------
(1) Based on number of shares outstanding on January 31, 1999, assuming
conversion of the Series B Preferred Stock. Excludes 647,598 shares of
common stock issuable upon exercise of outstanding options at a weighted
average exercise price of $1.27 per shares, and 529,128 shares of common
stock reserved for issuance pursuant to our 1998 Stock Option Plan, in each
case at January 31, 1999.
(2) See Note 3 of notes to the financial statements included elsewhere in this
prospectus.
(3) Both basic and diluted earnings per share for fiscal 1998 and the nine
months ended January 31, 1999 are based on reported net income less the
accretion on our outstanding Series A and Series B Preferred Stock of $1.4
million and $1.1 million in fiscal 1998 and the nine months ended January
31, 1999, respectively. This reduction in earnings per share 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.
(4) 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 of the estimated net proceeds therefrom after deducting
estimated underwriting discounts and estimated offering expenses. See "Use
of Proceeds."
UNLESS OTHERWISE INDICATED, ALL INFORMATION INCLUDED IN THIS PROSPECTUS
ASSUMES: (I) THE REINCORPORATION OF DITECH FROM CALIFORNIA TO DELAWARE; (II) THE
REDEMPTION OF ALL OF DITECH'S OUTSTANDING SERIES A PREFERRED STOCK AND SERIES C
PREFERRED STOCK AND 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 TO OCCUR ON OR PRIOR TO THE CLOSING OF THIS OFFERING;
(III) A TWO-FOR-THREE REVERSE SPLIT OF COMMON STOCK TO OCCUR PRIOR TO THE
CLOSING OF THIS OFFERING; AND (IV) NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE TERM "DITECH" REFERS TO DITECH, A DELAWARE CORPORATION, ITS
PREDECESSOR CALIFORNIA CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES.
6
<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.
THIS PROSPECTUS ALSO CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR FUTURE PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY
THE USE OF WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS," "PLANS" AND
SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THESE STATEMENTS. FACTORS THAT COULD CONTRIBUTE TO THESE
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
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 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, 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.
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
7
<PAGE>
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 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. 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. As a result, we may
face reduced profitability and perhaps losses in future periods.
WE NEED TO SUCCESSFULLY DEVELOP AND INTRODUCE OUR NEW PRODUCTS TO GROW OUR
BUSINESS
Our ability to increase revenue in the future will depend primarily on:
- acceptance of our new Quad T1, Quad E1, Broadband Echo Cancellation System
and 4SA echo cancellation products; and
- our successful introduction and sale of our new optical monitors,
telemetry systems, transponders and four-channel WDM products, and our
successful development and introduction of our sixteen-channel WDM
products.
However, we may not be able to successfully produce or market our new
products in commercial quantities, complete product development when
anticipated, or increase sales. These risks are of particular concern when a new
generation product is introduced. As a result, while we believe we will achieve
our product introduction dates, they may be delayed. As of January 31, 1999, we
had neither shipped nor recognized revenue from the sale of any significant
amount of these new
8
<PAGE>
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 EDFA optical communications subsystem product 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
subsystem 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 subsystem
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.
WE RELY ON SALES OF OUR ECHO CANCELLATION PRODUCTS FOR THE VAST MAJORITY OF OUR
REVENUE
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 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. If we are not able to develop
substantial revenue from sales of our optical communications subsystem products,
our ability to grow our business may be substantially impaired.
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY
The markets for our echo cancellation and optical communications subsystem
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.
We believe that our products face competition in the following areas:
- price;
- 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.
Our principal competitors in the echo cancellation market are Lucent and
Tellabs. Our principal competitors in the optical communications subsystem
products market are Alcatel, Ciena, Lucent and Pirelli. 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.
9
<PAGE>
One of our competitors, Nortel Networks, has announced that it is developing
an integrated switch, which would have echo cancellation capability built into
it and would therefore eliminate the need for the echo cancellation capability
provided by our products. Announcements such as these, or the commercial
availability of such switches or other competing products, may cause our
customers to delay or cancel orders for our products.
Most of our competitors and potential competitors have substantially greater
name recognition and technical, financial and marketing resources than we do.
Such competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than we will. 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.
WE ARE DEPENDENT ON A SINGLE MANUFACTURER FOR OUR CURRENT PRODUCTS AND MAY NOT
BE ABLE TO REDUCE MANUFACTURING COSTS OF OUR PRODUCTS TO RESPOND TO DECREASING
AVERAGE SELLING PRICES
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. However, 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 additional relationships.
Until we are able to establish multiple manufacturing relationships, 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;
10
<PAGE>
- changes in end user requirements; and
- evolving industry standards.
WE MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID
CHANGES. The emerging nature of these products and their rapid evolution will
require us to continually improve the performance, features and reliability of
our products, particularly in response to competitive product offerings. We may
not be able to respond quickly and effectively to these developments. The
introduction or market acceptance of products incorporating superior
technologies or the emergence of alternative technologies and new industry
standards could render our existing products, as well as our products currently
under development, obsolete and unmarketable. In addition, we may have only a
limited amount of time to penetrate certain markets, and we may not be
successful in achieving widespread 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.
