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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: NOVEMBER 30, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-21367
DATA TRANSLATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3332230
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
ORGANIZATION OR INCORPORATION) NUMBER)
100 LOCKE DRIVE
MARLBOROUGH, MASSACHUSETTS 01752-1192
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(508) 481-3700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(NONE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_] .
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $7,466,149 as of January 31, 1997. The number of
shares of Common Stock, $0.01 par value, outstanding as of January 31, 1997
was 2,022,021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 14, 1997 are incorporated by reference into Part
III.
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PART 1
ITEM 1. BUSINESS
INTRODUCTION
Data Translation, Inc., f/k/a Data Translation II, Inc., (the "Company") was
incorporated in September 1996 as a wholly-owned subsidiary of Media 100 Inc.,
f/k/a Data Translation, Inc., ("Parent"). On November 29, 1996, Parent
contributed to the Company substantially all of the assets and liabilities of
Parent's data acquisition and imaging, commercial products and networking
distribution groups (the "Contributed Businesses"). On November 11, 1996,
Parent sold a substantial portion of the assets of the networking distribution
business, and the Company is in the process of discontinuing and winding-up
the remainder of such business. The Company will continue to operate the data
acquisition and imaging and commercial products groups. On December 2, 1996
(the "Distribution Date"), Parent distributed to its stockholders in the form
of a dividend all of the outstanding shares of capital stock of the Company
(the "Distribution"). References to "the Company" below refer to the
Contributed Businesses as operated by the Company after the Distribution, or
as operated by Parent 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.
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
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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 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(R) application,
such as Microsoft PowerPoint or Word for Windows. 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.
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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 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 ProTM 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.
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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.
. 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 Company has a full-time sales and administrative staff of
9 employees to support sales. 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.
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.
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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 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 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
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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.
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 17 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 15% of net sales. For the fiscal year ended November 30, 1996,
the Company invested approximately $3,736,000 or 17.6% of net sales in product
development compared to $2,806,000 or 12.9% of net sales in the prior fiscal
year.
The Company employed, as of January 31, 1997, 33 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.
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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.
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
The Company holds eight United States patents, expiring from March 2001
through August 2013, and has three pending patent applications in the United
States, none of which the Company believes is material. Pursuant to an
agreement with Parent, the Company also has full cross-licenses to technology
under Parent's current patents and patent applications, together with
technology resulting from patent applications which Parent applies for during
the two-year period ending December 2, 1998. 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.
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 January 31, 1997, the Company employed approximately 152 persons
worldwide. None of the employees is represented by a labor union. The Company
believes it has good relations with its employees.
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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.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<C> <C> <S>
Alfred A. Molinari, Jr... 55 Chairman and Chief Executive Officer
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 Vice President
</TABLE>
Mr. Molinari is the Chief Executive Officer and Chairman of the Company. Mr.
Molinari is the founder of Parent, served as the Chief Executive Officer and a
director of Parent from its inception in 1973 and resigned as Chief Executive
Officer on November 30, 1996. Mr. Molinari continues to serve on the Board of
Directors of Parent.
Mr. Godin was appointed Vice President Finance and Administration and Chief
Financial Officer of the Company in September 1996. Mr. Godin had served as
Corporate Controller and Chief Accounting Officer of Parent since August 1992.
He was employed by Parent since May, 1987 and served as Corporate Accounting
Manager until August 1992. On November 30, 1996, Mr. Godin resigned from his
offices at Parent.
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 Parent since January 1996. Prior to that, she served as Vice
President--Operations of Parent beginning July 1995. She was employed by
Parent since 1979, and during her tenure held various positions in materials,
production and manufacturing service. On November 30, 1996, Ms. Gray resigned
from her office at Parent.
Mr. Hack was appointed Vice President of Operations of the Company in
September 1996. Prior to that he served as Director of Operations for Parent
since January 1996. Mr. Hack served as Director of Materials from November
1994 to January 1996. He has been employed by Parent since February 1990 and
during his tenure has held various positions within manufacturing operations,
including Production Manager. On Novmeber 30, 1996, Mr. Hack resigned from his
office at Parent.
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 Parent since June 1995. He also served as
Director of Software Engineering for the Data Acquisition and Imaging Group of
Parent from June 1994 to June 1995. Mr. Walsh has been employed by Parent
since June 1991 and during his tenure has held various engineering and
engineering management positions. On November 30, 1996, Mr. Walsh resigned
from his office at Parent.
Ms. Harpin was appointed Vice President of the Company in September 1996.
Prior to that she served as Vice President of Administration for Parent since
July 1995. She also served as Chief Financial Officer for Parent from November
1991 to July 1995. Ms. Harpin has been employed by Parent since March 1983 and
during her tenure has served as Vice President--Finance and Administration,
Treasurer, Vice President Manufacturing and Director of Sales. On November 30,
1996, Ms. Harpin resigned from her office at Parent.
ITEM 2. PROPERTIES
The Company maintains its principal executive, engineering, manufacturing
and sales operations in a 100,000 square foot facility located in Marlboro,
Massachusetts. The building is leased from a related party trust under an
agreement expiring in 1999. The Company licenses a portion of the building to
Parent pursuant to a
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Use and Occupancy Agreement. The minimum annual net basic rent for the
building is approximately $1,092,000, which amount will be allocated between
the Company and Parent pursuant to the Use and Occupancy Agreement.
