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INFORMATION STATEMENT
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1996
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
(AMENDMENT NO. 2)
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------
DATA TRANSLATION II, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-3332230
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
100 LOCKE DRIVE 01752
MARLBORO, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(508) 481-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
TO BE SO REGISTERED: WHICH EACH CLASS IS TO BE REGISTERED:
Common Stock, par value $.01 per share The Nasdaq National Market
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<PAGE>
LOGO
November 26, 1996
Dear Stockholder:
I am pleased to inform you that the Board of Directors of Data Translation,
Inc. ("DTI") has approved a distribution to our stockholders of all the
outstanding shares of common stock of Data Translation II, Inc. ("New DTI").
Following completion of the distribution, New DTI will own and operate DTI's
data acquisition and imaging and commercial products businesses, while DTI
will retain its Media 100(R) business.
In the distribution, each DTI stockholder of record as of the close of
business on November 29, 1996 will receive one share of New DTI for every four
shares of DTI common stock held on such date (plus a cash payment in lieu of
fractional share interests). The distribution will be effective on December 2,
1996, and New DTI stock certificates will be mailed in mid-December.
DTI intends with the distribution to change its name to Media 100 Inc.,
reflecting its sole focus on its retained business, and to utilize "MDEA" as
its Nasdaq ticker symbol. New DTI will take the name Data Translation, Inc.,
which has historically been closely associated with its businesses, and it
intends to assume the "DATX" Nasdaq ticker symbol.
The enclosed Information Statement explains the proposed distribution in
detail and provides financial and other important information regarding New
DTI. You are urged to read it carefully. Holders of DTI common stock are not
required to take any action to participate in the distribution.
Your Board of Directors believes that the distribution, which is designed to
separate these businesses into stand-alone, independent publicly-traded
companies that are able to pursue independent business strategies and develop
separate identities in the marketplace, is in the best interests of both Media
100 and the new Data Translation.
Upon completion of the distribution, I will become chairman and chief
executive officer of the new Data Translation, and John Molinari will become
president and chief executive officer of Media 100. We are enthusiastic about
the distribution and look forward to the future successes of these respective
businesses as independent public companies.
Sincerely,
LOGO
Alfred A. Molinari, Jr.
Chairman and Chief Executive Officer
<PAGE>
INFORMATION STATEMENT
DATA TRANSLATION II, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by Data Translation, Inc. ("DTI") to holders
of record of shares of common stock of DTI, par value $.01 per share (the "DTI
Stock"), at the close of business on November 29, 1996 (the "Record Date"), of
one share of common stock, par value $.01 per share (the "Common Stock"), of a
newly formed Delaware corporation and wholly-owned subsidiary of DTI,
initially called Data Translation II, Inc. (the "Company"), for every four
shares of DTI Stock owned on the Record Date. Simultaneously with the
Distribution, DTI will change its name to Media 100 Inc. and the Company will
change its name to Data Translation, Inc. As a result of the Distribution,
100% of the outstanding shares of Common Stock will be distributed to holders
of the DTI Stock on a pro rata basis. The Company expects the Distribution to
be effective on December 2, 1996 (the "Distribution Date"). It is expected
that certificates representing shares of Common Stock will be mailed to DTI
stockholders on or about December 13, 1996.
As a result of certain transactions entered into in connection with the
Distribution, on and after the Distribution Date, the Company will own
substantially all of the businesses and assets of, and will be responsible for
substantially all of the liabilities associated with, DTI's data acquisition
and imaging, commercial products and networking distribution businesses, as
more fully described herein. DTI will retain its digital media business, which
consists of its Media 100(R) product line.
No consideration will be paid by DTI's stockholders for the shares of Common
Stock. There is no current public trading market for the shares of Common
Stock, although it is expected that a "when-issued" trading market will
develop on or about the Record Date. The Company has applied for listing of
the Common Stock on the Nasdaq National Market under the symbol "DATX."
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NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
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The date of this Information Statement is November 26, 1996.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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SUMMARY.................................................................. 1
SUMMARY HISTORICAL FINANCIAL DATA........................................ 3
INTRODUCTION............................................................. 4
THE DISTRIBUTION......................................................... 4
Background and Reasons for the Distribution............................ 4
Manner of Effecting the Distribution................................... 5
No Fractional Shares................................................... 5
Federal Income Tax Aspects of the Distribution......................... 5
Listing and Trading of the Common Stock................................ 7
SPECIAL FACTORS.......................................................... 8
Future Prospects; Dependence on New Products; No Assurance of
Profitability......................................................... 8
Competition............................................................ 8
Capital Requirements................................................... 8
Certain Tax Considerations............................................. 9
Relationship Between the Company and DTI; Conflicts of Interest........ 9
Ability to Attract Qualified Personnel................................. 9
Absence of History as an Independent Company........................... 9
Dependence on Proprietary Technology................................... 9
Absence of Prior Trading Market for the Common Stock................... 10
Common Stock Dividend Policy........................................... 10
Listing and Trading of DTI Stock....................................... 10
Certain Provisions of the Company's Certificate of Incorporation and
By-laws............................................................... 10
Accounting Treatment................................................... 10
RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE DISTRIBUTION.......... 11
Intercompany Agreements................................................ 11
Distribution Agreement............................................... 11
Intellectual Property Agreement...................................... 12
Use and Occupancy Agreements......................................... 12
Corporate Services Agreement......................................... 13
Board of Directors and Management...................................... 13
PRO FORMA CAPITALIZATION OF THE COMPANY.................................. 14
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY........................ 15
Consolidated Statements of Operations Data............................. 15
Consolidated Balance Sheet Data........................................ 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY............................................ 16
General Overview....................................................... 16
Forward Looking Statements............................................. 16
Discontinued Operations................................................ 16
Results of Operations.................................................. 17
Comparison of Nine Months Ended August 31, 1996 to Nine Months Ended
August 31, 1995....................................................... 17
Comparison of Fiscal Year Ended November 30, 1995 to Fiscal Year Ended
November 30, 1994..................................................... 18
Comparison of Fiscal Year Ended November 30, 1994 to Fiscal Year Ended
November 30, 1993..................................................... 18
Liquidity and Capital Resources........................................ 19
BUSINESS OF THE COMPANY.................................................. 20
Company Overview....................................................... 20
Commercial Products.................................................... 20
Market............................................................... 20
Business Strategy.................................................... 21
</TABLE>
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<TABLE>
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PAGE
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<S> <C>
Product and Technology................................................. 21
Customers and Sales.................................................... 22
Competition............................................................ 23
Data Acquisition and Imaging............................................. 23
Market................................................................. 23
Business Strategy...................................................... 23
Products and Services.................................................. 24
Customers and Sales.................................................... 25
Competition............................................................ 25
Research and Development................................................. 25
Manufacturing............................................................ 25
Proprietary Rights....................................................... 26
Backlog.................................................................. 26
Employees................................................................ 26
Properties............................................................... 27
Legal Proceedings........................................................ 27
MANAGEMENT OF THE COMPANY.................................................. 28
Directors and Executive Officers......................................... 28
Board of Directors and its Committees.................................... 29
Board of Directors Compensation.......................................... 29
Executive Compensation................................................... 29
Stock Options............................................................ 30
Option Exercises and Holdings............................................ 31
Compensation Committee Interlocks and Insider Participation.............. 31
Company Stock Plans...................................................... 31
TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION.......................... 34
CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................... 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 35
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK................................. 37
Authorized and Outstanding Capital Stock................................. 37
Certain Provisions of the Company's Charter and By-laws.................. 37
Statutory Business Combination Provision................................. 39
Transfer Agent and Registrar............................................. 39
INDEPENDENT PUBLIC ACCOUNTANTS............................................. 39
ADDITIONAL INFORMATION..................................................... 40
GLOSSARY................................................................... 41
</TABLE>
ii
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information set forth in this Information Statement, which
should be read in its entirety. Unless the context otherwise requires, (i)
references in this Information Statement to DTI and the Company shall include
DTI's and the Company's respective subsidiaries after the Distribution and (ii)
references in this Information Statement to the Company prior to the
Distribution Date shall refer to the Contributed Businesses as operated by DTI.
DISTRIBUTING CORPORATION: Data Translation, Inc. ("DTI"), which will change
its name to Media 100 Inc. simultaneously with the
Distribution.
DISTRIBUTED CORPORATION: Data Translation II, Inc., a newly formed Delaware
corporation to be renamed Data Translation, Inc.
simultaneously with the Distribution (the
"Company") which, as of the Distribution Date, will
have contributed to it substantially all of the
businesses and assets of, and will be responsible
for substantially all of the liabilities associated
with, DTI's data acquisition and imaging,
commercial products and networking distribution
businesses, as more fully described herein (the
"Contributed Businesses"). On November 11, 1996,
DTI sold a substantial portion of the assets of the
networking distribution business, and the Company
intends to discontinue and wind-up the remainder of
such business as soon as practicable after the
Distribution. See "INTRODUCTION."
PRINCIPAL BUSINESS TO BE
RETAINED BY DTI: DTI will retain its digital media business,
consisting of its Media 100 product line (the
"Retained Business").
PRIMARY PURPOSE OF THE
DISTRIBUTION: To separate the Contributed Businesses from the
Retained Business in order to (i) allow each
company to pursue strategies and investment
opportunities appropriate to its business and size;
(ii) create separate identities for each business
in their respective marketplaces, thereby enhancing
the competitive presence of each company; (iii)
allow management of each of the Company and DTI to
concentrate exclusively on their own businesses,
without regard for the policies and objectives of
the other company; (iv) allow implementation of
more effective equity incentive compensation plans
through the creation of separate publicly traded
equity securities that will be more closely linked
to the separate businesses of the two companies,
thereby enhancing the ability of both companies to
attract, retain, and motivate key personnel; and
(v) allow each of the Company and DTI to position
themselves to obtain lower cost, industry specific
debt and equity financing by presenting the
financial community with simpler, more coherent
credit and investment profiles.
SHARES TO BE DISTRIBUTED: Approximately 2,021,071 shares of Company common
stock, par value $.01 per share (the "Common
Stock") based on the shares of DTI common stock,
par value $.01 per share (the "DTI Stock")
outstanding on November 12, 1996. The shares to be
distributed will be equal to approximately one-
quarter of the number of shares of DTI Stock
outstanding on the Record Date and will constitute
100% of the outstanding shares of Common Stock of
the Company on the Distribution Date.
<PAGE>
DISTRIBUTION RATIO: Each DTI stockholder will receive one share of
Common Stock for every four shares of DTI Stock
held on the Record Date.
FRACTIONAL SHARE Fractional share interests will be sold by the
INTERESTS: Distribution Agent and the cash proceeds
distributed to those stockholders entitled to a
fractional interest. See "THE DISTRIBUTION--No
Fractional Shares."
LISTING AND TRADING The Company has applied for listing of the Common
MARKET: Stock on the Nasdaq National Market ("Nasdaq")
under the symbol "DATX."
RECORD DATE:
Close of business on November 29, 1996.
DISTRIBUTION DATE: December 2, 1996. The shares of Common Stock to be
distributed will be delivered to the Distribution
Agent for distribution to holders of DTI Stock on
the Distribution Date. The contribution of
substantially all of the assets and liabilities of
the Contributed Businesses from DTI to the Company
will become effective on November 30, 1996.
MAILING DATE:
Certificates representing the shares of Common
Stock will be mailed to DTI stockholders on or
about December 13, 1996.
DISTRIBUTION AGENT: Boston EquiServe, L.P. (the "Distribution Agent").
TAX CONSEQUENCES: See "THE DISTRIBUTION--Federal Income Tax Aspects
of the Distribution."
DIVIDEND POLICY: The Company currently intends to reinvest any
earnings in the Company to finance future growth.
Accordingly, the Board of Directors of the Company
does not anticipate paying any cash or other
dividends in the foreseeable future.
RELATIONSHIP WITH DTI
AFTER THE DISTRIBUTION: Following the Distribution, the Company and DTI
will each be operated as an independent public
company. The Company and DTI will, however,
continue to have a relationship pursuant to certain
agreements being entered into between the Company
and DTI in connection with the Distribution
regarding certain services to be provided by the
Company to DTI, use of leased space by DTI, certain
tax matters and other matters. See "RELATIONSHIP
BETWEEN THE COMPANY AND DTI AFTER THE
DISTRIBUTION," and "MANAGEMENT OF THE COMPANY--
Directors and Executive Officers."
SPECIAL FACTORS: Stockholders should carefully consider the matters
discussed under the section entitled "SPECIAL
FACTORS" in this Information Statement.
2
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SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical financial data of the Company should be read
in conjunction with the Company's historical financial statements and the notes
thereto included elsewhere in this Information Statement. The following
financial information relates to the Contributed Businesses as they were
operated as part of DTI and is derived from the historical financial statements
of the Company. The Company's historical financial statements include an
allocation of certain general corporate expenses of DTI which were not directly
related to the Contributed Businesses.
The summary historical financial data that relate to the three years in the
period ended November 30, 1995 have been derived from the historical financial
statements audited by Arthur Andersen LLP, independent public accountants. The
historical financial statements of the Company may not reflect the results of
operations or financial position that would have been obtained had the Company
been a separate, independent company during such periods. See "Notes to
Consolidated Financial Statements--Note 2(j) regarding the nine months ended
August 31, 1995 and 1996."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED NOVEMBER 30, AUGUST 31,
--------------------------------- -------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA(1):
Net sales............... $ 23,733 $ 22,440 $ 21,826 $ 16,359 $ 15,858
Cost of sales........... 9,412 9,355 8,187 6,087 6,034
Income (loss) from
continuing operations.. 121 1,172 1,436 1,267 (560)
Discontinued
operations(2).......... (126) 381 24 120 (2,625)
Net income (loss)....... $ (5) $ 1,553 $ 1,460 $ 1,387 $ (3,185)
Income (loss) from
continuing operations
per share.............. $ 0.86 $ (0.26)
Discontinued operations
per share.............. $ 0.01 $ (1.23)
Net income (loss) per
share.................. $ 0.87 $ (1.49)
Weighted average number
of shares outstanding.. 1,675 2,130
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, 1996
NOVEMBER 30, -------------------
1995 ACTUAL PRO FORMA(3)
------------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.......................................... $ -- $ -- $10,000
Working capital............................... 1,655 2,560 12,560
Total assets.................................. 9,337 7,402 17,402
Long-term debt................................ -- -- --
Total liabilities............................. 3,067 2,606 2,606
Total stockholder's investment................ 6,270 4,796 14,796(4)
</TABLE>
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(1) Does not include incremental annual expenses of approximately $350,000
which the Company expects to incur as the result of being an independent
public company.
(2) Discontinued operations relates to the networking distribution business of
DTI prior to the Distribution. On November 11, 1996, DTI sold a substantial
portion of such business, and the Company intends to discontinue and wind-
up the remainder of such business as soon as practicable after the
Distribution. See "RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE
DISTRIBUTION--Intercompany Agreements--Distribution Agreement."
(3) Adjusted to give effect to the deemed contribution of $10,000,000 from DTI
to the Company after August 31, 1996 and the distribution of its investment
in the Company by DTI to the existing stockholders of DTI in the form of a
one for four stock dividend. The actual amount of cash, which will be
contributed simultaneously with the Distribution, will depend on certain
adjustments based on the net cash flow of the Contributed Businesses after
August 31, 1996 as described in the Distribution Agreement. See
"RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE DISTRIBUTION--
Intercompany Agreements--Distribution Agreement."
r(4) Does not include any tax considerations pertaining to the Distribution.
See "SPECIAL FACTORS--Certain Tax Considerations."
3
<PAGE>
INTRODUCTION
On November 15, 1996, the Board of Directors of DTI (the "DTI Board")
declared a dividend payable to holders of record of DTI Stock at the close of
business on the Record Date of one share of Common Stock for every four shares
of DTI Stock held on the Record Date. The Company expects the Distribution to
be effective on December 2, 1996. Certificates representing the Common Stock
will be mailed to DTI stockholders on or about December 13, 1996. As a result
of the Distribution, 100% of the outstanding shares of Common Stock will be
distributed to DTI stockholders. See "THE DISTRIBUTION--Manner of Effecting
the Distribution."
The Company was formed in September 1996 for the purpose of effecting the
Distribution. As of the Distribution Date, DTI will contribute to the Company
substantially all of the assets and liabilities of the Contributed Businesses.
Prior to the Distribution, DTI operated the Contributed Businesses as its data
acquisition and imaging, commercial products and networking distribution
groups. On November 11, 1996, DTI sold a substantial portion of the assets of
the networking distribution business, and the Company intends to discontinue
and wind-up the remainder of such business after the Distribution. See
"RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE DISTRIBUTION--Intercompany
Agreements--Distribution Agreement."
If you have any questions relating to the Distribution and delivery of
certificates representing shares of Common Stock of the Company, please
contact the Distribution Agent, Boston EquiServe, L.P., Investor Relations
Department, P.O. Box 644, Mail Stop 45-02-64, Boston, MA 02102-0644, Tel. No.
(617) 575-3100.
The Company's principal executive offices are located at 100 Locke Drive,
Marlboro, Massachusetts 01752-1192 and its telephone number is (508) 481-3700.
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
DTI has historically been a leader in the design, development and
manufacture of high performance digital media and data acquisition and imaging
products, as well as engaged in the distribution of networking products
manufactured by third parties. Each of the Company's major markets have been
served by different business groups which consist of units that focus on
specific business niches within those markets.
In April 1996, DTI received the approval of its stockholders at its annual
meeting of stockholders to transfer its digital media business to a newly-
formed Delaware corporation. At the time of the solicitation of proxies for
the annual meeting, the DTI Board believed that the structure proposed at that
time would be most suitable for the organization of its business units.
Further analysis, however, has since lead the DTI Board to determine that a
transfer of its data acquisition and imaging, commercial products and
networking distribution groups to a new subsidiary and the subsequent
distribution of such subsidiary's stock to DTI's stockholders would be a more
advantageous structure for separating the businesses. The DTI Board has,
therefore, restructured the proposed separation of its business units in the
form described herein. In order to effect the Distribution, DTI recently
formed the Company, a Delaware corporation and wholly-owned subsidiary, to
which it will contribute its data acquisition and imaging and commercial
products business groups, as well as the remainder of its networking
distribution business on the Distribution Date. DTI will retain its digital
media business which consists of its Media 100 product line.
The DTI Board believes that the Distribution will: (i) allow each company to
pursue strategies and investment opportunities appropriate to its business and
size; (ii) create separate identities for each business in their respective
marketplaces, thereby enhancing the competitive presence of each company;
(iii) allow management of each of the Company and DTI to concentrate
exclusively on their own businesses, without regard
4
<PAGE>
for the policies and objectives of the other company; (iv) allow
implementation of more effective equity incentive compensation plans through
the creation of separate publicly traded equity securities that will be more
closely linked to the separate businesses of the two companies, thereby
enhancing the ability of both companies to attract, retain, and motivate key
personnel; and (v) allow each of the Company and DTI to position themselves to
obtain lower cost, industry specific debt and equity financing by presenting
the financial community with simpler, more coherent credit and investment
profiles.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in the Distribution Agreement between DTI and the Company (the "Distribution
Agreement"). See "RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE
DISTRIBUTION--Intercompany Agreements--Distribution Agreement."
On the Distribution Date, all of the shares of Common Stock will be
delivered by DTI to the Distribution Agent. As soon as practicable thereafter,
certificates representing shares of Common Stock will be mailed by the
Distribution Agent to holders of record of DTI Stock as of the Record Date on
the basis of one share of Common Stock for every four shares of DTI Stock held
on that date. The actual number of shares of Common Stock to be distributed
with respect to each outstanding share of DTI Stock will depend upon the
number of shares of DTI Stock outstanding on the Record Date. In any event,
100% of the shares of Common Stock will be distributed in the Distribution. No
holder of DTI Stock will be required to pay any cash or other consideration
for the shares of Common Stock received in the Distribution or to surrender or
exchange shares of DTI Stock in order to receive shares of Common Stock. All
such shares of Common Stock will be fully paid and nonassessable and the
holders thereof will not be entitled to any preemptive rights. See
"DESCRIPTION OF THE COMPANY'S CAPITAL STOCK."
Simultaneously with the Distribution, DTI intends to merge its wholly-owned
subsidiary, Media 100 Inc., a Delaware corporation, into DTI in accordance
with Section 253 of the General Corporation Law of the State of Delaware, and
as a result of such merger, the name of DTI shall be changed to "Media 100
Inc." The Company will also change its name by filing an amendment to its
Certificate of Incorporation changing its name to "Data Translation, Inc."
