<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
Amendment No. 1
(MARK ONE)
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Fiscal Year Ended April 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Transition Period From To
COMMISSION FILE NUMBER: 000-26209
------------------------
DITECH COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
94-2935531
(I.R.S. Employer Identification No.)
------------------------
825 East Middlefield Road
Mountain View, CA 94043
(650) 623-1300
(Address, Including Zip Code, of Registrant's Principal Executive Offices and
Telephone Number, Including Area Code)
------------------------
Securities Registered Pursuant to Section 12(B) of the Act: None
Securities Registered Pursuant to Section 12(G) of the Act: Common Stock,
$.001 Par Value
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $1,565,125,393 as of July 18, 2000, based upon
the closing price on the Nasdaq National Market reported for such date.
Excludes an aggregate of 9,479,687 shares of common stock held by officers
and directors and by each person known by the registrant to own 5% or more of
the outstanding common stock. Exclusion of shares held by any of these
persons should not be construed to indicate that such person is an affiliate
of the registrant.
The number of shares outstanding of the Registrant's Common Stock on July
18, 2000 was 28,494,003 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
------------------------------------------------------------------
------------------------------------------------------------------
i
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DITECH COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants ............................................. 2
Balance Sheets ................................................................ 3
Statements of Operations ...................................................... 4
Statements of Stockholders' Equity (Deficit) .................................. 5
Statements of Cash Flows ...................................................... 6
Notes to Financial Statements ................................................. 7
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ditech Communications Corporation:
In our opinion, the accompanying balance sheets and the related
statements of operations, stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Ditech
Communications Corporation at April 30, 1999 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
April 30, 2000, in conformity with accounting principles generally accepted in
the United States. 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 auditing standards generally accepted in the
United States, 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.
PricewaterhouseCoopers LLP
May 24, 2000
San Jose, California
2
<PAGE>
DITECH COMMUNICATIONS CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30,
------------------------------------
1999 2000
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $3,114 $88,616
Accounts receivable, net of allowance for doubtful accounts of $100 and
$400 at April 30, 1999 and 2000, respectively ....................... 3,068 20,349
Inventories .......................................................... 4,606 6,596
Deferred income taxes ................................................ 575 1,839
Other current assets ................................................. 88 352
Income taxes receivable .............................................. -- 1,412
---------------- ----------------
Total current assets ............................................. 11,451 119,164
Property and equipment, net .............................................. 1,538 2,680
Purchased technology, net ................................................ -- 24,617
Goodwill, net ............................................................ -- 10,790
Deferred income taxes .................................................... -- 4,703
Other assets ............................................................. 1,341 3,198
---------------- ----------------
Total assets ..................................................... $14,330 $165,152
================ ================
LIABILITIES
Current liabilities:
Accounts payable ..................................................... $2,559 $5,201
Note payable, current portion ........................................ 1,125 --
Accrued expenses ..................................................... 1,454 4,228
Deferred revenue ..................................................... 531 2,074
Income taxes payable ................................................. 417 --
Obligations under capital lease, current portion ..................... 61 55
---------------- ----------------
Total current liabilities ........................................ 6,147 11,558
Deferred income taxes .................................................... 4 --
Note payable, net of current portion ..................................... 6,188 --
Obligations under capital lease, net of current portion .................. 76 21
---------------- ----------------
Total liabilities ................................................ 12,415 11,579
---------------- ----------------
Commitments and contingencies (Note 6)
Redeemable preferred stock:
Series A preferred stock, $0.001 par value, 17,250 shares authorized,
issued and outstanding at April 30, 1999, no shares at April 30, 2000 19,241 --
Series B convertible preferred stock, $0.001 par value, 6,260 shares
authorized issued and outstanding at April 30, 1999, no shares at April
30, 2000............................................................. 6,017 --
---------------- ----------------
Total redeemable preferred stock ................................. 25,258 --
---------------- ----------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value: 50,000 shares authorized and 9,188 and
28,274 shares issued and outstanding at April 30, 1999 and 2000 ....... 9 28
Deferred stock compensation .............................................. (1,229) (21,937)
Additional paid in capital ............................................... 3,081 171,119
Retained earnings/(accumulated deficit) .................................. (25,204) 4,363
---------------- ----------------
Total stockholders' equity (deficit) ............................. (23,343) 153,573
---------------- ----------------
Total liabilities, redeemable preferred stock and stockholders' equity
(deficit) ........................................................... $14,330 $165,152
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
DITECH COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenue ............................................. $ 12,326 $ 25,364 $116,946
Cost of goods sold .................................. 5,651 11,858 34,913
-------- -------- --------
Gross profit .................................... 6,675 13,506 82,033
-------- -------- --------
Operating expenses:
Sales and marketing ............................. 2,405 5,759 9,411
Research and development ........................ 2,367 3,860 8,559
General and administrative ...................... 1,279 2,399 4,296
Purchased research and development .............. -- -- 8,684
Amortization of goodwill and purchased technology -- -- 1,860
-------- -------- --------
Total operating expenses ........................ 6,051 12,018 32,810