The Company's United Kingdom sales operations are conducted in an 18,050
square foot facility in Wokingham, Berkshire, England, that is leased by the
Company through a United Kingdom subsidiary under a twenty-five year net
lease. The subsidiary has exercised an option to terminate the lease in
September 1997. The minimum annual basic rent is approximately $257,000 per
year. The Company's subsidiary has licensed a portion of the leased space to a
subsidiary of Parent for a transitional period.
The Company's German sales 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. The Company's subsidiary
has licensed a portion of the leased space to a subsidiary of Parent for a
transitional period.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in disputes and/or litigation
with respect to its products and operations in its normal course of business.
The Company does not believe that the ultimate impact of the resolution of
such matters will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A consent in lieu of a special meeting of the sole stockholder of the
Company (Parent, prior to the Distribution), was held on November 26,
1996. The matters voted upon at the meeting were (i) the amendment of
the Company's Certificate of Incorporation to change the Company's name
from "Data Translation II, Inc." to "Data Translation, Inc.", (ii) the
approval of the Company's 1996 Stock Option Plan, (iii) the approval of
the Company's Replacement Stock Option Plan and (iv) the approval of
the Company's Employee Stock Purchase Plan. All 100 shares of Common
Stock issued and outstanding on November 26, 1996 were voted in favor
of such matters.
(b) A consent in lieu of a special meeting of the sole stockholder of the
Company (Parent, prior to the Distribution), was held on November 27,
1996. The matter voted upon at the meeting was the granting of stock
options under the Replacement Stock Option Plan to certain employees of
the Company. All 100 shares of Common Stock issued and outstanding on
November 27, 1996 were voted in favor of such matter.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company is traded in the over-the-counter market and
is reported on the Nasdaq National Market System under the symbol: DATX. The
Company's Common Stock began trading on December 16, 1996 subsequent to the
stock dividend issued in connection with the Distribution. The high and low
sale prices of the Company's Common Stock on the over-the-counter market
through January 31, 1997 as reported on the Nasdaq National Market System were
$4.75 and $3.00, respectively. The Company has never paid a cash dividend on
its Common Stock, and the Board of Directors does not anticipate paying cash
dividends in the foreseeable future. As of January 31, 1997, there were
approximately 225 stockholders of record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
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, 1996. The data should be read in conjunction
with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and the
10
<PAGE>
Consolidated Financial Statements and the notes thereto and other financial
information included elsewhere in this Form 10-K.
This selected historical financial data relates to the Contributed
Businesses as they were operated as part of Parent. They also include an
allocation of certain general corporate expenses of Parent 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NOVEMBER 30,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA(1):
Net sales.................... $24,775 $ 23,733 $ 22,440 $ 21,826 $ 21,201
Cost of sales................ 9,793 9,412 9,355 8,187 8,181
-------- -------- -------- -------- --------
Gross profit............... 14,982 14,321 13,085 13,639 13,020
Research and development
expenses.................... 3,820 3,165 3,041 2,806 3,736
Selling and marketing
expenses.................... 8,681 8,154 6,212 6,799 9,696
General and administrative
expenses.................... 2,948 2,580 1,924 1,627 2,032
-------- -------- -------- -------- --------
Income (loss) from
operations................ (467) 422 1,908 2,407 (2,444)
Interest (expense) income,
net......................... (10) (16) (1) (7) 560
Other income (expense)....... (23) (210) 63 2 (51)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before provision (benefit)
for income taxes.......... (500) 196 1,970 2,402 (1,935)
Provision (benefit) for
income taxes................ -- 75 798 966 (658)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations..... (500) 121 1,172 1,436 (1,277)
Discontinued operations(2)... (142) (126) 381 24 (3,555)
-------- -------- -------- -------- --------
Net income (loss).......... $ (642) $ (5) $ 1,553 $ 1,460 (4,832)
======== ======== ======== ======== ========
Income (loss) from continuing
operations per share........ $ 0.86 $ (0.64)
Income (loss) from
discontinued operations per
share....................... $ 0.01 $ (1.78)
======== ========
Net income (loss) per share.. $ 0.87 $ (2.42)
======== ========
Weighted average shares
outstanding................. 1,675 1,998
======== ========
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
----------------- ------------
1996
1994 1995 1996 PRO FORMA(3)
----- ----- ----- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ -- $ -- $ 1 $ 8,828
Working capital................................. 1,523 1,655 2,606 11,433
Total assets.................................... 7,769 9,337 7,534 16,361
Total liabilities............................... 2,792 3,067 3,743 3,743
Total stockholder's investment.................. 4,977 6,270 3,791 12,618(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
Parent prior to the Distribution. On November 11, 1996, Parent sold a
substantial portion of the assets of the networking distribution business,
and the Company is in the process of discontinuing and winding-up the
remainder of such business
(3) Adjusted to give effect to the deemed contribution by the Parent to the
Company of $8,828,000 in cash and cash equivalents after November 30,
1996.
(4) Does not include any tax considerations pertaining to the Distribution.
11
<PAGE>
ITEM 7. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Data Translation, Inc., f/k/a Data Translation II, Inc., (the "Company") was
incorporated in September 1996 as a wholly-owned subsidiary of Media 100 Inc.,
f/k/a Data Translation, Inc., ("Parent"). On November 29, 1996, Parent
contributed to the Company substantially all of the assets and liabilities of
Parent's data acquisition and imaging, commercial products and networking
distribution groups (the "Contributed Businesses"). On November 11, 1996,
Parent sold a substantial portion of the assets of the networking distribution
business, and the Company is in the process of discontinuing and winding-up
the remainder of such business. The Company will continue to operate the data
acquisition and imaging and commercial products groups. On December 2, 1996
(the "Distribution Date"), Parent distributed to its stockholders in the form
of a dividend all of the outstanding shares of capital stock of the Company
(the "Distribution").