NO FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Common Stock will
be issued to DTI's stockholders in the Distribution. The Distribution Agent
will aggregate fractional shares into whole shares and sell such shares in the
open market at then prevailing prices on behalf of holders who otherwise would
be entitled to receive fractional share interests and such persons will
receive a cash payment in the amount of their pro rata share of the total sale
proceeds, net of any commissions payable in connection with such sale. Such
sales are expected to be made as soon as practicable after the mailing of the
certificates evidencing shares of Common Stock to DTI's stockholders.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
DTI has not requested and does not intend to request a letter ruling from
the Internal Revenue Service (the "IRS"), nor has DTI received an opinion of
counsel on the tax treatment of the Distribution. Further, the Distribution is
not conditioned on the receipt of either a letter ruling from the IRS or an
opinion of counsel that the Distribution qualifies as a tax-free distribution.
The tax treatment of the Distribution is not entirely clear. The
Distribution may not satisfy the IRS' published guidelines for issuing advance
letter rulings on the tax-free treatment of spin-off transactions. However,
based on the law in effect as of the date of this Information Statement and
certain facts beyond the control of the Company and DTI, which are assumed to
be true at the time of the distribution, DTI believes that the Distribution
may qualify as a tax-free distribution under Section 355 of the Internal
Revenue Code of 1986,
5
<PAGE>
as amended (the "Code"), in which case (i) the DTI stockholders would not
recognize income, gain or loss upon the receipt of shares of Common Stock;
(ii) the aggregate tax basis of the shares of DTI Stock and Common Stock held
by the DTI stockholders immediately after the Distribution would be the same
as the tax basis of the shares of DTI Stock held by the DTI stockholders
immediately before the Distribution, allocated in proportion to the fair
market value of each security immediately after the Distribution; (iii) the
holding period of the shares of Common Stock received by the DTI stockholders
would include the holding period of the shares of DTI Stock with respect to
which the Distribution is made, provided that the shares of DTI Stock are held
as a capital asset on the date of the Distribution; and (iv) dispositions of
fractional interests in Common Stock would give rise to capital gain or loss
equal to the difference between the amount of cash received in respect thereof
and the tax basis allocable to such fractional interests, provided that the
shares of DTI Stock are held as capital assets on the Distribution Date.
Provided that certain assumed facts are not determined to be untrue as of
the Distribution Date, DTI intends to take the position that the Distribution
qualifies for tax-free treatment under Section 355 of the Code, and therefore
that it will not recognize gain or loss on the Distribution. Assuming that DTI
takes this position, it will provide each DTI stockholder receiving Common
Stock pursuant to the Distribution with information necessary to comply with
Treasury regulations under Section 355 of the Code requiring that the
stockholder attach a statement to his or her federal income tax return, for
the taxable year in which such Common Stock is received, showing the
applicability of Section 355 of the Code to the Distribution.
The tax-free consequences described above depend on, among other conditions,
there not being sales or other dispositions of Common Stock or DTI Stock
(before or after the Distribution) that would violate the continuity of
interest or anti-device requirements under Section 355 of the Code. If any of
these or other requirements for tax-free treatment is not satisfied, or if the
IRS should successfully assert for any other reason that the Distribution does
not qualify as a tax-free distribution under Section 355(a) of the Code, then
(i) DTI would be required to recognize gain, if any, equal to the excess of
the fair market value of the Common Stock immediately after the Distribution
over DTI's tax basis in that Common Stock; and (ii) each DTI stockholder
receiving shares of Common Stock in the Distribution would be treated as
though each stockholder had received a taxable distribution in an amount equal
to the fair market value of Common Stock received, which would result in (a) a
dividend to the extent of such stockholder's pro rata share of DTI's current
and accumulated earnings and profits, (b) a reduction in such stockholder's
basis in such holder's shares of DTI Stock to the extent that the amount
received exceeds such stockholder's share of earnings and profits, (c) a gain
from the deemed sale or exchange of such shares of DTI Stock and (d) the tax
basis of the Common Stock received in the Distribution would be equal to its
fair market value on the date of the Distribution and a new holding period for
the Common Stock would commence on the day following such date.
In addition, the tax-free consequences to DTI depend on there being no
person (or group of persons subject to the aggregation rules of Section
355(d)(7), (8) or (9) of the Code) who holds a 50-percent interest in the
stock of DTI or the Company that was acquired by purchase (within the meaning
of Section 355(d)(5) of the Code) within the five-year period ending on the
date of the Distribution. Under the consolidated tax return rules of the Code,
each member of DTI's consolidated group (including the Company) would be
severally liable for any tax liability of DTI arising as a result of the
Distribution failing to qualify for tax-free treatment under Section 355 of
the Code. For a description of the tax sharing arrangement entered into
between the Company and DTI in connection with the Distribution, see
"RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE DISTRIBUTION--Intercompany
Agreements--Distribution Agreement."
THE SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS
BASED ON THE CODE, THE REGULATIONS PROMULGATED THEREUNDER BY THE TREASURY
DEPARTMENT AND THE INTERPRETATIONS OF THE CODE AND REGULATIONS BY THE COURTS
AND THE IRS, ALL AS THEY EXIST AS OF THE DATE OF THIS INFORMATION STATEMENT.
THE SUMMARY DOES NOT DISCUSS ALL TAX ASPECTS OF THE DISTRIBUTION THAT MAY BE
RELEVANT TO DTI STOCKHOLDERS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES, NOR
DOES IT ADDRESS THE CONSEQUENCES TO CERTAIN
6
<PAGE>
DTI STOCKHOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE UNITED STATES FEDERAL
INCOME TAX LAWS (SUCH AS NON-RESIDENT ALIEN INDIVIDUALS AND FOREIGN
CORPORATIONS). ALSO THE SUMMARY DOES NOT ADDRESS ANY STATE, LOCAL OR FOREIGN
TAX CONSEQUENCES. DTI STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE DISTRIBUTION, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS AND ANY CHANGES IN FEDERAL
TAX LAWS WHICH OCCUR AFTER THE DATE OF THIS INFORMATION STATEMENT.
LISTING AND TRADING OF THE COMMON STOCK
The Company has applied for listing of the Common Stock on Nasdaq under the
symbol "DATX." The shares of DTI Stock will trade on Nasdaq after the
Distribution Date under the symbol "MDEA." Initially the Company is expected
to have approximately 242 holders of record, based on the number of
stockholders of record of DTI as of November 12, 1996.
A "when-issued" trading market may develop on or about the Record Date. The
term "when-issued" means that shares can be traded prior to the time
certificates are actually available or issued. Prices at which the shares of
Common Stock may trade, on a "when-issued" basis or after the Distribution,
cannot be predicted. See "SPECIAL FACTORS--Absence of Prior Trading Market for
the Common Stock."
The shares of Common Stock distributed to DTI stockholders will be freely
transferable, except for shares of Common Stock received by persons who may be
deemed to be "affiliates" of the Company under the Securities Act of 1933 as
amended (the "Securities Act"). Persons who may be deemed to be affiliates of
the Company after the Distribution generally include individuals or entities
that control, are controlled by, or are under common control with the Company
and may include the directors and principal executive officers of the Company
as well as any principal stockholder of the Company. Persons who are
affiliates of the Company will be permitted to sell their shares of Common
Stock only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemptions afforded by Section 4(2) of the
Securities Act and Rule 144 thereunder.
7
<PAGE>
SPECIAL FACTORS
FUTURE PROSPECTS; DEPENDENCE ON NEW PRODUCT; NO ASSURANCE OF PROFITABILITY
Substantially all of the Company's current revenues and operating profits
are derived from its data acquisition and imaging group. During the Company's
last five completed fiscal years, revenues from this group declined an
aggregate of $3.8 million, or 14.9%. There can be no assurance that such
revenues will not continue to decline, or that any such decline would not have
a material adverse effect on the Company's financial condition and results of
operations.
The Company's future operating results depend in large part on the success
of the Company's new video capture and encoding product called Broadway(TM).
DTI began shipping Broadway at the end of June 1996. There can be no assurance
that Broadway will gain the wide market acceptance and generate the
significant revenues necessary for the Company to remain profitable. The
failure of Broadway to generate such revenues for the Company would have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, the Company expects to be required to reduce
the price of Broadway periodically in order to maintain unit sales levels as a
result of competition and reductions in the cost of technology generally.
There can be no assurance that such price reductions will not cause declines
in the Company's revenues and that any such revenue declines will not cause
the Company to become unprofitable.
In addition, the Company anticipates continuing to invest a significant
amount of its resources on research and development for Broadway and other new
products. The Company also expects increases in certain other operating
expenses relating to the marketing and selling of Broadway and other new
products. Such expenses could cause the Company to become unprofitable, and
there can be no assurance as to when the Company would return to
profitability, if at all.
COMPETITION
The markets for the Company's products are highly competitive. The Company
competes in the data acquisition market principally with National Instruments
Corporation, Computer Boards, Inc. and Keithley Instruments, Inc. and in the
imaging market with Matrox and Imaging Technology Inc., some of which have
substantially greater financial, technical or marketing resources than the
Company. The Company also competes with a number of smaller competitors in
each of these markets. The data acquisition and imaging markets and the
Company's share of such markets have been adversely affected in recent years
by reduced government funding of research, increased competition and lower
levels of corporate capital expenditures. There can be no assurance that such
markets will grow in the future or that the Company can maintain its position
in such markets.
In the commercial products area, the Company currently competes with Sigma
Design's Real Magic Producer(R) and Darim Corporation's hardware encoding
product, MPEGator(R) as well as a number of other competitors whose products
are based on platforms and video standards other than those used by the
Company. There can be no assurance that customers in the markets for the
Company's products will not prefer products offered by the Company's
competitors to those currently offered by the Company, or that the Company's
competitors will not adapt more quickly than the Company to new technologies
or evolving customer requirements. There also can be no assurance that
companies with greater financial, technical or marketing resources who do not
currently compete with the Company will not develop products in the future to
compete with products offered by the Company.
CAPITAL REQUIREMENTS
Following the Distribution, the Company will be responsible for obtaining
its own financing. The Company expects to be required to obtain such financing
from time to time due, in particular, to expected increases in research and
development and other operating expenses. The Company believes that
historically DTI was successfully able to raise equity financing in the public
markets due to investors' belief in the future prospects of
8
<PAGE>
DTI's Media 100 product line. No assurance can be given that the Company will
be able to obtain either debt or equity financing on terms acceptable to the
Company, or at all.
CERTAIN TAX CONSIDERATIONS
Based on the law in effect as of the date of this Information Statement and
on certain facts beyond the control of the Company and DTI assumed to be true
at the time of the Distribution, DTI believes that the Distribution may
qualify as a tax-free distribution under Section 355 of the Code. However,
there is a significant risk that the Distribution may not qualify as a tax-
free distribution. DTI has not requested and does not intend to request a
letter ruling from the IRS nor has DTI received an opinion of counsel on the
tax treatment of the Distribution. Further, the tax treatment of the
Distribution is not entirely clear. The Distribution may not satisfy the IRS'
published guidelines for issuing advance letter rulings on the tax-free
treatment of spin-off transactions. The Distribution is not conditioned on
either the receipt of a letter ruling from the IRS or an opinion of counsel
that the Distribution qualifies as a tax-free distribution. If the
Distribution were to fail to qualify for such tax-free treatment, the
Distribution may be taxable to DTI and would be taxable to its stockholders
receiving Company Stock pursuant thereto. See "THE DISTRIBUTION--Federal
Income Tax Aspects of the Distribution."
RELATIONSHIP BETWEEN THE COMPANY AND DTI; CONFLICTS OF INTEREST
Conflicts of interest may arise between the Company and DTI in a number of
areas relating to their past and ongoing relationships, including potential
competitive business activities, international marketing functions, tax and
employee benefit matters and indemnity arrangements. Several of the current
executive officers of the Company are former executive officers of DTI. In
addition, the Chief Executive Officer and Chairman of the Board of the Company
will continue to serve on the Board of Directors of DTI, and his son will be
the Chief Executive Officer and a director of DTI. These relationships may
create conflicts of interest with respect to matters potentially or actually
involving or affecting the Company and DTI. Further, although neither the
Company nor DTI presently intends to engage in the business currently
conducted by the other, neither company is contractually obligated not to do
so. Moreover, following the Distribution, each company will be cross-licensed
to use the technology of the other. See "RELATIONSHIP OF THE COMPANY AND DTI
AFTER THE DISTRIBUTION."
ABILITY TO ATTRACT QUALIFIED PERSONNEL
The businesses of each of the Company and DTI are dependent upon each
company's ability to attract and retain highly qualified managerial, technical
and sales personnel. Competition for such personnel is intense, and following
the Distribution the Company and DTI may compete with each other as well as
third parties for such personnel. There can be no assurance regarding the
impact of the Distribution on the ability of each of the Company and DTI to
retain its key managerial, technical and sales personnel or to attract,
assimilate or retain such personnel in the future. The inability of either
company to attract and retain such personnel could have a material adverse
effect on the business, results of operations and financial condition of such
company.
ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY
The Company was formed for the purpose of effecting the Distribution and
does not have an operating history as an independent company. Accordingly, the
financial statements included herein may not necessarily reflect the results
of operations, financial position and cash flows of the Contributed Businesses
had the Company been operated independently during the periods presented. See
Historical Financial Information.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon its proprietary technology.
The Company relies principally upon patent, trademark, copyright and trade
secret protection to protect its proprietary technology. There can be no
assurance such measures are adequate to protect the Company's proprietary
technology or that
9
<PAGE>
third parties will not assert infringement claims in the future or that such
claims will not be successful. See "BUSINESS OF THE COMPANY--Proprietary
Rights" and "RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE DISTRIBUTION--
Intercompany Agreements--Intellectual Property Agreement."
ABSENCE OF PRIOR TRADING MARKET FOR THE COMMON STOCK
There has not been any established public market for the trading of the
Common Stock, although a "when-issued" trading market may develop on or about
the Record Date. The Company has applied for listing of the Common Stock on
Nasdaq. There can be no assurance, however, that a liquid trading market for
the Common Stock will develop, or that listing of the Common Stock on Nasdaq
will be maintained. There also can be no assurance as to the prices at which
the Common Stock will trade before or after the Distribution Date. Until the
Common Stock is fully distributed and an orderly market develops, the prices
at which shares trade may fluctuate significantly. Prices for shares of Common
Stock will be determined in the marketplace and may be influenced by many
factors other than the financial performance and prospects of the Company,
including the depth and liquidity of the market for the shares, investor
perception of the Company and the industry in which the Company participates
and general economic and market conditions.
COMMON STOCK DIVIDEND POLICY
Consistent with DTI's historical policy, the Company currently intends to
reinvest any earnings to finance future growth. Accordingly, the Board of
Directors of the Company does not anticipate paying any cash or other
dividends in the foreseeable future.
LISTING AND TRADING OF DTI STOCK
It is expected that the DTI Stock will continue to be listed and traded on
Nasdaq after the Distribution. Following the Distribution, the Company's
financial results will no longer be consolidated with those of DTI, and DTI's
assets and revenues will be substantially lower than prior to the
Distribution. Accordingly, as a result of the Distribution, the trading price
range of the DTI Stock immediately after the Distribution may be significantly
lower than the trading price range of the DTI Stock prior to the Distribution.
The combined trading prices of the DTI Stock and the Common Stock after the
Distribution may be less than the trading price of the DTI Stock prior to the
Distribution. The prices at which the DTI Stock trades after the Distribution
will be determined by the marketplace and may be influenced by many factors,
other than the financial performance and prospects of the Company, including
the continuing depth and liquidity of the market for the DTI Stock, investor
perception of DTI's remaining businesses, dividend policy and general economic
and market conditions.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Certificate of Incorporation and By-laws as of the
Distribution Date and applicable law contain provisions that may have the
effect of delaying, deterring or preventing a change in control of the
Company. In addition, the Company's Certificate of Incorporation authorizes
the issuance of up to 30,000,000 shares of Common Stock and 5,000,000 shares
of preferred stock (the "Preferred Stock"). The Company's Board has the
authority to determine the price and terms under which any such additional
capital stock may be issued and to fix the terms of the Preferred Stock and
stockholders of the Company do not have preemptive rights with respect
thereto. See "PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS--Certain Charter and By-law Anti-Takeover and Other
Provisions."
ACCOUNTING TREATMENT
Effective with its quarterly financial statements with respect to its fiscal
quarter ended August 31, 1996, DTI will present the business of the Company
and its subsidiaries as a discontinued operation to the extent financial
information for periods prior to the Distribution is required to be included
in DTI's historical financial statements.
10
<PAGE>
RELATIONSHIP BETWEEN THE COMPANY
AND DTI AFTER THE DISTRIBUTION
For purposes of an orderly transfer on the Distribution Date of the
Contributed Businesses to the Company and an orderly transition to the status
of two separate independent companies, the Company and DTI have entered or
will enter into various agreements and relationships, including those
described in this section. The forms of agreements summarized in this section
are included as exhibits to the Company's registration statement on Form 10
(the "Registration Statement"), as filed with the Securities and Exchange
Commission (the "Commission") of which this Information Statement forms a
part, and the following summaries are qualified in their entirety by reference
to the agreements as filed.
INTERCOMPANY AGREEMENTS
Distribution Agreement
On or prior to the Distribution Date, the Company and DTI will enter into
the Distribution Agreement, which provides for, among other things, the
principal corporate transactions required to effect the Distribution, the
contribution to the Company of the Contributed Businesses and the assumption
by the Company of related liabilities, the contribution to the Company
simultaneously with the Distribution of an amount in cash and cash equivalents
for use in the Company's business equal to $10 million increased or decreased
based on the net cash flow of the Contributed Businesses after August 31,
1996, less cash used in the disposition of the networking distribution
business, and certain other arrangements between DTI and the Company related
to the Distribution. DTI has agreed to pay fifty-percent of the net costs
incurred by the Company in completing the winding-up of the networking
business, up to a maximum of $500,000. The Contributed Businesses include the
stock of certain of DTI's subsidiaries in Germany and the United Kingdom, the
latter of which includes the networking distribution business.
On November 11, 1996, DTI sold a substantial portion of the assets of the
networking distribution business, and the Company intends to discontinue and
wind-up the remainder of such business as soon as practicable following the
Distribution. Pursuant to the agreement of sale relating to such business, DTI
and the Company have agreed in general not to engage in any business in the
United Kingdom which competes with the business so sold for a period of three
years. The Company and DTI have agreed to provide sufficient funding to the
networking distribution business to ensure the payment of all liabilities
associated therewith (provided that such obligation of DTI shall expire upon
the Distribution Date).
The Distribution Agreement will provide for indemnification of DTI by the
Company in a manner designed to place financial responsibility with the
Company for specified liabilities, such as those relating to the networking
distribution business, arising out of the Contributed Businesses, including
such liabilities prior to the Distribution. DTI will indemnify the Company for
liabilities arising out of the Retained Business both prior to and after the
Distribution.
The Distribution Agreement will contain certain provisions relating to
employee compensation and benefits and the treatment of options to purchase
DTI Stock held by both employees of DTI who will become employees of the
Company and employees of DTI who will remain employees of DTI. The
Distribution Agreement will provide for the establishment by the Company of a
stock option plan, an employee stock purchase plan and retirement and savings
plan similar to those maintained by DTI, and the transfer of certain assets
and liabilities relating to the Company's employees from the DTI plans to the
Company's plans. The Distribution Agreement also will provide for the
establishment by the Company of employee welfare plans similar to those
maintained by DTI.
The Distribution Agreement also will provide for a tax sharing arrangement
between the Company and DTI. Pursuant to such agreement, DTI will be solely
responsible for any tax liabilities relating to periods prior to the
Distribution Date, and is entitled to any tax refunds relating to such
periods. After the Distribution Date, each of the Company and DTI will be
responsible for tax liabilities relating to their respective operations. With
respect to any liability relating to the Distribution being deemed a taxable
transaction, DTI will be responsible for 75% of any such liability and the
Company will be responsible for 25% of any such liability; provided, however,
that
11
<PAGE>
if the Distribution is deemed a taxable transaction as a result of certain
actions taken, caused by or within the control of either DTI or the Company,
or as a result of certain acquistions of DTI or the Company, such party shall
be solely responsible for the resulting tax liability.
The Distribution Agreement will further provide that each of the Company and
DTI shall be granted access to certain records and information in the
possession of the other and, subject to certain exceptions, requires the
retention by each of the Company and DTI of all such information in its
possession in accordance with its record retention program. The Distribution
Agreement will also provide that DTI will bear all expenses incurred by the
Company and DTI in connection with the Distribution. It is expected that such
expenses will be approximately $1.8 million.
Intellectual Property Agreement
On or prior to the Distribution Date, the Company and DTI will enter into an
Intellectual Property Agreement, pursuant to which DTI will assign to the
Company those trademarks, trade secrets, know-how, patents and patent
applications that are used exclusively or primarily in the Contributed
Businesses. DTI will retain the trademarks, trade secrets, know-how, patents
and patent applications that are used exclusively or primarily in the Retained
Business.
