Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Ditech Communications Corporation
In our opinion, the accompanying combined balance sheets and the
related combined statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position
of Telinnovation, acquired by Ditech Communications Corporation, at December
31, 1998 and October 31, 1999 and the results of its operations and its cash
flows for the year ended December 31, 1998 and the ten-months ended October
31, 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of Ditech'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 audit 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.
The accompanying financial statements were prepared to comply with the
rules and regulations of the Securities and Exchange Commission and on the
basis of presentation as described in Note 1, to present the financial
position and results of operations of the Telinnovation echo cancellation
business acquired by Ditech Communications Corporation from Telinnovation.
PricewaterhouseCoopers LLP
San Jose, California
December 17, 1999, except as to Note 7 which is as of February 2, 2000.
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TELINNOVATION
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, OCTOBER 31,
1998 1999
--------------- ---------------
ASSETS
Current assets:
Cash $ 715 $ 2,814
Investments 2,380 2,778
Accounts receivable 127 80
Prepaid expenses and other current assets 5 6
--------------- ---------------
Total current assets 3,227 5,678
Investments 102 95
Investments in Ditech common stock 250 11,330
Property and equipment, net 44 53
Intangibles 12 12
--------------- ---------------
Total assets $ 3,635 $ 17,168
--------------- ---------------
--------------- ---------------
LIABILITIES
Current liabilities:
Accounts payable $ 5 $ 14
Accrued compensation 59 48
--------------- ---------------
Total current liabilities 64 62
--------------- ---------------
Commitments (Note 5)
SHAREHOLDERS' EQUITY
Preferred shares: nil par value; 1,000,000 authorized,
none issued and outstanding - -
Common shares, nil par value, 2,000,000 shares authorized;
400,000 and 410,000 issued at December 31, 1998 and
October 31, 1999, respectively 5 15
Partners' capital 1,597 (1,883)
Retained earnings 1,969 7,817
Accumulated other comprehensive income - 11,157
--------------- ---------------
Total shareholders' equity 3,571 17,106
--------------- ---------------
Total liabilities and shareholders' equity $ 3,635 $ 17,168
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of these
financial statements.
7
TELINNOVATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
TEN
MONTHS
YEAR ENDED ENDED
DECEMBER 31, OCTOBER 31,
1998 1999
--------------- ---------------
NET REVENUES:
Royalties $ 2,210 $ 4,712
--------------- ---------------
OPERATING EXPENSES:
Research and development 325 415
Sales, general and administrative 259 309
--------------- ---------------
Total operating expenses 584 724
--------------- ---------------
Income from operations 1,626 3,988
Investment income 366 70
Other income (expense), net (1) 1,790
--------------- ---------------
Net income 1,991 5,848
--------------- ---------------
Change in unrealized gain on investments - 11,157
--------------- ---------------
Total comprehensive income $ 1,991 $ 17,005
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of these
financial statements.
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TELINNOVATION
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED ACCUMULATED
COMMON SHARES EARNINGS/ OTHER TOTAL
------------------------------- PARTNER'S ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
NUMBER AMOUNT CAPITAL (DEFICIT) INCOME EQUITY
-------------- -------------- ---------------- ---------------- ---------------- --------------
Balances at December 31, 1997 400 $ 4 $ 2,398 $ (22) $ 2,380
Issuance of common shares - 1 - - 1
Drawings of partners - - (801) - (801)
Net income - - - 1,991 1,991
-------------- -------------- ---------------- ---------------- --------------- --------------
Balances at December 31, 1998 400 5 1,597 1,969 3,571
Issuance of common shares 10 10 - - 10
Drawings of partners - - (3,480) - (3,480)
Net income - - - 5,848 5,848
Change in unrealized gain
on investments $ 11,157 11,157
-------------- -------------- ---------------- ---------------- --------------- --------------
Balances at October 31, 1999 410 $ 15 $ (1,883) $ 7,817 $ 11,157 $ 17,106
-------------- -------------- ---------------- ---------------- --------------- --------------
-------------- -------------- ---------------- ---------------- --------------- --------------
The accompanying notes are an integral part of these
financial statements.
9
TELINNOVATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, OCTOBER 31,
1998 1999
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,991 $ 5,848
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of investment in Ditech - (1,790)
Loss on disposal of property and equipment 1 -
Depreciation and amortization 11 17
Interest income (90) (45)
Ditech shares received for technology purchase (250) -
Changes in operating assets and liabilities:
Accounts receivable (22) 47
Prepaid expenses (5) (1)
Accounts payable 5 9
Accrued compensation - (11)
--------------- ---------------
Net cash provided by operating activities 1,641 4,074
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment in Ditech - 1,847
Purchase of investments (302) (325)
Purchase of property and equipment (53) (27)
--------------- ---------------
Net cash provided by (used in) investing activities (355) 1,495
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 1 10
Drawings of partners (801) (3,480)
--------------- ---------------
Net cash used in financing activities (800) (3,470)
--------------- ---------------
Net increase in cash and cash equivalents 486 2,099
Cash and cash equivalents at beginning of period 229 715
--------------- ---------------
Cash and cash equivalents at end of period $ 715 $ 2,814
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of these
financial statements.