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations is based upon the separate historical financial
statements of the Company, which present the Company's results of operations,
financial position and cash flows. These historical financial statements
include the assets, liabilities, income and expenses that were directly
related to the Contributed Businesses as they were operated within Parent. In
the case of assets and liabilities not specifically allocable to any
particular business of Parent, only those assets and liabilities 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
Parent 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 Parent. 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 Parent. Following the
Distribution, the Company became a stand-alone entity with objectives and
strategies separate from those of Parent. The Company will focus on providing
products in the data acquisition, imaging and consumer video editing
industries.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statements as a result of the
following risk factors: dependence on new products, impact of competitive
products, ability of the Company to meet its future capital requirements,
ability to attract qualified personnel, the absence of history as an
independent company, and the dependence on proprietary technology.
DISCONTINUED OPERATIONS
On July 30, 1996, Parent announced its strategic decision to discontinue the
operations comprising its networking business. The networking business had
historically been operated by Data Translation Networking Limited
("Networking") which distributed, integrated and supported enterprise-wide
networking products
12
<PAGE>
manufactured by third party suppliers in the United Kingdom. On November 11,
1996, Parent sold a substantial portion of the assets of the networking
distribution business, and the Company is in the process of discontinuing and
winding-up the remainder of such business. The Company estimates a loss on the
disposal of the remaining business assets and settlement of liabilities of
approximately $1,561,000 before applicable income taxes. Net sales from
Networking were approximately $15,382,000, $20,348,000 and $16,522,000 for the
years ended November 30, 1994, 1995, and 1996, respectively.
RESULTS OF OPERATIONS
The following table shows certain statement of operations data as a
percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NOVEMBER 30,
--------------------
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Net sales............................................... 100.0 100.0 100.0
Gross margin............................................ 61.4 62.5 58.3
Research and development expenses....................... 17.6 12.9 13.5
Selling and marketing expenses.......................... 45.7 31.1 27.7
General and administrative expenses..................... 9.6 7.5 8.6
------ ----- -----
Income (loss) from operations........................... (11.5) 11.0 8.5
Interest income (expense) and other, net................ 2.4 (0.0) 0.3
------ ----- -----
Income (loss) from continuing operations before
provision (benefit) for income taxes................... (9.1) 11.0 8.8
Provision (benefit) for income taxes.................... (3.1) 4.4 3.6
------ ----- -----
Income (loss) from continuing operations................ (6.0) 6.6 5.2
Income (loss) from discontinued operations.............. (16.8) 0.1 1.7
------ ----- -----
Net income (loss)....................................... (22.8)% 6.7% 6.9%
====== ===== =====
</TABLE>
COMPARISON OF FISCAL YEAR ENDED NOVEMBER 30, 1996 TO FISCAL YEAR ENDED
NOVEMBER 30, 1995
Net sales for the fiscal year ended November 30, 1996 were $21,201,000
compared to $21,826,000 for the same period in the prior year, which
represents a decrease of 2.9% or $625,000. 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 November 30, 1996 was 61.4% of net sales,
compared to 62.5% 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 fiscal 1996 was $2,444,000, compared to income from
operations of $2,407,000 for the same period in the prior year. This change
was primarily due to an increase in operating expenses over the prior year of
$4,232,000. Total operating expenses increased to 72.9% of net sales for the
year compared to 51.5% in the prior year. Research and development expenses
were $3,736,000 or 17.6% of net sales compared to $2,806,000 or 12.9% of net
sales in fiscal 1995. The increase in research and development expenses was
the result of continuing investment in Broadway, the Company's new MPEG based
digital video product. Selling and marketing expenses were $9,696,000 or 45.7%
of net sales compared to $6,799,000 or 31.2% of net sales in fiscal 1995. The
increase in selling and marketing expenses was due largely to the initial
marketing promotion and sales channel development for Broadway, which began
shipping in June 1996. General and administration expenses increased $405,000
to 9.6% of net sales compared to 7.5% of net sales in the prior year. The
increase was largely due to higher fees for increased personnel levels and
increased professional services. As previously mentioned, these expenses were
part of an allocation of certain general corporate expenses of Parent and were
not directly related to the Contributed Businesses.
13
<PAGE>
Net interest income of $560,000 reported in fiscal 1996 is a result of an
allocation of total interest income earned by Parent utilizing an assumed cash
balance throughout the year for the Company.
The Company had an income tax benefit of $658,000 for the fiscal year ended
November 30, 1996, compared to a provision for income taxes of $966,000 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 Parent. The
offsetting charge for the provision (benefit) for income taxes has been
included as an element of Parent'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.
Loss from continuing operations was $1,277,000 for the fiscal year ended
November 30, 1996, compared to income from continuing operations of $1,436,000
in the prior fiscal year.
The Company incurred a net loss of $4,832,000 for the fiscal year ended
November 30, 1996 compared to net income of $1,460,000 in the prior fiscal
year. These results include a loss on discontinued operations of $3,555,000
for the fiscal year ended November 30, 1996 and income from discontinued
operations of $24,000 in the prior fiscal year. 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. Total operating expenses increased $55,000 to 51.5% of net sales from
49.8% of net sales in the prior year. The increase was due to higher selling
and marketing expenses associated with the sales and promotion of the
Company's new data acquisition and imaging products introduced during the
fiscal year. These expenses were offset by lower research and development
expenses and general and administrative expenses.
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 Parent. The
offsetting charge for the provision for income taxes has been included as an
element of Parent'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."