The Intellectual Property Agreement will further provide for royalty-free
perpetual cross-licenses to each of DTI and the Company, as the case may be,
for all technologies covered by existing patents and patent applications held
by DTI and the Company, respectively. The parties will also cross-license to
each other technologies under patents issued pursuant to applications made in
the two-year period following the Distribution. The parties may not sell or
sublicense technology to which they are the licensee; rather they may only use
such technology in their own products. The cross-licensed technology may only
be contributed by the licensee in connection with a sale of the licensee's
business as a going concern. The cross-licenses provide for termination upon a
change in control with respect to patents issued pursuant to applications made
after August 31, 1996, although the licensee may continue to use such patents
in products already being shipped or which are substantially near completion
of development.
The parties will also cross-license each other under trade secrets and know-
how. Like the patent cross-licenses, these licenses will be royalty-free and
only transferable in the event of a sale of the business as a going concern.
All employees of each company will sign non-disclosure agreements which
acknowledge non-disclosure obligations with respect to the other company.
Use and Occupancy Agreements
On or prior to the Distribution Date, the Company and DTI will enter into
various use and occupancy agreements (the "Use and Occupancy Agreements") with
respect to use by DTI following the Distribution of facilities leased by the
Company. The Company will grant to DTI a license to use a portion of the
Company's facility in Marlboro, Massachusetts, as well as certain shared
equipment contributed to the Company, so as to enable DTI to conduct
operations at such facility. See "BUSINESS OF THE COMPANY--Properties." DTI
will pay the Company a monthly license fee for the use of such facility and
shared equipment of approximately $105,377. Such license agreement shall
remain in effect until April 30, 1997.
In addition, pursuant to such Use and Occupancy Agreements, the Company
shall also grant to certain subsidiaries of DTI a license to use a portion of
the Company's facilities in Wokingham, Berkshire, England and in Bietigheim-
Bissingen, Germany for a transitional period. See "BUSINESS OF THE COMPANY--
Properties."
DTI has indicated that in each case, it intends to find a new space for its
operations prior to the expiration of the agreements.
12
<PAGE>
Corporate Services Agreement
On or prior to the Distribution Date, the Company and DTI will enter into a
Corporate Services Agreement pursuant to which the Company has agreed to
provide DTI with certain corporate services. The Company will provide DTI with
accounting and finance, information systems and support, purchasing support,
material planning, mail, shipping and receiving, invoicing, document control,
second shift supervision and environmental stress screening. The amount that
DTI initially shall pay for such services will be based upon the particular
service and will initially be an aggregate amount of approximately $35,000 per
month. DTI may terminate any service upon 30 days prior written notice to the
Company, with an appropriate adjustment in the fees. The Company may terminate
any service upon 30 days notice to DTI if it no longer provides such service
to its own organization. The Corporate Services Agreement shall terminate upon
the earlier of the discontinuance or termination of all services thereunder or
December 31, 1997. During the transition period following the Distribution
Date, DTI may request that the Company provide additional services to DTI
until DTI is able to otherwise contract or arrange for such services, in which
case DTI and the Company have agreed to negotiate in good faith as to the
scope of such services and the terms and conditions under which such services
may be provided.
BOARD OF DIRECTORS AND MANAGEMENT
Alfred A. Molinari, Jr., who will serve as Chairman of the Board of
Directors and Chief Executive Officer of the Company, will also continue to
serve on the Board of Directors of DTI. See "MANAGEMENT OF THE COMPANY." Mr.
Molinari's son, John A. Molinari, will serve as a director and Chief Executive
Officer of DTI. Alfred A. Molinari, Jr. and members of his family, including
John A. Molinari, who hold a significant number of shares of DTI Stock will
also own a significant number of shares of Common Stock following the
Distribution. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT." These relationships may give rise to potential conflicts of
interest should the interests of the Company and DTI be different. See
"SPECIAL FACTORS--Relationship Between the Company and DTI; Conflicts of
Interest."
13
<PAGE>
PRO FORMA CAPITALIZATION OF THE COMPANY
The following table sets forth the unaudited pro forma capitalization of the
Company at August 31, 1996. This data should be read in conjunction with the
pro forma balance sheet appearing elsewhere in this Information Statement. The
pro forma information may not reflect the capitalization of the Company in the
future or as it would have been had the Company been a separate, independent
company on August 31, 1996. In addition, it does not include any tax
considerations pertaining to the Distribution. See "SPECIAL FACTORS--Certain
Tax Considerations." Assumptions regarding the number of shares of the
Company's Common Stock may not reflect the actual numbers on the Distribution
Date. See Consolidated Financial Statements and the notes thereto.
<TABLE>
<CAPTION>
AUGUST 31, 1996
----------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Long-term debt.......................................... $ -- $ --
Stockholder's Investment:
Investment by DTI..................................... 4,796,000 --
Preferred Stock, $.01 par value per share, 5,000,000
shares authorized, none issued....................... -- --
Common Stock, $.01 par value per share, 30,000,000
shares authorized, 2,017,571 shares issued pro forma
as adjusted.......................................... -- 20,000
Additional paid-in capital............................ -- 14,776,000
Cumulative translation adjustment..................... -- --
---------- -----------
Total Stockholder's Investment.......................... 4,796,000 14,796,000
---------- -----------
Total Capitalization................................ $4,796,000 $17,402,000
========== ===========
</TABLE>
14
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The following data has been derived from the Company's consolidated
financial statements which have been audited by Arthur Andersen LLP,
independent public accountants, as of and for the fiscal years in the five
year period ended November 30, 1995. The data as of August 31, 1996 and for
the nine month periods ended August 31, 1995 and 1996 are derived from the
Company's Unaudited Consolidated Financial Statements that are included
elsewhere in this information statement and include, in the opinion of
management, all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation of this information. The data should be read
in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY" and the Consolidated
Financial Statements and the notes thereto and other financial information
included elsewhere in this Information Statement.
This selected historical financial data relates to the Contributed
Businesses as they were operated as part of DTI. They also include an
allocation of certain general corporate expenses of DTI which were not
directly related to these businesses. The historical financial data of the
Company may not reflect the results of operations or financial position that
would have been obtained had the Company been a separate, independent company.
The results of operations for the nine month period ended August 31, 1996
should not necessarily be taken as indicative of the results of operations
that may be expected for the entire year 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED NOVEMBER 30, AUGUST 31,
------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA(1):
Net sales............... $25,647 $24,775 $23,733 $22,440 $21,826 $ 16,359 $ 15,858
Cost of sales........... 10,627 9,793 9,412 9,355 8,187 6,087 6,034
------- ------- ------- ------- ------- -------- ---------
Gross profit........... 15,020 14,982 14,321 13,085 13,639 10,272 9,824
Research and development
expenses............... 4,114 3,820 3,165 3,041 2,806 1,950 2,713
Selling and marketing
expenses............... 8,348 8,681 8,154 6,212 6,799 5,001 6,492
General and
administrative
expenses............... 3,178 2,948 2,580 1,924 1,627 1,210 1,465
------- ------- ------- ------- ------- -------- ---------
Income (loss) from
operations............ (620) (467) 422 1,908 2,407 2,111 (846)
Interest expense, net... (20) (10) (16) (1) (7) 1 --
Other income (expense).. (127) (23) (210) 63 2 -- (88)
------- ------- ------- ------- ------- -------- ---------
Income (loss) from
continuing operations
before provision
(benefit) for income
taxes................. (767) (500) 196 1,970 2,402 2,112 (934)
Provision (benefit) for
income taxes........... -- -- 75 798 966 845 (374)
------- ------- ------- ------- ------- -------- ---------
Income (loss) from
continuing
operations............ (767) (500) 121 1,172 1,436 1,267 (560)
Discontinued
operations(2).......... (455) (142) (126) 381 24 120 (2,625)
------- ------- ------- ------- ------- -------- ---------
Net income (loss)...... $(1,222) $ (642) $ (5) $ 1,553 $ 1,460 $ 1,387 $ (3,185)
======= ======= ======= ======= ======= ======== =========
Income (loss) from
continuing operations
per share.............. $ 0.86 $ (0.26)
Income (loss) from
discontinued operations
per share.............. $ 0.01 $ (1.23)
Net income (loss) per
share.................. $ 0.87 $ (1.49)
======= =========
Weighted average shares
outstanding........... 1,675 2,130
======= =========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31, 1996
-------------------- --------------------
1993 1994 1995 ACTUAL PRO FORMA(3)
------ ------ ------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........... $ -- $ -- $ -- $ -- $10,000
Working capital..................... 627 1,523 1,655 2,560 12,560
Total assets........................ 8,354 7,769 9,337 7,402 17,402
Total liabilities................... 3,332 2,792 3,067 2,606 2,606
Total stockholder's investment...... 5,022 4,977 6,270 4,796 14,796(4)
</TABLE>
- -------
(1) Does not include incremental annual expenses of approximately $350,000
which the Company expects to incur as the result of being an independent
public company.
(2) Discontinued operations relates to the networking distribution business of
DTI prior to the Distribution. On November 11, 1996, DTI sold a
substantial portion of the assets of the networking distribution business,
and the Company intends to discontinue and wind-up the remainder of such
business as soon as practicable after the Distribution.
(3) Adjusted to give effect to the deemed contribution of $10,000,000 in cash
and cash equivalents from DTI after August 31, 1996 and the distribution
of the investment by DTI to the existing stockholders of DTI in the form
of a one-for-four stock dividend. The actual amount of cash and cash
equivalents, which will be contributed simultaneously with the
Distribution, will depend on certain adjustments based on the net cash
flow of the Contributed Businesses after August 31, 1996 as described in
the Distribution Agreement.
(4) Does not include any tax considerations pertaining to the Distribution.
See "SPECIAL FACTORS--Certain Tax Considerations."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
GENERAL OVERVIEW
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company is based upon the separate historical
financial statements of the Company, which present the Company's results of
operations, financial position and cash flow. These historical financial
statements include the assets, liabilities, income and expenses that were
directly related to the Contributed Businesses as they were operated within
DTI. In the case of assets and liabilities not specifically allocable to any
particular business of DTI, only those assets and liabilities expected to be
owned by the Company after the Distribution were included in the Company's
separate balance sheets. Regardless of the allocation of these assets and
liabilities, however, the Company's statement of operations includes all of
the related costs of doing business, including charges for the use of
facilities and for employee benefits, and includes an allocation of certain
general corporate expenses of DTI which were not directly related to the
Contributed Businesses, including costs for corporate logistics, corporate
research and development, information technologies, finance, legal and
corporate executives. These allocations were based on a number of factors
including, for example, personnel, space, time and effort, and sales volume.
Management believes these allocations as well as the assumptions underlying
the development of the Company's separate financial statements to be
reasonable.
The financial information included herein may not, however, necessarily
reflect the results of operations, financial position and cash flows of the
Company as it will operate in the future or what the results of operations,
financial position and cash flows would have been had the Company been a
separate, stand-alone entity during the periods presented. This is due, in
part, to the historical operation of the Company as an integral part of the
larger DTI. The historical financial information included herein also does not
reflect any changes which may occur in the operations of the Company following
the Distribution.
The Company historically has operated as part of DTI. Following the
Distribution, the Company will be a stand-alone entity with objectives and
strategies separate from those of DTI. The Company will focus on providing
products in the data acquisition, imaging and consumer video editing
industries.
FORWARD LOOKING STATEMENTS
Certain information, other than the historical information, discussed in the
following Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company (and elsewhere in this Information
Statement) may constitute forward looking statements and as such may involve
risks and uncertainties. Important factors which may cause actual results to
differ from the forward looking statements contained herein or in other public
statements by the Company are described under the caption titled "SPECIAL
FACTORS," including, in particular, the Company's ability to implement
successfully its reorganization plan and future business strategy. See
"SPECIAL FACTORS."
DISCONTINUED OPERATIONS
On July 30, 1996, DTI announced its strategic decision to discontinue the
operations comprising its networking business. The networking business has
historically been operated by Data Translation Networking Limited
("Networking") which distributed, integrated and supported enterprise-wide
networking products manufactured by third party suppliers in the United
Kingdom. The Company estimates a loss on disposal of $1,563,000 which includes
estimated operating losses of $1,024,000 through the phase out period. Net
sales from Networking were $10,850,000, $15,382,000 and $20,348,000, for the
years ended November 30, 1993, 1994, and 1995, respectively, and $14,604,000
and $16,522,000 for the nine months ended August 31, 1995 and 1996,
respectively. On November 11, 1996, DTI sold a substantial portion of the
assets of the networking distribution business, and the Company intends to
discontinue and wind-up the remainder of such business as soon as practicable
after the Distribution. See "RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER
THE DISTRIBUTION--Intercompany Agreements--Distribution Agreement."
16
<PAGE>
RESULTS OF OPERATIONS
The following table shows certain statement of operations data as a
percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
NOVEMBER 30, AUGUST 31,
-------------------- ------------------
1993 1994 1995 1995 1996
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales......................... 100.0 100.0 100.0 100.0 100.0
Gross margin...................... 60.3 58.3 62.5 62.8 62.0
Research and development
expenses......................... 13.3 13.5 12.9 11.9 17.1
Selling and marketing expenses.... 34.3 27.7 31.1 30.6 40.9
General and administrative
expenses......................... 10.9 8.6 7.5 7.4 9.3
----- ----- ----- -------- --------
Income (loss) from operations..... 1.8 8.5 11.0 12.9 (5.3)
Interest (expense) income and
other, net....................... (1.0) 0.3 (0.0) 0.0 (0.6)
----- ----- ----- -------- --------
Income (loss) from continuing
operations before provision
(benefit) for income taxes....... 0.8 8.8 11.0 12.9 (5.9)
Provision (benefit) for income
taxes............................ 0.3 3.6 4.4 5.2 (2.4)
----- ----- ----- -------- --------
Income (loss) from continuing
operations....................... 0.5 5.2 6.6 7.7 (3.5)
(Loss) income from discontinued
operations....................... (0.5) 1.7 0.1 0.8 (16.6)
----- ----- ----- -------- --------
Net income (loss)................. 0.0 % 6.9% 6.7 % 8.5% (20.1)%
===== ===== ===== ======== ========
</TABLE>
COMPARISON OF NINE MONTHS ENDED AUGUST 31, 1996 TO NINE MONTHS ENDED AUGUST
31, 1995
Net sales for the nine months ended August 31, 1996 were $15,858,000
compared to $16,359,000 for the same period in the prior year, which
represents a decrease of 3.1% or $501,000. Net sales decreased due to lower
unit sales of older mature products as well as lower average selling prices,
offset in part by an increase in unit sales of newly introduced products
utilizing the PCI bus architecture.
Gross margin for the period ended August 31, 1996 was 62.0% of net sales,
compared to 62.8% of net sales for the same period in the prior year. The
decrease in gross margins was primarily due to a less favorable product mix
reflecting lower average selling prices.
Loss from operations for the first nine months of fiscal 1996 was $846,000,
compared to income from operations of $2,111,000 for the same period in the
prior year. This change was primarily due to an increase in operating expenses
over the prior year's period of $2,504,000. Total operating expenses increased
to 67.2% of net sales for the period compared to 49.9% in the prior period.
Research and development expenses were $2,713,000 or 17.1% of net sales
compared to $1,950,000 or 11.9% of net sales for the first nine months of
fiscal 1995. The increase in research and development expenses was the result
of continuing investment in the commercial products group's new MPEG-1 encoder
product, Broadway. Selling and marketing expenses were $6,492,000 or 40.9% of
net sales compared to $5,001,000 or 30.6% of net sales for the first nine
months of fiscal 1995. The increase in selling and marketing expenses was due
largely to the initial marketing promotion of the Company's Broadway product,
which began shipping in June 1996.
The Company had an income tax benefit of $374,000 for the nine months ended
August 31, 1996, compared to a provision for income taxes of $845,000 for the
same period in fiscal 1995. The provision (benefit) for income taxes for both
periods has been calculated on a separate tax return basis. Historically, the
Company filed its tax return as part of a consolidated group with DTI. The
offsetting charge for the provision (benefit) for income taxes has been
included as an element of DTI's net investment in the Company as reflected in
the accompanying consolidated statements of stockholder's investment. The
provision (benefit) for income taxes may not necessarily reflect the
consolidated results of operations of the Company in the future or what they
would have been had it been a separate, stand-alone entity during the periods
presented.
17
<PAGE>
Loss from continuing operations was $560,000 for the nine months ended
August 31, 1996, compared to income from continuing operations of $1,267,000
for the same period in the prior year.
The Company incurred a net loss of $3,185,000 for the nine months ended
August 31, 1996 compared to net income of $1,387,000 for the same period in
the prior year. These results take into account a loss on discontinued
operations of $2,625,000 for the nine months ended August 31, 1996 and income
from discontinued operations of $120,000 for the nine months ended August 31,
1995. See "--Discontinued Operations."
COMPARISON OF FISCAL YEAR ENDED NOVEMBER 30, 1995 TO FISCAL YEAR ENDED
NOVEMBER 30, 1994
Net sales for the fiscal year ended November 30, 1995 were $21,826,000,
which represented a decrease of 2.7%, or $614,000, over the same period in the
prior year. The decrease was primarily the result of a continued shift in the
data acquisition and imaging market toward new, lower priced hardware and
software solutions. Despite the decrease in net sales dollars, data
acquisition and imaging experienced an increase in unit sales from the same
period in fiscal 1994.
Gross margin for fiscal 1995 was 62.5% of net sales, compared to 58.3% of
net sales in the comparable period in the prior year. This increase primarily
reflects higher margins on the Company's manufactured products due to higher
utilization of the Company's manufacturing capacity.
Income from operations for fiscal 1995 was $2,407,000 or 11.0% of net sales,
compared to $1,908,000 or 8.5% of net sales in fiscal 1994. The increase in
operating income of $499,000 can primarily be attributed to the increase in
gross margin as discussed above as well as level operating expenses year to
year.
The provision for income taxes was $966,000 for fiscal 1995, compared to
$798,000 for fiscal 1994. The provision for income taxes for both periods has
been calculated on a separate tax return basis. Historically, the Company
filed its tax return as part of a consolidated group with DTI. The offsetting
charge for the provision for income taxes has been included as an element of
DTI's net investment in the Company as reflected in the accompanying
consolidated statements of stockholder's investment. The provision for income
taxes may not necessarily reflect the consolidated results of operations of
the Company in the future or what they would have been had it been a separate,
stand-alone entity during the periods presented.
Income from continuing operations was $1,436,000 for fiscal 1995, compared
to $1,172,000 in fiscal 1994.
Net income for fiscal year 1995 was $1,460,000 compared to net income of
$1,553,000 for fiscal year 1994. These results take into account income from
discontinued operations of $24,000 for fiscal year 1995 compared to net income
of $381,000 from discontinued operations for fiscal year 1994. See "--
Discontinued Operations."
COMPARISON OF FISCAL YEAR ENDED NOVEMBER 30, 1994 TO FISCAL YEAR ENDED
NOVEMBER 30, 1993
Net sales for the fiscal year ended November 30, 1994 were $22,440,000,
which was a decrease of 5.4%, or $1,293,000, over the same period in the prior
year. The decrease was primarily the result of changes in the product mix.
Demand for older, mature data acquisition and imaging products began to
decline over the prior year, partially offset by the introduction of new,
lower priced hardware products.
The gross margin decreased to 58.3% of net sales, compared to 60.3% of net
sales in fiscal 1993. This decrease was, again, the result of changes in
product demand and the lowering of average selling prices.
Although there was a decrease in both net sales and gross profit, income
from operations for fiscal 1994 was $1,908,000, which was an increase of
$1,486,000 over the same period in the prior year. The increase was primarily
the result of a decrease of $1,942,000 in selling and marketing expenses, and
a decrease of $656,000 in general and administrative expenses over the same
period in the prior year.
18
<PAGE>
The provision for income taxes was $798,000 for fiscal 1994, compared to
$75,000 for fiscal 1993. The provision for income taxes for both periods has
been calculated on a separate tax return basis. Historically, the Company
filed its tax return as part of a consolidated group with DTI. The offsetting
charge for the provision for income taxes has been included as an element of
DTI's net investment in the Company as reflected in the accompanying
consolidated statements of stockholder's investment. The provision for income
taxes may not necessarily reflect the consolidated results of operations of
the Company in the future or what they would have been had it been a separate,
stand-alone entity during the periods presented.
Income from continuing operations was $1,172,000 for fiscal 1994 compared to
$121,000 in fiscal 1993.
Net income for fiscal year 1994 was $1,553,000 compared to a net loss of
$5,000 for fiscal year 1993. These results take into account income from
discontinued operations of $381,000 for fiscal year 1994 compared to a loss
from discontinued operations of $126,000 for fiscal year 1993. See "--
Discontinued Operations."
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Distribution Agreement, simultaneously with the Distribution
DTI will contribute $10,000,000 in cash and cash equivalents to the Company,
for use in the Company's business, which will be increased or decreased based
upon the net cash flow of the Contributed Businesses after August 31, 1996,
less cash used in the disposition of the networking distribution business. DTI
has agreed to pay fifty-percent of the net costs incurred by the Company in
completing the winding-up of the networking business, up to a maximum of
$500,000. The Company plans to fund and support a business plan which includes
continuing investment in channel development, promotion and product
development for Broadway and other new commercial products, as well as other
product areas. Although the Company believes that the proceeds from the
Distribution, together with cash generated from future operations, should be
sufficient to meet the Company's cash requirements for at least twelve months,
it may need to raise additional capital from equity and/or debt sources in
order to finance its anticipated growth. See "RISK FACTORS--Capital
Requirements."