-------- -------- --------
Income from operations .............................. 624 1,488 49,223
Other income (expense):
Interest income ................................. 175 202 1,725
Interest expense ................................ (768) (702) (180)
-------- -------- --------
Total other income (expense) ................. (593) (500) 1,545
-------- -------- --------
Income before provision for income taxes ..... 31 988 50,768
Provision for income taxes .......................... 24 413 20,765
-------- -------- --------
Net income .......................................... 7 575 30,003
Accretion of mandatorily redeemable preferred stock to
redemption value ............................... 1,374 1,497 99
-------- -------- --------
Net income (loss) attributable to common stockholders $ (1,367) $ (922) $ 29,904
======== ======== ========
Net income (loss) per share attributable to common
stockholders
Basic ........................................... $ (0.22) $ (0.13) $ 1.27
======== ======== ========
Diluted ......................................... $ (0.22) $ (0.13) $ 1.11
======== ======== ========
Number of shares used in per share calculations
Basic ........................................... 6,122 7,132 23,505
======== ======== ========
Diluted ......................................... 6,122 7,132 27,016
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
DITECH COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK DEFERRED ADDITIONAL EARNINGS/
--------------------------- STOCK PAID IN (ACCUMULATED
SHARES AMOUNT COMPENSATION CAPITAL DEFICIT) TOTAL
----------- ----------- ---------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, MAY 1, 1997 ............. 5,720 $-- $-- $-- $ (22,768) $ (22,768)
Issuance of stock under employee
stock plans ..................... 306 4 -- 19 -- 23
Issuance of common stock .......... 134 2 -- 53 -- 55
Accretion for dividend on Series A
and B redeemable preferred stock -- -- -- -- (1,374) (1,374)
Net income ........................ -- -- -- -- 7 7
--------- --------- --------- ------- --------- ---------
BALANCES, APRIL 30, 1998 .......... 6,160 6 -- 72 (24,135) (24,057)
Issuance of stock under employee
stock plans ..................... 2,698 2 -- 909 -- 911
Issuance of common stock .......... 334 1 -- 739 -- 740
Repurchase of common stock ........ (4) -- -- (2) -- (2)
Accretion for dividend on Series A
and B redeemable preferred stock -- -- -- -- (1,497) (1,497)
Redemption of Series C preferred
stock ........................... -- -- -- -- (147) (147)
Tax benefit on exercise of stock
options ......................... -- -- -- 43 -- 43
Deferred compensation on issuance
of stock options ................ -- -- (1,320) 1,320 -- --
Amortization of deferred stock
compensation .................... -- -- 91 -- -- 91
Net income ........................ -- -- -- -- 575 575
--------- --------- --------- ------- --------- ---------
BALANCES, APRIL 30, 1999 .......... 9,188 9 (1,229) 3,081 (25,204) (23,343)
Issuance of stock under employee
stock plans ..................... 651 1 -- 690 -- 691
Issuance of common stock, net of
issuance costs .................. 8,900 9 -- 82,376 -- 82,385
Repurchase of common stock ........ (11) -- -- (4) -- (4)
Accretion for divided on Series A
and Series B redeemable preferred
stock ........................... -- -- -- -- (99) (99)
Redemption of Series A preferred
stock ........................... -- -- -- -- (337) (337)
Conversion of Series B preferred
stock ........................... 8,346 8 -- 6,033 -- 6,041
Issuance of common stock in
purchase acquisition ............ 1,200 1 (22,950) 68,849 -- 45,900
Tax benefit of employee stock
transactions .................... -- -- -- 9,995 -- 9,995
Deferred compensation on issuance
of stock options to a consultant -- -- (99) 99 -- --
Amortization of deferred stock
compensation .................... -- -- 2,341 -- -- 2,341
Net income ........................ -- -- -- -- 30,003 30,003
--------- --------- --------- ----------- --------- ---------
BALANCES, APRIL 30, 2000 .......... 28,274 $ 28 $ (21,937) $ 171,119 $ 4,363 $ 153,573
========= ========= ========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
DITECH COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 7 $ 575 $ 30,003
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .......................... 175 482 1,715
Increase (decrease) in provision for doubtful accounts . (45) 70 300
Loss on disposal of property and equipment ............. -- 34 89
Tax benefit from exercise of stock options.............. -- 43 9,995
Deferred income taxes .................................. (18) (189) (5,970)
Amortization of deferred stock compensation ............ -- 91 2,341
Amortization of purchased technology and goodwill ...... -- -- 1,860
Purchased research and development ..................... -- -- 8,684
Change in assets and liabilities:
Accounts receivable ................................. 58 (948) (17,581)
Inventories ......................................... (503) (2,443) (1,990)
Other current assets ................................ (58) 1 (263)
Income taxes receivable/payable ..................... 705 559 (1,874)
Accounts payable .................................... (177) 1,347 2,642
Accrued expenses and other .......................... (246) 562 2,774
Deferred revenue .................................... -- 531 1,543
-------- -------- --------
Net cash provided by (used in) operating activities (102) 715 34,268
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................... (823) (698) (1,968)
Other assets .............................................. -- (634) (3,305)
Maturity of investments ................................... 221 -- --
-------- -------- --------
Net cash used in investing activities ................. (602) (1,332) (5,273)
-------- -------- --------
Cash flows from financing activities:
Issuance of note payable .................................. 8,000 -- --
Repayment of subordinated promissory notes ................ (8,000) -- --
Repurchase of common stock ................................ -- (2) (4)
Principal payments on note payable ........................ (125) (563) (7,313)
Principal payments under capital lease obligations ........ (15) (48) (61)
Redemption Series A preferred stock ....................... -- -- (19,655)
Proceeds from issuance of common stock .................... 55 -- 82,849
Proceeds from employee stock plan issuances ............... 23 911 691
-------- -------- --------
Net cash provided by (used in) financing activities ... (62) 298 56,507
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........ (766) (319) 85,502
Cash and cash equivalents, beginning of year ................ 4,199 3,433 3,114
-------- -------- --------
Cash and cash equivalents, end of year ...................... $ 3,433 $ 3,114 $ 88,616
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
DITECH COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Ditech Communications Corporation (formerly Automated Call Processing
Corporation) (the "Company") is a Delaware corporation that reincorporated from
a California corporation in April 1999. The Company designs, develops and
markets echo cancellation equipment and optical communications products for use
in building and expanding telecommunications and cable communications networks.