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Simultaneously with the Distribution, Parent contributed $8,828,000 in cash
and cash equivalents to the Company for use in the Company's business. 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.
The Company believes that the proceeds from the Distribution, together with
cash generated from future operations, will be sufficient to meet the
Company's cash requirements for at least twelve months.
15
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. 17
Pro Forma Consolidated Balance Sheet as of November 30, 1996 and
Consolidated Balance Sheets as of November 30, 1996 and 1995............. 18
Consolidated Statements of Operations for the Years Ended November 30,
1996, 1995, and 1994..................................................... 19
Pro Forma Consolidated Statement of Stockholder's Investment for the Year
Ended November 30, 1996 and Consolidated Statements of Stockholder's
Investment for the Years Ended November 30, 1996, 1995, and 1994......... 20
Consolidated Statements of Cash Flows for the Years Ended November 30,
1996, 1995, and 1994..................................................... 21
Notes to Consolidated Financial Statements................................ 22
</TABLE>
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Data Translation, Inc.:
We have audited the accompanying consolidated balance sheets of Data
Translation, Inc. (a Delaware corporation and wholly-owned subsidiary of Media
100 Inc. ("Parent")) and subsidiaries as of November 30, 1996 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, 1996.
These financial statements are the responsibility of Data Translation, 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, Inc. and
subsidiaries as of November 30, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended November 30, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
January 13, 1997
17
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.................................. $ 8,828,000 $ 1,000 $ --
Accounts receivable, net of reserves
of $132,000 and $156,000 in 1996 and
1995, respectively................... 2,741,000 2,741,000 3,253,000
Inventories........................... 1,490,000 1,490,000 1,086,000
Prepaid expenses...................... 690,000 690,000 383,000
----------- ----------- -----------
Total current assets................ 13,749,000 4,922,000 4,722,000
Net assets of discontinued operations... -- -- 2,232,000
Equipment and leasehold improvements,
net.................................... 2,352,000 2,352,000 2,250,000
Other assets--net....................... 260,000 260,000 133,000
----------- ----------- -----------
Total Assets........................ $16,361,000 $ 7,534,000 $ 9,337,000
=========== =========== ===========
CURRENT LIABILITIES:
Accounts payable...................... $ 377,000 $ 377,000 $ 716,000
Borrowings from bank.................. -- -- 39,000
Accrued expenses...................... 1,939,000 1,939,000 2,312,000
----------- ----------- -----------
Total current liabilities........... 2,316,000 2,316,000 3,067,000
Net liabilities of discontinued
operations............................. 1,424,000 1,424,000 --
Commitments and Contingencies (Note 8)
Deferred income taxes................... 3,000 3,000 --
STOCKHOLDER'S INVESTMENT:
Investment by Parent.................. -- 3,822,000 6,102,000
Preferred stock, $.01 par value,--
Authorized 5,000,000 shares, none
issued and outstanding............... -- -- --
Common stock, $.01 par value,--
Authorized 30,000,000 shares,
2,022,021 shares issued and
outstanding at November 30, 1996 pro
forma................................ 20,000 -- --
Additional paid-in capital............ 12,629,000 -- --
Cumulative translation adjustment..... (31,000) (31,000) 168,000
----------- ----------- -----------
Total stockholder's investment...... 12,618,000 3,791,000 6,270,000
----------- ----------- -----------
Total Liabilities and Stockholder's
Investment........................... $16,361,000 $ 7,534,000 $ 9,337,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net sales................................ $ 21,201,000 $21,826,000 $22,440,000
Cost of sales............................ 8,181,000 8,187,000 9,355,000
------------ ----------- -----------
Gross profit......................... 13,020,000 13,639,000 13,085,000
Research and development expenses........ 3,736,000 2,806,000 3,041,000
Selling and marketing expenses........... 9,696,000 6,799,000 6,212,000
General and administrative expenses...... 2,032,000 1,627,000 1,924,000
------------ ----------- -----------
Income (loss) from operations........ (2,444,000) 2,407,000 1,908,000
Interest income (expense)................ 560,000 (7,000) (1,000)
Other income (expense)................... (51,000) 2,000 63,000
------------ ----------- -----------
Income (loss) from continuing
operations before tax provision
(benefit)..............................(1,935,000) 2,402,000 1,970,000
Provision (benefit) for income taxes..... (658,000) 966,000 798,000
------------ ----------- -----------
Income (loss) from continuing
operations.......................... (1,277,000) 1,436,000 1,172,000
Discontinued operations (Note 3):
Income (loss) from discontinued
operations of TFS Wokingham, Limited
(less applicable provision (benefit)
for income taxes of $(10,000),
$10,000, and $163,000, respectively).. (3,555,000) 24,000 381,000
------------ ----------- -----------
Net income (loss).................... $ (4,832,000) $ 1,460,000 $ 1,553,000
============ =========== ===========
Income (loss) from continuing operations
per common share........................ $ (0.64) $ 0.86
Income (loss) from discontinued
operations per common share............. $ (1.78) $ 0.01
------------ -----------
Net income (loss) per common share....... $ (2.42) $ 0.87
============ ===========
Weighted average number of common and
common equivalent shares outstanding.... 1,998,000 1,675,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S INVESTMENT
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
-------------------------------------------------
PRO FORMA
1996 1996 1995 1994
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Investment by Parent
Balance--Beginning of
Year...................... $ 6,102,000 $ 6,102,000 $4,950,000 $5,018,000
Net income (loss)......... (4,832,000) (4,832,000) 1,460,000 1,553,000
Impact of income taxes.... 658,000 658,000 (966,000) (798,000)