19
<PAGE>
BUSINESS OF THE COMPANY
COMPANY OVERVIEW
Data Translation II, Inc. (the "Company") was incorporated in September,
1996. Following the Distribution, the Company will operate the data
acquisition and imaging and commercial products groups of Data Translation,
Inc. ("DTI") (the "Contributed Business"). The Company will also acquire DTI's
networking distribution group of which the Company intends to divest itself as
soon as practicable after the Distribution. References to "the Company" below
refer to the Contributed Businesses after the Distribution, or as operated by
DTI prior to the Distribution, as the context requires.
The Company has been a leader in the design, development and manufacture of
high performance data acquisition and imaging products. For more than two
decades, the Company's products have provided engineers and scientists with
accurate and timely data for measurement, analysis and process control in a
wide range of industrial, scientific and medical applications. The Company has
sold more than 320,000 data acquisition and imaging products since its
inception. The Company's principal products in this area are data acquisition
and imaging hardware, which are used in personal computers ("PCs") to receive
analog signals, convert them to digital form and process the digital data. The
Company's strategy is to identify existing growth opportunities in the data
acquisition and imaging market.
An outgrowth of the Company's core technology of analog to digital
conversion is its low cost, high performance video capture and encoding system
for Microsoft(R) Windows(R) 95-based PCs called Broadway(TM). Broadway
captures analog video, digitizes it, compresses it into an editable MPEG-1
format, and writes it to disk in real time. The video can then be edited using
the Broadway editing utility or a third-party video editing package, highly
compressed to the MPEG-1 video format, an ISO video compression standard, and
then sent over the Internet or incorporated in presentation packages such as
Microsoft Powerpoint(R). The Company's Broadway product has many applications,
including incorporation of video into home pages on the world wide web (the
"Web"), multimedia presentations, CD-ROM titles and computer-based training.
The Contributed Businesses also include DTI's networking distribution
business in the United Kingdom. On July 31, 1996, DTI announced a plan to
discontinue the networking distribution business. On November 11, 1996, DTI
sold a substantial portion of the assets of the networking distribution
business and the Company intends to discontinue and wind-up of the remainder
of such business as soon as practicable after the Distribution.
COMMERCIAL PRODUCTS
Market
New video and audio technologies are impacting the way in which
presentations and communications are being created and sent. The advancement
of such technologies now allows many PC users to utilize the benefits of video
at increasingly reduced cost. The Company believes the areas offering the
greatest prospects for growth in the use of PC video applications are Web home
pages, business presentations, PC-based training and the production of CD-ROM
titles. OEM Magazine predicts that in 1996, eleven million MPEG-capable PCs
will be shipped. In 1997 thirty-five million will be shipped. The Company
believes this capability to play back high quality MPEG video will inspire
many presentation, training, and Web page authors to use video in their work.
The Company believes that many PC users would consider video clips an
attractive, creative and useful addition to their presentations and other
communications and would utilize them if they were easy to create and it was
affordable to do so. Businesses, for example, could create short, full-motion
video clips to install on their Web home pages showing interviews with
satisfied customers, product demonstrations and personal messages from
celebrity advertisers or corporate executives. Video could also be used to
create multimedia, PC-based corporate training presentations. In addition,
PowerPoint users might also find video an attractive addition to corporate
marketing presentations and other sales and marketing efforts. As a result of
the greatly reduced file sizes created by MPEG-1 compression, video is also
available for use on laptop PCs, even further broadening its
20
<PAGE>
potential applications. For example, sales people could visit prospective
customers and make sophisticated, interactive multimedia presentations,
including video product demonstrations, without the inconvenience of arranging
the availability of TVs, VCRs or overhead or slide projectors.
The Company believes that users in this market will only be attracted by a
high quality product that is easy to use and which can be offered at a
reasonably low price. The Company believes that these users have historically
not utilized video regularly because existing high quality products were too
expensive and too hard to use, and the products which were affordable did not
offer high enough quality for use in professional presentations.
Business Strategy
The Company's strategy for its commercial products, initially Broadway, is
to target low-end business users and consumers with an easy-to-use solution to
create near VHS quality video clips and incorporate such clips into common PC
applications. Historically, the use of video in computer applications was
largely confined to higher-end multimedia professionals. The Company believes
its Broadway product will make video capture and editing available to the low-
end business user and consumer markets due to its relatively lower suggested
retail price of $995 and ease of use compared to traditional systems. Broadway
is an intuitive application which allows virtually anyone to capture and edit
video clips within minutes with very little instruction. The Company believes
that the consumer market for video editing will grow substantially as
technology becomes more affordable and consumers become more familiar with
video applications.
The Company's strategy for its commercial products incorporates the
following critical elements:
. Ease of use. The Company targets customers who do not create video on a
regular basis. Therefore, in order to attract such customers to utilize
products such as Broadway, the product must allow them to incorporate and
edit video simply and easily. The Broadway graphical user interface was
intentionally designed to be used like any other Windows application,
such as Microsoft PowerPoint or Word for Windows(R). A user familiar with
PowerPoint would find using a Broadway system intuitive and could easily
incorporate video into a presentation created with PowerPoint, or with
many other applications.
. Standards based. Historically, video has not been available on
conventional PCs due to the enormous amount of memory and storage space
required to handle traditional video files. In the past several years,
however, compression techniques have been developed to allow standard PCs
to manipulate such files. Such techniques have begun to be standardized
to allow video to be incorporated into the widest variety of
applications. The MPEG-1 format is an ISO standard and is emerging as a
leading industry standard. Most PCs sold today now include playback of
MPEG-1 video as a standard feature. Because Broadway is based on the
MPEG-1 standard, it allows users to incorporate video into many
applications and delivery mechanisms which are also based on such
standard. Broadway allows delivery of MPEG-1 video via the hard drive,
CD-ROM, video CDs, DVD, private networks and the Internet. MPEG video can
be played back on millions of PCs that include either hardware or
software MPEG-1 playback capabilities.
. Affordability. The continued penetration of the PC into the home market
has been brought about by the continuously declining cost of technology.
The Company believes that it is critical to the Company's success to be
able to continue to reduce the cost of its commercial products thereby
making them increasingly affordable for the Company's target customers.
. Distribution to mass market. The Company's marketing strategy for its
commercial products is to achieve broad distribution of such products
through retail outlets, mass distribution centers, value added resellers,
Internet marketers, catalogs, and super stores. This broad distribution
will allow products such as Broadway to be available to consumers at
familiar and convenient purchasing locations.
Product and Technology
Broadway is a high-performance video capture and encoding system for Windows
95 PCs that can be integrated with third party video editing software packages
to edit and produce near VHS quality digital video
21
<PAGE>
clips with CD-quality stereo sound. Using Broadway, a computer user can
capture video from most analog sources, edit the digitized version created by
Broadway, fully compress it to MPEG-1 and then incorporate the finished video
into multimedia applications, such as Web home pages, multimedia presentations
and CD-ROMs. Broadway is comprised of a Peripheral Component Interconnect
("PCI") integrated circuit board and a graphical user interface compatible
with Windows. The Company's standard Broadway package is shipped complete with
Ulead Systems, Inc.'s MediaStudio Pro(TM) video editing software. Broadway is
also designed to be integrated with a variety of other video editing packages,
including Adobe Premiere(R). The standard Broadway package currently has a
manufacturer's suggested retail price of $995.
The first step in the process of creating a video presentation with Broadway
is to capture a clip of analog video from an external source, such as a
camcorder or a VCR. Video capture is the process of converting an analog video
signal into a digital format for storage on a computer disk drive from which
it can be manipulated. To capture a video clip with Broadway, a user first
connects the video source, such as a VCR, to the Broadway PCI board in the
user's PC with a standard video cable. The user then starts the video which
begins to play on the user's computer monitor allowing the user to determine
exactly which video frames to digitize. Using simple point-and-click commands,
the user starts and stops the capture of the video clip from the source video.
The video is automatically digitized and written to the hard disk drive of the
user's PC in an editable digital format.
Once a user has captured the desired video clip and it has been digitized by
Broadway, it can be edited using software utilities which are a part of
Broadway itself. Broadway contains a variety of editing utilities such as
cutting and pasting, saving selections and replacing audio. Broadway also
allows users to combine several video clips in one sequence and to incorporate
fade-to- and fade-from-black transitions. If more sophisticated transitions
are desired, or the user would like to include titles in the video clip, the
third party video editing software integrated with Broadway can perform these
functions. Editing with Broadway is performed in near real time because it
uses hardware to accelerate the editing process.
The final step in creating a video presentation with Broadway is to compress
the edited video clip and to incorporate the edited video into an application
such as a Web home page or a PowerPoint presentation. Compression is necessary
to play back digital video on a PC because of the enormous amount of data
required to create a video image. Fifteen seconds of uncompressed video would
occupy approximately 400 megabytes of disk storage space, far more than the
typical PC could dedicate to one small video clip. In addition, uncompressed
video is infeasible for low bandwidth environments, such as the Internet and
CD-ROMs. There are numerous digital video compression methods, however, the
Company believes that MPEG-1, a standard promulgated by the Moving Picture
Experts Group, is becoming the leading international standard for PC digital
video compression. MPEG-1 reduces digital video file sizes by up to a 200 to 1
ratio, one of the highest data compression ratios of any video compression
standard. Broadway utilizes a robust implementation of the MPEG-1 standard
which uses a combination of hardware and software to fully compress video
clips into the MPEG-1 format at approximately three times real time
(approximately three minutes for a one minute clip). Alternative systems which
use software compression are only able to perform this task at approximately
thirty to sixty times real time (approximately sixty minutes for a one-minute
clip), although such systems are relatively inexpensive. Historically, MPEG-1
compression at the rate provided by Broadway was only available through
service bureaus charging up to $300 per minute of video or sophisticated
computer packages costing in excess of $15,000.
Using the MPEG-1 standard allows Broadway to produce compressed videos which
can be played back at 30 frames per second, the standard, full-motion video
speed. Videos compressed to be played back at speeds slower than 30 frames per
second typically drop frames causing the resulting video to be less than full-
motion and of lower image quality. Once the video clip is compressed and saved
on the user's hard drive in the standard video file format, it is easily
incorporated into applications such as PowerPoint.
Customers and Sales
The Company believes there are three general categories of customers that
will use its commercial products.
. Multimedia content creators and developers. These include CD-ROM title
developers, computer-based training designers, game creators and
professional video service providers.
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. Presentation and Web page creators and developers. This group includes
sales and marketing professionals, financial presenters, trainers and
service providers such as advertising agencies, real estate agencies and
talent agencies.
. Home users. This category includes consumers who want to preserve and
archive their family videos. Valuable, irreplaceable home videos can be
preserved on CD-ROM or on a PC whereas they would ordinarily be subject
to deterioration over time. Additionally, consumers can edit these videos
and enhance their presentation.
Worldwide, the Company's commercial products are sold through a two-tier
distribution network. The Company has direct relationships with international
mass market distributors as well as resellers and value-added resellers
("VARs"). The distributors sell the commercial products to retail outlets as
well as smaller computer resellers and VARs. This allows the Company's
products to be available through any method used by its customers to purchase
their products. The strategy is to make it easy for the customer to purchase
the product by offering a 30-day money back guarantee which eliminates any
possible user concerns or hesitations. The product packaging was designed to
be sold through the retail channel with packaging which is attractive to the
retailer and consumer.
The Company provides end users with free technical support with the purchase
of the product. Broadway includes extensive on-line technical support via the
Company's Web site, as well as documentation which provides a video tutorial
to the non-video user and an intuitive installation guide.
Competition
The Company's greatest competition for the Broadway product includes other
products which include MPEG encoding. Sigma Design's Real Magic Producer, like
Broadway, includes hardware and software encoding. Darim Corporation, another
competitor, offers a hardware encoding product at a similar price point to
Broadway. The Company's Broadway product competes principally on the basis of
price and speed of compression of video. In addition, there are a number of
other competitors whose products are based on platforms and video standards
other than those used by the Company. There can be no assurance that customers
in the markets for the Company's products will not prefer products offered by
the Company's competitors to those currently offered by the Company, or that
the Company's competitors will not adapt more quickly than the Company to new
technologies or evolving customer requirements. There also can be no assurance
that companies with greater financial, technical or marketing resources who do
not currently compete with the Company will not develop products in the future
to compete with products offered by the Company.
DATA ACQUISITION AND IMAGING
Market
The market for the Company's data acquisition and imaging products is
comprised primarily of technical users, such as engineers and scientists,
interested in incorporating the Company's systems in their final products.
These products are designed for the scientific research and analysis, test and
measurement and industrial machine vision inspection markets. End users
include original equipment manufacturers, research laboratories, universities,
hospitals and government agencies. Users require highly accurate, real-time
measurement and control of analog signals, such as temperature, pressure,
sound and video.
The Company believes it is one of the top five suppliers in each market
although the data acquisition and imaging markets are highly fragmented. These
markets have been adversely affected in recent years by reduced government
funding of research and lower levels of corporate capital expenditures.
Business Strategy
In the data acquisition and imaging area, the Company is focused on
providing system solutions which include not only exceptional hardware but
also powerful, easy to use software. The Company will continue to
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invest in its current data acquisition and imaging markets, while identifying
new applications and growth opportunities in the machine vision and inspection
markets.
In the imaging market, the Company is focused on continuing to develop its
Mach(TM) series of PCI-based frame grabbers, leveraging this technology into
two distinct markets, machine vision and scientific image analysis. Both
markets require high accuracy and low-cost hardware. The Company's strategy
will be to continue to focus on its strengths in these areas. In the data
acquisition market, the Company is focused on expanding its market leadership
through continued development of its PCI-based data acquisition products.
These developments are being driven by rapid adoption of PCI bus slots by
personal computer manufacturers. In both data acquisition and imaging, the
Company is pursuing relationships with software companies who offer
application-specific programs in the Company's markets.
Products and Services
The Company's data acquisition and imaging products are designed to
facilitate (i) the high-speed capture of analog signals representing physical
events, such as temperature, pressure, sound and video, (ii) the fast
conversion of such signals into digital form and (iii) the use of such digital
signals in PCs for processing. These capabilities permit customers to use PCs
to identify, measure, analyze and control physical phenomena (data
acquisition) and to analyze or enhance video images (imaging).
The Company's data acquisition and imaging systems consist of plug-in cards
and Windows-based software which provide an integrated, high performance
systems solution to the general scientific and measurement marketplace. These
systems allow customers to configure their own PC-based data acquisition,
signal processing or imaging system with higher performance and lower cost
than alternative pre-packaged or custom-integrated systems. Users are able to
integrate these products more quickly into their systems, thereby reducing
their development time. Over a three year period the Company defined and
developed DT-Open Layers(R), a standard set of software protocols under the
Microsoft Windows operating system. DT-Open Layers simplifies programming and
accelerates the development of new software products and permits customers to
replace circuit boards and add new functions. These products offer leading-
edge functionality for data acquisition and imaging under Windows while
allowing customers to protect their software investments and develop solutions
more quickly.
The Company sells over 300 data acquisition and imaging products, which
range in retail price as of August 31, 1996 from $199 to $4,995. Domestically,
the Company sells such products to end users, VARs, system integrators and
original equipment manufacturers ("OEMs"). Internationally, the Company sells
through its wholly-owned subsidiaries, as well as through resellers and
independent distributors. Such prices do not reflect distributor discounts for
international sales, which range from approximately 20% to 35% on hardware
products and up to approximately 50% on software applications.
Data acquisition products provide capabilities ranging from simple
measurement to advanced digital signal processing functions. While
researchers, systems integrators and OEMs have been predominant data
acquisition users in the past, new data acquisition markets have emerged in
the industrial and medical areas, such as industrial inspection, medical
diagnostic/therapeutic applications, high-performance control, vibration
analysis, acoustics and test and measurement applications. Customers
incorporate the Company's data acquisition boards into PCs to measure real-
world parameters, including temperature, pressure, acceleration and sound; to
analyze this data; and to use the results to control real-world events and
processes.
The Company's imaging products may be used in a number of applications. In
machine vision applications, images can be captured and processed immediately
in real time for fast, accurate inspection of manufactured parts. In
scientific imaging applications, images can be captured from video cameras for
analysis, or images can be captured from cameras mounted on microscopes to
identify and count cells. In medical applications, images can be captured from
different diagnostic devices, such as CAT scanners or ultrasound imaging
devices, for enhancement, analysis and display.
24
<PAGE>
The Company has incorporated several new technologies in its products. For
example, the Company's frame grabber, a product which combines software with
proprietary circuits that permit users to acquire data from a variety of video
inputs, now utilizes the PCI bus architecture. In addition, the Company has
begun using the Display Connect Interface ("DCI") standard in certain of the
Company's frame grabber products.
Customers and Sales
The Company sells its data acquisition and imaging products to end users,
VARs, system integrators and OEMs for use primarily in the scientific, medical
and industrial markets. End users include manufacturers, research
laboratories, universities, hospitals and government agencies.
The Company sells its data acquisition and imaging products through a
comprehensive, widely distributed annual catalog, an in-house telemarketing
force, OEM-focused direct sales, indirect channels (VARs, distributors and
system integrators), and extensive advertising and promotional campaigns. The
Company has a full-time sales and administrative staff of over 26 employees in
the United States to support sales. International sales are supported by three
subsidiaries and various distributors throughout Europe, Asia and the Pacific
rim.
Competition
The Company competes in the data acquisition market principally with
National Instruments Corporation, Computer Boards, Inc. and Keithley
Instruments, Inc. and in the imaging market with Matrox and Imaging
Technology, Inc., all of which may have substantially greater financial,
technical and marketing resources than the Company. The Company also competes
with a number of smaller companies in each of these markets. The Company's
data acquisition and imaging products compete on the ability to supply
extensive hardware and software components with competitive performance and
price.
RESEARCH AND DEVELOPMENT
The Company intends to continue to invest in research and development for
new products and for enhancements to existing products. The Company is
currently targeting spending on research and development at an annual rate of
approximately 12% of net sales. For the nine months ended August 31, 1996, the
Company invested approximately $2,713,000 in product development.
The Company employed, as of August 31, 1996, 30 full-time engineers whose
primary duties relate to product development. Outside firms and consultants
are selectively engaged to develop or assist with development of products when
favorable opportunities exist.
In the data acquisition and imaging area, the new areas for hardware
development include the integration of ASICs (application specific integrated
circuits) into circuit boards, which will reduce cost and advance the
development of new computer bus technologies (e.g., PCI). The Company's
software development in data acquisition and imaging centers on supporting
Windows 95 and Windows NT(TM).
MANUFACTURING
The Company manufactures all of its products at its facility in Marlboro,
Massachusetts. The Company believes its control of manufacturing significantly
contributes to hardware design improvements, and allows for quicker turn-
around of engineering changes for shipment to the market. The Company
periodically assesses its production efficiencies against the benefits of
outsourcing certain hardware production.
In manufacturing, the Company seeks to be the leader in both technology and
management. The Company has adopted the philosophy of Total Quality
Management, a systematic approach to continuous improvement. The Company uses
work cells with higher volume products which, together with Just-In-Time
techniques, allows the Company to reduce throughput time and provide five day
shipment on most customer orders.
25
<PAGE>
The Company's fully integrated assembly and test operations have sufficient
capacity to meet the Company's needs for assembled printed circuit boards. In
addition, the Company designs circuit boards and modules using advanced
computer-aided-design technology. The Company's manufacturing capabilities
include the assembly of fine pitch, surface mounted electronic devices
utilizing state of the art pick and place robotics for high density, multi-
layered, single or double sided boards. A majority of the Company's shipments
incorporate surface-mount components. Initial testing is performed to assure
that products are free from process-related defects after assembly. Following
this, a complete functional test is performed twice on each board, with an
environmental stress screen between tests to eliminate defects and assure
long-term reliability of products. The Company uses automated test equipment
to assure product quality, improve throughput and increase production yields.
Components used in circuit board assembly are generally available from
several distributors and manufacturers. Suppliers are selected based on their
ability to provide defect-free products quickly at low cost. The Company
continuously measures the performance of key suppliers. Special programs are
used to speed availability of material and protect the Company from unplanned
shifts in product demand. These programs include ship-to-stock, and point-of-
use bonding, a program where suppliers hold material on-site at the Company
and as the material is used, title transfers to the Company and payment is
made. Certain components used by the Company do not have ready substitutes or
have been subject to industry-wide shortages. There can be no assurance that
the Company's inventories would be adequate to meet the Company's production
needs during any interruption of supply. The Company's inability to develop
alternative supply sources, if required, or a reduction or stoppage in supply,
could adversely affect its operations until new sources of supply become
available.