The Company has established a direct sales force that sells its products in the
U.S. and internationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when a product has been shipped, no
material vendor obligations remain outstanding and collection of the resulting
receivable is probable. In the event that revenue recognition is deferred due to
uncertainty about collectibility or the existence of a material vendor
obligation such as installation, the revenue is recognized when the uncertainty
is removed and/or the vendor obligation is fulfilled.
WARRANTIES
The Company's products are warranted for one to five years. A provision
for the estimated future cost of warranty is made at the time a sale is
recorded.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Management
believes that the financial institutions in which it maintains such deposits are
financially sound and, accordingly, minimal credit risk exists with respect to
these deposits. Cash and cash equivalents are held by four major U.S.
financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, 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.
7
<PAGE>
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 two 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.
INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of
purchased businesses is recorded as goodwill and is amortized on a
straight-line basis over its estimated useful life, generally five years or
less. The cost of other acquired intangibles is amortized on a straight-line
basis over their estimated useful lives. The Company continually evaluates
the carrying value of goodwill and other intangible assets. Any impairments
would be recognized when the expected future operating cash flows derived
from such intangible assets is less than their carrying value.
Amortization expense for goodwill and purchased technology
associated with the Telinnovation acquisition (see Note 3) was $1.3 million
and $564,000, respectively.
LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets based upon expected undiscounted cash flows and recognizes impairment
from the carrying value of long-lived assets, if any, based on the fair value of
such assets.
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, 1998, three customers accounted for
67% (42%, 14%, and 11%) of net revenues. During the year ended April 30, 1999,
one customer accounted for 42% of net revenues. During the year ended April 30,
2000, one customer accounted for 57% of net revenues. Net revenues from
customers outside the United States, which were denominated in U.S. dollars,
were 6%, 13% and 12% in 1998, 1999 and 2000, respectively. The Company's
accounts receivable was concentrated with four customers at April 30, 1999
(representing 25%, 12%, 12% and 10% of receivables) and two customers at April
30, 2000 (57% and 12%). The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of accounts receivable.
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
two manufacturers for a majority of the Company's products. The Company may
experience delays if it were to shift production to an alternative vendor.
8
<PAGE>
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.
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 1998, 1999 and 2000.
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.
EARNINGS PER SHARE
Basic earnings per share is calculated based on the weighted average
number of shares of common stock outstanding during the period less shares
subject to repurchase, which are considered contingently issuable shares.
Diluted earnings per share is calculated based on the weighted average number of
shares of common stock and common stock equivalents outstanding, including the
dilutive effect of stock options, using the treasury stock method, common stock
subject to repurchase and the assumed conversion of all outstanding shares of
Series B preferred stock.
9
<PAGE>
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,
---------------------------------
1998 1999 2000
------- ------ --------
<S> <C> <C> <C>
Historical net income (loss) per share, basic and diluted:
Basic:
Net income ............................................. $ 7 $ 575 $ 30,003
Less accretion on mandatorily redeemable preferred stock 1,374 1,497 99
------- ------ --------
Net income (loss) attributable to common stockholders .. $(1,367) $ (922) $ 29,904
======= ====== ========
Weighted average shares of common stock outstanding .... 6,122 8,088 24,417
Less stock subject to repurchase ....................... -- (956) (912)
------- ------ --------
Shares used in calculation of basic per share numbers .. 6,122 7,132 23,505
======= ====== ========
Net income (loss) per share ............................ $ (0.22) $(0.13) $ 1.27
======= ====== ========
Diluted:
Net income ............................................. $ 7 $ 575 $ 30,003
Less accretion on mandatorily redeemable preferred stock 1,374 1,497 99
------- ------ --------
Net income (loss) attributable to common stockholders .. $(1,367) $ (922) $ 29,904
======= ====== ========
Shares used in calculation of basic per share numbers .. 6,122 7,132 23,505
Add back shares subject to repurchase .................. -- -- 912
Assumed conversion of Series B preferred ............... -- -- 894
Dilutive effect of stock options ....................... -- -- 1,705
------- ------ --------
Shares used in calculation of diluted per share numbers 6,122 7,132 27,016
======= ====== ========
Net income (loss) per share ............................ $ (0.22) $(0.13) $ 1.11
======= ====== ========
</TABLE>
SEGMENT INFORMATION
The Company applies the Financial Accounting Standards Board's
Statement of Financial Accounting Standard No. 131 "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131"). Under SFAS 131, the
Company is required to use a "management" approach to reporting its segments.
The management approach designates that internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's segments. The Company currently generates the vast
majority of its revenue from a single product line/segment.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. We do not believe this will have a material
effect on our operations or financial position. Implementation of this standard
is effective for fiscal years beginning after June 15, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The SEC has deferred the
implementation date of SAB 101. The Company is required to adopt SAB 101 in the
fourth quarter of fiscal 2001. We do not expect the adoption of SAB 101 to have
a material effect on our operations or financial position.
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44) for
certain transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence for various modifications to the terms of a
10
<PAGE>
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain provisions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company does not expect that the
adoption of the provisions will have a material effect on the financial
statements.
3. ACQUISITIONS
On February 1, 2000, the Company completed the acquisition of
substantially all the assets of Telinnovation Service Corporation, Telinnovation
Corporation and Telinnovation Partners (collectively "Telinnovation") of
Mountain View, California in exchange for 1,200,000 shares of the Company's
common stock. A portion of these shares are being held in escrow and will be
released upon completion of certain events. The acquisition has been accounted
for using the purchase method.
