Ditech Networks (DITC) 8-K Texas Instruments Acquires Ditech's Telinnovation Echo-Cancellation Software Unit

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 8-K

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report: April 30, 2002
(Date of earliest event reported: April 16, 2002)

DITECH COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)

000-26209
(Commission File No.) 94-2935531
(IRS Employer Identification No.)

825 E. Middlefield Road
Mountain View, Ca. 94043
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code:(650) 623-1300

Item 2. Acquisition or Disposition of Assets.

        On April 16, 2002, Ditech Communications Corporation, a Delaware corporation ("Ditech"), sold to Texas Instruments Incorporated, a Delaware corporation ("TI"), all of its assets relating to its voice enhancement and echo cancellation software business for an aggregate total of $26.8 million in cash, of which (i) $18.3 million was paid to Ditech at closing, (ii) $5.0 million will be paid to Ditech on the first anniversary of the closing (subject to reduction in the event of any breaches of Ditech's representations and warranties), and (iii) $3.5 million will be paid to Ditech on the second anniversary of the closing. The purchase price was determined in arms-length negotiations between the parties. Concurrent with the closing of the sale, Dr. Charles Davis, Ditech's former chief technology officer, and certain other members of the Ditech echo-cancellation team joined TI to lead its echo-cancellation software team.

        Additionally, in connection with the sale, Ditech entered into a license agreement with TI and Telogy Networks Inc., a Delaware corporation and a wholly-owned subsidiary of TI ("Telogy"), pursuant to which TI and Telogy granted to Ditech a license to implement the voice enhancement and echo cancellation software, including any enhancements made by TI and Telogy to the software, in Ditech's products for a period of four years.

        See press release attached hereto as Exhibit 99.1, which is incorporated by reference here.

Item 7. Financial Statements and Exhibits.

(b)

Pro Forma Condensed Consolidated Financial Information (Unaudited)

        The following unaudited pro forma condensed consolidated financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, the historical financial statements and notes thereto of the Company included in the Company's Annual Report on Form 10-K filed July 26, 2001, and the Company's January 31, 2002 unaudited quarterly financial statements on Form 10-Q filed March 18, 2002, with the Securities and Exchange Commission.

        The unaudited pro forma condensed consolidated financial statements assume the sale of the Company's assets relating to its voice enhancement and echo cancellation software business (the "Sale"). The unaudited pro forma condensed consolidated balance sheet shows the Company's condensed consolidated balance sheet as of January 31, 2002, giving effect to the Sale as if it had occurred on January 31, 2002. The unaudited pro forma condensed consolidated statements of operations show the Company's historical results for the year ended April 30, 2001, and the nine months ended January 31, 2002, giving effect to the Sale as if it had occurred at May 1, 2000 and 2001, respectively.

        The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Sale had been consummated at the beginning of the earliest period presented, nor is it necessarily indicative of future operating results or financial position.

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Ditech Communications Corporation
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of January 31, 2002
(in thousands)

		As Reported			Pro Forma Adjustments			Pro Forma Adjusted
Assets
Cash and cash equivalents		$	95,216		$	18,300	(a)	$	113,516
Accounts receivable, net			2,853						2,853
Inventories			14,846						14,846
Other current assets			1,728						1,728
Income taxes receivable			9,374						9,374
Deferred income taxes			4,080						4,080
	Total current assets		128,097			18,300			146,397
Property and equipment, net			12,057			(35	)(a)		12,022
Purchased technology, net			15,548			(15,548	)(a)		0
Goodwill, net			46,994			(6,815	)(a)		40,179
Deferred income taxes			24,738			820	(a)		25,558
Other assets			4,674			9,710	(a)		14,384
	Total Assets	$	232,108		$	6,432		$	238,540
Liabilities and Stockholders' Equity
Accounts payable		$	3,924						3,924
Accrued expenses			7,901			692	(a)		8,593
Deferred revenue			2,266						2,266
Income taxes payable			74						74
Capital lease obligation			2						2
	Total current liabilities		14,167			692			14,859
Common stock			30						30
Additional paid-in capital			270,850						270,850
Accumulated deficit			(38,186	)		(1,910	)(a)		(40,096	)
Deferred stock compensation			(14,753	)		7,650	(a)		(7,103	)
	Total stockholders' equity		217,941			5,740			223,681
	Total Liabilities and Stockholders' Equity	$	232,108		$	6,432		$	238,540

The accompanying notes are an integral part of these
unaudited pro forma condensed consolidated financial statements

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Ditech Communications Corporation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended April 30, 2001
(in thousands, except per share amounts)

			As Reported		Pro Forma Adjustments			Pro Forma Adjusted
Revenue			$	121,714	$	(2,675	)(b)	$	119,039
Cost of goods sold				38,486		(294	)(b)		38,192
Gross profit				83,228		(2,381	)		80,847
Operating expenses:
	Sales and marketing			13,821					13,821
	Research and development			34,372		(9,013	)(b)		25,359
	General and administrative			6,716					6,716
	Amortization of goodwill and other intangibles			20,124		(7,454	)(b)		12,670
		Total operating expenses		75,033		(16,467	)		58,566
Income from operations				8,195		14,086			22,281
Other income, net				4,853					4,853
Income before provision for income taxes				13,048		14,086			27,134
Provision for income taxes				10,952		4,930	(c)		15,882
Net income			$	2,096	$	9,156		$	11,252
Per share data:
Basic			$	0.07				$	0.40
Diluted			$	0.07				$	0.37
Weighted shares used in per share calculation:
Basic				28,145					28,145
Diluted				30,512					30,512