PROPRIETARY RIGHTS
Following the Distribution, the Company will hold eight United States
patents, expiring from March 2001 through August 2013, and have three pending
patent applications in the United States, none of which the Company believes
is material. Pursuant to the Company's Intellectual Property Agreement with
DTI, the Company also will have full cross-licenses to technology under DTI's
current patents and patent applications, together with technology resulting
from patent applications which DTI applies for during the two years following
the Distribution. The cross-licensed technology may only be transferred by the
Company in connection with a sale of the Company's business as a going
concern. The cross-licenses provide for termination upon a change in control
with respect to patents issued pursuant to applications made after August 31,
1996, although the licensee may continue to use such patents in products
already being shipped or which are substantially near completion of
development. See "RELATIONSHIP BETWEEN THE COMPANY AND DTI AFTER THE
DISTRIBUTION--Intercompany Agreements--Intellectual Property Agreement."
The Company believes that its success depends primarily upon the proprietary
know-how, innovative skills, technical competence and marketing abilities of
its employees.
BACKLOG
Most customers order products on an as-needed basis, relying, in the case of
most products, on the Company's five-day delivery capability. As a result, the
Company believes that its backlog at any point in time is not indicative of
its future sales.
EMPLOYEES
As of the Distribution Date, the Company expects to employ approximately 160
persons worldwide. None of the employees is represented by a labor union. The
Company believes it has good relations with its employees.
Competition for employees with the skills required by the Company is intense
in the geographic areas in which the Company's operations are located. The
Company believes that its future success will depend on its continued ability
to attract and retain qualified employees, especially in research and
development.
26
<PAGE>
PROPERTIES
DTI maintains its principal executive, engineering, manufacturing and sales
operations in a 103,000 square foot facility located in Marlboro,
Massachusetts. The building is rented under a lease signed by DTI with a
related party trust expiring in 1999. On the Distribution Date, the lease will
be assigned to the Company which will license a portion of the leased space to
DTI pursuant to a Use and Occupancy Agreement. The minimum annual net basic
rent is approximately $1,092,000, which amount will be allocated between the
Company and DTI pursuant to the Use and Occupancy Agreement.
The United Kingdom operations are conducted in an 18,050 square foot
facility in Wokingham, Berkshire, England, that is leased by DTI through a
United Kingdom subsidiary under a twenty-five year net lease. The subsidiary
has an option to terminate the lease in 1997. The minimum annual basic rent is
approximately $257,000 per year. On the Distribution Date the stock of the
subsidiary will be transferred to the Company and the Company will license a
portion of the leased space to DTI for a transitional period.
The German operations are conducted in a 2,420 square foot office facility
in Bietigheim-Bissingen, Germany that is leased under a five-year renewable
lease, expiring in 2000, by Data Translation GmbH. The minimum annual basic
rent is approximately $52,000 per year. On the Distribution Date the stock of
the subsidiary will be transferred to the Company and the Company will license
a portion of the leased space to a subsidiary of DTI for a transitional
period. See "CERTAIN RELATIONSHIPS AND TRANSACTIONS" and "RELATIONSHIP BETWEEN
THE COMPANY AND DTI AFTER THE DISTRIBUTION--Use and Occupancy Agreements."
LEGAL PROCEEDINGS
From time to time, DTI has been involved in disputes and/or litigation with
respect to the products and operations of the Contributed Businesses
encountered in its normal course of business. In accordance with DTI's past
experience, the Company does not believe that the ultimate impact of the
resolution of such other outstanding matters will have a material effect on
the Company's financial condition or results of operations.
27
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Alfred A. Molinari,
Jr..................... 55 Chairman and Chief Executive Officer(1)
Gary B. Godin........... 40 Vice President--Finance and Administration, Chief Financial Officer
Kim J. Gray............. 35 Vice President/General Manager--Data Acquisition and Imaging Group
William T. Hack......... 41 Vice President--Operations
Bruce E. Walsh.......... 38 Vice President--Engineering
Ellen W. Harpin......... 40 Director and Vice President
D'Anne Hurd............. 45 Director(1)(2)(3)
Dr. David Cyganski...... 41 Director(1)(2)(3)
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Ms. Hurd and Dr. Cyganski have agreed to serve as Directors of the Company
as of the Distribution Date and the Company will cause such persons to be
appointed to the Board of Directors on such date.
Mr. Molinari is the Chief Executive Officer and Chairman of the Company. Mr.
Molinari is the founder of DTI, and served as the Chief Executive Officer and
a director of DTI from its inception in 1973 and will resign as Chief
Executive Officer as of the Distribution Date. Mr. Molinari will continue to
serve on the Board of Directors of DTI. Mr. Molinari served as director of
Viewlogic Systems, Inc., which is a supplier of electronic design automation
solutions, from July 1992 to February 1995.
Mr. Godin was appointed Vice President Finance and Administration and Chief
Financial Officer of the Company in September 1996. Mr. Godin has served as
Corporate Controller and Chief Accounting Officer of DTI since August 1992. He
was employed by DTI since May, 1987 and served as Corporate Accounting Manager
until August 1992. As of the Distribution Date, Mr. Godin shall resign from
his offices at DTI.
Ms. Gray was appointed Vice President/General Manager--Data Acquisition and
Imaging Group of the Company in September 1996. Ms. Gray has served in the
same position for DTI since January 1996. Prior to that, she served as Vice
President--Operations of DTI beginning July 1995. She was employed by DTI
since 1979, and during her tenure held various positions in materials,
production and manufacturing service. As of the Distribution Date, Ms. Gray
shall resign from her office at DTI.
Mr. Hack was appointed Vice President of Operations of the Company in
September 1996. Prior to that he served as Director of Operations for DTI
since January 1996. Mr. Hack served as Director of Materials from November
1994 to January 1996. He has been employed by DTI since February 1990 and
during his tenure has held various positions within manufacturing operations,
including Production Manager. As of the Distribution Date, Mr. Hack shall
resign from his office at DTI.
Mr. Walsh was appointed Vice President of Engineering of the Company in
September 1996. Prior to that he served as Director of Engineering for the
Commercial Products Group of DTI since June 1995. He also served as Director
of Software Engineering for the Data Acquisition and Imaging Group of DTI from
June 1994 to June 1995. Mr. Walsh has been employed by DTI since June 1991 and
during his tenure has held various engineering and engineering management
positions. As of the Distribution Date, Mr. Walsh shall resign from his office
at DTI.
28
<PAGE>
Ms. Harpin was appointed a Director of the Company in September 1996. Prior
to that she served as Vice President of Administration for DTI since July
1995. She also served as Chief Financial Officer for DTI from November 1991 to
July 1995. Ms. Harpin has been employed by DTI since March 1983 and during her
tenure has served as Vice President--Finance and Administration, Treasurer,
Vice President Manufacturing and Director of Sales. As of the Distribution
Date, Ms. Harpin shall resign from her office at DTI.
Ms. Hurd will become a Director of the Company on the Distribution Date. Ms.
Hurd has served as a business/legal consultant since January 1995,
specializing in initial public offerings and strategic alliances/joint
ventures. From September 1993 until December 1994, Ms. Hurd was Corporate Vice
President, General Counsel and Clerk and from June 1993 until September 1993
General Counsel of MediSense, Inc., a manufacturer of blood glucose monitors
for people with diabetes. From 1985 to 1993 she was associated with the law
firm of Burns & Levinson in Boston, specializing in corporate and securities
law.
Dr. Cyganski will become a Director of the Company on the Distribution Date.
Dr. Cyganski has served in faculty and administrative positions at Worcester
Polytechnic Institute ("WPI") since July 1981. Since October 1992 Dr.
Cyganski, has been a professor in the WPI Electrical and Computer Engineering
Department. From 1987 until resuming his position as Professor, Dr. Cyganski
held the administrative positions of Chief Information Officer, Vice President
of Information Systems and Vice Provost at WPI.
BOARD OF DIRECTORS AND ITS COMMITTEES
As of the Distribution Date, the Board of Directors will be divided into
three classes, each of whose members will serve for a staggered three-year
term. The Board will be comprised of one Class I Director (Ms. Harpin), two
Class II Directors (Ms. Hurd and Dr. Cyganski) and one Class III Director (Mr.
Molinari). At each annual meeting of stockholders, a class of directors will
be elected to a three-year term to succeed the directors of the same class
whose terms are then expiring. The terms of each of the Class I Director,
Class II Directors and Class III Director will expire upon the election and
qualification of successor directors at the annual meeting of stockholders
held following the end of the Company's fiscal years in 1997, 1998 and 1999,
respectively.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the Directors and executive officers of
the Company.
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation for employees of and consultants to the Company,
establishes and approves salaries and incentive compensation for certain
senior officers and employees. As of the Distribution Date, the members of the
Compensation Committee shall be Ms. Hurd, Dr. Cyganski and Mr. Molinari. The
Audit Committee reviews the results and scope of the financial audit and other
services provided by the Company's independent public accountants. As of the
Distribution Date the members of the Audit Committee shall be Ms. Hurd and Dr.
Cyganski.
BOARD OF DIRECTORS COMPENSATION
The Company compensates each director who is not also an employee of the
Company $7,500 per year plus $500 per meeting for services as a director. In
addition, each non-employee director is eligible to receive options under the
Company's 1996 Stock Option Plan.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid or accrued by DTI to or on behalf of the Chief Executive
Officer of the Company and each of the executive officers of the Company whose
cash compensation exceeded $100,000 annually (the "Named Executive Officers")
in the most recently ended fiscal year.
29
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)(2)
- --------------------------- ---- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Alfred A. Molinari,
Jr. .................... 1995 $223,945 $50,000 100,000 $1,256
Chairman and Chief Exec- 1994 206,700 10,335 -- 422
utive Officer 1993 206,700 -- 20,000 3,138
Kim J. Gray.............. 1995 92,000 25,000 4,000 696
Vice President/General
Manager-- 1994 75,981 2,250 -- 153
Data Acquisition and Im-
aging Group 1993 63,000 -- -- 49
Ellen W. Harpin.......... 1995(3) 93,195 25,000 4,000 364
Director and Vice Presi-
dent 1994 104,712 5,250 20,000 214
1993 100,000 -- 5,000 1,559
</TABLE>
- --------
(1) DTI has not issued stock appreciation rights or granted restricted stock
awards. In addition, DTI does not maintain a "long-term incentive plan,"
as that term is defined in applicable rules.
(2) The amounts for fiscal 1994 represent the dollar value of premiums paid by
DTI on term life insurance for the benefit of the Named Executive
Officers.
(3) Beginning in January 1995, Ms. Harpin has been working a reduced time
schedule.
STOCK OPTIONS
The following table provides information concerning the grant of stock
options under DTI's Key Employee Incentive Plan (1992) to the Named Executive
Officers. For a discussion of the treatment of employee stock options in the
Distribution, see "TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION."
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------- -------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION 5% 10%
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE ($) ($)
---- ---------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Alfred A. Molinari,
Jr..................... 30,616(1) 9.31% $14.365 6/28/00 $ 70,613 $ 204,279
69,384(2) 21.09 13.063 6/28/01 308,204 699,252
Kim J. Gray............. 4,000(3) 1.22 11.00 2/28/01 14,964 33,948
Ellen W. Harpin......... 4,000(3) 1.18 11.00 2/28/01 14,964 33,949
</TABLE>
- --------
(1) These incentive options become exercisable over four years, 25% on each
anniversary of the date of grant and expire five years after grant. The
exercise price is 110% of the fair market value of the Common Stock on the
date of grant.
(2) These non-incentive options become exercisable over five years, 20% on
each anniversary of the date of grant and expire six years after grant.
(3) These incentive options become exercisable over five years, 20% on each
anniversary of the date of grant and expire six years after grant.
30
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides information, with respect to the Named
Executive Officers, concerning the unexercised DTI options held as of the end
of the fiscal year. For a discussion of the treatment of employee stock
options in the Distribution, see "TREATMENT OF EMPLOYEE OPTIONS IN THE
DISTRIBUTION."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alfred A. Molinari,
Jr. ................... 32,000 $374,295 5,000 115,000 $ 72,750 $831,748
Kim J. Gray............. 11,766 99,675 800 5,600 13,800 61,600
Ellen W. Harpin......... 30,666 333,493 30,000 27,000 497,000 362,250
</TABLE>
- --------
(1) Market value of underlying securities at November 30, 1995, minus the
exercise price of "in-the-money" options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of the Distribution Date, Mr. Molinari, the Chief Executive Officer and
Chairman of the Board of Directors of the Company will be a member of the
Compensation Committee of the Board of Directors. See "CERTAIN RELATIONSHIPS
AND TRANSACTIONS" for a description of certain lease payments by the Company
in which Mr. Molinari has an interest.
COMPANY STOCK PLANS
1996 Stock Option Plan
As of the Distribution Date, the Board of Directors shall adopt the
Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") pursuant to
which 500,000 shares of Common Stock are authorized and reserved for issuance.
The 1996 Stock Option Plan permits the grant of (i) options to purchase shares
of Common Stock intended to qualify as incentive stock options under Section
422 of the Code ("Incentive Options") and (ii) options that do not so qualify
("Non-Qualified Options"). The 1996 Stock Option Plan is designed and intended
as a performance incentive for officers, directors, employees, consultants and
other key persons performing services for the Company and its subsidiaries to
encourage such persons to acquire or increase a proprietary interest in the
success of the Company.
Plan Administration. The 1996 Stock Option Plan provides that it shall be
administered either by the entire Board of Directors or a Stock Option
Committee as appointed by the Board of Directors from time to time (in either
case, the "Administrator"). If the Company has a Stock Option Committee, each
member of the Stock Option Committee must be a "Non-Employee Director" within
the meaning of rules promulgated by the Securities and Exchange Commission in
order for specific grants of Incentive Options or Non-Qualified Options to
receive favorable treatment under certain relevant securities laws. The
Administrator may delegate to the Chief Executive Officer of the Company
authority to grant options to persons who are not subject to such securities
laws.
The Board of Directors may discontinue or amend the 1996 Stock Option Plan
at any time. Amendments must be approved by the stockholders if required to
ensure that Incentive Options qualify under the Code. In addition, the rights
and obligations under any option issued prior to an amendment of the 1996
Stock Option Plan cannot be adversely affected by such amendment without the
consent of the optionee.
31
<PAGE>
The Administrator has full power to select, from among the persons eligible
for awards under the 1996 Stock Option Plan, the individuals to whom awards
will be granted, to make any combination of awards to participants, and to
determine the specific terms of each award, subject to the provisions of the
1996 Stock Option Plan. Incentive Options may be granted only to officers or
other employees of the Company or certain subsidiaries, including members of
the Board of Directors who are also employees of the Company or such
subsidiaries. Non-Qualified Options may be granted to officers or other
employees of the Company, directors and to consultants and other key persons
who provide services to the Company or any subsidiary (regardless of whether
they are also employees).
The exercise price of each option granted under the 1996 Stock Option Plan
is determined by the Administrator but, in the case of Incentive Options, may
not be less than 100% of the fair market value of the underlying shares on the
date of grant. No Incentive Option may be granted under the 1996 Stock Option
Plan to any employee of the Company or any subsidiary who owns at the date of
grant shares of stock representing in excess of 10% of the voting power of all
classes of stock of the Company or a parent or a subsidiary unless the
exercise price for stock subject to such option is at least 110% of the fair
market value of such stock at the time of grant and the option term does not
exceed five years. Options generally may not be transferred by the optionee
other than by will or the laws of descent or distribution and may be exercised
only by the optionee during his or her lifetime. In limited circumstances, the
Administrator may permit an optionee to transfer his Non-Qualified Options to
members of the optionee's immediate family, family trusts and partnerships,
and charitable organizations.
The term of each option is fixed by the Administrator and, in the case of an
Incentive Option, may not exceed ten years from the date of grant. The
Administrator determines at what time or times each option may be exercised
and, subject to the provisions of the 1996 Stock Option Plan, the period of
time during which options may be exercised, if any, after termination of
employment for any reason. Options may be made exercisable in installments,
and the exercisability of options may be accelerated by the Administrator.
Upon exercise of options, the option exercise price must be paid in full (i)
in cash or by certified or bank check or other instrument acceptable to the
Administrator, (ii) if the applicable option agreement permits, by delivery of
shares of Common Stock already owned by the optionee, or (iii) through a
"cashless" exercise procedure, subject to certain limitations.
Change of Control Provisions. The 1996 Stock Option Plan provides that in
the case of certain transactions constituting a change in control of the
Company, the 1996 Stock Option Plan and the options issued thereunder shall
terminate upon the effectiveness of any such transaction or event, unless
provision is made in connection with such transaction for the assumption of
options theretofore granted, or the substitution for such options of new
options of the successor entity or parent thereof, with appropriate adjustment
as to the number and kind of shares and the per share exercise price. In the
event of such termination, each holder of outstanding options shall be
permitted to exercise all options whether vested or unvested for a period of
at least 15 days prior to the date of such termination.
Replacement Stock Option Plan
The Board of Directors shall adopt the Company's Replacement Stock Option
Plan (the "Replacement Plan"), effective as of the Distribution Date. The
Replacement Plan will provide for the issuance, effective immediately prior to
the Distribution, of options to purchase shares of Common Stock (the
"Replacement Options") to holders of options to purchase shares of DTI Stock
that were granted under DTI's 1992 Key Employee Incentive Plan and its 1982
Key Employee Incentive Plan and are outstanding on the Distribution Date (the
"DTI Options"), as part of an adjustment to the DTI Options. The number of
shares subject to each Replacement Option, the exercise price therefor and the
other terms and conditions of each Replacement Option shall be determined in
accordance with the applicable provisions of the Distribution Agreement. See
"TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION". It is intended that
Replacement Options issued to employees of the Company ("Transferred
Employees") in respect of DTI Options that qualify
32
<PAGE>
as Incentive Options shall qualify as Incentive Options pursuant to Section
424(a) of the Code. Replacement Options issued to persons other than
Transferred Employees and Replacement Options issued to Transferred Employees
in respect of DTI Options that do not qualify as Incentive Options will be
Non-Qualified Options.
The Replacement Plan shall be administered by the Board of Directors or by a
stock option committee appointed by the Board of Directors. The Company has
authorized the issuance of up to 275,000 shares of Common Stock under the
Replacement Plan, which the Company expects to be sufficient to satisfy all
purchase requirements under the Replacement Options.
Employee Stock Purchase Plan
The Company Employee Stock Purchase Plan (the "Stock Purchase Plan")
provides an opportunity for eligible employees of the Company and its
subsidiaries to purchase shares of Common Stock, at a discount, through
regular monthly payroll deductions of up to 10% of their pre-tax gross salary.
Subject to adjustment for stock splits, stock dividends and similar events, a
maximum of 150,000 shares of Common Stock may be issued under the Stock
Purchase Plan. The Stock Purchase Plan will be administered by an
Administrator appointed by the Board of Directors.
The first offering under the Stock Purchase Plan will begin on January 2,
1997 and end on June 30, 1997. Unless otherwise determined by the
Administrator, subsequent offerings will commence on the first business day
occurred on or after each January 1 and July 1 thereafter and will have a
duration of six months. The Administrator may, in its discretion select a
different offering period for any offering, provided the duration of the
offering is not more than one year. Generally, all employees of the Company
and designated subsidiaries who are customarily employed for more than 20
hours per week as of the first day of the applicable offering period are
eligible to participate in the Stock Purchase Plan.
The maximum number of shares which may be purchased by a participating
employee of the Company and its subsidiaries during an offering will be
determined by the Administrator on a uniform basis and generally will equal
1,000 shares. An employee may purchase shares under the Stock Purchase Plan by
authorizing payroll deductions, of up to 10% of his regular pay during this
offering period. Unless the employee has previously withdrawn from the
offering, his accumulated payroll deductions will be used to purchase Common
Stock on the last business day of the period at a price equal to 85% of the
fair market value of the Common Stock on the first or last day of this
offering period whichever is lower. Under applicable tax rules, an employee
may purchase no more than $25,000 worth of Common Stock in any calendar year
(determined on the first day of the offering period(s) in which such stock is
purchased); certain other tax limitations may apply.
The Board of Directors has the discretion to designate the subsidiaries of
the Company whose employees are eligible to participate in the Stock Purchase
Plan from time to time. The Board of Directors may at any time amend the Stock
Purchase Plan, subject to the approval of the Company's stockholders if and to
the extent required to preserve the favorable tax treatment of participants,
or discontinue the Stock Purchase Plan.
The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" as defined in Section 423 of the Code, which provides that an
employee will not have income for federal income tax purposes at the start of
an offering or upon receipt of shares of Common Stock at the end of an
offering, but generally will recognize ordinary income, in addition to capital
gain or loss, when the employee sells the shares. The Company generally will
not be entitled to a tax deduction upon either the purchase or sale of shares
issued under the Stock Purchase Plan if certain holding period requirements
are met.