Net activity with Parent.. 1,894,000 1,894,000 658,000 (823,000)
Pro forma contribution
from Parent.............. 8,827,000 -- -- --
Pro forma transfer to
common stock and
additional paid-in
capital.................. (12,649,000) -- -- --
------------ ----------- ---------- ----------
Balance--End of Year....... $ -- $ 3,822,000 $6,102,000 $4,950,000
Common Stock
Balance--Beginning of
Year...................... $ -- $ -- $ -- $ --
Pro forma issuance of
2,022,021 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 Parent.............. 12,629,000 -- -- --
------------ ----------- ---------- ----------
Balance--End of Year....... $ 12,629,000 $ -- $ -- $ --
Cumulative Translation
Adjustment
Balance--Beginning of
Year...................... $ 168,000 $ 168,000 $ 27,000 $ 4,000
Translation adjustments... (199,000) (199,000) 141,000 23,000
------------ ----------- ---------- ----------
Balance--End of Year....... $ (31,000) $ (31,000) $ 168,000 $ 27,000
------------ ----------- ---------- ----------
Total Stockholder's
Investment............... $ 12,618,000 $ 3,791,000 $6,270,000 $4,977,000
============ =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................ $(4,832,000) $1,460,000 $1,553,000
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities--
Depreciation and amortization........... 844,000 836,000 873,000
Deferred income taxes................... 3,000 -- --
Changes in current assets and
liabilities--
Accounts receivable.................... 512,000 (274,000) (460,000)
Inventories............................ (404,000) (118,000) 199,000
Prepaid expenses....................... (307,000) (15,000) (95,000)
Net assets (liabilities) of
discontinued operations............... 3,656,000 (312,000) 350,000
Accounts payable....................... (339,000) 76,000 (137,000)
Due to related party................... -- (546,000) --
Accrued expenses....................... (373,000) 706,000 (403,000)
----------- ---------- ----------
Net cash provided by (used in)
operating activities................. (1,240,000) 1,813,000 1,880,000
----------- ---------- ----------
Cash Flows from Investing Activities:
Purchases of equipment and leasehold
improvements............................ (861,000) (1,617,000) (217,000)
Increase in other assets................. (212,000) (68,000) (65,000)
----------- ---------- ----------
Net cash used in investing
activities........................... (1,073,000) (1,685,000) (282,000)
----------- ---------- ----------
Cash Flows from Financing Activities:
Net borrowings from bank................. (39,000) 39,000 --
Impact of income taxes................... 658,000 (966,000) (798,000)
Decrease (increase) in investment by
Parent.................................. 1,894,000 658,000 (823,000)
----------- ---------- ----------
Net cash provided by (used in)
financing activities................. 2,513,000 (269,000) (1,621,000)
----------- ---------- ----------
Exchange Rate Effects..................... (199,000) 141,000 23,000
----------- ---------- ----------
Net increase in cash...................... 1,000 -- --
Cash, beginning of period................. -- -- --
----------- ---------- ----------
Cash, end of period....................... $ 1,000 $ -- $ --
=========== ========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid for income taxes.............. $ -- $ -- $ --
Cash paid for interest.................. -- 7,000 1,000
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
(a) Background
Data Translation, Inc., f/k/a Data Translation II, Inc., (the "Company") was
incorporated in September 1996 as a wholly-owned subsidiary of Media 100 Inc.,
f/k/a Data Translation, Inc., ("Parent"). On November 29, 1996, Parent
contributed to the Company substantially all of the assets and liabilities of
Parent's data acquisition and imaging, commercial products and networking
distribution groups (the "Contributed Businesses"). On November 11, 1996,
Parent sold a substantial portion of the assets of the networking distribution
business, and the Company is in the process of discontinuing and winding-up
the remainder of such business. The Company will continue to operate the data
acquisition and imaging and commercial products groups. On December 2, 1996
(the "Distribution Date"), Parent distributed to its stockholders in the form
of a dividend all of the outstanding shares of capital stock of the Company
(the "Distribution").
Based on the law in effect at the time and certain facts beyond the control
of the Company and Parent assumed to be true at the time of the Distribution,
Parent 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. Parent has not requested and does not intend to request a letter
ruling from the Internal Revenue Service (the "IRS") nor has Parent 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 was 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 Parent and would be taxable to its stockholders
receiving Common Stock of the Company 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
businesses that were transferred to the Company from Parent 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 Parent's contribution of its net investment after giving
effect to the net income of the Company plus net cash transfers to or from
Parent. The Company began accumulating its retained earnings on the date of
the Distribution.
Additionally, the consolidated financial statements include allocations of
certain Parent corporate assets, liabilities and expenses relating to the
Contributed Businesses that were transferred to the Company from Parent.
Management believes these allocations are reasonable. All material
intercompany transactions and balances between the Contributed Businesses have
been eliminated.
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 Parent as
disclosed in the Corporate Services and Use and Occupancy Agreements (see Note
8(a)(iii)). Additionally, income taxes are calculated on a separate tax return
basis (see Notes 2(i) and 9).
22
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Raw materials.......................................... $ 904,000 $ 629,000
Work in-process........................................ 181,000 20,000
Finished goods......................................... 405,000 437,000
---------- ----------
$1,490,000 $1,086,000
========== ==========
</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>
Leasehold improvements are amortized over the shorter of their economic life
or the life of the lease.