OUR ABILITY TO GROW IS TIED TO THE SUCCESS OF EMERGING COMPETITIVE SERVICE
PROVIDERS AND THE TELECOMMUNICATIONS INDUSTRY AS A WHOLE
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 DSPS USED IN OUR PRODUCTS,
THE LOSS OF WHICH COULD DELAY PRODUCT SHIPMENTS
We rely on Texas Instruments as the sole source of the DSPs that we use in
our echo cancellation products. We have no guaranteed supply arrangements with
Texas Instruments. Any extended interruption in the supply of DSPs 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 DSPs 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
11
<PAGE>
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 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. We also need, and are
actively searching for, a Vice President of Marketing, especially for the
marketing of our optical communications products. 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
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 OEM
relationships. If we do not, our ability to increase sales could be materially
impaired.
WE DEPEND ON CERTAIN KEY PERSONNEL
Our success is dependent in part on Tim Montgomery, our President and Chief
Executive Officer, and Pong Lim, our Chairman of the Board, and on other key
management and technical personnel, the loss of one or more of whom could
adversely affect our business. We do not have employment contracts with any of
our executive officers other than Mr. Montgomery, Mr. Lim and Ms. Toni Bellin,
our Vice President of Operations, 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%
12
<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.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY
Our ability to compete successfully will depend, in part, on our ability to
protect our intellectual property rights. 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
subsystem 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 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
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 EXPECT OUR STOCK PRICE TO BE VOLATILE
The market price of the shares of our common stock is likely to be highly
volatile. Factors that may have a significant effect on the market price of our
common stock include:
- fluctuations in our operating results;
- announcements of technological innovations;
- new products or new services introduced by us or our partners, competitors
or customers;
- our competitors' developments with respect to patents or proprietary
rights;
- announcements of litigation by or against us;
- changes in research analyst recommendations regarding Ditech or our
competitors; and
- general market conditions.
In addition, equity markets, particularly the market for high-technology
companies, recently have experienced significant price and volume fluctuations
unrelated to the operating performance of individual companies. These broad
market fluctuations may also adversely affect the market price of our common
stock.
13
<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. 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. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of our common 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
8,745,681 shares of common stock outstanding as of January 31, 1999, 8,303,670
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 315,650 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 and 126,361 shares
may become available for sale at various times after the 180 days following the
date of this Prospectus, subject to the restrictions imposed by the federal
securities laws on sales by affiliates. The underwriters, however, may waive the
lock-up restriction at their sole discretion. In addition, up to an additional
181,598 shares may become available for sale 180 days from the date of this
prospectus upon the exercise of stock options. 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
14
<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 subsystem products;
- our expectations as to margins on our new products and products we sell
through OEMs;
- 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 and the effect it will have on
us;
- 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 plan to hire a new Vice President of Marketing;
- 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.
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.
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<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.; 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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CAPITALIZATION
The following table sets forth the capitalization of Ditech as of January
31, 1999: (i) on an actual basis; and (ii) on a pro forma basis assuming the
conversion of all of our Series B Preferred Stock to common stock, and (iii) 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 redemption of
all of our Series C Preferred Stock for the preferred stock we hold in Globe
Wireless and the change in par value of our common stock. 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(1) ------------ 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, no 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, no 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, no 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................................. 1,883 7,809 12
Additional paid in capital.............................. -- -- 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>
- ------------------------
(1) Excludes (i) 647,598 shares of common stock issuable upon exercise of
options outstanding as of January 31, 1999 at a weighted average exercise
price of $1.27 per share and (ii) 529,128 additional shares of common stock
reserved for future issuance under our stock option plans, (iii) 133,333
shares currently reserved for issuance under our employee stock purchase
plan and (iv) 100,000 shares currently reserved for issuance under our
non-employee directors' stock option plan.
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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.
19
<PAGE>
SELECTED 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
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 (3)
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
Net loss per share--basic and diluted................ $ (0.14) $ (0.08)
------- -------
------- -------
Shares used in per share calculations--basic and
diluted............................................ 7,234 7,620
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
------------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------------- ------------- --------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 42 $ 100 $ 531 $ 4,199 $ 3,433 $ 3,222 $ 4,724
Total assets............................... 5,880 7,333 11,075 17,508 17,274 16,889 21,714
Long-term debt............................. -- -- -- 7,875 7,410 7,500 6,830
Total stockholders' equity (deficit)....... 5,217 6,793 8,172 (22,768) (24,057) (23,610) (23,499)
</TABLE>
- ------------------------------
(1) See Note 3 of notes to the financial statements included elsewhere in this
prospectus.
(2) Both basic and diluted earnings per share for fiscal 1998 and the nine
months ended January 31, 1999 are based on reported net income less the
accretion on our outstanding Series A and Series B Preferred Stock of $1.4
million and $1.1 million in fiscal 1998 and the nine months ended January
31, 1999, respectively. This reduction in earnings per share 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.
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. 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. DITECH'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. SEE
"RISK FACTORS" AND "DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS."
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 optical communications
subsystems. 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 DSPs 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 subsystem products enable the implementation of WDM technology,
which is becoming more widely adopted by service providers to address network
capacity constraints. Ditech's optical communications subsystem products are
designed to function either as stand-alone products or as a complete system
known as the Optical Path Solution. We began sales of our third generation echo
cancellation products in March 1995. We began sales of our first optical
communications subsystems product in September 1996.
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 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 was subsequently merged with Ditech Corporation, its wholly-owned
subsidiary, and the surviving entity was renamed Ditech Corporation. Financial
information for prior periods have been restated to reflect the discontinuation
of these lines of business in March 1997. Immediately prior to the consummation
of this offering we intend to reincorporate Ditech in Delaware. As part of the
reincorporation and 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 and redeem all of our Series C Preferred Stock with the shares of
preferred stock of Globe Wireless that we hold. See "Use of Proceeds."