33
<PAGE>
TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION
DTI currently maintains and has outstanding options under its 1992 Key
Employee Incentive Plan and its 1982 Key Employee Incentive Plan (collectively
the "Incentive Plans"). Each current holder of an option to purchase shares of
DTI Stock outstanding under the Incentive Plans (an "Old DTI Option") will
have the exercise price of such Old DTI Options adjusted to give effect to the
Distribution (as so adjusted, a "New DTI Option") and will receive a new
option for one quarter of the number of shares of such holder's Old DTI Option
to purchase Common Stock, at an exercise price proportionate to the exercise
price of such holder's Old DTI Option, under the Replacement Plan (a "Company
Option"). Each New DTI Option and each Company Option will have substantially
the same terms, including expiration dates and vesting provisions, as the Old
DTI Options, except for exercise prices. The exercise prices of the New DTI
Options and Company Options will be determined consistent with the intention
that New DTI Options issued to DTI employees and Company Options issued to
Company employees in respect of Old DTI Options that qualified as Incentive
Options will continue to qualify as Incentive Options.
Subject to certain conditions, employees of the Company and DTI will be paid
an amount in cash intended to compensate them for the loss of incentive stock
option treatment under the Code with respect to options they hold in the
company which is not their employer following the Distribution. Such amount
will be paid by the employer, will be determined by such employer in its
discretion and will not exceed the value of the corresponding tax benefit to
such employer.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
DTI has leased, and upon the Distribution, the Company will lease its
domestic headquarters (the "facilities") from a related party trust, Nason
Hill Trust (the "Trust"), a nominee trust of which Alfred A. Molinari, Jr.,
Chairman and Chief Executive Officer of the Company, and his wife are the sole
trustees and beneficiaries.
The facilities are leased from the Trust under an operating lease agreement
expiring on December 1, 1999. Pursuant to an amendment dated November 29,
1989, the annual lease payments are equal to the sum of (i) $1,092,000 and
(ii) any additional interest costs payable by the Trust in such year under a
note in favor of Fleet National Bank due to the failure of the Company to
maintain the financial ratios required for the most favorable interest rate
under such note. In addition to such lease payments, the Company bears all of
the tax, insurance and other costs of operating the facilities and, under
certain circumstances, various costs and expenses associated with the series
of industrial revenue bonds, the proceeds of which were used in connection
with the facilities. Total rental expense included in the operations of the
Company under the lease agreements for fiscal 1995 was $633,000 and $410,000
for the nine months ended August 31, 1996.
The Company believes that the terms of its leases with the Trust are at
least as favorable as it could have obtained in an arm's-length transaction
with an unrelated third party. The leases were approved by those directors of
DTI who had no beneficial interest in the Trust.
Following the Distribution, DTI will license a portion of the Company's
facilities for a license fee equal to DTI's pro rata portion of the base rent
and operating expenses under the lease. See "RELATIONSHIP BETWEEN THE COMPANY
AND DTI AFTER THE DISTRIBUTION--Intercompany Agreements--Use and Occupancy
Agreements." Alfred A. Molinari is a director of DTI and will continue to be a
director of DTI after the Distribution. See "RELATIONSHIP BETWEEN THE COMPANY
AND DTI AFTER THE DISTRIBUTION--Board of Directors and Management."
34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the shares of
Common Stock which are expected to be beneficially owned by each person
holding more than 5% of the outstanding securities of any class of the
Company, each director, and the Named Executive Officers of the Company and by
all directors and officers of the Company as a group as of the Distribution
Date based upon their respective holdings of DTI's Stock as of October 31,
1996. The table includes as a basis for calculation options to purchase shares
of Common Stock issued as a result of the Distribution which are exercisable
at or within 60 days of October 31, 1996. See "TREATMENT OF EMPLOYEE OPTIONS
IN THE DISTRIBUTION." The table does not include any options which may be
granted as part of the Company's employee benefit programs following the
Distribution.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
OWNED(1) PERCENT(1)
------------ ----------
<S> <C> <C>
5% STOCKHOLDERS
Dawson-Samberg Capital Management, Inc.(2)............ 181,900 8.94%
354 Pequot Ave.
Southport, Connecticut 06490
Oppenheimer Funds, Inc.(3)............................ 128,750 6.33
Two World Trade Center, Suite 3400
New York, New York 10048-0203
Twentieth Century Companies, Inc.(4).................. 138,500 6.81
4500 Main Street
P.O. Box 418210
Kansas City, Missouri 64141-9210
West Highland Capital, Inc.(5)........................ 189,425 9.31
300 Drake's Landing Road, Suite 290
Green Brac, California 94904
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Alfred A. Molinari, Jr.(6)............................ 259,150 12.74
100 Locke Drive
Marlboro, Massachusetts 01752
Ellen W. Harpin....................................... 5,814 *
100 Locke Drive
Marlboro, Massachusetts 01752
Kim J. Gray(7)........................................ 494 *
D'Anne Hurd(8)........................................ 125 *
David Cyganski........................................ -- *
All executive officers and directors as a group (8 269,514 13.25%
persons in all)......................................
</TABLE>
- --------
*Represents less than 1%.
(1) The number and percent of the outstanding shares of Common Stock treat as
outstanding all shares issuable on exercise of options held by a
particular beneficial owner that are exercisable within 60 days of
November 30, 1996 and are included in the first column.
(2) According to a Schedule 13D filed by Dawson-Samberg Capital Management,
Inc. ("Dawson") with the Commission on October 30, 1996. Dawson is a
registered investment advisor and beneficially owns 18,425 shares of the
Company's Common Stock, Pequot General Partners beneficially owns 65,825
shares of the Company's Common Stock, DS International Partners
beneficially owns 59,700 shares of the Company's Common Stock and Pequot
Endowment Partners, L.P. beneficially owns 37,950 shares of the Company's
Common Stock. Jonathan T. Dawson and Arthur J. Samberg are the principal
stockholders of Dawson and are general partners of each of Pequot
Partners, DS International Partners and Pequot Endowment Partners, L.P.
35
<PAGE>
(3) According to Schedule 13G filed with the Commission on February 8, 1996,
Oppenheimer Funds, Inc. ("OFI") is a registered investment advisor to
certain registered investment companies including the Oppenheimer Discover
Fund which holds 87,500 shares of the Common Stock. The Board of Directors
or Trustees of the registered investment companies managed by OFI and
owning shares of the Company can direct the disposition of dividends
received by such funds and can dispose of such securities. Additionally,
OFI shares the power to dispose of such securities with the Board of
Directors or Trustee of such funds; however, the Board of Directors or
Trustees of such fund has delegated these responsibilities to OFI as the
fund's investment advisor under its advisory agreement. In the Schedule
13D, OFI has disclaimed beneficial ownership of the shares held by the
Oppenheimer Discover Fund.
(4) Twentieth Century Companies, Inc. ("TCC") and its affiliates collectively
hold 138,500 shares of the Company's Common Stock. According to Schedule
13G filed with the Commission on February 13, 1996. Investors Research
Corporation ("IRC"), a registered investment advisor, is a wholly-owned
subsidiary of TCC. Mr. James E. Stowers, Jr., controls TCC by virtue of
his beneficial ownership of a majority of the voting stock of TCC. As a
result of its status as investment advisor to six registered investment
companies and to several institutional investors, IRC is deemed to be the
beneficial owner of 138,500 shares or 6.81% of the outstanding common
stock of the Company. TCC, as a result of its control of IRC, and Mr.
Stowers, as a result of his control of TCC, are also deemed to
beneficially own all such shares deemed to be beneficially owned by IRC.
Mr. Stowers, TCC and IRC all disclaim beneficial ownership of the shares.
The ownership of one investment company client of IRC, Twentieth Century
Investors, Inc., totaled 125,000 shares or 6.15% of the outstanding Common
Stock of the Company.
(5) West Highland Capital, Inc. and its affiliates collectively hold 189,425
shares of the Company's Common Stock (the "West Highland Shares").
According to a Schedule 13D filed with the Commission on November 27,
1995, (i) West Highland Capital, Inc. beneficially owns all 189,425 of the
West Highland Shares, (ii) Lang H. Gerhard beneficially owns 161,169 of
the West Highland Shares, (iii) West Highland Partners, L.P. beneficially
owns 132,708 of the West Highland Shares and (iv) Buttonwood Partners L.P.
beneficially owns 28,461 of the West Highland Shares.
(6) Includes 7,883 shares subject to options exercisable on or before January
31, 1997. Does not include 4,404 shares owned by Mr. Molinari's wife as to
which Mr. Molinari disclaims beneficial ownership.
(7) Includes 400 shares subject to options exercisable on or before January
31, 1997.
(8) Does not include 75 shares owned by Ms. Hurd's husband as to which Ms.
Hurd disclaims beneficial ownership.
36
<PAGE>
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, of which approximately 2,021,071 shares will be issued and
outstanding as of the Distribution Date, and 5,000,000 shares of Preferred
Stock, of which no shares will be issued and outstanding. The following
summary description of the capital stock of the Company is qualified in its
entirety by reference to the Company's Certificate of Incorporation as of the
Distribution Date (the "Certificate") and By-laws, copies of which are filed
as exhibits to the Registration Statement of which this Information Statement
is a part. The Certificate and By-laws have been adopted by the stockholders
and the Board of Directors of the Company.
Common Stock. Holders of Common Stock are entitled to one vote per share on
all matters to be voted on by stockholders. Holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election, subject to the rights of the holders of Preferred
Stock, if and when issued. The holders of Common Stock have no preemptive or
other subscription rights.
The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors from funds
legally available therefor, with each share of Common Stock sharing equally in
such dividends. The possible issuance of Preferred Stock with a preference
over Common Stock as to dividends could impact the dividend rights of holders
of Common Stock.
There are no redemption or sinking fund provisions with respect to the
Common Stock. All outstanding shares of Common Stock, including the shares
offered hereby, are, or will be upon completion of the Offering, fully paid
and non-assessable.
The By-laws provide, subject to the rights of the holders of the Preferred
Stock, if and when issued, that the number of directors shall be fixed by the
Board of Directors. The directors, other than those who may be elected by the
holders of Preferred Stock, if and when issued, are divided into three
classes, as nearly equal in number as possible, with each class serving for a
three-year term, except with respect to the initial term of each class of
directors which shall be for the period described under "Management--Directors
and Executive Officers." Subject to any rights of the holders of Preferred
Stock, if and when issued, to elect directors, and to remove any director,
whom the holders of any such stock had the right to elect, any director of the
Company may be removed from office only for cause and by the affirmative vote
of at least two-thirds of the total votes which would be eligible to be cast
by stockholders in the election of such director.
Undesignated Preferred Stock. The Board of Directors of the Company is
authorized, without further action of the stockholders of the Company, to
issue up to 5,000,000 shares of Preferred Stock in classes or series and to
fix the designations, powers, preferences and the relative, participating,
optional or other special rights of the shares of each series and any
qualifications, limitations and restrictions thereon as set forth in the
Certificate. Any such Preferred Stock issued by the Company may rank prior to
the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of
Common Stock.
The purpose of authorizing the Board of Directors to issue Preferred Stock
is, in part, to eliminate delays associated with a stockholder vote on
specific issuances. The issuance of Preferred Stock could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring or seeking to acquire, a significant portion of the
outstanding stock of the Company.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND BY-LAWS
General. A number of provisions of the Certificate and By-laws concern
matters of corporate governance and the rights of stockholders. Certain of
these provisions, as well as the ability of the Board of Directors to
37
<PAGE>
issue shares of Preferred Stock and to set the voting rights, preferences and
other terms thereof, may be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by the Board of Directors
(including takeovers which certain stockholders may deem to be in their best
interests). To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of the Common Stock, which may result from
actual or rumored takeover attempts, may be inhibited.
The Certificate provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
In addition, the Certificate provides that stockholders may remove a director
only for cause and only by the vote of the holders of two-thirds of the Common
Stock of the Company. This provision, when coupled with the provision of the
Certificate authorizing only the Board of Directors to fill vacant
directorships, will preclude stockholders from removing incumbent directors
without cause and simultaneously gaining control of the Board of Directors by
filling the vacancies created by such removal with their own nominees, and
will make more difficult, and therefore may discourage, a proxy contest to
change control of the Company. These provisions, together with the ability of
the Board to issue Preferred Stock without further stockholder action, also
could delay or frustrate the removal of incumbent directors or the assumption
of control by stockholders, even if such removal or assumption would be
beneficial to stockholders of the Company. In addition, these provisions could
discourage or make more difficult a merger, tender offer or proxy contest,
even if they could be favorable to the interests of stockholders, and could
potentially depress the market price of the Common Stock. The Board of
Directors of the Company believes that these provisions are appropriate to
protect the interests of the Company and all of its stockholders. The Board of
Directors has no present plans to adopt any other measures or devices which
may be deemed to have an anti-takeover effect.
Meetings of Stockholders. The By-laws provide that, unless otherwise
required by law, a special meeting of stockholders may be called only by the
Board of Directors. The By-laws provide that only those matters set forth in
the notice of special meeting may be considered or acted upon at that special
meeting, unless otherwise provided by law. In addition, the By-laws set forth
certain advance notice and informational requirements and time limitations on
any director nomination or any new business which a stockholder wishes to
propose for consideration at an annual or special meeting of stockholders.
No Stockholder Action by Written Consent. The Certificate provides that any
action required or permitted to be taken by the stockholders of the Company at
an annual or special meeting of stockholders must be effected at a duly called
meeting and may not be taken or effected by a written consent of stockholders
in lieu thereof.
Indemnification and Limitation of Liability. The By-laws provide that
directors and officers of the Company shall be, and, in the discretion of the
Board of Directors, non-officer employees may be, indemnified by the Company
to the fullest extent authorized by Delaware law, as it now exists or may in
the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of the Company. The By-
laws also provide that the right of directors and officers to indemnification
shall be a contract right and shall not be exclusive of any other right now
possessed or hereafter acquired under any by-law, agreement, vote of
stockholders or otherwise. The Certificate contains a provision permitted by
Delaware law that generally eliminates the personal liability of directors for
monetary damages for breaches of their fiduciary duty, including breaches
involving negligence or gross negligence in business combinations, unless the
director has breached his or her duty of loyalty, failed to act in good faith,
engaged in intentional misconduct or a knowing violation of law, paid a
dividend or approved a stock repurchase in violation of the Delaware General
Corporation Law or obtained an improper personal benefit. This provision does
not alter a director's liability under the federal securities laws. In
addition, this provision does not affect the availability of equitable
remedies, such as an injunction or rescission, for breach of fiduciary duty.
Amendment of the Certificate. The Certificate provides that an amendment
thereof must first be approved by, a majority of the Board of Directors and
(with certain exceptions) thereafter approved by the holders of a majority of
the outstanding shares entitled to vote on such amendment or repeal and the
affirmative vote of a
38
<PAGE>
majority of the outstanding shares of each class entitled to vote thereon as a
class; provided however, that the affirmative vote of two-thirds of the
outstanding shares of each class entitled to vote thereon as a class, is
required to amend (i) provisions set forth in Article V therein relating to
stockholder actions at annual or special meetings of stockholders, (ii)
provisions set forth in Article VI therein relating to Directors of the
Company, (iii) provisions set forth in Article VII therein relating to the
limitation of liability of Directors and officers of the Company and (iv)
provisions set forth in Article IX therein relating to amendments to the
Certificate.
Amendment of By-laws. The Certificate provides that the By-laws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the stockholders requires the
affirmative vote of the holders of at least two-thirds of the total votes
eligible to be cast by holders of voting stock with respect to such amendment
or repeal at an annual meeting of stockholders or a special meeting called for
such purpose, unless the Board of Directors recommends that the stockholders
approve such amendment or repeal at such meeting, in which case such amendment
or repeal shall only require the affirmative vote of a majority of the total
votes eligible to be cast by holders of voting stock with respect to such
amendment or repeal.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations
with a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved
by the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the same transaction
that makes it an interested stockholder (excluding shares owned by persons who
are both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which
it is sought to be determined whether such person is an interested
stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such by-law
or charter amendment shall not become effective until 12 months after the date
it is adopted. Neither the Certificate nor the By-laws contains any such
exclusion.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock of the Company is
Boston EquiServe, L.P.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company has appointed Arthur Andersen LLP as the Company's independent
public accountants to audit the Company's financial statements as of and for
the year ending November 30, 1996. Arthur Andersen LLP has audited the
Company's historical financial statements as of November 30, 1994 and 1995 and
for each of the three years in the period ended November 30, 1995.
39
<PAGE>
ADDITIONAL INFORMATION
The Company has filed the Registration Statement with the Commission under
the Exchange Act with respect to the shares of Common Stock being received by
DTI stockholders in the Distribution. This Information Statement does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made. Statements
made in this Information Statement as to the contents of any contract,
agreement or other document referred to herein are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to such exhibit for a
more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by the Company
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Regional Offices of the Commission
at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, 13th Floor, New York, New
York 10048. Copies of such information can be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
40
<PAGE>
GLOSSARY
ASICs: An acronym for Application-Specific Integrated
Circuits.
Bandwidth: The throughput or ability to move information to or
from a device. Bandwidth is measured in quantities of
data--usually bits per second.
CD-ROM: An acronym for Compact Disk Read-Only Memory--a high-
capacity optical storage device that can read but not
write data. The desire to deliver video on CD-ROM was
the chief inspiration for the MPEG-1 standard.
Display Connect
Interface (DCI): DCI provides a device-independent method for Microsoft
Windows software, such as 3-D graphics packages or
games interface packages, to display real-time video on
a computer screen without going through the computer's
central processing unit.
DVD:
An acronym for Digital Video Disk--optical disks that
contain full-length motion pictures for viewing on a
personal computer or through a set-up box.
Encoding: In the field of digital video, a term meaning
compression.
Frame: A single image of a moving picture. Full-motion video
consists of 30 images or frames per second. The human
eye can detect flicker when the frame rate falls below
30 frames per second. Higher frame rates produce
greater continuity in a video.
Internet: An open global network of interconnected commercial,
educational and governmental computer networks which
utilize a common communications protocol.
MPEG-1:
MPEG-1 defines a set of international standards
developed by the Moving Picture Experts Group for the
compression and decompression of digital video signals.
MPEG-1 specifies a video resolution of 352-by-240
pixels compressed at 30 frames per second at a
bandwidth of 150 kilobytes per second.
PCI bus: PCI is an acronym for Peripheral Component
Interconnect, an industry standard. A PCI bus is an
industry standard communication link from external
plug-in devices to the internal processing components
of a personal computer.
Protocol:
A formal description of message formats and the rules
two or more machines must follow in order to exchange
such messages.
Video CD: A particular type of compact disk that records and
plays still pictures and video sequences. Video CDs are
used with a Video CD player connected to a television.
World Wide Web: A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication of
graphics, video and sound.