23
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
Machinery and equipment............................. $14,609,000 $14,206,000
Furniture and fixtures.............................. 2,135,000 2,171,000
Vehicles............................................ 73,000 87,000
Leasehold improvements.............................. 2,051,000 1,543,000
----------- -----------
18,868,000 18,007,000
Less--accumulated depreciation and amortization..... 16,516,000 15,757,000
----------- -----------
$ 2,352,000 $ 2,250,000
=========== ===========
</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 gains and
losses were not significant for the years ended November 30, 1996, 1995 and
1994.
(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 $256,000, $106,000
and $119,000 as of November 30, 1996, 1995 and 1994, 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 $85,000, $80,000, and $90,000 in 1996, 1995 and 1994,
respectively.
(i) Income Taxes
Historically, the Company's operations have been included in the
consolidated income tax returns filed by Parent. The provision for income
taxes in the Company's consolidated financial statements has been calculated
on a separate tax return basis (see Note 9).
24
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(j) 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.
(k) 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.
(l) Pro Forma Presentation
The pro forma consolidated balance sheet and pro forma consolidated
statement of stockholder's investment as of November 30, 1996 reflect (1) the
contribution of $8,828,000 from Parent simultaneously with the Distribution
and (2) the distribution of the investment by Parent to the existing
stockholders of Parent 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, Parent announced its strategic decision to discontinue the
operations comprising its networking business. The networking operations were
historically operated by TFS Wokingham, Limited, f/k/a Data Translation
Networking Limited ("Networking") which distributed, integrated and supported
enterprise-wide networking products manufactured by third party suppliers in
the United Kingdom. On November 11, 1996, the Parent sold certain assets of
the networking distribution business, primarily inventories, equipment and its
ongoing business, for approximately $1.3 million. Parent recognized a gain of
approximately $340,000 on this transaction. The Company is in the process of
discontinuing and winding-up the remainder of such business.
The Company estimates a loss on the disposal of the remaining business
assets and extinguishment of liabilities of approximately $1,561,000 before
applicable income taxes.
Sales from Networking were approximately $16,522,000, $20,348,000, and
$15,382,000 for the years ended November 30, 1996, 1995, and 1994,
respectively.
The components of net assets (liabilities) of discontinued operations
included in the accompanying consolidated balance sheets at November 30, 1996
and 1995 follow:
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Accounts receivable, net........................... $ 1,563,000 $ 5,742,000
Inventories........................................ 1,159,000 2,546,000
Prepaid expenses................................... 433,000 337,000
Equipment and leasehold improvements, net.......... 68,000 233,000
Accounts payable................................... (1,450,000) (3,903,000)
Borrowings from a bank............................. (1,577,000) (657,000)
Accrued expenses................................... (1,620,000) (2,066,000)
----------- -----------
$(1,424,000) $ 2,232,000
=========== ===========
</TABLE>
25
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. NET INCOME PER COMMON SHARE
Prior to the Distribution, the Company had 100 shares of Common Stock
outstanding, all of which were owned by Parent. Effective with the
Distribution discussed in Note 1(a), the stockholders of Parent received one
share of the common stock of the Company for each four shares of common stock
held of Parent. 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 Parent. 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 adopted 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.
Subject to certain conditions, employees of the Company and Parent 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 Company's Board of Directors adopted the Company's Replacement Stock
Option Plan (the "Replacement Plan"), effective as of the date of the
Distribution. The Replacement Plan provides 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
Parent Stock that were granted under Parent's 1992 Key Employee Incentive Plan
and its 1982 Key Employee Incentive Plan and were outstanding on the date of
the Distribution (the "Parent Options"), as part of an adjustment to the
Parent Options. The number of shares subject to each Replacement Option, the
exercise price therefor and the other terms and conditions of each Replacement
Option have been 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 Parent
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 Parent 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.
26
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE STOCK PURCHASE PLAN
Effective with the Distribution, the Company established 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 were eligible to participate in
Parent's employee savings plan (the "Savings Plan") in compliance with Section
401(k) of the Internal Revenue Code. Following the Distribution, the Company
established a plan similar to the Savings Plan. 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
Company's employees were $43,000, $28,000, and $0 in 1996, 1995 and 1994,
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. COMMITMENTS AND CONTINGENCIES
(a) Intercompany Agreements
(I) DISTRIBUTION AGREEMENT
The Distribution Agreement provides for indemnification of Parent 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. Parent has indemnified
the Company for liabilities arising out of the Media 100 business both prior
to and after the Distribution.
The Distribution Agreement also provides for a tax sharing arrangement
between the Company and Parent. Parent is solely responsible for any tax
liabilities relating to periods prior to the date of the Distribution, and is
entitled to any tax refunds relating to such periods. After the date of the
Distribution, each of the Company and Parent are responsible for tax
liabilities relating to their respective operations.
With respect to any liability relating to the Distribution being deemed a
taxable transaction, Parent is responsible for 75% of any such liability and
the Company is 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 Parent or the
Company, such party shall be solely responsible for the resulting tax
liability.
(II) CORPORATE SERVICES AND USE AND OCCUPANCY AGREEMENTS
Effective as of the date of the Distribution, the Company and Parent have
corporate services and use and occupancy agreements under which the Company
will provide Parent with certain facilities, equipment and administrative
services. Parent will pay the Company in accordance with the predetermined
rates and fees 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 Parent would
have incurred on a stand-alone basis. The corporate services
27
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $3,541,000, $2,545,000, and $3,567,000 in fiscal
years 1996, 1995 and 1994, respectively.