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.
21
<PAGE>
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 generally do not grant rights of return. 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 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. See "Risk Factors--We rely on
sales of our echo cancellation products for the vast majority of our revenue."
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, OEMs and distributors to sell and market our products
internationally. In addition, we have entered into an agreement with an OEM for
distribution of our optical communications subsystem 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 OEMs 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 OEMs 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
subsystem product development, including our fourth generation echo
cancellation, optical telemetry and WDM 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 subsystem 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.
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>
26
<PAGE>
<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>
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.
See "Risk Factors--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."
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.
27
<PAGE>
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 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.
28
<PAGE>
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. The Company 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 ("EMU"). 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.
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>
Optical Communications
Echo Cancellation Products Subsystem Products
- ------------------------------------- -------------------------------------
<S> <C>
18T1 EDFAs
18E1 DWDM Monitor
Quad T1 OTS
Quad E1 Transponder
Broadband Echo Cancellation System WDM Multiplexer/Demultiplexer
4SA
</TABLE>
29
<PAGE>
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;
- 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.
30
<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 optical communications
subsystems. 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 DSPs 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 subsystem products enable the implementation of WDM technology,
which is becoming more widely adopted by service providers to address network
capacity constraints. Ditech's optical communications subsystem 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 signal
exceeds 16 milliseconds. If the delay exceeds 32 milliseconds, the quality of
the voice call
31
<PAGE>
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.
Voice-over Internet, voice-over ATM and voice-over Frame Relay are examples of
voice-over packet networks.
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 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.
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 ("TDM"), or deploying WDM. While appropriate for certain service
providers, laying new fiber optic cables and implementing technologies based on
legacy infrastructures such as TDM have significant drawbacks. Installing new
fiber optic cable is a costly and time-consuming process for service providers.
Similarly, TDM requires significant investment in network equipment and has
inherent bandwidth limitations. WDM allows service providers to multiply their
bandwidth capacity
32
<PAGE>
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, WDM 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 WDM and DWDM and their ability to multiply the capacity of existing fiber.
Like traditional service providers, cable communications service providers are
increasingly deploying WDM 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 WDM 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 WDM by service providers.
WDM 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, resulting in severe business consequences for service providers,
including regulatory fines and loss of business. WDM is also currently expensive
to implement. To date, WDM 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 WDM
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 DSPs 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 ("DART") is designed to solve the echo problem more efficiently than
other solutions, by applying processing power only when and where it is needed.
By using DART, a single DSP 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 ("ICs"),
which reduces product size and power consumption requirements.
TIME-TO-MARKET ADVANTAGES. Based on an intelligent software algorithm, the
DART approach enables us to utilize off-the-shelf ICs and DSPs. Competitive echo
cancellation solutions using application specific integrated circuits ("ASIC")
are more expensive to design, require more development time and are difficult to
upgrade. Our approach leverages rapid technological advances in the commercial
IC and DSP 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
33
<PAGE>
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
subsystems 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"), WDM multiplexers and
demultiplexers, transponders and a DWDM 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
subsystems 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.
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 WDM
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. OTS management software
also helps facilitate communications between legacy network management software
and our products.
34
<PAGE>
This promotes the use of our products on existing networks and lowers overall
cost of ownership. Additionally, the OTS 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 subsystem 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 OEMs
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 SUBSYSTEM 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
subsystem products and are developing additional products, which together
comprise our complete suite of optical communications subsystems 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 OEM relationships for specific
geographical markets or technology segments, and have already entered into one
such relationship. We believe that OEM 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
subsystem 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
35
<PAGE>
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 BBEC
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 ("ITU"), the organization responsible for
developing global telecommunications standards.
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 ICs.
ITU STANDARDS. Our products are fully compliant with current ITU standards.
As a member of the ITU, we actively participate in establishing the evolving
global standards.
WARRANTY. We offer a five-year warranty on all of our echo cancellation
products.
36
<PAGE>
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
BBEC Broadband echo cancellation system - First system level echo
utilizing DS3 (45 Mb/s) interfaces cancellation product
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 SUBSYSTEM PRODUCTS
Our suite of optical communications subsystem 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 OTS, transponders, four-channel WDM
multiplexers and demultiplexers, and a DWDM monitor. All of these subsystems are
intended to be sold either as stand-alone products or as a complete system. All
of our optical communications subsystem products are commercially available,
except the DWDM monitor, which is undergoing customer beta testing. As of
January 31, 1999, we have only recognized revenue for our optical amplifiers,
which have been shipping since the third quarter of calendar 1996. Our
sixteen-channel DWDM multiplexers and demultiplexers are currently in
development.
Our optical product family shares several common advantages:
INTEROPERABLE IN MULTI-VENDOR ENVIRONMENT. Our subsystems 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 ITU.
REMOTE MONITORING AND MANAGEMENT. Our products are designed to function in
a sophisticated, remote monitoring and management environment.
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<PAGE>
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
EDFA technology suitable for DWDM 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-ITU compliant
legacy laser source and re-transmits transmission equipment to be used
the signal at an industry standard on WDM networks
compliant optical wavelength - Packaged in a compact module that
suitable for transmission on a WDM is half the size of currently
network 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 subsystems
operate in a network environment.
DITECH'S OPTICAL COMMUNICATION SUBSYSTEMS
[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 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
Facilicom Electonica Multimedia
</TABLE>
In addition to these service providers, we have sold products to one OEM.