41
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of November 30, 1994 and 1995 and August
31, 1996 (unaudited) and Pro Forma Consolidated Balance Sheet as of Au-
gust 31, 1996 (unaudited)............................................... F-3
Consolidated Statements of Operations for the Years Ended November 30,
1993, 1994, and 1995 and for the Nine Months Ended August 31, 1995 and
1996 (unaudited)........................................................ F-4
Consolidated Statements of Stockholder's Investment for the Years Ended
November 30, 1993, 1994, and 1995 and for the Nine Months Ended August
31, 1996 (unaudited) and Pro Forma Consolidated Statement of Stockhold-
er's Investment for the Nine Months Ended August 31, 1996 (unaudited)... F-5
Consolidated Statements of Cash Flows for the Years Ended November 30,
1993, 1994, and 1995 and for the Nine Months Ended August 31, 1995 and
1996 (unaudited)........................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Data Translation II, Inc.:
We have audited the accompanying consolidated balance sheets of Data
Translation II, Inc. (a Delaware corporation and wholly-owned subsidiary of
Data Translation, Inc. ("DTI")) and subsidiaries as of November 30, 1994 and
1995 and the related consolidated statements of operations, stockholder's
investment and cash flows for each of the three years in the period ended
November 30, 1995. These financial statements are the responsibility of Data
Translation II, Inc.'s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Data Translation II, Inc.
and subsidiaries as of November 30, 1994 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended November 30, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
September 12, 1996
F-2
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30, AUGUST 31, PRO FORMA
1994 1995 1996 AUGUST 31, 1996
------------ ------------ ----------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash................... $ -- $ -- $ -- $10,000,000
Accounts receivable,
net of reserves of
$238,000, $156,000 and
$76,000 in 1994, 1995
and 1996,
respectively.......... 2,979,000 3,253,000 2,377,000 2,377,000
Inventories............ 968,000 1,086,000 1,525,000 1,525,000
Prepaid expenses....... 368,000 383,000 790,000 790,000
---------- ---------- ---------- -----------
Total current
assets.............. 4,315,000 4,722,000 4,692,000 14,692,000
Net assets of
discontinued
operations.............. 1,920,000 2,232,000 -- --
Equipment and leasehold
improvements, net....... 1,389,000 2,250,000 2,420,000 2,420,000
Other assets--net........ 145,000 133,000 290,000 290,000
---------- ---------- ---------- -----------
Total Assets......... $7,769,000 $9,337,000 $7,402,000 $17,402,000
========== ========== ========== ===========
CURRENT LIABILITIES:
Accounts payable....... $ 640,000 $ 716,000 $ 383,000 $ 383,000
Due to related party... 546,000 -- 273,000 273,000
Borrowings from bank... -- 39,000 -- --
Accrued expenses....... 1,606,000 2,312,000 1,476,000 1,476,000
---------- ---------- ---------- -----------
Total current
liabilities......... 2,792,000 3,067,000 2,132,000 2,132,000
Net liabilities of
discontinued
operations.............. -- -- 474,000 474,000
Commitments and
Contingencies (Note 9)
STOCKHOLDER'S INVESTMENT:
Investment by DTI...... 4,950,000 6,102,000 4,796,000 --
Preferred stock, $.01
par value,--
Authorized 5,000,000
shares, issued none... -- -- -- --
Common stock, $.01 par
value,--
Authorized 30,000,000
shares, 2,017,571
shares issued and
outstanding at August
31, 1996 pro forma.... -- -- -- 20,000
Additional paid-in
capital............... -- -- -- 14,776,000
Cumulative translation
adjustment............ 27,000 168,000 -- --
---------- ---------- ---------- -----------
Total stockholder's
investment.......... 4,977,000 6,270,000 4,796,000 14,796,000
---------- ---------- ---------- -----------
Total Liabilities and
Stockholder's
Investment............ $7,769,000 $9,337,000 $7,402,000 $17,402,000
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED NOVEMBER 30, AUGUST 31,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $23,733,000 $22,440,000 $21,826,000 $16,359,000 $15,858,000
Cost of sales........... 9,412,000 9,355,000 8,187,000 6,087,000 6,034,000
----------- ----------- ----------- ----------- -----------
Gross profit........ 14,321,000 13,085,000 13,639,000 10,272,000 9,824,000
Research and development
expenses............... 3,165,000 3,041,000 2,806,000 1,950,000 2,713,000
Selling and marketing
expenses............... 8,154,000 6,212,000 6,799,000 5,001,000 6,492,000
General and
administrative
expenses............... 2,580,000 1,924,000 1,627,000 1,210,000 1,465,000
----------- ----------- ----------- ----------- -----------
Income from
operations......... 422,000 1,908,000 2,407,000 2,111,000 (846,000)
Interest (expense)
income................. (16,000) (1,000) (7,000) 1,000 --
Other income (expense).. (210,000) 63,000 2,000 -- (88,000)
----------- ----------- ----------- ----------- -----------
Income from
continuing
operations before
tax provision
(benefit).......... 196,000 1,970,000 2,402,000 2,112,000 (934,000)
Provision (benefit) for
income taxes........... 75,000 798,000 966,000 845,000 (374,000)
----------- ----------- ----------- ----------- -----------
Income from
continuing
operations......... 121,000 1,172,000 1,436,000 1,267,000 (560,000)
Discontinued operations
(Note 3):
Income (loss) from
discontinued
operations of Data
Translation
Networking, Limited
(less applicable
provision (benefit)
for income taxes of
$(44,000), $163,000,
$10,000, $54,000, and
$(10,000),
respectively)........ (126,000) 381,000 24,000 120,000 (2,625,000)
----------- ----------- ----------- ----------- -----------
Net income (loss)... $ (5,000) $ 1,553,000 $ 1,460,000 $ 1,387,000 $(3,185,000)
=========== =========== =========== =========== ===========
Income from continuing
operations per common
share.................. $ 0.86 $ (0.26)
Income (loss) from
discontinued operations
per common share....... $ 0.01 (1.23)
----------- -----------
Net income (loss) per
common share........... $ 0.87 $ (1.49)
=========== ===========
Weighted average number
of common and common
equivalent shares
outstanding............ 1,675,000 2,130,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S INVESTMENT
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS NINE MONTHS
FISCAL YEARS ENDED NOVEMBER 30, ENDED ENDED
----------------------------------- AUGUST 31, AUGUST 31,
1993 1994 1995 1996 1996
----------- ---------- ---------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Investment by DTI
Balance--Beginning of
Year.................. $ 6,904,000 $5,018,000 $4,950,000 $ 6,102,000 $ 6,102,000
Net income (loss)..... (5,000) 1,553,000 1,460,000 (3,185,000) (3,185,000)
Impact of income
taxes................ (75,000) (798,000) (966,000) 374,000 374,000
Net activity with
DTI.................. (1,806,000) (823,000) 658,000 1,505,000 1,505,000
Pro forma contribution
from DTI............. -- -- -- -- 10,000,000
Pro forma transfer to
common stock and
additional paid-in
capital.............. -- -- -- -- (14,796,000)
----------- ---------- ---------- ----------- ------------
Balance--End of Year... $ 5,018,000 $4,950,000 $6,102,000 $ 4,796,000 $ --
Common Stock
Balance--Beginning of
Year.................. $ -- $ -- $ -- $ -- $ --
Pro forma issuance of
2,017,571 shares of
common stock, $.01
par value per share.. -- -- -- -- 20,000
----------- ---------- ---------- ----------- ------------
Balance--End of Year... $ -- $ -- $ -- $ -- $ 20,000
Additional Paid-in
Capital
Balance--Beginning of
Year.................. $ -- $ -- $ -- $ -- $ --
Pro forma contribution
from DTI............. -- -- -- -- 14,776,000
----------- ---------- ---------- ----------- ------------
Balance--End of Year... $ -- $ -- $ -- $ -- $ 14,776,000
Cumulative Translation
Adjustment
Balance--Beginning of
Year.................. $ (31,000) $ 4,000 $ 27,000 $ 168,000 $ 168,000
Translation
adjustments.......... 35,000 23,000 141,000 (168,000) (168,000)
----------- ---------- ---------- ----------- ------------
Balance--End of Year... $ 4,000 $ 27,000 $ 168,000 $ -- $ --
----------- ---------- ---------- ----------- ------------
Total Stockholder's
Investment........... $ 5,022,000 $4,977,000 $6,270,000 $ 4,796,000 $ 14,796,000
=========== ========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED NOVEMBER 30, AUGUST 31,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net income (loss)...... $ (5,000) $ 1,553,000 $ 1,460,000 $1,387,000 $(3,185,000)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities--
Depreciation and
amortization......... 1,214,000 873,000 836,000 757,000 617,000
Changes in current
assets and
liabilities--
Accounts receivable.. 965,000 (460,000) (274,000) (93,000) 876,000
Inventories.......... 55,000 199,000 (118,000) (255,000) (439,000)
Prepaid expenses..... 279,000 (95,000) (15,000) (60,000) (407,000)
Net assets
(liabilities) of
discontinued
operations.......... (704,000) 350,000 (312,000) (295,000) 2,706,000
Accounts payable..... 71,000 (137,000) 76,000 55,000 (333,000)
Due to related
party............... 546,000 -- (546,000) (273,000) 273,000
Accrued expenses..... 111,000 (403,000) 706,000 345,000 (836,000)
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) operating
activities......... 2,532,000 1,880,000 1,813,000 1,568,000 (728,000)
----------- ----------- ----------- ---------- -----------
Cash Flows from
Investing Activities:
Purchases of equipment
and leasehold
improvements.......... (617,000) (217,000) (1,617,000) (1,444,000) (737,000)
Increase in other
assets................ (81,000) (65,000) (68,000) (50,000) (207,000)
----------- ----------- ----------- ---------- -----------
Net cash used in
investing
activities......... (698,000) (282,000) (1,685,000) (1,494,000) (944,000)
----------- ----------- ----------- ---------- -----------
Cash Flows from
Financing Activities:
Net borrowings from
bank.................. 12,000 -- 39,000 -- (39,000)
Impact of income
taxes................. (75,000) (798,000) (966,000) (845,000) 374,000
(Increase) decrease in
investment by DTI..... (1,806,000) (823,000) 658,000 744,000 1,505,000
----------- ----------- ----------- ---------- -----------
Net cash provided by
(used in) financing
activities......... (1,869,000) (1,621,000) (269,000) (101,000) 1,840,000
----------- ----------- ----------- ---------- -----------
Exchange Rate Effects... 35,000 23,000 141,000 27,000 (168,000)
----------- ----------- ----------- ---------- -----------
Change in Cash.......... -- -- -- -- --
Cash, beginning of
period................. -- -- -- -- --
----------- ----------- ----------- ---------- -----------
Cash, end of period..... $ -- $ -- $ -- $ -- $ --
=========== =========== =========== ========== ===========
Supplemental Disclosure
of Cash Flow
Information:
Cash paid for income
taxes................ $ -- $ -- $ -- $ -- $ --
Cash paid for
interest............. 16,000 1,000 7,000 3,000 --
=========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. BACKGROUND AND BASIS OF PRESENTATION
(a) Background
Data Translation II, Inc. (the "Company") was incorporated in September 1996
with 100 shares of Common Stock, $.01 par value, authorized and outstanding,
all of which are owned by Data Translation, Inc. ("DTI"). The Board of
Directors of DTI intends to declare a dividend payable to holders of record of
DTI common stock at the close of business on a record date to be determined of
one share of the Company's common stock for each four shares of DTI's common
stock held (the "Distribution"). As a result of the Distribution, 100% of the
outstanding shares of the Company's common stock will be distributed to DTI
stockholders. The Company expects the Distribution to be effective at or near
the end of its current fiscal year, November 30, 1996 (the "Distribution
Date"). As of the Distribution Date, DTI will contribute to the Company
substantially all of the assets and liabilities of DTI's data acquisition and
imaging and commercial products businesses, as well as the remainder of its
networking distribution business (the "Contributed Businesses"). DTI will
contribute to the Company $10 million which will be increased or decreased
based on the Company's net cash flow after August 31, 1996, less cash used in
the disposition of the networking distribution business. DTI has agreed to pay
fifty-percent of the net costs incurred by the Company in completing the
winding-up of the networking business up to a maximum of $500,000.
Based on the law in effect as of the date of this Information Statement and
on certain facts beyond the control of the Company and DTI assumed to be true
at the time of the Distribution, DTI believes that the Distribution may
qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code (the "Code"). However, there is a significant risk that the Distribution
may not qualify as a tax-free distribution. DTI has not requested and does not
intend to request a letter ruling from the Internal Revenue Service (the
"IRS") nor has DTI received an opinion of counsel on the tax treatment of the
Distribution. Further, the tax treatment of the Distribution is not entirely
clear. The Distribution may not satisfy the IRS' published guidelines for
issuing advance letter rulings on the tax-free treatment of spin-off
transactions. The Distribution is not conditioned on either the receipt of a
letter ruling from the IRS or an opinion of counsel that the Distribution
qualifies as a tax-free distribution. If the Distribution were to fail to
qualify for such tax-free treatment, the Distribution may be taxable to DTI
and would be taxable to its stockholders receiving Company Stock pursuant
thereto.
The Company designs, develops and manufactures high performance data
acquisition and imaging products for use with personal computers. The
Company's principal products are digital signal processing boards and software
which receive analog signals, convert them to digital form and process the
digital data.
(b) Basis of Presentation
The consolidated financial statements reflect the results of operations,
financial position, changes in stockholder's investment and cash flows of the
business that will be transferred to the Company from DTI in the Distribution
as if the Company were a separate entity for all periods presented. The
consolidated financial statements have been prepared using the historical
basis in assets and liabilities and historical results of operations related
to the Contributed Businesses. Changes in stockholder's investment represent
DTI's contribution of its net investment after giving effect to the net income
of the Company plus net cash transfers to or from DTI. The Company will begin
accumulating its retained earnings on the Distribution Date.
Additionally, the consolidated financial statements include allocations of
certain DTI corporate assets, liabilities and expenses relating to the
Contributed Businesses that will be transferred to the Company from DTI.
Management believes these allocations are reasonable. All material
intercompany transactions and balances between the Contributed Businesses have
been eliminated.
F-7
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
General corporate overhead related to corporate headquarters and common
support divisions will be allocated by the Company based on a number of
factors including, for example, personnel, space, time and effort, and sales
volume. Management believes these allocations are reasonable. However, the
costs of these services charged to the Company are not necessarily indicative
of the costs that would have been incurred if the Company had performed these
functions as a stand-alone entity. Subsequent to the Distribution, the Company
will allocate costs associated with certain shared services to DTI as
disclosed in the Corporate Services and Use and Occupancy Agreements (see Note
9(a)(iii)). Additionally, income taxes are calculated on a separate tax return
basis (see Notes 2(i) and 10).
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in
stockholder's investment and cash flows of the Company in the future or what
they would have been had it been a separate, stand-alone entity during the
periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) 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.
(c) Inventories
Inventories are stated at the lower of first-in, first-out ("FIFO") cost or
market and consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------- AUGUST 31,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Raw materials................................. $564,000 $ 629,000 $ 977,000
Work in-process............................... 18,000 20,000 126,000
Finished goods................................ 386,000 437,000 422,000
-------- ---------- ----------
$968,000 $1,086,000 $1,525,000
======== ========== ==========
</TABLE>
Work in-process and finished goods inventories include material, labor and
manufacturing overhead. Management performs periodic reviews of inventory and
disposes of items not required by their manufacturing plan and reduces the
carrying cost of inventory items to the lower of cost or market (with market
value generally defined as the lower of replacement cost or net realizable
value).
(d) Depreciation and Amortization
The Company provides for depreciation and amortization, using the straight-
line and declining balance methods, by charges to operations in amounts that
allocate the cost of the equipment and leasehold improvements over the
following estimated useful lives:
<TABLE>
<CAPTION>
DESCRIPTION USEFUL LIVES
----------- ------------
<S> <C>
Machinery and equipment...................................... 3 to 7 years
Furniture and fixtures....................................... 7 years
Vehicles..................................................... 3 years
</TABLE>
F- 8
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Leasehold improvements are amortized over the shorter of their economic life
or the life of the lease.
(e) Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization, and consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------- AUGUST 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment................ $12,777,000 $14,206,000 $14,542,000
Furniture and fixtures................. 2,046,000 2,171,000 2,085,000
Vehicles............................... 87,000 87,000 73,000
Leasehold improvements................. 1,480,000 1,543,000 2,044,000
----------- ----------- -----------
16,390,000 18,007,000 18,744,000
Less--accumulated depreciation and
amortization.......................... 15,001,000 15,757,000 16,324,000
----------- ----------- -----------
$ 1,389,000 $ 2,250,000 $ 2,420,000
=========== =========== ===========
</TABLE>
(f) Foreign Currency
The Company translates the assets and liabilities of its foreign
subsidiaries at the rates of exchange in effect at year-end. Revenues and
expenses are translated using exchange rates in effect during the year. Gains
and losses from foreign currency translation are credited or charged to
"Cumulative translation adjustment" included in stockholder's investment in
the accompanying consolidated balance sheets. Foreign currency transaction
gains and losses are included in "Other income (expense)" on the accompanying
consolidated statements of operations. Foreign currency transaction losses for
the year ended November 30, 1993 were approximately $180,000. Foreign currency
transaction gains and losses were not significant for the years ended November
30, 1994 and 1995 and for the nine months ended August 31, 1995 and 1996.
(g) Revenue Recognition
The Company recognizes revenue when products are shipped. Costs of service
and warranty are not significant and are charged to operations as incurred.
Revenues from hardware systems with other than incidental software components
and stand alone software sales are recognized upon shipment, provided that no
significant vendor or postcontract support obligations remain outstanding and
collection of the resulting receivable is deemed to be probable.
(h) Research and Development Costs
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
2, Accounting for Research and Development Costs, the Company charges research
and development costs to operations as incurred. However, in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed, the Company capitalizes certain computer software
development costs upon establishing technological feasibility. Capitalized
costs, net of accumulated amortization, were approximately $119,000, $106,000
and $286,000 as of November 30, 1994, 1995 and August 31, 1996, respectively,
and are included in other assets. These costs are amortized on a straight-line
basis over the lesser of two years or the economic life of the product.
Amortization expense, included in cost of sales in the accompanying
consolidated statements of operations, was $60,000, $90,000, $80,000, $62,000
and $50,000 in 1993, 1994, 1995 and the nine months ended August 31, 1995 and
1996, respectively.
F-9
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(i) Income Taxes
Historically, the Company's operations have been included in the
consolidated income tax returns filed by DTI. The provision for income taxes
in the Company's consolidated financial statements has been calculated on a
separate tax return basis (see Note 10).
(j) Interim Financial Statements
The financial statements as of August 31, 1996 and for the nine months ended
August 31, 1995 and 1996 are unaudited but, in the opinion of management,
reflect all adjustments of a normal recurring nature necessary for a fair
presentation of results for these interim periods. The results of operations
for the nine months ended August 31, 1996 are not necessarily indicative of
the results to be expected for the entire year or any other interim period.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet concentration
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
(l) Disclosure About Fair Value of Financial Instruments
SFAS No. 107, Disclosure About Fair Market Value of Financial Instruments,
requires disclosure of estimated fair values for certain of its financial
instruments. The Company's financial instruments include accounts receivable
and accounts payable. The carrying amounts of these financial instruments
approximate their fair value.
(m) Stock-based Compensation Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The
Company has adopted the disclosure option of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 requires that companies which do not
choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings and earnings per
share as if SFAS No. 123 had been adopted. Additionally, certain other
disclosures are required with respect to stock compensation and the
assumptions used to determine the pro forma effects of SFAS No. 123. As of
August 31, 1996, the Company had no reporting requirements under SFAS No. 123
as no stock option grants had been made under the Company's 1996 Stock Option
Plan (see Note 5).
(n) Pro Forma Presentation
The pro forma consolidated balance sheet and pro forma consolidated
statement of stockholder's investment as of August 31, 1996 reflect (1) the
contribution of $10 million from DTI simultaneously with the Distribution,
which will be increased or decreased based on the net cash flow of the
Contributed Businesses after August 31, 1996, less cash used in disposition of
the networking distribution business and (2) the distribution of the
investment by DTI to the existing stockholders of DTI in the form of a one-
for-four stock dividend as discussed in Note 1(a) and reflects the
capitalization of the Company. The pro forma stockholder's investment excludes
any tax considerations pertaining to the Distribution.
3. DISCONTINUED OPERATIONS
On July 30, 1996, the Company announced its strategic decision to
discontinue the operations comprising its networking business. The networking
operations were historically operated by Data Translation Networking Limited
("Networking") which distributed, integrated and supported enterprise-wide
networking products manufactured
F-10
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
by third party suppliers in the United Kingdom. On November 11, 1996, DTI sold
certain assets of the networking distribution business, primarily inventories,
equipment and its ongoing business, for approximately $1.3 million. DTI
expects to recognize a gain of approximately $340,000 on this transaction. The
Company intends to discontinue and wind-up the remainder of such business
after the Distribution.
The Company estimates a loss on the disposal of the remaining business
assets and extinguishment of liabilities of approximately $1,563,000 before
applicable income taxes, which includes estimated operating losses of
$1,024,000 to be incurred during the period from August 31, 1996 to phase-out.
Sales from Networking were approximately $10,850,000, $15,382,000,
$20,348,000, $14,604,000, and $16,522,000 for the years ended November 30,
1993, 1994, and 1995 and the nine months ended August 31, 1995 and 1996,
respectively.
The components of net assets (liabilities) of discontinued operations
included in the accompanying consolidated balance sheets at November 30, 1994
and 1995 and August 31, 1996 follow:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------- AUGUST 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash................................... $ 814,000 $ -- $ --
Accounts receivable, net............... 3,039,000 5,742,000 3,183,000
Inventories............................ 1,139,000 2,546,000 2,144,000
Prepaid expenses....................... 173,000 337,000 299,000
Equipment and leasehold improvements,
net................................... 199,000 233,000 252,000
Accounts payable....................... (2,728,000) (3,903,000) (2,651,000)
Borrowings from a bank................. -- (657,000) (2,031,000)
Accrued expenses....................... (716,000) (2,066,000) (1,670,000)
---------- ---------- ----------
$1,920,000 $2,232,000 $ (474,000)
========== ========== ==========
</TABLE>
4. NET INCOME PER COMMON SHARE
The Company has 100 shares of Common Stock outstanding, all of which are
owned by DTI. Effective with the Distribution discussed in Note 1(a),
stockholders of DTI would receive one share of the common stock of the Company
for each four shares of common stock held of DTI. Accordingly, the net income
per common share was calculated by dividing net income by the sum of the
weighted average number of shares of common stock plus common equivalent
shares of DTI. Common equivalent shares are calculated using the treasury
stock method and considered outstanding for all periods presented. Fully
diluted net income per common share has not been separately presented, as the
amounts would not be materially different from net income per share.