During the transition of moving from shared to independent services
following the date of the Distribution, Parent may request that the Company
provide additional services to Parent until Parent is able to otherwise
contract or arrange for such services, in which case Parent 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 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 matters will have a
material adverse 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 $546,000, $633,000, and $732,000 for each of the years ended
November 30, 1996, 1995 and 1994, respectively.
In addition, the Company leases sales facilities and equipment under leases
expiring through 2001. Rent expense under these agreements totaled $360,000,
$425,000, and $229,000 in the years ended November 30, 1996, 1995 and 1994,
respectively. Future minimum lease payments under all operating leases are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NOVEMBER 30, AMOUNT
------------------------------- ----------
<S> <C>
1997.......................................................... $1,343,000
1998.......................................................... 1,223,000
1999.......................................................... 1,176,000
2000.......................................................... 156,000
2001.......................................................... 59,000
Thereafter.................................................... --
----------
Total minimum lease payments.................................. $3,957,000
==========
</TABLE>
9. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated
statements of operations has been calculated on a separate tax return basis.
Prior to the Distribution as discussed in Note 1(a), the Company filed its tax
return as part of a consolidated group with Parent. 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 Parent" 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.
28
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
------------------
1996 1995
-------- --------
<S> <C> <C>
Depreciation............................................. $459,000 $387,000
Nondeductible reserves and accruals...................... 383,000 568,000
Capitalized software development costs................... (103,000) (43,000)
-------- --------
739,000 912,000
Less--Valuation Allowance................................ 739,000 912,000
-------- --------
$ -- $ --
======== ========
</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,
------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Federal:
Current.................................... $(814,000) $ 920,000 $693,000
Deferred................................... 135,000 (209,000) (27,000)
State:
Current.................................... (39,000) 268,000 202,000
Deferred................................... 39,000 (61,000) (8,000)
Foreign--Current (benefit)................... 21,000 48,000 (62,000)
--------- --------- --------
$(658,000) $ 966,000 $798,000
========= ========= ========
</TABLE>
29
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. GEOGRAPHIC INFORMATION
Operations in various geographic areas for the three years ended November
30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
FISCAL 1994
Sales to unaffiliated
customers(1)........... $ 18,272,000 $4,168,000 $ -- $ 22,440,000
Sales or transfers
between 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
operations(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
between 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
operations(2).......... $ 7,004,000 $1,557,000 $(1,456,000) $ 7,105,000
============ ========== =========== ============
FISCAL 1996
Sales to unaffiliated
customers(1)........... $ 17,480,000 $3,721,000 $ -- $ 21,201,000
Sales or transfers
between geographic
areas.................. 1,870,000 -- (1,870,000) --
------------ ---------- ----------- ------------
Total net sales......... $ 19,350,000 $3,721,000 $(1,870,000) $ 21,201,000
------------ ---------- ----------- ------------
Income (loss) before
provision for income
taxes.................. $ (2,037,000) $ 50,000 $ 52,000 $ (1,935,000)
============ ========== =========== ============
Identifiable assets from
continuing
operations(2).......... $ 7,909,000 $ 881,000 $(1,256,000) $ 7,534,000
============ ========== =========== ============
</TABLE>
- --------
(1) Foreign sales from the United States to unaffiliated customers for the
years ended November 30, 1996, 1995 and 1994 were approximately
$3,536,000, $3,748,000 and $3,547,000, respectively.
(2) Excludes net assets (liabilities) of discontinued operations of
$(1,424,000), $2,232,000, and $1,920,000 as of November 30, 1996, 1995 and
1994, respectively.
11. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Payroll and related taxes............................. $ 545,000 $ 551,000
Bonuses and commissions............................... 350,000 15,000
Professional services................................. 125,000 15,000
Other................................................. 918,000 1,731,000
---------- ----------
$1,938,000 $2,312,000
========== ==========
</TABLE>
30
<PAGE>
DATA TRANSLATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. 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,
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 Year Ended November 30,
1996................................ $156,000 $ 5,000 $ 29,000 $132,000
</TABLE>
13. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FISCAL QUARTERS ENDED: FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
------------------------------ ----------- ------- --------- -----------
<S> <C> <C> <C> <C>
1996
Net sales........................... $5,694 $ 5,064 $ 5,100 $ 5,343
Gross profit........................ 3,505 3,298 3,021 3,196
Income (loss) from continuing
operations......................... 294 222 (714) (1,079)
Income (loss) from discontinued
operations......................... 38 (372) (2,271) (950)
------ ------- ------- -------
Net income (loss)................... 332 (150) (2,985) (2,029)
====== ======= ======= =======
Income (loss) from continuing
operations per share............... $ 0.14 $ 0.11 $ (0.35) $ (0.53)
Income (loss) from discontinued
operations per share............... $ 0.02 $ (0.19) $ (1.13) $ (0.47)
------ ------- ------- -------
Net income (loss) per share......... $ 0.16 $ (0.08) $ (1.48) $ (1.00)
====== ======= ======= =======
1995
Net sales........................... $5,775 $5,001 $5,583 $5,467
Gross profit........................ 3,602 3,135 3,535 3,367
Income from continuing operations... 513 256 498 169
Income (loss) from discontinued
operations......................... 6 104 10 (96)
------ ------- ------- -------
Net income.......................... 519 360 508 73
====== ======= ======= =======
Income from continuing operations
per share.......................... $ 0.32 $ 0.16 $ 0.29 $ 0.10
Income (loss) from discontinued
operations per share............... $ -- $ 0.06 $ 0.01 $ (0.06)
------ ------- ------- -------
Net income per share................ $ 0.32 $ 0.22 $ 0.30 $ 0.04
====== ======= ======= =======
</TABLE>
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. The information appearing under the caption "Nomination and
Election of Directors" in the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held on May 14, 1997 (the "Proxy Statement") is
incorporated herein by reference.