Selected examples of our customers and their applications of our products are as
follows:
QWEST/LCI. Qwest is a long-distance telecommunications company with
approximately 8,700 employees and revenues of $2.24 billion for the year ended
December 31, 1998. In June 1998, Qwest acquired LCI, which provides telephone
service to commercial customers in over 40 U.S. markets. Qwest/LCI is Ditech's
largest customer and is installing Ditech's echo cancellation products in the
build-out of its national fiber optic network.
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<PAGE>
FRONTIER COMMUNICATIONS. Frontier Communications is a business unit of
Frontier Corporation, which employs approximately 8,150 people and had revenues
of $1.86 billion for the year ended December 31, 1998. Frontier Communications
is one of the leading providers of integrated communications services, providing
local phone service in 32 states and the District of Columbia. Frontier uses
Ditech's echo cancellation products in its long distance wireless networks.
MCI WORLDCOM. MCI Worldcom is a global communications company with
approximately 77,000 employees and revenues of $17.68 billion for the year ended
December 31, 1998. MCI Worldcom has established operations in over 65 countries
encompassing the Americas, Europe and the Asia Pacific regions. MCI Worldcom's
global networks provide end-to-end high-capacity connectivity to more than
40,000 buildings worldwide. MCI Worldcom uses Ditech's echo cancellation
products in its domestic and international networks.
GTE TELECOM. GTE Telecom is a business unit of GTE Corporation, one of the
world's largest telecommunications companies. GTE Corporation employs
approximately 120,000 people and had revenues of $25.47 billion for the year
ended December 31, 1998. GTE Telecom is one of the nation's leading
telecommunications companies, employing over 27,000 people and providing 5.4
million telephone access lines. GTE Telecom uses Ditech's echo cancellation
products in its long distance and wireless networks.
FACILICOM Facilicom is a leading telecommunications service provider with
approximately 210 employees and revenues of $184 million for the fiscal year
ended September 30, 1998. Facilicom supports a worldwide fiber optic network and
its strong European base has enabled Facilicom to develop strong relationships
with state-owned telephone companies throughout the world. Facilicom uses
Ditech's echo cancellation products in its domestic and international networks.
GCI. GCI, located in Alaska, had approximately 950 employees and revenues
of $224 million for the year ended December 31, 1997. GCI provides services to
more than 150,000 residential, commercial and government customers. In November
1996, GCI purchased three leading cable television companies giving the company
wired access to 78% of the state's households in 17 of the state's largest
communities. GCI uses Ditech's optical amplifiers in its network.
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.
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 ("RF"), 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
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<PAGE>
development, including 9 engineers with advanced degrees. By continuing to
develop new generation echo cancellation and optical communications subsystem
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 subsystems. 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 DSPs. See "Risk Factors--We
depend on Texas Instruments as the sole source of DSPs used in our products, the
loss of which could delay product shipments." 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. See "Risk Factors--We are dependent
on a single manufacturer for our current products, and may not be able to reduce
manufacturing costs of our products to respond to decreasing average selling
prices."
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, OEMs, and distributors to sell and market our products
internationally. We have entered into an agreement with an OEM for distribution
of our optical communications subsystem 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 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
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<PAGE>
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.
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
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<PAGE>
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.
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 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
43
<PAGE>
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.
44
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Certain information regarding Ditech's directors, executive officers and key
employees as of January 31, 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....................... 46 Vice President of Engineering and Development, Optical Products
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>
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, 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.
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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 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.
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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.
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.
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EXECUTIVE COMPENSATION
The following table sets forth certain information for the fiscal year ended
April 30, 1998, 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").
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 (2)...... 1998 $ 150,000 -- 266,665 --
Pong Lim
Chairman of the Board (3).................... 1998 $ 100,000 $ 73,500 113,333 $ 1,111
Salim Jabr
Vice President of Engineering and
Development, Optical Products................ 1998 $ 110,000 $ 22,000 99,999 --
Serge Stepanoff
Vice President of Engineering and
Development, Echo Cancellation Products...... 1998 $ 105,833 $ 22,000 49,998 --
William Tamblyn
Vice President and Chief Financial
Officer(4)................................... 1998 $ 111,779 $ 35,000 99,999 --
</TABLE>
- ------------------------------
(1) In accordance with Securities and Exchange Commission rules, other 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.
(2) Mr. Montgomery began working for Ditech on November 1, 1997. He was promoted
to his current position of President, Chief Executive Officer of Ditech in
September 1998.
(3) 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.
(4) Mr. Tamblyn began working for Ditech on June 9, 1997.
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<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, 1998 to each of the Named Executive Offiers.
<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(4)
OPTIONS OPTIONS GRANTED PRICE PER EXPIRATION --------------------
NAME GRANTED(1) 1998(2) SHARE(3) DATE 5% 10%
- ------------------------------------------------- ----------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery............................... 199,999 20.4% $ 0.83 11/13/07 $ 103,768 $ 262,350
66,666 6.8% $ 0.83 1/15/08 $ 34,589 $ 87,656
Pong Lim......................................... 113,333 11.5% $ 0.83 11/13/07 $ 58,802 $ 149,015
William Tamblyn.................................. 66,666 6.8% $ 0.83 7/9/07 $ 34,590 $ 87,656
33,333 3.4% $ 0.83 1/15/08 $ 17,295 $ 43,828
Serge Stepanoff.................................. 49,998 5.1% $ 0.83 7/9/07 $ 25,942 $ 65,742
Salim Jabr....................................... 99,999 10.2% $ 0.83 5/12/07 $ 51,884 $ 131,484
</TABLE>
- ------------------------------
(1) The options granted to Messrs Montgomery, Lim, Tamblyn, Stepanoff and Jabr
vest in two ways: some vest over a standard four-year period, with an
initial one-year cliff and monthly thereafter; others have full vesting
after approximately six years with acceleration schedules tied to
performance goals and Ditech's financial results.