Included in the 1,200,000 shares issued as part of the Telinnovation
Purchase Agreement were 400,000 restricted shares of common stock issued to the
Telinnovation Employees. These restricted shares are tied to the employees'
continued employment with Ditech and vest over a three-year period following the
closing of the Acquisition. This stock has been recorded as deferred stock
compensation and will be charged to the statement of operations as stock
compensation over the three-year vesting period.
The allocation of the stock purchase price is summarized below (in
thousands):
<TABLE>
<S> <C>
Developed technology ................................ $25,914
Purchased research and development .................. 8,684
Goodwill ............................................ 11,213
Net assets acquired ................................. 89
-------------
45,900
Restricted shares tied to continued employment 22,950
-------------
$68,850
=============
</TABLE>
The amounts allocated to purchased research and development were
determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition because
technological feasibility had not been established and no future alternative
uses existed. The purchased research and development relates to the
development of packet based echo cancellation and voice quality products
which were under development as of the acquisition date. Research and
development costs to bring the products from the acquired company to
technological feasibility are estimated to total approximately $430,000. The
Company anticipates the development will be completed between twelve and
eighteen months.
The nature of the efforts to develop the purchased in-process research
and development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specifications including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and development costs, sales and
marketing costs, and income taxes from such projects.
The amount allocated to purchased research and development was charged
to the statement of operations in the fourth quarter of fiscal year 2000. The
cost of developed technology and goodwill will be amortized to expense over
their estimated useful lives of five years. Amortization expense associated with
purchased technology and goodwill totaled $1.9 million in fiscal 2000.
The following unaudited pro forma financial information reflects the
results of operations for the years ended April 30, 1999 and 2000, as if the
acquisition had occurred on May 1, 1998. These pro forma results have
11
<PAGE>
been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisitions actually taken
place on May 1, 1998, and may not be indicative of future operating results, (in
thousands except share and per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1999 2000
---------------- -------------
(UNAUDITED)
<S> <C> <C>
Pro forma financial information (unaudited)
Net revenues ........................................................ $26,474 $117,658
---------------- -------------
Income (loss) from operations ....................................... $(12,022) $38,426
---------------- -------------
Net income (loss) attributable to common stockholders ............... $(8,987) $23,458
---------------- -------------
Net income (loss) per share attributable to common stockholders:
Basic ........................................................... $(1.13) $0.97
---------------- -------------
Diluted ......................................................... $(1.13) $0.84
---------------- -------------
Weighted average shares:
Basic ........................................................... 7,932 24,105
---------------- -------------
Diluted ......................................................... 7,932 27,916
---------------- -------------
</TABLE>
4. BALANCE SHEET ACCOUNTS
INVENTORIES:
Inventories comprised (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
-------------------------------
1999 2000
------------- --------------
<S> <C> <C>
Raw materials ........................................... $2,099 $1,717
Work in progress ........................................ 263 849
Finished goods .......................................... 2,244 4,030
------------- --------------
Total ............................................... $4,606 $6,596
============= ==============
</TABLE>
PROPERTY AND EQUIPMENT:
Property and equipment comprised (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Furniture and fixtures .................................................... $154 $339
Equipment ................................................................. 1,680 3,067
Leasehold improvements .................................................... 89 114
Computer software ......................................................... 250 620
------------- -------------
2,173 4,140
Less: accumulated depreciation and amortization ........................... (635) (1,460)
------------- -------------
Total ................................................................. $1,538 $2,680
============= =============
</TABLE>
Included in property and equipment are assets under capital leases of
$209,000 at April 30, 1999 and 2000, respectively, with related accumulated
amortization of $46,000 and $86,000, respectively. Prior to fiscal year 1998,
the Company did not have any assets under capital lease.
12
<PAGE>
ACCRUED EXPENSES:
Accrued expenses comprised (in thousands):
<TABLE>
<CAPTION>
APRIL 30,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Accrued royalties ......................................................... $388 $--
Accrued employee compensation ............................................. 624 2,425
Accrued professional services ............................................. 420 108
Accrued warranty .......................................................... 12 905
Other accrued expenses .................................................... 10 790
------------- -------------
Total ................................................................. $1,454 $4,228
============= =============
</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. The balance of this loan was repaid in
full in July of 1999, subsequent to the completion of our initial public
offering. No amounts remain outstanding as of April 30, 2000.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office facilities under a non-cancelable
operating lease expiring in June 2006. 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.
At April 30, 2000, future minimum payments under the leases are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, OPERATING CAPITAL
--------------------- --------- -------
<S> <C> <C>
2001 $1,730 $58
2002 1,917 23
2003 1,889 9
2004 1,853 --
2005 1,909 --
2006 and thereafter 2,296 --
-------------- --------------
$11,594 90
==============
Less amount representing interest 14
--------------
76
Less current portion 55
--------------
$21
==============
</TABLE>
Rent expense for the years ended April 30, 1998, 1999 and 2000 was
$384,000, $728,000 and $1,276,000, respectively.
13
<PAGE>
LINE OF CREDIT
The Company has a line of credit agreement with its bank under which it
may borrow the lesser of $3 million or 80% of eligible accounts receivable.
Borrowings bear interest at the lesser of the bank's prime rate or LIBOR plus
1.25%. The line of credit is subject to certain covenants including a minimum
quick ratio and minimum quarter earnings before interest, taxes, depreciation
and amortization. The line expires on August 20, 2000. There were no amounts
outstanding at April 30, 1999 or 2000. However, letter of credit facilities
outstanding of $12,000 have reduced the amount available under the line of
credit by an equal amount.