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TELINNOVATION
NOTES TO COMBINED FINANCIAL STATEMENTS
TEN MONTHS ENDED OCTOBER 31, 1999 AND YEAR ENDED DECEMBER 31, 1998
1. BASIS OF PRESENTATION
Telinnovation (the "Company"), as presented in these financial
statements, is the combination of three entities, Telinnovation (a
partnership), Telinnovation Corporation (an S-corporation), and Telinnovation
Service Corporation (an S-corporation), which are all under common control.
Effective February 1, 2000, Ditech Communications Corporation acquired from
the Company the operating assets relating to an echo cancellation business.
Historically, combined financial statements were not prepared for the
three Telinnovation entities. The accompanying statements were prepared to
comply with the rules and regulations of the Securities and Exchange
Commission. These financial statements are derived from the three
Telinnovation entities historical accounting records and intercompany
transactions and balances have been eliminated.
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company derives the significant portion of its revenue from the
licensing of echo cancellation technology. Customers pay royalties to the
Company for each unit they sell which employs the Company's technology. Revenue
is recorded by the Company as notified by the licensee.
INCOME TAXES
There is no provision for income taxes in the financial statements of the
Company. Each partner or shareholder is individually liable for their own tax
payments on their share of the income of the Company.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, investments and accounts
receivable. The Company's accounts receivable are derived from revenue earned
from customers located in the U.S., Canada, France, China, Germany, Belgium,
Italy and Israel. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers.
During the year ended December 31, 1998, three customers accounted for
93% (52%, 30% and 11%, respectively) of net revenues. During the ten months
ended October 31, 1999, two customers accounted for 95% (89% and 6%) of net
revenues. At December 31, 1998, three customers accounted for 36%, 29% and 26%
of total accounts receivable, respectively. At October 31, 1999, no customer
accounted for greater than 10% of total accounts receivable.
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.
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TELINNOVATION
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
TEN MONTHS ENDED OCTOBER 31, 1999 AND YEAR ENDED DECEMBER 31, 1998
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable and accounts payable
are considered to approximate fair value because of their short maturities.
The fair value of investments are determined using quoted market prices for
those securities or similar financial instruments (see Note 4).
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
such assets.
INTANGIBLE ASSETS
Intangible assets comprise of patents. Intangible assets are amortized on
a straight-line basis over the estimated lives, which is 15 years.
COMPREHENSIVE INCOME
In fiscal 1999, 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. In the
Company's case, other comprehensive income comprises unrealized gains on
available for sale investments.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
yet determined what the effect of SFAS No. 133 will be on the operations and
financial position of the Company. The Company will be required to implement
SFAS No. 133 beginning in 2001.
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3. BALANCE SHEET COMPONENTS
DECEMBER 31, OCTOBER 31,
1998 1999
---------------- ----------------
PROPERTY AND EQUIPMENT, NET (in thousands):
Automobiles $ 44 $ 45
Computer equipment 15 30
Furniture and fixtures 13 12
Lab equipment 100 36
---------------- ----------------
172 123
Less: Accumulated depreciation (128) (70)
---------------- ----------------
$ 44 $ 53
---------------- ----------------
---------------- ----------------
Property and equipment includes no items acquired under capital leases.
4. INVESTMENTS
The following tables summarize the Company's investments (in
thousands):
GROSS UNREALIZED FAIR
COST GAINS VALUE
--------- ---------------- ----------
December 31, 1998
Corporate equity securities $ 102 - $ 102
Ditech Common stock 250 - 250
--------- ---------------- ----------
$ 352 $ - $ 352
--------- ---------------- ----------
--------- ---------------- ----------
October 31, 1999
Corporate equity securities $ 75 $ 20 $ 95
Ditech common stock 193 11,137 11,330
--------- ---------------- ----------
$ 268 $ 11,157 $ 11,425
--------- ---------------- ----------
--------- ---------------- ----------
5. COMMITMENTS
Future minimum lease payments under noncancelable operating, including
lease commitments entered into subsequent to December 31, 1998 and future
minimum sublease rental receipts under noncancelable operating leases are as
follows (in thousand):
1999 $ 9
2000 35
----------------
$ 44
----------------
----------------
6. SHAREHOLDERS' EQUITY
Shareholders' equity as presented in these financial statements, assumes
the combination of the three Telinnovation entities without conversion of
partners' capital into common stock. At inception, Telinnovation Corporation
issued 400,000 common shares to its founders. At inception, Telinnovation
Service Corporation issued 10,000 common shares to its founders. There has been
no other stock issuances. None of the presented entities had a stock option
plan.
7. SUBSEQUENT EVENTS
On February 1, 2000, Ditech Communications Corporation completed an
agreement to purchase the echo cancellation business from the presented
Telinnovation entities for 600,000 shares of Ditech's common stock.
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