(2) In the fiscal year ended April 30, 1998, Ditech granted employees,
consultants and directors options to purchase an aggregate of 982,133 shares
of common stock.
(3) 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.
(4) In accordance with the rules of the Securities and Exchange Commission,
these columns show the gains or "option spreads" that would exist for the
options granted. These gains are 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, 1998 and exercisable and
unexercisable options held as of April 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
UNDERLYING AT APRIL 30, 1998(1) APRIL 30, 1998(1)(2)
SHARES ACQUIRED VALUE ---------------------------- --------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------------- ----------- ----------- --------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery............... -- -- 241,665 25,000 -- --
Pong Lim......................... 20,000 $ 13,500 479,998 -- $ 247,500 --
William Tamblyn.................. -- -- 99,999 -- -- --
Serge Stepanoff.................. -- -- 99,998 -- -- --
Salim Jabr....................... -- -- 199,999 -- $ 67,500 --
</TABLE>
- ------------------------------
(1) Each option grant other than with respect to the 25,000 shares not
exercisable by Mr. Montgomery permits immediate exercise subject to a
repurchase option in favor of Ditech, which lapses over time.
(2) The fair market value of Ditech's common stock as determined by the Board of
Directors on or about April 30, 1998 was $0.83 per share.
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<PAGE>
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 January 31, 1999, under the 1997 plan (i) options to purchase 459,314
shares of common stock were outstanding, and (ii) options to purchase 1,435,522
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 1999
the Board of Directors approved an amendment to the 1998 plan increasing the
number of shares issuable under the 1998 plan by 166,666 shares, and made
certain technical amendments to the 1998 plan in anticipation of Ditech becoming
a public company. These amendments will be submitted to the stockholders for
approval in 1999.
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
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<PAGE>
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 March 15, 1999, Ditech had granted options to purchase 240,580 shares
of common stock under the 1998 plan and an additional 687,461 shares remained
available for future grant. Of the options granted (i) options to purchase
192,034 shares of common stock were outstanding, (ii) options to purchase 48,546
shares had been exercised, and (iii) no options to purchase shares had been
canceled or repurchased or had lapsed without being exercised.
1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. In March 1999 the Board
adopted, and the Board will submit to our stockholders to approve, the Ditech
Corporation 1999 Non-Employee Directors' Stock Option Plan (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 4,000 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 4,000 shares of common stock immediately following each annual
meeting of stockholders.
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
52
<PAGE>
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 March 15, 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 1999 the Board adopted, and the
Board will submit to our stockholders to approve, the Ditech Corporation 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. 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.
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
53
<PAGE>
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 (i) a period of one year following the termination
of her employment, or (ii) 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.
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<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 Redeemable 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 Redeemable
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 Redeemable 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.
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<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."
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of January 31, 1999, and as adjusted to reflect
the sale of the common stock offered by this prospectus, by: (i) each
stockholder who is known by us to own beneficially more than 5% of our common
stock; (ii) each of our Named Executive Officers; (iii) each of our directors;
and (iv) 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 8,745,681 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 January 31, 1999, and 11,745,681 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 44.2% 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 4.3
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 2.3 1.7
Gregory Avis (9)................................................... 3,867,649 44.2 32.9
Peter Chung (10)................................................... 3,867,649 44.2 32.9
William Hasler (11)................................................ 66,666 * *
Kenneth E. Jones (12).............................................. 1,387,421 15.8 11.8
George Turner (13)................................................. 154,052 1.8 1.3
All directors and executive officers as a group (11 persons)....... 6,892,446 75.0% 58.7
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1 percent.
(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.
57
<PAGE>
(2) Seahawk Investment Trust and Seahawk Ranch Irrevocable Trust are located at
550 Pilgrim Drive, Foster City, California 94404.
(3) Includes 100,000 shares which may be acquired pursuant to the exercise of
stock options. On January 31, 1999, 251,387 of Mr. Montgomery's shares were
subject to a repurchase option in favor of Ditech. The address for Mr.
Montgomery is c/o Ditech Corporation, 825 E. Middlefield Rd., Mountain View,
CA 94043.
(4) On January 31, 1999, 125,555 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 50,000 shares which may be acquired pursuant to the exercise of
stock options. On January 31, 1999, 40,277 of Mr. Tamblyn's shares were
subject to a repurchase option in favor of Ditech. The address for Mr.
Tamblyn is c/o Ditech Corporation, 825 E. Middlefield Rd., Mountain View, CA
94043.
(6) Consists solely of 100,000 shares which may be acquired pursuant to the
exercise of stock options. The address for Ms. Bellin is c/o Ditech
Corporation, 825 E. Middlefield Rd., Mountain View, CA 94043.
(7) Consists solely of 99,998 shares which may be acquired pursuant to the
exercise of stock options. The address for Mr. Stepanoff is c/o Ditech
Corporation, 825 E. Middlefield Rd., Mountain View, CA 94043.
(8) Includes 125,000 shares which may be acquired pursuant to the exercise of
stock options. The address for Mr. Jabr is c/o Ditech Corporation, 825 E.
Middlefield Rd., Mountain View, CA 94043.