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 optical amplifier products and sought monetary damages. In June 1999,
the Company received a favorable ruling from the arbitration panel in the matter
related to Antec Corporation's breach of a purchase contract. Subsequent to the
favorable ruling, the Company was notified by Antec's counsel of its intent to
contest the arbitrator's decision. In August, the Company and Antec reached a
final settlement in which the Company received a minor settlement award.
Additionally, the Company and Antec entered into a patent license agreement. The
Company recognized $1.9 million of revenue in the Company's second quarter of
fiscal 2000 associated with the fixed license fee paid in fiscal 2000.
7. REDEEMABLE PREFERRED STOCK
Ditech is authorized to issue, from time to time, in one or more
series, 5,000,000 shares of preferred stock at a $0.001 par value. The board of
directors may determine the rights, preferences, privileges and restrictions
granted or imposed upon any series of preferred stock. As of April 30, 2000, no
preferred stock was outstanding.
In March 1997, the Company issued 17,250,000 shares of Series A
redeemable preferred stock and 6,259,718 shares of Series B redeemable preferred
stock, in conjunction with the recapitalization of the Company. In June 1999,
after completion of our initial public offering, all shares of Series A
redeemable preferred were retired in exchange for cash generated from our
initial public offering and all shares of Series B redeemable preferred stock
were converted into common stock at the stated exchange ratio. Prior to the
retirement or conversion these shares carried certain rights and privileges as
more fully set out below.
LIQUIDATION RIGHTS
The preferred stock has certain liquidation preferences over the common
stock in the event of a liquidating event such as dissolution of the affairs of
the Company or a take-over by another corporation. The liquidation preferences
entitle the Series A and Series B preferred stockholders to receive $1.00 and
$0.86 per share, respectively, in addition to amounts due on unpaid dividends,
which have been accrued or declared. The Series A preferred stockholders have
preference over the Series B preferred stockholders in determining the order of
liquidation payout. The preferred stock does not participate in the distribution
of assets remaining after the liquidation preference has been paid.
CONVERSION RIGHTS
The Series A preferred stock has no conversion rights. The Series B
preferred stockholders have the right at any time to convert each share of
preferred stock into shares of common stock at the specified conversion rate per
share, which currently is $1.29 per share of common stock. The conversion rate
will be adjusted for stock splits
14
<PAGE>
and recapitalization. In the event of a public offering of the Company's common
stock where the net proceeds received by the Company equals or exceeds
$20,000,000 and the offering price is at least $3.89 per share, or in the event
of approval from two thirds of Series B preferred stockholders, all shares of
the Series B preferred stock automatically convert into common stock at the
specified conversion rate.
REDEMPTION RIGHTS
The Company may not redeem any or all of the Series A and Series B
preferred stock until after February 1, 2004, with a request of the majority of
the outstanding stockholders. The Series B preferred stock may be redeemed only
if there are no shares of Series A preferred stock then outstanding.
The Company, upon the election of the holders of a majority of the
outstanding shares, will redeem all of the Series A preferred stock in the event
of a public offering of the Company's common stock. Upon a change in ownership
or fundamental change in the Company and an election by a majority of the
stockholders, the Series A and Series B preferred stockholders may redeem all of
their shares at liquidation value and unpaid dividends. The Series A preferred
has preference over the Series B preferred.
VOTING RIGHTS
The Series B preferred stockholders are entitled to vote on all matters
with the holders of common stock as if on an as converted basis and have the
right to elect two directors to the Board of Directors. The Series A preferred
stockholders have no rights to vote.
DIVIDEND RIGHTS
The preferred stockholders will be entitled to receive dividends in
preference to the common stockholders. In addition, Series A and Series B
stockholders dividends shall be on a pro rata basis based on liquidation values
of each. From the date of issuance, cumulative dividends are payable when and if
declared or accumulate as part of the shares' liquidation preferences at 6% per
year, compounded daily.
The carrying amounts of both Series A and Series B have been increased
by amounts representing dividends not currently declared or paid but which will
be payable under the dividend rights of the respective series of preferred
stock. The increases have been effected by a charge against accumulated deficit.
8. STOCKHOLDERS' EQUITY (DEFICIT)
REINCORPORATION AND STOCK SPLITS
The Company reincorporated in Delaware on April 21, 1999; all amounts
have been retroactively adjusted to effect this presentation. On April 27, 1999,
the Company effected a two-for-three reverse split of the Company's common
stock. On February 16, 2000, the Company effected a two-for-one split of the
Company's common stock. All relevant share data has been adjusted to reflect
these stock splits.
RECAPITALIZATION
In March 1997, the Company recapitalized its financial structure by
exchanging substantially all of the then outstanding shares of common stock for
cash of $21,486,000 and Series A and C preferred stock. In retiring the common
stock outstanding at that time, the excess of the fair value of the common stock
over the original issuance price of common stock of $23,637,000 was recorded
against retained earnings, which gave rise to an accumulated deficit of
$22,768,000 as of April 30, 1997.
15
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN.
In March and April 1999 the Board adopted, and the stockholders
approved, the Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of 266,666 shares of common stock. Employees who
participate in an offering period 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. No shares were purchased
under this Plan during fiscal 1999. In fiscal 2000, 67,958 shares were purchased
under the plan.
STOCK OPTION PLANS
The Company's 1997 Stock Option 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 continue to be governed by the terms and conditions of the
1997 Stock Option Plan. The Company has reserved 4,000,000 shares of common
stock for issuance under the 1997 Stock Option Plan. Under the 1997 Stock Option
Plan, the Board of Directors could grant incentive or non-statutory stock
options at a price not less than 100% or 85%, respectively, of fair market value
of common stock, as determined by the Board of Directors, at grant date. 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. In March and
April 1998 the Company increased the number of shares reserved for issuance
under the 1998 Stock Option Plan. The Company has reserved a total of 1,856,082
shares of common stock for issuance under the 1998 Stock Option Plan, under
terms similar to those granted under the 1997 Stock Option Plan. During fiscal
2000, the Company adopted two non-statutory stock option plans under which a
total of 1,350,000 shares were reserved for issuance. The terms of non-statutory
options granted under these plans are substantially consistent with
non-statutory options granted under the 1997 and 1998 plans.