5. STOCK OPTION PLANS
(a) 1996 Stock Option Plan
Effective with the Distribution, the Company will adopt the 1996 Stock
Option Plan (the "1996 Stock Option Plan") for its key employees, directors,
and others, which permits the grant of stock options as approved by the
Company's Board of Directors. 500,000 shares of common stock have been
reserved for issuance under the 1996 Stock Option Plan. Options granted
pursuant to the 1996 Stock Option Plan may, at the discretion of the Board, be
incentive stock options as defined by the Internal Revenue Code. Subject to
the provisions of the 1996 Stock Option Plan, options granted are at a price
as specified by the Board. The Board will determine when the options will vest
and expire, but in no event will the option period exceed ten years.
Employees of the Company currently participate in DTI's incentive plans. DTI
currently maintains and has outstanding options under its 1992 Key Employee
Incentive Plan and its 1982 Key Employee Incentive Plan (collectively the
"Incentive Plans"). Each current holder of an option to purchase shares of DTI
Stock
F-11
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
outstanding under the Incentive Plans (an "Old DTI Option") will have the
exercise price of such Old DTI Options adjusted to give effect to the
Distribution (as so adjusted, a "New DTI Option") and will receive a new
option for one quarter of the number of shares of such holder's Old DTI Option
to purchase Common Stock, at an exercise price proportionate to the exercise
price of such holder's Old DTI Option, under the Replacement Plan (a "Company
Option"). Each New DTI Option and each Company Option will have substantially
the same terms, including expiration dates and vesting provisions, as the Old
DTI Options, except for exercise prices. The exercise prices of the New DTI
Options and Company Options will be determined consistent with the intention
that New DTI Options issued to DTI employees and Company Options issued to
Company employees in respect of Old DTI Options that qualified as Incentive
Options will continue to qualify as Incentive Options.
Subject to certain conditions, employees of the Company and DTI will be paid
an amount in cash intended to compensate them for the loss of incentive stock
option treatment under the Code with respect to options they hold in the
company which is not their employer following the Distribution. Such amount
will be paid by the company which has issued the option, will be determined by
such company in its discretion and will not exceed the value of the
corresponding tax benefit to such company.
(b) Replacement Stock Option Plan
The Board of Directors shall adopt the Company's Replacement Stock Option
Plan (the "Replacement Plan"), effective as of the Distribution Date. The
Replacement Plan will provide for the issuance, effective immediately prior to
the Distribution, of options to purchase shares of Common Stock (the
"Replacement Options") to holders of options to purchase shares of DTI Stock
that were granted under DTI's 1992 Key Employee Incentive Plan and its 1982
Key Employee Incentive Plan and are outstanding on the Distribution Date (the
"DTI Options"), as part of an adjustment to the DTI Options. The number of
shares subject to each Replacement Option, the exercise price therefor and the
other terms and conditions of each Replacement Option shall be determined in
accordance with the applicable provisions of the Distribution Agreement. It is
intended that Replacement Options issued to employees of the Company
("Transferred Employees") in respect of DTI Options that qualify as Incentive
Options shall qualify as Incentive Options pursuant to Section 424(a) of the
Code. Replacement Options issued to persons other than Transferred Employees
and Replacement Options issued to Transferred Employees in respect of DTI
Options that do not qualify as Incentive Options will be Non-Qualified
Options.
The Replacement Plan shall be administered by the Board of Directors or by a
stock option committee appointed by the Board of Directors. The Company has
authorized the issuance of up to 275,000 shares of Common Stock under the
Replacement Plan, which the Company expects to be sufficient to satisfy all
purchase requirements under the Replacement Options.
6. EMPLOYEE STOCK PURCHASE PLAN
Effective with the Distribution, the Company will establish an Employee
Stock Purchase Plan (the "Stock Purchase Plan") which permits the eligible
employees of the Company and its subsidiaries to purchase shares of the
Company's common stock, at a discount, through regular monthly payroll
deductions of up to 10% of their pre-tax gross salary. Subject to adjustment
for stock splits, stock dividends and similar events, a maximum of 150,000
shares of common stock may be issued under the Stock Purchase Plan.
7. RETIREMENT PLAN
The majority of the Company's employees have been eligible to participate in
DTI's employee savings plan (the "Savings Plan") in compliance with Section
401(k) of the Internal Revenue Code. The Company will establish a plan similar
to the Savings Plan following the Distribution. The Savings Plan provides for
annual Company contributions of up to 15% of the first 6% of total salary per
participant. These contributions vest incrementally over a five-year period.
Contributions to the Savings Plan charged to operations with respect to
F-12
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company's employees were $63,000, $0, $28,000, $11,000 and $32,000 in 1993,
1994 and 1995 and the nine months ended August 31, 1995 and 1996,
respectively.
The Company does not provide postretirement benefits to any employees as
defined under SFAS No. 106, Employer's Accounting for Postretirement Benefits
Other Than Pensions.
8. BANK FACILITIES
The Company's United Kingdom subsidiary, Data Translation Ltd., has a bank
overdraft facility of approximately $150,000. The facility bears interest at
the bank's base rate (5.75% at August 31, 1996) plus 1.75%. No amounts were
outstanding at November 30, 1994 and August 31, 1996. Approximately $39,000
was outstanding at November 30, 1995.
9. COMMITMENTS AND CONTINGENCIES
(a) Intercompany Agreements
(I) DISTRIBUTION AGREEMENT
As discussed in Note 1, the Distribution Agreement will provide for
indemnification of DTI by the Company in a manner designed to place financial
responsibility with the Company for specified liabilities arising out of the
Contributed Businesses, including such liabilities prior to the Distribution.
DTI will indemnify the Company for liabilities arising out of the Retained
Business both prior to and after the Distribution.
The Distribution Agreement will contain certain provisions relating to
employee compensation and benefits and the treatment of options to purchase
DTI Stock held by both employees of DTI who will become employees of the
Company and employees of DTI who will remain employees of DTI. The
Distribution Agreement will provide for the establishment by the Company of a
stock option plan, an employee stock purchase plan and retirement and savings
plan similar to those maintained by DTI, and the transfer of certain assets
and liabilities relating to the Company's employees from the DTI plans to the
Company's plans. The Distribution Agreement also will provide for the
establishment by the Company of employee welfare plans similar to those
maintained by DTI.
The Distribution Agreement also will provide for a tax sharing arrangement
between the Company and DTI. Pursuant to such agreement, DTI will be solely
responsible for any tax liabilities relating to periods prior to the
Distribution Date, and is entitled to any tax refunds relating to such
periods. After the Distribution Date, each of the Company and DTI will be
responsible for tax liabilities relating to their respective operations.
With respect to any liability relating to the Distribution being deemed a
taxable transaction, DTI will be responsible for 75% of any such liability and
the Company will be responsible for 25% of any such liability; provided,
however, that if the Distribution is deemed a taxable transaction as a result
of certain actions taken, caused by or within the control of either DTI or the
Company, such party shall be solely responsible for the resulting tax
liability.
(II) INTELLECTUAL PROPERTY AGREEMENT
On or prior to the Distribution Date, the Company and DTI will enter into an
Intellectual Property Agreement, pursuant to which DTI will assign to the
Company those trademarks, trade secrets, know-how, patents and patent
applications that are used exclusively or primarily in the Contributed
Businesses. DTI will retain the trademarks, trade secrets, know-how, patents
and patent applications that are used exclusively or primarily in the Retained
Business.
The Intellectual Property Agreement will further provide for royalty-free
perpetual cross-licenses to each of DTI and the Company, as the case may be,
for all technologies covered by existing patents and patent
F-13
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
applications held by DTI and the company, respectively. The parties will also
cross-license to each other technologies under patents issued pursuant to
applications made in the two year period following the Distribution. The
parties may not sell or sublicense technology to which they are the licensee;
rather they may only use such technology in their own products. The cross-
licensed technology may only be transferred by the licensee in connection with
a sale of the licensee's business as a going concern. The cross-licenses
provide for termination upon a change in control with respect to patents
issued pursuant to applications made after August 31, 1996, although the
licensee may continue to use such patents in products already being shipped or
which are substantially near completion of development.
The parties will also cross-license each other under trade secrets and know-
how. Like the patent cross-licenses, these licenses will be royalty-free and
only transferable in the event of a sale of the business as a going concern.
All employees of each company will sign non-disclosure agreements which
acknowledge non-disclosure obligations with respect to the other company.
(III) CORPORATE SERVICES AND USE AND OCCUPANCY AGREEMENTS
Effective as of the Distribution Date, the Company and DTI will have
corporate services and use and occupancy agreements under which the Company
will provide DTI with certain facilities, equipment and administrative
services including purchasing support, material planning, mail, shipping and
receiving, invoicing, document control, second shift supervision,
environmental screening and other services as required. DTI will pay the
Company in accordance with predetermined rates and fees as mutually agreed
upon.
Management believes that the rates and fees charged by the Company are
reasonable and that such fees are representative of the expenses DTI would
have incurred on a stand-alone basis. The corporate services agreement shall
remain in effect until the earlier of the discontinuance or termination of all
services to be provided or December 31, 1997. The Use and Occupancy Agreement
shall remain in effect until April 30, 1997.
Prior to the corporate services agreement, related expenses were allocated
based on estimated time spent relating directly to the Company's activities.
Management believes these allocations are reasonable. Allocated expenses under
these agreements totaled $4,007,000, $3,567,000, $2,545,000, $1,918,000 and
$3,022,000 in fiscal years 1993, 1994, and 1995 and for the nine months ended
August 31, 1995 and 1996, respectively.
During the transistion period following the Distribution Date, DTI may
request that the Company provide additional services to DTI until DTI is able
to otherwise contract or arrange for such services, in which case DTI and the
Company have agreed to negotiate in good faith as to the scope of such
services and the terms and conditions under which such services may be
provided.
(b) Contingencies
From time to time, the Company is involved in other disputes and/or
litigation encountered in its normal course of business. The Company does not
believe that the ultimate impact of the resolution of such other outstanding
matters will have a material effect on the Company's financial condition or
results of operations.
(c) Lease Commitments
The Company has operating lease agreements expiring December 1, 1999 for a
building and property owned by a related party trust. The agreements provide
for aggregate minimum annual rental payments plus other expenses of the lessor
on a net basis. Total rental expense charged to operations on these leases
included in the accompanying consolidated statements of operations was
approximately $874,000, $732,000, $633,000, $475,000 and $410,000 for each of
the years ended November 30, 1993, 1994, and 1995 and the nine months ended
August 31, 1995 and 1996, respectively.
In addition, the Company leases sales facilities and equipment under leases
expiring through 2000. Rent expense under these agreements totaled $237,000,
$229,000, $425,000, $233,000, and $192,000 in the years
F-14
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ended November 30, 1993, 1994, and 1995 and the nine months ended August 31,
1995 and 1996, respectively. Future minimum lease payments under all operating
leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, AMOUNT
------------------------------- ----------
<S> <C>
1996.......................................................... $ 453,000
1997.......................................................... 1,897,000
1998.......................................................... 1,316,000
1999.......................................................... 1,283,000
2000.......................................................... 130,000
Thereafter.................................................... 3,000
----------
Total minimum lease payments.................................. $5,082,000
==========
</TABLE>
10. INCOME TAXES
The income tax provision in the accompanying consolidated statements of
operations has been calculated on a separate tax return basis. Prior to the
spin-off to the stockholders as discussed in Note 1(a), the Company filed its
tax return as part of a consolidated group with DTI. The consolidated group
did not have any net tax requirements during any of the periods presented due
to the utilization of net operating losses of its other entities. Thus, the
offsetting charge for the income tax provision has been included as an element
of the "Investment by DTI" in the accompanying consolidated statements of
stockholder's investment. The financial information included herein may not
necessarily reflect the consolidated results of operations of the Company in
the future or what they would have been had it been a separate, stand-alone
entity during the periods presented.
The Company has accounted for income taxes in accordance with the provisions
of SFAS No. 109. The approximate tax effect of each type of temporary
difference is summarized as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------ AUGUST 31,
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Depreciation................................. $304,000 $387,000 $ 449,000
Nondeductible reserves and accruals.......... 385,000 568,000 365,000
Capitalized software development costs....... (47,000) (43,000) (120,000)
-------- -------- ---------
642,000 912,000 694,000
Less--Valuation Allowance.................... 642,000 912,000 694,000
-------- -------- ---------
$ -- $ -- $ --
======== ======== =========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of
its favorable tax attributes in future income tax returns, the Company has
placed a valuation allowance against its otherwise recognizable deferred tax
assets.
The income tax provision (benefit) shown in the accompanying consolidated
statements of operations comprise the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------ AUGUST 31,
1993 1994 1995 1996
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Federal:
Current........................ $ 565,000 $693,000 $ 920,000 $(435,000)
Deferred....................... (249,000) (27,000) (209,000) 169,000
State:
Current........................ 164,000 202,000 268,000 (125,000)
Deferred....................... (73,000) (8,000) (61,000) 49,000
Foreign--Current (benefit)....... (332,000) (62,000) 48,000 (32,000)
--------- -------- --------- ---------
$ 75,000 $798,000 $ 966,000 $(374,000)
========= ======== ========= =========
</TABLE>
F-15
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. GEOGRAPHIC INFORMATION
Operations in various geographic areas for the three years ended November
30, 1995 and nine months ended August 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
FISCAL 1993
Sales to unaffiliated
customers(1)........... $ 18,689,000 $5,044,000 $ -- $23,733,000
Sales or transfers be-
tween geographic
areas.................. 2,672,000 -- (2,672,000) --
------------ ---------- ----------- -----------
Total net sales......... $ 21,361,000 $5,044,000 $(2,672,000) $23,733,000
------------ ---------- ----------- -----------
Income (loss) before
provision for income
taxes.................. $ 837,000 $ (730,000) $ 89,000 $ 196,000
============ ========== =========== ===========
Identifiable assets from
continuing opera-
tions(2)............... $ 6,502,000 $1,333,000 $(1,751,000) $ 6,084,000
============ ========== =========== ===========
FISCAL 1994
Sales to unaffiliated
customers(1)........... $ 18,272,000 $4,168,000 $ -- $22,440,000
Sales or transfers be-
tween geographic
areas.................. 2,104,000 -- (2,104,000) --
------------ ---------- ----------- -----------
Total net sales......... $ 20,376,000 $4,168,000 $(2,104,000) $22,440,000
------------ ---------- ----------- -----------
Income (loss) before
provision for income
taxes.................. $ 2,185,000 $ (154,000) $ (61,000) $ 1,970,000
============ ========== =========== ===========
Identifiable assets from
continuing opera-
tions(2)............... $ 5,751,000 $1,418,000 $(1,320,000) $ 5,849,000
============ ========== =========== ===========
FISCAL 1995
Sales to unaffiliated
customers(1)........... $ 17,692,000 $4,134,000 $ -- $21,826,000
Sales or transfers be-
tween geographic
areas.................. 1,919,000 -- (1,919,000) --
------------ ---------- ----------- -----------
Total net sales......... $ 19,611,000 $4,134,000 $(1,919,000) $21,826,000
------------ ---------- ----------- -----------
Income before provision
for income taxes....... $ 2,275,000 $ 120,000 $ 7,000 $ 2,402,000
============ ========== =========== ===========
Identifiable assets from
continuing opera-
tions(2)............... $ 7,004,000 $1,557,000 $(1,456,000) $ 7,105,000
============ ========== =========== ===========
FISCAL 1996 (THROUGH AU-
GUST 31, 1996)
Sales to unaffiliated
customers(1)........... $ 12,939,000 $2,919,000 $ -- $15,858,000
Sales or transfers be-
tween geographic
areas.................. 1,500,000 -- (1,500,000) --
------------ ---------- ----------- -----------
Total net sales......... $ 14,439,000 $2,919,000 $(1,500,000) $15,858,000
------------ ---------- ----------- -----------
Income (loss) before
provision for income
taxes.................. $ (1,066,000) $ (81,000) $ 213,000 $ (934,000)
============ ========== =========== ===========
Identifiable assets from
continuing opera-
tions(2)............... $ 7,650,000 $ 909,000 $(1,157,000) $ 7,402,000
============ ========== =========== ===========
</TABLE>
- --------
(1) Foreign sales from the United States to unaffiliated customers for the
years ended November 30, 1993, 1994 and 1995 and the nine months ended
August 31, 1996 were approximately $3,511,000, $3,547,000, $3,748,000 and
$2,690,000, respectively.
(2) Excludes net assets (liabilities) of discontinued operations of
$2,270,000, $1,920,000, $2,232,000, and $(474,000) as of November 30,
1993, 1994, and 1995 and August 31, 1996, respectively.
F-16
<PAGE>
DATA TRANSLATION II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------- AUGUST 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Payroll and related taxes.................. $ 428,000 $ 551,000 $ 495,000
Bonuses and commissions.................... 50,000 15,000 341,000
Accrued inventory.......................... 111,000 69,000 105,000
Other...................................... 1,017,000 1,677,000 535,000
---------- ---------- ----------
$1,606,000 $2,312,000 $1,476,000
========== ========== ==========
</TABLE>
13. VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's accounts receivable
reserve account:
<TABLE>
<CAPTION>
BEGINNING COST AND END OF
BALANCE AT OF YEAR EXPENSE DEDUCTIONS PERIOD
---------- --------- -------- ---------- --------
<S> <C> <C> <C> <C>
For the Year Ended November 30, 1993.. $273,000 $148,000 $174,000 $247,000
For the Year Ended November 30, 1994.. $247,000 $172,000 $181,000 $238,000
For the Year Ended November 30, 1995.. $238,000 $(46,000) $ 36,000 $156,000
For the Nine Months Ended August 31,
1996................................. $156,000 $(55,000) $ 25,000 $ 76,000
</TABLE>
F-17
<PAGE>
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has issued no securities other than shares of its common
stock issued to Data Translation in September, 1996. Such issuance did not
involve an underwriter, and no discount or commission was paid in connection
therewith. The Registrant relied on the exemption contained in Section 4(2) of
the Securities Act of 1933, as amended.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
Schedules for which provision is made in the applicable regulations of the
Securities and Exchange Commission have been omitted because the information
is disclosed in the financial statements or because such schedules are not
required or are not applicable. See Index to Consolidated Financial
Statements.
(b) Exhibits
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.1 Specimen Stock Certificate of Common Stock (See also Exhibits 3.1 and
3.2)
10.1 Form of Distribution Agreement between Data Translation, Inc. and
Data Translation II, Inc.
10.2 Form of Intellectual Property Agreement between Data Translation,
Inc. and Data Translation II, Inc.
10.3 Form of Corporate Services Agreement between Data Translation, Inc.
and Data Translation II, Inc.
10.4 Form of Use and Occupancy Agreement between Data Translation, Inc.
and Data Translation II, Inc.
10.5 Lease dated December 1, 1979, as amended, for Locke Drive with Nason
Hill Trust
10.6 Form of 1996 Stock Option Plan
10.7 Form of Employee Stock Purchase Plan
10.8 Form of Replacement Stock Option Plan
10.9* Software Bundling Master License Agreement
10.10* Distribution Agreement dated June 26, 1996 by and between Data
Translation, Inc. and DS Datenverarbeitung und Sensortechnik GmbH
21 List of Subsidiaries of the Registrant as of the Distribution Date
99.1+ Information Statement of Data Translation II, Inc. (included as Part
I of this Registration Statement)
99.2 Consents of Persons Named to Become Directors
</TABLE>
- --------
* Certain portions have been omitted and filed separately with the Securities
and Exchange Commission.
+ Filed herewith. All other exhibits were filed previously.
II-1
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Data Translation II, Inc.
/s/ Alfred A. Molinari, Jr.
By: _________________________________
ALFRED A. MOLINARI, JR., PRESIDENT
Date: November 26, 1996
II-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.1 Specimen Stock Certificate of Common Stock (See also Exhibits 3.1 and
3.2)
10.1 Form of Distribution Agreement between Data Translation, Inc. and Data
Translation II, Inc.
10.2 Form of Intellectual Property Agreement between Data Translation, Inc.
and Data Translation II, Inc.
10.3 Form of Corporate Services Agreement between Data Translation, Inc.
and Data Translation II, Inc.
10.4 Form of Use and Occupancy Agreement between Data Translation, Inc. and
Data Translation II, Inc.
10.5 Lease dated December 1, 1979, as amended, for Locke Drive with Nason
Hill Trust
10.6 Form of 1996 Stock Option Plan
10.7 Form of Employee Stock Purchase Plan
10.8 Form of Replacement Stock Option Plan
10.9* Software Bundling Master License Agreement
10.10* Distribution Agreement dated June 26, 1996 by and between Data
Translation, Inc. and DS Datenverarbeitung und Sensortechnik GmbH
21 List of Subsidiaries of the Registrant as of the Distribution Date
99.1+ Information Statement of Data Translation II, Inc. (included as Part I
of this Registration Statement)
99.2 Consents of Persons Named to Become Directors
</TABLE>
- --------
*Certain portions have been omitted and filed separately with the Securities
and Exchange Commission.
+Filed herewith. All other exhibits were filed previously.