(9) 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.
(10) 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.
(11) The address for Mr. Hasler is c/o Apthon Corporation, One Market, Spear
Tower, Suite 1850, San Francisco, CA 94105.
(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) The address for Mr. Turner is P.O. Box 666, Lafayette, CA 94549.
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 January 31, 1999, and assuming conversion of our Series B Preferred
Stock, there were 8,745,681 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. See "Dividend Policy."
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. All outstanding
shares of common stock are, and all shares of common stock to be outstanding
upon completion of this offering will be, fully paid and non-assessable.
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 (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer or (iii) 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. See "Management--Board Composition." 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
59
<PAGE>
also may have the effect of preventing changes in the management of Ditech. See
"Risk Factors-- Our charter documents and Delaware law may inhibit a takeover."
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.
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 January 31, 1999, Ditech will have outstanding an aggregate of 11,745,681
shares of common stock assuming (i) the issuance by Ditech of the shares of
common stock offered hereby, (ii) no exercise of exercisable options to purchase
647,598 shares of common stock, and (iii) 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 8,745,681 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. 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: (i) no restricted securities will be eligible for
immediate sale on the effective date of this offering or 90 days thereafter;
(ii) 8,303,670 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; (iii) an additional 315,650 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; and (iv) 126,361
shares may become available for sale at various times after the 180 days
following the date of this prospectus, subject to the restrictions imposed by
the federal securities laws on sales by affiliates. An additional 181,598 shares
may be eligible for sale 180 days after the date of this prospectus upon the
exercise of stock options. 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 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. Ditech has agreed that it
will not, without the prior written consent of BT Alex. Brown Incorporated,
offer, sell or otherwise dispose 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,
61
<PAGE>
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 (i) 1% of the then outstanding shares Ditech's
common stock (approximately 11,745,681 shares immediately after this offering)
or (ii) 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
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
through their Representatives, BT Alex. Brown Incorporated, BancBoston Robertson
Stephens LLC, and ING Baring Furman Selz 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.................................................. 1,500,000
BancBoston Robertson Stephens LLC............................................ 900,000
ING Baring Furman Selz LLC................................................... 600,000
-----------
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 the Representatives 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.
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
hereby. 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............................................................ $ 0.84 $ 2,520,000 $ 2,898,000
</TABLE>
The Company 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.
The Company 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
63
<PAGE>
this 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. Among the
factors to be considered in such negotiations are prevailing market conditions,
the results of operations of the Company in recent periods, the market
capitalization and stages of development of other companies that we and the
Representatives 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 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 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.
65
<PAGE>
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.
The Company 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 the Company.
66
<PAGE>
DITECH 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 Shareholders' 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 Shareholders of
Ditech Corporation:
The stock split described in note 15 to the financial statements has not
been consummated at April 6, 1999. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' 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 6, 1999
San Jose, California
F-2
<PAGE>
DITECH 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 shares:
Series A preferred shares, no 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 shares, no 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 shares, no par value, 7,508 shares
authorized, issued and outstanding actual and pro
forma.................................................... 7,361 7,361 7,361 7,361
--------- --------- ------------ ---------------
Total redeemable preferred shares........................ 29,747 31,122 32,236 $ 26,310
--------- --------- ------------ ---------------
---------------
SHAREHOLDERS' DEFICIT
Common shares, no 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................ -- 78 1,883 $ 7,809
Deferred stock compensation.................................. -- -- (409) (409)
Accumulated deficit.......................................... (22,768) (24,135) (24,973) (24,973)
--------- --------- ------------ ---------------
Total shareholders' deficit.............................. (22,768) (24,057) (23,499) $ (17,573)
--------- --------- ------------ ---------------
---------------
Total liabilities, redeemable preferred shares and
shareholders' deficit.................................... $ 17,508 $ 17,274 $ 21,714
--------- --------- ------------
--------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
DITECH 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 shareholders...... $ 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 CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON SHARES NOTES
--------------------- RECEIVABLE FROM DEFERRED STOCK ACCUMULATED
SHARES AMOUNT SHAREHOLDERS COMPENSATION DEFICIT TOTAL
--------- ---------- --------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, MAY 1, 1995.............. 27,903 $ 9,638 $ (87) $ (2,758) $ 6,793
Net income......................... -- -- -- 1,379 1,379
--------- ---------- ----- ------------- ----------
BALANCES, APRIL 30, 1996........... 27,903 9,638 (87) (1,379) 8,172
Exercise of stock options.......... 1,050 155 -- -- 155
Tax benefit on exercise of stock
options.......................... -- 307 -- -- 307
Collection of shareholder notes
receivable....................... -- -- 87 -- 87
Repurchase of common shares........ (26,093) (10,100) -- (23,637) (33,737)
Accretion for dividend on Series A
and B redeemable preferred
shares........................... -- -- -- (187) (187)
Net income......................... -- -- -- 2,435 2,435
--------- ---------- ----- ------------- ----------
BALANCES, APRIL 30, 1997........... 2,860 -- -- (22,768) (22,768)
Exercise of stock options.......... 153 23 -- -- 23
Issuance of common shares.......... 67 55 -- -- 55
Accretion for dividend on Series A
and B redeemable preferred
shares........................... -- -- -- (1,374) (1,374)
Net income......................... -- -- -- 7 7
--------- ---------- ----- ------------- ----------
BALANCES, APRIL 30, 1998........... 3,080 78 -- (24,135) (24,057)
Exercise of stock options.......... 1,327 873 -- -- 873
Issuance of common shares.......... 167 500 -- -- 500
Repurchase of common shares........ (1) (1) -- -- (1)
Accretion for dividend on Series A
and B redeemable preferred
shares........................... -- -- -- (1,115) (1,115)
Deferred compensation in issuance
of stock options................. -- 433 -- $ (433) -- --
Amortization of deferred stock
compensation..................... -- -- -- 24 -- 24
Net income......................... -- -- -- -- 277 277
--------- ---------- ----- ------ ------------- ----------
BALANCES, JANUARY 31, 1999
(UNAUDITED)...................... 4,573 $ 1,883 $ -- $ (409) $ (24,973) $ (23,499)
--------- ---------- ----- ------ ------------- ----------
--------- ---------- ----- ------ ------------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
DITECH 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 shareholders................ -- 87 -- -- --
Repayment of subordinated promissory notes...................... -- -- (8,000) -- --
Repurchase of common shares..................................... -- (21,486) -- -- (1)
Principal payments on note payable.............................. -- -- (125) -- (375)
Principal payments under capital lease obligations.............. -- -- (15) -- (18)
Proceeds from issuance of preferred shares...................... -- 17,901 -- -- --
Proceeds from issuance of common shares......................... -- -- 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 CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Ditech Corporation (formerly Automated Call Processing Corporation) (the
"Company") is a California corporation that intends to reincorporate to Delaware
prior to the consummation of this offering. The Company designs, develops and
markets echo cancellation equipment and optical communications subsystems 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.