Options under the 1997 Stock Option Plan and 1998 Stock Option 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. As of April 30, 2000, 493,000 shares
were subject to repurchase.
In March 1999, the Company adopted the 1999 Non-Employee Directors
Stock Option Plan, and reserved 200,000 shares for issuance under the plan.
Options granted under the plan have a 5 year term and are fully vested at the
date of grant.
16
<PAGE>
Activity under the stock option plans referenced above 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, 1997 ....... 1,200 1,540 $0.08-$0.41 $222 $0.15
Reservation of shares ... 1,264
Options granted ......... (1,964) 1,964 $0.41 810 $0.41
Options exercised ....... -- (306) $0.08 (23) $0.08
Options cancelled ....... 66 (66) $0.41 (27) $0.41
-------- -------- ------------- -------- ---------
Balances, April 30, 1998 .... 566 3,132 $0.08-$0.41 982 $0.32
Reservation of shares ... 2,056
Reserved shares cancelled (190)
Options granted ......... (1,406) 1,406 $0.41-$4.88 3,110 $2.21
Options exercised ....... -- (2,698) $0.08-$3.75 (911) $0.34
Options cancelled ....... 88 (112) $0.41-$3.75 (67) $0.60
-------- -------- ------------- -------- ---------
Balances, April 30, 1999 .... 1,114 1,728 $0.08-$4.88 3,114 $1.80
Reservation of shares ... 1,350
Options granted ......... (1,744) 1,744 $5.50-$85.75 54,617 $31.32
Options exercised ....... -- (583) $0.08-$4.88 (357) $0.61
Options cancelled ....... 177 (248) $0.41-$48.94 (1,839) $7.48
-------- -------- ------------- -------- ---------
Balances, April 30, 2000 .... 897 2,641 $0.41-$85.75 $55,535 $21.00
======== ======== ======== =========
</TABLE>
Options outstanding at April 30, 2000 (in thousands, except per share
amounts):
<TABLE>
<CAPTION> OPTIONS EXERCISABLE AT
WEIGHTED APRIL 30, 2000
AVERAGE --------------------------------------
WEIGHTED REMAINING WEIGHTED
RANGE OF EXERCISE OPTIONS AVERAGE CONTRACTUAL AVERAGE
PRICES OUTSTANDING EXERCISE PRICE LIFE YEARS OPTIONS EXERCISE PRICE
--------------------- ----------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.41-$1.50 606 $0.77 8.29 606 $0.77
$3.75-$5.50 507 $4.94 9.00 507 $4.94
$9.00-$11.19 534 $9.03 9.28 534 $9.03
$24.69-$48.94 479 $30.98 8.86 479 $30.98
$56.38-$85.75 515 $63.96 9.80 515 $63.96
--- ---
$0.41-$85.75 2,641 $21.02 9.02 2,641 $21.02
===== =====
</TABLE>
The estimated weighted average fair value of options granted during
fiscal year 1998, 1999 and 2000 was $0.29, $0.60 and $28.74 per share,
respectively. The estimated weighted average fair value of shares granted under
the Employee Stock Purchase Plan was $3.51 in fiscal 2000. The Company applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock option plan other than 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, 1998, 1999 and 2000 would have been reduced to the pro forma amounts
indicated in the following table (in thousands, except per share amounts):
17
<PAGE>
<TABLE>
<CAPTION>
APRIL 30,
-----------------------------------
1998 1999 2000
------ ------ -------
<S> <C> <C> <C>
Income before provision for income taxes, as reported ... $31 $988 $50,768
Less: net expense per SFAS 123 .......................... 86 128 9,027
------ ------ -------
Pro forma income (loss) before provision for income taxes (55) 860 41,741
Less: pro forma provision (benefit) for income taxes .... (22) 362 17,072
------ ------ -------
Pro forma income (loss) ................................. $(33) $498 $24,669
====== ====== =======
Income as reported ...................................... $7 $575 $30,003
====== ====== =======
Net income (loss) attributable to common shareholders
per share:
Pro forma ........................................... $(0.23) $(0.14) $0.91
====== ====== =======
As reported ......................................... $(0.22) $(0.13) $1.11
====== ====== =======
</TABLE>
The fair value of options granted under the Company's stock plans
during 1998, 1999 and 2000 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 in 1998 and
1999, and was 130% in 2000, risk-free interest rates of 5.90%, 4.74% and 6.28%
in 1998, 1999 and 2000, respectively, and expected lives of four years for the
option plans and 6 months for the Employee Stock Purchase Plan. Forfeitures are
recognized as they occur.
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 April 30, 1999, the
Company had recorded deferred compensation related to these options in the total
amount of $1,320,000, of which $91,000 and $330,000 had been amortized to
expense during 1999 and 2000, respectively. Future compensation expense from
options granted through April 30, 1999 is estimated to be $330,000, $330,000 and
$239,000 for the years ending April 30, 2001, 2002 and 2003, respectively.