Executive Officers. Information in response to this Item appears under the
caption "Executive Officers of the Company" in Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item appears under the caption "Executive
Compensation" in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item appears under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item appears under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
32
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS AND EXHIBITS.
(a)(1) Financial Statements. The Index to Consolidated Financial Statements
appears at page 16 of this Form 10-K.
(a)(2) Schedules. 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.
(a)(3) Exhibits. Exhibits 10.6 through 10.8 constitute all of the
management contracts and compensation plans and arrangements of the
Company required to be filed as Exhibits to this Form 10-K.
(b) Reports on Form 8-K. The Registrant did not file any reports on Form 8-
K during the last quarter of the period covered by the Form 10-K.
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Registrant(1)
3.2 By-laws of Registrant(1)
Specimen Stock Certificate of Common Stock (See also Exhibits 3.1 and
4.1 3.2)(1)
Distribution Agreement dated as of November 19, 1996 with Media 100
10.1 Inc.(2)
Intellectual Property Agreement dated as of December 2, 1996 with
10.2 Media 100 Inc.(3)
Corporate Services Agreement dated as of December 2, 1996 with Media
10.3 100 Inc.(4)
Use and Occupancy Agreement dated as of December 2, 1996 with Media
10.4 100 Inc.(5)
Lease dated December 1, 1979, as amended, for Locke Drive with Nason
10.5 Hill Trust(1)
10.6 1996 Stock Option Plan(6)
10.7 Employee Stock Purchase Plan(7)
10.8 Replacement Stock Option Plan(8)
10.9* Software Bundling Master License Agreement(1)
10.10* Distribution Agreement dated June 26, 1996 by and between Data
Translation, Inc. and DS Datenverarbeitung und Sensortechnik GmbH(1)
21 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
- --------
* Certain portions have been omitted and filed separately with the Securities
and Exchange Commission.
(1) Incorporated herein by reference to the Company's Registration Statement
on Form 10 (No. 000-21367) filed with the Securities and Exchange
Commission on November 26, 1996
(2) Incorporated herein by reference to Exhibit 10.8.1 to the 1996 Annual
Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
Securities and Exchange Commission on February 28, 1997
(3) Incorporated herein by reference to Exhibit 10.8.2 to the 1996 Annual
Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
Securities and Exchange Commission on February 28, 1997
(4) Incorporated herein by reference to Exhibit 10.8.3 to the 1996 Annual
Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
Securities and Exchange Commission on February 28, 1997
(5) Incorporated herein by reference to Exhibit 10.8.4 to the 1996 Annual
Report on Form 10-K of Media 100 Inc. (File No. 0-14779) filed with the
Securities and Exchange Commission on February 28, 1997
(6) Incorporated herein by reference to the Company's Registration Statement
on Form S-8 (No. 333-16855) filed with the Securities and Exchange
Commission on November 26, 1996
(7) Incorporated herein by reference to the Company's Registration Statement
on Form S-8 (No. 333-16857) filed with the Securities and Exchange
Commission on November 26, 1996
(8) Incorporated herein by reference to the Company's Registration Statement
on Form S-8 (No. 333-16859) filed with the Securities and Exchange
Commission on November 26, 1996
33
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Data Translation, Inc.
/s/ Alfred A. Molinari, Jr.
By: _________________________________
ALFRED A. MOLINARI, JR.,
CHIEF EXECUTIVE OFFICER
Date: February 28, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Alfred A. Molinari, Jr. Chief Executive Officer and February 28, 1997
- ------------------------------------------- Chairman
ALFRED A. MOLINARI, JR.
/s/ Gary B. Godin Vice President (Principal February 28, 1997
- ------------------------------------------- Financial Officer)
GARY B. GODIN
/s/ Dr. David Cyganski Director February 28, 1997
- -------------------------------------------
DR. DAVID CYGANSKI
/s/ Ellen W. Harpin Director February 28, 1997
- -------------------------------------------
ELLEN W. HARPIN
/s/ D'Anne Hurd Director February 28, 1997
- -------------------------------------------
D'ANNE HURD
</TABLE>
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
21 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE REGISTRANT
1. Data Translation Ltd Wokingham, Berkshire England
2. Data Translation GmbH Bietigheim-Bissingen, Germany
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report in this Form 10-K, into the Company's previously filed Registration
Statement File Nos. 333-16855, 333-16857, and 333-16859.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 8,828,000
<SECURITIES> 0
<RECEIVABLES> 2,741,000
<ALLOWANCES> 132,000
<INVENTORY> 1,490,000
<CURRENT-ASSETS> 13,749,000
<PP&E> 18,868,000
<DEPRECIATION> 16,516,000
<TOTAL-ASSETS> 16,361,000
<CURRENT-LIABILITIES> 2,316,000
<BONDS> 0
0
0
<COMMON> 20,000
<OTHER-SE> 12,598,000
<TOTAL-LIABILITY-AND-EQUITY> 16,361,000
<SALES> 21,201,000
<TOTAL-REVENUES> 21,201,000
<CGS> 8,181,000
<TOTAL-COSTS> 8,181,000
<OTHER-EXPENSES> 15,464,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,935,000)
<INCOME-TAX> (658,000)
<INCOME-CONTINUING> (1,277,000)
<DISCONTINUED> (3,555,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,832,000)
<EPS-PRIMARY> (2.42)
<EPS-DILUTED> (2.42)
</TABLE>