The Company generally does not grant rights of return.
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 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 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 common shares outstanding during the period less shares subject to
repurchase. Diluted earnings per share is
F-9
<PAGE>
DITECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
calculated based on the weighted average number of common and common equivalent
shares outstanding, including the dilutive effect of stock options, using the
treasury stock method, and the assumed conversion of all outstanding shares of
Series B preferred shares.
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 shares.......... -- 187 1,374
--------- --------- ---------
Net income (loss) attributable to common shareholders.............. $ 1,379 $ 2,248 $ (1,367)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares 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 shares.......... -- 187 1,374
--------- --------- ---------
Net income (loss) attributable to common shareholders.............. $ 1,379 $ 2,248 $ (1,367)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares 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.
F-10
<PAGE>
DITECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DISCONTINUED OPERATIONS (CONTINUED)
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 at the 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 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 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 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 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. The Company has not accrued for any
potential losses.
F-14
<PAGE>
DITECH CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED SHARES
The Company has authorized and issued 17,250,000 Series A preferred shares,
6,259,718 Series B preferred shares and 7,508,221 Series C preferred shares.
Certain former common shareholders of the Company own a portion of Series A
preferred shares and Series C preferred shares. The rights, preferences and
privileges of the Series A, Series B and Series C preferred shares are as
follows:
LIQUIDATION RIGHTS
The preferred shares have certain liquidation preferences over the common
shares 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
shareholders have distribution preference related to the Globe Wireless
preferred stock and related to unpaid dividends over the Series A and Series B
preferred shareholders. The liquidation preferences entitle the Series A and
Series B preferred shareholders 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 shareholders have preference over
the Series B preferred shareholders in determining the order of liquidation
payout. Subsequently, the Series C preferred shareholders 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 shares do not participate in the distribution
of assets remaining after the liquidation preference has been paid.
CONVERSION RIGHTS
The Series A and Series C preferred shares have no conversion rights. The
Series B preferred shareholders have the right at any time to convert each
preferred shares into common shares at the specified conversion rate per share,
which currently is $0.86 per common shares. The conversion rate will be adjusted
for stock splits and recapitalization. In the event of a public offering of the
Company's common shares where the net proceeds received by the Company equals or
exceeds $20,000,000 and the offering price is at least $2.59 per share, or in
the event of approval from two thirds of Series B preferred shareholders, all
shares of the Series B preferred shares automatically convert into common shares
at the specified conversion rate.
REDEMPTION RIGHTS
The Company may not redeem any or all of the Series A and Series B preferred
shares until after February 1, 2004, with a request of the majority of the
outstanding shareholders. The Series B preferred shares may be redeemed only if
there are no Series A preferred shares 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 shares in the
event of a public offering of the Company's common shares. Upon a change in
ownership or fundamental change in the Company and an election by a majority of
the shareholders, the Series A and Series B preferred shareholders 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 CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED SHARES (CONTINUED)
VOTING RIGHTS
The Series B preferred shareholders are entitled to vote on all matters with
the holders of common shares as if on an as converted basis and have the right
to elect two directors to the Board of Directors. The Series A preferred
shareholders have no rights to vote. The Series C preferred shareholders shall
have one vote for every five shares held and have the right along with the
holders of common shares to elect two directors to the Board of Directors.
DIVIDEND RIGHTS
The preferred shareholders will be entitled to receive dividends in
preference to the common shareholders. In addition, Series A and Series B
shareholders 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 shares.
The increases have been effected by a charge against accumulated deficit.
Dividends for Series C shareholders shall accrue only when dividends are
paid with respect to the investment in Globe Wireless preferred stock on a pro
rata basis.