9. INCOME TAXES
The provision for income taxes reflected in the statements for the
years ended April 30, 1998, 1999 and 2000 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal .......... $41 $590 $21,454
State ............ 1 12 5,282
-------- -------- --------
Total current 42 602 26,736
-------- -------- --------
Deferred:
Federal .......... (19) (258) (5,190)
State ............ 1 69 (781)
-------- -------- --------
Total deferred (18) (189) (5,971)
-------- -------- --------
Total ....... $24 $413 $20,765
======== ======== ========
</TABLE>
The deferred income tax provision reflects the tax effect of changes in
the amounts of temporary differences during each year ended April 30, 1998, 1999
and 2000. As of April 30, 1999 and 2000, the Company's
18
<PAGE>
deferred tax assets and liabilities consisted of (in thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Deferred tax asset (liability):
Uniform capitalization ................................. $314 $283
Depreciation ........................................... (128) (231)
Inventory reserves and other, net ...................... 385 1,691
Purchased technology, goodwill and other
intangibles ........................................ -- 4,799
------- -------
Total .............................................. $571 $6,542
======= =======
</TABLE>
The Company's effective tax rate differs from the statutory federal
income tax rate as shown in the following schedule:
<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- --------
<S> <C> <C> <C>
Tax provision at federal statutory rate 34.0% 34.0% 35.0%
State taxes, net of federal benefit .... 13.0 6.1 6.7
Tax-exempt interest income ............. -- -- (0.9)
Other, primarily non-deductible expenses 30.4 1.7 0.1
--------- --------- --------
Total .......................... 77.4% 41.8% 40.9%
========= ========= ========
</TABLE>
10. SEGMENT INFORMATION
The Company markets its products 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 by geographic area are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
USA $11,539 $22,107 $102,632
China ........................... -- 275 6,732
Mexico 345 1,294 1,004
Rest of the world .................. 442 1,688 6,578
----------- ----------- ------------
$12,326 $25,364 $116,946
=========== =========== ============
</TABLE>
International sales are entirely comprised of export sales.
11. 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, 1998
and 1999. For the year ended April 30, 2000, the Company contributed $24,000 to
the plan.
19
<PAGE>
12. SUPPLEMENTAL CASHFLOW INFORMATION
<TABLE>
<CAPTION>
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
Operating:
Interest paid ................................................... $600 $736 $104
Income taxes paid ............................................... -- -- 18,609
Noncash financing and investing activities:
Accretion of preferred stock .................................... 1,374 1,497 99
Acquisition of asset under capital lease ........................ 154 47 --
Redemption of Series C preferred stock .......................... -- 7,508 --
Deferred stock compensation ..................................... -- 1,320 22,950
Purchase of technology rights for common stock .................. -- 740 --
Purchase method acquisition for common stock .................... -- -- 37,216
Conversion of Series B Preferred Stock .......................... -- -- 6,041
Compensation associated with stock options issued to
consultants ................................................. -- -- 99
</TABLE>
13. SUBSEQUENT EVENTS (UNAUDITED)
On June 22, 2000, the Company announced that it had signed a definitive
agreement to acquire privately-held Atmosphere Networks, Inc. of Campbell,
California in a stock and cash merger. Atmosphere Networks is an emerging
provider of optical networking products, enabling carriers to combine various
types of traffic (voice, data and video) onto an optical network. The
acquisition, which is expected to close by the end of the first fiscal quarter
of fiscal 2001, will be accounted for as a purchase.
Under the terms of the agreement, the stockholders of Atmosphere
Networks will receive merger consideration valued at approximately $88.5
million, provided that if the average closing price of a share of Ditech common
stock for a designated period prior to the closing is less than $73.75, the
merger consideration will be valued at 1,200,000 shares of Ditech common stock,
and if such average closing price is greater than $88.50, the merger
consideration will be valued at 1,000,000 shares of Ditech common stock. The
actual merger consideration will consist primarily of Ditech common stock,
provided that certain holders of Atmosphere Networks common stock will receive
cash (estimated not to exceed approximately $10 million) upon the consummation
of the merger. Ditech is also expected to grant the Atmosphere Networks
employees 4-year vesting stock options covering up to 750,000 shares of Ditech
common stock at a price representing up to a 50% discount to market. As a
result, the Company will record deferred stock compensation attributable to
these option grants, which will be recognized as expense ratably over the 4-year
option term. The Company is still evaluating the allocation of the purchased
price to intangible assets including the extent of any purchased research and
development write-off, if any, associated with this acquisition.
20
<PAGE>
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(1) FINANCIAL STATEMENTS
Reference is made to the Index to Financial Statements of
Ditech Communications Corporation under Item 8 in Part II of
this Form 10-K
(2) FINANCIAL STATEMENT SCHEDULES
21
<PAGE>
All schedules are omitted because they are not required, they
are not applicable or information appears included in the
financial statements or notes thereto.
(3) EXHIBITS
The exhibits listed below are required by Item 601 of
Regulation S-K. Each management contract or compensatory plan
or arrangement required to be filed as an exhibit to this Form
10-K has been identified.
(4) REPORTS ON FORM 8-K
Ditech filed one report on Form 8-K during the fourth quarter
of fiscal 2000. This report was filed on February 16, 2000 and
related to the acquisition of substantially all the assets of
Telinnovation.
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1+++ Agreement and Plan of Merger and Reorganization, dated June 21, 2000, among Ditech Communications Corporation,
a Delaware corporation, Oxygen Acquisition Corporation, a Delaware corporation, and Atmosphere Networks,
Inc., a Delaware corporation.