The accompanying notes are an integral part of these
unaudited pro forma condensed consolidated financial statements

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Ditech Communications Corporation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For Nine Month Period Ended January 31, 2002
(in thousands, except per share amounts)

			As Reported			Pro Forma Adjustments			Pro Forma Adjusted
Revenue			$	31,714		$	(841	)(b)	$	30,873
Cost of goods sold				18,928			(145	)(b)		18,783
Gross profit				12,786			(696	)		12,090
Operating expenses
	Sales and marketing			13,312						13,312
	Research and development			39,747			(6,993	)(b)		32,754
	General and administrative			4,757						4,757
	Amortization of goodwill and other intangible assets			18,757			(5,591	)(b)		13,166
		Total operating expenses		76,573			(12,584	)		63,989
Loss from operations				(63,787	)		11,888			(51,899	)
Other income, net				2,634						2,634
Loss before benefit from income taxes				(61,153	)		11,888			(49,265	)
Benefit from income taxes				(16,508	)		3,570	(c)		(12,938	)
Net loss			$	(44,645	)	$	8,318		$	(36,327	)
Per share data:
Basic			$	(1.53	)				$	(1.24	)
Diluted			$	(1.53	)				$	(1.24	)
Weighted shares used in per share calculation:
Basic				29,237						29,237
Diluted				29,237						29,237

The accompanying notes are an integral part of these
unaudited pro forma condensed consolidated financial statements

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Ditech Communications Corporation
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

1.

Basis of Presentation

        Effective April 16, 2002, the Company sold the operating assets relating to its voice enhancement and echo cancellation software business (the "Sale") for a net sales price, after expenses of the sale, of $25.8 million. The disposition of this business resulted in a gain of $583,000 ($413,000 after taxes.) If the disposition had occurred at the beginning of the year ended April 30, 2001 or the nine months ended January 31, 2002, it would have resulted in a loss of $30.4 million ($19.8 million after tax at an assumed rate of 35%) and $14.7 million ($10.3 million after tax at an assumed rate of 30%), respectively. The difference is due to the continuing depreciation and amortization of the voice enhancement and echo cancellation assets.

        The assets related to the voice enhancement and echo cancellation software business consisted of equipment, purchased technology, goodwill, licensed software and deferred stock compensation with an original value of $64.0 million.

2.

Pro Forma Adjustments

(a)

To reflect the proceeds of the sale of the operating assets relating to the voice enhancement and echo cancellation software business, and the disposition of the assets as if the sale had occurred January 31, 2002, net of taxes at an assumed rate of 30%.

(b)

To reflect elimination of the software license revenue, costs and expenses related to the voice enhancement and echo cancellation software business as if the acquisition had occurred May 1, 2000 or 2001 as applicable. Expenses eliminated include personnel and related expenses and the amortization of purchased technology, a software license, goodwill and deferred stock compensation.

(c)

To reflect the elimination of income tax benefit on losses of the business sold at an assumed rate of 35% for the year ended April 30, 2001 and 30% for the nine months ended January 31, 2002.

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(c)

Exhibits.

The following Exhibits are filed as part of this report:

2.3		Asset Purchase Agreement, dated as of April 16, 2002, by and between Ditech and TI.
10.29	(1)	Software License Agreement, dated as of April 16, 2002, by and between Ditech, TI and Telogy.
99.1		Press Release, dated as of April 16, 2002, entitled "Texas Instruments Acquires Ditech's Telinnovation Echo-Cancellation Software Unit."

(1)

Confidential treatment has been requested for portions of this Exhibit.

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SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DITECH COMMUNICATIONS CORPORATION
Dated: April 30, 2002	By:	/s/ William J. TamblynWilliam J. Tamblyn Vice President and Chief Financial Officer

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INDEX TO EXHIBITS

2.3		Asset Purchase Agreement, dated as of April 16, 2002, by and between Ditech and TI.
10.29	(1)	Software License Agreement, dated as of April 16, 2002, by and between Ditech, TI and Telogy.
99.1		Press Release, dated as of April 16, 2002 entitled "Texas Instruments Acquires Ditech's Telinnovation Echo-Cancellation Software Unit."

(1)

Confidential treatment has been requested for portions of this Exhibit.

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Item 2. Acquisition or Disposition of Assets.
Item 7. Financial Statements and Exhibits.

Ditech Communications Corporation Unaudited Pro Forma Condensed Consolidated Balance Sheet As of January 31, 2002 (in thousands)
Ditech Communications Corporation Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended April 30, 2001 (in thousands, except per share amounts)
Ditech Communications Corporation Unaudited Pro Forma Condensed Consolidated Statement of Operations For Nine Month Period Ended January 31, 2002 (in thousands, except per share amounts)
Ditech Communications Corporation Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
SIGNATURE
INDEX TO EXHIBITS