8. SHAREHOLDERS' EQUITY (DEFICIT)
RECAPITALIZATION
In March 1997, the Company recapitalized its financial structure by
exchanging substantially all of the then outstanding common shares for cash of
$21,486,000 and Series A and C preferred shares. In retiring the common shares
outstanding at that time, the excess of the fair value of the common shares 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 common shares 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 shares, 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 CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' 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 CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' 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 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 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
SHAREHOLDERS 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
shares...................................................................... 1,047 849
-------------- -----------------
Net loss attributable to common shareholders................................ $ (1,040) $ (572)
-------------- -----------------
-------------- -----------------
Weighted average common shares 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 shares................................................... 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
Series B convertible Preferred Shares outstanding as of the closing date will
automatically be converted into an aggregate of approximately 4,173,139 common
shares based on the number of Series B convertible preferred shares outstanding
at January 31, 1999. Unaudited pro forma shareholders' equity at January 31,
1999, as adjusted for the conversion of Series B convertible preferred shares,
is disclosed on the balance sheet.
F-20
<PAGE>
DITECH 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 shares 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 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 common shares, 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,
from which it licenses technology included in its echo cancellation products.
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
receives a royalty-free non-exclusive license to the technology.
On April 6, 1999 the Company's board of directors authorized a two-for-three
reverse split of the Company's common stock. The reverse stock split will become
effective upon the reincorporation of the Company in Delaware and shareholder
approval. All relevant share data has been adjusted to reflect this reverse
stock split.
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.............................................................. 7
Disclosure Regarding Forward-Looking Statements........................... 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 21
Business.................................................................. 31
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.................................................... 66
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
ING BARING FURMAN SELZ LLC
, 1999
- -------------------------------------------
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- -------------------------------------------
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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 any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The
II-1
<PAGE>
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 Articles of Incorporation of the Registrant, filed March 3, 1997.
3.2 * Certificate of Correction of Amended and Restated Articles of Incorporation of the Registrant, filed
March 10, 1997.
3.3 * Certificate of Amendment of Articles of Incorporation of the Registrant, filed October 16, 1998.
3.4 * Certificate of Correction of Amended and Restated Articles of Incorporation of the Registrant, filed
March 2, 1999.
3.5 * Form of Certificate of Incorporation of the Registrant to be effective upon the closing of the offering.
3.6 * Bylaws of the Registrant.
3.7 * Bylaws of the Registrant to be effective upon the closing of the offering.
4.1 * Reference is made to Exhibits 3.1 through 3.4.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.16* Form of Indemnity Agreement to be entered between Ditech and its executive
officers and directors.
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.
(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 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 7th day of April, 1999.
<TABLE>
<S> <C> <C>
DITECH 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 April 7, 1999
Timothy K. Montgomery officer)
/s/ WILLIAM J. TAMBLYN Chief Financial Officer
- ------------------------------ (principal financial and April 7, 1999
William J. Tamblyn accounting officer)
*
- ------------------------------ Chairman of the Board of April 7, 1999
Pong C. Lim Directors
*
- ------------------------------ Director April 7, 1999
Gregory M. Avis
*
- ------------------------------ Director April 7, 1999
Peter Y. Chung
*
- ------------------------------ Director April 7, 1999
William A. Hasler
*
- ------------------------------ Director April 7, 1999
Kenneth E. Jones
*
- ------------------------------ Director April 7, 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 Articles of Incorporation of the Registrant, filed March 3, 1997.
3.2 * Certificate of Correction of Amended and Restated Articles of Incorporation of the Registrant, filed
March 10, 1997.
3.3 * Certificate of Amendment of Articles of Incorporation of the Registrant, filed October 16, 1998.
3.4 * Certificate of Correction of Amended and Restated Articles of Incorporation of the Registrant, filed
March 2, 1999.
3.5 * Form of Certificate of Incorporation of the Registrant to be effective upon the closing of the offering.
3.6 * Bylaws of the Registrant.
3.7 * Bylaws of the Registrant to be effective upon the closing of the offering.
4.1 * Reference is made to Exhibits 3.1 through 3.4.
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.
16.1 Letter re: change in certifying accountant.
23.1 * Consent of PricewaterhouseCoopers LLP.
</TABLE>
<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.
<PAGE>
EXHIBIT 16.1
April 5, 1999
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously engaged as independent certified public accountants for
Ditech Corporation ("Ditech") for the fiscal years ended April 30, 1996 and
1997. Our engagement as independent certified public accountants ceased in
April 1998.
We have read the five sentences in the paragraph under the caption "Change in
Accountants" of Ditech's Amendment Number 1 to its Registration Statement on
Form S-1, to be filed with the Securities and Exchange Commission on or about
April 6, 1999 and have the following comments:
1. We agree with the statements made in the second sentence.
2. We have no basis of agreeing or disagreeing with the statements made in
the first and fifth sentences.
3. With respect to the third and fourth sentences, under date of August
15, 1997, we previously issued an unqualified opinion on the financial
statements of Ditech as of and for the fiscal years ended April 30, 1996
and 1997. On March 26, 1999, we obtained a copy of Ditech's Registration
Statement on Form S-1, as filed with the Securities and Exchange
Commission on March 25, 1999. Such Registration Statement included 1996
and 1997 financial statements of Ditech which had been restated from
Ditech's previously issued 1996 and 1997 financial statements on which
we previously reported. We were informed by the management of Ditech
that such restatement was due to the recording of additional provisions
for bad debts in years prior to 1998 for a consolidated subsidiary that
was disposed of in March 1997. As a result of Ditech's restatement of
its previously issued financial statements, on April 2, 1999, we
withdrew our aforementioned report dated August 15, 1997.
Yours truly,
/s/ Deloitte & Touche LLP
<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, on our audits of the financial statements of
Ditech 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
April 7, 1999