3.1 * Amended and Restated Certificate of Incorporation of the Registrant,
filed June 14, 1999
3.2 * Bylaws of the Registrant
4.1 * Reference is made to Exhibits 3.1 and 3.2
4.2 ** Specimen Stock Certificate
4.3 ** Amended and Restated Registration Agreement, dated March 19, 1999, between Ditech and certain
investors
10.1 ** Lease Agreement, dated August 31, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC, as amended
January 25, 1999
10.2 **(1) 1997 Ditech Stock Option Plan
10.3 **(1) 1998 Amended and Restated Ditech Stock Option Plan
10.4 **(1) 1999 Employee Stock Purchase Plan
10.5 ** 1999 Non-employee Directors' Stock Option Plan
10.6 **(1) Employment Agreement, dated September 1998, between Ditech and Timothy Montgomery
10.7 **(1) Employment Agreement, dated September 14, 1998, between Ditech and Pong Lim
10.8 **(1) 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.
10.11.1* Third Amendment to Credit Agreement, dated August 13, 1999, 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**(1) Form of Indemnity Agreement to be entered between Ditech and its executive officers and directors
10.17**(1) Employment Agreement dated April 27, 1999, between Ditech and Marc Schwager
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
10.18** Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler
10.19**(1) Form of option agreement under the 1997 Stock Option Plan
10.20**(1) Form of option agreement under the 1998 Stock Option Plan
10.21++ Patent License Agreement, dated as of August 13, 1999, between Ditech and Antec Corporation
10.22*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, Telinnovation,
Telinnovation Corporation and Telinnovation Service Corporation, Charles Davis and David Shvarts
10.23*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, and
Richard Hardy
10.24+++(1) Employment Agreement, dated January 31, 2000, between Ditech and Ian Wright
10.25*** 1999 Non-Qualified Stock Option Plan
10.26+++ Lease Amendment, dated February 15, 2000, between Ditech and Middlefield-Bernardo Associates LCC
10.27+++(1) Stock Option Agreement for Ian Wright-outside of the 1998 Stock Option Plan
23.1 Consent of PricewaterhouseCoopers LLP
27.1+++ Financial Data Schedule
------------------------
</TABLE>
* Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-86691), filed
September 8, 1999.
** Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-75063), declared
effective on June 9, 1999.
*** Incorporated by reference from the exhibits with titles from the
Registrant's Current Report on Form 8-K filed February 16, 2000.
(1) Management contract or compensatory plan or arrangement.
+ Confidential treatment has been granted 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.
++ Incorporated by reference from the exhibit with the corresponding
exhibit number from the Registrant's Quarterly Report on Form 10-Q for
the quarter ending July 31, 1999. Confidential treatment has been
granted for a portion of this exhibit.
+++ Previously filed with the Annual Report on Form 10-K which this report
amends.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
August 10, 2000 DITECH COMMUNICATIONS CORPORATION
By: /s/ William J. Tamblyn
-----------------------------
William J. Tamblyn
Vice President and Chief Financial Officer
24
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1+++ Agreement and Plan of Merger and Reorganization, dated June 21, 2000, among Ditech Communications Corporation,
a Delaware corporation, Oxygen Acquisition Corporation, a Delaware corporation, and Atmosphere Networks,
Inc., a Delaware corporation.
3.1 * Amended and Restated Certificate of Incorporation of the Registrant,
filed June 14, 1999
3.2 * Bylaws of the Registrant
4.1 * Reference is made to Exhibits 3.1 and 3.2
4.2 ** Specimen Stock Certificate
4.3 ** Amended and Restated Registration Agreement, dated March 19, 1999, between Ditech and certain
investors
10.1 ** Lease Agreement, dated August 31, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC, as amended
January 25, 1999
10.2 **(1) 1997 Ditech Stock Option Plan
10.3 **(1) 1998 Amended and Restated Ditech Stock Option Plan
10.4 **(1) 1999 Employee Stock Purchase Plan
10.5 ** 1999 Non-employee Directors' Stock Option Plan
10.6 **(1) Employment Agreement, dated September 1998, between Ditech and Timothy Montgomery
10.7 **(1) Employment Agreement, dated September 14, 1998, between Ditech and Pong Lim
10.8 **(1) 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.
10.11.1* Third Amendment to Credit Agreement, dated August 13, 1999, 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**(1) Form of Indemnity Agreement to be entered between Ditech and its executive officers and directors
10.17**(1) Employment Agreement dated April 27, 1999, between Ditech and Marc Schwager
10.18** Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler
10.19**(1) Form of option agreement under the 1997 Stock Option Plan
10.20**(1) Form of option agreement under the 1998 Stock Option Plan
10.21++ Patent License Agreement, dated as of August 13, 1999, between Ditech and Antec Corporation
10.22*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, Telinnovation,
Telinnovation Corporation and Telinnovation Service Corporation, Charles Davis and David Shvarts
10.23*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, and
Richard Hardy
10.24+++(1) Employment Agreement, dated January 31, 2000, between Ditech and Ian Wright
10.25*** 1999 Non-Qualified Stock Option Plan
10.26+++ Lease Amendment, dated February 15, 2000, between Ditech and Middlefield-Bernardo Associates LCC
10.27+++(1) Stock Option Agreement for Ian Wright-outside of the 1998 Stock Option Plan
23.1 Consent of PricewaterhouseCoopers LLP
27.1+++ Financial Data Schedule
------------------------
</TABLE>
* Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-86691), filed
September 8, 1999.
** Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-75063), declared
effective on June 9, 1999.
*** Incorporated by reference from the exhibits with titles from the
Registrant's Current Report on Form 8-K filed February 16, 2000.
(1) Management contract or compensatory plan or arrangement.
+ Confidential treatment has been granted 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.
++ Incorporated by reference from the exhibit with the corresponding
exhibit number from the Registrant's Quarterly Report on Form 10-Q for
the quarter ending July 31, 1999. Confidential treatment has been
granted for a portion of this exhibit.
+++ Previously filed with the Annual Report on Form 10-K which this report
amends.
